<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 SEPTEMBER 30, 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
---------------
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 17,981,982 (as
of November 8, 2000).
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<PAGE> 2
JAKKS PACIFIC, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
ITEMS IN FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Facing page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed consolidated balance sheets -
December 31, 1999 and September 30, 2000 (unaudited) 3
Condensed consolidated statements of operations for the three and nine months
ended September 30, 1999 and 2000 (unaudited) 4
Condensed consolidated statements of cash flows for the nine months ended
September 30, 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. None
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 Sheets
ASSETS
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
----------------- ------------------
(*) (unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 57,546,406 $ 48,302,536
Marketable securities 39,333,944 7,004,289
Accounts receivable, net 38,024,903 78,763,437
Inventory, net 19,863,508 32,799,750
Advance royalty payments 1,137,238 1,931,059
Prepaid expenses and other current assets 1,617,692 3,363,905
------------ ------------
Total current assets 157,523,691 172,164,976
------------ ------------
Office furniture and equipment 1,233,068 3,494,759
Molds and tooling 15,283,211 22,487,132
Leasehold improvements 344,263 1,841,190
------------ ------------
Total 16,860,542 27,823,081
Less accumulated depreciation and amortization 5,320,103 9,082,261
------------ ------------
Property and equipment, net 11,540,439 18,740,820
------------ ------------
Notes Receivable-Officers -- 2,606,706
Investment in joint venture 3,658,339 2,261,505
Goodwill, net 46,020,232 69,001,885
Trademarks, net 12,633,248 12,236,721
Intangibles and deposits, net 1,502,147 1,212,842
------------ ------------
Total assets $232,878,096 $278,225,455
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 41,137,161 $ 60,504,331
Income taxes payable 3,211,926 7,844,707
Current portion of long term debt 4,967 400,000
------------ ------------
Total current liabilities 44,354,054 68,749,038
------------ ------------
Long term debt 8,713 1,100,000
Deferred income taxes 1,013,834 470,383
------------ ------------
Total liabilities 45,376,601 70,319,421
------------ ------------
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 19,475,582 shares issued 19,273 19,476
Additional paid-in capital 155,172,781 156,292,384
Treasury stock, at cost, nil and 268,100 shares -- (3,324,007)
Retained earnings 32,309,441 54,918,181
------------ ------------
Total stockholders' equity 187,501,495 207,906,034
------------ ------------
Total liabilities and stockholders' equity $232,878,096 $278,225,455
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
(*) Derived from audited financial statements
3
<PAGE> 4
JAKKS PACIFIC, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1999 and 2000 (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Net sales $60,235,407 $91,838,086 $121,176,908 $193,197,882
Cost of sales 35,476,603 54,165,752 71,005,451 113,674,062
----------- ----------- ------------ ------------
Gross profit 24,758,804 37,672,334 50,171,457 79,523,820
Selling, general and administrative expenses 14,866,324 26,470,917 33,310,912 57,602,848
----------- ----------- ------------ ------------
Income from operations 9,892,480 11,201,417 16,860,545 21,920,972
Income from Joint Venture -- (1,382,539) -- (8,167,676)
Other (income) expense -- (91,670) -- 980,705
Interest income (535,646) (1,112,255) (1,066,497) (3,272,543)
Interest expense 1,093 173,182 170,820 173,182
----------- ----------- ------------ ------------
Income before provision for income taxes 10,427,033 13,614,699 17,756,222 32,207,304
Provision for income taxes 2,784,993 3,846,152 4,754,048 9,598,563
----------- ----------- ------------ ------------
Net income $ 7,642,040 $ 9,768,547 $ 13,002,174 $ 22,608,741
=========== =========== ============ ============
Net income per share - basic $ 0.48 $ 0.50 $ 0.98 $ 1.17
=========== =========== ============ ============
Net income per share - diluted $ 0.44 $ 0.48 $ 0.86 $ 1.11
=========== =========== ============ ============
</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 Nine Months Ended September 30, 1999 and 2000 (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 2000
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $13,002,174 $22,608,741
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,363,609 5,830,026
Change in operating assets and liabilities
Accounts receivable (22,711,526) (40,738,534)
Preferred return from joint venture -- 1,396,834
Inventory (6,518,864) (12,936,242)
Advanced royalty payments (624,895) (793,821)
Prepaid expenses and other 375,188 (1,746,213)
Accounts payable and accrued expenses 28,694,986 19,367,170
Income taxes payable 1,808,583 4,632,781
Deferred income taxes 179,082 (543,451)
Sale of marketable securities -- 32,329,655
----------- -----------
Total adjustments 3,566,163 6,798,205
----------- -----------
Net Cash provided by operating activities 16,568,337 29,406,946
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid in excess of fair value of
toy business assets acquired (goodwill) (4,365,209) (24,327,997)
Purchase of Property and equipment (5,899,949) (10,962,538)
Other assets 173,071 (35,693)
Investment in joint venture (9,144) --
Repurchase of common stock -- (3,324,007)
----------- -----------
Net Cash used by investing activities (10,101,231) (38,650,235)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 51,898,066 --
Proceeds from stock options and warrants exercised 3,047,536 1,119,806
Dividends paid on convertible preferred stock (437,500) --
Notes Receivable - Officers -- (2,606,706)
Acquired debt -- 1,500,000
Repayment of long term debt -- (13,681)
----------- -----------
Net Cash provided (used) by financing activities 54,508,102 (581)
----------- -----------
Net increase in cash and cash equivalents 60,975,208 (9,243,870)
Cash and cash equivalents, beginning of period 12,452,201 57,546,406
----------- -----------
Cash and cash equivalents, end of period $73,427,409 $48,302,536
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 2,945,465 $ 5,660,289
=========== ===========
Interest $ 170,820 $ 172,881
=========== ===========
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
September 30, 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)
September 30, 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 SEPTEMBER 30,
----------------------------------------------------------------------------------
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 available to
common stockholders......... $7,642,040 16,037,041 $0.48 $9,768,547 19,389,112 $0.50
---------- ---------- ----- ---------- ---------- -----
Effect of dilutive securities
Options and warrants......... -- 1,504,134 -- 941,085
-------- ---------- ---------- ----------
Net income per share - diluted
Income available to common
stockholders plus assumed
exercises and conversions... $7,642,040 17,541,175 $0.44 $9,768,547 20,330,197 $0.48
========== ========== ===== ========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
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................... $13,002,174 $22,608,741
Preferred Stock Dividends... (437,500) --
---------- -----------
Net income available to
common stockholders......... 12,564,674 12,843,090 $0.98 22,608,741 19,352,851 $1.17
---------- ---------- ----- ----------- ---------- -----
Effect of dilutive securities
Options and warrants......... -- 1,238,493 -- 1,008,160
9% convertible debentures.... 116,867 624,360 -- --
7% convertible preferred
stock..................... 437,500 542,842 -- --
-------- ---------- ----------- ---------
Net income per share - diluted
Income available to common
stockholders plus assumed
exercises and conversions... $13,119,041 15,248,785 $0.86 $22,608,741 20,361,011 $1.11
========== ========== ===== =========== ========== =====
</TABLE>
7
<PAGE> 8
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.
During the third quarter of 2000, the Company purchased 268,100 shares of
its common stock at an average price of $12.40 per share pursuant to a buy-back
program approved by the Board of Directors.
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 ("Berk"), 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. ("Flying Colors") 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 branded products achieve certain
prescribed levels in each of such period.
On July 28, 2000, the Company acquired all of the outstanding capital stock
of Pentech International, Inc. ("Pentech") for an aggregate purchase price of
approximately $20.6 million, which was paid in cash on the closing of the
transaction. In addition, the Company paid on the closing $10.0 million to pay
down certain indebtedness of Pentech, assumed liabilities of approximately $25.5
million and incurred estimated legal and other acquisition costs of
approximately $1.2 million. Pentech designs, produces and markets licensed pens,
markers, pencils and other writing instruments, craft and activity kits, and
related stationery products.
Note 6 -- Notes Receivable From Officers
As of September 30, 2000, there were two notes receivable from officers
totaling $2,356,706 issued at interest rates of 6.5% each, with interest
payable on each April 28 and October 28 of each year, and principal payable at
a maturity date of April 28, 2003. Additionally, there is a third note
receivable from an officer for $250,000 issued at an interest rate of 7.0%,
with interest and principal payable at a maturity date of May 12, 2002.
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 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, 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. In July 2000, we acquired Pentech whose product lines
include pens, markers, pencils, and other writing instruments, crafts and
activity kits, and related stationery products. Pentech product lines
contributed to operations beginning in August 2000.
8
<PAGE> 9
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, (5) Pentech pens,
markers, pencils, and other writing instruments, craft and activity kits, and
related stationery products, and (6) 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.
Through the acquisition of Pentech in July 2000, we became a fifty percent
member of a Chinese joint venture engaged in the manufacture of pencils, pens,
and markers that are sold individually, in sets or are included in Pentech and
Flying Colors activity kits.
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.
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
$72.0 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.
9
<PAGE> 10
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1999 2000 1999 2000
------ ------ ------- -------
<S> <C> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 58.9 59.0 58.6 58.8
----- ----- ----- -----
Gross profit.......................................... 41.1 41.0 41.4 41.2
Selling, general and administrative expenses.......... 24.7 28.8 27.5 29.9
----- ----- ----- -----
Income from operations................................ 16.4 12.2 13.9 11.3
Income from joint venture............................. -- (1.5) -- (4.2)
Interest, net......................................... (0.9) (1.0) (0.7) (1.6)
Other expenses........................................ 0.0 (0.1) -- 0.5
----- ----- ----- -----
Income before income taxes............................ 17.3 14.8 14.6 16.6
Provision for income taxes............................ 4.6 4.2 3.9 5.0
----- ----- ----- -----
Net income............................................ 12.7% 10.6% 10.7% 11.6%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net Sales. Net sales increased $31.6 million, or 52.5%, to $91.8 million in
2000 from $60.2 million in 1999. The significant growth in net sales was due
primarily to the continuing growth in our Wheels division, consisting primarily
of our Road Champs die-cast toy and collectible vehicles with its BXS die-cast
bicycles and MXS die-cast motorcycles, fashion and holiday dolls, as well as the
addition of Flying Colors products, which began contributing to operations
beginning in the fourth quarter of 1999, and Pentech products, which began
contributing to operations in August 2000, offset by a decrease in sales of our
WWF wrestling products.
Gross Profit. Gross profit increased $12.9 million, or 52.2%, to $37.7
million in 2000, or 41.0% of net sales, from $24.8 million, or 41.1% of net
sales, in 1999. The overall increase in gross profit was attributable to the
significant increase in net sales. The decrease in gross profit margin of 0.1%
of Net Sales is attributed to the increase in amortization expense of molds and
tools used in the manufacture of our products and royalty expense as a
percentage of net sales due to changes in the product mix and the launch of a
larger number of products in 2000, which is partially offset by lower product
costs associated with the BXS, MXS and wrestling products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $26.5 million in 2000 and $14.9 million in 1999,
constituting 28.8% and 24.7% of net sales, respectively. The overall significant
increase of $11.6 million in such costs was due to costs incurred in support of
the Company's development, marketing and distribution of products under its
recently acquired Flying Colors and Pentech brands. The overall dollar increase
was 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 higher average cash balances during 2000 than in 1999
due to the net proceeds from the sale of our common stock in December 1999. In
addition, we assumed certain interest-bearing obligations in 2000 in conjunction
with the Pentech acquisition and we had convertible debentures outstanding in
1999.
Other Income. Other income was nominal in 2000. No such income was incurred
in 1999.
10
<PAGE> 11
Provision for Income Taxes. Provision for income taxes included Federal,
state and foreign income taxes in 1999 and 2000, at effective tax rates of 26.7%
in 1999 and 28.2% in 2000, benefiting from a flat 16.5% Hong Kong Corporation
Tax on our income arising in, or derived from, Hong Kong. As of September 30,
2000, we had deferred tax assets of approximately $1.8 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.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net Sales. Net sales increased $72.0 million, or 59.4%, to $193.2 million
in 2000 from $121.2 million in 1999. The significant growth in net sales was due
primarily to the continuing growth 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, as well as the addition of
Flying Colors products, which began contributing to operations beginning in the
fourth quarter of 1999, and Pentech products, which began contributing to
operations in August 2000, offset by a decrease in sales of our WWF wrestling
products.
Gross Profit. Gross profit increased $29.4 million, or 58.5%, to $79.5
million in 2000, or 41.2% of net sales, from $50.2 million, or 41.4% of net
sales, in 1999. The overall increase in gross profit was attributable to the
significant increase in net sales. Gross profit margin did not significantly
change. However, the slight increase is mainly attributed to an increase in the
amortization expense of molds and tools used in the manufacture of our products
and royalty expense as a percentage of net sales due to changes in the product
mix and the launch of a larger number of products in 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $57.6 million in 2000 and $33.3 million in 1999,
constituting 29.8% and 27.5% of net sales, respectively. The overall significant
increase of $24.3 million in such costs was due to costs incurred in support of
the Company's development, marketing and distribution of products under its
recently acquired Flying Colors and Pentech brands. The overall dollar increase
was 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 significantly higher average cash balances during 2000
than in 1999 due to the net proceeds from the sale of our common stock in
December 1999. In addition, we assumed certain interest-bearing obligations in
2000 in conjunction with the Pentech acquisition and we had convertible
debentures outstanding in 1999.
Other Expense Net. 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 26.8%
in 1999 and 29.8% in 2000, benefiting from a flat 16.5% Hong Kong Corporation
Tax on our income arising in, or derived from, Hong Kong. As of September 30,
2000, we had deferred tax assets of approximately $1.8 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.
11
<PAGE> 12
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 fourth and
first fiscal quarters. The Company's working capital needs have been highest
during the third and fourth quarters.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had working capital of $103.4 million, as
compared to $113.2 million as of December 31, 1999. This decrease was primarily
attributable to our operating activities.
Operating activities provided net cash of $29.4 million in 2000, as
compared to $16.6 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 preferred return from THQ joint
venture, and an increase in accounts payable and accrued expenses and income
taxes payable, which were offset in part by increases in accounts receivable,
inventory, advanced royalty payments and prepaid expenses and other and a
decrease in deferred income taxes. Excluding the sale of marketable securities
and inventory and accounts receivable acquired in the Pentech acquisition, cash
flow from operations was $14.9 million in 2000. As of September 30, 2000, we had
cash and cash equivalents of $48.3 million and marketable securities of $7.0
million.
Our investing activities used net cash of $38.7 million in 2000, as
compared to $10.1 million in 1999, consisting primarily of the purchase of molds
and tooling used in the manufacture of our products and goodwill in 2000 and
1999 and the repurchase of common shares in 2000. 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 18% payable on net sales of
such products. As of September 30, 2000, these agreements required future
aggregate minimum guarantees of $14.4 million, exclusive of $1.9 million in
advances already paid.
Our financing activities used net cash of $581 in 2000, consisting
primarily of notes receivable from officers, offset by proceeds from the
exercise of options and warrants and acquired debt. In 1999, financing
activities provided net cash of $54.5 million, consisting primarily of proceeds
from sales of common stock and 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 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
product line through the purchase of all the outstanding capital stock of Flying
Colors, 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' senior executives and most of its creative design
and product development staff have remained with Flying Colors Toys. Flying
Colors' 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.
On July 28, 2000, the Company acquired all of the outstanding capital stock
of Pentech for an aggregate purchase price of approximately $20.6 million, which
was paid in cash on the closing of the transaction. In addition, the Company
paid on the closing $10.0 million to pay down certain indebtedness of Pentech,
assumed liabilities of approximately $25.5 million and incurred estimated legal
and other acquisition costs of approximately $1.2 million. In December 1999,
Pentech renewed a three-year $25,000,000 Revolving Credit Agreement with Bank
America Business Credit, Inc. now known as Bank of America, N.A. ("BABC") (the
"Credit Agreement"). Borrowings under the Credit Agreement are subject to
limitations based upon eligible inventory and accounts receivable as defined in
the Credit Agreement. Amounts borrowed under the Credit Agreement accrue
interest, at Pentech's option, at either prime plus 0.5% or libor plus 2.5%.
Pentech designs, produces and markets licensed pens, markers, pencils, and other
writing instruments, craft and activity kits, and related stationery products.
We believe that our cash flow from operations, cash and cash equivalents on
hand and marketable securities as well as the available borrowings under the
bank line 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.
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 September 30,
2000, we have not used derivative instruments or engaged in hedging activities
to minimize our market risk.
INTEREST RATE RISK
We have financial instruments that are subject to interest rate risk
including both debt and investment instruments. Due to the conservative nature
of our investments and relatively short duration, we believe interest rate risk
is mitigated.
We assumed a three-year $25,000,000 revolving credit line with BABC in
conjunction with the Pentech acquisition. Amounts borrowed under the Credit
Agreement accrue interest at Pentech's option, at either prime plus 0.5% or
libor plus 2.5%. Based on our current working capital levels and our cash flow
from operations, we do not expect to utilize our credit line. Accordingly, we
believe that our exposure to interest rate risk is not material.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 Agreement of Merger dated as of May 22, 2000 among the Company,
JAKKS Acquisition II, Inc. and Pentech International Inc.(1)
2.2 First Amendment dated as of July 13, 2000 to Agreement of
Merger(2)
2.3 Voting and Lock-Up Agreement dated May 22, 2000 among the
Company and certain stockholders of Pentech International
Inc.(3)
3.1 Restated Certificate of Incorporation of the Company(4)
3.1.1 Certificate of Designation and Preferences of Series A
Cumulative Convertible Preferred Stock of the Company(5)
3.1.2 Certificate of Elimination of All Shares of 4% Redeemable
Convertible Preferred Stock of the Company(5)
3.1.3 Certificate of Amendment of Restated Certificate of
Incorporation of the Company(6)
3.2.1 By-Laws of the Company(4)
3.2.2 Amendment to By-Laws of the Company(7)
10.1 Loan and Security Agreement dated as of January 13, 1997 among
Pentech International Inc., certain subsidiaries thereof and
Bank of America, N.A. (formerly BankAmerica Business Credit,
Inc.)(8)
10.2 Waiver and First Amendment dated as of January 11, 1999 to Loan
and Security Agreement(9)
10.3 Waiver, Consent and Second Amendment dated as of December 20,
1999 to Loan and Security Agreement(10)
10.4 Consent, Waiver and Third Amendment dated as of July 27, 2000 to
Loan and Security Agreement(11)
10.5 Lease dated February 1993 between Edison Equities and Pentech
International Inc.(12)
10.6 Agreement of Lease dated August 28, 1995 between 1101 CR NB,
L.L.C. (successor in interest to Pensud Company Limited
Partnership) and Pentech International Inc.(13)
10.7 First Amendment to Lease dated April 19, 2000 between 1101 CR
NB, L.L.C. and Pentech International Inc.(14)
27 Financial Data Schedule(15)
</TABLE>
------------
(1) Incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K, filed August 11, 2000.
(2) Incorporated by reference to Exhibit 2.2 of the Company's Current
Report on Form 8-K, filed August 11, 2000.
(3) Incorporated by reference to Exhibit 2.3 of the Company's Current
Report on Form 8-K, filed August 11, 2000.
(4) 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.
(5) Filed previously as an exhibit to the Company's Current Report on Form
8-K, filed April 7, 1998, and incorporated herein by reference.
(6) 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.
(7) 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.
(8) Incorporated by reference to exhibit 10.7 of the Annual Report on Form
10-K of Pentech International Inc. for its fiscal year ended September
30, 1996.
(9) Incorporated by reference to exhibit 10.5 of the Annual Report on Form
10-K of Pentech International Inc. for its fiscal year ended September
30, 1998.
(10) Incorporated by reference to exhibit 10.6 of the Annual Report on Form
10-K of Pentech International Inc. for its fiscal year ended September
30, 1999.
(11) Incorporated by reference to Exhibit 10.4 of the Company's Current
Report on Form 8-K, filed August 11, 2000.
(12) Incorporated by reference to Exhibit 10.10 of the Annual Report on Form
10-K of Pentech International Inc. for its fiscal year ended September
30, 1993.
(13) Incorporated by reference to Exhibit 10.7 of the Annual Report on Form
10-K of Pentech International Inc. for its fiscal year ended September
30, 1995.
(14) Incorporated by reference to Exhibit 10.15 of the Company's Quarterly
Report on Form 10-Q for its quarter ended June 30, 2000, filed on August
14, 2000.
(15) Filed herewith.
(b) Reports on Form 8-K
A Current Report on Form 8-K relating to the Company's acquisition of
Pentech International was filed on August 11, 2000 and an amendment
thereto on Form 8-K/A was filed on October 11, 2000, which amendment
included financial statements of Pentech International for its fiscal
year ended September 30, 1999 and its three and nine month periods ended
June 30, 2000 and pro forma financial information relating to the
Company's acquisition of Pentech International.
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: November 8, 2000 By: /s/ Joel M. Bennett
--------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
------ ----------- -----
<S> <C> <C>
2.1 Agreement of Merger dated as of May 22, 2000 among the Company,
JAKKS Acquisition II, Inc. and Pentech International Inc.(1)
2.2 First Amendment dated as of July 13, 2000 to Agreement of
Merger(2)
2.3 Voting and Lock-Up Agreement dated May 22, 2000 among the
Company and certain stockholders of Pentech International
Inc.(3)
3.1 Restated Certificate of Incorporation of the Company(4)
3.1.1 Certificate of Designation and Preferences of Series A
Cumulative Convertible Preferred Stock of the Company(5)
3.1.2 Certificate of Elimination of All Shares of 4% Redeemable
Convertible Preferred Stock of the Company(5)
3.1.3 Certificate of Amendment of Restated Certificate of
Incorporation of the Company(6)
3.2.1 By-Laws of the Company(4)
3.2.2 Amendment to By-Laws of the Company(7)
10.1 Loan and Security Agreement dated as of January 13, 1997 among
Pentech International Inc., certain subsidiaries thereof and
Bank of America, N.A. (formerly BankAmerica Business Credit,
Inc.)(8)
10.2 Waiver and First Amendment dated as of January 11, 1999 to Loan
and Security Agreement(9)
10.3 Waiver, Consent and Second Amendment dated as of December 20,
1999 to Loan and Security Agreement(10)
10.4 Consent, Waiver and Third Amendment dated as of July 27, 2000 to
Loan and Security Agreement(11)
10.5 Lease dated February 1993 between Edison Equities and Pentech
International Inc.(12)
10.6 Agreement of Lease dated August 28, 1995 between 1101 CR NB,
L.L.C. (successor in interest to Pensud Company Limited
Partnership) and Pentech International Inc.(13)
10.7 First Amendment to Lease dated April 19, 2000 between 1101 CR
NB, L.L.C. and Pentech International Inc.(14)
27 Financial Data Schedule(15)
</TABLE>
--------------
(1) Incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K, filed August 11, 2000.
(2) Incorporated by reference to Exhibit 2.2 of the Company's Current
Report on Form 8-K, filed August 11, 2000.
(3) Incorporated by reference to Exhibit 2.3 of the Company's Current
Report on Form 8-K, filed August 11, 2000.
(4) 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.
(5) Filed previously as an exhibit to the Company's Current Report on Form
8-K, filed April 7, 1998, and incorporated herein by reference.
(6) 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.
(7) 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.
(8) Incorporated by reference to exhibit 10.7 of the Annual Report on Form
10-K of Pentech International Inc. for its fiscal year ended September
30, 1996.
(9) Incorporated by reference to exhibit 10.5 of the Annual Report on Form
10-K of Pentech International Inc. for its fiscal year ended September
30, 1998.
(10) Incorporated by reference to exhibit 10.6 of the Annual Report on Form
10-K of Pentech International Inc. for its fiscal year ended September
30, 1999.
(11) Incorporated by reference to Exhibit 10.4 of the Company's Current
Report on Form 8-K, filed August 11, 2000.
(12) Incorporated by reference to Exhibit 10.10 of the Annual Report on Form
10-K of Pentech International Inc. for its fiscal year ended September
30, 1993.
(13) Incorporated by reference to Exhibit 10.7 of the Annual Report on Form
10-K of Pentech International Inc. for its fiscal year ended September
30, 1995.
(14) Incorporated by reference to Exhibit 10.15 of the Company's Quarterly
Report on Form 10-Q for its quarter ended June 30, 2000, filed on August
14, 2000.
(15) Filed herewith.
