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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, 2000
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.
(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.)
615 HOPE ROAD 07724
EATONTOWN, NEW JERSEY (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: (732) 935-0707
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 November 17, 2000, the issuer had 10,073,259 shares of its common stock,
no par value, and 5,000,000 shares of its preferred stock, no par value, issued
and outstanding (plus an additional minimum of 16,697,129 shares of Common Stock
committed for issuance). See Part II, Item 5: Other Information in this report.
<PAGE>
JANEX INTERNATIONAL, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I
CONSOLIDATED BALANCE SHEET ...............................................3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED).........................4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED).........................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)....................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION...........................................12
PART II OTHER INFORMATION.................................................15
ITEM 5. OTHER INFORMATION.................................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................19
SIGNATURES.................................................................22
</TABLE>
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JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 2000
(Unaudited)
-------------------
<S> <C>
ASSETS (All Collateralized)
Current assets:
Cash and cash equivalents ........................ $ 5,141
Accounts receivable, net of allowance of $22,942. 81,479
Inventories ...................................... --
Other current assets ............................. 112,827
------------
Total current assets ................................. 119,447
Property and equipment, net .......................... --
Intangible assets, net ............................... 270,662
------------
Total assets ......................................... $ 470,109
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Note payable - bank .............................. $ 331,943
Due to Futech Interactive Products, Inc. ......... 1,606,199
Accounts payable ................................. 1,320,524
Accrued expenses ................................. 852,618
Loans Payable..................................... 174,352
------------
Total current liabilities ............................ 4,285,636
Shareholders' deficit:
Class A convertible preferred stock, no par value:
Authorized shares - 5,000,000
Issued and outstanding shares - 5,000,000 ........ 569,022
Common stock, no par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 14,770,388 ....... 15,980,721
Additional paid-in capital ...................... 554,517
Treasury Stock, at cost: 10,000,000 shares (2,870,000)
Accumulated deficit .............................. (24,919,787)
------------
(10,685,527)
Due to Related Parties............................ 6,870,000
Total shareholders' deficit .......................... (3,815,527)
------------
Total liabilities and shareholders' deficit .......... $ 470,109
============
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
3
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JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------- -------------- ------------ -------------
1999 2000 1999 2000
-------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Net Sales ........................ $ 47,442 $ 410 $ 292,377 $ 3,337
Cost of Sales .................... (36,973) -- (238,882) (279)
Royalty Expense .................. (76,112) 4,618 (173,503) --
------------ ------------ ------------ ------------
Gross margin ................ (65,643) 5,028 (120,008) 3,058
Operating Expenses:
Selling, general and
administrative ............ 137,874 442,457 491,982 1,036,473
Stock based compensation .... -- 87,207 -- 6,883,156
Depreciation and amortization 95,617 (6,979) 244,574 3,025
------------ ------------ ------------ ------------
Loss from operations ............. (299,134) (517,657) (856,564) (7,919,596)
------------ ------------ ------------ ------------
Other income (expense)
Interest expense ............ (7,305) (2,964) (19,665) (22,075)
Other income (expense) ...... 1,362 -- (288) --
------------ ------------ ------------ ------------
Total other income (expense) ..... (5,943) (2,964) (19,953) (22,075)
------------ ------------ ------------ ------------
Loss before income tax ........... (305,077) (520,621) (876,517) (7,941,671)
Income tax provision ............. -- -- (4,725) (2,000)
------------ ------------ ------------ ------------
Net Loss ......................... $ (305,077) $ (520,621) $ (881,242) $ (7,943,671)
============ ============ ============ ============
Loss per common share ............ $ (0.02) $ (.04) $ (0.05) $ (.56)
============ ============ ============ ============
Weighted average number of Common
shares outstanding .............. 18,098,750 13,652,356 18,098,750 14,125,629
============ ============ ============ ============
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
4
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JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1999 2000
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss .......................................... $ (881,242) $(7,943,671)
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Stock based compensation .................. -- 6,883,156
Compensation ............................... -- 125,000
Depreciation ............................... 139,538 3,025
Amortization ............................... 105,036 --
Inventory Write-offs ....................... 15,238 --
Provision (credit) for doubtful accounts ... (18) --
Changes in operating assets and liabilities:
Accounts receivable ........................ (37,506) (25,501)
Inventories ................................ 96,708 --
Other current assets ....................... (19,240) (28,521)
Accounts payable ........................... (244,664) 286,853
Accrued expenses ........................... (249,126) 475,146
----------- -----------
Net cash used in operating activities ........... (1,075,276) (224,513)
INVESTING ACTIVITIES
Purchase of property and equipment .............. (19,723) --
Product development costs ....................... (26,476) --
Proceeds from Stock Options ..................... -- 375
----------- -----------
Net cash used in investing activities ........... (46,199) 375
FINANCING ACTIVITIES
Increase/(Decrease) in due to Futech ............ 1,076,884 (23,993)
Increase/(Decrease) in Notes Payable ............ (57) 75,000
Increase/(Decrease) in Loans Payable ............ -- 174,352
----------- -----------
Net cash provided/(used) by financing activities. 1,076,827 225,359
----------- -----------
Net increase in cash and cash equivalents ....... (44,648) 1,221
Cash and cash equivalents at beginning of period 62,412 3,920
----------- -----------
Cash and cash equivalents at end of period ...... $ 17,764 $ 5,141
=========== ===========
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
5
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JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Janex International, Inc. and its subsidiaries have historically been in the
business of developing, marketing and selling toys and functional children's
products manufactured by subcontractors. We have sold our products primarily to
U.S.-based retailers and their Hong Kong subsidiaries. Janex currently has no
significant operations, but has entered into an agreement to acquire DaMert
Company, Inc. and certain assets of Futech Interactive Products, Inc. See Part
II, Item 5. Other Information.
The accompanying consolidated financial statements are unaudited. However, in
the opinion of our management, they contain all adjustments necessary to present
fairly our financial position at September 30, 2000, the results of our
operations for the three month and nine month periods ended September 30, 2000
and 1999, and the changes in our cash flows for the nine-month periods ended
September 30, 2000 and 1999. These adjustments are of a normal recurring nature.
Some of the information and footnote disclosures normally included in financial
statements that are prepared in accordance with generally-accepted accounting
principles have been condensed or omitted under the rules and regulations of the
Securities and Exchange Commission. However, our management believes that the
disclosures contained in the financial statements are adequate to make the
information presented not misleading. For further information, refer to the
consolidated financial statements and notes included in our Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1999, as filed with the
Securities and Exchange Commission.
The consolidated financial statements include the accounts of Janex
International, Inc. and its wholly-owned subsidiaries. All inter-company
accounts and transactions have been eliminated in consolidation. All balance
sheet accounts of our foreign subsidiaries are translated at the current
exchange rate at the balance sheet date, while income statement items are
translated at the average currency exchange rates for each period presented. The
resulting translation adjustments, if significant, are recorded as comprehensive
income. At December 31, 1999 and September 30, 2000, there were no significant
adjustments to comprehensive income.
The preparation of financial statements in conformity with generally-accepted
accounting principles requires our 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.
The financial statements have been prepared assuming that we will continue as a
going concern. We have incurred significant operating losses and negative cash
flow over the last several years, and we have negative net worth and negative
working capital as of September 30, 2000. These factors raise significant doubt
as to our ability to continue as a going concern.
Our ultimate ability to continue as a going concern depends on our ability to
complete an acquisition, such as the acquisition of DaMert Company, our ability
to raise additional capital, the market's acceptance of any products we acquire
or develop, an increase in our revenues and the achievement of operating
profits, and positive cash flow. We will also require additional financial
resources from other sources to provide near-term operating cash to enable us to
execute our plans to move toward profitability. Management believes that future
financings, the acquisitions described in Part II, Item 5. Other Information, of
this Form 10-QSB, and additional sales we hope to generate from new product
lines that we expect to develop, will be sufficient to allow us to continue in
operation.
The results of operations for the three months ended September 30, 2000 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2000.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
We consider all highly-liquid investments (i.e., with a maturity of three months
or less when purchased) to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market valuation. Cost is
determined by various methods which approximate the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at acquisition cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the
assets, which range from two to five years for molds, machinery and equipment,
and furniture and fixtures. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the lease term.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At September 30, 2000, we had the following financial instruments: cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses, and
short-term debt. The carrying value of such financial instruments approximates
their fair value based on the liquidity of these financial instruments or based
on their short-term nature.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and product development costs.
Any costs of business acquisitions in excess of the net assets of the
subsidiaries acquired (goodwill) are amortized on a straight-line basis over a
ten-year period. We record impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less then the carrying amounts of those assets. This methodology
includes intangible assets acquired.
Any goodwill relating to specific intangible assets is included in the related
impairment measurements to the extent it is identified with such assets.
Any product development costs consist of product design and development (through
subcontractors) for the various toys and children's products that we sell. The
designs are stated at the lower of cost or net realizable value and amortized on
a straight-line basis over a one-year to five-year period, depending on their
nature.
Management reviews goodwill and other intangible assets periodically for
possible impairment. This policy includes recognizing write-downs if it is
probable that measurable undiscounted future cash flows and/or the aggregate net
cash flows of an asset, as measured by current revenues and costs (exclusive of
depreciation) over the asset's remaining depreciable life, are not sufficient to
recover the net book value of an asset.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
We transact business on a credit basis with our customers. We routinely assess
the financial strength of our customers and, as a consequence, believe that our
trade accounts receivable credit risk exposure is limited. We do not require
collateral to support customer receivables. However, foreign receivables are
generally secured by a letter of credit. We maintain an allowance for potential
credit losses and such losses have been within management's expectations.
REVENUE RECOGNITION
We recognize revenue upon shipment of the product to the customer, with
appropriate allowances made for estimated returns and uncollectible accounts.
7
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INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
statement employs an asset and liability approach for financial accounting and
reporting of deferred income taxes.
Generally, SFAS 109 allows for recognition of deferred tax assets in the current
period for the future benefit of net operating loss carry-forward and items for
which expenses have been recognized for financial statement purposes but will be
deductible in future periods. A valuation allowance is recognized, if the weight
of available evidence is more likely than not that some portion or all of the
deferred tax assets will not be realized.
STOCK-BASED COMPENSATION
We have elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for our employee stock options.
Under APB 25, to the extent that the exercise price of our employee stock
options equals management's estimate of the fair value of the underlying stock
on the date of grant, no compensation expense is recognized. To the extent that
the fair market value of the common stock at date of grant exceeds the option
price, compensation expense is recorded.
Deferred expense on stocks and options issued to officers and directors for
services or 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
Loss per share is calculated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." Basic earnings per
share is computed by dividing net loss (profits) by the weighted average number
of common shares outstanding.
Diluted earnings per share is computed using the weighted average number of
common share equivalents outstanding during the period. Common share equivalents
include employee stock options using the treasury method and dilutive
convertible securities using the if-converted method.
Common share equivalents have been excluded from the calculation of loss per
share for all periods presented, as their effect is anti-dilutive.
COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted SFAS Statement No. 130, "Reporting
Comprehensive Income." SFAS 130 establishes new rules for the reporting and
display of comprehensive loss and its components. Our comprehensive loss is the
same as net loss for all periods presented.
PENSION PLAN
We have a 401(k) Plan for the benefit of our employees. Under the provisions of
the 401(k) Plan, employees may make contributions on a tax-deferred basis to
their 401(k) accounts, up to the legal limits provided for by United States
income tax regulations. At our discretion, we may contribute a portion of our
profits to the 401(k) Plan. Such contributions are allocated between members of
the 401(k) Plan based on a pre-stated formula. Employer contributions vest with
401(k) Plan participants at the rate of 20% per year, beginning in year two and
ending in year six of employment. We have not made contributions to the 401(k)
Plan for 1999 or 2000.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has recently issued several
pronouncements, two of which may have future applicability, viz: Statement of
Financial Accounting Standards (SFAS) No. 132, "Employers Disclosures about
Pensions and other Postretirement Benefits,"
8
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effective June 15, 2000, and No. 137, "Accounting for Derivative Instruments and
Hedging Activities," effective June 15, 2000. The current financial statements
would not have been impacted by these pronouncements, as we have not
participated in derivative transactions or a 401(k) Plan.
SHAREHOLDERS' DEFICIT
Stock-Based Compensation
On September 18, 2000, we issued 1,341,638 shares of our unregistered common
stock to Vincent Goett, our Chairman and former president. This issuance was in
satisfaction of accrued expenses incurred by Mr. Goett on our behalf in the
amount of $67,082. The difference between the fair market value of the common
stock and the amount owed at the date of issuance was $87,206, which was charged
to operations. Accordingly, common stock increased by $154,288 in the three
months ended September 30, 2000.
See Part II, Item 5. Other Information, of this Form 10-QSB, for a description
of the transaction in which Palmilla Ventures Limited Partnership, a related
party, for itself and on behalf of certain other related parties, surrendered
10,000,000 shares of our common stock. The 10,000,000 shares (minimum) and the
2,000,000 compensation shares are issuable by us. The 10,000,000 shares
surrendered are to be re-issued upon an increase in our authorized shares. The
2,000,000 shares to be issued as consideration for the surrender of the
10,000,000 shares were valued at our common stock's market value at the date of
the transaction ($2.00). Further, in November, 2000, Palmilla Ventures Limited
Partnership surrendered to us an additional 4,697,129 shares of our common
stock. These shares are to be re-issued upon an increase in our authorized
shares.
Treasury Stock represents the original value of the acquisition of the
10,000,000 shares which have been surrendered.
As the liability to the related parties will be liquidated by the issuance of
12,000,000 (minimum) shares when the authorized shares are increased, such
liability is reflected as a component of Shareholder's Deficit.
Accumulated Deficit
For the nine months ended September 30, 2000, our accumulated deficit increased
to the extent of our net loss of $7,943,671.
4. MATERIAL TRANSACTIONS, LITIGATION AND SUBSEQUENT EVENTS
In February 2000, we entered into two asset purchase agreements, as amended,
with Futech, one to acquire all the assets of Futech (other than those related
to the website www.oKid.com), and the other to purchase the URL domain name and
related website, www.oKid.com, and the related assets.
In June 2000, Futech filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. Following the filing of the bankruptcy petition,
on July 12, 2000, we entered into a new Purchase and Sale Agreement with Futech
(the "July Agreement"), which agreement superseded all then prior agreements
between us and Futech. This transaction was subject to, among other conditions,
approval of the Bankruptcy Court, which was denied on August 18, 2000.
Accordingly, we withdrew from the transactions contemplated by the July
Agreement, including the purchase of the assets of Futech.
We entered into a new asset purchase agreement with Futech, effective as of
October 23, 2000 (the "Futech Agreement"). Under the Futech Agreement, we have
agreed to acquire specified assets of Futech in exchange for the following
consideration: approximately $150,000 in cash ($61,000 of which has been paid);
3,400,000 shares of our common stock; and assumption of Futech liabilities in
the aggregate amount of up to approximately $9,600,000. In addition, $1,645,000
that Futech claims we owe it would be discharged. The consummation of this
transaction is subject to numerous conditions, including approval of our board
of directors and shareholders, approval of Futech's secured creditors, and
approval of the bankruptcy court. We can give you no assurance that this
transaction will be consummated.
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On May 16, 2000, Golden Books Family Entertainment, Inc., as plaintiff ("Golden
Books"), served us with a Second Amended Complaint which names Futech, Vincent
W. Goett ("Goett"), and us as defendants. We were not named in the original
complaint or the first amended complaint. The case was pending in the United
States Bankruptcy court for the Southern District of New York (Bankruptcy case
No. 99-10030). On July 25, 2000, Golden Books and the Company entered into a
stipulation to suspend this litigation until the earliest to occur of: (1) the
closing of the transactions contemplated by the Agreement with Futech for the
Purchase and Sale of Assets, as amended (the "Agreement"); (2) rescission or
invalidation of the Agreement; or (3) January 1,2001. As noted above, although
we had withdrawn from the transactions contemplated by the agreement for the
purchase and sale of Futech's assets, we have since entered into a new agreement
for such purchase and sale.
The proceeding originally commenced in June 1999. The Second Amended Complaint
alleges, among other things, (i) that Futech is indebted to Golden Books in the
amount of $1 million under a promissory note dated August 14, 1996 ("Note"),
(ii) that Futech has defaulted on its obligations under the Note, (iii) that
Goett has personally guaranteed performance of Futech's obligations under the
Note, (iv) that Goett in January 2000 caused Futech to transfer all or virtually
all of its assets to the Company, and (v) that the transfer was made by Goett
and Futech knowingly with intent to deplete Futech of assets and that we
accepted the transfer knowingly and with intent to assist Goett and Futech in
depleting Futech of assets and thereby rendering it judgment-proof or, in the
alternative, that Futech, on or about January 2000, transferred to us Futech's
Interactive Books division and all of the assets and liabilities thereof. On the
basis of the foregoing, the Second Amended Complaint alleges that Futech, Goett
and the Company (or in the alternative Goett and the Company) are jointly and
severally liable for the $1 million under the Note, plus interest, costs and
reasonable attorney's fees.
The Second Amended Complaint also alleges (i) that Futech transferred its assets
to us with intent to hinder, delay or defraud Golden Books in pursuit of its
claim against Futech, (ii) that such transfer was made without receiving a
reasonably equivalent value for the transfer, (iii) that Futech was insolvent at
the time of transfer (or became insolvent as a result), (iv) that the transfer
included all or substantially all of Futech's assets to the Company, (v) that
the transfer of Futech assets to us was a "fraudulent conveyance" under Arizona
law, and (vi) that Goett conspired with Futech and Janex to effect the asset
transfer with the intent and for the purpose of hindering, delaying and
defrauding Futech's creditors, including rendering Futech judgment-proof, and
that such conduct was malicious and intended to injure Golden Books.
Based on the foregoing, Golden Books claims it is entitled to garnishment,
avoidance of the transfer, and attachment or other provisional remedy and $1
million, plus interest and punitive damages.
As described above, since we have not completed the acquisition of Futech's
assets, we believe that we have strong defenses against the foregoing claims and
intend to vigorously defend against them. Although we believe that we have
strong defenses, no assurance can be given as to the outcome of the litigation,
which could have a material adverse effect on us.
On June 20, 2000, Jon Weber, d/b/a Alma Designs, as plaintiff ("Weber"), served
us with a Complaint which names Futech and us as defendants. The case is pending
in the United States District court for the Northern District of California, San
Jose Division (Case No. CA-00 20670). The Complaint alleges, among other things,
(i) that the defendants solicited the plaintiff to ship goods valued in excess
of $240,000, and failed to pay for the goods after their sale, (ii) that Futech
issued purchase orders to the plaintiff, (iii) that we are the parent company of
Futech, and that we caused Futech to transfer substantially all of its liquid
assets to us, and (iv) that the defendants fraudulently induced the plaintiff to
ship the merchandise knowing that it did not have sufficient funds to pay the
amount due and with the intent of not paying the amounts due. On the basis of
the foregoing, the Complaint demands judgment for $243,000, interest and costs
and punitive damages of $200,000. On August 2, 2000, the Court awarded a Default
Judgment against us and Futech in the amount of approximately $237,000. We are
not the parent company of Futech and, as described above, we have not
consummated the acquisition of Futech's assets. We intend to attempt to have the
Default Judgment vacated, as we believe that we have strong defenses against the
foregoing claims. We cannot assure you that we will be able to have the Default
Judgment vacated, and we have made a special provision of the full amount of the
default judgment as of September 30, 2000. Even if we are able to have the
Default Judgment
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vacated, we cannot give you any assurance as to the outcome of the litigation,
which could have a material adverse affect on us.
On January 26, 2000, Caterpillar, Inc., as plaintiff ("Caterpillar"), served us
with a Complaint which names us and Futech as defendants. The case was pending
in the Circuit Court of the Tenth Judicial Circuit of Illinois, Peoria County
(case No. 00 L26). The Complaint alleged that Janex is indebted to Caterpillar
in the amount of $45,000 in unpaid minimum royalty payments under a Trademark
Merchandise License Agreement dated April 15, 1997. On May 23, 2000, the Court
awarded a Default Judgment against us and Futech in the amount of $60,621.80.
On May 16, 2000, A.H. Warner Properties. L.L.C., as plaintiff ("Warner"), served
us with a Complaint which names us, Futech, and others as defendants. The case
was pending in the Superior Court of the State of California for the County of
Los Angeles (case No. 00B03229). The Complaint alleges that Janex is indebted to
Warner for unpaid rent pursuant to a lease for a property located in Woodland
Hills, California, and seeks judgment for the debt and interest, legal fees and
expenses. The lease on the subject property expired on June 30, 2000. On July
17, 2000, the Court awarded a Default Judgment against us in the amount of
approximately $22,000.
On June 30, 2000, CarrAmerica Realty Corporation, L.P., as Plaintiff, served us
with a Complaint which names us and others as defendants. On July 7, 2000 we
were served with a first amended Complaint which changed the Plaintiff to
CarrAmerica Realty, L.P. ("Carr"). The case is pending in the Superior Court of
the State of Arizona in and for the County of Maricopa (case No. CV2000-012389).
The Complaint alleges that, on or about June 1, 2000, we issued a check for
$61,812.78 which was returned to Carr for insufficiency of funds. The Complaint
further alleges that we intended to defraud Carr. We issued the check to Carr in
payment of a portion of the rent owed by Futech Interactive Products, Inc.
("Futech") to Carr on a property located in Phoenix, Arizona. Carr seeks
judgment against us for twice the amount of the check (that is, $123,635.56), in
addition to interest, court costs and reasonable attorneys' fees. On September
14, 2000 we answered the amended Complaint and asserted several affirmative
defenses. The outcome of this litigation is uncertain and could materially
adversely affect our financial condition.
On October 24, 2000 Carr served us and Futech, among others, with a Complaint
for forcible entry and detainer. The case was filed in the Superior Court of the
state of Arizona, in and for the County of Maricopa (case no. CV2000-019259).
The Complaint alleges that Carr's lease with Futech was deemed rejected by
operation of law in connection with Futech's bankruptcy proceeding and sought to
have all the defendants vacate the leased premises. We have stipulated to a
judgment ordering the defendants (including us) to vacate the premises leased by
Futech at 2999 North 44th Street, Phoenix, AZ.
On November 9, 2000, we entered into a Merger agreement with DaMert Company,
Inc. ("DaMert"), a Berkeley, California-based designer, manufacturer, and
distributor of specialty toy products. Pursuant to the Merger agreement, DaMert
will be merged with and into Janex or a wholly-owned subsidiary of Janex. Under
the Merger Agreement, we will issue 2,000,000 shares of our common stock and
will assume DaMert's indebtedness to Amresco Financial I, L.P. ("Amresco"),
amounting to approximately $2,800,000. We have also agreed to issue to the
principals of DaMert, who will continue as employees of DaMert, options to
purchase an aggregate of 1,000,000 shares of our common stock at $.01 per share.
These options will not be exercisable until the number of our authorized shares
is increased to 125,000,000. As part of our arrangements to satisfy the DaMert
debt to Amresco, we entered into a Settlement, Exchange of Collateral and
Release agreement with Amresco (the "Amresco Agreement"). Pursuant to the
Amresco Agreement, we will pay to Amresco cash in the aggregate of $1,500,000,
payable as follows: $400,000 at the closing of the DaMert acquisition, $400,000
within 60 days of closing, and the remaining $700,000 will be paid in six equal
quarterly installments, beginning no later than March 31, 2001. In addition, we
will issue 1,500,000 shares of our common stock to Amresco.
As part of our financing for the DaMert acquisition, we expect to borrow up to
$815,000, which will be payable on demand, from private lenders, who may be
affiliates, at an interest rate of ten percent (10%) per annum. Pursuant to the
terms of this loan, we anticipate issuing to the lender(s), 5,000,000 shares of
our common stock and warrants to purchase 2,000,000 shares of our common stock
at $.50 per share. The issuance of these shares and warrants would be subject to
an increase to 125,000,000 in the number of our authorized shares of common
stock. In addition, Vincent W. Goett, our Chairman has agreed to personally
guarantee $1.1 million of the Company's obligation to Amresco. In
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consideration of this guarantee, the Company has agreed to issue Mr. Goett 10
million shares of common stock, subject to an increase in the number of our
authorized shares of common stock.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Over the last fifteen months, we have been seeking to increase our sales and
operating performance through mergers with, or acquisitions of, selected
companies with complementary products. To this end, we had entered into
agreements with Futech Interactive Products, Inc. ("Futech"), and the DaMert
Company ("DaMert"). We had also entered into a letter of intent with Trudy
Corporation. We have since abandoned our discussions with Trudy, and had
withdrawn from the contemplated transaction with Futech and our original
agreement with DaMert terminated. On November 9, 2000, we entered into a new
Merger agreement with DaMert, a Berkeley, California-based designer,
manufacturer, and distributor of specialty toy products. Pursuant to the Merger
agreement, DaMert will be merged with and into Janex or a wholly-owned
subsidiary of Janex. We have also since entered into a new asset purchase
agreement with Futech.
The prolonged and expensive preparations for these transactions have had a
material adverse impact on our financial performance, working capital position
and business prospects.
Currently, we have no significant business operations and are experiencing a
severe working capital deficiency and negative cash flow.
We believe that we could benefit from such mergers and acquisitions.
We believe that completion of the DaMert and/or Futech acquisition should: (i)
provide access to funding for inventory and operating expenses; (ii) allow the
introduction of new and complementary product lines with new licenses; and (iii)
enable us to recover markets which have been neglected for some time.
Although we expect to realize revenue growth from the planned acquisitions, we
also expect that our operating expenses will increase dramatically. We plan to
implement a thorough review of operating expenses with a view to reducing them
wherever possible; however, we cannot assure you that we will be able to reduce
expenses or that the planned acquisitions will be profitable. DaMert and Futech
have incurred in the past, and continue to incur, significant losses and
negative cash flow. Accordingly, we expect to continue to incur significant
losses and negative cash flow for the foreseeable future.
NET LOSS
Our net loss for the three and nine months ended September 30, 2000 was $520,621
and $7,943,671, respectively, compared with net losses of $305,077 and $881,242
for the comparable periods in the prior year. Such losses are analyzed below.
NET SALES
For the three and nine months ended September 30, 2000, net sales were $410 and
$3,337 respectively, compared to net sales of $47,442 and $292,377 for the
comparable periods in the prior year. The decrease in net sales is due to
several factors, the most significant of which has been the concentration of our
management's focus during the second half of 1999 and the first nine months of
2000 on potential acquisitions of complementary businesses. This has had a
material adverse effect on sales performance, as management's attention was not
directed to sales of existing products or the development of new products. In
addition, our shortage of operating capital throughout this period has had a
serious adverse affect on our sales and marketing activities and has limited
significantly our ability to acquire inventory, which in turn has contributed to
reduction in sales. Even with the planned acquisitions described in Part II,
Item 5. Other Information, of this Form 10-QSB, we do not expect that we will
realize any significant sales during the year ending December 31, 2000.
At September 30, 2000, the Company had no backlog of unfilled orders, compared
to a backlog of approximately $111,000 at September 30, 1999. The decrease in
backlog is due to the decrease in sales activity and the associated factors
described above.
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GROSS MARGIN
Gross margin is equal to net sales plus royalty income, less cost of sales and
royalty expense.
For the three and nine months ended September 30, 2000, gross margin was $5,028
and $3,058, respectively, compared to a negative gross margin of $65,643 and
$120,008 for the comparable periods in the prior year. Performance during 2000
reflects the reduction in sales, as described above.
ROYALTY EXPENSE AND INCOME
For the three and nine months ended September 30, 2000, there was a negative
$4,618 and $0, respectively of royalty expense, as compared to $76,112 and
$173,503 for the comparable prior periods. The negative royalty expense for
the three months ending September 30, 2000 resulted from previously recorded
amounts. Overall, the lack of royalty income for the nine months ending
September 30, 2000 was a direct result of the very substantial reduction in
sales for the same period, as described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
For the three and nine months ended September 30, 2000, selling, general and
administrative expenses were $442,457 and $1,036,473, respectively, as compared
to $137,874 and $491,982 for the comparable periods in the prior year.
The increase in selling, general and administrative expenses was due to
increased expenses primarily related to professional fees: legal fees,
$225,000; consulting services, $30,000; and accounting and auditing services,
$180,000. These expenses were partially offset by a reduction of recurring
operating expenses. In addition, approximately $237,000 was accrued in the
quarter ending September 20, 2000 in relation to a judgment against us in a
lawsuit.
STOCK-BASED COMPENSATION
For the three and nine months ended September 30, 2000, we incurred stock-based
compensation (non-cash) expense in the amount of $87,207 and $6,883,156,
respectively. Of the stock-based compensation incurred in the nine months ended
September 30, 2000, $2,616,000 relates to 2,500,000 stock options granted during
the period, $4,000,000 relates to stock issuable to related parties as
compensation for surrendering their shares to us, $180,000 relates to issuance
of 2,250,000 shares of our common stock to our Chairman and former President in
satisfaction of accrued salary owing to him, and $87,207 relates to issuance of
1,341,638 shares of our common stock to our Chairman and former President in
satisfaction of $67,082 of expenses owing to him. See Part II, Item 5. Other
Information, of this Form 10-QSB, for a description of the transactions in which
certain related parties surrendered their shares to us.
We expect to incur further significant stock based compensation (non-cash)
expense in future periods in connection with options granted and to be granted.
LIQUIDITY AND CAPITAL RESOURCES
We continue to experience a severe working capital deficiency and negative cash
flow. We currently have no cash reserves, and are unable to meet our financial
obligations as they become due. We have an immediate and urgent need for cash.
Our working capital deficiency at September 30, 2000 was $4,166,000, including
$1,606,199 which Futech, an affiliate, claims we owe it, compared to a working
capital deficiency of $3,322,667 at December 31, 1999. The increase in working
capital deficiency is due primarily to increased accounts payable, accrued
expenses, and amounts due to related parties. At this time, we are not
generating any revenue, and we are continuing to incur substantial costs and
expenses. Currently, we have no significant business operations. We expect that
our working capital deficiency will increase significantly if we complete either
of the acquisitions described in Part II, Item 5. Other Information, in this
Form 10-QSB. We also expect that the completion of either of the acquisitions
will exacerbate our cash flow problems until we are able to benefit from
expected increases in sales.
Based on current cash on hand, we need to raise additional funds immediately in
order to continue as a going concern. We plan to reduce the working capital
deficiency by raising
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additional capital in the form of either debt or equity financings. Further, as
described above, we plan to carefully review operating expenses, with a view to
reducing them wherever possible. We cannot assure you that we will raise
sufficient funds to reduce the working capital deficiency or to fund our costs
and expenses. If we are unable to raise sufficient capital in a timely fashion
to reduce the working capital deficiency and to fund our costs and expenses, our
business will be adversely affected and we will not be able to continue as a
going concern.
Our auditors' report as at December 31, 1999 indicates, and our auditors
continue to believe, that certain factors raise substantial doubt about our
ability to continue as a going concern. Our auditors issued a going concern
opinion because we:
- have experienced a significant decline in revenues;
- have negative net worth and working capital; and
- have recurring losses.
Based upon our current budget and business planning, we believe that we will
need approximately $2 million of additional capital to fund our planned
operations over the next twelve months. We cannot be sure that we will be able
to internally generate or raise sufficient funds to continue our operations, or
that our auditors will not issue another going concern opinion.
We are involved in various legal proceedings, as described in Part II Other
Information, Item 1: Legal Proceedings. In connection with such proceedings,
default judgments in the aggregate amount of approximately $400,000 have been
entered against us. We currently do not have the ability to pay these judgments.
The enforcement of these judgments will have a material adverse affect on our
business and financial condition and our ability to continue as a going concern.
As described under Part II, Item 5: Other Information, Futech has filed a
bankruptcy petition under Chapter 11 of the Bankruptcy Code. Futech claims
that we owe it approximately $1.6 million. We are currently reviewing the
amount Futech claims we owe it, with a view to determining the amount, if
any, that is properly chargeable to us. The trustee of the Futech bankruptcy
estate may make a claim against us for the $1.6 million. If we were required
to pay all or even a part of such $1.6 million, there would be a material
adverse affect on our business and financial condition and our ability to
continue as a going concern.
Our ultimate ability to continue as a going concern depends on: (1) obtaining
additional capital to provide near-term operating cash; and (2) creation of a
sustainable positive cash flow.
Our operating activities used $224,513 of cash for the nine months ended
September 30, 2000, as compared to $1,075,276 for the nine months ended
September 30, 1999. The decrease in cash used by our operating activities is
primarily attributable to an increase of $762,000 in accounts payable and
accrued expenses in the first nine months of 2000, compared to a decrease of
$494,000 in accounts payable and accrued expenses in the same period in 1999.
The increase in accounts payable and accrued expenses primarily reflects our
lack of operating capital. In addition, we provided an accrual of $237,000 in
the three months ending September 30, 2000 for a judgment against us in a
lawsuit.
Our investing activities generated $375 during the nine months ended September
30, 2000, compared to using $46,199 during the same period in 1999. The decrease
of approximately $40,000 in cash used by investing activities is a result of our
lack of operating capital.
Our financing activities provided $225,359 of cash during the nine months ended
September 30, 2000, compared to providing $1,076,827 in cash during the same
period in 1999. The decrease in cash generated from financing activities is a
result of decreased advances from Futech, partially offset by a $250,000
increase in loans and notes payable.
As of September 30, 2000, subject to the availability of operating capital and
assuming the completion of the DaMert and/or Futech acquisition (discussed in
Part II, Item 5. Other Information, of this Form 10-QSB), we plan to make
capital expenditures over the next twelve months of up to $285,000 to fund new
product development, including initial licensing charges and tooling. Assuming
the completion of the DaMert and/or Futech acquisition, we will have
significantly more employees. Staff numbers and efficiency will
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be considered as part of our overall approach to reduction and control of
operating expenses within the new corporate structure.
INFLATION
We do not believe that inflation has had a significant impact on our costs and
profits during the past two years.
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
below and other risks and uncertainties indicated from 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 "believe,"
"expect," "anticipate" 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
from those expressed in our forward-looking statements:
* the implementation of our growth strategy, including our ability to
consummate the planned acquisitions;
* the effects of the DaMert acquisition and new relationships with
complementary companies;
* 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 16, 2000, Golden Books Family Entertainment, Inc., as plaintiff ("Golden
Books"), served us with a Second Amended Complaint which names Futech, Vincent
W. Goett ("Goett"), and us as defendants. We were not named in the original
complaint or the first amended complaint. The case was pending in the United
States Bankruptcy court for the Southern District of New York (Bankruptcy case
No. 99-10030). On July 25, 2000, Golden Books and the Company entered into a
stipulation to suspend this litigation until the earliest to occur of: (1) the
closing of the transactions contemplated by the Agreement with Futech for the
Purchase and Sale of Assets, as amended (the "Agreement"); (2) rescission or
invalidation of the Agreement; or (3) January 1,2001. As noted above, although
we had withdrawn from the transactions contemplated by the agreement for the
purchase and sale of Futech's assets, we have since entered into a new agreement
for such purchase and sale.
The proceeding originally commenced in June 1999. The Second Amended Complaint
alleges, among other things, (i) that Futech is indebted to Golden Books in the
amount of $1 million under a promissory note dated August 14, 1996 ("Note"),
(ii) that Futech has defaulted on its obligations under the Note, (iii) that
Goett has personally guaranteed performance of Futech's obligations under the
Note, (iv) that Goett in January 2000 caused Futech to transfer all or virtually
all of its assets to the Company, and (v) that the transfer was made by Goett
and Futech knowingly with intent to deplete Futech of assets and that we
accepted the transfer knowingly and with intent to assist Goett and Futech in
depleting Futech of assets and thereby rendering it judgment-proof or, in the
alternative, that Futech, on or about January 2000, transferred to us Futech's
Interactive Books division and all of the assets and liabilities thereof. On the
basis of the foregoing, the Second
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Amended Complaint alleges that Futech, Goett and the Company (or in the
alternative Goett and the Company) are jointly and severally liable for the $1
million under the Note, plus interest, costs and reasonable attorney's fees.
The Second Amended Complaint also alleges (i) that Futech transferred its assets
to us with intent to hinder, delay or defraud Golden Books in pursuit of its
claim against Futech, (ii) that such transfer was made without receiving a
reasonably equivalent value for the transfer, (iii) that Futech was insolvent at
the time of transfer (or became insolvent as a result), (iv) that the transfer
included all or substantially all of Futech's assets to the Company, (v) that
the transfer of Futech assets to us was a "fraudulent conveyance" under Arizona
law, and (vi) that Goett conspired with Futech and Janex to effect the asset
transfer with the intent and for the purpose of hindering, delaying and
defrauding Futech's creditors, including rendering Futech judgment-proof, and
that such conduct was malicious and intended to injure Golden Books.
Based on the foregoing, Golden Books claims it is entitled to garnishment,
avoidance of the transfer, and attachment or other provisional remedy and $1
million, plus interest and punitive damages.
As described above, since we have not completed the acquisition of Futech's
assets, we believe that we have strong defenses against the foregoing claims and
intend to vigorously defend against them. Although we believe that we have
strong defenses, no assurance can be given as to the outcome of the litigation,
which could have a material adverse effect on us.
On June 20, 2000, Jon Weber, d/b/a Alma Designs, as plaintiff ("Weber"), served
us with a Complaint which names Futech and us as defendants. The case is pending
in the United States District court for the Northern District of California, San
Jose Division (Case No. CA-00 20670). The Complaint alleges, among other things,
(i) that the defendants solicited the plaintiff to ship goods valued in excess
of $240,000, and failed to pay for the goods after their sale, (ii) that Futech
issued purchase orders to the plaintiff, (iii) that we are the parent company of
Futech, and that we caused Futech to transfer substantially all of its liquid
assets to us, and (iv) that the defendants fraudulently induced the plaintiff to
ship the merchandise knowing that it did not have sufficient funds to pay the
amount due and with the intent of not paying the amounts due. On the basis of
the foregoing, the Complaint demands judgment for $243,000, interest and costs
and punitive damages of $200,000. On August 2, 2000, the Court awarded a Default
Judgment against us and Futech in the amount of approximately $237,000. We are
not the parent company of Futech and, as described above, we have not
consummated the acquisition of Futech's assets. We intend to attempt to have the
Default Judgment vacated, as we believe that we have strong defenses against the
foregoing claims. We cannot assure you that we will be able to have the Default
Judgment vacated, and we have made a special provision of the full amount of the
default judgment as of September 30, 2000. Even if we are able to have the
Default Judgment vacated, we cannot give you any assurance as to the outcome of
the litigation, which could have a material adverse affect on us.
On January 26, 2000, Caterpillar, Inc., as plaintiff ("Caterpillar"), served us
with a Complaint which names us and Futech as defendants. The case was pending
in the Circuit Court of the Tenth Judicial Circuit of Illinois, Peoria County
(case No. 00 L26). The Complaint alleged that Janex is indebted to Caterpillar
in the amount of $45,000 in unpaid minimum royalty payments under a Trademark
Merchandise License Agreement dated April 15, 1997. On May 23, 2000, the Court
awarded a Default Judgment against us and Futech in the amount of $60,621.80.
On May 16, 2000, A.H. Warner Properties. L.L.C., as plaintiff ("Warner"), served
us with a Complaint which names us, Futech, and others as defendants. The case
was pending in the Superior Court of the State of California for the County of
Los Angeles (case No. 00B03229). The Complaint alleges that Janex is indebted to
Warner for unpaid rent pursuant to a lease for a property located in Woodland
Hills, California, and seeks judgment for the debt and interest, legal fees and
expenses. The lease on the subject property expired on June 30, 2000. On July
17, 2000, the Court awarded a Default Judgment against us in the amount of
approximately $22,000.
On June 30, 2000, CarrAmerica Realty Corporation, L.P., as Plaintiff, served us
with a Complaint which names us and others as defendants. On July 7, 2000 we
were served with a first amended Complaint which changed the Plaintiff to
CarrAmerica Realty, L.P. ("Carr"). The case is pending in the Superior Court of
the State of Arizona in and for the County of
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Maricopa (case No. CV2000-012389). The Complaint alleges that, on or about June
1, 2000, we issued a check for $61,812.78 which was returned to Carr for
insufficiency of funds. The Complaint further alleges that we intended to
defraud Carr. We issued the check to Carr in payment of a portion of the rent
owed by Futech Interactive Products, Inc. ("Futech") to Carr on a property
located in Phoenix, Arizona. Carr seeks judgment against us for twice the amount
of the check (that is, $123,635.56), in addition to interest, court costs and
reasonable attorneys' fees. On September 14, 2000 we answered the amended
Complaint and asserted several affirmative defenses. The outcome of this
litigation is uncertain and could materially adversely affect our financial
condition.
On October 24, 2000 Carr served us and Futech, among others, with a Complaint
for forcible entry and detainer. The case was filed in the Superior Court of the
State of Arizona, in and for the County of Maricopa (case no. CU2000-019259).
The Complaint alleges that Carr's lease with Futech was deemed rejected by
operation of law in connection with Futech's bankruptcy proceeding and sought to
have all the defendants vacate the leased premises. We have stipulated to a
judgment ordering the defendants (including us) to vacate the premises leased by
Futech at 2999 North 44th Street, Phoenix, Arizona.
ITEM 5. OTHER INFORMATION.
During the quarter ended September 30, 2000, we amended our 2000 Combination
Stock Option Plan to increase from 2,500,000 to 7,000,000 the number of shares
issuable under such Plan. In October, 2000, we granted an option for 3,300,000
shares of our common stock at par value ($0.001) to our Chairman, Vince W.
Goett, as compensation for services. We also granted an option for 160,000
shares of our common stock at par value ($0.001) to a consultant to the Company,
as compensation for services.
In order to ensure that we had sufficient authorized shares available to
complete our business and financial plans, we arranged for the surrender and
return to the Company of 4,697,121 shares of our common stock from the holdings
of Palmilla Ventures Limited Partnership ("Palmilla"), of which our Chairman,
Vince W. Goett, is a general partner. We have agreed to issue 4,697,121 shares
to Palmilla after shareholder approval of a proposal to increase our authorized
shares of common stock to 125,000,000 shares. In addition, we indemnified
Palmilla and its partners from any tax liability associated with this
transaction.
In order to obtain the financing needed to complete the planned DaMert
acquisition, our board of directors has authorized us to borrow up to $815,000
from accredited investors (who may be affiliates). Such Promissory Notes will be
payable on demand and bear interest at ten percent (10%) per annum. As further
consideration to the lender(s), our board of directors has authorized us to
issue up to 5,000,000 shares of our common stock and warrants to purchase up to
2,000,000 shares of our common stock, at a price of $0.50 per share, exercisable
over a five year period. All such shares and warrants are to be issued only
after shareholder approval of a proposal to increase the number of authorized
shares of our common stock to 125,000,000.
On January 19, 2000, we signed a non-binding letter of intent to acquire 100% of
the capital stock of WebShare, Inc. ("WebShare"), a San Diego-based company that
provides lead generation services to the timeshare vacation resort industry
through its subsidiary, ResorTravel.com. The transaction is subject to, among
other things, the negotiation, execution and delivery of definitive agreements
and approval of our board of directors. No formal activity has taken place with
respect to this transaction since the date of the non-binding letter of intent.
In February 2000, we entered into two asset purchase agreements, as amended,
with Futech, one to acquire all the assets of Futech (other than those related
to the website www.oKid.com, and the other to purchase the URL domain name and
related website, www.oKid.com, and the related assets.
In June 2000, Futech filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. Following the filing of the bankruptcy petition,
on July 12, 2000, we entered into a new Purchase and Sale Agreement with Futech
(the "July Agreement"), which agreement superseded all then prior agreements
between us and Futech. This transaction was subject to, among other conditions,
approval of the Bankruptcy Court, which was denied on August 18, 2000.
Accordingly, we withdrew from the transactions contemplated by the July
Agreement, including the purchase of the assets of Futech.
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We entered into a new asset purchase agreement with Futech, effective as of
October 23, 2000 (the "Futech Agreement"). Under the Futech Agreement, we have
agreed to acquire specified assets of Futech in exchange for the following
consideration: approximately $150,000 in cash ($61,000 of which has been paid);
3,400,000 shares of our common stock; and assumption of Futech liabilities in
the aggregate amount of up to approximately $9,600,000. In addition, $1,645,000
that Futech claims we owe it would be discharged. The consummation of this
transaction is subject to numerous conditions, including approval of our board
of directors and shareholders, approval of Futech's secured creditors, and
approval of the bankruptcy court. We can give you no assurance that this
transaction will be consummated.
On November 9, 2000, we entered into a Merger agreement with DaMert Company,
Inc. ("DaMert"), a Berkeley, California-based designer, manufacturer, and
distributor of specialty toy products. Pursuant to the Merger agreement, DaMert
will be merged with and into Janex or a wholly-owned subsidiary of Janex. Under
the Merger Agreement, we will issue 2,000,000 shares of our common stock and
will assume DaMert's indebtedness to Amresco Financial I, L.P. ("Amresco"),
amounting to approximately $2,800,000. We have also agreed to issue to the
principals of DaMert, who will continue as employees of DaMert, options to
purchase an aggregate of 1,000,000 shares of our common stock at $.01 per share.
These options will not be exercisable until the number of our authorized shares
is increased to 125,000,000. The Merger Agreement with DaMert is subject to a
variety of conditions and we cannot assure you that the acquisition of DaMert
will be consummated. As part of our arrangements to satisfy the DaMert debt to
Amresco, we entered into a Settlement, Exchange of Collateral and Release
agreement with Amresco (the "Amresco Agreement"). Pursuant to the Amresco
Agreement, we will pay to Amresco cash in the aggregate of $1,500,000, payable
as follows: $400,000 at the closing of the DaMert acquisition, $400,000 within
60 days of closing, and the remaining $700,000 will be paid in six equal
quarterly installments beginning no later than March 31, 2001. In addition, we
will issue 1,500,000 shares of our common stock to Amresco.
As part of our financing for the DaMert acquisition, we expect to borrow up to
$815,000, which will be payable on demand, from private lenders, who may be
affiliates, at an interest rate of ten percent (10%) per annum. Pursuant to the
terms of this loan, we anticipate issuing to the lender(s) 5,000,000 shares of
our common stock and warrants to purchase 2,000,000 shares of our common stock
at $.50 per share. The issuance of these shares and warrants would be subject to
an increase to 125,000,000 in the number of our authorized shares of common
stock. In addition, Vincent W. Goett, our Chairman, has agreed to personally
guarantee $1.1 million of the Company's obligation to Amresco. In consideration
of this guarantee, the Company has agreed to issue Mr. Goett 10 million shares
of common stock, subject to an increase to 125,000,000 in the number of our
authorized shares of common stock. We cannot assure you that we will be able to
obtain the financing needed to close the DaMert acquisition.
Because we did not have sufficient authorized but unissued shares of common
stock to execute our business and financial plans, in March 2000, Palmilla
Ventures Limited Partnership, of which Vincent Goett is a general partner,
agreed to surrender to the Company an aggregate of 10 million shares of our
common stock so that such shares could be restored to the status of authorized
but unissued shares of common stock. Of the aggregate 10 million shares
surrendered, 1,159,952 (6.0% of the outstanding common stock prior to surrender)
were being held for the benefit of Dan Lesnick, our then Chief Operating Officer
(now, our President) and a Director, 2,182,417 (11.4% of the outstanding common
stock prior to surrender) were being held for the benefit of Mr. and Mrs. Howard
Moore, and 1,657,631 (8.6% of the outstanding common stock prior to surrender)
were being held for the benefit of Mr. Les Friedland, a former President.
Under this Agreement, as soon as possible following an increase to 125,000,000
in the number of our authorized but unissued shares, we will return the 10
million shares surrendered and will issue the surrendering shareholders, PRO
RATA, based on the number of shares surrendered, an aggregate of 2 million
additional shares of common stock as compensation for surrendering their shares
to us.
In addition, if the price of our common stock is lower when the 10 million
replacement shares are issued than it was on the date the shares were
surrendered, the surrendering shareholders will be issued additional shares, PRO
RATA, based on the number of shares surrendered, such that the total replacement
shares issued is equal in value on the replacement date to the value of the
shares surrendered on the date of surrender. For example, if the value of 10
million shares on the date of surrender was $15 Million and the
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market price of the Company's common stock on the replacement date was $1.00,
the surrendering shareholders would be issued 15 million shares of common stock
on the replacement date to replace the $15 Million in value surrendered at the
surrender date.
Further, in November, 2000, Palmilla Ventures Limited Partnership surrendered to
us an additional 4,697,129 shares of our common stock. These shares are to be
re-issued upon an increase to 125,000,000 in the number of our authorized
shares.
ITEM 6. RECENT ISSUES OF UNREGISTERED SECURITIES
On September 18, 2000, we agreed to issue 1,341,638 shares of our unregistered
common stock in satisfaction of expenses incurred by Vincent Goett, our Chairman
and former President in the amount of $67,082. The difference between the amount
owed and the fair market value of the common stock at the date of issuance was
$87,206, which was charged to operations.
The issuance of the shares was effected without registration under the
Securities Act of 1933, as amended, in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act. The facts relied
upon to establish such exemption are as follows: (1) there was a single
accredited investor who had full access to all relevant information about us;
(2) there was no general solicitation; and (3) the certificates evidencing the
shares are subject to restriction on transfer.
ITEM 7. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits have been or are being filed
herewith, and are numbered in accordance with Item 601 of Regulation S-B:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1 Global Merger Agreement dated June 4, 1999 and incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K filed with the
Commission June 15, 1999. (1)
2.2 Termination Agreement dated as of December 1, 1999 relating to Global
Merger Agreement. (1)
2.3 Termination, Release and Settlement Agreement dated December 1999. (1)
2.4 Agreement for Purchase and Sale of Assets between Futech Interactive
Products, Inc. and the Company dated February 25, 2000, as amended by
the First Amendment thereto dated April 28, 2000. (11)
2.5 Agreement for Purchase and Sale of oKid Assets between Futech
Interactive Products, Inc. and the Company dated February 25, 2000, as
amended by the First Amendment thereto dated April 28, 2000. (11)
2.6 Letter withdrawing from the Agreement for Purchase and Sale of Assets
between the Company and Futech Interactive Products, Inc., dated July
12, 2000 ("Purchase Agreement") and Purchase Agreement. (12)
2.7 Agreement for Purchase and Sale of Assets between Futech Interactive Products,
Inc. and the Company, dated as of October 23, 2000.
2.8 Merger Agreement between, among others, the Company and DaMert Company
dated March 2000, as amended by the First Amendment thereto dated May
10, 2000. (11)
2.9 Merger Agreement between, among others, the Company and DaMert
Company, dated November 9, 2000.
3.1 Articles of Incorporation. (2)
3.2 Amendment No. 1 to Articles of Incorporation. (3)
3.3 Statement of Resolution Establishing Series for Shares. (3)
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
3.4 Amendment No. 2 to Articles of Incorporation. (3)
3.5 Bylaws of the Company. (4)
3.6 Articles of Amendment to Articles of Incorporation, dated August 11,
1994 and filed on August 16, 1994. (5)
4.1 Specimen Common Stock Certificate. (3)
10.1 Lease Agreement between With Design in Mind International, Inc., a
Colorado corporation and Warner Center Business Park Properties III,
L.P. for premises located at 21700 Oxnard Street, Suite 1610, Woodland
Hills, CA 91367, dated January 6, 1994. (6)
10.26 Indemnification Agreement wherein the Company is indemnifying its
former accountants BDO Seidman, LLP for claims arising out of the
reissuance of the Company's 1997 financial statements. (7)
10.27 Letter Agreement between Palmilla Ventures Limited Partnership and the
Company dated March 9, 2000, as supplemented by a Letter Agreement
dated April 15, 2000. (11)
10.28 First Amendment of Option Agreement between the Company and Daniel
Lesnick dated May 12, 2000. (12)
10.30 Subscription Agreement between the Company and Vincent W. Goett, dated
as of June 28, 2000. (12)
10.32 Debt Conversion Agreement between the Company and Vincent W. Goett,
dated September 18, 2000.
16 Letter of BDO Seidman, LLP. (8)
16.1 Letter of Ernst & Young, LLP. (9)
21 Subsidiaries of the Registrant. (1)
27 Financial Data Schedule
99.1 Amended and Restated 2000 Combination Stock Option Plan. (10)
---------------------------------------------------------------------------------------------------
</TABLE>
(1) Filed as an Exhibit with the same exhibit number to the Company's Form
10-KSB for the year ended December 31, 1999 and incorporated by this
reference.
(2) Incorporated by reference to Exhibit 3(a) to the Company's Registration
Statement on Form 8-A, filed with the Commission on August 15, 1989 and
declared effective on September 1, 1989.
(3) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-1 filed August 8, 1990.
(4) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form 8-A, filed with the Commission on August 15, 1989 and
declared effective on September 1, 1989.
(5) Incorporated by reference to an exhibit to the Company's Registration
Statement filed with the Commission December 20, 1994.
(6) Incorporated by reference to an exhibit to the Company's Form 10-KSB for
the fiscal year ended December 31, 1993.
(7) Incorporated by reference to an exhibit to the Company's Form 10-K SB for
the year ended December 31, 1998.
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<PAGE>
(8) Incorporated by reference to Exhibit 16 to the Company's Form 8-K filed
with the Commission of March 10, 1999.
(9) Incorporated by reference to Exhibit 16 to the Company's Form 8-K filed
with the Commission on April 28, 2000.
(10) Incorporated by reference to Exhibit 99.1 to the Company's Form S-8
Registration Statement filed with the Commission on November 21, 2000.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 2000.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2000.
(b) Reports on Form 8-K
On September 6, 2000, the Company filed a Current Report on Form 8-K to
report that its Merger Agreement with DaMert Company dated March 2000
had terminated. The Company has since entered into a new Merger
Agreement with DaMert Company.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
JANEX INTERNATIONAL, INC.
Registrant
By: /s/ Vincent W. Goett
Date: November 22, 2000 ------------------------------------
Vincent W. Goett
Chairman
By: /s/ Daniel Lesnick
Date: November 22, 2000 ------------------------------------
Daniel Lesnick
President and Director
22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1 Global Merger Agreement dated June 4, 1999 and incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K filed with the
Commission June 15, 1999. (1)
2.2 Termination Agreement dated as of December 1, 1999 relating to Global
Merger Agreement. (1)
2.3 Termination, Release and Settlement Agreement dated December 1999. (1)
2.4 Agreement for Purchase and Sale of Assets between Futech Interactive
Products, Inc. and the Company dated February 25, 2000, as amended by
the First Amendment thereto dated April 28, 2000. (11)
2.5 Agreement for Purchase and Sale of oKid Assets between Futech
Interactive Products, Inc. and the Company dated February 25, 2000, as
amended by the First Amendment thereto dated April 28, 2000. (11)
2.6 Letter withdrawing from the Agreement for Purchase and Sale of Assets
between the Company and Futech Interactive Products, Inc., dated July
12, 2000 ("Purchase Agreement") and Purchase Agreement. (12)
2.7 Agreement for Purchase and Sale of Assets between Futech Interactive Products,
Inc. and the Company, dated as of October 23, 2000.
2.8 Merger Agreement between, among others, the Company and DaMert Company
dated March 2000, as amended by the First Amendment thereto dated May
10, 2000. (11)
2.9 Merger Agreement between, among others, the Company and DaMert
Company, dated November 9, 2000.
3.1 Articles of Incorporation. (2)
3.2 Amendment No. 1 to Articles of Incorporation. (3)
3.3 Statement of Resolution Establishing Series for Shares. (3)
3.4 Amendment No. 2 to Articles of Incorporation. (3)
3.5 Bylaws of the Company. (4)
3.6 Articles of Amendment to Articles of Incorporation, dated August 11,
1994 and filed on August 16, 1994. (5)
4.1 Specimen Common Stock Certificate. (3)
10.1 Lease Agreement between With Design in Mind International, Inc., a
Colorado corporation and Warner Center Business Park Properties III,
L.P. for premises located at 21700 Oxnard Street, Suite 1610, Woodland
Hills, CA 91367, dated January 6, 1994. (6)
10.26 Indemnification Agreement wherein the Company is indemnifying its
former accountants BDO Seidman, LLP for claims arising out of the
reissuance of the Company's 1997 financial statements. (7)
10.27 Letter Agreement between Palmilla Ventures Limited Partnership and the
Company dated March 9, 2000, as supplemented by a Letter Agreement
dated April 15, 2000. (11)
10.28 First Amendment of Option Agreement between the Company and Daniel
Lesnick dated May 12, 2000. (12)
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
10.30 Subscription Agreement between the Company and Vincent W. Goett, dated
as of June 28, 2000. (12)
10.32 Debt Conversion Agreement between the Company and Vincent W. Goett,
dated September 18, 2000.
16 Letter of BDO Seidman, LLP. (8)
16.1 Letter of Ernst & Young, LLP. (9)
21 Subsidiaries of the Registrant. (1)
27 Financial Data Schedule
99.1 Amended and Restated 2000 Combination Stock Option Plan. (10)
</TABLE>
------------------
(1) Filed as an Exhibit with the same exhibit number to the Company's Form
10-KSB for the year ended December 31, 1999 and incorporated by this
reference.
(2) Incorporated by reference to Exhibit 3(a) to the Company's Registration
Statement on Form 8-A, filed with the Commission on August 15, 1989 and
declared effective on September 1, 1989.
(3) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-1 filed August 8, 1990.
(4) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form 8-A, filed with the Commission on August 15, 1989 and
declared effective on September 1, 1989.
(5) Incorporated by reference to an exhibit to the Company's Registration
Statement filed with the Commission December 20, 1994.
(6) Incorporated by reference to an exhibit to the Company's Form 10-KSB for
the fiscal year ended December 31, 1993.
(7) Incorporated by reference to an exhibit to the Company's Form 10-K SB for
the year ended December 31, 1998.
(8) Incorporated by reference to Exhibit 16 to the Company's Form 8-K filed
with the Commission of March 10, 1999.
(9) Incorporated by reference to Exhibit 16 to the Company's Form 8-K filed
with the Commission on April 28, 2000.
(10) Incorporated by reference to Exhibit 99.1 to the Company's Form S-8
Registration Statement filed with the Commission on November 21, 2000.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 2000.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2000.
24
