<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: Not applicable
Commission file number 0-17927
JANEX INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1034251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21700 OXNARD STREET, STE. 1610, WOODLAND HILLS, CALIFORNIA 91367
(Address of principal executive offices) (Zip Code)
818-593-6777
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act of 1934 during the past 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 [ ]
As of April 30, 1997, the issuer had 5,296,721 shares of its common stock,
no par value, issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Total sequentially numbered pages in this document: 21
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheet as of
December 31, 1996 and March 31, 1997. . . . . . . . . 3
Consolidated Statements of Operations
for the three months ended
March 31, 1997 and 1996 . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
for the three months ended
March 31, 1997 and 1996 . . . . . . . . . . . . . 5 - 6
Notes to Consolidated Financial Statements . . . 7 - 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION . . . . . . . . . . . . . . . 13 - 19
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . 20
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
2
<PAGE>
JANEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 353,477 $ 186,616
Certificate of deposit (Note 5) 500,000 500,000
Accounts receivable,
net of allowance of $200,402 & $202,634 797,576 230,479
Inventories 354,266 569,637
Prepaid royalties 182,465 182,465
Other current assets 117,772 179,108
------------ ------------
Total current assets 2,305,556 1,848,305
PROPERTY AND EQUIPMENT, net 439,038 476,355
INTANGIBLE ASSETS, net 1,965,601 2,021,551
PRODUCT DEVELOPMENT COSTS, net 257,891 242,471
DEFERRED LOAN CHARGES 254,889 331,155
OTHER ASSETS 7,734 11,939
------------ ------------
$ 5,230,709 $ 4,931,776
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Loan payable - bank (Note 5) $ 400,000 $ 400,000
Loans payable - agent (Note 6) 309,844 450,088
Accounts payable 1,345,523 809,308
Accrued expenses 1,104,987 848,359
Note payable (Note 8) 394,515 531,356
Income taxes payable -0- 1,940
------------ ------------
Total current liabilities 3,554,869 3,041,051
Notes payable - stockholders (Note 7) 1,205,000 1,115,000
------------ ------------
Total liabilities 4,759,869 4,156,051
Commitments and contingency (Notes 2 and 3) -- --
STOCKHOLDERS' EQUITY (Note 4)
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; 5,296,721 shares issued and
outstanding 11,268,816 11,268,816
Additional paid-in capital 554,517 554,517
Accumulated deficit (11,352,493) (11,047,608)
Total stockholders' equity 470,840 775,725
------------ ------------
$ 5,230,709 $ 4,931,776
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
JANEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
------------ -----------
<S> <C> <C>
NET SALES $1,733,876 $ 894,306
---------- ----------
COSTS AND EXPENSES
Cost of sales 1,044,225 531,695
Selling, general and administrative 639,938 683,093
Royalty expense 91,903 33,192
---------- ----------
Total costs and expenses 1,776,066 1,247,980
---------- ----------
OPERATING LOSS (42,190) (353,674)
---------- ----------
OTHER INCOME (EXPENSE)
Interest income 6,685 11,663
Interest expense (125,729) (14,795)
Foreign exchange loss -- (1,194)
Depreciation/Amortization (144,801) (115,779)
Loss from settlement with
warrant holder (Note 4) -- (84,125)
Gain on disposal of fixed assets 1,500 --
---------- ----------
Total other income (expense) (262,345 (204,230)
---------- ----------
LOSS BEFORE INCOME TAX (304,535) (557,904)
INCOME TAX PROVISION 350 5,096
---------- ----------
NET LOSS $ (304,885) $ (563,000)
========== ==========
LOSS PER COMMON SHARE $ (0.06) $ (0.11)
========== ==========
WEIGHTED AVERAGE NUMBER
OF SHARE OUTSTANDING 5,296,721 5,046,721
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(304,885) $(563,000)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities:
Provision for losses on
accounts receivable, net (2,232) 45,247
Amortization 85,280 105,430
Depreciation 59,521 31,356
Imputed interest 76,266 --
Loss from settlement with
warrant holder -- 84,125
Foreign exchange loss -- 1,194
Changes in operating assets
and liabilities:
(Increase) decrease in -
Accounts receivable (564,865) (24,115)
Inventories 215,371 96,397
Prepaid royalties -- (23,500)
Other current assets 61,336 6,950
Other assets 4,205 11,985
Increase (decrease) in -
Accounts payable 536,215 118,061
Accrued expenses 256,628 19,672
Income taxes payable (1,940) 1,229
--------- ---------
Net cash provided by (used in)
operating activities 420,900 (88,969)
--------- ---------
Cash flows from investing activities:
Additions to property
and equipment (22,204) (205,467)
Additions to product
development costs (44,750) (60,652)
--------- ---------
Net cash used in
investing activities (66,954) (266,119)
--------- ---------
</TABLE>
5
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Cash flows from financing activities:
Repayment of loan payable - bank -- $(351,425)
Proceeds from loan payable -
shareholder $ 90,000 --
Repayment of loan payable - agent (140,244) --
Proceeds from loan payable - agent -- 85,000
Repayment of note payable (136,841) --
--------- ---------
Net cash used in financing activities (187,085) (266,425)
--------- ---------
Cash and cash equivalents:
Net increase (decrease) 166,861 (621,513)
At beginning of period 186,616 783,564
--------- ---------
At end of period $ 353,477 $ 162,051
========= =========
</TABLE>
See accompany notes to condensed consolidated financial statements
6
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization - Janex International, Inc. was incorporated in Colorado on July
- ------------
28, 1986, and is the parent corporation of With Design in Mind, a California
corporation, Janex Corporation ("Janex"), a New Jersey corporation, and Malibu
Fun Stuffed ("Malibu"), a California corporation, all of which are wholly-owned
subsidiaries. Janex International, Inc. is also the parent corporation of Pro
Gains Company Limited ("Pro Gains"), a Hong Kong corporation owned 50% by Janex
International, Inc. and 50% by Janex. Malibu Fun Stuffed International Limited
("MFSI"), a Hong Kong corporation, is owned 99% by Malibu and 1% by Janex
International, Inc. As used in this report, the "Company" refers to Janex
International, Inc. and its subsidiaries, unless the context indicates
otherwise.
Business - The Company's business is conducted primarily through its
- --------
subsidiaries, Janex, Pro Gains, Malibu and MFSI, and consists mainly of
developing, manufacturing (through subcontractors), marketing and selling toys
and functional children's products ("Children's Products"). These products
include (1) coin and gumball banks, flashlights, battery-operated toothbrushes
and clocks marketed under the brand name "Janex" and (2) plush, pool toys, video
sets and children's watches marketed under the brand name "Malibu Fun Stuffed!",
all of which retail for prices between $3 and $40. The Children's Products are
manufactured to the Company's specifications by manufacturers based in Macau,
China and the United States, and are sold nationwide to mass merchant retailers,
toy specialty stores, department stores and gift shops through a network of
independent sales representative firms.
Basis of Presentation - The accompanying consolidated financial statements are
- ---------------------
unaudited but, in the opinion of management of the Company, contain all
adjustments necessary to present fairly the financial position at March 31,
1997, the results of operations for the three months ended March 31, 1997 and
1996, and the changes in cash flows for the three months ended March 31, 1997
and 1996. These adjustments are of a normal recurring nature. The consolidated
balance sheet as of December 31, 1996 is derived from the Company's audited
financial statements. The accompanying consolidated financial statements include
the operations of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
7
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (CONTINUED)
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although management of
the Company believes that the disclosures contained in these financial
statements are adequate to make the information presented therein not
misleading. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1996, as filed with the Securities
and Exchange Commission.
Seasonality - Because of the seasonality of the Company's business, the results
- -----------
of operations for the three months ended March 31, 1997 are not necessarily
indicative of the results of operations to be expected for the full fiscal year
ending December 31, 1997.
Net Loss Per Share - Net loss per share is based on the weighted average number
- ------------------
of shares of common stock outstanding during the respective periods presented.
Common stock equivalents are not included in the calculation of loss per share
as their effect would be anti-dilutive or it is not material.
2. GOING CONCERN
The Company has suffered recurring losses from operations and had a net
loss of $304,885 for three months ended March 31, 1997. The Company's net
working capital deficit increased by $56,567, from $1,192,746 at December 31,
1996, to $1,249,313 at March 31, 1997. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
3. LEGAL PROCEEDINGS
On May 27, 1993, a class action lawsuit (the "Lawsuit") was filed by Kevin
J. O'Rourke and Patricia Ann O'Rourke (the "Plaintiffs") against the Company and
other parties in the United States District Court for the Central District of
California (the "Court"). On May 24, 1994, on Motion by the Company, the Lawsuit
was dismissed, but the Plaintiffs were given 45 days to amend their complaint.
On July 8, 1994, the Plaintiffs filed their Second Amended Complaint.
Thereafter, settlement negotiations ensued without success. On May 6, 1996, the
Plaintiffs filed a voluntary Request for Dismissal of the Lawsuit, which the
Court entered without prejudice on May 7, 1996.
8
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (CONTINUED)
4. WARRANT AGREEMENT AND SETTLEMENT
Under the terms of the warrant agreement granting Deco Disc warrants to
purchase 500,000 shares of the Company's common stock (the "Warrant Agreement"),
the Company was obligated to register the stock underlying the warrants, and to
use its best efforts to maintain the registration statement effective during the
period the warrants are exercisable. Deco Disc threatened to sue the Company,
claiming that the Company did not file the registration statement on a timely
basis, and that the registration statement was not kept effective by the
Company, resulting in Deco Disc being damaged. In order to avoid any potential
litigation, on March 26, 1996, the Company and Deco Disc entered into a
Settlement Agreement and Specific Release under which the Company issued to Deco
Disc additional warrants to purchase 100,000 shares of the Company's common
stock (restricted), with certain "piggy-back" registration rights, at a price of
$.64 per share, in exchange for Deco Disc releasing the Company from any and all
prior claims relating to violations of the Warrant Agreement, and failure to
update the registration statement. As a result of the foregoing transaction,
during the three months ended March 31, 1996, the Company recorded a charge to
operations of $84,125 as management's estimate of the fair value of the 100,000
common stock purchase warrants.
5. LOAN PAYABLE - BANK
The Company had a $1,000,000 line of credit with a bank with interest at
9.5%, pursuant to a loan agreement which expired on May 3, 1996. The line of
credit is secured by a $500,000 certificate of deposit purchased from the bank
and a first priority security interest in all of the assets of the Company. The
outstanding balance on the line of credit was $751,425 at December 31, 1995. On
March 20, 1996, the Company and the bank agreed to reduce the amount available
under the line of credit to $500,000 (including the ability of the Company to
utilize the line of credit to issue up to $100,000 of stand-by letters of
credit), and the bank waived certain covenant violations under the original loan
agreement. Accordingly, at March 31, 1997, the outstanding balance under the
line of credit had been reduced by $351,425 to $400,000. The Company recently
has begun negotiation with the bank to extend the maturity date of May 7, 1997,
with all other terms of the loan remaining the same.
9
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (CONTINUED)
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$7,000,000 (US$900,000) and from December to April the line is
HK$1,500,000 (US$200,000). Janex International, Inc. has issued a guarantee to
the Hong Kong bank in the full amount of the line. At March 31, 1997, the
Company had advances under this line for discounted letters of credit of
$90,171. The cash advances under the line are treated as reductions in accounts
receivable.
6. LOAN PAYABLE - AGENT
Pursuant to an agency agreement dated October 23, 1995, the Company,
through its Hong Kong subsidiaries, Pro Gains and MFSI, may borrow up to
$450,000 from its Hong Kong agent for the payment of product development and
tooling costs, provided that the Company issues to the agent an irrevocable
stand-by letter of credit for $150,000. The loan is to be repaid from
collections of certain customer invoices at the rate of 5% of the invoice
amount, with interest at 2% above the Hong Kong prime rate, and any balance
remaining unpaid at December 31, 1997 will be due and payable on January 15,
1998. The Agent will retain ownership of all tooling paid for with the credit
facility until the credit facility is repaid. The credit facility is available
in each year that the agency agreement is in effect, which was for an initial
term of two years. As of March 31, 1997, the Company had borrowed $131,545
under this credit facility.
Pursuant to a supplementary agency agreement dated September 24, 1996, the
Company may borrow up to another $200,000 from its Agent provided that the
Company issues to the Agent an irrevocable stand-by letter of credit for
$100,000. Any advance under this facility is to be repaid within 60 days from
the date of advance with interest at 2% above the Hong Kong prime rate, and any
balance remaining unpaid at December 31, 1997, will be due and payable on
January 15, 1998. As of March 31, 1997, the Company had borrowed $178,299 under
this credit facility.
10
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (CONTINUED)
7. NOTES PAYABLE - STOCKHOLDERS
Effective as of April 19, 1996, pursuant to a Revolving Credit Agreement
(the "Agreement") with an individual lender (who is also a significant
shareholder of the Company) (the "Lender") that expires on October 19, 1999,
Janex Corporation arranged to borrow up to $900,000, with interest at 9.5%
payable quarterly. The Agreement is secured by all of the assets of Janex
Corporation, and the guarantee of Janex International, Inc. As additional
consideration, the Company granted the Lender warrants to purchase up to 900,000
shares of the Company's common stock (restricted), with certain "piggy-back"
registration rights, exercisable at a price of $1.45 per share through April 19,
2000. The warrants vest in equal increments of 180,000 on the first day of
consecutive six-month periods commencing April 19, 1996. However, to the extent
that amounts borrowed under the Agreement are paid off and the Agreement is
canceled during its term, any unvested warrants shall be void. As of March 31,
1997, the Company had borrowed $590,000 pursuant to this Agreement. In addition,
the Company has used an additional $150,000 as security to issue stand-by
letters of credit in connection with the loan payable to the Company's Hong Kong
agent (See Note 6).
Under the terms of the stock purchase agreement for the acquisition of
Janex, the Company issued two promissory notes to two stockholders totalling
$1,000,000, payable in semi-annual installments over a three year period (at
December 31, 1995, the amount payable was $458,760, representing the present
value of the future payments under the obligation discount at 9%, not including
imputed interest accrued but not paid). The first three payments of $166,667
each under the $1,000,000 note were made on June 30, 1994, December 31, 1994,
and June 30, 1995. On December 29, 1995, the holders of the $1,000,000 of notes
agreed to a deferral of the payment due on December 31, 1995 , to June 30, 1996.
As a condition of the deferral, the Company agreed to pay the note holders
interest on the deferred payments at the rate of 9% per annum from December 31,
1995 to the date of payment. On June 28, 1996, the note holders agreed to
further extend the payment date for all remaining payments to February 1, 1998,
subject to payment of interest at the rate of 9.5% per annum, retroactive to
January 1, 1996. Quarterly interest payments commenced on September 1, 1996.
Further, in connection with the extension of the notes, the Company entered into
a warrant agreement with each of the note holders, providing for the issuance of
up to 282,994 warrants to one of them and up to 167,994 warrants to the other,
to acquire a total of 450,998 shares of the Janex International Common Stock
(restricted), exercisable at a price of $1.45 per share through
11
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (CONTINUED)
June 28, 2000, with certain "piggy-back" registration rights. The warrants vest
in six-month increments over the term of the loan, and if the loan is paid off
early certain of the warrants will be void. The outstanding loan balance as of
March 31, 1997 was $500,000.
The Company charged to operations $76,266 of imputed interest from the
issuance of stock warrants noted in the above two paragraphs in the three months
ended March 31, 1997.
In addition, as part of the June 28, 1996 Agreement with the stockholders,
the payment of commissions owing one of the stockholders was extended to
February 1, 1998. Furthermore, the unpaid commission balance bears interest at
9.5% per annum beginning January 1, 1996, until paid with interest paid
quarterly beginning September 1, 1996. The outstanding commission loan balance
as of March 31, 1997 was $115,000.
8. 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. 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, 1996) per annum.
In addition, an agreement was reached whereby an additional $340,000 was
added to the outstanding balance as of December 31, 1996. If the loan is not
fully paid off by December 31, 1997, the remaining balance and accrued interest
will be paid off no later than January 31, 1998. The balance of this note
payable at March 31, 1997 is $394,515.
9. NEW ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings per Share (SFAS 128). This pronouncement provides a
different method of calculating earnings per share than is currently used in
accordance with APB 15, Earnings per Share. SFAS 128 provides for the
calculation of Basic and Diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to fully diluted earnings
per share.
12
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (CONTINUED)
The pronouncement is effective for fiscal years and interim periods ending after
December 15, 1997; early adoption is not permitted. The Company has not
determined the effect, if any, of adoption on its EPS computation(s).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Consolidated Results of Operations - Three Months Ended March 31, 1997 and 1996:
Net Sales
- ---------
For the three months ended March 31, 1997, net sales increased by $839,570
or 93.9%, to $1,733,876, as compared to net sales of $894,306 for the three
months ended March 31, 1996. The increase in net sales is a direct result of
increased sales generated by Malibu Fun Stuffed and shipment of its Wet Pet
product line which make up a substantial portion of 1997 sales (69%). A
substantial portion of 1996 net sales consisted of products incorporating
characters licensed from the Walt Disney Company (42%) and the "Looney Tunes"
characters licensed from Warner Bros. Corporation (39%).
At March 31, 1997, the Company had a backlog of unfilled orders of
approximately $2,500,000 comparable with its order backlog of approximately the
same at March 31, 1996. Although orders are booked throughout the fiscal year,
historically as much as 50% of the Company's business is booked during the
second fiscal quarter. Although the Company has noted a general increase in
order flow in 1997 as compared to prior years, the present backlog is not
necessarily indicative of net sales to be expected for the full fiscal year
ending December 31, 1997.
Gross Profit
- ------------
For the three months ended March 31, 1997, gross profit was $689,651 or
39.8% of net sales, as compared to $362,611 or 40.5% of net sales for the three
months ended March 31, 1995. The Company typically establishes prices to obtain
a target gross margin ranging from 45% to 50%, but overall gross margin can vary
depending on the sales mix in each quarter. The small decrease in gross margin
in 1997 as compared to 1996 was primarily the result of the Company taking
markdowns in 1997 to close out certain slow-moving inventory.
13
<PAGE>
Selling, General and Administrative Expenses
- --------------------------------------------
For the three months ended March 31, 1997, selling, general and
administrative expenses decreased by $43,155 or 6.3%, to $639,938 or 36.9% of
net sales, as compared to $683,093 or 76.3% of net sales for the three months
ended March 31, 1996. Selling, general and administrative expenses are comprised
of fixed overhead costs and variable selling expenses. The decrease in selling,
general and administrative expenses as a percentage of sales is consistent with
the increase in net sales.
Royalty Expense
- ---------------
For the three months ended March 31, 1997, royalty expense was $91,903 or
5.3% of net sales, as compared to $33,192 or 3.7% of net sales for the three
months ended March 31, 1996. The increase in royalty expense in 1997 as compared
to 1996 was as a result of three factors. First, royalty rates vary from license
to license from 8% to 16%. Royalties will vary between periods based upon the
product mix included in sales during the period. Secondly, the increase in
royalties as a percentage of sales is consistent with a general upward trend in
the royalty rates on license agreements. An finally, a reserve of $28,000 was
charged to operations to meet royalty guarantees made on contracts under which
insufficient product sales were generated to meet the minimum guarantee.
Loss from Settlement with Warrant Holder
- ----------------------------------------
Under the terms of the warrant agreement granting Deco Disc warrants to
purchase 500,000 shares of the Company's common stock (the "Warrant Agreement"),
the Company was obligated to register the stock underlying the warrants, and to
use its best efforts to maintain the registration statement effective during the
period the warrants are exercisable. Deco Disc threatened to sue the Company,
claiming that the Company did not file the registration statement on a timely
basis, and that the registration statement was not kept effective by the
Company, resulting in Deco Disc being damaged. In order to avoid any potential
litigation, on March 26, 1996, the Company and Deco Disc entered into a
Settlement Agreement and Specific Release under which the Company issued to Deco
Disc additional warrants to purchase 100,000 shares of the Company's common
stock (restricted), with certain "piggy-back" registration rights, at a price of
$.64 per share in exchange for Deco Disc releasing the Company from any and all
prior claims relating to violations of the Warrant Agreement, and failure to
update the registration statement. As a result of the foregoing transaction,
during the three months ended March 31, 1996, the Company recorded a charge to
operations of $84,125 as management's estimate of the fair value of the 100,000
common stock purchase warrants.
14
<PAGE>
Net Loss
- --------
The reasons for the decrease in net loss in 1997 as compared to 1996 are
summarized above. For the three months ended March 31, 1997, the net loss was
$304,885, or $.06 per share, as compared to a net loss of $563,000, or $.11 per
share, for the three months ended March 31, 1996.
Consolidated Financial Condition - March 31, 1997
Liquidity and Capital Resources
- -------------------------------
The Company's cash balance increased by $166,861 to $353,477 at March 31,
1997, as compared to $186,616 at December 31, 1996. The Company's net working
capital decreased by $56,567 from working capital deficit of $1,192,746 at
December 31, 1996 to a working capital deficit of $1,249,313 at March 31, 1997,
and the Company's current ratio increased to 0.65:1 at March 31, 1997 as
compared to 0.61:1 at December 31, 1996. For the three months ended March 31,
1997, the Company's operations provided cash resources of $420,900, as compared
to utilizing cash resources of $88,969 for the three months ended March 31,
1996, primarily as a result of a decrease in inventories, an increase in
accounts receivable and an increase in accounts payable and accrued expenses
during the three months ended March 31, 1997
During the three months ended March 31, 1997, as part of the Company's
continuing program of capital investment in new products and licenses, the
Company incurred additions to property and equipment, reflecting tooling and
molds related to new licenses, of $22,204, and additions to product development
costs of $44,750.
The Company believes that its existing cash balance together with its
existing lines of credit and projected cash flow from operations will not be
-----------
sufficient to fund projected order flow, overhead and debt repayment for the
- ----------
fiscal year ending December 31, 1997. Accordingly, the Company must obtain
additional financing in order to maintain its current level of operations. If
financing is not obtained in the immediate future, then the Company will have no
choice but to seek to substantially reduce operations to a level consistent with
available working capital. The Company is actively seeking additional sources of
financing, including but not limited to a merger with, or acquisition by,
another company. There can be no assurances that any such additional financing
will be available on a timely basis and/or under acceptable terms. If such
financing does not materialize the Company will be forced to cease operations.
The Company has experienced recurring losses from operations, negative cash
flows and decreases in working capital.
15
<PAGE>
The Company had a $1,000,000 line of credit with a bank with interest at
9.5%, pursuant to a loan agreement which expired on May 3, 1996. The outstanding
balance on the line of credit was $751,425 at December 31, 1995. On March 20,
1996, the Company and bank agreed to reduce the amount available under the line
of credit to $500,000 (including the ability of the Company to utilize the line
of credit to issue up to $100,000 of stand-by letters of credit), and the bank
waived certain covenant violations under the original loan agreement. 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.
Accordingly, at December 31, 1996, the outstanding balance under the line of
credit had been reduced by $351,425 to $400,000. The Company is negotiating with
the bank to extend the maturity date of May 7, 1997, with all other terms of the
loan remaining the same.
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$7,000,000 (US$900,000) and from December to April the line if
HK$1,500,000 (US$200,000). Janex International, Inc. has issued a guarantee to
the Hong Kong bank in the full amount of the line. At March 31, 1997, the
Company had advances under this line for discounted letters of credit of
$90,171. The cash advances under the line are treated as reductions in accounts
receivable.
Effective as of April 19, 1996, pursuant to a Revolving Credit Agreement
with an individual lender (who is also a significant shareholder of the Company)
(the "Lender") that expires on October 19, 1999, (the "Agreement"), Janex
Corporation arranged to borrow up to $900,000, with interest at 9.5% payable
quarterly. The Agreement is secured by all of the assets of Janex Corporation,
and the guarantee of Janex International, Inc. As additional consideration, the
Company granted the Lender warrants to purchase up to 900,000 shares of the
Company's common stock (restricted), with certain "piggy-back" registration
rights, exercisable at a price of $1.45 per share through April 19, 2000. The
warrants vest in equal increments of 180,000 on the first day of consecutive
six-month periods commencing April 19, 1996. However, to the extent that
amounts borrowed under the Agreement are paid off and the Agreement is canceled
during its term, any unvested warrants shall be void. The Company recorded
imputed interest of $111,786 from the issuance of these warrants. As of March
31, 1997, the Company had borrowed $590,000 pursuant to this Agreement. In
addition, the Company has used an additional $150,000 as security to issue
stand-by letters of credit in connection with loans payable to the Company's
Hong Kong agent. The unamortized loan charge at March 31, 1997 was $168,238.
16
<PAGE>
Under the terms of the stock purchase agreement for the acquisition of
Janex, the Company issued two promissory notes totalling $1,000,000, payable in
semi-annual installments over a three year period (at December 31, 1995, the
amount payable was $458,760, representing the present value of the future
payments under the obligation discount at 9%, not including imputed interest
accrued by not paid). The first three payments of $166,667 each under the
$1,000,000 note were made on June 30, 1994, December 31, 1994, and June 30,
1995. On December 29, 1995, the holders of the $1,000,000 of notes agreed to a
deferral of the payment due on December 31, 1995, to June 30, 1996. As a
condition of the deferral, the Company agreed to pay the note holders interest
on the deferred payments at the rate of 9% per annum from December 31, 1995 to
the date of payment. On June 28, 1996, the note holders agreed to further extend
the payment date for all remaining payments to February 1, 1998, subject to
payment of interest at the rate of 9.5% per annum, retroactive to January 1,
1996. Quarterly interest payments commenced on September 1, 1996. The Company
also agreed to provide the note holders with security for the notes. Further, in
connection with the extension of the notes, the Company entered into a warrant
agreement with each of the note holders, providing for the issuance of up to
282,994 warrants to one of them and up to 167,994 warrants to the other, to
acquire a total of 450,998 shares of the Janex International Common Stock
(restricted), exercisable at a price of $1.45 per share through June 28, 2000,
with certain "piggy-back" registration rights. The warrants vest in six-month
increments over the term of the loan, and if the loan is paid off early certain
of the warrants will be void. The Company recorded imputed interest of $55,668
from the issuance of these warrants and another $13,023 from the extension of
the notes. The outstanding loan balance and unamortized loan charge as of March
31, 1997, was $500,000 and $86,651.
In addition, as part of the June 28, 1996 Agreement, the payment of
commissions owing one of the stockholders was extended to February 1, 1998,
Furthermore, the unpaid commission balance bears interest at 9.5% per annum
beginning January 1, 1996, until paid with interest paid quarterly beginning
September 1, 1996. The outstanding principal balance as of March 31, 1997 was
$115,000.
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. 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, 1996) per annum. In addition, an agreement was
reached whereby an additional $340,000 was added to the outstanding balance. If
the loan is not fully paid off by December 31, 1997, the remaining balance and
accrued interest will be paid off no later than January 31, 1998. The balance of
this note payable at March 31, 1997 is $394,515.
17
<PAGE>
Pursuant to an Agency Agreement dated October 23, 1995, the Company,
through its Hong Kong subsidiaries, Pro Gains and MFSI, may borrow up to
$450,000 from its Hong Kong agent for the payment of product development and
tooling costs, provided that the Company issues to the agent an irrevocable
stand-by letter of credit for $150,000. The loan is to be repaid from
collections of certain customer invoices at the rate of 5% of the invoice
amount, with interest at 2% above the Hong Kong prime rate, and any balance
remaining unpaid at December 31, 1997, will be due and payable on January 15,
1998. The Agent will retain ownership of all tooling paid for with the credit
facility until the credit facility is repaid. The credit facility is available
in each year that the Agency Agreement is in effect, which was for an initial
term of two years. In March 1996, the Company opened the stand-by letter of
credit to the agent. As of March 31, 1997, the Company had borrowed $131,545
under this credit facility.
Pursuant to a supplementary agency agreement dated September 24, 1996, the
Company may borrow up to another $200,000 from its agent provided that the
Company issues to the Agent an irrevocable stand-by letter of credit for
$100,000. Any advance under this facility is to be repaid with 60 days from the
date of advance with interest at 2% above the Hong Kong prime rate, and any
balance remaining unpaid at December 31, 1997, will be due and payable on
January 15, 1998. As of March 31, 1997, the Company had borrowed $178,299 under
this credit facility.
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. In addition, the former stockholders of Malibu and
MFSI were entitled to an earn-out based on future performance of Malibu and
MFSI. In October 1996, the Company revised this agreement and issued the former
owners of Malibu 150,000 shares of restricted common stock in exchange for
cancellation of the earn-out provisions of the agreement. The common stock was
valued at $1.00 per share, which was management's estimate of the fair value at
the time. Accordingly, $150,000 was recorded as compensation expense.
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
18
<PAGE>
maintain the registration statement effective during the period the warrants are
excisable. 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. As a result of the foregoing transaction, during the year ended
December 31, 1996, the Company recorded a charge to operations of $84,125 as
management's estimate of the fair value of the 100,000 common stock purchase
warrants.
19
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K -
Three Months Ended March 31, 1997: Under Item 5.
Other Events: NONE
20
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
JANEX INTERNATIONAL, INC.
-------------------------
Registrant
Date: May 19, 1997 By: /s/ Sheldon F. Morick
-------------------------
Sheldon F. Morick
President and Director
21
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 353,477
<SECURITIES> 500,000
<RECEIVABLES> 997,978
<ALLOWANCES> 200,402
<INVENTORY> 354,266
<CURRENT-ASSETS> 2,305,556
<PP&E> 1,737,994
<DEPRECIATION> 1,298,956
<TOTAL-ASSETS> 5,230,709
<CURRENT-LIABILITIES> 3,554,869
<BONDS> 0
0
0
<COMMON> 11,268,816
<OTHER-SE> 554,517
<TOTAL-LIABILITY-AND-EQUITY> 5,230,709
<SALES> 1,733,876
<TOTAL-REVENUES> 1,733,876
<CGS> 1,044,225
<TOTAL-COSTS> 1,776,066
<OTHER-EXPENSES> 262,345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125,729
<INCOME-PRETAX> (304,885)
<INCOME-TAX> 350
<INCOME-CONTINUING> (304,885)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (304,885)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
