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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 10549
FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to ______________
Commission File No. 0-17927
JANEX INTERNATIONAL, INC.
(Name of small business issuer in its charter)
Colorado 84-1034251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21700 Oxnard Street, Suite 1610
Woodland Hills, California 91367
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (818) 593-6777
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X
---
No ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ____
The issuer's net revenue for its most recent fiscal year was $9,355,021.
The aggregate market value of the voting stock held by non-affiliates of the
issuer as of February 29, 1996, was $6,939,241.
Number of registrant's shares of Common Stock outstanding as of February 29,
1996 was 5,046,721.
Documents incorporated by reference: None Page 1 of 91
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT
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Janex International, Inc., 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, Inc. is also the parent corporation of Pro Gains Company Limited,
a Hong Kong corporation ("Pro Gains"), owned 50% by Janex International, Inc.,
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, Inc. As used in herein, the term "the Company" refers to Janex
International, Inc. and its wholly owned subsidiaries, unless the context
indicates otherwise. From October 6, 1993, to August 4, 1995, the Company's
business was conducted primarily through its subsidiaries Janex and Pro Gains.
Prior to October 6, 1993, business was conducted primarily through WDIM.
Subsequent to August 4, 1995, business has been conducted primarily through
Janex, Pro Gains, Malibu and MFSI. 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.
From inception (July 1986) 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 seek 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
Prox, Inc. ("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 third quarter of fiscal 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 the Company's strategy was changed 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.
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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 Industries, Inc. ("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 Securities and Exchange Commission on February
13, 1995.
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 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, in or about 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. 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 announced that it had 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 Janex Agreement, the shareholders of
Janex received 1,200,000 shares of the Company's restricted common stock, 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, the holders of the $1,000,000 of notes agreed to defer the payments due
under the notes on December 31, 1995, to June 30, 1996, provided the Company
pays the note holders interest during the deferral period at the rate of 9% per
annum.
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, Inc.
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. The California subsidiary, WDIM, which prior to this time was the main
operating arm of the Company, began a process of winding down operations. As
part
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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
restricted Common Stock to Dentsu, with certain registration rights, in full
settlement of the Company's obligations owing to Dentsu.
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.
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 of
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 product, 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. 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 restricted common stock, and $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.
Under the earn-out ("Malibu Earn-out") base revenues for Malibu and
MFSI combined are set for the six months period ended December 31, 1995, and the
years ended 1996, 1997 and 1998, at $1.25 million, $3 million, $4 million and $5
million, respectively. For each period mentioned, if revenues equal at least 75%
of the base revenue for the period, the former shareholders of Malibu will
collectively receive that percentage of $50,000 worth of the Company's stock as
the actual revenue bears to the base revenue, not to exceed $50,000 worth of
stock. For each one dollar of revenue in excess of the base revenue for each
period mentioned, the former shareholders of Malibu will collectively receive
$0.05 worth of the Company's stock, up to $1.5 million, $3.0 million, $4.0
million and $5.0 million of excess revenue for each previously mentioned period,
respectively. The Malibu Earn-out is based on Malibu and MFSI achieving a
contribution margin of 25%, and the Malibu Earn-out will be reduced by 20% with
respect to the base revenue objectives, and by $0.01 per dollar with respect to
the excess revenue objectives, for each 1% that the margin falls below 25%.
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. Effective with the acquisition
MFSI became a subsidiary of the Company, 99% of the stock of which is owned by
Malibu, and 1% of which is owned by Janex International, Inc.
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The product line of the Malibu Division differs from that of the Janex
Division in that most of the Malibu Division products ("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.
BUSINESS OF ISSUER
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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.
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. 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 which is to be incorporated into it.
The Janex Products are targeted for sale by mass merchant retailers
for prices ranging from $3 to $25. 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.
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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 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 $40. 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, Noah's Neighbors,
Cookie Muncher, Card Pals, Kid-a-Round Horses, Fire Engines and Police Cars,
Card Pals, Wide-A-Wake Ups, Hat Box Dolls, Shoe Box Dolls, Sweet Angel Dolls,
Pez Watches, 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. Depending upon the Company's liquidity and
the operating results achieved during 1996, the Company may increase the
projected number of new product introductions. See "Management's Discussion and
Analysis or Plan of Operations--Liquidity and Capital Resources." The
concentration 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
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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, Toys R Us and Kmart
represented 26%, 24%, and 5% of the Company's revenues, respectively.
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 $25. 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 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
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Li & Fung (Trading) Limited ("Li & Fung"), a Hong Kong based services company
(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, 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 Orient 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, 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 Orient. All products
manufactured in the Orient are manufactured specifically for a customer order,
or specifically for shipment to the Baltimore 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.
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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, 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
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the availability of funds, the Company expects to spend approximately $500,000
and $800,000 in each of 1996 and 1997, respectively, for start-up costs
pertaining to new products.
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 $200,000 in each of 1996 and
1997, respectively, on the acquisition of new licenses, exclusive of ongoing
royalties.
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 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
10
<PAGE>
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.
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
Operations). 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 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.
11
<PAGE>
The volatility of revenues and profits created as a result of the
significant reliance on licensed characters by Janex Products is expected over
time to reduce as Malibu Products increasingly contribute 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 $25,000, and in some instances have
guaranteed royalties of up to $150,000. 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/
- 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".
__________________
/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.
12
<PAGE>
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 period and, consequently 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,
and at December 31, 1995, the backlog of orders was approximately $1.0 million.
EMPLOYEES
As of February 29, 1996, the Company had 7 full-time employees. The
full-time employees were engaged as follows: one in accounting, one 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.
ITEM 2. DESCRIPTION OF PROPERTY.
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.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
SHAREHOLDER LITIGATION
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 Company's 1991 stock 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 August 31, 1993, the
Company moved to dismiss the original action. Prior to the Court ruling on the
motion, on October 29, 1993, Plaintiffs amended and filed their First Amended
Complaint.
The Company filed a motion to dismiss the First Amended Complaint on
December 3, 1993 and on May 24, 1994, the Court dismissed the suit. The
Plaintiffs were ordered to submit, if they so choose, any amended complaint
within 45 days. Plaintiffs filed their Second Amended Complaint, which is
similar to the First Amended Complaint, but includes certain additional
allegations in an effort to correct the defects in the First Amended Complaint.
The Second Amended Complaint, like the First Amended Complaint,
alleges violation of federal securities laws by the Defendants, in connection
with the May 1991 public offering. As relief, the Plaintiffs are seeking to have
the Court declare the action to be a proper class action, to have the
Plaintiffs' certified as class representatives, to have the Plaintiffs' granted
the right to tender or rescind their purchases of the Company's securities, and
to have the Plaintiffs awarded unspecified damages.
The Company is attempting to settle the O'Rourke Suit and the parties
agreed upon the principle terms of a settlement which was to include payment by
the Company of $75,000, of which $15,000 was to be in cash and the balance was
to be 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 Common Stock on the trading day preceding the date of the
signed definitive settlement agreement. However, due to regulatory
complications, no final settlement has been reached. There can be no assurance
that settlement will be reached. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended December 31, 1995.
14
<PAGE>
PART II
ITEM 5. 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 National
Association of Securities Dealers Automated Quotation System ("NASDAQ") 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 December 31, 1995, as
reported by the National Association of Securities Dealers. Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
do not necessarily represent actual transaction.
<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
<CAPTION>
Year Ended December 31, 1995 High Low
- ---------------------------- ---- ---
<S> <C> <C>
First Quarter $4.50 $2.00
Second Quarter $3.38 $1.75
Third Quarter $2.75 $1.50
Fourth Quarter $2.38 $1.13
</TABLE>
(1) The closing price on NASDAQ on February 29, 1996, was $1.38 per share of
Common Stock. As of February 29, 1996, the Company had approximately 860
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.
15
<PAGE>
ITEM 6. 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 Form 10-KSB.
OVERVIEW
From inception (July 1986) 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, 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, was 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 combined they
generated a profit. While subsequent to the acquisition, the Company's
operations were restructured, 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.
16
<PAGE>
With the acquisition of Janex in October 1993, the Company ceased
marketing the Great Stuff, Deco Disc and MicroTheatre product lines and focused
entirely on marketing the Janex products. See "Business of Issuer--Products."
By May of 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 product, 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". 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 OF THE COMPANY
The following table sets forth, for the periods indicated, the relative
percentage that certain income and expense items bear to net sales.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1995 1994
------------- -------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 56.8 54.6
------ -----
43.2 45.4
Royalties 13.3 10.3
Selling, general
& administrative expenses 41.3 27.7
------ -----
Operating income (loss) (11.4) 7.4
Other (expense) (0.4) (1.9)
------ -----
Income (loss) before taxes (11.8) 5.5
Income tax (expense) (0.4) (0.2)
------ -----
Income (loss) before
extraordinary item (12.2) 5.3
Extraordinary item 0.0 3.7
------ -----
Net Income (loss) (12.2)% 9.0 %
======== =======
</TABLE>
17
<PAGE>
MATERIAL CHANGES IN RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
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% of total sales, and the
shipment of products incorporating characters licensed from Warner Bros., which
generated sales of $2,822,000, or 30% 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% of total sales, and licenses from
Warner Bros. generated $512,000, or 4% 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 54% of total sales, or $7,386,000 in 1994, only generated 11% 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 revenue 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% of sales, and sales for Pro Gains and
MFSI ("FOB Hong Kong") for the year ended December 31, 1995, were $7,562,444, or
81% of sales. This compares to Domestic Sales for the year ended December 31,
1994, of $3,565,449, or 27% of total sales, and FOB Hong Kong sales for the year
ended December 31, 1994, of $9,380,646 or 72% of total sales. Since Janex and
Pro Gains, and Malibu and MFSI, operate in tandem as two profit centers, the net
profit of each entity viewed alone would not be 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 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 the recently acquired 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. Management sets prices
on most products to achieve a gross profit of between 45% and 50%. 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 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 the factories that produce those products. Gross profits are
expected to be in the 45% to 50% range in 1996.
18
<PAGE>
Royalty expense was $1,239,656 for the year ended December 31, 1995,
or 13.3% of sales, as compared to royalties of $1,345,625 for the year ended
December 31, 1994, which was 10.3% of sales. The increase in royalties 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. Royalty
expense for the year ended December 31, 1995, 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, will require payment of royalties ranging from
12% to 20% of the selling price.
Selling, general and administrative ("SG&A") expenses were $3,859,527,
or 41.3% of sales, for the year ended December 31, 1995, as compared to
$3,663,354, 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.
SG&A expenses are comprised of fixed overhead costs and variable selling
expenses. The fixed overhead portion of SG&A for the year ended December 31,
1995, was $2,866,982, approximately $535,692, or 23%, greater than in 1994. SG&A
increased during 1995 primarily as a result of increases in payroll costs of
18.4%, or $161,489, increases in travel and accommodation costs of $46.4%, or
$56,436, increases in depreciation of 16.6%, or $66,104, increases in product
development costs of 131.8%, or $248,581 and increases in communication costs of
40.9%, or $36,621. These increases were offset by decreases in occupancy costs
of 37.3%, or $43,693, and decreases in professional fees & investor relations of
20.4%, or $44,359. Product development costs for 1995 included a reserve of
$105,000 against product development costs associated with licenses under which
management expects to generate insufficient sales to recover the cost of those
product development costs.
The variable selling cost component of SG&A was $992,545 for the year
ended December 31, 1995, or 10.6% of sales, compared to $1,302,064 for the year
ended December 31, 1994, which was 9.9% of sales. 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 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 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 56.6%. The decrease was primarily attributable to a decrease in the
imputed interest charges of $28,222 on the Long-Term 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 the year.
During 1995 the Company recorded income tax expense of $36,909,
compared to income tax expense in 1994 of $27,629. The Company does not expect
there to be any income tax liability for 1995, as the
19
<PAGE>
Company suffered a net loss. The income tax expense relates to income tax paid
primarily on state tax returns that was not provided for in the income tax
provision in 1994. The Company did not accrue a United States tax liability in
1994 as a result of the substantial federal income tax loss carry forwards
available to the Company to offset future income. The income tax 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 profits 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, compared to a positive cash flow
in 1994 of $1,196,539. 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 $646,349, as a consequence of
the drop in revenues between 1994 and 1995. Inventories increased by $201,134
primarily as a result of the acquisition of Malibu, and amortization and
deprecation increased by $320,417 primarily as a result of the Company's
increased investment in tooling and product development costs.
The Company used $857,418 in investing activities for the year ended
December 31, 1995, compared to using $568,456 in 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 $259,459 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 generated $1,259,467 from financing activities during the
year ended December 31, 1995, compared to reducing financing by $199,400 during
1994. The cash generated from financing activities came primarily from an
increase in bank debt of $751,425, a private loan transaction of $500,000, and
proceeds from the exercise of warrants of $147,200, offset by a reduction in
stockholder notes payable of $139,158.
The Company assesses liquidity based upon its ability to provide
adequate sources of funds to meet foreseeable cash requirements. The Company
believes its existing cash balance together with its lines of credit and cash
flow from operations will not be sufficient to meet its financing requirements
during the next twelve months. Early forecasts for 1996 showed that in order to
meet desired manufacturing and shipping objectives the Company could suffer a
cash shortfall of as much as $1.0 million during 1996. The Company has
20
<PAGE>
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.
As a result of the projected shortfall, 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 per annum.
Further, the Company, at its option, may avail itself of the privilege
of borrowing up to $300,000 from its Hong Kong 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 22, 1996, the Company opened the stand-by letter
of credit to the Agent.
The Company is currently seeking suitable funding arrangements to meet
the balance of its anticipated shortfall. The Company has held, and is holding,
ongoing discussions with banks and other financing sources in its efforts to
cover its projected working capital deficiency. Another option available to the
Company would be a private placement of the Company's stock. There can be no
assurance that such financing will be available should it be necessary. If the
Company is unable to obtain adequate additional financing, management will be
required to curtail the operations of the Company.
The Company had a $1,000,000 line of credit with a bank, pursuant to a
loan agreement which expires on May 3, 1996. Loans from the credit line bear
interest at 9.50% as of December 31, 1995. 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. There
was $751,425 outstanding under the line of credit 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. 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.
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, Inc. issued a
21
<PAGE>
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 its Hong Kong agent, 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 is obligated to pay $1,000,000 in semi-annual installments
over a three year period (at December 31, 1995, the amount payable was $458,760
being 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 is obligated
to pay the note holders interest on the deferred payments at the rate of nine
percent (9%) per annum from December 31, 1995, through to the date of payment.
The Company intends to fund all future payments due under the $1,000,000 note
from its cash reserves or borrowings, and/or the revenues generated from
operations.
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 restricted common stock, 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).
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. See "Description of Business - Business Development". The combined
companies did not generate the level of sales required in 1995 to trigger
payments under the Malibu Earn-out provision.
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.
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, 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.
22
<PAGE>
As of December 31, 1995, the Company has significant amounts of net
operating loss carry forwards and other temporary differences which result in
deferred tax assets. It is not possible at this time to determine that the
realization of the deferred tax assets is more likely than not; accordingly, a
valuation reserve has been established for the full amount.
SUBSEQUENT EVENTS
Under the terms of the June 30, 1993, 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 (See - "Overview").
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.
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.
23
<PAGE>
LEGAL PROCEEDINGS
The Company is a defendant in a class action complaint filed on
February 17, 1993. The Company agreed to the principal terms of a settlement,
however, due to regulatory complications, no final settlement has been reached.
There can be no assurance that settlement will be reached. 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. See "Item 3. Legal Proceedings" and "Note
13 - Commitments and Contingencies: Legal Proceedings, to the Consolidated
Financial Statements".
INFLATION
Management believes that inflation has not had a significant impact on
the Company's costs and profits during the past two years.
24
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORTS 26
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet as of December 31, 1995 28
Statements of Operations for the years ended
December 31, 1995 and December 31, 1994 29
Statement of Changes in Stockholders' Equity for the
years ended December 31, 1995 and December 31, 1994 30
Statements of Cash Flows for the years ended
December 31, 1995 and December 31, 1994 31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 33
</TABLE>
25
<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
26
<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 & ANDERSON
ACCOUNTANCY CORPORATION
Sherman Oaks, California
February 17, 1995
27
<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.
28
<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.
29
<PAGE>
JANEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Total
Common Stock (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.
30
<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) 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>
31
<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.
32
<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.
33
<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.
34
<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.
35
<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.
36
<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:
<TABLE>
<S> <C>
Leasehold improvements $ 2,506
Equipment and furniture 128,035
Molds 1,155,294
----------
1,285,835
Accumulated depreciation (926,161)
----------
$ 359,674
==========
</TABLE>
NOTE 5 - PRODUCT DEVELOPMENT COSTS
Product development costs consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
Product development costs $ 598,752
Accumulated amortization and reserve (414,726)
----------
$ 184,026
==========
</TABLE>
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:
<TABLE>
<S> <C>
Licensing relationships $ 795,014
Trademarks 385,129
Goodwill 1,459,724
----------
2,639,867
Accumulated amortization (394,515)
----------
$ 2,245,352
==========
</TABLE>
37
<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.
38
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9 - ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
Accrued royalties $211,731
Accrued commissions 57,042
Accrued restructuring and other charges 118,392
Other accrued expenses 116,550
--------
$503,715
========
</TABLE>
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>
39
<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)
--------- ---------
Income tax provision $ 36,909 $ 27,629
========= =========
</TABLE>
40
<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.
41
<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:
42
<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.
43
<PAGE>
JANEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)
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.
44
<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>
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>
45
<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.
46
<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.
47
<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).
48
<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.
49
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 6, 1995, the Company engaged the services of BDO Seidman,
LLP, independent certified public accountants, to replace Kellogg & Andelson,
Accountancy Corporation, as the Company's independent auditors, for the fiscal
year ended December 1995. The independent auditors' report of Kellogg & Andelson
on the financial statements of the Company for the last two years have not
included an adverse opinion or disclaimer of opinion, and were not modified as
to uncertainty, audit scope or accounting principles. The independent auditors'
report of Kellogg & Andelson for the year ended December 31, 1994, included an
explanatory paragraph describing an uncertainty regarding a legal action related
to alleged federal securities law violations. The decision to change auditors
was both recommended and approved by the board of directors of the Company.
There were no disagreements with the former auditors on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which would have caused the former auditors to make reference to the
subject matter of the disagreement in connection with its report.
50
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth information regarding the Company's executive
officers and directors:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------------------------------------------
<S> <C> <C>
Sheldon F. Morick 58 Chairman of the Board, President,
Chief Executive Officer and Director
Michael S. Manahan 40 Vice President, Chief Financial Officer,
Secretary, Treasurer and Director
Renee White Fraser 42 Director
Daniel Lesnick 43 Janex Corporation, Executive Vice President
Terence F. Davis 49 Malibu Fun Stuffed, Inc., President
</TABLE>
SHELDON F. MORICK, has been President, Chief Executive Officer and a
Director of the Company since June 30, 1992. 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.
MICHAEL S. MANAHAN, has been Vice President, Chief Financial Officer,
Treasurer, Secretary and a Director of the Company since September 1, 1993. He
was previously Vice President, Chief Financial Officer, Treasurer and Secretary
of the Company from June 29, 1992, to August 31, 1993. From February 28, 1992,
to June 22, 1992, he was Vice-President Finance. From February 1990 to October
1991 Mr. Manahan was Chief Financial Officer of Barr Films/KVC Entertainment, an
Irwindale, California producer and distributor of special interest film and
video products. From May 1989 to January 1990 Mr. Manahan was Corporate
Controller of Bradbury International Equities Ltd., Vancouver, Canada, a company
operating in the food manufacturing and forestry products industries. From May
1988 to May 1989 Mr. Manahan was a consultant with Corporate Business Brokers,
Inc., in Vancouver, Canada, which specialized in providing acquisition and
divestiture services to business owners and corporations for small and middle
market companies. From June 1986 to April 1988, Mr. Manahan was Vice President -
Finance for Ark Development Corporation, in Vancouver, Canada. Mr. Manahan is a
graduate of the British Columbia Institute of Technology, in Financial
51
<PAGE>
Management, and a Certified General Accountant in British Columbia, Canada. Mr.
Manahan also has a Masters of Business Administration from Pepperdine
University, Malibu, California.
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 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. 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 Executive Vice President of Janex
Corporation, a wholly owned subsidiary of Janex International, Inc., 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.
TERENCE F. DAVIS, has been President of Malibu Fun Stuffed, Inc., a
wholly owned subsidiary of Janex International, Inc., since July 1992, a company
which he founded. 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.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who beneficially own more
than 10% of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission
("SEC"). Such persons are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company and
written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers,
directors, and more than 10% shareholders were complied with, except that a
Statement of Change in Ownership for Mr. Sheldon Morick, chief executive officer
and a director, and Mr. Les Friedland, a more than 10% shareholder, were not
timely filed with respect to a purchase and a sale of the Company's shares of
common stock in August, 1995, and April, 1995, respectively. Both Mr. Morick and
Mr. Friedland state that the failure to timely file was inadvertent. As of the
date hereof, there are no transactions for which Mr. Morick and Mr. Friedland
have not filed the appropriate form under Section 16(a) of the Exchange Act.
52
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
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.
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 & 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
- ---------------------------------------------------------------------------------------------------
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.
53
<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, CEO - - 262,500/350,000 $22,000/$5,000
- ---------------------------------------------------------------------------------------------------------------
Michael Manahan - - 91,250/140,000 $22,500/$7,500
- ---------------------------------------------------------------------------------------------------------------
Daniel Lesnick - - 12,500/50,000 - / -
===============================================================================================================
</TABLE>
The following table provides certain information concerning grants of options to
purchase the Company's Common Stock made during the fiscal year ended December
31, 1995, to persons named in the Summary Compensation Table:
<TABLE>
<CAPTION>
=============================================================================================================
Option Grants in Last Fiscal Year
Individual Grants in Fiscal 1995
=============================================================================================================
Name Number of Securities % of Total Options Exercise or Expiration Date
Underlying Options Granted to Employees Base Price
Granted (1) in Fiscal Year ($/sh)
<S> <C> <C> <C> <C>
Sheldon Morick,CEO 100,000 45.4% $2.125 04/01/00
- -------------------------------------------------------------------------------------------------------------
Michael Manahan 40,000 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.
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 $213,008 on an annual
basis), pursuant to an employment agreement dated March 26, 1993. Effective
April 1, 1995, in accordance with the employment contract, 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 restricted common stock, 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.
54
<PAGE>
Under the terms of this agreement, the Company has established an annual bonus
pool equal to 10% of the 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 has provided for compensation for Terence
Davis, President of Malibu Fun Stuffed, Inc., 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. 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 Company can terminate the agreement without cause in the event that
the Malibu Division does not achieve sales in fiscal year 1996 of $3 million, or
sales in fiscal 1997 of $4 million, however, in this case, the Company would be
required to continue Mr. Davis's salary for the lesser of one year, or the time
remaining between the date of termination and December 31, 1998.
The Board of Directors has provided for compensation for Michael S.
Manahan, Chief Financial Officer, at a salary of $9,000 per month plus $600 per
month of taxable benefits (a total of $115,200 on an annualized basis).
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 has 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.
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.
55
<PAGE>
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 do they contemplate implementing any such plans
at this time.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth information, as of March 26, 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 (9) of Class (9)
- --------------------- ----------------------- ----------------
<S> <C> <C>
Security ownership of certain beneficial owners:
Leslie Friedland 672,000 11.8%
615 Hope Road
Bldg 1, First Floor
Eatontown, NJ 07724
Deco Disc Industries, Inc.(2) 370,000 6.5%
4530 Chermak Street
Burbank, CA 91505
Howard W. Moore (3) 453,400 7.9%
15 Muir Beach Circle
Corona Del Mar, CA 92625
Security ownership of management:
Terence Davis (4) 75,000 1.3%
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
Daniel Lesnick (5) 540,500 9.5%
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
Renee White Fraser (6) 26,700 0.5%
100 Wilshire Blvd Ste 440
Santa Monica, CA 90401
Michael S. Manahan (7) 98,750 1.7%
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C>
Sheldon F. Morick (8) 278,500 4.9%
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
All officers and directors
as a group (four persons) 1,019,450 17.8%
</TABLE>
______________________________
(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) Includes 370,000 shares to be issued pursuant to warrants, all of which are
presently exercisable.
(3) 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. Does not include 135,000 warrants,
having an exercise price of $3.25, that are not currently exercisable, nor
100,000 public warrants, having an exercise price of $7.50. Of the shares
shown, Mr. Moore has sole voting and dispositive power over 65,900, and
shared voting and dispositive power over 380,500.
(4) President - Malibu Fun Stuffed, Inc. Former owner of Malibu, stock issued
in partial payment of Malibu purchase price.
(5) Executive Vice President - Janex Corporation. Former owner of Janex, stock
issued in partial payment of Janex purchase price. Includes 12,500 shares
to be issued pursuant to options which are presently exercisable.
(6) Director. Includes 22,500 shares to be issued pursuant to options which are
presently exercisable.
(7) Chief Financial Officer, Vice President and Director. Includes 91,250
shares to be issued pursuant to options which are presently exercisable.
(8) Chief Executive Officer, President and Director. Includes 262,500 shares to
be issued pursuant to options which are presently exercisable.
(9) Does not include 1,725,000 public warrants exercisable at $7.50 per share
nor 150,000 underwriter's warrants exercisable at $6.00 per share. Includes
270,000 shares issuable upon exercise of the Deco Disc Warrants.
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.
ITEM 12. 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 672,000 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 for the year ended December 31, 1995. Further, the Company rented
showroom space from LFA during a major industry trade
57
<PAGE>
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.
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 for the year ended December 31, 1995.
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, $33,060 for the year ended December 31, 1995.
Mr. Moore is also the Trustee of the Howard Moore Associates, Inc.
Retirement Trust ("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 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 May 17, 1994, HMA exercised the options and acquired 115,000 shares of
Common Stock, for gross proceeds to the Company of $135,000.
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
58
<PAGE>
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 for the year ended
December 31, 1995.
59
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits have been or are being filed
--------
herewith, and are numbered in accordance with Item 601 of Regulation S-B:
Exhibit
Number Description
- ------ -----------
2 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. (7)
2.1 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 (12)
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. (11)
4.1 Specimen Common Stock Certificate. (3)
4.2 Specimen Warrant Certificate. (5)
4.3 Form of Warrant Agreement. (5)
4.4 Amended Form of Representative's Warrants. (4)
4.5 1991 Non-Statutory Stock Option Plan. (5)
4.6 Amendment No. 1 dated January 15, 1993, to 1991 Non-
Statutory Stock Option Plan. (6)
4.7 Amendment No. 2 dated September 13, 1993, to 1991 Non-
Statutory Stock Option Plan. (6)
60
<PAGE>
Exhibit
Number Description
- ------ -----------
4.8 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. (9)
4.9 Warrant Agreement dated May 17, 1994, by and between the
Company and H&M Moore Investment Group, Inc. (9)
4.10 Settlement Warrant Agreement dated March 26, 1996, by
and between the Company and Deco Disc Industries, Inc.
(14)
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 Distribution Agreement between With Design in Mind, a
California corporation and wholly owned subsidiary, and
Deco Disc Industries, Inc., a Nevada corporation, dated
June 1, 1993. (6)
10.3 Employment Contract with Sheldon F. Morick, dated
February 26, 1993. (6)
10.4 Employment Contract with Daniel Lesnick, dated October
6, 1993. (6)
10.5 Stock Option Agreement with Sheldon F. Morick, dated
June 30, 1992. (6)
10.6 Stock Option Agreement with Sheldon F. Morick, dated
February 26, 1993. (6)
10.7 Stock Option Agreement with Sheldon F. Morick, dated
November 17, 1993. (6)
10.8 Stock Option Agreement with Michael S. Manahan, dated
June 30, 1992. (6)
10.9 Stock Option Agreement with Michael S. Manahan, dated
November 17, 1993. (6)
10.10 Stock Option Agreement with Renee White Fraser, dated
June 25, 1993. (6)
10.11 Stock Option Agreement with Renee White Fraser, dated
November 17, 1993. (6)
10.12 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. (12)
61
<PAGE>
Exhibit
Number Description
- ------ -----------
10.13 Stock Purchase Agreement dated May 17, 1994, by and
between the Company and H&M Moore Investment Group, Inc.
(9)
10.14 Settlement Agreement dated October 17, 1994, by and
between the Company and Dentsu Prox Inc. (10)
10.15 Stock Option Agreement with Sheldon F. Morick dated
April 3, 1995 (13)
10.16 Stock Option Agreement with Daniel Lesnick dated April
3, 1995 (13)
10.17 Stock Option Agreement with Michael S. Manahan dated
April 3, 1995 (13)
10.18 Stock Option Agreement with Renee W. Fraser dated April
3, 1995 (13)
10.19 Employment Contract with Terence Davis, dated August 4,
1995. (14)
10.20 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 (14)
16 Letter to Securities and Exchange Commission from
Kellogg & Andelson, dated October 31, 1995 (8)
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
27 Financial Data Schedule
______________________________
(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 on March 20, 1991 as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1.
(5) Filed on May 7, 1991 as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1.
(6) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
December 31, 1993.
(7) Filed as an exhibit to the Company's Form 8-K dated October 6, 1993.
(8) Filed as an exhibit to the Company's Form 8-K/A dated October 5, 1995.
(9) Filed as an exhibit to the Company's Form 8-K dated May 17, 1994.
(10) Filed as an exhibit to the Company's Form 8-K dated October 14, 1994.
(11) Filed on December 20, 1994 as an exhibit to the Company's Registration
Statement.
(12) Filed as an exhibit to the Company's Form 8-K dated August 4, 1995
(13) Filed as an exhibit to the Company's Form 8-K dated April 3, 1995
(14) Filed herewith.
62
<PAGE>
b) Reports on form 8-K. The Following reports were filed on form 8-K
--------------------
during the last quarter of the fiscal year:
Date of Report Item
-------------- -----------------------------------
October 5, 1995 Item 4. Changes in Registrants Certifying
Accountant
63
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Balance at Balance at
beginning end
of year Additions Deductions of year
--------------------------------------------------
<S> <C> <C> <C> <C>
1995
Allowance for doubtful accounts deducted from
accounts receivable in balance sheet $197,543 $217,727 $205,154 $210,116
======== ======== ======== ========
Reserve for unproductive development costs deducted
from product development costs in balance sheet $ - $105,000 $ - $105,000
======== ======== ======== ========
Reserve for unproductive licenses deducted from
prepaid royalties in the balance sheet $ - $122,500 - $122,500
======== ======== ======== ========
1994
Allowance for doubtful accounts deducted from
accounts receivable in balance sheet $151,983 $482,443 $436,883 $197,543
======== ======== ======== ========
Reserve for unproductive development costs deducted
from product development costs in balance sheet $ - $ - $ - $ -
======== ======== ======== ========
Reserve for unproductive licenses deducted from
prepaid royalties in the balance sheet $ - $ - - -
======== ======== ======== ========
</TABLE>
64
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: April 3, 1996
JANEX INTERNATIONAL, INC.
By: /s/ Sheldon F. Morick
-------------------------------------
Sheldon F. Morick, Chairman of the Board,
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Sheldon F. Morick Chairman of the Board, President April 3, 1996
- ------------------------
Sheldon F. Morick Chief Executive Officer and Director
/s/ Michael S. Manahan Vice President, Chief Financial April 3, 1996
- ------------------------
Michael S. Manahan Officer, Treasurer, Secretary,
Director and Chief Accounting Officer
/s/ Renee White Fraser Director April 3, 1996
- ------------------------
Renee White Fraser
65
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Description Page
- ------ ------------------- ----
<S> <C> <C>
2 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. (7)
2.1 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 (12)
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.
(11)
4.1 Specimen Common Stock Certificate. (3)
4.2 Specimen Warrant Certificate. (5)
4.3 Form of Warrant Agreement. (5)
4.4 Amended Form of Representative's Warrants. (4)
4.5 1991 Non-Statutory Stock Option Plan. (5)
4.6 Amendment No. 1 dated January 15, 1993, to 1991 Non-
Statutory Stock Option Plan. (6)
4.7 Amendment No. 2 dated September 13, 1993, to 1991
Non-Statutory Stock Option Plan. (6)
4.8 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. (9)
4.9 Warrant Agreement dated May 17, 1994, by and
between the Company and H&M Moore Investment Group,
Inc. (9)
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Description Page
- ------ ------------------- ----
<S> <C> <C>
4.10 Settlement Warrant Agreement dated March 26, 1996,
by and between the Company and Deco Disc
Industries, Inc. (14)
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 Distribution Agreement between With Design in Mind,
a California corporation and wholly owned
subsidiary, and Deco Disc Industries, Inc., a
Nevada corporation, dated June 1, 1993. (6)
10.3 Employment Contract with Sheldon F. Morick, dated
February 26, 1993. (6)
10.4 Employment Contract with Daniel Lesnick, dated
October 6, 1993. (6)
10.5 Stock Option Agreement with Sheldon F. Morick,
dated June 30, 1992. (6)
10.6 Stock Option Agreement with Sheldon F. Morick,
dated February 26, 1993. (6)
10.7 Stock Option Agreement with Sheldon F. Morick,
dated November 17, 1993. (6)
10.8 Stock Option Agreement with Michael S. Manahan,
dated June 30, 1992. (6)
10.9 Stock Option Agreement with Michael S. Manahan,
dated November 17, 1993. (6)
10.10 Stock Option Agreement with Renee White Fraser,
dated June 25, 1993. (6)
10.11 Stock Option Agreement with Renee White Fraser,
dated November 17, 1993. (6)
10.12 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. (12)
10.13 Stock Purchase Agreement dated May 17, 1994, by and
between the Company and H&M Moore Investment Group,
Inc. (9)
10.14 Settlement Agreement dated October 17, 1994, by and
between the Company and Dentsu Prox Inc. (10)
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Description Page
- ------ ------------------- ----
<S> <C> <C>
10.15 Stock Option Agreement with Sheldon F. Morick dated
April 3, 1995 (13)
10.16 Stock Option Agreement with Daniel Lesnick dated
April 3, 1995 (13)
10.17 Stock Option Agreement with Michael S. Manahan
dated April 3, 1995 (13)
10.18 Stock Option Agreement with Renee W. Fraser dated
April 3, 1995 (13)
10.19 Employment Contract with Terence Davis, dated
August 4, 1995. (14)
10.20 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 (14)
16 Letter to Securities and Exchange Commission from
Kellogg & Andelson, dated October 31, 1995 (8)
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
27 Financial Data Schedule
</TABLE>
______________________________
* Note filed herewith.
(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 on March 20, 1991 as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1.
(5) Filed on May 7, 1991 as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1.
68
<PAGE>
(6) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
December 31, 1993.
(7) Filed as an exhibit to the Company's Form 8-K dated October 6, 1993.
(8) Filed as an exhibit to the Company's Form 8-K/A dated October 5, 1995.
(9) Filed as an exhibit to the Company's Form 8-K dated May 17, 1994.
(10) Filed as an exhibit to the Company's Form 8-K dated October 14, 1994.
(11) Filed on December 20, 1994 as an exhibit to the Company's Registration
Statement.
(12) Filed as an exhibit to the Company's Form 8-K dated August 4, 1995
(13) Filed as an exhibit to the Company's Form 8-K dated April 3, 1995
(14) Filed herewith.
69
<PAGE>
Exhibit 4.10
SETTLEMENT WARRANT AGREEMENT
----------------------------
This Settlement Warrant Agreement (the "Warrant Agreement") is made this
26th day of March, 1996, by and between Janex International, Inc., a Colorado
Corporation (the "Company") and Deco Disc Industries, Inc., a Nevada corporation
(referred to herein as "Deco Disc"). The parties agree as follows:
1. THE WARRANT.
-----------
A. GRANT OF WARRANT.
----------------
The Company hereby grants warrants ("Warrants") to Deco Disc to
purchase up to ONE HUNDRED THOUSAND (100,000) 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 March 26, 1996, and shall terminate at 5:00 p.m., California time,
on the later of: (i) March 26, 1999 or (ii) two years after the effective date
of the first registration statement in which the Warrant Stock is registered.
Notwithstanding the above, unless extended by the mutual agreement of Deco Disc
and the Company, no Warrant shall be exercisable after 5:00 p.m., California
time, on March 26, 2001. The termination date of the Warrants is referred to
herein as the "Warrant Expiration Date".
C. EXERCISE OF WARRANT.
-------------------
The Warrants granted hereunder are all exercisable as of the date
hereof. 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(d). 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. As used herein, the term
"Warrant Holder" shall mean Deco Disc, to whom the Warrants are initially
issued, and any permitted assignee.
1
<PAGE>
D. EXERCISE PRICE.
--------------
The Exercise Price for each share of Warrant Stock shall be $0.64 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.
E. PAYMENT OF EXERCISE PRICE.
-------------------------
Payment of the Exercise Price shall be made by cashier's or certified
check made payable to Company.
F. NO FRACTIONAL SHARES.
--------------------
No fractional share shall be issued on exercise of any Warrant.
G. 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 SECURITES" 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.
2. REGISTRATION.
-------------
A. "PIGGY-BACK" REGISTRATION RIGHTS.
-----------------------------------
If at any time or from time to time, 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
2
<PAGE>
("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, 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 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
3
<PAGE>
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, 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
4
<PAGE>
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
433 North Camden Drive, Suite 1010
Beverly Hills, CA 90210
Attn: Ronald J. Grant, Esq.
If to Warrant Deco Disc Industries, Inc.
Holder: 4530 Chermak Street
Burbank, California 91505
Atten: James E. McGraw
5
<PAGE>
With a Copy to: MORRIS & SPENCER
21800 Oxnard Street, Suite 1190
Woodland Hills, CA 91367
Atten: Richard G. Morris, Esq.
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 agree ments, 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
6
<PAGE>
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 Deco Disc
without the prior written consent of the Company. Provided, however, that Deco
Disc may, upon written notice to the Company, but without the consent of the
Company, assign this Warrant Agreement in whole or in part, but not in
increments of less than 5,000 Warrants, to one or more shareholders of Deco
Disc, provided that (1) any assignee meets the definition of an "Accredited
Investor" as that term is defined in Rule 501 of Regulation D, promulgated under
the Securities Act of 1933, (2) executes and delivers to the Company customary
and usual representations and warranties similar to that executed by Deco Disc
in connection with the issuance and delivery of this Warrant Agreement, and (3)
the assignee delivers to the Company an opinion of counsel, reasonably
acceptable to the Company, that an applicable exemption from registration under
state and federal securities laws is available with respect to the assignment to
the proposed assignee. Any assignment in violation of the foregoing shall be
void.
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 RELEASE.
--------------------
This Warrant Agreement is entered into pursuant to the provisions of a
Settlement Agreement and Specific Release, dated March 26, 1996, entered into
between the Company, Deco Disc, and each of the shareholders of Deco Disc.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this instrument as of the
date first above written.
"WARRANT HOLDER" "COMPANY"
-------------- -------
DECO DISC INDUSTRIES, INC. JANEX INTERNATIONAL, INC.
By:/s/ James E. McGraw By:/s/ Sheldon F. Morick
----------------------- --------------------------
James E. McGraw, Sheldon F. Morick,
President President
8
<PAGE>
Exhibit 10.19
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
4th day of August, 1995, by and among MALIBU FUN STUFFED, a California
corporation (referred to herein as "Employer"), JANEX INTERNATIONAL, INC., a
Colorado corporation ("Janex") and TERENCE F. DAVIS ("Employee"), with reference
to the following:
A. Janex has purchased all of Employee's shares of stock of
Employer, and Employer has become a wholly owned subsidiary of Janex.
B. This Agreement is being entered into in connection with the purchase
by Janex of the shares of stock of Employer.
NOW, THEREFORE, the parties hereto agree as follows:
1. Duties. Employer hereby employs Employee as the President and Chief
------
Operating Officer of Employer. Employee shall report to the Chairman of the
Board of Employer or, alternatively, to the President of Janex. Employee
shall be responsible for product development, marketing and sales. Employee
shall also perform such other duties that the Board of Directors may
reasonably request. Employee shall also serve in such executive capacity
with respect to Malibu Fun Stuffed International Limited, a Hong Kong
corporation, as the President of Janex may reasonably determine, without
additional compensation. Employee shall perform his duties in the Southern
California region, with the exception of business travel.
2. Term. The term of employment shall commence effective as of the date
----
hereof, and shall end on December 31, 1998, subject to earlier termination
as set forth below.
3. Salary.
------
a. Employee shall receive from Employer, as compen sation for his
services, a salary of Six Thousand Two Hundred Fifty Dollars
($6,250.00) per month, during the term hereof, payable in equal semi-
monthly installments on the 15th and last day of each month, subject
to usual withholding and other employment related taxes.
b. The Board of Directors of Employer shall annually review
Employee's compensation and may in its discretion, grant additional
compensation or bonus(es) to Employee.
4. Janex Stock Options. During the term of this Agreement, Employee
-------------------
shall be eligible to receive Janex stock options, in amounts, at such time
or times and upon such terms and conditions as the Board of Directors of
Janex may determine, in its sole discretion.
1
<PAGE>
5. 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 such medical insurance coverage for Employee and his dependents, as
Janex customarily provides for its employees, which may be under the plan
carried by Janex.
6. 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 out his duties hereunder. Additionally,
Employee shall be entitled to receive, within thirty (30) 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.
7. Automobile Allowance. During the term of this Agreement, Employer
--------------------
shall pay to Employee an automobile allowance of Five Hundred Dollars
($500.00) per month. The automobile allowance shall be paid at the end of
each month during the term of this Agreement.
8. 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
adversely affecting Employer or its affiliates or any of their
employees; or (3) Employee's conviction of a crime involving moral
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 period of three (3) months.
c. This Agreement shall terminate immediately upon the death of
Employee, at which time Employer shall pay to Employee's estate all unpaid
expenses, and compensation which were incurred, earned or granted prior to
employee's death, but not to include any severance benefit.
d. Employer may terminate Employee, without cause, within three (3)
months after the audited Janex financial statements are issued for Employer's
fiscal years set forth below, in the event the following goals are not met for
Employer and Malibu Fun Stuffed International Limited on a combined basis
("Combined Malibu"):
2
<PAGE>
<TABLE>
<CAPTION>
Combined Malibu Gross
Fiscal Year Sales Revenue Goal
- ---------------------------------------------------------
<S> <C>
12/31/96 $3,000,000.00
12/31/97 $4,000,000.00
</TABLE>
In the event Employer terminates Employee under this subparagraph (d), Employer
agrees to pay Employee's salary, for the lesser of: (1) one (1) year from the
date of such termination or (2) from the date of such termination until December
31, 1998.
9. Restrictive Covenant.
--------------------
a. 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.
Notwithstanding the foregoing, nothing herein shall prevent the Employee from
owning not more than five percent (5%) of the shares of stock of a corporation
whose shares are traded on a national securities exchange.
b. For and as additional consideration for the Employer's entry into
this Agreement, and the purchase by Janex of all of the shares of stock of
Employer owned by Employee, Employee agrees that upon the termination of this
Agreement, Employee shall not, for a period of three (3) year after such
termination, within the Territory defined below, directly or indirectly own,
manage, operate, join, control, be employed by or participate in the ownership,
management, operation or control of, or be connected with, any business which
directly competes with any products manufactured, marketed or sold by Employer
or its affiliates as of the time of the termination of Employee's employment. As
used herein, the term "Territory" shall mean all counties in the State of
California in which Employer or any of its affiliates does business as of the
date of termination, all of the names of which are incorporated herein by
reference, but which include, but are not limited to the counties of Los
Angeles, Orange, Ventura, San Bernardino, San Diego, Sacramento, San Francisco,
California, and such other counties or political subdivisions in the United
States and Hong Kong, in which Employer or any of its affiliates does business
as of the date of such termination.
c. The provisions of paragraph 9(b) shall be interpreted such that
Employee makes a separate covenant not to compete for each county or political
subdivision within the Territory. In the event a court of competent jurisdiction
determines that a covenant not to compete is not enforceable as to a particular
county or counties or other area, then the court shall excise such county or
counties or other area from the provisions of paragraph 9(b) and said paragraph
shall be enforceable as to the remaining county, counties or other area.
3
<PAGE>
10. 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 during the term hereof and for a period of three
years after the termination of this Agreement, regard and preserve as
confidential such Confidential Information previously known by the
Employee prior to his execution hereof, or obtained by Employee from
whatever source during the course of his employment hereunder, and he
will not, either during his employment or during the three years
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, or unless
such Confidential Information becomes otherwise lawfully publicly
known. 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, within the course and scope of his duties
hereunder, 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 Infor mation 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, 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.
d. Employee agrees, at any time during Employee's employment or
thereafter, upon request and without
4
<PAGE>
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, 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) days thereafter, shall claim ownership of such Invention
under the terms of this Agreement.
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 10 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 "A" attached hereto.
j. Employee acknowledges that Janex is a public company whose shares
trade on The NASDAQ Stock Market. 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
5
<PAGE>
known to outsiders, might affect their investment decision.
Furthermore, if Employee is or becomes an officer or director of Janex
or if Employee owns more than 10% of Janex's common stock, Employee
acknowledges that he has or will have certain filing requirements
under Section 16(a) of the Securities Exchange Act of 1934 ("Exchange
Act"), and that he is familiar with Section 16(b) of the Exchange Act,
which requires a person in such a position, who makes a profit from
the purchase and sale, or any sale and purchase of Janex's securities
(including but not limited to options, warrants and common stock),
within a six month period, to disgorge such profits to Janex.
k. The provisions of this paragraph 10 shall specifically survive
any termination of this Agreement.
11. Equitable Remedies. Employee acknowledges that the disclosure of such
------------------
Confidential Information or a breach of the aforesaid covenant not to
compete, will result in immediate and irreparable damage to Employer and
that money damages alone would be inadequate to compensate Employer.
Therefore, to further induce Employer to enter this Agreement and as
additional valuable consideration therefor, Employee agrees that in the
event of a breach or threatened breach of the provisions of this Agreement
pertaining to the covenant not to compete or the agreement not to disclose,
Employer may, in addition to other remedies, immediately obtain and enforce
injunctive relief, including but not limited to obtaining and enforcing a
temporary restraining order, consent to which is hereby specifically given
by Employee, prohibiting the breach hereof and compelling performance
hereunder.
12. Attorneys' Fees. In the event any 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 Court shall
have the power and authority to determine which party(ies) is the
prevailing party(ies).
13. 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: Malibu Fun Stuffed
5312 Derry Avenue, Suites Q & R
Agoura Hills, CA 91301
Atten: Sheldon F. Morick, Chairman
6
<PAGE>
IF TO JANEX: Janex International, Inc.
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367
Atten: Sheldon F. Morick, President
IF TO EMPLOYEE: Mr. Terence Davis
23901 Civic Center Drive
Malibu, CA 90265
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 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.
14. 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.
15. Applicable Law. This Agreement shall be interpreted, governed by and
--------------
enforced in accordance with the internal laws of the State of California.
16. Modification. This Agreement shall not be changed, modified, or
------------
amended in any respect except by a written instrument signed by all the
parties hereto.
17. 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.
18. 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.
19. Headings. Headings in this Agreement are for convenience only and
--------
shall not be used to interpret or construe its provisions.
7
<PAGE>
20. 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.
21. 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 and year first above written.
"EMPLOYER" "EMPLOYEE"
- ----------------------------------------------
MALIBU FUN STUFFED
By: /s/ Sheldon F. Morick /s/ Terence Davis
------------------------- ---------------------
Sheldon F. Morick, Terence F. Davis
Chairman of the Board
"JANEX"
- -------
JANEX INTERNATIONAL, INC.
By: /s/ Sheldon F. Morick
-------------------------
Sheldon F. Morick,
President
8
<PAGE>
STATEMENT ON CONCLUSION OF EMPLOYMENT
-------------------------------------
In connection with the conclusion of my employment with Malibu Fun Stuffed
(herein referred to 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 an obligation under the Employment Agreement
signed by me on August __, 1995, to disclose information concerning certain
described "Inventions" in accordance therewith, 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 10.20
SETTLEMENT AGREEMENT
AND SPECIFIC RELEASE
This Settlement Agreement and Specific Release ("Agreement") is entered
into this 26th day of March, 1996, by and between JANEX INTERNATIONAL, INC., a
Colorado Corporation, formerly known as With Design in Mind International, Inc.
("Janex"), on the one hand, and DECO DISC INDUSTRIES, INC., a Nevada corporation
("Deco Disc"), and its shareholders, Donald Spector, Michael Deutsch, Barbara
Carver and James E. McGraw (Deco Disc and its shareholders are jointly and
severally referred to herein as the "Deco Disc Parties"), on the other hand,
with reference to the following:
A. On June 1, 1993, With Design in Mind, a subsidiary of Janex entered
into a Distributor Agreement with Deco Disc. In connection with the Distributor
Agreement, Janex entered into a Warrant Agreement with Deco Disc, dated June 30,
1993 ("Warrant Agreement"), whereby Deco Disc was granted 500,000 common stock
purchase warrants ("Warrants"), with certain registration rights.
B. Pursuant to the terms of the Warrant Agreement, the shares of Janex's
common stock underlying the Warrants (the "Warrant Stock") were registered on a
Form SB-2 Registration Statement (the "Registration Statement") with the
Securities and Exchange Commission ("SEC"), on February 13, 1995, SEC File No.
33-87662 (the "Registration").
C. From time to time Deco Disc has exercised its Warrants, and the
original Warrant Agreement has been replaced with successive new Warrant
Agreements, representing the balance of the Warrants not yet exercised. As used
herein, the term "Warrant Agreement" shall include the Warrant Agreement dated
June 30, 1993, and each Warrant Agreement issued in replacement thereof.
D. From time to time the Deco Disc Parties have claimed that they have
been damaged by Janex's failure to register the Warrant Stock within the time
limits required by the Warrant Agreement. Additionally, the Deco Disc Parties
claim that they have been and continue to be damaged by Janex's failure to
timely file a post-effective amendment to the Registration Statement and to
update the Prospectus contained therein.
E. Janex claims that a certain Deco Disc Party or Parties has threatened
litigation against Janex which impairs certain financing contemplated by Janex.
F. Janex denies that it has breached any provision of the Warrant
Agreement, or any other agreement with Deco Disc, and denies that the Deco Disc
Parties have been damaged through any action or inaction of Janex. The Deco Disc
Parties deny that any
1
<PAGE>
Deco Disc Party has threatened litigation which affects any such financing.
G. Notwithstanding the viability of any potential cause of action that
Janex or the Deco Disco Parties may have, in order to avoid protracted and
expensive litigation, the parties hereto have agreed to settle their differences
in accordance with the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing recitals, and the mutual
promises of the parties hereinafter contained, the parties hereto agree as
follows:
i. Granting of New Warrants. For and in consideration of the
------------------------
release set forth in Paragraph 2 below, upon the execution of
this Agreement by all parties, Janex shall grant 100,000
unregistered warrants to acquire 100,000 shares of Janex
restricted common stock, all in accordance with and in the form
of the Settlement Warrant Agreement attached hereto as Exhibit
"A" and incorporated herein by this reference. Upon the execution
of this Agreement by all parties, Janex and Deco Disc shall
execute and deliver to each other, duplicate copies of the
Settlement Warrant Agreement attached hereto as Exhibit "A." As a
condition precedent to delivery of the Settlement Warrant
Agreement, Deco Disc shall execute and deliver to Janex the
Investment Letter attached hereto as Exhibit "B."
ii. Specific Release by Deco Disc Parties.
-------------------------------------
(a) Subject to Paragraph 2(b) below and except for the obligations
set forth in this Agreement and the Settlement Warrant Agreement, Deco Disc,
Donald Spector, Michael Deutsch, Barbara Carver and James E. McGraw, and each of
them, and each of their respective heirs, executors, personal representatives,
successors and assigns, hereby release, acquit and forever discharge Janex
International, Inc., its subsidiaries, its transfer agent, and each of their
respective shareholders, directors, officers, agents, employees, and attorneys
(jointly and severally referred to as the "Janex Released Parties") from any and
all claims, obligations, liabilities, debts, demands, suits, orders, covenants,
losses, costs, expenses, and attorneys' fees, of every kind and nature
whatsoever, whether now known or unknown, arising out of or relating in any
manner whatsoever to: (1) any breach or violation by the Janex Released Parties
arising or occurring prior to the date of this Agreement, of (i) the Warrant
Agreement or (ii) the Distributor Agreement; (2) any failure to prepare and file
a Post-Effective Amendment to the Registration Statement (including an updated
Prospectus) prior to June 29, 1996, and (3) any failure
2
<PAGE>
to perform any other act required to make the Warrant Stock freely tradable
prior to June 29, 1996.
(b) The foregoing release in no way impairs the continuing
contractual obligations of Janex under the Warrant Agreement from and after the
date of this Agreement (except with respect to the Post-Effective Amendment
referred to and any failure to perform any other act required to make the
Warrant Stock freely tradable prior to June 29, 1996) and the Warrant Agreement
shall remain in full force and effect, following the execution of this
Agreement.
iii. Specific Release by Janex.
-------------------------
(a) Subject to Paragraph 3(b) below and except for the obligations
set forth in this Agreement, and the Settlement Warrant Agreement, Janex
International, Inc. and its successors and assigns, hereby releases, acquits and
forever discharges the Deco Disc Parties, and Deco Disc's directors, officers,
agents, employees and attorneys, and the personal representatives, successors,
assigns, agents, attorney's and employees of the other Deco Disc Parties
(jointly and severally referred to as the "Deco Disc Released Parties") from any
and all claims, obligations, liabilities, debts, demands, suits, orders,
covenants, losses, costs, expenses, and attorneys' fees, of every kind and
nature whatsoever, whether now known or unknown, arising out of or relating in
any manner whatsoever to: (1) any breach or violation by the Deco Disc Released
Parties, arising or occurring prior to the date of this Agreement, of (i) the
Warrant Agreement or (ii) the Distributor Agreement, and (2) any claim based on
conduct occuring prior to the date of this Agreement, that any Deco Disc Party
has threatened litigation which has affected or impaired the ability of Janex to
obtain financing or otherwise damaged it.
(b) The foregoing release in no way impairs the continuing
contractual obligations of Deco Disc under the Warrant Agreement from and after
the date of this Agreement and the Warrant Agreement shall remain in full force
and effect, following the execution of this Agreement.
iv. Amendment to Warrant Agreement. The last sentence of
------------------------------
Paragraph 2.e. of the Warrant Agreement is amended to read: "No
registration right referred to in Paragraph 2.a. above shall last
longer that three (3) years from the date of the original Warrant
Agreement (June 30, 1993)."
v. No Admissions. Notwithstanding the provisions of this
-------------
Agreement, no party hereto admits any liability whatsoever to any
other party hereto.
3
<PAGE>
vi. Governing Law. This Agreement shall be interpreted and
-------------
enforced in accordance with the laws of the State of California.
vii. Captions. The captions of paragraphs of this Agreement are
--------
for convenience and identification only, and shall not be deemed
to limit, amplify, or define the contents of the respective
sections or paragraphs to which they pertain.
viii. Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which shall be deemed an original and
which shall together constitute one and the same instrument.
ix. Entire Agreement. This Agreement and its exhibits,
----------------
constitutes the entire agreement between the parties concerning
the subject matter hereof and supersedes all prior and
contemporaneous agreements, understandings, terms, conditions and
representations, written or oral, made by the parties concerning
the matters covered by this Agreement. This Agreement may be
amended or modified only by a written agreement signed by the
parties hereto.
x. Binding on Successors. The terms, covenants, conditions and
---------------------
provisions of this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective
heirs, executors, personal representatives, successors and
assigns.
xi. No Assignment of Claims. The parties hereto, and each of
-----------------------
them, represent and warrant that none of them have sold,
conveyed, assigned or in any manner transferred or purported to
sell, convey, assign or transfer, voluntarily or by operation of
law, any of the claims released in this Agreement.
xii. Attorneys' Fees. In the event any action or proceeding is
---------------
instituted to interpret or enforce any of the provisions of this
Agreement, the prevailing party shall be entitled to reasonable
attorneys' fees.
xiii. Incorporation of Recitals. The Recitals set forth in
-------------------------
Paragraphs A through G above are incorporated herein and hereat
by reference.
4
<PAGE>
xiv. Authority. Each individual executing this Agreement on
---------
behalf of an entity represents and warrants that such individual
has full power, authority and right to execute this Agreement on
behalf of such entity, and to bind the entity hereto, and that
such entity knows of and has approved and authorized the
execution of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"JANEX" "DECO DISC PARTIES"
JANEX INTERNATIONAL, INC. DECO DISC INDUSTRIES, INC.
By: /s/ Sheldon F. Morick By: /s/ James E. McGraw
----------------------- -------------------------
Sheldon F. Morick, James E. McGraw,
President President
/s/ James E. McGraw
----------------------------
James E. McGraw, individually
/s/ Donald Spector
----------------------------
Donald Spector, individually
/s/ Michael Deutsch
----------------------------
Michael Deutsch, individually
/s/ Barbara Carver
----------------------------
Barbara Carver, individually
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF JANEX INTERNATIONAL, INC. AS OF DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,283,564
<SECURITIES> 0
<RECEIVABLES> 705,103
<ALLOWANCES> 210,116
<INVENTORY> 605,623
<CURRENT-ASSETS> 2,647,930
<PP&E> 1,285,835
<DEPRECIATION> 926,161
<TOTAL-ASSETS> 5,448,967
<CURRENT-LIABILITIES> 2,576,320
<BONDS> 0
0
0
<COMMON> 11,054,816
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,448,967
<SALES> 9,355,021
<TOTAL-REVENUES> 9,355,021
<CGS> 5,315,659
<TOTAL-COSTS> 10,414,842
<OTHER-EXPENSES> 41,902
<LOSS-PROVISION> 61,903
<INTEREST-EXPENSE> 89,429
<INCOME-PRETAX> (1,100,913)
<INCOME-TAX> 36,909
<INCOME-CONTINUING> (1,100,913)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,100,913)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
