<PAGE>
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, 2000
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 11-3391313
(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, 10,598,108 as of November 10, 2000.
1
<PAGE>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 2000 (Unaudited) and March 31, 2000 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended September 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Three and Six Months Ended September 30, 2000 and 1999 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults by the Company upon Its Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
2
<PAGE>
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 2000
--------------------------------------------------------- ------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT:
Cash $ 4,543,823 $ 7,476,104
Due from Factor 15,147,198 24,418,879
Accounts receivable, less allowance for possible
losses of $280,000 and $310,000 12,303,499 7,224,514
Due from affiliates 387,777 873,395
Inventories 11,811,119 16,761,646
Prepaid expenses and other current assets 4,405,611 6,150,022
Income tax refunds receivable 2,877,890 2,852,570
Deferred income taxes 2,407,945 2,407,945
--------------------------------------------------------- ------------ -------------
TOTAL CURRENT ASSETS 53,884,862 68,165,075
--------------------------------------------------------- ------------ -------------
PROPERTY AND EQUIPMENT, NET 5,872,905 5,946,582
INVESTMENT IN AND ADVANCES TO JOINT VENTURE 2,314,720 1,922,658
DEFERRED INCOME TAXES 1,176,512 1,176,512
GOODWILL, net of amortization of $1,061,754 and $1,910,899 18,879,535 20,623,672
OTHER ASSETS, primarily prepaid advertising 6,944,663 6,987,803
--------------------------------------------------------- ------------ -------------
$89,073,197 $104,822,302
--------------------------------------------------------- ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Bank credit facility $14,029,044 $16,154,783
Accounts payable 17,774,774 8,430,997
Accrued expenses 6,570,002 8,238,194
Accrued rebates and allowances 5,061,656 5,938,316
Due to affiliates 2,388,540 18,672,201
Current portion of long-term obligations 637,319 12,680
Income taxes payable 1,260,651 2,719,104
--------------------------------------------------------- ------------ -------------
TOTAL CURRENT LIABILITIES 47,721,986 60,166,275
--------------------------------------------------------- ------------ -------------
LONG-TERM OBLIGATIONS 49,951 48,358
--------------------------------------------------------- ------------ -------------
TOTAL LIABILITIES 47,771,937 60,214,633
--------------------------------------------------------- ------------ -------------
COMMITMENTS AND CONTINGENCIES
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; 10,633,108 shares issued 106,331 106,331
Additional paid-in capital 23,120,275 23,120,275
Retained earnings 18,267,695 21,574,104
Treasury stock, 35,000 shares at cost (177,889) (177,889)
Accumulated other comprehensive income (15,152) (15,152)
--------------------------------------------------------- ------------ -------------
TOTAL STOCKHOLDERS' EQUITY 41,301,260 44,607,669
--------------------------------------------------------- ------------ -------------
$89,073,197 $104,822,302
--------------------------------------------------------- ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------- ---------------------------- ----------------------------
1999 2000 1999 2000
---------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 47,428,789 $ 48,423,719 $ 62,908,409 $ 74,504,738
---------------------------------------------- ------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of goods sold 28,941,872 31,916,543 38,770,190 48,570,003
Selling and administrative 12,492,900 10,358,697 18,845,026 19,719,428
---------------------------------------------- ------------ ------------ ------------ ------------
41,434,772 42,275,240 57,615,216 68,289,431
---------------------------------------------- ------------ ------------ ------------ ------------
OPERATING INCOME 5,994,017 6,148,479 5,293,193 6,215,307
---------------------------------------------- ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Other income, net 73,485 95,561 98,973 146,243
Interest income 106,720 80,658 257,713 86,649
Interest expense (118,897) (454,119) (170,349) (740,336)
Equity in loss of joint venture -- (184,028) -- (315,669)
Finance charges (263,717) (289,170) (381,559) (392,750)
---------------------------------------------- ------------ ------------ ------------ ------------
(202,409) (751,098) (195,222) (1,215,863)
---------------------------------------------- ------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 5,791,608 5,397,381 5,097,971 4,999,444
Provision for income taxes 1,633,952 1,842,182 1,299,559 1,693,035
---------------------------------------------- ------------ ------------ ------------ ------------
NET INCOME $ 4,157,656 $ 3,555,199 $ 3,798,412 $ 3,306,409
---------------------------------------------- ------------ ------------ ------------ ------------
EARNINGS PER SHARE:
BASIC $ 0.39 $ 0.34 $ 0.36 $ 0.31
DILUTED $ 0.38 $ 0.34 $ 0.36 $ 0.31
---------------------------------------------- ------------ ------------ ------------ ------------
SHARES USED IN COMPUTING EARNINGS PER SHARE:
BASIC 10,585,854 10,598,108 10,595,246 10,598,108
DILUTED 10,802,260 10,598,108 10,693,730 10,598,108
---------------------------------------------- ------------ ------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------------------------- ----------------------------
1999 2000
-------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,798,412 $ 3,306,409
-------------------------------------------------------------- ------------ ------------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,690,141 2,412,209
Bad debts 113,585 30,003
Equity in loss of joint venture -- 315,669
Non-cash compensation -- issuance of warrants 61,201 --
Non-cash revenue -- barter credits (377,433) --
Changes in operating assets and liabilities:
Due from Factor and accounts receivable (23,304,365) (4,222,699)
Due from affiliates (107,414) (485,618)
Inventories (6,029,435) (4,950,527)
Prepaid expenses and other (3,219,265) (1,938,592)
Income tax refunds receivable 435,801 25,320
Accounts payable and accruals 4,578,467 (8,398,925)
Due to affiliates 11,714,919 16,283,661
Income taxes payable 914,083 1,458,453
-------------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (9,731,303) 3,835,363
-------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,920,670) (1,410,668)
Proceeds from disposals of property and equipment 9,793 --
Business acquisitions (6,907,661) (991,921)
-------------------------------------------------------------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (8,818,538) (2,402,589)
-------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank credit facility 16,090,042 2,125,739
Increase (decrease) in long-term obligations (118,778) (626,232)
Purchase of treasury stock (177,889) --
-------------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,793,375 1,499,507
-------------------------------------------------------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,756,466) 2,932,281
CASH AND CASH EQUIVALENTS, beginning of period 18,469,027 4,543,823
-------------------------------------------------------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 15,712,561 $ 7,476,104
-------------------------------------------------------------- ------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 115,044 $ 733,588
Income taxes paid $ 634,973 $ 615,986
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Accrual of additional acquisition costs $ 1,450,000 $ 1,600,000
-------------------------------------------------------------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES o
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS o
SEPTEMBER 30, 1999 AND 2000
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, 2000 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 Form 10-K for the fiscal year ended March 31, 2000.
The Company follows the same accounting policies in preparation of interim
reports. The results of operations and financial position for interim periods
are not necessarily indicative of those to be expected for the full year ended
March 31, 2001, due, in part, to seasonal fluctuations which are normal for the
Company's business.
NOTE 2 -- EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects, in periods in which they have a
dilutive effect, the effect of common shares issuable upon exercise of stock
options and warrants.
Options and warrants to purchase an aggregate of 2,738,620 shares of
common stock were outstanding at September 30, 2000. Such options and
warrants are not included in the computation of diluted earnings per share
because the effect would be anti-dilutive.
NOTE 3 -- COMPREHENSIVE INCOME
Comprehensive income refers to revenue, expenses, gains and losses that
under generally accepted accounting principles are excluded from net income, as
these amounts are recorded directly as an adjustment to shareholders' equity.
The Company's comprehensive income is comprised of foreign currency translation
adjustments. The comprehensive income for the three and six months ended
September 30, 1999 and September 30, 2000 is the same as the reported net
income.
NOTE 4 -- RECENT ACCOUNTING STANDARDS
In September 1998, the Financial Accounting Standards Board issued SFAS No.
133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No.
133, as amended, is effective for fiscal years beginning after September 15,
2000. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of the derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of the hedged
transaction and the type of hedge transaction. The ineffective portion of all
hedges will be recognized in earnings. The Company believes that the adoption of
SFAS No. 133 will not have any effect on its results of operations and financial
position as it does not use derivative financial instruments.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements."
In June 2000, the SEC delayed the required implementation date to the fourth
quarter of fiscal years beginning after December 15, 1999. The Company does
not expect the implementation of SAB 101 to have a material effect on its
results of operations and financial position.
6
<PAGE>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES o
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS o
SEPTEMBER 30, 1999 AND 2000
NOTE 5 -- SEGMENT AND GEOGRAPHIC DATA
The Company operates two reportable segments: Toymax Brands (primarily
consists of Toymax Inc., Toymax (H.K.) Limited and the Company's equity
investment in Yaboom Limited ("Yaboom")) and Toymax Enterprises (which consists
of Go Fly A Kite, Inc. ("GFK"), Candy Planet, a division of Toymax Inc.,
Monogram International, Inc. ("Monogram"), and Funnoodle, Inc. ("Funnoodle")).
The following tables present summarized information about the Company's
operations by reportable segments (net of consolidating eliminations) as of and
for the three and six months ended September 30, 1999 and 2000:
<TABLE>
<CAPTION>
------------------------------------------ ---------------- -------------- ----------------
TOYMAX
THREE MONTHS ENDED SEPTEMBER 30, 1999 TOYMAX BRANDS ENTERPRISES CONSOLIDATED
------------------------------------------ ---------------- -------------- ----------------
<S> <C> <C> <C>
Revenues-Net sales $37,361,542 $10,067,247 $ 47,428,789
Income (loss) before income tax expense 6,073,717 (282,109) 5,791,608
Identifiable assets 82,118,415 23,238,673 105,357,088
Interest income 105,616 1,104 106,720
Interest expense 40,781 78,116 118,897
Depreciation and amortization 437,465 656,711 1,094,176
Capital expenditures 1,379,475 235,749 1,615,224
------------------------------------------ ---------------- -------------- ----------------
<CAPTION>
------------------------------------------ ---------------- --------------- -----------------
TOYMAX
THREE MONTHS ENDED SEPTEMBER 30, 2000 TOYMAX BRANDS ENTERPRISES CONSOLIDATED
------------------------------------------ ---------------- --------------- -----------------
<S> <C> <C> <C>
Revenues-Net sales $40,545,349 $ 7,878,370 $ 48,423,719
Income (loss) before income tax expense 7,513,305 (2,115,924) 5,397,381
Identifiable assets 70,050,980 34,771,322 104,822,302
Interest income 64,564 16,094 80,658
Interest expense 390,840 63,279 454,119
Depreciation and amortization 513,986 753,908 1,267,894
Capital expenditures 892,357 107,150 999,507
------------------------------------------ ---------------- --------------- -----------------
<CAPTION>
------------------------------------------ ---------------- -------------- ----------------
TOYMAX
SIX MONTHS ENDED SEPTEMBER 30, 1999 TOYMAX BRANDS ENTERPRISES CONSOLIDATED
------------------------------------------ ---------------- -------------- ----------------
<S> <C> <C> <C>
Revenues-Net sales $46,754,208 $16,154,201 $ 62,908,409
Income (loss) before income tax expense 4,762,406 335,565 5,097,971
Identifiable assets 82,118,415 23,238,673 105,357,088
Interest income 255,755 1,958 257,713
Interest expense 63,788 106,561 170,349
Depreciation and amortization 786,008 904,133 1,690,141
Capital expenditures 1,639,256 281,414 1,920,670
------------------------------------------ ---------------- -------------- ----------------
</TABLE>
7
<PAGE>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES o
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS o
SEPTEMBER 30, 1999 AND 2000
<TABLE>
<CAPTION>
------------------------------------------ ---------------- --------------- -----------------
TOYMAX
SIX MONTHS ENDED SEPTEMBER 30, 2000 TOYMAX BRANDS ENTERPRISES CONSOLIDATED
------------------------------------------ ---------------- --------------- -----------------
<S> <C> <C> <C>
Revenues-Net sales $48,535,807 $25,968,931 $ 74,504,738
Income (loss) before income tax expense 5,732,752 (733,308) 4,999,444
Identifiable assets 70,050,980 34,771,322 104,822,302
Interest income 70,556 16,093 86,649
Interest expense 566,934 173,402 740,336
Depreciation and amortization 985,434 1,426,775 2,412,209
Capital expenditures 1,140,408 270,260 1,410,668
------------------------------------------ ---------------- --------------- -----------------
</TABLE>
NOTE 6 -- INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market value. Inventories consist principally of purchased finished goods.
NOTE 7 -- INCOME TAXES
The Company provides for income taxes during interim periods based upon an
estimate of the effective annual tax rate.
The Company has been notified by the Internal Revenue Service concerning a
pending examination covering tax years 1993, 1994, 1995 and 1996. 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.
NOTE 8 -- BUSINESS ACQUISITIONS AND JOINT VENTURES
In May 1999, newly formed subsidiaries of Toymax acquired substantially all
of the assets and certain liabilities of Burkett Enterprises, Inc. f/k/a
Monogram International, Inc. and Monogram Products, (H.K.) Limited pursuant to
an asset purchase agreement dated April 19, 1999. Monogram is a leading
designer, manufacturer and marketer of gift, novelty and souvenir products sold
globally. The consideration for the acquisition was $6.0 million paid in cash at
the closing plus up to $9.0 million payable after the closing if certain
contingencies occur. In addition, Monogram's short-term indebtedness consisting
of two promissory notes, totaling $3.8 million as of the date of acquisition,
was assumed. The Company recorded approximately $6.0 million of goodwill for the
excess of the total purchase price over the fair value of the net assets
acquired. Transaction costs of approximately $0.9 million were incurred in
connection with the acquisition. The funds required at closing came out of the
working capital of the Company.
In November 1999, Funnoodle acquired the Funnoodle product line from
Kidpower, Inc. ("Kidpower"), pursuant to an asset purchase agreement dated
October 25, 1999. The Funnoodle product line is a highly recognized consumer
brand of pool and backyard water recreational products which include the
original Funnoodle(R) water toys, floating pool mats, lawn sprinkler toys and
exercise mats. The consideration for the acquisition was $8.7 million paid in
cash at the closing, the assumption of certain commitments of Kidpower in an
amount of $500,000, plus up to $7.0 million payable to Kidpower after the
closing if certain contingencies occur. The Company recorded approximately $8.1
million of goodwill for the excess of the total purchase price over the fair
value of the net assets acquired. The funding for the acquisition was out of the
working capital of the Company. Based on the occurrence of certain
contingencies contained in the acquisition agreement, the Company recorded
approximately $2.6 million as additional goodwill in the quarter ended
September 30, 2000, of which approximately $1 million was paid in September
2000 and $1 million was paid in October 2000.
8
<PAGE>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES o
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS o
SEPTEMBER 30, 1999 AND 2000
In connection with the Funnoodle acquisition, the Company entered into a
management services agreement dated November 30, 1999 with Kidpower (the
"KIDPOWER MANAGEMENT AGREEMENT"). Pursuant to the Kidpower Management Agreement,
Kidpower will manage the day-to-day operations with respect to the Funnoodle
product line. The term of the Kidpower Management Agreement is through November
15, 2002 and the management fee payable to Kidpower is seven percent (7%) of the
cost of all finished goods with respect to the Funnoodle product line.
On a pro forma basis, reflecting the acquisition of Monogram and Funnoodle
as if they had taken place at the beginning of fiscal 1999 and after giving
effect to adjustments recording the acquisitions, unaudited pro-forma results
for the three and six months ended September 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
--------------------------------------- --------------- ----------------- ---------------- -----------------
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------- --------------------------------- ----------------------------------
1999 2000 1999 2000
--------------------------------------- --------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net sales $47,597,138 $48,423,719 $75,981,550 $74,504,738
Net income 4,087,235 3,555,199 4,688,241 3,306,409
--------------------------------------- --------------- ----------------- ---------------- -----------------
Earnings per share:
Basic $0.39 $0.34 $0.44 $0.31
Diluted $0.38 $0.34 $0.44 $0.31
--------------------------------------- --------------- ----------------- ---------------- -----------------
</TABLE>
In October 1999, the Company and a private investor formed Yaboom, a joint
venture. The Company's investment in Yaboom includes $1.5 million for the equity
ownership and $1.1 million in non-interest bearing advances. Yaboom was formed
to develop, manufacture and market innovative high-tech consumer products, which
incorporate music and other intellectual property rights from popular recording
artists. Under the terms of the joint venture, the Company, through a
wholly-owned Hong Kong subsidiary, and the private investor each own fifty
percent of Yaboom. The Company recorded $1.5 million of goodwill in connection
with the investment, of which $150,080 has been amortized as of September 30,
2000. The Company has accounted for the joint venture using the equity method
and intends to permanently reinvest the earnings derived from the joint venture.
9
<PAGE>
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:
Certain expectations and projections regarding the future performance of Toymax
International, Inc. and its subsidiaries ("Toymax") discussed in this quarterly
report are forward-looking and are made under the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. These expectations and
projections are based on currently available competitive, financial, and
economic data along with Toymax's operating plans and are subject to certain
future events and uncertainties. Forward-looking statements can be identified by
the use of forward-looking terminology, such as "may", "will", "should",
"expect", "anticipate", "estimate", "project", "continue", "plans", "intends" or
other similar terminology. Management cautions you that the following factors,
among others, could cause Toymax's actual consolidated results of operations and
financial position in fiscal 2001 and thereafter to differ significantly from
those expressed in forward-looking statements:
MARKETPLACE RISKS
o Dependence on the timely development, introduction and customer
acceptance of new products, which may affect Toymax's ability to
successfully redesign, restyle and extend existing core products and
product lines and successfully bring new products to market
o Increased competitive pressure, both domestically and internationally,
which may negatively affect the sales of Toymax's products
o Possible weaknesses in economic conditions, both domestically and
internationally, which may negatively affect the sales of Toymax's
products and the costs associated with manufacturing and distributing
these products
o Failure to successfully integrate recent acquisitions
FINANCIAL CONSIDERATIONS
o Significant changes in interest rates, both domestically and
internationally, which may negatively affect Toymax's cost of
financing its operations
o Currency fluctuations, which may affect Toymax's reportable income
OTHER RISKS
o Development of new technologies, including the Internet, which may
create new risks to Toymax's ability to protect its intellectual
property rights
o Changes in laws or regulations, both domestically and internationally,
including those affecting consumer products, environmental activities
or trade restrictions, which may lead to increased costs or
interruption in normal business operations of Toymax
o Other factors and risks that may be described from time to time in
Toymax's public announcements and filings with the Securities and
Exchange Commission
10
<PAGE>
RESULTS OF OPERATIONS
FOR PURPOSES OF THE FISCAL YEAR COMPARISONS WHICH FOLLOW, FIGURES REFERRING
TO THE FINANCIAL PERFORMANCE OF TOYMAX INC. ("TMI"), TOYMAX (H.K.) LIMITED
("THK") AND THE COMPANY'S EQUITY INVESTMENT IN YABOOM LIMITED ("YABOOM") ARE
REFERRED TO AS TOYMAX BRANDS AND THOSE REFERRING TO THE PERFORMANCE OF GO FLY A
KITE, INC. ("GFK"), CANDY PLANET, MONOGRAM INTERNATIONAL, INC. ("MONOGRAM") AND
THE FUNNOODLE PRODUCT LINE ("FUNNOODLE") ARE REFERRED TO AS TOYMAX ENTERPRISES.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES. Net sales for the quarter ended September 30, 2000 increased to
$48.4 million from $47.4 million for the quarter ended September 30, 1999, an
increase of $1.0 million, or 2.1%.
Net sales of Toymax Brands for the quarter ended September 30, 2000
increased 8.5% to $40.5 million, or 83.7% of total net sales, from $37.3
million, or 78.8% of total net sales for the quarter ended September 30, 1999.
The increase in net sales was primarily due to an increase in international
sales.
Net sales of Toymax Enterprises for the quarter ended September 30, 2000
decreased 21.7% to $7.9 million, or 16.3% of total net sales, from $10.1
million, or 21.2% of total net sales for the quarter ended September 30, 1999.
The decrease in net sales was primarily the result of a decrease in licensed
gift and novelty sales, which was partially offset by an increase in kite and
water product sales.
GROSS PROFIT. Gross profit for the quarter ended September 30, 2000,
decreased by $2.0 million, or 10.7%, to $16.5 million, or 34.1% of net sales,
from $18.5 million, or 39.0% of net sales, for the quarter ended September 30,
1999.
The gross profit of Toymax Brands remained level at $14.5 million, while
the gross margin decreased to 35.8% from 39.0% of net sales for the quarter
ended September 30, 1999. The decrease in gross margin is primarily attributable
to the increase in sales promotional expenses and the product mix of domestic
sales. The gross profit of Toymax Enterprises decreased by $1.9 million, or
49.3%, to $2.0 million, or 25.3% of net sales, from $3.9 million, or 39.1% of
net sales in the quarter ended September 30, 1999. The decrease in gross margin
is primarily attributable to the effect of price reductions on certain licensed
candy products and the effect of end of season sales of the Company's water
products.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
for the quarter ended September 30, 2000 decreased by $2.1 million, or 17.1%, to
$10.4 million from $12.5 million for the quarter ended September 30, 1999, while
decreasing as a percentage of net sales from 26.3% to 21.4%.
Selling and administrative expenses of Toymax Brands for the quarter ended
September 30, 2000 decreased by $1.9 million, or 23.6%, to $6.4 million, or
15.7% of net sales, from $8.3 million, or 22.3% of net sales for the quarter
ended September 30, 1999. The decrease was primarily due to lower advertising
costs, royalty expense and professional fees in the period. Selling and
administrative expenses of Toymax Enterprises for the quarter ended September
30, 2000 decreased to $4.0 million from $4.2 million, despite the addition of
operating expenses related to the businesses acquired in the second half of
fiscal 2000, which include the amortization of goodwill and other intangibles
assets.
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OPERATING INCOME. As a result of the foregoing, operating income for the
quarter ended September 30, 2000 increased by $0.2 million, or 2.6%, to $6.2
million from $6.0 million for the quarter ended September 30, 1999.
Operating income for Toymax Brands increased by $1.9 million, or 31.0%, to
$8.1 million from $6.2 million for the quarter ended September 30, 1999. The
operating loss for Toymax Enterprises increased by $1.8 million, to $2.0 million
from $0.2 million for the quarter ended September 30, 1999.
OTHER EXPENSE, NET. Net other expense for the quarter ended September 30,
2000 was $0.4 million, compared to $0.2 million for the quarter ended September
30, 1999. The increase in net other expense was primarily attributable to the
inclusion of the Company's equity in the net loss of Yaboom.
INTEREST INCOME (EXPENSE), NET. Net interest expense for the quarter ended
September 30, 2000 was $0.4 million, compared to $0.01 million for the quarter
ended September 30, 1999. The increase in net interest expense was primarily due
to the Company's acquisitions being paid out of working capital. In addition,
the Company assumed some short-term indebtedness in conjunction with the
acquisition of Monogram.
INCOME (LOSS) BEFORE TAXES. Income before taxes for the quarter ending
September 30, 2000 decreased by $0.4 million, or 6.8%, to $5.4 million, compared
to $5.8 million for the quarter ended September 30, 1999. Income before taxes
for Toymax Brands increased by $1.4 million, or 23.8%, to $7.5 million, compared
to $6.1 million for the quarter ended September 30, 1999. The pre-tax loss for
Toymax Enterprises increased by $1.8 million, or to $2.1 million, compared to
$0.3 million for the quarter ended September 30, 1999.
PROVISION FOR INCOME TAXES. The effective tax rate for the quarter ending
September 30, 2000 increased to 34.1% from 28.2% for the quarter ended
September 30, 1999 due to a higher proportion of income derived from the
Company's U.S. based businesses, which are subject to higher tax rates.
NET INCOME. As a result of the foregoing, net income for the quarter ended
September 30, 2000 decreased $0.6 million, or 14.5%, to $3.6 million, or $0.34
per diluted share, from $4.2 million, or $0.38 per diluted share, for the
quarter ended September 30, 1999.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE SIX MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES. Net sales for the six months ended September 30, 2000 increased
$11.6 million, or 18.4% to $74.5 million from $62.9 million for the six months
ended September 30, 1999.
Net sales of Toymax Brands for the six months ended September 30, 2000
increased 3.8% to $48.5 million, or 65.1% of total net sales, from $46.8
million, or 74.3% of total net sales for the six months ended September 30,
1999. The increase in net sales was primarily due to an increase in
international sales.
Net sales of Toymax Enterprises for the six months ended September 30, 2000
increased 60.8% to $26.0 million, or 34.9% of total net sales, from $16.1
million, or 25.7% of total net sales for the six months ended September 30, 1999
primarily as a result of the acquisition of Funnoodle during the latter part of
fiscal 2000.
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GROSS PROFIT. Gross profit for the six months ended September 30, 2000,
increased by $1.8 million, or 7.4%, to $25.9 million, or 34.8% of net sales,
from $24.1 million, or 38.4% of net sales, for the six months ended
September 30, 1999.
The gross profit of Toymax Brands decreased by $0.7 million, or 3.9%, to
$17.2 million, or 35.4% of net sales, from $17.9 million, or 38.2% of net sales
for the six months ended September 30, 1999. The decrease in gross margin is
primarily attributable to the increase in sales promotional expenses and the
product mix of domestic sales. The gross profit of Toymax Enterprises increased
by $2.5 million, or 39.7%, to $8.8 million, or 33.8% of net sales, from $6.3
million, or 38.9% of net sales in the six months ended September 30, 1999,
primarily as a result of the increase in sales volume attributable to the
acquisition of Funnoodle.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
for the six months ended September 30, 2000 increased by $0.9 million, or 4.6%,
to $19.7 million, or 26.5% of net sales, from $18.8 million for the six months
ended September 30, 1999, or 30.0% of net sales.
Selling and administrative expenses of Toymax Brands for the six months
ended September 30, 2000 decreased by $2.5 million, or 19.4%, to $10.5 million,
or 21.6% of net sales, from $13.0 million, or 27.9% of net sales for the six
months ended September 30, 1999. The decrease was primarily due to lower
advertising costs, royalty expense and professional fees. Selling and
administrative expenses of Toymax Enterprises for the six months ended September
30, 2000 increased by $3.4 million, or 58.6%, to $9.2 million, or 35.5% of net
sales, from $5.8 million, or 36.0% of net sales for the six months ended
September 30, 1999. The increase in expenses was primarily due to the operating
expenses related to the acquisition of Monogram and the Funnoodle product line,
which include the amortization of goodwill and intangibles related to the
acquisitions.
OPERATING INCOME. As a result of the foregoing, operating income for the
six months ended September 30, 2000 increased by $0.9 million, or 17.4%, to $6.2
million from $5.3 million for the six months ended September 30, 1999.
Operating income for Toymax Brands increased by $1.8 million, or 38.0%, to
$6.6 million from $4.8 million for the six months ended September 30, 1999.
Operating income for Toymax Enterprises decreased by $0.9 million to an
operating loss of $0.4 million from an operating profit of $0.5 million for the
six months ended September 30, 1999.
OTHER INCOME (EXPENSE), NET. Net other expense for the six months ended
September 30, 2000 was $0.6 million, compared to $0.3 million for the six months
ended September 30, 1999. The increase in net other expense was primarily
attributable to the inclusion of the Company's equity in the net loss of Yaboom.
INTEREST INCOME (EXPENSE), NET. Net interest expense for the six months
ended September 30, 2000 was $0.7 million, compared to net interest income of
$0.09 million for the six months ended September 30, 1999. The increase in net
interest expense was primarily due to the Company's acquisitions being paid out
of working capital. In addition, the Company assumed some short-term
indebtedness in conjunction with the acquisition of Monogram.
INCOME (LOSS) BEFORE TAXES. Income before taxes for the six months ending
September 30, 2000 decreased by $0.1 million, or 1.9%, to $5.0 million, compared
to $5.1 million for the six months ended September 30, 1999. Income before taxes
for Toymax Brands increased by $1.0 million, or 20.4%, to $5.7 million, compared
to $4.8 million for the six months ended September 30, 1999. Income before taxes
for Toymax Enterprises decreased by $1.1 million to a loss of $0.7
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million, compared to income before taxes of $0.3 million for the six months
ended September 30, 1999.
PROVISION FOR INCOME TAXES. The effective tax rate for the quarter ending
September 30, 2000 increased to 33.9% from 25.5% for the six months ended
September 30, 1999 due to a higher proportion of income derived from the
Company's U.S. based businesses, which are subject to higher tax rates.
NET INCOME. As a result of the foregoing, net income for the six months
ended September 30, 2000 decreased to $3.3 million, or $0.31 per diluted share,
from $3.8 million, or $0.36 per diluted share, for the six months ended
September 30, 1999, a decrease of $0.5 million or 13.0%.
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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, 2000 cash and cash equivalents increased $2.9 million
to $7.5 million.
The Company's operating activities provided net cash of approximately $3.8
million, as compared to $9.7 million used in operations in the six months ended
September 30, 1999. The increase was primarily due to the increase in due to
affiliates, which was partially offset by the increase in due from factor,
accounts receivable and inventories and the decrease in accounts payable. The
changes in the net assets are primarily attributable to the increase in sales
for the period and the seasonal effects of the business.
Investing activities used $2.4 million in net cash, as compared to $8.8 million
in the six months ended September 30, 1999. Investing activities in the current
period consisted of capital expenditures of $1.4 million, principally for the
purchase of tooling for new products and equipment, and the payment of $1.0
million of additional purchase price for the Funnoodle product line. Investing
activities in the prior year period included $6.9 million related to the
acquisition of Monogram International, Inc. and $1.9 million in capital
expenditures.
Financing activities provided $1.5 million in net cash due to the increase in
the working capital credit facilities and payments against the Company's long
term debt. The Company's TMI and GFK subsidiaries' credit facility (the"
AGREEMENT") provides for a borrowing limit of up to $30.0 million. The first
$25.0 million of borrowings are subject to availability according to a
borrowing base formula based on factored accounts receivable at either a rate
equal to the Bank's U.S. prime rate or LIBOR plus 1.75%. The Company has
available to it a borrowing supplement of $5.0 million at a rate equal to
either the Bank's U.S. prime rate or LIBOR plus 2.25%. The Agreement also
establishes a letter of credit facility ("L/C") whereby the Company may
request issuance of L/C's of up to $2.5 million as part of the overall
availability. The entire credit line is secured by TMI's and GFK's factored
accounts receivable, inventory and other assets and is guaranteed by Toymax.
The Agreement contains certain restrictions relating to limitations on debt,
certain investments and the payment of dividends. As of September 30, 2000,
the outstanding balance under the Agreement was $16.0 million and borrowing
availability was approximately $2.0 million. The Agreement is terminable by
the Bank at any time at its sole discretion, at which time the Company's
obligations to the Bank would become due and payable.
In April 2000, the Company's Toymax (H.K.) Limited subsidiary renewed its credit
facility with The Hongkong and Shanghai Banking Corporation Limited ("HONGKONG
BANK"). The facility provides a line of credit of $500,000 and a letter of
credit guarantee of up to approximately $2.3 million. The facility is
terminable by the Hongkong Bank at any time at its sole discretion, at which
time the Company's obligations to the Hongkong Bank would become due and
payable. As of September 30, 2000, there was approximately $23,000
outstanding under this facility.
In May 1999, Monogram entered into a credit agreement with SunTrust Bank to
provide a $4.0 million revolving line of credit and a term loan with an original
principal balance of approximately $0.8 million. The term loan was repaid in
August 2000 and the outstanding balance of the revolver was repaid in
September 2000.
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<PAGE>
Effective April 5, 2000, the Company amended its agreement with Kidpower,
Inc., a Tennessee corporation ("KIDPOWER"), to include the provision of
advances from Kidpower to suppliers on behalf of Funnoodle of up to $1.0
million through May 15, 2000 as it pursued negotiations to factor and finance
Funnoodle. In May 2000, the Company finalized a non-recourse factoring
facility with The CIT Group/Commercial Services (Asia), Limited (the
"Factor") to advance up to the lesser of $5.0 million or 80% of eligible
accounts receivable. Borrowings against the facility bear interest at the
Factor's prime rate. As of September 30, 2000, there were no borrowings
outstanding under the Agreement and borrowing availability was approximately
$0.2 million.
The Company expects to fund its near-term cash requirements from a
combination of existing cash balances, cash flow from operations and
borrowings under its banking arrangements. The Company expects to finance its
longer-term growth primarily with cash flow from operations and with
externally generated funds, which will likely include borrowings under its
existing or future credit facilities. The Company is pursuing negotiations to
consolidate financing for its domestic operations into a combined credit
facility. In addition, the Company expects to issue a private placement of
common stock, in connection with which a portion of the proceeds were
received in the subsequent period. There can be no assurance that sufficient
cash flows 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.
In connection with any future cash needs or acquisition opportunities, the
Company may incur additional debt or issue additional equity or debt securities
depending on market conditions and other factors.
NEW ACCOUNTING STANDARDS
------------------------
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bullletin 101, "Revenue Recognition in Financial Statements." In
June 2000, the SEC delayed the required implementation date to the fourth
quarter of fiscal years beginning after December 15, 1999. The Company does
not expect the implementation of SAB 101 to have a material effect on its
results of operations and financial position.
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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks, which arise from transactions
entered into in the normal course of business. The Company's primary exposures
are changes in interest rates with respect to its debt and foreign currency
exchange fluctuations.
INTEREST RATE RISK
The interest payable on the Company's revolving line-of-credit is variable based
on LIBOR and/or the prime rate, and therefore, affected by changes in market
interest rates. The Company does not use derivative financial instruments.
FOREIGN CURRENCY RISK
While the Company's product purchases are transacted in U.S. dollars, most
transactions among the suppliers and subcontractors of Tai Nam Industrial
Company Limited, the Company's purchasing agent, are effected in Hong Kong
dollars. Accordingly, fluctuations in Hong Kong monetary rates may have an
impact on the Company's cost of goods. However, since 1983, the value of the
Hong Kong dollar has been tied to the value of the United States dollar,
eliminating fluctuations between the two currencies. Despite the
announcements by the Hong Kong Government that it is determined to maintain
such a fixed exchange rate, there can be no assurance that the Hong Kong
dollar will continue to be tied to the United States dollar in the near
future or longer term. Furthermore, appreciation of Chinese currency values
relative to the Hong Kong dollar could increase the cost to the Company of
the products manufactured in China, and thereby have a negative impact on the
Company.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings in the ordinary course of
its business activities. The Company believes that the resolution of such legal
proceedings and claims, individually and in aggregate, are not likely to have a
material adverse effect on its financial position or results of operations.
Reference is made to Part I, Item 3, Legal Proceedings, in the Registrant's
Annual Report on Form 10-K for the year ended March 31, 2000 for descriptions of
[Link Group International v. Toymax Inc., U.S. District Court for the District
of Connecticut].
The Company has been notified by the Internal Revenue Service concerning a
pending examination covering tax years 1993, 1994, 1995 and 1996. 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Reference is made to Part II, Item 5, Market for the Registrant's Common Equity
and Related Stockholder Matters, in the Registrant's Annual Report on Form 10-K
for the year ended March 31, 2000.
Under the Company's stock repurchase program approved by the Board of Directors
in May 1999, as of November 10, 2000, a total of 35,000 shares of Toymax common
stock have been repurchased for a total purchase price of $177,868.85.
ITEM 3. DEFAULTS BY THE COMPANY UPON ITS SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 16, 2000, the Company held its Annual Meeting of Stockholders. The
number of shares of Common Stock represented at the meeting, either in person or
by proxy, was 6,840,149 shares (64.5% of the outstanding shares of Common
Stock). The following sets forth the votes cast for, against or withheld, as
well as the number of abstentions and broker non-votes, as to each of the
matters presented at the meeting:
1. Proposal 1 -- Election of Directors
The following person(s) were elected as director(s) as follows:
NAME CLASS FOR WITHHELD
---- ----- --- --------
Steven A. Lebensfeld 2 6,641,387 198,762
Oren Asher 2 6,641,287 198,862
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2. Proposal 2 -- Ratification of the Amendment to the Company's Stock Option
Plan to increase the number of shares of Common Stock of the Company, which
may be issued under the 1997 Stock Option Plan.
FOR AGAINST WITHHELD
--- ------- --------
6,631,065 209,084 --
3. Proposal 3 -- Ratification of selection by the Company's Board of Directors
of BDO Seidman, LLP as independent auditors of the Company for the year
ended March 31, 2001.
FOR AGAINST WITHHELD
--- ------- --------
6,821,029 18,620 500
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None.
b) Reports on Form 8-K
None.
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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
Chief Executive Officer and Director
By /s/ WILLIAM A. JOHNSON, JR.
------------------------------------
William A. Johnson, Jr.
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
Date: November 14, 2000
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