<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 JUNE 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 August 14, 2000.
<PAGE>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
June 30, 2000 (Unaudited) and March 31, 2000 3
Condensed Consolidated Statements of Operations
for the Three Months Ended June 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended June 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 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults by the Company upon Its Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE>
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 2000
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT:
Cash $ 4,543,823 $ 4,232,460
Due from Factor 15,147,198 13,281,026
Accounts receivable, less allowance for possible
losses of $280,000 and $290,000 12,303,499 7,294,407
Due from affiliates 387,777 510,381
Inventories 11,811,119 11,789,896
Prepaid expenses and other current assets 4,405,611 3,474,219
Income tax refunds receivable 2,877,890 2,546,733
Deferred income taxes 2,407,945 2,407,945
------------ ------------
TOTAL CURRENT ASSETS 53,884,862 45,537,067
------------ ------------
PROPERTY AND EQUIPMENT, NET 5,872,905 5,643,779
INVESTMENT IN AND ADVANCES TO JOINT VENTURE 2,314,720 2,145,563
DEFERRED INCOME TAXES 1,176,512 1,176,512
Goodwill, net of amortization of $1,061,754 and $1,493,423 18,879,535 18,502,312
Other assets, primarily prepaid advertising 6,944,663 7,103,923
------------ ------------
$ 89,073,197 $ 80,109,156
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Bank credit facility $ 14,029,044 $ 10,432,113
Accounts payable 17,774,774 12,119,763
Accrued expenses 6,570,002 6,478,798
Accrued rebates and allowances 5,061,656 4,051,389
Due to affiliates 2,388,540 4,526,780
Current portion of long-term obligations 637,319 442,235
Income taxes payable 1,260,651 957,116
------------ ------------
TOTAL CURRENT LIABILITIES 47,721,986 39,008,194
------------ ------------
LONG-TERM OBLIGATIONS 49,951 48,492
------------ ------------
TOTAL LIABILITIES 47,771,937 39,056,686
------------ ------------
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 18,018,905
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 41,052,470
------------ ------------
$ 89,073,197 $ 80,109,156
============ ============
</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
JUNE 30,
---------------------------------
1999 2000
------------ ------------
<S> <C> <C>
NET SALES $ 15,479,620 $ 26,081,019
------------ ------------
COSTS AND EXPENSES
Cost of goods sold 9,828,318 16,653,459
Selling and administrative 6,352,126 9,360,732
------------ ------------
16,180,444 26,014,191
------------ ------------
OPERATING INCOME (LOSS) (700,824) 66,828
------------ ------------
OTHER INCOME (EXPENSES):
Other income, net 25,488 50,682
Interest income 150,993 5,991
Interest expense (51,452) (286,217)
Equity in loss of joint venture -- (131,641)
Finance charges (117,842) (103,580)
------------ ------------
7,187 (464,765)
------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (693,637) (397,937)
Income tax benefit (334,393) (149,147)
------------ ------------
NET LOSS $ (359,244) $ (248,790)
============ ============
BASIC AND DILUTED LOSS PER SHARE: $ (0.03) $ (0.02)
============ ============
SHARES USED IN COMPUTING BASIC AND DILUTED
LOSS PER SHARE: 10,604,741 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>
THREE MONTHS ENDED
JUNE 30,
---------------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (359,244) $ (248,790)
------------ ------------
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 595,965 1,144,315
Bad debts 11,215 9,324
Equity in loss of joint venture -- 131,641
Non-cash revenue - barter credits (377,433) --
Changes in operating assets and liabilities:
Due from Factor and accounts receivable 516,420 6,865,940
Due from affiliates (322,539) (122,604)
Inventories (75,981) 21,223
Prepaid expenses and other (1,240,413) 699,773
Income tax refunds receivable (1,234,122) 331,157
Accounts payable and accruals (1,092,934) (6,756,482)
Due to affiliates 135,537 2,138,240
Income taxes payable 371,125 (303,535)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (3,072,404) 3,910,202
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (305,446) (411,161)
Proceeds from disposals of property and equipment 7,489 --
Business acquisitions (6,907,661) (16,930)
Advances to officers (12,249) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (7,217,867) (428,091)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank credit facility 3,117,199 (3,596,931)
Increase (decrease) in long-term obligations 230,837 (196,543)
Purchase of treasury stock (31,314) --
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,316,722 (3,793,474)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,973,549) (311,363)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,469,027 4,543,823
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,495,478 $ 4,232,460
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 36,650 $ 308,655
Income taxes paid $ 333,767 $ 188,581
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES o
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS o
JUNE 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 1,590,875 and
2,738,620 shares of common stock were outstanding at June 30, 1999 and 2000,
respectively. Such options and warrants are not included in the computation of
diluted earnings per share because they are 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 months ended
June 30, 1999 and June 30, 2000 is the same as the reported net income.
NOTE 4 - RECENT ACCOUNTING STANDARDS
In June 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 June 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.
6
<PAGE>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES o
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS o
JUNE 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 months ended June 30, 1999 and 2000:
<TABLE>
<CAPTION>
TOYMAX TOYMAX
THREE MONTHS ENDED JUNE 30, 1999 BRANDS ENTERPRISES CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
Revenues-Net sales $ 9,392,666 $ 6,086,954 $ 15,479,620
Income (loss) before income tax expense (1,311,312) 617,675 (693,637)
Identifiable assets 50,100,293 20,767,544 70,867,837
Interest income 150,139 854 150,993
Interest expense 23,008 28,444 51,452
Depreciation and amortization 348,544 247,421 595,965
Capital expenditures 259,781 45,665 305,446
------------ ------------ ------------
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000 TOYMAX TOYMAX
BRANDS ENTERPRISES CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
Revenues-Net sales $ 7,990,458 $ 18,090,561 $ 26,081,019
Income (loss) before income tax expense (1,780,552) 1,382,615 (397,937)
Identifiable assets 37,490,430 42,618,726 80,109,156
Interest income 5,991 -- 5,991
Interest expense 176,094 110,123 286,217
Depreciation and amortization 471,448 672,867 1,144,315
Capital expenditures 248,051 163,110 411,161
------------ ------------ ------------
</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
7
<PAGE>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES o
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS o
JUNE 30, 1999 AND 2000
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.
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 quarter ended June 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999 2000
------------ ------------
<S> <C> <C>
Net sales $ 28,384,412 $ 26,081,019
Net income (loss) 601,006 (248,790)
------------ ------------
Basic and diluted earnings (loss) per share $ 0.06 $ (0.02)
------------ ------------
</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-
8
<PAGE>
TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES o
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS o
JUNE 30, 1999 AND 2000
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 $112,564 has been amortized as of June 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
- 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
- Increased competitive pressure, both domestically and internationally,
which may negatively affect the sales of Toymax's products
- 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
- Failure to successfully integrate recent acquisitions
FINANCIAL CONSIDERATIONS
- Significant changes in interest rates, both domestically and
internationally, which may negatively affect Toymax's cost of
financing its operations
- Currency fluctuations, which may affect Toymax's reportable income
OTHER RISKS
- Development of new technologies, including the Internet, which may
create new risks to Toymax's ability to protect its intellectual
property rights
- 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
- 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 JUNE 30, 2000 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1999
NET SALES. Net sales for the quarter ended June 30, 2000 increased
to $26.1 million from $15.5 million for the quarter ended June 30, 1999, an
increase of $10.6 million, or 68.5%.
Net sales of Toymax Brands for the quarter ended June 30, 2000
decreased 14.9% to $8.0 million, or 30.6% of total net sales, from $9.4 million,
or 60.7% of total net sales for the quarter ended June 30, 1999. The decrease in
net sales was primarily due to a decrease in sales of the Company's Laser
Challenge(TM) and Arcadia(TM) Electronic Skeet Shoot gaming sysTEMS.
Net sales of Toymax Enterprises for the quarter ended June 30, 2000
increased 197.2% to $18.1 million, or 69.4% of total net sales, from $6.1
million, or 39.3% of total net sales for the quarter ended June 30, 1999 as a
result the acquisition of Monogram in the first quarter of fiscal 2000 and the
acquisition of Funnoodle during the latter part of fiscal 2000.
GROSS PROFIT. Gross profit for the quarter ended June 30, 2000,
increased by $3.7 million, or 66.8%, to $9.4 million, or 36.1% of net sales,
from $5.7 million, or 36.5% of net sales, for the quarter ended June 30, 1999.
The gross profit of Toymax Brands decreased by $.7 million, or
19.9%, to $2.6 million, or 33.1% of net sales, from $3.3 million, or 35.2% of
net sales for the quarter ended June 30, 1999. The gross profit of Toymax
Enterprises increased by $4.4 million, or 188.9%, to $6.8 million, or 37.5% of
net sales, from $2.4 million, or 38.6% of net sales in the quarter ended June
30, 1999, primarily as a result of the increase in sales volume attributable to
the acquisitions of Monogram and Funnoodle.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses for the quarter ended June 30, 2000 increased by $3.0 million, or
47.4%, to $9.4 million from $6.4 million for the quarter ended June 30, 1999,
while decreasing as a percentage of net sales from 41.0% to 35.9%.
Selling and administrative expenses of Toymax Brands for the quarter
ended June 30, 2000 decreased by $0.6 million, or 12.0%, to $4.1 million, or
51.7% of net sales, from $4.7 million, or 50.0% of net sales for the quarter
ended June 30, 1999. The decrease was primarily due to lower advertising and
research and development costs in the period. Selling and administrative
expenses of Toymax Enterprises for the quarter ended June 30, 2000 increased by
$3.6 million, or 215.6%, to $5.2 million, or 28.9% of net sales, from $1.6
million, or 27.2% of net sales for the quarter ended June 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 (LOSS). As a result of the foregoing, the operating
loss for the quarter ended June 30, 2000 decreased by $.8 million, or 109.5%, to
an operating profit of approximately $67,000 from a loss of $0.7 million for the
quarter ended June 30, 1999.
The operating loss for Toymax Brands increased by $.1 million, or
6.8%, to $1.5 million
11
<PAGE>
from $1.4 million for the quarter ended June 30, 1999. Operating income for
Toymax Enterprises increased by $.9 million, or 124.9%, to $1.6 million from
$0.7 million for the quarter ended June 30, 1999.
OTHER EXPENSE, NET. Net other expense for the quarter ended June 30,
2000 was $0.2 million, compared to $0.1 million for the quarter ended June 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 June 30, 2000 was $0.3 million, compared to net interest income of $0.1
million for the quarter ended June 30, 1999, an increase of $0.4 million, or
381.5%. 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. The loss before taxes for the quarter
ending June 30, 2000 decreased by $0.3 million, or 42.6%, to $0.4 million,
compared to a loss before taxes of $0.7 million for the quarter ended June 30,
1999. The loss before taxes for Toymax Brands increased by $0.5 million, or
35.8%, to $1.8 million, compared to a loss before taxes of $1.3 million for the
quarter ended June 30, 1999. Income before taxes for Toymax Enterprises
increased by $0.8 million, or 123.8%, to $1.4 million, compared to income before
taxes of $0.6 million for the quarter ended June 30, 1999.
INCOME TAX BENEFIT. The effective tax rate for the quarter ending
June 30, 2000 decreased to 37.5% from 48.2% for the quarter ended June 30, 1999.
NET LOSS. As a result of the foregoing, the net loss for the quarter
ended June 30, 2000 decreased to $0.2 million, or $(0.02) per share, from $0.4
million, or $(0.03) per share, for the quarter ended June 30, 1999, a decrease
of $0.1 million or 30.8%.
12
<PAGE>
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 three
months ended June 30, 2000 cash and cash equivalents decreased $0.3 million
to $4.2 million.
The Company's operating activities provided net cash of approximately $3.9
million, as compared to $3.1 million used in operations in the quarter ended
June 30, 1999. The increase was primarily due to the decrease in the due from
factor and accounts receivable and the increase in the due to affiliates, which
was partially offset by the decrease in accounts payable and accrued expenses
and the net loss in the period. 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 $0.4 million in net cash, as compared to $7.2 million
in the quarter ended June 30, 1999. Investing activities in the current period
consisted principally of capital expenditures, principally for the purchase of
tooling for new products and equipment. Investing activities in the prior year
period included $6.9 million related to the acquisition of Monogram
International, Inc. and $0.3 million in capital expenditures.
Financing activities used $3.8 million in net cash due to the decrease in the
working capital credit facilities and the installment payments against the
Company's long term debt. In February 1999 the Company's TMI and GFK
subsidiaries signed a new credit facility (the" AGREEMENT") with State Street
Bank and Trust Company (the "BANK") and Congress Talcott Corporation
("CONGRESS") as collateral agent. Effective April 1, 1999, the rights and
obligations of Congress under the Agreement were transferred to The CIT
Group/Commercial Services, Inc. ("CIT"). The Agreement provides for a borrowing
limit of up to $30.0 million. The first $25.0 million of borrowings are subject
to a borrowing base formula of 80% of the 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 June 30, 2000 the outstanding balance under the
Agreement was $5.0 million and borrowing availability was approximately $1.1
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 1999, 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 for a borrowing limit of up to approximately $2.3
million and 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 June 30, 2000 there was no outstanding balance
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 revolving line of credit is
secured by substantially all assets of Monogram and is guaranteed by Toymax.
Available borrowings against the revolving line of credit are limited to a
percentage of eligible accounts receivable and finished goods inventory. As of
June 30, 2000, the outstanding balance of the revolver and the term loan was
approximately $2.8 million and $0.6 million, respectively. Effective August 1,
2000, the term loan was repaid and the balance of the credit agreement was
renewed and extended through September 15, 2000. The Company is pursuing
alternative financing options to replace the Monogram credit facility upon its
expiration.
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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. Advances
are payable, with interest at 8%, from the collection of Funnoodle accounts
receivable. 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
June 30, 2000 the outstanding balance under the Agreement was $2.6 million and
borrowing availability was approximately $2.4 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. 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.
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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 Jauntiway Investments
Limited, an OEM toy manufacturer that has been the Company's most important
manufacturer since inception, 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 July 31, 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 will hold its Annual Meeting of Stockholders at
which the stockholders will be asked to vote upon the following proposals:
1. Proposal 1 - Election of Directors
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.
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.
ITEM 5. OTHER INFORMATION
None.
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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
President and Director
By /s/ WILLIAM A. JOHNSON, JR.
----------------------------------
William A. Johnson, Jr.
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
Date: August 14, 2000
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