<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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: Not applicable
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.)
615 HOPE ROAD, BUILDING ONE
EATONTOWN, NEW JERSEY 07724
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (732) 935-0707
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 October 31, 1998, the issuer had 9,962,105 shares of its common stock, no
par value, issued and outstanding.
Transitional Small Business Disclosure Format: Yes ____ No X
-----
Total sequential number pages in this document: 18
------
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JANEX INTERNATIONAL, INC.
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997 (audited) 3
Statements of Operations (unaudited) for the nine months
ended September 30, 1998 and 1997 4
Statements of Cash Flows (unaudited) for the nine months
ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements (unaudited) 6-11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 12-16
PART II OTHER INFORMATION
ITEM 5 OTHER INFORMATION 17
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
2
<PAGE>
JANEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (Audited)
SEPTEMBER 30, December 31,
1998 1997
--------------------- ----------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 106,026 $ 164,672
Certificate of deposit (Note 5) 100,000 100,000
Accounts receivable, net of allowance of $3,500 and $10,439 411,776 225,826
Inventories (Note 4) 474,278 173,107
Prepaid royalties 71,418 61,626
Other current assets 20,139 19,925
-------------------- --------------------
TOTAL CURRENT ASSETS 1,183,637 745,156
PROPERTY AND EQUIPMENT, net 332,263 395,165
INTANGIBLE ASSETS, net 288,513 325,988
PRODUCT DEVELOPMENT COSTS, net 141,260 122,827
DEFERRED LOAN CHARGES 56,044 116,863
OTHER ASSETS - 2,801
-------------------- --------------------
$ 2,001,717 $ 1,708,800
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Loans payable - agent (Note 6) $ 174,174 $ 249,113
Accounts payable 1,051,715 685,725
Accrued expenses 1,562,823 1,373,899
Note payable (Note 8) - 1,373,899
Loan payable ? bank (Note 5) 247,000 219,189
-------------------- --------------------
TOTAL CURRENT LIABILITIES 3,035,712 2,527,926
NOTES PAYABLE - STOCKHOLDERS (NOTE 7) 1,230,000 1,230,000
-------------------- --------------------
TOTAL LIABILITIES 4,265,712 3,757,926
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 3)
STOCKHOLDERS' (DEFICIT) (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; 11,868,816 11,618,816
9,962,105 shares issued and outstanding
Additional paid-in capital 554,517 554,517
Accumulated deficit (14,687,328) (14,222,459)
-------------------- --------------------
TOTAL STOCKHOLDERS' (DEFICIT) (2,263,995) (2,049,126)
-------------------- --------------------
$ 2,001,717 $ 1,708,800
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
JANEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 779,014 $1,165,533 $2,979,639 $ 4,781,187
---------------- ---------------- ---------------- ----------------
COSTS AND EXPENSES
Cost of sales 495,182 683,193 1,619,705 2,840,751
Selling, general and administrative 288,991 506,271 1,051,891 1,735,520
Royalty expense 122,425 69,718 344,350 559,613
Depreciation and amortization 94,246 52,822 256,509 1,976,125
---------------- ---------------- ---------------- ----------------
TOTAL COST AND EXPENSES 1,000,844 1,312,004 3,272,455 7,112,009
---------------- ---------------- ---------------- ----------------
OPERATING LOSS (221,830) (146,471) (292,816) (2,330,822)
---------------- ---------------- ---------------- ----------------
OTHER INCOME (EXPENSE)
Interest income - 944 4,160 13,299
Interest expense (56,542) (112,944) (170,313) (360,383)
Foreign exchange gain (1,840) - - -
Gain on disposal of fixed assets - - - 1,500
---------------- ---------------- ---------------- ----------------
TOTAL OTHER INCOME (EXPENSE) (58,382) (112,000) (166,153) (345,584)
---------------- ---------------- ---------------- ----------------
LOSS BEFORE INCOME TAX (280,212) (258,471) (458,969) (2,676,406)
INCOME TAX PROVISION - - 5,900 398
---------------- ---------------- ---------------- ----------------
NET LOSS $ (280,212) $ (258,471) $ (464,869) $(2,676,804)
================ ================ ================ ================
LOSS PER COMMON SHARE $(.03) $(.05) $(.05) $(.51)
================ ================ ================ ================
WEIGHTED AVERAGE NUMBER OF SHARES 9,962,105 5,296,721 9,962,105 5,296,721
OUTSTANDING
================ ================ ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
JANEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(464,869) $(2,676,804)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for losses on accounts receivable, net (6,939) 1,294
Amortization 112,032 -
Depreciation 144,477 2,129,065
Imputed interest 60,819 228,796
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (179,011) (52,497)
Inventories (301,171) 374,722
Prepaid royalty (9,792) 32,152
Other current assets (214) 43,432
Other assets 2,801 9,137
Increase (decrease) in:
Accounts payable 365,990 513,122
Accrued expenses 188,924 120,319
Income tax payable - (1,890)
------------ ------------
Net cash provided by (used in) operating activities (86,953) 251,848
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (81,575) (119,650)
Additions to product development costs (92,990) (148,683)
Reduction of certificate of deposit - 400,000
------------ ------------
Net cash provided by (used in) investing activities (174,565) 131,667
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) loan payable - bank 247,000 (400,000)
Proceeds from loan payable - shareholder - 115,000
Repayment of note payable - agent (74,939) (43,516)
Proceeds from issuance of common stock 250,000 300,000
Repayment of note payable (219,189) (265,909)
------------ ------------
Net cash provided by (used in) financing activities 202,872 (294,425)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (58,646) 89,090
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 164,672 186,616
------------ ------------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 106,026 $ 275,706
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 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 ("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 this report, the term "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. 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, battery operated toothbrushes
and clocks marketed under the brand name "Janex" and 2) plush, pool toys and
video sets 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 Macao, 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 the management of the Company, contain all adjustments necessary to
present fairly the financial position at September 30, 1998, the results of
operations for the nine months ended September 30, 1998 and 1997, and the
changes in cash flows for the nine months ended September 30, 1998 and 1997.
These adjustments are of a normal recurring nature. The consolidated balance
sheet as of December 31, 1997 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.
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, 1997, as filed with the Securities
and Exchange Commission.
6
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(CONTINUED)
SEASONALITY
Because of the seasonality of the Company' business, the results of operations
for the nine months ended September 30, 1998 are not necessarily indicative of
the results of operations to be expected for the full fiscal year ending
December 31, 1998.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
per Share." SFAS 128 replaced the calculation of primary and fully diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes the dilutive effects of options. Basic earnings per share has been
computed using the weighted average number of shares of common stock outstanding
for the period. Diluted earnings (loss) per share includes the effect, if any,
of unissued shares underlying warrants, computed using the treasury stock
method.
NOTE 2 - GOING CONCERN
The Company has suffered recurring losses from operations and had net loss of
$464,869 for the nine months ended September 30, 1998. The Company's net working
capital deficit increased by $69,305 from $1,782,770 at December 31, 1997 to
$1,852,075 at September 30, 1998. These conditions still raise substantial doubt
about the Company's ability to continue as a going concern.
NOTE 3 - LEGAL PROCEEDINGS
On July 15, 1997, Actional Limited ("Actional"), a company that previously
manufactured products for the Company, filed a Complaint against Janex
Corporation, OSP Publishing ("OSP") and O.S.P. Acquisition Corporation ("OSP
Acquisition"), in the Superior Court for the State of California, County of Los
Angeles, Case No. BC 174599. The Complaint sets forth a cause of action against
Janex Corporation for breach of contract, seeking damages in the sum of
$112,500. The Company filed an answer to the Complaint, denying all allegations
and claims. The Company filed a Cross-Complaint against Actional, OSP and OSP
Acquisition, for breach of contract (against Actional), rescission (against OSP
and OSP Acquisition) and declaratory relief against all defendants. The
Company's breach of contract claim against Actional alleges that Actional
manufactured defective merchandise causing damage to the Company in the sum of
$241,129.85, plus other damages to be proved at trial.
On July 15, 1997, Actional filed an additional Complaint against the Company in
the Superior Court for the State of California, County of Los Angeles, Case No.
BD 174598. The Complaint sets forth causes of action against Janex Corporation
for open book account and for account stated and seeks to recover $113,895.17.
The Company filed an answer to the Complaint, denying all allegations and
claims. The Company filed a Cross-Complaint against Actional, OSP and OSP
Acquisition, for breach of contract (against Actional), rescission (against OSP
and OSP Acquisition) and declaratory relief against all defendants. The
Company's breach of contract claim against Actional alleges that Actional
manufactured defective merchandise causing
7
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(CONTINUED)
damage to the Company in the sum of $241,120.85, plus other damages to be proved
at trial. The Company requested that both of Actional's cases be consolidated
and the Court entered an order to that effect.
Both of these cases have been settled for a total payment of $48,732.
NOTE 4 - INVENTORIES
Inventories are value at the lower of cost or market and consist of the
following at September 30, 1998 and December 31, 1997:
September 30, December 31,
1998 1997
------------- ------------
Finished goods $409,298 $ 37,743
Work-in-process 64,980 135,364
-------- --------
$474,278 $173,107
======== ========
NOTE 5 - LOAN PAYABLE - BANK
The Company had a $1,000,000 line of credit with a bank with interest at 9.50%,
pursuant to a loan agreement, which expired on May 3, 1996. The line of credit
was 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. 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.
On May 27, 1997, the Company and the bank further agreed to reduce the line of
credit to $100,000 (including the ability of the Company to utilize the line of
credit to issue $100,000 of stand-by letters of credit) and in conjunction
therewith, the $400,000 outstanding balance of the line of credit was repaid in
full by reducing the balance of the certificate of deposit.
On January 3, 1998, the Company and the bank agreed to close the certificate of
deposit and not renew the line of credit. On the same date the Company opened a
certificate of deposit with a new bank, which in addition, agreed to utilize the
certificate of deposit as collateral to issue $100,000 as standby letters of
credit.
The Company has a new $400,000 line of credit with a bank at the bank's prime
rate plus 0.25%, pursuant to a loan agreement, which expires July 1, 1999. The
line of credit is secured by a $300,000 certificate of deposit purchased from
the bank by the major stockholders, and a first priority security interest in
all of the assets of the Company. All outstanding balances on the line are due
by July 1, 1999. As of September 30, 1998 the outstanding balance of the line
of credit is $247,000.
The Company, through a Hong Kong bank, has a line of credit for the Company's
subsidiary, Pro Gains,
8
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(CONTINUED)
which allows 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$7,000,000
(approximately US$900,000) and from December to April the line was HK$1,500,000
(approximately US$200,000). Janex International, Inc. had issued a guarantee to
the Hong Kong bank in the full amount of the credit line. At September 30, 1997,
the bank decided not to renew the credit facility.
NOTE 6 - LOANS 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 December 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
September 30, 1998 and December 31, 1997, the Company had borrowed $174,174 and
$249,113, respectively, 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.
In November 1996, the Company opened the stand-by letter of credit to the Agent.
As of September 30, 1998 and December 31, 1997, the Company had no borrowing
under this credit facility.
NOTE 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
vested in equal increments of 180,000 on the first day of consecutive six-month
periods commencing April 19, 1996. As of September 30, 1998 and December 31,
1997, the Company had borrowed $615,000, 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).
9
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JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(CONTINUED)
Under the terms of the stock purchase agreement for the acquisition of Janex,
the Company issued two promissory notes to two stockholders totaling $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 Company's Common Stock (restricted),
exercisable at a price of $1.45 per share through June 28, 2000, with certain
"piggy-back" registration rights. The warrants vested in six-month increments
over the term of the loan. On August 4, 1997, the shareholders agreed to further
extend the due date of the notes to February 1, 1999. The outstanding loan
balance as of September 30, 1998 and December 31, 1997, was $500,000.
The Company charged to operations $60,819 and $228,796 of imputed interest
expense from the issuance of stock purchase warrants noted in the above two
paragraphs in the nine months ended September 30, 1998 and 1997, respectively.
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
September 30, 1998 and December 31, 1997 was $115,000.
NOTE 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.
In addition, an agreement was reached whereby an additional $340,000 was added
to the outstanding balance as of December 31, 1996. The balance of this note
payable at September 30, 1998 and December 31, 1997 was $ 0 and $219,189,
respectively.
10
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(CONTINUED)
NOTE 9 - NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," establishes standards for the way that public companies
report information about operating segments in interim financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131, defines operating segments as components of a company
about which separate financial information is available that is evaluated
regularly by management in deciding how to allocate resources and in assessing
performance.
SFAS No's 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the relatively recent issuance of these
standards, management has been unable to fully evaluate the impact, if any, it
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of these
standards.
11
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CONSOLIDATED RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997:
Net Sales
- ---------
For the nine months ended September 30, 1998, net sales decreased by $1,801,548
or 38%, to $2,979,639, as compared to net sales of $4,781,187 for the nine
months ended September 30, 1997. The decrease in net sales is a direct result of
a decrease of sales incorporating licensed products. For the nine months ended
September 30, 1998, these sales were only 43% of total sales, as compared to 47%
for the comparable period in 1997. The decrease of sales was only slightly
offset by the increase of sales of the Wet Pet Product line, which made up the
substantial portion of 1998 sales (57%) as compared to 1997 sales (53%).
At September 30, 1998, the Company had a backlog of unfilled orders of
approximately $350,000 comparable with its order backlog of approximately
$1,000,000 at September 30, 1997. 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
decrease in order flow in 1998, 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, 1998.
Gross Profit
- ------------
For the nine months ended September 30, 1998, gross profit was $1,359,934 or
45.6% of net sales, as compared to $1,940,436 or 40.6% of net sales for the nine
months ended September 30, 1997. 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 increase in gross
margin in 1998, as compared to 1997, was primarily the result of an increase in
the sales of the Wet Pet product line, which have a higher gross margin than
that of sales incorporating licensed products.
Selling, General and Administrative Expenses
- --------------------------------------------
For the nine months ended September 30, 1998, selling, general and
administrative expenses decreased by $683,629 or 39.3%, to $1,051,891 or 35.3%
of net sales, as compared to $1,735,520 or 36.3% of net sales for the nine
months ended September 30, 1997. Selling, general and administrative expenses
are comprised of fixed overhead costs and variable selling expenses. The
decrease in selling, general and administrative expenses is a direct result of
management's continuing effort to reduce fixed overhead costs.
Royalty Expense
- ---------------
For the nine months ended September 30, 1998, royalty expense was $344,350 or
11.6% of net sales, as compared to $559,613 or 11.7% of net sales for the nine
months ended September 30, 1997. The decrease of royalty expense in 1998, as
compared to 1997 was as a result of a significant shift in the sales mix to a
higher proportion of non-royalty sales, which include the Wet Pet line.
12
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
Depreciation and Amortization
- -----------------------------
For the nine months ended September 30, 1998, depreciation and amortization was
$256,509 or 8.6% of net sales, as compared to $1,976,125 or 41.3% of net sales
for the nine months ended September 30, 1997. The decrease of depreciation and
amortization in 1998 as compared to 1997 was the direct result of a one time
charge of $1,643,385 to write off certain intangible assets, during the nine
months ended September 30, 1997.
Net Loss
- --------
The reasons for the decrease in net loss in 1998 as compared to 1997 are
summarized above. For the nine months ended September 30, 1998, net loss was
$464,869 or $.05 per share, as compared to a net loss of $2,676,804 or $.51 per
share, for the nine months ended September 30, 1997.
Year 2000 Compliance
- --------------------
It has been determined by management of the Company to undergo a complete
evaluation of the uncertainty that relates to the Year 2000 compliance.
Management has determined that the consequences of its Year 2000 issues would
have a material effect on the Company's business as well as results of
operations and financial condition. The Company has put into effect a
preliminary plan of readiness to meet the Year 2000 issues.
In addition, management has been working closely with vendors and suppliers to
determine if these third parties with whom the Company has a material
relationship with are Year 2000 compliant.
As of the third quarter of 1998, the Company in the beginning phase of the
compliance work and has determined that the estimated cost of remediation will
be approximately $5,000 - $7,500 to cover expenses to replace problem systems
and equipment.
CONSOLIDATED FINANCIAL CONDITION - SEPTEMBER 30, 1998:
Liquidity and Capital Resources
- -------------------------------
The Company's cash balance decreased by $58,646 to $106,026 at September 30,
1998, as compared to $164,672 at December 31, 1997. The Company's net working
capital decreased by $69,305 from working capital deficit of $1,782,770 at
December 31, 1997 to a working capital deficit of $1,852,075 at September 30,
1998 and the Company's current ratio increased to 0.39:1 at September 30, 1998,
as compared to 0.29:1 at December 31, 1997. For the nine months ended September
30, 1998, the Company's operations utilized cash resources of $86,953, as
compared to providing cash resources of $251,848 for the nine months ended
September 30, 1997, primarily as a result of a decrease in other assets, an
increase in accounts receivable, inventories, prepaid royalties, accounts
payable and accrued expenses during the nine months ended September 30, 1998.
During the nine months ended September 30, 1998, as part of the Company's
continuing program of capital investment in new products and licenses, the
Company incurred additions to property and equipment,
13
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
reflecting tooling and molds related to new licenses, of $81,575 and additions
to product development costs of $92,990.
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, 1998. 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 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.
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
was 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. 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 he
bank waived certain covenant violations under the original loan agreement. On
May 27, 1997, the Company and the bank further agreed to reduce the line of
credit to $100,000 (including the ability of the Company to utilize the line of
credit to issue $100,000 of stand-by letters of credit) and in conjunction
therewith, the $400,000 outstanding balance of the line of credit was repaid in
full by reducing the balance of the certificate of deposit.
On January 3, 1998, the Company and the bank agreed to close the certificate of
deposit and not renew the line of credit. On the same date the Company opened a
certificate of deposit with a new bank, which in addition, agreed to utilize the
certificate of deposit as collateral to issue $100,000 as standby letters of
credit.
The Company has a new $400,000 line of credit with a bank at the bank?s prime
rate plus 0.25%, pursuant to a loan agreement, which expires July 1, 1999. The
line of credit is secured by a $300,000 certificate of deposit purchased from
the bank by the major stockholders, and a first priority security interest in
all of the assets of the Company. All outstanding balances on the line are due
by July 1, 1999. As of September 30, 1998 the outstanding balance of the line
of credit is $247,000.
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 line was tailored to
match the Company's selling season. From May to November the credit line was
HK$7,000,000 (approximately US$900,000) and from December to April the line was
HK$1,500,000 (approximately US$200,000). Janex International, Inc. had issued a
guarantee to the Hong Kong bank in the full amount of the credit line. At
September 30, 1997, the bank decided not to renew the credit facility.
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
14
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
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 vested in equal increments of 180,000 on the first day of consecutive
six-month periods commencing April 19, 1996. As of September 30, 1998 and
December 31, 1997, the Company had borrowed $615,000, 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.
Under the terms of the stock purchase agreement for the acquisition of Janex,
the Company issued two promissory notes to two stockholders totaling $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 Company's Common Stock (restricted),
exercisable at a price of $1.45 per share through June 28, 2000, with certain
"piggy-back" registration rights. The warrants vested in six-month increments
over the term of the loan. On August 4, 1997, the stockholders agreed to further
extend the due date of the notes to February 1, 1999. The outstanding loan
balance as of September 30, 1998 and December 31, 1997, was $500,000.
The Company charged to operations $60,819 and $228,796 of imputed interest
expense from the issuance of stock purchase warrants noted in the above two
paragraphs in the nine months ended September 30, 1998 and 1997, respectively.
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
September 30, 1998 and December 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.
In addition, an agreement was reached whereby an additional $340,000 was added
to the outstanding balance as of December 31, 1996. The balance of this note
payable at September 30, 1998 and December 31, 1997 was $ 0 and $219,189,
respectively.
15
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
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 December 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
September 30, 1998 and December 31, 1997, the Company had borrowed $174,174 and
$249,113, respectively, 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.
In November 1996, the Company opened the stand-by letter of credit to the Agent.
As of September 30, 1998 and December 31, 1997, the Company had no borrowing
under this credit facility.
Forward Looking Statements
- --------------------------
Except for the historical information contained herein, the discussion in this
Form 10-QSB contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, and the Company intends
that such forward-looking statements be subject to the safe harbors created
thereby. The forward-looking statements include statements regarding
management?s anticipation of the Company?s year 2000 compliance efforts and the
Company?s future liquidity. The forward-looking statements included herein are
based on current expectations that involve a number of risks and uncertainties,
and on assumptions that involve judgements with respect to, among other things,
future economic, competitive and market conditions, future credit availability,
and future business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond the control of the Company.
Although the Company believes that the assumptions underlying the forward-
looking statements, many of which are beyond the control of the Company, are
reasonable, any of the assumptions could prove inaccurate and, therefore, there
can be no assurance that the results contemplated in forward-looking information
will be realized. Important factors which may cause actual results to differ
materially from those contemplated or implied by such forward-looking statements
are discussed in more detail in the Company?s Form 10-KSB filed April 15, 1998.
In light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
16
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 5 OTHER INFORMATION
Three of the Company?s major shareholders have entered into a definitive stock
purchase and sale agreement with Futech Interactive Products, Inc. (?Futech?) of
Phoenix, Arizona. Pursuant to the agreement, the three shareholders of the
Company will sell all of their stock of the Company, constituting approximately
52% of the issued and outstanding common stock of the Company, to Futech for a
combination of Futech preferred stock and promissory notes, and the assumption
by Futech of certain liabilities. As part of this transaction, Futech is also
purchasing certain receivables owing from the Company to the three shareholders.
After the closing of the transaction, it is expected that Futech will exchange
the receivables purchased for common and preferred stock of the Company. After
the closing, it is also expected that Futech nominees will take control of the
Company?s board of directors. The closing of the transaction is subject to
certain terms and conditions.
The closing is expected to occur by November 30, 1998.
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 September 30, 1998: Under Item 5.
Other events: None
17
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
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: November 16, 1998 By: /s/ Leslie Friedland
------------------------
Leslie Friedland
President
Chief Executive Officer
By: /s/ Michael Handelman
-------------------------
Michael Handelman
Chief Financial Officer
18
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JANEX
INTERNATIONAL AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 106026
<SECURITIES> 100000
<RECEIVABLES> 415276
<ALLOWANCES> 3500
<INVENTORY> 474278
<CURRENT-ASSETS> 1183637
<PP&E> 1988263
<DEPRECIATION> (1656000)
<TOTAL-ASSETS> 2001717
<CURRENT-LIABILITIES> 3035712
<BONDS> 0
0
0
<COMMON> 11868816
<OTHER-SE> (14132811)
<TOTAL-LIABILITY-AND-EQUITY> 2001717
<SALES> 2979639
<TOTAL-REVENUES> 2983799
<CGS> 1619705
<TOTAL-COSTS> 3272455
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170313
<INCOME-PRETAX> (458969)
<INCOME-TAX> 5900
<INCOME-CONTINUING> (464869)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (464869)
<EPS-PRIMARY> (0.05)
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