<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 1996
REGISTRATION NO. 33-87662
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
JANEX INTERNATIONAL, INC.
(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
COLORADO 3944 84-1034251
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL IDENTIFICATION NUMBER)
CLASSIFICATION CODE NUMBER)
</TABLE>
--------------------------
21700 OXNARD STREET, SUITE 1610
WOODLAND HILLS, CALIFORNIA 91367
(818) 593-6777
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
________________________
SHELDON F. MORICK
PRESIDENT
JANEX INTERNATIONAL, INC.
21700 OXNARD STREET, SUITE 1610
WOODLAND HILLS, CALIFORNIA 91367
(818) 593-6777
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
_______________________
COPIES TO:
RONALD J. GRANT, ESQ.
TILLES, WEBB, KULLA & GRANT, A.L.C.
433 NORTH CAMDEN DRIVE, SUITE 1010
BEVERLY HILLS, CALIFORNIA 90210
(310) 888-3430
_______________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON
AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE AS DETERMINED
BY MARKET CONDITIONS.
_______________________
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. [X]
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(b) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ] ______________
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(c)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. [ ]
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. [ ]
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
_______________________________________________________________________________
<PAGE>
PROSPECTUS
785,000 SHARES
JANEX INTERNATIONAL, INC.
The 785,000 shares (the "Shares") of Common Stock, no par value (the
"Common Stock"), of Janex International, Inc., formerly known as With Design in
Mind International, Inc. (the "Company") offered hereby are being sold by
certain shareholders of the Company named herein (collectively, the "Selling
Shareholders"). See "Selling Shareholders." Of the Shares being offered,
270,000 are issuable upon the exercise of certain warrants; 400,000 were issued
in connection with an acquisition; and 115,000 were issued upon the exercise of
certain options.
-------------------
THE COMPANY WILL NOT RECEIVE PROCEEDS FROM THE SALE OF SHARES OF COMMON
STOCK OFFERED BY THE SELLING SHAREHOLDERS PURSUANT TO THIS PROSPECTUS. THERE IS
NO ASSURANCE THAT ANY WARRANTS WILL BE EXERCISED; THEREFORE THERE IS NO
ASSURANCE THAT THE COMPANY WILL RECEIVE ANY PROCEEDS AS A RESULT OF THIS
REGISTRATION.
The Company will receive proceeds only if the warrants are exercised. If
all of the warrants are exercised, the gross proceeds to the Company would be
$172,800. The selling price for the Common Stock is expected to be the market
price as reported on The Nasdaq Stock Market ("NASDAQ") under the symbol "JANX"
on the date of the sale. On July 31, 1996, the closing bid and asked prices for
the Company's Common Stock as reported on NASDAQ were $1.06 and $1.31,
respectively.
Broker-dealers either may act as agents for the Selling Shareholders and/or
their respective pledgees, donees, transferees or other successors in interest,
or may purchase any of the shares of Common Stock as principals and thereafter
may sell such shares from time to time in the over-the-counter market, in
negotiated transactions or otherwise, at prices and terms then obtainable. The
shares of Common Stock may be sold to underwriters for public offering pursuant
to the terms of offering fixed at the time of sale. The specific terms of such
sale, if made, and the names of the underwriters, if any, will be set forth in a
prospectus supplement. Any underwriters, broker-dealers or agents participating
in the offering may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "1933 Act").
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE
CONSIDERED ONLY BY PERSONS ABLE TO SUSTAIN A TOTAL LOSS OF THEIR INVESTMENT.
SEE "RISK FACTORS."
The date of this Prospectus is , 1996
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the detailed information and consolidated financial
statements appearing elsewhere in this Prospectus.
THE COMPANY
Janex International, Inc. ("Janex International"), formerly known as With
Design in Mind International, Inc., was incorporated in Colorado on July 28,
1986, and is the parent corporation of With Design in Mind, a California
corporation ("WDIM"), a wholly owned subsidiary that it acquired on August 19,
1988, Janex Corporation, a New Jersey corporation ("Janex"), a wholly owned
subsidiary acquired on October 6, 1993, and Malibu Fun Stuffed, Inc., a
California corporation ("Malibu"), a wholly owned subsidiary acquired on August
4, 1995. Janex International is also the parent corporation of Pro Gains Company
Limited, a Hong Kong corporation ("Pro Gains"), owned 50% by Janex
International, and 50% by Janex, and the parent corporation of Malibu Fun
Stuffed International Limited, a Hong Kong corporation ("MFSI"), owned 99% by
Malibu and 1% by Janex International As used in this Prospectus, the term "the
Company" refers to Janex International and its subsidiaries, unless the context
indicates otherwise. Malibu and MFSI are referred to collectively herein as the
"Malibu Division" and Janex and Pro Gains are referred to collectively herein as
the "Janex Division."
The Company's business is conducted primarily through its subsidiaries,
Janex, Pro Gains, Malibu and MFSI. The Company's business consists mainly of
developing, manufacturing (through subcontractors), marketing and selling toys
and functional children's products. These products include 1) coin and gumball
banks, flashlights, battery powered hand held fun fans, chalk boards, battery
operated toothbrushes and clocks incorporating licensed characters and marketed
under the brand name "Janex", and 2) stuffed animals ("plush"), dolls, video
sets and children's watches marketed under the brand name "Malibu Fun Stuffed!",
all of which retail for prices between $3 and $30 ("Children's Products"). The
Children's Products are manufactured to the Company's specifications by
manufacturers based in Macau, China and the United States, and sold nationwide
to mass merchant retailers, toy specialty stores, department stores and gift
stores, through a network of independent sales representative firms.
There is considerable competition in both of the Company's target markets
(functional products and toys). To be competitive the Company seeks to
differentiate its products from that of the competition. Functional products are
differentiated by incorporating popular licensed fantasy characters into the
design. For example, among other characters, the Company currently is licensed
to use characters from the Walt Disney Company movies "The Hunchback of Notre
Dame" and "101 Dalmatians," as well as the Warner Bros. Looney Tunes characters.
Toys are differentiated by incorporating unique features, unusual packaging
and/or unique merchandising.
The Company's principal place of business is located at 21700 Oxnard
Street, Suite 1610, Woodland Hills, California 91367. The Company's telephone
number is (818) 593-6777.
2
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered by
Selling Shareholders ....... 785,000 shares
Common Stock Outstanding..... 5,046,721 shares at July 31, 1996;
5,831,721 shares as adjusted for this offering.*
Risk Factors................. Investment in the Shares involves substantial risks
and should be considered only by persons able to
sustain a total loss of their investment.
See "Risk Factors."
NASDAQ Symbol................ JANX
- ---------------------
</TABLE>
* Assumes exercise of the Deco Disc Warrants. See "Description of Securities--
Deco Disc Warrants."
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended Year Ended Year Ended
March 31, March 31, December 31, December 31,
1996 1995 1995 1994
------------- ------------- ------------- --------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Net sales............................ $ 894,306 $ 782,754 $ 9,355,021 $ 13,109,165
Gross profit......................... 362,611 371,245 4,039,362 5,952,262
Operating expenses................... 832,064 763,200 5,099,183 4,978,979
Operating income (loss).............. (469,453) (391,955) (1,059,821) 973,283
Net income (loss).................... (563,000) (392,833) (1,137,822) 1,186,738 (1)
Net income (loss) per common share... (.11) (.08) (.23) .24 (2)
Weighted average number of
common shares outstanding............ 5,046,721 4,711,721 4,860,447 4,904,504 (2)
- -------------------
</TABLE>
(1) Net income for the year ended December 31, 1994, included an extraordinary
gain from extinguishment of debt, net of applicable income taxes, of
$489,335 ($.10 per share).
(2) Fully diluted.
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Balance Sheet Data:
Working capital.......................... $ (533,721) $ 71,610
Total assets............................. 4,842,629 5,448,967
Current portion of long-term debt........ 458,760 458,760
Long-term debt, net of current portion... -- --
Total stockholders' equity............... 2,393,772 2,872,647
</TABLE>
3
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a
high degree of risk. In evaluating the Company and its business, prospective
investors should carefully consider the following risk factors in addition to
the other information included in this Prospectus.
ACCUMULATED DEFICIT. At March 31, 1996, the Company had an accumulated
deficit of $8,745,169 and had a net loss of $563,000 for the three months ended
March 31, 1996. At December 31, 1995, the Company had an accumulated deficit of
$8,182,169 and a net loss for the fiscal year ended December 31, 1995 of
$1,137,822. For the fiscal year ended December 31, 1994, the Company had net
income of $1,186,738 and for the fiscal year ended December 31, 1993, the
Company had a net loss of $2,918,301. There can be no assurance that the Company
will achieve profitable operations for fiscal 1996 or thereafter. See
"Management's Discussion and Analysis or Plan of Operation."
INSUFFICIENT WORKING CAPITAL. As of March 31, 1996, the Company had a
working capital deficit of $533,721. As of December 31, 1995, the Company had
working capital of $71,610. The possibility exists that the Company may have
insufficient working capital to finance its activities through the first half of
the year, during which time the Company has historically generated negative cash
flow. There can be no assurance that the Company will be able to obtain
financing to the extent necessary. See "Management's Discussion and Analysis or
Plan of Operation--Liquidity and Capital Resources."
GOING CONCERN QUALIFICATION. The Company has suffered losses from
operations in two out of the last three years, had a net loss of $1,137,822 and
a negative cash flow of $288,457 for the year ended December 31, 1995. Also, at
December 31, 1995, the Company's working capital had decreased to $71,610 from
$1,450,853 at December 31, 1994. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. See "Note 3. Going Concern" of the consolidated financial
statements.
COMPETITION; DEPENDENCE ON LICENSES. The Company competes with numerous
other companies, most of which have substantially greater financial and other
resources than those of the Company. The Company's success depends in great part
upon the Company's ability to continue licensing fantasy characters for use with
the Company's products. Most licensing agreements are non-exclusive and limited
in duration, with two years being typical. Competition for licenses is intense,
thus there can be no assurance that the Company will be successful in renewing
its present licenses or in obtaining new licenses. The failure of the Company to
renew licenses or obtain suitable new licenses will have a material adverse
effect on the Company's business. Further, the strength or weakness of the
respective licenses held by the Company can have a significant impact on revenue
and profitability. The Company can be expected to record significant upward
swings in sales when it has "fad" or "hit" licenses, followed by significant
downward swings when fads change. These upward and downward fluctuations in
revenue make the business of selling licensed products extremely volatile in
comparison to businesses that do not sell licensed products. See "Business--
Competition."
PRODUCT OBSOLESCENCE. Because consumer preferences can change rapidly, the
Company's success will ultimately depend on its ability to successfully
introduce new products. The success of new
4
<PAGE>
products depends on a variety of factors, including product selection, timely
and efficient completion of product design, timely and efficient implementation
of manufacturing and assembly processes and effective, marketing and
distribution. Because new product commitments must be made well in advance of
sales, new product decisions must anticipate future market demand. There can be
no assurance that the Company will be successful in introducing new products.
The Company has and is continuing to review and evaluate new products for
commercial viability.
SEASONALITY. The Company expects its highest level of net sales and
operating income during the quarter ending September 30, due to the Christmas
season. If, for any reason, the Company's sales were to be substantially below
those normally expected during such quarter, as was the case for the quarter
ended September 30, 1995, the Company's annual results would be adversely
affected. See "Management's Discussion and Analysis or Plan of Operation--
Seasonality and Quarterly Fluctuations."
DEPENDENCE ON FOREIGN MANUFACTURING. The Company does not have
manufacturing facilities. Most of the Company's products are manufactured by
contract manufacturers in the Far East. The Company's operations are subject to
the customary risks of doing business abroad, including insufficient Company
supervision of quality control, fluctuations in the value of currencies,
tariffs, export duties, quotas, restrictions on the transfer of funds, work
stoppages and, in certain parts of the world, political instability. To date,
these factors have not had a material adverse impact on the Company's
operations, but there can be no assurance that one or more of these factors will
not adversely affect the Company in the future. See "Business--Manufacturing."
DEPENDENCE ON KEY PERSONNEL. The Company's business depends to a large
extent on the abilities and continued participation of certain key employees,
including Sheldon F. Morick, President, who has primary responsibility for
marketing of the Company's products and raising capital, and Daniel Lesnick,
Executive Vice President of Janex, who has primary responsibility for product
development and manufacturing. Mr. Morick has an employment agreement which
expires on March 31, 1997. Mr. Lesnick has an employment agreement which expires
on September 30, 1996. There is no key-man life insurance on either Mr. Morick
or Mr. Lesnick. The loss of one or both of these officers would have a material
adverse effect on the Company's business if suitable replacements could not be
promptly found. See "Management."
DEPENDENCE ON SIGNIFICANT CUSTOMERS. The Company's products are sold
primarily through mass merchant retailers. In 1995, Wal-Mart and Toys R Us
represented 26% and 24%, respectively, of the Company's revenues, as compared to
16% and 25%, respectively, for 1994. The loss of either of these major customers
or a significant decrease in purchases by these customers, would have a material
adverse effect on the results of the Company's operations. The Company does not
have any long-term contracts with any of its customers and none are expected to
be signed. Long-term contracts are not customary in the retail industry. See
"Business--Marketing, Distribution and Customers."
SECURITIES MARKET FACTORS. There have been periods of extreme volatility in
the stock markets, which in many cases were unrelated to the operating
performance of, or announcements concerning, the issuers of the affected stocks.
The price of the Company's Common Stock has fluctuated substantially. See
"Market for Common Equity and Related Stockholder Matters." General market price
declines or market volatility in the future could adversely affect the price of
the Common Stock. As part of this
5
<PAGE>
offering, the Company is registering 270,000 shares of Common Stock to be issued
pursuant to 270,000 private warrants which were issued having an exercise price
of $.64 per share ("Deco Disc Warrants"). The exercise of the 270,000 warrants
could have a substantial adverse effect on the market price. See "Description of
Securities--Deco Disc Warrants."
SHARES ELIGIBLE FOR FUTURE SALE. As of July 31, 1996, the Company had
5,046,721 shares of Common Stock outstanding. Of those shares, 1,580,000 are
eligible for immediate sale pursuant to Rule 144 under the 1933 Act, 100,000
will become eligible for sale pursuant to Rule 144 after August 4, 1997 and the
balance, to the extent they are not held by affiliates of the Company, are
freely transferrable, subject to compliance with applicable state securities
laws. Rule 144, promulgated under the 1933 Act, provides for the sale of limited
quantities of restricted securities, in accordance with the provisions of the
Rule, without registration under the 1933 Act. In connection with this offering,
the Company registered for sale 270,000 shares of Common Stock underlying the
Deco Disc Warrants. The Company has issued private warrants to acquire 235,000
shares of Common Stock, with certain registration rights. The Company has issued
1,314,986 private warrants, which vest over a period of 2-1/2 years, with
certain registration rights. The Company has also granted to certain employees
stock options to acquire 550,250 shares of Common Stock, which the Company
intends to register by December 31, 1996. The sale of substantial amounts of
shares registered in this offering, the possibility of sales of Common Stock
under Rule 144, and the existence of these options and warrants, as well as
actual sales under Rule 144 or of registered shares issued upon option or
warrant exercises, may have a depressive effect upon the prevailing market price
of the Common Stock, and might adversely affect the terms at which the Company
may be able to obtain additional equity financing. See "Description of
Securities--Shares Eligible for Future Sale."
NO ASSURANCE OF PUBLIC TRADING MARKET OR CONTINUED QUALIFICATION FOR
NASDAQ INCLUSION. The Company's Common Stock is thinly traded in the over-the-
counter market and there is no assurance that an active trading market for the
Company's securities will develop. If an active trading market does in fact
develop there can be no assurance that it will be sustained. The Company's
Common Stock and Class A Warrants ("Public Warrants") are listed on The Nasdaq
SmallCap Market ("NASDAQ"). If for any reason, however, any of the Company's
securities are not eligible for continued listing or an active public trading
market does not develop or continue, purchasers of the Company's securities may
have difficulty selling them should they desire to do so. Under the rules of
the National Association of Securities Dealers, Inc. ("NASD"), in order to
qualify for initial quotation of securities on NASDAQ, a company, among other
things, must have at least $4,000,000 in total assets, $2,000,000 in total
capital and surplus, $1,000,000 in market value of public float and a minimum
bid price of $3.00 per share. For continued listing, a company, among other
things, must have $2,000,000 in total assets, $1,000,000 in total capital and
surplus, $1,000,000 in market value of public float and a minimum bid price of
$1.00 per share. If the Company is unable to satisfy the continuing
requirements for quotation on NASDAQ, trading, if any, in the Common Stock and
the Public Warrants, would be conducted in the over-the-counter market in what
are commonly referred to as the "pink sheets" or on the NASD OTC Electronic
Bulletin Board. As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Common Stock
offered hereby. The above-described rules may materially adversely affect the
liquidity of the market for the Company's securities.
"PENNY STOCK" REGULATIONS. The Securities and Exchange Commission
("Commission") has adopted regulations which generally define a "penny stock"
to be any equity security that has a market price (as defined) less than $5.00
per share or an exercise price of less than $5.00 per share,
6
<PAGE>
subject to certain exceptions. If the securities offered hereby are removed from
NASDAQ, the Company's securities may become subject to rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and must have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a disclosure schedule prepared by the
Commission relating to the penny stock market. The broker-dealer also must
disclose the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market-maker, the broker-dealer also must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, if
applicable, the "penny stock" rules may restrict the ability of the broker-
dealers to sell the Company's securities and may affect the ability of
purchasers to sell the Company's securities in the secondary market.
7
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth certain information as of July 31, 1996,
with respect to the beneficial ownership of the Common Stock by each Selling
Shareholder. As of July 31, 1996, there were 5,046,721 shares of Common Stock
outstanding. Except as otherwise noted, no shareholder named below has had any
position, office, or other material relationship with the Company within the
past three years. No effect has been given to the exercise of the Public
Warrants which were issued in connection with the Company's May 10, 1991 public
offering ("1991 Public Offering").
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering (5)
--------------------------------- Number of ------------------------------------
Number % of Class Shares Number % of Class
of Shares Outstanding Offered of Shares Outstanding
------------------ ------------ ----------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
Deco Disc Industries, Inc. 370,000 (1) 6.8% 270,000 (1) 100,000 1.8%
Daniel Lesnick 553,000 (2) 10.9% 200,000 353,000 7.0%
Leslie Friedland 667,000 (3) 13.2% 200,000 467,000 9.3%
Howard Moore Associates, Inc. 578,900 (4) 11.2% 115,000 463,900 9.0%
- ----------------------------
</TABLE>
(1) 270,000 of such shares are registered hereunder, and may be acquired
pursuant to the exercise of privately held warrants which were acquired by
Deco Disc Industries, Inc. ("Deco Disc"), on June 30, 1993. These warrants
were acquired by Deco Disc as part of a transaction whereby the Company was
granted a license by Deco Disc to market, sell and distribute certain Deco
Disc products. 500,000 Warrants were originally issued, however, Deco Disc
exercised 230,000 of such warrants and sold or transferred the shares
issued upon the exercise of the warrants. See "Business--General Business
Development," "Description of Securities--Deco Disc Warrants." 100,000 of
such shares are not being registered hereunder and were acquired in
connection with a settlement with Deco Disc on March 26, 1996. See
"Description of Securities--Deco Disc Settlement Warrants."
(2) Acquired on October 6, 1993, in connection with the acquisition of Janex.
Mr. Lesnick is an Executive Vice President of Janex. See "Business--General
Business Development" and "Certain Relationships and Related Transactions."
Includes 25,000 shares to be issued pursuant to options currently
exercisable. Does not include any warrants granted to Mr. Lesnick in
connection with an extension of a loan, none of which warrants are
presently exercisable. See "Description of Securities--Lesnick Warrants."
(3) Acquired on October 6, 1993, in connection with the acquisition of Janex.
See "Business--General Business Development" and "Certain Relationships and
Related Transactions." Does not include any warrants granted to Mr.
Friedland in connection with an extension of a loan, none of which warrants
are presently exercisable. See "Description of Securities--Lesnick
Warrants."
(4) Includes shares owned by H&M Moore Investment Group, Inc., Howard Moore
Associates, Inc., and Howard Moore as Trustee of the Howard Moore
Associates, Inc. Retirement Trust. Includes 135,000 warrants currently
exercisable. Does not include 100,000 Public Warrants, having an exercise
price of $7.50, which are not currently exercisable. See "Certain
Relationships and Related Party Transactions."
(5) Assumes sale of all the shares offered.
USE OF PROCEEDS
The Selling Shareholders will receive all proceeds from the sale of Common
Stock by them. The Company will only receive proceeds upon the exercise of
warrants, if any, in the future. If the 270,000 Deco Disc Warrants are
exercised, gross proceeds to the Company will be approximately $172,800. The
Company currently anticipates that any such proceeds will be used primarily for
working capital purposes. However, such proceeds may be used for other purposes
depending upon a variety of factors, including the Company's business plans and
financial condition at the time such proceeds are received, if ever.
8
<PAGE>
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
PRICE RANGE OF OUTSTANDING COMMON STOCK
On October 16, 1989, the Common Stock began trading on The Nasdaq Stock
Market and has been quoted on NASDAQ since that date except for the period from
June 7, 1990, to June 18, 1990. The following table sets forth the high and low
bid prices for each fiscal quarter from January 1, 1994, through July 31, 1996,
as reported by The Nasdaq Stock Market, Inc. Such quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Year Ended December 31, 1994 High (1) Low (1)
- -------------------------------- -------- -------
<S> <C> <C>
First Quarter $2.44 $0.81
Second Quarter $2.50 $1.50
Third Quarter $3.06 $1.88
Fourth Quarter $5.25 $2.50
Year Ended December 31, 1995 High Low
- -------------------------------- ----- -----
First Quarter $4.50 $2.00
Second Quarter $3.38 $1.75
Third Quarter $2.75 $1.50
Fourth Quarter $1.38 $1.13
Year Ending December 31, 1996 High Low
- -------------------------------- ----- -----
First Quarter $2.25 $1.00
Second Quarter $1.94 $1.19
</TABLE>
(1) The closing bid price on July 31, 1996, was $1.06 per share. As of July 31,
1996, the Company had approximately 800 shareholders of record.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. The Company anticipates
that all earnings, if any, in the foreseeable future, will be retained for
development of the Company's business.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto appearing elsewhere
in this Prospectus.
OVERVIEW
From July 1986 (inception) to June 1992, the Company developed and marketed
a variety of consumer products that were sold by retailers of gift, novelty and
educational items throughout the United States ("Gift Products"). In 1990, the
Company expanded its product line with the introduction of the MicroTheatre
Display Unit, which was intended for commercial markets. During 1991 and 1992,
the Company had revenues from MicroTheatre related products of $3,580,000,
primarily as a result of a contract with Sega Enterprises Ltd., which produced
revenues of $3,000,000 from the licensing of a video game (the "Game") and the
sale of certain optical system kits ("Kits"). However, the Game was not a
commercial success, Sega did not purchase any Kits after the initial order, and
advised the Company in December 1992, that it did not intend to purchase any
additional Kits. At or about the same time, management had serious concerns
regarding the market for the Company's products, since revenues from the Gift
Products went from a high of $8,204,697 for the year ended September 30, 1989,
to $2,636,411 for the year ended September 30, 1992, due to what management
believed was the continuation of a downward trend in the demand for high-end
novelty gift items. Accordingly, management changed the Company's product
philosophy and focus, to that of producing functional children's products.
In early 1993, the Company introduced a new line of functional children's
products, under the brand name "Great Stuff." But, by June 1993, management
realized that the Great Stuff product line was not gaining acceptance, and the
Company began looking for other sources of revenue. In June 1993, the Company
sought to obtain sales revenue by entering into a license and distribution
agreement with Deco Disc Industries, Inc. ("Deco Disc"), which gave the Company
the right to distribute to the Gift and Specialty retail markets a line of
patented greeting cards and ornaments with "pop out" compact discs. However,
when orders for the Deco Disc products did not materialize as expected, with
total Deco Disc product orders totaling only about $190,000 in fiscal 1993,
management began searching for an acquisition and in October 1993, MJL
Marketing, Inc. (now known as Janex Corporation) and its affiliate Pro Gains, a
successful manufacturer and distributor of children's products which utilized
fanciful licensed characters on their products, were acquired.
The operating results of Pro Gains and Janex for the fiscal years 1992 and
1993 (prior to their acquisition by the Company) indicate that independently Pro
Gains was profitable while Janex incurred losses. However, the two companies
operated in tandem, with considerable interdependencies and on a combined basis
they generated a profit. Although the Company's operations were restructured
subsequent to the acquisition, Pro Gains and Janex continue to operate in tandem
to achieve consolidated objectives, and by design, significant interdependencies
continue to exist. Management measures their performance on a combined rather
than an individual basis. Both companies sell their products primarily to
customers in the United States. However, Pro Gains sells free on board (FOB)
Hong Kong, on a letter of credit basis, while Janex sells FOB the Company's
warehouse in Baltimore, Maryland, on customary industry credit terms. It is
normally the customer that determines the form of the transaction. Accordingly,
consideration and comparison of those measurable standards of performance such
as sales, operating profits and identifiable assets for these entities as if
they were operating independently may not be meaningful.
10
<PAGE>
With the acquisition of Janex in October 1993, the Company ceased marketing
the Great Stuff, Deco Disc and MicroTheater product lines and focused entirely
on marketing the Janex products. See "Business of Issuer--Products"
By May 1995, it became apparent that the order flow for 1995 was
significantly behind that of 1994, and management became increasingly concerned
about the Company's reliance on licensed products, given the volatility of the
licensing business and the cost of acquiring licenses. See "Business of Issuer-
- -Competition." Therefore, the decision was made to investigate the possibility
of adding other product lines, and to evaluate various acquisition opportunities
that were presented to the Company for its consideration. As a result, on
August 4, 1995, the Company acquired Malibu and its Hong Kong affiliate MFSI.
See "Liquidity and Capital Resources" and "Business--General Business
Development." The two acquired companies operate in tandem similar to Janex and
Pro Gains. Together they develop, manufacture (through subcontractors) and
market toys and novelty gift items, selling primarily in the United States to
mass merchant retailers, chain stores, and specialty stores, both FOB the
Company's warehouse in Baltimore, Maryland and FOB Hong Kong.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentage that certain income and expense items bear to net sales.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Year Ended Year Ended
March 31, 1996 March 31, 1995 December 31, 1995 December 31, 1994
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 59.5 52.6 56.8 54.6
------ ------ ------ -----
Gross profit 40.5 47.4 43.2 45.4
Royalty expense 3.7 10.9 13.3 10.3
Selling, general and
administrative expenses 89.3 86.7 41.3 27.7
------ ------ ------ -----
Operating income (loss) (52.5) (50.1) (11.4) 7.4
Other income (expense) (9.9) 0.1 (0.4) (1.9)
------ ------ ------ -----
Income (loss)
before income taxes (62.4) (50.0) (11.8) 5.5
Income tax provision (0.6) (0.2) (0.4) (0.2)
------ ------ -----
Income (loss) before
extraordinary item 0.0 0.0 (12.2) 5.3
Extraordinary item 0.0 0.0 0.0 3.7
------ -----
Net income (loss) (63.0)% (50.2)% (12.2)% 9.0%
====== ====== ====== =====
</TABLE>
11
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND MARCH 31, 1996
For the three months ended March 31, 1996, sales increased by $111,552 or
14.3%, to $894,306, as compared to sales of $782,754 for the three months ended
March 31, 1995. The increase in sales is a result of increased sales to Europe
and Canada, as well as sales generated by Malibu and its affiliate, MFSI, which
the Company acquired in August 1995. A substantial portion of 1996 sales
consisted of products incorporating characters licensed from The Walt Disney
Company (42%) and the "Looney Tunes" characters licensed from Warner Bros.
Corporation (39%), whereas a substantial portion of 1995 sales consisted of
products incorporating characters licensed from The Walt Disney Company (44%)
and characters featured on the television show Mighty Morphin Power Rangers
(34%).
At March 31, 1996, the Company had a backlog of unfilled orders of
approximately $4,000,000, comparable with its order backlog of approximately the
same amount at March 31, 1995. Although orders are booked throughout the fiscal
year, historically as much as 50% of the Company's business is booked during the
second fiscal quarter. Although the Company has noted a general slowdown in
order flow in 1996 as compared to prior years, the present backlog is not
necessarily indicative of sales to be expected for the full fiscal year ending
December 31, 1996.
For the three months ended March 31, 1996, gross profit was $362,611 or
40.5% of sales, as compared to $371,245 or 47.4% of sales for the three months
ended March 31, 1995. The Company typically establishes prices to obtain a
target gross margin ranging from 45% to 50%, but overall gross margin can vary
depending on the sales mix in each quarter. The decrease in gross margin in
1996 as compared to 1995 was primarily the result of the Company taking
markdowns in 1996 to close out certain slow-moving inventory.
For the three months ended March 31, 1996, royalty expense was $33,192 or
3.7% of sales, as compared to $85,049 or 10.9% of sales for the three months
ended March 31, 1995. Typical royalty contracts include royalty rates ranging
from 8% to 16%. The decrease in royalty expense in 1996 as compared to 1995 was
primarily the result of a shift in the sales mix in 1996 to a higher proportion
of non-royalty sales, which included sales to Europe and sales by Malibu and
MFSI.
For the three months ended March 31, 1996, selling, general and
administrative ("SG&A") expenses increased by $120,721 or 17.8%, to $798,872 or
89.3% of sales, as compared to $678,151 or 86.6% of sales for the three months
ended March 31, 1995. SG&A expenses are comprised of fixed overhead costs and
variable selling expenses. The increase in SG&A expenses is consistent with the
increase in sales, and included additional costs relating to Malibu and MFSI.
Under the terms of the warrant agreement granting Deco Disc warrants to
purchase 500,000 shares of the Company's common stock (the "Deco Disc Warrant
Agreement"), the Company was obligated to register the stock underlying the
warrants, and to use its best efforts to maintain the registration statement
effective during the period the warrants are exercisable. Deco Disc threatened
to sue the Company, claiming that the Company did not file the registration
statement on a timely basis, and that the registration statement was not kept
effective by the Company, resulting in Deco Disc being damaged. In order to
avoid any potential litigation, on March 26, 1996, the Company and Deco Disc
entered into a Settlement Agreement and Specific Release ("Deco Disc Settlement
Agreement") under which the Company issued to Deco Disc
12
<PAGE>
additional warrants to purchase 100,000 shares of the Company's common stock
(restricted), with certain "piggy-back" registration rights, at a price of $.64
per share, in exchange for Deco Disc releasing the Company from any and all
prior claims relating to violations of the Deco Disc Warrant Agreement, and
failure to update the registration statement.
As a result of the foregoing transaction, during the three months ended
March 31, 1996, the Company recorded a charge to operations of $84,125 as
management's estimate of the fair value of the 100,000 common stock purchase
warrants. As a result of the foregoing, for the three months ended March 31,
1996, the net loss was $563,000, or $.11 per share, as compared to a net loss of
$392,833, or $.08 per share, for the three months ended March 31, 1995.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1995
Sales for the year ended December 31, 1995, were $9,355,021, as compared to
$13,109,165 for the year ended December 31, 1994, a decrease of $3,754,144 or
28.6%. The net loss for the year ended December 31, 1995, was $1,137,822, or
$0.23 per share on a fully diluted basis, as compared to net income of
$1,186,738 for the year ended December 31, 1994, or net income of $0.24 per
share on a fully diluted basis.
Sales during the year ended December 31, 1995, were primarily from shipment
of products incorporating characters licensed from The Walt Disney Company,
which generated sales of $3,774,000, or 40.3% of total sales, and the shipment
of products incorporating characters licensed from Warner Bros., which generated
sales of $2,822,000, or 30.2% of total sales. This compares to sales during the
year ended December 31, 1994, when licenses from The Walt Disney Company
generated sales of $4,154,000, or 31.7% of total sales, and licenses from Warner
Bros., which generated sales of $512,000, or 3.9% of total sales.
The major cause for the decrease in sales during the year ended December
31, 1995, was the decrease in sales of product based on the Mighty Morphin Power
Rangers license ("Power Rangers"). Power Rangers product, which accounted for
56.3% of total sales, or $7,386,000 in 1994, only generated 11.6% of total
sales, or $1,081,000, in 1995, reflecting a dramatic decrease in the demand for
Power Rangers merchandise. None of the Company's new licenses for 1995 generated
enough sales to replace the decrease in sales of Power Rangers products.
Sales for Janex and Malibu ("Domestic Sales") for the year ended December
31, 1995, were $1,792,577, or 19.2% of total sales, and sales for Pro Gains and
MFSI ("FOB Hong Kong") for the year ended December 31, 1995, were $7,562,444, or
80.8% of sales. This compares to Domestic Sales for the year ended December
31, 1994, of $3,728,519, or 28.4% of total sales, and FOB Hong Kong sales for
the year ended December 31, 1994, of $9,380,646 or 71.6% of total sales. The
Company's operations are structured to achieve consolidated objectives. As a
result, significant interdependencies and overlaps exist among the Company's
operating units. Accordingly, since Janex and Pro Gains, and Malibu and MFSI,
operate in tandem as two profit centers, the profitability of each entity on an
independent basis is not meaningful. In general, products sold by Janex and
Malibu generate a slightly greater gross profit than those sold by Pro Gains and
MFSI to compensate for the higher costs of servicing domestic business,
including the costs of carrying inventory, and the costs of carrying trade
receivables. While management does not anticipate any major change in the
percentages of total sales generated from Domestic Sales and FOB Hong Kong
13
<PAGE>
shipments, it is the customer that ultimately decides whether the goods are
shipped FOB a United States warehouse, or FOB Hong Kong.
Sales for the year ended December 31, 1995, include $493,406 of sales, or
5.3% of total sales, generated by Malibu and MFSI.
Gross profit was 43.2% for the year ended December 31, 1995, as compared to
45.4% for the year ended December 31, 1994. The 1995 gross profit was negatively
affected by the write down of inventories of approximately $73,000 during the
year, and by the sales of product during the year of approximately $130,000 at
or below cost. In addition, gross profit generated on sales of products from the
Malibu Division ("Malibu Products") was 35%, well below the target rate set for
the Company overall. Management believes that the gross profit on the Malibu
Products will improve as a result of changes being made in the design of the
products, and at the factories that produce those products.
Royalty expense was $1,239,656 for the year ended December 31, 1995, or
13.3% of sales, as compared to royalty expense of $1,345,625, or 10.3% of sales,
for the year ended December 31, 1994. The increase in royalty expense as a
percentage of sales is a result of increased royalty rates being charged by
major licensors, royalties payable to licensing consultants, and royalties
payable on product designs incorporated in the Company's products. For the year
ended December 31, 1995, royalty expense includes a reserve of $122,500 against
royalty advances made on contracts under which management expects to generate
insufficient product sales to recoup those advances. Most of the Company's
products, when sold, require payment of royalties ranging from 12% to 20% of the
selling price.
SG&A expenses were $3,859,527, or 41.3% of sales, for the year ended
December 31, 1995, as compared to $3,633,354, or 27.7% of sales, for the year
ended December 31, 1994. SG&A expenses increased as a percentage of sales due to
the significant decrease in sales volume in 1995 over that of 1994, with no
corresponding decrease in SG&A expenses. SG&A expenses are comprised of fixed
overhead costs and variable selling expenses. The fixed overhead portion of SG&A
expenses for the year ended December 31, 1995, was $2,866,982, approximately
$535,692, or 23%, greater than in 1994. SG&A expenses increased during 1995
primarily as a result of increases in payroll costs of $161,489, or 18.4%,
increases in travel and accommodation costs of $56,436, or 46.4%, increases in
depreciation of $66,104, or 16.6%, increases in product development costs of
$248,581, or 131.8%, and increases in communication costs of $36,621, or 40.9%.
These increases were offset by decreases in occupancy costs of $43,693, or
37.3%, and decreases in professional fees and investor relations of $44,359, or
20.4%. Product development costs for 1995 included a reserve of $105,000 against
product development costs associated with licenses for which management expects
to generate insufficient sales to recover those product development costs.
The variable selling cost component of SG&A expenses was $992,545 for the
year ended December 31, 1995, or 10.6% of sales, compared to $1,302,064, or 9.9%
of sales, for the year ended December 31, 1994. Variable selling costs include
sales representative's commission, agent's commission, freight, product
liability insurance, testing fees and other charges that vary directly with
sales volume. Management expects variable selling costs to be between 10% and
12% of sales. Variable selling costs were slightly higher in 1995 as compared to
1994 as a result of a slight increase in the cost of local transportation
charges in Hong Kong for moving customer orders from
14
<PAGE>
the factory to the delivery point, and as a result of an increase in the fee
being charged by the Company's Hong Kong agent.
During the year ended December 31, 1994, a charge against earnings of
$79,839 was recorded relating to the foreign exchange loss on the Company's
license fee obligation, payable in Japanese yen. On October 17, 1994, the
Company and Dentsu Prox, Inc., a Japanese company ("Dentsu") entered into a
Settlement Agreement, which eliminated the license fee obligation. As a result
of the settlement, the Company recorded an extraordinary gain on extinguishment
of debt of $489,335 during the year ended December 31, 1994. See "Liquidity and
Capital Resources" and "Description of Business - Business Development." As the
obligation was eliminated in 1994, there was no corresponding foreign exchange
loss or gain recorded in 1995.
Interest expense for the year ended December 31, 1995, was $89,429, as
compared to $207,270 for the year ended December 31, 1994, a decrease of
$117,841 or 56.9%. The decrease was primarily attributable to a decrease in the
imputed interest charges of $28,222 on the stockholder notes payable, and a
reduction in the use of the Company's credit facilities to finance operations
during peak business periods as a result of the overall decrease in sales during
1995.
During 1995, the Company recorded income tax expense of $36,909, compared
to income tax expense of $27,629 in 1994. The Company does not expect any income
tax liability for 1995, as the Company suffered a net loss. The income tax
expense relates to income tax paid primarily on state income tax returns that
were not provided for in the 1994 income tax provision. The Company did not
accrue a United States income tax liability in 1994 as a result of substantial
federal income tax loss carry forwards available to offset future income. The
income tax expense recorded in 1994 relates primarily to Hong Kong income taxes
on the profits of Pro Gains.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business follows closely that of other companies with
children oriented product lines, which tend to generate the greater part of both
sales and operating income during the Christmas selling season. The Company
expects that sales will be higher in the third and fourth quarters of the year,
as compared to the first and second quarters of the year, with over 75% of
shipping expected to take place between April and September.
LIQUIDITY AND CAPITAL RESOURCES
The Company had negative cash flow from operating activities of $690,506
for the year ended December 31, 1995, as compared to a positive cash flow of
$1,196,539 for the year ended December 31, 1994. The $1,887,045 difference
between the 1995 cash flow and the 1994 cash flow from operating activities
resulted primarily from a decrease in net income of $2,324,560. Accounts
receivable decreased by $405,671, and accounts payable and accrued expenses
decreased by $649,349, as a result of the reduction in revenues between 1994 and
1995. Inventories increased by $201,134 primarily as a result of the acquisition
of Malibu, and amortization and depreciation increased by $320,417 primarily as
a result of the Company's increased investment in tooling and product
development costs.
As of December 31, 1995, the Company had cash and certificates of deposit
of $1,283,564, working capital of $71,610 and a current ratio of 1.03-to-1. This
compares to cash of $1,572,021,
15
<PAGE>
working capital of $1,450,853 and a current ratio of 1.99-to-1 as of December
31, 1994. The Company had, at December 31, 1995, consolidated stockholders'
equity of $2,872,647, as compared to consolidated stockholders' equity at
December 31, 1994, of $3,534,769.
The Company's cash balance decreased by $621,513 to $162,051 at March 31,
1996, as compared to $783,564 at December 31, 1995. The Company's net working
capital decreased by $605,331, from working capital of $71,610 at December 31,
1995 to a working capital deficit of $533,721 at March 31, 1996, and the
Company's current ratio declined to .78:1 at March 31, 1996 as compared to
1.03:1 at December 31, 1995. For the three months ended March 31, 1996, the
Company's operations utilized cash resources of $88,969, as compared to
utilizing cash resources of $208,636 for the three months ended March 31, 1995,
primarily as a result of the increased net loss for the quarter, offset by a
loss from settlement with warrant holder, a decrease in inventories and an
increase in accounts payable during the three months ended March 31, 1996.
The Company used $857,418 in investing activities for the year ended
December 31, 1995, as compared to using $568,456 during the year ended December
31, 1994. The increase in cash used in investing activities relates primarily to
increases in expenditures to build tools and molds and to develop new products.
During the year ended December 31, 1995, the Company invested $453,118 in
additions to property, plant and equipment, of which approximately $424,000 was
for tooling for new products, and the Company invested $349,403 in product
development costs. During 1994 the Company made comparable investments of
$259,452 in property, plant and equipment, of which approximately $233,000 was
for tooling for new products, and the Company invested $300,313 in product
development costs.
The Company maintains a continuing program of capital investment in new
products and licenses. New product start-up costs, which can range from $5,000
to $20,000, consist of product development, including any necessary licensor
approval, artwork and sculpting, and also production equipment, consisting of
any required tooling and molds. The Company actively searches for new characters
to license, which can be used to introduce new products as well as to extend the
life of existing products. Subject to the availability of working capital, the
Company expects to spend approximately $700,000 in 1996 and $1,000,000 in 1997
for new products, and approximately $300,000 in each of 1996 and 1997 for the
acquisition of new licenses. During the three months ended March 31, 1996, the
Company incurred additions to property and equipment of $205,467, additions to
product development costs of $60,652, and $23,500 for new licenses.
The Company generated $1,259,467 from financing activities during the year
ended December 31, 1995, as compared to utilizing $199,440 during the year ended
December 31, 1994. The cash generated from financing activities during 1995 came
primarily from an increase in bank debt of $751,425, a private loan transaction
of $500,000 (the "$500,000 Private Loan"), and proceeds from the exercise of
warrants of $147,200, offset by a reduction in stockholder note payable of
$139,158.
The $500,000 Private Loan was provided by a customer on or about December
22, 1995, is unsecured and bears interest, payable monthly, at prime plus 2%.
Under the terms of the $500,000 Private Loan agreement, payments are made when
goods are shipped to the customer by the customer deducting 25% from the
invoice, and applying the deducted amount to repayment of the loan. If the loan
is not fully paid by October 1, 1996, the remaining balance becomes
16
<PAGE>
immediately due and payable. At March 31, 1996, the outstanding balance on this
loan was $500,000.
The Company, at its option, may borrow up to $300,000 from its Hong Kong
agent, Li & Fung (Trading) Limited, a Hong Kong based services company ("Li &
Fung"), as agreed upon between the Company and Li & Fung in an Agency Agreement
dated October 23, 1995, provided the Company issues to the Agent an irrevocable
stand-by letter of credit for $100,000. Under the Agreement, Li & Fung will
advance the Company's Hong Kong subsidiaries, Pro Gain and MFSI, up to $300,000
for the payment of product development and tooling costs, to be repaid from
collections of customer invoices at the rate of 5% of the invoice amount, on
goods shipped FOB Hong Kong, between May 1 and December 31. Any balance
remaining unpaid at December 31 would be due and payable by the following
January 15. This credit facility bears interest at the rate of 2% above the Hong
Kong Prime Rate. Under the Agreement, Li & Fung retains ownership of all tooling
paid for with the credit facility, until the credit facility is repaid. The
credit facility is available in each year that the Agreement is in effect, and
the Agreement's initial term was for a period of two years. On March 22, 1996,
the Company opened the stand-by letter of credit to Li & Fung. As of March 31,
1996, the Company had borrowed $85,000 under the credit facility.
On April 19, 1996, pursuant to a Revolving Loan Agreement with The Howard
and Helene Moore Trust ("Trust"), Janex arranged to borrow, on a revolving loan
basis until April 19, 1998, up to $900,000, with interest at 9.5% payable
quarterly. Howard Moore, a significant shareholder of the Company, is a trustee
of the Trust. Between April 19, 1996 and May 31, 1996, Janex borrowed $200,000
pursuant to the Revolving Loan Agreement. The loan is secured by all of the
assets of Janex (subject to the prior lien of the Company's bank lender), and is
guaranteed by Janex International. In connection with the loan, the Company
entered into a Warrant Agreement with the lender, providing for the issuance of
up to 900,000 warrants to acquire 900,000 shares of Janex International Common
Stock (restricted), exercisable at a price of $1.45 per share through April 19,
2000, with certain "piggy-back" registration rights. The warrants vest in 6-
month increments over the term of the loan, and if the loan is paid off early,
certain of the warrants will be void. See "Certain Relationships and Related
Transactions" and "Description of Securities--Moore Revolving Loan Warrants."
The Company had a $1,000,000 line of credit with a bank with interest at
9.5% pursuant to a loan agreement which expired on May 3, 1996. The line of
credit is secured by a $500,000 certificate of deposit purchased from the bank
and a first priority security interest in all of the assets of the Company,
including accounts receivable and inventory. The certificate of deposit has a
5.65% yield. The outstanding balance on the line of credit was $751,425 at
December 31, 1995. The loan agreement provided that the Company must maintain a
tangible net worth of at least $1,525,000 and an annual profit after tax of
$500,000. At December 31, 1995, the Company was in breach of both of these
covenants. In January 1996, the bank advised the Company that it would not make
any further advances under the line. On March 20, 1996, the Company signed
amended loan documents reducing the amount available under the line to $500,000,
and providing the Company with the ability to utilize the line to issue up to
$100,000 of stand-by letters of credit. As a result, the bank waived both of the
covenant violations under the original loan agreement. Accordingly, at March 31,
1996, the outstanding balance on the line of credit had been reduced by $351,425
to $400,000. The Company is currently in negotiations with the bank to
restructure the loan agreement and expects to conclude the negotiations during
August 1996. There can be no assurances as to the ultimate outcome of these
negotiations.
17
<PAGE>
In January 1995, a Hong Kong bank approved a line of credit for the
Company's subsidiary, Pro Gains, which allowed Pro Gains to discount with the
bank letters of credit issued to Pro Gains by its customers. The credit line was
tailored to match the Company's selling season. From May to November the credit
line was HK$10,000,000 (US$1,300,000) and from December to April the line was
HK$2,000,000 (US$260,000). The credit line was secured by a $100,000 term
deposit with the bank. Janex International issued a guarantee to the Hong Kong
bank in the full amount of the line. In January 1996, the Company paid down the
entire line of credit and made a decision not to renew the term deposit which
effectively canceled the line of credit. The Company, with the help of Li &
Fung, is attempting to negotiate a new line of credit without the cash
collateral requirement.
Under the terms of the stock purchase agreement for the acquisition of
Janex, the Company issued two promissory notes totalling $1,000,000, payable in
semi-annual installments over a three year period (at December 31, 1995, the
amount payable was $458,760, representing the present value of the future
payments under the obligation discounted at 9%, not including imputed interest
accrued but not paid). The first three payments of $166,667 each under the
$1,000,000 note were made on June 30, 1994, December 31, 1994, and June 30,
1995. On December 29, 1995, the holders of the $1,000,000 of notes agreed to a
deferral of the payment due on December 31, 1995, to June 30, 1996. As a
condition of the deferral, the Company agreed to pay the note holders interest
on the deferred payments at the rate of 9% percent per annum from December 31,
1995 to the date of payment. On June 28, 1996, the note holders agreed to
further extend the payment date for all remaining payments to February 1, 1998,
subject to payment of interest at the rate of 9.5% per annum, retroactive to
January 1, 1996. Quarterly interest payments are to commence on September 1,
1996. The Company also agreed to provide the note holders with security for the
notes. Further, in connection with the extension of the notes, the Company
entered into a warrant agreement with each of the note holders, providing for
the issuance of up to 282,994 warrants to one of them and up to 167,994 warrants
to the other, to acquire a total of 450,998 shares of the Janex International
Common Stock (restricted), exercisable at a price of $1.45 per share through
June 28, 2000, with certain "piggy-back" registration rights. The warrants vest
in 6-month increments over the term of the loan, and if the loan is paid off
early, certain of the warrants will be void. See "Certain Relationships and
Related Transactions" and "Description of Securities--Friedland Warrants" and
"--Lesnick Warrants".
On or about May 17, 1994, in connection with a private placement, the
Company raised $494,100. Under the private placement the Company issued 270,000
Units of its securities, each unit consisting of one share of common stock and a
warrant to acquire one share of Common Stock for every two Units purchased. The
purchase price for the Units was $1.83 per unit. The warrants have an exercise
price of $3.25, and are exercisable after two years. See "Certain Relationships
and Related Transactions." In addition, the Company received $135,000 from an
option holder pursuant to the holder's election to exercise options to purchase
115,000 shares of common stock.
On October 17, 1994, the Company entered into a Settlement Agreement and
General Release with Dentsu to terminate the agreement under which a subsidiary
of the Company, With Design in Mind, had licensed from Dentsu the MicroTheatre
technology. Under the terms of the Settlement Agreement, the Company paid to
Dentsu $75,000 in cash, and issued to Dentsu 50,000 shares of the Company's
Common Stock (restricted), with certain registration rights, in full settlement
of all obligations relating to the license, which at the date of settlement
totaled approximately 68,000,000 yen (approximately US$700,000).
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On August 4, 1995, the Company acquired all of the outstanding stock of
Malibu, a California corporation, and its affiliated Hong Kong company, MFSI.
Under the terms of the purchase agreement ("Malibu Purchase Agreement") the
Company issued 125,000 shares of the Company's Common Stock (restricted) to the
former owners of the acquired companies, and paid $50,000 at the closing. Under
the terms of the Malibu Purchase Agreement the former shareholders of Malibu
were entitled to an earn-out based on the future performance of Malibu and MFSI.
However, the former shareholders of Malibu and the Company entered into an
agreement, dated June 28, 1996, eliminating the earn-out provisions in return
for the issuance of 150,000 shares of Janex International Common Stock
(restricted).
During the year ended December 31, 1995, the Company received $147,200 from
a warrant holder pursuant to the warrant holder exercising warrants to purchase
230,000 shares of the Company's Common Stock.
The Company believes that its existing cash balance together with its lines
of credit and cash flow from operations, will be sufficient to fund order flow
and overhead for the remainder of the fiscal year ending December 31, 1996.
However, depending on the availability of financing and the results of its
operations, the ability of the Company to fund new licenses and develop new
products may be constrained. In order to fund any potential working capital
deficiency that may develop in 1996 as a result of the debt repayment
obligations referred to previously, the Company continues to engage in
discussions with various financing sources. There can be no assurances that any
additional financing necessary to fund the debt service obligations and/or the
operations of the Company will be available on a timely basis and/or under
acceptable terms and conditions. To the extent that the Company's sales are
limited by the availability of working capital, the Company would be required to
reduce operations to a level consistent with its available working capital. The
Company has experienced recurring losses from operations, negative cash flows
and decreases in working capital. The Company's independent certified public
accountants have included an explanatory paragraph in their report indicating
there is substantial doubt with respect to the Company's ability to continue as
a going concern.
INFLATION
Management believes that inflation has not had a significant impact on the
Company's operations during the past two years.
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BUSINESS
GENERAL BUSINESS DEVELOPMENT
From July 1986 (inception) to June 1992, the Company developed and marketed
a variety of consumer products that were sold by retailers of gift, novelty and
educational items throughout the United States ("Gift Products"). The Company's
historic focus was to market products that were unusual in nature and that in
some cases displayed interesting and engaging scientific phenomena. In 1990, the
Company expanded its product line with the introduction of the MicroTheatre(TM)
Display Unit ("MicroTheatre"), licensed from Dentsu.
On June 23, 1992, Mr. Steve Zuloff, then the Chief Executive Officer and a
Director of the Company, and Mr. Barry R. Benjamin, then the President, Chief
Financial Officer and a Director of the Company, resigned their positions with
the Company. Upon the former officers' resignations, Mr. Sheldon F. Morick was
appointed Chief Executive Officer, President and Director of the Company, and
Mr. Michael S. Manahan was appointed Chief Financial Officer, Vice President,
Treasurer and Secretary of the Company.
During the three months ended September 30, 1992, the new executive
officers of the Company commenced an analysis of the Company, including an
analysis of the Company's products, overhead, and potential growth areas. As a
result of that analysis, the Company began a process of discontinuing the
development and marketing of Gift Products, and changing the Company's strategy
to emphasize the development, manufacture and marketing of unique, functional
children's products that were intended to fulfill the needs of both parents and
children. The new line of products for children was to be sold to mass merchant
retailers.
In early 1993, the Company introduced a new line of children's products
under the brand name "Great Stuff." Product development was completed early in
the year, and the Company began the process of manufacturing product and selling
to retailers. Also during the first six months of 1993, the Company continued
with a limited program to market the MicroTheatre.
By June 1993, due to manufacturing delays and limited acceptance by the
major retailers of the Great Stuff product line, it was apparent that the
product line was not going to be successful, and thus the Company began a
process of seeking alternative sources of revenue. In June 1993 the Company
entered into an agreement with Deco Disc, under which Deco Disc licensed to the
Company the rights to distribute to the Gift and Specialty retail markets a line
of patented greeting cards and ornaments with "pop out" compact discs. In
connection with the Deco Disc Agreement the Company paid a license fee of
$100,000, which was to be recouped by the Company at a rate of $1.00 for each
ornament and $.50 for each greeting card as the Company purchased finished
products from Deco Disc. Under the Deco Disc Agreement, Deco Disc received
warrants to purchase 500,000 shares of the Company's Common Stock (restricted)
with certain registration rights. The shares underlying the warrants were
registered with the Commission on February 13, 1995, and 270,000 of such
warrants have not yet been exercised.
In July 1993, management made another review of the Company's product lines
and sales results, and based upon that review made the decision that the
existing product lines of the Company, Great Stuff, MicroTheatre and Deco Disc,
were not generating sufficient revenues to support the ongoing operations of the
Company. In particular, during fiscal 1991 and 1992, the Company received
revenues of
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approximately $3,580,000 in connection with the MicroTheatre products,
$3,000,000 of which was due to orders from Sega Enterprises Ltd. ("Sega").
However, during December 1992, the Company was advised by Sega that it did not
foresee purchasing any further MicroTheatre products. Consequently, in fiscal
1993, sales of MicroTheatre products were only approximately $147,000.
Furthermore, orders for the Deco Disc products did not materialize as expected,
with total Deco Disc product orders totaling only about $190,000 in fiscal 1993.
Therefore, the decision was made to continue to market the existing product
lines, with limited financial outlays, and at the same time, begin the process
of identifying and making an acquisition.
In September 1993 the Company entered into an agreement to purchase all of
the outstanding stock of MJL Marketing Inc. ("MJL"), a New Jersey corporation.
The acquisition was completed on October 6, 1993. In November 1993 the Company
changed the name of MJL to Janex Corporation so that the corporate name would
match the brand name under which most of the Janex products are marketed. Under
the agreement to purchase MJL, the shareholders of MJL received 1,200,000 shares
of the Company's Common Stock (restricted), with certain registration rights,
and $600,000 at the closing. An additional $150,000 was to be paid in January
1994 and $1,000,000 was payable on an installment basis over a period of three
years. Subsequently the $150,000 note was paid in three equal payments of
$50,000 on April 30, June 30 and September 30, 1994. Further, through several
extensions, the holders of the $1,000,000 (at December 31, 1995, the amount
payable was $458,760, representing the present value of the future payments
under the obligation discounted at 9%, not including imputed interest accrued
but not paid) of notes have agreed to extend payment on the notes to February 1,
1998, subject to certain interest payments and the granting of certain warrants.
See "Certain Relationships and Related Transactions" and "Description of
Securities--Friedland Warrants and --Lesnick Warrants."
The business of Janex has historically focused on the manufacturing and
marketing of children's toys, coin and gumball banks, flashlights and battery
operated toothbrushes marketed under the brand name Janex. Janex incorporates
licensed characters into most of its products, and sells its products to United
States mass merchant retailers, toy specialty stores and department stores.
Sales and manufacturing were historically facilitated through Janex's sister
company in Hong Kong, Pro Gains. Effective with the acquisition, Pro Gains
became a subsidiary of the Company, 50% of the stock of which is owned by Janex,
and the other 50% by Janex International.
With the acquisition of Janex in October 1993, the Company made the
decision to cease marketing the Great Stuff, Deco Disc, and MicroTheatre product
lines. WDIM, which prior to this time was the main operating arm of the Company,
began a process of winding down operations. As part of that winding down
process, the Company entered into negotiations with Dentsu, from whom the
Company licensed the MicroTheatre technology, to terminate the agreement under
which that technology was licensed. On October 17, 1994, the Company entered
into a Settlement Agreement and General Mutual Release with Dentsu, paying the
sum of $75,000 in cash and issuing 50,000 shares of Common Stock (restricted) to
Dentsu, with certain registration rights, in full settlement of the Company's
obligations owing to Dentsu. The 50,000 shares were registered with the
Commission on February 13, 1995.
The Company also entered into negotiations with Allen Design Group, Inc.
("ADG"), its joint venture partner in Hologram Ventures, the joint venture
established to market the MicroTheatre technology to the arcade game industry,
to terminate the joint venture. The negotiations with ADG were concluded in
February 1994 at which time the parties entered into a settlement agreement and
mutual release.
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On March 31, 1994, the Company advised Deco Disc of its intention not to
proceed with the further marketing of Deco Disc products and under the
provisions of the Deco Disc Agreement gave Deco Disc ninety days notice of the
termination of the distribution agreement.
From October 1993 through to July 1995, the operations of the Company were
primarily through Janex and the Hong Kong subsidiary, Pro Gains. By May 1995, it
became apparent that the order flow for 1995 was significantly behind that of
1994, and management became increasingly concerned about the Company's reliance
on licensed products, given the volatility of the licensing business and the
cost of acquiring licenses. See "Business of Issuer--Competition". Therefore the
decision was made to investigate the possibility of adding other product lines,
and to evaluate various acquisition opportunities that were presented to the
Company for its consideration. As a result, in July 1995, the Company entered
into an agreement to acquire all of the outstanding stock of Malibu and its
affiliate MFSI ("Malibu Agreement"). The acquisition was completed on August 4,
1995. Under the Malibu Agreement, the shareholders of Malibu and MFSI received
125,000 shares of the Company's Cocmmon Stock (restricted) and $50,000 at the
closing. In addition, the former shareholders of Malibu were entitled to an
earn-out based on the future performance of Malibu and MFSI. However, the former
shareholders of Malibu and the Company entered into an agreement, dated June 28,
1996, eliminating the earn-out provisions in return for the issuance of 150,000
shares of Janex International Common Stock (restricted).
Malibu and MFSI (collectively referred to as the "Malibu Division") operate
in tandem similar to Janex and Pro Gains (collectively referred to as the "Janex
Division"). Together they develop, manufacture and market toys and novelty gift
items, selling to mass merchant retailers, chains stores, and specialty stores
primarily in the United States.
The product line of the Malibu Division differs from that of the Janex
Division in that most of the Malibu Products do not incorporate licensed
characters. Further the Company considers the Janex Division products ("Janex
Products") to be of a functional nature and not necessarily toys, while the
Malibu Products fall more clearly into the toy category. Therefore, the Company
operates Malibu and MFSI, and Janex and Pro Gains, as two distinct divisions.
Nevertheless, their methods of operation and procedures are almost identical,
and therefore will not be separately discussed herein, unless there are
significant differences.
The Company intends to merge the operations of Janex and Malibu, and the
operations of Pro Gains and MFSI, during 1996. Subsequent to effecting those
mergers, the Company will continue to maintain the Janex Product line and the
Malibu Product line as two separate product lines.
PRODUCTS
The Company's products are either created by the Company or licensed from
independent inventors. The Company is constantly seeking new ideas from many
sources and is frequently approached by inventors who propose that the Company
manufacture and market a product based on their designs or concepts. If a
design or concept is licensed by the Company, the Company will, in some cases,
make significant modifications for the purpose of enhancing the product's
features or eliminating unnecessary or costly aspects. Royalties are payable by
the Company with respect to products manufactured from designs or technologies
licensed by the Company from inventors or other third parties.
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The Company considers itself to be in one business segment.
Most of the Janex Products incorporate licensed fantasy characters. Once
the decision has been made to include a specific product in the line, the Janex
Division will endeavor to obtain licenses to incorporate fantasy characters into
the product. Presently, the Janex Division has licenses to utilize one or more
trademarks and/or copyrights owned or controlled by The Walt Disney Company,
Marvel Entertainment, Inc., Warner Bros. Corporation, and Turner Home
Entertainment, Inc., among others. Although the basic underlying product may
stay the same, generally the product goes through a stage of customization to
tailor that product design to the license under which it is to be incorporated.
The Janex Products are targeted for sale by mass merchant retailers for
prices ranging from $3 to $30. Generally, the commercial life expectancy of any
given Janex Product is virtually unlimited in its generic state (i.e., without a
licensed character). For example, the predecessors of Janex marketed battery
operated toothbrushes for over twenty years. However, the commercial life span
of any particular version of one of the Janex Products is directly tied into the
length of the license agreement for the fantasy character incorporated into that
product, and the popularity of that fantasy character with consumers. Since most
of the Janex Division license agreements are written for a term of two years,
and given that the popularity of most fantasy characters is short lived, the
Company estimates that the useful life of any given version of the Janex
Products will be no more than two years. Although the Company intends to
continue to market some version of every one of the Janex Products it now sells
for at least the next three years, the Company nevertheless is actively
developing new products which could incorporate fantasy characters.
The Janex Product line currently includes the following: battery operated
Power Toothbrush and Stand, battery operated Power Toothbrush (without stand),
battery operated Power Flashlight, battery operated hand held Fun Fan, Chalk
Board, Book Light, Squeeze Light Figures, Action/Talking Alarm Clock,
Action/Talking Bank, Light Pals, Table Fan, Pencil Sharpener, Tape Dispenser,
Stapler, Fun Hook, Liquid Soap Dispenser, Doll or Action Figure Carrying Case,
Gumball Bank, Vinyl Coin Bank, Deluxe Doll Carrier, Deluxe Doll Diaper Bag,
Budget Doll Bedding Assortment, Doll Comforter and Pillow Set, and Lil' Miss
Executive Play Set.
The Malibu Products do not normally incorporate licensed fantasy
characters. As a result, this division is not limited by licensor approval of
the products that it develops and sells. Therefore, the product line reflects a
more opportunistic and diverse approach than the Janex Product line. The Malibu
Products are targeted for sale by mass merchant retailers, specialty retailers
and gift stores at prices ranging from $3 to $30. The commercial life span of
the Malibu Products could be long-lived, as is the case with many toys that are
not tied into a fashion or fad, but the Company expects the life span of any of
the Malibu Product to be no more than five years. Consequently, the Company is
constantly seeking new product concepts for the Malibu Product line, and
further, is continually redesigning and repacking existing products to improve
consumer appeal.
The Malibu Products include the following: Wee Wet Pets, Tub-a-Ducky, Wee
Wet Pet Kid-a-Rounds, Slide-O-Bunny, Slide-O-Monkey, Cookie Muncher, Card Pals,
Kid-a-Round Horses, Fire Engines and Police Cars, Card Pals, Wide-A-Wake Ups,
Pez Fashion Accessories, Nutcracker Puppet & Video Set, Peter Cottontail Puppet
& Video Set, Peter and the Wolf Puppet & Video Set, Train Adventure Video Set,
Kids Music Video Set and Mr. Baby Proofer.
The Company intends to add at least six new products in 1997 and at least
another six products in 1998, subject to the availability of working capital.
See "Management's Discussion and
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Analysis or Plan of Operation--Liquidity and Capital Resources." The
concentration of new product introductions will be on products of similar
characteristics to those already in the Company's product lines, i.e., similar
retail price levels, the capability of incorporating a fanciful licensed
character (for Janex Products), similar target age groups, functional or toys,
suitable for manufacture through existing or similar factories, and suitable for
distribution through existing distribution channels. The Company intends to
continue to include in its strategy for product line growth the possibility of
acquiring other companies, particularly where potential acquisition candidates
offer product line, manufacturing or marketing synergies.
The Company's products carry a 90-day limited warranty.
GOVERNMENT REGULATIONS
The Company is subject to the provision of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Products Safety Act. Those
laws empower the Consumer Products Safety Commission (the "CPSC") to protect
children from hazardous products. The CPSC has the authority to exclude from the
market articles which are found to be hazardous and can require a manufacturer
to repurchase such products under certain circumstances. Any such determination
by the CPSC is subject to court review. Similar laws exist in some states and
cities in the United States and in many jurisdictions throughout the world. The
Company endeavors to comply with all applicable regulations through a program of
quality inspections and product testing. The Company maintains product liability
insurance in the amount of $3,000,000.
MARKETING, DISTRIBUTION AND CUSTOMERS
The Company sells its products nationwide to retailers primarily through a
network of independent sales representative firms. One of those independent
sales representative firms is owned by a shareholder of the Company. That firm
represents the Company's products to three of its largest customers. See
"Certain Relationships and Related Transactions." The Company's products are
displayed at two major consumer product shows in January and February of each
year, and at a number of smaller specialty market shows throughout the year.
Marketing activities for the Company's product lines primarily target mass
merchant retailers in the United States and Canada, such as Kmart, Wal-Mart,
Target, and Toys R Us, as well as smaller regional merchants, drug chains,
department stores and gift stores. In 1995, Wal-Mart and Toys R Us represented
26% and 24%, respectively, of the Company's revenues, as compared to 16% and
25%, respectively, for 1994.
The product marketing strategy for the Janex Product line is to market the
line as a selection of products for children that are primarily functional in
nature, may in certain circumstances be used as toys, incorporate licensed
characters where possible, are marketed under one brand name, Janex, and that
retail for prices between $3 and $30. The brand name provides an umbrella for
all products which helps both the sell-in of the product line to retailers, and
the sell-through to customers.
The product marketing strategy for the Malibu Product line is to market a
line of reasonably priced toys and novelty gift items that are different from
other products on the market, either through unique product design or innovative
packaging. The marketing strategy is opportunistic, meaning that the Malibu
Division will include in its product line almost any product for reasons of
advantageous entry costs and/or significant consumer demand, if the Company
believes the product can make a material contribution to corporate
profitability. Further, if profitable, the
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Malibu Products will be customized, either in design or in packaging, to meet
the needs of specific customers.
The Company currently offers to customers two primary methods of purchasing
product: on customary industry credit terms, FOB the Company's primary warehouse
facility in Baltimore, Maryland; or on a letter of credit basis, through the
Hong Kong subsidiaries Pro Gains and MFSI, FOB Hong Kong. Under these terms,
title to the goods passes to the buyer at the point of origin, and in most cases
the buyer is responsible for the costs of transportation.
Domestic inventories are kept in a third party contract warehouse facility
located in Baltimore, Maryland. See "Certain Relationships and Related
Transactions." Orders from domestic customers are processed at the Company's
offices in California. Shipping documents are forwarded to the Baltimore
warehouse, which fills the orders and ensures shipment of product to customers
in accordance with customer specified shipping instructions. The warehouse
confirms shipment to the customer, and the Company then invoices the customer
from California. Occasionally the Company utilizes the services of a similar
contract warehouse facility in the Los Angeles area.
Letter of credit orders are processed through the Company's Hong Kong
subsidiaries, Pro Gains and MFSI. The Company has no employees in Hong Kong, but
instead has entered into a service agreement with Li & Fung (also referred to in
the industry as an agent), that provides the personnel and facilities to
accomplish accepting orders primarily from United States and Canadian based
retailers, arranging for the manufacture of products to fill those orders,
delivering the products to the customer or the customer's representative in Hong
Kong, and then processing the necessary documentation to negotiate payment for
the goods by way of letters of credit or, in some instances, by direct wire
transfer from the customer. Previously the Company used the services of the Hong
Kong services provider Oriental World Trading. That relationship was terminated
in September 1995.
Historically, Janex sold to customers primarily on a letter of credit
basis, FOB Hong Kong. Although Janex maintained a domestic warehouse in
Baltimore, Maryland, and did ship to customers FOB Baltimore, this type of
business was not emphasized, because to do so required continued investment in
inventory and accounts receivable. Management now believes that shipping to
customers on normal credit terms from domestic inventories may provide access to
a base of potential new customers that do not purchase on a letter of credit
basis. This group of customers would include smaller retailers that do not
purchase enough to make letter of credit purchasing advantageous, and certain
larger multi-location retailers that rely on their suppliers to provide
inventory and logistics services along with product. Malibu traditionally
emphasized sales both on a domestic basis, and on a letter of credit basis, FOB
Hong Kong, with their business in recent years being equally divided. The
Company believes that the acquisition of Malibu will strengthen its ability to
meet the objective of increasing domestic business.
MANUFACTURING
Most of the Company's products are manufactured to the Company's
specifications by manufacturers based in Macau and China. The Company does have
one product manufactured in the United States, and further has eight products
assembled in the United States from components acquired from companies located
in the United States, China and Brazil. The Company believes that teaming
contract manufacturers with Company employees yields cost savings, maximizes the
design resources of the Company and shortens the new product introduction cycle.
During the design stage,
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Company employees work closely with employees of the manufacturers, and also
travel to the manufacturers' facilities, in order to accomplish the Company's
design goals. Company employees also travel to the manufacturing facilities for
the purpose of inspecting the manufacturing process and verifying the
effectiveness of quality control and assurance programs. Manufactured products
may be shipped to the Company's warehouse in Baltimore, Maryland, for inspection
and distribution. Alternatively, products may be shipped directly from the
manufacturer to the customer.
Molds and tooling for those products manufactured in the Far East are
procured and owned by Pro Gains or MFSI. Regardless of whether the goods are
destined for delivery to the Company's warehouse facility in Baltimore,
Maryland, or destined for delivery direct to a customer, Pro Gains or MFSI,
through Li & Fung, initiates all orders for product with the manufacturer, and
pays the manufacturer, through Li & Fung, subsequent to the delivery of the
product in accordance with payment terms agreed to between the Company and the
manufacturer. The Company does not inventory product in the Far East. All
products manufactured in the Far East are manufactured specifically for a
customer order, or specifically for shipment to the Baltimore, Maryland
warehouse. From time to time, the Company may have on hand a supply of specific
components for incorporation into finished products, if those components are
difficult to procure, have long lead times on delivery, or have minimum order
quantities associated therewith.
PRODUCT DESIGN AND SELECTION
For the Janex Product line, the Company seeks to identify functional
products for children that will provide a benefit for both the parent and the
child, which are suited to the incorporation of a licensed fantasy character,
and which are not already being manufactured and marketed effectively by other
companies.
Traditionally, mothers purchase the majority of all children's products.
Therefore, the primary target audience for the product line is mothers of boys
and girls between the ages of three and ten. The Company believes that one of
the greatest needs of any parent is help in "managing" their children. This
would include such activities as help in keeping dolls and other playthings
organized, brushing teeth, teaching children about money, and getting children
to do their chores. The Janex Products are designed to be functional fun
products which would help a parent "manage" their children and at the same time
make routine activities and chores fun and/or easier for the child to perform.
For the Malibu Product line, the Company seeks to identify toys for which a
demand exists, and that can be made more attractive or fun by incorporating a
unique design or by packaging the product in a manner that is different from
other similar products on the market. Since the Company does not have the
financial strength to support the Malibu Products with television advertising,
the product design and unique packaging are designed to capture the attention of
consumers at the shelf level.
New products are initially selected based upon what management believes, in
its experience, will be successful. However, in order to seek to reduce the
expense of producing a product that may not sell, the Company may utilize the
services of professional market research companies to perform product testings
and to determine product viability. In the product selection and design process
input is also solicited from buyers at certain retailers, and from sales
representatives. Feedback from these market research techniques is also used in
the development of product packaging and in the establishment of product price
levels. In addition, for the Janex Products, since most incorporate licensed
characters,
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the licensor's input into product and packaging design is always
solicited, and in some cases may even be required by the terms and conditions of
the license agreement.
While the Company has been the sole originator of several of its products,
it actively seeks innovative and unusual product concepts from third parties.
Management attempts to be open and accessible to inventors who may have new
product ideas. The Company receives many unsolicited proposals from inventors
seeking to interest the Company in licensing their product. Company management
frequently meets with inventors to review the various proposed products. If and
when the Company determines that it is willing to license a product, it seeks to
obtain the exclusive marketing and manufacturing rights for the duration of the
patent, if the product is patentable, or other suitably lengthy period if not
patentable.
Historically the Company has not incurred any significant costs in
connection with research and development and does not expect to do so in the
foreseeable future. The Company keeps the direct investment in research and
development on new products to a minimum by entering into agreements with
product researchers/inventors providing for ongoing royalty participation should
a given product be brought to market. Once the decision has been made to include
a product in one of the Company's product lines, the Company typically incurs
start-up costs in the range of $5,000 to $20,000 for each version of that
product introduced. Such costs include producing one or more prototypes of a
product, obtaining licensor approval (if it is licensed) on concept, artwork and
sculpting, and acquiring any required molds and tooling for production. Subject
to the availability of funds, the Company expects to spend approximately
$700,000 in 1996 and $1,000,000 in 1997, for start-up costs pertaining to new
products. See "Management's Discussion and Analysis or Plan of Operation --
Liquidity and Capital Resources."
For the Janex Product line, the Company continually searches for new
characters to license. A new fantasy character can be used on new products as
well as extend the life of an existing product. The Company attends trade shows,
subscribes to industry publications, and utilizes the services of licensing
consultants to ensure that, when new licenses become available, the Company
receives due consideration from the licensor as a potential licensing candidate.
When new licenses are acquired, the licensors generally specify exactly what
products the licensed characters can be incorporated into, the territory in
which products incorporating those licenses can be sold, the royalty rate
payable on sales of products, the royalty advance (if any), and the royalty
guarantee (if any). The amount of the royalty rate, advance and guarantee
required under any given license agreement is generally a function of the
credibility of the owner of the licensed property, and the popularity of the
licensed character with the target market.
For the Janex Products, the Company seeks licenses which may open up
additional target market groups. As an example, the Pocahontas character on a
battery operated toothbrush is a suitable product for a four year old girl. That
same battery operated toothbrush with a Batman character on it would be a
suitable product for a ten year old boy. As a result, the Company endeavors as
part of its product development program to ensure that it has spread its
available license acquisition funds across a range of licenses, rather than
investing heavily in only one or two licenses. Subject to the availability of
funds, the Company expects to spend approximately $300,000 in each of 1996 and
1997, for the acquisition of new licenses. See "Management's Discussion and
Analysis or Plan of Operation -- Liquidity and Capital Resources."
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COMPETITION
The market for both toys and functional children's products is served by
many manufacturers, both foreign and domestic. Many products are available over
a broad price range, and the market is competitive, includes numerous small
manufacturers, and is dominated by three industry giants. The Company classifies
the competition for its product lines into three categories, as follows: (1) toy
and novelty gift manufacturers, (2) functional product manufacturers, and (3)
direct functional children's product competitors.
Toy and novelty gift manufacturers are companies which are primarily in the
business of manufacturing and marketing toys. Functional product manufacturers
are companies which are primarily in the business of manufacturing and marketing
a specific type, or group, of functional products, such as furniture, lighting,
or clocks, but which may include in their product line certain functional
children's products. Direct functional children's product competitors are
companies which manufacture and market functional children's products as their
company's primary business. All companies that fall into these three categories
compete with the Company's product lines.
There is considerable competition for the consumer's dollar in the
Company's target markets. However, the Janex Products are differentiated from
those of the competition by relying heavily on the use of licensed characters.
The Malibu Products are differentiated from those of the competition by relying
on unique product designs and unique packaging. Although the Company attempts to
protect its products with patents and/or trademarks when available, successful
products in any product classification are always susceptible to imitation or
"knock-off." The Company seeks to maintain a competitive advantage by continuing
the introduction of new products and/or product enhancements over time, by
producing high quality products, and by pursuing licenses for a broad range of
children's characters.
For the Janex Products, given the reliance on licensed characters to
differentiate products and to drive sales, competition must also be viewed from
the perspective of the competition between companies for licenses. Most license
agreements are non-exclusive, and limited in duration. Within the industry, two
years is the standard term for most license agreements. When licenses become
available, or when they are up for renewal, the licensor may give the license to
the company which is willing to offer the highest royalty rate, advance royalty
amount, or royalty guarantee. The Company ranks as a very small player in the
industry, and is extremely vulnerable in the competition for licenses, should
financial strength become a primary decision making criterion of the licensor.
Licensors do not normally license multiple manufacturers for the same
product in the same territory, although technically under the terms of many
license agreements they could. This option is generally reserved by the licensor
as a method of dealing with licensees that do not perform. In addition,
licensors tend not to auction licenses, where the license would go to the
highest bidder. Instead most licensors, particularly those concerned with the
longevity of their characters, base the license granting decision more on the
ability of the manufacturer to make the products, to sell the products, to
manufacture quality products that enhance the value of the license and the
licensor's reputation, to account accurately for the sales of products, and to
pay royalties due on a timely basis. Also, most reputable licensors recognize
the value of the relationship between the licensee and their customers, and
realize the potential disruption that could occur by precipitously replacing
licensees.
28
<PAGE>
The Company believes its relationship with its major licensors to be
excellent, and believes that it will continue to be able to obtain from its
existing licensors, and new licensors, the necessary licenses to maintain a
competitive advantage in the marketplace. However, there is no guarantee that
the Company will be able to obtain the licenses necessary to maintain a
competitive advantage, and failure to obtain those licenses would adversely
effect the sales of Janex Products.
Since the Janex Division relies upon licensed characters as the primary
method of differentiating its products from those of other companies, revenues
tend to be a function of the general popularity of the characters licensed by
the Company vis-a-via those characters licensed to competing companies. Further,
the Janex Products account for the majority of the sales of the Company. (See
"Management's Discussion and Analysis or Plan of Operation"). As a result, more
traditional indicators of revenue stability such as the state of the economy,
market share, financial strength and/or weakness of the Company and historical
growth rate, offer limited insight as tools to predict future performance. Thus,
the strength or weakness of the licenses held by the Company can be expected to
a have a major influence on revenues and profitability, and over time it would
not be unexpected for the Company to experience both significant upward and
downward fluctuations in sales. These upward and downward swings in revenue
associated with "fad" or "hit" licenses that generate tremendous sales volumes
for short periods of time make the business of selling products that incorporate
licensed fantasy characters extremely volatile, in comparison to businesses that
do not sell products that incorporate licensed fantasy characters, and that do
not sell products that are considered fads.
The volatility of revenues and related operating income generated as a
result of the significant reliance on licensed characters by Janex Products is
expected to decline over time as Malibu Products increases its contribution to
the operations of the Company.
PATENTS, TRADEMARKS AND LICENSES
For those products that can be patented, the Company normally takes the
steps necessary to do so. However, the Company recognizes that patents are not
totally effective in prohibiting competitors from producing similar products
that could compete with those of the Company. Therefore, the Company does not
rely heavily upon patent protection to maintain its competitive position. The
Company believes that its growth, competitive position and success are dependent
upon its right to use specific licensed characters and trademarks, its ability
to develop and design unique products and packaging, its relationships with
customers, and its relationship with contract manufacturers.
The Company has entered into a number of license agreements for the use of
licensed fantasy characters on its products. These license agreements typically
run for two years, require a payment of royalties on sales of up to 16%, require
royalty advances of up to $50,000, and in some instances have guaranteed
royalties of up to $200,000. The following is a list of the current licensors to
the Company and the characters licensed:
- The Walt Disney Company for Mickey's Stuff for Kids, Pocahontas, The
Hunchback of Notre Dame, Gargoyles and 101 Dalmatians/1/
- Warner Bros. Corporation for Batman, Animaniacs, Looney Tunes and Free
Willy/1/
- Marvel Entertainment Group Inc. for Spiderman and X-Men/1/
29
<PAGE>
- Nelvana Marketing for Wild C.A.T.S./1/
- New Line Cinema Corporation for The Mask/1/
- Turner Home Entertainment, Inc. for Johnny Quest/1/
- Bluebird Toys (UK) Limited for Polly Pockets/1/
- UPA Productions of America for Godzilla/1/
- Australian Broadcasting Corporation for Bananas in Pajamas/1/.
In addition, the Company has entered into a number of license agreements
for the use of product designs and for the rights to use certain trademarks.
These license agreements typically run two to five years, require payment of
royalties on sales of up to 6%, and require royalty advances of up to $15,000.
See "Certain Relationships and Related Transactions".
As a result of the failure of the MicroTheatre products to be commercially
viable, and the decision of Sega to not pursue the technology for further arcade
game applications (see "--General Business Development"), the Company entered
into negotiations with ADG to terminate the joint venture agreement and with
Dentsu to terminate the license agreement. The joint venture agreement was
terminated on February 28, 1994, and the Dentsu license agreement was terminated
on October 17, 1994.
BACKLOG
Shipment of the Company's products is anticipated to peak during the summer
months, in anticipation of the Christmas selling season. Accordingly, it is
expected that the Company's backlog will be at a maximum during June, July and
August. If items are not in stock, delivery typically takes between one and
three months. When items are in stock, items are normally shipped on the date
upon which the customer has requested shipment.
At December 31, 1994, the backlog of orders was approximately $1.8 million,
and at December 31, 1995, the backlog of orders was approximately $1.0 million.
At May 31, 1995 and at May 31, 1996, the backlong of orders was approximately
$4.0 million.
EMPLOYEES
As of May 31, 1996, the Company had 8 full-time employees. The full-time
employees were engaged as follows: one in accounting, two in administration and
sales support, three in marketing and product development and two in general and
sales management. The Company has never experienced a work stoppage and the
Company believes that relations with its employees are good. None of the
Company's employees are covered by collective bargaining agreements.
- --------------------
/1/ The respective licensors in each instance have registered, own and/or
control the trademark, registered trademarks and/or copyright rights to the
characters licensed and the characters, likenesses thereof, names, pictures,
drawings and any other associations with those characters are used by the
Company strictly under license from the respective licensor.
30
<PAGE>
PROPERTIES
The Company entered into a lease, effective April 1, 1994, for 2,202 square
feet of office space in a multi-tenant high rise building located at 21700
Oxnard Street, Woodland Hills, California (the "Office"). The Company and the
Landlord amended the lease, effective January 1, 1996, providing the Company
with an additional 2,460 square feet of space adjacent to its current offices,
and extended the expiration date of the lease to December 31, 2000. The Office
is being leased from non-affiliated third parties under a non-cancelable lease.
With this additional space, the Company believes the Office is sufficient for
its existing activities and short term growth potential. Nevertheless, the
provisions of the lease allow for its early termination anytime after March 31,
1997, provided that the Company enters into another lease with the landlord for
a space of at least 6993 square feet in the same complex.
With the acquisition of Malibu, the Company acquired the lease on 4,432
square feet of industrial warehouse space in a multi-tenant industrial complex
located at 5312 Derry Avenue, Suite R & Q, Agoura Hills, California (the
"Warehouse"). The lease expires on March 31, 1998. In December, 1995, the
Company sublet the Warehouse for the remaining term of the lease. The rental
income under the sublease is approximately equal to the rent the Company is
obligated to pay.
LEGAL PROCEEDINGS
On February 17, 1993, a class action complaint was filed on behalf of
shareholders of the Company against the Company, Mr. Steven C. Zuloff, former
Chairman and Chief Executive Officer of the Company, Mr. Barry R. Benjamin,
former President and Chief Financial Officer of the Company, David S. Benjamin,
former Vice President of the Company, Deloitte and Touche, former auditors of
the Company, and the underwriters of the 1991 Public Offering, by Kevin J.
O'Rourke and Patricia Ann O'Rourke in the United States District Court, Central
District of California ("O'Rourke Suit"). On May 6, 1996, the Plaintiffs filed a
voluntary request for Dismissal of Lawsuit, which the Court entered without
prejudice on May 7, 1996.
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<PAGE>
MANAGEMENT
The following table sets forth information regarding the Company's executive
officers and directors as of July 31, 1996:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Sheldon F. Morick 58 Chairman of the Board, President, Chief
Executive Officer, Chief Financial Officer,
Treasurer and Director (1)
Renee White Fraser 42 Director
Daniel Lesnick 43 Janex Corporation, Executive Vice President
Lawrence Bernstein 55 Janex Corporation, Executive Vice President
Terence F. Davis 49 Janex Corporation, Vice President of Sales
</TABLE>
___________________
(1) On April 15, 1996, Mr. Morick assumed the positions of Chief Financial
Officer and Treasurer due to the resignation of Michael S. Manahan on April 12,
1996. It is expected that the Company will hire a replacement for Mr. Manahan
who will assume the duties of Chief Financial Officer and Treasurer.
SHELDON F. MORICK, has been President, Chief Executive Officer and a
Director of the Company since June 30, 1992. He has been Chief Financial Officer
and Treasurer since April 15, 1996, when Michael Manahan resigned. He was
previously Executive Vice President and a Director of the Company from April 1,
1992 to June 29, 1992. From July 1990 to April 1992, Mr. Morick was President
and Chief Executive Officer of Original Marketing Corp., Woodland Hills,
California, a full service sales and marketing consulting firm which he founded.
From February 1987 to June 1990, Mr. Morick was President, Chief Executive
Officer and a Director of International Tropic-Cal, Inc., Commerce, California,
a distributor of nationally branded sunglasses and fashion accessories. From
June 1984 to August 1986, Mr. Morick was President, Chief Executive Officer and
a Director of Revell, Inc., Los Angeles, California, a domestic and
international hobby kit manufacturer. Prior to that, from April 1981 to February
1984, Mr. Morick was a co-founder and Senior Vice President of General Consumer
Electronics, Santa Monica, California, which was acquired by the Milton Bradley
Company. Mr. Morick was formerly Senior Vice President-Sales and Distribution of
Mattel Toys, Hawthorne, California. Mr. Morick received a bachelor of foreign
trade degree at the Thunderbird School of International Management, Phoenix,
Arizona, and a B.S. in Business Administration from Cornell University, Ithaca,
New York.
RENEE WHITE FRASER, Ph.D., has been a Director of the Company since May
1993, and is President of Fraser & Young, a Santa Monica based advertising
agency, a position she has held since January 1995. Previously, Dr. Fraser was
Chief Executive Officer of Fraser & Associates Advertising, Inc., a full service
Los Angeles based advertising agency of which she was founder and
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<PAGE>
principal, from December 1991 to December 1995. From July 1988 to November 1991
Dr. Fraser was Executive Vice President and General Manager of the Los Angeles
office of Bozell Advertising, Inc. Previously, from September 1984 to August
1988, Dr. Fraser was Senior Vice President, Director of Strategic Planning and
Research for Bozell, also in Los Angeles, California. Dr. Fraser was formerly
Vice President, Director of Research and Strategic Planning for the Western
Region, for the advertising firm of Young Rubicam and Dentsu. Dr. Fraser holds a
Doctorate in Psychology from the University of Southern California.
DANIEL LESNICK, has been an Executive Vice President of Janex since October
6, 1993. From August 1988 to October 5, 1993, Mr. Lesnick was Vice President and
co-owner of MJL Marketing Inc. (now Janex). He was Director of Sales and
Marketing for Sunk Yong Company, a Korean corporation operating in a number of
different industries, from February 1986 to July 1988. Previously Mr. Lesnick
held positions as Merchandising Manager with Spencer Gifts, and as a Senior
Buyer with Lionel Leisure, both specialty retailers. Mr. Lesnick holds an
associate degree in marketing.
LAWRENCE BERNSTEIN, has been an Executive Vice President of Janex since
April 1996. From February 1994 to February 1996, Mr. Bernstein was Executive
Vice President of Micro Games of America, North Hills, California, where he was
the head of research and development and marketing, involving electronic toys
and hand held electronic games. From June 1993 to February 1994, Mr. Bernstein
was President of CLB Design, Los Angeles, California, involved in product
development consulting. From June 1991 to June 1993, Mr. Bernstein was Senior
Vice President of Mattel Toys, El Segundo, California, where he was the head of
sales, manufacturing and research and development.
TERENCE F. DAVIS, has been Vice President of Sales of Janex since May 1,
1996. From July 1992 to April 30, 1996, Mr. Davis was President of Malibu, the
company he founded, which is now a wholly owned subsidiary of Janex
International. From June 1991 to June 1992, he was Vice President of Caltoy,
Inc., a California toy manufacturer. From July 1990 to June 1991, he was
Executive Vice President and a Director of Art Guard, Inc., a California
security device manufacturer. Previously Mr. Davis held senior sales positions
with such major toy manufacturers as Hasbro, Inc. and Tomy Corporation. Mr.
Davis also provided consulting services to several major toy manufacturers.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive $500 for each
directors meeting attended, and may be granted options to purchase stock in the
Company at the discretion of the Board. No fees for serving as directors of the
Company are payable to employees of the Company. Directors are reimbursed for
reasonable out-of-pocket expenses incurred in performing their functions as
directors of the Company.
33
<PAGE>
COMPENSATION OF OFFICERS AND KEY EMPLOYEES
The following table sets forth the compensation paid or to be paid by the
Company with respect to the fiscal year ended December 31, 1995, to the
executive officers whose total annual salary and bonus exceeded $100,000 /(1)/:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1) LONG TERM
COMPENSATION
=======================================================================================================
NAME AND PRINCIPAL YEAR SALARY BONUS OTHER ANNUAL AWARDS
POSITION COMPENSATION ------
(4) OPTIONS
(SHARES)
=======================================================================================================
<S> <C> <C> <C> <C> <C>
Sheldon F. Morick 1995 $241,250 $ - $13,017 100,000 (7)
Chairman of the Board, 1994 200,000 54,000 26,005 - (6)
Chief Executive Officer, 1993 187,500 - 31,639 150,000 (5)
President and Director
- --------------------------------------------------------------------------------------------------------
Michael S. Manahan 1995 $108,000 $ - $ 7,200 40,000 (7)
Chief Financial Officer, 1994 104,400 16,000 7,200 - (6)
Vice President, Treasurer, 1993 98,400 500 7,200 75,000 (5)
Secretary and Director (8)
- --------------------------------------------------------------------------------------------------------
Daniel Lesnick 1995 $150,000 $ - $13,260 50,000 (7)
Executive Vice President - 1994 150,000 22,000 13,050 - (6)
Janex Corporation 1993 24,000(2) 50,000 (3) 3,225 -
========================================================================================================
</TABLE>
(1) Compensation under Company employee benefit plans, to which all employees of
the Company are eligible, is not included in the table.
(2) Employment with Company started October 6, 1993, the acquisition date of
Janex Corporation.
(3) Includes a one time bonus of $50,000 as specified in Mr. Lesnick's
employment agreement.
(4) Includes car allowances, Company paid vehicles and Company paid
life/disability insurance.
(5) These options are issued under the Company's 1991 Non-Statutory Stock Option
Plan ("Plan"). On January 15, 1993, and again on September 13, 1993, the
Board increased the number of shares which may be issued under the Plan to
300,000 and 500,000, respectively. On June 8, 1994, the Board terminated the
Plan, at which time there were options outstanding to acquire 382,000 shares
of Common Stock.
(6) The Company did not grant any stock options during 1994.
(7) These options were not issued under the Company's 1991 Non-Statutory Stock
Option Plan ("Plan") as that Plan was terminated on June 8, 1994.
(8) Resigned April 12, 1996.
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<PAGE>
The following table provides certain information concerning each exercise
of stock options during the fiscal year ended December 31, 1995, and the value
of unexercised options at December 31, 1995, to persons named in the Summary
Compensation Table:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
=================================================================================================================
Name Shares Acquired Value Realized Number of Securities Value of Unexercisable
on Exercise Underlying Unexercised In-the-Money Options at
Options at FY-End FY-End
Exercisable/ Exercisable/
Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sheldon Morick, - - 262,500/350,000 $22,000/$5,000
CEO
- -----------------------------------------------------------------------------------------------------------------
Michael Manahan - - 91,250/140,000 $22,500/$7,500
- -----------------------------------------------------------------------------------------------------------------
Daniel Lesnick - - 12,500/50,000 - / -
=================================================================================================================
</TABLE>
The following table provides certain information concerning grants of
options to purchase the Company's Common Stock made during the fiscal year ended
December 31, 1995, to persons named in the Summary Compensation Table:
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants in Fiscal 1995
===================================================================================================================
Name Number of Securities % of Total Options Exercise or Expiration
Underlying Options Granted to Base Price Date
Granted (1) Employees in Fiscal ($/sh)
Year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sheldon 100,000 45.4% $2.125 04/01/00
Morick,CEO
- -------------------------------------------------------------------------------------------------------------------
Michael Manahan 40,000 (2) 18.2% $2.125 04/01/00
- -------------------------------------------------------------------------------------------------------------------
Daniel Lesnick 50,000 22.7% $2.125 04/01/00
===================================================================================================================
</TABLE>
(1) The options granted in fiscal 1995 were not under the Company's 1991 Non-
Statutory Stock Option Plan, as that plan was terminated in June 1994. The
options vest as follows: 25% on the date granted, 25% at the end of one year
from the grant date, 25% at the end of two years from the grant date, and
25% at the end of three years from the grant date. The exercise price was
set at 85% of the closing price of the stock on March 31, 1995. Options are
nontransferable except by will or the laws of descent and distribution.
(2) Mr. Manahan resigned on April 12, 1996. At that time 20,000 of the 40,000
options were vested and the Company agreed that they would not expire until
the fifth anniversary date of the grant.
EMPLOYMENT ARRANGEMENTS
The Board of Directors has provided for compensation for Sheldon F. Morick,
Chief Executive Officer, at a salary of $16,666.66 per month plus $1,084.00 per
month of taxable benefits (a total of
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<PAGE>
$213,008 on an annual basis), pursuant to an employment agreement dated March
26, 1993. Effective April 1, 1995, in accordance with the employment agreement,
Mr. Morick's compensation increased to a salary of $21,250.00 per month plus
$1,084.00 per month of taxable benefits (a total of $268,008 on an annual
basis). The employment agreement provides for, among other things, stock options
to acquire 100,000 shares of Common Stock (restricted), that the Company
purchase $500,000 of insurance on the life of Mr. Morick, payable to a
beneficiary designated by him, and participation as a member of the Board
without additional compensation. Under the terms of this agreement, the Company
has established an annual bonus pool equal to 10% of each fiscal year's
operating profits. The bonus pool is allocated 50% to Mr. Morick, and 50% to the
other employees of the Company, as selected by Mr. Morick. The employment
agreement provides that Mr. Morick can be terminated: (a) for "cause," as
defined in the agreement, (b) if Mr. Morick becomes permanently disabled for two
months, or if the Company's operating profits for any fiscal year are less than
50% of the forecasted operating profits, and the Company pays Mr. Morick a
severance benefit equal to six months salary. Additionally, if as a consequence
of a merger, or purchase or sale of stock, Mr. Morick is terminated by the Board
of Directors, or his duties or compensation are substantially and adversely
altered, and Mr. Morick resigns, such termination would require the Company to
continue Mr. Morick's salary and benefits for the lesser of 12 months or until
Mr. Morick commenced other employment. The employment agreement was scheduled to
terminate on March 31, 1996, but was extended by the Board of Directors to March
31, 1997.
The Board of Directors has provided for compensation for Daniel Lesnick,
Executive Vice President of Janex, at a salary of $12,500 per month plus $1,105
per month of taxable benefits (a total of $163,260 on an annualized basis),
pursuant to an employment agreement dated October 6, 1993. On November 20, 1995,
the Board increased Mr. Lesnick's compensation to $14,000 per month plus $1,105
per month of taxable benefits (a total of $181,260 on an annualized basis). The
employment agreement provides for, among other things, participation in the
Company's annual bonus pool. The employment agreement provides that Mr. Lesnick
can be terminated: (a) for "cause," as defined in the agreement, or (b) if Mr.
Lesnick becomes permanently disabled for two months. Mr. Lesnick can terminate
the agreement upon 60 days notice to the Company. The Company can terminate the
agreement upon 60 days notice to Mr. Lesnick, however, in this case, the Company
would be required to continue Mr. Lesnick's salary and benefits for a period of
one year, not to exceed six months beyond the termination date of the agreement.
The employment agreement terminates on September 30, 1996.
The Board of Directors initially provided for compensation for Terence
Davis, Vice President of Sales of Janex and Malibu, at a salary of $6,250 per
month plus $500 per month of taxable benefits (a total of $81,000 on an
annualized basis), pursuant to an employment agreement dated August 4, 1995. On
April 1, 1996, Mr. Davis' salary was increased to $8,700 per month plus $500 per
month of taxable benefits (a total of $110,400 on an annualized basis). The
employment agreement provides that Mr. Davis can be terminated: (a) for "cause",
as defined in the agreement, or (b) if Mr. Davis becomes permanently disabled
for three months. The employment agreement terminates on December 31, 1998.
The Board of Directors has provided for compensation for Lawrence
Bernstein, Executive Vice President of Janex, at a salary of $18,750 per month,
pursuant to an employment agreement dated April 15, 1996. The employment
agreement provides that Mr. Bernstein can be terminated: (a) for "cause," as
defined in the agreement or (b) if Mr. Bernstein becomes permanently disabled
for two months. Additionally, if as a consequence of a merger, or purchase or
sale of stock, Mr. Bernstein is terminated by the Board of Directors, or his
duties or compensation are substantially and
36
<PAGE>
adversely altered, and Mr. Bernstein resigns, such termination would require the
Company to continue Mr. Bernstein's salary and benefits for the greater of 6
months or until the termination date of the employment agreement. Unless
extended, the employment agreement terminates on April 15, 1997.
Effective February 1, 1996, Mr. Morick, Mr. Lesnick and Mr. Manahan agreed
to a monthly reduction in compensation of $2,225, $1,480, and $960 per month,
respectively. The Company agreed to pay Mr. Morick, Mr. Lesnick and Mr. Manahan
back for this salary reduction if the Company generates profits in 1996
exceeding the total amount of the salary reductions taken by these three
individuals. However, when Mr. Manahan resigned, as part of his severance
compensation, the Company paid Mr. Manahan $2,400 being the total amount of the
salary reduction. Additionally, a $10,000 loan to Mr. Manahan was forgiven.
In August 1995, the Company established a 401K Profit Sharing Plan ("401K")
for the benefit of the employees of the Company. Under the provisions of the
401K, employees may make contributions on a tax deferred basis to their 401K
account, up to the legal limits provided for by United States income tax
regulations. The Company, at its discretion, may contribute a portion of the
Company's profits to the 401K. Such contributions are allocated between members
of the 401K based on a pre-stated formula. Employer contributions vest with 401K
participants at the rate of 20% per year, beginning in year two and ending in
year six of employment. For the year ended December 31, 1995, the Company did
not make a contribution to the 401K.
The Company has a health insurance plan, which covers all employees in a
non-discriminatory manner. With the exception of the health insurance plan, the
401K and the annual bonus pool provided for under Mr. Morick's Employment
Agreement, the Company has no insurance or medical reimbursement plans covering
its officers or directors, nor does the Company contemplate implementing any
such plans at this time.
INDEMNIFICATION
The Company has adopted provisions in its Articles of Incorporation which
limit the liability of its directors. As permitted by the Colorado Corporation
Code, directors will not be liable to the Company or its shareholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
to its shareholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for acts
specified under Section 7-108-403 (formerly Section 7-5-114) of the Colorado
Corporation Code, or (iv) for any transaction from which the director derived an
improper personal benefit.
The Company has also adopted provisions in its Articles of Incorporation
providing that the Company has the right and/or duty to indemnify (i) a
director of the Company to the extent provided by statute, and (ii) any officer,
employee, or agent of the Company who is not a director to the extent provided
by law, or to a greater extent if consistent with law and if provided by
resolution of the Company's shareholders or directors, or in a contract.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable.
37
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has engaged the services of a manufacturers representative
firm, Les Friedland Associates ("LFA"), to represent the Company to customers
located in the states of New York, New Jersey, Connecticut and Pennsylvania. LFA
represents the Company to three of its largest customers, Toys R Us, Wal-Mart
and Kmart. The principal owner and operator of LFA, Mr. Leslie Friedland, is one
of the former owners of Janex, and currently owns 667,000 shares of the
Company's stock. See "Security Ownership of Certain Beneficial Owners and
Management." Under the terms of the representative agreement ("LFA Agreement"),
LFA was to be paid a commission of 4.25% on all sales that it generates within
its territory. Effective April 1, 1995, LFA and the Company agreed to reduce the
commission rate under the LFA Agreement to 4%. The terms and conditions of the
representative agreement are standard in the industry, and the agreement is
cancelable at any time with 30 days notice. Pursuant to the LFA Agreement, LFA
was paid $373,013 for the year ended December 31, 1994, and was paid, or will be
paid, $189,953 and $5,419, for the year ended December 31, 1995 and quarter
ended March 31, 1996, respectively. Further, the Company rented showroom space
from LFA during a major industry trade show in February 1995, for which the
Company paid $16,000. The rate charged by LFA for the showroom rental is
competitive with other showroom space rental rates during the show period.
In connection with the acquisition of Janex, Leslie Friedland received the
Company's promissory note in the sum of $560,000, payable in semi-annual
installments, all due on December 31, 1996. Payments of $280,000, have been made
under the note, and the note has been extended several times. At December 31,
1995, the amount payable was $256,906, representing the present value of the
future payments under the obligation discounted at 9%, not including imputed
interest accrued but not paid. On June 28, 1996, Mr. Friedland agreed to extend
the time for all payments under the note to February 1, 1998. Mr. Friedland was
granted a security interest in the assets of Janex (subject to the prior lien of
the Company's bank lender), on parity to that given to Mr. Lesnick (see next
paragraph) and the Moore Trust (see below). Additionally, as of December 31,
1995, LFA was owed $115,000 for commissions. LFA agreed to extend the time for
payment of the $115,000 to February 1, 1998. In accordance with the extension
agreement, Mr. Friedland and LFA will be paid 9-1/2% interest on the unpaid
principal balance, payable quarterly. Additionally, Mr. Friedland was granted
282,994 warrants to acquire up to 282,994 shares of Janex International Common
Stock (restricted), with certain "piggy-back" registration rights. The warrants
vest in 6-month increments, and if the loan is paid off early, certain of the
warrants will be void. See "Description of Securities--Friedland Warrants."
In connection with the acquisition of Janex, Daniel Lesnick, Executive Vice
President of Janex, received the Company's promissory note in the sum of
$440,000, payable in semi-annual installments, all due on December 31, 1996.
Payments of $220,000, have been made under the note, and the note has been
extended several times. At December 31, 1995, the amount payable was $201,854,
representing the present value of the future payments under the obligation
discounted at 9%, not including imputed interest accrued but not paid. On June
28, 1996, Mr. Lesnick agreed to extend the time for all payments under the note
to February 1, 1998. Mr. Lesnick was granted a security interest in the assets
of Janex (subject to the prior lien of the Company's bank lender), on parity to
that given to Mr. Friedland (see previous paragraph) and the Moore Trust (see
below). In accordance with the extension agreement, Mr. Lesnick will be paid
interest at the rate of 9-1/2% per annum on the unpaid principal balance,
payable quarterly. Additionally, Mr. Lesnick was granted 167,994 warrants to
acquire up to 167,994 shares of Janex International Common Stock
38
<PAGE>
(restricted), with certain "piggy-back" registration rights. The warrants vest
in 6-month increments, and if the loan is paid off early, certain of the
warrants will be void. See "Description of Securities--Lesnick Warrants."
The Company utilizes the services of a public warehouse facility, Hollins
Distributors, in Baltimore, Maryland. The warehouse facility charges the Company
a fee based on the amount of goods received, and the amount of goods shipped.
The rates charged by Hollins Distributors are competitive with those of other
public warehouses, and the relationship can be terminated annually upon 60 days
written notification. Hollins Distributors is owned by Mr. Howard Friedland, the
father of Mr. Leslie Friedland. Hollins Distributors was paid $135,439 for the
year ended December 31, 1994 and was paid, or will be paid, $78,108 and $17,976,
for the year ended December 31, 1995 and the quarter ended March 31, 1996,
respectively.
Howard W. Moore, was formerly the father-in-law of Mr. Leslie Friedland.
Mr. Moore has an informal oral arrangement with Janex whereby Mr. Moore
guarantees a $255,000 letter of credit from Janex to one of its licensors. The
letter of credit expires on November 30, 1998. There is no provision requiring
Mr. Moore to continue his guarantee beyond the expiration date. Howard Moore
Associates, Inc. ("HMA"), of which Mr. Moore is the sole shareholder and
President, has a Royalty Agreement with Janex whereby HMA receives a commission
of 1% of the net revenue received by Janex from sales of products using a
certain company's trademark and certain licensed characters. Under the Royalty
Agreement, HMA was paid $59,292 for the year ended December 31, 1994, and was
paid, or will be paid, $33,070 for the year ended December 31, 1995.
Mr. Moore is also the Trustee of the Howard Moore Associates, Inc.
Retirement Trust ("HMA Trust") and is the President and sole shareholder of H&M
Moore Investment Group, Inc. ("H&M"). Mr. Moore may be deemed to be the
beneficial owner of all the shares of Common Stock and warrants, owned by HMA,
the HMA Trust and H&M. On or about May 17, 1994, the Company raised $494,100 in
a private placement. In connection with the private placement, the Company
offered units ("Units") consisting of one share of Common Stock and a warrant to
acquire one share of Common Stock for every two Units purchased. Consequently,
the following shares of Common Stock and warrants were issued:
<TABLE>
<CAPTION>
Shares of
Purchaser Common Stock Warrants
- --------- ------------ --------
<S> <C> <C>
H&M Moore Investment Group, Inc. 206,600 103,300
Howard Moore, as Trustee of the Howard
Moore Associates, Inc. Retirement Trust 63,400 31,700
</TABLE>
The Units were sold at a purchase price of $1.83 each, which was the
average of the closing bid and ask prices for the shares of Common Stock as
quoted on NASDAQ for the ten trading days prior to the date of the sale. The
warrants have an exercise price of $3.25 per share and are not exercisable until
May 17, 1996, and expire on May 17, 2000.
HMA, in connection with consulting services previously rendered to the
Company, was previously granted options to acquire 115,000 shares of the
Company's Common Stock. 75,000 options were granted at an exercise price of
$1.00, and 40,000 options were granted at an exercise price of $1.50. On or
about
39
<PAGE>
May 17, 1994, HMA exercised the options and acquired 115,000 shares of
Common Stock, for gross proceeds to the Company of $135,000.
On April 19, 1996, the Company entered into a Revolving Loan Agreement with
The Howard and Helene Moore Trust ("Moore Trust"). Under the terms of the
Revolving Loan Agreement, the lender agreed to loan to the Company, on a
revolving basis, up to $900,000, at 9-1/2% per annum on the outstanding balance,
interest payable quarterly, during the period April 19, 1996 through September
19, 1998. The loan is secured by all of the assets of Janex (subject to the
prior lien of the Company's bank lender) and is guaranteed by Janex
International In connection with the loan, the Company entered into a Warrant
Agreement with the lender, providing for the issuance of up to 900,000 warrants
to acquire 900,000 shares of the Janex International Common Stock (restricted),
with certain "piggy-back" registration rights. These warrants have an exercise
price of $1.45 and expire on April 19, 2000. The warrants vest in 6-month
increments over the term of the loan, and if the loan is paid off early, certain
of the warrants will be void. See "Description of Securities--Moore Revolving
Loan Warrants."
Michael Moore is the son of Howard Moore. On March 29, 1995, the Company
entered into a license agreement with Michael Moore under which the Company
licensed two product concepts which have since been incorporated into the
Company's product line. The Company is obligated under the agreement to pay a
royalty of 3% of the gross sales of products incorporating these concepts. The
Company can terminate the agreement at any time with 60 days notice, otherwise
the agreement will terminate at such time as the Company ceases to sell and
market products incorporating the concepts for a period of twelve months. Under
the agreement, Michael Moore was paid, or will be paid, royalties of $15,650 and
$183, for the year ended December 31, 1995 and the quarter ended March 31, 1996,
respectively.
40
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of July 31, 1996, with
respect to the beneficial ownership of the Company's Common Stock by each person
known by the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, by each of the Company's directors, and by the
officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Shares
Owned Percent
Beneficial Owners (1) Beneficially of Class (11)
- --------------------- ------------ -------------
<S> <C> <C>
Security ownership of certain beneficial owners:
Leslie Friedland 667,000 (2) 13.2%
615 Hope Road
Bldg 1, First Floor
Eatontown, NJ 07724
Deco Disc Industries, Inc. 370,000 (3) 6.8%
4530 Chermak Street
Burbank, CA 91505
Howard W. Moore 578,900 (4) 11.2%
15 Muir Beach Circle
Corona Del Mar, CA 92625
Security ownership of management:
Terence Davis 75,000 (5) 1.5%
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
Daniel Lesnick 553,000 (6) 10.9%
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
Renee White Fraser 55,900 (7) 1.1%
100 Wilshire Blvd Ste 440
Santa Monica, CA 90401
Sheldon F. Morick 303,500 (8) 5.7%
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
Lawrence Bernstein 50,000 (9) 1.0%
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
All officers and directors
as a group (five persons) 1,037,400 (10) 19.1%
</TABLE>
41
<PAGE>
______________________________
(1) Unless otherwise indicated in the footnotes, and subject to community
property laws where applicable, each of the security holders has sole
voting and investment power with respect to the shares beneficially owned.
(2) Does not include any shares issuable upon exercise of warrants granted to
Mr. Friedland under the Friedland Warrant Agreement, none of which warrants
are presently exercisable. See "Certain Relationships and Related
Transactions.
(3) Includes 370,000 shares issuable upon exercise of warrants, all of which
are presently exercisable.
(4) Includes shares owned by H&M Moore Investment Group, Inc., Howard Moore
Associates, Inc., and Howard Moore as Trustee of the Howard Moore
Associates, Inc. Retirement Trust. Includes 135,000 warrants currently
exercisable at $3.25 per share. Does not include 100,000 Public Warrants,
having an exercise price of $7.50, that are not currently exercisable. Does
not include any shares issuable upon exercise of warrants granted to the
Moore Trust in connection with the Moore Revolving Loan, none of which are
presently exercisable. See "Certain Relationships and Related
Transactions."
(5) Vice President of Sales of Janex. Former owner of Malibu, stock issued in
partial payment of Malibu purchase price. Does not include 90,000 shares to
be issued to Mr. Davis in connection with an amendment to the Malibu
Agreement, which were not issued as of July 31, 1996. See "Business--
General Business Development.
(6) Executive Vice President - Janex. Former owner of Janex, stock issued in
partial payment of Janex purchase price. Includes 25,000 shares issuable
pursuant to options which are presently exercisable. Does not include any
shares issuable upon exercise of warrants granted to Mr. Lesnick under the
Lesnick Warrant Agreement, none of which warrants are presently
exercisable. See "Certain Relationships and Related Transactions.
(7) Director. Includes 25,000 shares issuable pursuant to options which are
presently exercisable.
(8) Chief Executive Officer, President and Director. Includes 287,500 shares
issuable pursuant to options which are presently exercisable.
(9) Executive Vice President - Janex. Includes 50,000 shares issuable pursuant
to options which are presently exercisable.
(10) Includes 387,500 shares issuable pursuant to options which are presently
exercisable.
(11) Based upon 5,046,721 shares of Common Stock issued and outstanding on July
31, 1996.
The Company is not aware of any contract or other arrangement, including a
pledge of the Company's securities, that could result in a change in the control
of the Company. The Company is not aware of any voting trusts.
42
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company has 20,000,000 shares of Common Stock authorized, no par value
per share, of which 5,046,721 shares were outstanding and held by approximately
800 record shareholders as of July 31, 1996. No holder of any shares of Common
Stock has any preemptive rights to subscribe for any securities of the Company.
Each share of the Common Stock is entitled to share ratably in the amount
available for distribution to holders of the Common Stock. All shares of Common
Stock outstanding are fully paid and nonassessable and the shares of Common
Stock offered hereby will, upon payment therefor, as contemplated hereby, be
fully paid and nonassessable and are not subject to conversion or redemption.
Each shareholder is entitled to one vote for each share of Common Stock
held. This means that holders of more than 50% of the shares voting for the
election of directors can elect all of the directors if they choose to do so,
and in such event the holders of the remaining shares voting for the election of
directors will not be able to elect any person or persons to the Board of
Directors.
Under Section 2115 of the California Corporations Code, a foreign
corporation (i.e., any corporation other than a California corporation) may
become subject to various provisions of the California Corporations Code,
including, but not limited to, provisions creating shareholder rights to
cumulate votes at any election of directors. A foreign corporation is subject to
Section 2115 if it meets certain tests relating to the percentage of its
shareholders, property, payroll and sales who and which are located and/or
generated in California. Section 2115 ceases to apply after a specified time
following the date that the foreign corporation fails to meet the aforementioned
tests.
Presently, only about 12% of the Company's shares of Common Stock are held
of record by shareholders in the State of California. Accordingly, the Company
does not believe that Section 2115 is applicable to the Company, and therefore,
among other things, shareholders do not have the right to cumulate their votes
in the election of directors.
PREFERRED STOCK
The Company is also authorized to issue up to 5,000,000 shares of Preferred
Stock, no par value per share, in series having such designations, powers,
preferences, rights and limitations and on such terms and conditions as the
Board of Directors may from time to time determine, including the rights, if
any, of the holders of such preferred stock with respect to voting, dividends,
redemptions, liquidation, and conversion. The Board of Directors may provide
for the issuance of Preferred Stock without shareholder approval that could have
voting, conversion or other rights that could be superior to and adversely
affect the rights of the holders of Common Stock and that could have the effect
of delaying or preventing a change in control of the Company. As of the date of
this Prospectus, there were no shares of Preferred Stock issued and outstanding.
PUBLIC AND UNDERWRITER'S WARRANTS
The Company currently has 1,725,000 Public Warrants issued and outstanding,
which were issued in connection with the 1991 Public Offering. Each such warrant
entitles the holder to acquire
43
<PAGE>
one share of Common Stock at a price of $7.50 per share. The expiration date of
the Public Warrants was extended from May 9, 1996 to May 9, 1998.
In connection with the 1991 Public Offering, the Company also issued
warrants to the representative of the underwriters, to acquire 150,000 shares of
Common Stock, at a price of $6.00 per share. These warrants expired on May 10,
1996.
The Public Warrants contain anti-dilution provisions to avoid dilution of
the equity interest represented by the underlying shares upon the occurrence of
certain events such as share dividends or splits, mergers or acquisitions.
DECO DISC WARRANTS
On or about June 30, 1993, the Company issued to Deco Disc (See "Business--
General Business Development"), under the Deco Disc Agreement, warrants to
purchase 500,000 shares of the Company's Common Stock (restricted), at an
exercise price of $.64 per share, which was the market price of the Company's
shares at that time. Of those warrants, 250,000 were exercisable on or after
June 30, 1993, and 250,000 were exercisable on or after June 1, 1994. All such
warrants expire on June 1, 1998. The Company agreed to use its best efforts to
register the Common Stock underlying the warrants, under the 1933 Act, by
December 31, 1993, or as soon as possible thereafter. The shares of Common Stock
underlying these warrants were registered in connection with this offering. As
of the date of this Prospectus, Deco Disc has exercised 230,000 warrants leaving
270,000 warrants to acquire shares of Common Stock registered in connection
herewith.
DECO DISC SETTLEMENT WARRANTS
Under the terms of the warrant agreement granting Deco Disc warrants to
purchase 500,000 shares of the Company's common stock (the "Warrant Agreement"),
the Company was obligated to register the stock underlying the warrants, and to
use its best efforts to maintain the registration statement effective during the
period the warrants are exercisable. Deco Disc threatened to sue the Company,
claiming that the Company did not file the registration statement on a timely
basis, and that the registration statement was not kept effective by the
Company, resulting in Deco Disc being damaged. In order to avoid any potential
litigation, on March 26, 1996, the Company and Deco Disc entered into a
Settlement Agreement and Specific Release under which the Company issued to Deco
Disc additional warrants to purchase 100,000 shares of the Company's Common
Stock (restricted), with certain "piggy-back" registration rights, at a price of
$.64 per share, expiring on March 26, 2001, in exchange for Deco Disc releasing
the Company from any and all prior claims relating to violations of the Warrant
Agreement, and failure to update the registration statement.
MOORE PRIVATE PLACEMENT
On or about May 17, 1994, the Company raised $494,100 in a private
placement. In connection with the private placement, the Company offered units
("Units") consisting of one share of Common Stock (restricted) and a warrant to
acquire one share of Common Stock for every two Units purchased. The following
shares of Common Stock and warrants were issued:
44
<PAGE>
<TABLE>
<CAPTION>
Shares of
Purchaser Common Stock Warrants
- --------- ------------ --------
<S> <C> <C>
H&M Moore Investment Group, Inc. 206,600 103,300
Howard Moore, as Trustee of the Howard
Moore Associates, Inc. Retirement Trust 63,400 31,700
</TABLE>
The Units were sold at a purchase price of $1.83 each, which was the
average of the closing bid and ask prices for the shares of Common Stock as
quoted on NASDAQ for the ten trading days prior to the date of the sale. The
warrants have an exercise price of $3.25 per share, are not exercisable until
May 17, 1996, and expire on May 17, 2000.
MOORE REVOLVING LOAN WARRANTS
On April 19, 1996, the Company entered into a Revolving Loan Agreement
("Revolving Loan Agreement") with the Moore Trust. See "Certain Relationships
and Related Transactions." Under the terms of the Revolving Loan Agreement, the
Moore Trust agreed to loan to the Company, on a revolving basis, up to $900,000,
at 9-1/2% per annum on the outstanding balance, during the period April 19, 1996
through September 19, 1998. The loan is secured by all of the assets of Janex
(subject to the prior lien of the Company's bank lender) and is guaranteed by
Janex International. In connection with the loan, the Company entered into a
Warrant Agreement with the Lender, providing for the issuance of up to 900,000
warrants to acquire 900,000 shares of the Janex International Common Stock
(restricted), with certain "piggy-back" registration rights. These warrants have
an exercise price of $1.45 and expire on April 19, 2000. The warrants vest in 6-
month increments over the term of the loan, commencing on April 19, 1996, as
follows:
<TABLE>
<CAPTION>
Period Warrants Vested
------ ---------------
<S> <C>
1st 6-month period 180,000
2nd 6-month period 180,000
3rd 6-month period 180,000
4th 6-month period 180,000
5th 6-month period 180,000
</TABLE>
The first 180,000 warrants vest upon the execution of the Revolving Loan
Agreement. The remaining warrants vest on the first day of each period indicated
above, provided, however, if the revolving credit line ("Credit Line") is paid
off and canceled by the Company during any 6-month period, other than the 5th 6-
month period, the warrants that vest in the remaining 6-month periods will be
void, and the Revolving Loan Agreement will be terminated.
FRIEDLAND WARRANTS
On June 28, 1996, the Company and Leslie Friedland entered into an
agreement whereby the due date on the Company's note held by Mr. Friedland was
extended to December 31, 1997. Additionally, the Company owed Mr. Friedland
$115,000 for commissions as of December 31, 1995, which Mr. Friedland also
extended to December 31, 1997. See "Certain Relationships and Related
Transactions." In connection with such extension agreement, the Company granted
warrants to Mr.
45
<PAGE>
Friedland to acquire up to 282,994 shares of the Company's Common Stock
(restricted), with certain "piggy-back" registration rights. These warrants have
an exercise price of $1.45 and expire on June 28, 2000. The warrants vest in 6-
month increments over the term of the loan, commencing on June 28, 1996, as
follows:
<TABLE>
<CAPTION>
Period Warrants Vested
------ ---------------
<S> <C>
1st 6-month period 70,749
2nd 6-month period 70,749
3rd 6-month period 70,748
4th 6-month period 70,748
</TABLE>
The first 70,749 warrants vest upon the execution of the extension
agreement. The remaining warrants vest on the first day of each period indicated
above, provided, however, if the Friedland note is paid off by the Company
during any 6-month period, other than the 4th 6-month period, the warrants that
vest in the remaining 6-month periods will be void.
LESNICK WARRANTS
On June 28, 1996, the Company and Daniel Lesnick, Executive Vice President
of Janex, entered into an agreement whereby the due date on Company's note held
by Mr. Lesnick was extended to December 31, 1997. See "Certain Relationships and
Related Transactions." In connection with such extension agreement, the Company
granted warrants to Mr. Lesnick to acquire up to 131,994 shares of the Company's
Common Stock (restricted), with certain "piggy-back" registration rights. These
warrants have an exercise price of $1.45 and expire on June 28, 2000. The
warrants vest in 6-month increments over the term of the loan, commencing on
June 28, 1996, as follows:
<TABLE>
<CAPTION>
Period Warrants Vested
------ ---------------
<S> <C>
1st 6-month period 32,999
2nd 6-month period 32,999
3rd 6-month period 32,998
4th 6-month period 32,998
</TABLE>
The first 32,999 warrants vest upon the execution of the extension
agreement. The remaining warrants vest on the first day of each period indicated
above, provided, however, if the Lesnick note is paid off by the Company during
any 6-month period, other than the 4th 6-month period, the warrants that vest in
the remaining 6-month periods will be void.
CERTAIN REGISTRATION RIGHTS
The Moore Revolving Loan Warrants, the Friedland and Lesnick Warrants
and the Deco Disc Settlement Warrants are not being registered in connection
with this offering. The warrant agreements entered into in connection with all
of said warrants contain "piggy-back" registration rights, which requires the
Company to register the warrants in the event the Company does a subsequent
public offering.
46
<PAGE>
The Company has agreed to use its best efforts to maintain the
effectiveness of a registration statement under the 1933 Act for the Common
Stock being registered in connection with this offering and to take such other
actions under the laws of various states as may be required to cause the lawful
sale of securities upon the exercise of warrants through the expiration date, or
until the warrants have been exercised, whichever comes first. However, the
Company will not be required to honor the exercise of warrants if, in the
opinion of the Board of Directors, upon advice of counsel, the sale of
securities upon such exercise would be unlawful.
TRANSFER AGENT
American Securities Transfer, Incorporated, Lakewood, Colorado is the
registrar and transfer agent for the Company's Common Stock and Public Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
As of July 31, 1996, the Company had 5,046,721 shares of Common Stock
outstanding. Of those shares, 1,580,000 are eligible for immediate sale pursuant
to Rule 144 under the 1933 Act, 100,000 will become eligible for sale pursuant
to Rule 144 after August 4, 1997 and the balance, to the extent they are not
held by affiliates of the Company, are freely transferrable, subject to
compliance with applicable state securities laws. Rule 144, promulgated under
the 1933 Act, provides for the sale of limited quantities of restricted
securities, in accordance with the provisions of the Rule, without registration
under the 1933 Act. In connection with this offering, the Company registered for
sale 270,000 shares of Common Stock underlying the Deco Disc Warrants. The
Company has issued private warrants to acquire 235,000 shares of Common Stock,
with certain registration rights. See "--Deco Disc Settlement Warrants" and "--
Moore Private Placement." The Company has issued 1,314,986 private warrants,
which vest over a period of 2-1/2 years, with certain registration rights. See
"--Moore Revolving Loan Warrants" and "--Friedland Warrants" and "--Lesnick
Warrants." The Company has also granted to certain employees stock options to
acquire 550,250 shares of Common Stock, which the Company intends to register by
December 31, 1996. The sale of substantial amounts of shares registered in this
offering, the possibility of sales of Common Stock under Rule 144, and the
existence of these options and warrants, as well as actual sales under Rule 144
or of registered shares issued upon option or warrant exercises, may have a
depressive effect upon the prevailing market price of the Common Stock, and
might adversely affect the terms at which the Company may be able to obtain
additional equity financing.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who beneficially owns
restricted securities with respect to which at least two years have elapsed
since the later of the date the shares were acquired from the Company or from an
affiliate of the Company, is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock of the Company, or (ii) the average weekly
trading volume in Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions
and notice requirements, and to the availability of current public information
about the Company. A person who is not an affiliate, has not been an affiliate
within 90 days prior to sale and who beneficially owns restricted securities
with respect to which at least three years have elapsed since the later of the
date the shares were acquired from the Company or from an affiliate of the
Company, is entitled to sell such shares under Rule 144(k) without regard to any
of the volume limitations or other requirements described above.
47
<PAGE>
PLAN OF DISTRIBUTION
To management's knowledge, no underwriter has specifically agreed to
purchase from the Selling Shareholders any shares of Common Stock being
registered hereunder; nor has an broker/dealer agreed to act as a placement
agent for the Selling Shareholders. The Selling Shareholders may, from time to
time during the offering, enter into agreements with various broker/dealers for
the offer and sale of the shares of Common Stock, but management is not aware of
any such agreement. In such an event, each broker/dealer will be obligated to
offer and sell all or a portion of the shares under the terms and conditions and
for the fees or commissions set forth in those respective agreements.
The Selling Shareholders will each bear their pro-rata share of the
expenses in connection with the issuance and distribution of the shares being
offered hereby, in accordance with the percentage of the total shares sold by
each of them. The Company will pay no costs of distribution.
Since the Company's shares are quoted on NASDAQ, it may be expected that at
such time as the Selling Shareholders sell their shares, that such shares will
be offered to the public through NASDAQ, at the quoted prices on or about the
date of sale.
LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be
passed upon for the Company by Tilles, Webb, Kulla & Grant, a Law Corporation,
Beverly Hills, California.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective October 6, 1995, the Company dismissed Kellogg & Andelson
Accountancy Corporation ("Kellogg & Andelson"), Sherman Oaks, California, as the
Company's independent accountants, and engaged BDO Seidman, LLP ("BDO Seidman"),
Los Angeles, California, as the Company's new independent accountants. The
dismissal of Kellogg & Andelson and the retention of BDO Seidman were approved
by the Company's Board of Directors.
Prior to the engagement of BDO Seidman, the Company did not consult
with such firm regarding the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements, or any matter that was
either the subject of a disagreement or a reportable event.
Kellogg & Andelson audited the Company's financial statements for the
years ended December 31, 1994 and 1993. Kellogg & Andelson's reports for each
of such periods did not contain an adverse opinion or a disclaimer of opinion,
and were not qualified or modified as to audit scope or accounting principles.
However, Kellogg & Andelson's reports for the years ended December 31, 1994 and
1993 contained a modification paragraph describing the uncertainty with respect
to a legal action related to alleged federal securities law violations by the
Company. Kellogg & Andelson's report for the year ended December 31, 1993 also
contained a modification paragraph with respect to the Company's ability to
continue as a going concern.
48
<PAGE>
During the period from January 1, 1995 to October 6, 1995, and the years
ended December 31, 1994 and 1993, there were no disagreements with Kellogg &
Andelson on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Kellogg & Andelson, would have caused such
firm to make reference to the subject matter of the disagreements in connection
with its reports on the Company's financial statements.
EXPERTS
The consolidated financial statements as of December 31, 1995, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the year ended December 31, 1995, included in this Prospectus
have been audited by BDO Seidman LLP, independent public accountants, as stated
in their report appearing herein and elsewhere in the registration statement
("Registration Statement") of which this Prospectus is a part, and have been so
included in reliance upon such report given upon the authority of that firm as
experts in accounting and auditing.
The consolidated statement of operations, and the related consolidated
statements of changes in stockholders' equity and cash flows for the year ended
December 31, 1994, included in this Prospectus have been audited by Kellogg &
Andelson, Accountancy Corporation, independent public accountants, as stated in
their report appearing herein and elsewhere in the Registration Statement of
which this Prospectus is a part, and have been so included in reliance upon such
report given upon the authority of that firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on form SB-2
(including amendments and exhibits) under the 1933 Act with respect to the
securities offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement, certain items of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the securities offered by this
Prospectus, reference is made to such Registration Statement and the exhibits
thereto, copies of which may be obtained from the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549, upon
payment of the fees prescribed by the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement for
a full statement of the provisions thereof; each such statement contained herein
is qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated thereunder, and in accordance therewith, files periodic
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information filed by the Company can be
inspected and copied at public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the
following regional offices: Northeast Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048 and Midwest Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS (AUDITED):
Independent Auditor's Report F-2
Independent Auditor's Report F-3
Balance Sheet as of December 31, 1995 F-4
Statements of Operations for the years ended
December 31, 1995 and December 31, 1994 F-5
Statement of Changes in Stockholders' Equity for the
years ended December 31, 1995 and December 31, 1994 F-6
Statements of Cash Flows for the years ended
December 31, 1995 and December 31, 1994 F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) F-9
----------
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheet as of December 31, 1995
and March 31, 1996 F-28
Statements of Operations for the three months ended
March 31, 1995 and March 31, 1996 F-30
Statements of Cash Flows for the three months ended
March 31, 1995 and March 31, 1996 F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNADUITED) F-33
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Janex International, Inc.
Woodland Hills, California
We have audited the accompanying consolidated balance sheet of Janex
International, Inc. as of December 31, 1995, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the year then ended. We have also audited the schedule for the year ended
December 31, 1995 listed in the accompanying index. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Janex
International, Inc. as of December 31, 1995, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
Also, in our opinion, the schedule for the year ended December 31, 1995 presents
fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements and schedule have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 3 to the consolidated financial statements, the Company has
suffered recurring losses from operations, negative cash flows and decreases in
working capital. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The financial statements and schedule do
not include any adjustments that might result from the outcome of this
uncertainty.
BDO SEIDMAN, LLP
Los Angeles, California
February 23, 1996
F-2
<PAGE>
Board of Directors
Janex International, Inc.
Woodland Hills, California
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated Janex International, Inc.
statements of operations, changes in stockholders' equity, and cash flows
for the year ended December 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated Janex
International, Inc. results of their operations and their cash flows for the
year ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 10 to the financial statements, the Company is a
defendant in a class action lawsuit. The ultimate outcome of this action
cannot presently be determined. The Company has accrued an estimate of
certain amounts which it may incur in connection with the final resolution
of the dispute.
KELLOGG & ANDELSON
ACCOUNTANCY CORPORATION
Sherman Oaks, California
February 17, 1995
F-3
<PAGE>
JANEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1995
-------------
<S> <C>
ASSETS (Notes 7 and 8)
CURRENT ASSETS
Cash and cash equivalents $ 783,564
Certificate of deposit 500,000
Accounts receivable, net of allowance of $210,116 494,987
Inventories (Note 2) 605,623
Prepaid royalties 119,995
Other current assets 143,761
-----------
Total current assets 2,647,930
PROPERTY AND EQUIPMENT, net (Note 4) 359,674
INTANGIBLE ASSETS, net (Note 6) 2,245,352
PRODUCT DEVELOPMENT COSTS, net (Note 5) 184,026
OTHER ASSETS 11,985
-----------
$ 5,448,967
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Loan payable - bank (Note 7) $ 751,425
Stockholder notes payable (Note 8) 458,760
Accounts payable 355,834
Accrued expenses (Note 9) 503,715
Note payable (Note 10) 500,000
Income taxes payable (Note 11) 6,586
-----------
Total current liabilities 2,576,320
-----------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Note 12):
Class A convertible preferred stock, no par value,
5,000,000 shares authorized; none issued and outstanding -
Common stock, no par value; 20,000,000 shares authorized;
5,046,721 shares issued and outstanding 11,054,816
Accumulated deficit (8,182,169)
-----------
Total stockholders' equity 2,872,647
-----------
$ 5,448,967
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
JANEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1995 1994
------------- ------------
<S> <C> <C>
NET SALES $ 9,355,021 $13,109,165
----------- -----------
COSTS AND EXPENSES
Cost of sales 5,315,659 7,156,903
Selling, general and administrative (Note 16) 3,859,527 3,633,354
Royalty expense 1,239,656 1,345,625
----------- -----------
Total cost and expenses 10,414,842 12,135,882
----------- -----------
OPERATING INCOME (LOSS) (1,059,821) 973,283
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 53,300 39,937
Interest expense (89,429) (207,270)
Foreign exchange loss (Notes 2 and 15) (4,963) (82,941)
Gain on disposal of fixed assets (Note 4) - 2,023
----------- -----------
Total other income (expense) (41,092) (248,251)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,100,913) 725,032
INCOME TAX PROVISION (Note 11) 36,909 27,629
----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS (1,137,822) 697,403
EXTRAORDINARY GAIN FROM EXTINGUISHMENT OF
DEBT, net of applicable income taxes (Note 15) - 489,335
----------- -----------
NET INCOME (LOSS) $(1,137,822) $ 1,186,738
=========== ===========
INCOME (LOSS) PER COMMON SHARE
Primary
Before extraordinary item $ (0.23) $ 0.15
Extraordinary item - 0.10
----------- -----------
Total $ (0.23) $ 0.25
=========== ===========
Weighted average number of primary shares outstanding 4,860,447 4,804,698
=========== ===========
Fully diluted
Before extraordinary item $ (0.23) $ 0.14
Extraordinary item - 0.10
----------- -----------
Total $ (0.23) $ 0.24
=========== ===========
Weighted average number of fully diluted
shares outstanding 4,860,447 4,904,540
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
JANEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Total
------------------------ Accumulated Stockholders'
Shares Amount Deficit Equity
--------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
BALANCE
at December 31, 1993 4,256,721 $ 9,806,266 $(8,231,085) $ 1,575,181
Issuance of common stock 270,000 494,100 - 494,100
Issuance of common stock
due to exercise of options 115,000 135,000 - 135,000
Issuance of common stock
in extinguishment of debt 50,000 143,750 - 143,750
Net income - - 1,186,738 1,186,738
--------- ----------- ----------- -----------
BALANCE
at December 31, 1994 4,691,721 10,579,116 (7,044,347) 3,534,769
Issuance of common stock
due to exercise of warrants 230,000 147,200 - 147,200
Acquisition of Malibu
and MFSI 125,000 328,500 - 328,500
Net loss - - (1,137,822) (1,137,822)
--------- ----------- ----------- -----------
BALANCE
at December 31, 1995 5,046,721 $11,054,816 $(8,182,169) $ 2,872,647
========= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
JANEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1995 1994
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,137,822) $1,186,738
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for losses on accounts receivable 61,903 118,657
Amortization of licensing relationships,
trademarks and goodwill (Note 6) 193,367 170,473
Amortization of product development costs 415,207 160,753
Depreciation 270,947 227,878
Unrealized foreign exchange losses 4,963 -
Imputed interest on licensing fee obligation (Note 15) - 67,077
Gain on settlement of license fee obligation - (489,335)
Foreign exchange loss from licensing fee
obligation (Note 15) - 79,839
Loss on sale/retirement of property and
equipment - (2,023)
Changes in assets and liabilities, net of effects from
purchase of Malibu and MFSI (Note 1):
Increase (decrease) in cash from changes in:
Accounts receivable 405,671 (322,420)
Inventories (201,134) (132,900)
Prepaid royalty 17,910 (88,190)
Prepaids and other assets (49,612) 14,320
Accounts payable (330,395) 65,432
Accrued expenses (318,954) 287,397
Checks issued in excess of funds on deposit - (63,485)
Accrued restructuring and other charges (Note 13) - (20,996)
Income tax payable (22,557) (62,676)
----------- ----------
Net cash provided by (used in) operating activities (690,506) 1,196,539
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (453,118) (259,452)
Proceeds from sale of assets - 14,330
Proceeds from certificate of deposit - 500,000
Purchase of certificate of deposit - (500,000)
Additions to intangible assets - (23,021)
Additions to product development costs (349,403) (300,313)
Payment for purchase of Malibu and MFSI,
net of cash acquired (Note 1) (54,897) -
----------- ----------
Net cash used in investing activities (857,418) (568,456)
----------- ----------
</TABLE>
F-7
<PAGE>
JANEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1995 1994
----------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loan 751,425 150,000
Proceeds from note payable 500,000 -
Payment of bank loan - (500,000)
Issuance of stockholder note receivable - (10,000)
Payment of stockholder note payable (139,158) (393,540)
Payments under licensing agreement - (75,000)
Proceeds from exercise of warrants in 1995 and
common stock options in 1994 147,200 135,000
Proceeds from issuance of common stock - 494,100
---------- ----------
Net cash provided by (used in) financing activities 1,259,467 (199,440)
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (288,457) 428,643
CASH AND CASH EQUIVALENTS, at beginning of period 1,072,021 643,378
---------- ----------
CASH AND CASH EQUIVALENTS, at end of period $ 783,564 $1,072,021
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 68,216 $ 129,508
Income tax 59,466 22,098
========== ==========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
In August 1995, the Company issued 125,000 shares of common stock for $328,500
to acquire all of the outstanding stock of Malibu Fun Stuffed and its related
company Malibu Fun Stuffed International Limited. The Company allocated the
excess of the purchase price over the net assets of the acquired companies of
$422,220 to goodwill.
On October 17, 1994, the Company settled its licensing fee obligation (Note 15)
of $709,798. As part of the settlement the Company paid cash of $75,000,
issued 50,000 shares of common stock with fair market value of approximately
$143,750 and recognized a net gain on settlement of $489,335.
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
Janex International, Inc. (the "Company") was incorporated in Colorado on July
28, 1986 and is the parent corporation of With Design in Mind ("WDIM"), a
California corporation, Janex Corporation ("Janex"), a New Jersey corporation,
and Malibu Fun Stuffed ("Malibu"), a California corporation, all wholly-owned
subsidiaries. Janex International, Inc. is also the parent corporation of Pro
Gains Company Limited ("Pro Gains"), a Hong Kong corporation, owned 50% by Janex
International, Inc., and 50% by Janex. Malibu Fun Stuffed International Limited
("MFSI"), a Hong Kong corporation, is owned 99% by Malibu and 1% by Janex
International, Inc. As used in the report, the term "the Company" refers to
Janex International, Inc. and its subsidiaries, unless the context indicates
otherwise.
On August 4, 1995, the Company acquired all of the outstanding stock of Malibu,
a California corporation, and its then affiliated Hong Kong company, MFSI.
Under the terms of the purchase agreement, the Company issued 125,000 shares of
the Company's restricted common stock to the former stockholder of the acquired
companies, and paid $50,000 cash. The Company recorded the acquisition using
the purchase method of accounting. Under this method, the allocation of the
purchase price to Malibu's and MFSI's assets and liabilities is required to
reflect fair value. The Company allocated the excess of purchase price over net
assets acquired to goodwill (see Note 6). In addition, the former stockholders
of Malibu and MFSI are entitled to an earn-out based on future performance of
Malibu and MFSI. The results of operations of Malibu and MFSI are not material
in relation to the Company.
The Company's business is conducted primarily through its subsidiaries, Janex,
Pro Gains, Malibu and MFSI. The Company's business consists mainly of
developing, manufacturing (through subcontractors), marketing and selling toys
and functional children's products ("Children's Products"). These products
include 1) coin and gumball banks, flashlights and battery operated toothbrushes
marketed under the brand name "Janex" and 2) plush, dolls, video sets and
children's watches marketed under the brand name "Malibu Fun Stuffed!", all of
which retail for prices between $3 and $40. The Children's Products are
manufactured to the Company's specifications by manufacturers based in Macau,
China and the United States and sold nationwide to mass merchant retailers, toy
specialty stores, department stores and gift shops, through a network of
independent sales representative firms.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the operations of the
Company, its wholly owned subsidiaries, WDIM, Janex, Pro Gains, Malibu and MFSI.
Hologram Ventures, a joint venture in which the Company owned a 50% interest,
was dissolved in February 1994.
Hologram Ventures had no activity for the year ended December 31, 1994. The
results of operations for Malibu and MFSI have been included in the accompanying
statements of operations for the period from the acquisition date of August 4,
1995 through December 31, 1995. All significant intercompany accounts and
balances have been eliminated in consolidation.
F-9
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
The Company considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized upon shipment of the product, with appropriate allowance
made for estimated returns and uncollectible accounts.
Inventories
Inventories, which consist principally of finished goods, are stated at the
lower of cost or market. Cost is determined on various methods which
approximate the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed on the straight-line and accelerated methods over the estimated useful
lives of the related assets, principally 2 to 5 years for molds, machinery and
equipment and furniture and fixtures. Leasehold improvements are amortized over
the shorter of their estimated useful lives or the lease term.
Maintenance and repairs are charged to expenses as incurred. When assets are
sold or retired, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is credited or charged to income.
Intangible Assets
Intangible assets resulting from business acquisitions, consist of cost in
excess of net assets (goodwill) of subsidiaries acquired, licensing
relationships and trademarks. Goodwill is being amortized on a straight-line
basis over the period of expected benefit of 10 to 20 years. Licensing
relations and trademarks are being amortized over 9 to 15 years using the
straight-line method. Management has a policy to review goodwill and other
productive assets at each quarterly balance sheet date for possible impairment.
This policy includes recognizing write-downs if it is probable that measurable
undiscounted future cash flows and/or the aggregate net cash flows of an asset,
as measured by current revenues and costs (exclusive of depreciation) over the
asset's remaining depreciable life, are not sufficient to recover the net book
value of an asset.
F-10
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Product Development Costs
Product development costs consist of product design and development (through
subcontractors) for the various toys and children's products the Company sells.
The designs are stated at their net realizable value and amortized on a
straight-line basis over a 1 to 2 year period. Such costs are periodically
reviewed each year based on management's estimates of sales of related products.
Product development costs are written off when management believes they provide
no future benefit.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash investments and trade receivables.
The Company maintains cash and cash equivalents in short-term investments with
various financial institutions. These financial institutions are located in the
United States and Hong Kong. The Company performs periodic evaluations of the
financial situation of these institutions, as part of the Company's investment
strategy.
The Company's two largest customers totaled approximately 50% and 41% of net
sales in 1995 and 1994 and 18% and 34% of accounts receivable at December 31,
1995 and 1994 (see Note 14). The loss of either of these major customers could
have a material adverse effect on the results of the Company's operations. The
Company routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk exposure is
limited. The Company does not require collateral to support customer
receivables.
Royalties
Royalties due to licensors are generally provided for based upon a negotiated
percentage of underlying net sales and are frequently subject to a minimum
guaranteed royalty obligation. Prepaid royalties are recouped against royalties
accrued on the sale of licensed products.
Product Warranty
Estimated warranty costs are provided for at the time of sale of the warranted
products.
Foreign Currencies
All balance sheet accounts of Pro Gains and MFSI are translated at the current
exchange rate at balance sheet date, while income statement items are translated
at the average currency exchange rates for each period presented. The resulting
translation adjustments, if significant, are recorded as a separate component of
stockholders' equity.
F-11
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings per Share
Earnings per share are based upon the weighted average number of shares of
common stock outstanding and common stock equivalents (common stock options and
warrants), when dilutive.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain 1994 amounts were reclassified to conform with 1995 presentation.
New Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes guidelines regarding when impairment losses
on long-lived assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how impairment losses
should be measured. The Company does not expect adoption to have a material
effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123) issued by the Financial Accounting Standards
Board (FASB) is effective for specific transactions entered into after December
15, 1995, while the disclosure requirements of SFAS No. 123 are effective for
financial statements for fiscal years beginning no later than December 15, 1995.
The new standard establishes a fair value method of accounting for stock-based
compensation plans and for transactions in which an entity acquires goods or
services from non-employees in exchange for equity instruments. The Company
does not expect adoption to have a material effect on its financial position or
results of operations. At the present time, the Company has not determined if
it will change its accounting policy for stock based compensation or only
provide the required financial statement disclosures. As such, the impact on
the Company's financial position and results of operations is currently unknown.
NOTE 3 - GOING CONCERN
The Company has suffered losses from operations in two out of the last three
years, has a net loss of $1,137,822 and negative cash flow of $288,457 for the
year ended December 31, 1995. Also, at December 31, 1995, the Company's working
capital position had decreased to $71,610. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
F-12
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3 - GOING CONCERN (Continued)
The Company has been able to continue in operation through the financial support
provided by a combination of both debt and equity financing. Continued
operations depend upon the Company continuing to obtain financing for its
activities. Management's plan for the Company includes raising additional
working capital through debt and/or equity financing until profitable operations
and positive cash flow are achieved and maintained, which management believes
are in the near future. However, no assurances can be given that the Company
will be successful in raising additional capital. Further, should the Company
be successful in raising additional capital, there is no assurance that the
Company will achieve profitability or positive cash flow. If the Company is
unable to obtain adequate additional financing, management will be required to
curtail the operations of the Company.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995:
Leasehold improvements $ 2,506
Equipment and furniture 128,035
Molds 1,155,294
----------
1,285,835
Accumulated depreciation (926,161)
----------
$ 359,674
==========
NOTE 5 - PRODUCT DEVELOPMENT COSTS
Product development costs consisted of the following at December 31, 1995:
Product development costs $ 598,752
Accumulated amortization and reserve (414,726)
----------
$ 184,026
==========
The Company has established a reserve for unproductive development costs of
$105,000.
NOTE 6 - INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1995:
Licensing relationships $ 795,014
Trademarks 385,129
Goodwill 1,459,724
----------
2,639,867
Accumulated amortization (394,515)
----------
$2,245,352
==========
F-13
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7 - LOAN PAYABLE - BANK
The Company has a $1,000,000 line of credit with a Bank, pursuant to a loan
agreement which has a maturity date of May 3, 1996. The maximum amount
available under the line of credit is reduced by advances against the line for
working capital purposes. Loans from the credit line bear interest at prime
(8.5% at December 31, 1995) plus 1%. The line of credit is secured by the
Company's assets including all accounts receivable and inventory plus a $500,000
certificate of deposit purchased from the bank. The certificate of deposit has
a yield rate of 5.65%. The outstanding borrowings under the line of credit as
of December 31, 1995 were $751,425.
The loan agreement provided that the Company must maintain a tangible net worth
of at least $1,525,000 and an annual profit after tax of $500,000. At December
31, 1995, the Company was in breach of both of these covenants. Accordingly, in
January the bank advised the Company that it would not make any further advances
under the line. On March 20, 1996, the Company signed amended loan documents
reducing the amount available under the line to $500,000, and providing the
Company the ability to utilize the line to issue up to $100,000 of stand-by
letters of credit. As a result, the bank waived both of the covenant violations
under the original loan agreement.
The Company, through a Hong Kong bank, has a line of credit for the Company's
subsidiary, Pro Gains, which allows Pro Gains to discount with the bank letters
of credit issued to Pro Gains by its customers. The credit is tailored to match
the Company's selling season. From May to November the credit line is
HK$10,000,000 (US$1,300,000) and from December to April the line is HK$2,000,000
(US$260,000). The credit line is secured by a $100,000 term deposit with the
bank. Janex International, Inc. has issued a guarantee to the Hong Kong bank in
the full amount of the line. At December 31, 1995, the Company had advances
under this line for discounted letters of credit of $26,425. As the line is
paid down when the bank collects on the customer's letters of credit, the cash
advances under the line are treated as reductions in accounts receivable. In
January 1996, the Company paid down the entire line of credit and made a
decision not to renew the term deposit which effectively canceled the line of
credit. The Company is attempting to negotiate a new line of credit without the
cash collateral requirement.
NOTE 8 - STOCKHOLDER NOTES PAYABLE
The notes payable to stockholders as of December 31, 1995 are payable in semi-
annual installments of $166,666. On December 29, 1995, the stockholders agreed
to defer the December 31, 1995 installment to June 30, 1996. The notes have an
imputed interest of 9%, are secured by certain assets of the Company, and mature
on December 31, 1996. The outstanding balance as of December 31, 1995 is
$458,760 which is classified as current.
F-14
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 1995:
Accrued royalties $211,731
Accrued commissions 57,042
Accrued restructuring and other charges 118,392
Other accrued expenses 116,550
--------
$503,715
========
NOTE 10 - NOTE PAYABLE
On December 22, 1995, the Company borrowed $500,000 in a private unsecured loan
transaction. Under the terms of the loan agreement, payments are to be made on
a periodic basis based upon the level of certain sales. If the loan is not
fully paid by October 1, 1996, the remaining balance becomes immediately due and
payable. The loan accrues interest monthly on the unpaid portion at the rate of
two percent (2%) above the prime rate (8.5% at December 31, 1995) per annum.
NOTE 11 - INCOME TAXES
The income tax provision, all of which is current, consists of the following for
the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1995 1994
------------------
<S> <C> <C>
Current
Federal $ - $ -
State 33,790 2,413
Foreign 3,119 25,216
------- -------
Income tax provision $36,909 $27,629
======= =======
</TABLE>
F-15
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11 - INCOME TAXES (Continued)
The Company's total deferred tax assets and deferred tax asset valuation
allowance at December 31, 1995 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Provision for losses on accounts receivable $ 86,148
Prepaid royalty 50,225
Product development costs 43,050
Depreciation and amortization 77,407
Inventory capitalization 39,729
Unrealized foreign exchange loss 2,035
State income taxes 6,151
Net operating loss carryforward 2,653,579
---------
Total deferred tax assets 2,958,324
---------
Deferred tax liability:
Income from controlled foreign corporation under Subpart F (22,535)
---------
Total deferred tax liability (22,535)
---------
Net deferred tax assets 2,935,789
---------
Less: Valuation allowance (2,935,789)
----------
$ -
==========
</TABLE>
The net deferred tax assets have a 100% valuation allowance as the Company
cannot determine if it is more likely than not that the deferred tax asset will
be realized.
The income tax provision and the applicable income taxes from the extraordinary
item differs from the amount computed by applying the U.S. Federal income tax
rate (34%) because of the effect of the following items:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1995 1994
------------ -----------
<S> <C> <C>
U.S. Federal statutory rate applied to pretax income $(374,310) $ 412,885
Permanent differences 4,608 -
State income taxes, net of Federal benefit 33,790 37,109
Temporary differences - 69,368
Benefit of net operating loss carryforward - (168,590)
Tax effect of unrecognized net operating loss carryforward 369,702 -
Income tax for foreign operation 3,119 78,500
Increase (decrease) in deferred tax asset
valuation allowance - (401,643)
--------- ---------
</TABLE>
F-16
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<S> <C> <C>
Income tax provision $ 36,909 $ 27,629
========= =========
</TABLE>
F-17
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11 - INCOME TAXES (Continued)
At December 31, 1995, the Company had Federal and state net operating loss carry
forwards of approximately $7,843,889 and $4,028,891, respectively. Net
operating loss carry forwards can be used to offset future taxable income. If
not used, the Federal net operating loss carryforward will expire through 2010.
The (loss) income before taxes related to the foreign subsidiaries for the years
ended December 31, 1995 and 1994 were $(235,000) and $231,000, respectively.
NOTE 12 - STOCKHOLDERS' EQUITY
Common Stock
On May 17, 1994, in connection with a private placement, the Company raised
$494,100. Under the private placement the Company issued 270,000 Units of its
securities, each Unit consisting of one share of common stock and a warrant to
acquire one share of Common Stock for every two Units purchased. A total of
270,000 shares of common stock and 135,000 warrants were issued related to this
private placement. The purchase price for the Units was $1.83 per unit. The
warrants have an exercise price of $3.25, and are exercisable after two years.
On May 17, 1994, the Company received cash proceeds of $135,000 from the
issuance of 115,000 shares of common stock due to the exercise of options.
On October 14, 1994, the Company issued 50,000 shares of common stock at a price
of $2.87 per share for a total of $143,750 and the Company paid $75,000 in full
settlement of a $709,798 debt obligation. The Company recorded an extraordinary
gain of $489,335 related to this transaction (see Note 15).
On August 4, 1995, the Company acquired all of the outstanding stock of Malibu,
a California corporation, and its affiliated Hong Kong company, MFSI. Under the
terms of the purchase agreement, the Company issued 125,000 shares of the
Company's restricted common stock to the former owners of the acquired
companies, and paid $50,000 at the closing. In addition, the former
shareholders of Malibu are entitled to an earn-out based on the future
performance of Malibu and MFSI.
During the year ended December 31, 1995, the Company received $147,200 from a
warrant holder pursuant to the warrant holder exercising warrants to purchase
230,000 shares of the Company's common stock.
No warrants were exercised and/or expired during the years ended December 31,
1994. 2,145,000 of these warrants are vested as of December 31, 1995. At
December 31, 1995, 2,280,000 warrants remain outstanding at exercise prices of
$0.64 to $7.50 per share.
F-18
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12 - STOCKHOLDERS' EQUITY (Continued)
Common Stock (Continued)
On December 20, 1994, on behalf of certain stockholders, the Company filed a
registration statement with the SEC, which became effective on February 13, 1995
registering 1,065,000 shares of common stock which were previously issued to
certain stockholders. Of the shares being registered, 500,000 are issuable upon
the exercise of certain warrants (as of December 31, 1995, 270,000 of the
warrants remain outstanding); 400,000 were issued in connection with the
acquisition of Janex Corporation; 115,000 were issued upon the exercise of
certain options; and 50,000 were issued in connection with a settlement. The
Company will not receive proceeds from the sale of shares of common stock
offered by the selling stockholders. The Company will receive proceeds only if
the warrants are exercised. During 1995, the Company received $147,200 from
warrant holders pursuant to them exercising 230,000 warrants to purchase 230,000
shares of the Company's stock.
Stock Option Plan
On June 8, 1994, the Board terminated the Company's Stock Option Plan ("the
Plan") which provided for the granting of options to selected employees,
officers and directors to acquire up to 500,000 shares of the Company's common
stock. The options were exercisable for ten years from the date of the grant.
In 1995, the Company awarded its officers and employees stock option bonuses.
At December 31, 1995, 598,000 options were outstanding and 399,750 were
exercisable all with exercise prices ranging from $0.85 to $2.125 per share.
During the years ended December 31, 1994 and 1993 the Company granted to one of
its business and financial consultants options to purchase 40,000 shares and
75,000 shares, respectively, of the Company's common stock. These options were
not issued under the Plan. On May 17, 1994 all of these options were exercised
and the Company received $135,000 from this transaction.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company leases its current facility under a noncancelable operating lease.
The Company and the landlord amended the lease, effective January 1, 1996,
providing the Company with an additional 2,460 square feet of space, adjacent to
its current offices, and extended the expiration of the lease to December 31,
2000. These leases allow for its early termination anytime after March 1997,
provided that the Company enters into another lease with the landlord for at
least 6,993 square feet in the same complex. The Company also leases the
facilities previously occupied by Malibu under a noncancelable operating lease
which expires March 31, 1998. The Company is currently subleasing these
facilities to a third party. The monthly rental income derived from the
sublease is approximately the same as the rent expense. At December 31, 1995,
the total minimum lease rental payments are as follows:
F-19
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Operating Lease (Continued)
<TABLE>
<CAPTION>
December 31, Amount
------------ ------
<S> <C>
1996 $100,600
1997 129,700
1998 108,800
1999 101,800
2000 101,800
--------
$542,700
========
</TABLE>
Total rental expense was $72,950 and $36,650 for the years ended December 31,
1995 and 1994, respectively.
Royalties
At December 31, 1995, the Company has commitments for minimum guaranteed
royalties under licensing agreements as follows:
<TABLE>
<CAPTION>
December 31, Amount
------------ --------
<S> <C>
1996 $ 76,900
1997 610,900
1998 22,500
--------
$710,300
========
</TABLE>
Legal Proceedings
On May 27, 1993 a class action suit was filed against the Company, among others.
On May 24, 1994, on motion by the Company, the class action was dismissed, but
the Plaintiffs were given 45 days to amend their complaint. On July 8, 1994,
the Plaintiffs filed their Second Amended Complaint. The Company and the
Plaintiffs agreed upon the principal terms of a settlement which included
payment by the Company of $75,000, of which $15,000 was to be in cash and the
balance of any combination of cash and the Company's Common Stock.
Additionally, the Company was to issue 200,000 warrants to acquire Common Stock,
exercisable for a period of two years, at a price $.50 above the average of the
closing bid and ask prices of the Company's Common Stock on the trading day
preceding the date of the signed definitive settlement agreement. However, due
to regulatory complications, no formal settlement has been reached. There is no
assurance that a settlement will be reached or that the principle terms will not
be changed. The financial statements include an accrual recorded in 1992 for
restructuring expenses of $118,392 against which the settlement in this lawsuit
will be charged (see Note 9). Additionally, if settlement is reached, the
agreement will be subject to approval by the Court and the class. In the event
no settlement is reached, the Company intends to vigorously defend itself, but
there can be no assurance that the Company will be successful in defending the
action. An adverse judgment against the Company could have an adverse effect on
the Company.
F-20
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Contracts
The Company has employment agreements with certain executive officers and
employees, the terms of which expire at various dates through December 31, 1998.
Such agreements provide for minimum salary levels and incentive bonuses based on
prescribed formulas over their terms. The aggregate commitment for future
salaries at December 31, 1995 was approximately $789,000.
Credit Facility Under Agency Agreement
The Company, at its option, may borrow up to $300,000 from the Hong Kong
services company ("Agent"), as agreed upon between the Company and the Agent in
an Agency Agreement dated October 23, 1995, provided the Company issues to the
Agent an irrevocable stand-by letter of credit for $100,000. Under the
Agreement, the Agent will advance the Company's Hong Kong subsidiaries, Pro Gain
and MFSI, up to $300,000 for the payment of product development and tooling
costs, to be repaid from collections of customer invoices at the rate of 5% of
the invoice amount, on goods shipped FOB Hong Kong, between May 1 and December
31. Any balance remaining unpaid at December 31 would be due and payable by
January 15. This credit facility bears interest at the rate of 2% above the
Hong Kong Prime Rate per annum. Under the Agreement, the Agent retains
ownership of all tooling paid for with the credit facility, until the credit
facility is repaid. The credit facility is available in each year that the
Agreement is in effect, and the Agreement's initial term was for a period of two
years. On March 21, 1996, the Company opened the stand-by letter of credit to
the Agent.
NOTE 14 - SEGMENT INFORMATION
The Company had sales to certain customers comprising 10% or more of total
sales. The following table sets forth the percentage of sales of these
customers to total domestic sales and total foreign sales.
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
United Hong United Hong
States Kong States Kong
-------------- --------------
<S> <C> <C> <C> <C>
Customer A 10% 31% 4% 12%
Customer B 35 22 10 15
-- -- -- --
45% 53% 14% 27%
== == == ==
</TABLE>
In 1995, customer A and customer B represented 26% and 24% of the Company's
sales. In 1994, customer A and customer B represented 16% and 25% of the
Company's sales.
F-21
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14 - SEGMENT INFORMATION (Continued)
A summary of the Company's operations by geographical area for the years ended
December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Adjustments
United Hong and
States Kong Eliminations Consolidated
----------- ------------ ------------------ -------------
<S> <C> <C> <C> <C>
1995
Net sales:
Customers $1,792,577 $ 7,562,444 $ - $ 9,355,021
Intercompany 2,768,202 627,174 (3,395,376) -
---------- ----------- ----------- ------------
Total revenue $4,560,779 $ 8,189,618 $(3,395,376) $ 9,355,021
========== =========== =========== ============
Operating loss $ (833,752) $ (226,069) $ $(1,059,821)
Interest income 53,300
Interest expense (89,429)
Foreign exchange loss (4,963)
-----------
Loss before income taxes (1,100,913)
Income tax provision 36,909
------------
Net loss $(1,137,822)
============
Identifiable assets $5,290,291 $ 1,299,823 $(1,766,290) $ 4,823,824
Corporate assets 625,143
------------
Total assets $ 5,448,967
============
Total liabilities $ 2,576,320
============
<CAPTION>
Adjustments
United Hong and
States Kong Eliminations Consolidated
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
1994
Net sales:
Customers $3,728,519 $ 9,380,646 $ - $13,109,165
Intercompany 3,618,504 930,186 (4,548,690) -
---------- ----------- ----------- -----------
Total revenue $7,347,023 $10,310,832 $(4,548,690) $13,109,165
========== =========== =========== ===========
Operating income $ 750,239 $ 223,044 $ $ 973,283
Interest income 39,937
Interest expense (207,270)
Foreign exchange loss (82,941)
Gain on sale of fixed asset 2,023
-----------
Income before income taxes 725,032
Income tax provision 27,629
-----------
Income before extraordinary items 697,403
Extraordinary gain from extinguishment
of debt - net 489,335
-----------
Net income $ 1,186,738
===========
Identifiable assets $4,860,682 $ 1,138,446 $(1,215,183) $ 4,783,945
Corporate assets 531,549
-----------
Total assets $ 5,315,494
===========
Total liabilities $ 1,780,725
===========
</TABLE>
F-22
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14 - SEGMENT INFORMATION (Continued)
The Company's operations are structured to achieve consolidated objectives. As
a result, significant interdependencies and overlaps exist among the Company's
operating units. Accordingly, the net sales, operating loss and identifiable
assets shown for each geographic area may not be indicative of the amounts which
would have been reported if the operating units were independent of one another.
Intercompany sales are at cost. Operating income or loss is net sales less
related costs and operating expenses, excluding interest. Corporate assets are
those assets maintained for general purposes, principally cash, short-term
investments and administration facilities.
NOTE 15 - LICENSING FEE OBLIGATION
In October 1990 the Company entered into a license agreement for the exclusive
right to use and market certain technology used in the manufacture of its
MicroTheatre and video arcade product lines in the United States and Canada
through the year 2005. The license fees were payable in Japanese yen over a
period of four years. The Company recorded the initial liabilities and related
asset of $494,759 using the exchange rate at October 1, 1990 of 138.45 yen per
dollar. Fluctuations in the related licensing fee obligation caused by changes
in the exchange rate between the yen and the dollar have been charged to
operations in the period they occurred, and the obligation adjusted accordingly.
Changes in the exchange rate between the yen and the dollar required the
recognition of a $79,837 loss on foreign exchange for the year ended December
31, 1994.
Royalty fees of 8% of net sales of products related to this technology are
required as cumulative advance against the licensing fee obligation. The
Company was subject to certain royalty fees of approximately 4% to 5% of net
sales, as defined, of products related to this technology. Royalties paid
pursuant to this agreement were approximately $1,584 for the year ended December
31, 1994.
The Company charged to operations imputed interest on the licensing fee
obligation of $67,077 for the year ended December 31, 1994.
On October 17, 1994, the Company entered into an agreement which required
payment of the sum of $75,000 cash and issuance of 50,000 shares of restricted
common stock in full settlement of the license fee obligation. The agreement
resulted in a gain of $489,335 which the Company reported as an extraordinary
item in the consolidated statement of operations for the year ended December 31,
1994. Income tax expense of approximately $196,409 was not incurred in this
transaction due to the carryforward of the net operating loss and reversing
temporary differences.
F-23
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 16 - RELATED PARTY TRANSACTIONS
The Company pays commissions at the rate of 4% of net sales generated by a
company owned by a major stockholder, relating to customers located in New York,
New Jersey, Connecticut and Pennsylvania. Commissions on such sales of
approximately $4,750,000 and $7,105,000 amounted to $189,953 and $373,013 for
the years ended December 31, 1995 and 1994, respectively, which are included in
selling, general and administrative expenses. Accrued commissions included in
accrued expenses and accounts payable, on such sales amounted to $117,443 as of
December 31, 1995. The Company also rented showroom space from this major
stockholder for which the Company paid $16,000 during 1995. In addition, the
Company utilizes the services of a public warehouse facility in Baltimore,
Maryland that is owned by the father of the major stockholder for a fee based on
the amount of goods received and shipped. Fees amounted to $78,108 and $135,439
for the years ended December 31, 1995 and 1994.
The former father-in-law of the major stockholder has an informal oral
arrangement with the Company whereby he guarantees a $255,000 letter of credit
from the Company to one of its licensors. The letter of credit expires on
November 30, 1998. Howard Moore Associates, Inc. ("HMA"), of which the former
father-in-law of the major stockholder is the sole shareholder and President,
has a Royalty Agreement with the Company whereby HMA receives a commission of 1%
of the net revenue received by the Company from sales of products using a
certain company's trademark and certain licensed characters. Under the Royalty
Agreement, HMA was paid, or will be paid, $33,070 for the year ended December
31, 1995, and was paid $59,292 for the year ended December 31, 1994.
Included in other assets is an unsecured note receivable to an officer of the
Company for $10,000. The note bears interest at the prime rate, which was 8.5%
at December 31, 1995, plus 0.5%. The note requires monthly payments of interest
only with all principal and accrued interest due on December 31, 1996.
NOTE 17 - DISCLOSURE OF CERTAIN RISKS AND UNCERTAINTIES (See Note 14)
Competition; Dependence on Licenses
The Company competes with numerous other companies, most of which have
substantially greater financial and other resources than those of the Company.
The Company's success depends in great part upon the Company's ability to
continue licensing fantasy characters for use with the Company's products. Most
licensing agreements are non-exclusive and limited in duration, with two years
being typical. Competition for licenses is intense, thus there can be no
assurance that the Company will be successful in renewing its present licenses
or in obtaining new licenses.
F-24
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 17 - DISCLOSURE OF CERTAIN RISKS AND UNCERTAINTIES (Continued)
Product Obsolescence
Because consumer preferences can change rapidly, the Company's success will
ultimately depend on its ability to successfully introduce new products. The
success of new products depends on a variety of factors including product
selection, timely and efficient completion of product design, timely and
efficient implementation of manufacturing and assembly processes and effective
sales and marketing. Because new product commitments must be made well in
advance of sales, new product decisions must anticipate future market demand.
There is no assurance that the Company will be successful in introducing new
products. The Company has and is continuing to review and conduct
investigations into new products to evaluate them for commercial viability.
Seasonality
The Company expects its highest level of net sales and income before taxes
during the quarter ending September 30, due to the Christmas season. If, for
any reason, the Company's sales were to be substantially below those normally
expected during such quarter, the Company's annual results would be adversely
affected.
Dependence on Foreign Manufacturing
The Company does not have manufacturing facilities. Most of the Company's
products are manufactured by contract manufacturers in the Far East. The
Company's operations are subject to the customary risks of doing business
abroad, including insufficient Company supervision of quality control,
fluctuations in the value of currencies, tariffs, export duties, quotas,
restrictions on the transfer of funds, work stoppages and, in certain parts of
the world, political instability. To date, these factors have not had a
material adverse impact on the Company's operations, but there is no assurance
that one or more of these factors will not adversely affect the Company in the
future.
Dependence on Significant Customers (See Note 14)
The Company historically has had a concentration of significant customers.
Although the Company considers its commercial relationships with its significant
customers to be good, a loss of these customers, or a significant decrease in
purchases by these customers, could have an adverse effect on the Company's
operations. The Company does not have any long-term contracts with any of its
customers and none are expected to be signed. Long-term contracts are not
customary in the retail industry.
NOTE 18 - FOURTH QUARTER RESULTS
During the quarter ended December 31, 1994, the Company recorded an
extraordinary gain of $489,335 from the settlement of a license fee obligation
(see Note 15).
F-25
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 19 - SUBSEQUENT EVENTS
Under the terms of the warrant agreement granting Deco Disc warrants to purchase
500,000 shares of the Company's Common Stock (the "Warrant Agreement") the
Company was obligated to register the stock underlying the warrants, and to use
its best efforts to maintain the registration statement effective during the
period the warrants are exercisable. Deco Disc threatened to sue the Company
claiming that the Company did not file the registration statement on a timely
basis, and that the registration statement was not kept effective by the
Company, resulting in Deco Disc being damaged. In order to avoid any potential
litigation, on March 26, 1996, the Company and Deco Disc entered into a
Settlement Agreement and Specific Release under which the Company issued to Deco
Disc additional warrants to purchase 100,000 shares of the Company's Common
Stock (restricted), with certain "piggy-back" registration rights, at a price
of $0.64 per share, in exchange for Deco Disc releasing the Company from any and
all prior claims relating to violations of the Warrant Agreement, and failure to
update the registration statement.
F-26
<PAGE>
JANEX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND MARCH 31, 1995
F-27
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - ASSETS
DECEMBER 31, 1995 AND MARCH 31, 1996
<TABLE>
<CAPTION>
March 31, December
1996 31, 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 162,051 $ 783,564
Certificate of deposit (Note 5) 500,000 500,000
Accounts receivable, net 463,553 494,987
Inventories - principally
finished goods 509,226 605,623
Prepaid royalties 143,495 119,995
Other current assets 136,811 143,761
---------- ----------
Total current assets 1,915,136 2,647,930
Property and equipment, net 539,894 359,674
Intangible assets, net 2,190,322 2,245,352
Product development costs, net 197,277 184,026
Other assets 11,985
---------- ----------
$4,842,629 $5,448,967
========== ==========
</TABLE>
(continued)
F-28
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) -
LIABILITIES AND STOCKHOLDERS' EQUITY (CONTINUED)
DECEMBER 31, 1995 AND MARCH 31, 1996
<TABLE>
<CAPTION>
March 31, December
1996 31, 1995
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable - bank (Note 5) $ 400,000 $ 751,425
Notes payable - stockholders 458,760 458,760
Loan payable - agent (Note 6) 85,000
Note payable 500,000 500,000
Accounts payable 473,895 355,834
Accrued expenses 523,387 503,715
Income taxes payable 7,815 6,586
----------- -----------
Total current liabilities 2,448,857 2,576,320
----------- -----------
Commitments and contingencies
(Notes 2 and 3)
Stockholders' equity (Note 4):
Class A convertible preferred
stock, no par value;
authorized -5,000,000 shares;
issued and outstanding - none
Common stock, no par value;
authorized - 20,000,000 shares;
issued and outstanding -
5,046,721 11,138,941 11,054,816
Accumulated deficit (8,745,169) (8,182,169)
----------- -----------
Total stockholders equity 2,393,772 2,872,647
----------- -----------
$ 4,842,629 $ 5,448,967
=========== ===========
</TABLE>
See accompanying notes to condense
consolidated financial statements.
F-29
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net sales $ 894,306 $ 782,754
---------- ----------
Cost and expenses:
Cost if sales 531,695 411,509
Selling, general and
administrative expenses 798,872 678,151
Royalty expense 33,192 85,049
---------- ----------
Total costs and expenses 1,363,759 1,174,709
---------- ----------
Operating loss (469,453) (391,955)
Other income (expense):
Interest income 11,663 14,529
Interest expense (14,795) (13,807)
Foreign exchange loss (1,194)
Loss from settlement with
warrant holder (Note 4) (84,125)
---------- ----------
Total other income (expense) (88,451) 722
---------- ----------
Loss before income taxes (557,904) (391,233)
Income tax provision 5,096 1,600
---------- ----------
Net loss $ (563,000) $ (392,833)
========== ==========
Net loss per common share $(.11) $(.08)
========== ==========
Weighted average number of
common shares outstanding 5,046,721 4,711,721
========== ==========
</TABLE>
See accompanying notes to condensed
consolidated financial statements.
F-30
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
Increase (decrease) in cash
and cash equivalents 1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(563,000) $(392,833)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Provision for losses on
accounts receivable, net 45,247 14,996
Amortization 105,403 90,198
Depreciation 31,356 40,536
Foreign exchange loss 1,194
Loss from settlement with
warrant holder 84,125
Changes in operating assets
and liabilities:
(Increase) decrease in-
Accounts receivable (24,115) 576,698
Inventories 96,397 44,768
Prepaid royalties (23,500) (27,962)
Other current assets 6,950 (27,787)
Other assets 11,985 (306)
Increase (decrease) in-
Accounts payable 118,061 (271,293)
Accrued expenses 19,672 (256,173)
Income taxes payable 1,229 522
--------- ---------
Net cash used in operating
activities (88,969) (208,636)
--------- ---------
</TABLE>
(continued)
F-31
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1996 AND 1996
<TABLE>
<CAPTION>
Increase (decrease) in cash
and cash equivalents 1996 1995
---------- -----------
<S> <C> <C>
Cash flows from investing activities:
Additions to property and
equipment (205,467) (38,722)
Additions to product
development (60,652) (98,572)
--------- ----------
Net cash used in investing
activities (266,119) (137,294)
--------- ----------
Cash flows from financing activities:
Proceeds from exercise of common
stock purchase warrants 64,000
Repayment of loan payable -
bank (351,425)
Proceeds from loan payable -
agent 85,000
--------- ----------
Net cash provided by (used in)
financing activities (266,425) 64,000
--------- ----------
Cash and cash equivalents:
Net decrease (621,513) (281,930)
At beginning of period 783,564 1,072,021
--------- ----------
At end of period $ 162,051 $ 790,091
========= ==========
</TABLE>
See accompanying notes to condensed
consolidated financial statements.
F-32
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization - Janex International, Inc. was incorporated in Colorado on July
- ------------
28, 1986, and is the parent corporation of With Design in Mind, a California
corporation, Janex Corporation ("Janex"), a New Jersey corporation, and Malibu
Fun Stuffed ("Malibu"), a California corporation, all of which are wholly-owned
subsidiaries. Janex International, Inc. is also the parent corporation of Pro
Gains Company Limited ("Pro Gains"), a Hong Kong corporation, owned 50% by Janex
International, Inc. and 50% by Janex. Malibu Fun Stuffed International Limited
("MFSI"), a Hong Kong corporation, is owned 99% by Malibu and 1% by Janex
International, Inc. As used in this report, the "Company" refers to Janex
International, Inc. and its subsidiaries, unless the context indicates
otherwise.
Business - The Company's business is conducted primarily through its
- --------
subsidiaries, Janex, Pro Gains, Malibu and MFSI, and consists mainly of
developing, manufacturing (through subcontractors), marketing and selling toys
and functional children's products ("Children's Products"). These products
include (1) coin and gumball banks, flashlights, battery-operated toothbrushes
and clocks marketed under the brand name "Janex" and (2) plush, pool toys, video
sets and children's watches marketed under the brand name "Malibu Fun Stuffed!",
all of which retail for prices between $3 and $40. The Children's Products are
manufactured to the Company's specifications by manufacturers based in Macau,
China and the United States, and are sold nationwide to mass merchant retailers,
toy specialty stores, department stores and gift shops through a network of
independent sales representative firms.
Basis of Presentation - The accompanying consolidated financial statements are
- ---------------------
unaudited but, in the opinion of management of the Company, contain all
adjustments necessary to present fairly the financial position at March 31,
1996, the results of operations for the three months ended March 31, 1995 and
1996, and the changes in cash flows for the three months ended March 31, 1995
and 1996. These adjustments are of a normal recurring nature. The consolidated
balance sheet as of December 31, 1995 is derived from the Company's audited
financial statements. The accompanying consolidated financial statements
include the operations of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
F-33
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although management of
the Company believes that the disclosures contained in these financial
statements are adequate to make the information presented therein not
misleading. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1995, as filed with the Securities
and Exchange Commission.
Seasonality - Because of the seasonality of the Company's business, the results
- -----------
of operations for the three months ended March 31, 1996 are not necessarily
indicative of the results of operations to be expected for the full fiscal year
ending December 31, 1996.
Net Loss Per Share - Net loss per share is based on the weighted average number
- ------------------
of shares of common stock outstanding during the respective periods presented.
Common stock equivalents are not included in the calculation of loss per share
as their effect would be anti-dilutive.
Pro Forma Information - Malibu and its affiliate, MFSI, were acquired in August
- ---------------------
1995 in a transaction accounted for under the purchase method of accounting. As
the combined results of operations of Malibu and MFSI during 1995 were not
material in relation to the Company's consolidated results of operations, 1995
pro forma financial information is not presented.
2. GOING CONCERN
The Company has suffered losses from operations in two out of the last three
fiscal years, and had a net loss of $563,000 and a negative cash flow of
$621,513 for three months ended March 31, 1996. In addition, the Company's net
working capital decreased by $605,331, from working capital of $71,610 at
December 31, 1995 to a working capital deficit of $533,721 at March 31, 1996.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
F-34
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
2. GOING CONCERN (continued)
The Company has been able to continue in operation through the financial
support provided by a combination of debt and equity financing. Continued
operations depend upon the Company continuing to obtain financing for its
activities. Management's plan for the Company includes raising additional
working capital through debt and/or equity financing until profitable operations
and positive cash flow are achieved and maintained, which management believes
are in the near future. However, no assurances can be given that the Company
will be successful in raising additional capital. Further, should the Company
be successful in raising additional capital, there is no assurance that the
Company will achieve profitability or positive cash flow. If the Company is
unable to obtain adequate additional financing, management will be required to
curtail the operations of the Company.
3. LEGAL PROCEEDINGS
On May 27, 1993, a class action lawsuit (the "Lawsuit") was filed by Kevin
J. O'Rourke and Patricia Ann O'Rourke (the "Plaintiffs") against the Company and
other parties in the United States District Court for the Central District of
California (the "Court"). On May 24, 1994, on Motion by the Company, the Lawsuit
was dismissed, but the Plaintiffs were given 45 days to amend their complaint.
On July 8, 1994, the Plaintiffs filed their Second Amended Complaint.
Thereafter, settlement negotiations ensued without success. On May 6, 1996, the
Plaintiffs filed a voluntary Request for Dismissal of the Lawsuit, which the
Court entered without prejudice on May 7, 1996.
4. WARRANT AGREEMENT AND SETTLEMENT
Under the terms of the warrant agreement granting Deco Disc warrants to
purchase 500,000 shares of the Company's common stock (the "Warrant Agreement"),
the Company was obligated to register the stock underlying the warrants, and to
use its best efforts to maintain the registration statement effective during the
period the warrants are exercisable. Deco Disc threatened to sue the Company,
claiming that the Company did not file the registration statement on a timely
basis, and that the registration statement was not kept effective by the
Company, resulting in Deco Disc being damaged.
F-35
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
4. WARRANT AGREEMENT AND SETTLEMENT (continued)
In order to avoid any potential litigation, on March 26, 1996, the Company and
Deco Disc entered into a Settlement Agreement and Specific Release under which
the Company issued to Deco Disc additional warrants to purchase 100,000 shares
of the Company's common stock (restricted), with certain "piggy-back"
registration rights, at a price of $.64 per share, in exchange for Deco Disc
releasing the Company from any and all prior claims relating to violations of
the Warrant Agreement, and failure to update the registration statement. As a
result of the foregoing transaction, during the three months ended March 31,
1996, the Company recorded a charge to operations of $84,125 as management's
estimate of the fair value of the 100,000 common stock purchase warrants.
5. LOAN PAYABLE - BANK
The Company had a $1,000,000 line of credit with a bank with interest at
9.5%, pursuant to a loan agreement which expired on May 3, 1996. The line of
credit is secured by a $500,000 certificate of deposit purchased from the bank
and a first priority security interest in all of the assets of the Company. The
outstanding balance on the line of credit was $751,425 at December 31, 1995. On
March 20, 1996, the Company and the bank agreed to reduce the amount available
under the line of credit to $500,000 (including the ability of the Company to
utilize the line of credit to issue up to $100,000 of stand-by letters of
credit), and the bank waived certain covenant violations under the original loan
agreement. Accordingly, at March 31, 1996, the outstanding balance under the
line of credit had been reduced by $351,425 to $400,000. The Company is
currently in negotiations with the bank to restructure and extend the loan
agreement, and expects to conclude the negotiations during June 1996. There can
be no assurances as to the ultimate resolution of these negotiations.
6. LOAN PAYABLE - AGENT
Pursuant to an Agency Agreement dated October 23, 1995, the Company, through
its Hong Kong subsidiaries, Pro Gains and MFSI, may borrow up to $300,000 from
its Hong Kong agent for the payment of product development and tooling costs,
provided that the Company issues to the agent an irrevocable stand-by letter of
credit for $100,000.
F-36
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
6. LOAN PAYABLE - AGENT (continued)
The loan is to be repaid from collections of certain customer invoices at the
rate of 5% of the invoice amount, with interest at 2% above the Hong Kong prime
rate, and any balance remaining unpaid at December 31, 1996 will be due and
payable on January 15, 1997. The agent will retain ownership of all tooling
paid for with the credit facility until the credit facility is repaid. The
credit facility is available in each year that the Agency Agreement is in
effect, which was for an initial term of two years. On March 22, 1996, the
Company opened the stand-by letter of credit to the agent. As of March 31,
1996, the Company had borrowed $85,000 under this credit facility.
7. SUBSEQUENT EVENTS
(a) The Board of Directors extended the expiration date of the Company's Class
A Warrants from May 9, 1996 to May 9, 1999.
(b) Effective as of April 19, 1996, pursuant to a Revolving Credit Agreement
with an individual lender (who is also a significant shareholder of the Company)
(the "Lender") that expires on October 19, 1999 (the "Agreement"), Janex
Corporation arranged to borrow up to $900,000, with interest at 9.5% payable
quarterly. The Agreement is secured by all of the assets of Janex Corporation,
and the guaranty of Janex International, Inc. As additional consideration, the
Company granted the Lender warrants to purchase up to 900,000 shares of the
Company's common stock (restricted), with certain "piggy-back" registration
rights, exercisable at a price of $1.45 per share through April 19, 2000. The
warrants vest in equal increments of 180,000 on the first day of consecutive
six-month periods commencing April 19, 1996. However, to the extent that
amounts borrowed under the Agreement are paid off and the Agreement is canceled
during its term, any unvested warrants shall be void. As of May 17, 1996, the
Company had borrowed $100,000 pursuant to this Agreement.
F-37
<PAGE>
______________________________
NO DEALER, SALESMAN OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES
TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR ANY SALE
MADE HEREUNDER, SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
____________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Prospectus Summary................... 2
Risk Factors......................... 4
Selling Shareholders................. 8
Use of Proceeds...................... 8
Market for Common Equity and
Related Stockholder Matters........ 9
Management's Discussion and
Analysis or Plan of Operation...... 10
Business............................. 20
Management........................... 32
Certain Relationships
and Related Transactions........... 38
Security Ownership of Certain
Beneficial Owners and Management... 41
Description of Securities............ 43
Plan of Distribution................. 48
Legal Matters........................ 48
Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure............... 48
Experts.............................. 49
Available Information................ 49
Index to Financial Statements........ F-1
</TABLE>
___________________________________________
____________________________________________
785,000 SHARES
COMMON STOCK
JANEX
INTERNATIONAL, INC.
-------------------
PROSPECTUS
-------------------
, 1996
____________________________________
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has adopted provisions in its Articles of Incorporation which
limit the liability of its directors. As permitted by the Colorado Corporation
Code, directors will not be liable to the Company or its shareholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
to its shareholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for acts
specified under Section 7-108-403 (formerly Section 7-5-114) of the Colorado
Corporation Code, or (iv) for any transaction from which the director derived an
improper personal benefit.
The Company's has also adopted provisions in its Articles of Incorporation
providing that the Company has the right and/or duty to indemnify (i) a
director of the Company to the extent provided by statute, and (ii) any officer,
employee, or agent of the Company who is not a director to the extent provided
by law, or to a greater extent if consistent with law and if provided by
resolution of the Company's shareholders or directors, or in a contract.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses to be paid by the Company in connection with the securities being
registered hereby are estimated as follows:
<TABLE>
<S> <C>
SEC filing fee................................. $ 1,468.97
NASD filing fee................................ None
Legal fees and expenses........................ 40,000.00
Accounting and auditing fees................... 10,000.00
Printing and engraving......................... 3,000.00
Transfer agent fees............................ None
Blue sky qualification and
and related expenses, including counsel... 2,000.00
Other expenses................................. 5,000.00
TOTAL.................................... $61,468.97
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
(1) On October 6, 1993, the Company acquired all of the capital stock of
Janex and Pro Gains (both private companies), from Leslie Friedland and Daniel
Lesnick, in return for the issuance to them of 672,000 and 528,000 shares of
Common Stock, respectively, and payment of the sum of $1,150,000 plus certain
contingent payments based upon profitability. Mr. Friedland and Mr. Lesnick
II-1
<PAGE>
represented, among other things, that they were acquiring the shares for
investment, and that they had received the Company's latest Annual Report, as
well as Quarterly reports filed since the last Annual Report.
(2) On November 18, 1993, the Company granted options to acquire 75,000
shares of the Company's Common Stock, to HMA, in return for consulting services.
Said options were exercisable immediately, at an exercise price of $1.00 per
share, and expire on November 18, 1998. In connection with such options, HMA
represented that it was acquiring the options (and subsequently the Common
Stock) for investment. Furthermore, HMA represented that it was an accredited
investor as that term is defined in Rule 501 of Regulation D promulgated under
the 1933 Act.
(3) On May 17, 1994, the Company raised $494,100 in a private placement.
In connection with the private placement, the Company offered units ("Units")
consisting of one share of Common Stock and a warrant to acquire one share of
Common Stock for every two Units purchased. Consequently, the following shares
of Common Stock and warrants were issued:
<TABLE>
<CAPTION>
Shares of
Purchaser Common Stock Warrants
- --------- ------------ --------
<S> <C> <C>
H&M Moore Investment Groups, Inc. 206,600 103,300
Howard Moore, as Trustee of the Howard
Moore Associates, Inc. Retirement Trust 63,400 31,700
</TABLE>
The Units were sold at a purchase price of $1.83 each, which was the
average of the closing bid and ask prices for the shares of Common Stock as
quoted on NASDAQ for the ten trading days prior to the date of the sale. The
warrants have an exercise price of $3.25 per share and are not exercisable until
May 17, 1996, and expire on May 17, 2000. The purchasers represented, among
other things, that the securities were being acquired for investment, and that
the purchasers were accredited investors as defined in rule 501 of Regulation D
promulgated under the 1933 Act.
(4) On October 17, 1994, the Company entered into a Settlement Agreement
and General Mutual Release with Dentsu Prox Inc., a Japanese company ("Dentsu"),
and on October 24, 1994, in connection therewith issued 50,000 shares of
restricted Common Stock to Dentsu. Dentsu represented that it was acquiring the
shares of Common Stock for investment. Furthermore, Dentsu represented that it
was an accredited investor as that term is defined in Rule 501 of Regulation D
promulgated under the 1933 Act.
(5) On March 26, 1996, in connection with a settlement, the Company
entered into a Warrant Agreement with Deco Disc, whereby Deco Disc was granted
warrants to purchase 100,000 shares of the Company's Common Stock (restricted),
with certain "piggy-back registration rights, at an exercise price of $.64 per
share, which warrants expire on Mar 26, 2001. Deco Disc represented that they
were acquiring the shares for investment and without view to further
distribution. Deco Disc further represented that it was an accredited investor
as that term is defined in Rule 501 of Regulation D promulgated under the 1933
Act.
(6) On April 19, 1996, in connection with the granting of a loan pursuant
to a Revolving Loan Agreement, the Company entered into a Warrant Agreement with
the Howard and Helene Moore Living Trust, u/d/t dated June 28, 1991 ("Moore
Trust"), providing for the issuance of up
II-2
<PAGE>
to 900,000 warrants to acquire 900,000 shares of the Company's Common Stock
(restricted), with certain "piggy-back" registration rights. These warrants have
an exercise price of $1.45 and expire on April 19, 2000. The warrants vest in 6-
month increments over the term of the loan, commencing on April 19, 1996, as
follows:
<TABLE>
<CAPTION>
Period Warrants Vested
- ------ ---------------
<S> <C>
1st 6-month period 180,000
2nd 6-month period 180,000
3rd 6-month period 180,000
4th 6-month period 180,000
5th 6-month period 180,000
</TABLE>
The first 180,000 warrants vest upon the execution of the Revolving Loan
Agreement. The remaining warrants vest on the first day of each period indicated
above, provided, however, if the revolving credit line ("Credit Line") is paid
off and canceled by the Company during any 6-month period, other than the 5th 6-
month period, the warrants that vest in the remaining 6-month periods will be
void, and the Revolving Loan Agreement will be terminated. The Moore Trust
represented that it was acquiring the shares for investment and without view to
further distribution. The Moore Trust further represented that it was an
accredited investor as that term is defined in Rule 501 of Regulation D
promulgated under the 1933 Act.
(7) On June 28, 1996, in connection with the extension of the due date of
loan payments due from the Company and an extension of the time to pay certain
commissions due from the Company, the Company and Mr. Leslie Friedland entered
into a Warrant Agreement whereby Mr. Friedland was granted warrants to acquire
up to 282,994 shares of the Company's Common Stock (restricted), with certain
"piggy-back" registration rights. These warrants have an exercise price of $1.45
and expire on June 28, 2000. The warrants vest in 6-month increments over the
term of the loan, commencing on June 28, 1996, as follows:
<TABLE>
<CAPTION>
Period Warrants Vested
- ------ ---------------
<S> <C>
1st 6-month period 70,749
2nd 6-month period 70,749
3rd 6-month period 70,748
4th 6-month period 70,748
</TABLE>
The first 70,749 warrants vest upon the execution of the extension
agreement. The remaining warrants vest on the first day of each period indicated
above, provided, however, if the Friedland note is paid off by the Company
during any 6-month period, other than the 4th 6-month period, the warrants that
vest in the remaining 6-month periods will be void. Mr. Friedland represented
that he was acquiring the shares for investment and without view to further
distribution. Mr. Friedland further represented that he was an accredited
investor as that term is defined in Rule 501 of Regulation D promulgated under
the 1933 Act.
(8) On June 28, 1996, in connection with the extension of the due date of
loan payments due from the Company, the Company and Mr. Daniel Lesnick entered
into a Warrant Agreement whereby Mr. Lesnick was granted warrants to acquire up
to 167,994 shares of the Company's
II-3
<PAGE>
Common Stock (restricted), with certain "piggy-back" registration rights. These
warrants have an exercise price of $1.45 and expire on June 28, 2000. The
warrants vest in 6-month increments over the term of the loan, commencing on
June 28, 1996, as follows:
<TABLE>
<CAPTION>
Period Warrants Vested
- ------ ---------------
<S> <C>
1st 6-month period 32,999
2nd 6-month period 32,999
3rd 6-month period 32,998
4th 6-month period 32,998
</TABLE>
The first 32,999 warrants vest upon the execution of the extension
agreement. The remaining warrants vest on the first day of each period indicated
above, provided, however, if the Lesnick note is paid off by the Company during
any 6-month period, other than the 4th 6-month period, the warrants that vest in
the remaining 6-month periods will be void.
The Company believes that all of the aforesaid sales were exempt from
registration pursuant to Section 4(2) of the 1933 Act, by virtue of being
private placements with persons who had access to all information concerning the
Company and who gave written investment representations. Although the Company
does not claim an exemption pursuant to Section 4(6) of the 1933 Act, the
Company believes that all purchasers referred to above were accredited investors
as that term is defined in Section 2(15) of the 1933 Act and the rules
promulgated thereunder.
With respect to the foregoing transactions, there were no underwriters, and
there were no underwriting discounts or commissions paid in connection
therewith.
ITEM 27. EXHIBITS
The following exhibits are filed as part of this Registration Statement:
Exhibit
Number Description
- ------ -----------
2.1 Agreement of Purchase and Sale of Stock by and among With Design in
Mind International, Inc., Leslie Friedland, and Daniel Lesnick, dated
October 6, 1993, relating to the acquisition of MJL Marketing Inc., a
New Jersey corporation. (11)
2.2 Agreement of Purchase and Sale of Stock by and among Janex
International, Inc., Malibu Fun Stuffed, Malibu Fun Stuffed
International, Limited, Terence Davis and Marie Boule (18)
3.1 Articles of Incorporation. (1)
3.2 Amendment No. 1 to Articles of Incorporation. (3)
3.3 Statement of Resolution Establishing Series for Shares. (3)
II-4
<PAGE>
Exhibit
Number Description
- ------- -----------
3.4 Amendment No. 2 to Articles of Incorporation. (3)
3.5 Bylaws of the Company. (2)
3.6 Articles of Amendment to Articles of Incorporation, dated August 11,
1994 and filed on August 16, 1994. (15)
4.1 Specimen Common Stock Certificate. (3)
4.2 Specimen Warrant Certificate. (6)
4.3 Form of Warrant Agreement. (6)
4.4 1991 Non-Statutory Stock Option Plan. (5)
4.5 Amendment No. 1 dated January 15, 1993, to 1991 Non-Statutory Stock
Option Plan. (10)
4.6 Amendment No. 2 dated September 13, 1993, to 1991 Non-Statutory Stock
Option Plan. (10)
4.7 Warrant Agreement dated May 17, 1994, by and between the Company and
Howard Moore, Trustee of the Howard Moore Associates, Inc. Retirement
Trust, dated December 30, 1990. (13)
4.8 Warrant Agreement dated May 17, 1994, by and between the Company and
H&M Moore Investment Group, Inc. (13)
4.9 Settlement Warrant Agreement dated March 26, 1996, by and between the
Company and Deco Disc Industries, Inc. (19)
4.10 Warrant Agreement dated April 19, 1996, by and between the Company and
the Moore Trust. (21)
4.11 Warrant Agreement dated June 29, 1996, by and between the Company and
Leslie Friedland. (21)
4.12 Warrant Agreement dated June 28, 1996, by and between the Company and
Daniel Lesnick. (21)
5 Opinion of Tilles, Webb, Kulla & Grant, a Law Corporation, as to the
legality of the securities being registered. (16)
II-5
<PAGE>
Exhibit
Index Description
- ------- -----------
10.1 Lease Agreement between With Design in Mind International, Inc., a
Colorado corporation and Warner Center Business Park Properties III,
L.P. for premises located at 21700 Oxnard Street, Suite 1610, Woodland
Hills, CA 91367 dated January 6, 1994. (10)
10.2 Employment Contract with Sheldon F. Morick, dated February 26, 1993.
(10)
10.3 Employment Contract with Daniel Lesnick, dated October 6, 1993. (10)
10.4 Stock Option Agreement with Sheldon F. Morick, dated June 30, 1992.
(10)
10.5 Stock Option Agreement with Sheldon F. Morick, dated February 26,
1993. (10)
10.6 Stock Option Agreement with Sheldon F. Morick, dated November 17,
1993. (10)
10.7 Stock Option Agreement with Michael S. Manahan, dated June 30, 1992.
(10)
10.8 Stock Option Agreement with Michael S. Manahan, dated November 17,
1993. (10)
10.9 Stock Option Agreement with Renee White Fraser, dated June 25, 1993.
(10)
10.10 Stock Option Agreement with Renee White Fraser, dated November 17,
1993. (10)
10.11 Stock Purchase Agreement dated May 17, 1994, by and between the
Company and Howard Moore, Trustee of the Howard Moore Associates, Inc.
Retirement Trust, dated December 30, 1990. (13)
10.12 Stock Purchase Agreement dated May 17, 1994, by and between the
Company and H&M Moore Investment Group, Inc. (13)
10.13 Settlement Agreement, dated October 17, 1994, by and between the
Company and Dentsu Prox Inc. (14)
10.14 Stock Option Agreement with Sheldon F. Morick dated April 3, 1995.(17)
10.15 Stock Option Agreement with Daniel Lesnick, dated April 3, 1995.
II-6
<PAGE>
Exhibit
Number Description
- ------- -----------
10.16 Stock Option Agreement with Michael S. Manahan, dated April 3,
1995.(17)
10.17 Stock Option Agreement with Renee W. Fraser, dated April 3, 1995.(17)
10.18 Employment Agreement with Terence Davis, dated August 4, 1995.(19)
10.19 Settlement Agreement and Specific Release by and between the Company,
Deco Disc Industries, Inc., and its shareholders, Donald Spector,
Michael Deutch, Barbara Carver, and James McGraw, dated March 26,
1996. (19)
10.20 Employment Agreement, dated April 15, 1996, by and between the Company
and Lawrence Bernstein. (21)
10.21 Stock Option Agreement with Lawrence Bernstein, April 15, 1996. (21)
10.22 Extension Agreement, dated June 28, 1996, by and between the Company
and Leslie Friedland. (21)
10.23 Extension Agreement, dated June 28, 1996, by and between the Company
and Daniel Lesnick. (21)
10.24 Inter-Creditor Agreement, dated June 28, 1996, by and between the
Company, Leslie Friedland, Daniel Lesnick and the Moore Trust. (21)
10.25 Modification Agreement, dated June 28, 1996, by and between the
Company, Terence F. Davis and Marie Boule. (21)
16 Letter to Securities and Exchange Commission from Kellogg & Andelson,
dated October 31, 1995. (20)
21 Subsidiaries of the registrant:
1) With Design in Mind, a California corporation, a wholly owned
subsidiary.
2) Janex Corporation, a New Jersey corporation, a wholly owned
subsidiary.
3) Pro Gain Company Limited, a Hong Kong corporation, a wholly owned
subsidiary.
4) Malibu Fun Stuffed, Inc., a California corporation, a wholly owned
subsidiary.
II-7
<PAGE>
5) Malibu Fun Stuffed International Limited, a Hong Kong corporation,
a wholly owned subsidiary.
Exhibit
Index Description
- ------- -----------
23.1 Consent of Tilles, Webb, Kulla & Grant, a Law Corporation, to be
included in Exhibit 5.
23.2 Consent of Kellogg & Andelson, as independent public accountants
(see page II-12).
23.3 Consent of BDO Seidman, LLP, as independent public accountantss (see
page II-11).
24 Power of Attorney (15).
______________________________
(1) Incorporated by reference to Exhibit 3(a) to the Company's Registration
Statement on Form 8-A, filed with the Commission on August 15, 1989 and
declared effective on September 1, 1989.
(2) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form 8-A, filed with the Commission on August 15, 1989 and
declared effective on September 1, 1989.
(3) Filed on August 8, 1990 as an exhibit to the Company's Registration
Statement on Form S-1.
(4) Filed as exhibit to the Company's Form 10-Q for the quarter ended December
31, 1990.
(5) Filed on March 20, 1991 as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1.
(6) Filed on May 7, 1991 as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1.
(7) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
September 30, 1991.
(8) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
September 30, 1992.
(9) Filed as an exhibit to the Company's Form 8-K dated September 3, 1992.
(10) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
December 31, 1993.
(11) Filed as an exhibit to the Company's Form 8-K dated October 6, 1993.
(12) Filed as an exhibit to the Company's Form 8-K dated January 6, 1994.
(13) Filed as an exhibit to the Company's Form 8-K dated May 17, 1994.
(14) Filed as an exhibit to the Company's Form 8-K dated October 14, 1994.
(15) Filed on December 20, 1994 as an exhibit to the Company's Registration
Statement.
(16) Filed on February 9, 1995 as an exhibit to Pre-Effective Amendment No. 1
to the Company's Registration Statement
(17) Filed as an exhibit to the Company's Form 8-K dated April 3, 1995.
(18) Filed as an exhibit to the Company's Form 8-K dated August 4, 1995.
(19) Filed as an exhibit to the Company's Form 10-KSB, for the fiscal year ended
December 31, 1995.
(20) Filed as an exhibit to the Company's Form 8-K/A dated October 5, 1995.
(21) Filed herewith.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
II-8
<PAGE>
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid
by a director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental change in the
information in the registration statement; and
(iii) To include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act of 1933, to
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(4) That for the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration
statement as of the time it the Commission declared it effective.
(5) That for the purpose of determining any liability under the
Securities Act of 1933, to treat each such post-effective amendment that
contains a form of prospectus as a new registration statement for the securities
offered in the registration statement, and that offering of the securities at
that time as the initial bona fide offering of those securities.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has caused this Post-Effective
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on the 7th day of August, 1996.
JANEX INTERNATIONAL, INC.
(Registrant)
By: /s/ SHELDON F. MORICK
------------------------------------------
Sheldon F. Morick, Chairman of the
Board, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ SHELDON F. MORICK Chairman of the Board, President, August 7, 1996
- --------------------------- Chief Executive Officer, Chief
Sheldon F. Morick Financial and Chief Accounting
Officer
/s/ RENEE WHITE FRASER *Director August 7, 1996
- ---------------------------
Renee White Fraser
*By: /s/ SHELDON F. MORICK
-----------------------
Sheldon F. Morick,
Attorney-in-Fact
II-10
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
Janex International, Inc.
Woodland Hills, California
We hereby consent to the inclusion in the Prospectus constituting a part of the
Registration Statement on Form SB-2 of our report dated February 23, 1996,
relating to the consolidated financial statements of Janex International, Inc.
as of December 31, 1995 and for the year then ended.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Los Angeles, California
August 6, 1996
II-11
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
Janex International, Inc.
Woodland Hills, California
We hereby consent to the inclusion in the Prospectus constituting a part of the
Registration Statement on Form SB-2 of our report dated February 17, 1995,
relating to the consolidated financial statements of Janex International, Inc.
as of December 31, 1994 and for the year then ended.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
KELLOGG & ANDELSON
Accountancy Corporation
Sherman Oaks, California
August 5, 1996
II-12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Page
Number Description Number
- ------ ----------- ------
<C> <S> <C>
2.1 Agreement of Purchase and Sale of Stock by and among
With Design in Mind International, Inc., Leslie Friedland,
and Daniel Lesnick, dated October 6, 1993, relating to
the acquisition of MJL Marketing Inc., a New Jersey
corporation. (11)
2.2 Agreement of Purchase and Sale of Stock by and among
Janex International, Inc., Malibu Fun Stuffed, Malibu
Fun Stuffed International, Limited, Terence Davis and
Marie Boule (18)
3.1 Articles of Incorporation. (1)
3.2 Amendment No. 1 to Articles of Incorporation. (3)
3.3 Statement of Resolution Establishing Series for Shares. (3)
3.4 Amendment No. 2 to Articles of Incorporation. (3)
3.5 Bylaws of the Company. (2)
3.6 Articles of Amendment to Articles of Incorporation,
dated August 11, 1994 and filed on August 16, 1994. (15)
4.1 Specimen Common Stock Certificate. (3)
4.2 Specimen Warrant Certificate. (6)
4.3 Form of Warrant Agreement. (6)
4.4 1991 Non-Statutory Stock Option Plan. (5)
4.5 Amendment No. 1 dated January 15, 1993, to 1991
Non-Statutory Stock Option Plan. (10)
4.6 Amendment No. 2 dated September 13, 1993, to 1991
Non-Statutory Stock Option Plan. (10)
4.7 Warrant Agreement dated May 17, 1994, by and between the
Company and Howard Moore, Trustee of the Howard Moore
Associates, Inc. Retirement Trust, dated December 30,
1990. (13)
4.8 Warrant Agreement dated May 17, 1994, by and between the
Company and H&M Moore Investment Group, Inc. (13)
4.9 Settlement Warrant Agreement dated March 26, 1996, by
and between the Company and Deco Disc Industries, Inc. (19)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------- ------
<C> <S> <C>
4.10 Warrant Agreement dated April 19, 1996, by and between
the Company and the Moore Trust. (21)
4.11 Warrant Agreement dated June 29, 1996, by and between the
Company and Leslie Friedland. (21)
4.12 Warrant Agreement dated June 28, 1996, by and between the
Company and Daniel Lesnick. (21)
5 Opinion of Tilles, Webb, Kulla & Grant, a Law Corporation,
as to the legality of the securities being registered. (16)
10.1 Lease Agreement between With Design in Mind International,
Inc., a Colorado corporation and Warner Center Business
Park Properties III, L.P. for premises located at 21700
Oxnard Street, Suite 1610, Woodland Hills, CA 91367 dated
January 6, 1994. (10)
10.2 Employment Contract with Sheldon F. Morick, dated
February 26, 1993. (10)
10.3 Employment Contract with Daniel Lesnick, dated October
6, 1993. (10)
10.4 Stock Option Agreement with Sheldon F. Morick, dated
June 30, 1992. (10)
10.5 Stock Option Agreement with Sheldon F. Morick,dated
February 26, 1993. (10)
10.6 Stock Option Agreement with Sheldon F. Morick, dated
November 17, 1993. (10)
10.7 Stock Option Agreement with Michael S. Manahan, dated
June 30, 1992. (10)
10.8 Stock Option Agreement with Michael S. Manahan, dated
November 17, 1993. (10)
10.9 Stock Option Agreement with Renee White Fraser, dated
June 25, 1993. (10)
10.10 Stock Option Agreement with Renee White Fraser, dated
November 17, 1993. (10)
10.11 Stock Purchase Agreement dated May 17, 1994, by and
between the Company and Howard Moore, Trustee of the
Howard Moore Associates, Inc. Retirement Trust, dated
December 30, 1990. (13)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------- ------
<C> <S> <C>
10.12 Stock Purchase Agreement dated May 17, 1994, by and
between the Company and H&M Moore Investment Group,
Inc. (13)
10.13 Settlement Agreement, dated October 17, 1994, by and
between the Company and Dentsu Prox Inc. (14)
10.14 Stock Option Agreement with Sheldon F. Morick dated
April 3, 1995.(17)
10.15 Stock Option Agreement with Daniel Lesnick, dated
April 3, 1995.(17)
10.16 Stock Option Agreement with Michael S. Manahan, dated
April 3, 1995.(17)
10.17 Stock Option Agreement with Renee W. Fraser, dated
April 3, 1995.(17)
10.18 Employment Agreement with Terence Davis, dated August 4,
1995.(19)
10.19 Settlement Agreement and Specific Release by and between
the Company, Deco Disc Industries, Inc., and its
shareholders, Donald Spector, Michael Deutch, Barbara
Carver, and James McGraw, dated March 26, 1996. (19)
10.20 Employment Agreement, dated April 15, 1996, by and between
the Company and Lawrence Bernstein. (21)
10.21 Stock Option Agreement with Lawrence Bernstein, April 15,
1996. (21)
10.22 Extension Agreement, dated June 28, 1996, by and between
the Company and Leslie Friedland. (21)
10.23 Extension Agreement, dated June 28, 1996, by and between
the Company and Daniel Lesnick. (21)
10.24 Inter-Creditor Agreement, dated June 28, 1996, by and
between the Company, Leslie Friedland, Daniel Lesnick and
the Moore Trust. (21)
10.25 Modification Agreement, dated June 28, 1996, by and between
the Company, Terence F. Davis and Marie Boule. (21)
16 Letter to Securities and Exchange Commission from Kellogg
& Andelson, dated October 31, 1995. (20)
</TABLE>
(continued on next page)
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- ----------- ------
<C> <S> <C>
21 Subsidiaries of the registrant:
1) With Design in Mind, a California corporation, a
wholly owned subsidiary.
2) Janex Corporation, a New Jersey corporation, a wholly
owned subsidiary.
3) Pro Gain Company Limited, a Hong Kong corporation, a
wholly owned subsidiary.
4) Malibu Fun Stuffed, Inc., a California corporation, a
wholly owned subsidiary.
5) Malibu Fun Stuffed International Limited, a Hong Kong
corporation, a wholly owned subsidiary.
23.1 Consent of Tilles, Webb, Kulla & Grant, a Law Corporation,
to be included in Exhibit 5.
23.2 Consent of Kellogg & Andelson, as independent public
accountants (see page II-12).
23.3 Consent of BDO Seidman, LLP, as independent public
accountants (see page II-11).
24 Power of Attorney (15).
</TABLE>
______________________________
(1) Incorporated by reference to Exhibit 3(a) to the Company's Registration
Statement on Form 8-A, filed with the Commission on August 15, 1989 and
declared effective on September 1, 1989.
(2) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form 8-A, filed with the Commission on August 15, 1989 and
declared effective on September 1, 1989.
(3) Filed on August 8, 1990 as an exhibit to the Company's Registration
Statement on Form S-1.
(4) Filed as exhibit to the Company's Form 10-Q for the quarter ended December
31, 1990.
(5) Filed on March 20, 1991 as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1.
(6) Filed on May 7, 1991 as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1.
(7) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
September 30, 1991.
(8) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
September 30, 1992.
(9) Filed as an exhibit to the Company's Form 8-K dated September 3, 1992.
(10) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
December 31, 1993.
(11) Filed as an exhibit to the Company's Form 8-K dated October 6, 1993.
(12) Filed as an exhibit to the Company's Form 8-K dated January 6, 1994.
(13) Filed as an exhibit to the Company's Form 8-K dated May 17, 1994.
(14) Filed as an exhibit to the Company's Form 8-K dated October 14, 1994.
(15) Filed on December 20, 1994 as an exhibit to the Company's Registration
Statement.
(16) Filed on February 9, 1995 as an exhibit to Pre-Effective Amendment No. 1 to
the Company's Registration Statement
(17) Filed as an exhibit to the Company's Form 8-K dated April 3, 1995.
(18) Filed as an exhibit to the Company's Form 8-K dated August 4, 1995.
(19) Filed as an exhibit to the Company's Form 10-KSB, for the fiscal year ended
December 31, 1995.
(20) Filed as an exhibit to the Company's Form 8-K/A dated October 5, 1995.
(21) Filed herewith.
<PAGE>
EXHIBIT 4.10
WARRANT AGREEMENT DATED APRIL 19, 1996,
BY AND BETWEEN THE COMPANY AND THE MOORE TRUST
<PAGE>
WARRANT AGREEMENT
-----------------
This Warrant Agreement (the "Warrant Agreement") is made this 19th day of
April, 1996, by and between Janex International, Inc., a Colorado Corporation
(the "Company") and Howard W. Moore, Helene Z. Moore, Shellee A. Friedland,
Susan E. Downing and Michael J. Moore, Co-Trustees of the Howard and Helene
Moore Living Trust, Dated June 28, 1991 (the trust is referred to hereinafter as
"Moore"). The parties agree as follows:
1. THE WARRANT.
-----------
a. GRANT OF WARRANT.
----------------
The Company hereby grants warrants ("Warrants") to Moore to purchase up
to NINE HUNDRED THOUSAND (900,000) shares of the Company's restricted common
stock, no par value (the "Warrant Stock") or any other replacement security of
Company whether by way of merger, consolidation, exchange, recapitalization, or
other reorganization of the Company, pursuant to the terms and conditions of
this Warrant Agreement. The Warrants shall be evidenced solely by this Warrant
Agreement.
b. TERM OF WARRANT.
---------------
The term of the Warrants granted under this Warrant Agreement shall
commence on April 19, 1996, and shall terminate at 5:00 p.m., California time,
on April 19, 2000. The termination date of the Warrants is referred to herein as
the "Warrant Expiration Date".
c. VESTING OF WARRANTS. No Warrant is exercisable until vested. The
-------------------
900,000 Warrants granted hereunder, shall vest as follows:
<TABLE>
<CAPTION>
Period (1) Warrants Vested
---------- ---------------
<S> <C>
1st 6-month period 180,000
2nd 6-month period 180,000
3rd 6-month period 180,000
4th 6-month period 180,000
5th 6-month period 180,000
</TABLE>
- -------------------
(1) Refers to 6-month periods after the date hereof.
The first 180,000 Warrants vest immediately upon the execution of this
Agreement. The remaining Warrants vest on the first day of each period indicated
in the foregoing schedule, provided, however, if the Revolving Credit Line
("Line") granted to the Company by Moore, pursuant to the Revolving Credit Line
Agreement, dated April 19, 1996 ("Credit Agreement"), is paid off and canceled
by the Company during any 6-month period, other than the 5th 6-month period, the
Warrants that vest in the remaining 6-month periods
<PAGE>
shall be void, and the Credit Agreement shall be terminated. For example, if
the Line is paid down to zero and canceled during the 3rd 6-month period, then
540,000 Warrants will be vested and 360,000 Warrants will be unvested and will
be void.
d. EXERCISE OF WARRANT.
-------------------
Only vested Warrants may be exercised. No Warrant may be exercised within
six months of the date of this Warrant Agreement. Vested Warrants may be
exercised in full or in part (but for not less than 5,000 shares at one time) at
any time prior to the Warrant Expiration Date, by a written notice (the
"Notice") to the Company, specifying the number of shares of Warrant Stock to be
purchased, accompanied by the payment of the exercise price (the "Exercise
Price") specified in paragraph 1(e). Upon receipt of the Notice accompanied by
the Exercise Price, the Company shall cause to be delivered share certificates
to the Warrant Holder representing ownership of the number of shares of Warrant
Stock purchased by Warrant Holder, and the number of Warrants remaining under
this Warrant Agreement shall be reduced by the number of Warrants exercised. As
used herein, the term "Warrant Holder" shall mean Moore, and any permitted
assignee of Moore.
e. EXERCISE PRICE.
--------------
The Exercise Price for each share of Warrant Stock shall be $1.45 per
share. If the Company subdivides or combines its outstanding shares of common
stock, by reclassification, recapitalization, reorganization, merger, or
otherwise, the Exercise Price shall be proportionately decreased or increased,
as the case may be.
f. PAYMENT OF EXERCISE PRICE.
-------------------------
Payment of the Exercise Price shall be made by cashier's or certified check
made payable to Company.
g. CASHLESS EXERCISE.
-----------------
(1) In the event the Company's common stock, no par value ("Common
Stock") is listed on a national securities exchange or traded over the counter
on an inter-dealer quotation system maintained by the National Association of
Securities Dealers, Inc. ("NASD"), and on the date of exercise, the fair market
value (defined below) of the Common Stock is Five Dollars ($5.00) or more, then,
the Warrant Holder shall have the right to convert the Warrants being exercised
("Conversion Right") into shares of Common Stock, without payment of the
exercise price, in accordance with paragraph (2) below. Upon exercise of the
Conversion Right, the Company shall deliver to the Warrant Holder (without
payment by the Warrant Holder of any of the exercise price) that number of
shares of Common Stock equal to the quotient obtained by dividing (i) the
3
<PAGE>
aggregate value of the Warrants at the time the Conversion Right is exercised
(determined by subtracting the aggregate exercise price for the exercised
Warrants from the aggregate fair market value at that time for the shares of
Common Stock issuable upon exercise of the Warrants as if no cashless exercise
were involved) by (ii) the fair market value of one share of Common Stock
immediately prior to the exercise of the Conversion Right. For example, if the
fair market value of the Common Stock is $6.00, and 5,000 Warrants are
exercised, the number of shares of Warrant Stock to be issued would be
calculated as follows: 5,000 x $1.45 = $7,250, which is the aggregate exercise
price for the Warrants. The aggregate fair market value for the Common Stock is
5,000 x $6.00 = $30,000. Therefore the total number of shares of Warrant Stock
to be issued would be $30,000 - 7,250/ $6.00 = 3,792 shares (rounded).
(2) As used in this paragraph (g), the "fair market value" per share of
Common Stock shall be the average of the closing sale prices of Common Stock on
the principal stock exchange on which the Common Stock is listed or admitted to
trading, or in the over-the-counter market as report by the NASD, for the ten
(10) trading days prior to the date of exercise of the Conversion Right; or,
during such time as there is not a market price available, the fair market value
as mutually determined by the Company and the Warrant Holder. No cashless
exercise of Warrants will be permitted if contrary to the laws of the state of
incorporation of the Company.
h. NO FRACTIONAL SHARES.
--------------------
No fractional share shall be issued on exercise of any Warrant.
i. LEGENDS.
-------
Prior to registration under paragraph 2 below (and, without impairing any
claim of any party under this Warrant Agreement, after such registration if any
Prospectus to be used in connection with a sale of the Warrant Stock fails to
comply with Section 10(a)(3) of the Securities Act of 1933), each certificate
for Warrant Stock issued on exercise of any Warrant shall be stamped or
otherwise imprinted with a legend, which provides substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 ("THE ACT") AND ARE "RESTRICTED SECURITIES" AS
THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SHARES MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF THE COMPANY."
4
<PAGE>
A legend referring to applicable state law may also be imprinted on the
share certificate.
2. REGISTRATION.
-------------
a. "PIGGY-BACK" REGISTRATION RIGHTS.
-------------------------------
If at any time or from time to time, but not more than two (2) times,
the Company shall determine to register any of its securities, either for its
own account or the account of any other security holder or holders ("Holders")
on a registration statement under the Securities Act of 1933 (the "Act"), other
than on a Form S-8, the Company will, (1) promptly give Warrant Holder written
notice thereof; and (2) include in such registration (and any related
qualifications under blue sky laws or other compliance) and in any underwriting
involved therein, all shares of the Warrant Stock underlying the Warrants, as
may be requested by Moore in writing not more than ten days after receipt of the
notice from the Company, subject to the terms of paragraph 2(b) below.
b. MARKET CONDITIONS.
-----------------
The offering price of the Warrant Stock and the number of shares of
Warrant Stock to be included in any registration which includes the registration
of other Company securities or any separate registration of the Warrant Stock,
shall be determined by then existing marketing conditions and by negotiations
between the Company, the Warrant Holder and one or more underwriters, if any,
who are participating in the offering of the Warrant Stock. In connection with
any registration of the Warrant Stock, the Company and Warrant Holder agree to
execute the usual and customary indemnifications and such other instruments and
documents as an underwriter may reasonably require.
c. INFORMATION.
-----------
The Warrant Holder shall furnish to the Company, in writing, such
information regarding Warrant Holder as the Company may request and shall
further provide such consents as may be required by the Securities and Exchange
Commission or applicable state securities administrators, which shall state that
any information provided to Company pursuant to this Warrant Agreement can be
used in any registration which includes the Warrant Stock.
d. SHELF REGISTRATION.
------------------
The Company shall use its best efforts to keep any registration of the
Warrant Stock effective through the earlier of: (1) the Warrant Expiration Date,
or (2) until all of the Warrants granted hereunder have been exercised.
5
<PAGE>
e. RESERVATION OF SHARES OF COMMON STOCK.
-------------------------------------
The Company agrees that the number of shares of Common Stock
sufficient to provide for the exercise of the Warrants shall at all times during
the term of this Agreement be reserved for exercise.
3. EXPENSES OF REGISTRATION.
------------------------
All expenses (which term does not include underwriting discounts or
commissions or Warrant Holder's out-of-pocket expenses) incurred in connection
with any registration of the Warrant Stock, including, but not limited to
printing expenses, fees and disbursements of counsel for the Company, and
accounting fees, shall be borne by Company, provided however, that the Company
shall not be required to pay any fees for any legal counsel retained by the
Warrant Holder in connection with the negotiation and preparation of this
Warrant Agreement or any registration.
4. INDEMNIFICATION.
---------------
a. INDEMNIFICATION BY COMPANY.
--------------------------
The Company hereby agrees to indemnify, defend, and hold harmless
Warrant Holder, against all claims, losses, damages, and liabilities, and
actions in respect to such claims, losses, damages, and liabilities, including
reasonable attorneys' fees, arising out of or based on (1) any untrue statement
or alleged untrue statement of a material fact made by the Company, in any
prospectus, offering circular, or other document (including any related
registration statement, notification or the like) incident to any such
registration, (2) any omission or alleged omission, by the Company, to state in
any such prospectus, offering circular, or other document a material fact
required to be stated in it or necessary to make the statements in it not
misleading, or (3) any violation by the Company of any rule or regulation
promulgated under the Act applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration.
b. INDEMNIFICATION BY WARRANT HOLDER.
---------------------------------
Warrant Holder hereby agrees to indemnify, defend, and hold harmless
the Company, its officers and directors, each person, if any, who controls the
Company (within the meaning of the Act), against all claims, losses, damages,
liabilities, and actions in respect of such claims, losses, damages, and
liabilities, including reasonable attorneys' fees, arising out of or based on
(1) any untrue statement or alleged untrue statement of a material fact made by
Warrant Holder in any such registration statement or any prospectus, offering
circular, or other document incident to such registration, (2) any omission or
alleged omission by the Warrant
6
<PAGE>
Holder to state in any such registration statement, prospectus, offering
circular, or other document a material fact required to be stated in it or
necessary to make the statements in it not misleading, but only to the extent,
that such untrue statement, alleged untrue statement, omission, or alleged
omission as specified in (1) and (2) above, is made in such registration
statement, prospectus, offering circular, or other document in reliance on and
in conformity with written information furnished to the Company by the Warrant
Holder for use in, or in connection therewith, or (3) any disposition by Warrant
Holder of the Warrant Stock, which disposition is or is claimed to be in
violation of the Act.
c. REQUIRED NOTICES.
----------------
Each party entitled to indemnification under paragraphs 4(a) and 4(b)
shall give notice to the party required to provide indemnification, promptly
after the indemnified party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the indemnifying party to assume the
defense of any such claim or any litigation resulting from it, provided that
counsel for the indemnifying party who shall conduct the defense of such claim
or litigation shall be approved by the indemnified party (whose approval shall
not be unreasonably withheld), and that the indemnified party may participate in
such defense at its expense, and provided further that the failure of any
indemnified party to give notice as provided in this paragraph 4(c) shall not
relieve the indemnifying party of its obligations under paragraphs 4(a) and
4(b). No indemnifying party, in the defense of any such claim or litigation,
shall, without the consent of the indemnified party, consent to entry of any
judgment or enter into any settlement that does not include as an unconditional
term the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect to such claim or litigation.
5. MISCELLANEOUS.
-------------
a. NOTICES.
-------
All notices, requests, demands and other communications required or
permitted to be given hereunder shall be deemed to have been duly given if in
writing and delivered personally, given by prepaid telegram, or mailed first
class, postage prepaid, registered or certified mail, return receipt requested,
as follows:
If to Company: Janex International, Inc.,
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
Attention: President
7
<PAGE>
With Copy to: TILLES, WEBB, KULLA & GRANT, ALC
433 North Camden Drive, Suite 1010
Beverly Hills, CA 90210
Attn: Ronald J. Grant, Esq.
If to Moore: Mr. Howard Moore, Co-Trustee
15 Muir Beach Circle
Corona Del Mar, CA 92625
With Copy to: Bruce W. Feuchter, Esq.
Stradling, Yocca, Carlson & Rauth, ALC
600 Newport Center Drive, Suite 1600
Newport Beach, CA 92660
Any party may change the address to which such communications are to be
directed to it by giving written notice to the other parties. Except as
otherwise provided in this Agreement, all notices shall be deemed to be given
when delivered in person, or if placed in the mail as aforesaid, then three (3)
days thereafter.
b. MODIFICATIONS.
-------------
The parties may, by mutual consent, amend, modify, supplement and
waive any right under this Warrant Agreement in any manner agreed by them in
writing at any time.
c. ENTIRE AGREEMENT.
----------------
This Warrant Agreement and any documents, instruments or agreements
expressly referred to herein, set forth the entire agreement and understanding
of the parties with respect to the transactions contemplated hereby and
supersede all prior agreements, arrangements and understandings relating to the
subject matter hereof.
d. HEADINGS.
--------
The section and paragraph headings contained in this Warrant Agreement
are for convenient reference only, and shall not in any way affect the meaning
or interpretation hereof.
e. APPLICABLE LAW.
--------------
This Warrant Agreement shall be governed by and construed in
accordance with the laws of the state of California.
f. SEVERABILITY.
------------
If any provision of this Warrant Agreement shall be held to be
invalid, illegal or unenforceable, it shall be deemed severable from the
remaining provisions hereof which shall remain in full force and effect.
8
<PAGE>
g. WAIVER.
------
No waiver of any provision of this Warrant Agreement or any breach
thereof shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar) or any other breach hereunder nor shall such
waiver constitute a continuing waiver. Either party may waive performance of
any provision of this Warrant Agreement, the non-performance of which would
otherwise constitute a breach of this Agreement, including but not limited to
the non-performance of any condition precedent to such party's performance,
without affecting the enforceability of this Warrant Agreement and the
provisions contained herein.
h. SUCCESSORS AND ASSIGNS.
----------------------
Subject to the provisions set forth below, the terms and conditions of
this Warrant Agreement shall inure to the benefit of and be binding upon the
respective successors and assigns of the parties hereto. Neither this Warrant
Agreement nor any interest herein, may be assigned or transferred by Moore
without the prior written consent of the Company.
i. COUNTERPARTS.
------------
This Warrant Agreement may be executed in counterparts each of which
shall be deemed an original and all of which together shall be one and the same
instrument.
j. REFERENCE TO REVOLVING CREDIT AGREEMENT.
---------------------------------------
This Warrant Agreement is entered into pursuant to the provisions of a
Revolving Credit Agreement, dated April 19, 1996, entered into between the
Company and Moore.
IN WITNESS WHEREOF, the parties have executed this instrument as of the
date first above written.
"WARRANT HOLDER" "COMPANY"
-------------- -------
THE HOWARD AND HELENE MOORE
LIVING TRUST DATED JUNE 28, 1991 JANEX INTERNATIONAL, INC.
By: /s/ HOWARD W. MOORE By: /s/ SHELDON F. MORICK
---------------------------- -----------------------
Howard W. Moore, Co-Trustee Sheldon F. Morick,
President
By: /s/ HELENE Z. MOORE
----------------------------
Helene Z. Moore, Co-Trustee
By: /s/ MICHAEL J. MOORE
----------------------------
Michael J. Moore, Co-Trustee
9
<PAGE>
EXHIBIT 4.11
WARRANT AGREEMENT DATED JUNE 29, 1996,
BY AND BETWEEN THE COMPANY AND LESLIE FRIEDLAND
<PAGE>
WARRANT AGREEMENT
-----------------
This Warrant Agreement (the "Warrant Agreement") is made this 28th day of
June, 1996, by and between Janex International, Inc., a Colorado Corporation
(the "Company") and Leslie Friedland ("Friedland"). The parties agree as
follows:
1. THE WARRANT.
-----------
a. GRANT OF WARRANT.
----------------
The Company hereby grants warrants ("Warrants") to Friedland to
purchase up to TWO HUNDRED EIGHTY TWO THOUSAND NINE HUNDRED NINETY FOUR
(282,994) shares of the Company's restricted common stock, no par value (the
"Warrant Stock") or any other replacement security of Company whether by way of
merger, consolidation, exchange, recapitalization, or other reorganization of
the Company, pursuant to the terms and conditions of this Warrant Agreement. The
Warrants shall be evidenced solely by this Warrant Agreement.
b. TERM OF WARRANT.
---------------
The term of the Warrants granted under this Warrant Agreement shall
commence on June 28, 1996, and shall terminate at 5:00 p.m., California time, on
June 28, 2000. The termination date of the Warrants is referred to herein as the
"Warrant Expiration Date."
c. VESTING OF WARRANTS. No Warrant is exercisable until vested. The
-------------------
282,994 Warrants granted hereunder, shall vest as follows:
<TABLE>
<CAPTION>
Period (1) Warrants Vested
---------- ---------------
<S> <C>
1st 6-month period 70,749
2nd 6-month period 70,749
3rd 6-month period 70,748
4th 6-month period 70,748
</TABLE>
- -------------------
(1) Refers to 6-month periods after the date hereof.
The first 70,749 Warrants vest immediately upon the execution of this Agreement.
The remaining Warrants vest on the first day of each period indicated in the
foregoing schedule, provided, however, if the indebtedness to Friedland is paid
off by the Company during any 6-month period, other than the 4th 6-month period,
the Warrants that vest in the remaining 6-month periods shall be void. For
example, if the indebtedness is paid off during the 3rd 6-month period, then
212,246 Warrants will be vested and 70,748 Warrants will be unvested and will be
void.
<PAGE>
d. EXERCISE OF WARRANT.
-------------------
Only vested Warrants may be exercised. No Warrant may be exercised
within six months of the date of this Warrant Agreement. Vested Warrants may be
exercised in full or in part (but for not less than 5,000 shares at one time) at
any time prior to the Warrant Expiration Date, by a written notice (the
"Notice") to the Company, specifying the number of shares of Warrant Stock to be
purchased, accompanied by the payment of the exercise price (the "Exercise
Price") specified in paragraph 1(e). Upon receipt of the Notice accompanied by
the Exercise Price, the Company shall cause to be delivered share certificates
to the Warrant Holder representing ownership of the number of shares of Warrant
Stock purchased by Warrant Holder, and the number of Warrants remaining under
this Warrant Agreement shall be reduced by the number of Warrants exercised. As
used herein, the term "Warrant Holder" shall mean Friedland, and any permitted
assignee of Friedland.
e. EXERCISE PRICE.
--------------
The Exercise Price for each share of Warrant Stock shall be $1.45 per
share. If the Company subdivides or combines its outstanding shares of common
stock, by reclassification, recapitalization, reorganization, merger, or
otherwise, the Exercise Price shall be proportionately decreased or increased,
as the case may be.
f. PAYMENT OF EXERCISE PRICE.
-------------------------
Payment of the Exercise Price shall be made by cashier's or certified
check made payable to Company.
g. CASHLESS EXERCISE.
-----------------
(1) In the event the Company's common stock, no par value
("Common Stock") is listed on a national securities exchange or traded over the
counter on an inter-dealer quotation system maintained by the National
Association of Securities Dealers, Inc. ("NASD"), and on the date of exercise,
the fair market value (defined below) of the Common Stock is Five Dollars
($5.00) or more, then, the Warrant Holder shall have the right to convert the
Warrants being exercised ("Conversion Right") into shares of Common Stock,
without payment of the exercise price, in accordance with paragraph (2) below.
Upon exercise of the Conversion Right, the Company shall deliver to the Warrant
Holder (without payment by the Warrant Holder of any of the exercise price) that
number of shares of Common Stock equal to the quotient obtained by dividing (i)
the aggregate value of the Warrants at the time the Conversion Right is
exercised (determined by subtracting the aggregate exercise price for the
exercised Warrants from the aggregate fair market value at that time for the
shares of Common Stock issuable upon exercise of the Warrants as if no cashless
exercise were involved) by (ii) the
2
<PAGE>
fair market value of one share of Common Stock immediately prior to the exercise
of the Conversion Right. For example, if the fair market value of the Common
Stock is $6.00, and 5,000 Warrants are exercised, the number of shares of
Warrant Stock to be issued would be calculated as follows: 5,000 x $1.45 =
$7,250, which is the aggregate exercise price for the Warrants. The aggregate
fair market value for the Common Stock is 5,000 x $6.00 = $30,000. Therefore the
total number of shares of Warrant Stock to be issued would be $30,000 - 7,250/
$6.00 = 3,792 shares (rounded).
(2) As used in this paragraph (g), the "fair market value" per
share of Common Stock shall be the average of the closing sale prices of Common
Stock on the principal stock exchange on which the Common Stock is listed or
admitted to trading, or in the over-the-counter market as report by the NASD,
for the ten (10) trading days prior to the date of exercise of the Conversion
Right; or, during such time as there is not a market price available, the fair
market value as mutually determined by the Company and the Warrant Holder. No
cashless exercise of Warrants will be permitted if contrary to the laws of the
state of incorporation of the Company.
h. NO FRACTIONAL SHARES.
--------------------
No fractional share shall be issued on exercise of any Warrant.
i. LEGENDS.
-------
Prior to registration under paragraph 2 below (and, without impairing
any claim of any party under this Warrant Agreement, after such registration if
any Prospectus to be used in connection with a sale of the Warrant Stock fails
to comply with Section 10(a)(3) of the Securities Act of 1933), each certificate
for Warrant Stock issued on exercise of any Warrant shall be stamped or
otherwise imprinted with a legend, which provides substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 ("THE ACT") AND ARE "RESTRICTED SECURITIES" AS
THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SHARES MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF THE COMPANY."
A legend referring to applicable state law may also be imprinted on the
share certificate.
3
<PAGE>
2. REGISTRATION.
-------------
a. "PIGGY-BACK" REGISTRATION RIGHTS.
-------------------------------
If at any time or from time to time, but not more than two (2) times,
the Company shall determine to register any of its securities, either for its
own account or the account of any other security holder or holders ("Holders")
on a registration statement under the Securities Act of 1933 (the "Act"), other
than on a Form S-8, the Company will, (1) promptly give Warrant Holder written
notice thereof; and (2) include in such registration (and any related
qualifications under blue sky laws or other compliance) and in any underwriting
involved therein, all shares of the Warrant Stock underlying the Warrants, as
may be requested by Friedland in writing not more than ten days after receipt of
the notice from the Company, subject to the terms of paragraph 2(b) below.
b. MARKET CONDITIONS.
-----------------
The offering price of the Warrant Stock and the number of shares of
Warrant Stock to be included in any registration which includes the registration
of other Company securities or any separate registration of the Warrant Stock,
shall be determined by then existing marketing conditions and by negotiations
between the Company, the Warrant Holder and one or more underwriters, if any,
who are participating in the offering of the Warrant Stock. In connection with
any registration of the Warrant Stock, the Company and Warrant Holder agree to
execute the usual and customary indemnifications and such other instruments and
documents as an underwriter may reasonably require.
c. INFORMATION.
-----------
The Warrant Holder shall furnish to the Company, in writing, such
information regarding Warrant Holder as the Company may request and shall
further provide such consents as may be required by the Securities and Exchange
Commission or applicable state securities administrators, which shall state that
any information provided to Company pursuant to this Warrant Agreement can be
used in any registration which includes the Warrant Stock.
d. SHELF REGISTRATION.
------------------
The Company shall use its best efforts to keep any registration of the
Warrant Stock effective through the earlier of: (1) the Warrant Expiration Date,
or (2) until all of the Warrants granted hereunder have been exercised.
e. RESERVATION OF SHARES OF COMMON STOCK.
-------------------------------------
The Company agrees that the number of shares of Common Stock
sufficient to provide for the exercise of the Warrants shall
4
<PAGE>
at all times during the term of this Agreement be reserved for exercise.
3. EXPENSES OF REGISTRATION.
------------------------
All expenses (which term does not include underwriting discounts or
commissions or Warrant Holder's out-of-pocket expenses) incurred in connection
with any registration of the Warrant Stock, including, but not limited to
printing expenses, fees and disbursements of counsel for the Company, and
accounting fees, shall be borne by Company, provided however, that the Company
shall not be required to pay any fees for any legal counsel retained by the
Warrant Holder in connection with the negotiation and preparation of this
Warrant Agreement or any registration.
4. INDEMNIFICATION.
---------------
a. INDEMNIFICATION BY COMPANY.
--------------------------
The Company hereby agrees to indemnify, defend, and hold harmless
Warrant Holder, against all claims, losses, damages, and liabilities, and
actions in respect to such claims, losses, damages, and liabilities, including
reasonable attorneys' fees, arising out of or based on (1) any untrue statement
or alleged untrue statement of a material fact made by the Company, in any
prospectus, offering circular, or other document (including any related
registration statement, notification or the like) incident to any such
registration, (2) any omission or alleged omission, by the Company, to state in
any such prospectus, offering circular, or other document a material fact
required to be stated in it or necessary to make the statements in it not
misleading, or (3) any violation by the Company of any rule or regulation
promulgated under the Act applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration.
b. INDEMNIFICATION BY WARRANT HOLDER.
---------------------------------
Warrant Holder hereby agrees to indemnify, defend, and hold harmless
the Company, its officers and directors, each person, if any, who controls the
Company (within the meaning of the Act), against all claims, losses, damages,
liabilities, and actions in respect of such claims, losses, damages, and
liabilities, including reasonable attorneys' fees, arising out of or based on
(1) any untrue statement or alleged untrue statement of a material fact made by
Warrant Holder in any such registration statement or any prospectus, offering
circular, or other document incident to such registration, (2) any omission or
alleged omission by the Warrant Holder to state in any such registration
statement, prospectus, offering circular, or other document a material fact
required to be stated in it or necessary to make the statements in it not
misleading, but only to the extent, that such untrue statement,
5
<PAGE>
alleged untrue statement, omission, or alleged omission as specified in (1) and
(2) above, is made in such registration statement, prospectus, offering
circular, or other document in reliance on and in conformity with written
information furnished to the Company by the Warrant Holder for use in, or in
connection therewith, or (3) any disposition by Warrant Holder of the Warrant
Stock, which disposition is or is claimed to be in violation of the Act.
c. REQUIRED NOTICES.
----------------
Each party entitled to indemnification under paragraphs 4(a) and 4(b)
shall give notice to the party required to provide indemnification, promptly
after the indemnified party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the indemnifying party to assume the
defense of any such claim or any litigation resulting from it, provided that
counsel for the indemnifying party who shall conduct the defense of such claim
or litigation shall be approved by the indemnified party (whose approval shall
not be unreasonably withheld), and that the indemnified party may participate in
such defense at its expense, and provided further that the failure of any
indemnified party to give notice as provided in this paragraph 4(c) shall not
relieve the indemnifying party of its obligations under paragraphs 4(a) and
4(b). No indemnifying party, in the defense of any such claim or litigation,
shall, without the consent of the indemnified party, consent to entry of any
judgment or enter into any settlement that does not include as an unconditional
term the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect to such claim or litigation.
5. MISCELLANEOUS.
-------------
a. NOTICES.
-------
All notices, requests, demands and other communications required or
permitted to be given hereunder shall be deemed to have been duly given if in
writing and delivered personally, given by prepaid telegram, or mailed first
class, postage prepaid, registered or certified mail, return receipt requested,
as follows:
If to Company: Janex International, Inc.,
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
Attention: President
With Copy to: TILLES, WEBB, KULLA & GRANT, ALC
433 North Camden Drive, Suite 1010
Beverly Hills, CA 90210
Attn: Ronald J. Grant, Esq.
6
<PAGE>
If to Friedland: Mr. Leslie Friedland
615 Hope Road, Bldg. One, 1st Floor
Eaton Town, NJ 07724
Any party may change the address to which such communications are to be
directed to it by giving written notice to the other parties. Except as
otherwise provided in this Agreement, all notices shall be deemed to be given
when delivered in person, or if placed in the mail as aforesaid, then three (3)
days thereafter.
b. MODIFICATIONS.
-------------
The parties may, by mutual consent, amend, modify, supplement and
waive any right under this Warrant Agreement in any manner agreed by them in
writing at any time.
c. ENTIRE AGREEMENT.
----------------
This Warrant Agreement and any documents, instruments or agreements
expressly referred to herein, set forth the entire agreement and understanding
of the parties with respect to the transactions contemplated hereby and
supersede all prior agreements, arrangements and understandings relating to the
subject matter hereof.
d. HEADINGS.
--------
The section and paragraph headings contained in this Warrant Agreement
are for convenient reference only, and shall not in any way affect the meaning
or interpretation hereof.
e. APPLICABLE LAW.
--------------
This Warrant Agreement shall be governed by and construed in
accordance with the laws of the state of California.
f. SEVERABILITY.
------------
If any provision of this Warrant Agreement shall be held to be
invalid, illegal or unenforceable, it shall be deemed severable from the
remaining provisions hereof which shall remain in full force and effect.
g. WAIVER.
------
No waiver of any provision of this Warrant Agreement or any breach
thereof shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar) or any other breach hereunder nor shall such
waiver constitute a continuing waiver. Either party may waive performance of
any provision of this Warrant Agreement, the non-performance of which would
otherwise constitute a breach of this Agreement, including but not
7
<PAGE>
limited to the non-performance of any condition precedent to such party's
performance, without affecting the enforceability of this Warrant Agreement and
the provisions contained herein.
h. SUCCESSORS AND ASSIGNS.
----------------------
Subject to the provisions set forth below, the terms and conditions of
this Warrant Agreement shall inure to the benefit of and be binding upon the
respective successors and assigns of the parties hereto. Neither this Warrant
Agreement nor any interest herein, may be assigned or transferred by Friedland
without the prior written consent of the Company.
i. COUNTERPARTS.
------------
This Warrant Agreement may be executed in counterparts each of which
shall be deemed an original and all of which together shall be one and the same
instrument.
j. REFERENCE TO EXTENSION AGREEMENT.
--------------------------------
This Warrant Agreement is entered into pursuant to the provisions of a
Payment Extension Agreement, dated June 20, 1996, entered into between the
Company and Friedland.
IN WITNESS WHEREOF, the parties have executed this instrument as of the
date first above written.
"WARRANT HOLDER" "COMPANY"
-------------- -------
JANEX INTERNATIONAL, INC.
/s/ LESLIE FRIEDLAND By:/s/ SHELDON F. MORICK
- ------------------------------- -----------------------
Leslie Friedland, an individual Sheldon F. Morick,
President
8
<PAGE>
EXHIBIT 4.12
WARRANT AGREEMENT DATED JUNE 28, 1996,
BY AND BETWEEN THE COMPANY AND DANIEL LESNICK
<PAGE>
WARRANT AGREEMENT
-----------------
This Warrant Agreement (the "Warrant Agreement") is made this 28th day of
June, 1996, by and between Janex International, Inc., a Colorado Corporation
(the "Company") and Daniel Lesnick ("Lesnick"). The parties agree as follows:
1. THE WARRANT.
-----------
A. GRANT OF WARRANT.
----------------
The Company hereby grants warrants ("Warrants") to Lesnick to purchase
up to ONE HUNDRED SIXTY SEVEN THOUSAND NINE HUNDRED NINETY FOUR (167,994) shares
of the Company's restricted common stock, no par value (the "Warrant Stock") or
any other replacement security of Company whether by way of merger,
consolidation, exchange, recapitalization, or other reorganization of the
Company, pursuant to the terms and conditions of this Warrant Agreement. The
Warrants shall be evidenced solely by this Warrant Agreement.
B. TERM OF WARRANT.
---------------
The term of the Warrants granted under this Warrant Agreement shall
commence on June 28, 1996, and shall terminate at 5:00 p.m., California time, on
June 28, 2000. The termination date of the Warrants is referred to herein as the
"Warrant Expiration Date".
C. VESTING OF WARRANTS. No Warrant is exercisable until vested. The
-------------------
167,994 Warrants granted hereunder, shall vest as follows:
<TABLE>
<CAPTION>
Period (1) Warrants Vested
---------- ---------------
<S> <C>
1st 6-month period 41,999
2nd 6-month period 41,999
3rd 6-month period 41,998
4th 6-month period 41,998
</TABLE>
- -------------------
(1) Refers to 6-month periods after the date hereof.
The first 41,999 Warrants vest immediately upon the execution of this Agreement.
The remaining Warrants vest on the first day of each period indicated in the
foregoing schedule, provided, however, if the indebtedness to Lesnick is paid
off by the Company during any 6-month period, other than the 4th 6-month period,
the Warrants that vest in the remaining 6-month periods shall be void. For
example, if the indebtedness is paid off during the 3rd 6-month period, then
125,996 Warrants will be vested and 41,998 Warrants will be unvested and will be
void.
<PAGE>
D. EXERCISE OF WARRANT.
-------------------
Only vested Warrants may be exercised. No Warrant may be exercised
within six months of the date of this Warrant Agreement. Vested Warrants may be
exercised in full or in part (but for not less than 5,000 shares at one time) at
any time prior to the Warrant Expiration Date, by a written notice (the
"Notice") to the Company, specifying the number of shares of Warrant Stock to be
purchased, accompanied by the payment of the exercise price (the "Exercise
Price") specified in paragraph 1(e). Upon receipt of the Notice accompanied by
the Exercise Price, the Company shall cause to be delivered share certificates
to the Warrant Holder representing ownership of the number of shares of Warrant
Stock purchased by Warrant Holder, and the number of Warrants remaining under
this Warrant Agreement shall be reduced by the number of Warrants exercised. As
used herein, the term "Warrant Holder" shall mean Lesnick, and any permitted
assignee of Lesnick.
E. EXERCISE PRICE.
--------------
The Exercise Price for each share of Warrant Stock shall be $1.45 per
share. If the Company subdivides or combines its outstanding shares of common
stock, by reclassification, recapitalization, reorganization, merger, or
otherwise, the Exercise Price shall be proportionately decreased or increased,
as the case may be.
F. PAYMENT OF EXERCISE PRICE.
-------------------------
Payment of the Exercise Price shall be made by cashier's or certified
check made payable to Company.
G. CASHLESS EXERCISE.
-----------------
(1) In the event the Company's common stock, no par value ("Common
Stock") is listed on a national securities exchange or traded over the counter
on an inter-dealer quotation system maintained by the National Association of
Securities Dealers, Inc. ("NASD"), and on the date of exercise, the fair market
value (defined below) of the Common Stock is Five Dollars ($5.00) or more, then,
the Warrant Holder shall have the right to convert the Warrants being exercised
("Conversion Right") into shares of Common Stock, without payment of the
exercise price, in accordance with paragraph (2) below. Upon exercise of the
Conversion Right, the Company shall deliver to the Warrant Holder (without
payment by the Warrant Holder of any of the exercise price) that number of
shares of Common Stock equal to the quotient obtained by dividing (i) the
aggregate value of the Warrants at the time the Conversion Right is exercised
(determined by subtracting the aggregate exercise price for the exercised
Warrants from the aggregate fair market value at that time for the shares of
Common Stock issuable upon exercise of the Warrants as if no cashless exercise
were involved) by (ii) the
2
<PAGE>
fair market value of one share of Common Stock immediately prior to the exercise
of the Conversion Right. For example, if the fair market value of the Common
Stock is $6.00, and 5,000 Warrants are exercised, the number of shares of
Warrant Stock to be issued would be calculated as follows: 5,000 x $1.45 =
$7,250, which is the aggregate exercise price for the Warrants. The aggregate
fair market value for the Common Stock is 5,000 x $6.00 = $30,000. Therefore the
total number of shares of Warrant Stock to be issued would be $30,000 - 7,250/
$6.00 = 3,792 shares (rounded).
(2) As used in this paragraph (g), the "fair market value" per share
of Common Stock shall be the average of the closing sale prices of Common Stock
on the principal stock exchange on which the Common Stock is listed or admitted
to trading, or in the over-the-counter market as report by the NASD, for the ten
(10) trading days prior to the date of exercise of the Conversion Right; or,
during such time as there is not a market price available, the fair market value
as mutually determined by the Company and the Warrant Holder. No cashless
exercise of Warrants will be permitted if contrary to the laws of the state of
incorporation of the Company.
H. NO FRACTIONAL SHARES.
--------------------
No fractional share shall be issued on exercise of any Warrant.
I. LEGENDS.
-------
Prior to registration under paragraph 2 below (and, without impairing
any claim of any party under this Warrant Agreement, after such registration if
any Prospectus to be used in connection with a sale of the Warrant Stock fails
to comply with Section 10(a)(3) of the Securities Act of 1933), each certificate
for Warrant Stock issued on exercise of any Warrant shall be stamped or
otherwise imprinted with a legend, which provides substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 ("THE ACT") AND ARE "RESTRICTED SECURITIES" AS
THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SHARES MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF THE COMPANY."
A legend referring to applicable state law may also be imprinted on the
share certificate.
3
<PAGE>
2. REGISTRATION.
-------------
A. "PIGGY-BACK" REGISTRATION RIGHTS.
-------------------------------
If at any time or from time to time, but not more than two (2) times,
the Company shall determine to register any of its securities, either for its
own account or the account of any other security holder or holders ("Holders")
on a registration statement under the Securities Act of 1933 (the "Act"), other
than on a Form S-8, the Company will, (1) promptly give Warrant Holder written
notice thereof; and (2) include in such registration (and any related
qualifications under blue sky laws or other compliance) and in any underwriting
involved therein, all shares of the Warrant Stock underlying the Warrants, as
may be requested by Lesnick in writing not more than ten days after receipt of
the notice from the Company, subject to the terms of paragraph 2(b) below.
B. MARKET CONDITIONS.
-----------------
The offering price of the Warrant Stock and the number of shares of
Warrant Stock to be included in any registration which includes the registration
of other Company securities or any separate registration of the Warrant Stock,
shall be determined by then existing marketing conditions and by negotiations
between the Company, the Warrant Holder and one or more underwriters, if any,
who are participating in the offering of the Warrant Stock. In connection with
any registration of the Warrant Stock, the Company and Warrant Holder agree to
execute the usual and customary indemnifications and such other instruments and
documents as an underwriter may reasonably require.
C. INFORMATION.
-----------
The Warrant Holder shall furnish to the Company, in writing, such
information regarding Warrant Holder as the Company may request and shall
further provide such consents as may be required by the Securities and Exchange
Commission or applicable state securities administrators, which shall state that
any information provided to Company pursuant to this Warrant Agreement can be
used in any registration which includes the Warrant Stock.
D. SHELF REGISTRATION.
------------------
The Company shall use its best efforts to keep any registration of the
Warrant Stock effective through the earlier of: (1) the Warrant Expiration Date,
or (2) until all of the Warrants granted hereunder have been exercised.
E. RESERVATION OF SHARES OF COMMON STOCK.
-------------------------------------
The Company agrees that the number of shares of Common Stock
sufficient to provide for the exercise of the Warrants shall
4
<PAGE>
at all times during the term of this Agreement be reserved for exercise.
3. EXPENSES OF REGISTRATION.
------------------------
All expenses (which term does not include underwriting discounts or
commissions or Warrant Holder's out-of-pocket expenses) incurred in connection
with any registration of the Warrant Stock, including, but not limited to
printing expenses, fees and disbursements of counsel for the Company, and
accounting fees, shall be borne by Company, provided however, that the Company
shall not be required to pay any fees for any legal counsel retained by the
Warrant Holder in connection with the negotiation and preparation of this
Warrant Agreement or any registration.
4. INDEMNIFICATION.
---------------
A. INDEMNIFICATION BY COMPANY.
--------------------------
The Company hereby agrees to indemnify, defend, and hold harmless
Warrant Holder, against all claims, losses, damages, and liabilities, and
actions in respect to such claims, losses, damages, and liabilities, including
reasonable attorneys' fees, arising out of or based on (1) any untrue statement
or alleged untrue statement of a material fact made by the Company, in any
prospectus, offering circular, or other document (including any related
registration statement, notification or the like) incident to any such
registration, (2) any omission or alleged omission, by the Company, to state in
any such prospectus, offering circular, or other document a material fact
required to be stated in it or necessary to make the statements in it not
misleading, or (3) any violation by the Company of any rule or regulation
promulgated under the Act applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration.
B. INDEMNIFICATION BY WARRANT HOLDER.
---------------------------------
Warrant Holder hereby agrees to indemnify, defend, and hold harmless
the Company, its officers and directors, each person, if any, who controls the
Company (within the meaning of the Act), against all claims, losses, damages,
liabilities, and actions in respect of such claims, losses, damages, and
liabilities, including reasonable attorneys' fees, arising out of or based on
(1) any untrue statement or alleged untrue statement of a material fact made by
Warrant Holder in any such registration statement or any prospectus, offering
circular, or other document incident to such registration, (2) any omission or
alleged omission by the Warrant Holder to state in any such registration
statement, prospectus, offering circular, or other document a material fact
required to be stated in it or necessary to make the statements in it not
misleading, but only to the extent, that such untrue statement,
5
<PAGE>
alleged untrue statement, omission, or alleged omission as specified in (1) and
(2) above, is made in such registration statement, prospectus, offering
circular, or other document in reliance on and in conformity with written
information furnished to the Company by the Warrant Holder for use in, or in
connection therewith, or (3) any disposition by Warrant Holder of the Warrant
Stock, which disposition is or is claimed to be in violation of the Act.
C. REQUIRED NOTICES.
----------------
Each party entitled to indemnification under paragraphs 4(a) and 4(b)
shall give notice to the party required to provide indemnification, promptly
after the indemnified party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the indemnifying party to assume the
defense of any such claim or any litigation resulting from it, provided that
counsel for the indemnifying party who shall conduct the defense of such claim
or litigation shall be approved by the indemnified party (whose approval shall
not be unreasonably withheld), and that the indemnified party may participate in
such defense at its expense, and provided further that the failure of any
indemnified party to give notice as provided in this paragraph 4(c) shall not
relieve the indemnifying party of its obligations under paragraphs 4(a) and
4(b). No indemnifying party, in the defense of any such claim or litigation,
shall, without the consent of the indemnified party, consent to entry of any
judgment or enter into any settlement that does not include as an unconditional
term the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect to such claim or litigation.
5. MISCELLANEOUS.
-------------
A. NOTICES.
-------
All notices, requests, demands and other communications required or
permitted to be given hereunder shall be deemed to have been duly given if in
writing and delivered personally, given by prepaid telegram, or mailed first
class, postage prepaid, registered or certified mail, return receipt requested,
as follows:
If to Company: Janex International, Inc.,
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
Attention: President
6
<PAGE>
With Copy to: TILLES, WEBB, KULLA & GRANT, ALC
433 North Camden Drive, Suite 1010
Beverly Hills, CA 90210
Attn: Ronald J. Grant, Esq.
If to Lesnick: Mr. Daniel Lesnick
______________________________
______________________________
Any party may change the address to which such communications are to be
directed to it by giving written notice to the other parties. Except as
otherwise provided in this Agreement, all notices shall be deemed to be given
when delivered in person, or if placed in the mail as aforesaid, then three (3)
days thereafter.
B. MODIFICATIONS.
-------------
The parties may, by mutual consent, amend, modify, supplement and
waive any right under this Warrant Agreement in any manner agreed by them in
writing at any time.
C. ENTIRE AGREEMENT.
----------------
This Warrant Agreement and any documents, instruments or agreements
expressly referred to herein, set forth the entire agreement and understanding
of the parties with respect to the transactions contemplated hereby and
supersede all prior agreements, arrangements and understandings relating to the
subject matter hereof.
D. HEADINGS.
--------
The section and paragraph headings contained in this Warrant Agreement
are for convenient reference only, and shall not in any way affect the meaning
or interpretation hereof.
E. APPLICABLE LAW.
--------------
This Warrant Agreement shall be governed by and construed in
accordance with the laws of the state of California.
F. SEVERABILITY.
------------
If any provision of this Warrant Agreement shall be held to be
invalid, illegal or unenforceable, it shall be deemed severable from the
remaining provisions hereof which shall remain in full force and effect.
G. WAIVER.
------
No waiver of any provision of this Warrant Agreement or any breach
thereof shall be deemed or shall constitute a waiver of
7
<PAGE>
any other provision hereof (whether or not similar) or any other breach
hereunder nor shall such waiver constitute a continuing waiver. Either party
may waive performance of any provision of this Warrant Agreement, the non-
performance of which would otherwise constitute a breach of this Agreement,
including but not limited to the non-performance of any condition precedent to
such party's performance, without affecting the enforceability of this Warrant
Agreement and the provisions contained herein.
H. SUCCESSORS AND ASSIGNS.
----------------------
Subject to the provisions set forth below, the terms and conditions of
this Warrant Agreement shall inure to the benefit of and be binding upon the
respective successors and assigns of the parties hereto. Neither this Warrant
Agreement nor any interest herein, may be assigned or transferred by Lesnick
without the prior written consent of the Company.
I. COUNTERPARTS.
------------
This Warrant Agreement may be executed in counterparts each of which
shall be deemed an original and all of which together shall be one and the same
instrument.
J. REFERENCE TO EXTENSION AGREEMENT.
--------------------------------
This Warrant Agreement is entered into pursuant to the provisions of a
Payment Extension Agreement, dated June 20, 1996, entered into between the
Company and Lesnick.
IN WITNESS WHEREOF, the parties have executed this instrument as of the
date first above written.
"WARRANT HOLDER" "COMPANY"
-------------- -------
JANEX INTERNATIONAL, INC.
/S/ DANIEL LESNICK By: /S/ SHELDON F. MORICK
- ----------------------------- ----------------------
Daniel Lesnick, an individual Sheldon F. Morick,
President
8
<PAGE>
EXHIBIT 10.20
EMPLOYMENT AGREEMENT, DATED APRIL 15, 1996,
BY AND BETWEEN THE COMPANY AND LAWRENCE BERNSTEIN
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of the 15th day of
April, 1996, by and among JANEX CORPORATION, a New Jersey corporation
("Employer"), JANEX INTERNATIONAL, INC., a Colorado corporation
("International"), and LAWRENCE I. BERNSTEIN ("Employee"). The parties hereto
agree as follows:
1. Duties. Employer hereby employs Employee as the Executive Vice
------
President-Marketing of Employer. Employee shall be responsible for Employer's
marketing, product development and product sourcing, and shall undertake such
other duties and responsibilities as the Chief Executive Officer of Employer may
reasonably request.
2. Term. The term of employment shall be one (1) year commencing as of
----
the date hereof, and ending April 14, 1997, subject to earlier termination as
set forth below. If Employer does not intend to extend the term of this
Agreement beyond April 14, 1997, Employer shall so notify Employee not later
than February 14, 1997.
3. Salary. Employee shall receive from Employer, as compensation for his
------
services a salary of Two Hundred Twenty Five Thousand Dollars ($225,000.00) per
year during Employee's employment hereunder. Said salary shall be payable in
equal semi-monthly installments on the first and 15th day of each month, subject
to usual withholding and other employment related taxes.
4. Annual Bonus Pool. Pursuant to an Employment Agreement between
-----------------
Sheldon F. Morick, the CEO of Employer and Employer, an Annual Bonus Pool has
been established. Employee shall be entitled to participate in the Bonus Pool.
5. Stock Options. Employee shall receive stock options to acquire up to
-------------
250,000 shares of International's restricted common stock, in accordance with
the provisions of the Stock Option Agreement attached hereto as Exhibit "A".
Said options shall vest as to 50,000 shares immediately, and 50,000 shares
yearly after the date hereof, subject to the terms and conditions of the Stock
Option Agreement. The exercise price shall be $1.45. As an inducement to
International to issue said stock options to Employee, Employee represents and
warrants to International, which shall be continuing representations and
warranties, as follows:
a. The stock options and the shares of International's common stock
to be acquired by Employee thereunder, shall be acquired for Employee's own
account and not with a view to or for sale in connection with any distribution
of such securities.
b. Employee has the requisite financial and/or business experience
necessary to evaluate the risks and rewards of investing in the shares of
International and Employee is capable of protecting himself in that regard.
<PAGE>
c. The shares of International stock that Employee will be acquiring
upon exercise of option(s), will be "restricted securities" as that term is
defined in Rule 144, promulgated under the Securities Act of 1933, as amended;
that the exemption from registration under Rule 144 will not be available in any
event for at least two (2) years from the date of issuance, and even then will
not be available unless (1) a public trading market then exists for the Stock,
(2) adequate information concerning International is then available to the
public, and (3) other terms and conditions of Rule 144 are complied with; and
that any sale of the Stock may be made by the undersigned only in accordance
with such terms and conditions.
d. That Employee understands that the certificates representing the
shares of International stock shall be stamped or otherwise imprinted with a
legend, which provides substantially as follows (but may also include references
to state law):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 ("THE ACT") AND ARE "RESTRICTED SECURITIES" AS
THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SHARES MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
e. If during the term of this Agreement, International proposes to
register any of its Common Stock under the Securities Act of 1933 ("Act"),
solely for cash, on a form that would also permit the registration of the shares
of Common Stock underlying the options held by Employee, Employer shall, each
time, give written notice to Employee. Upon the written request of Employee
given within twenty days of mailing of any such notice by Employer,
International shall use its best efforts to cause to be registered under the Act
that number of shares of Common Stock underlying such options, as Employee has
requested to be registered. Provided, however, that any such registration shall
be subject to the approval of the underwriter, in the underwriter's sole
discretion.
6. Vacation and Health Care Benefits. Employee shall be entitled to
---------------------------------
three (3) weeks vacation per year, during the term of this Agreement. During the
term of this Agreement, Employer shall, at Employer's expense, provide usual and
customary medical benefits for Employee and his dependents.
7. Taxes. Employee agrees to be responsible for the payment of any and
-----
all taxes, including but not limited to income, estate and gift taxes arising
out of or related to the compensation/ benefits (including the stock options)
received or to be received by Employee under this Agreement.
8. Business Expenses. During the term of this Agreement, Employer shall
-----------------
provide Employee with such appropriate credit cards as are reasonably necessary
for Employee to carry
2
<PAGE>
out his duties hereunder. Additionally, Employee shall be entitled to receive,
within 15 days after delivery by him of an itemized statement thereof and
appropriate receipts, reimbursement for all reasonable expenses incurred by him
in connection with the performance of his duties.
9. Termination.
-----------
a. Employee's employment may be immediately terminated by Employer
for cause. As used herein, the term "cause" shall mean (1) wilful and habitual
neglect of duty (not due to disability), which Employee fails to cure within ten
(10) days after written notice thereof; (2) intentional or grossly negligent
conduct toward, involving or affecting Employer; or (3) Employee's conviction of
a crime involving morale turpitude.
b. If Employee becomes permanently disabled, either Employer or
Employee may immediately terminate Employee's employment. As used herein, the
term "permanently disabled" shall mean if by reason of bodily injury or mental
or physical disease Employee is unable to perform substantially all of the
duties required of Employee under this Agreement for a continuous period of two
(2) months.
c. If there is a merger, or purchase or sale of stock or assets
involving a change in control of Employer, the Board of Directors may elect to
terminate Employee or if in connection therewith the Board substantially and
adversely alters Employee's duties or compensation, then Employee may elect to
resign, and in such event, Employer shall continue to pay Employee's salary (at
its then level) for the greater of: (1) six months from the date of termination,
or (2) for the balance of the one year term of this Agreement.
d. This Agreement shall terminate immediately upon the death of
Employee.
10. Restrictive Covenant. During the term of this Agreement, Employee
--------------------
shall devote his full time and efforts exclusively to Employer's business and
affairs and do his utmost to promote its interests. He shall not, directly or
indirectly, own, manage, operate, join, control, be employed by, or participate
in the ownership, management, operation, or control of, or be connected in any
manner with, any business which is competitive to that of Employer or its
affiliates or any business selling to or doing business with Employer or its
affiliates.
11. Inventions and Confidential Information.
---------------------------------------
a. Employee recognizes that his employment with Employer will
involve contact with information of substantial value to Employer, which is not
old and/or generally known in the trade and which gives Employer an advantage
over its competitors who do not know or use it, including but not limited to
designs, drawings, processes, inventions, prototypes and product concepts, sales
and customer information, and business and financial information, relating to
the business of Employer (herein referred to as "Confidential Information").
Employee shall at all times regard and preserve as confidential such
Confidential Information obtained by Employee from whatever source and will not,
either during his employment or
3
<PAGE>
thereafter, publish or disclose any part of such Confidential Information in any
manner, or use the same except on behalf of Employer, without the prior written
consent of Employer. Further, Employee shall, during his employment and
thereafter, refrain from any acts or omissions that would reduce the value of
such Confidential Information to Employer.
b. Employee shall promptly disclose in writing to Employer complete
information concerning each and every invention or discovery or improvement
thereof (herein referred to as "Inventions"), whether Employee considers them
patentable or not, conceived or reduced to practice by Employee, either solely
or in collaboration with others, during the period of Employee's employment by
Employer, and relating either directly or indirectly to the business of Employer
or to its actual or demonstrably anticipated research or development, or
resulting from any work performed by Employee for Employer or with the
equipment, supplies, facilities or Confidential Information of Employer.
c. Employee agrees that any such Inventions conceived or reduced to
practice by Employee during the period of Employee's employment by Employer, as
defined in paragraph 12b above, are the sole property of Employer, and Employee
hereby assigns and agrees to assign to Employer, its successors and assigns, all
of Employee's right, title and interest in and to said Inventions, and any
patent applications or Letters Patent thereon.
NOTIFICATION
------------
This Agreement does not apply to an invention for which no equipment,
supplies, facility, or trade secret information of the Employer was used
and which was developed entirely on the Employee's time, and (a) which does
not relate (1) to Employer's actual or demonstrably anticipated research or
development, or (b) which does not result from any work performed by
Employee for Employer, as defined and provided by Section 2870 of the
California Labor Code.
d. Employee agrees, at any time during Employee's employment or
thereafter, upon request and without further compensation therefor, but at no
expense to Employee, to do all lawful acts, including the execution of papers
and oaths and the giving of testimony, that in the opinion of Employer, its
successors or assigns, may be necessary or desirable for obtaining, sustaining,
reissuing or enforcing Letters Patent in the United States and throughout the
world for said Inventions, and for perfecting, recording or maintaining the
title of Employer, its successors and assigns, thereto.
e. For any Invention conceived or reduced to practice by Employee
during the period of Employee's employment by Employer, and up to and including
a period of twelve (12) months after termination of Employee's employment, but
which is claimed for any reason to belong to an entity or person other than
Employer, Employee shall promptly disclose the same in writing to Employer and
shall not disclose the same to others if Employer, within twenty (20)
4
<PAGE>
days thereafter, shall claim ownership of such Invention under the terms of this
Agreement. If Employer makes such a claim, Employee agrees that any controversy
relating to such claim will be settled and determined by binding arbitration in
accordance with the provisions of paragraph 12 below.
f. Employee agrees that all accounts, notes, data, sketches,
drawings and other documents and records, and all material and physical items of
any kind, including all reproductions and copies thereof, which relate in any
way to the business of Employer or contain Confidential Information, made by
Employee or that come into Employee's possession by reason of Employee's
employment are the property of Employer and will be promptly surrendered to
Employer at the conclusion of Employee's employment.
g. Employee agrees that Employee will not disclose to Employer or
induce Employer to use any invention or confidential information belonging to
any third party.
h. Employee affirms that Employee has no agreement with any other
party that would preclude Employee's compliance with Employee's obligations
under this Agreement as set forth above.
i. Employee agrees that at the conclusion of Employee's employment
with Employer, Employee shall give a written statement to Employer certifying
that Employee has complied with Employee's obligations under paragraph 11 of
this Agreement and acknowledging Employee's continuing obligations to disclose
Inventions, to do certain lawful acts relating to United States and foreign
Letters Patent on said Inventions, and to preserve as confidential and refrain
from using Employer's confidential Information. The written statement shall be
in the form of Exhibit "B" attached hereto.
j. Employee acknowledges that International is a public company
whose shares trade on NASDAQ. Accordingly, Employee acknowledges that he is
prohibited from engaging in securities transactions on the basis of information
not available to the general public which, if known to outsiders, might affect
their investment decision.
k. The provisions of this paragraph 11 shall specifically survive
any termination of this Agreement.
12. Arbitration. Any controversy or claim between the parties hereto
-----------
involving the interpretation, breach or enforcement of any provision of this
Agreement, shall be settled by arbitration conducted in Los Angeles County,
California, in accordance with, and by an arbitrator appointed pursuant to, the
Rules of the American Arbitration Association then in effect, and judgment upon
the award rendered pursuant thereto may be entered in any court of competent
jurisdiction. The arbitration award shall be final and binding upon the parties
hereto, and all rights or remedies of the parties hereto to the contrary are
expressly waived. The arbitrator or arbitrators shall be empowered to grant any
provisional relief or equitable relief (including, without limitation, temporary
or permanent restraining orders or injunctions)
5
<PAGE>
provided for under the California Code of Civil Procedure or otherwise under
California law. Employee is obligated under this Agreement to render services of
a special, unique, unusual, extraordinary, and intellectual character, which
give this Agreement peculiar value. The loss of these services cannot be
reasonably or adequately compensated in damages in an action at law.
Accordingly, in addition to other remedies provided by law or this Agreement,
Employer shall have the right to obtain injunctive relief against the breach of
this Agreement by Employee or the performance of services elsewhere by Employee,
or both. Section 1283.05 of the California Code of Civil Procedure shall be
applicable to any arbitration. The costs of conducting the arbitration
proceeding shall be borne by the losing party or in such proportions as the
arbitrator decides.
13. Attorneys' Fees. In the event any arbitration, suit, proceeding or
---------------
action is instituted arising out of or relating in any manner whatsoever to this
Agreement, the prevailing party(ies) shall recover from the losing party(ies)
reasonable attorneys' fees in addition to the costs and expenses of such
proceeding. In any such suit, proceeding or action, the arbitrator or judge, as
the case may be, shall have the power and authority to determine which
party(ies) is the prevailing party(ies).
14. Notices. Any party desiring to give notice to any other party to this
-------
Agreement, shall give such notice in writing either in person or by facsimile,
telegram, express mail, air express carrier or certified mail. Notices shall be
addressed and delivered to the addressees as follows:
IF TO EMPLOYER OR
INTERNATIONAL: Janex Corporation
Janex International, Inc.
21700 Oxnard Street, suite 1610
Woodland Hills, CA 91367
Atten: President
With a copy in all instances to:
Ronald J. Grant, Esq.
Tilles, Webb, Kulla & Grant, ALC
433 North Camden Drive, Suite 1010
Beverly Hills, CA 90210
IF TO EMPLOYEE: Lawrence I. Bernstein
2110 Country Hill Lane
Los Angeles, CA 90049
Notices delivered or sent in accordance herewith, shall be deemed given on
the date of delivery if personally delivered; upon receipt if sent by facsimile,
telegram, express mail or air
6
<PAGE>
express carrier; three (3) business days after mailing, if mailed by certified
mail, return receipt requested. Any notice not delivered or sent in accordance
herewith, shall be deemed given only upon actual receipt. Any party may change
his or its address for notices, by giving notice to the other parties in
accordance herewith.
15. Assignment. Except as specifically set forth in this Agreement,
----------
neither this Agreement nor any interest herein, shall be assigned or transferred
without the prior written consent of the parties hereto. Any attempted
assignment or transfer in violation of the previous sentence shall be void.
Subject to the restrictions on assignment and transfer, the provisions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective heirs, executors, legal representatives, successors
and assigns.
16. Applicable Law. This Agreement shall be interpreted, governed by and
--------------
enforced in accordance with the internal laws of the State of California.
17. Modification. This Agreement shall not be changed, modified, or
------------
amended in any respect except by a written instrument signed by the party
charged with such change, modification or amendment.
18. Entire Agreement. This provisions of this Agreement supersedes any
----------------
and all prior and contemporaneous written or oral agreements, understandings and
representations between the parties relating to the subject matter of this
Agreement. Except as set forth in this Agreement, there are no other
agreements, understandings or representations pertaining to the subject matter
hereof.
19. Non-Waiver. No delay or failure by either party to exercise any right
----------
under this Agreement, and no partial or single exercise of that right, shall
constitute a waiver of that or any other right.
20. Headings. Headings in this Agreement are for convenience only and
--------
shall not be used to interpret or construe its provisions.
21. Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original but all of which together shall constitute
one and the same instrument.
22. Severability. If any provision of this Agreement is held invalid or
------------
unenforceable, the remainder of this Agreement shall nevertheless remain in full
force and effect. If any provision is held invalid or unenforceable with respect
to particular circumstances, it shall nevertheless remain in full force and
effect in all other circumstances.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day
7
<PAGE>
and year first above written.
EMPLOYER: INTERNATIONAL:
- --------- --------------
JANEX CORPORATION JANEX INTERNATIONAL, INC.
By:/s/ SHELDON F. MORICK By:/s/ SHELDON F. MORICK
----------------------------- -----------------------------
Sheldon F. Morick, Sheldon F. Morick,
Chief Executive Officer Chief Executive Officer
EMPLOYEE:
- ---------
/s/ LAWRENCE I. BERNSTEIN
- ------------------------------------
Lawrence I. Bernstein, an individual
8
<PAGE>
Exhibit B
STATEMENT ON CONCLUSION OF EMPLOYMENT
-------------------------------------
In connection with the conclusion of my employment with Janex Corporation
(herein referred to collectively as the "Company"), I certify that I have
surrendered and returned to the Company all accounts, notes, data, sketches,
drawings, and other documents and records, and all material and physical items
of any kind, including all reproductions and copies thereof, which are the
property of the Company, which relate in any way to the business of the Company
or contain Confidential Information (as defined in the Employment Agreement
identified below).
I also understand that I have a continuing obligation under the Employment
Agreement signed by me, dated April 15, 1996, to disclose information concerning
certain described "Inventions" for a period up to and including twelve (12)
months after termination of my employment, to do certain lawful acts relating to
United States and foreign Letters Patent on certain of said Inventions which are
the property of the Company, and to preserve as confidential and refrain from
using information defined in said Employment Agreement as Confidential
Information which relates to the business of the Company. I also understand
that I have a continuing obligation under the aforementioned Employment
Agreement to refrain from any acts or omissions that would reduce the value of
such Confidential Information to the Company.
EXECUTED BY ME at _________________________, ____________________, this
______ day of ________________________, 199___.
___________________________________
(Employee's Name)
___________________________________
(Witness)
9
<PAGE>
EXHIBIT 10.21
STOCK OPTION AGREEMENT
WITH LAWRENCE BERNSTEIN, APRIL 15, 1996
<PAGE>
STOCK OPTION AGREEMENT
(Vesting Schedule-Employee)
This Stock Option Agreement (the "Agreement") is effective as of the 15th
day of April, 1996 by and between Janex International, Inc., a Colorado
corporation (the "Company") and Lawrence I. Bernstein (the "Optionee").
RECITALS
A. The Company's Board of Directors (the "Board") has the authority to
issue stock options to employees and directors of the Company and its
subsidiaries, and others, from time to time, in its discretion.
B. The Company has sufficient authorized, but unissued shares of its
common stock, to issue the options to be granted hereunder.
C. The Company desires to grant to Optionee and Optionee desires to obtain
from the Company an option to purchase shares of the common capital stock of the
Company pursuant to the terms and conditions set forth below.
NOW, THEREFORE, the parties hereto agree as follows:
1. GRANT OF OPTION.
---------------
Subject to the provisions of this Agreement, the Company hereby grants to
Optionee, the right, option, and privilege to purchase (the "Option" or
"Options") TWO HUNDRED FIFTY THOUSAND (250,000) shares of the restricted common
stock, no par value, of the Company or any other replacement security therefor
(the "Option Stock").
2. NON-TRANSFERABILITY OF OPTION.
-----------------------------
No Option, or any interest therein, may be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by
the laws of descent or distribution, and except as provided in paragraph
8(a)(2), shall be exercised only during the lifetime of the Optionee, and only
by the Optionee. Any sale, pledge, assignment, hypothecation, transfer or
disposition in violation of the foregoing provisions shall be void.
3. TERM.
----
The term of the Option (the "Option Period") shall commence on the date of
this Agreement (the "Option Commencement Date") and shall continue until the
earlier of (a) the date of Optionee's termination as an employee of the Company
(subject to paragraph 8), or (2)
<PAGE>
at 5:00 p.m., California time, on April 14, 2001. The Option shall terminate
without notice if Optionee fails to exercise the Option during the Option Period
in the manner described herein.
4. VESTING OF OPTION.
-----------------
No Option granted hereunder shall be exercisable until it is vested.
The Options granted hereunder shall vest in Optionee according to the following
schedule:
a. Fifty Thousand (50,000) as of the date of this Agreement;
b. Fifty Thousand (50,000) one year after the date of this
Agreement;
c. Fifty Thousand (50,000) two years after the date of this
Agreement;
d. Fifty Thousand (50,000) three years after the date of this
Agreement; and
e. Fifty Thousand (50,000) four years after the date of this
Agreement.
Notwithstanding the foregoing vesting schedule, if during Optionee's
employment by the Company or its subsidiary, Janex Corporation, there is: (i) a
merger between the Company and another entity wherein after the merger the
shareholders of the Company immediately prior to the merger have beneficial
ownership of less than 50% of the voting power of the surviving corporation, or
(ii) an acquisition of more than 50% of the voting stock of the Company, then
upon the occurrence of either of such events, or if all or substantially all the
assets of the Company are sold, all unvested options set forth above shall vest.
5. EXERCISE OF OPTION.
------------------
Vested Options may be exercised in full or in part (but not in increments
of less than 1,000 shares) at any time during the Option Period by Optionee's
delivery and the Company's receipt of written notice (in the form attached
hereto as Exhibit A), which shall state the election to exercise the Option, the
number of shares in respect of which the Option is being exercised, and such
other representations and agreements as to the holder's investment intent with
respect to such shares as may be required by the Company. Such written notice
shall be signed by the Optionee and shall be delivered in person or by certified
mail to the Secretary of the Company. The written notice shall be accompanied by
payment of the Exercise Price. This option shall be deemed to be exercised upon
receipt by the Company of such written notice accompanied by the Exercise Price.
6. EXERCISE PRICE.
--------------
The Exercise Price for each share of Option Stock shall be ONE DOLLAR AND
FORTY-FIVE CENTS ($1.45) per share. If the Company subdivides or combines its
outstanding shares of common stock, by reclassification, recapitalization,
reorganization, merger,
2
<PAGE>
or otherwise, the Exercise Price shall be proportionately decreased or
increased, as the case may be.
7. PAYMENT OF PURCHASE PRICE.
-- -------------------------
The Exercise Price shall be paid in United States dollars, in cash or by
check, bank draft or money order (collectively referred to as "Cash") payable to
the order of the Company. To the extent that applicable law permits, payment
may, at the discretion of the Board, consist of any of the following:
a. The delivery and assignment to the Company of shares of the
Company's common stock, held by the Optionee for a minimum of six months, with
an aggregate Fair Market Value (as of the date of Optionee's exercise), equal to
the Exercise Price;
b. The delivery to the Company by the Optionee of a promissory note
with such collateral as the Board determines to be sufficient;
c. A combination of Cash, and/or (a) and/or (b) above; or
d. Without any obligation on the part of the Company to do so, the
Company may assist Optionee in paying the Exercise Price in the following
manner:
(1) The extension of a loan to the Optionee by the Company;
(2) Payment by the Optionee of the Exercise Price in
installments, or
(3) A guarantee by the Company of a loan obtained by the
Optionee from a third party.
8. CONDITIONS PRECEDENT.
--------------------
Optionee's exercise of the Option is conditioned upon the following:
a. Optionee being continuously employed by the Company from the date
of this Agreement to the date he or she exercises the Option; provided however:
(1) Disability of Employee.
----------------------
If the Optionee is unable to continue his employment with the Company
as a result of his permanent and total disability (as defined in Section
22(e)(3) of the Internal Revenue Code, as amended from time to time (the
"Code"), he or she may, but only within three (3) months (or such other period
of time as is specifically determined by the Board) from the date of
termination, exercise his or her Option to the extent he or she was entitled to
exercise
3
<PAGE>
it at the date the Optionee's employment was terminated due to a disability. To
the extent he or she was not entitled to exercise the Option at the date of such
termination, or if he or she does not exercise such Option (which he or she was
entitled to exercise) within the time specified herein, the Option shall
terminate.
(2) Death of Optionee.
-----------------
If the Optionee dies during the Option Period and is at the time of
his or her death an employee of the Company who shall have been an employee
since the date of grant of the Option, without any interruptions or termination
of service as an employee (Optionee's status as an employee shall not be
considered interrupted in the case of sick leave or military leave or any other
leave of absence approved by the Board), the Option may be exercised, at any
time within one (1) year following the date of death (or such other period of
time as is specifically determined by the Board), by the Optionee's estate or by
bequest or inheritance, but only to the extent that Optionee was entitled to
exercise the Option on the date of his or her death. To the extent that the
Optionee was not entitled to exercise the Option on the date of his or her
death, or if the Optionee's estate, or person who acquired the right to exercise
the Option by bequest or inheritance, does not exercise such Option within the
time specified herein, the Option shall terminate.
(3) Termination With and Without Cause.
----------------------------------
If Optionee's employment with the Company is terminated for cause
(defined below), then the Option granted hereunder (regardless of whether vested
or unvested) shall terminate at the same time as Optionee's employment. If
Optionee's employment with the Company is terminated for reasons other than
death, disability, or cause, then he or she may, but only within thirty (30)
days (or such other period of time as is specifically determined by the Board)
from the date of termination, exercise his or her Option to the extent he or she
was entitled to exercise it at the date the Optionee's employment was
terminated. To the extent he or she was not entitled to exercise the Option at
the date of such termination, or if he or she does not exercise such Option
(which he or she was entitled to exercise) within the time specified herein, the
Option shall terminate. As used herein, Optionee shall be deemed terminated for
"cause" if he or she was terminated as a result of (i) the habitual neglect of
Optionee's duties, (ii) intentional wrongdoing or grossly negligent acts or
conduct toward or involving the Company or a co-worker, or (iii) being convicted
of a crime involving moral turpitude. Nothing herein shall be deemed to mean
that an employee may only be terminated for cause, nor shall such definition of
"cause" be used for any other purpose.
b. The exercise of such Option and the issuance and delivery of such
Shares pursuant thereto complying with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended (the
"Act"), the Securities Exchange Act of 1934, the rules and regulations
promulgated hereunder, the requirements of any stock exchange upon which the
Company's shares may then be listed, applicable state law, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance. Assuming such
4
<PAGE>
compliance, for income tax purposes, the shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such shares.
c. The Optionee shall not be in breach under any of the
representations or warranties set forth in paragraph 9.
9. REPRESENTATIONS AND WARRANTIES OF OPTIONEE.
------------------------------------------
As an inducement to the Company to grant the Option and to issue and sell
the Option Stock to Optionee, Optionee represents, warrants and acknowledges
that:
a. Any shares of Option Stock acquired by exercise of this Option
shall be acquired for Optionee's own account and not with a view to or for sale
in connection with any distribution of such shares.
b. Optionee has the requisite financial and/or business experience
necessary to evaluate the risks and rewards of investing in the shares of Option
Stock and that Optionee is capable of protecting himself or herself in that
regard.
c. Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Option and the Option Stock
upon exercise of the Option.
d. The Option Stock that the Optionee will be acquiring, upon
exercise of the Option, will be "restricted securities" as that term is defined
in Rule 144, promulgated under the Act; that the exemption from registration
under Rule 144 will not be available in any event for at least two (2) years
from the date of issuance, and even then will not be available unless (1) a
public trading market then exists for the Option Stock, (2) adequate information
concerning the Company is then available to the public, and (3) other terms and
conditions of Rule 144 are complied with; and that any sale of the Option Stock
may be made by the undersigned only in accordance with such terms and
conditions. Optionee understands that the Option Stock must be held indefinitely
unless they are subsequently registered under the Act or an exemption from such
registration is available.
e. That the Optionee understands that the certificates representing
the Option Stock shall be stamped or otherwise imprinted with a legend, which
provides substantially as follows (and may also include references to state
law):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 ("THE ACT") AND ARE "RESTRICTED SECURITIES" AS
THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SHARES MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR
5
<PAGE>
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY
OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
e. The foregoing representations and warranties shall be true as of
the date the Option is granted as well as at the time Optionee exercises any
Option.
10. TAX CONSEQUENCES.
----------------
The Option will be a nonstatutory stock option for income tax
purposes. Optionee understands that Optionee may incur federal and state income
tax liability upon the exercise of the Option and upon the subsequent
disposition of the Option Stock. Optionee represents that Optionee has consulted
with a tax advisor in connection with the purchase or disposition of the Option
Stock and that Optionee is not relying upon the Company or its counsel for tax
advice.
11. RESERVATION OF SHARES.
---------------------
The Company shall at all times reserve and keep available out of its
authorized by unissued shares of Common Stock, solely for the purpose of
issuance of shares upon exercise of the Option, such number of shares of Common
Stock issuable upon exercise of the Option.
12. MISCELLANEOUS.
-------------
a. Notices.
-------
All notices, requests, demands and other communications required or
permitted to be given hereunder shall be deemed to have been duly given if in
writing and delivered personally, given by prepaid telegram, or mailed first
class, postage prepaid, registered or certified mail, return receipt requested,
as follows:
If to Company: Janex International, Inc.,
21700 Oxnard Street, Suite 1610
Woodland Hills, California 91367
Attention: President
If to Option
Holder: At Option Holder's latest address
as shown on the books of the Company
Any party may change the address to which such communications are to be
directed to it by giving written notice to the other parties. Except as
otherwise provided in this Agreement, all notices shall be deemed to be given
when delivered in person, or if placed in the mail as aforesaid, then two (2)
days thereafter.
6
<PAGE>
b. Modifications.
-------------
The provisions of this Agreement shall not be modified or amended
except by a writing signed by the parties hereto.
c. Entire Agreement.
----------------
This Agreement and any documents, instruments or agreements expressly
referred to herein, set forth the entire agreement and understanding of the
parties with respect to the transactions contemplated hereby and supersede all
prior agreements, arrangements and understandings relating to the subject matter
hereof.
d. Headings.
--------
The section and paragraph headings contained in this Agreement are for
convenient reference only, and shall not in any way affect the meaning or
interpretation hereof.
e. Applicable Law and Venue.
------------------------
This Agreement shall be governed by and construed in accordance with
the laws of the state of California. Any action or proceeding pertaining in any
manner whatsoever to this Agreement, shall be brought and maintained solely in a
Court of competent jurisdiction in the County of Los Angeles, State of
California, to which jurisdiction and venue the parties irrevocably consent.
f. Severability.
------------
If any provision of this Agreement shall be held to be invalid,
illegal or unenforceable, it shall be deemed severable from the remaining
provisions hereof which shall remain in full force and effect.
g. Waiver.
------
No waiver of any provision of this Agreement or any breach thereof
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar) or any other breach hereunder nor shall such waiver
constitute a continuing waiver. Either party may waive performance of any
provision of this Agreement, the non-performance of which would otherwise
constitute a breach of this Agreement, including but not limited to the non-
performance of any condition precedent to such party's performance, without
affecting the enforceability of this Agreement and the provisions contained
herein.
7
<PAGE>
h. Successors and Assigns.
----------------------
Subject to the provisions of paragraph 2 above, the terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective heirs, executors, administrators, personal representatives,
successors and assigns of the parties hereto.
i. Incorporation of Recitals.
-------------------------
The Recitals set forth in the "Recitals" section, above, are incorporated
herein by this reference.
j. Counterparts.
------------
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Stock Option Agreement,
at Los Angeles, California, as of the day and year first above written.
"Company" "Optionee"
- -------- --------
Janex International, Inc.,
a Colorado corporation
By: /s/ SHELDON F. MORICK /s/ LAWRENCE I. BERNSTEIN
---------------------------- ---------------------------
Sheldon F. Morick, Chief Lawrence I. Bernstein
Executive Officer
8
<PAGE>
EXHIBIT A
EXERCISE NOTICE
Janex International, Inc.
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
Attention: Secretary
1. Exercise of Option. Effective as of today, ______________, 199__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option (the
"Option") to purchase ____________ shares of the Common Stock (the "Shares") of
Janex International, Inc., a Colorado corporation (the "Company") under and
pursuant to the Stock Option Agreement dated April 15, 1996 (the "Option
Agreement"), the terms and provisions of which are incorporated herein by
reference. The purchase price shall be $1.45 per share, as required by the
Option Agreement. This Exercise Notice is sometimes referred to herein as the or
this "Agreement."
2. Delivery of Payment. Optionee herewith delivers to the Company the
-------------------
full exercise price for the Shares.
3. Representation of Optionee. Optionee acknowledges that Optionee has
--------------------------
received, read and understood the Option Agreement and agrees to abide by and be
bound by its terms and conditions, and affirms that Optionee's representations
and warranties set forth in the Option Agreement are true and correct as of the
date of this exercise of Option.
4. Rights as Shareholder. Until the stock certificate evidencing such
---------------------
Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the Option Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued. Optionee shall enjoy rights as a shareholder until such time as
Optionee disposes of the Shares.
5. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
1
<PAGE>
6. Restrictive Legend and Stop-Transfer Orders.
-------------------------------------------
a. Legend. Optionee understands and agrees that the Company shall
------
cause the legend set forth below or a legend substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required or desirable to comply with state or
federal securities laws:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 ("THE ACT") AND ARE "RESTRICTED SECURITIES" AS
THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SHARES MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE
ESTABLISHED TO THE SATISFACTION OF THE COMPANY.
b. Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent.
c. Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of the Option Agreement or this Agreement or
(ii) to treat as owner of such Shares or to accord the right to vote or pay
dividends to any purchaser or other transferee to whom such Shares shall have
been so transferred.
7. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.
8. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Company's Board of Directors, which shall review such dispute at its next
regular meeting. The resolution of such a dispute by the board shall be final
and binding on the Company and on Optionee.
9. Notices. Any notice required or permitted hereunder shall be given in
-------
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party.
2
<PAGE>
10. Further Instruments. The parties agree to execute such further
-------------------
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
11. Entire Agreement. This Agreement and the Option Agreement constitute
----------------
the entire agreement of the parties and supersede in their entirety all prior
undertakings and agreements of the Company and Optionee with respect to the
subject matter hereof and are governed by applicable California law except for
that body of law pertaining to conflict of laws. Should any provision of the
Option Agreement or this Agreement be determined by a court of law to be illegal
or unenforceable, the other provisions shall nevertheless remain effective and
shall remain enforceable. In the event of a conflict between this Agreement and
the Option Agreement, the provisions of the Option Agreement shall prevail.
Dated:__________________, 199____
_________________________________
Signature of Optionee
_________________________________
Printed Name of Optionee
Address:
_________________________________
_________________________________
Accepted by:
JANEX CORPORATION
By:_______________________________
Its:______________________________
3
<PAGE>
EXHIBIT 10.22
EXTENSION AGREEMENT, DATED JUNE 28, 1996,
BY AND BETWEEN THE COMPANY AND LESLIE FRIEDLAND
<PAGE>
EXTENSION AGREEMENT
This Extension Agreement ("Agreement") is made as of the 28th day of June,
1996, by and between Janex International, Inc., a Colorado corporation
("International") and Leslie Friedland ("Friedland"), with reference to the
following:
A. In connection with the acquisition of the capital stock of Janex
(formerly known as MJL Marketing, Inc.) by International, International made and
delivered to Friedland an Installment Note ("Note") in the sum of $560,000,
dated October 1, 1993.
B. By its terms, the Note was payable in six equal semi-annual payments
of principal, commencing on June 30, 1994, all due and payable on December 31,
1996.
C. Friedland previously granted an extension to pay the Note provided
that interest be paid on the Note.
D. As of December 31, 1995, International (or its Janex subsidiary) was
indebted to Friedland in the sum of $115,000 for commissions. International
seeks an extension of the time to pay said commissions.
E. The parties have been negotiating a further extension of the Note,
upon the terms and conditions set forth below.
NOW, THEREFORE, the parties hereto agree as follows:
1. Present Note Indebtedness. Disregarding interest, the present
-------------------------
principal balance owing on the Note is $280,000, with payments due or to be due
as follows:
<TABLE>
<CAPTION>
<S> <C>
$93,333.33 12/31/95 (Past due)
$93,333.33 06/30/96 (Past due)
$93,333.33 12/31/96
</TABLE>
2. Extension of Note Payment. Friedland agrees that the date for all
-------------------------
payments under the Note shall be extended to February 1, 1998, at which time all
principal and accrued interest shall be due and payable. The parties agree that
notwithstanding any provision of the Note, commencing January 1, 1996, the
Company will pay interest on a principal balance of $93,333.33, and commencing
July 1, 1996, the Company will pay interest on a principal balance of $280,000,
all at the rate of nine and one-half percent (9-1/2%) per annum, until paid in
full, with interest payable quarterly commencing on September 1, 1996. Upon the
execution of this Agreement, International agrees to pay all accrued interest on
the Note as of the date of this Agreement.
3. Extension of Commission Payment. Friedland agrees that the date for
-------------------------------
payment of the commissions that was due on December 31, 1995, in the sum of
$115,000, shall be extended to February 1, 1998. The parties agree that
commencing January 1, 1996, the unpaid
<PAGE>
commission balance shall bear interest at the rate of Nine and one-half percent
(9-1/2%) per annum, simple interest, until paid in full, with interest payable
quarterly commencing on September 1, 1996. Upon the execution of this Agreement,
International agrees to pay all accrued interest on the commissions as of the
date of this Agreement.
4. Granting of Warrants. As further consideration for the extension of
--------------------
the due date on the Note and the commissions, International shall grant to
Friedland 282,994 warrants to acquire the restricted common stock of
International, in accordance with the provisions of the Warrant Agreement
attached hereto as Exhibit "A."
5. Governing Law and Interpretation. This Agreement shall be governed,
--------------------------------
interpreted and enforced in accordance with the laws of the State of California.
6. Amendments. This Agreement may only be amended in writing signed by
----------
the parties hereto.
7. Captions. The captions of the paragraphs of this Agreement are for
--------
convenience only and shall not be used to interpret or alter any of the
provisions hereof.
8. Entire Agreement. This Agreement and the Warrant Agreement attached
----------------
hereto, set forth the entire agreement with respect to the subject matter
hereof, and supersede all prior representations and agreements pertaining to the
subject matter hereof.
9. Counterparts. This Agreement may be executed in multiple counterparts
------------
each of which shall be deemed an original and all of which together shall be one
and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement at Woodland
Hills, California, on the day and year first above written.
JANEX INTERNATIONAL, INC.
By: /s/ SHELDON F. MORICK
------------------------
Sheldon F. Morick,
President
/s/ LESLIE FRIEDLAND
- ----------------------------------
Leslie Friedland, an individual
2
<PAGE>
EXHIBIT 10.23
EXTENSION AGREEMENT, DATED JUNE 28, 1996,
BY AND BETWEEN THE COMPANY AND DANIEL LESNICK
<PAGE>
EXTENSION AGREEMENT
This Extension Agreement ("Agreement") is made as of the 28th day of June,
1996, by and between Janex International, Inc., a Colorado corporation
("International") and Daniel Lesnick ("Lesnick"), with reference to the
following:
A. In connection with the acquisition of the capital stock of Janex
(formerly known as MJL Marketing, Inc.) by International, International made and
delivered to Lesnick an Installment Note ("Note") in the sum of $440,000, dated
October 1, 1993.
B. By its terms, the Note was payable in six equal semi-annual payments
of principal, commencing on June 30, 1994, all due and payable on December 31,
1996.
C. Lesnick previously granted an extension to pay the Note provided that
interest be paid on the Note.
D. The parties have been negotiating a further extension of the Note,
upon the terms and conditions set forth below.
NOW, THEREFORE, the parties hereto agree as follows:
1. Present Indebtedness. Disregarding interest, the present principal
--------------------
balance owing on the Note is $220,000.00, with payments due or to be due as
follows:
<TABLE>
<CAPTION>
<S> <C>
$73,333.33 12/31/95 (Past due)
$73,333.33 06/30/96 (Past due)
$73,333.33 12/31/96
</TABLE>
2. Extension of Payment. Lesnick agrees that the date for all payments
--------------------
under the Note shall be extended to February 1, 1998, at which time all
principal and accrued interest shall be due and payable. The parties agree that
notwithstanding any provision of the Note, commencing January 1, 1996, the
Company will pay interest on a principal balance of $93,333.33, and commencing
July 1, 1996, the Company will pay interest on a principal balance of $280,000,
all at the rate of nine and one-half percent (9-1/2%) per annum, until paid in
full, with interest payable quarterly commencing on September 1, 1996. Upon the
execution of this Agreement, International agrees to pay all accrued interest on
the Note as of the date of this Agreement.
3. Granting of Warrants. As further consideration for the extension of
--------------------
the due date on the Note, International shall grant to Lesnick 131,994 warrants
to acquire the restricted common stock of International, in accordance with the
provisions of the Warrant Agreement attached hereto as Exhibit "A."
4. Governing Law and Interpretation. This Agreement shall be governed,
--------------------------------
interpreted and enforced in accordance with the laws
<PAGE>
of the State of California.
5. Amendments. This Agreement may only be amended in writing signed by
----------
the parties hereto.
6. Captions. The captions of the paragraphs of this Agreement are for
--------
convenience only and shall not be used to interpret or alter any of the
provisions hereof.
7. Entire Agreement. This Agreement and the Warrant Agreement attached
----------------
hereto, set forth the entire agreement with respect to the subject matter
hereof, and supersede all prior representations and agreements pertaining to the
subject matter hereof.
8. Counterparts. This Agreement may be executed in multiple counterparts
------------
each of which shall be deemed an original and all of which together shall be one
and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement at Woodland
Hills, California, on the day and year first above written.
JANEX INTERNATIONAL, INC.
By:/s/ SHELDON F. MORICK
------------------------
Sheldon F. Morick,
President
/s/ DANIEL LESNICK
- -------------------------------
Daniel Lesnick, an individual
-2-
<PAGE>
EXHIBIT 10.24
INTER-CREDITOR AGREEMENT, DATED JUNE 28, 1996,
BY AND BETWEEN THE COMPANY, LESLIE FRIEDLAND,
DANIEL LESNICK AND THE MOORE TRUST
<PAGE>
INTER-CREDITOR AGREEMENT
THIS INTER-CREDITOR AGREEMENT ("Agreement") is made as of the 28th day of
July 1996, by and among The Howard and Helene Moore Living Trust dated June 28,
1991 ("Moore Trust"), Leslie Friedland ("Friedland"), Daniel Lesnick ("Lesnick")
and Janex Corporation, a New Jersey corporation ("Janex"), with reference to the
following facts:
A. The Moore Trust has entered into a Revolving Credit Agreement, dated
April 19, 1996, with Janex (formerly known as MJL Marketing, Inc.), under the
terms of which the Moore Trust is obligated to loan up to $900,000 to Janex,
during the term of the Revolving Loan Agreement.
B. Pursuant to the Revolving Credit Agreement, the Moore Trust has been
granted a security interest in all of the assets of Janex, subordinate to the
lien of Janex's primary bank lender.
C. Janex is obligated to pay the principal sum of $280,000 to Friedland,
pursuant to the terms of a $560,000 Promissory Note made by Janex in favor of
Friedland, dated October 6, 1993 (the "Friedland Note").
D. Janex is obligated to pay the principal sum of $220,000 (not all of
which is presently due) to Lesnick, pursuant to the terms of a $440,000
Promissory Note made by Janex in favor of Lesnick, dated October 6, 1993 (the
"Lesnick Note").
E. Friedland and Lesnick are willing to extend the due date on their
respective notes to February 1, 1998, provided that they are given security for
their notes.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises of the parties set forth below, the parties agree as follows:
1. Moore Security Interest. On April 19, 1996 the Moore Trust and Janex
-----------------------
entered into a Security Agreement, in order to secure Janex's obligations under
the Revolving Credit Agreement. A copy of said Security Agreement is attached
hereto as Exhibit "A."
2. Friedland Security Interest. On October 6, 1993, Friedland and Janex
---------------------------
entered into a Security Agreement, in order to secure the Friedland Note. A copy
of said Security Agreement is attached hereto as Exhibit "B."
3. Lesnick Security Interest. On October 6, 1993, Lesnick and Janex
-------------------------
entered into a Security Agreement, in order to secure the Friedland Note, a copy
of said Security Agreement is attached hereto as Exhibit "C."
<PAGE>
4. No Previous Perfection of Security Interest by Friedland and Lesnick.
--------------------------------------------------------------------
To the knowledge of Friedland and Lesnick, their security interest was not
perfected by the filing of a UCC-1 Financing Statement in any state.
5. Perfection of Security Interests. The Moore Trust has perfected its
--------------------------------
security interest by filing a UCC-1 Financing Statement in the State of
California on June 20, 1996. Friedland and Lesnick each intend to file a UCC-1
Financing Statement in the State of California, in order to perfect their
respective security interests.
6. Agreement Between Parties As to Priority. The Moore Trust, Friedland
----------------------------------------
and Lesnick agree that as between them, their respective security interests in
and to the proceeds received from any recovery on the collateral securing their
various debt instruments, shall be apportioned in the same proportion as the
amount owed by Janex to each of them at the time the proceeds are distributed,
regardless of which security interest is foreclosed upon. For example, if the
Moore Trust is owed $900,000, Friedland is owed $280,000 and Lesnick is owed
$220,000, then the net proceeds of any foreclosure would be divided, 900/1400 to
the Moore Trust, 280/1400 to Friedland and 220/1400 to Lesnick.
7. Curing of Default. In the event of a default with respect to secured
-----------------
debt owed by the Company to Moore, Friedland or Lesnick, any one of such persons
is permitted to cure the default, with the amount paid being added to the
secured debt owed to the party or parties curing the default.
8. No Invalidity of Security Interest. In the event a security interest
----------------------------------
of a party is invalid for any reason, such invalidity shall not affect the
validity of any other party's security interest.
9. Subordination to Bank Lending. Notwithstanding anything contained in
-----------------------------
this Agreement, Friedland and Lesnick agree to subordinate each of their
security interests to that of Janex's primary bank lender ("Bank"), pertaining
to financing from the Bank not to exceed $1,000,000, on usual and customary
terms, and to execute and deliver, from time to time, such instruments or
documents as may be required to effectuate such subordination.
10. Payments on Secured Debt. If Janex decides to make a principal
------------------------
payment on any of the secured debt referred to herein, it shall divide the
payment between the Moore Trust, Friedland and Lesnick, in proportion to the
then outstanding principal balance owing on their respective secured debts. For
example, if Friedland is owed $400,000, Lesnick is owed $220,000 and the Moore
Trust is owed $500,000, a payment of $100,000 by Janex would be divided $35,714
to Friedland, $19,643 to Lesnick and $44,643 to the Moore Trust. However,
Friedland and Lesnick
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<PAGE>
acknowledge that funds loaned to Janex by the Moore Trust are on a revolving
loan basis. Accordingly, to the extent that any principal payments are made to
Friedland and/or Lesnick prior to February 1, 1998, Friedland and Lesnick agree
to re-loan any such principal payments to Janex upon demand made prior to
February 1, 1998, with the amount of the funds so loaned by each of them to
Janex added back to the amount owing under their respective secured notes.
11. Arbitration. Any controversy or claim between the parties hereto
-----------
involving the interpretation, breach or enforcement of any provision of this
Agreement, shall be settled by arbitration conducted in Los Angeles County,
California, in accordance with, and by an arbitrator appointed pursuant to, the
Rules of the American Arbitration Association then in effect, and judgment upon
the award rendered pursuant thereto may be entered in any court of competent
jurisdiction. The arbitration award shall be final and binding upon the parties
hereto, and all rights or remedies of the parties hereto to the contrary are
expressly waived. The arbitrator or arbitrators shall be empowered to grant any
provisional relief or equitable relief (including, without limitation, temporary
or permanent restraining orders or injunctions) provided for under the
California Code of Civil Procedure or otherwise under California law. Section
1283.05 of the California Code of Civil Procedure shall be applicable to any
arbitration. The costs of conducting the arbitration proceeding shall be borne
by the losing party or in such proportions as the arbitrator decides.
12. Agreement of Janex to Provide Information. Janex agrees upon demand
-----------------------------------------
from any party hereto, to provide a schedule of the amount owed to each such
party, that is secured by Exhibits A, B or C.
13. Miscellaneous.
-------------
(a) Interpretation. The captions by which the Paragraphs of this
--------------
Agreement are identified and the captions under which certain subject matter is
placed are for convenience only and shall have no effect upon the interpretation
of this Agreement. This Agreement shall be construed without regard to any
presumption or other rule requiring construction against the parties causing
this Agreement to be drafted.
(b) No Assignment; Binding Effect. Neither this Agreement nor any
-----------------------------
interest herein may be assigned to any person without the prior written consent
of all other parties. Subject to the foregoing restriction on assignment, this
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective successors and assigns.
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<PAGE>
(c) Severability. If any term, provision, covenant or restriction
------------
contained in this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants or restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
(d) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of California.
(e) Attorney's Fees. If any party commences any suit or action,
---------------
including but not limited to any arbitration, arising out of or connected with
this Agreement then the prevailing party(ies) shall recover his or its
reasonable attorneys' fees from the non-prevailing party(ies).
(f) Amendment. This Agreement may only be amended by a writing signed
---------
by the parties hereto.
(g) Counterparts. This Agreement may be signed in one or more
------------
counterparts each of which shall be deemed an original and all of which together
shall be one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement which shall be
effective as of the date first set forth above.
The Howard and Helene Moore
Living Trust dated June 28, 1991 JANEX CORPORATION
By: /s/ HOWARD MOORE By: /s/ SHELDON F. MORICK
---------------------------- ------------------------
Howard Moore, Trustee Sheldon F. Morick,
Chief Executive
Officer
By:
------------------------------
Trustee
/s/ LESLIE FRIEDLAND
- ----------------------------------
Leslie Friedland, individually
/s/ DANIEL LESNICK
- ----------------------------------
Daniel Lesnick, individually
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<PAGE>
EXHIBIT 10.25
MODIFICATION AGREEMENT, DATED JUNE 28, 1996,
BY AND BETWEEN THE COMPANY, TERENCE F. DAVIS AND MARIE BOULE
<PAGE>
MODIFICATION AGREEMENT
THIS MODIFICATION AGREEMENT ("Agreement") is made this 28th day of June,
1996, by and among Janex International, Inc., a Colorado corporation ("Janex
International"), Terence F. Davis ("Davis") and Marie Boule ("Boule"), with
reference to the following facts:
A. On August 4, 1995, the parties, among others, entered into an
Agreement of Purchase and Sale of Stock ("Malibu Agreement"), whereby Davis and
Boule sold to Janex International, all of the stock of Malibu Fun Stuffed and
Malibu Fun Stuffed International Limited.
B. Paragraph 1.3 of the Malibu Agreement provides for certain Contingent
consideration to be paid to Davis and Boule, in shares of Common Stock of Janex
International.
C. Due to the corporate reorganization of Janex International and its
subsidiaries, it has become difficult, if not impossible, to measure the amount
of the Contingent consideration to be received by Davis and Boule.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises of the parties set forth below, the parties agree as follows:
14. Deletion of Contingent Consideration. Paragraph 1.3 of the Malibu
------------------------------------
Agreement is hereby deleted in its entirety.
15. Issuance of Shares of Janex International. For and in consideration
-----------------------------------------
of the deletion of the Contingent consideration set forth in the Malibu
Agreement and in lieu of said Contingent consideration, the parties agree that
Janex International shall issue: (a) Ninety Thousand (90,000) shares of Janex
International Common Stock (restricted) to Davis; and (b) Sixty Thousand
(60,000) shares of Janex International Common Stock (restricted) to Boule.
16. Representations and Warranties Concerning Securities. As an
----------------------------------------------------
inducement to Janex International to issue the shares of Janex Stock to Davis
and Boule, each of Davis and Boule represent and warrant to Janex International,
which shall be continuing representations and warranties, the following:
(a) The shares of Janex International Common Stock to be acquired by
each of them hereunder will be acquired for each such person's own account and
not with a view to or for sale in connection with any distribution of such
shares.
(b) Each of them (1) has had the opportunity to discuss Janex
International's business, management and financial affairs with its Chief
Executive Officer, and (2) has reviewed Janex International's financial
statements, 1995 Annual Report
<PAGE>
Form 10-KSB and Quarterly Reports Form 10-QSB filed since the date of the last
Form 10-KSB, and such other documents as each of them deemed important.
(c) Each of them has the requisite financial and/or business
experience necessary to evaluate the risks and rewards of investing in the
shares of Janex International Stock and each of them is capable of protecting
himself or herself in that regard.
(d) Davis is an employee and officer of Janex Corporation, as well as
Malibu Fun Stuffed, Inc. Boule is an employee of Malibu Fun Stuffed, Inc.
(e) All solicitations, negotiations, offers and acceptances pertaining
to the transactions contemplated by this Agreement have taken place in the State
of California. No commission or other remuneration is being paid by either of
them, directly or indirectly, with respect to any solicitation of either of them
in connection with this transaction.
(f) The shares of Janex International Stock that each of them will be
acquiring have not been registered under the Securities Act of 1933, as amended
(the "Act") by reason of their issuance in a transaction exempt from the
registration and prospectus delivery requirements of the Act pursuant to Section
4(2) thereof, and that they must be held indefinitely unless a subsequent
disposition thereof is registered under the Act, or is exempt from registration.
The shares of Janex International Stock that each of them will be acquiring,
will be "restricted securities" as that term is defined in Rule 144, promulgated
under the Act; that the exemption from registration under Rule 144 will not be
available in any event for at least two (2) years from the date of issuance, and
even then will not be available unless (1) a public trading market then exists
for the Janex International Stock, (2) adequate information concerning Janex
International is then available to the public, and (3) other terms and
conditions of Rule 144 are complied with; and that any sale of the Janex
International Stock may be made by each of them only in accordance with such
terms and conditions.
(g) Each of them understands and agrees that the certificates
representing the shares of Janex International Stock to be issued to each of
them will be stamped or otherwise imprinted with a legend, which provides
substantially as follows (but may also include references to state law):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 ("THE ACT") AND ARE "RESTRICTED SECURITIES" AS
THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THE SHARES MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFEC-
2
<PAGE>
TIVE REGISTRATION STATEMENT UNDER THE ACT, OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED
TO THE SATISFACTION OF THE COMPANY.
17. Entire Agreement. This agreement contains a complete statement of the
----------------
arrangements between the parties with respect to its subject matter, supersedes
any previous agreement among them relating to the subject matter hereof, and
cannot be changed or terminated orally.
18. Headings. The paragraph headings of this Agreement are for reference
--------
purposes only and are to be given no effect in the construction or
interpretation of this Agreement.
19. Governing Law. This agreement shall be governed by and construed in
-------------
accordance with the law of the State of California.
20. Counterparts. This Agreement may be executed in any number of
------------
counterparts, which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
JANEX INTERNATIONAL, INC.
By:/s/ SHELDON F. MORICK
-------------------------
Sheldon F. Morick,
Chief Executive Officer
/s/ TERENCE F. DAVIS
- ---------------------------------
Terence F. Davis, an individual
/s/ MARIE BOULE
- ---------------------------------
Marie Boule, an individual
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<PAGE>
CONSENT OF SPOUSE
I, the undersigned, agree and certify that:
1. I am married to Terence F. Davis, who signed the foregoing
Modification Agreement ("Agreement").
2. I have read and approve the provisions of said Agreement and agree to
be bound thereby.
3. In consenting hereto, I have either been advised by an attorney of
my own choosing, or personally decided not to seek such advice.
4. This Consent and the Agreement shall be interpreted and governed under
the laws of the State of California, and venue for any suit or proceeding shall
be limited solely to a court of competent jurisdiction located in the County of
Los Angeles, State of California.
Dated: June 28, 1996.
/s/ ELYSE DAVIS
---------------------
Elyse Davis
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