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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------- ------------
COMMISSION FILE NUMBER: 0-23215
TOYMAX INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3391335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 EAST BETHPAGE ROAD
PLAINVIEW, NY 11803
(Address, including zip code, of principal executive offices)
(516) 391-9898
(Registrant's telephone number, including area code)
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.
(1)Yes X No
- -
(2)Yes No X
- -
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock, par value $.01, 10,605,000 as of November 25, 1997.
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TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations
for the Quarters Ended September 30, 1997 and 1996
and for the Six Months Ended September 30, 1997 and 1996 4
Condensed Consolidated Statement of Cash Flows for
the Six Months Ended September 30, 1997 and 1996 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
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TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
SEPT. 30, MARCH 31,
1997 1997
--------- ---------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents $ 6,001 $ 565
Due from Factor 27,153 14,311
Accounts receivable, net 3,937 2,227
Due from affiliates 4 4
Due from officers 2 172
Inventories 5,885 4,797
Prepaid expenses and other current assets 1,437 797
Deferred income taxes 1,007 1,007
------- -------
Total current assets 45,426 23,880
Property and equipment, net 2,255 2,191
Deferred income taxes 57 57
Other assets 374 150
------- -------
Total assets $48,112 $26,278
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank credit facility $13,264 $ 8,447
Accounts payable 2,032 1,649
Accrued expenses 5,394 2,920
Accrued rebates and allowances 4,386 1,426
Due to affiliates 14,376 10,756
Due to officer - 504
Current portion of long-term obligations 38 38
Income taxes payable 2,415 275
------- -------
Total current liabilities 41,905 26,015
Long-term obligations 60 8
Total liabilities 41,965 26,023
------- -------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share;
5,000,000 shares authorized; none outstanding - -
Common stock, par value $.01 per share; 50,000,000
shares authorized; 7,500,000 shares issued and
outstanding 58 58
Additional paid-in capital 190 -
Retained earnings 5,914 212
Cumulative foreign currency translation adjustment (15) (15)
------- -------
Total stockholders equity 6,147 255
------- -------
Total liabilities and stockholders' equity $48,112 $26,278
======= =======
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
3
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TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales $37,176 $14,921 $44,267 $17,600
Costs and expenses:
Cost of goods sold 20,287 8,988 24,071 11,354
Selling and administrative expenses 7,811 3,735 11,475 6,568
------- ------- ------- -------
Operating income (loss) 9,078 2,198 8,721 (322)
Other income (expenses):
Other income, net (107) 259 (57) 505
Interest income 13 4 31 14
Interest expense (235) (36) (384) (87)
Finance charges (303) (108) (386) (133)
------- ------- ------- -------
Income (loss) before income taxes 8,446 2,317 7,925 (23)
Provision (benefit) for income taxes
(Note 7) 2,375 330 2,223 (592)
------- ------- ------- -------
Net income $ 6,071 $ 1,987 $ 5,702 $ 569
======= ======= ======= =======
Earnings per share (Note 4) $ 0.81 $ 0.26 $ 0.76 $ 0.08
======= ======= ======= =======
Shares used in computing earnings per
share 7,500 7,500 7,500 7,500
======= ======= ======= =======
Supplemental net income per share
(Note 5) $ 0.77 $ 0.70
======= =======
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
4
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TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
September 30,
--------------------
1997 1996
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,702 $ 569
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 572 704
Bad debts 122 2
Non-cash compensation 187 -
Loss on disposal of property and equipment 8 1
Minority interest (32) -
Changes in operating assets and liabilities:
Due from Factor and accounts receivable (14,674) (2,061)
Due from affiliates - (1)
Inventories (1,087) (2,340)
Prepaid expenses and other current assets (640) (294)
Income tax refunds receivable - 2,839
Other assets (192) 127
Accounts payable and accruals 5,817 (3,700)
Due to affiliates 3,619 4,633
Income taxes payable 2,140 247
-------- -------
Net cash provided by operating activities 1,542 726
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (679) (357)
Proceeds from disposals of property and equipment 36 24
Repayments from (advances to) officers 169 (2)
-------- -------
Net cash provided by (used in) investing
activities (474) (335)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in bank credit facility 4,817 (473)
Long-term borrowings 52 (43)
Capital contributions 3 -
Borrowings from officer (504) 483
-------- -------
Net cash provided by (used in) financing
activities 4,368 (33)
-------- -------
Net increase in cash and cash equivalents 5,436 358
Cash and cash equivalents, beginning of year 565 1,269
-------- -------
Cash and cash equivalents, end of period $ 6,001 $ 1,627
======== =======
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
5
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TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
- ---------------------------------------------------
The accompanying unaudited condensed consolidated financial statements of Toymax
International, Inc. ("Toymax" or the "Company") include the accounts of the
Company and its subsidiaries after elimination of all material intercompany
accounts and transactions, and have been prepared in accordance with the
instructions to Form 10-Q. Accordingly, the unaudited consolidated financial
statements do not include all of the financial information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The balance sheet at March 31, 1997 has been derived from the audited
balance sheet at that date. It is suggested that these condensed consolidated
financial statements, which are presented in U.S. dollars, be read in
conjunction with the consolidated financial statements and related notes
included in the Company's prospectus dated October 20, 1997. The results of
operations and financial position for interim periods are not necessarily
indicative of those to be expected for a full year, due, in part, to seasonal
fluctuations which are normal for the Company's business.
NOTE 2 - REORGANIZATION
- ------------------------
Toymax International, Inc., a Delaware corporation ("Toymax" and the "Company")
was organized in Delaware on August 6, 1997 to acquire and continue the various
businesses conducted by Toymax Inc., a New York corporation ("Toymax NY"),
Toymax (H.K.) Limited, a private company organized under the laws of Hong Kong
("Toymax HK"), Toymax (Bermuda) Limited, a company organized under the laws of
Bermuda ("Toymax Bermuda"), Toymax (Canada) Limited, a corporation organized
under the laws of the Province of Ontario ("Toymax Canada") and Toymax (U.K.)
Limited, a company organized under the laws of England and Wales ("Toymax UK"
and collectively, the "Toymax Group"). Toymax HK and Toymax NY, historically
the Company's principal operating entities, were each formed in 1990. Toymax
Canada was formed in August 1997 and Toymax Bermuda was formed in September
1997. Toymax Bermuda will continue the business previously carried out by
Toymax HK on a going forward basis. Toymax NY owns a 75% interest in Craft
Expressions, Inc. ("Craft"), a New York corporation. The Company sold 2,700,000
shares of common stock for $8.50 per share pursuant to an initial public
offering (the "Public Offering") which closed on October 24, 1997. In
conjunction with the Public Offering, the Company completed the reorganization
on October 20, 1997 pursuant to which: (i) Toymax HK contributed all of the
outstanding capital stock of its wholly-owned subsidiaries, Toymax NY and Toymax
UK, to the Company and (ii) the stockholders of Toymax HK exchanged their
100,000 ordinary shares of Toymax HK stock for 425,686 shares of Common Stock of
the Company and 4,500,000 shares of Preferred Stock of Toymax HK for 24,224
shares of Common Stock of the Company (the "Reorganization"). Following the
Reorganization, Toymax NY, Toymax HK, Toymax Bermuda, Toymax Canada and Toymax
UK are direct or indirect wholly-owned subsidiaries of Toymax. The Company also
effected a 16.67 to one stock split on October 20, 1997.
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The Reorganization has been accounted for as a reorganization of entities under
common control in a manner similar to a pooling of interests. The financial
statements present the results of the Company and its subsidiaries as if the
Company had been combined for all periods presented.
NOTE 3 - RECAPITALIZATION
- --------------------------
The equity accounts of the Company have been retroactively adjusted for the
Reorganization and the 16.67 to one stock split by the Company described above.
NOTE 4 - EARNINGS PER SHARE
- ----------------------------
Per share data is calculated using the weighted average number of common shares
outstanding during the period.
On March 3, 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share"("FAS 128"). This pronouncement provides for the
calculation of Basic and Diluted earning per share which is different from the
current calculation of Primary and Fully Diluted earnings per share. FAS 128 is
effective for financial statements for periods ending after December 15, 1997.
The adoption of FAS 128 is not expected to have a material impact on the
Company's earnings (loss) per share data.
NOTE 5 - SUPPLEMENTAL NET INCOME PER SHARE
- -------------------------------------------
Supplemental net income per share is based on the weighted average number of
shares of common stock and common stock equivalents used in the calculation of
income per share (7,500,000 shares at March 31, 1997 and September 30, 1997),
plus the estimated number of shares (528,000 for March 31, 1997 and 1,111,000
for September 30, 1997) that would need to be sold by the Company in order to
fund the repayment of the outstanding bank debt, ($8.4 million at April 1, 1997)
which were paid out of the proceeds of the Public Offering.
NOTE 6 - INITIAL PUBLIC OFFERING
- ---------------------------------
On October 20, 1997, the Company sold 2,700,000 shares of common stock for $8.50
per share pursuant to an initial public offering. The proceeds, net of
underwriting discounts and Public Offering related fees and expenses, of
approximately $21.2 million were used to pay bank indebtedness of $10.0 million
and trade payables to affiliates of $6.0 million and the balance was intended
for working capital and general corporate purposes.
In November 1997, the underwriters exercised their over-allotment option in full
and, as a result, the Company sold an additional 405,000 shares at $8.50 per
share. The net proceeds of approximately $3.2 million are intended to be used
to further reduce bank indebtedness and for working capital and general
corporate purposes.
NOTE 7 - INCOME TAXES
- ----------------------
The Company provides for income taxes during interim periods based upon an
estimate of the effective annual tax rate.
7
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NOTE 8 - NEW ACCOUNTING STANDARDS NOT YET ADOPTED
- --------------------------------------------------
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards. Results of operations and financial position will be unaffected by
implementation of these new standards.
Statement of Financial Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME,
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, which supersedes SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS
OF A BUSINESS ENTERPRISE, establishes standards for the way that public
enterprises report information about operating segments in interim financial
statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographical areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for the
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any, they
may have on future financial statement disclosures.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING CAUTIONARY STATEMENT IS INCLUDED IN THIS QUARTERLY REPORT PURSUANT
TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995:
From time to time, information provided by the Company or statements made by its
employees may contain "forward-looking" statements, as that term is defined in
the PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "may," "estimate," "continue,"
"intends," "expects," and similar expressions are intended to identify
forward-looking statements.
This Form 10-Q may contain forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such statements. Certain factors that could cause such a
difference include, without limitation, the risks specifically described in the
Company's Registration Statement on Form S-1. Registration No. 333-33409, filed
with the Securities and Exchange Commission in connection with its recent
initial public offering, which factors are incorporated herein by reference, and
other factors including, without limitation, the demand for Laser Challenge and
other products of the Company; the Company's dependence on timely development,
introduction and customer acceptance of new products; possible weakness of the
Company's markets; dependence on a limited number of major customers; the impact
of competition on revenues, margins and pricing; the effect of currency
fluctuations; other risks and uncertainties as may be disclosed from time to
time in the Company's public announcements; the general state of the economy in
the United States and other major markets; customer inventory levels; the cost
and availability of raw materials; and changes in trade relations regarding
China.
RESULTS OF OPERATIONS
FOR PURPOSES OF THE THREE MONTH AND SIX MONTH COMPARISONS BELOW, FIGURES
REFERRING TO THE FINANCIAL PERFORMANCE OF TOYMAX NY (WHICH HAS CONDUCTED THE
COMPANY'S U.S. DOMESTIC SALES) ARE REFERRED TO AS THE "U.S. DOMESTIC OPERATION"
AND THOSE REFERRING TO THE PERFORMANCE OF TOYMAX HK (WHICH HAS CONDUCTED THE
TOYMAX HK SALES) ARE REFERRED TO AS THE "FOB HONG KONG OPERATION."
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
NET SALES. Net sales for the quarter ended September 30, 1997 increased by
approximately $22.3 million, or 149.1%, to approximately $37.2 million from
$14.9 million for the quarter ended September 30, 1996.
Net sales of the U.S. Domestic Operation increased 310.6% to $24.5 million,
or 65.9% of total net sales, in the quarter ended September 30, 1997, from $6.0
million, or 40.0% of total net sales, for the quarter ended September 30, 1996.
Net sales of the FOB Hong Kong Operation increased 41.4% to $12.7 million, or
34.1% of total net sales, in the quarter ended September 30, 1997 from $9.0
million, or 60.0% of total net sales, in the quarter ending September 30, 1996.
9
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The increase in sales, in both operations, was mainly attributable to the
inclusion of the Laser Challenge and Metal Molder product lines for the full
period in 1997 compared to only a portion of the period in 1996 when they were
first introduced. These lines were initially shipped to customers in the latter
part of the quarter ended September 30, 1996.
GROSS PROFIT. Gross Profit for the quarter ended September 30, 1997,
increased by approximately $11.0 million, or 184.6%, to approximately $16.9
million, or 45.4% of net sales, from approximately $5.9 million, or 39.8% of net
sales, for the quarter ended September 30, 1996. The increase in gross profit
as a percentage of net sales was mainly attributable to an improvement in the
U.S. Domestic Operation which was primarily due to higher product margins on
invoiced sales partially offset by an increase in customer discounts and
allowances. In addition, the U.S. Domestic Operation, which carries a higher
gross profit margin than the FOB Hong Kong Operation, represented 65.9% of total
net sales for the quarter ended September 30, 1997 compared to 40.0% for the
quarter ended September 30, 1996.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
for the quarter ended September 30, 1997 increased by approximately $4.1
million, or 109.1%, to approximately $7.8 million, or 21.0% of net sales, from
approximately $3.7 million, or 25.0% of net sales, for the quarter ended
September 30, 1996. The increase in selling and administrative expenses was
mainly attributable to an increase in advertising expenses of $1.9 million
primarily to support the sales of Laser Challenge and an increase in payroll
expenses of $1.5 million primarily reflecting increased staffing and a provision
for the Executive Bonus Plan. The decrease in selling and administrative
expenses as a percent of net sales was primarily due to the improvement in net
sales.
OPERATING INCOME . As a result of the foregoing, operating income for the
quarter ended September 30, 1997 increased by approximately $6.9 million, or
312.9%, to approximately $9.1 million from $2.2 million for the quarter ended
September 30, 1996.
NET INTEREST EXPENSE. Net interest expense for the quarter ended September
30, 1997 increased by approximately $191,000, or 602.4%, to approximately $0.2
million from approximately $32,000 for the quarter ended September 30, 1996.
The increase in net interest expense was mainly due to higher interest costs
reflecting an increase in average borrowings under the Company's credit
facility.
OTHER INCOME (EXPENSE), NET. Other income (expense), net for the quarter
ended September 30, 1997 decreased by approximately $0.6 million or 382.9%, to
expense of $0.4 million from income of $0.2 million. The decrease in other
income (expense) is primarily the result of the termination of an agency
agreement between Toymax (H.K.) and another unaffiliated international toy
distributor on December 31, 1996. In addition, there was an increase in finance
charges as a direct result of the increase in sales for the quarter ended
September 30, 1997.
INCOME BEFORE TAXES. Income before taxes for the quarter ending September
30, 1997 increased by approximately $6.1 million to $8.4 million, compared to
income before taxes of approximately $2.3 million for the quarter ended
September 30, 1996.
PROVISION FOR INCOME TAXES. The provision for income taxes for the quarter
ending September 30, 1997 increased by approximately $2.0 million, or 619.9%, to
$2.4 million from a provision of approximately $0.3 million for the quarter
ended September 30, 1996. The effective tax rate increased to 28.1% for the
quarter ended September 30, 1997 from 14.2% for the quarter ended September 30,
1996. The increased effective tax rate was primarily due to an increased
10
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contribution to net income by the U.S. Domestic Operation, which is subject to a
higher tax rate than the FOB Hong Kong Operation.
NET INCOME. As a result of the foregoing, net income for the quarter ended
September 30, 1997 increased by approximately $4.1 million, or 205.5%, to net
income of $6.1 million ($0.81 per share) from net income of approximately $2.0
million ($0.26 per share) for the quarter ended September 30, 1996.
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 30,
1996
NET SALES. Net sales for the six months ended September 30, 1997 increased
by approximately $26.7 million, or 151.5%, to approximately $44.3 million from
$17.6 million for the six months ended September 30, 1996. This increase in
sales was mainly attributable to the inclusion of the Laser Challenge and Metal
Molder product lines for the full period in 1997 compared to only a portion of
the period in 1996 when they were first introduced. These lines accounted for
approximately 78.3% of net sales in the first six months of fiscal 1998 as
compared to 11.2% in the first six months of fiscal 1997.
Net sales of the U.S. Domestic Operation increased 316.1% to $29.0 million,
or 65.5% of total net sales, for the six months ended September 30, 1997, from
$7.0 million, or 39.6% of total net sales, in the six months ended September 30,
1996. Net sales of the FOB Hong Kong Operation increased 43.8% to $15.3
million, or 34.5%, of total net sales for the six months ended September 30,
1997 from $10.6 million, or 60.4% of total net sales for the six months ended
September 30, 1996.
GROSS PROFIT. Gross profit for the six months ended September 30, 1997
increased by approximately $14.0 million, or 223.3% to approximately $20.2
million, or 45.6% of net sales, from approximately $6.3 million, or 35.5% of net
sales for the six months ended September 30, 1996. The increase in gross profit
as a percentage of net sales was mainly attributable to an increase of
approximately 15.0% as a percentage of net sales in the U.S. Domestic Operation
and an increase of 0.4% as a percentage of net sales in the FOB Hong Kong
Operation. In addition, gross profit was favorably impacted by the increase in
the percentage of total net sales of the U.S. Domestic Operation which carries a
higher gross profit margin than the FOB Hong Kong Operation.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
for the six months ended September 30, 1997 increased by approximately $4.9
million, or 74.7%, to approximately $11.5 million, or 25.9% of net sales, from
approximately $6.6 million, or 37.3% of net sales, for the six months ended
September 30, 1996. The increase in selling and administrative expenses was
mainly attributable to increases in advertising expenses of $1.8 million in
order to support the sales of Laser Challenge and increases in payroll expenses
of $1.8 million primarily reflecting increased staffing and a provision for the
Executive Bonus Plan.
OPERATING INCOME. As a result of the foregoing, operating income for the
six months ended September 30, 1997 increased by approximately $9.0 million to
approximately, $8.7 million from a loss of $0.3 million for the six months
ended September 30, 1996.
NET INTEREST EXPENSE. Net interest expense for the six months ended
September 30, 1997 increased by approximately $0.3 million, or 388.6%, to
approximately $0.4 million from approximately $0.1 million for the six months
ended September 30, 1996. The increase in net
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interest expense was mainly due to higher interest costs reflecting an increase
in average borrowings under the Company's credit facility.
OTHER INCOME (EXPENSE), NET. Other income (expense), net for the six
months ended September 30, 1997 decreased by approximately $0.8 million, or
219.3%, to expense of $0.4 million from income of $0.4 million for the six
months ended September 30, 1996. The decrease is primarily the result of the
termination of an agency agreement between Toymax (H.K.) and another
unaffiliated toy distributor on December 31, 1996 as well as increased finance
charges as a direct result of increased sales.
INCOME (LOSS) BEFORE TAXES. Income (loss) before taxes for the six months
ended September 30, 1997 increased approximately $7.9 million to income of
approximately $7.9 million compared to a loss before taxes of $23,278 for the
six months ended September 30, 1996.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision for income taxes for
the six months ended September 30, 1997 increased by approximately $2.8 million
to approximately $2.2 million from a benefit of approximately $0.6 million for
the six months ended September 30, 1996. The effective tax rate increased to
25.5% for the six months ended September 30, 1997 from a benefit for the six
months ended September 30, 1996. The increase in the effective tax rate is
primarily the result of the Company experiencing income before taxes for the six
months ended September 30, 1997 as compared to a loss before taxes for the six
months ended September 30, 1996.
NET INCOME. As a result of the foregoing, net income for the six months
ended September 30, 1997 increased by approximately $5.1 million, or 902.2%, to
net income of approximately $5.7 million ($0.76 per share) from net income of
$0.6 million ($.08 per share) for the six months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company historically has funded its operations and capital requirements from
cash generated from operations and from financing activities. During the six
months ended September 30, 1997 cash and cash equivalents increased $5.4 million
to $6.0 million. The Company's operating activities provided net cash of
approximately $1.5 million which was primarily due to net income of $5.7 million
partially offset by changes in operating assets and liabilities including
increases in accounts receivable and amounts due from factor of $14.7 million
and increases in accounts payable, accruals and due to affiliates totaling $9.4
million. Additional cash of $4.8 million was provided by increased borrowings
under the Company's Bank Credit Facility.
The Company's initial public offering yielded approximately $21.2 million of
cash of which $10.0 million was used to pay down indebtedness under its credit
facility with State Street Bank and Trust Company ("State Street") and $6.0
million was used to pay trade payables to affiliates. The balance of the net
proceeds will be used for general corporate purposes. On November 24, 1997, the
underwriters exercised their over-allotment option in full, providing the
Company with approximately $3.2 million in additional net proceeds. These
proceeds are intended to be used to further reduce bank indebtedness and for
working capital and general corporate purposes.
The Company expects to fund its near-term cash requirements from a combination
of the net proceeds from the Public Offering, cash flow from operations and
borrowings under its credit facility with State Street. The Company expects to
finance its longer term growth primarily from cash flow from operations and with
externally generated funds that will likely include borrowings
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under its existing or future credit facilities. There can be no assurance that
sufficient cash flow from operations will materialize or that financing under a
credit facility will be available in amounts, or at rates, or on terms and
conditions acceptable to the Company. In such event, additional funding would
be required.
The Company has been notified by the Internal Revenue Service concerning a
pending examination covering tax years 1993, 1994 and 1995. As of the date of
this Form 10-Q, no issues have been raised by the Internal Revenue Service. The
Company cannot predict at this time what the outcome of the examination will be
or the impact on the Company's results of operations, if any.
13
<PAGE>
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
In April 1997, Link Group International ("Link Group"), a developer of toy
games, filed a complaint against the Company in the United States District Court
for the District of Connecticut, alleging breach of express and implied
contracts, unjust enrichment, misappropriation, conversion and tortious
interference with contract and seeking damages of $1.0 million. The substance
of the allegations in this complaint were that the Company orally agreed to pay
royalties to Link Group relating to a laser action game allegedly conceived by
Link Group, and then developed its own game using ideas provided by Link Group.
Link Group subsequently filed an amended complaint seeking, instead of a
specific quantum of damages, the greater of royalty payments allegedly due to it
or the disgorgement of profits made by the Company on Laser Challenge-TM-,
damages for the loss of good will, punitive damages, and an injunction against
the Company's further use or benefits of Link Group's alleged materials. The
Company has filed a motion to dismiss the amended complaint and the parties are
awaiting a decision. The Company intends to continue to defend the action
vigorously and does not believe that it will have a material adverse effect on
the Company's financial position or results of operations; however there can be
no assurance of the outcome.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
The Company's Registration Statement on Form S-1 (Registration No. 333-33409)
with respect to its initial public offering of securities was declared effective
and commenced on October 20, 1997 by the Securities and Exchange Commission.
The managing underwriters of the offering were Fahnestock & Co. Inc. and Wedbush
Morgan Securities Inc. The Company registered and sold 3,105,000 shares of its
Common Stock for an aggregate public offering price of $26,392,500. The
offering has since been completed.
The total amount of expenses incurred by the Company in connection with the
offering is estimated at approximately $3,288,400, which is comprised of
$1,913,400 for underwriting discounts, $75,000 of underwriter's non-accountable
expenses, and approximately $1,300,000 of other expenses (including counsel,
accounting, printing, transfer agent, SEC, NASDAQ and miscellaneous fees and
expenses). No expenses were paid to directors, officers and persons owning more
than ten percent of any class of the Company's equity securities. However,
legal expenses of approximately $300,000 were paid to Baer Marks & Upham LLP,
counsel to the Company, of which Joel M. Handel, a director of the Company, is a
partner. The resultant net offering proceeds to the Company were approximately
$23,104,000.
As of September 30, 1997, the Company had not received the proceeds from the
offering. On October 24, 1997, the Company received the offering proceeds of
$21,179,400 and on November 24, 1997, received $3,177,900 of additional offering
proceeds from the exercise in full of the underwriter's over-allotment option
with respect to 405,000 additional shares of Common Stock.
The Company has applied $10.0 million of the net proceeds to the partial
repayment of its Credit Facility Agreement with State Street Bank and $6.0
million to the partial payment of outstanding trade payables to Tai Nam
Industrial Company Limited and Concentric Toys Limited, each of which are
affiliates of David Chu, the Chairman and a principal stockholder of the
Company.
14
<PAGE>
The balance of the net proceeds are to be used to further reduce bank
indebtedness and for working capital and general corporate purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934. the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOYMAX INTERNATIONAL, INC.
--------------------------
(Registrant)
By /s/ Steven A. Lebensfeld
-----------------------------------
Steven A. Lebensfeld
President and Director
By /s/ William A. Johnson, Jr.
-----------------------------------
William A. Johnson, Jr.
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
Date: December 3, 1997
16
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Toymax International, Inc. Condensed Consolidated Balance Sheets and Statements
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