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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 DECEMBER 31, 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 X No
- --
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 February 1, 1998.
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TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
DECEMBER 31, 1997
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations
for the Quarters Ended December 31, 1997 and 1996
and for the Nine Months Ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended December 31, 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 14
Signatures 15
2
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<TABLE>
<CAPTION>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
DEC. 31, MARCH 31,
1997 1997
------------- -----------
(UNAUDITED)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $18,789 $ 565
Due from Factor 34,644 14,311
Accounts receivable, net 1,080 2,227
Due from affiliates 5 4
Due from officers 22 172
Inventories 4,513 4,797
Prepaid expenses and other current assets 1,310 797
Deferred income taxes 1,007 1,007
------- -------
Total current assets 61,370 23,880
Property and equipment, net 2,329 2,191
Deferred income taxes 1,562 57
Other assets 248 150
------- -------
Total assets $65,509 $ 26,278
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank credit facility $ 6,618 $ 8,447
Accounts payable 1,915 1,649
Accrued expenses 9,696 2,920
Accrued rebates and allowances 5,853 1,426
Due to affiliates 4,849 10,756
Due to officer - 504
Current portion of long-term obligations 33 38
Income taxes payable 2,816 275
------- -------
Total current liabilities 31,780 26,015
Long-term obligations 54 8
------- -------
Total liabilities 31,834 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; 10,605,000 shares issued and
outstanding 90 58
Additional paid-in capital 23,183 -
Retained earnings 10,417 212
Cumulative foreign currency translation adjustment (15) (15)
-------- ---------
Total stockholders equity 33,675 255
------- ---------
Total liabilities and stockholders' equity $ 65,509 $ 26,278
-------- ---------
-------- ---------
</TABLE>
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
3
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<TABLE>
<CAPTION>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $35,754 $21,398 $80,021 $38,998
Costs and expenses:
Cost of goods sold 20,020 13,581 44,091 24,935
Selling and administrative expenses 9,708 7,033 21,182 13,602
------- ------- ------- -------
Operating income 6,026 784 14,748 461
Other income (expenses):
Other income, net 269 206 212 711
Interest income 192 35 222 50
Interest expense (235) (184) (619) (271)
Finance charges (308) (230) (694) (363)
------- ------- ------- -------
Income before income taxes 5,944 611 13,869 588
Provision (benefit) for income taxes (Note 7) 1,442 269 3,665 (323)
------- ------- ------- -------
Net income $ 4,502 $ 342 $10,204 $ 911
------- ------- ------- -------
------- ------- ------- -------
Basic earnings per share (Note 4) $ 0.46 $ 0.05 $ 1.23 $ 0.12
------- ------- ------- -------
------- ------- ------- -------
Diluted earnings per share (Note 4) $ 0.46 $ 0.05 $ 1.23 $ 0.12
------- ------- ------- -------
------- ------- ------- -------
Shares used in computing basic earnings per share 9,810 7,500 8,273 7,500
------- ------- ------- -------
------- ------- ------- -------
Shares used in computing diluted earnings per share 9,832 7,500 8,280 7,500
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
4
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<TABLE>
<CAPTION>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
----------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 10,204 $ 911
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 898 1,079
Bad debts 122 17
Non-cash compensation 187 -
Loss on disposal of property and equipment 8 15
Deferred income taxes (1,505) -
Minority interest (40) -
Changes in operating assets and liabilities:
Due from Factor and accounts receivable (19,308) (10,082)
Due from affiliates - (1)
Inventories 284 612
Prepaid expenses and other current assets (514) (1,346)
Income tax refunds receivable - 2,995
Other assets (59) 149
Accounts payable and accruals 11,471 (1,477)
Due to affiliates (5,908) 3,044
Income taxes payable 2,541 370
--------- ---------
Net cash used in operating activities (1,619) (3,714)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (969) (550)
Proceeds from disposals of property and equipment 36 10
Repayments from (advances to) officers 150 (6)
--------- ---------
Net cash provided by (used in) investing activities (783) (546)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in bank credit facility (1,829) 6,157
Long-term borrowings (70) (57)
Proceeds from issuance of common stock 23,029 -
Borrowings from officer (504) 536
--------- ---------
Net cash provided by (used in) financing activities 20,626 6,636
--------- ---------
Net increase in cash and cash equivalents 18,224 2,376
Cash and cash equivalents, beginning of year 565 1,269
--------- ---------
Cash and cash equivalents, end of period $ 18,789 $ 3,645
--------- ---------
--------- ---------
</TABLE>
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 NINE MONTHS ENDED DECEMBER 31, 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 was established for the purpose of continuing the business
previously carried out by Toymax HK. 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. In November 1997, the
6
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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 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 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 EARNINGS PER SHARE. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented to conform to the Statement 128 requirements.
NOTE 4 - 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. 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 proceeds, net
of underwriting discounts and Public Offering related fees and expenses, of
approximately $23.0 million were used to pay bank indebtedness of $10.0 million
and trade payables to affiliates of $6.0 million and the balance is being used
for working capital and general corporate purposes.
NOTE 5 - INCOME TAXES
The Company provides for income taxes during interim periods based upon an
estimate of the effective annual tax rate.
In the quarter ending December 31, 1997 the Company reversed all of the
remaining valuation allowance that was established in prior years against
certain deferred income tax assets due to the uncertainty as to future
realization.
NOTE 6 - 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
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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 NINE 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 DECEMBER 31, 1997 COMPARED WITH THE THREE MONTHS ENDED
DECEMBER 31, 1996
NET SALES. Net sales for the quarter ended December 31, 1997 increased by
approximately $14.4 million, or 67.1%, to approximately $35.8 million from $21.4
million for the quarter ended December 31, 1996.
Net sales of the U.S. Domestic Operation increased 65.6% to $31.1 million,
or 86.9% of total net sales, in the quarter ended December 31, 1997, from $18.8
million, or 87.7% of total net sales, for the quarter ended December 31, 1996.
Net sales of the FOB Hong Kong Operation increased 78.1% to $4.7 million, or
13.1% of total net sales, in the quarter ended December 31,
9
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1997 from $2.6 million, or 12.3% of total net sales, in the quarter ending
December 31, 1996. The growth in sales, in both operations, was mainly
attributable to the increased sales of the Laser Challenge product line
GROSS PROFIT. Gross Profit for the quarter ended December 31, 1997,
increased by approximately $7.9 million, or 101.3%, to approximately $15.7
million, or 44.0% of net sales, from approximately $7.8 million, or 36.5% of net
sales, for the quarter ended December 31, 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.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
for the quarter ended December 31, 1997 increased by approximately $2.7 million,
or 38.0%, to approximately $9.7 million, or 27.2% of net sales, from
approximately $7.0 million, or 32.9% of net sales, for the quarter ended
December 31, 1996. The increase in selling and administrative expenses was
mainly attributable to an increase in advertising expenses of $1.3 million
primarily to support the sales of Laser Challenge, an increase in payroll
expenses of $0.7 million primarily reflecting increased staffing and a provision
for the Executive Bonus Plan and an increase in sales commissions of $0.7
million as a direct result of the increase in net sales. 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 December 31, 1997 increased by approximately $5.2 million, or
668.7%, to approximately $6.0 million from $0.8 million for the quarter ended
December 31, 1996.
NET INTEREST EXPENSE. Net interest expense for the quarter ended December
31, 1997 decreased by approximately $106,000, or 71.0%, to approximately $43,000
from approximately $149,000 for the quarter ended December 31, 1996. The
decrease in net interest expense was mainly due to an increase in interest
income related to proceeds from the initial public offering.
OTHER INCOME (EXPENSE), NET. Other income (expense), net for the quarter
ended December 31, 1997 increased by approximately $22,000 or 95.1%, to expense
of $45,000 from expense of $23,000. The increase in the expense is primarily
the result of increased finance charges as a direct result of the growth in
sales for the quarter ended December 31, 1997.
INCOME BEFORE TAXES. Income before taxes for the quarter ending December
31, 1997 increased by approximately $5.3 million to $5.9 million, compared to
income before taxes of approximately $0.6 million for the quarter ended December
31, 1996.
PROVISION FOR INCOME TAXES. The provision for income taxes for the quarter
ending December 31, 1997 increased by approximately $1.2 million, or 434.5%, to
$1.4 million from a provision of approximately $0.3 million for the quarter
ended December 31, 1996. The effective tax rate decreased to 24.3% for the
quarter ended December 31, 1997 from 44.1% for the quarter ended December 31,
1996. The decrease in the effective tax rate was in large part due to a
one-time net tax benefit resulting primarily from the reversal of all the
remaining valuation allowances provided in prior years against certain tax
assets.
NET INCOME. As a result of the foregoing, net income for the quarter ended
December 31, 1997 increased by approximately $4.2 million, or 1,217.2%, to net
income of $4.5 million ($0.46
10
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per share) from net income of approximately $0.3 million ($0.05 per share) for
the quarter ended December 31, 1996.
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH NINE MONTHS ENDED DECEMBER 31,
1996
NET SALES. Net sales for the nine months ended December 31, 1997 increased
by approximately $41.0 million, or 105.2%, to approximately $80.0 million from
$39.0 million for the nine months ended December 31, 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 83.8% of net sales in the first nine months of fiscal 1998 as
compared to 40.9% in the first nine months of fiscal 1997.
Net sales of the U.S. Domestic Operation increased 133.4% to $60.0 million,
or 75.0% of total net sales, for the nine months ended December 31, 1997, from
$25.7 million, or 66.0% of total net sales, in the nine months ended December
31, 1996. Net sales of the FOB Hong Kong Operation increased 50.6% to $20.0
million, or 25.0% of total net sales for the nine months ended December 31, 1997
from $13.3 million, or 34.0% of total net sales for the nine months ended
December 31, 1996.
GROSS PROFIT. Gross profit for the nine months ended December 31, 1997
increased by approximately $21.9 million, or 155.5% to approximately $35.9
million, or 44.9% of net sales, from approximately $14.1 million, or 36.1% of
net sales for the nine months ended December 31, 1996. The increase in gross
profit as a percentage of net sales was mainly attributable to an increase as a
percentage of net sales in the U.S. Domestic Operation which was primarily due
to higher product margins on invoiced sales partially offset by higher customer
discounts and allowances. 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 nine months ended December 31, 1997 increased by approximately $7.6
million, or 55.7%, to approximately $21.2 million, or 26.5% of net sales, from
approximately $13.6 million, or 34.9% of net sales, for the nine months ended
December 31, 1996. The increase in selling and administrative expenses was
mainly attributable to increases in advertising expenses of $3.2 million in
order to support the sales of Laser Challenge, increases in payroll expenses of
$2.5 million primarily reflecting increased staffing and a provision for the
Executive Bonus Plan and an increase in sales commissions expense of $0.9
million as a direct result of the increase in net sales.
OPERATING INCOME. As a result of the foregoing, operating income for the
nine months ended December 31, 1997 increased by approximately $14.3 million to
approximately, $14.7 million from $0.5 million for the nine months ended
December 31, 1996.
NET INTEREST EXPENSE. Net interest expense for the nine months ended
December 31, 1997 increased by approximately $0.2 million, or 79.3%, to
approximately $0.4 million from approximately $0.2 million for the nine months
ended December 31, 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.
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OTHER INCOME (EXPENSE), NET. Other income (expense), net for the nine
months ended December 31, 1997 decreased by approximately $0.8 million, or
249.7%, to expense of $0.5 million from income of $0.3 million for the nine
months ended December 31, 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 BEFORE TAXES. Income before taxes for the nine months ended
December 31, 1997 increased approximately $13.3 million to $13.9 million
compared with $0.6 million for the nine months ended December 31, 1996.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision for income taxes for
the nine months ended December 31, 1997 increased by approximately $4.0 million
to approximately $3.7 million from a benefit of approximately $0.3 million for
the nine months ended December 31, 1996. The effective tax rate increased to
26.4% for the nine months ended December 31, 1997 from a benefit for the nine
months ended December 31, 1996. The increase in the effective tax rate is
primarily the result of an increase in income before taxes due to higher net
sales for the nine month period ended December 31, 1997.
NET INCOME. As a result of the foregoing, net income for the nine months
ended December 31, 1997 increased by approximately $9.3 million, or 1,020.4%, to
approximately $10.2 million ($1.23 per share) from $0.9 million ($.12 per share)
for the nine months ended December 31, 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 nine
months ended December 31, 1997 cash and cash equivalents increased $18.2 million
to $18.8 million. The increase was primarily due to the Company's initial
public offering, which including the exercise of the underwriters'
over-allotment option in full, yielded approximately $23.0 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 Company's operating activities used net cash of approximately $1.6 million
which was primarily due to net income of $10.2 million more than offset by
changes in operating assets and liabilities including increases in accounts
receivable and amounts due from factor of $19.3 million and a net increase in
accounts payable, accruals, income taxes payable and due to affiliates totaling
$8.1 million
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 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.
12
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1997, the Company entered a Settlement Agreement with 4Kids
Entertainment, Inc. ("4Kids") resolving all disputes between the Companies.
While the terms of the Agreement are confidential, in Management's opinion, the
terms of the Agreement will not have a material effect on the financial
condition of the Company or the Company's results of operations.
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 $3,365,000, which is comprised of
$1,925,000 for underwriting discounts, $75,000 of underwriter's
non-accountable expenses, and approximately $1,365,000 of other expenses
(including legal 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
$390,000 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 $23,029,000.
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. The balance of the net proceeds will be used 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
13
<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: February 12, 1998
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
TOYMAX INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS
OF OPERATIONS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,789
<SECURITIES> 0
<RECEIVABLES> 1,227
<ALLOWANCES> 147
<INVENTORY> 4,513
<CURRENT-ASSETS> 61,370
<PP&E> 7,947
<DEPRECIATION> 5,618
<TOTAL-ASSETS> 65,509
<CURRENT-LIABILITIES> 31,780
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 33,585
<TOTAL-LIABILITY-AND-EQUITY> 65,509
<SALES> 80,021
<TOTAL-REVENUES> 80,021
<CGS> 44,091
<TOTAL-COSTS> 44,091
<OTHER-EXPENSES> 482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 619
<INCOME-PRETAX> 13,869
<INCOME-TAX> 3,665
<INCOME-CONTINUING> 10,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,204
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
</TABLE>
