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 JUNE 30, 1999
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.)
2999 N. 44TH STREET, SUITE 225
PHOENIX, ARIZONA 85018-7247
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (602) 808-8765
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 [ ]
As of July 31, 1999, the issuer had 18,098,750 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: 15
<PAGE>
JANEX INTERNATIONAL, INC.
INDEX
PAGE
NUMBER
------
PART I
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998 3
Statements of Operations (unaudited) for the six months
ended June 30, 1999 and 1998 4
Statements of Cash Flows (unaudited) for the six months
ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements (unaudited) 6-9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 10-13
PART II
ITEM 5 OTHER INFORMATION 14
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE 15
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<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
1998 1999
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 62,412 $ 14,902
Accounts receivable, net of allowance of
$25,973 at December 31, 1998 and June 30,
1999, respectively 162,710 211,793
Inventories 131,098 35,018
Prepaid royalties 59,934 124,434
Other current assets 25,257 27,534
------------ ------------
Total current assets 441,411 413,681
Property and equipment, net 258,103 174,383
Intangible assets, net 405,625 362,011
Other assets -- 13,022
------------ ------------
Total assets $ 1,105,139 $ 963,097
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Advance from parent $ 621,080 $ 1,571,249
Accounts payable 602,715 356,343
Accrued expenses 1,203,277 842,364
Note payable - other 257,000 257,000
------------ ------------
Total current liabilities 2,684,072 3,026,956
Shareholders' deficit:
Class A convertible preferred stock,
no par value:
Authorized shares - 5,000,000
Issued and outstanding shares - 5,000,000 at
December 31, 1998 and June 30, 1999,
respectively 569,022 569,022
Common stock, no par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 18,098,750 at
December 31, 1998 and June 30, 1999,
respectively 12,803,327 12,803,327
Additional paid-in capital 554,517 554,517
Accumulated deficit (15,505,799) (15,990,725)
------------ ------------
Total shareholders' deficit (1,578,933) (2,063,859)
------------ ------------
Total liabilities and shareholders' deficit $ 1,105,139 $ 963,097
============ ============
See accompanying notes.
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<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
1998 1999 1998 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Sales $ 592,068 $ 22,589 $ 2,200,625 $ 244,935
Cost of Sales 354,788 14,872 1,124,523 201,909
Royalty Expense 167,066 797 221,925 6,152
----------- ------------ ----------- ------------
Gross Profit 70,214 6,920 854,177 36,874
Operating Expenses:
Selling, general and administrative 338,364 199,180 762,900 354,108
Depreciation and Amortization 87,019 75,548 162,263 148,956
----------- ------------ ----------- ------------
Loss from operations (355,169) (267,808) (70,986) (466,190)
----------- ------------ ----------- ------------
Other income (expense)
Interest income 4,003 -- 4,160 --
Interest expense (56,446) (6,840) (113,771) (12,360)
Other income(expense) 465 (2,060) 1,840 (1,651)
----------- ------------ ----------- ------------
Total other income(expense) (51,978) (8,900) (107,771) (14,011)
----------- ------------ ----------- ------------
Loss before income tax (407,147) (276,708) (178,757) (480,201)
Income tax provision (817) -- (5,900) (4,725)
----------- ------------ ----------- ------------
Net Loss $ (407,964) $ (276,708) $ (184,657) $ (484,926)
=========== ============ =========== ============
Loss per common share $ (0.04) $ (0.02) $ (0.02) $ (0.03)
Weighted average number of
shares outstanding 9,962,105 18,098,750 9,962,105 18,098,750
=========== ============ =========== ============
</TABLE>
See accompanying notes
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<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1999
--------- ---------
OPERATING ACTIVITIES
Net loss $(184,657) $(484,926)
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Depreciation 90,722 90,118
Amortization 71,541 58,838
Imputed Interest 40,546 --
Provision (credit) for doubtful accounts (10,439) --
Changes in operating assets and liabilities:
Accounts receivable (98,942) (49,083)
Inventories (150,447) 96,080
Prepaid expenses and other (7,426) (70,776)
Accounts payable 249,299 (246,369)
Accrued expenses and other (70,182) (360,946)
--------- ---------
Net cash used in operating activities (69,985) (967,064)
INVESTING ACTIVITIES
Purchase of property and equipment (54,702) --
Product development costs (80,042) (30,615)
--------- ---------
Net cash used in investing activities (134,744) (30,615)
FINANCING ACTIVITIES
Advances from parent -- 950,169
Net payments on notes payable (115,743) --
Payments on loans payable - agent (56,364) --
Proceeds from issuance of common stock 250,000 --
--------- ---------
Net cash provided by financing activities 77,893 950,169
Net decrease in cash and cash equivalents (126,836) (47,510)
Cash and cash equivalents at beginning of period 164,672 62,412
--------- ---------
Cash and cash equivalents at end of period $ 37,836 $ 14,902
========= =========
See accompanying notes.
-5-
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Janex International, Inc. and subsidiaries (the "Company") are in the business
of developing, marketing and selling toys and functional children's products
which are manufactured by subcontractors. The Company sells its products
primarily to U.S.-based retailers and their Hong Kong subsidiaries.
On December 11, 1998, approximately 79 percent of the Company's outstanding
stock was acquired by Futech Interactive Products, Inc. ("Futech"). Because the
minority interest exceeds 20 percent, the Company did not establish a new basis
of accounting upon the acquisition.
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 June 30, 1999, the results of
operations for the six months ended June 30, 1999 and 1998, and the changes in
cash flows for the six months ended June 30, 1999 and 1998. These adjustments
are of a normal recurring nature. The consolidated balance sheet as of December
31, 1998 is derived from the Company's audited financial statements.
Certain information and footnote disclosures, normally included in financial
statements 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 the financial statements are adequate
to make the information presented herein 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, 1998, as filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation. All balance sheet accounts of the Company's
foreign subsidiaries 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 (at December 31, 1998 and June 30, 1999, the adjustment was not
significant), are recorded as comprehensive income.
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<PAGE>
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform to the 1999 presentation.
The financial statements have been prepared assuming the Company will continue
as a going concern. The Company has incurred significant operating losses in the
past three years and has negative net worth and negative working capital as June
30, 1999. These factors raise significant doubt as to the Company's ability to
continue as a going concern.
The Company's ultimate ability to continue as a going concern depends on the
market acceptance of products, and the achievement of operating profits and
positive cash flow. The Company will also require additional financial resources
from its new parent or other sources to provide near term operating cash to
enable the Company to execute its plans to move toward profitability. Management
believes that the financial resources of its new parent company, in addition to
sales to be generated from new product lines that are being developed, will be
sufficient to allow the Company to continue in operation.
The results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 1999.
2. SIGNIFICANT ACCOUNTING POLICIES
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued Employees" (APB ) and related Interpretations in
accounting for its employee stock options. Under APB 25, to the extent that the
exercise price of the Company's employee stock options equals management's
estimate of the fair market value of the underlying stock on the date of grant,
no compensation expense is recognized.
Deferred expense on stock and options issued to officers and directors for
service other consideration to be received in the future are offset against
equity and are amortized to expense over the period of benefit.
Loss per share is calculated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," (Statement 128).
Basic earnings per share is computed using the weighted average number of common
shares. Diluted earnings per share is computed using the weighted average number
of common share equivalents during the period. Common share equivalents include
employee stock options using the treasury method and dilutive convertible
securities using the if-converted methods. Common share equivalents have been
excluded for the calculation of loss per share for all periods presented, as
their effect is anti-dilutive.
-7-
<PAGE>
As of January 1, 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME (Statement 130). Statement 130 establishes new rules for the reporting
and display of comprehensive loss and it components. Comprehensive loss for the
Company is the same as net loss for all periods presented.
3. INVENTORIES
Inventories are valued at the lower of cost or market and consist of the
following at June 30, 1999 and December 31, 1998:
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
Finished goods $131,098 $35,018
Work-in-process -- --
-------- -------
$131,098 $35,018
======== =======
4. NOTE PAYABLE - OTHER
The Company may borrow up to $400,000 under a line of credit agreement with a
bank. Borrowings under the line bear interest at the bank's prime rate plus 0.25
percent (8 percent at June 30, 1999). The line is collateralized by all of the
Company's assets and is personally guaranteed by two shareholders. Borrowings
under the line has been extended to September 1, 1999 from the original due date
of July 1, 1999. Borrowing capacity of $143,000 is available at June 30, 1999.
-8-
<PAGE>
5. SEGMENT INFORMATION
A summary of the Company's operations by geographical area for the six
months ended June 30, 1998, and 1999 were as follows:
Adjustments
United Hong and
States Kong Eliminations Consolidated
------ ---- ------------ ------------
1998
Net sales:
Customers $ 28,388 $2,172,237 $ -- $2,200,625
Intercompany -- 1,952 (1,952) --
Total sales 28,388 2,174,189 (1,952) 2,200,625
Operating income (loss) (754,601) 683,615 -- (70,986)
Interest expense (98,581) (15,190) -- (113,771)
Depreciation and amortization (57,187) (105,076) -- (162,263)
Adjustments
United Hong and
States Kong Eliminations Consolidated
------ ---- ------------ ------------
1999
Net sales:
Customers $ 119,354 $ 125,581 $ -- $ 244,935
Intercompany -- -- -- --
Total sales 119,354 125,581 -- 244,935
Operating loss (349,718) (113,224) -- (462,942)
Interest expense (15,670) 62 -- (15,608)
Depreciation and amortization (51,225) (97,731) -- (148,956)
-9-
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CONSOLIDATED RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999 AND 1998:
NET SALES
For six months ended June 30, 1999, net sales decreased by $1,955,690 or 89%, to
$244,935, as compared to net sales of $2,200,625 for the six months ended June
30, 1998. The significant decrease in net sales is a result of several factors.
There was an apparent lack of any popular licenses in the marketplace. As a
result, many of the major customers of the Company are not willing to make large
inventory commitments. Additionally, some customers have experienced an
overstocking of inventory, due to previously purchased inventory not selling as
expected
At June 30, 1999, the Company had a backlog of unfilled orders of approximately
$200,000 compared to its order backlog of approximately $1,000,000 at June 30,
1998. Although the Company has noted a general decrease in order flow in 1999,
as compared to prior years, the present backlog is not necessarily indicative of
net sales to be expected for the fiscal year ending December 31, 1999.
GROSS PROFIT
For the six months ended June 30, 1999, gross profit was $36,874 or 15% of net
sales, as compared to $854,177 or 39% of net sales for the six months ended June
30, 1998. The Company typically establishes prices to obtain a target gross
margin ranging from 45% to 50%, but overall gross margin can vary depending on
the sales mix in each quarter. The decrease in gross margin in 1999, as compared
to 1998, was the result of the Company deciding to sell certain slow-moving
inventory at little or no profit.
ROYALTY EXPENSE
For the six months ended June 30, 1999, royalty expense was $6,152 or 3% of net
sales, as compared to $221,925 or 10% of net sales for the six months ended June
30, 1998. The decrease of royalty expense in 1999, as compared to 1998 was a
result of a shift in the sales mix to non-royalty items, which includes the Wet
Pet line.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the six months ended June 30, 1999, selling, general and administrative
expenses decreased by $408,792 or 54%, to $354,108 or 145% of net sales, as
compared to $762,900 or 35% of net sales, for the six months ended June 30,
-10-
<PAGE>
1998. Selling, general and administrative expenses are comprised of fixed
overhead costs and variable selling expenses. The decrease in fixed selling,
general and administrative expenses is a direct result of management's
continuing effort to reduce fixed overhead costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased by $47,510 to $14,902 at June 30, 1999, as
compared to $62,412 at December 31, 1998. The Company's net working capital
decreased by $370,614 from working capital deficit of $2,242,661 at December 31,
1998 to a working capital deficit of $2,613,275 at June 30, 1999 and the
Company's current ratio decreased to 0.14:1 at June 30, 1999, as compared to
0.16:1 at December 31, 1998.
The Company believes that its existing cash balance together with its existing
line 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, 1999. The Company has experienced recurring losses from
operations, negative cash flows and decreases in working capital.
The Company's ultimate ability to continue as a going concern depends on: (i)
the market acceptance of its products; (ii) its generation of sufficient
operating profits; (iii) its creation of a sustainable positive cash flow; and
(iv) obtaining additional financial resources to provide near term operating
cash. Management believes that the financial resources from its majority
shareholder, Futech, in addition to sales generated from new product lines that
it is developing, will allow the company to continue in operation for fiscal
year 1999.
The Company had negative cash flow from operating activities of $967,064 for the
six months ended June 30, 1999, as compared to a negative operating cash flow in
1998 of $69,985, as declining sales have led to lower accounts receivable
collections in 1999.
During the six months ended June 30, 1999, the Company incurred additions to
product development costs of $30,615. This compares to additions to tooling and
molds related to new licenses of $54,702 and additions to product development
costs of $80,042 for the six months ended June 30, 1998.
The Company generated $950,169 from financing activities during the six months
ended June 30, 1999, compared to $77,893 during the same period in 1998. The
cash generated in financing activities came from proceeds of advances from
parent of $950,169.
The Company's capital commitments for 1999 include commitments for minimum
guaranteed royalties under licensing agreements. The commitments for 1999 amount
to $181,500. The Company also maintains a non-cancelable operating lease on its
former facility, although it subleases that space for an amount approximating
the Company's rent to the landlord. Future minimum payments under this lease are
$51,000 for 1999.
-11-
<PAGE>
The Company may borrow up to $400,000 under a line of credit agreement with a
bank. Borrowings under the line bear interest at the bank's prime rate plus 0.25
percent (8.0 percent at June 30, 1999). The line is secured by all of the
Company's assets and is personally guaranteed by two shareholders. Borrowings
under the line are due September 1, 1999. Borrowing capacity of $143,000 was
available at June 30, 1999.
INFLATION
Management does not believe that inflation has had a significant impact on the
Company's costs and profits during the past two years.
YEAR 2000
The Year 2000 presents potential concerns for business and consumer computing.
The consequences of this issue may include systems failures and business process
interruption. The Year 2000 issue affects Janex's internal systems, including
information technology (IT) and non-IT systems. Janex is assessing the readiness
of its systems for handling the Year 2000. Although the assessment is still
underway, management believes that all material systems will be compliant by the
Year 2000 and that the cost to address the issues will not be material.
Nevertheless, Janex is creating contingency plans for certain internal systems.
The Company has not instituted any procedures to obtain certification from its
major vendors or customers that their systems are Year 2000 compliant. Such a
survey would include vendors who provide systems related services, e.g.,
banking, letter of credit processing, shipping, security, HVAC, etc. along with
third-party factories providing toy products. The cost of such a survey, in both
time and money, would be substantial. However, the Company does not believe that
the failure of any vendor or customer to be Year 2000 compliant will have a
material impact on the Company.
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this report that are subject to a
number of risks and uncertainties, including without limitation, those described
in our Annual Report on Form 10-KSB for the year ended December 31, 1998 and
other risks and uncertainties indicated form time to time in our filings with
the SEC. These forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include the information concerning possible or
assumed future results of operations. Also, when we use words such as
"believes," "expects," "anticipates" or similar expressions, we are making
forward-looking statements. Readers should understand that the following
important factors, in addition to those discussed in the referenced SEC filings,
could affect our future financial results, and could cause actual results to
differ materially form those expressed in our forward-looking statements:
-12-
<PAGE>
* the implementation of our growth strategy;
* the integration of acquisitions;
* the availability of additional capital;
* variations in stock prices and interest rates;
* fluctuations in quarterly operating results; and
* other risks and uncertainties described in our filings with the SEC.
We make no commitment to disclose any revisions to forward-looking statements,
or any facts, events or circumstances after the date hereof that may bear upon
forward-looking statements.
-13-
<PAGE>
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 5 OTHER INFORMATION
On June 7, 1999, a Form S-4 was filed with the SEC to which the Company was
a party. The Company's Board of Directors authorized a merger transaction
whereby the Company and four other entities would merge into a newly
incorporated entity, known as Futech Interactive Products (Delaware) Inc.
The merger is subject to shareholder approval.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule (electronic filing only)
(b) 8-K - a current report on Form 8-K was filed on June 15, 1999 to
report the parties' signing of a global merger agreement dated June 7,
1999, as described in Item 5 above.
-14-
<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: August 16, 1999 By: /s/ Vincent W. Goett
---------------------------------
Vincent W. Goett
President
Chief Executive Officer, Director
By: /s/ Fred B. Gretsch
---------------------------------
Frederick B. Gretsch, Sr.
Chief Financial Officer
Treasurer and Secretary, Director
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 14,902
<SECURITIES> 0
<RECEIVABLES> 237,766
<ALLOWANCES> 25,973
<INVENTORY> 35,018
<CURRENT-ASSETS> 413,681
<PP&E> 1,992,419
<DEPRECIATION> 1,818,036
<TOTAL-ASSETS> 963,097
<CURRENT-LIABILITIES> 3,026,956
<BONDS> 0
0
569,022
<COMMON> 12,803,327
<OTHER-SE> 115,436,208
<TOTAL-LIABILITY-AND-EQUITY> 963,097
<SALES> 244,935
<TOTAL-REVENUES> 244,935
<CGS> 208,061
<TOTAL-COSTS> 711,125
<OTHER-EXPENSES> 1,651
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,360
<INCOME-PRETAX> (480,201)
<INCOME-TAX> 4,725
<INCOME-CONTINUING> (484,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (484,926)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
