SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 3)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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[X]
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Preliminary Proxy Statement
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[ ]
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Definitive Proxy Statement
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[ ]
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
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[ ]
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Definitive Additional Materials
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Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
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JAKKS Pacific, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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[X]
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Fee not required.
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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Title of each class of securities to which transaction applies:
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Aggregate number of securities to which transaction applies:
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Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
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Proposed maximum aggregate value of transaction:
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Fee paid previously with preliminary materials.
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the
filing for which the offsetting fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
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(1)
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Amount Previously Paid:
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Form, Schedule or Registration Statement No.:
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Date Filed:
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JAKKS PACIFIC, INC.
22619 Pacific Coast Highway
Malibu, CA 90265
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on September 27, 2002
The Annual Meeting of Stockholders of JAKKS
PACIFIC, INC. (the Company) will be held at the
Sherwood Country Club, 320 West Stafford Road, Thousand Oaks,
California 91361, on September 27, 2002 at 8:00 a.m.
local time, to consider and act upon the following matters:
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(1)
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To elect six directors to serve for the ensuing
year;
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(2)
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To ratify and approve the amendment of the
Companys certificate of incorporation (i) to increase
the number of authorized shares of the Companys common
stock, par value $0.001 per share, from 25,000,000 shares
to 100,000,000 shares; (ii) to increase the number of
authorized shares of the Companys preferred stock, par
value $0.001 per share, from 1,000,000 shares, to
5,000,000 shares; and (iii) to implement changes to
reflect recent changes to Delaware law and that remove or revise
certain obsolete provisions.
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(3)
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To ratify the appointment by the Board of
Directors of PKF, Certified Public Accountants, A Professional
Corporation, as the Companys independent auditor for the
current fiscal year;
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(4)
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To ratify and approve the Companys 2002
Stock Award and Incentive Plan.
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(5)
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To transact such other business as may properly
come before the meeting or any adjournment thereof.
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Stockholders of record as of the close of
business on August 27, 2002 will be entitled to notice of
and to vote at the meeting or any adjournment thereof. The stock
transfer books of the Company will remain open.
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By Order of the Board of Directors
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Stephen G. Berman, Secretary
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Malibu, California
August 30, 2002
WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND
MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER TO ENSURE
REPRESENTATION OF YOUR SHARES. YOU MAY REVOKE THE PROXY AT ANY
TIME BEFORE THE AUTHORITY GRANTED THEREIN IS
EXERCISED.
TABLE OF CONTENTS
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ELECTION OF DIRECTORS (Proposal No. 1)
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
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PERFORMANCE GRAPH
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AUDIT COMMITTEE REPORT
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ADOPTION OF AN AMENDED AND RESTATED CERTIFICATE OF INCORPORATION (Proposal No. 2)
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DESCRIPTION OF SECURITIES
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RATIFICATION OF THE APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS (Proposal No. 3)
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RATIFICATION AND APPROVAL OF OUR 2002 STOCK AWARD AND INCENTIVE PLAN (Proposal No. 4)
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BOARD RECOMMENDATION
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STOCKHOLDER PROPOSALS
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OTHER MATTERS
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QUESTIONS AND ANSWERS ABOUT THE MERGER
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SUMMARY
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Purpose of the Special Meeting (see pages 23 and 24)
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Date, Time and Place of the Special Meeting (see page 23)
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Record Date and Quorum (see page 23)
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Vote Required and Revocation of Proxies (see page 25)
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Parties to the Merger (see page 23)
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The Merger Agreement (see pages 53 through 58)
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Conditions to the Merger (see page 57)
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Termination of the Merger Agreement (see pages 57 and 58)
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Tax Consequences of the Merger (see pages 48 and 49)
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Accounting Treatment of the Merger (see page 48)
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Regulatory Matters (see page 49)
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Appraisal Rights (see pages 49 through 52 and Appendix C)
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Comparison of Rights of Holders of JAKKS and Toymax Capital Stock (see pages 93 through 96)
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Comparative Per Share Market Price Data (see page 89)
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SELECTED HISTORICAL AND PRO FORMA PER SHARE DATA
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
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TRADEMARK AND LICENSING INFORMATION
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RISK FACTORS
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Risks Relating to the Merger
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Risks Relating to the Operation of JAKKS
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PARTIES TO THE MERGER
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THE SPECIAL STOCKHOLDERS MEETING
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Date, Time, Place and Record Date of the Special Stockholders Meeting
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Matters to Be Voted Upon
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Recommendation of Toymaxs Board of Directors
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Recommendation of the Board of Directors of JAKKS and the Merger Subsidiary
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Voting Information
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Solicitation, Revocation and Use of Proxies
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Fairness of the Merger; Opinions of Financial Advisor
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Effects of the Merger; Plans for Toymax Following the Merger
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Risk that the Merger Will Not Be Completed
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Certain Relationships and Related Transactions
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Stock Options
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Employment Agreements and Other Material Agreements
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Accounting Treatment of the Merger
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Material Federal Income Tax Consequences
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Tax Consequences of the Receipt of the Merger Consideration to Holders of Toymax Common Stock
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Dissenters
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Tax Consequences of the Merger to Toymax, JAKKS and the Merger Subsidiary
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Regulatory Matters
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Dissenters Rights of Appraisal
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Listing of JAKKS Common Stock
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THE MERGER AGREEMENT
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The Merger
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Effective Time of the Merger
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Structure; Merger Consideration
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Treatment of Options
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Payment for Shares; Exchange of Toymax Certificates
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Transfer of Shares
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Officers, Directors and Governing Documents
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Representations and Warranties
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Conduct of Business Pending the Merger
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Stockholders Meeting; Recommendation of Board of Directors
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Regulatory and Other Consents and Approvals
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Conditions to the Merger
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Termination of the Merger Agreement by JAKKS or Toymax
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Amendment and Waiver
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No Termination Fee
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
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BUSINESS OF THE PARTIES TO THE MERGER
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF JAKKS
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TOYMAX
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PRICE RANGE OF COMMON STOCK
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COMPARISON OF RIGHTS OF STOCKHOLDERS OF JAKKS AND TOYMAX
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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JAKKS
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Toymax
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DIRECTORS AND EXECUTIVE OFFICERS OF JAKKS
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EXECUTIVE COMPENSATION FOR JAKKS
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS FOR JAKKS
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OTHER MATTERS
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LEGAL OPINION
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EXPERTS
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FUTURE STOCKHOLDER PROPOSALS
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WHERE YOU CAN FIND MORE INFORMATION
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CONDENSED CONSOLIDATED BALANCE SHEETS
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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CONSOLIDATED BALANCE SHEETS
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TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000, 2001 and 2002
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APPENDIX A
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EXHIBIT A
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SCHEDULE 5.4 TO MERGER AGREEMENT OPTION CONVERSION
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APPENDIX B
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STOCK PURCHASE AGREEMENT
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SCHEDULE I TO STOCK PURCHASE AGREEMENT STOCKHOLDERS
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APPENDIX C
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PART I
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Item 1. Business
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Item 2. Properties
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Item 3. Legal Proceedings
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Item 4. Submission of Matters to a Vote of Security Holders
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PART II
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Item 5. Market for the Registrants Common Equity and Related Stockholder Matters
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Item 6. Selected Consolidated Financial Data
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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Item 8. Financial Statements and Supplementary Data
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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PART III
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Item 10. Directors and Executive Officers of the Registrant
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Item 11. Executive Compensation
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Item 12. Security Ownership of Certain Beneficial Owners and Management
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Item 13. Certain Relationships and Related Transactions
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PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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SIGNATURES
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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CONSOLIDATED BALANCE SHEETS
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TOYMAX INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000, 2001 and 2002
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TOYMAX INTERNATIONAL, INC. INDEX TO FORM 8-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AUGUST 1, 2002
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Item 4. Changes in Registrants Certifying Accountant
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Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
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SIGNATURES
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
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Item 2. Changes in Securities and Use of Proceeds
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Item 3. Defaults By the Company Upon Its Senior Securities
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Item 4. Submission of Matters to a Vote of Security Holders
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Item 5. Other Information
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Item 6. Exhibits and Reports on Form 8-K
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SIGNATURES
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JAKKS PACIFIC, INC.
22619 Pacific Coast Highway
Malibu, CA 90265
Proxy Statement for the 2002 Annual Meeting of
Stockholders
To be Held on September 27, 2002
This Proxy Statement is furnished in connection
with the solicitation of proxies by the Board of Directors of
JAKKS Pacific, Inc. (the Company) for use at the
2002 Annual Meeting of Stockholders to be held on
September 27, 2002, and at any adjournment of that meeting
(the Annual Meeting). Throughout this Proxy
Statement, we, us and our
are used to refer to the Company.
The shares of our common stock represented by
each proxy will be voted in accordance with the
stockholders instructions as to each matter specified
thereon, unless no instruction is given, in which case, the
proxy will be voted in favor of such matter. Any proxy may be
revoked by a stockholder at any time before it is exercised by
delivery of written revocation or a subsequently dated proxy to
our corporate Secretary or by voting in person at the Annual
Meeting.
We are mailing this Proxy Statement to our
stockholders on or about August 30, 2002, accompanied by
our Annual Report to Stockholders for our fiscal year ended
December 31, 2001.
Voting Securities and Votes Required
At the close of business on August 27, 2002,
the record date for the determination of stockholders entitled
to vote at the Annual Meeting, there were outstanding and
entitled to vote an aggregate of 23,585,149 shares of our
common stock, par value $.001 per share. All holders of our
common stock are entitled to one vote per share.
The affirmative vote of the holders of a
plurality of the shares of our common stock present or
represented by proxy at the Annual Meeting is required for
election of directors. The affirmative vote of the holders of a
majority of the shares of our common stock present or
represented by proxy at the Annual Meeting is required for the
ratification and approval of an amendment to the Companys
certificate of incorporation, the ratification of the
appointment by the Board of Directors of PKF, Certified Public
Accountants, A Professional Corporation, as our independent
auditor for the current fiscal year and the ratification and
approval of our 2002 Stock Award and Incentive Plan, all as
hereinafter described. A majority of the outstanding shares of
our common stock represented in person or by proxy at the Annual
Meeting will constitute a quorum at the meeting. All shares of
our common stock represented in person or by proxy (including
shares which abstain or do not vote for any reason with respect
to one or more of the matters presented for stockholder
approval) will be counted for purposes of determining whether a
quorum is present at the Annual Meeting. Abstentions will be
treated as shares that are present and entitled to vote for
purposes of determining the number of shares present and
entitled to vote with respect to any particular matter, but will
not be counted as a vote in favor of such matter. Accordingly,
an abstention from voting on a matter has the same legal effect
as a vote against the matter. If a broker or nominee holding
stock in street name indicates on the proxy that it
does not have discretionary authority to vote as to a particular
matter (broker non-votes), those shares will not be
considered as present and entitled to vote with respect to such
matter. Accordingly, a broker non-vote on a matter has no effect
on the voting on such matter.
Security Ownership of Certain Beneficial
Owners and Management
The following table sets forth certain
information as of July 9, 2002 with respect to the
beneficial ownership of our common stock by (1) each person
known by us to own beneficially more than 5% of the outstanding
shares of our common stock, (2) each of our directors and
nominees for director, (3) each of the executive officers
named below, and (4) all our directors and executive
officers as a group.
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Amount and
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Nature of
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Percent of
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Name of
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Beneficial
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Outstanding
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Beneficial Owner(1)
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Ownership(2)
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Shares
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Kern Capital Management LLC(3)
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1,183,800
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5.0
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%
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Jack Friedman(4)
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468,717
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1.9
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Stephen G. Berman(5)
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98,387
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*
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Joel M. Bennett(6)
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41,698
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*
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Michael Bianco, Jr.(7)
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75,306
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*
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David C. Blatte(8)
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37,500
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*
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Robert E. Glick(9)
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54,019
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*
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Michael G. Miller(10)
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44,644
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*
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Murray L. Skala(11)
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56,657
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*
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All directors and executive officers as a group
(8 persons)(12)
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863,981
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3.6
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%
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*
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Less than 1% of our outstanding shares.
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(1)
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Unless otherwise indicated the address is at our
executive offices, 22619 Pacific Coast Highway, Malibu,
California 90265.
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(2)
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The number of shares of common stock beneficially
owned by a person or entity is determined under rules
promulgated by the United States Securities and Exchange
Commission (the SEC). Under such rules, beneficial
ownership includes any shares as to which a person or entity has
sole or shared voting power or investment power. Included among
the shares owned by such person are any shares which such person
or entity has the right to acquire within 60 days after
May 13, 2002. The inclusion herein of any shares deemed
beneficially owned does not constitute an admission of
beneficial ownership of such shares.
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(3)
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Mr. Robert E. Kern, Jr. and
Mr. David G. Kern (Messrs. Kern),
principals and controlling members of Kern Capital
Management LLC (KCM), have also reported
beneficial ownership of these shares. The address of KCM and
Messrs. Kern is 114 West 47th Street, Suite 1926, New
York, New York 10036. All the information presented in this Item
with respect to these beneficial owners was extracted solely
from their Schedule 13G jointly filed on February 14,
2002.
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(4)
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Includes 12,947 shares held in trusts for
the benefit of children of Mr. Friedman. Also includes
455,770 shares which Mr. Friedman may purchase upon
the exercise of certain stock options.
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(5)
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Represents shares which Mr. Berman may
purchase upon the exercise of certain stock options.
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(6)
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Includes 14,448 shares which Mr. Bennett may
purchase upon the exercise of certain stock options.
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(7)
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Includes 35,256 shares which Mr. Bianco
may purchase upon the exercise of certain stock options.
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(8)
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Represents shares which Mr. Blatte may
purchase upon the exercise of certain stock options.
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(9)
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Represents shares which Mr. Glick may
purchase upon the exercise of certain stock options.
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(10)
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Represents shares which Mr. Miller may
purchase upon the exercise of certain stock options.
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(11)
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Includes 52,771 shares which Mr. Skala
may purchase upon the exercise of certain stock options. Also
includes 3,186 shares held by Mr. Skala as trustee
under trusts for the benefit of children of Mr. Friedman.
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2
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(12)
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Includes 12,947 shares held in trusts for
the benefit of children of Mr. Friedman and an aggregate of
792,795 shares which the directors and executive officers
may purchase upon the exercise of certain stock options.
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Section 16(a) Beneficial Ownership Reporting
Compliance
To the best of our knowledge, all Forms 3, 4
or 5 required to be filed pursuant to Section 16(a) of the
Exchange Act during or with respect to the fiscal year ended
December 31, 2001 were filed on a timely basis.
3
ELECTION OF DIRECTORS
(Proposal No. 1)
The persons named in the enclosed proxy will vote
to elect as directors the six nominees named below, unless
authority to vote for the election of any or all of the nominees
is withheld by marking the proxy to that effect. All of the
nominees have indicated their willingness to serve, if elected,
but if any nominee should be unable to serve or for good cause
will not serve, the proxies may be voted for a substitute
nominee designated by management. Each director will be elected
to hold office until the next annual meeting of stockholders or
until his successor is elected and qualified. There are no
family relationships between or among any of our executive
officers or directors.
Nominees
Certain information about the nominees to serve
as our directors (all of whom are currently directors) is set
forth below.
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Name
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Age
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Positions with the Company
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Director Since
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Jack Friedman
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63
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Chairman and Chief Executive Officer
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January 1995
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Stephen G. Berman
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37
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Chief Operating Officer, President,
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January 1995
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Secretary and Director
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David C. Blatte
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38
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Director
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January 2001
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Robert E. Glick
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56
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Director
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October 1996
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Michael G. Miller
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53
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Director
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February 1996
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Murray L. Skala
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55
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Director
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October 1995
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Jack Friedman
has
been our Chairman and Chief Executive Officer since co-founding
JAKKS with Mr. Berman in January 1995. Until
December 31, 1998, he was also our President. From January
1989 until January 1995, Mr. Friedman was Chief Executive
Officer, President and a director of THQ Inc., a developer,
publisher and distributor of interactive entertainment software
(THQ). From 1970 to 1989, Mr. Friedman was
President and Chief Operating Officer of LJN Toys, Ltd., a toy
and software company. After LJN was acquired by MCA/ Universal,
Inc. in 1986, Mr. Friedman continued as President until his
departure in late 1988. Mr. Friedman is a director of
Toymax International Inc. (Toymax), a publicly-held
company which develops and markets toys and related products.
Stephen G. Berman
has been our Chief Operating Officer
and Secretary since co-founding JAKKS with Mr. Friedman in
January 1995. Since January 1, 1999, he has also served as
our President. From our inception until December 31, 1998,
Mr. Berman was also our Executive Vice President. From
October 1991 to August 1995, Mr. Berman was a Vice
President and Managing Director of THQ International, Inc., a
subsidiary of THQ. From 1988 to 1991, he was President and an
owner of Balanced Approach, Inc., a distributor of personal
fitness products and services. Mr. Berman is a director of
Toymax.
David C.
Blatte
has been one of our
directors since January 2001. From January 1993 to May 2000,
Mr. Blatte was a Senior Vice President in the specialty
retail group of the investment banking division of Donaldson,
Lufkin and Jenrette Securities Corporation. Since May 2000,
Mr. Blatte has been a principal in Catterton Partners, a
private equity fund. Mr. Blatte is a director of Case
Logic, Inc., a privately-held consumer products company.
Mr. Blatte is a director of Toymax.
Robert E. Glick
has
been one of our directors since October 1996. He has been, for
more than 20 years, an officer, director and principal
stockholder in a number of privately-held companies which
manufacture and market womens apparel. Mr. Glick is a
director of Toymax.
Michael G. Miller
has been one of our directors since
February 1996. From 1979 until 1998, Mr. Miller was
President and a director of several privately-held affiliated
companies, including a list brokerage and list management
consulting firm, a database management consulting firm, and a
direct mail graphic and creative design firm.
Mr. Millers interests in these companies were sold in
May 1998. Since 1991, he has been President of an advertising
company. Mr. Miller is a director of Toymax.
4
Murray L. Skala
has
been one of our directors since October 1995. Since 1976,
Mr. Skala has been a partner of the law firm Feder,
Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine
LLP, our general counsel. Mr. Skala is a director of
Traffix, Inc., a publicly-held company in the business of
database marketing and is a director of Toymax.
Committees of the Board of Directors
We have an Audit Committee, a Compensation
Committee and a Stock Option Committee. The Board does not have
a Nominating Committee and performs the functions of a
Nominating Committee itself.
Audit Committee.
The
primary functions of the Audit Committee are to select or to
recommend to our Board the selection of our outside auditor; to
monitor our relationships with our outside auditor and its
interaction with our management in order to ensure their
independence and objectivity; to review, and to assess the scope
and quality of, our outside auditors services, including
the audit of our annual financial statements; to review our
financial management and accounting procedures; to review our
financial statements with our management and outside auditor;
and to monitor managements compliance with applicable
legal requirements and ethical standards. Messrs. Blatte,
Glick and Miller, all of whom are our non-employee directors,
are the current members of the Audit Committee. The Board has
adopted a written Audit Committee Charter for the Audit
Committee, a copy of which was filed as Appendix A to our
proxy statement for our 2001 Annual Meeting of Stockholders.
Compensation Committee.
The functions of the Compensation
Committee are to make recommendations to the Board regarding
compensation of management employees and to administer plans and
programs relating to employee benefits, incentives and
compensation, other than our Third Amended and Restated
1995 Stock Option Plan (the Option Plan).
Messrs. Friedman, Miller and Skala are the current members
of the Compensation Committee. If the 2002 Stock Award and
Incentive Plan (the 2002 Plan) is approved, the
board of directors intends to dissolve the Stock Option
Committee and incorporate the duties of the Stock Option
Committee into the duties of the Compensation Committee. The
additional duties of the Compensation Committee would include
determining the recipients of and the size of awards granted
under both of the Option Plan and the 2002 Plan.
Furthermore, if the 2002 Plan is approved,
Messrs. Friedman and Skala will resign from the
Compensation Committee and its members will be
Messrs. Miller and Glick, both of whom are non-employee
directors.
Stock Option Committee.
The function of the Stock Option
Committee is to determine the recipients of and the size of
awards granted under the Option Plan. Messrs. Glick and
Miller, both of whom are non-employee directors, are the current
members of the Stock Option Committee. As described above in our
discussion of the Compensation Committee, if the 2002 Plan is
approved, this committee will be dissolved.
In 2001, our Board held five meetings and acted
by unanimous consent four times; our Stock Option Committee
acted by unanimous consent twice; and our Audit Committee met
once.
Executive Officers
Our officers are elected annually by our Board of
Directors and serve at the discretion of the Board of Directors.
Two of our executive officers, Jack Friedman and Stephen G.
Berman, are also directors of the Company. See the section above
entitled Nominees for biographical information about
these officers.
Joel M. Bennett, 40, joined us in September 1995
as our Chief Financial Officer and was given the additional
title of Executive Vice President in May 2000. From August 1993
to September 1995, he served in several financial management
capacities at Time Warner Entertainment Company, L.P., including
Controller of Warner Bros. Consumer Products Worldwide
Merchandising and Interactive Entertainment. From June 1991 to
August 1993, he was Vice President and Chief Financial Officer
of TTI Technologies, Inc., a direct-mail computer hardware and
software distribution company. From 1986 to June 1991,
Mr. Bennett held various financial management positions at
The Walt Disney Company, including Senior Manager of Finance for
its international television syndication and production
division. Mr. Bennett holds a Master of Business
Administration degree and is a Certified Public Accountant.
5
Michael Bianco, Jr., 44, has been an Executive
Vice President since July 2001 and was given the additional
title of Chief Merchandising Officer in February 2001. Until
July 2001, he had served as a Senior Vice President of our
Flying Colors division since joining us in October 1999, when we
acquired Flying Colors Toys, where he had been President and a
principal shareholder since July 1996. From 1994 to 1996,
Mr. Bianco served as Executive Vice President of Rose Art
Industries, Inc., a manufacturer of craft and activity products,
and from 1976 to 1993, he served in various capacities,
including Vice President of Merchandising, at toy retailer Kay
Bee Toys.
Certain Relationships and Related
Transactions
One of our directors, Murray L. Skala, is a
partner in the law firm of Feder, Kaszovitz, Isaacson, Weber,
Skala, Bass & Rhine LLP, which has performed,
and is expected to continue to perform, legal services for us.
In 2001, we incurred approximately $1,129,000 for legal fees and
reimbursable expenses payable to that firm.
In April 2000, we loaned $1,500,000 to each of
Jack Friedman and Stephen G. Berman. The entire principal
amount of each loan is due on April 28, 2003 and, until
repaid, interest thereon is payable semi-annually at the rate of
6.5% per annum. Mr. Bermans indebtedness to us under
his loan is secured by a deed of trust on certain real property.
As of May 7, 2002, the outstanding principal balances of
Mr. Friedmans and Bermans loans were $975,000
and $995,000, respectively. In May 2000, we loaned $250,000
to Joel M. Bennett. The entire principal amount of his
loan, together with interest accrued thereon at the rate of 7.0%
per annum, was due on May 12, 2002. Pursuant to our
agreement with Mr Bennet, we agreed to forgive all of his
indebtedness to us under his loan if he continued to be employed
by us on such date. As of May 12, 2002, accrued interest to
date on Mr. Bennetts loan was $35,000.00. All three
loans were made to assist our executive officers in meeting
certain personal financial obligations.
Michael Bianco, Jr., an Executive Vice President
and our Chief Merchandising Officer, was one of the selling
shareholders from whom we acquired Flying Colors Toys in October
1999. In connection with that acquisition, we agreed to pay an
earn-out, in an amount not less than $2.5 million nor more than
$4.5 million, in each of the three twelve-month periods
following the closing if the gross profit of
Flying Colors
products achieve certain targeted levels during these
periods. In 2001, we paid $1,850,000 to Mr. Bianco on
account of the earn-out for the twelve-month period ended
September 30, 2001.
6
Executive Compensation
The following table sets forth the compensation
we paid for our fiscal years ended December 31, 1999, 2000
and 2001 to our Chief Executive Officer and to our four most
highly compensated executive officers (other than our Chief
Executive Officer) whose compensation exceeded $100,000 on
an annual basis (collectively, the Named Officers).
Summary Compensation Table
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|
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|
|
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|
|
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|
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|
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|
|
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|
Long-Term Awards
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Annual Compensation
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Restricted
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|
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Other Annual
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Stock
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|
Name and
|
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|
|
Salary
|
|
Bonus
|
|
Compensation
|
|
Awards
|
|
Options
|
Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
(#)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack Friedman
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|
2001
|
|
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821,000
|
|
|
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1,706,390
|
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
|
Chairman and Chief
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2000
|
|
|
|
771,000
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|
|
|
1,613,401
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|
|
|
|
|
|
|
|
|
|
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207,254
|
(1)
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|
Executive Officer
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1999
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521,000
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1,750,000
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|
|
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|
|
|
|
|
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232,500
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Stephen G. Berman
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2001
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|
|
796,000
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|
|
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1,706,390
|
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
|
Chief Operating Officer,
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2000
|
|
|
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746,000
|
|
|
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1,613,401
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|
|
|
|
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|
|
|
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346,024
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(2)
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President and Secretary
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1999
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496,000
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1,750,000
|
|
|
|
|
|
|
|
|
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394,500
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Joel M. Bennett
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2001
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247,500
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|
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160,000
|
|
|
|
|
|
|
|
|
|
|
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20,000
|
|
|
Executive Vice President and
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2000
|
|
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225,000
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140,000
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|
|
|
|
|
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|
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211,700
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(3)
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Chief Financial Officer
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1999
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155,000
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|
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130,000
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|
|
|
|
|
|
|
|
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42,500
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|
Michael Bianco, Jr.
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2001
|
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|
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550,000
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|
|
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450,000
|
|
|
|
|
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|
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150,000
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|
|
Executive Vice President and Chief
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2000
|
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|
450,000
|
|
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300,000
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|
|
|
|
|
|
|
|
|
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75,263
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|
Merchandising Officer
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|
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1999
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75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
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15,000
|
|
|
|
(1)
|
Includes options to purchase 182,254 shares
issued in replacement of options to purchase 257,500 shares
pursuant to a reset in the price of those options.
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(2)
|
Includes options to purchase 321,024 shares
issued in replacement of options to purchase 419,500 shares
pursuant to a reset in the price of those options.
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(3)
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Includes options to purchase 110,874 shares
issued in replacement of options to purchase 143,326 shares
pursuant to a reset in the price of those options.
|
The following table sets forth certain
information regarding options granted to the Named Officers
in 2001.
Option/ SAR Grants in Last Fiscal
Year
Individual Grants
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Potential Realizable Value
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Number of
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% of Total
|
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at Assumed Annual Rates
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Securities
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Options/SARs
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|
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|
|
|
of Stock Appreciation for
|
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Underlying
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Granted to
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Exercise
|
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|
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Option Term
|
|
|
Options/SARs
|
|
Employees in
|
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or Base Price
|
|
|
|
|
Name
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|
Granted (#)
|
|
Fiscal Year(1)
|
|
($/Share)
|
|
Expiration Date
|
|
5%($)
|
|
10%($)
|
|
|
|
|
|
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|
|
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Jack Friedman
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175,000
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26.6
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%
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16.25
|
|
|
|
7/11/07
|
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967,146
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2,194,133
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Stephen G. Berman
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175,000
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26.6
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%
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16.25
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7/11/07
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967,146
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2,194,133
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Joel M. Bennett
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20,000
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3.0
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%
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16.25
|
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7/11/07
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110,531
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250,758
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Michael Bianco, Jr.
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150,000
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22.8
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%
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16.25
|
|
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7/11/07
|
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828,983
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1,880,685
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(1)
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Options to purchase a total of
658,500 shares of our common stock were granted to our
employees, including the Named Officers, during 2001.
|
7
The following table sets forth certain
information regarding options exercised and exercisable
during 2001, and the value of options held as of
December 31, 2001 by the Named Officers:
Aggregated Option/SAR Exercises in Last Fiscal
Year
and Fiscal Year End Option/SAR
Values
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Number of Securities
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Value of Unexercised
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Underlying Unexercised
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In-the-Money
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|
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Options/SARs
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Options/SARs
|
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|
Shares
|
|
|
|
at Fiscal Year End
|
|
at Fiscal Year End(2)
|
|
|
Acquired on
|
|
Value
|
|
|
|
|
Name
|
|
Exercise (#)
|
|
Realized ($)
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack Friedman
|
|
|
|
|
|
|
|
|
|
|
426,835
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|
|
305,419
|
|
|
|
5,360,010
|
|
|
|
1,916,890
|
|
Stephen G. Berman
|
|
|
145,000
|
|
|
|
1,851,111
|
|
|
|
198,481
|
|
|
|
402,557
|
|
|
|
2,430,946
|
|
|
|
2,992,694
|
|
Joel M. Bennett
|
|
|
40,489
|
|
|
|
520,692
|
|
|
|
1,330
|
|
|
|
109,057
|
|
|
|
14,730
|
|
|
|
1,040,306
|
|
Michael Bianco, Jr.
|
|
|
12,756
|
|
|
|
162,781
|
|
|
|
1,466
|
|
|
|
220,813
|
|
|
|
16,236
|
|
|
|
1,189,254
|
|
|
|
(1)
|
The difference between (x) the product of
the number of exercised options and the average sale price per
share of the common stock sold on the exercise dates and
(y) the aggregate exercise price of such options.
|
|
(2)
|
The difference between (x) the product of
the number of unexercised options and $18.95 (the closing sale
price of the common stock on December 31, 2001) and
(y) the aggregate exercise price of such options.
|
Compensation of Directors
Directors currently receive an annual cash
stipend on January 1 of each year in the amount of $10,000
for serving on the Board, and are reimbursed for reasonable
expenses incurred in attending meetings. In addition, our Option
Plan provides for each newly elected non-employee director to
receive at the commencement of his term an option to purchase
37,500 shares of our common stock at their then current
fair market value, and for grants to our non-employee directors
on January 1 and July 1 of each year of an option to
purchase 7,500 shares of our common stock at their then
current fair market value. In the event the 2002 Plan is adopted
at the Meeting, no further grants of options will be made under
the Option Plan. Nevertheless, the 2002 Plan also provides for
similar option grants, so that, if the 2002 Plan is adopted,
non-employee directors will continue to be issued the options
described above. Options granted to a non-employee director
expire upon the termination of the directors services for
cause, but may be exercised at any time during a one-year period
after such person ceases to serve as a director for any other
reason.
Employment Agreements
On July 1, 1999, we entered into 10-year
employment agreements with Jack Friedman and Stephen G. Berman,
respectively, pursuant to which Mr. Friedman serves as our
Chairman and Chief Executive Officer and Mr. Berman serves
as our President and Chief Operating Officer.
Mr. Friedmans annual base salary in 2002 is $846,000
and Mr. Bermans is $821,000. Their annual base
salaries are subject to annual increases in an amount, not less
than $25,000, determined by our Board of Directors. Each of them
is also entitled to receive an annual bonus equal to 4% of our
pre-tax income, but not more than $2,000,000, if our pre-tax
income is are at least $2,000,000.
On May 8, 2000, we entered into an
employment agreement with Joel M. Bennett pursuant to which
Mr. Bennett serves as an Executive Vice President and our
Chief Financial Officer during a four-year term from
January 1, 2000 to December 31, 2003. Mr.
Bennetts annual base salary in 2002 is $272,500. His
annual base salary is subject to annual increases in an amount
determined by our Board of Directors. He is also entitled to
receive an annual bonus equal to the product of his base salary
and the percentage year-over-year increase in our pre-tax
income, but not less than $75,000 nor more than his base salary.
On July 12, 2001, we amended and restated
our employment agreement with Michael Bianco, Jr. The new
agreement provides for Mr. Bianco to serve as an Executive
Vice President during a term ending on
8
December 31, 2007. Mr. Biancos
annual base salary in 2002 is $575,000. His annual base salary
is subject to annual increases, in an amount not less than
$25,000, determined by our Board of Directors. In February 2002,
we appointed Mr. Bianco to serve as our Chief Merchandising
Officer.
If we terminate Mr. Friedmans,
Mr. Bermans, Mr. Biancos or
Mr. Bennetts employment other than for
cause or if he resigns because of our material breach of
the employment agreement or because we cause a material change
in his employment, we are required to make a lump-sum severance
payment in an amount equal to his base salary and bonus during
the balance of the term of the employment agreement, based on
his then applicable annual base salary and bonus. In the event
of the termination of his employment under certain circumstances
after a Change of Control (as defined in the
employment agreement), we are required to make to him a one-time
payment of an amount equal to 2.99 times his base
amount determined in accordance with the applicable
provisions of the Internal Revenue Code.
Compensation Committee Interlocks and Insider
Participation
Mr. Friedman, Mr. Miller and
Mr. Skala were the three members of our Compensation
Committee in 2001. Mr. Jack Friedman, our Chairman and Chief
Executive Officer, is the only member of our Compensation
Committee who is or formerly was an officer or employee of JAKKS
or any of its subsidiaries. Our Board believes that
Mr. Friedmans assessment of the performance and
contribution of our other employees and his views on the
appropriate manner and level of compensation for their services
are essential to the Compensation Committees ability to
evaluate and make determinations with respect to compensation
matters. However, Mr. Friedman does not participate in any
deliberations or determinations by the Compensation Committee or
our Board with respect to his own compensation. Furthermore, if
the 2002 Plan (see Proposal No. 4 below) is approved,
Messrs. Friedman and Skala will resign from the
Compensation Committee and will be replaced by Mr. Glick.
None of our executive officers has served as a
director or member of a compensation committee (or other board
committee performing equivalent functions) of any other entity,
one of whose executive officers served as a director or a member
of our Compensation Committee.
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
Overview
Our approach to employee compensation is grounded
in our belief that our most important resource is our people.
While some companies may enjoy an exclusive or limited franchise
or are able to exploit unique assets, proprietary technology or
other special properties or rights, we depend fundamentally on
the skills, energy and dedication of our employees to drive our
business. It is only through their constant efforts that we are
able to innovate through the creation of new products and the
continual rejuvenation of our product lines, to maintain
superior operating efficiencies, and to develop and exploit
marketing channels. With this in mind, we have consistently
sought to employ the most talented, accomplished and energetic
people available in the industry.
One of our key management principles is to
operate with a lean and mean executive staff. This
allows for quick decision-making and efficient operation, but
also stresses clearly delineated responsibilities and
accountability for each area of business. We believe that we
have assembled an outstanding management team and that this has
been a primary factor in our success to date. Accordingly, we
have determined that the paramount aim of our compensation
policy should be to attract and retain the most promising people
available to work for us and to motivate them so that they
perform to their maximum potential.
Our Board of Directors determines the
compensation of our executive officers, except that
Mr. Friedman and Mr. Berman do not participate in any
deliberations or determinations with respect to their
compensation. Mr. Friedman and Mr. Berman generally
determine the compensation of other management employees,
subject to oversight by the Board of Directors. Executive
compensation is generally determined based on a subjective
evaluation of the executives efforts and achievements, our
overall performance and the executives contribution
thereto. The role of our Compensation Committee in this process
is to review our compensation
9
policy for management employees, to recommend to
the Board programs and policies related to employee compensation
and benefits, and to administer programs and plans relating
thereto, other than the Option Plan. Our Stock Option Committee
is authorized to administer the Option Plan and, in particular,
to determine the persons to whom, the number of shares for
which, and the times and exercise prices at which options are
granted.
Executive Compensation
Our executive compensation consists of four
components:
Base Salary
The base salaries of Mr. Friedman,
Mr. Berman, Mr. Bennett and Mr. Bianco are
determined by our Board of Directors in accordance with their
respective employment agreements. We determine the base salary
of each of our other executive officers on an annual basis.
Incentive Bonus
Generally, we award a cash bonus to our
management employees based on their personal performance in the
past year and the overall performance of the Company.
Mr. Friedman, Mr. Berman, Mr. Bennett and
Mr. Bianco are entitled to receive a formula-based bonus
under their respective employment agreements, and may also
receive additional discretionary bonuses.
Stock Option Grants
We believe that an important element of our
compensation policy is to align the interests of our management
employees with the long-term interests of our stockholders. The
most direct way to accomplish this is by giving our executives
an equity stake in our Company, which we do by granting stock
options to our employees as a non-cash component of incentive
compensation. Options are granted to employees by the Board of
Directors or our Stock Option Committee, based on the
recommendations of Mr. Friedman and Mr. Berman (except
that they do not participate in determining their own option
grants). To date, the exercise price of each option granted
under our Option Plan was set equal to the Nasdaq closing price
of our common stock on the date of grant (except where a higher
exercise price was required in order for the option to qualify
as an incentive stock option under the Internal
Revenue Code when the option is granted to a 10% stockholder),
and we intend to continue this practice in general. Beginning in
1999, we have provided for all options granted under our Option
Plan to vest in increments of 15%, 15%, 15%, 25% and 30% over
the five-year period beginning on the first anniversary of the
date of grant, and to terminate six years after the date of
grant. We believe that the relatively long and back-end weighted
vesting period encourages a long-term commitment to the Company
by the option grantee.
Employee Benefits
We provide customary employee benefits, such as
medical and hospitalization insurance, paid vacation and a
401(k) retirement savings plan, to all our full-time employees.
In addition, certain of our management employees are entitled to
perquisites, such as an automobile allowance.
Chief Executive Officer Compensation
In 2001, Mr. Friedman, our chief executive
officer, earned a base salary of $821,000 and a bonus of
$1,706,390, and was granted options to purchase
175,000 shares of our common stock, and Mr. Berman,
our chief operating officer, earned a base salary of $796,000
and a bonus of $1,706,390, and was granted options to purchase
175,000 shares of our common stock. Mr. Friedman and
Mr. Berman are subject to employment agreements which
require us to increase their salary each year by an amount not
less than $25,000 and which provide for a formula-based
4% Bonus linked to our Pre-Tax Income (as defined). The 4%
Bonus accounted for their respective bonuses in 2001. In order
to implement an understanding between them (and although there
is no legally binding agreement that requires it) we have paid,
and expect to continue to pay,
10
substantially equal cash compensation to
Mr. Friedman and Mr. Berman, the principal difference
being that Mr. Friedmans base salary is fixed in an
amount $25,000 higher than that of Mr. Berman.
We believe that our success to date has been to a
significant extent attributable to the personal efforts of
Mr. Friedman and Mr. Berman. They founded the Company,
established its business philosophy and operating structure and
were the driving force behind our central theme of focusing our
business on evergreen products.
Mr. Friedmans long-term relationship with World
Wrestling Federation Entertainment, Inc. was instrumental in our
acquiring our successful
World Wrestling Federation
licenses. In his nearly four-decade-long career in the toy
industry, he has established an important network of
relationships that we have been able to exploit in product
acquisition, production and sales. Both Mr. Berman and
Mr. Friedman embody our management philosophy with a
hands on approach in all areas of our business. In
addition to their general supervisory functions, they are
directly involved in license acquisition, product design and
development, production, and sales and marketing, as well as our
financing and acquisition efforts. Their efforts have resulted
in our identifying and securing the
World Wrestling
Federation
licenses and other desirable licenses and
properties, the rapid expansion of our product lines, our
achieving significant production efficiencies and the
development of a loyal and growing customer base.
Considerations with Respect to Tax
Deductibility
The deductibility of compensation payments in
excess of $1,000,000 to each of our chief executive officer or
four other most highly compensated executive officers is subject
to certain limitations under Section 162(m) of the Internal
Revenue Code. The Board of Directors and the Compensation
Committee take into account the effect of the loss of
deductibility of executive compensation that exceeds $1,000,000
as one factor in its consideration of the appropriate manner and
level of compensation for our executives. While they seek to
minimize any adverse impact of these limitations, they may not
confine compensation to the $1,000,000 limit in order to
maintain flexibility to award greater compensation where
appropriate.
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Members of the Compensation Committee:
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Jack Friedman
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Michael Miller
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Murray L. Skala
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11
PERFORMANCE GRAPH
The graph and table below display the relative
performance of our common stock, the Russell 2000 Price Index
(the Russell 2000) and a peer group index over the
period from May 1, 1996 (the first day on which our common
stock was publicly traded) to December 31, 2001 by
comparing the cumulative total stockholder return (which assumes
reinvestment of any dividends) on an assumed $100 investment in
our common stock (at its initial public offering price of
$4.16), the Russell 2000 and the peer group index at the market
close on capitalization weighted basis, the common stocks of
eight companies: Acclaim Entertainment, Inc., Action
Performance Companies, Inc., Empire of Carolina, Inc.,
Equity Marketing, Inc., The First Years, Inc.,
Hasbro, Inc., Mattel, Inc. and Russ Berrie and
Company, Inc. We believe that these companies represent a
cross-section of publicly-traded companies with product lines
and businesses similar to our own throughout the comparison
period. The historical performance data presented below may not
be indicative of the future performance of our common stock,
either reference index or any component company in either
reference index.
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Apr. 30, 1996
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Dec. 31, 1996
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Dec. 31, 1997
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Dec. 31, 1998
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Dec. 31, 1999
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Dec. 31, 2000
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Dec. 31, 2001
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JAKKS Pacific
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100.00
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127.87
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127.87
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171.82
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448.03
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218.34
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451.64
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Peer Group
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100.00
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103.54
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136.79
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112.78
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74.65
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70.59
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96.47
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Russell 2000
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100.00
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105.25
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128.65
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125.77
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152.63
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148.16
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151.98
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12
AUDIT COMMITTEE REPORT
The Audit Committee has reviewed and discussed
our audited financial statements for 2001 with our management
and has discussed with PKF, our independent auditor, the matters
required to be discussed by Statement on Auditing Standards
No. 61 (Communications with Audit Committees). The Audit
Committee has received the written disclosures and the letter
from PKF required by Independence Standards Board Standard
No. 1 (Independence Discussions with Audit Committees), and
has discussed with PKF that firms independence. Based on
this review and these discussions, the Audit Committee
recommended to the Board of Directors that the audited financial
statements be included in our Annual Report on Form 10-K
for 2001 for filing with the SEC.
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Members of the Audit Committee:
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David C. Blatte
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Robert E. Glick
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Michael G. Miller
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13
ADOPTION OF AN AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
(Proposal No. 2)
On April 8, 2002, the Board of Directors
unanimously resolved, subject to stockholder approval, to amend
and restate our Certificate of Incorporation (the New
Certificate). The New Certificate would amend and restate
the Certificate of Incorporation as follows:
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increase the number of authorized shares of
common stock from 25,000,000 shares to
100,000,000 shares and increase the number of authorized
shares of preferred stock from 1,000,000 shares to
5,000,000 shares;
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revise certain provisions of the New Certificate
so that they reflect current Delaware General Corporate Law and
eliminate provisions of the Certificate of Incorporation that
are obsolete.
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Purpose and Effect of the Amendment
We Urge Each Stockholder to Carefully Read the
New Certificate Before Voting on This Proposal.
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Increase the number of authorized shares of
common stock and preferred stock
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If Proposal 2 is approved,
Article Fourth of the Certificate of Incorporation would be
amended by Article Fourth of the New Certificate to increase the
authorized shares of common stock to 100,000,000 shares and to
increase the authorized shares of preferred stock to 5,000,000
shares.
The additional shares of common stock to be
authorized by adoption of Proposal 2 would have rights
identical to the currently outstanding common stock. Adopting
Proposal 2 would not affect the rights of the holders of
currently outstanding common stock. However, if additional
shares of common stock are actually issued, any such issuance
would have the effect of diluting the earnings per share and
book value per share of outstanding shares of common stock.
The additional shares of preferred stock to be
authorized by adoption of Proposal 2 would be blank check
preferred stock, which means that the Board of Directors may
authorize and issue such preferred stock from time to time, upon
such terms and conditions as the Board of Directors may approve.
These rights are identical to the rights to the currently
authorized preferred stock. Adopting Proposal 2 would not
affect the rights of the holders of currently outstanding common
stock. However, if additional shares of preferred stock are
actually issued, any such issuance could have the effect of
diluting the earnings per share and book value per share of
outstanding shares of common stock.
We currently have 25,000,000 authorized shares of
common stock. As of July 8, 2002, 23,585,149 shares of
common stock were outstanding and 1,745,813 shares of
common stock were subject to awards under the Option Plan. We
currently have 1,000,000 authorized shares of preferred stock.
As of July 8, 2002, there were no shares of preferred stock
issued and outstanding.
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Reasons to Increase the Amount of
Authorized Shares
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The principal purpose to authorize additional
shares of common stock and preferred stock is to provide us with
additional financial flexibility to issue common stock and/or
preferred stock for purposes which may be identified in the
future, including, without limitation, to distribute common
stock to stockholders pursuant to stock splits and/or stock
dividends, to raise equity capital, to provide sufficient shares
for issuance under the existing Option Plan and proposed 2002
Plan, to adopt additional equity incentive plans or reserve
additional shares for issuance under such plans, to make
acquisitions through the use of common stock, and to effect
other corporate transactions, including without limitation, our
agreement with Toymax to pay its stockholders a combination of
cash and our common stock to complete our acquisition of the
remaining outstanding shares of Toymax common stock, as
described in detail in this Proxy Statement in the section
entitled Future Issuance of Our Common Stock.
The availability of additional shares of common
stock and/or preferred stock is particularly important if the
Board of Directors needs to undertake any of the foregoing
actions on an expedited basis. An increase in the number of
authorized shares of common stock and/or preferred stock would
enable the Board of Directors to avoid the time (and expense) of
seeking stockholder approval in connection with any such
contemplated action. If Proposal 2 is approved by our
stockholders, the Board of Directors does not intend to solicit
further
14
stockholder approval prior to the issuance of any
additional shares of common stock or preferred stock, except as
may be required by applicable law or the rules of any stock
exchange upon which our securities may be listed. The holders of
common stock do not have preemptive rights to purchase any
shares issued in the future.
The proposed increase in the authorized number of
shares of common stock and preferred stock could have a variety
of effects on our stockholders depending upon the exact nature
and circumstances of any actual issuances of authorized shares.
The increase could have an anti-takeover effect, in that
additional shares could be issued (within the limits imposed by
applicable law) in one or more transactions that could make a
change in control or takeover of us more difficult. For example,
additional shares could be issued by us so as to dilute the
stock ownership or voting rights of persons seeking to obtain
control of us. Similarly, the issuance of additional shares to
certain persons allied with our management could have the effect
of making it more difficult to remove our current management by
diluting the stock ownership or voting rights of persons seeking
to cause such removal. In addition, an issuance of additional
shares by us could have an effect on the potential realizable
value of a stockholders investment. In the absence of a
proportionate increase in our earnings and book value, an
increase in the aggregate number of our outstanding shares
caused by the issuance of the additional shares would dilute the
earnings per share and book value per share of all outstanding
shares of our common stock. If such factors were reflected in
the price per share of common stock, the potential realizable
value of a stockholders investment could be adversely
affected.
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Revise the Certificate of Incorporation to
Reflect Current Delaware Law and Eliminate Provisions That are
Obsolete
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The Certificate of Incorporation contains
provisions that are obsolete or that do not reflect current
Delaware corporate practice. The following is a summary
description of these provisions and the proposed amendments
thereto, as set forth in the New Certificate. The Board of
Directors does not anticipate that any of such changes will
materially affect our governance, business, operations or
prospects.
The Certificate of Incorporation provides, in
Article Third, the purpose and business in which we may engage.
Article Third of the New Certificate provides that
[t]he purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized
under the Delaware General Corporation Law. The wording of
the proposed new purpose clause follows the wording of the
applicable Delaware statutory provision more closely than that
of the purpose clause in the Certificate of Incorporation. The
Board of Directors believes the purpose clause in the
Certificate of Incorporation may restrict us from engaging in
business that may be in our best interests to pursue. The Board
of Directors believes that the restated purpose clause in the
New Certificate would allow us to engage in various activities
to the maximum extent allowed by Delaware law.
Article Seventh of the Certificate of
Incorporation lists specific powers the Board of Directors may
exercise in furtherance, and not in limitation of the
powers conferred by statute. Other than the power to
adopt, amend, and alter bylaws, listing specific powers of the
Board of Directors is unnecessary under Delaware law.
Section 141 of the Delaware General Corporation Law
provides that the business and affairs of every corporation
organized under the laws of Delaware shall be managed by or
under the direction of the board of directors unless otherwise
provided in the Delaware General Corporation Law or a
corporations certificate of incorporation.
Article Sixth of the New Certificate continues to permit
the Board of Directors to adopt, amend and alter our bylaws, but
does not list any additional powers of the Board of Directors
because listing additional powers is unnecessary.
Article Sixth of the Certificate of
Incorporation relates to a Delaware courts ability to
order a special meeting of our creditors if we become insolvent.
In such a meeting, the creditors would vote on a compromise or
settlement arrangement between them and our company. It is
inconsistent with current Delaware corporate practice to include
such a compromise and settlement provision in the Certificate of
Incorporation. Additionally, there are doubts concerning the
constitutionality of whether non-resident creditors can be by
required to attend such a court imposed meeting of creditors.
Accordingly, Article Sixth of the Certificate of
Incorporation is not included in the New Certificate.
15
DESCRIPTION OF SECURITIES
General
If Proposal No. 2 is passed by our
stockholders, we will be authorized to issue
100,000,000 shares of common stock, par value $.001 per
share, and 5,000,000 shares of preferred stock, par value
$.001 per share. As of August 20, 2002,
23,585,149 shares of our common stock were outstanding and
owned of record by approximately 106 persons, and no shares
of our preferred stock were outstanding.
Common Stock
Holders of our common stock are entitled to one
vote for each share on all matters submitted to a vote of our
stockholders, including the election of directors. Our
certificate of incorporation does not provide for cumulative
voting. Accordingly, holders of a majority of the shares of
common stock entitled to vote in any election of directors may
elect all of the directors standing for election if they choose
to do so. Holders of common stock will be entitled to receive
ratably dividends, if any, declared from time to time by our
Board of Directors, and will be entitled to receive ratably all
of our assets available for distribution to them upon
liquidation. Holders of common stock have no preemptive,
subscription or redemption rights. All the currently outstanding
shares of our common stock are, and all shares of our common
stock offered by us hereby, upon issuance and sale, will be,
fully paid and nonassessable.
Preferred Stock
Our certificate of incorporation currently
provides that we are authorized to issue up to
1,000,000 shares of blank check preferred
stock. Without any further approval by our stockholders, our
Board of Directors may designate and authorize the issuance,
upon the terms and conditions it may determine, of one or more
classes or series of preferred stock with prescribed
preferential dividend and liquidation rights, voting,
conversion, redemption and other rights. The issuance of
preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among
other things, adversely affect the voting power of the holders
of the common stock. Under certain circumstances, the issuance
of preferred stock could also make it more difficult for a third
party to gain control of JAKKS, discourage bids for the common
stock at a premium or otherwise adversely affect the market
price of our common stock. We do not currently have any shares
of preferred stock outstanding.
FUTURE ISSUANCE OF OUR COMMON STOCK
Toymax Transactions
On March 10, 2002, we acquired approximately
66.8% of the outstanding voting shares of Toymax International,
Inc. (Toymax) pursuant to a Stock Purchase
Agreement, dated as of February 10, 2002, between Toymax,
certain principal stockholders of Toymax and our Company. In
connection with this purchase, we entered into an Agreement of
Merger, dated February 10, 2002, with Toymax and our
wholly-owned merger subsidiary pursuant to which we may acquire
the remaining outstanding shares of Toymax common stock (not
owned by us) at a per share price of $3.00 in cash plus
.0798 shares of our common stock (325,853 shares in
the aggregate), subject to certain adjustments set forth in the
Agreement of Merger.
If Proposal No. 2 is passed by our
stockholders and after such time as our certificate of
incorporation has been amended and restated to increase the
amount of our authorized shares of common stock, we intend to
issue such 325,853 shares of our common stock to complete
the Toymax merger.
For a complete description of the merger and the
Agreement of Merger, see the Joint Proxy Statement/ Prospectus
prepared by Toymax and us covering the merger, filed with the
SEC on July 10, 2002, and which is included herein as
Appendix 1.
16
Financial and Other Information of
Toymax
Toymaxs Audited Consolidated Financial
Statements for the three-year period ended March 31, 2002,
Unaudited Interim Financial Statements for the quarter ended
June 30, 2002, Selected Historical Financial Data,
Unaudited Pro Forma Consolidated Financial Statements, Notes to
Unaudited Pro Forma Consolidated Financial Statements and
Managements Discussion and Analysis of Financial Condition
and Results of Operations that are set forth in the Joint Proxy
Statement/ Prospectus at Appendix 1 are incorporated herein
by reference. Toymaxs principal accountant, PKF, Certified
Public Accountants, A Professional Corporation, is expected to
be present at the Meeting, will have the opportunity to make a
statement if PKF desires to do so and is expected to be
available to respond to appropriate questions.
Mergers, Consolidations, Acquisitions and
Similar Matters
As discussed above, we intend to acquire the
remaining outstanding shares of Toymax pursuant to a merger of
our wholly-owned merger subsidiary with and into Toymax. The
complete details of our proposed merger and exchange of Toymax
common stock for cash plus our common stock are set forth in the
Joint Proxy Statement/ Prospectus at Appendix 1
incorporated herein by reference.
Information Incorporated by
Reference
Any document that is incorporated by reference
into this proxy statement but is not delivered to our security
holders, JAKKS will provide, without charge, to each person to
whom this proxy statement is delivered, upon written or oral
request of such person and by first class mail or other equally
prompt means within one business day of receipt of such request,
a copy of any and all of the information that has been
incorporated by reference in this proxy statement (not including
exhibits to the information that is incorporated by reference
unless such exhibits are specifically incorporated by reference
into the information that this proxy statement incorporates).
Please direct such requests to JAKKS Pacific, Inc.,
22619 Pacific Coast Highway, Malibu, California 90265,
(310) 456-7799, Attention: Joel M. Bennett.
17
RATIFICATION OF THE APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
(Proposal No. 3)
Upon the recommendation of our Audit Committee,
our Board of Directors has appointed the firm of PKF, Certified
Public Accountants, A Professional Corporation, as the principal
independent auditor of the Company for the fiscal year ending
December 31, 2002, subject to ratification by the
stockholders. This firm has served as our independent auditor
since our inception in 1995. If the appointment of this firm is
not ratified or if it declines to act or their engagement is
otherwise discontinued, the Board of Directors will appoint
another independent auditor. Representatives of the firm are
expected to be present at the Annual Meeting, will have the
opportunity to make a statement at the Annual Meeting, if they
so desire, and will be available to respond to appropriate
questions from stockholders.
In 2001 the aggregate fees billed for
professional services provided by PKF to us were as follows:
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Audit Fees(1)
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$
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245,400
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Financial Information Systems Design and
Implementation Fees(2)
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$
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980
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All Other Fees(3)
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$
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188,650
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(1)
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Audit fees relate to services rendered for the
annual audit of our consolidated financial statements for 2001
and the review of the financial statements included in our
quarterly reports on Form 10-Q in 2001.
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(2)
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Financial information systems design and
implementation fees relate to operating, or supervising the
operation of, our information system or managing our local area
network or to services rendered in connection with the design or
implementation of hardware or software systems that aggregate
source data underlying the financial statements or generate
information that is significant to the financial statements
taken as a whole.
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(3)
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All other fees relate to advice and assistance
provided to us in connection with tax compliance and various
transactions.
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Our Audit Committee has considered whether the
provisions of the non-audit services described above is
compatible with maintaining PKFs independence and
determined that such services are appropriate.
18
RATIFICATION AND APPROVAL OF OUR
2002 STOCK AWARD AND INCENTIVE PLAN
(Proposal No. 4)
General
The Board of Directors (Board) has
determined that it is in our best interests to adopt the 2002
Stock Award and Incentive Plan (the 2002 Plan), with
the approval of stockholders, to enhance our ability to link pay
to performance, including through the use of stock options.
The Board and the Compensation Committee (the
Committee) believe that attracting and retaining
executives and other key employees of high quality is essential
to our growth and success. To this end, the availability of a
comprehensive compensation program which includes different
types of incentives for motivating employees and rewards for
outstanding service can contribute to our future success. In
particular, we intend to use stock options and stock-related
awards as an important element of compensation for executives,
employees, non-employee directors and certain other persons
because such awards enable them to acquire or increase their
proprietary interest in us, thereby promoting a closer identity
of interests between them and our stockholders. In addition,
annual incentive awards and other performance-based awards will
provide incentives for achieving specific performance
objectives. The Board and the Committee therefore view the 2002
Plan as a key part of our compensation program.
The 2002 Plan would replace our current option
plan (the Current Option Plan), which has been in
effect since 1995. The 2002 Plan would allow us to continue to
grant performance-based awards similar to those under the
Current Option Plan, but would also authorize a broad range of
other awards, including options, restricted and deferred stock,
performance awards, stock appreciation rights (SARs)
and other types of awards based on the our common stock
(collectively, Awards).
Reasons for Stockholder Approval
The Board and Committee seek stockholder approval
of the 2002 Plan to satisfy certain legal requirements and to
provide potential tax advantages to us and participants.
In addition, the Board and the Committee seek to
preserve our ability to claim tax deductions for compensation,
to the greatest extent practicable. Therefore, we are seeking
stockholder approval of the material terms of performance awards
to named executives under the 2002 Plan, to meet a key
requirement for such awards to qualify as
performance-based compensation under
Section 162(m) of the Internal Revenue Code (the
Code). Section 162(m) limits the deductions a
publicly held company can claim for compensation in excess of
$1,000,000 paid to certain executive officers (generally, the
officers who are named executive officers in the
summary compensation table in the companys proxy
statement). Performance-based compensation is not
counted against the $1 million deductibility cap. If the
2002 Plan is approved by our stockholders, performance awards
intended by the Committee to qualify as
performance-based compensation will be payable only
upon achievement of pre-established performance goals, subject
to any additional requirements and terms as the Committee may
establish. Such performance awards can be used to place strong
emphasis on the building of value for all stockholders. For
purposes of Section 162(m), approval of the 2002 Plan will
be deemed also to include approval of the eligibility of
executive officers and other eligible persons to participate,
the per-person limitations described below under the caption
Shares Available and Award Limitations
and
the general business criteria upon which performance objectives
for performance awards are based, described below under the
caption
Performance-Based Awards.
Because
stockholder approval of general business criteria, without
specific targeted levels of performance, qualifies performance
awards for a period of approximately five years, stockholder
approval of such business criteria will meet the requirements
under Section 162(m) until 2007. Stockholder approval of
the performance goal inherent in stock options and SARs
(increases in the market price of shares) is not subject to a
time limit under Section 162(m).
19
Stockholder approval will also allow the
Committee to designate options as incentive stock
options, if it chooses, to provide potential tax
advantages to participants. These potential advantages are
explained below under Federal Income Tax Implications of
the 2002 Plan.
Description of the 2002 Plan
The following is a brief description of the
material features of the 2002 Plan. This description is
qualified in its entirety by reference to the full text of the
Plan, a copy of which is attached to this Proxy Statement as
Appendix 3.
Shares Available and Award
Limitations.
Under the 2002 Plan, the
number of shares of common stock reserved and available for
awards will be 2,300,000 plus the number of shares that remain
available for issuance under the Current Option Plan after
settlement of all awards under that plan. As discussed below,
this number is subject to adjustment in the event of stock
splits, stock dividends, and other extraordinary events. A total
of 327,926 shares remain available under the Current Option
Plan. Accordingly, if stockholders approve the 2002 Plan, the
total number of shares available would be 2,627,926 shares,
or 13.4% of the shares outstanding on May 7, 2002. Of this
amount, the total number of shares with respect to which ISOs
may be granted shall not exceed 2,300,000, and no more than
2,000,000 shares shall be used for Awards other than
options or SARs. Any shares of stock delivered under the 2002
Plan shall consist of authorized and unissued shares or treasury
shares.
Shares subject to forfeited or expired Awards or
to Awards settled in cash or otherwise terminated without
issuance of shares to the participant, and shares withheld by or
surrendered to us to satisfy withholding tax obligations or in
payment of the exercise price of an Award, will be deemed to be
available for new Awards under the 2002 Plan. These same
share-counting rules will apply to awards under the Current
Option Plan, for purposes of determining which shares will
become available under the 2002 Plan. Under the 2002 Plan,
shares subject to an Award granted in substitution for an award
of a company or business acquired by us or a subsidiary will not
count against the number of shares reserved and available.
Shares delivered under the 2002 Plan may be either newly issued
or treasury shares. On May 17, 2002, the last reported sale
price of our common stock on the Nasdaq National Market was
$18.60 per share.
In addition, the 2002 Plan includes a limitation
on the amount of Awards that may be granted to any one
participant in a given year to qualify Awards as
performance-based compensation not subject to the
limitation on deductibility under Section 162(m). Under
this annual per-person limitation, no Participant may in any
year be granted share-denominated Awards under the 2002 Plan
relating to more than his or her Annual Limit for
each type of Award. The Annual Limit equals 1,000,000 shares
plus the amount of the Participants unused Annual Limit
relating to the same type of Award as of the close of the
previous year, subject to adjustment for splits and other
extraordinary corporate events. For purposes of this limitation,
options, SARs, restricted stock, deferred stock, and other
stock-based awards are each considered separate types of awards
for purposes of the Annual Limit. In the case of Awards not
relating to shares in a way in which the share limitation can
apply, no Participant may be granted Awards authorizing the
earning during any year of an amount that exceeds the
Participants Annual Limit, which for this purpose equals
$5,000,000 plus the amount of the Participants unused cash
Annual Limit as of the close of the previous year. The Annual
Limit for non-share-based Awards is separate from the Annual
Limit for each type of share-based Award.
Adjustments to the number and kind of shares
subject to the share limitations and specified in the Annual
Limits are authorized in the event of a large, special or
non-recurring dividend or distribution, recapitalization, stock
split, stock dividend, reorganization, business combination, or
other similar corporate transaction or event affecting the
common stock. The Committee is also authorized to adjust
performance conditions and other terms of Awards in response to
these kinds of events or to changes in applicable laws,
regulations, or accounting principles, except that adjustments
to Awards intended to qualify, as performance-based
generally must conform to requirements under Section 162(m).
Eligibility.
Our and
our subsidiaries executive officers and other employees
and non-employee directors, consultants and others who provide
substantial services to us and our subsidiaries, are eligible to
be
20
granted Awards under the 2002 Plan. In addition,
any person who has been offered employment by us or one of our
subsidiaries may be granted Awards, but such prospective
employee may not receive any payment or exercise any right
relating to the Award until he or she has commenced employment.
At present, approximately 300 persons would be eligible for
Awards under the 2002 Plan.
Administration.
The
2002 Plan is administered by the Committee, except that the
Board may appoint any other committee to administer the
2002 Plan or may itself act to administer the
2002 Plan. The Board must perform the functions of the
Committee for purposes of granting Awards to non-employee
directors. (References to the Committee below mean
the committee or the full Board exercising authority with
respect to a given Award.) The Committee is authorized to select
participants, determine the type and number of Awards to be
granted and the number of shares to which Awards will relate or
the amount of a performance award, specify times at which Awards
will be exercisable or settled, including performance conditions
that may be required as a condition thereof, set other terms and
conditions of such Awards, prescribe forms of Award agreements,
interpret and specify rules and regulations relating to the
2002 Plan, and make all other determinations which may be
necessary or advisable for the administration of the
2002 Plan. Nothing in the 2002 Plan precludes the Committee
from authorizing payment of other compensation, including
bonuses based upon performance, to any Participant, including
executive officers. The 2002 Plan provides that Committee
members shall not be personally liable, and shall be fully
indemnified, in connection with any action, determination, or
interpretation taken or made in good faith under the
2002 Plan.
Stock Options and
SARs.
The Committee is authorized to
grant stock options, including both incentive stock options
(ISOs), which can result in potentially favorable
tax treatment to the participant, and non-qualified stock
options, and SARs entitling the participant to receive the
excess of the fair market value of a share on the date of
exercise or other specified date over the grant price of the
SAR. The exercise price of an option and the grant price of an
SAR is determined by the Committee, but generally may not be
less than the fair market value of the shares on the date of
grant (except as described below). The maximum term of each
option or SAR, the times at which each option or SAR will be
exercisable, and provisions requiring forfeiture of unexercised
options at or following termination of employment or upon the
occurrence of other events, generally are fixed by the
Committee, subject to a restriction that no ISO, or SAR in
tandem therewith, may have a term exceeding ten years. Options
may be exercised by payment of the exercise price in cash,
shares or other property (possibly including notes or
obligations to make payment on a deferred basis, or through
broker-assisted cashless exercise procedures) or by surrender of
other outstanding awards having a fair market value equal to the
exercise price. Methods of exercise and settlement and other
terms of SARs will be determined by the Committee. SARs granted
under the 2002 Plan may include limited SARs
exercisable for a stated period of time following a Change
in Control, as discussed below.
Restricted and Deferred
Stock.
The Committee is authorized to
make Awards of restricted stock and deferred stock. Prior to the
end of the restricted period, shares received as restricted
stock may not be sold or disposed of by participants, and may be
forfeited in the event of termination of employment. The
restricted period generally is established by the Committee. An
Award of restricted stock entitles the participant to all of the
rights of a stockholder of ours, including the right to vote the
shares and the right to receive any dividends thereon, unless
otherwise determined by the Committee. Deferred stock gives
participants the right to receive shares at the end of a
specified deferral period, subject to forfeiture of the Award in
the event of termination of employment under certain
circumstances prior to the end of a specified restricted period
(which need not be the same as the deferral period). Prior to
settlement, deferred stock Awards carry no voting or dividend
rights or other rights associated with stock ownership, but
dividend equivalents may be paid on such deferred stock.
Other Stock-Based Awards, Bonus Shares, and
Awards in lieu of Cash Obligations.
The 2002 Plan authorizes the Committee to grant Awards that are
denominated or payable in, valued in whole or in part by
reference to, or otherwise based on or related to shares. The
Committee will determine the terms and conditions of such
Awards, including the consideration to be paid to exercise
Awards in the nature of purchase rights, the periods during
which Awards will be outstanding, and any forfeiture conditions
and restrictions on Awards. In addition, the Committee is
authorized to grant shares as a bonus free of restrictions, or
to grant shares or other Awards in lieu of our obligations under
other plans or compensatory arrangements, subject to such terms
as the Committee may specify. The number of shares granted to an
executive officer or non-
21
employee director in place of salary, fees or
other cash compensation must be reasonable, as determined by the
Committee.
Performance-Based
Awards.
The Committee may require
satisfaction of pre-established performance goals, consisting of
one or more business criteria and a targeted performance level
with respect to such criteria, as a condition of Awards being
granted or becoming exercisable or settleable under the 2002
Plan, or as a condition to accelerating the timing of such
events. If so determined by the Committee, to avoid the
limitations on deductibility under Section 162(m) of the
Code, the business criteria used by the Committee in
establishing performance goals applicable to performance Awards
to named executive officers will be selected from among the
following: (1) growth in revenues or assets;
(2) earnings from operations, earnings before or after
taxes, earnings before or after interest, depreciation,
amortization, or extraordinary or special items; (3) net
income or net income per common share (basic or diluted);
(4) return on assets, return on investment, return on
capital, or return on equity; (5) cash flow, free cash
flow, cash flow return on investment, or net cash provided by
operations; (6) interest expense after taxes;
(7) economic profit; (8) operating margin or gross
margin; (9) stock price or total stockholder return; and
(10) strategic business criteria, consisting of one or more
objectives based on meeting environmental or safety standards,
market penetration, geographic business expansion goals, cost
targets, customer satisfaction, employee satisfaction,
management of employment practices and employee benefits,
supervision of litigation and information technology, and goals
relating to acquisitions or divestitures of subsidiaries,
affiliates or joint ventures. The Committee may specify that any
such criteria will be measured before or after extraordinary or
non-recurring items, before or after service fees, or before or
after payments of Awards under the 2002 Plan. The Committee may
set the levels of performance required in connection with
performance Awards as fixed amounts, goals relative to
performance in prior periods, as goals compared to the
performance of one or more comparable companies or an index
covering multiple companies, or in any other way the Committee
may determine.
Annual Incentive
Awards.
The Committee is authorized to
grant annual incentive awards, settleable in cash or in shares
upon achievement of preestablished performance objectives
achieved during a specified period of up to one year. The
performance objectives will be one or more of the performance
objectives available for other performance awards under the 2002
Plan, as described in the preceding paragraph. As discussed
above, annual incentive awards granted to named executive
officers may be intended as performance-based
compensation not subject to the limitation on
deductibility under Section 162(m). The Committee generally
must establish the performance objectives, the corresponding
amounts payable (subject to per-person limits), other terms of
settlement, and all other terms of such awards not later than
90 days after the beginning of the fiscal year.
Other Terms of
Awards.
Awards may be settled in cash,
shares, other Awards or other property, in the discretion of the
Committee. The Committee may require or permit participants to
defer the settlement of all or part of an Award in accordance
with such terms and conditions as the Committee may establish,
including payment or crediting of interest or dividend
equivalents on any deferred amounts. The Committee is authorized
to place cash, shares or other property in trusts or make other
arrangements to provide for payment of the Companys
obligations under the 2002 Plan. The Committee may condition
Awards on the payment of taxes such as by withholding a portion
of the shares or other property to be distributed (or receiving
previously acquired shares or other property surrendered by the
participant) to satisfy tax obligations. Awards granted under
the 2002 Plan generally may not be pledged or otherwise
encumbered and are not transferable except by will or by the
laws of descent and distribution, or to a designated beneficiary
upon the participants death, except that the Committee may
permit transfers in individual cases, including for estate
planning purposes.
Awards under the 2002 Plan are generally granted
without a requirement that the participant pay consideration in
the form of cash or property for the grant (as distinguished
from the exercise), except to the extent required by law. The
Committee may, however, grant Awards in substitution for,
exchange for or as a buyout of other Awards under the 2002 Plan,
awards under our other plans, or other rights to payment from
us, and may exchange or buyout outstanding Awards for cash or
other property. The Committee also may grant Awards in addition
to and in tandem with other Awards, awards, or rights as well.
In granting a new Award, the Committee may determine that the
in-the-money value of any surrendered Award may be applied to
reduce the exercise price of any option, grant price of any SAR,
or purchase price of any other Award.
22
Vesting, Forfeitures, and Acceleration
Thereof.
The Committee may, in its
discretion determine the vesting schedule of options and other
Awards, the circumstances that will result in forfeiture of the
Awards, the post-termination exercise periods of options and
similar Awards, and the events that will result in acceleration
of the ability to exercise and the lapse of restrictions, or the
expiration of any deferral period, on any Award. In addition,
the 2002 Plan provides that, unless otherwise provided by the
Committee in writing at the time of the Award, in the event of a
Change in Control of the Company, most outstanding Awards will
immediately vest and be fully exercisable, any restrictions,
deferral of settlement and forfeiture conditions of such Awards
will lapse, and goals relating to performance-based awards will
be deemed met or exceeded to the extent specified in the
performance-award documents. A Change in Control means generally
(i) any person or group becomes a beneficial owner of 30%
or more of the voting power of our voting securities,
(ii) a change in the Boards membership such that the
current members, or those elected or nominated by vote of
two-thirds of the current members and successors elected or
nominated by them, cease to represent a majority of the Board in
any period of less than two years, (iii) certain mergers or
consolidations substantially reducing the percentage of voting
power held by shareholders prior to such transactions, and
(iv) shareholder approval of a sale or liquidation of all
or substantially all of our assets.
Automatic Grants of Options to Non-Employee
Directors.
Unless otherwise determined
by the Board, the 2002 Plan provides that non-employee
directors be granted 37,500 shares upon the date of their
initial election to the Board. In addition, non-employee
directors are entitled to receive 7,500 additional shares on
January 1 and July 1 of each year such director
continues to serve in a non-employee capacity throughout the
term of this Plan. All of the above awards to non-employee
directors are to have an exercise price equal to the fair market
value of our common stock on the award date, and unless
otherwise provided by the Board in a written agreement at the
time of the award, shall be immediately vested and have a term
of 10 years from the Award date.
Amendment and Termination of the 2002
Plan.
The Board may amend, alter,
suspend, discontinue, or terminate the 2002 Plan or the
Committees authority to grant awards thereunder without
stockholder approval unless stockholder approval is required by
law, regulation, or stock exchange rule. The Board may, in its
discretion, submit other amendments to stockholders for
approval. Under these provisions, stockholder approval will not
necessarily be required for amendments, which might increase the
cost of the 2002 Plan or broaden eligibility. Unless earlier
terminated, the 2002 Plan will terminate at such time that no
shares reserved under the Plan remain available and we have no
further rights or obligations with respect to any outstanding
Award.
Federal Income Tax Implications of the 2002
Plan
The following is a brief description of the
federal income tax consequences generally arising with respect
to Awards that may be granted under the 2002 Plan. The grant of
an option (including a stock-based award in the nature of a
purchase right) or an SAR will create no federal income tax
consequences for the participant or us. A participant will not
have taxable income upon exercising an option, which is an ISO
(except that the alternative minimum tax may apply). Upon
exercising an option which is not an ISO, the participant must
generally recognize ordinary income equal to the difference
between the exercise price and the fair market value of the
freely transferable and nonforfeitable shares acquired on the
date of exercise. Upon exercising an SAR, the participant must
generally recognize ordinary income equal to the cash received.
Upon a disposition of shares acquired upon
exercise of an ISO before the end of the applicable ISO holding
periods, the participant must generally recognize ordinary
income equal to the lesser of (i) the fair market value of
the shares at the date of exercise of the ISO minus the exercise
price or (ii) the amount realized upon the disposition of
the ISO shares minus the exercise price. Otherwise, a
participants disposition of shares acquired upon the
exercise of an option generally will result in short-term or
long-term capital gain or loss measured by the difference
between the sale price and the participants tax
basis in such shares (generally, the tax
basis is the exercise price plus any amount
previously recognized as ordinary income in connection with the
exercise of the option).
23
We generally will be entitled to a tax deduction
equal to the amount recognized as ordinary income by the
participant in connection with options and SARs. We generally
are not entitled to a tax deduction relating to amounts that
represent a capital gain to a participant. Accordingly, we will
not be entitled to any tax deduction with respect to an ISO if
the participant holds the shares for the applicable ISO holding
periods prior to disposition of the shares.
With respect to other Awards granted under the
2002 Plan that result in a transfer to the participant of cash
or shares or other property that is either not restricted as to
transferability or not subject to a substantial risk of
forfeiture, the participant must generally recognize ordinary
income equal to the cash or the fair market value of shares or
other property actually received. Except as discussed below, we
generally will be entitled to a deduction for the same amount.
With respect to Awards involving shares or other property that
is restricted as to transferability and subject to a substantial
risk of forfeiture, the participant must generally recognize
ordinary income equal to the fair market value of the shares or
other property received at the earliest time the shares or other
property become transferable or not subject to a substantial
risk of forfeiture. Except as discussed below, we generally will
be entitled to a deduction in an amount equal to the ordinary
income recognized by the participant. A participant may elect to
be taxed at the time of receipt of shares (
e.g.,
restricted stock) or other property rather than upon lapse of
restrictions on transferability or the substantial risk of
forfeiture, but if the participant subsequently forfeits such
shares or property he or she would not be entitled to any tax
deduction, including as a capital loss, for the value of the
shares or property on which he or she previously paid tax.
As discussed above, compensation that qualifies
as performance-based compensation is excluded from
the $1 million deductibility cap of Section 162(m),
and therefore remains fully deductible by the company that pays
it. Under the 2002 Plan, options granted with an exercise price
or grant price at least equal to 100% of fair market value of
the underlying shares at the date of grant will be, and Awards
which are conditioned upon achievement of performance goals may
be, intended to qualify as such performance-based
compensation. A number of requirements must be met, however, in
order for particular compensation to so qualify. Accordingly,
there can be no assurance that such compensation under the 2002
Plan will be fully deductible under all circumstances. In
addition, other Awards under the 2002 Plan generally will not so
qualify, so that compensation paid to certain executives in
connection with such Awards may, to the extent it and other
compensation subject to Section 162(m)s deductibility
cap exceed $1 million in a given year, be subject to the
limitation of Section 162(m).
The foregoing provides only a general description
of the application of federal income tax laws to certain types
of Awards under the 2002 Plan. This discussion is intended for
the information of stockholders considering how to vote at the
Annual Meeting and not as tax guidance to participants in the
2002 Plan, as the consequences may vary with the types of awards
made, the identity of the recipients and the method of payment
or settlement. Different tax rules may apply, including in the
case of variations in transactions that are permitted under the
2002 Plan (such as payment of the exercise price of an option by
surrender of previously acquired shares). The summary does not
address the effects of other federal taxes (including possible
golden parachute excise taxes) or taxes imposed
under state, local, or foreign tax laws.
New Plan Benefits
Because the value of the awards to be granted
under the 2002 Plan are based upon the fluctuating market price
of our common stock, we cannot presently determine the benefits
to be received by any particular individual or particular group
of individuals for such awards under the 2002 Plan. The
following table, however, sets forth the benefits (losses) that
would have been received in 2001 by the Named Officers, all
24
executive officers as a group, non-executive
officer directors as a group and non-executive officer employees
as a group, as if the 2002 Plan had been in effect during 2001.
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|
|
|
|
|
|
|
|
|
|
|
|
|
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The 2002 Plan(1)(2)
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Dollar
|
|
Number of
|
Name and Position
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|
Value($)
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|
Shares
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|
|
|
|
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Jack Friedman
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|
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*
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|
|
*
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Stephen G. Berman
|
|
|
*
|
|
|
|
*
|
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Joel Bennett
|
|
|
*
|
|
|
|
*
|
|
Michael Bianco, Jr.
|
|
|
*
|
|
|
|
*
|
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Executive Officer Group
|
|
|
*
|
|
|
|
*
|
|
Non-Executive Officer Director Group (4
Persons)(2)
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|
|
|
|
|
|
|
|
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January 1, 2001
|
|
$
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9.12 per share(3)
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|
|
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30,000
|
|
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July 1, 2001
|
|
$
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16.26 per share(3)
|
|
|
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30,000
|
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Non-Executive Officer Employee Group
|
|
|
*
|
|
|
|
*
|
|
|
|
*
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The 2002 Plan provides for the automatic granting
of options to directors who are not employees of the Company.
Such individuals would receive, subject to stockholder approval
of the 2002 Plan, options to purchase 7,500 shares of common
stock on January 1 and July 1 of each year the 2002
Plan is in effect. Grants of awards under the 2002 Plan to all
other groups, including executive officers and non-executive
officer employees, are discretionary and not determinable as to
amount or dollar value as of the date of this proxy statement.
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(1)
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Subject to stockholder approval of the 2002 Plan.
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(2)
|
The information provided represents the benefits
(losses) that would have been received in 2001, as if the 2002
Plan had been in effect during 2001.
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(3)
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Represents what the exercise prices of the
options would have been upon their grant, which is equal to the
closing price of our common stock on the NASDAQ National Market
on the date the options would have been granted, had the 2002
Plan been in effect during 2001.
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Equity Compensation Plan Information
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|
|
|
|
|
|
|
|
Number of
|
|
|
|
Number of securities
|
|
|
securities to be
|
|
Weighted-
|
|
remaining available
|
|
|
issued upon
|
|
average exercise
|
|
for future issuance
|
|
|
exercise of
|
|
price of
|
|
under equity
|
|
|
outstanding
|
|
outstanding
|
|
compensation plans
|
|
|
options,
|
|
options,
|
|
(excluding securities
|
|
|
warrants and
|
|
warrants and
|
|
reflected in the first
|
|
|
rights
|
|
rights
|
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column of this table)
|
|
|
|
|
|
|
|
Equity compensation plans approved by
our stockholders*
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6,025,000
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$10.39
|
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2,627,926
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Equity compensation plans not approved by
our stockholders
|
|
0
|
|
0
|
|
0
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Total
|
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6,025,000
|
|
$10.39
|
|
2,627,926
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* Includes 2002 Plan
25
BOARD RECOMMENDATION
The Board of Directors believes that approval of
the foregoing four proposals is in the best interests of the
Company and its stockholders and recommends that the
stockholders vote
FOR
these proposals.
STOCKHOLDER PROPOSALS
We must receive a stockholder proposal (and any
supporting statement) to be considered for inclusion in our
proxy statement and proxy for our annual meeting in 2003 at our
principal executive offices on or before May 31, 2003. Any
other proposal that a stockholder intends to present at that
meeting may be deemed untimely unless we have received written
notice of such proposal on or before June 30, 2003.
Stockholders should send proposals and notices addressed to
JAKKS Pacific, Inc., 22619 Pacific Coast Highway, Malibu,
California 90265, Attention: Stephen G. Berman, Secretary.
OTHER MATTERS
We have not received any other proposal or notice
of any stockholders intention to present any proposal at
our annual meeting, and we are not aware of any matter, other
than those discussed above in this Proxy Statement, to be
presented at the meeting. If any other matter is properly
brought before the annual meeting, the persons named in the
attached proxy intend to vote on such matter as directed by our
Board of Directors. With respect to any proposal that is not
included in the proxy statement and proxy for our annual meeting
in 2003, but which is properly presented at the meeting, the
persons designated by us as proxies for that meeting will vote
on any such matter in their discretion if (1) we have
received notice of the proposal on or before June 30, 2003
and, subject to certain exception prescribed by the SECs
rules, we have advised in our proxy statement for that meeting
on the nature of the matter and how we intend to exercise our
discretion to vote on such matter; or (2) we have not
received notice of the proposal on or before June 30, 2003.
Stockholders should send notices of such proposals addressed to
JAKKS Pacific, Inc., 22619 Pacific Coast Highway, Malibu,
California 90265, Attention: Stephen G. Berman, Secretary.
We will bear all costs of solicitation of
proxies. In addition to solicitations by mail, our directors,
officers and regular employees, without additional remuneration,
may solicit proxies by telephone, telegraph, facsimile, mail and
personal interviews, and we reserve the right to compensate
outside agencies for the purpose of soliciting proxies. We will
request brokers, custodians and fiduciaries to forward proxy
soliciting material to the owners of shares held in their names
and we will reimburse them for out-of-pocket expenses incurred
on our behalf.
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS
WILL ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU PLAN TO
ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THE
ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. STOCKHOLDERS WHO
ATTEND THE ANNUAL MEETING MAY VOTE THEIR SHARES PERSONALLY, EVEN
THOUGH THEY HAVE SENT IN THEIR PROXIES.
26
The information in this Joint
Proxy Statement/ Prospectus is not complete and may be changed.
We have filed a registration statement with the Securities and
Exchange Commission and we may not sell these securities until
it becomes effective. This Joint Proxy Statement/ Prospectus is
not an offer to sell, and we are not soliciting offers to buy
these securities in any jurisdiction where the offer or sale is
not permitted.
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APPENDIX 1
SUBJECT TO COMPLETION
AUGUST 20, 2002
JAKKS PACIFIC, INC.
JAKKS Pacific, Inc. (JAKKS) is
furnishing this joint proxy statement/ prospectus in regard to
the issuance of approximately 551,282 shares of its common
stock in connection with the merger of JP/TII Acquisition Corp.
(the Merger Subsidiary), a wholly-owned subsidiary
of JAKKS, with and into Toymax International Inc.
(Toymax). This joint proxy statement/ prospectus is
being delivered to those persons who held Toymax common stock,
$0.01 par value per share, as of August 27, 2002, the
record date for the meeting to which this joint proxy statement/
prospectus relates. Upon consummation of the merger, Toymax will
become the surviving corporation and will be a wholly-owned
subsidiary of JAKKS. Each outstanding share of Toymax common
stock (except for shares held by the Merger Subsidiary, which
will have been cancelled, and shares held by Toymaxs
stockholders who perfect their statutory appraisal rights under
Delaware law), will be exchanged for $3.00 in cash plus 0.0798
share of JAKKS common stock (subject to further adjustments as
more fully described herein).
The merger cannot be completed unless the Toymax
stockholders adopt the merger agreement relating to the merger,
approve the merger and ratify the stock purchase agreement
described in this joint proxy statement/ prospectus. Toymax has
scheduled a special meeting for its stockholders to vote on this
matter. YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to
attend the Toymax special meeting, please take the time to vote
by completing and mailing the enclosed proxy form.
The date, time and place of the special meeting
is:
September 27, 2002
8:30 a.m. local time
The Sherwood Country Club
320 West Stafford Road
Thousand Oaks, California 91361
JAKKS common stock is listed on the Nasdaq
National Market under the symbol JAKK. Toymax common
stock is listed on the Nasdaq National Market under the symbol
TMAX.
This document provides you with detailed
information about the proposed merger, the merger agreement and
the stock purchase agreement. We encourage you to read this
entire document carefully. In addition, you may obtain
information about JAKKS and Toymax from publicly available
documents that each company has filed with the Securities and
Exchange Commission.
See Risk Factors beginning on
page 20 for a description of factors that may affect the
value of JAKKS common stock to be issued in the merger along
with several other risk factors that should be considered by
stockholders with respect to the merger.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved
of these securities or determined if this joint proxy
statement/prospectus is truthful or complete. Any representation
to the contrary is a criminal offense.
Prospectus/joint proxy statement dated as of
August 20, 2002 and first mailed to Toymax stockholders on
or about August 30, 2002.
App-1-1
HOW TO OBTAIN ADDITIONAL INFORMATION
THIS JOINT PROXY STATEMENT/ PROSPECTUS
INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION ABOUT
JAKKS AND TOYMAX THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS
DOCUMENT. THIS INFORMATION IS AVAILABLE TO YOU WITHOUT CHARGE
UPON YOUR WRITTEN OR ORAL REQUEST. YOU CAN OBTAIN FREE COPIES OF
THIS INFORMATION BY REQUESTING THEM IN WRITING OR BY TELEPHONE
FROM THE APPROPRIATE COMPANY AT THE FOLLOWING ADDRESSES AND
TELEPHONE NUMBERS.
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JAKKS Pacific, Inc.
22619 Pacific Coast Highway
Malibu, California 90265
(310) 456-7799
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Toymax International, Inc.
22619 Pacific Coast Highway
Malibu, California 90265
(310) 456-7799
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IN ORDER TO OBTAIN TIMELY DELIVERY OF THE
DOCUMENTS, YOU MUST REQUEST THE INFORMATION BY
September 22, 2002. Please also see Where You Can
Find More Information beginning on page 85 to obtain
further information and learn about other ways that you can get
this information.
IMPORTANT INFORMATION ABOUT THIS JOINT PROXY
STATEMENT/PROSPECTUS
No one has been authorized to give any
information or make any representation about JAKKS or Toymax or
the matters to be voted upon, that differs from, or adds to, the
information:
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contained in this joint proxy
statement/prospectus;
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contained in the documents that are referred to
in this joint proxy statement/prospectus; or
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|
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contained in the documents JAKKS and Toymax file
with the Securities and Exchange Commission and incorporated
herein by reference.
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If anyone does give you different or additional
information, you should not rely on it.
This joint proxy statement/prospectus has been
prepared as of August 30, 2002. There may be changes in the
affairs of JAKKS or Toymax since that date that are not
reflected in this document.
App-1-2
TABLE OF CONTENTS
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Page
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QUESTIONS AND ANSWERS ABOUT THE MERGER
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App-1-6
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SUMMARY
|
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App-1-10
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Purpose of the Special Meeting
|
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App-1-10
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Date, Time and Place of the Special Meeting
|
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App-1-10
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Record Date and Quorum
|
|
|
App-1-10
|
|
|
Vote Required and Revocation of Proxies
|
|
|
App-1-10
|
|
|
Parties to the Merger
|
|
|
App-1-11
|
|
|
Fairness of the Transaction
|
|
|
App-1-11
|
|
|
Purpose of the Transaction
|
|
|
App-1-11
|
|
|
Reasons for the Merger
|
|
|
App-1-11
|
|
|
The Stock Purchase Agreement
|
|
|
App-1-12
|
|
|
The Merger Agreement
|
|
|
App-1-12
|
|
|
Conditions to the Merger
|
|
|
App-1-12
|
|
|
Termination of the Merger Agreement
|
|
|
App-1-13
|
|
|
Tax Consequences of the Merger
|
|
|
App-1-13
|
|
|
Accounting Treatment of the Merger
|
|
|
App-1-13
|
|
|
Regulatory Matters
|
|
|
App-1-13
|
|
|
Appraisal Rights
|
|
|
App-1-13
|
|
|
Comparison of Rights of Holders of JAKKS and
Toymax Capital Stock
|
|
|
App-1-14
|
|
|
Comparative Per Share Market Price Data
|
|
|
App-1-14
|
|
|
Selected Historical and Pro Forma Per Share Data
|
|
|
App-1-15
|
|
|
Selected Historical Consolidated Financial Data
|
|
|
App-1-16
|
|
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
|
|
|
App-1-19
|
|
TRADEMARK AND LICENSING INFORMATION
|
|
|
App-1-19
|
|
RISK FACTORS
|
|
|
App-1-20
|
|
|
Risks Relating to the Merger
|
|
|
App-1-20
|
|
|
Risks Relating to the Operation of JAKKS
|
|
|
App-1-21
|
|
PARTIES TO THE MERGER
|
|
|
App-1-28
|
|
THE SPECIAL STOCKHOLDERS MEETING
|
|
|
App-1-28
|
|
|
Date, Time, Place and Record Date of the Special
Stockholders Meeting
|
|
|
App-1-28
|
|
|
Matters to Be Voted Upon
|
|
|
App-1-28
|
|
|
Recommendation of Toymaxs Board of Directors
|
|
|
App-1-29
|
|
|
Recommendation of the Board of Directors of JAKKS
and the Merger Subsidiary
|
|
|
App-1-29
|
|
|
Voting Information
|
|
|
App-1-30
|
|
|
Solicitation, Revocation and Use of Proxies
|
|
|
App-1-30
|
|
SPECIAL FACTORS
|
|
|
App-1-32
|
|
|
Background and Reasons for the Merger
Toymax
|
|
|
App-1-32
|
|
|
|
History of the Negotiations
|
|
|
App-1-32
|
|
|
|
Toymaxs Reasons for the Merger
|
|
|
App-1-33
|
|
|
|
Fairness of the Merger; Opinions of Financial
Advisor
|
|
|
App-1-34
|
|
App-1-3
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
Procedural and Substantive Fairness of the Merger
|
|
|
App-1-45
|
|
|
Effect of the Transaction
|
|
|
App-1-46
|
|
|
Background and Reasons for the Merger
JAKKS
|
|
|
App-1-46
|
|
|
|
History of the Negotiations
|
|
|
App-1-46
|
|
|
|
JAKKS Reasons for the Merger; Effects of
the Transaction
|
|
|
App-1-47
|
|
|
|
The Stock Purchase Agreement
|
|
|
App-1-48
|
|
|
|
Reconfiguration of the Toymax Board of Directors
|
|
|
App-1-49
|
|
|
Effects of the Merger; Plans for Toymax Following
the Merger
|
|
|
App-1-49
|
|
|
Risk that the Merger Will Not Be Completed
|
|
|
App-1-50
|
|
|
Certain Relationships and Related Transactions
|
|
|
App-1-51
|
|
|
Stock Options
|
|
|
App-1-52
|
|
|
Employment Agreements and Other Material
Agreements
|
|
|
App-1-53
|
|
|
Accounting Treatment of the Merger
|
|
|
App-1-53
|
|
|
Material Federal Income Tax Consequences
|
|
|
App-1-53
|
|
|
|
Tax Consequences of the Receipt of the Merger
Consideration to Holders of Toymax Common Stock
|
|
|
App-1-54
|
|
|
|
Dissenters
|
|
|
App-1-54
|
|
|
|
Tax Consequences of the Merger to Toymax, JAKKS
and the Merger Subsidiary
|
|
|
App-1-54
|
|
|
Regulatory Matters
|
|
|
App-1-54
|
|
|
Dissenters Rights of Appraisal
|
|
|
App-1-54
|
|
|
Listing of JAKKS Common Stock
|
|
|
App-1-57
|
|
THE MERGER AGREEMENT
|
|
|
App-1-58
|
|
|
The Merger
|
|
|
App-1-58
|
|
|
Effective Time of the Merger
|
|
|
App-1-58
|
|
|
Structure; Merger Consideration
|
|
|
App-1-58
|
|
|
Treatment of Options
|
|
|
App-1-59
|
|
|
Payment for Shares; Exchange of Toymax
Certificates
|
|
|
App-1-59
|
|
|
Transfer of Shares
|
|
|
App-1-59
|
|
|
Officers, Directors and Governing Documents
|
|
|
App-1-59
|
|
|
Representations and Warranties
|
|
|
App-1-60
|
|
|
Conduct of Business Pending the Merger
|
|
|
App-1-60
|
|
|
Stockholders Meeting; Recommendation of Board of
Directors
|
|
|
App-1-61
|
|
|
Regulatory and Other Consents and Approvals
|
|
|
App-1-61
|
|
|
Conditions to the Merger
|
|
|
App-1-62
|
|
|
Termination of the Merger Agreement by JAKKS or
Toymax
|
|
|
App-1-62
|
|
|
Amendment and Waiver
|
|
|
App-1-63
|
|
|
No Termination Fee
|
|
|
App-1-63
|
|
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
App-1-64
|
|
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
App-1-67
|
|
BUSINESS OF THE PARTIES TO THE MERGER
|
|
|
App-1-69
|
|
|
Information concerning JAKKS
|
|
|
App-1-69
|
|
|
Information concerning TOYMAX
|
|
|
App-1-79
|
|
App-1-4
|
|
|
|
|
|
|
|
Page
|
|
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF JAKKS
|
|
|
App-1-88
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TOYMAX
|
|
|
App-1-88
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK OF JAKKS
|
|
|
App-1-95
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK OF TOYMAX
|
|
|
App-1-95
|
|
PRICE RANGE OF COMMON STOCK
|
|
|
App-1-97
|
|
COMPARISON OF RIGHTS OF STOCKHOLDERS OF JAKKS AND
TOYMAX
|
|
|
App-1-98
|
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
|
|
|
App-1-101
|
|
|
JAKKS
|
|
|
App-1-101
|
|
|
Toymax
|
|
|
App-1-101
|
|
DIRECTORS AND EXECUTIVE OFFICERS OF JAKKS
|
|
|
App-1-102
|
|
EXECUTIVE COMPENSATION FOR JAKKS
|
|
|
App-1-102
|
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF
JAKKS
|
|
|
App-1-102
|
|
OTHER MATTERS
|
|
|
App-1-102
|
|
LEGAL OPINION
|
|
|
App-1-103
|
|
EXPERTS
|
|
|
App-1-103
|
|
FUTURE STOCKHOLDER PROPOSALS
|
|
|
App-1-103
|
|
WHERE YOU CAN FIND MORE INFORMATION
|
|
|
App-1-104
|
|
INFORMATION INCORPORATED BY REFERENCE
|
|
|
App-1-105
|
|
FINANCIAL STATEMENTS
|
|
|
F-1
|
|
|
|
|
Appendix A
|
|
Agreement of Merger dated as of February 10,
2002, among Toymax International, Inc., JAKKS Pacific, Inc. and
JP/TII Acquisition Corp.
|
|
Appendix B
|
|
Stock Purchase Agreement dated as of
February 10, 2002 among Toymax International, Inc., JAKKS
Pacific, Inc. and the Selling Stockholders named therein
|
|
Appendix C
|
|
Section 262 of the Delaware General
Corporation Law
|
|
Appendix D
|
|
Annual Report on Form 10-K of Toymax, Inc.
for the year ended March 31, 2002
|
|
Appendix E
|
|
Fairness Opinion of Morgan Lewins & Co.
Inc. dated February 10, 2002
|
|
Appendix F
|
|
Fairness Opinion of Morgan Lewins & Co.
Inc. dated July 9, 2002
|
|
Appendix G
|
|
Current Report on Form 8-K of Toymax filed
August 1, 2002
|
|
Appendix H
|
|
Quarterly Report on Form 10-Q of Toymax for
the quarter ended June 30, 2002
|
App-1-5
QUESTIONS AND ANSWERS ABOUT THE
MERGER
The following are some questions that you, as a
stockholder of Toymax, may have and answers to those questions.
These answers may not address all questions that may be
important to you as a stockholder of Toymax. Accordingly, we
urge you to read carefully the remainder of this joint proxy
statement/ prospectus because additional important information
is contained in the remainder of this joint proxy statement/
prospectus and the appendices to this joint proxy statement/
prospectus.
|
|
Q:
|
What am I being asked to vote upon?
|
|
|
A:
|
You are being asked to vote upon three matters:
|
|
|
|
You are being asked to adopt a merger agreement
that provides for JAKKS to acquire all of the remaining
outstanding shares of Toymax common stock (not owned by JAKKS)
in exchange for a combination of cash and JAKKS common stock.
|
|
|
The acquisition of the remaining outstanding
shares of Toymax common stock will be effected by the merger of
a wholly-owned subsidiary of JAKKS into Toymax with Toymax being
the surviving corporation. You are being asked to approve that
merger.
|
|
|
On February 10, 2002, Toymax and four of
Toymaxs principal stockholders entered into a stock
purchase agreement with JAKKS, pursuant to which they agreed to
sell to JAKKS approximately 8.1 million shares of Toymax
common stock, representing approximately, 66.3% of Toymaxs
outstanding common stock. You are being asked to ratify the
stock purchase agreement.
|
|
|
|
If the merger agreement is adopted, the merger is
approved and the stock purchase agreement is ratified, then the
merger will be completed, Toymax will no longer be a
publicly-held corporation and you will no longer own Toymax
common stock.
|
|
|
Q:
|
How much of Toymax does JAKKS currently
own?
|
|
|
A:
|
Based upon its purchase of Toymax common stock
under the stock purchase agreement and open market purchases,
JAKKS beneficially owns approximately 66.8% of Toymaxs
outstanding shares of common stock.
|
Q: Why is the
merger being proposed?
|
|
A:
|
The purpose of Toymax engaging in the
transactions contemplated by the merger agreement is to allow
its stockholders to become part of a larger, more diverse,
operating entity and thereby potentially be part of a company
with improved operating and financial results and a stronger
competitive position. In deciding to undertake the merger,
Toymax considered the following factors, among others:
|
|
|
|
diminished value of Toymaxs common stock
since Toymaxs initial public offering;
|
|
|
uncertainty regarding Toymaxs future growth
prospects;
|
|
|
significant historical losses associated with
Toymaxs acquisition strategy; and
|
|
|
the costs of, and the burdens on management
associated with, being a public company.
|
|
|
Q:
|
What will I receive in the merger?
|
|
|
A:
|
Unless you seek appraisal rights, you will be
entitled to receive $3.00 in cash plus .0798 of a share of JAKKS
common stock in exchange for each share of Toymax common stock
you own at the time of the merger. In the event that the average
closing price of JAKKS common stock for the 10 days prior
to the effective date of the merger is less than $16.9173 per
share (the adjusted closing price), the amount of
JAKKS common stock you receive (in addition to the cash payment
described above) for each share of Toymax common stock will be
determined by dividing $1.35 by the adjusted closing price.
Additionally, each holder of shares of Toymax common stock that
would otherwise be entitled to receive a fractional
|
App-1-6
|
|
|
share of JAKKS common stock by virtue of the
merger will otherwise be paid cash without any interest, equal
to the product of the fractional share that would have been
issued multiplied by $18.797. Further, in the event that the
ten-day average closing price of JAKKS common stock exceeds
$20.6767 per share, JAKKS may elect, in its sole
discretion, to pay you exclusively in cash, consideration of
$4.65 in exchange for each share of Toymax common stock you own
at the time of the merger.
|
|
|
Q:
|
What will happen to my Toymax
options?
|
|
|
A:
|
Pursuant to the merger agreement, upon the
merger, all of the outstanding options to acquire Toymax common
stock that Toymax has granted will be exchanged for
fully-exercisable options to acquire JAKKS common stock (or, in
certain limited circumstances, for cash), in an amount and at an
exercise price determined in accordance with the formula set
forth in the merger agreement. The stock purchase agreement
further provides that the new JAKKS options will remain
exercisable for a period of six months after the effective date
of the merger.
|
|
|
Q:
|
What does the Board of Directors
recommend?
|
|
|
A:
|
On February 10, 2002, Toymaxs prior
board of directors unanimously determined that the consummation
of the merger pursuant to the merger agreement and the execution
of the stock purchase agreement were fair to, and in the best
interests of, Toymaxs public stockholders. The Toymax
board of directors based its decision in part, upon the opinion
of Toymaxs financial advisor, which determined that the
merger was fair to, and in the best interests of, Toymaxs
public stockholders from a financial point of view. By
resolution dated February 10, 2002, the Toymax board of
directors unanimously recommended that you vote FOR adoption of
the merger agreement, the approval of the merger and the
ratification of the stock purchase agreement.
|
|
|
On July 10, 2002 Toymaxs current board
of directors unanimously ratified the February 10, 2002
resolution of Toymaxs prior board of directors that
adopted the merger agreement, approved the merger and ratified
the stock purchase agreement. Toymaxs current board of
directors based its decision in part, upon the July 9, 2002
opinion of Toymaxs financial advisor which maintained its
determination that the merger is fair to, and in the best
interest of, Toymaxs public stockholders from a financial
point of view. By resolution dated July 10, 2002,
Toymaxs board of directors unanimously recommended that
you vote FOR adoption of the merger agreement, the approval of
the merger and the ratification of the stock purchase agreement.
|
|
|
Q:
|
Was advice obtained as to the fairness from a
financial point of view of the merger exchange ratio in the
merger?
|
|
|
A.
|
Yes. Toymaxs board of directors retained
Morgan Lewins & Co. Inc. (Morgan Lewins) as its
independent financial advisor to make a determination as to the
fairness from a financial point of view of the merger
consideration to be paid to the Toymax stockholders. Morgan
Lewins rendered an opinion on each of February 10, 2002 and
July 9, 2002 that the merger exchange ratio is fair, from a
financial point of view, to the public stockholders of Toymax.
The opinions are reproduced in their entirety in
Appendices E and F to this joint proxy statement/
prospectus, respectively, and stockholders of Toymax are urged
to read the opinions carefully and in their entirety for a
description of the assumptions and qualifications made and other
matters considered by Morgan Lewins, in rendering its opinions.
See the section entitled Fairness of the Merger; Opinion
of Financial Advisor later in this joint proxy
statement/prospectus.
|
|
|
Q:
|
What happens if the Board of Directors
receives a better offer for Toymax?
|
|
|
A:
|
The merger agreement provides that Toymaxs
board of directors may withdraw, modify or qualify from making
its recommendation to the stockholders if Toymax receives a
written offer that its board of directors determines in good
faith is superior, from a financial point of view, to the merger
and the board
|
App-1-7
|
|
|
of directors determines in good faith that its
failure to so withdraw, modify or qualify would cause it to
violate its fiduciary duties under applicable law.
|
|
|
Q:
|
Who can vote on the matters presented
hereby?
|
|
|
A:
|
Holders of Toymax common stock at the close of
business on August 27, 2002, the record date relating to
the special stockholders meeting, may vote in person or by proxy
on adopting the merger agreement, approving the merger and
ratifying the stock purchase agreement at the special
stockholders meeting.
|
|
|
Q:
|
What vote is required to approve, adopt and
ratify the matters presented hereby?
|
|
|
A:
|
The matters presented hereby require the approval
of the affirmative vote of a majority of the outstanding voting
shares of Toymax common stock. JAKKS beneficially owns, and as
of the record date owned, approximately 66.8% of the outstanding
shares of Toymax common stock. JAKKS has agreed to vote its
shares of Toymax common stock to adopt the merger agreement,
approve the merger and ratify the stock purchase agreement.
|
|
|
Q:
|
Is the merger subject to the fulfillment of
certain conditions?
|
|
|
A:
|
Yes. Before completion of the merger, certain
conditions must be satisfied, including the approval by
Toymaxs stockholders as described in this joint proxy
statement/prospectus. It is expected, however, that these
conditions will have been met and the merger will be completed
if the stockholders vote to approve, adopt and ratify the
matters presented hereby.
|
|
|
The authorized capital stock of JAKKS is
presently 26,000,000 shares, 25,000,000 of which are shares of
common stock and 1,000,000 of which are shares of preferred
stock. JAKKS has filed a preliminary proxy statement with the
SEC for its 2002 Annual Meeting of Stockholders. One of the
resolutions provided in the preliminary proxy statement that
will be voted upon at that Annual Meeting will be to increase
JAKKS authorized capital stock. If this proposal is
approved, JAKKS will have authorized capital stock of
105,000,000 shares, 100,000,000 of which are shares of JAKKS
common stock and 5,000,000 of which are shares of JAKKS
preferred stock. The approval of this proposal is required for
JAKKS to have a sufficient number of authorized shares available
for issuance to the Toymax stockholders of the approximately
551,282 shares required to consummate the merger.
|
|
|
Q:
|
When do you expect the merger to be
completed?
|
|
|
A:
|
Toymax hopes to complete the merger promptly
following the special stockholders meeting.
|
|
|
Q:
|
Do Toymaxs officers and directors and
JAKKS have interests in the merger that are different from, or
in addition to, your interests?
|
|
|
A:
|
Members of Toymaxs current management and
the current Toymax board of directors have interests in the
transaction that are or may be different from, or in addition
to, your interests as a Toymax stockholder. As of the date
of this joint proxy statement/prospectus, JAKKS controls Toymax
because all of Toymaxs executive officers and six of
Toymaxs directors are also directors and officers of
JAKKS, and owe fiduciary duties to JAKKS and its stockholders.
In addition, each of them own JAKKS common stock and/or options.
The interests of JAKKS are different from those of the Toymax
public stockholders because JAKKS will become the sole
stockholder of Toymax and hold 100% of the outstanding shares of
Toymax common stock and, therefore, will be able to control
Toymaxs future growth. The public stockholders of Toymax
will only be able to indirectly participate in Toymaxs
future growth through their receipt in the merger of JAKKS
common stock.
|
|
|
Q:
|
What do I need to do now?
|
|
|
A:
|
After you have carefully reviewed this joint
proxy statement/ prospectus, please mark your vote on your proxy
card and sign and return the election form and proxy card in the
enclosed return envelope as soon
|
App-1-8
|
|
|
as possible. This will ensure that your vote will
be recorded and your shares will be represented at the special
stockholders meeting. If you sign and send in the proxy card and
do not indicate how you want to vote, your proxy will be voted
FOR the matters presented hereby.
|
|
|
Q:
|
If my shares are held in street
name by my broker, will my broker vote my shares for
me?
|
|
|
A:
|
Your broker will vote your shares only if you
provide written instructions as to how to vote your shares. You
should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares.
|
|
|
Q:
|
What rights do I have to dissent from the
merger?
|
|
|
A:
|
If you wish, you may dissent from the merger and
seek an appraisal of the fair value of your shares, but only if
you comply with all requirements of Delaware law summarized on
pages [36] through [39] and set forth in Appendix C of
this joint proxy statement/prospectus. Based on the
determination of the Delaware Court of Chancery, the appraised
fair value of your shares of Toymax common stock may be more
than, less than or equal to the value of the merger
consideration to be issued in the merger. The appraised fair
value of your shares of Toymax common stock would be paid to you
only if the merger is completed and an appraisal proceeding
follows.
|
|
|
Q:
|
Can I change my vote after I have mailed my
signed proxy card?
|
|
|
A:
|
Yes. You can change your vote at any time before
the vote is taken at the special stockholders meeting. If you
are the record holder of your shares, you can change your vote
in one of the following three ways:
|
|
|
|
You can send a written notice dated later than
your proxy card stating that you would like to revoke your
current proxy.
|
|
|
You can complete and submit a new proxy card
dated later than your original proxy card.
|
|
|
You can attend the special stockholders meeting
and vote in person.
|
|
|
|
If you choose either of the first two methods,
you must submit your notice of revocation or your new proxy card
to the Secretary of Toymax at 22619 Pacific Coast Highway,
Malibu, California 90265. Toymax must receive the notice or new
proxy card before the vote is taken at the special stockholders
meeting.
|
|
|
Simply attending the special stockholders meeting
and not voting, however, will not revoke your proxy. If you hold
your shares in street name and have instructed a
broker to vote your shares, you must follow the directions
received from your broker as to how to change your vote.
|
|
|
Q:
|
Should I send in my stock certificates
now?
|
|
|
A:
|
No. If the merger is completed, Toymax will
promptly send you written instructions for sending in your stock
certificates in exchange for the merger consideration to be
issued in exchange for your shares.
|
|
|
Q.
|
Who can help answer my questions?
|
|
|
A.
|
If you have more questions about the merger you
should contact:
Joel Bennett
Toymax International, Inc.
22619 Pacific Coast Highway
Malibu, California 90265
(310) 456-7799
|
App-1-9
SUMMARY
This summary highlights selected information
contained elsewhere in this joint proxy statement/ prospectus
and may not contain all of the information that is important to
you. You should carefully read this entire joint proxy
statement/ prospectus, including the attached appendices, and
the other documents to which we refer you to in this joint proxy
statement/ prospectus. See Where You Can Find More
Information on page 99.
Purpose of the Special Meeting (see
pages 23 and 24)
At the special meeting, the stockholders of
Toymax will consider and vote on proposals to adopt the merger
agreement, approve the merger and ratify the stock purchase
agreement. The stock purchase agreement provided for JAKKS to
obtain a controlling interest in Toymax. The merger agreement
provides that a wholly-owned subsidiary of JAKKS would merge
with and into Toymax. Toymax would be the surviving corporation
in the merger and would then be a wholly-owned subsidiary of
JAKKS. Each outstanding share of common stock of Toymax, other
than shares held by Toymax in treasury, shares held by JAKKS and
shares held by stockholders who perfect their statutory
appraisal rights under Delaware law, would be converted
automatically into the right to receive $3.00 in cash plus
0.0798 shares of JAKKS common stock.
In the event that the average closing price of
JAKKS common stock for the 10 days prior to the effective
date of the merger is less than $16.9173 per share (the
adjusted closing price), the amount of JAKKS common
stock you receive (in addition to the cash payment described
above) for each share of Toymax common stock will be determined
by dividing $1.35 by the adjusted closing price. Additionally,
each holder of shares of Toymax common stock that would
otherwise be entitled to receive a fractional share of JAKKS
common stock by virtue of the merger will otherwise be paid cash
without any interest, equal to the product of the fractional
share that would have been issued multiplied by $18.797.
Further, in the event that the average closing price of JAKKS
common stock for the 10 days prior to the effective date of
the merger exceeds $20.6767 per share, JAKKS may elect, in
its sole discretion, to pay you exclusively in cash
consideration of $4.65 for each share of Toymax common stock you
own at the time of the merger.
Date, Time and Place of the Special Meeting
(see page 23)
The special meeting will be held on
September 27, 2002, at 8:30 a.m., local time, at the
Sherwood Country Club, 320 West Stafford Road, Thousand
Oaks, California 91361.
Record Date and Quorum (see
page 23)
You can vote at the special meeting if you owned
Toymax common stock at the close of business on August 27,
2002, which is the record date for the special meeting. You are
entitled to one vote for each share of Toymax common stock held
by you on the record date. At the close of business on the
record date, there were 12,316,586 shares of Toymax common
stock outstanding. Holders of a majority of the outstanding
shares of Toymax common stock entitled to vote at the special
meeting must be present in person or represented by proxy to
constitute a quorum for the transaction of business. Shares
which abstain or do not vote for any reason with respect to one
or more of the matters presented for stockholder approval will
be counted as present for purposes of determining whether a
quorum is present.
Vote Required and Revocation of Proxies (see
page 25)
The merger agreement requires the approval of
Toymaxs stockholders of the matters presented hereby. The
holders of a majority of the outstanding voting shares of Toymax
common stock entitled to vote at the special meeting will be
asked to approve, adopt and ratify these matters.
JAKKS, which owns approximately 66.8% of the
outstanding shares of Toymax common stock, owns enough shares of
Toymax common stock to approve the merger, adopt the merger
agreement and ratify the
App-1-10
stock purchase agreement without the vote of any
other holders of Toymax common stock. JAKKS has indicated that
it will vote its shares of Toymax common stock in favor of these
matters.
No shares of capital stock of Toymax are owned by
any director or officer of JAKKS.
You may revoke your proxy at any time before your
shares are voted at the special meeting by sending a written
notice to the secretary of Toymax so that it is received prior
to the special meeting, by executing and returning a later-dated
proxy, or by voting in person at the special meeting.
If you send in your proxy card without
instructions on how to vote, your shares will be voted
FOR the matters presented hereby.
No other matters are expected to be voted on at
the special meeting. If any other matters do properly come
before the special meeting, the people named on the accompanying
proxy card will vote the shares represented by all properly
executed proxies in their discretion. However, shares
represented by proxies that have been voted AGAINST
the matters presented hereby will not be used to vote
FOR adjournment of the special meeting to allow more
time to solicit additional votes FOR adoption of the
matters presented hereby.
Parties to the Merger (see
page 23)
JAKKS Pacific,
Inc.
JAKKS develops,
designs, produces and markets childrens toys and related
products which are sold in the United States and throughout the
world.
Toymax International,
Inc.
Toymax is a consumer
leisure products company that creates, designs and markets
innovative and technologically advanced toys as well as other
leisure products which are sold in the United States and
throughout the world.
JP/TII Acquisition
Corp.
JP/TII Acquisition
Corp., a newly-formed Delaware corporation, was formed solely
for the purpose of completing the merger and is sometimes
referred to as the merger subsidiary. It is a wholly-owned
subsidiary of JAKKS.
Fairness of the Transaction (see
pages 29-40)
On February 10, 2002, Toymaxs Board of
Directors received a written fairness opinion from the
investment banking firm of Morgan Lewins & Co. Inc.
(formerly Morgan Lewis Githen & Ahn, Inc.). Morgan
Lewins fairness opinion stated that the merger
consideration to be paid to Toymaxs unaffiliated
stockholders was fair, from a financial point of view, as of
February 10, 2002. On July 9, 2002, the Boards of
Directors of Toymax, JAKKS and the Merger Subsidiary received a
written fairness opinion from Morgan Lewins. The July 9,
2002 fairness opinion stated that the merger consideration to be
paid to the unaffiliated stockholders of Toymax was fair, from a
financial point of view, as of July 9, 2002. Each of
Toymax, JAKKS and the Merger Subsidiary believe that the merger
is procedurally and substantively fair to Toymaxs public
stockholders. See page 39 of this joint proxy
statement/prospectus for a complete discussion of the procedural
and substantive fairness of the merger.
Purpose of the Transaction
The purpose of the transaction is to make Toymax
a wholly-owned subsidiary of JAKKS.
Reasons for the Merger (see pages 28 and
42 through 43)
Toymax decided to be acquired by JAKKS and
proceed with the merger for the following reasons:
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diminished value of Toymaxs common stock
since Toymaxs initial public offering;
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uncertainty regarding Toymaxs future growth
prospects;
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significant historical losses associated with our
acquisition strategy; and
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the costs of, and the burdens on management
associated with, being a public company.
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App-1-11
JAKKS decided to acquire Toymax and proceed with
the merger for the following reasons:
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Integrate Toymaxs operations into JAKKS,
thereby reducing Toymaxs operating costs;
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Acquire new and diversified product lines; and
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Combine operational synergies of both companies
to efficiently market and distribute toys and related products.
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The Stock Purchase Agreement (see
page 43)
Between December 2, 2001 and
February 4, 2002, JAKKS purchased 132,754 shares of
Toymax common stock on the open market for an aggregate purchase
price of $226,985.69. On March 11, 2002, JAKKS purchased
8,100,065 shares of Toymax common stock from four of
Toymaxs principal stockholders, pursuant to the stock
purchase agreement. As a result of these transactions, as of
May 17, 2002, JAKKS owns 8,232,819 shares of Toymax
common stock, representing approximately 66.8% of the
outstanding shares of Toymax common stock.
The Merger Agreement (see pages 53
through 58)
The merger agreement, including the significant
conditions to the closing of the merger, is described on
pages 52 through 57 and the entire text of the merger
agreement is attached as Appendix A to this joint proxy
statement/ prospectus. Toymax encourages you to read carefully
the entire merger agreement, as it is the legal document that
governs the merger.
Conditions to the Merger (see
page 57)
We will complete the merger only if a number of
conditions are satisfied or waived, including, but not limited
to, the following:
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the adoption of the merger agreement, the
approval of the merger and the ratification of the stock
purchase agreement by stockholders who hold a majority of the
outstanding voting shares of Toymax common stock;
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the fairness opinion received by Toymax on
February 10, 2002 stating that the merger is fair, from a
financial point of view, has not been withdrawn, rescinded or
adversely updated or modified; and
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the consummation of the merger is not restrained,
enjoined or prohibited by any order, judgment or decree of a
court of competent jurisdiction or any governmental entity,
including any pending action seeking damages.
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If all of these conditions are not satisfied or
waived, the merger will not be completed.
The authorized capital stock of JAKKS is
presently 26,000,000 shares, 25,000,000 of which are shares of
common stock and 1,000,000 of which are shares of preferred
stock. JAKKS has filed a preliminary proxy statement with the
SEC for its 2002 Annual Meeting of Stockholders. One of the
resolutions provided in the preliminary proxy statement that
will be voted upon at that Annual Meeting will be to increase
JAKKS authorized capital stock. If this proposal is
approved, JAKKS will have authorized capital stock of
105,000,000 shares, 100,000,000 of which are shares of JAKKS
common stock and 5,000,000 of which are shares of JAKKS
preferred stock. The approval of this proposal is required for
JAKKS to have a sufficient number of authorized shares available
for issuance to the Toymax stockholders of the approximately
551,282 shares required to consummate the merger.
App-1-12
Termination of the Merger Agreement (see
pages 57 and 58)
Toymax and JAKKS may agree to terminate the
merger agreement at any time before the effective time of the
merger. In addition, the merger agreement may be terminated:
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by Toymax, if Toymaxs fairness opinion has
been withdrawn, rescinded or adversely updated or modified;
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by either party, if there shall be any material
breach of any representation or warranty by the other party or
the other fails to perform any material covenant or obligation
(subject to such other partys ability to cure such breach);
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by either party, if the condition requiring that
the merger agreement and the merger be approved and adopted by
the affirmative vote of the holders of a majority of the
outstanding shares of Toymax common stock is not met; or
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by either party, if the merger has not been
consummated on or before September 30, 2002.
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No termination fee is payable by any party in the
event of a termination performed in accordance with these
conditions.
Tax Consequences of the Merger (see
pages 48 and 49)
The merger will generally be treated as a taxable
exchange by the Toymax stockholders of their shares of Toymax
common stock for the merger consideration. Each Toymax
stockholder will realize taxable gain, or loss, to the extent
that the fair market value of the cash and JAKKS common stock
received by the Toymax stockholder in the merger exceeds,
or is less than, the stockholders basis in the
Toymax common stock exchanged in the merger. You should
consult your own tax advisor for a full understanding of the
mergers tax consequences. Additionally, no gain or loss
will generally be recognized by Toymax, JAKKS or the Merger
Subsidiary as a result of the merger.
Accounting Treatment of the Merger (see
page 48)
The merger will be accounted for as the
acquisition of a minority interest by JAKKS, using the purchase
method of accounting.
Regulatory Matters (see
page 49)
There are no federal or state regulatory
approvals required that have not already been obtained in order
for us to complete the merger, except for:
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the requirements of the Delaware General
Corporation Law relating to stockholder approval for and
completion of the merger; and
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the requirements of the federal and state
securities laws.
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Appraisal Rights (see pages 49
through 52 and Appendix C)
Toymax is a Delaware corporation. Under the
Delaware General Corporation Law, if you do not vote in favor of
the merger and you follow all of the procedures for demanding
appraisal rights described in Appendix C and summarized on
Pages 49 through 52, you will be entitled to dissent
and elect to have an appraisal of the fair value of
your shares of common stock by the Delaware Court of Chancery.
The value determined by the Delaware Court of Chancery may be
more than, the same as or less than the per share payment (in
cash and JAKKS common stock) you would have received for each of
your shares in the merger if you had not exercised your
appraisal rights. Generally, to exercise appraisal rights, among
other things:
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You must NOT vote in favor of the merger
agreement and the merger; and
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You must make a written demand for appraisal in
compliance with Delaware law BEFORE the vote on the merger
agreement and the merger.
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App-1-13
Merely voting against the merger agreement and
the merger will not preserve your appraisal rights under
Delaware law. Appendix C to this joint proxy
statement/prospectus contains the Delaware statute relating to
your appraisal rights.
If you want to exercise your appraisal
rights, you are urged to read and follow carefully the
procedures on pages 49 through 52 and in
Appendix C. Failure to follow all of the steps required
under Delaware law will result in the loss of your appraisal
rights.
Comparison of Rights of Holders of JAKKS and
Toymax Capital Stock (see pages 93
through 96)
There are differences between the rights you have
as a holder of Toymax common stock and the rights you will
have as a holder of JAKKS common stock. For a description of
these differences, please read the section called
Comparison of Rights of Stockholders of JAKKS and
Toymax.
Comparative Per Share Market Price Data (see
page 89)
The JAKKS common stock is traded on the NASDAQ
National Market under the symbol JAKK. The Toymax
common stock is traded on the NASDAQ National Market under the
symbol TMAX.
The following table presents the closing prices
per share of the Toymax common stock and the JAKKS common
stock on the following dates:
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February 8, 2002, the last trading day
before the public announcement that JAKKS and Toymax had entered
into the merger agreement; and
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[ ,]
2002, the last trading day before the date of this joint proxy
statement/ prospectus.
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The chart also presents, in the line entitled
Equivalent Per Share Price, the price per share of
Toymax common stock you would have received if the merger
consideration had been set under the terms of the merger
agreement on each of February 8, 2002, the trading day
prior to the public announcement of the merger,
and , 2002 the day
prior to mailing this joint proxy statement/prospectus.
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February 8,
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[ ,]
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Stock Date
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2002
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2002
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Toymax
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$
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3.05
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$
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JAKKS
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18.80
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Equivalent Per Share Price
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4.50
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You should obtain current stock price quotations
for the Toymax common stock and the JAKKS common stock.
App-1-14
SELECTED HISTORICAL AND PRO FORMA PER SHARE
DATA
The following table presents historical per share
data for JAKKS and pro forma per share data after giving effect
to the proposed merger. The historical financial information is
derived from the financial statements of JAKKS, included in or
incorporated by reference into this joint proxy statement/
prospectus. The pro forma per share data is derived from the
selected historical financial data and gives effect to the
issuance of shares of JAKKS common stock in the merger. The pro
forma per share data has been calculated based on the historical
financial data of JAKKS adjusted for the acquisition of the
minority interest related to Toymax upon the issuance of JAKKS
common stock.
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Fiscal Year
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Fiscal Year
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Six Months Ended
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Ended
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Ended
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June 30,
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December 31,
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March 31,
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2002
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2001
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2002
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JAKKS
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Toymax
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JAKKS
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Toymax
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(Unaudited)
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(In thousands, except per share amounts)
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Per Share Data (Historical):
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Book Value per Common Share
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$
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13.96
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$
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1.22
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$
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12.98
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$
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1.19
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Income (Loss) per Common Share from Continuing
Operations:
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Basic
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$
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0.50
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$
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(0.57
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)
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$
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1.55
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$
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(1.69
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)
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Diluted
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$
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0.47
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$
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(0.57
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$
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1.45
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$
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(1.69
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)
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Pro Forma Per Share Amounts:
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Book Value per Common Share
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$
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14.28
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$
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1.14
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$
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13.17
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$
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1.05
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Income (Loss) per Common Share from Continuing
Operations:
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Basic
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$
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1.18
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$
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1.14
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Diluted
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$
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1.12
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$
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1.07
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App-1-15
SELECTED HISTORICAL CONSOLIDATED FINANCIAL
DATA
Selected Historical Financial Data of
JAKKS
The following selected historical consolidated
financial data have been derived from the JAKKS audited
and unaudited consolidated financial statements, which are
incorporated by reference in this joint proxy statement. You
should read the financial data set forth below in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations of JAKKS and
JAKKS consolidated financial statements and notes thereto
incorporated by reference in this joint proxy statement/
prospectus.
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Six Months Ended
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Year Ended December 31,
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June 30,
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1997
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1998
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1999
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2000
|
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2001
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2001
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2002
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(In thousands, except per share data)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
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Net sales
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$
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41,945
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$
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85,253
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$
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183,685
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$
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252,288
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$
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284,309
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$
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130,103
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$
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138,887
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Cost of sales
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25,875
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52,000
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|
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107,602
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149,881
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164,222
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73,026
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|
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77,226
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Gross profit
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16,070
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|
|
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33,253
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|
|
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76,083
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|
|
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102,407
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|
|
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120,087
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|
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57,077
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|
|
|
61,661
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Income from operations
|
|
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4,175
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|
|
|
9,246
|
|
|
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24,929
|
|
|
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20,503
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|
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29,298
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(1)
|
|
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16,146
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|
|
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11,332
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(2)
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(Profit)/loss from joint venture
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|
|
|
|
|
|
|
|
|
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(3,605
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)
|
|
|
(15,906
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)
|
|
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(6,675)
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|
|
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(881
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)
|
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(1,969)
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Net income
|
|
$
|
2,786
|
|
|
$
|
6,375
|
|
|
$
|
21,970
|
|
|
$
|
28,637
|
|
|
$
|
28,233
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(1)
|
|
$
|
12,894
|
|
|
$
|
9,988
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(2)
|
|
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|
|
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Diluted earnings per share
|
|
$
|
0.35
|
|
|
$
|
0.59
|
|
|
$
|
1.39
|
|
|
$
|
1.41
|
|
|
$
|
1.45
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(1)
|
|
$
|
0.67
|
|
|
$
|
0.47
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(2)
|
|
|
|
|
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Weighted average shares and equivalents
outstanding diluted
|
|
|
9,103
|
|
|
|
11,403
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|
|
|
15,840
|
|
|
|
20,281
|
|
|
|
19,410
|
|
|
|
19,114
|
|
|
|
21,081
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|
|
|
|
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|
|
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As of December 31,
|
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As of
|
|
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|
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June 30,
|
|
|
1997
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
(In thousands)
|
CONSOLIDATED BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,536
|
|
|
$
|
12,452
|
|
|
$
|
57,546
|
|
|
$
|
29,275
|
|
|
$
|
25,036
|
|
|
$
|
81,277
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
39,334
|
|
|
|
13,618
|
|
|
|
37,119
|
|
|
|
5,813
|
|
Working capital
|
|
|
3,368
|
|
|
|
13,736
|
|
|
|
113,170
|
|
|
|
86,897
|
|
|
|
116,487
|
|
|
|
153,129
|
|
Total assets
|
|
|
43,605
|
|
|
|
58,736
|
|
|
|
232,878
|
|
|
|
248,722
|
|
|
|
284,041
|
|
|
|
406,285
|
|
Total long-term debt
|
|
|
6,000
|
|
|
|
5,940
|
|
|
|
9
|
|
|
|
1,000
|
|
|
|
73
|
|
|
|
77
|
|
Total stockholders equity
|
|
|
25,959
|
|
|
|
37,754
|
|
|
|
187,501
|
|
|
|
204,530
|
|
|
|
244,403
|
|
|
|
329,272
|
|
|
|
(1)
|
Results reflect a one-time charge of
$5.0 million relating to the bankruptcy filing of Kmart.
|
|
(2)
|
Results reflect one-time restructuring charges of
$6.6 million relating to our acquisitions of Kidz Biz and
Toymax and a $1.5 million charge for the recall of one of
our products.
|
App-1-16
Selected Historical Consolidated Financial
Data of Toymax
The following selected historical consolidated
financial data have been derived from the audited consolidated
financial statements of Toymax. The selected historical
consolidated financial data should be read in conjunction with
Toymaxs consolidated financial statements and the notes
thereto, and Managements Discussion and Analysis of
Financial Condition and Results of Operations of Toymax
included elsewhere in this joint proxy statement/prospectus and
incorporated herein by reference.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Fiscal Years Ended March 31,
|
|
June 30,
|
|
|
|
|
|
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
99,367
|
|
|
$
|
106,495
|
|
|
$
|
109,865
|
|
|
$
|
115,151
|
|
|
$
|
94,852
|
|
|
$
|
20,008
|
|
|
$
|
18,748
|
|
Cost of goods sold
|
|
|
55,907
|
|
|
|
65,524
|
|
|
|
75,517
|
|
|
|
72,770
|
|
|
|
71,424
|
|
|
|
14,653
|
|
|
|
13,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
43,460
|
|
|
|
40,971
|
|
|
|
34,348
|
|
|
|
42,381
|
|
|
|
23,428
|
|
|
|
5,355
|
|
|
|
5,574
|
|
Selling and administrative expenses
|
|
|
27,268
|
|
|
|
29,740
|
|
|
|
38,220
|
|
|
|
37,719
|
|
|
|
49,760
|
(1)
|
|
|
6,405
|
|
|
|
5,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
16,192
|
|
|
|
11,231
|
|
|
|
(3,872
|
)
|
|
|
4,662
|
|
|
|
(26,332
|
)
|
|
|
(1,050
|
)
|
|
|
318
|
|
Income (loss) of joint venture
|
|
|
|
|
|
|
|
|
|
|
290
|
|
|
|
(2,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(507
|
)
|
|
|
(196
|
)
|
|
|
144
|
|
|
|
(102
|
)
|
|
|
(615
|
)
|
|
|
(4
|
)
|
|
|
75
|
|
Interest income (expense), net
|
|
|
(212
|
)
|
|
|
985
|
|
|
|
(536
|
)
|
|
|
(885
|
)
|
|
|
(978
|
)
|
|
|
(420
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
15,473
|
|
|
|
12,020
|
|
|
|
(3,974
|
)
|
|
|
(1,115
|
)
|
|
|
(27,925
|
)
|
|
|
(1,474
|
)
|
|
|
381
|
|
Income tax expense (benefit)
|
|
|
4,133
|
|
|
|
3,275
|
|
|
|
(2,207
|
)
|
|
|
(1,087
|
)
|
|
|
(7,498
|
)
|
|
|
(490
|
)
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
11,340
|
|
|
|
8,745
|
|
|
|
(1,767
|
)
|
|
|
29
|
|
|
|
(20,427
|
)
|
|
|
(984
|
)
|
|
|
278
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(129
|
)
|
|
|
(134
|
)
|
|
|
(9,776
|
)
|
|
|
(3,435
|
)
|
|
|
(747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,340
|
|
|
$
|
8,616
|
|
|
$
|
(1,901
|
)
|
|
$
|
(9,747
|
)
|
|
$
|
(23,861
|
)
|
|
$
|
(1,731
|
)
|
|
$
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
1.28
|
|
|
$
|
0.82
|
|
|
$
|
(0.17
|
)
|
|
$
|
|
|
|
$
|
(1.69
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.02
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.86
|
)
|
|
|
(0.28
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
1.28
|
|
|
$
|
0.81
|
|
|
|
(0.18
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(1.97
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.02
|
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic average common shares outstanding
|
|
|
8,847,781
|
|
|
|
10,605,000
|
|
|
|
10,596,677
|
|
|
|
11,280,804
|
|
|
|
12,116,843
|
|
|
|
12,131,441
|
|
|
|
12,131,441
|
|
Diluted average common shares outstanding
|
|
|
8,847,781
|
|
|
|
10,605,000
|
|
|
|
10,596,677
|
|
|
|
11,280,864
|
|
|
|
12,116,843
|
|
|
|
12,131,441
|
|
|
|
12,384,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
As of
|
|
|
|
|
June 30,
|
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
|
|
$
|
31,755
|
|
|
$
|
30,417
|
|
|
$
|
6,163
|
|
|
$
|
7,693
|
|
|
$
|
(14,153
|
)
|
|
$
|
(13,559
|
)
|
Total assets
|
|
|
53,831
|
|
|
|
62,584
|
|
|
|
89,073
|
|
|
|
69,088
|
|
|
|
55,806
|
|
|
|
61,610
|
|
Short-term debt (including current portion of
long term debt)
|
|
|
30
|
|
|
|
37
|
|
|
|
14,666
|
|
|
|
10,000
|
|
|
|
15
|
|
|
|
13
|
|
Long-term obligations
|
|
|
47
|
|
|
|
32
|
|
|
|
50
|
|
|
|
1,212
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
34,703
|
|
|
|
43,319
|
|
|
|
41,301
|
|
|
|
35,594
|
|
|
|
14,636
|
|
|
|
14,905
|
|
|
|
(1)
|
Included in selling and administrative expenses
for year ended March 31, 2002 is $15.6 million of
restructuring charges as described in footnote 2 in the
Toymax consolidated financial statements.
|
App-1-17
Toymax Supplemental Financial
Information
The following supplemental financial information
has been derived from unaudited quarterly consolidated financial
statements of Toymax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2001
|
|
Fiscal Year Ended March 31, 2002
|
|
|
|
|
|
|
|
|
Three months
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Ended
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Year End
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Year End
|
|
June 30, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
Net sales
|
|
$
|
21,688
|
|
|
$
|
44,348
|
|
|
$
|
34,601
|
|
|
$
|
14,514
|
|
|
$
|
115,151
|
|
|
$
|
20,008
|
|
|
$
|
39,104
|
|
|
$
|
25,613
|
|
|
$
|
10,127
|
|
|
$
|
94,852
|
|
|
$
|
18,748
|
|
Gross profit
|
|
|
9,427
|
|
|
|
16,507
|
|
|
|
15,874
|
|
|
|
4,917
|
|
|
|
46,725
|
|
|
|
6,512
|
|
|
|
15,230
|
|
|
|
6,223
|
|
|
|
(4,537
|
)
|
|
|
23,428
|
|
|
|
5,574
|
|
Net income (loss) from continuing operations
|
|
|
1,021
|
|
|
|
7,414
|
|
|
|
(36
|
)
|
|
|
(7,283
|
)
|
|
|
1,116
|
|
|
|
|
|
|
|
(984
|
)
|
|
|
5,282
|
|
|
|
(5,294
|
)
|
|
|
(19,430
|
)
|
|
|
381
|
|
Net income (loss) from discontinued operations
|
|
|
597
|
|
|
|
4,869
|
|
|
|
(155
|
)
|
|
|
(5,283
|
)
|
|
|
28
|
|
|
|
(747
|
)
|
|
|
(444
|
)
|
|
|
(1,110
|
)
|
|
|
(1,634
|
)
|
|
|
(3,935
|
)
|
|
|
|
|
Gain on disposal of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
Net income
|
|
|
(846
|
)
|
|
|
(1,314
|
)
|
|
|
(1,444
|
)
|
|
|
(6,172
|
)
|
|
|
(9,776
|
)
|
|
|
(1,732
|
)
|
|
|
4,838
|
|
|
|
(5,904
|
)
|
|
|
(21,064
|
)
|
|
|
(23,862
|
)
|
|
|
278
|
|
Basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued operations
|
|
$
|
0.06
|
|
|
$
|
0.46
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.44
|
|
|
$
|
(0.44
|
)
|
|
$
|
(1.61
|
)
|
|
$
|
(1.69
|
)
|
|
$
|
0.02
|
|
|
Discontinued operations
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
Total
|
|
$
|
(0.02
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.95
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.40
|
|
|
$
|
(0.49
|
)
|
|
$
|
(1.74
|
)
|
|
$
|
(1.97
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
App-1-18
DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS
This joint proxy statement/prospectus includes or
incorporates by reference forward-looking
statements. For example, statements included in this joint
proxy statement/prospectus regarding JAKKS or
Toymaxs financial position, business strategy and other
plans and objectives for future operations, and assumptions and
predictions about future product demand, supply, manufacturing,
costs, marketing and pricing factors are all forward-looking
statements. When words like intend,
anticipate, believe,
estimate, plan or expect,
are used these are forward-looking statements. We believe that
the assumptions and expectations reflected in such
forward-looking statements are reasonable, based on information
available to us on the date hereof, but we cannot assure you
that these assumptions and expectations will prove to have been
correct or that we will take any action that we may presently be
planning. We have disclosed certain important factors that could
cause our actual results to differ materially from our current
expectations under Risk Factors below and elsewhere
in this joint proxy statement/prospectus. You should understand
that forward-looking statements made in connection with this
joint proxy statement/prospectus are necessarily qualified by
these factors. We are not undertaking to publicly update or
revise any forward-looking statement if we obtain information or
upon the occurrence of future events or otherwise.
TRADEMARK AND LICENSING INFORMATION
JAKKS owns or has rights to various trademarks
and brand or trade names that we use in conjunction with the
sale of our products. These include
World Wrestling
Entertainment
®
, Nickelodeon
®
,
Rugrats
® and
Hello Kitty
®
,
among
others. We also refer in this joint proxy statement/ prospectus
to other trademarks or brand or trade names that are owned or
licensed by other companies.
App-1-19
RISK FACTORS
If you hold your shares of Toymax common stock
until the merger and receive JAKKS common stock, you will be
investing in JAKKS. The following important factors, among
others, in some cases have affected, and in the future could
affect, JAKKS actual results and could cause its actual
results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, JAKKS. In
addition to the other information contained in or incorporated
by reference into this joint proxy statement/prospectus, you
should carefully consider the following risk factors in deciding
whether to vote for the matters presented hereby and,
accordingly to elect to receive JAKKS common stock.
Risks Relating to the Merger
JAKKS may not
achieve the expected benefits of the merger.
The merger is intended to achieve certain
specific benefits, such as decreasing the combined operating
expenses of JAKKS and Toymax, improving JAKKS cash flow
and increasing its net profit. The likelihood of achieving those
benefits represents the subjective judgment of JAKKS
management and board of directors. Some of those benefits may
not be achieved or, if achieved, may not be achieved in the time
frame in which they are expected. Whether JAKKS will actually
realize these anticipated benefits may depend on future events
and circumstances beyond the control of JAKKS.
It is possible that JAKKS will not realize some
or all of the benefits of the merger that formed the basis for
the recommendation of Toymaxs board of directors that you
vote in favor of the matters presented hereby.
JAKKS may not
have a sufficient number of shares authorized for issuance to
effectuate the merger.
The authorized capital stock of JAKKS is
presently 26,000,000 shares, 25,000,000 of which are shares of
common stock and 1,000,000 of which are shares of preferred
stock. JAKKS has filed a preliminary proxy statement with the
SEC for its 2002 Annual Meeting of Stockholders. One of the
resolutions provided in the preliminary proxy statement that
will be voted upon at that Annual Meeting will be to increase
JAKKS authorized capital stock. If this proposal is
approved, JAKKS will have authorized capital stock of
105,000,000 shares, 100,000,000 of which are shares of JAKKS
common stock and 5,000,000 of which are shares of JAKKS
preferred stock. The approval of this proposal is required for
JAKKS to have a sufficient number of authorized shares available
for issuance to the Toymax stockholders of the approximately
551,282 shares required to consummate the merger.
The value of
the JAKKS common stock to be received in the merger may
fluctuate.
The merger consideration may be subject to
certain adjustments. For example, in the event the average
closing price of JAKKS common stock for the 10 days
prior to the effective date of the merger is greater than
$20.6767 per share, JAKKS may elect, in its sole discretion, to
pay the entire merger consideration in cash, at a price of $4.50
per share of Toymax common stock. If the average closing price
of JAKKS common stock for the 10 days prior to the
effective date of the merger is less than $16.9173 per share
(the adjusted closing price), the amount of JAKKS
common stock you receive will be determined by dividing $1.35 by
the adjusted closing price. Other than the foregoing, the merger
agreement does not contain any provisions for adjustment of the
merger consideration and does not provide any right of
termination by either party if there are fluctuations in the
market price of either Toymax or JAKKS stock before the
completion of the merger. Because no adjustment will be made to
the merger consideration (except in the limited circumstances
described above), Toymax stockholders that receive JAKKS common
stock will not be able to determine the value of the merger
consideration until the closing, which will depend upon the
market price of JAKKS and Toymax common stock as of the
completion of the merger. Variations in the trading prices of
Toymax and JAKKS stock may result from:
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changes in the business or results of operations
of Toymax or JAKKS;
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the prospects for the post-merger operations of
JAKKS;
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App-1-20
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the timing of the merger;
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general stock market and economic conditions; and
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other factors beyond the control of Toymax or
JAKKS, including those described elsewhere in this Risk
Factors section.
|
Before voting, stockholders are urged to obtain
current market quotations for both JAKKS and Toymax common stock.
Risks Relating to the Operation of
JAKKS
JAKKS is
Subject to Changing Consumer Preferences and New Product
Introductions
JAKKS business and operating results depend
largely upon the appeal of its products. JAKKS continued
success in the toy industry will depend on its ability to
redesign, restyle and extend its existing core products and
product lines as consumer preferences evolve, and to develop,
introduce and gain customer acceptance of new products and
product lines. Several trends in recent years have presented
challenges for the toy industry, including:
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the phenomenon of children outgrowing toys at
younger ages, particularly in favor of interactive and high
technology products;
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increasing use of technology;
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shorter life cycles for individual products; and
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higher consumer expectations for product quality,
functionality and value.
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JAKKS cannot assure you that:
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its current products will continue to be popular
with consumers;
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the product lines or products that it introduces
will achieve any significant degree of market acceptance; or
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the life cycles of its products will be
sufficient to permit JAKKS to recover licensing, design,
manufacturing, marketing and other costs associated with those
products.
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JAKKS is
Subject to Changing Popularity of Its Products
The success of many of JAKKS
character-related and theme-related products depends on the
popularity of characters in movies, television programs, live
wrestling exhibitions and other media. JAKKS cannot assure you
that:
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media associated with our character-related and
theme-related product lines will be released at the times JAKKS
expects or will be successful;
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the success of media associated with JAKKS
existing character-related and theme-related product lines will
result in substantial promotional value to its products;
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JAKKS will be successful in renewing licenses
upon expiration on terms that is favorable to JAKKS; or
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JAKKS will be successful in obtaining licenses to
produce new character-related and theme-related products in the
future.
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There Are
Risks Associated with JAKKS License
Agreements
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JAKKS Current Licenses Require JAKKS to
Pay Minimum Royalties
|
Sales of products under trademarks or trade or
brand names licensed from others account for substantially all
of JAKKS net sales. Product licenses allow JAKKS to
capitalize on characters, designs,
App-1-21
concepts and inventions owned by others or
developed by toy inventors and designers. JAKKS license
agreements generally require JAKKS to make specified minimum
royalty payments, even if JAKKS fail to sell a sufficient number
of units to cover these amounts. In addition, under certain of
our license agreements, if JAKKS fails to achieve certain
prescribed sales targets, JAKKS may be unable to retain or renew
these licenses.
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Some of JAKKS Licenses Are Restricted as
to Use
|
Under some of JAKKS license agreements,
including WWE and Nickelodeon, the licensors have the right to
review and approve JAKKS use of their licensed products,
designs or materials before we may make any sales. If a licensor
refuses to permit JAKKS use of any licensed property in
the way JAKKS proposes, or if their review process is delayed,
JAKKS development or sale of new products could be impeded.
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New Licenses Are Difficult and Expensive to
Obtain
|
JAKKS continued success will depend
substantially on its ability to obtain additional licenses.
Intensive competition exists for desirable licenses in the toy
industry. JAKKS cannot assure you that it will be able to secure
or renew significant licenses on terms acceptable to JAKKS. In
addition, as JAKKS adds licenses, the need to fund additional
royalty advances and guaranteed minimum royalty payments may
strain its cash resources.
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A Limited Number of Licensors Account for a
Large Portion of JAKKS Net Sales
|
JAKKS derives a significant portion of its net
sales from a limited number of licensors. If one or more of
these licensors were to terminate or fail to renew JAKKS
license or not grant JAKKS new licenses, JAKKS business,
financial condition and results of operations could be adversely
affected.
The Toy
Industry Is Highly Competitive
The toy industry is highly competitive. Globally,
certain of JAKKS competitors have financial and strategic
advantages over JAKKS, including:
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greater financial resources;
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larger sales, marketing and product development
departments;
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stronger name recognition;
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longer operating histories; and
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greater economies of scale.
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In addition, the toy industry has no significant
barriers to entry. Competition is based primarily on the ability
to design and develop new toys, to procure licenses for popular
characters and trademarks and to successfully market products.
Many of JAKKS competitors offer similar products or
alternatives to its products. JAKKS competitors have
obtained and are likely to continue to obtain licenses that
overlap JAKKS licenses with respect to products,
geographic areas and markets. JAKKS cannot assure you that it
will be able to obtain adequate shelf space in retail stores to
support its existing products or to expand its products and
product lines or that JAKKS will be able to continue to compete
effectively against current and future competitors.
JAKKS
Video Game Joint Venture with THQ Is Subject to Numerous Risks
and Uncertainties
In addition to the risks relating to JAKKS and
the toy industry, JAKKS joint venture with THQ faces the
following risks:
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The joint venture depends entirely on a single
license, which gives the venture exclusive worldwide rights to
produce and market video games based on World Wrestling
Entertainment characters and themes. The popularity of
professional wrestling, in general, and the World Wrestling
Entertainment, in particular, is subject to changing consumer
tastes and demands. The relative popularity of
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App-1-22
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professional wrestling has fluctuated
significantly in recent years. A decline in the popularity of
the World Wrestling Entertainment could adversely affect the
joint ventures and JAKKS business, financial
condition and results of operations.
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The joint venture relies on hardware
manufacturers and THQs non-exclusive licenses with them
for the right to publish titles for their platforms and for the
manufacture of the joint ventures titles. If THQs
manufacturing licenses were to terminate and the joint venture
could not otherwise obtain these licenses from other
manufacturers, the joint venture would be unable to publish
additional titles for these manufacturers platforms, which
would materially adversely affect the joint ventures and
JAKKS business, financial condition and results of
operations.
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The software industry has experienced periods of
significant growth in consumer interest, followed by periods in
which growth has substantially declined. The joint
ventures sales of software titles depend, among other
factors, on the popularity and unit sales of platforms
generally, as well as on the relative popularity and unit sales
of various platforms. The relative popularity of certain
platforms has fluctuated significantly in recent years. An
unexpected decline in the popularity of a particular platform
can be expected to have a material adverse affect on consumer
demand for titles released or to be released by the joint
venture for such platforms.
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The joint ventures failure to timely
develop titles for new platforms that achieve significant market
acceptance, to maintain net sales that are commensurate with
product development costs or to maintain compatibility between
its personal computer CD-ROM titles and the related hardware and
operating systems would adversely affect the joint
ventures and JAKKS business, financial condition and
results of operations.
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In general, THQ controls the day-to-day
operations of the joint venture and all of its product
development and production operations. Accordingly, the joint
venture relies exclusively on THQ to manage these operations
effectively. THQs failure to effectively manage the joint
venture would have a material adverse effect on the joint
ventures and JAKKS business and results of
operations.
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JAKKS May Not
Be Able To Sustain or Manage its Rapid Growth
JAKKS has experienced rapid growth in net sales,
operating income and net income over the last five years. As a
result, comparing JAKKS period-to-period operating results
may not be meaningful and results of operations from prior
periods may not be indicative of future results. JAKKS cannot
assure you that it will continue to experience growth in, or
maintain our present level of, net sales or net income.
JAKKS growth strategy calls for it to
continuously develop and diversify its toy business by acquiring
other companies, entering into additional license agreements,
refining JAKKS product lines and expanding into
international markets, which will place additional demands on
JAKKS management, operational capacity and financial resources
and systems. The increased demand on JAKKS management may
necessitate our recruitment and retention of qualified
management personnel. JAKKS cannot assure you that it will be
able to recruit and retain qualified personnel or expand and
manage JAKKS operations effectively and profitably. To
effectively manage future growth, JAKKS must continue to expand
its operational, financial and management information systems
and to train, motivate and manage its work force. There can be
no assurance that JAKKS operational, financial and
management information systems will be adequate to support
JAKKS future operations. Failure to expand JAKKS
operational, financial and management information systems or to
train, motivate or manage employees could have a material
adverse effect on its business, financial condition and results
of operations.
In addition, implementation of JAKKS growth
strategy is subject to risks beyond our control, including
competition, market acceptance of new products, changes in
economic conditions, JAKKS ability to obtain or renew
licenses on commercially reasonable terms and its ability to
finance increased levels of accounts receivable and inventory
necessary to support its sales growth, if any. Accordingly,
JAKKS cannot assure you that its growth strategy will continue
to be implemented successfully.
App-1-23
JAKKS Needs
To Be Able To Acquire and Integrate Companies and New Product
Lines Successfully
JAKKS growth strategy depends in part upon
its ability to acquire companies and new product lines. Future
acquisitions will succeed only if JAKKS can effectively assess
characteristics of potential target companies and product lines,
such as:
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attractiveness of products;
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suitability of distribution channels;
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management ability;
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financial condition and results of operations; and
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the degree to which acquired operations can be
integrated with our operations.
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JAKKS cannot assure you that it can
identify attractive acquisition candidates or negotiate
acceptable acquisition terms, and its failure to do so may
adversely affect our results of operations and JAKKS
ability to sustain growth. JAKKS acquisition strategy
involves a number of risks, each of which could adversely affect
its operating results, including:
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difficulties in integrating acquired businesses
or product lines, assimilating new facilities and personnel and
harmonizing diverse business strategies and methods of operation;
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diversion of management attention from operation
of JAKKS existing business;
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loss of key personnel from acquired companies; and
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failure of an acquired business to achieve
targeted financial results.
|
A Limited
Number of Customers Account for a Large Portion of JAKKS
Net Sales
JAKKS five largest customers accounted for
54.7% of its net sales in 2001. Except for outstanding purchase
orders for specific products, JAKKS does not have written
contracts with or commitments from any of its customers. A
substantial reduction in or termination of orders from any of
JAKKS largest customers could adversely affect its
business, financial condition and results of operations. In
addition, pressure by large customers seeking price reductions,
financial incentives, changes in other terms of sale or for
JAKKS to bear the risks and the cost of carrying inventory also
could adversely affect JAKKS business, financial condition
and results of operations. If one or more of JAKKS major
customers were to experience difficulties in fulfilling their
obligations to JAKKS, cease doing business with JAKKS,
significantly reduce the amount of their purchases from us or
return substantial amounts of JAKKS products, it could
have a material adverse effect on JAKKS business,
financial condition and results of operations. In addition, the
bankruptcy or other lack of success of one or more of
JAKKS significant retailers could negatively impact
JAKKS revenues and bad debt expense. Kmart, one of
JAKKS major customers, filed for Chapter 11
bankruptcy protection on January 22, 2002. JAKKS recorded a
$5.0 million charge in its 2001 financial statements to
allow for any losses that may result from Kmarts
bankruptcy filing. However, it is not possible to predict the
ultimate impact of Kmarts bankruptcy filing at this time.
JAKKS Depends
on Its Key Personnel
JAKKS success is largely dependent upon the
experience and continued services of Jack Friedman, its Chairman
and Chief Executive Officer, Stephen G. Berman, its President
and Chief Operating Officer, and Michael Bianco, Jr., its
Executive Vice President and Chief Merchandising Officer. JAKKS
cannot assure you that it would be able to find an appropriate
replacement for Mr. Friedman, Mr. Berman or
Mr. Bianco if the need should arise, and any loss or
interruption of Mr. Friedmans, Mr. Bermans
or Mr. Biancos services could adversely affect
JAKKS business, financial condition and results of
operations. JAKKS maintains, and is the beneficiary of, a
$4.0 million key-man life insurance policy on
Mr. Friedman, which may be insufficient to fund the cost of
employing his successor.
App-1-24
JAKKS Depends
on Third-Party Manufacturers
JAKKS depends on approximately 20 third-party
manufacturers who develop, provide and use the tools, dies and
molds that JAKKS owns to manufacture its products. However,
JAKKS has limited control over the manufacturing processes
themselves. As a result, any difficulties encountered by the
third-party manufacturers that result in product defects,
production delays, cost overruns or the inability to fulfill
orders on a timely basis could adversely affect our business,
financial condition and results of operations.
JAKKS does not have long-term contracts with its
third-party manufacturers. Although JAKKS believes it could
secure other third-party manufacturers to produce its products,
JAKKS operations would be adversely affected if it lost
its relationship with any of its current suppliers or if its
current suppliers operations or sea or air transportation
with our overseas manufacturers were disrupted or terminated
even for a relatively short period of time. JAKKS tools,
dies and molds are located at the facilities of its third-party
manufacturers.
Although JAKKS does not purchase the raw
materials used to manufacture its products, it is potentially
subject to variations in the prices JAKKS pays its third-party
manufacturers for products, depending on what they pay for their
raw materials.
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JAKKS Has Substantial Sales and
Manufacturing Operations Outside of the United States Subjecting
It to Risks Common to International Operations.
|
JAKKS sells products and operates facilities in
numerous countries outside the United States. For the fiscal
year ended December 31, 2001, sales to JAKKS
international customers comprised approximately 14.1% of its net
sales. JAKKS expects its sales to international customers to
account for a greater portion of our revenues in future fiscal
periods. Additionally, JAKKS utilizes third-party manufacturers
located principally in The Peoples Republic of China.
These sales and manufacturing operations are subject to the
risks normally associated with international operations,
including:
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currency conversion risks and currency
fluctuations;
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limitations, including taxes, on the repatriation
of earnings;
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political instability, civil unrest and economic
instability;
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greater difficulty enforcing intellectual
property rights and weaker laws protecting such rights;
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complications in complying with laws in varying
jurisdictions and changes in governmental policies;
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greater difficulty and expenses associated with
recovering from natural disasters;
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transportation delays and interruptions; and
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the potential imposition of tariffs.
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JAKKS reliance on external sources of
manufacturing can be shifted, over a period of time, to
alternative sources of supply, should such changes be necessary.
However, if JAKKS were prevented from obtaining products or
components for a material portion of our product line due to
political, labor or other factors beyond its control, its
operations would be disrupted while alternative sources of
products were secured. Also, the imposition of trade sanctions
by the United States against a class of products imported by
JAKKS from, or the loss of normal trade relations
status by China, could significantly increase JAKKS cost
of products imported from that nation. Because of the importance
of our international sales and international sourcing of
manufacturing to JAKKS business, its financial condition
and results of operations could be significantly and adversely
affected if any of the risks described above were to occur.
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JAKKS Business Is Subject to
Extensive Government Regulation and to Potential Product
Liability Claims
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JAKKS business is subject to various laws,
including the Federal Hazardous Substances Act, the Consumer
Product Safety Act, the Flammable Fabrics Act and the rules and
regulations promulgated under
App-1-25
these acts. These statutes are administered by
the Consumer Product Safety Commission (CPSC), which has the
authority to remove from the market products that are found to
be defective and present a substantial hazard or risk of serious
injury or death. The CPSC can require a manufacturer to recall,
repair or replace these products under certain circumstances.
JAKKS cannot assure you that defects in its products will not be
alleged or found. Any such allegations or findings could result
in:
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product liability claims;
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loss of sales;
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diversion of resources;
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damage to our reputation;
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increased warranty costs; and
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removal of our products from the market.
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Any of these results may adversely affect
JAKKS business, financial condition and results of
operations. There can be no assurance that JAKKS product
liability insurance will be sufficient to avoid or limit
JAKKS loss in the event of an adverse outcome of any
product liability claim.
JAKKS Depends
on Its Proprietary Rights
JAKKS relies on trademark, copyright and trade
secret protection, nondisclosure agreements and licensing
arrangements to establish, protect and enforce its proprietary
rights in its products. The laws of certain foreign countries
may not protect intellectual property rights to the same extent
or in the same manner as the laws of the United States. JAKKS
cannot assure you that JAKKS or its licensors will be able to
successfully safeguard and maintain JAKKS proprietary
rights. Further, certain parties have commenced legal
proceedings or made claims against JAKKS based on our alleged
patent infringement, misappropriation of trade secrets or other
violations of their intellectual property rights. JAKKS cannot
assure you that other parties will not assert intellectual
property claims against it in the future. These claims could
divert JAKKS attention from operating its business or
result in unanticipated legal and other costs, which could
adversely affect JAKKS business, financial condition and
results of operations.
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Market Conditions and Other Third-Party
Conduct Could Negatively Impact JAKKS Margins and
Implementation of Other Business Initiatives.
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Economic conditions, such as rising fuel prices
and decreased consumer confidence, may adversely impact
JAKKS margins. In addition, general economic conditions
were significantly and negatively affected by the
September 11
th
terrorist attacks and could be
similarly affected by any future attacks. Such a weakened
economic and business climate, as well as consumer uncertainty
created by such a climate, could adversely affect JAKKS
sales and profitability. Other conditions, such as the
unavailability of electronics components, may impede JAKKS
ability to manufacture, source and ship new and continuing
products on a timely basis. Significant and sustained increases
in the price of oil could adversely impact the cost of the raw
materials used in the manufacture of JAKKS products, such
as plastic.
The Market
Price of JAKKS Common Stock May Be Volatile
Market prices of the securities of toy companies
are often volatile. The market price of our common stock may be
affected by many factors, including:
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fluctuations in our financial results;
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the actions of our customers and competitors,
including new product line announcements and introductions;
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new regulations affecting foreign manufacturing;
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App-1-26
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other factors affecting the toy industry in
general; and
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sales of JAKKS common stock into the public
market.
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In addition, the stock market periodically has
experienced significant price and volume fluctuations, which may
have been unrelated to the operating performance of particular
companies.
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JAKKS Ability to Issue Blank Check
Preferred Stock and JAKKS Obligation to Make Severance
Payments Could Prevent or Delay Takeovers
|
JAKKS certificate of incorporation
authorizes the issuance of blank check preferred stock (that is,
preferred stock that our board of directors can create and issue
without prior stockholder approval) with rights senior to those
of its common stock. In addition, JAKKS employment
agreements with certain of its senior officers require JAKKS,
under certain conditions, to make substantial severance payments
to them if they resign after a change of control. These
provisions could delay or impede a merger, tender offer or other
transaction resulting in a change in control of JAKKS, even if
such a transaction would have significant benefits to its
stockholders. As a result, these provisions could limit the
price that certain investors might be willing to pay in the
future for shares of JAKKS common stock.
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JAKKS has not paid dividends on its common
stock and does not expect to in the foreseeable
future.
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JAKKS has not paid dividends on its common stock
since its inception and does not expect to in the foreseeable
future, so JAKKS stockholders will not be able to receive
a return on their investments without selling their shares.
JAKKS presently anticipates that all earnings, if any, will be
retained for development of its business and for future
acquisitions. Any future dividends will be subject to the
discretion of JAKKS board of directors and will depend on,
among other things, future earnings, JAKKS operating and
financial condition, JAKKS capital requirements and
general business conditions.
The market price of JAKKS common stock
could be adversely affected by sales of substantial amounts of
common stock in the public market or the perception that such
sales could occur.
As of August 20, 2002, JAKKS had
23,585,149 shares of common stock outstanding. The market
price of JAKKS common stock could be adversely affected by
the issuance of shares of common stock pursuant to the terms of
the merger.
App-1-27
PARTIES TO THE MERGER
JAKKS Pacific, Inc.
JAKKS develops, designs, produces and markets
childrens toys and related products which are sold in the United
States and throughout the world. JAKKS principal offices
are located at 22619 Pacific Coast Highway, Malibu,
California 90265 and the telephone number is (310) 456-7799.
JAKKS Annual Report on Form 10-K for
the fiscal year ended December 31, 2001, as amended, and
its Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2002, as amended, and June 30, 2002, are
incorporated by reference into this joint proxy
statement/prospectus.
Toymax International, Inc.
Toymax is a consumer leisure products company
that creates, designs and markets innovative and technologically
advanced toys as well as other leisure products which are sold
in the United States and throughout the world. Toymaxs
principal offices are located at 22619 Pacific Coast
Highway, Malibu, California 90265 and the telephone number is
(310) 456-7799.
Toymaxs Annual Report on Form 10-K for
the fiscal year ended March 31, 2002 and its consolidated
financial statements for the three year period ended
March 31, 2002 and Toymaxs Report on Form 10-Q
for the quarter ended June 30, 2002 accompany this joint
proxy statement/prospectus.
JP/TII Acquisition Corp.
The merger subsidiary was formed in February 2002
solely for the purposes of engaging in the merger. The merger
subsidiary is a wholly-owned subsidiary of JAKKS. The merger
subsidiary has not carried on any activities to date other than
those incident to its formation and the negotiation and
execution of the merger agreement. The merger subsidiarys
principal offices are located at 22619 Pacific Coast
Highway, Malibu, California 90265 and the telephone number is
(310) 456-7799.
THE SPECIAL STOCKHOLDERS MEETING
Date, Time, Place and Record Date of the
Special Stockholders Meeting
The special stockholders meeting will be held on
Friday, September 27, 2002, 8:30 a.m., local time, at
the Sherwood Country Club, 320 West Stafford Road, Thousand
Oaks, California 91361. The accompanying proxy is being
solicited by Toymaxs Board of Directors and is to be voted
at the special stockholders meeting or any adjournment(s) or
postponement(s) thereof. The holders of record of Toymaxs
common stock as of the close of business on August 27, 2002
are entitled to receive notice of, and to vote at, the special
stockholders meeting. On the record date, there were
12,316,586 shares of Toymax common stock entitled to vote.
No other voting securities of Toymax are outstanding.
Matters to Be Voted Upon
At the special stockholders meeting, you will be
asked to consider and vote upon three matters:
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You are being asked to adopt a merger agreement
that provides for JAKKS to acquire all of the remaining
outstanding shares of Toymax common stock (not owned by JAKKS)
in exchange for a combination of cash and JAKKS common stock.
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The acquisition of the remaining outstanding
shares of Toymax common stock will be effected by the merger of
a wholly-owned subsidiary of JAKKS into Toymax with Toymax being
the surviving corporation. You are being asked to approve that
merger.
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On February 10, 2002, Toymax and four of
Toymaxs principal stockholders entered into a stock
purchase agreement with JAKKS, pursuant to which they agreed to
sell to JAKKS approximately
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App-1-28
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8.1 million shares of Toymax common stock,
representing approximately, 66.3% of Toymaxs outstanding
common stock. You are being asked to ratify the stock purchase
agreement.
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If the merger agreement is adopted, the merger
approved and subsequently completed and the stock purchase
agreement ratified, Toymax will no longer be a publicly-held
corporation and you will no longer own Toymax common stock. In
the merger, unless you seek appraisal rights or except as
described in the next paragraph, each issued and outstanding
share of Toymax common stock held by you will be canceled and
converted into the right to receive $3.00 in cash plus .0798
shares of JAKKS common stock.
In the event the average closing price of JAKKS
common stock for the 10 days prior to the effective date of
the merger is less than $16.9173 per share (the adjusted
closing price), the amount of JAKKS common stock you
receive (in addition to the cash payment described above) for
each share of Toymax common stock will be determined by dividing
$1.35 by the adjusted closing price. Additionally, each holder
of shares of Toymax common stock that would otherwise be
entitled to receive a fractional share of JAKKS common stock by
virtue of the merger will otherwise be paid cash without any
interest, equal to the product of the fractional share that
would have been issued multiplied by $18.797. Further, in the
event that the average closing price of JAKKS common stock for
the 10 days prior to the effective date of the merger
exceeds $20.6767 per share, JAKKS may elect, in its sole
discretion, to pay you exclusively in cash consideration of
$4.65 for each share of Toymax common stock you own at the time
of the merger.
Following the merger, JAKKS will hold directly
100% of the outstanding shares of stock in the surviving
corporation. Treasury shares and shares of Toymax common stock
owned by JAKKS or the merger subsidiary will be canceled. Shares
held by stockholders who perfect their dissenters rights
will be subject to appraisal in accordance with Delaware law.
Recommendation of Toymaxs Board of
Directors
On February 10, 2002, Toymaxs prior
board of directors unanimously approved the merger agreement,
the merger and the stock purchase agreement. The Toymax board of
directors believed the merger agreement and the transactions
contemplated by the merger agreement were advisable and in the
best interests of the stockholders of Toymax. The Toymax board
of directors based its decision, in part, upon the opinion of
its independent financial advisor, Morgan Lewins & Co. Inc.
(formerly known as Morgan, Lewis, Githen & Ahn, Inc.),
which stated that the merger agreement is fair, from a financial
point of view, to Toymaxs public stockholders. By
resolution dated February 10, 2002, Toymaxs board of
directors unanimously recommended the Toymax common stockholders
vote FOR adoption of the merger agreement, approval
of the merger and ratification of the stock purchase agreement.
On July 9, 2002, Toymaxs current board
of directors unanimously approved the merger agreement and the
merger. The Toymax board of directors believed that the merger
agreement and the transactions contemplated by the merger
agreement were advisable and in the best interests of the
unaffiliated stockholders of Toymax. The Toymax board of
directors based its decision, in part, upon Morgan Lewins
July 9, 2002 opinion, which stated that the merger
agreement is fair, from a financial point of view, to
Toymaxs unaffiliated stockholders. By resolution dated
July 9, 2002, Toymaxs current board of directors
unanimously recommended that Toymaxs common stockholders
vote FOR adoption of the merger agreement and
approval of the merger.
For a more detailed discussion of the specific
factors the Toymax board considered in making these
recommendations, see Background and Reasons for the
Merger Toymax, pages 26 to 38.
Recommendation of the Board of Directors of
JAKKS and the Merger Subsidiary
On July 9, 2002 the board of directors of
both JAKKS and the Merger Subsidiary received the July 9,
2002 fairness opinion of Morgan Lewins. The board of directors
of both JAKKS and the Merger Subsidiary believe that the merger
consideration is fair, from a financial point of view, to the
unaffiliated stockholders of Toymax. The board of directors of
both JAKKS and the Merger Subsidiary based their respective
decisions, in part, upon Morgan Lewins July 9
fairness opinion.
App-1-29
Voting Information
Each outstanding share of Toymax common stock is
entitled to one vote. The three matters being voted upon must
each be approved by holders of a majority of the outstanding
shares of Toymax common stock entitled to vote at the special
meeting. JAKKS, which owns approximately 66.8% of the
outstanding Toymax common stock, owns enough shares of Toymax
common stock to satisfy this vote requirement without the vote
of any other holders of Toymax common stock. JAKKS has indicated
that it will vote its shares of Toymax common stock in favor of
the three matters being voted upon.
The presence, in person or by proxy, of the
holders of a majority of the outstanding shares of Toymaxs
common stock entitled to vote at the special stockholders
meeting is necessary to constitute a quorum for the transaction
of business at the special stockholders meeting. Abstentions are
counted for purposes of determining whether a quorum exists at
the special stockholders meeting.
Brokers who hold shares in street name for
customers have the authority to vote on routine
proposals when they have not received instructions from
beneficial owners. However, absent specific instructions from
the beneficial owner of the shares, brokers are not allowed to
exercise their voting discretion with respect to the approval
and adoption of non-routine matters such as the three matters
being voted upon. Abstentions and properly executed broker
non-votes will be treated as shares that are present and
entitled to vote at the special stockholders meeting for
purposes of determining whether a quorum exists and will have
the same effect as a vote against approval of such matters.
Solicitation, Revocation and Use of
Proxies
Toymax will pay the costs of all mailing and
filing fees incurred in connection with this joint proxy
statement/prospectus. Some of Toymaxs directors, officers
and employees may solicit proxies by telephone, facsimile and
personal contact, without separate compensation for those
activities. Copies of solicitation materials will be furnished
to fiduciaries, custodians and brokerage houses for forwarding
to beneficial owners of common stock, and these persons will be
reimbursed for their reasonable out-of-pocket expenses.
The grant of a proxy on the enclosed form does
not preclude you from attending the special stockholders meeting
and voting in person. You may revoke your proxy at any time
before it is voted at the special stockholders meeting. If you
are a record holder, you may revoke your proxy by:
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delivering to the Secretary of Toymax, before the
vote is taken at the special stockholders meeting, a written
notice of revocation bearing a later date than the proxy;
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duly executing a later dated proxy relating to
the same shares of common stock and delivering it to the
Secretary of Toymax before the vote is taken at the special
stockholders meeting; or
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attending the special stockholders meeting and
voting in person.
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Attendance at the special stockholders meeting
will not in and of itself constitute a revocation of a proxy.
Any written notice of revocation or subsequent proxy should be
sent to the Secretary of Toymax at 22619 Pacific Coast
Highway, Malibu, California 90265, or hand delivered to the
Secretary of Toymax before the vote is taken at the special
stockholders meeting. All valid proxies will be voted at the
special stockholders meeting in accordance with the instructions
given. If no instructions are given, the shares represented by
the proxy will be voted at the special stockholders meeting for
adoption of the merger agreement, approval of the merger and
ratification of the stock purchase agreement. If you hold your
shares in street name and have instructed a broker
to vote your shares, you must follow the directions received
from your broker as to how to change your vote.
App-1-30
Stockholders who do not vote in favor of adoption
of the merger agreement, approval of the merger and ratification
of the stock purchase agreement, and who otherwise comply with
the applicable statutory procedures of the Delaware General
Corporation law summarized elsewhere in this proxy statement,
will be entitled to seek appraisal of the value of their common
stock under Section 262 of the Delaware General Corporation
law. See The Merger Dissenters Rights of
Appraisal.
Please do not send in your stock certificates
at this time. Once the merger is completed, Toymax will send you
instructions regarding the procedures for exchanging your
existing stock certificates for the merger
consideration.
App-1-31
SPECIAL FACTORS
This section of the joint proxy statement/
prospectus describes the proposed merger, reasons for the
proposed merger and the fairness of the proposed merger to
Toymaxs public stockholders. While Toymax and JAKKS
believe that this description covers the material terms of the
merger, this summary may not contain all of the information that
is important to you. You should read carefully this entire joint
proxy statement/ prospectus and the documents we incorporate by
reference for a more complete understanding of the merger. In
addition, certain important business and financial information
are incorporated about each of JAKKS and Toymax into this joint
proxy statement/ prospectus by reference. You may obtain the
information incorporated by reference into this joint proxy
statement/ prospectus without charge by following the
instructions in the section entitled How to Obtain
Additional Information on the inside front cover of this
joint proxy statement/prospectus and in the section entitled
Where You Can Find More Information that begins on
page 99.
Background and Reasons for the
Merger Toymax
History of the Negotiations
On July 17, 2001, Jack Friedman, JAKKS
Chairman and Chief Executive Officer, and Murray L. Skala,
a member of the firm of Feder, Kaszovitz, Isaacson, Weber,
Skala, Bass & Rhine LLP, outside counsel to JAKKS, and
a director of JAKKS, had a conference with Joel Handel, a
director of Toymax and a member of the firm of Brown, Raysman
Millstein Felder & Steiner LLP (then Baer
Marks & Upham LLP), counsel to Toymax, regarding
JAKKS interest in acquiring Toymax. On November 5,
2001, Steve Lebensfeld, Toymaxs Chief Executive Officer,
and Mr. Friedman met to discuss the possible acquisition by
JAKKS of Toymax. In early December 2001, Mr. Skala and
Mr. Handel discussed the possibility of the acquisition of
Toymax by JAKKS. On December 12, 2001, a meeting was held
at Mr. Skalas office with Mr. Handel and
Mr. Dan Almagor, also a director of Toymax and a partner in
the investment banking firm Datex Consulting Group, which firm
was later retained to provide investment banking services to
Toymax, to discuss this possible transaction. A general outline
of preliminary terms for the transaction was discussed and a
memorandum with those terms, subject to numerous conditions, was
prepared. On January 10, 2002, non-disclosure agreements
were signed by each of the parties and the preparation of
documents and due diligence was commenced.
On December 31, 2001, the Toymax board of
directors was notified of the possibility of a transaction with
JAKKS. At a meeting of the Toymax board of directors held on
January 28, 2002, a special committee, consisting of Oren
Asher and Eric Inspektor, was formed for the purpose of
reviewing the terms of the proposed transaction with JAKKS and
providing a recommendation to the full board of directors. After
interviewing several firms, the special committee retained the
investment banking firm of Morgan Lewins & Co. Inc.
(formerly Morgan Lewis Githens & Ahn Inc. (Morgan
Lewins)) to review the transaction with the purpose of
providing a recommendation and a fairness opinion. On
January 29-30, 2002, JAKKS performed a due diligence review
of Toymax at the offices of Brown Raysman Millstein
Felder & Steiner, LLP. Present at that time were Joel
Bennet, JAKKS Executive Vice President and Chief Financial
Officer, Jason Bitsky of the law firm of Feder, Kaszovitz,
Isaacson, Weber, Skala, Bass & Rhine LLP, Michael
Sabatino, Toymaxs Chief Financial Officer, and Betty Tse,
assistant to Farra Chan, an employee of David Chu (who at that
time was the majority stockholder and Chairman of Toymax).
Others present at that time were Mr. Almagor and
Mr. Handel. On February 7, 2002, representatives of
Morgan Lewins met with the special committee and reviewed in
great detail their opinion and analysis concerning the
transaction. On the afternoon of February 7, 2002, the
entire board of directors of Toymax met with representatives of
Morgan Lewins. The information that Morgan Lewins presented to
both the special committee and the entire board of directors is
identical to the information set forth on pages 28-35 of
this joint proxy statement/ prospectus. Morgan Lewins
representatives reviewed the entire transaction for the board of
directors and recommended that the transaction was fair, from a
financial point of view, to Toymaxs stockholders. The
special committee recommended to the full board at that time
that Toymax proceed with the transaction. The full Toymax board,
by resolution dated February 10, 2002, unanimously approved
the transaction. The stock purchase agreement (providing for the
sale to JAKKS by the principal stockholders of Toymax of their
approximately
App-1-32
8.1 million shares of Toymax) and the
agreement of merger, along with other significant documents,
were executed on Saturday evening, February 9, 2002, and
dated as of February 10, 2002.
Toymaxs Reasons for the Merger
The Toymax board of directors, in reaching its
unanimous recommendation, considered a number of factors, both
positive and negative, including the following:
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Toymaxs ability to sustain the continuation
of its business and products and to avoid the need for a
potential restructure or reorganization of its business. During
the fiscal years ended March 31, 2000 and 2001, and during
the year that was to end March 31, 2002, Toymax suffered
significant operating losses. Prior to this period when losses
were sustained, Toymax had sufficient capital to maintain its
operations and had planned to continue its growth. However, both
the slow down in the economy and losses incurred in an
unsuccessful attempt to develop certain electronic and musical
products produced significant reduction in available capital.
Toymax did not believe it had sufficient capital as a result of
such losses and accordingly was considering a substantial
downsizing of its business in order to survive and return to
profitability. The price for Toymaxs common stock when
negotiations commenced with JAKKS was between $1 and $2 per
share. At one point during the year 2001, Toymaxs stock
price had dropped below $1.00 per share and Toymax was concerned
about being delisted from NASDAQ. The offer of $4.50 per share,
consisting of cash and common stock of JAKKS, appeared to the
Toymax Board to be a very favorable price and at a price level
that might not be reached by Toymax, standing alone, for a
significant period of time.
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The valuation of Toymaxs outstanding shares
of common stock had diminished substantially from the time of
its initial public offering, at a price of $8.50 per share, and
had traded at prices from below $1.00 to $1.50 per share during
a recent period. The proposal from JAKKS would enable the Toymax
stockholders to receive significantly enhanced value for their
shares.
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Toymax had suffered significant operating losses
during the last several years stemming in large part from its
acquisition and operation of the Monogram companies and its
investments in the Yaboom joint venture and the Maxverse
subsidiary. As a result of the losses, Toymax lacked any excess
working capital for possible future acquisitions or investments
in the expansion and growth of its existing business. The low
price for Toymaxs common stock made acquisitions through
the use of its securities difficult, if not impossible.
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Toymaxs business plan for a return to
profitability would have resulted in a potential downsizing of
its business and the risks inherent in continuation of operating
a public company and its overhead with a business on a smaller
scale. Moreover, the business relied heavily on credit extended
to Toymax, principally through the personal credit of David Chu,
Chairman of the board. There was no assurance that this credit
would or could continue to be available indefinitely in the
future which may have caused significant financial problems for
Toymax.
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Based on the current financial condition of
Toymax, it was becoming exceedingly difficult for Toymax to
attract and keep key executives with the risk that persons
important to Toymax might leave if new capital and expansion was
not provided for the business.
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The only alternative that Toymax was considering
when it entered into negotiations with JAKKS was to continue as
an independent company. Toymax had lost a significant amount of
money for the fiscal years ended March 31, 2000 and 2001
and appeared to be losing money in the fiscal year that was to
end March 31, 2002. The lack of capital and the low selling
price of Toymaxs common stock made growth through
acquisition or other means of expansion unavailable. Toymax had
reduced its staff and was facing significant reductions in
overhead that threatened the loss of key personnel. The concerns
about the continuing viability of Toymax made the offer from
JAKKS a more attractive one than standing alone.
App-1-33
Although JAKKS elected a majority of the Board of
Directors after acquiring 66.8% of the outstanding stock of
Toymax on March 11, 2002, the stock purchase agreement
required that two of the Toymax members remain on the Board of
Directors to protect the interest of the unaffiliated security
holders.
The Board of Directors of Toymax viewed the
entire transaction with JAKKS as fair to the unaffiliated
stockholders of Toymax and deemed the only unfavorable aspect of
the transaction was that Toymax was giving up any independent
future apart from its participation with JAKKS.
Fairness of the Merger; Opinions of Financial
Advisor
The members of Toymaxs board of directors
also determined that the merger was fair to the public
stockholders because, among other things:
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at the time the board of directors adopted the
merger agreement, Toymaxs board of directors consisted
solely of directors who are not officers or employees of JAKKS
or Toymax, and was given exclusive authority to, among other
things, consider, negotiate and evaluate the terms of any
proposed transaction, including the merger;
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the Toymax board of directors retained and
received advice from legal counsel selected and engaged by it in
negotiating and evaluating the terms of the JAKKS proposal and
the merger agreement; and
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the merger consideration and the other terms and
conditions of the merger agreement resulted from
arms-length bargaining between the Toymax board of
directors and its representatives, on the one hand, and JAKKS
and its representatives, on the other hand.
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February
2002 Fairness Opinion
Prior to adopting the merger and the merger
agreement, Toymaxs board of directors sought independent
verification of its conclusions as to the fairness of the merger
to Toymaxs public stockholders by obtaining a fairness
opinion from an independent financial advisor. The Board
appointed a committee of two independent directors, Oren Asher
and Eric Inspektor, to select an investment banking firm to pass
on the fairness of the transaction and to provide their own
recommendation to the Board of Directors in reliance on the
recommendation of the investment bankers. No special person or
committee was appointed to represent solely the unaffiliated
stockholders. Several names of investment banking firms were
provided to the Committee, but some firms were eliminated
because of cost considerations (they would not consider
providing a fairness opinion for a fee of $100,000 which was the
maximum that Toymax was prepared to spend). The four firms
interviewed by the independent committee were Rodman &
Renshaw, Inc., Fahenstock & Co., Inc., Corporate
Solutions Group, an American Express Company, and Morgan Lewins.
After interviewing all of the firms, the independent committee
chose Morgan Lewins. All four had agreed to undertake the
assignment for the same fee so cost was not a consideration. The
decision was made based on the personal impressions created by
those interviewed and consideration given to their experience
and knowledge of the industry. The investment bankers at Morgan
Lewins have had over 25 years of experience in a wide range
of investment banking transactions and have worked on over
250 mergers and acquisitions. Pursuant to an engagement
letter dated February 5, 2002, the independent committee
retained Morgan Lewins as Toymaxs financial advisor in
order to render an opinion as to the fairness of the proposed
merger.
At the meeting of Toymaxs board of
directors on February 9, 2002, Morgan Lewins gave its oral
opinion, subsequently confirmed in writing, to the board of
directors that, as of such date and based upon and subject to
various considerations set forth in the opinion, the
consideration to be paid pursuant to the proposed merger was
fair from a financial point of view to Toymaxs public
stockholders. Toymaxs board of directors did not limit
Morgan Lewins in any way in the investigations it made or the
procedures it followed in giving its opinion.
The Board of Directors of Toymax in considering
the fairness of the proposed transaction with JAKKS relied on
the analysis and opinion of Morgan Lewins. Morgan Lewins
reviewed the proposed transaction, studied both companies and
focused on the financial condition of Toymax, its historical and
current stock prices and key financial and operating issues. In
reviewing the prices for the common stock of Toymax, it was
App-1-34
noted that the offer of $4.50 per share from
JAKKS was a 228% premium over the 90-day average of
Toymaxs common stock at an average price of $1.37, 190%
premium over the 60-day average price of $1.55 and 143% premium
over the 30-day average price of $1.35. The common stock of
Toymax had not traded above $4.00 per share since December 1999.
While the initial offering price of Toymax in 1997 had been at
$8.50 per share, over the past two years, based on a volume of
trading, over 100% of Toymaxs shares had changed hands at
a price below $4.50 per share. Morgan Lewins also analyzed the
financial statements of Toymax and it was noted that its
tangible net worth was approximately $23 million, or less
than $2.00 per share, including approximately $18 million
of inventory which on a liquidation basis would produce
substantially less value than on a going concern basis.
Accordingly, JAKKSs offer was substantially higher than an
estimated liquidation value. Morgan Lewins compared the proposed
Toymax transaction to other transactions in the industry,
reviewed the structure of the transaction and reviewed the
contractual arrangements of the Toymax affiliates. Based on its
entire analysis, Morgan Lewins concluded that in its opinion, as
investment bankers, the consideration to be received by
Toymaxs public stockholders was fair from a financial
point of view.
Morgan Lewins addressed its written opinion only
to the Toymax board of directors. The opinion addressed only the
consideration pursuant to the merger and was not a
recommendation to any Toymax stockholder as to how such
stockholder should vote at the Toymax special meeting. The
summary of the opinion of Morgan Lewins set forth in this joint
proxy statement/prospectus is qualified in its entirety by
reference to the full text of such opinion. Toymaxs
stockholders are urged to, and should, read the opinion
carefully and in its entirety.
In arriving at its opinion, Morgan Lewins
reviewed and analyzed, among other things, the following:
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(i) the merger agreement dated as of
February 10, 2002;
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(ii) the stock purchase agreement
dated as of February 10, 2002;
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(iii) Toymaxs Form 10-K for the
year ended March 31, 2001, Toymaxs Forms 10-Q
for the three months ended June 30, 2001 and the six months
ended September 30, 2001, and Toymaxs Form 8-K
dated November 9, 2001;
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(iv) JAKKS Form 10-K for the year
ended December 31, 2000, and JAKKS Forms 10-Q
for the three months ended March 31, 2001, the six months
ended June 30, 2001, and the nine months ended
September 30, 2001;
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(v) certain other publicly available
information concerning Toymax and JAKKS and the trading markets
for their respective common stocks;
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(vi) certain internal information and other
data relating to Toymax and JAKKS and their business and
prospects, including forecasts and projections provided to
Morgan Lewins by management of Toymax and JAKKS, respectively;
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(vii) certain publicly available information
concerning certain other companies engaged in businesses which
Morgan Lewins believed to be generally comparable to Toymax and
JAKKS and the trading markets for certain of such other
companies securities; and
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(viii) the financial terms of certain recent
business combinations which Morgan Lewins believed to be
relevant.
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Morgan Lewins also held discussions with members
of the management of Toymax and JAKKS on various aspects of the
merger, the past and current business operations of Toymax and
JAKKS, the financial condition and future prospects and
operations of Toymax and JAKKS, the effect of the merger on the
financial condition and future prospects and operations of
Toymax and JAKKS and other matters that Morgan Lewins believed
necessary or appropriate to its inquiry. In addition, Morgan
Lewins visited representative facilities of Toymax and reviewed
other financial studies and analyses and considered other
information that it deemed appropriate for the purposes of its
opinion.
App-1-35
Morgan Lewins relied upon and assumed, without
independent verification, the accuracy and completeness of all
information that was publicly available or furnished to it by
Toymax or JAKKS or otherwise reviewed by Morgan Lewins from
third party sources. Morgan Lewins has stated that it is not
responsible or liable for that information or its accuracy.
Morgan Lewins did not conduct any valuation or appraisal of any
assets or liabilities, nor were any valuations or appraisals
provided to Morgan Lewins.
In relying on other financial analyses provided
to it, Morgan Lewins stated that it assumed that they had been
reasonably prepared based on assumptions reflecting the best
currently available estimates as to the financial condition of
Toymax to which those analyses relate.
Morgan Lewins based its opinion on economic,
market and other conditions as in effect on, and the information
made available to Morgan Lewins as of, the date of the opinion.
Morgan Lewins stated that subsequent developments may affect
Morgan Lewinss opinion and Morgan Lewins does not have any
obligation, to update, revise, or reaffirm its opinion. Morgan
Lewins expressed no opinion as to the price at which JAKKS
Common Stock will trade at any future time.
The terms of the proposed merger were determined
through negotiations between Toymax and JAKKS and were approved
by the Toymax board of directors. Although Morgan Lewins
provided advice to Toymax during the course of these
negotiations, the decision to enter into the merger was solely
that of Toymaxs board of directors. As described above,
the opinion of Morgan Lewins and its presentation to the Toymax
board of directors were only two of a number of factors taken
into consideration by the Toymax board of directors in making
its determination to approve the proposed merger.
Valuation Methods
Morgan Lewins employed generally accepted
valuation methods that it considered customary and appropriate
in reaching its opinion. As part of its valuation analysis,
Morgan Lewins reviewed certain financial factors of Toymax in
determining if the merger consideration was fair to
Toymaxs public stockholders. Those factors included
Toymaxs:
current market price;
historical market prices;
net book value;
going concern value; and
liquidation value.
Morgan Lewins did not give particular weight to
any factor, but used each of them in conjunction with its
analysis.
The following is a summary of the material
financial analyses and valuation methods that Morgan Lewins
utilized in providing its opinion. Some of the summaries of
financial analyses and valuation methods have been presented in
tabular format. In order to understand the financial analyses
and valuation methods used by Morgan Lewins more fully, you
should read the tables together with the text of each summary.
The tables alone do not constitute a complete description of
Morgan Lewinss financial analyses and valuation methods.
Morgan Lewins reviewed the premium by which the
estimated offer price for Toymax exceeded Toymaxs stock
price prior to the announcement of the transaction and compared
such merger premium to other historical merger and acquisition
transactions that Morgan Lewins determined to be relevant to the
proposed acquisition of Toymax.
Based on JAKKS average stock price for the
10 business days prior to February 7, 2002, the implied
value of the consideration to be received by Toymaxs
stockholders was estimated to be approximately $4.50 per share
(the Offer Price). The Offer Price presents a
premium to the last reported sales price of Toymax
App-1-36
common stock on the NASDAQ National Market System
during each of the following periods prior to the signing of the
merger agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 7,
|
|
February 6,
|
|
February 5,
|
|
30-Day
|
|
60-Day
|
|
90-Day
|
|
|
2002
|
|
2002
|
|
2002
|
|
Average(a)
|
|
Average(a)
|
|
Average(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price
|
|
$
|
2.62
|
|
|
$
|
2.40
|
|
|
$
|
2.09
|
|
|
$
|
1.85
|
|
|
$
|
1.55
|
|
|
$
|
1.37
|
|
Premium
|
|
|
72
|
%
|
|
|
88
|
%
|
|
|
115
|
%
|
|
|
143
|
%
|
|
|
190
|
%
|
|
|
228
|
%
|
|
|
(a)
|
All averages calculated for the period ending
February 5, 2002.
|
Morgan Lewins also reviewed a sample of
historical merger and acquisition transactions that were
determined to be relevant to the proposed acquisition of Toymax.
The following represents the median premiums paid for the sample
transactions reviewed by Morgan Lewins:
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
Median
|
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|
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|
|
Premium
|
|
|
|
|
|
|
|
|
Paid in
|
|
|
|
|
|
Premium/(Discount)
|
|
|
Comparable
|
|
Toymax
|
|
Implied
|
|
of Estimated Offer
|
|
|
M&A
|
|
Stock
|
|
Toymax
|
|
Price to Implied
|
|
|
Transactions
|
|
Price(a)
|
|
Price
|
|
Price(b)
|
|
|
|
|
|
|
|
|
|
1 Day Prior to Announcement
|
|
|
50
|
%
|
|
$
|
2.09
|
|
|
$
|
3.14
|
|
|
|
44
|
%
|
4 Weeks Prior to Announcement
|
|
|
84
|
%
|
|
$
|
1.75
|
|
|
$
|
3.22
|
|
|
|
40
|
%
|
|
|
(a)
|
Assumed an announcement date of February 6,
2002.
|
|
(b)
|
Assumed an implied value for the Toymax
acquisition of $4.50 per share.
|
Morgan Lewins concluded that the premium by which
the estimated Offer Price for Toymax exceeded Toymaxs
stock price prior to the announcement of the transaction
exceeded the premium for comparable merger and acquisition
transactions.
|
|
|
Comparable Transaction
Analysis
|
Morgan Lewins computed the estimated enterprise
value for Toymax of $71.3 million implied by the Offer
Price (representing the estimated equity value implied by the
Offer Price plus Toymaxs total debt and minority interest
minus its cash and cash equivalents) and compared such
enterprise value to Toymaxs then recent operating results,
including revenues, operating income (EBIT) and
operating cash flow before depreciation and amortization
(EBITDA) each for the then latest twelve month
period for which such financial information was available. In
addition, Morgan Lewins compared such valuation multiples for
Toymax to the valuation multiples for other historical merger
and acquisition transactions that it determined
App-1-37
to be relevant to the proposed acquisition of
Toymax. The following table presents a comparison of the merger
valuation multiples for the then latest available twelve month
period:
Selected Historical Transactions
Acquiror/Target
|
|
|
Department 56/Axis Corp.
|
|
DSI Toys/Meritus Industries
|
|
Toymax International/Funnoodle
|
|
JAKKS Pacific/Flying Colors
|
|
JAKKS Pacific/Berk Corp.
|
|
Toymax International/Monogram
|
|
Racing Champions/The Ertle Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Valuation Multiples for
|
|
|
Comparable M&A Transactions
|
|
|
|
Enterprise Value as a Multiple of
|
|
|
|
Mean of Comparable
|
Latest Twelve Months:
|
|
Toymax Acquisition(a)
|
|
Company Transactions
|
|
|
|
|
|
Revenue
|
|
|
0.6x
|
|
|
|
0.7x
|
|
EBITDA
|
|
|
Not meaningful
|
|
|
|
7.2x
|
|
EBIT
|
|
|
Not meaningful
|
|
|
|
12.8x
|
|
|
|
(a)
|
Assumes an implied value for the Toymax
acquisition of $4.50 per share.
|
Toymaxs EBITDA and EBIT for the period
examined by Morgan Lewins were negative. Therefore, the multiple
of Toymaxs estimated enterprise value (as implied by the
Offer Price) to its historical EBITDA and EBIT was not
meaningful. The fact that Toymaxs historical EBITDA and
EBIT for the then latest available twelve months were negative
was a factor considered by Morgan Lewins in rendering its
fairness opinion. Comparable transaction values to EBIT and
EBITDA calculations were computed to illustrate that other
companies for which revenue multiples were calculated were, on
average, profitable on an EBIT and EBITDA basis. We believe that
these multiples illustrate a measure of financial health for
comparable companies analyzed that is relevant and informative
to our analysis. Morgan Lewins also compared the multiple of
Toymaxs estimated enterprise value (as implied by the
Offer Price) to its historical revenues and compared such
valuation multiple to the valuation multiples for other
historical merger and acquisition transactions that it
determined to be relevant to the proposed acquisition of Toymax.
Morgan Lewins concluded that the revenue multiple implied by the
proposed acquisition of Toymax was comparable to the mean
revenue multiple for the other historical merger and acquisition
transactions that Morgan Lewins determined to be relevant to the
proposed acquisition of Toymax (as summarized above).
App-1-38
|
|
|
Selected Public Trading
Multiples
|
Morgan Lewins computed the estimated enterprise
value for Toymax implied by the Offer Price and compared such
enterprise value to Toymaxs then recent operating results,
including revenues, EBIT and EBITDA for the then latest twelve
month period for which such financial information was available.
In addition, Morgan Lewins compared such valuation multiples for
Toymax to the valuation multiples for selected publicly traded
companies engaged in businesses that Morgan Lewins judged to be
reasonably comparable to Toymax. These companies were:
|
|
|
Action Performance
|
|
DSI Toys
|
|
Equity Marketing
|
|
JAKKS Pacific
|
|
Marvel Enterprises
|
|
Ohio Art
|
|
Racing Champions
|
|
Radica Games
|
|
|
|
Morgan Lewins selected these companies because
they engaged in businesses reasonably comparable to those of
Toymax. Morgan Lewins used publicly available financial
information to determine the ratio of enterprise value to the
then latest twelve months revenues for each of these companies.
The following table presents a comparison of the mean revenue
multiples of the comparable companies and the implied merger
multiples for Toymax based on a range of the then latest twelve
months revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Trading Valuation
|
|
|
Multiples for Comparable Companies
|
|
|
|
|
|
|
|
Mean of
|
Enterprise Value as a Multiple of
|
|
|
|
Comparable
|
Latest Twelve Months:
|
|
Toymax(a)
|
|
Companies
|
|
|
|
|
|
Revenue
|
|
|
0.6x
|
|
|
|
1.2x
|
|
EBITDA
|
|
|
Not meaningful
|
|
|
|
7.2x
|
|
EBIT
|
|
|
Not meaningful
|
|
|
|
10.4x
|
|
|
|
(a)
|
Assumes an implied value for the Toymax
acquisition of $4.50 per share.
|
Toymaxs EBITDA and EBIT for the period
examined by Morgan Lewins were negative. Therefore, the multiple
of Toymaxs estimated enterprise value (as implied by the
Offer Price) to its historical EBITDA and EBIT is not
meaningful. The fact that Toymaxs historical EBITDA and
EBIT for the then latest twelve months were negative was a
factor considered by Morgan Lewins in rendering its fairness
opinion. Morgan Lewins also compared the multiple of
Toymaxs estimated enterprise value (as implied by the
Offer Price) to its historical revenues and compared such
valuation multiple to the valuation multiples for selected
publicly traded companies engaged in businesses that Morgan
Lewins judged to be reasonably comparable to Toymax. Morgan
Lewins concluded that the revenue multiple implied by the
proposed acquisition of Toymax was below the mean revenue
multiple for the selected publicly traded companies engaged in
businesses that Morgan Lewins judged to be reasonably comparable
to Toymax. (as summarized above).
No company or transaction used in the premium
analysis, the comparable transaction analysis or the comparable
public company trading analysis is identical to Toymax.
Accordingly, an evaluation of the results of these analyses is
not simply a mathematical calculation. It involves complex
considerations and judgments concerning differences in financial
and operating characteristics of the companies and other factors
that could affect the public trading value of the companies
being analyzed. The summary above is not a comprehensive
description of all analyses and examinations actually conducted
by Morgan Lewins in the preparation of its opinion. In
evaluating companies and transactions identified by Morgan
Lewins as comparable to Toymax and the acquisition of Toymax,
Morgan Lewins made judgments and assumptions with regard to
industry performance, general business, economic, market and
financial conditions and other matters, many of which were
beyond the control of Toymax, such as the impact of competition
on the business of Toymax and the
App-1-39
industry generally, industry growth and the
absence of any material change in the financial condition and
prospects of Toymax or the industry or in the financial markets
in general. The preparation of a fairness opinion is a complex
process and is not necessarily susceptible to partial analysis
or summary description. Selecting portions of the analyses and
of the factors considered by Morgan Lewins, without considering
all analyses and factors would create an incomplete view of the
process underlying Morgan Lewinss presentation to the
board of directors of Toymax. In addition, Morgan Lewins may
have given some analyses more or less weight than other analyses
and may have deemed various assumptions more or less probable
than other assumptions. For a description of the assumptions
Morgan Lewins made in rendering its fairness opinion see the
actual text of the fairness opinion which is attached as
Appendix F to this joint proxy statement/ prospectus. The ranges
of valuations resulting from any particular analysis described
above should not be taken to be Morgan Lewinss or
Toymaxs view of the actual value of Toymax or the shares
of Toymax common stock. To the contrary, Morgan Lewins expressed
no opinion on the actual value of Toymax, or shares of
Toymaxs common stock.
The analyses performed by Morgan Lewins are not
necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than
those suggested by these analyses. Morgan Lewins prepared these
analyses as part of its analysis for the board of directors of
Toymax of the fairness from a financial point of view of the
merger consideration to be received by holders of Toymax common
stock and provided these analyses to the Toymax board of
directors and the special committee in connection with their
consideration of the merger. The analyses do not purport to be
appraisals or to reflect the prices at which a company might
actually be sold or the prices at which any securities may trade
at any time in the future. Morgan Lewins used in its analyses
various projections of future performance prepared and supplied
by the management of Toymax. The projections were based on
numerous uncertain variables and assumptions that are inherently
unpredictable. Accordingly, actual results could vary
significantly from those assumed in these projections.
The opinion of Morgan Lewins and the presentation
to the special committee and the board of directors summarized
above were among the many factors taken into consideration by
the board of directors of Toymax in determining whether to
approve and to recommend that the Toymax stockholders vote in
favor of the matters being presented hereby. During Morgan
Lewinss presentations to the special committee and the
board of directors, the members of the special committee and
board of directors asked numerous questions regarding the
analyses performed by Morgan Lewins and its conclusion as to the
fairness from a financial point of view of the consideration to
be received pursuant to the merger agreement. Morgan Lewins,
however, did not make any recommendation to any stockholders or
to any other person or entity as to how any stockholder should
vote with respect to the merger agreement. Morgan Lewinss
opinion did not address the relative merits of the merger, any
alternatives to the merger, or Toymaxs underlying business
decision to proceed with or effect the merger.
Under its engagement letter with Morgan Lewins,
Toymax agreed to pay Morgan Lewins $100,000 for the financial
advisory services provided by Morgan Lewins in connection with
the delivery of the fairness opinion. In addition, Toymax agreed
to reimburse Morgan Lewins for its expenses incurred in
connection with its services, including the fees and
disbursements of counsel, and will indemnify Morgan Lewins
against certain liabilities, including liabilities arising under
the federal securities laws.
Prior to advising Toymax on this transaction,
Morgan Lewins had no relationship with Toymax. Morgan Lewins has
no financial advisory or other relationship with JAKKS. In the
ordinary course of their businesses, Morgan Lewins and its
affiliates may actively trade the equity securities of Toymax
and JAKKS for their own accounts or for the accounts of
customers and, accordingly, they may hold long or short
positions in those securities at any given time.
The foregoing discussion addresses the material
information and factors considered by the Toymax board of
directors in their consideration of the merger, including
factors that support the merger as well as those that may weigh
against it. In view of the variety of factors and the amount of
information considered, the Toymax board did not find it
practicable to, and did not specifically, make assessments of,
quantify or otherwise assign relative weights to the various
factors and analyses considered in reaching its determination.
The determination to approve the merger agreement and the merger
was made after consideration of all the factors as a whole.
App-1-40
|
|
|
July 2002 Fairness Opinion
|
The boards of directors of Toymax, JAKKS and the
Merger Subsidiary engaged Morgan Lewins, pursuant to an
engagement letter dated July 2, 2002, to render a written
opinion as to the fairness, from a financial point of view, to
the stockholders of Toymax other than JAKKS of the consideration
to be received in the merger. On July 10, 2002, the boards
of directors of each of Toymax, JAKKS and the Merger Subsidiary
reviewed a written opinion from Morgan Lewins that, as of
July 9, 2002 and based upon and subject to various
considerations set forth in the opinion, the consideration to be
received in the merger was fair from a financial point of view
to Toymaxs stockholders other than JAKKS. Attached as
Appendix F to this joint proxy statement/prospectus is the
full text of Morgan Lewins written opinion dated
July 9, 2002. This opinion sets forth the assumptions made,
matters considered and limits on the review undertaken. The
opinion addresses only the fairness, from a financial point of
view, of the merger consideration and is not a recommendation to
any Toymax stockholder as to how such stockholder should vote
with regard to the merger. The summary of the opinion of Morgan
Lewins set forth in this joint proxy statement/prospectus is
qualified in its entirety by reference to the full text of such
opinion. Toymaxs stockholders are urged to, and should,
read the opinion carefully and in its entirety. The opinion
rendered by Morgan Lewins on July 9, 2002, was in addition
to an opinion rendered by Morgan Lewis Githens & Ahn, Inc.
(whose name was subsequently changed to Morgan Lewins) to the
board of directors of Toymax on February 10, 2002, that is
attached as Appendix E to this joint proxy
statement/prospectus.
In arriving at its opinion dated July 9,
2002, Morgan Lewins reviewed and analyzed, among other things,
the following:
|
|
|
(i) the Merger Agreement dated
February 10, 2002;
|
|
|
(ii) the Stock Purchase Agreement dated
February 10, 2002;
|
|
|
(iii) JAKKS Form S-4 registration
statement filed with the Securities and Exchange Commission on
May 21, 2002, and its Schedule 13E-3 dated
May 22, 2002;
|
|
|
(iv) certain other publicly available
financial statements and other business and financial
information concerning Toymax and JAKKS and the trading markets
for their respective common stocks;
|
|
|
(v) certain internal information and other
data relating to Toymax and JAKKS and their business and
prospects, including forecasts and projections provided by the
management of Toymax and JAKKS, respectively;
|
|
|
(vi) certain publicly available information
concerning certain other companies engaged in businesses which
Morgan Lewins believed to be generally comparable to Toymax and
JAKKS and the trading markets for certain of such other
companies securities; and
|
|
|
(vii) the financial terms of certain recent
business combinations which Morgan Lewins believed to be
relevant.
|
In rendering its opinion dated July 9, 2002,
Morgan Lewins also held discussions with members of the
management of Toymax and JAKKS on various aspects of the merger,
the past and current business operations of Toymax and JAKKS,
the financial condition and future prospects and operations of
Toymax and JAKKS, the effect of the merger on the financial
condition and future prospects and operations of Toymax and
JAKKS and other matters that Morgan Lewins believed necessary or
appropriate to its inquiry. In addition, Morgan Lewins reviewed
other financial studies and analyses and considered other
information that it deemed appropriate for the purposes of its
opinion dated July 9, 2002. Toymax, JAKKS or the Merger
Subsidiary did not limit Morgan Lewins in any way in the
investigations it made or the procedures it followed in giving
its opinion.
Morgan Lewins relied upon and assumed, without
independent verification, the accuracy and completeness of all
information that was publicly available or furnished to it by
Toymax, JAKKS or the Merger Subsidiary or otherwise reviewed by
Morgan Lewins from third party sources and is not responsible or
liable
App-1-41
for the accuracy of such information. Morgan
Lewins did not conduct any valuation or appraisal of any assets
or liabilities, nor were any valuations or appraisals provided
to Morgan Lewins.
In relying on other financial analyses provided
to it, Morgan Lewins assumed that they had been reasonably
prepared based on assumptions reflecting the best currently
available estimates as to the financial condition of Toymax to
which those analyses relate.
Morgan Lewins based its opinion dated
July 9, 2002, on economic, market and other conditions as
in effect on, and the information made available to
Morgan Lewins as of, the date of the opinion. Subsequent
developments may affect Morgan Lewins opinion and Morgan
Lewins does not have any obligation to update, revise, or
reaffirm its opinion. Morgan Lewins expressed no opinion as to
the price at which JAKKS common stock will trade at any future
time.
Morgan Lewins employed generally accepted
valuation methods in reaching its opinion dated July 9,
2002. As part of its valuation analysis, Morgan Lewins reviewed
certain financial factors of Toymax in determining if the merger
consideration was fair to Toymaxs public stockholders.
Those factors included Toymaxs:
current market price;
historical market prices;
net book value;
going concern value; and
liquidation value.
Morgan Lewins did not give particular weight to
any factor, but used each of them in conjunction with its
analysis.
The following is a summary of the material
financial analyses that Morgan Lewins utilized in providing such
opinion. Some of the summaries of financial analyses have been
presented in tabular format. In order to understand the
financial analyses used by Morgan Lewins more fully, you should
read the tables together with the text of each summary. The
tables alone do not constitute a complete description of Morgan
Lewins financial analyses.
|
|
|
Comparable Transaction Analysis
|
Morgan Lewins computed the estimated enterprise
value for Toymax implied by the offer price (representing the
estimated equity value implied by the offer price plus the
Toymaxs total debt and minority interest minus its cash
and cash equivalents) and compared such enterprise value to the
Toymaxs estimated operating results, including earnings
before interest and taxes (EBIT) and earnings before
interest, taxes, depreciation and amortization
(EBITDA) for the period ending December 31,
2002. Toymaxs EBITDA and EBIT for the twelve months ended
March 31, 2002 were negative, therefore Toymaxs
estimated enterprise value (as implied by the offer price) as a
multiple of its historical EBITDA and EBIT is not meaningful.
However, the fact that Toymaxs EBITDA and EBIT for the
twelve months ended March 31, 2002 were negative was a
factor considered by Morgan Lewins in support of its fairness
opinion. Morgan Lewins compared the valuation multiples based on
Toymaxs estimated EBITDA and EBIT for the twelve month
period ending December 31, 2002 to the valuation multiples
for selected merger and acquisition transactions that we
determined to be relevant to the proposed acquisition of Toymax.
The following table presents a comparison of the merger
valuation multiples:
|
|
|
|
|
|
|
|
|
|
|
Toymax Valuation
|
|
Mean of Selected Merger
|
|
|
Multiples Based on
|
|
and Acquisition
|
Enterprise Value as a Multiple of:
|
|
Implied Acquisition Price(a)
|
|
Transactions(b)
|
|
|
|
|
|
EBITDA
|
|
|
10.6x
|
|
|
|
7.2x
|
|
EBIT
|
|
|
22.3x
|
|
|
|
12.8x
|
|
App-1-42
|
|
(a)
|
Based on estimated operating results for the
twelve months ended December 31, 2002. Assumes an implied
value for the Toymax acquisition of $4.37 per share.
|
|
(b)
|
Based on operating results for the latest twelve
months prior to the relevant acquisition date.
|
|
|
|
Selected Public Trading Multiples
|
Morgan Lewins computed the estimated enterprise
value for Toymax implied by the offer price and compared such
enterprise value to the Toymaxs recent operating results,
including revenues, EBIT and EBITDA for the twelve month period
ended March 31, 2002, and estimated operating results for
the year ending December 31, 2002 for which such financial
information was available. Morgan Lewins also computed the
estimated equity value for Toymax implied by the offer price and
compared such equity value to Toymaxs net income and book
value for the twelve month period ended March 31, 2002, and
estimated operating results for the year ending
December 31, 2002 for which such financial information was
available. In addition, Morgan Lewins compared such valuation
multiples for Toymax to the valuation multiples for selected
publicly traded companies engaged in businesses that Morgan
Lewins judged to be reasonably comparable to Toymax. These
companies were:
|
|
|
Action Performance
|
|
Marvel Enterprises
|
DSI Toys
|
|
Ohio Art
|
Equity Marketing
|
|
Racing Champions
|
JAKKS Pacific
|
|
Radica Games
|
Morgan Lewins selected these companies because
they engage in businesses reasonably comparable to those of
Toymax. Morgan Lewins used publicly available financial
information to determine the ratio of enterprise value to latest
twelve months and estimated revenues, EBITDA, EBIT and the ratio
of equity value to latest twelve months and estimated net income
and book value for each of these companies. The following table
presents a comparison of the mean multiples of the comparable
companies and the implied merger multiples for Toymax based on a
range of 2002 estimated operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Mean Trading
|
|
|
Toymax Valuation
|
|
Valuation Multiples
|
|
|
Multiples Based on
|
|
for Comparable
|
Enterprise Value as a Multiple of:
|
|
Implied Acquisition Price(a)
|
|
Companies
|
|
|
|
|
|
Estimated 2002 Revenue
|
|
|
0.9x
|
|
|
|
1.1x
|
|
Estimated 2002 EBITDA
|
|
|
10.6x
|
|
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6.4x
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Estimated 2002 EBIT
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22.3x
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7.9x
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Equity Value as a Multiple of:
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Estimated 2002 Net Income
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41.9x
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10.7x
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March 31, 2002 Book Value
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3.9x
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1.9x
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(a)
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Assumes an implied value for the Toymax
acquisition of $4.37 per share.
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No company or transaction used in the comparable
transaction analysis or the comparable public company trading
analysis is identical to Toymax. Accordingly, an evaluation of
the results of these analyses is not simply a mathematical
calculation. It involves complex considerations and judgments
concerning differences in financial and operating
characteristics of the companies and other factors that could
affect the public trading value of the companies being analyzed.
The summary above is not a comprehensive description of all
analyses and examinations actually conducted by Morgan Lewins in
the preparation of its opinion. In evaluating companies and
transactions identified by Morgan Lewins as comparable to Toymax
and the acquisition of Toymax, Morgan Lewins made judgments and
assumptions with regard to industry performance, general
business, economic, market and financial conditions and other
matters, many of which are beyond the control of Toymax, such as
the impact of competition on the business of Toymax and the
industry generally, industry growth and the absence of any
material change in the financial condition and prospects of
App-1-43
Toymax or the industry or in the financial
markets in general. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial
analysis or summary description. Selecting portions of the
analyses and of the factors considered by Morgan Lewins, without
considering all analyses and factors would create an incomplete
view of the process underlying Morgan Lewins presentation
to the board of directors of Toymax, JAKKS and the Merger
Subsidiary. In addition, Morgan Lewins may have given some
analyses more or less weight than other analyses and may have
deemed various assumptions more or less probable than other
assumptions. For a description of the assumptions Morgan Lewins
made in rendering its fairness opinion dated July 9, 2002,
see the actual text of the fairness opinion which is attached as
Appendix F to this joint proxy statement/ prospectus.
Accordingly, the ranges of valuations resulting from any
particular analysis described above should not be taken to be
Morgan Lewins or Toymaxs view of the actual value of
Toymax or the shares of Toymax common stock. To the contrary,
Morgan Lewins expressed no opinion on the actual value of
Toymax, or shares of Toymaxs common stock.
The analyses performed by Morgan Lewins are not
necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than
those suggested by these analyses. Morgan Lewins prepared these
analyses as part of its analysis for the board of directors of
Toymax, JAKKS and the Merger Subsidiary as to the fairness from
a financial point of view of the merger consideration to be
received by stockholders of Toymax other than JAKKS and provided
these analyses to Toymax, JAKKS and the Merger Subsidiary in
connection with their consideration of the merger. The analyses
do not purport to be appraisals or to reflect the prices at
which a company might actually be sold or the prices at which
any securities may trade at any time in the future. Morgan
Lewins used in its analyses various projections of future
performance prepared and supplied by the management of Toymax.
The projections were based on numerous uncertain variables and
assumptions that are inherently unpredictable. Accordingly,
actual results could vary significantly from those assumed in
these projections.
In connection with rendering its
February 10, 2002 fairness opinion, Morgan Lewins did not
consider the $15.6 million restructuring charge that Toymax
took with respect to Toymaxs 2002 consolidated financial
statements because that charge was not taken until JAKKS
acquired control of Toymax in March 2002. However, Morgan Lewins
did take such restructuring charge into consideration when
Morgan Lewins rendered its July 9, 2002 fairness opinion.
Morgan Lewins does not make any recommendation to any
stockholders or to any other person or entity as to how any
stockholder should vote with respect to the merger agreement.
Morgan Lewins opinion did not address the relative merits
of the merger, any alternatives to the merger, or Toymaxs
underlying business decision to proceed with or effect the
merger.
Under its engagement letter with Morgan Lewins
dated July 2, 2002, Toymax, JAKKS and the Merger Subsidiary
have agreed to pay Morgan Lewins an aggregate of $50,000 in
connection with the delivery of the fairness opinion. In
addition, Toymax, JAKKS and the Merger Subsidiary have agreed to
reimburse Morgan Lewins for its expenses incurred in connection
with its services, including the fees and disbursements of
counsel, and will indemnify Morgan Lewins against certain
liabilities, including liabilities arising under the federal
securities laws.
Prior to being retained by Toymax pursuant to the
February 5, 2002, engagement letter, Morgan Lewins had no
relationship with either Toymax or JAKKS. In the ordinary course
of their businesses, Morgan Lewins and its affiliates may
actively trade the equity securities of Toymax and JAKKS for
their own accounts or for the accounts of customers and,
accordingly, they may hold long or short positions in those
securities at any given time.
Appendices E and F that accompany this joint
proxy statement/ prospectus are the full text of Morgan
Lewinss written opinions of February 10, 2002 and
July 9, 2002. These opinions set forth the assumptions
made, matters considered and limits on the review undertaken.
Morgan Lewinss opinion is incorporated in its entirety
into this document by reference. These opinions are available
for inspection and copying at Toymaxs principal executive
offices, 22615 Pacific Coast Highway, Malibu, California
90265, during its regular business hours by any interested
equity security holder of Toymax or representative who has been
so designated in writing.
App-1-44
Procedural and Substantive Fairness of the
Merger
Each of Toymax, JAKKS and the Merger Subsidiary
have determined that the merger is both procedurally and
substantively fair to Toymaxs public stockholders. The
factors that JAKKS, Toymax and the Merger Subsidiary considered
in connection with determining the procedural fairness of the
merger include:
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The negotiations between Toymax and JAKKS were
conducted at arms-length;
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JAKKS and Toymax were each represented by
separate legal counsel;
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Toymax appointed a special committee to select an
independent financial adviser to determine if the transaction
was fair to Toymaxs unaffiliated stockholders; and
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After JAKKS acquired control of Toymax, both
JAKKS and Toymax determined that an additional fairness opinion
from Morgan Lewins would be required.
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With respect to the procedural fairness of the
merger, Toymaxs board of directors did not require that a
majority of its directors who were not Toymax employees retain
an unaffiliated representative to act solely on behalf of
Toymaxs unaffiliated stockholders to negotiate the merger
or prepare a report in connection with the fairness of the
merger. Further, Toymaxs board of directors did not
structure the merger to require the approval of a majority of
Toymaxs unaffiliated stockholders. Nevertheless,
Toymaxs board of directors believes the transaction is
procedurally fair to Toymaxs public stockholders for the
reasons set forth above, and believes the merger is
substantively fair for the reasons discussed in the following
paragraphs.
In connection with determining the substantive
fairness of the merger, Toymax relied on Morgan Lewins February
2002 presentation and fairness opinion. In this regard, the
Toymax board of directors adopted Morgan Lewins findings
with respect to the substantive fairness of the merger. Further,
each of Toymax, JAKKS and the Merger Subsidiary relied on Morgan
Lewins July 9, 2002 report and fairness opinion in
determining the substantive fairness of the merger. In this
regard, the board of directors of Toymax, JAKKS and the Merger
Subsidiary have adopted Morgan Lewins findings with
respect to the substantive fairness of the merger.
With respect to the substantive fairness of the
merger, Toymaxs prior board of directors was unaware of
the $15.6 million restructuring charge that Toymax took in
the fiscal year ended March 31, 2002 because such charge
was accrued after March 11, 2002 when JAKKS acquired
control of Toymax. Toymaxs current board of directors was
aware of this charge with respect to the substantive fairness of
the transaction.
Further, in connection with determining the
fairness of the merger to Toymaxs unaffiliated
stockholders, the boards of directors of Toymax, JAKKS and the
Merger Subsidiary evaluated certain financial factors to
determine if the merger consideration was fair with respect to
Toymaxs public stockholders. These factors included
Toymaxs current market prices, Toymaxs historical
market prices, Toymaxs net book value, Toymaxs going
concern value, Toymaxs liquidation value, prior purchases
of Toymax common stock by JAKKS during the last two years and
any firm offers to acquire Toymax during the past two years.
Although each of the boards of directors of Toymax, JAKKS and
the Merger Subsidiary reviewed each of those foregoing factors,
each respective board of directors did not give any weight to
Toymaxs current market prices, historical market prices,
net book value and going concern value because such values are
not reliable indicators of the fair value of the merger
consideration. With respect to these factors, each respective
board of directors looked at more reliable indicators of value
such as EBITDA and EBIT, which are more accurate measures of
Toymaxs future performance and operating value. Further,
each respective board of directors determined that it would rely
on the fairness opinion of Morgan Lewins dated July 9, 2002
with respect to the substantive fairness of the merger and each
respective board of directors adopted such fairness opinion.
Each respective board of directors did not give
any weight to Toymaxs liquidation value as a measure of
the fairness of the merger consideration because JAKKS does not
intend to liquidate or sell substantially all of the assets of
Toymax. Additionally, any value associated with Toymaxs
liquidation would be unable to include the value of certain
intangible assets, such as good will for example, with respect
to determining a fair value to compensate Toymaxs
unaffiliated stockholders.
App-1-45
Each respective board of directors did not give
any weight to the purchase prices that JAKKS paid for Toymax
common stock during the past two years because the purchase
prices that JAKKS paid when it acquired Toymax common stock in
the open market during December 2001 and January 2002 were at
prices substantially less than the merger consideration, and the
shares of Toymax common stock that JAKKS acquired in connection
with the stock purchase agreement are for the same cash and
stock consideration (without any adjustments) as the merger
consideration offered in connection with this joint proxy
statement/prospectus.
Finally, because there have been no firm offers
to acquire Toymax within the last two years, each respective
board of directors did not give any weight to this factor.
Effect of the Transaction
The effect of the transaction on Toymax is that
Toymax will no longer be an independent public company but will
become a wholly owned subsidiary of JAKKS. The benefit to
Toymax, its affiliates and its unaffiliated security holders is
that the Company is able to survive in business as a
wholly-owned subsidiary of JAKKS and the unaffiliated security
holders will receive $4.50 per share, which they might not have
received without the transaction. The detriment to the
affiliated and unaffiliated stockholders is that they will not
receive the benefit of any future growth of Toymax that they
might have if it had remained an independent company. To the
extent that each stockholder receives part of the
stockholders consideration in common stock of JAKKS, they
may obtain a benefit of Toymax growth through the increased
value of JAKKS common stock.
The three principal affiliates of Toymax, David
Chu, Steve Lebensfeld and Harvey Goldberg, gave up their long
term contracts with Toymax for short term employment or
consulting agreements with respect to Messrs. Lebensfeld
and Goldberg and an ongoing manufacturing contract for a company
controlled by David Chu. The manufacturing contract with JAKKS
replaced one that Mr. Chus company had with Toymax.
All three gave up their positions on the Board of Directors and
the Executive Committee of Toymax. One of David Chus
companies which provided agency services to Toymax had the
contract terminated. Additionally, David Chus position
with the Company as Chairman of the Board was terminated, as was
the compensation he received for such position.
Background and Reasons for the
Merger JAKKS
History of the Negotiations
On February 11, 2001, Jack Friedman,
JAKKS Chairman and Chief Executive Officer, and Stephen
Berman, JAKKS President and Chief Operating Officer,
advised Murray L. Skala, a director of JAKKS and partner of
Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine
LLP, the law firm that represents JAKKS, of JAKKS interest
in the acquisition of Toymax. Mr. Skala then discussed with
Mr. Friedman and Mr. Berman a possible structure for
the deal. On July 17, 2001, Mr. Skala had a conference
with Mr. Friedman and Joel Handel, a director of Toymax and
a member of the firm of Brown, Raysman Millstein
Felder & Steiner LLP (then Baer Marks & Upham LLP),
counsel to Toymax, regarding the possibility of a transaction.
In early September 2001, Mr. Skala discussed with
Mr. Friedman a potential purchase price. In October 2001,
Mr. Skala discussed the possible terms of the acquisition
with Mr. Friedman and Mr. Berman on a continuing basis.
On November 5, 2001, Mr. Friedman
informed Joel Bennett, Executive Vice President and Chief
Financial Officer of JAKKS, of a meeting scheduled for the
evening of November 5, 2001 in New York, New York between
Mr. Friedman and Steve Lebensfeld, Chief Executive Officer
of Toymax, the purpose of which was to discuss a potential
transaction. From that time until the execution of the stock
purchase agreement, there was constant communication amongst
Messrs. Friedman, Berman and Bennett regarding the
transaction.
During early December 2001, Mr. Skala,
Mr. Handel and Dan Almagor, a director of Toymax and a
partner in the investment banking firm of Datex Consulting
Group, which firm was later retained to provide investment
banking services to Toymax, began working through the terms of
the transaction.
App-1-46
During such period, Messrs. Friedman and
Berman were in constant communication with Mr. Skala
concerning the status and terms of the transaction. On or about
December 10, 2001, Mr. Berman informed
Mr. Bennett of the status of the transaction and that JAKKS
was going to commence purchasing shares of Toymax in the open
market.
On December 11, 2001, Mr. Berman
informed George Bevis, Senior Managing Director of the
investment banking firm Advest, Inc., via telephone of the
pending transaction on a confidential basis and instructed his
firm to begin purchasing for JAKKS Toymax common stock in the
open market. Mr. Bevis conferred with Larry McIntosh,
Supervisor Compliance Officer of Advest, and Advest commenced
purchasing Toymax shares for JAKKS on December 12, 2001.
On or about December 19, 2002,
Mr. Bennett informed Rex Poulsen, Director of Audit, and
John Englebrecht, Director of Taxation, of PKF, Certified Public
Accountants, A Professional Corporation, JAKKS independent
accounting firm, to discuss the transaction including the
structure, timing, financial reporting and tax implications of
the transaction.
On January 10, 2002, JAKKS and Toymax signed
non-disclosure agreements and on January 29-30, 2002, JAKKS
performed a due diligence review at the offices of Brown Raysman
Millstein Felder & Steiner LLP. The primary participants
were Mr. Bennett, Jason Bitsky, of Feder, Kaszovtiz,
Isaacson, Weber, Skala, Bass & Rhine LLP, JAKKS
outside counsel, Michael Sabatino, Chief Financial Officer of
Toymax, and Betty Tse, assistant to Farra Chan, an employee of
David Chu (who at that time was the majority stockholder and
Chairman of Toymax). Others present from time to time were
Mr. Almagor, and Mr. Handel.
On January 29, 2002, Mr. Berman advised
Genna Goldeberg, JAKKS Director of Corporate
Communications, of the pending transaction so that she would be
able to prepare the necessary press release announcing the
transaction.
On February 1, 2002, Mr. Bennett
informed JAKKS senior lender, the Bank of America, N.A.,
of the details of the transaction in order to obtain the waivers
that would be necessary for JAKKS to remain in compliance with
its senior credit facility and provide guidance to JAKKS on
various other aspects of the transaction including structure and
financing. Draft purchase agreements were provided to the Bank
of America along with public financing information relating to
Toymax to facilitate this process.
On February 1, 2002, written materials about
the transaction including a description of the transaction and
Toymax along with public historical Toymax operating results
were sent via Federal Express for delivery on Saturday,
February 2, 2002, to the non-employee directors of
JAKKS board of directors, David Blatte, Robert Glick,
Michael Miller and Murray L. Skala, in preparation for
their meeting held on February 4, 2002 in New York, NY.
On or about February 7 and 8, 2002,
Mr. Bennett discussed details relating to the transaction
and JAKKS via telephone with J. Buckner Brown, Managing
Director, and Jeffrey Jacobs, Associate, of Morgan Lewins in
connection with Toymaxs fairness opinion on the
transaction. The discussion included JAKKS business
strategy and how Toymax fits into JAKKS business strategy.
On February 9, 2002, the JAKKS board of
directors reviewed Morgan Lewins fairness opinion and
discussed the transaction. The full board then adopted the
merger agreement and approved the merger and stock purchase
agreement.
JAKKS Reasons for the Merger; Effects of
the Transaction
On February 10, 2002, the JAKKS board of
directors adopted the merger agreement and approved the merger
and stock purchase agreement. The JAKKS board of directors
considered a number of factors, as more fully described below,
in making its determination and unanimous recommendation. The
JAKKS board of directors in reaching its unanimous
recommendation considered a number of factors, both positive and
negative, including the following material factors:
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JAKKS has consummated several acquisitions since
its inception as a means of supplementing internal growth to
maintain or increase its competitive position in the toy
industry. In addition to efficiencies of
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App-1-47
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scale, JAKKS strives through acquisition to
diversify its portfolio of products to expand opportunities and
reduce risk associated with having limited product offerings. By
the second quarter of 2001, JAKKS completed the integration of
its acquisition of Pentech and was prepared operationally and
financially to undertake its next acquisition. With its
extensive experience in and knowledge of the toy industry, it
had been familiar with Toymax and based on Toymaxs most
recent stock price during the course of the early discussions,
there was a reasonable value proposition in JAKKS acquiring
Toymax for Toymaxs diverse products and certain key
personnel and operations.
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recent trends in the price of Toymax
common stock;
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the relative lack of liquidity for Toymax common
stock;
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JAKKS ability to finance the merger,
including its available working capital;
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the net overall cost of the transaction and its
benefits, including the transactions contribution to
JAKKS earnings;
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the impact on JAKKS common stock of the
issuance of shares proposed to be used for this transaction; and
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the conclusions of the fairness
opinion provided to the Toymax board of directors.
After consideration of the factors identified
above, JAKKS determined that the advantages of acquiring all of
the outstanding shares of Toymax common stock outweighed the
disadvantages and approved JAKKS acquisition of the
outstanding shares of Toymax common stock not already owned by
JAKKS pursuant to the terms of the merger agreement.
The addition of the Toymax product lines to
JAKKS portfolio of products further diversified its
product lines and increased its position in the toy industry,
and the combining of the operations of Toymax into those of
JAKKS has resulted in a number of efficiencies, including the
elimination of personnel and facilities in redundant operations,
elimination of debt and related interest expense, as well as the
elimination of various costs associated with complying with
federal securities laws. JAKKS expects to save $5.3 million
from the integration of Toymax into JAKKS and $500,000 in legal,
accounting, printing and miscellaneous fees associated with
Toymax no longer being a public company.
The Stock Purchase Agreement
Between December 2, 2001 and
February 4, 2002, JAKKS purchased 132,754 shares of Toymax
common stock on the open market at prices ranging between
$1.3792 per share to $2.00 per share with an average per share
price of $1.71 for an aggregate purchase price of approximately
$0.2 million. On March 11, 2002, JAKKS purchased
8,100,065 shares of Toymax common stock (the Shares)
from four of Toymaxs principal stockholders, in a
transaction pursuant to a stock purchase agreement dated as of
February 10, 2002 among JAKKS, Toymax and those four
principal stockholders. Steven Lebensfeld, Stanley Goldberg and
David Chu, three of the four principals stockholders who are
parties to the stock purchase, were directors of Toymax who
approved the merger agreement and the merger.
The aggregate purchase price for the Shares was
approximately $24.3 million in cash and 646,384 shares of JAKKS
common stock, based on a price per share consisting of $3.00 in
cash and 0.0798 share of JAKKS common stock (with cash
payable in lieu of any fractional share). In connection with the
JAKKS acquisition of the Shares, all options to purchase
Toymax common stock held by the principal stockholders or David
Chu (an affiliate of one of the principal stockholders) were
cancelled. In addition, JAKKS entered into employment or
consulting agreements with certain Toymax executives, whose
prior employment agreements with Toymax were terminated, and
Toymax entered into new agreements with certain affiliates of
one of the principal stockholders with respect to certain of
Toymaxs manufacturing and agency arrangements.
The purchase price and the compensation payable
under the employment, consulting, manufacturing and agency
agreements were determined through arms length
negotiations between JAKKS, on the one hand, and Toymax and the
other respective parties to such agreements, on the other hand.
App-1-48
The entire cost of the Shares, including, without
limitation, the purchase price, the closing payments to certain
former affiliates of Toymax and the fees and expenses incurred
by JAKKS, was funded out of JAKKS working capital/cash
reserves.
As a result of these transactions, as of
May 17, 2002, JAKKS owns 8,232,819 shares of Toymax common
stock, representing approximately 66.8% of the outstanding
shares of Toymax common stock.
Reconfiguration of the Toymax Board of
Directors
Pursuant to the stock purchase agreement,
Toymaxs board of directors was reconfigured to consist of
six directors designated by JAKKS and two directors designated
by Toymax. In addition, the executive officers of JAKKS were
appointed to serve as the executive officers of Toymax. Further,
until the effective time of the merger, Toymaxs board of
directors is required to consult with the individuals who were
officers and directors of Toymax immediately prior to the
closing of the transactions set forth in the stock purchase
agreement with respect to any matter that may arise
significantly affecting Toymax, its business or its assets.
To complete JAKKS acquisition of Toymax,
JAKKS and Toymax propose to effect the merger of JAKKS
wholly-owned merger subsidiary with and into Toymax. JAKKS
currently estimates that the merger consideration payable in the
merger (which is subject to certain conditions and contingent
adjustments) will consist of approximately $11.7 million in cash
and approximately 551,282 shares of JAKKS common stock.
Effects of the Merger; Plans for Toymax
Following the Merger
At the effective time of the merger,
Toymaxs public stockholders will cease to have ownership
interests in Toymax or rights as Toymax stockholders. Upon
completion of the merger, Toymax will be a wholly-owned
subsidiary of JAKKS. JAKKS will be the sole beneficiary of the
future earnings and growth of Toymax, if any.
As a result of the merger, Toymax will be a
privately-held corporation with no public market for its common
stock. After the merger, the common stock will cease to be
quoted on the Nasdaq National Market System and bid and ask
prices with respect to sales of shares of common stock in the
public market will no longer be available. After the effective
time of the merger, Toymax will no longer be required by law to
file periodic reports with the Securities and Exchange
Commission.
At the effective time of the merger, the
certificate of incorporation and bylaws of JAKKS merger
subsidiary in effect immediately prior to the effective time
will be the certificate of incorporation and bylaws of the
surviving corporation; provided however, that the certificate of
incorporation will be amended to provide that the name of the
surviving entity is Toymax International, Inc.
Subject to applicable law, the directors of Toymax immediately
prior to the effective time of the merger will be the directors
of the surviving corporation immediately following the effective
time and will hold office until their respective successors are
duly elected and qualified, or their earlier death, resignation
or removal. The officers of Toymax immediately prior to the
effective time of the merger will be the officers of the
surviving corporation immediately following the effective time
and will hold office until their respective successors are duly
elected and qualified, or their earlier death, resignation or
removal.
Following the merger, JAKKS expects that it will
manage Toymaxs business and assets in a manner to
appropriately address the existing condition of Toymaxs
business and the toy industry in general. In this regard, after
the merger, JAKKS expects it will evaluate Toymaxs
business practices, operations, properties, corporate structure,
management and personnel to determine what changes, if any, are
desirable.
JAKKS does not have any current plans or
proposals relating to any extraordinary corporate transactions,
such as a merger, reorganization, or liquidation involving
Toymax, any sale or transfer of a material amount of the assets
of Toymax or any other material change in Toymaxs
corporate structure or business. JAKKS will continue, however,
to review and explore any opportunities to maximize stockholder
value and may elect in the future to evaluate any transactions
involving its business, including a potential sale of Toymax or
some or all of its assets, as they arise.
App-1-49
Risk that the Merger Will Not Be
Completed
JAKKS currently owns 66.8% of the outstanding
voting securities of Toymax and intends to vote such shares in
favor of the merger, thereby assuring its approval by the
stockholders of Toymax. Nevertheless, completion of the merger
is subject to certain additional conditions.
The obligations of Toymax, JAKKS and the merger
subsidiary to complete the merger are subject to the
satisfaction of the following conditions:
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the February 10, 2002 fairness opinion
stating that the merger and the merger consideration was fair,
from a financial point of view, to the holders of Toymax common
stock, will not have been withdrawn, rescinded or adversely
updated or modified; and
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the consummation of the merger is not restrained,
enjoined or prohibited by any order, judgment or decree of a
court of competent jurisdiction or any governmental entity,
including any pending action seeking damages.
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The obligations of JAKKS and the Merger
Subsidiary to complete the merger are subject to the
satisfaction of each of the following conditions:
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each of the representations and warranties made
by Toymax in the merger agreement that is qualified by
materiality or a material adverse effect on Toymax must be true
and each of the representations and warranties made by Toymax in
the merger agreement that is not so qualified must be true, in
each case, as of the date of the merger agreement and, with
respect to certain representations and warranties, as of the
effective time of the merger (provided that if a representation
or warranty was made regarding a specific date, it need only be
true as of that date);
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Toymax must have observed and performed in all
material respects all of its material covenants under the merger
agreement;
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each holder of a Toymax option that does not by
its terms or pursuant to the Toymax option plan terminate at the
effective time of the merger, executes and delivers to JAKKS an
agreement terminating such option as of the effective time of
the merger; and
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there will have not been any event or occurrence
that has had or would reasonably be expected to have a material
adverse effect on Toymax.
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The obligation of Toymax to complete the merger
is subject to the satisfaction of each of the following
conditions:
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each of the representations and warranties made
by JAKKS in the merger agreement that is qualified by
materiality or a material adverse effect on JAKKS must be true
and each of the representations and warranties made by JAKKS in
the merger agreement that is not so qualified must be true, in
each case, as of the date of the merger agreement and as of the
effective time of the merger (provided that if a representation
or warranty was made regarding a specific date, it need only be
true as of that date); and
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each of JAKKS and the Merger Subsidiary must have
observed and performed in all material respects all of its
material covenants under the merger agreement.
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The merger agreement defines a material
adverse effect as a material adverse effect on the
business, assets or the operations, financial conditions or
results of operation of Toymax and its subsidiaries, taken as a
whole.
The merger agreement contains various
representations and warranties made by Toymax to JAKKS, subject
to identified exceptions, including representations and
warranties relating to:
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the due incorporation, valid existence, good
standing, and full corporate power and authority of Toymax to
own its assets and carry on its business;
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the capitalization of Toymax;
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App-1-50
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Toymax having full corporate power and authority
to execute, deliver and enforce the merger agreement;
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the Toymax board of directors unanimous
(i) determination that the merger agreement and the merger
are advisable and in the best interests of Toymax,
(ii) approval of the merger agreement and the merger and
(iii) recommendation that Toymaxs stockholders adopt
the merger agreement, approve the merger and ratify the stock
purchase agreement;
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the absence of any conflicts between the merger
agreement and Toymaxs certificate of incorporation or
bylaws, any applicable laws and any other material contracts or
documents; and
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the absence of any required consents, approvals
or authorizations of any governmental authorities, except those
specified in the merger agreement, in order for Toymax to
complete the merger.
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The merger agreement contains various
representations and warranties made by JAKKS and the Merger
Subsidiary to Toymax, subject to identified exceptions,
including representations and warranties relating to:
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the due incorporation, valid existence, good
standing and full corporate power and authority of JAKKS and the
merger subsidiary;
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the authorization, execution, delivery and
enforceability of the merger agreement;
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JAKKS having full corporate power and authority
to execute, deliver and enforce the merger agreement;
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the absence of any conflicts between the merger
agreement and JAKKS or the Merger Subsidiarys
certificate of incorporation or bylaws, any applicable laws and
any other material contracts or documents; and
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the absence of any required consents, waivers,
approvals or authorizations of governmental authorities, except
those specified in the merger agreement, in order for JAKKS and
the Merger Subsidiary to complete the merger.
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None of the representations and warranties in the
merger agreement will survive the completion of the merger.
The authorized capital stock of JAKKS is
presently 26,000,000 shares, 25,000,000 of which are shares of
common stock and 1,000,000 of which are shares of preferred
stock. JAKKS has filed a preliminary proxy statement with the
SEC for its 2002 Annual Meeting of Stockholders. One of the
resolutions provided in the preliminary proxy statement that
will be voted upon at that Annual Meeting will be to increase
JAKKS authorized capital stock. If this proposal is
approved, JAKKS will have authorized capital stock of
105,000,000 shares, 100,000,000 of which are shares of JAKKS
common stock and 5,000,000 of which are shares of JAKKS
preferred stock. The approval of this proposal is required for
JAKKS to have a sufficient number of authorized shares available
for issuance to the Toymax stockholders of the approximately
551,282 shares required to consummate the merger.
As a result of these various conditions to the
completion of the merger, we cannot assure you that the merger
will be completed even if the requisite stockholder approval is
obtained.
It is expected that, if Toymax stockholders do
not approve and adopt the merger agreement and the merger, or if
the merger is not completed for any other reason, the current
management of Toymax, under the direction of the Toymax board,
will continue to manage Toymax as an ongoing business.
Certain Relationships and Related
Transactions
Pursuant to the sale of Toymax common stock as
described in the stock purchase agreement, JAKKS owns
approximately 66.8% of Toymaxs common stock. JAKKS also
controls the Toymax board of directors with six members of the
Toymax board of directors also being members of the JAKKS board
of directors and/or officers of JAKKS. Those six individuals owe
fiduciary duties to JAKKS and its stockholders and each of them
also owns securities of JAKKS.
App-1-51
Joel Handel, one of Toymaxs directors who
is not an employee, director or officer of JAKKS, is a partner
in the law firm of Brown Raysman Millstein Felder &
Steiner, LLP which provided approximately $905,540 of legal
services to Toymax during Toymaxs fiscal year ended
March 31, 2002.
Dan Almagor, one of Toymaxs directors who
is not an employee, director or officer of JAKKS, is a principal
in an investment banking firm that received approximately
$700,000 from Toymax for services rendered thereby in connection
with the stock purchase agreement and which firm is entitled to
receive an additional approximately $300,000 from Toymax upon
completion of the merger.
Stock Options
Pursuant to the merger agreement, upon the
merger, all of the outstanding options to acquire Toymax common
stock that Toymax has granted will be exchanged for
fully-exercisable options to acquire JAKKS common stock (or, in
certain limited circumstances, for cash), in an amount and at an
exercise price determined in accordance with the following
formula:
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The exercise price and number of shares of JAKKS
common stock subject to each JAKKS option will be determined in
accordance with the following:
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V =
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lower of (1) the value of JAKKS common stock
on the closing date with respect to the stock purchase agreement
and (2) the value of JAKKS common stock on the closing date
with respect to the merger agreement
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E = exercise price of JAKKS
option = R × exercise price of
corresponding Toymax option
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Number of shares
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subject to corresponding
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Toymax option
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N
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=
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number of shares subject to JAKKS
option =
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R
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Notwithstanding the foregoing, if the
aggregate number of shares of JAKKS common stock subject to
JAKKS options being granted as a result of the calculation set
forth in (I), above, together with the aggregate number of
shares of JAKKS common stock issued as part of the purchase
price under the stock purchase agreement and as part of the
merger consideration under the merger agreement, would exceed
the maximum number of shares of JAKKS common stock which could
be issued without obtaining stockholder approval if and as
required pursuant to the Nasdaq Rule (such maximum number,
M), then the total number of shares of JAKKS common
stock to be subject to JAKKS options, the total number of shares
of JAKKS common stock subject to each JAKKS option to be granted
pursuant to the merger agreement and the exercise price of such
JAKKS options, shall each be subject to adjustment, in
accordance with the following:
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(A) The total number of shares of JAKKS
common stock to be subject to JAKKS options (T) shall be
the excess of M over the aggregate number of shares of JAKKS
common stock issued as part of the purchase price under the
stock purchase agreement and as part of the merger consideration
under the merger agreement.
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(B) The number of shares subject to a JAKKS
option (N) shall be determined by multiplying the number
of shares subject to the JAKKS option, calculated as set forth
in (I), above, by F, where:
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T
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F
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=
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Aggregate number of shares of JAKKS
common stock that would be subject to JAKKS
options, calculated as set forth in (I)
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N = N × F
App-1-52
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(C) Subject to (III), below, the adjusted
exercise price of each JAKKS option (E) shall be
calculated in accordance with the following formula:
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E = V - (N/N × (V - E))
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Notwithstanding the foregoing, if the value of
E with respect to a JAKKS option calculated as set forth
in (C) above, is less than $0.01, then: (i) E shall
be deemed to equal $0.01, (ii) the holder of the Toymax
option shall be entitled to receive N JAKKS Options with
an exercise price of $0.01, and (iii) JAKKS shall be
required to pay to the holder of the applicable JAKKS Option
cash in an amount calculated as follows:
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Cash
Payment = N × ($0.01 - actual
value of E)
The stock purchase agreement further provides
that the new JAKKS options will remain exercisable for a period
of six months after the effective date of the merger.
Employment Agreements and Other Material
Agreements
At the time the stock purchase agreement closed,
the employment agreements with Toymax and its officers and
executives were terminated.
JAKKS entered into an employment agreement with
Steven Lebensfeld, one of Toymaxs former directors and one
of the selling stockholders in the stock purchase agreement,
pursuant to which he serves as JAKKS Senior Vice President
for Product Development for a period of one year for total
compensation of $250,000, paid in equal monthly installments,
less applicable withholdings. The agreement prohibits
Mr. Lebensfeld from competing with JAKKS or soliciting any
of JAKKS employees, suppliers or customers for one year
following its termination. The agreement does not contain any
change of control provision.
JAKKS entered into a consulting agreement with
Harvey Goldberg, one of Toymaxs former directors and one
of the selling stockholders in the stock purchase agreement. The
agreement engages Mr. Goldberg as a consultant to JAKKS
regarding the international sales and marketing of JAKKS
products for a period of one year for a consulting fee of
$325,000, paid in equal monthly installments. The agreement
prohibits Mr. Goldberg from competing with JAKKS or
soliciting any of JAKKS employees, suppliers or customers
for one year following its termination. The agreement does not
contain any change of control provision.
JAKKS entered into a termination and replacement
of manufacturing agreement with Tai Nam Industrial Company
Limited, a Hong Kong private limited company (Tai
Nam), controlled by David Chu, one of Toymaxs former
directors and one of the selling stockholders in the stock
purchase agreement. The term of the agreement is for three
years, and the agreement may be terminated by either party by
providing twenty days written notice. The total
consideration to be paid by JAKKS pursuant to this agreement is
expected to exceed $60,000 per year. The consideration paid by
Toymax in its fiscal year ended March 31, 2002 for a
similar agreement was $57.9 million. The agreement permits
Tai Nam to continue to manufacture existing Toymax products for
JAKKS, as well as manufacture new products for JAKKS and Toymax.
The agreement prohibits Mr. Chu and Tai Nam from competing
with JAKKS or soliciting any of JAKKS employees, suppliers
or customers for one year following its termination.
Consummation of the merger will not trigger any
severance payments under any agreements of Toymax.
Accounting Treatment of the Merger
The merger will be accounted for as the
acquisition of a minority interest by JAKKS using the
purchase method of accounting.
Material Federal Income Tax
Consequences
The following is a summary of the material United
States federal income tax consequences of the merger. This
summary is based on laws, regulations, rulings and decisions now
in effect, all of which are subject to change, possibly with
retroactive effect. This summary does not address all of the
United States federal
App-1-53
income tax consequences that may be applicable to
a particular holder of Toymaxs common stock or to holders
who are subject to special treatment under United
States federal income tax law (including, for example,
banks, insurance companies, tax-exempt investors,
S corporations, dealers in securities, non-United States
persons, holders who hold their Toymax common stock as part of a
hedge, straddle or conversion transaction, and holders who
acquired Toymax common stock through the exercise of employee
stock options or other compensation arrangements). In addition,
this summary does not address the tax consequences of the merger
under applicable state, local or foreign tax laws.
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Tax Consequences of the Receipt of the Merger
Consideration to Holders of Toymax Common Stock
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The merger will be treated as a taxable
transaction, and not a tax free reorganization, by the Toymax
stockholders with respect to their shares of Toymax common
stock. As a result, subject to certain exceptions, each Toymax
stockholder will have a sale or exchange and recognize taxable
gain, or loss, to the extent that the fair market value of the
cash and JAKKS common stock received by the stockholder in the
merger exceeds, or is less than, the stockholders basis in
the Toymax stock surrendered. Such gain or loss will be a
capital gain if the stockholders Toymax shares are held as
a capital asset. The stockholders basis in any JAKKS
common stock received in the merger will equal its fair market
value at the effective time of the merger, and the holding
period for such stock will commence on the day following the
merger.
Dissenters
A holder of Toymax common stock who perfects
dissenters rights will recognize capital gain or loss at
the effective time of the merger equal to the difference between
the amount realized by such holder and such
holders basis in such holders shares of common
stock. For this purpose, the amount realized generally will
equal the trading value per share of JAKKS common stock at the
effective time of the merger. Such gain or loss will be capital
gain or loss and will be long-term if such holders holding
period for the common stock at the effective time of the merger
exceeds one year. Additional capital gain (or loss) will be
recognized by such holder at the time the appraised fair value
is received to the extent such payment exceeds (or is less than)
the amount realized by such holder at the effective time of the
merger. Also, a portion of such payment may be characterized as
interest income.
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Tax Consequences of the Merger to Toymax,
JAKKS and the Merger Subsidiary
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No gain or loss will be realized by Toymax, JAKKS
or the Merger Subsidiary as a result of the merger.
You should consult your tax advisor as to the
particular tax consequences to you of the merger, including the
application of any state, local or foreign tax laws.
Regulatory Matters
Toymax and JAKKS have determined that no material
governmental or regulatory approvals are required for the merger
to occur. In particular, on February 26, 2002 JAKKS and
Toymax received early termination of the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
Dissenters Rights of Appraisal
Under Section 262 of the Delaware General
Corporation Law, which is referred to as the DGCL in
this joint proxy statement/prospectus, any holder of Toymax
common stock who does not wish to accept the merger
consideration being paid by JAKKS as described in this joint
proxy statement/prospectus may dissent from the merger and elect
to have the fair value of their shares of common stock
(exclusive of any element of value arising from the
accomplishment or expectation of the merger) judicially
determined and paid to the holder in cash, together with a fair
rate of interest, if any, provided that the holder complies with
the provisions of Section 262 of the DGCL.
The following discussion is not a complete
statement of the law pertaining to appraisal rights under the
DGCL, and is qualified in its entirety by the full text of
Section 262, which is provided in its entirety as
App-1-54
Appendix C to this joint proxy
statement/prospectus. All references in Section 262 and in
this summary to a stockholder are to the record
holder of the shares of common stock as to which appraisal
rights are asserted.
A person having a beneficial interest in
shares of Toymax common stock held of record in the name of
another person, such as a broker or nominee, must act promptly
to cause the record holder to follow properly the steps
summarized below in a timely manner to perfect appraisal
rights.
Under Section 262, where a proposed merger
is to be submitted for approval and adoption at a meeting of
stockholders, as in the case of the special stockholders
meeting, the corporation, not less than 20 days before the
meeting, must notify each of its stockholders entitled to
appraisal rights that appraisal rights are available and include
in that notice a copy of Section 262. This joint proxy
statement/prospectus constitutes that notice and the applicable
statutory provisions of the DGCL are attached to this proxy
statement as Appendix C. Any stockholder who wishes to
exercise appraisal rights or who wishes to preserve the right to
do so should review carefully the following discussion and
Appendix C to this joint proxy statement/ prospectus.
Failure to comply with the procedures specified in
Section 262 timely and properly will result in the loss of
appraisal rights.
Moreover, because of the complexity of the
procedures for exercising the right to seek appraisal of the
common stock, Toymax believes that stockholders who consider
exercising such appraisal rights should seek the advice of
counsel.
Any holder of Toymax common stock wishing to
exercise the right to demand appraisal under Section 262 of
the DGCL must satisfy each of the following conditions:
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as more fully described below, the holder must
deliver to Toymax a written demand for appraisal of the
holders shares before the vote on the merger agreement at
the special stockholders meeting, which demand will be
sufficient if it reasonably informs Toymax of the identity of
the holder and that the holder intends to demand the appraisal
of the holders shares;
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the holder must not vote the holders shares
of common stock in favor of the merger agreement; a proxy which
does not contain voting instructions will, unless revoked, be
voted in favor of the merger agreement and, therefore, a
stockholder who votes by proxy and who wishes to exercise
appraisal rights must vote against the merger agreement or
abstain from voting on the merger agreement; and
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the holder must continuously hold the shares from
the date of making the demand through the effective time of the
merger; a stockholder who is the record holder of shares of
common stock on the date the written demand for appraisal is
made but who thereafter transfers those shares before the
effective time of the merger will lose any right to appraisal in
respect of those shares.
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Neither voting (in person or by proxy) against,
abstaining from voting on or failing to vote on the proposal to
approve and adopt the merger agreement and the merger will
constitute a written demand for appraisal within the meaning of
Section 262. The written demand for appraisal must be in
addition to and separate from any such proxy or vote.
Only a holder of record of shares of Toymax
common stock issued and outstanding immediately before the
effective time of the merger is entitled to assert appraisal
rights for the shares in that holders name. A demand for
appraisal should be executed by or on behalf of the stockholder
of record, fully and correctly, as the stockholders name
appears on the stock certificates, and should specify the
stockholders name and mailing address, the number of
shares of common stock owned and that the stockholder intends to
demand appraisal of the stockholders common stock. If the
shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of the demand should
be made in that capacity. If the shares are owned of record by
more than one person, as in a joint tenancy or tenancy in
common, the demand should be executed by or on behalf of all
owners. An authorized agent, including one or more joint owners,
may execute a demand for appraisal on behalf of a stockholder;
however, the agent must identify the record owner or owners and
expressly disclose the fact that, in executing the demand, the
agent is acting as agent for such owner or owners. A record
holder such as a broker who holds shares as nominee for several
beneficial owners may exercise appraisal rights with respect to
the shares held for one or more beneficial owners while not
exercising appraisal rights with respect to the shares held for
one or more other beneficial owners. In such case, the written
demand should set forth the number of shares as to which
appraisal is sought, and where no number of shares is expressly
mentioned the demand will be presumed to cover all shares held
in the name of
App-1-55
the record owner.
Stockholders who hold their
shares in brokerage accounts or other nominee forms and who wish
to exercise appraisal rights are urged to consult with their
brokers to determine appropriate procedures for the making of a
demand for appraisal by the nominee.
A stockholder who elects to exercise appraisal
rights under Section 262 should mail or deliver a written
demand to: Toymax International, Inc., 22619 Pacific
Coast Highway, Malibu, California 90265, Attention:
Corporate Secretary.
Within ten days after the effective time of the
merger, Toymax must send a notice as to the effectiveness of the
merger to each former Toymax stockholder who has made a written
demand for appraisal in accordance with Section 262 and who
has not voted to approve and adopt the merger agreement and the
merger. Within 120 days after the effective time of the
merger, but not thereafter, either Toymax or any dissenting
stockholder who has complied with the requirements of
Section 262 may file a petition in the Delaware Court of
Chancery demanding a determination of the value of the shares of
common stock held by all dissenting stockholders. Toymax is
under no obligation to and has no present intention to file a
petition for appraisal, and stockholders seeking to exercise
appraisal rights should not assume that Toymax will file such a
petition or that Toymax will initiate any negotiations with
respect to the fair value of the shares. Accordingly,
stockholders who desire to have their shares appraised should
initiate any petitions necessary for the perfection of their
appraisal rights within the time periods and in the manner
prescribed in Section 262. Inasmuch as Toymax has no
obligation to file such a petition, the failure of a stockholder
to do so within the period specified could nullify the
stockholders previous written demand for appraisal.
Within 120 days after the effective time of
the merger, any stockholder who has complied with the provisions
of Section 262 to that point in time will be entitled to
receive from Toymax, upon written request, a statement setting
forth the aggregate number of shares not voted in favor of the
merger agreement and with respect to which demands for appraisal
have been received and the aggregate number of holders of such
shares. Toymax must mail that statement to the stockholder
within 10 days after receipt of the request or within
10 days after expiration of the period for delivery of
demands for appraisals under Section 262, whichever is later.
A stockholder timely filing a petition for
appraisal with the Delaware Court of Chancery must deliver a
copy to Toymax, which will then be obligated within 20 days
to provide the Delaware Court of Chancery with a duly verified
list containing the names and addresses of all stockholders who
have demanded appraisal of their shares. After notice to those
stockholders, the Delaware Court of Chancery is empowered to
conduct a hearing on the petition to determine which
stockholders are entitled to appraisal rights. The Delaware
Court of Chancery may require stockholders who have demanded an
appraisal for their shares and who hold stock represented by
certificates to submit their certificates to the Register in
Chancery for notation thereon of the pendency of the appraisal
proceedings, and if any stockholder fails to comply with the
requirement, the Delaware Court of Chancery may dismiss the
proceedings as to that stockholder.
After determining the stockholders entitled to an
appraisal, the Delaware Court of Chancery will appraise the
fair value of their shares, exclusive of any element
of value arising from the accomplishment or expectation of the
merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. The costs
of the action may be determined by the Delaware Court of
Chancery and taxed upon the parties as the Delaware Court of
Chancery deems equitable. Upon application of a dissenting
stockholder, the Delaware Court of Chancery may also order that
all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including, without
limitation, reasonable attorneys fees and the fees and
expenses of experts, be charged pro rata against the value of
all of the shares entitled to appraisal.
Stockholders
considering seeking appraisal should be aware that the fair
value of their shares as determined under Section 262 could
be more than, the same as or less than the value of the shares
of JAKKS common stock they would receive under the merger
agreement if they did not seek appraisal of their shares.
Stockholders should also be aware that banking opinions, such as
the one obtained by Toymax from Morgan Lewins and otherwise
described herein, are not opinions as to fair value under
Section 262.
In determining fair value and, if applicable, a
fair rate of interest, the Delaware Court of Chancery is to take
into account all relevant factors. In
Weinberger v.
UOP, Inc.,
the Delaware Supreme Court discussed the
App-1-56
factors that could be considered in determining
fair value in an appraisal proceeding, stating that proof
of value by any techniques or methods that are generally
considered acceptable in the financial community and otherwise
admissible in court should be considered, and that
fair price obviously requires consideration of all
relevant factors involving the value of a company. The
Delaware Supreme Court stated that, in making this determination
of fair value, the court must consider market value, asset
value, dividends, earnings prospects, the nature of the
enterprise and any other facts that could be ascertained as of
the date of the merger that throw any light on future prospects
of the merged corporation. In
Weinberger
, the Delaware
Supreme Court stated that elements of future value,
including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the
product of speculation, may be considered. However,
Section 262 provides that fair value is to be
exclusive of any element of value arising from the
accomplishment or expectation of the merger.
Any Toymax stockholder who has duly demanded an
appraisal in compliance with Section 262 will not, after
the effective time of the merger, be entitled to vote the shares
subject to that demand for any purpose or be entitled to the
payment of dividends or other distributions on those shares
(except dividends or other distributions payable to holders of
record of shares as of a record date before the effective time
of the merger).
Any stockholder may withdraw its demand for
appraisal and accept the merger consideration shares by
delivering to Toymax a written withdrawal of the
stockholders demand for appraisal, except that
(1) any such attempt to withdraw made more than
60 days after the effective time of the merger will require
written approval of Toymax and (2) no appraisal proceeding
in the Delaware Court of Chancery will be dismissed as to any
stockholder without the approval of the Delaware Court of
Chancery, and such approval may be conditioned upon such terms
as the Delaware Court of Chancery deems just. If Toymax does not
approve a stockholders request to withdraw a demand for
appraisal when that approval is required or if the Delaware
Court of Chancery does not approve the dismissal of an appraisal
proceeding, the stockholder would be entitled to receive only
the appraised value determined in any such appraisal proceeding,
which value could be more than, the same or less than the value
of the JAKKS shares to be received under the merger agreement.
Failure to comply strictly with all of the
procedures set forth in Section 262 of the DGCL may result
in the loss of a stockholders statutory appraisal rights.
Consequently, any stockholder wishing to exercise appraisal
rights is urged to consult legal counsel before attempting to
exercise appraisal rights.
Listing of JAKKS Common Stock
JAKKS will apply for listing on the Nasdaq
National Market of the shares of JAKKS common stock to be issued
in the merger.
App-1-57
THE MERGER AGREEMENT
The description of the merger agreement contained
in this joint proxy statement/prospectus describes the material
terms of the merger agreement. The merger agreement may be found
in its entirety in Appendix A to this joint proxy
statement/prospectus and is incorporated herein by reference.
You are urged to read the entire merger agreement as it is the
legal document that governs the merger.
The Merger
The merger agreement provides that, subject to
conditions summarized below, the merger subsidiary, a Delaware
corporation and wholly-owned subsidiary of JAKKS, will merge
with and into Toymax. Following the completion of the merger,
the merger subsidiary will cease to exist as a separate entity,
and Toymax will be the surviving corporation and a wholly-owned
subsidiary of JAKKS.
Effective Time of the Merger
The merger will become effective when a
certificate of merger is filed with the Secretary of State of
the State of Delaware in accordance with the DGCL or at such
later time as is specified in the certificate of merger. This
time is referred to as the effective time in this
joint proxy statement/prospectus. The filing is expected to
occur as soon as practicable after approval and adoption of the
merger agreement by Toymaxs stockholders at the special
stockholders meeting and satisfaction or waiver of the other
conditions to the merger contained in the merger agreement.
Toymax cannot guarantee that all conditions contained in the
merger agreement will be satisfied or waived. See
Conditions to the Merger.
Structure; Merger Consideration
Unless you seek appraisal rights, you will be
entitled to receive $3.00 in cash plus .0798 of a share of JAKKS
common stock in exchange for each share of Toymax common stock
you own at the time of the merger. In the event that the average
closing price of JAKKS common stock for the 10 days prior
to the effective time of the merger is less than $16.9173 per
share (the adjusted closing price), the amount of
JAKKS common stock you receive (in addition to the cash payment
described above) for each share of Toymax common stock will be
determined by dividing $1.35 by the adjusted closing price. In
the event that the average closing price of JAKKS common stock
for the 10 days prior to the effective time of the merger
exceeds $20.6767 per share, JAKKS may elect, in its sole
discretion, to pay you exclusively in cash consideration of
$4.65 for each share of Toymax common stock you own at the time
of the merger.
The merger agreement provides for the following
further conditions relating to the payment of the merger
consideration:
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Each holder of shares of Toymax common stock that
would otherwise be entitled to receive a fractional share of
JAKKS common stock by virtue of the merger will otherwise be
paid cash without any interest, equal to the product of the
fractional share that would have been issued multiplied by
$18.797. If the average closing price of JAKKS common stock for
the 10 days prior to the effective time of the merger is less
than $16.9173 per share at the effective time of the merger,
then the cash to be paid to each Toymax stockholder for such
fractional share will be the product of such fractional share
that would have been issued and the average closing price of
JAKKS common stock for the ten days prior to the effective time
of the merger;
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Treasury shares and shares of Toymax common stock
owned by any wholly-owned subsidiary of Toymax will be canceled
without any payment therefor;
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Shares of Toymax common stock owned by JAKKS or
the merger subsidiary will be canceled without any payment
therefor; and
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Shares held by stockholders who have perfected
their dissenters rights will be subject to appraisal in
accordance with Delaware law.
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App-1-58
Treatment of Options
Pursuant to the merger agreement, upon the
merger, all of the outstanding options to acquire Toymax common
stock will be exchanged for fully-exercisable options to acquire
JAKKS common stock (or, in certain limited circumstances, for
cash), in an amount and at an exercise price determined in
accordance with the formula set forth in the merger agreement
(and more fully described on
page of this joint proxy
statement/ prospectus). The stock purchase agreement further
provides that the new JAKKS options will remain exercisable for
a period of six months after the effective date of the merger.
Payment for Shares; Exchange of Toymax
Certificates
At the effective time, JAKKS will deliver the
cash, certificates representing the shares of JAKKS common stock
to be issued and the cash to be paid in lieu of fractional
shares in the merger, which is referred to as the merger
consideration in this joint proxy statement/ prospectus,
to American Stock Transfer and Trust Company, the paying agent.
Promptly after the effective time, the paying agent will mail to
each record holder of Toymax common stock a letter of
transmittal and instructions to effect the surrender of the
stock certificates that, immediately before the effective time,
represented the record holders shares of Toymax common
stock in exchange for payment of the merger consideration. When
you deliver your certificates of Toymax common stock to the
paying agent, along with a properly executed letter of
transmittal and any other required documents, you will receive
cash and certificates representing, or statements indicating
book-entry ownership of, the number of shares of JAKKS common
stock that you are entitled to receive under the merger
agreement. The surrendered certificates will be canceled.
Each holder of Toymax common stock will be
entitled to receive the merger consideration only upon surrender
to the paying agent the relevant share certificates. No interest
will accrue or will be paid on the cash portion, if any, of the
merger consideration upon the surrender of any certificate. The
paying agent will not issue any securities or make payments to
any person who is not the registered holder of the certificate
surrendered unless the certificate is properly endorsed and
otherwise in proper form for transfer. Further, the person
requesting such certificates or payment will be required to pay
any transfer or other taxes required by reason of the payment to
a person other than the registered holder of the certificate
surrendered or establish to the satisfaction of the paying agent
that such tax has been paid or is not payable.
Neither JAKKS, the paying agent nor any other
person will be liable to any former Toymax stockholder for any
amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
YOU SHOULD NOT FORWARD STOCK CERTIFICATES WITH
THE ENCLOSED PROXY CARD. YOU SHOULD SUBMIT YOUR STOCK
CERTIFICATES WHEN YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A
FORM OF LETTER OF TRANSMITTAL FROM THE PAYING AGENT.
Transfer of Shares
At and after the effective time, Toymaxs
transfer agent will not record on the stock transfer books
transfers of any shares of Toymax common stock that were
outstanding immediately prior to the effective time of the
merger.
Officers, Directors and Governing
Documents
Pursuant to the transactions set forth in the
stock purchase agreement, between February 10, 2002 and
March 10, 2002 five of Toymaxs directors resigned and
were replaced by six directors, all of whom are members of
JAKKS board of directors. After the effective time, the
current Toymax board of directors will resign and the board of
directors of the merger subsidiary will serve as the Toymax
board of directors until their successors are duly elected and
qualified. At the effective time of the merger, Toymaxs
officers will resign and the officers of the merger subsidiary
will serve as the officers of Toymax until their successors are
duly elected and qualified.
App-1-59
From and after the effective time of the merger,
the certificate of incorporation and by-laws of the merger
subsidiary will become the certificate of incorporation and
by-laws of the surviving corporation unless and until the same
are amended, restated or revoked, as the case may be.
Representations and Warranties
The merger agreement contains various
representations and warranties made by Toymax to JAKKS, subject
to identified exceptions, including representations and
warranties relating to:
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the due incorporation, valid existence, good
standing, and full corporate power and authority of Toymax to
own its assets and carry on its business;
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the capitalization of Toymax;
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|
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Toymax having full corporate power and authority
to execute, deliver and enforce the merger agreement;
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the Toymax board of directors unanimous
(i) determination that the merger agreement and the merger
are advisable and in the best interests of Toymax,
(ii) approval of the merger agreement and the merger and
(iii) recommendation that Toymaxs stockholders adopt
the merger agreement, approve the merger and ratify the stock
purchase agreement;
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the absence of any conflicts between the merger
agreement and Toymaxs certificate of incorporation or
bylaws, any applicable laws and any other material contracts or
documents; and
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|
|
the absence of any required consents, approvals
or authorizations of any governmental authorities, except those
specified in the merger agreement, in order for Toymax to
complete the merger.
|
The merger agreement contains various
representations and warranties made by JAKKS and the merger
subsidiary to Toymax, subject to identified exceptions,
including representations and warranties relating to:
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|
|
the due incorporation, valid existence, good
standing and full corporate power and authority of JAKKS and the
merger subsidiary;
|
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|
|
the authorization, execution, delivery and
enforceability of the merger agreement;
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JAKKS having full corporate power and authority
to execute, deliver and enforce the merger agreement;
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the absence of any conflicts between the merger
agreement and JAKKS or the merger subsidiarys
certificate of incorporation or bylaws, any applicable laws and
any other material contracts or documents; and
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the absence of any required consents, waivers,
approvals or authorizations of governmental authorities, except
those specified in the merger agreement, in order for JAKKS and
the merger subsidiary to complete the merger.
|
None of the representations and warranties in the
merger agreement will survive after the completion of the merger.
Conduct of Business Pending the
Merger
In the merger agreement, Toymax and its
subsidiaries has agreed, before completion of the merger, to:
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conduct its business in its ordinary course;
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use commercially reasonable efforts to preserve
the business and maintain its respective relations with
suppliers, customers and others having material business
dealings with Toymax;
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use commercially reasonable efforts to maintain
all material permits and consents; and
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not amend Toymaxs articles of incorporation
or bylaws.
|
App-1-60
Stockholders Meeting; Recommendation of Board
of Directors
In the merger agreement, Toymax has agreed to:
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prepare and file with the Securities and Exchange
Commission preliminary proxy materials including the notice of
the special meeting, proxy statement and form of proxy and make
any changes thereto pursuant to Securities and Exchange
Commission comment;
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duly call, give notice of, and hold a special
stockholders meeting as soon as reasonably practicable after the
date of the merger agreement including printing and mailing
definitive proxy materials; and
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except as described below, include in the proxy
statement sent to stockholders in connection with the
solicitation of proxies relating to the merger the
recommendation of Toymaxs board of directors that
Toymaxs stockholders vote in favor of adoption of the
merger agreement, approval of the merger and ratification of the
stock purchase agreement, unless that inclusion would cause any
of Toymaxs directors to breach his fiduciary duty or cause
Toymax or any of its directors, officers, employees or agents to
violate the law.
|
The merger agreement also provides that Toymax
shall not take any action to:
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|
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withdraw its approval or recommendation of the
merger;
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|
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modify or qualify such approval or recommendation
in a manner materially adverse to JAKKS or which would prevent,
impede or materially delay the consummation of the merger; or
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|
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accept or recommend any Alternative Proposal (as
defined in the next paragraph) except, subject to the provisions
of the merger agreement and the payment of the Termination Fee,
if applicable, that (i) is made in writing,
(ii) Toymaxs board of directors determines in good
faith in the exercise of its business judgment is reasonably
capable of being completed on the terms proposed and if so
completed would result in an Alternative Transaction (as defined
in the next paragraph) that, from a financial point of view,
would be superior and more beneficial to Toymaxs
stockholders than the merger, and (iii) Toymaxs board
of directors determines in good faith that its failure to
consider such Alternative Proposal or to withdraw, modify or
qualify its approval or recommendation of the merger would cause
it to violate its fiduciary duties under applicable law.
|
The merger agreement defines Alternative
Proposal as any bona fide bid, offer or other proposal
relating to an Alternative Transaction. The merger agreement
defines Alternative Transaction as (a) any
merger, consolidation or other business combination or
reorganization pursuant to which a substantial portion of
Toymaxs business or assets (including without limitation
any portion that accounts for, or is reasonably expected to
generate over the ensuing 12-month period, 10% or more of
Toymaxs accounts) is sold or otherwise transferred to, or
combined with that or those of, another person; (b) a
transaction as a result of which any person (other than JAKKS,
Toymax or one of Toymaxs subsidiaries) becomes the holder,
directly or indirectly, of securities of Toymax having 10% or
more of the voting power of all voting securities of Toymax; or
(c) the acquisition, directly or indirectly, by another
person (other than JAKKS) of control of Toymax, in each case,
other than the merger.
Regulatory and Other Consents and
Approvals
Subject to the terms and conditions of the merger
agreement, Toymax, JAKKS and the merger subsidiary have agreed
to cooperate and use their reasonable best efforts to make all
filings necessary, proper or advisable under applicable laws to
consummate the merger and to do all other things necessary,
proper or advisable under applicable laws to consummate the
merger. Each of the parties has also agreed to use its
reasonable best efforts to obtain as promptly as practicable all
consents of any governmental entity or any other person required
in connection with the consummation of the merger.
App-1-61
Conditions to the Merger
The obligations of Toymax, JAKKS and the merger
subsidiary to complete the merger are subject to the
satisfaction of certain conditions, including the following:
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stockholders who hold a majority of the voting
power of the outstanding shares of Toymax common stock must
adopt the merger agreement, approve the merger and ratify the
stock purchase agreement;
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|
the fairness opinion that Toymax received stating
that the merger and the merger consideration is fair, from a
financial point of view, to the holders of Toymax common stock,
will not have been withdrawn, rescinded or adversely updated or
modified; and
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|
|
the consummation of the merger is not restrained,
enjoined or prohibited by any order, judgment or decree of a
court of competent jurisdiction or any governmental entity,
including any pending action seeking damages.
|
The obligations of JAKKS and the merger
subsidiary to complete the merger are subject to the
satisfaction of each of the following conditions:
|
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each of the representations and warranties made
by Toymax in the merger agreement that is qualified by
materiality or a material adverse effect on Toymax must be true
and each of the representations and warranties made by Toymax in
the merger agreement that is not so qualified must be true, in
each case, as of the date of the merger agreement and, with
respect to certain representations and warranties, as of the
effective time (provided that if a representation or warranty
was made regarding a specific date, it need only be true as of
that date);
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Toymax must have observed and performed in all
material respects all of its material covenants under the merger
agreement;
|
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each holder of a Toymax option that does not by
its terms or pursuant to the Toymax option plan terminate at the
effective time of the merger, executes and delivers to JAKKS an
agreement terminating such option as of the effective time of
the merger; and
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there shall have not been any event or occurrence
that has had or would reasonably be expected to have a material
adverse effect on Toymax.
|
The obligations of Toymax to complete the merger
is subject to the satisfaction of each of the following
conditions:
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each of the representations and warranties made
by JAKKS in the merger agreement that is qualified by
materiality or a material adverse effect on JAKKS must be true
and each of the representations and warranties made by JAKKS in
the merger agreement that is not so qualified must be true, in
each case, as of the date of the merger agreement and as of the
effective time (provided that if a representation or warranty
was made regarding a specific date, it need only be true as of
that date); and
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each of JAKKS and the merger subsidiary must have
observed and performed in all material respects all of its
material covenants under the merger agreement.
|
The merger agreement defines a material
adverse effect as a material adverse effect on the
business, assets or the operations, financial conditions or
results of operation of Toymax and its subsidiaries, taken as a
whole.
Termination of the Merger Agreement by JAKKS
or Toymax
At any time before the effective time of the
merger, JAKKS and Toymax may terminate the merger agreement and
abandon the merger by mutual written consent, regardless of
whether the stockholders of
App-1-62
Toymax have adopted and approved the merger and
the merger agreement. Either party may also terminate the merger
agreement if:
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Toymax stockholder approval of the matters
presented hereby is not obtained; or
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the effective time has not occurred on or before
September 30, 2002, or such later date to which JAKKS or
Toymax may agree.
|
Termination by
JAKKS.
JAKKS may terminate the merger
agreement before the effective time of the merger upon a
material breach by Toymax of any of its representations,
warranties, covenants or agreements which would give rise to a
material change relating to Toymax and is not cured within
30 days after written notice thereof or is not curable by
Toymax.
Termination by
Toymax.
Toymax may terminate the
merger agreement before the effective time of the merger upon a
breach by JAKKS or the merger subsidiary of any of their
representations, warranties, covenants or agreements which would
give rise to a material change relating to JAKKS and is not
cured within 30 days after written notice thereof or is not
curable by JAKKS.
Amendment and Waiver
Any provision of the merger agreement may be
amended before the effective time of the merger provided that
after stockholder approval has been obtained no further
amendment may be made which is prohibited by law or would
require further stockholder action. Further, at any time before
the effective time, any party to this agreement may extend, in
writing, the time for the performance of any obligation of any
other party, waive any inaccuracy in the representations and
warranties of any other party in the merger agreement or in any
other document and waive compliance with any agreement or
condition to its obligations.
No Termination Fee
Toymax is not required by the terms of the merger
agreement to pay any termination fees to JAKKS if the merger
agreement is terminated in accordance with its terms.
App-1-63
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS
The following unaudited pro forma consolidated
financial statements as of June 30, 2002 and for the year
ended December 31, 2001 and six months ended June 30,
2002 give effect to the acquisition of Toymax. The pro forma
consolidated balance sheet presents JAKKS financial
position as if the acquisition of Toymax had occurred on
March 31, 2002. The pro forma consolidated statement of
operations presents JAKKS results as if the acquisition of
Toymax had occurred on January 1, 2001. JAKKS fiscal
year end is December 31 and Toymaxs fiscal year end
is March 31. The fourth quarter for JAKKS most recent
fiscal year ended December 31, 2001, while the third
quarter of Toymaxs fiscal year ended December 31,
2001. The historical consolidated balance sheet represents the
initial acquisition by JAKKS on March 11, 2002 of 66.8% of
Toymaxs common stock. The pro forma consolidated balance
sheet reflects the acquisition of the remaining shares described
herein. The consolidated statements of operations for the year
ended December 31, 2001 and six months ended June 30,
2002 reflect both the initial acquisition of 66.8% of
Toymaxs common stock and the acquisition of the remaining
shares of Toymax common stock described herein. The pro forma
consolidated statement of operations for the year ended
December 31, 2001 is based on JAKKS historical
consolidated statement of operations and the statement of
operations of Toymax for the twelve months ended
December 31, 2001.
The pro forma consolidated statement of
operations for the six months ended June 30, 2002 is based
on JAKKS historical consolidated statement of operations
including Toymax from March 12, 2002 to June 30, 2002
and the statement of operations of Toymax for the period
January 1, 2002 to June 30, 2002.
The combined consolidated financial statements
include, in JAKKS opinion, all material adjustments
necessary to reflect the acquisition of Toymax. The pro forma
consolidated financial statements do not represent JAKKS
actual results of operations, including the acquisitions, nor do
they purport to predict or indicate our financial position or
results of operations at any future date or for any future
period. The pro forma consolidated financial statements should
be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of
Operations, JAKKS consolidated financial statements
and the related notes thereto and Toymaxs consolidated
financial statements and the related notes thereto either
incorporated herein by reference or included with this joint
proxy statement/prospectus.
App-1-64
JAKKS PACIFIC, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
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|
|
|
|
June 30, 2002
|
|
|
|
|
|
Historical
|
|
Pro Forma
|
|
Pro Forma
|
|
|
JAKKS
|
|
Adjustments
|
|
Balance Sheet
|
|
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|
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|
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|
|
(unaudited)
|
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|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
81,276,777
|
|
|
$
|
(12,253,000
|
)(1)
|
|
$
|
69,023,777
|
|
|
Marketable securities
|
|
|
5,813,342
|
|
|
|
|
|
|
|
5,813,342
|
|
|
Accounts receivable, net
|
|
|
78,080,430
|
|
|
|
|
|
|
|
78,080,436
|
|
|
Inventory, net
|
|
|
49,911,765
|
|
|
|
|
|
|
|
49,911,765
|
|
|
Prepaid expenses and other current assets
|
|
|
5,826,372
|
|
|
|
|
|
|
|
5,826,372
|
|
|
Notes Receivables Officers
|
|
|
1,974,000
|
|
|
|
|
|
|
|
1,974,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
222,882,686
|
|
|
|
(12,253,000
|
)
|
|
|
210,629,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost
|
|
|
36,770,336
|
|
|
|
|
|
|
|
36,770,336
|
|
|
Less accumulated depreciation and amortization
|
|
|
21,653,028
|
|
|
|
|
|
|
|
21,653,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
15,117,308
|
|
|
|
|
|
|
|
15,117,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
13,805,932
|
|
|
|
|
|
|
|
13,805,932
|
|
|
Goodwill, net
|
|
|
136,360,429
|
|
|
|
19,358,852
|
(1)
|
|
|
155,719,281
|
|
|
Trademarks, net
|
|
|
11,567,679
|
|
|
|
|
|
|
|
11,567,679
|
|
|
Investment in joint venture
|
|
|
3,831,317
|
|
|
|
|
|
|
|
3,831,317
|
|
|
Other
|
|
|
2,719,345
|
|
|
|
|
|
|
|
2,719,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
406,284,696
|
|
|
$
|
7,105,852
|
|
|
$
|
413,390,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
61,118,676
|
|
|
|
|
|
|
$
|
61,118,676
|
|
|
Short term debt including current portion of long
term debt
|
|
|
22,560
|
|
|
|
|
|
|
|
22,560
|
|
|
Income taxes payable
|
|
|
8,612,930
|
|
|
|
|
|
|
|
8,612,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
69,754,166
|
|
|
|
|
|
|
|
69,754,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
|
77,457
|
|
|
|
|
|
|
|
77,457
|
|
|
Deferred income taxes
|
|
|
2,207,429
|
|
|
|
|
|
|
|
2,207,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
72,039,052
|
|
|
|
|
|
|
|
72,039,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
4,973,237
|
|
|
|
(4,973,237
|
)(1)
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
23,585
|
|
|
|
326
|
(1)
|
|
|
23,911
|
|
|
Additional paid-in capital
|
|
|
230,081,185
|
|
|
|
12,078,763
|
(1)
|
|
|
242,159,948
|
|
|
Treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
99,167,637
|
|
|
|
|
|
|
|
99,167,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
329,272,407
|
|
|
|
12,079,089
|
|
|
|
341,351,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
406,284,696
|
|
|
$
|
7,105,852
|
|
|
|
413,390,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited pro forma consolidated
financial statements.
App-1-65
JAKKS PACIFIC, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2001
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
Pro Forma
|
|
|
JAKKS
|
|
Toymax
|
|
Combined
|
|
Adjustments
|
|
Results
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
284,309,021
|
|
|
$
|
102,894,216
|
|
|
$
|
387,203,237
|
|
|
$
|
(3,655,610
|
)(2)
|
|
$
|
383,547,627
|
|
Cost of sales
|
|
|
164,222,261
|
|
|
|
75,893,456
|
|
|
|
240,115,717
|
|
|
|
(6,937,612
|
)(2),(4)
|
|
|
233,178,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
120,086,760
|
|
|
|
27,000,760
|
|
|
|
147,087,520
|
|
|
|
3,282,002
|
|
|
|
150,369,522
|
|
Selling, general and administrative expenses
|
|
|
89,574,503
|
|
|
|
36,366,509
|
|
|
|
125,941,012
|
|
|
|
(2,584,728
|
)(2),(5)
|
|
|
123,356,284
|
|
Acquisition shutdown & product recall costs
|
|
|
1,214,101
|
|
|
|
|
|
|
|
1,214,101
|
|
|
|
|
|
|
|
1,214,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
29,298,156
|
|
|
|
(9,365,749
|
)
|
|
|
19,932,407
|
|
|
|
5,866,730
|
|
|
|
25,799,137
|
|
Interest, net
|
|
|
(2,056,526
|
)
|
|
|
827,069
|
|
|
|
(1,229,457
|
)
|
|
|
961,923
|
(7)
|
|
|
(267,534
|
)
|
Other (income) expense
|
|
|
(6,675,428
|
)
|
|
|
7,783,336
|
|
|
|
1,107,908
|
|
|
|
(5,257,793
|
)(2)
|
|
|
(4,149,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income
taxes
|
|
|
38,030,110
|
|
|
|
(17,976,154
|
)
|
|
|
20,053,956
|
|
|
|
10,162,600
|
|
|
|
30,216,556
|
|
Provision for (benefit from) income taxes
|
|
|
9,797,209
|
|
|
|
(3,574,398
|
)
|
|
|
6,222,811
|
|
|
|
2,237,825
|
(2),(8)
|
|
|
8,460,636
|
|
Minority interest
|
|
|
|
|
|
|
(858,297
|
)
|
|
|
(858,297
|
)
|
|
|
858,297
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
28,232,901
|
|
|
$
|
(13,543,459
|
)
|
|
$
|
14,689,442
|
|
|
$
|
7,066,478
|
|
|
$
|
21,755,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
18,199,108
|
|
|
|
|
|
|
|
|
|
|
|
972,303
|
|
|
|
19,171,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares and equivalents
outstanding
|
|
|
19,409,925
|
|
|
|
|
|
|
|
|
|
|
|
972,303
|
|
|
|
20,382,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2002
|
|
|
|
|
|
|
|
Pro Forma
|
|
Pro Forma
|
|
|
Combined
|
|
Adjustments
|
|
Results
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
138,886,969
|
|
|
|
2,200,000
|
(3)
|
|
$
|
141,086,969
|
|
Cost of sales
|
|
|
77,225,515
|
|
|
|
(1,146,700
|
)(4)
|
|
|
76,078,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
61,661,454
|
|
|
|
3,346,700
|
|
|
|
65,008,154
|
|
Selling, general and administrative expenses
|
|
|
42,208,116
|
|
|
|
(12,379,272
|
)(5)
|
|
|
29,828,844
|
|
Acquisition shutdown expense
|
|
|
8,121,497
|
|
|
|
(4,634,149
|
)(6)
|
|
|
3,487,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11,331,841
|
|
|
|
20,360,121
|
|
|
|
31,691,962
|
|
Interest, net
|
|
|
(532,941
|
)
|
|
|
207,338
|
(7)
|
|
|
(325,603
|
)
|
Other (income) expense
|
|
|
(1,968,865
|
)
|
|
|
|
|
|
|
(1,968,865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income
taxes
|
|
|
13,833,647
|
|
|
|
20,152,783
|
|
|
|
33,986,430
|
|
Provision for (benefit from) income taxes
|
|
|
3,735,085
|
|
|
|
5,441,251
|
(8)
|
|
|
9,176,336
|
|
Minority interest
|
|
|
110,662
|
|
|
|
(110,662
|
)(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,987,900
|
|
|
$
|
14,822,194
|
|
|
$
|
24,810,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.50
|
|
|
|
|
|
|
$
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
20,004,500
|
|
|
|
1,054,284
|
|
|
|
21,058,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.47
|
|
|
|
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares and equivalents
outstanding
|
|
|
21,080,870
|
|
|
|
1,054,284
|
|
|
|
22,135,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited pro forma consolidated
financial statements.
App-1-66
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial
statements have been adjusted for the items relating to the
acquisition of Toymax as set forth below:
Balance Sheet
|
|
|
|
|
|
|
|
|
|
(1)
Consideration
paid for 4,084,197 shares of Toymax stock on or about the
closing of the merger with Toymax:
|
|
Cash of $3.00 per share of Toymax stock paid to
Toymax Stockholders
|
|
$
|
12,253,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325,919 shares of JAKKS common stock issued
to Toymax Stockholders
|
|
$
|
6,127,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of 2,147,863 Toymax Stock Options to
514,243 JAKKS Stock Options at a ratio of 4.18 to 1 based on the
ratio of the values of JAKKS common stock at $18.80 per share
and Toymax common stock at $4.50
|
|
$
|
5,952,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
(2)
Adjustments
to reflect the divestiture of the discontinued operations of
Toymax:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Six Months Ended
|
|
|
December 31, 2001
|
|
June 30, 2002
|
|
|
Total
|
|
Total
|
|
|
|
|
|
Net sales
|
|
$
|
3,655,610
|
|
|
|
|
|
Cost of sales
|
|
|
3,310,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
345,582
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,427,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,082,118
|
)
|
|
|
|
|
Other (income) expense
|
|
|
5,257,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(8,339,911
|
)
|
|
|
|
|
Benefit from income taxes
|
|
|
(218,934
|
)
|
|
|
|
|
Minority interest
|
|
|
(1,716,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(6,404,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
Pro Forma
|
|
|
Year Ended
|
|
Six Months Ended
|
|
|
Dec. 31, 2001
|
|
June 30, 2002
|
|
|
|
|
|
(3)
Net sales
is adjusted to reflect:
|
|
|
|
|
|
|
|
|
|
Restructuring charge
|
|
$
|
|
|
|
$
|
2,200,000
|
|
|
|
|
|
|
|
|
|
|
|
(See Note 2 of the Toymax consolidated
financial statements.)
|
|
|
|
|
|
|
|
|
(4)
Cost of
sales is adjusted to reflect:
|
|
|
|
|
|
|
|
|
|
Elimination of agency fee
|
|
$
|
(3,627,584
|
)
|
|
$
|
(146,700
|
)
|
|
(Toymax cancelled an agency agreement
March 11, 2002 for services that JAKKS does internally.)
|
|
|
|
|
|
|
|
|
|
Restructuring charge
|
|
|
|
|
|
$
|
(1,000,000
|
)
|
|
(See Note 2 of the Toymax consolidated
financial statements.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,627,584
|
)
|
|
$
|
(1,146,700
|
)
|
|
|
|
|
|
|
|
|
|
App-1-67
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
Pro Forma
|
|
|
Year Ended
|
|
Six Months Ended
|
|
|
Dec. 31, 2001
|
|
June 30, 2002
|
|
|
|
|
|
(5)
Selling,
general and administrative expenses are adjusted to reflect:
|
|
|
|
|
|
|
|
|
|
Adjustment in salaries and fees to Toymax
Directors
|
|
$
|
(697,544
|
)
|
|
$
|
(103,689
|
)
|
|
Adjustment in severance to Toymax employees
|
|
$
|
|
|
|
$
|
357,307
|
|
|
(Adjustments to reflect new employment agreements
as a result of the transaction.)
|
|
|
|
|
|
|
|
|
|
Restructuring charge
|
|
$
|
|
|
|
$
|
(12,632,690
|
)
|
|
(See Note 2 of the Toymax consolidated
financial statements.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of goodwill
|
|
$
|
1,540,516
|
|
|
$
|
|
|
|
(Toymax early adopted FAS 142)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
842,972
|
|
|
$
|
(12,379,272
|
)
|
|
|
|
|
|
|
|
|
|
(6)
Acquisition
and shutdown expense is adjusted to reflect:
|
|
|
|
|
|
|
|
|
|
Restructuring charge
|
|
$
|
|
|
|
$
|
(4,634,149
|
)
|
|
|
|
|
|
|
|
|
|
|
(See Note 2 of the Toymax consolidated
financial statements.)
|
|
|
|
|
|
|
|
|
(7)
Other
(income) expense is adjusted to reflect:
|
|
|
|
|
|
|
|
|
|
The elimination of interest expense related to
borrowings made by Toymax as if they had been repaid on
January 1, 2001
|
|
$
|
(950,077
|
)
|
|
$
|
(172,917
|
)
|
|
The elimination of interest income related to
lower cash balances held by JAKKS
|
|
$
|
1,912,000
|
|
|
$
|
380,255
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
961,923
|
|
|
$
|
207,338
|
|
|
|
|
|
|
|
|
|
|
(8)
Provision
for income taxes is adjusted to reflect the tax effect of pro
forma adjustments
|
|
$
|
2,018,891
|
|
|
$
|
5,441,251
|
|
|
|
|
|
|
|
|
|
|
(9)
Elimination
of Toymax minority interest
|
|
$
|
858,297
|
|
|
$
|
(110,662
|
)
|
|
|
|
|
|
|
|
|
|
App-1-68
BUSINESS OF THE PARTIES TO THE
MERGER
INFORMATION CONCERNING JAKKS
In this section Information
Concerning JAKKS, references to we,
us and our refer to JAKKS and, where the
context requires (such as when JAKKS discusses its business,
operations properties or products) its subsidiaries.
Company Overview
We are a leading multi-line, multi-brand toy
company that designs, develops, produces and markets toys and
related products. We focus our business on acquiring or
licensing well-recognized trademarks and brand names with long
product histories (evergreen brands). We seek to acquire these
evergreen brands because we believe they are less subject to
market fads or trends. Our products are typically simpler,
lower-priced, toys and accessories and include:
|
|
|
|
|
Action figures and accessories including licensed
characters, principally based on the
World Wrestling
Entertainment,
and toy vehicles, including
Road Champs
die-cast collectibles and
Remco
toy vehicles and
role-play toys and accessories;
|
|
|
|
Craft, activity and stationery products,
including
Flying Colors
activity sets, compounds,
playsets and lunch boxes, and
Pentech
writing
instruments, stationery and activity products;
|
|
|
|
Child Guidance
infant and pre-school electronic toys,
toy foam puzzle mats and blocks, activity sets, outdoor
products, plush toys and slumber bags; and
|
|
|
|
Fashion and mini dolls and related accessories,
including
Disney
Princesses sold exclusively in the
Disney Store.
|
We continually review the marketplace to identify
and evaluate evergreen brands that we believe have the potential
for significant growth. We generate growth within these brands
by:
|
|
|
|
|
creating innovative products under established
brand names;
|
|
|
|
focusing our marketing efforts to enhance
consumer recognition and retailer interest;
|
|
|
|
linking them with our evergreen portfolio of
brands;
|
|
|
|
adding new items to the branded product lines
that we expect will enjoy greater popularity; and
|
|
|
|
adding new features and improving the
functionality of products in the line.
|
In addition to developing our proprietary brands
and marks, we license brands such as
World Wrestling
Entertainment, Nickelodeon, Rugrats, Blues Clues, Mickey
Mouse, Barney, Sesame Street, Winnie the Pooh
and
Hello
Kitty and Car and Driver.
Licensing enables us to use these
high-profile marks at a lower cost than we would incur if we
purchased these marks or developed comparable marks on our own.
By licensing marks, we have access to a far greater range of
marks than would be available for purchase. We also license
technology produced by unaffiliated inventors and product
developers to improve the design and functionality of our
products.
We have capitalized on our relationship with the
WWE by obtaining an exclusive worldwide license for our joint
venture with THQ, which develops, produces, manufactures and
markets video games based on
World Wrestling
Entertainment
characters and themes. Since the joint
ventures first title release in 1999, it has released
12 new titles. We have received $28.2 million as our
share of the joint ventures profit through June 30,
2002.
Our March 11, 2002, we acquired a
controlling interest in Toymax, a developer and marketer of toys
and related products, which added toy brand names such as
Laser Challenge
and
Creepy Crawlers
to our brand
portfolio. In addition, pool-related products branded under the
name
Funnoodle
and kites branded under the name
Go Fly
a Kite
further diversify our portfolio with products popular
in the spring and summer seasons.
Most of our current products are relatively
simple and inexpensive toys. In 2001, approximately 70% of our
revenue came from products priced less than ten dollars at
retail. We believe that these products have enduring appeal and
are less subject to general economic conditions, toy product
fads and trends, and changes
App-1-69
in retail distribution channels. As of
March 31, 2002, we had over 4,300 products and 19
product categories. In addition, the simplicity of these
products enables us to choose among a wider range of
manufacturers and affords us greater flexibility in product
design, pricing and marketing. Our product development process
typically takes from three to nine months from concept to
production and shipment to our customers. We believe that many
licensors and retailers recognize and reward our ability to
bring product to market faster and more efficiently than many of
our competitors.
We sell our products through our in-house sales
staff and independent sales representatives to toy and
mass-market retail chain stores, department stores, office
supply stores, drug and grocery store chains, club stores, toy
specialty stores and wholesalers. The
Road Champs, Flying
Colors
and
Pentech
products also are sold to smaller
hobby shops, specialty retailers and corporate accounts, among
others. Our five largest customers are Target, Kmart, Toys
R Us, Wal-Mart, and Kay Bee Toys, which collectively
accounted for approximately 54.7% of our net sales in 2001. We
have over 10,000 other customers, none of which accounted for
more than 2.0% of our net sales in 2001.
Our Growth Strategy
The successful execution of our growth strategy
has resulted in increased revenues and earnings. From 1996 to
2001, our net sales, EBITDA and net income grew at a compound
annual rate of 88.2%, 95.0% and 88.7%, respectively. In 2001, we
generated net sales and EBITDA of $284.3 million and
$44.1 million, respectively. Key elements of our growth
strategy include:
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Expand Core Products.
We manage our existing and new
brands through strong product development initiatives, including
introducing new products, modifying existing products and
extending existing product lines. Our product designers strive
to develop new products or product lines to offer added
technological, aesthetic and functional improvements to our
product lines. In 2001, we expanded the use of real-scan
technology in our action toys, which produces higher quality and
better likenesses of the representative characters and vehicle
parts. In addition, we introduced action figures with
significantly greater ranges of motion, and expanded our
electronic action figure recognition play sets.
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Enter New Product Categories.
We will continue to use our
extensive experience in the toy and other industries to evaluate
products and licenses in new product categories and to develop
additional product lines. We have entered the plush toy category
through the licensing of
Pound Puppies
TM
,
as well as through the creation of our own
Limbo
Legs,
and expanded into slumber bags through the licensing
of this category from our current licensors, such as Nickelodeon.
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Pursue Strategic Acquisitions.
We intend to supplement our
internal growth rate with selected strategic acquisitions. Since
our inception in 1995, we have successfully completed and
integrated nine acquisitions of companies and trademarks. These
include our acquisitions of Justin Products, Road Champs,
Remco, Child Guidance,
Berk, Flying Colors, Pentech, Kidz
Biz and most recently, our controlling interest in Toymax. We
will continue focusing our acquisition strategy on businesses or
brands that have compatible product lines and offer valuable
trademarks or brands.
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Acquire Additional Character and Product
Licenses.
We have acquired the
rights to use many familiar corporate, trade and brand names and
logos from third parties that we use with our primary trademarks
and brands. Currently, we have license agreements with the WWE,
Nickelodeon, Disney, and Warner Bros., as well as with the
licensors of the many popular licensed childrens
characters previously mentioned, among others. We intend to
continue to pursue new licenses from these entertainment and
media companies and other licensors. We also intend to continue
to purchase additional inventions and product concepts through
our existing network of product developers.
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Expand International Sales.
We believe that foreign markets,
especially Europe, Australia, Canada, Latin America and Asia,
offer us significant growth opportunities. In 2001, our sales
generated outside the United States grew 78% to approximately
$40.0 million, or 14.1% of total sales. We intend to
continue to expand our international sales by capitalizing on
our experience and our relationships with foreign distributors
and retailers. Our recent expansion efforts included entering
into a distribution agreement with Funtastic Ltd., an Australia
based toy distributor. In addition, in December 2001, we
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acquired Kidz Biz for its distribution channels
in the United Kingdom and surrounding territories. We expect
both initiatives to contribute to our continued international
growth in 2002.
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Capitalize On Our Operating Efficiencies.
We believe that our current
infrastructure and low-overhead operating model can accommodate
significant growth without a proportionate increase in our
operating and administrative expenses, thereby increasing our
operating margins.
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Industry Overview
According to the TIA, the leading toy industry
trade group, the United States is the worlds largest toy
market, followed by Japan and Western Europe. Total retail sales
of toys, excluding video games, in the United States, were
approximately $25.0 billion in 2001. Sales by domestic toy
manufacturers to foreign customers exceeded $5.0 billion in
2001. We believe the two largest United States toy companies,
Mattel and Hasbro, collectively hold a dominant share of the
domestic non-video toy market. In addition, hundreds of smaller
companies compete in the design and development of new toys, the
procurement of character and product licenses, and the
improvement and expansion of previously introduced products and
product lines. In the United States video game segment, total
retail sales of video game software were approximately
$9.4 billion in 2001.
Over the past few years, the toy industry has
experienced substantial consolidation among both toy companies
and toy retailers. We believe that the ongoing consolidation of
toy companies provides us with increased growth opportunities
due to retailers desire to not be entirely dependent on a
few dominant toy companies. Retailer concentration also enables
us to ship products, manage account relationships and track
retail sales more effectively and efficiently.
Products
We focus our business on acquiring or licensing
well-recognized trademarks or brand names, and we seek to
acquire evergreen brands which are less subject to market fads
or trends. Some of our license agreements for products and
concepts call for royalties ranging from 1% to 6% of net sales,
and some may require minimum guarantees and advances. Our
principal products include:
World
Wrestling Entertainment Action Figures and
Accessories
We have an extensive toy license with the WWE
pursuant to which we have the exclusive worldwide right, until
December 31, 2009, to develop and market a full line of toy
products based on the popular
World Wrestling
Entertainment
professional wrestlers. These wrestlers
perform throughout the year at live events that attract large
crowds, many of which are broadcast on free and cable
television, including pay-per-view specials. We launched this
product line in 1996 with various series of 6 inch
articulated action figures that have movable body parts and
feature real-life action sounds from our patented bone-crunching
mechanism that allows the figures bones to
crack when they are bent. We continually expand and enhance this
product line by using technology in the development and in the
products themselves. The 6 inch figures currently make up a
substantial portion of our overall
World Wrestling
Entertainment line, which has since grown to include many other
new products including playsets using interactive technology.
Our strategy has been to release new figures and accessories
frequently to keep the line fresh and to retain the interest of
the consumers.
Flying
Colors/ Pentech Activity Sets, Compound Playsets, Writing
Instruments and Lunch Boxes
Through our acquisition of Flying Colors Toys we
entered into the toy activity category with compounds and
plastic molded activity cases containing a broad range of
activities, such as make and paint your own characters, jewelry
making, art studios, posters, puzzles and other projects. The
activity cases, with molded and painted likenesses of popular
characters, such as Nickelodeons
Rugrats
and
Blues Clues, Powerpuff Girls®, Looney Tunes®,
Hello Kitty
and
Scooby Doo®
, have immediate
visual appeal. Using a related production technology, our lunch
boxes complement this line with similarly-styled molded and
painted likenesses featuring these and other popular characters.
Through our acquisition of Pentech International in 2000, we
expanded the other categories of products offered by Flying
Colors, which now include stationery, back-to-school pens,
pencils, markers and notebooks.
App-1-71
Our compounds represent another significant area
of emphasis for Flying Colors. Launched under the
Blues
Clues
license, this line has expanded from play clay in a
bucket to an entire
Blues Clues
playset featuring
book molds, extrusion and other devices. We are continuing to
expand the compound area and have introduced a full line of
innovative compounds under the
Nickelodeon
brand,
including
Goooze®
,
Zyrofoam®
and
Gak
Splat
TM
, among others.
Wheels
Division Products
Road
Champs die-cast collectible and toy vehicles
The
Road Champs
product line consists of
highly detailed, die-cast replicas of new and classic cars,
trucks, motorcycles, emergency vehicles and service vehicles,
primarily in 1/43 scale (including police cars, fire trucks and
ambulances), buses and aircraft (including propeller planes,
jets and helicopters). Through licenses, we produce replicas of
well-known vehicles including those from
Ford
®,
Chevrolet
® and
Porsche
®. We believe that
these licenses, increase the perceived value of the products and
enhance their marketability.
Extreme
sports die-cast collectibles and toy vehicles and action
figures
In 1999, we launched our extreme sports category
with a new line of die-cast bicycles called
BXS
®.
These BMX-style bicycles feature removable and interchangeable
parts for complete customization by users as well as working
cranks. We have licensed the
Schwinn®
,
GT®
and
Haro®
brand names, among others,
as well as the names of some of the top riders, such as Dave
Mirra and Ryan Nyquist, for use in connection with this product
line.
In 2000, we expanded our extreme sports offerings
with the introduction of our
MXS
® line of
motorcycles with riders featuring click n grip
functionality which allows the user to release the rider from
the motorcycle seat and perform the signature moves of the
sports top riders. Other additions included off-road
vehicles, personal watercraft, surfboards and skateboards, all
sold individually and with playsets and accessories.
BattleBots®
and Junkyard Wars
TM
We introduced product lines featuring assembled
and non-assembled vehicles and playsets, which create a
do-it-yourself play pattern, based on the
BattleBots
and
Junkyard Wars
television shows.
Remco
toy vehicles and role-play
Our
Remco
toy line includes toy vehicles,
role-play and other toys. Our toy vehicle line is comprised of a
large assortment of rugged die-cast and plastic vehicles that
range in size from four and three-quarter inch to big-wheeled
seventeen inch vehicles. The breadth of the line is extensive,
with themes ranging from emergency, fire, farm and construction,
to racing and jungle adventure.
We offer a variety of branded and non-branded
role playsets in this new category under the
Remco
name.
Themes include
Caterpillar®
construction,
B.A.S.S. Masters®
fishing, police, fire and
NASA®
. Additionally, capitalizing on the popularity
of the World Wrestling Entertainment, we introduced a
World
Wrestling Entertainment
role-play product, which will give
children the opportunity to dress like and imagine being one of
their favorite wrestling superstars.
Child
Guidance
Infant
and pre-school toys
Our line of pre-school electronic toys features
products that enhance sensory stimulation and learning through
play, while offering value to the trade as well as to the
consumer. Our products are designed for children ages two and
under. We have combined the fun of music, lights, motion and
sound with the early introduction of numbers, letters, shape and
color recognition, all at a value price. These products carry
the
Good Housekeeping Seal of Approval®
. In 2001, we
introduced a line of musical toys in conjunction with Baby
Genius, the marketer of a popular line of music-oriented CDs and
home videos whose aim is to stimulate the development of young
children through music.
In addition to creating products internally, we
often acquire products and concepts from numerous toy inventors
with whom we have ongoing relationships. Both development of
internally-created items and
App-1-72
acquiring items are ongoing efforts. In either
case, it may take as long as nine months for an item to reach
the market. As part of an effort to keep the product line fresh
and to extend the life of the item, we create new packaging,
change sound chips and change product colors from time to time.
Plush
toys
In 2000, we entered this category by licensing
for reintroduction
Pound Puppies
and have since expanded
our offerings with the internally developed
Limbo Legs,
a
collection of 6 inch and 12 inch long-legged animals
in a variety of colors and fabrics.
Foam
puzzle mats and playsets
The acquisition of Berk in 1999 added the foam
toy category to our business. We incorporated this new toy
category into our
Child Guidance
product line, based on
the demographics and target market for foam toy products. This
line further expanded the breadth of our
Child Guidance
brand. The foam toy products include puzzle mats featuring
licensed characters, such as
Winnie the Pooh, Blues
Clues, Barney, Teletubbies®
and
Sesame Street,
among others, as well as letters of the alphabet and
numbers. The inter-locking puzzle pieces can also be used to
build houses and other play areas. Other products include foam
puzzles of the United States, foam vehicles and outdoor foam
products.
Fashion and
Mini Dolls and Related Accessories
We produce various proprietary and licensed
fashion and mini dolls and accessories for children between the
ages of three and ten. The proprietary product lines include
11 1/2 inch fashion dolls customized with high-fashion
designs that correspond with particular holidays, events or
themes, and fashion dolls based on childrens classic fairy
tales and holidays. We also produce licensed
15 1/2 inch dolls based on the fashion magazine
Elle®
, and 11 1/2 inch dolls based on the
feature films,
Charlies Angels
TM
and
Josie and the Pussycats
TM
. These dolls feature
a new skeleton with more realistic features and movement. We
also have an agreement with The Disney Store to manufacture
a full line of dolls under a private label which features
Disney
Princesses and classic Disney characters.
For 2002, we created a new assortment of
6 inch dolls called the
Fresh Look
Friends
TM
and a line of 4 inch dolls
consisting of puppies that have magnetic mechanisms that allow
children to perform tricks and to create action with the toys.
We also created playsets in the form of houses for these dolls,
which are sold under the
Tiny Tots in Puppy
Towne
TM
label.
Our in-house product developers originate the
design and functionality of most of our fashion dolls. In many
cases, they work with retailers and incorporate their input on
doll characteristics, packaging and other design elements to
create exclusive product lines for them.
World Wrestling
Entertainment Video Games
In June 1998, we formed a joint venture with THQ,
a developer, publisher and distributor of interactive
entertainment software for the leading hardware game platforms
in the home video game market. The joint venture entered into a
license agreement with the WWE under which it acquired the
exclusive worldwide right to publish
World Wrestling
Entertainment
video games on all hardware platforms. The
term of the license agreement expires on December 31, 2009,
and the joint venture has a right to renew the license for an
additional five years under various conditions.
The games are designed, developed, manufactured
and distributed by THQ. THQ arranges for the manufacture of the
CD-ROMs and game cartridges used in the various video game
platforms, under non-exclusive licenses held by Sony, Nintendo,
Sega and Microsoft. No other licenses are required for the
manufacture of the personal computer titles.
Through June 30, 2006, we are entitled to
receive a guaranteed preferred return from the joint venture at
varying rates of net sales of the video games depending on the
cumulative unit sales and platform of each particular game, as
well as on the royalties earned by the joint venture from the
publishing of game guides by third parties. After June 30,
2006, the amount of our preferred return from the joint venture
will be subject to renegotiation between THQ and us. The minimum
preferred return from the joint venture to be distributed to
App-1-73
us in each of the years in the period ending
December 31, 2003 is $2.6 million per year. THQ is
entitled to receive the balance of the profits.
The joint venture currently publishes titles for
the Sony
PlayStation®
and
PlayStation
2
®,
Nintendo 64
® and
GameCube®
and Microsoft
Xbox
® consoles, Nintendo
Game Boy
Color
® and
Game Boy Advance
® hand-held
platforms and personal computers. The joint venture launched its
first products, a video game for the Nintendo 64 platform and a
video game for
Game Boy Color,
in November 1999. It will
also publish titles for new hardware platforms, when and as they
are introduced to the market and have established a sufficiently
installed base to support new software. These titles are
marketed to our existing customers as well as to game,
electronics and other specialty stores, such as Electronics
Boutique and Best Buy.
The following table presents our past results
with the joint venture:
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New Game Titles
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Profit from Joint
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Console Platforms
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Hand-held Platforms
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Venture
(1)
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($ in millions)
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1999
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1
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1
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$
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3.6
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2000
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4
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1
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15.9
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2001
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1
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2
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6.7
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2002 (through June 30, 2002)
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2
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2.0
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(1)
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Profit from the joint venture reflects our
preferred return on joint venture revenue less certain costs
incurred directly by us.
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In the first half of 2002, we released one new
game title for
Xbox
and one new game title for
GameCube
. We anticipate releasing several other titles
during the second half of the year which include titles for
PlayStation 2
, personal computers and
Game Boy
Advance.
Wrestling video games have demonstrated
consistent popularity, with five of our wrestling-theme video
games each having sold in excess of 1 million units in
1999, 2000 and 2001, at retail prices ranging from approximately
$42 to $60. We believe that the success of the
World
Wrestling Entertainment
titles is dependent on the graphic
look and feel of the software, the depth and variation of game
play and the popularity of the
World Wrestling
Entertainment.
We believe that as a franchise property, the
World Wrestling Entertainment
titles have brand
recognition and sustainable consumer appeal, which may allow the
joint venture to use titles over an extended period of time
through the release of sequels and extensions and to re-release
such products at different price points in the future. In 2001,
our PlayStation title
SmackDown
TM
was
re-released as a greatest hit.
The joint venture uses external software
developers to conceptualize and develop titles. These developers
receive advances based on specific development milestones and
royalties in excess of the advances based on a fixed amount per
unit sold or on a percentage, typically ranging from 8% to 12%,
of net sales. Upon completion of development, each title is
extensively play-tested by us and THQ and sent to the
manufacturer and licensor for their review and approval.
App-1-74
Sales, Marketing and Distribution
We sell all of our products through our own
in-house sales staff and independent sales representatives to
toy and mass-market retail chain stores, department stores,
office supply stores, drug and grocery store chains, club
stores, toy specialty stores and wholesalers. The
Road
Champs, Flying Colors
and
Pentech
product lines are
also sold to smaller hobby shops, specialty retailers and
corporate accounts, among others. Our five largest customers are
Target, Kmart, Toys R Us, Wal-Mart, and Kay Bee
Toys, which accounted for approximately 63.2% of our net sales
in 2000 and 54.7% of our net sales in 2001. Except for purchase
orders relating to products on order, we do not have written
agreements with our customers. Instead, we generally sell
products to our customers pursuant to letters of credit or, in
some cases, on open account with payment terms typically varying
from 30 to 90 days. From time to time, we allow our
customers credits against future purchases from us in order to
facilitate their retail markdown and sales of slow-moving
inventory. We also sell our products through e-commerce sites,
including Toysrus.com.
We contract the manufacture of most of our
products to unaffiliated manufacturers located in China. We sell
the finished products on a letter of credit basis or on open
account to our customers, who take title to the goods in Hong
Kong or China. These methods allow us to reduce certain
operating costs and working capital requirements. A portion of
our sales originate in the United States, so we hold certain
inventory in our warehouse and fulfillment facilities. To date,
a significant portion of all of our sales has been to domestic
customers. We intend to continue expanding distribution of our
products into foreign territories and, accordingly, we have:
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acquired Kidz Biz, a United Kingdom-based
distributor of toys and related products,
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engaged representatives to oversee sales in
certain territories,
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engaged distributors in certain territories, such
as Funtastic in Australia, and
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established direct relationships with retailers
in certain territories.
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Outside of the United States, we currently sell
our products primarily in Europe, Australia, Canada, Latin
America and Asia. Sales of our products abroad accounted for
approximately $22.5 million, or 8.9% of our net sales, in
2000 and approximately $40.0 million, or 14.1% of our net
sales, in 2001. We believe that foreign markets present an
attractive opportunity, and we plan to intensify our marketing
efforts and further expand our distribution channels abroad.
We establish reserves for sales allowances,
including promotional allowances and allowances for anticipated
defective product returns, at the time of shipment. The reserves
are determined as a percentage of net sales based upon either
historical experience or on estimates or programs agreed upon by
our customers.
We obtain, directly, or through our sales
representatives, orders for our products from our customers and
arrange for the manufacture of these products as discussed
below. Cancellations generally are made in writing, and we take
appropriate steps to notify our manufacturers of these
cancellations.
We maintain a full-time sales and marketing
staff, many of whom make on-site visits to customers for the
purpose of showing product and soliciting orders for products.
We also retain a number of independent sales representatives to
sell and promote our products, both domestically and
internationally. Together with retailers, we sometimes test the
consumer acceptance of new products in selected markets before
committing resources to large-scale production.
We advertise our products in trade and consumer
magazines and other publications, market our products at
international, national and regional toy trade shows,
conventions and exhibitions and carry on cooperative advertising
programs with toy retailers and other customers which include
the use of in-store displays. We produce and broadcast
television commercials for our
World Wrestling Entertainment
action figure line as well as for some of our
Flying
Colors
and
Road Champs
extreme sports products. We
may also advertise some of our other products on television, if
we expect that the resulting increase in our net sales will
justify the relatively high cost of television advertising.
App-1-75
Product Development
Each of our product lines has an in-house manager
responsible for product development. The in-house manager
identifies and evaluates inventor products and concepts and
other opportunities to enhance or expand existing product lines
or to enter new product categories. In addition, we create
proprietary products, the principal source of products for our
fashion doll line, and products to more fully exploit our
concept and character licenses. Although we do have the
capability to create and develop products from inception to
production, we generally use third-parties to provide a
substantial portion of the sculpting, sample making,
illustration and package design required for our products in
order to accommodate our increasing product innovations and
introductions. Typically, the development process takes from
three to nine months from concept to production and shipment to
our customers.
We employ a staff of designers for all of our
product lines. We occasionally acquire our other product
concepts from unaffiliated third parties. If we accept and
develop a third partys concept for new toys, we generally
pay a royalty on the toys developed from this concept that are
sold, and may, on an individual basis, guarantee a minimum
royalty. Royalties payable to developers generally range from 1%
to 6% of the wholesale sales price for each unit of a product
sold by us. We believe that utilizing experienced third-party
inventors gives us access to a wide range of development talent.
We currently work with numerous toy inventors and designers for
the development of new products and the enhancement of existing
products. We believe that toy inventors and designers have come
to appreciate our practice of acting quickly and decisively to
acquire and market licensed products. In addition, we believe
that all of these factors, as well as our recent success in
developing and marketing products, make us more attractive to
toy inventors and developers than some of our competitors.
Safety testing of our products is done at the
manufacturers facilities by an engineer employed by us or
by independent third-party contractors engaged by us. Safety
testing is designed to meet regulations imposed by federal and
state governmental authorities. We also monitor quality
assurance procedures for our products for safety purposes. In
addition, independent laboratories engaged by some of our larger
customers test certain of our products.
Manufacturing and Supplies
Our products are currently produced by overseas
third-party manufacturers, which we choose on the basis of
quality, reliability and price. Consistent with industry
practice, the use of third-party manufacturers enables us to
avoid incurring fixed manufacturing costs, while maximizing
flexibility, capacity and production technology. All of the
manufacturing services performed overseas for us are paid for on
open account with the manufacturers. To date, we have not
experienced any material delays in the delivery of our products;
however, delivery schedules are subject to various factors
beyond our control, and any delays in the future could adversely
affect our sales. Currently, we have ongoing relationships with
approximately 20 manufacturers. We believe that alternative
sources of supply are available, although we cannot be assured
that we can obtain adequate supplies of manufactured products.
Although we do not conduct the day-to-day
manufacturing of our products, we participate in the design of
the product prototype and production tools, dies and molds for
our products and we seek to ensure quality control by actively
reviewing the production process and testing the products
produced by our manufacturers. We employ quality control
inspectors who rotate among our manufacturers factories to
monitor the production of substantially all of our products.
The principal raw materials used in the
production and sale of our toy products are plastics, zinc
alloy, plush, printed fabrics, paper products and electronic
components, all of which are currently available at reasonable
prices from a variety of sources. Although we do not manufacture
our products, we own the tools, dies and molds used in the
manufacturing process, and these are transferable among
manufacturers if we choose to employ alternative manufacturers.
Tools, dies and molds represent substantially all of our
long-lived assets, and amounted to $14.4 million in 2000
and $10.7 million in 2001. Substantially all of these
assets are located in China.
App-1-76
Trademarks and Copyrights
Most of our products are produced and sold under
trademarks owned by or licensed to us. We typically register our
properties, and seek protection under the trademark, copyright
and patent laws of the United States and other countries where
our products are produced or sold. These intellectual property
rights can be significant assets. Accordingly, while we believe
we are sufficiently protected, the loss of some of these rights
could have an adverse effect on our business, financial
condition and results of operations.
The two most material trademarks used in our
products are the ones we license from World Wrestling
Entertainment, Inc. (WWE) and MTV Networks
(Nickelodeon).
Our licensing agreement with WWE expires in 2010.
This agreement gives us the non-exclusive use of WWEs
trademarks, logos, copyrights and rights of publicity. The
agreement provides for a $1,000,000 advance royalty payment,
with annual guaranteed royalty payments of $850,000 per year and
royalties of 10% of net sales of our WWE products.
Our licensing agreement with Nickelodeon expires
in December 2003. The agreement gives us the non-exclusive use
of Nickelodeon trademarks, logos and characters. The agreement
provides that we pay a $925,000 advance royalty with guaranteed
minimum royalties of $1.1 million in 2002 and
$1.7 million in 2003. The agreement also requires us to pay
royalties of 10% of wholesale sales equal to or less than
$25 million and 12% of wholesale sales in excess of
$25 million.
Competition
Competition in the toy industry is intense.
Globally, certain of our competitors have greater financial
resources, larger sales and marketing and product development
departments, stronger name recognition, longer operating
histories and benefit from greater economies of scale. These
factors, among others, may enable our competitors to market
their products at lower prices or on terms more advantageous to
customers than those we could offer for our competitive
products. Competition often extends to the procurement of
entertainment and product licenses, as well as to the marketing
and distribution of products and the obtaining of adequate shelf
space. Competition may result in price reductions, reduced gross
margins and loss of market share, any of which could have a
material adverse effect on our business, financial condition and
results of operations. In each of our product lines we compete
against one or both of the toy industrys two dominant
companies, Mattel and Hasbro. In addition, we compete, in our
Flying Colors
and
Pentech
product categories, with
Rose Art Industries, Hasbro (Play-doh) and Binney & Smith
(Crayola), and, in our toy vehicle lines, with Racing Champions.
We also compete with numerous smaller domestic and foreign toy
manufacturers, importers and marketers in each of our product
categories. Our joint ventures principal competitors in
the video game market are Electronic Arts, Activision and
Acclaim Entertainment.
Seasonality and Backlog
In 2001, approximately 54.3% of our net sales
were made in the third and fourth quarters. Generally, the first
quarter is the period of lowest shipments and sales in our
business and the toy industry generally and therefore the least
profitable due to various fixed costs. Seasonality factors may
cause our operating results to fluctuate significantly from
quarter to quarter. However, Pentechs writing instrument
and activity products generally are counter-seasonal to the
traditional toy industry seasonality due to the higher volume
generally shipped for back-to-school beginning in the second
quarter. In addition, Toymaxs
Funnoodle
and
Go
Fly a Kite
products are primarily sold in the spring and
summer seasons. Our results of operations may also fluctuate as
a result of factors such as the timing of new products (and
related expenses) introduced by us or our competitors, the
advertising activities of our competitors, delivery schedules
set by our customers and the emergence of new market entrants.
We believe, however, that the low retail price of most of our
products may be less subject to seasonal fluctuations than
higher priced toy products.
We ship products in accordance with delivery
schedules specified by our customers, which usually request
delivery of their products within three to six months of the
date of their orders. Because customer orders may be canceled at
any time without penalty, our backlog may not accurately
indicate sales for any future period.
App-1-77
Government and Industry Regulation
Our products are subject to the provisions of the
Consumer Product Safety Act (CPSA), the Federal Hazardous
Substances Act (FHSA), the Flammable Fabrics Act (FFA) and
the regulations promulgated thereunder. The CPSA and the FHSA
enable the Consumer Products Safety Commission (CPSC) to
exclude from the market consumer products that fail to comply
with applicable product safety regulations or otherwise create a
substantial risk of injury, and articles that contain excessive
amounts of a banned hazardous substance. The FFA enables the
CPSC to regulate and enforce flammability standards for fabrics
used in consumer products. The CPSC may also require the
repurchase by the manufacturer of articles. Similar laws exist
in some states and cities and in various international markets.
We maintain a quality control program designed to ensure
compliance with all applicable laws. In addition, many of our
Child Guidance
products are sold under the
Good
Housekeeping Seal of Approval
. To qualify for this
designation, our products are tested by Good Housekeeping to
ensure compliance with its product safety and quality standards.
Employees
As of August 20, 2002, we employed 289 persons,
all of whom are full-time employees. We employ 200 people
in the United States, 16 in the United Kingdom, 51 in Hong Kong
and 22 in China. Of these employees, 63 are engaged in sales and
marketing, 60 in product development, 121 in operations and 38
in administration. Included with the United States employees are
all 47 Toymax employees, of which 19 are engaged in sales and
marketing, 3 in product development, 10 in operations and 15 in
administration. We believe that we have good relationships with
our employees. None of our employees is represented by a union.
Environmental Issues
We are subject to legal and financial obligations
under environmental, health and safety laws in the United States
and in other jurisdictions where we operate. We are not
currently aware of any material environmental liabilities
associated with any of our operations.
Properties
Our principal executive offices occupy
approximately 17,000 square feet of space in Malibu, California
under a lease expiring on February 28, 2008. In addition,
we have a lease, expiring August 31, 2007, for
approximately 11,000 square feet of space in Malibu, California
which contains our design offices. We lease showroom and office
space of approximately 8,000 square feet at the International
Toy Center in New York City. We also have leased office and
showroom space of approximately 5,000 square feet in Hong Kong
from which we oversee our China-based third-party manufacturing
operations, 318,000 square feet of warehouse space in City of
Industry, California, 10,000 square feet of office space in
Surrey, England and approximately 100,000 square feet of
warehouse space in New Brunswick, New Jersey. In connection with
our acquisition of Toymax, we have assumed various leases for
office, warehouse and showroom space. Relating to Toymax, we
occupy approximately 27,000 square feet of office space in
Plainview, New York under a lease expiring on April 30,
2004. We lease showroom and office space of approximately 14,500
square feet at the International Toy Center in New York City. We
occupy approximately 25,000 square feet of office and warehouse
space in Clinton, Connecticut under a lease expiring
September 30, 2007 from which the operations of
Toymaxs
Go Fly a Kite
division are carried out. We
also lease an additional 4,800 square feet of office space in
Hong Kong. We believe that our facilities in the United States,
Hong Kong and England are adequate for the reasonably
foreseeable future.
Legal Matters
We are a party to, and certain of our property is
the subject of, various pending claims and legal proceedings
that routinely arise in the ordinary course of our business, but
we do not believe that any of these claims or proceedings will
have a material effect on our business, financial condition or
results of operations.
App-1-78
INFORMATION CONCERNING TOYMAX
In this section, Information
Concerning Toymax, references to we,
us, our and the Company
refer to Toymax and, where the context requires (such as when
Toymax discusses its business, operations, properties or
products) its subsidiaries.
Company Overview
Toymax is a consumer leisure products company
that creates, designs and markets innovative and technologically
advanced toys as well as other leisure products, which are sold
in the United States (United States) and throughout
the world. Toymax products promote fun and creative play, and
are available under several brands:
Toymax®
toys,
such as
R.A.D.
TM
Robot, Mighty
Mos
TM
vehicles, the award-winning
Laser
Challenge
TM
brand,
Creepy
Crawlers
TM
activities brand and
TMX
RC
TM
radio control vehicles;
Funnoodle®
pool and water toys and accessories; and
Go Fly a Kite®
kites, banners,
WindWheels
TM
, weathervanes and wind chimes.
Management believes that the major strengths of Toymax include
its ability to develop and design new toys, such as
Singing
Starz
TM
Video Karaoke
; to identify and
satisfy niche opportunities with brands such as Mighty
Mos; to extend existing core brands such as Laser
Challenge; and to identify acquisitions, such as Go Fly A Kite,
Inc. (GFK), and Funnoodle Inc.
(Funnoodle), that further its plan to diversify into
other leisure product categories and selling seasons.
In 1998, we began to take a number of important
steps designed to better position us for future and balanced
growth through the diversification of our product line. In
December 1998, we acquired the business of
Go Fly A Kite,
Inc.
, a leading developer and marketer of kites, windsocks,
banners, mini flags and WindWheels
TM
. In November
1999, we completed the acquisition of the Funnoodle product
line. Funnoodle Inc. is a leader in the pool and backyard water
recreational products categories.
Effective November 30, 2001, we sold the
assets of Monogram International, Inc., Monogram Products
(H.K.) Limited and our Candy Plant division to an entity
controlled by David Chu, the former Chairman of our board of
directors.
We have incurred losses for the past three fiscal
years. For the year ended March 31, 2002, we had net sales
of $94.9 million and a pre-tax loss from continuing
operations of $12.3 million, excluding restructuring
charges of $15.6 million, compared to a pre-tax loss from
continuing operations of $1.1 million in fiscal 2001. The
restructuring charges relate to the acquisition of 66% of the
outstanding common stock by JAKKS, by which we were reorganized.
The restructuring charges include the write-off of assets that
will not be utilized by the combined companies, the accrual of
certain fees for the early terminations of certain agreements,
severance payments and a one time charge for the changing of the
terms of our stock options.
Our Internet address is www.toymax.com, which
provides information about us and our products. The site also
contains games, information about where to purchase our
products, a strictly monitored kids chat area and hotlinks
to affiliated web sites, such as those of licensors, industry
related parties and financial institutions. Our GFK affiliate
has a separate Internet addresses at www.goflyakite.com.
Notwithstanding the proposed merger, we believe
that we are well positioned for future growth and have taken
steps to return to profitability. The key elements of our growth
strategy are to: (i) penetrate new markets, by product and
customer expansion and diversification; (ii) smooth our
revenue stream throughout the year by adding non-promotional
items to our product portfolio; (iii) extend existing core
brands; (iv) develop new core product categories; and
(v) continue to license recognized brand names such as
Jeep,
Chevrolet
and
Mercedes-Benz
.
Industry and Competition
We compete in several industries, with toys
representing the largest portion. The majority of the toys sold
in the United States are manufactured, either in whole or in
part, overseas where labor rates are comparatively lower than in
the United States. The largest foreign manufacturing market is
the Peoples Republic of China (China),
followed by Japan and Taiwan. Such operations require greater
lead times than domestic manufacturing operations and also
result in greater shipping costs, particularly for larger toys.
The design,
App-1-79
production and sale of toy products in the United
States and throughout most of the world are subject to various
regulations.
Toy manufacturers sell their products either
directly to retailers or to wholesalers who carry the product
lines of many manufacturers. There are thousands of retail
outlets in the United States which sell toys and games. These
outlets include: mass merchandisers, small independent toy
stores, gift and novelty shops, grocery and drug chains,
warehouse clubs, e-retailers and mail order catalogs. Despite
the broad number of toy outlets, retail toy sales have been
increasingly generated by a small number of large chains, such
as Toys R Us, Wal-Mart, Kay-Bee, Kmart and Target.
Despite this consolidation in recent years, both at the retail
and manufacturing level, many small and mid-sized companies
continue to compete in the design and development of new toys,
the procurement of licenses, the improvement and expansion of
previously introduced products and product lines and the
marketing and distribution of toy products. This has resulted in
an increased reliance among retailers on the large toy companies
because of their financial stability and ability to support
products through advertising and promotion and to distribute
products on a national basis. Such consolidation may have a
negative effect on small and mid-sized toy companies, such as
Toymax.
The toy industry is highly competitive.
Competition within the industry is based on consumer
preferences, order fulfillment, pricing and new product
development. In recent years, the toy industry has experienced
rapid consolidation. We compete with many toy companies that
have greater financial resources, greater name recognition,
larger sales, marketing and product development departments and
greater economies of scale. Due to the low barriers to entry
into the toy industry, we also compete with smaller domestic and
foreign toy manufacturers, importers and marketers.
We chose to expand into new leisure product
categories in order to decrease reliance on the highly
competitive toy industry. In this regard we acquired GFK and
Funnoodle.
GFK competes in the kite, flag/windsock and lawn
ornament markets in which it is estimated to have a large share.
There are numerous specialty kite manufacturers, which are
characterized by very small volume and higher pricing, and
several larger companies distributing banners and lawn
ornaments. Funnoodle competes primarily in the water and pool
toy market, in which it is a leader.
Seasonality and Backlog
Sales of toy products are seasonal, with the
majority of retail sales occurring in the third and fourth
calendar quarters. We have taken steps to reduce our dependence
on these highly seasonal products, including the acquisitions of
GFK and Funnoodle, which are largely sold in the first and
second calendar quarters. While we have taken these steps to
level sales over the entire year, sales are expected to remain
heavily influenced by the seasonality of our toy products.
The result of these seasonal patterns is that
operating results and demand for working capital vary
significantly by quarter and net losses may be expected in the
first and last quarters of the fiscal year for the foreseeable
future. Orders placed with us for shipment are cancelable until
the date of shipment. The combination of seasonal demand and the
potential for order cancellation makes accurate forecasting of
future sales difficult and causes us to believe that backlog may
not be an accurate indicator of our future sales. Similarly,
financial results for a particular quarter may not be indicative
of results for the entire year.
Products
Our existing product lines and calendar 2002
product introductions and extensions fall into six categories:
Action Toys, Spring/ Summer, Childrens Activity Toys,
Girls Toys, Vehicles and Electronics.
The
Laser Challenge
brand was introduced
in 1996, and continues to be the top-selling laser game. The
Laser Challenge
system uses an advanced infrared light
technology, which is effective at longer firing distances than
competing systems. We continue to redesign and extend the
Laser Challenge
brand, a strategy which supports our
expectation that
Laser Challenge
will be marketed over a
long period of time. In fiscal 2002, we introduced
Laser
Challenge Gotcha Extreme Mini Mayhem
TM
, a compact
sized version of the Extreme segment first introduced in 2000 as
Gotcha Extreme
TM
and extended in 2001 as
Radar Extreme
TM
. In fiscal
App-1-80
2002, we launched
Virtual
Paintball
TM
, which combines the technology and
proven play pattern of
Laser Challenge
with the
excitement of paintball, one of the fastest growing alternative
sports in the United States.
In fiscal 2003, we intend to introduce a new and
improved
N.R.G. Paintball
TM
for
tween consumers who may be too mature to play
Laser Challenge
but are too young to be playing real
paintball.
N.R.G. Paintball
includes a blaster which
fires totally safe blobs of paint.
We entered the Spring/ Summer seasonal business
in fiscal 1999 with the acquisition of GFK, whose product line
includes youth and adult kites and a wide array of decorative
flags, windsocks, door banners, mini flags and the WindWheels
line of colorful lawn ornaments. In fiscal 2001, a series of
kites designed by Joel K. Scholz, a renowned designer, was added
to the GFK product line. In addition, the lawn ornament line was
expanded to include weathervanes and wind chimes. In fiscal
2000, we expanded our seasonal offerings in this category with
the acquisition of the Funnoodle product line. Funnoodle is a
highly recognized brand of pool and recreational products. The
product lines most visible item, the basic Funnoodle, is a
5-foot long, brightly colored, floating foam tube that has been
one of the best selling summer toys in the United States since
its introduction in 1994. The Funnoodle product line continues
to be expanded with the introduction of products such as pool
floats, swim rings, lawn sprinklers, and tumbling and exercise
mats.
We have historically been a significant factor in
Childrens Activity Toys and reestablished ourself in
fiscal 2001 with the successful re-introduction of the Creepy
Crawlers® brand. We extended the brand in fiscal 2002 to
include
Creeple People®
and
Graveyard
Ghoulies
TM
Creator Paks®
, which are
mold and play sets. In fiscal 2002, we also re-introduced the
Dollymaker
TM
Fashion Maker
consisting
of a molding oven, molds and
Glamour-Goop
TM
compound whereby girls can design and make mini dolls and
fashions in an endless variety of designs and colors.
Our Girls Toys product line includes the
Beauty Works
TM
brand of role play activities
such as
Nail Salon
and
Fragrance
Designer
TM
; the
Jam Rope
TM
, a
musical jump rope; and the
Talking Tina
® brand of
fashion dolls and soft furniture which fits any
11 1/2 fashion doll.
In fiscal 2003, we intend to introduce the
TMX
RC
TM
Equalizer
TM
a radio
control vehicle with X-Tech Wheels technology, which allows the
vehicle to slide across the floor and to perform a series of
exciting stunts.
We introduced the
Mighty
Mos
TM
brand of innovative vehicles late in
fiscal 1998. The first product utilized an infrared key
chain controller to activate these light, sound and motion
vehicles and is marketed in our patented try me
package. In fiscal 2000, the
Mighty Mos Infrared
Vehicles
category was extended to include specialty vehicles
with unique, stunt actions; this line expanded in fiscal 2002 to
include a rollover car and a wheelie quad. The
Mighty
Mos
brand also includes monster trucks and a line of
flywheel powered endurance vehicles. We currently have license
arrangements to produce
Mighty Mos
versions of
Chevrolet, Jeep, Dodge, Mercedes, BMW, Porsche, Audi,
Porsche, Humvee
and
Ford
styles.
Mighty Mos
Jr.
, the pre-school segment of our
vehicle business, is a line of products with moving eyes and
mouth, and speech and motion capabilities. This segment includes
Preston Pushbutton
TM
, a battery operated
programmable robot which walks, talks and has light-up eyes and
mouth;
Denny the Dump Truck
TM
and
Dougie
Chug-Along
TM
, which are infrared remote control
vehicles; and
Rick and Robbie Racers
TM
, which
are infrared remote vehicles which interact with each other as
they race.
App-1-81
We continue to successfully manage our key brands
in this category while expanding our popular T.V. games line of
palm sized controllers that plug directly into a television set
and includes 10 classic video games licensed from Activision.
New for fiscal 2003, we plan to ship Atari T.V. games utilizing
a joystick that connects directly to the television. The
controller is completely portable and does not require a
console. Additionally in the current fiscal year, we have
introduced
Singing Starz
TM
Video
Karaoke
, the first home karaoke player with a built in video
camera that puts you on the television screen.
Product Design and Development
We have built a knowledgeable in-house product
development team and a network of independent designers to
create new products. Employees in the Marketing and Research and
Development departments coordinate efforts to design and develop
the majority of our toy and innovative new product lines.
Current technologies have been utilized to redesign, redevelop
and extend major brands and products from the past,
E.G. Creepy Crawlers
and
Popples
. GFK strives
to maintain a product line that displays cutting edge graphics
and reflects current cultural trends. Funnoodle has sought to
develop new products largely by applying extruded foam
manufacturing techniques and designs to traditionally successful
products. Our success is dependent on our ability to continue
these activities. Our sponsored research and development
expenses for fiscal 2000, 2001 and 2002 were $4.2 million,
$3.4 million and $3.7 million, respectively.
We continually evaluate new product ideas
generated by a number of outside designers to maintain access to
a wide range of development talent. When a product is developed
based on the idea presented by an independent designer, we
typically enter into a royalty agreement with the designer.
Licensing
Licensing is a major influence on the leisure
products industry affecting virtually all product categories.
Although historically we have not significantly relied on
entertainment-related licenses, we have marketed and continue to
market products based on licensed popular characters and
trademarks from major entertainment companies and other widely
known corporate trademarks. This allows us to benefit from
pre-existing awareness of a character or brand and from the
marketing efforts and prior goodwill attached to it. A principal
licensor is
Activision©
, as well as many of the
worlds leading auto makers for use of their most popular
model names on our
Mighty Mos
vehicle line.
In return for the use of the licensed character
or brand name, we typically pay licensing fees based upon net
sales from products marketed under the subject license.
Furthermore, the acquisition of a license generally involves the
payment of non-refundable minimum royalty payments.
Sales and Distribution
We operate in two reporting segments:
(i) Toymax Brands (primarily consisting of sales activities
conducted through Toymax Inc. (TMI); and
(ii) Toymax (H.K.) Limited (THK) and Toymax
Enterprises (consisting of GFK and Funnoodle).
Sales conducted by TMI consist of sales of our
promotional product lines to primarily United
States customers pursuant to customer purchase orders.
Customers purchasing products on this basis include
Toys R Us, Kay-Bee Toys, Costco Wholesale,
Wal-Mart Stores, Inc., and Target Stores, Inc. Sales conducted
by THK consist of sales on a free on board (FOB)
Hong Kong basis which are generally based on letters of credit,
and include sales of primarily lower priced basic products to
the United States and international retailers including
Toys R Us International, Index (U.K.),
Wal-Mart (Canada) and sales of our promotional product lines to
approximately 50 international distributors.
Funnoodle and GFK sales are made primarily to
United States customers, on standard credit terms, pursuant to
customer purchase orders. Sales conducted by GFK are on a COD,
prepaid or credit card basis for those customers who do not
qualify for credit terms. Extended credit terms are periodically
offered to qualifying customers. To a lesser extent, the GFK
operations sell to customers internationally. These
App-1-82
international customers generally purchase
products utilizing a direct letter of credit and shipments are
made directly from the overseas factory on a FOB Hong Kong basis.
Our products are sold in over 45 countries around
the world. The following table depicts our net sales in these
two segments for the last three fiscal years:
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Toymax Brands
|
|
$
|
91,062
|
|
|
$
|
85,496
|
|
|
$
|
65,568
|
|
Toymax Enterprises
|
|
|
18,803
|
|
|
|
29,655
|
|
|
|
29,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
109,865
|
|
|
$
|
115,151
|
|
|
$
|
94,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toymax Brands Sales.
This segments United States sales activities are conducted
through its nationwide network of independent sales
representatives, an in-house sales staff and, with respect to
certain major accounts, by senior management. Comprised of more
than 50 sales executives and 14 sales organizations at
March 31, 2002, this sales network maintains close customer
relationships, develops new accounts and presents new products
to its established customers. Our leading United States
customers (not including THK sales to the United States) include
major toy retailers, mass merchandisers, department stores and
catalog companies. TMI sales constituted 55.3%, 41.0% and 37.5%
of consolidated net sales in fiscal 2000, 2001 and 2002,
respectively.
THK sales are comprised of sales to international
retailers and distributors and to certain United States
retailers. Such sales are conducted on a FOB Hong Kong basis and
generally require either the opening of a letter of credit or
are backed by credit insurance. Since our inception in 1990, we
have emphasized international sales, and today our products are
sold in over 50 countries worldwide. Our international
sales network consists of approximately 50 international
distributors and 11 international sales representative
organizations. In fiscal 2000, 2001 and 2002, Toymax HK sales
accounted for 27.5%, 26.3% and 31.6% of net sales, respectively.
Toymax Enterprises
Sales.
GFK sales are comprised
primarily of sales to kite stores, hobby stores, gift, specialty
and bookstores and toy stores. Products are also distributed by
mail order catalogs, such as L.L. Bean, sporting goods
stores, and other mass-market retailers. In addition to our
in-house sales and customer service staff, GFK employs a network
of 96 independent sales representatives. GFK products are
currently sold to over 20,000 customers.
Funnoodle products were sold through the in-house
sales staff of the prior owner under a servicing agreement and a
network of sales representative organizations primarily to the
largest mass-market chains in the United States The servicing
agreement terminated effective August 2001, and, thereafter,
such activities have been performed by our personnel.
Historically, domestic sales have accounted for substantially
all of Funnoodles sales.
Customers
Only Toys R Us and WalMart each
accounted for more than 10% of invoiced sales during fiscal 2002.
Marketing
We employ a variety of methods to market our new
and existing products. New toys, existing toys and line
extensions are marketed primarily by members of our executive
and sales management at our showrooms in Hong Kong, New York and
Dallas during major international toy shows. We are also
represented at additional toy and kite shows both domestically
and internationally.
App-1-83
Product packaging and placement is a large part
of our overall marketing strategy. Our products are sold in
brightly colored, eye-catching packages with strong brand
identity. All packaging must meet strict guidelines for
communication effectiveness and for the ability to stand out
from the competitive clutter. We utilize try me
packaging whenever possible. We also employ traditional
marketing methods such as couponing, in-store demonstrations
adjacent to our toy products, and public relations.
We currently allocate a significant portion of
our marketing resources to television advertising, which we
believe is the most cost-effective way to reach our primary
target audience of children. The commercials are run on national
television and in local spot television markets to support the
promotional efforts and distribution patterns of our key
retailers. We use other media, such as print and on-line
advertising, when appropriate.
Our GFK subsidiary primarily markets its products
through its annual catalogs. GFKs and Funnoodles
other marketing channels include trade shows, seasonal
brochures, advertisements in trade magazines, personal sales
calls, co-op advertising and telemarketing.
Purchasing and Manufacturing
TMI and THK currently contract for all of their
manufacturing requirements. We believe that this practice
provides us with the most efficient use of our capital at this
time. Tai Nam Industrial Company Limited (Tai Nam),
which is based in Hong Kong, served as our purchasing agent for
our core toy business pursuant to an agency agreement (the
Agency Agreement) which terminated March 11,
2002, between Tai Nam and Toymax NY. Tai Nam is owned by David
Chu, our former Chairman and principal stockholder. As our
purchasing agent, Tai Nam arranged for the manufacturing of our
products based on purchase orders placed with Tai Nam by us. In
addition, Tai Nam handled all shipping documents, letters of
credit, bills and payments, served as liaison with other vendors
and performed quality control functions. For these services, Tai
Nam generally received an agency fee of 7% of the gross invoiced
value of products purchased by us. Pursuant to the Agency
Agreement, we purchase products from Tai Nam at Yantian
(China) FOB prices. We paid all expenses associated with
the making of molds for new products. Pursuant to the Agency
Agreement, we owned the tooling and molds for our products.
Effective March 12, 2002, we perform these functions
directly.
As purchasing agent, Tai Nam arranged for the
manufacturing of our toy products based on purchase orders
placed with Tai Nam by us. The majority of such products have
been and are currently manufactured by Jauntiway Investments
Limited (Jauntiway). Jauntiway is an OEM toy
manufacturer with two ISO certified manufacturing facilities in
the southern portion of China. Jauntiway is also owned by
Mr. Chu. Since our inception, Jauntiway has been our single
most important manufacturer and we have been Jauntiways
leading customer. In fiscal 2001 and 2002, approximately 60% and
56%, respectively, of all our products were manufactured by
Jauntiway (some utilizing subcontractors). We entered into a
manufacturing agreement with Tai Nam and Jauntiway dated
September 22, 1997. Effective March 11, 2002, this
agreement was terminated and replaced by a new three-year
agreement with standard manufacturing terms.
Manufacturing commitments are made on a purchase
order basis. We base our production schedules on customer
estimates and orders, historical trends, the results of market
research and current market information. We closely monitor
market activity and adjust production schedules accordingly. We
utilize Electronic Data Interchange programs maintained by
certain of our largest customers, which allows us to monitor
actual store sales and inventories, and thereby to schedule our
production to meet anticipated re-orders.
Jauntiway also obtains products or components
from other independent manufacturers located principally in the
southern portion of China, particularly during peak production
periods. These suppliers are selected based on the quality of
their products, prices and service.
The basic raw materials used by Jauntiway in
manufacturing our toy products are petrochemical resin
derivatives. Integrated circuits have also become an important
component of our technologically advanced toys. Costs of
petrochemical derivatives and integrated circuits are affected
by demand and supply as well as the value of the United
States dollar in relation to foreign currencies, and have
been subject to volatility in
App-1-84
recent years. There can be no assurance as to the
timing or extent to which we will be able to pass on any raw
material or component price increases to our customers.
In addition, a large portion of Jauntiways
petrochemical derivates and integrated circuits are imported
from Taiwan via Hong Kong. Any disruption of trade between
Taiwan and China may have a significant adverse effect on
Jauntiways operations and, therefore, could have a
significant adverse effect on our results of operations.
GFK utilizes four manufacturers, three in China
and one in Taiwan, to make approximately 85% of its products,
based upon its product specifications. Tai Nam acted as its
agent in Hong Kong for all products produced in China pursuant
to an agency agreement dated September 1, 2000. This
agreement was also terminated on March 11, 2002.
Manufacturing commitments are made on a purchase order basis.
GFK typically has an annual agreement with each supplier, which
is cancelable at any time. The suppliers are paid primarily on
terms, and occasionally in cash or on terms with a letter of
credit.
The bulk of Funnoodles products are
manufactured through an exclusive outsourcing arrangement with
two United States-based manufacturers. This arrangement allows
us to minimize capital investments in tools and fixtures,
reduces our working capital requirements and eliminates the need
for warehousing facilities. The remainder of Funnoodles
products are manufactured through outsourcing arrangements with
various other contract manufacturers. Although Tai Nam and
Funnoodle did not currently execute an agency agreement,
Funnoodle and Tai Nam do have an existing relationship, whereby
Tai Nam was acting as a purchasing agent for Funnoodle.
Effective March 11, 2002, this arrangement was terminated.
Government and Industry Regulation
We are subject to the provisions of the Federal
Hazardous Substances Act, the Federal Consumer Product Safety
Act, the Flammable Fabrics Act and the regulations promulgated
under each such act. Such acts empower the Consumer Product
Safety Commission (CPSC) to protect the public from
hazardous goods. The CPSC has the authority to exclude from the
market goods that are found to be hazardous and requires a
manufacturer to repurchase such goods under certain
circumstances. We send samples of all of our marketed products
to independent laboratories to test for compliance with the
CPSCs rules and regulations, as well as with the product
standards of the Toy Manufacturers of America, Inc.
(TMA). We are not required to comply with the
product standards of the TMA, but do so voluntarily. Similar
consumer protection laws exist in state and local jurisdictions
within the United States, as well as certain foreign countries.
We design our products to exceed the highest safety standards
imposed or recommended either by government or industry
regulatory authorities.
We are not required by the United States
government to obtain any quality or safety approvals prior to
sales in the United States. However, prior to shipment, our
products are tested by independent laboratories on behalf of us
and major retailers. We, however, are required to have and have
obtained European Community (CE) approval, Europeans
toy safety standard, for our products sold in Europe.
Our advertising is subject to the Childrens
Television Act of 1990 and the rules promulgated by the United
States Federal Communications Commission as well as the laws of
certain countries that place certain limitations on television
commercials during childrens programming. We are subject
to various other federal, state and local laws and regulations
applicable to our business and believe that we are in
substantial compliance with these laws and regulations.
Tariffs and Duties
In December 1994, the United States approved a
trade agreement pursuant to which import duties on toys, games,
dolls and other specified items were eliminated effective
January 1, 1995 from products manufactured in all most
favored nation countries (including China). The imposition or
increases in quotas, duties, tariffs or other changes or trade
restrictions, which may be imposed in the future, would have a
material adverse effect on our financial condition, operating
results or ability to import products. In particular, our costs
would be increased if Chinas most favored nation status
was revoked. In October 2000, the United
App-1-85
States Congress approved permanent normal
trade relations status for China, which was intended to
eliminate the United States annual review of Chinas
trade relations status. China has signed similar
agreements with the European Union and other World Trade
Organization members in order to gain support for its entry into
the World Trade Organization, although such entry is not
guaranteed at this time. However, the imposition of trade
sanctions by the United States or the European Union, or the
loss of permanent normal trade relations status by China could
result in substantial duties on the cost of toy, candy and kite
related products manufactured in China and imported into the
United States and Europe.
In addition, several of our operations and our
primary agent, Tai Nam, are based in Hong Kong, formerly a
British Crown Colony. On July 1, 1997, sovereignty of Hong
Kong reverted back to China. To date, this change has not
impacted our business.
Patents, Trademarks and Proprietary
Technology
We own or control numerous patents and
trademarks, which limit the ability of third parties to directly
compete with us in our major brands. Key patents cover the
Creepy Crawlers Workshop
and the
Creature Creator
ovens, as well as aspects of the
Laser Challenge
system
and infrared remote control vehicles. Key trademarks include
Creepy Crawlers
,
Plasti-Goop
,
Laser Challenge,
Arcadia
,
Mighty Mos
,
R.A.D.
TM
,
Funnoodle, WindWheels
and
WindDesigns
.
Certain of our product lines also incorporate
concepts or technologies created by outside designers, some of
which are patented. In addition, many of our products
incorporate intellectual property rights, such as characters or
brand names that are proprietary to third parties. We typically
enter into a license agreement to acquire the rights to the
concepts, technologies or other rights for use with our
products. These license agreements typically provide for the
retention of ownership of the technology, concepts or other
intellectual property by the licensor and the payment of a
royalty to the licensor. Such royalty payments generally are
based on the net sales of the licensed product for the duration
of the license and, depending on the revenues generated from the
sale of the licensed product, may be substantial. In addition,
such agreements often provide for an advance payment of
royalties and may require us to guarantee payment of a minimum
level of royalties that may exceed the actual royalties
generated from net sales of the licensed product. Some of these
agreements have fixed terms and may need to be renewed or
renegotiated prior to their expiration in order for us to
continue to sell the licensed product.
Inflation
We do not believe that the relatively moderate
rates of inflation in the United States in recent years have had
a significant effect on our operations. Although rates of
inflation in Asia have periodically resulted in an increase in
the cost of manufacturing our products and such increased costs
have had a modest impact on margins, we do not believe that
inflation in Asia has had a materially adverse effect on our
results of operations. We will continue our policy of monitoring
costs and adjusting prices accordingly.
Employees
As of August 20, 2002, we had 47 employees,
substantially all of which were full time. We are not subject to
any collective bargaining agreements. We believe that our
relationship with our employees is satisfactory.
Legal Proceedings
In March 2001, George G. Grillo, a product
consultant, filed a complaint against us as well as against
Monogram International, Inc., Monogram Products
(H.K.) Ltd., Steven Lebensfeld and David Ki Kwan Chu, in
the Supreme Court of the State of New York, County of
Suffolk, alleging breach of express and implied contracts,
violation of New York State Labor Law, unjust enrichment
and unfair competition. The plaintiff seeks monetary damages
totaling $280,000 in compensatory damages, $2,500,000 in
exemplary damages plus costs and attorneys fees. We intend
to defend the action vigorously, as well as file
App-1-86
counterclaims, and do not believe that the
lawsuit will have a material adverse effect on our financial
position or results of operations, however, there can be no
assurance of the outcome of the lawsuit.
We are involved in various other legal
proceedings and claims incident to the normal conduct of our
business. We believe that such legal proceedings and claims,
individually and in the aggregate, are not likely to have a
material adverse effect on our financial position or results of
operations.
Our federal tax returns for 1992 through 2000 are
under examination by the Internal Revenue Service and the
statute has been extended through December 2002. Our New York
State tax returns for 1999 through 2001 are also under
examination by the New York State Division of Taxation. We
cannot predict at this time what the outcome of the examination
will be or the impact, if any, on our results of operations.
Submission of Matters to a Vote of Security
Holders
No matters were submitted to a vote of security
holders during the first quarter ended June 30, 2002.
App-1-87
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF JAKKS
The information contained in JAKKS Annual
Report on Form 10-K for the fiscal year ended December 31,
2001, as amended, and in JAKKS quarterly report on
Form 10-Q for the quarter ended June 30, 2002 under
the caption Managements Discussion and Analysis of
Financial Condition and Results of Operations is
incorporated herein by reference.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
TOYMAX
Toymax and its subsidiaries is a consumer leisure
products company that creates, designs and markets innovative
and technologically advanced toys as well as other leisure
products, which are sold in the United States and throughout the
world. Toymax products promote fun and creative play, and are
available under several brands: Toymax® toys, such as
R.A.D.
TM
Robot, Mighty
Mos
TM
vehicles, the award-winning
Laser
Challenge
TM
brand,
Creepy
Crawlers
TM
activities brand and
TMX
RC
TM
radio control vehicles;
Funnoodle®
pool and water toys and accessories;
Go Fly a Kite
® kites, banners,
WindWheels
TM
, weathervanes and wind chimes.
Critical Accounting Policies
Financial Reporting Release No. 60, which
was recently released by the SEC, requires all companies to
include in this item a discussion of critical accounting
policies or methods used in the preparation of financial
statements. Note 1 of the Notes to the Consolidated
Financial Statements includes a summary of the significant
accounting policies and methods used by us in the preparation of
our Consolidated Financial Statements. The following is a brief
discussion of the more critical of these accounting policies and
methods.
Revenue recognition.
Our revenue recognition policy is significant because our
revenue is a key component of our results of operations. In
addition, our revenue recognition determines the timing of
certain expenses, such as commissions and royalties. We follow
very specific and detailed guidelines in measuring revenues;
however, certain judgments affect the application of our revenue
policy. Revenue results are difficult to predict, and any
shortfall in revenue or delay in recognizing revenue could cause
our operating results to vary significantly from quarter to
quarter and could result in future operating losses.
Valuation of long-lived assets and
goodwill.
We assess the impairment of
long-lived assets and goodwill whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger
an impairment review include the following:
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significant underperformance relative to expected
historical or projected future operating results;
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significant changes in the manner of our use of
the acquired assets or the strategy for our overall business;
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significant negative industry or economic trends;
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significant decline in our stock price for a
sustained period; and
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our market capitalization relative to net book
value.
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When we determine that the carrying value of
long-lived assets and goodwill may not be recoverable based upon
the existence of one or more of the above indicators of
impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by
our management to be commensurate with the risk inherent in our
current business model. Net long-lived assets and goodwill
amounted to $18.0 million as of June 30, 2002.
In fiscal 2002, Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets became effective and as a result,
we will cease to amortize approximately $14.5 million of
goodwill. We had recorded approximately $1.1 million of
amortization on these amounts during fiscal 2001 and would have
recorded approximately $1.5 million of amortization during
fiscal 2002. In lieu of amortiza-
App-1-88
tion, we performed an initial impairment review
of our goodwill in fiscal 2002 and an annual impairment reviews
thereafter.
We did not have to record an impairment charge
upon completion of the initial impairment review.
Results of Operations
The following table sets forth the percentages of
net sales of certain income and expense items of Toymax for the
last three fiscal years:
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Percentage of Net Sales
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Three Months
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Ended
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Year Ended March 31,
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June 30,
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2000
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2001
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2002
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2001
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2002
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Net sales
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100.0
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%
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100.0
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%
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|
100.0
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%
|
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|
100.0
|
%
|
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|
100.0
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%
|
Cost of goods sold
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68.7
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63.2
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75.3
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73.2
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68.9
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Gross profit
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31.3
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36.8
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24.7
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26.8
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31.1
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Selling and administrative expenses
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34.8
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32.8
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52.5
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32.0
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29.4
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Operating income (loss)
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(3.5
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)
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4.0
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(27.8
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)
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(5.2
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)
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1.7
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Income (loss) of joint venture
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0.3
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(2.2
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)
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Other income (expense), net
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0.1
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(0.1
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)
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(0.6
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)
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0.0
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.4
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Interest income (expense), net
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(0.5
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)
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(0.8
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)
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(1.0
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)
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(2.1
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)
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(.1
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)
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Provision (benefit)for income taxes
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(2.0
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)
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(0.9
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)
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(7.9
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)
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(2.4
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)
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0.5
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Income (loss) from continuing operations
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(1.6
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)
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(21.5
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)
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(4.9
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1.5
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Loss from discontinued operations
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(0.1
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)
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(8.5
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)
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(3.6
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)
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(3.7
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Net loss
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(1.7
|
)%
|
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(8.5
|
)%
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(25.1
|
)%
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(8.6
|
)%
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1.5%
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For purposes of the fiscal year comparisons
which follow, figures referring to the financial performance of
Toymax Inc. (TMI) and Toymax (H.K.) Limited
(THK), are referred to as Toymax Brands
and those referring to the performance of Go Fly a Kite, Inc.
(GFK), and the Funnoodle product line
(Funnoodle) are referred to as Toymax
Enterprises.
Recent Developments:
On March 11, 2002, JAKKS acquired
approximately a 66.8% controlling interest in Toymax. In
connection with this acquisition by JAKKS, Toymax developed and
began to implement a restructuring plan to maximize its future
operating results. The fiscal 2002 results reflect this
restructuring plan. As part of this plan Toymax has determined
not to continue the operations of Maxverse Interactive, Inc,
(Maxverse) thus, Maxverse is treated as a
discontinued operation along with Monogram International, Inc.
and Candy Plant which were both sold effective November 30,
2001.
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Three months ended June 30, 2002
compared with the three months ended June 30,
2001
|
Net Sales.
Net sales
for the quarter ended June 30, 2002 decreased
$1.3 million, or 6.3%, to $18.7 million from
$20.0 million for the quarter ended June 30, 2001.
Net sales of Toymax Brands for the quarter ended
June 30, 2002 increased 5.7% to $7.2 million, or 38.3%
of total net sales, from $6.8 million, or 34.0% of total
net sales for the quarter ended June 30, 2001. The increase
in net sales was primarily due to a concentrated effort to
reduce on hand inventory in connection with the restructuring
plan implemented in March 2002.
App-1-89
Net sales of Toymax Enterprises for the quarter
ended June 30, 2002, decreased 12.5% to $11.6 million,
or 61.7% of total net sales, from $13.2, or 66.0% of total net
sales for the quarter ended June 30, 2001. The decrease in
net sales was primarily due to reduced sales of water leisure
products and wind wheels.
Gross Profit.
Gross
profit for the quarter ended June 30, 2002, increased by
$0.5 million, or 8.8%, to $5.8 million, or 31.1% of
net sales, from $5.4 million, or 26.8% of net sales, for
the quarter ended June 30, 2001.
The gross profit of Toymax Brands for the quarter
ended June 30, 2002 increased by $0.5 million to
$1.7 million, or 24.2% of net sales, from
$1.2 million, or 18.6% of net sales for the quarter ended
June 2001. The increase in gross margin was primarily the result
of product mix. The gross profit of Toymax Enterprises remained
unchanged at $4.1 million or 35.3% of net sales compared to
31.0% of net sales for the quarter ended June 30, 2001. The
increase in the gross profit percentage was primarily due to the
product mix of kites and banners and to a lesser extent water
leisure products.
Selling and Administrative
Expenses.
Selling and administrative
expenses for the quarter ended June 30, 2002 decreased by
$0.9 million, or 14.0%, to $5.5 million from
$6.4 million for the quarter ended June 30, 2001.
Selling and administrative expenses of Toymax
Brands for the quarter ended June 30, 2002 decreased
$0.7 million, or 17.9%, to $3.4 million from
$4.1 million for the quarter ended June 30, 2001. The
decrease was primarily due to the benefits being realized from
the restructuring which began in March 2002. Selling and
administrative expenses of Toymax Enterprises for the quarter
ended June 30, 2002 decreased by $0.2 million, or
7.1%, to $2.1 million from $2.3 million for the
quarter ended June 30, 2001. The decrease was primarily due
to the benefits being realized from the restructuring which
began in March 2002.
Operating Income (Loss).
As a result of the foregoing,
operating income for the quarter ended June 30, 2002
increased by $1.4 million, to $0.3 million from a
operating loss of $1.1 million.
The operating loss of Toymax Brands for the
quarter ended June 30, 2002 decreased by $1.2 million
to $1.6 million from $2.8 million for the quarter
ended June 30, 2001. Operating income for Toymax
Enterprises increased by $0.2 million to $2.0 million
from $1.8 million for the quarter ended June 30, 2001.
Other Expense, Net.
Other expense, net decreased to other
income of $0.1 million for the quarter ended June 30,
2002 compared to other expenses of $0.4 million primarily
due to the termination of both the bank facility and the
factoring agreement.
Income (Loss) Before Income Taxes.
Income before income taxes for the
quarter ended June 30, 2002 was $0.4 million compared
to a loss before income taxes of $1.5 million for the
quarter ended June 30, 2001. Toymax Brands had a loss
before income taxes for the quarter ended June 30, 2002 of
$1.6 million compared to a loss of $3.2 million for
the quarter ended June 30, 2001. Toymax Enterprises had
income before income taxes of $2.0 million for the quarter
ended June 30, 2002 compared to $1.7 million for the
quarter ended June 30, 2001.
Provision (Benefit) For Income Taxes.
The effective rate for the quarter
ended June 30, 2002 is 27% compared to a benefit of 33% for
the quarter ended June 30, 2001 which approximates the
expected annual effective rate.
Income (Loss) From Continuing
Operations.
Income from continuing
operations is $0.3 million for the quarter ended
June 30, 2002 compared to a loss of $1.0 million for
the quarter ended June 30, 2001.
Loss From Discontinued Operations.
The loss from discontinue operations
for the quarter ended June 30, 2001 was $0.7 million,
for the quarter ended June 30, 2002 there was no
discontinued operations.
Net Income (Loss).
As a result of the foregoing, net income for the quarter ended
June 30, 2002 increased $2.0 million to
$0.3 million ($0.02 per diluted share) from a net loss of
$1.7 million ($0.14 per diluted share) for the quarter
ended June 30, 2001.
App-1-90
Liquidity and Capital Resources
The Company historically has funded its
operations and capital requirements from cash generated from
operations and from financing activities. During the three
months ended June 30, 2002, cash and cash equivalents
increased $4.1 million to $5.0 million.
Cash used in operating activities was
approximately $2.6 million in 2002, as compared to
$3.4 million in 2001. The increase was primarily due to the
net income for the period and the decrease in prepaid expenses
and inventories, which was partially offset by the increase in
due from factor and accounts receivable and the decrease in
accounts payable and accrued expenses and income taxes payable.
Investing activities used $0.1 million in
net cash in 2002, as compared to $0.8 million in 2001.
Investing activities in the current and prior year periods
consisted of capital expenditures, principally for the purchase
of molds and equipment for new products.
Financing activities provided $6.8 million
in net cash in 2002 primarily due to funding received by JAKKS
partially offset by the decrease in long-term obligations. In
2001, financing activities provided $3.5 million in net
cash due to an increase in our bank credit facility, partially
offset by a decrease in long term obligations.
In March 2002, Toymaxs $25.0 million
bank facility was paid off in full and terminated.
In April 2002, Toymax (H.K.) Limited subsidiary
terminated its credit facility with The Hongkong and Shanghai
Banking Corporation Limited. The facility had provided for an
import line of credit of $500,000 and the acceptance of an
export letter of credit guarantee for documents presented with
discrepancies of up to approximately $2.3 million.
Toymax expects to fund its near-term and
long-term cash requirements from a combination of existing cash
balances, cash flow from operations and borrowings from JAKKS.
There can be no assurance that sufficient cash flows from
operations will materialize or that financing from JAKKS will be
available in amounts, at rates, or on terms and conditions
acceptable to Toymax. In such event, additional funding would be
required.
Fiscal Year Ended March 31, 2002 Compared
With Fiscal Year Ended March 31, 2001
Net Sales.
Net sales
for fiscal 2002 decreased $20.3 million, or 17.6%, to
$94.9 million from $115.2 million in fiscal 2001.
Net sales of Toymax Brands decreased 23.3% to
$65.6 million, or 69.1% of total net sales, from
$85.5 million, or 74.2% of total net sales, in fiscal 2001.
The decrease in net sales was primarily due to a decrease in
sales of IR and programmable vehicles and an increase in sales
discounts and allowances.
Net sales of Toymax Enterprises decreased 1.3% to
$29.3 million, or 30.9% of total net sales, from
$29.7 million, or 25.8% of total net sales, in fiscal 2001.
The decrease in net sales was primarily the result of a decrease
in the selling prices of pool and backyard water recreational
products offset somewhat by an increase in kites and windwheels.
Gross Profit.
Gross
profit for fiscal 2002 decreased by $19.0 million, or
44.7%, to $23.4 million from $42.4 million for fiscal
2001, with a decrease in gross margin from 36.8% of net sales
for fiscal 2001 to 24.7% in fiscal 2002.
The gross profit for Toymax Brands decreased by
$16.9 million, or 53.3%, to $14.8 million, or 22.7% of
net sales, from $31.8 million, or 37.2% of net sales for
fiscal 2001. The decrease in the gross profit and margin was
primarily the result of the decrease in sales volume, along with
the increase in sales discounts and allowances.
The gross profit for Toymax Enterprises decreased
$2.0 million, or 19.0%, to $8.6 million, or 29.3% of
net sales, from $10.6 million, or 35.7% of net sales for
fiscal 2001. The decrease in both gross profit and margin
App-1-91
was primarily the result of reduced selling
prices of Toymaxs pool and backyard water recreation
products and to a lesser extent margins realized by GFK
primarily as a result of product mix.
Selling and Administrative
Expenses.
Selling and administrative
expenses for fiscal 2002 increased by $12.0 million, or
31.9%, to $49.8 million, or 52.5% of net sales, from
$37.7 million, or 32.8% of net sales, for fiscal 2001.
Selling and administrative expenses of Toymax Brands for fiscal
2002 increased by $13.5 million, or 44.1%, to
$44.1 million, or 67.2% of net sales, from
$30.6 million, or 35.8% of net sales, for fiscal 2001. This
increase was a result of the restructuring charge of
$15.6 million relating to the acquisition of approximately
66.8% of Toymax by JAKKS. This charge includes a
$7.1 million write-off of certain assets which will not be
utilized by the combined companies, as well as severance
accruals of $1.4 million, termination costs of certain
agreements of $2.2 million, professional fees and other
charges of $2.2 million and a one time charge of
$2.7 million for changing the terms of the existing stock
options. This charge was offset by decreases in advertising and
royalties related to the decrease in sales. Selling and
administrative expenses of Toymax Enterprises for fiscal 2002
decreased $1.5 million, or 20.0%, to $5.6 million, or
19.4% of net sales, from $7.1 million, or 23.9% of net
sales, for fiscal 2001. The decrease was primarily the result of
a decrease in amortization of goodwill and consulting fees
offset by the restructuring charge.
Operating Income
(Loss).
As a result of the foregoing,
fiscal 2002 had a loss of $26.3 million compared to income
of $4.6 million in fiscal 2001. Toymax Brands incurred an
operating loss of $29.2 million in fiscal 2002 compared to
operating income of $1.2 million in fiscal 2001. Toymax
Enterprises had operating income of $2.9 million in fiscal
2002, compared to operating income of $3.5 million in
fiscal 2001.
Other Income (Expense),
Net.
Net other expense decreased from
$2.8 million, in fiscal 2001, to $0.6 million, in
fiscal 2002. This decrease was the result of the write-off of
advances and the investment in the Yaboom Limited joint venture
of $1.9 million and the equity in the loss of the joint
venture of $0.7 million in fiscal 2001. In fiscal 2002,
there were no such charges.
Interest Income (Expense),
Net.
Net interest expense for fiscal
2002 increased $0.1 million, or 10.5%, to $1.0 million
from $0.9 million in fiscal 2001. The increase in net
interest expense was primarily due to increased bank borrowings
in fiscal 2002.
Income (Loss) Before Income
Taxes.
Loss before income taxes for
fiscal 2002 was $27.9 million, compared to income before
income taxes of $1.1 million in fiscal 2001. In fiscal
2002, Toymax Brands had a loss before income taxes of
$30.6 million, compared to a loss of $2.3 million in
fiscal 2001. Toymax Enterprises had income before taxes of
$2.7 million in fiscal 2002, compared to income before
income taxes of $3.4 million in fiscal 2001.
Provision (Benefit) For Income
Taxes.
The effective rate for fiscal
2002 decreased to a benefit of 26.9% from an effective rate of
97.4% for fiscal 2001. The change in the effective rate is
primarily related to the write-off of the investment in and
advances to the joint venture in fiscal 2001 which did not
result in any income tax benefit.
Income (Loss) From Continuing
Operations.
Loss from continuing
operations was $20.4 million in fiscal 2002, compared to a
nominal profit in fiscal 2001.
Loss From Discontinued
Operations.
The loss from discontinued
operations decreased by $6.3 million, to a net loss of
$3.4 million in fiscal 2002, compared to a loss of
$9.8 million in fiscal 2001.
Net Loss.
As a
result of the foregoing, the net loss for fiscal 2002 increased
$14.1 million to $23.9 million ($1.97 per diluted
share) from $9.7 million ($0.86 per diluted share) for
fiscal 2001.
Fiscal Year Ended March 31, 2001 Compared with
Fiscal Year Ended March 31, 2000
Net Sales.
Net sales
for fiscal 2001 increased $5.3 million, or 5.0%, to
$115.2 million from $109.9 million in fiscal 2000.
Net sales of Toymax Brands decreased 6.1% to
$85.5 million, or 74.2% of total net sales, from
$91.1 million, or 82.9% of total net sales, in fiscal 2000.
The decrease in net sales was primarily due to a
App-1-92
decrease in the sales of electronic toys that was
partially offset by an increase in sales of infrared,
radio-controlled and programmable vehicles.
Net sales of Toymax Enterprises increased 57.7%
to $29.7 million, or 25.8% of total net sales, from
$18.8 million, or 17.1% of total net sales, in fiscal 2000.
The increase was primarily the result of the incorporation of a
full years net sales of Funnoodle, which was acquired in
November 1999.
Gross Profit.
Gross
profit for fiscal 2001 increased by $8.0 million, or 23.4%,
to $42.4 million from $34.3 million the gross margin
also increased from 31.3% in fiscal 2000 to 36.8% in fiscal 2001.
The gross profit of Toymax Brands increased by
$4.1 million, or 14.6%, to $31.8 million, or 37.2% of
net sales, from $27.7 million, or 30.5% of net sales, for
fiscal 2000. The increase in gross margin was primarily
attributable to the decrease in markdowns, allowances and other
promotional costs, which were adversely affected by the product
recall in the prior year.
The gross profit of Toymax Enterprises increased
by $4.0 million, or 60.1%, to $10.6 million, or 35.7%
of net sales, from $6.6 million, or 35.2% of net sales, for
fiscal 2000. The increase in gross profit was primarily due to a
full years net sales of Funnoodle combined with better
pricing.
Selling and Administrative
Expenses.
Selling and administrative
expenses for fiscal 2001 decreased by $0.5 million, or
1.3%, to $37.7 million, or 32.8% of net sales, from
$38.2 million, or 34.8% of net sales, for fiscal 2000.
Selling and administrative expenses of Toymax Brands for fiscal
2001 decreased by $3.1 million, or 9.2%, to
$30.6 million, or 35.8% of net sales, from
$33.7 million, or 37.0% of net sales, for fiscal 2000. The
decrease reflects a decrease in advertising costs of almost 30%,
which was partially offset by higher royalties and research and
development costs. Selling and administrative expenses of Toymax
Enterprises were $7.1 million, or 23.9% of net sales, as
compared to $4.2 million, or 22.4% of net sales in
fiscal 2000. Selling and administrative expenses for Toymax
Enterprises in fiscal 2001 reflect a full years
operating expenses of Funnoodle.
Operating Income
(Loss).
As a result of the foregoing,
the operating income for fiscal 2001 increased by
$8.5 million, or 220.4%, to $4.7 million from an
operating loss of $3.9 million for fiscal 2000. Operating
income for Toymax Brands increased by $7.4 million, or
118.4%, to $1.2 million from an operating loss of
$6.3 million for fiscal 2000. Operating income for
Toymax Enterprises increased by $1.1 million to
$3.5 million from operating income of $2.5 million in
fiscal 2000.
Other Income (Expense),
Net.
In fiscal 2001, Toymax recorded a
write-off of its advances and investment in the Yaboom joint
venture of $1.9 million. Including this charge and the
increase in the Companys equity in the operating loss of
the Yaboom venture in fiscal 2001, net other income for
fiscal 2001 decreased by $3.2 million from
$0.4 million in fiscal 2000 to net other expense of
$2.8 million in fiscal 2001.
Interest Income (Expense),
Net.
Net interest expense for
fiscal 2001 increased by $0.4 million, or 65.1%, to
$0.9 million from $0.5 million in fiscal 2000.
The increase in net interest expense was primarily due to the
use of working capital funds to finance Toymaxs
acquisitions and operations.
Income (Loss) Before Income
Taxes.
Income before taxes for
fiscal 2001 increased by $5.1 million to
$1.1 million, compared to a loss before taxes of
$4.0 million for fiscal 2000. Income before taxes for
Toymax Brands increased by $4.0 million, or 63.8%, to a
loss before taxes of $2.3 million, compared to a loss
before taxes of $6.3 million for fiscal 2000. Income
before taxes for Toymax Enterprises increased by
$1.1 million to $3.4 million, compared to income
before taxes of $2.3 million in fiscal 2000.
Provision (Benefit) for Income
Taxes.
The effective tax rate for
fiscal 2001 increased to 97.4% from a benefit of 55.5% for
fiscal 2000. The increase in the effective tax rate was
primarily a result of the geographic distribution of income, as
well as the reduction in the tax benefit attributable to the
write-off of the investment in and advances to the joint venture.
Income (Loss) From Continuing
Operations.
Income from continuing
operations increased from a loss of $1.8 million in fiscal
2000, compared to break even in fiscal 2001.
App-1-93
Loss From Discontinued
Operations.
The loss from discontinued
operations increased by $9.7 million, to a net loss of
$9.8 million, in fiscal 2001, from a loss of
$0.1 million in fiscal 2000.
Net Income (Loss).
As a result of the foregoing, the net loss for fiscal 2001
increased $7.8 million to $9.7 million ($0.86 per
diluted share) from $1.9 million ($0.18 per diluted share)
for fiscal 2000.
New Accounting Standards
The Financial Accounting Standards Board
(FASB) issued SFAS No. 141, Business
Combinations, and No. 142, Goodwill and
Intangible Assets. SFAS No. 141 requires the use of
the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS
No. 141 also requires that Toymax recognize acquired
intangible assets apart from goodwill if the acquired intangible
assets meet certain criteria. SFAS No. 141 applies to all
business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after
July 1, 2001. It also requires, upon adoption of SFAS
No. 142, that Toymax reclassify, if necessary, the carrying
amounts of intangible assets and goodwill based on the criteria
of SFAS No. 141.
In April 2001, Toymax elected to adopt SFAS
No. 142. SFAS No. 142 requires, among other things,
that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, SFAS
No. 142 requires that Toymax identify reporting units for
the purposes of assessing potential future impairments of
goodwill, reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets
with an indefinite useful life.
Toymaxs previous business combinations were
accounted for using the purchase method and as of April 1,
2001, the net carrying amount of goodwill from prior purchase
transactions was approximately $14.5 million. Annual
amortization of this amount, which ceased being effective as of
April 1, 2001, amounted to approximately $1.5 million.
In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of
a liability for an asset retirement obligation to be recognized
in the period in which it is incurred if a reasonable estimate
of fair value can be made. The associated asset retirement costs
are capitalized as part of the carrying amount of the long-lived
asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. We believe the adoption of this
statement will have no material impact on the financial
statements.
In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that
have not yet occurred. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after
December 14, 2001 and, generally, is to be applied
prospectively. Toymax has elected to early adopt SFAS
No. 144 in the current fiscal year.
Barter Transaction
In December 1998 and April 1999, Toymax entered
into agreements with a broker of media advertising, whereby
Toymax sold and transferred title to merchandise of Toymax
having a fair value of approximately $6.9 million in
exchange for approximately $8.7 million in trade credits.
In March, 2002, the total remaining net asset balance of
approximately $4.0 million which is not expected to be
utilized as a result of the acquisition by JAKKS, was expensed.
App-1-94
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK OF JAKKS
The information contained in JAKKS Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001, as amended, and JAKKS Quarterly
Report on Form 10-Q for the quarter ended June 30,
2002, under the caption Quantitative and Qualitative
Disclosures About Market Risk is incorporated herein by
reference.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK OF TOYMAX
Toymax is exposed to certain market risks, which
arise from transactions entered into in the normal course of
business. Toymaxs primary exposures are changes in
interest rates with respect to its debt and foreign currency
exchange fluctuations.
Interest Rate Risk
The interest payable on Toymaxs revolving
line-of-credit is variable based on LIBOR and/or the prime rates
in the United States and Hong Kong, and therefore, affected by
changes in market interest rates. Toymax does not use derivative
financial instruments.
Foreign Currency Risk
While the Toymax product purchases are transacted
in United States dollars, most transactions among the suppliers
and subcontractors of Jauntiway Investments Limited, an OEM toy
manufacturer that has been Toymaxs most important
manufacturer since inception, are effected in Hong Kong dollars.
Accordingly, fluctuations in Hong Kong monetary rates may have
an impact on Toymaxs cost of goods. However, since 1983,
the value of the Hong Kong dollar has been tied to the value of
the United States dollar, eliminating fluctuations between the
two currencies. Despite the announcements by the Hong Kong
Government that it is determined to maintain such fixed exchange
rate, there can be no assurance that the Hong Kong dollar will
continue to be tied to the United States dollar in the near
future or longer term. Furthermore, appreciation of Chinese
currency values relative to the Hong Kong dollar could increase
the cost to Toymax of the products manufactured in China, and
thereby have a negative impact on Toymax.
Financial Statements and Supplementary
Data
The Consolidated Financial Statements and
Financial Statement Exhibits are included in this joint proxy
statement/ prospectus beginning on page F-1 and
incorporated herein by reference.
App-1-95
Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
BDO Seidman, LLP was previously the principal
accountants for Toymax. On July 29, 2002, that firms
appointment as the Toymaxs principal accountants was
terminated by Toymax. PKF, Certified Public Accountants, A
Professional Corporation (PKF) was engaged as
Toymaxs principal accountants effective as of that date.
The decision to change accountants was approved by the Toymax
board of directors.
In connection with the audits of the two fiscal
years ended March 31, 2002, and the subsequent interim
period through July 29, 2002, there were no disagreements
with BDO Seidman, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their
satisfaction would have caused them to make reference in
connection with their opinion to the subject matter of the
disagreement.
The audit reports of BDO Seidman, LLP on the
consolidated financial statements of Toymax as of and for the
years ended March 31, 2001 and March 31, 2002, did not
contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope, or
accounting principles.
During Toymaxs two most recent fiscal years
and through July 29, 2002, neither Toymax nor anyone acting
on its behalf consulted with PKF with respect to the application
of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might
be rendered on Toymaxs consolidated financial statements,
or any other matters or reportable events as set forth in
Items 304(a)(2)(i) and (ii) of Regulation S-K.
App-1-96
PRICE RANGE OF COMMON STOCK
JAKKS common stock is traded on the Nasdaq
National Market under the symbol JAKK. The following
table sets forth the high and low closing sale prices of JAKKS
common stock for the periods indicated as reported by the Nasdaq
National Market. The prices have been adjusted to give
retroactive effect to the two-for-one stock split effected on
May 11, 2000.
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|
|
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|
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High
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|
Low
|
|
|
|
|
|
2000
|
|
|
|
|
|
|
|
|
First Quarter
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|
$
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25.19
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|
|
$
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13.91
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Second Quarter
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|
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25.00
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|
|
|
13.25
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Third Quarter
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|
|
20.75
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|
|
|
9.00
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|
Fourth Quarter
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|
|
10.56
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|
|
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7.00
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2001
|
|
|
|
|
|
|
|
|
First Quarter
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$
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15.00
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|
|
$
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8.00
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Second Quarter
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|
|
19.44
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|
|
|
8.78
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Third Quarter
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|
|
21.80
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|
|
|
12.68
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|
Fourth Quarter
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|
|
25.38
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|
|
|
12.44
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2002
|
|
|
|
|
|
|
|
|
First Quarter
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|
$
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25.70
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|
|
$
|
15.85
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Second Quarter
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|
|
23.49
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|
|
|
15.91
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|
Third Quarter (through August 20, 2002)
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|
|
17.26
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|
|
|
10.09
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Toymaxs common stock is traded on the
Nasdaq National Market under the symbol TMAX. The
following table sets forth the high and low closing sale prices
of Toymaxs common stock for the periods indicated as
reported by the Nasdaq National Market.
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High
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Low
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|
|
|
|
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Fiscal Year Ended March 31,
2001
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|
|
|
|
|
|
|
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First Quarter
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$
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3.25
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|
|
$
|
2.31
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Second Quarter
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|
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3.69
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|
|
|
2.31
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Third Quarter
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|
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2.63
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|
|
|
1.19
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Fourth Quarter
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|
|
2.69
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|
|
|
1.38
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Fiscal Year Ended March 31,
2002
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|
|
|
|
|
|
|
|
First Quarter
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|
$
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2.50
|
|
|
$
|
1.27
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Second Quarter
|
|
|
1.78
|
|
|
|
0.89
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Third Quarter
|
|
|
1.70
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|
|
|
0.80
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|
Fourth Quarter
|
|
|
4.49
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|
|
|
1.50
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|
Fiscal Year Ended March 31,
2003
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|
|
|
|
|
|
|
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First Quarter
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|
$
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4.50
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|
|
|
4.33
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Second Quarter (through August 20, 2002)
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|
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4.35
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|
4.18
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As of August 20, 2002, JAKKS had 106
stockholders of record, as indicated on the records of its
transfer agent, and Toymax had 2,051 stockholders of record, as
indicated on the records of its transfer agent.
The table below sets forth the high and low sale
prices per share of JAKKS common stock on the Nasdaq National
Market on February 8, 2002, the last completed trading day
prior to the public announcement of the proposed merger. Also
set forth is the implied equivalent value of one share of JAKKS
common stock on such date, using an exchange ratio of .0798 of a
share of Toymax common stock for each share of JAKKS common
stock.
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|
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Approximate
|
|
|
|
|
Toymax
|
|
|
JAKKS Common
|
|
Common Stock
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|
|
Stock
|
|
Equivalent
|
|
|
|
|
|
|
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High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
February 8, 2002
|
|
$
|
18.82
|
|
|
$
|
17.41
|
|
|
$
|
1.50
|
|
|
$
|
1.39
|
|
App-1-97
COMPARISON OF RIGHTS OF STOCKHOLDERS OF JAKKS
AND TOYMAX
Both Toymax and JAKKS were incorporated under the
laws of the State of Delaware. At the time the merger becomes
effective, the stockholders of Toymax who elect to receive JAKKS
common stock will become stockholders of JAKKS. As stockholders
of JAKKS, their rights will be governed by the Delaware General
Corporation Law and JAKKS certificate of incorporation and
bylaws, which differ in certain respects from Toymaxs
certificate of incorporation and bylaws.
The following is a summary of the material
differences between the rights of the holders of JAKKS common
stock and Toymax capital stock. You might regard as important
other differences that we do not include here. You should refer
to the documents and statutory sections we mention in this
section if you want more information.
The summary contained
in the chart below is not intended to be a complete statement of
the rights of holders of JAKKS common stock and Toymax common
stock under the Delaware General Corporation Law or the charter
or bylaws of either company.
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Toymax
|
|
JAKKS
|
|
|
|
|
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Authorized Capital Stock
|
|
The authorized capital stock of Toymax consists
of 55,000,000 shares, 50,000,000 of which are shares of common
stock and 5,000,000 of which are shares of preferred stock. The
Toymax charter grants specific authority to the board of
directors, without action by the stockholders, to issue
preferred stock with designations, preferences, and special
rights and qualifications, limitations, or restrictions
designated by the board of directors. At August 20, 2002,
12,316,586 shares of Toymax common stock were outstanding, and
no shares of Toymax preferred stock were outstanding.
Toymaxs charter does not provide for cumulative voting and
no preemptive rights are granted by Toymaxs charter or
bylaws.
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|
The authorized capital stock of JAKKS is
presently 26,000,000 shares, 25,000,000 of which are shares of
common stock and 1,000,000 of which are shares of preferred
stock. JAKKS has filed a preliminary proxy statement with the
SEC for its 2002 Annual Meeting of Stockholders. One of the
resolutions provided in the preliminary proxy statement that
will be voted upon at that Annual Meeting will be to increase
JAKKS authorized capital stock. If this proposal is
approved, JAKKS will have authorized capital stock of
105,000,000 shares, 100,000,000 of which are shares of JAKKS
common stock and 5,000,000 of which are shares of JAKKS
preferred stock. The approval of this proposal is required for
JAKKS to have a sufficient number of authorized shares available
for issuance to the Toymax stockholders of the approximately
551,282 shares required to consummate the merger. The JAKKS
charter grants specific authority to the board of directors,
without action by the stockholders, to issue preferred stock
with designations, preferences, and special rights and
qualifications, limitations, and restrictions designated by the
board of directors. At August 20, 2002, 23,585,149 shares of
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App-1-98
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|
|
|
|
|
Toymax
|
|
JAKKS
|
|
|
|
|
|
|
|
|
|
JAKKS common
stock were outstanding. No preemptive rights are granted by
JAKKS charter or bylaws.
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Number, Term and Election of Directors
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|
The Toymax charter and bylaws provides for three
classes of directors and a board which shall consist of not less
than three directors. One-third of the directors is to be
elected at every annual meeting of stockholders, and each
director shall serve until the directors successor shall
be elected and qualified.
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|
The JAKKS bylaws provide that the number of
directors shall be determined from time to time by the board of
directors and without any such determination the number of
directors on the board shall be at least one. Each director
shall be elected at the annual meeting and each director shall
hold office for the term for which he is elected, until a
successor shall have been elected and qualified or until his
earlier resignation, or removal.
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Vacancies on the Board of Directors
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|
The Toymax bylaws provide that if there is any
vacancy on the board of directors, the directors, by a majority
vote, may appoint any qualified person to fill such vacancy, and
that person shall hold office for the unexpired term until his
successor shall be duly chosen.
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|
The JAKKS bylaws provide that vacancies may be
filled by a majority of the directors then in office, although
less than a quorum, or a sole remaining director, and any
director so chosen shall hold office until the next annual
election and until his successor shall be duly elected and
qualified.
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Removal of Directors
|
|
The Toymax bylaws provide that any director may
be removed either for or without cause at any time by the
affirmative vote of the holders of a majority of all the shares
of stock outstanding and entitled to vote, at a special meeting
of the stockholders called for the purpose of removal.
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|
The JAKKS charter and bylaws do not contain any
specific provisions regarding the procedures to be followed in
removing directors, and, therefore, such removal is governed by
the Delaware General Corporation Law, which provides that a
director or the full board may be removed, with or without
cause, by the holders of a majority of shares entitled to vote
at an election of directors.
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Action by Written Consent and Special Meetings of
Stockholders
|
|
Toymaxs bylaws provide that any action
required to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any meeting,
may be taken without a meeting, without prior notice and without
a vote, if a consent in writing shall be signed by the holders of
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|
JAKKS bylaws provide that special meetings
may be held by resolution of JAKKS board of directors.
|
App-1-99
|
|
|
|
|
|
|
Toymax
|
|
JAKKS
|
|
|
|
|
|
|
|
outstanding stock
having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. The
Toymax bylaws also provide that special meetings of the
stockholders for any purpose or purposes may be called by
resolution of the board of directors or by the Secretary of the
board of directors upon the written request stating the purpose
of such meeting by the holders of at least 30% of the
outstanding shares of Toymaxs capital stock.
|
|
|
Indemnification of Directors and Officers
|
|
The Toymax charter provides that the corporation
shall have the power to indemnify and advance expenses to the
fullest extent permitted by Section 145 of the Delaware
General Corporation Law any person who was or is a director or
officer of the corporation. Any expenses (including
attorneys fees) incurred by each person who is or was a
director or officer of the corporation, and the heirs, executors
and administrators of such a person in connection with defending
any such proceeding in advance of its final disposition shall be
paid by the corporation; provided, however, that if the Delaware
General Corporation Law requires, an advancement of expenses
incurred by an indemnitee in his capacity as a director or
officer (and not in any other capacity in which service was or
is tendered by such indemnitee, including, without limitation,
service in an employee benefit plan) shall be made only upon
delivery to the corporation of an undertaking by or on behalf of
such indemnitee, to repay all amounts so advanced. If it shall
|
|
The JAKKS charter provides that the corporation
indemnify to the fullest extent permitted by Section 145 of
the Delaware General Corporation Law each person who may be so
indemnified thereunder.
|
App-1-100
|
|
|
|
|
|
|
Toymax
|
|
JAKKS
|
|
|
|
|
|
|
|
ultimately be
determined that such indemnitee is not entitled to be
indemnified for such expenses under this article or otherwise.
|
|
|
Limitation of Director Liability
|
|
Toymaxs charter provides that the personal
liability of directors is eliminated, to the fullest extent
permitted by Section 102(b)(7) of the Delaware General
Corporation Law.
|
|
JAKKS charter provides that, to the fullest
extent permitted by the Delaware General Corporation Law, a
director shall not be personally liable to the corporation or
its stockholders for monetary damages for breach of fiduciary
duty as a director, except if and to the extent required by
paragraph (7) of subsection (b) of Section 102 of
the Delaware General Corporation Law.
|
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
JAKKS
The information in JAKKS Annual Report on
Form 10K for the fiscal year ended December 31, 2001,
as amended, under the caption Security Ownership of
Certain Beneficial Owners and Management, is incorporated
herein by reference.
Toymax
The following table furnishes information
concerning all persons known to beneficially own 5% or more of
Toymax common stock as of August 16, 2002.
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
Beneficially
|
|
Percent of
|
Name and Address of Beneficial Owner
|
|
Owned
|
|
Class
|
|
|
|
|
|
JAKKS Pacific, Inc.
|
|
|
8,232,819
|
|
|
|
66.8%
|
|
22619 Pacific Coast Highway
Malibu, California 90265
|
|
|
|
|
|
|
|
|
App-1-101
The following table furnishes information
concerning the ownership by directors, officers and directors
and officers as a group of Toymax common stock as of
August 16, 2002.
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
Beneficially
|
|
Percent of
|
Name and Address of Beneficial Owner(1)
|
|
Owned
|
|
Class
|
|
|
|
|
|
Jack Friedman(2)(3)
|
|
|
0
|
|
|
|
*
|
|
Stephen G. Berman(2)(3)
|
|
|
0
|
|
|
|
*
|
|
Joel M. Bennett(2)
|
|
|
0
|
|
|
|
*
|
|
David C. Blatte(3)
|
|
|
0
|
|
|
|
*
|
|
Robert E. Glick(3)
|
|
|
0
|
|
|
|
*
|
|
Michael G. Miller(3)
|
|
|
0
|
|
|
|
*
|
|
Murray L. Skala(3)
|
|
|
0
|
|
|
|
*
|
|
Joel Handel(3)(4)
|
|
|
73,476
|
|
|
|
*
|
|
Dan Almagor(3)(5)
|
|
|
30,000
|
|
|
|
*
|
|
Directors and officers as a group (9 persons)
|
|
|
103,476
|
|
|
|
*
|
|
|
|
(1)
|
The address of Toymaxs directors is 22619
Pacific Coast Highway, Malibu, California 90265.
|
|
(2)
|
Serves as an executive officer of Toymax. None of
Toymaxs executive officers own Toymax stock or have
employment agreements with Toymax. All of Toymaxs
executive officers are executive officers of JAKKS and have
employment agreements with JAKKS.
|
|
(3)
|
Serves as a director of Toymax.
|
|
(4)
|
Includes 73,476 options that will become
exercisable upon the earlier of the effective date of the merger
and September 30, 2002.
|
|
(5)
|
Includes 30,000 options that will become
exercisable upon the earlier of the effective date of the merger
and September 30, 2002.
|
|
*
|
Represents less than 1%.
|
DIRECTORS AND EXECUTIVE OFFICERS OF
JAKKS
The information in JAKKS Annual Report on
Form 10K for the fiscal year ended December 31, 2001,
as amended, under the caption Directors and Executive
Officers, is hereby incorporated by reference.
EXECUTIVE COMPENSATION FOR JAKKS
The information in JAKKS Annual Report on
Form 10-K for the fiscal year ended December 31, 2001,
as amended, under the caption Executive
Compensation, is incorporated herein by reference.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FOR JAKKS
The information contained in JAKKS Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001, as amended, under the caption
Certain Relationships and Related Transactions, is
incorporated herein by reference.
OTHER MATTERS
The Toymax board of directors does not presently
know of any matters to be presented for consideration at the
special stockholders meeting other than matters described in the
notice of special stockholders meeting mailed together with this
joint proxy statement/ prospectus. If other matters are
presented, the persons named in the accompanying proxy to vote
on such matters will have discretionary authority to vote in
accordance with their best judgment.
App-1-102
LEGAL OPINION
The validity of the shares of JAKKS common stock
offered by this joint proxy statement/prospectus will be passed
upon for JAKKS by the law firm of Feder, Kaszovitz, Isaacson,
Weber, Skala, Bass & Rhine LLP.
EXPERTS
The consolidated financial statements and
schedule of JAKKS Pacific, Inc. as of December 31, 2001 and
2000, and for each of the years in the three year period ended
December 31, 2001, have been included in and incorporated
by reference herein in reliance upon the reports of PKF,
Certified Public Accountant, Professional Corporation, included
in and incorporated by reference herein, and upon the authority
of said firms as experts in accounting and auditing.
The consolidated financial statements and
schedule of Toymax International, Inc. at March 31, 2002
and 2001, and for each of the three years in the period ended
March 31, 2002, appearing in this joint proxy statement/
prospectus and the Toymax financial statements and schedule
incorporated by reference in this joint proxy
statement/prospectus have been audited by BDO Seidman, LLP,
independent auditors as set forth in their reports thereon
appearing elsewhere herein and incorporated by reference, and
are included and incorporated by reference in reliance upon such
reports given on the authority of such firm as experts in
accounting and auditing.
FUTURE STOCKHOLDER PROPOSALS
If the merger is completed there will be no
public participation in any future meetings of stockholders of
Toymax.
App-1-103
WHERE YOU CAN FIND MORE INFORMATION
Both JAKKS and Toymax file annual, quarterly and
current reports, proxy statements, and other information with
the Securities and Exchange Commission. You may read and copy
any reports, statements, or other information that JAKKS or
Toymax files at the Securities and Exchange Commissions
public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You can request copies of these documents, upon
payment of a duplicating fee, by writing the Securities and
Exchange Commission. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. JAKKS and
Toymaxs Securities and Exchange Commission filings are
also available to the public on the SEC Internet site
(http://www.sec.gov). As described below under INFORMATION
INCORPORATED BY REFERENCE, you may also obtain the
documents that JAKKS and Toymax are incorporating by reference
into this prospectus/ joint proxy statement at no charge from
JAKKS or Toymax.
JAKKS has filed a Registration Statement on
Form S-4 (File No. 333-88778) to register with
the Securities and Exchange Commission the JAKKS common stock to
be issued to Toymax stockholders in the merger. This joint proxy
statement/prospectus is part of that Registration Statement and
constitutes a prospectus of JAKKS in addition to being a proxy
statement of Toymax for the Toymax special stockholders meeting.
As allowed by Securities and Exchange Commission rules, this
joint proxy statement/prospectus does not contain all of the
information that you can find in the Registration Statement or
the exhibits to the Registration Statement.
JAKKS Internet address is www.jakkspacific.com.
Toymaxs Internet address is www.toymax.com. The
information contained on either website, and on any website
linked to either JAKKS or Toymaxs website, is not
part of this joint proxy statement/prospectus and you should not
rely on such information in deciding whether to invest in the
securities offered hereby or approve the matters presented
hereby.
App-1-104
INFORMATION INCORPORATED BY
REFERENCE
The Securities and Exchange Commission allows
JAKKS and Toymax to incorporate by reference
information into this prospectus/ joint proxy statement, which
means that JAKKS and Toymax can disclose important information
to you by referring you to another document filed separately by
JAKKS and Toymax with the Securities and Exchange Commission.
The information incorporated by reference is deemed to be part
of this prospectus/ joint proxy statement, except for any
information superseded by any information in this prospectus/
joint proxy statement.
This joint proxy statement/ prospectus
incorporates by reference the documents set forth below that
JAKKS has previously filed with the Securities and Exchange
Commission. These documents contain important information about
JAKKS and its finances:
|
|
|
|
|
Annual Report on Form 10-K for the year ended
December 31, 2001, as amended;
|
|
|
|
Quarterly Report on Form 10-Q for the quarters
ended March 31 and June 30, 2002;
|
|
|
|
Current Reports on Form 8-K filed on March 5,
2002, March 22, 2002, an amendment to the March 22,
2002 filing on April 23, 2002 (which includes pro forma
information about JAKKS acquisition of Toymax) and
July 18, 2002;
|
|
|
|
JAKKS Statement on Schedule 13D
relating to JAKKS acquisition of a controlling interest in
Toymax filed March 20, 2002; and
|
|
|
|
The Description of Registrants
Securities to be Registered contained in JAKKS
Registration Statement on Form 8-A (File No. 0-28104),
filed March 29, 1996 and the Description of
Securities Common Stock incorporated
therein by reference to JAKKS Registration Statement on
Form SB-2 (Reg. No. 333-2048-LA).
|
This joint proxy statement/prospectus also
incorporates by reference the documents set forth below and that
accompany this joint proxy statement/ prospectus that Toymax has
previously filed with the Securities and Exchange Commission.
These documents contain important information about Toymax:
|
|
|
|
|
Annual Report on Form 10-K for the year ended
March 31, 2002;
|
|
|
|
Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002; and
|
|
|
|
Current Report on Form 8-K filed August 1,
2002.
|
Any documents JAKKS or Toymax files pursuant to
Section 13(a) or 15(d) of the Exchange Act (File
Nos. 0-28104 and 5-53691, respectively) after the date of
this joint proxy statement/prospectus and prior to the
termination of the offering will automatically be deemed to be
incorporated by reference in this joint proxy
statement/prospectus and to be part of the joint proxy
statement/prospectus from the date of filing those documents
(except that each time either company files a new annual report
on Form 10-K, any of such documents filed prior to such
filing shall no longer be incorporated into this prospectus).
Any statement contained in this joint proxy statement/prospectus
or in a document incorporated by reference shall be deemed to
modified or superseded for all purposes to the extent that a
statement contained in those documents modifies or supersedes
that statement. Any statement so modified or superseded will not
be deemed to constitute a part of this joint proxy
statement/prospectus, except as so modified or superseded. In
addition, any prospectus supplement filed in relation to this
joint proxy statement/prospectus shall be deemed to supercede
for all purposes any earlier prospectus supplement filed in
relation to this prospectus.
JAKKS will provide without charge to each person
to whom this joint proxy statement/ prospectus is delivered,
upon written or oral request, a copy of any or all of the
documents referred to above which have been or may be
incorporated by reference in this joint proxy statement/
prospectus. Requests for these documents should be directed to
Joel M. Bennett, Chief Financial Officer, JAKKS Pacific Inc.,
22619 Pacific Coast Highway, Malibu, California 90265
(310) 456-7799.
You should rely only on the information contained
in or incorporated by reference into this joint proxy
statement/prospectus. Neither JAKKS nor Toymax has authorized
any other person to provide you with different information. If
anyone provides you with different or inconsistent information,
you should not rely on it. The information in this joint proxy
statement/prospectus is current as of its date.
App-1-105
INDEX TO FINANCIAL EXHIBITS
CONSOLIDATED FINANCIAL STATEMENTS OF TOYMAX
INTERNATIONAL INC.
|
|
|
FINANCIAL STATEMENTS
|
|
|
Financial Statements:
|
|
|
Condensed Consolidated Balance Sheets as of March
31, 2002 and June 30, 2002 (Unaudited)
|
|
F-2
|
Condensed Consolidated Statements of Operations
for the Three Months Ended June 30, 2002 and 2001
(Unaudited)
|
|
F-3
|
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended June 30, 2002 and 2001
(Unaudited)
|
|
F-4
|
Notes to Condensed Consolidated Financial
Statements
|
|
F-5
|
Report of Independent Certified Public Accountants
|
|
F-9
|
Consolidated Balance Sheets as of March 31,
2001 and 2002
|
|
F-10
|
Consolidated Statements of Operations for the
three year period ended March 31, 2002
|
|
F-11
|
Consolidated Statements of Stockholders
Equity for the three year period ended March 31, 2002
|
|
F-12
|
Consolidated Statements of Cash Flows for the
three year period ended March 31, 2002
|
|
F-13
|
Notes to Consolidated Financial Statements
|
|
F-14
|
|
FINANCIAL STATEMENT SCHEDULES
|
|
|
Report of independent certified public
accountants on the Financial Statement Schedule
|
|
S-1
|
Schedule II Valuation and Qualifying
Accounts for the three years in the period ended March 31,
2002
|
|
S-2
|
F-1
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
|
2002
|
|
2002
|
|
|
|
|
|
|
|
(*)
|
|
(Unaudited)
|
ASSETS
|
Current:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
940,136
|
|
|
$
|
5,006,490
|
|
|
Due from Factor
|
|
|
9,084,009
|
|
|
|
2,774,692
|
|
|
Accounts receivable, less allowance for possible
losses of $341,000 and $467,000
|
|
|
3,750,699
|
|
|
|
13,687,635
|
|
|
Inventories
|
|
|
8,954,348
|
|
|
|
8,254,462
|
|
|
Prepaid expenses and other current assets
|
|
|
1,233,352
|
|
|
|
349,704
|
|
|
Income tax refunds receivable
|
|
|
2,405,741
|
|
|
|
2,424,816
|
|
|
Deferred income taxes
|
|
|
648,612
|
|
|
|
648,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
27,016,897
|
|
|
|
33,146,411
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,533,625
|
|
|
|
1,344,569
|
|
Deferred income taxes
|
|
|
10,470,003
|
|
|
|
10,470,003
|
|
Intangible assets,
net of amortization of $1,984,367
|
|
|
15,739,482
|
|
|
|
15,739,482
|
|
Other assets
|
|
|
1,045,984
|
|
|
|
909,181
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,805,991
|
|
|
$
|
61,609,646
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
24,488,433
|
|
|
$
|
23,678,246
|
|
|
Due to affiliates
|
|
|
13,404,492
|
|
|
|
20,209,670
|
|
|
Current portion of long-term obligations
|
|
|
14,790
|
|
|
|
12,632
|
|
|
Income taxes payable
|
|
|
3,262,417
|
|
|
|
2,804,472
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
41,170,132
|
|
|
|
46,705,020
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
41,170,132
|
|
|
|
46,705,020
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
Common stock, par value $.01 per share;
50,000,000 shares authorized; 12,316,241 shares issued
|
|
|
123,162
|
|
|
|
123,162
|
|
|
Additional paid-in capital
|
|
|
30,079,944
|
|
|
|
30,079,944
|
|
|
Accumulated deficit
|
|
|
(15,341,692
|
)
|
|
|
(15,063,912
|
)
|
|
Treasury stock at cost; 66,200 shares
|
|
|
(210,403
|
)
|
|
|
(210,403
|
)
|
|
Accumulated other comprehensive income
|
|
|
(15,152
|
)
|
|
|
(24,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
14,635,859
|
|
|
|
14,904,626
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,805,991
|
|
|
$
|
61,609,646
|
|
|
|
|
|
|
|
|
|
|
(*) Derived from audited financial
statements.
See accompanying notes to condensed consolidated
financial statements.
F-2
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 30,
|
|
|
|
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Net sales
|
|
$
|
20,007,541
|
|
|
$
|
18,747,922
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
14,653,387
|
|
|
|
13,174,102
|
|
|
Selling and administrative
|
|
|
6,404,637
|
|
|
|
5,255,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,058,024
|
|
|
|
18,429,610
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1,050,483
|
)
|
|
|
318,312
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
(4,239
|
)
|
|
|
75,037
|
|
|
Interest income
|
|
|
53,002
|
|
|
|
421
|
|
|
Interest expense
|
|
|
(294,883
|
)
|
|
|
(5,203
|
)
|
|
Finance charges
|
|
|
(177,773
|
)
|
|
|
(7,982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(423,893
|
)
|
|
|
62,273
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes
|
|
|
(1,474,376
|
)
|
|
|
380,585
|
|
Provision (benefit) for income taxes
|
|
|
(489,953
|
)
|
|
|
102,803
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(984,423
|
)
|
|
|
277,782
|
|
Loss from discontinued operations
|
|
|
(747,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,731,510
|
)
|
|
$
|
277,782
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
from:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(.08
|
)
|
|
$
|
.02
|
|
|
|
Discontinued operations
|
|
$
|
(.06
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
(0.14
|
)
|
|
$
|
.02
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
from:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(.08
|
)
|
|
$
|
.02
|
|
|
|
Discontinued operations
|
|
$
|
(.06
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
(0.14
|
)
|
|
$
|
.02
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,131,441
|
|
|
|
12,131,441
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
12,131,441
|
|
|
|
12,384,162
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated
financial statements.
F-3
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,731,510
|
)
|
|
$
|
277,782
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
896,414
|
|
|
|
294,812
|
|
|
Minority interest
|
|
|
(246,096
|
)
|
|
|
|
|
|
Bad debts
|
|
|
50,000
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Due from Factor and accounts receivable
|
|
|
(4,110,342
|
)
|
|
|
(3,627,619
|
)
|
|
|
Inventories
|
|
|
(1,078,743
|
)
|
|
|
699,886
|
|
|
|
Prepaid expenses and other
|
|
|
(68,128
|
)
|
|
|
1,011,436
|
|
|
|
Income tax refunds receivable
|
|
|
304,932
|
|
|
|
(19,075
|
)
|
|
|
Accounts payable and accrued expenses
|
|
|
(188,416
|
)
|
|
|
(810,187
|
)
|
|
|
Due to affiliates
|
|
|
3,423,316
|
|
|
|
|
|
|
|
Income taxes payable
|
|
|
(620,188
|
)
|
|
|
(457,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(3,368,761
|
)
|
|
|
(2,630,910
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(754,693
|
)
|
|
|
(105,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(754,693
|
)
|
|
|
(105,756
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
Increase in bank credit facility
|
|
|
3,524,732
|
|
|
|
|
|
|
Decrease in long-term obligations
|
|
|
(10,385
|
)
|
|
|
(2,158
|
)
|
|
Increase in due to affiliates
|
|
|
|
|
|
|
6,805,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
3,514,347
|
|
|
|
6,803,020
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
|
(609,107
|
)
|
|
|
4,066,354
|
|
Cash and cash equivalents,
beginning of period
|
|
|
1,718,754
|
|
|
|
940,136
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents,
end of period
|
|
$
|
1,109,647
|
|
|
$
|
5,006,490
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
266,189
|
|
|
$
|
5,202
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
25,886
|
|
|
$
|
31,992
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated
financial statements.
F-4
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2001 and 2002
Note 1 Basis of Financial
Statement Presentation
The accompanying unaudited condensed consolidated
financial statements of Toymax International, Inc.
(Toymax or the Company) include the
accounts of the Company and its subsidiaries after elimination
of all material intercompany accounts and transactions, and have
been prepared in accordance with the instructions to
Form 10-Q. Accordingly, the unaudited consolidated
financial statements do not include all of the financial
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. The balance sheet at March 31, 2002 has
been derived from the audited balance sheet at that date. It is
suggested that these condensed consolidated financial
statements, which are presented in U.S. Dollars, be read in
conjunction with the consolidated financial statements and
related notes included in the Companys Form 10-K for
the fiscal year ended March 31, 2002. The Company follows
the same accounting policies in preparation of interim reports.
The results of operations and financial position for interim
periods are not necessarily indicative of those to be expected
for the full year ended March 31, 2003, due, in part, to
seasonal fluctuations which are normal for the Companys
business.
Certain reclassifications have been made to the
prior period amounts to conform with the current period
presentation and with the presentation of discontinued
operations.
Note 2 Earnings Per
Share
Basic earnings (loss) per share is computed by
dividing income (loss) available to common shareholders by the
weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects, in periods in which
they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options and warrants.
Options and warrants to purchase an aggregate of
2,866,190 and 251,383 shares of common stock were
outstanding at June 30, 2001 and 2002, respectively. Such
options and warrants are not included in the computation of
diluted earnings per share because they are anti-dilutive.
Average shares of common stock outstanding are:
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
2002
|
|
|
|
|
|
Basic
|
|
|
12,131,441
|
|
|
|
12,131,441
|
|
Effect of options and warrants
|
|
|
|
|
|
|
252,721
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
12,131,441
|
|
|
|
12,384,162
|
|
|
|
|
|
|
|
|
|
|
Note 3 Other Comprehensive
Income
Other comprehensive income (loss) refers to
revenue, expenses, gains and losses that under generally
accepted accounting principles are excluded from net income
(loss), as these amounts are recorded directly as an adjustment
to shareholders equity. The Companys other
comprehensive income (loss) is comprised of foreign currency
translation adjustments. The comprehensive income (loss) for the
three months ended
F-5
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
June 30, 2001 is the same as the reported
net income (loss). Comprehensive income for the three months
ended June 30, 2002 is comprised of the following:
|
|
|
|
|
Net income
|
|
$
|
277,782
|
|
Change in foreign currency translation adjustments
|
|
|
(9,013
|
)
|
|
|
|
|
|
Comprehensive income
|
|
$
|
268,769
|
|
|
|
|
|
|
Note 4 Recent Accounting
Standards
In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of
a liability for an asset retirement obligation to be recognized
in the period in which it is incurred if a reasonable estimate
of fair value can be made. The associated asset retirement costs
are capitalized as part of the carrying amount of the long-lived
asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. We believe the adoption of this
statement will have no material impact on the financial
statements.
Note 5 Segment and Geographic
Data
The Company operates two reportable segments:
Toymax Brands (which consists of Toymax Inc. and Toymax (H.K.)
Limited and Toymax Enterprises (which consists of Go Fly A Kite,
Inc., and Funnoodle, Inc.).
The following tables present summarized
information about the Companys operations by reportable
segments (net of consolidating eliminations) as of and for the
three months ended June 30, 2001 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2001
|
|
|
|
|
|
Toymax
|
|
Toymax
|
|
|
|
|
Brands
|
|
Enterprises
|
|
Consolidated
|
|
|
|
|
|
|
|
Revenues net sales
|
|
$
|
6,802,143
|
|
|
$
|
13,205,398
|
|
|
$
|
20,007,541
|
|
Income (loss) before income taxes
|
|
|
(3,187,772
|
)
|
|
|
1,713,396
|
|
|
|
(1,474,376
|
)
|
Total assets
|
|
|
37,797,530
|
|
|
|
35,441,515
|
|
|
|
73,239,045
|
|
Interest income
|
|
|
39,746
|
|
|
|
13,256
|
|
|
|
53,002
|
|
Interest expense
|
|
|
293,701
|
|
|
|
1,182
|
|
|
|
294,883
|
|
Depreciation and amortization
|
|
|
571,045
|
|
|
|
325,369
|
|
|
|
896,414
|
|
Capital expenditures
|
|
|
734,898
|
|
|
|
19,795
|
|
|
|
754,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-6
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2002
|
|
|
|
|
|
Toymax
|
|
Toymax
|
|
|
|
|
Brands
|
|
Enterprises
|
|
Consolidated
|
|
|
|
|
|
|
|
Revenues net sales
|
|
$
|
7,187,913
|
|
|
$
|
11,560,009
|
|
|
$
|
18,747,922
|
|
Income (loss) before income taxes
|
|
|
(1,560,110
|
)
|
|
|
1,940,695
|
|
|
|
380,585
|
|
Total assets
|
|
|
28,417,358
|
|
|
|
33,192,288
|
|
|
|
61,609,646
|
|
Interest income
|
|
|
421
|
|
|
|
|
|
|
|
421
|
|
Interest expense
|
|
|
3,140
|
|
|
|
2,063
|
|
|
|
5,203
|
|
Depreciation and amortization
|
|
|
270,594
|
|
|
|
24,218
|
|
|
|
294,812
|
|
Capital expenditures
|
|
|
100,056
|
|
|
|
5,700
|
|
|
|
105,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6 Inventories
Inventories are stated at the lower of cost
(first-in, first-out) or market. Inventories consist principally
of purchased finished goods.
Note 7 Income Taxes
The Company provides for income taxes during
interim periods based upon an estimate of the effective annual
tax rate.
The Companys federal tax returns for 1992
through 2000 and New York State returns for 1999 through 2001
are under examination. As of the date of this Form 10-Q,
the tax authorities have raised no issues that would have a
material effect on the financial statements. The Company cannot
predict at this time what the outcome of the examinations will
be or the impact, if any, on the Companys results of
operations.
Note 8 Discontinued
Operations
Effective November 30, 2001, the Company
sold the net assets of the Monogram and Candy Planet segments of
the business to an entity controlled by David Chu, the former
Chairman of the Companys board of directors, for
$2.25 million. A gain of $0.5 million was recognized
on the sale. In March 2002, the Company decided to abandon and
discontinue the operations of Maxverse, which commenced
operations in fiscal 2001. The results of these operations,
which have been classified as discontinued operations in the
accompanying financial statements, are as follows:
|
|
|
|
|
|
|
For the Three Months
|
|
|
Ended June 30,
|
|
|
2001
|
|
|
|
Net sales
|
|
$
|
3,174,011
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,158,379
|
)
|
Income tax benefit
|
|
|
(165,195
|
)
|
Minority interest
|
|
|
(246,097
|
)
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
(747,087
|
)
|
|
|
|
|
|
F-7
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 9 Acquisition
On February 9, 2002, the Company entered
into an agreement with JAKKS Pacific Inc. (JAKKS)
for JAKKS to acquire all of the outstanding shares of the
Companys common stock. In a two-step transaction, JAKKS
initially acquired approximately 66.8% of the Companys
outstanding shares from the Companys principal
shareholders pursuant to a stock purchase agreement and JAKKS
will acquire the remaining outstanding shares of the
Companys common stock pursuant to a merger agreement that
is subject to stockholder approval. JAKKS will pay $3 per
share in cash and .0798 shares of JAKKS common stock, subject to
adjustment based on the 10-day trailing average closing price
prior to the closing of the merger. The Company and JAKKS have
filed a joint proxy statement/prospectus with the Securities and
Exchange Commission (SEC) and are currently awaiting
the SECs comments.
F-8
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
The Board of Directors and Stockholders of
Toymax International, Inc.
We have audited the accompanying consolidated
balance sheets of Toymax International, Inc. and Subsidiaries as
of March 31, 2001 and 2002, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three years in the period ended
March 31, 2002. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Toymax International, Inc.
and Subsidiaries at March 31, 2001 and 2002, and the
results of their operations and their cash flows for each of the
three years in the period ended March 31, 2002, in
conformity with accounting principles generally accepted in the
United States of America.
BDO Seidman, LLP
New York, New York
May 8, 2002
F-9
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2001
|
|
2002
|
|
|
|
|
|
Assets
|
Current:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,718,754
|
|
|
$
|
940,136
|
|
|
Due from Factor
|
|
|
9,241,280
|
|
|
|
9,084,009
|
|
|
Accounts receivable, less allowance for possible
losses of $476,000 and $341,000
|
|
|
6,668,456
|
|
|
|
3,750,699
|
|
|
Inventories
|
|
|
9,220,010
|
|
|
|
8,954,348
|
|
|
Prepaid expenses and other current assets
|
|
|
3,526,569
|
|
|
|
1,233,352
|
|
|
Assets of discontinued operations
|
|
|
4,917,113
|
|
|
|
|
|
|
Income tax refunds receivable
|
|
|
2,236,624
|
|
|
|
2,405,741
|
|
|
Deferred income taxes
|
|
|
1,966,948
|
|
|
|
648,612
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
39,495,754
|
|
|
|
27,016,897
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
4,805,925
|
|
|
|
1,533,625
|
|
Property, equipment and other assets of
discontinued operations, net
|
|
|
894,868
|
|
|
|
|
|
Deferred income taxes
|
|
|
2,168,509
|
|
|
|
10,470,003
|
|
Goodwill, net of accumulated amortization of
$1,984,367
|
|
|
14,497,309
|
|
|
|
15,739,482
|
|
Other assets
|
|
|
7,225,227
|
|
|
|
1,045,984
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,087,592
|
|
|
$
|
55,805,991
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity
|
Current:
|
|
|
|
|
|
|
|
|
|
Bank credit facility
|
|
$
|
9,971,578
|
|
|
$
|
|
|
|
Accounts payable
|
|
|
7,290,912
|
|
|
|
6,643,487
|
|
|
Accrued expenses
|
|
|
3,649,697
|
|
|
|
6,203,858
|
|
|
Accrued rebates and allowances
|
|
|
2,490,481
|
|
|
|
11,234,533
|
|
|
Due to affiliates
|
|
|
6,273,154
|
|
|
|
13,404,492
|
|
|
Current portion of long-term obligations
|
|
|
27,926
|
|
|
|
14,790
|
|
|
Current liabilities of discontinued operations
|
|
|
1,090,704
|
|
|
|
406,555
|
|
|
Income taxes payable
|
|
|
1,008,062
|
|
|
|
3,262,417
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
31,802,514
|
|
|
|
41,170,132
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
|
1,211,566
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
33,014,080
|
|
|
|
41,170,132
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
479,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value $.01 per share;
5,000,000 shares authorized; none outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, par value $.01 per share;
50,000,000 shares authorized; 12,166,441 and 12,316,241 shares
issued
|
|
|
121,664
|
|
|
|
123,162
|
|
|
Additional paid-in capital
|
|
|
27,144,942
|
|
|
|
30,079,944
|
|
|
Retained earnings (deficit)
|
|
|
8,520,065
|
|
|
|
(15,341,692
|
)
|
|
Treasury stock, 35,000 and 66,200 shares at cost
|
|
|
(177,889
|
)
|
|
|
(210,403
|
)
|
|
Accumulated other comprehensive income
|
|
|
(15,152
|
)
|
|
|
(15,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
35,593,630
|
|
|
|
14,635,859
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,087,592
|
|
|
$
|
55,805,991
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-10
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
109,864,677
|
|
|
$
|
115,151,485
|
|
|
$
|
94,852,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
75,516,553
|
|
|
|
72,769,988
|
|
|
|
71,424,452
|
|
|
Selling and administrative (including
restructuring charges in 2002 of $15,600,000)
|
|
|
38,220,075
|
|
|
|
37,718,929
|
|
|
|
49,760,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,736,628
|
|
|
|
110,488,917
|
|
|
|
121,184,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3,871,951
|
)
|
|
|
4,662,568
|
|
|
|
(26,332,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
853,041
|
|
|
|
567,065
|
|
|
|
349,071
|
|
|
Interest income
|
|
|
533,933
|
|
|
|
247,883
|
|
|
|
157,188
|
|
|
Interest expense
|
|
|
(1,069,742
|
)
|
|
|
(1,133,129
|
)
|
|
|
(1,135,391
|
)
|
|
Equity in income (loss) of joint venture
|
|
|
289,768
|
|
|
|
(699,500
|
)
|
|
|
|
|
|
Write-off of investment in and advances to joint
venture
|
|
|
|
|
|
|
(1,859,906
|
)
|
|
|
|
|
|
Finance charges
|
|
|
(709,127
|
)
|
|
|
(668,925
|
)
|
|
|
(963,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102,127
|
)
|
|
|
(3,546,512
|
)
|
|
|
(1,593,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
|
(3,974,078
|
)
|
|
|
1,116,056
|
|
|
|
(27,925,651
|
)
|
Income tax expense (benefit)
|
|
|
(2,206,877
|
)
|
|
|
1,087,477
|
|
|
|
(7,499,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(1,767,201
|
)
|
|
|
28,579
|
|
|
|
(20,426,475
|
)
|
Loss from discontinued operations
|
|
|
(134,159
|
)
|
|
|
(9,776,209
|
)
|
|
|
(3,935,282
|
)
|
Gain on disposal of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,901,360
|
)
|
|
$
|
(9,747,630
|
)
|
|
$
|
(23,861,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.17
|
)
|
|
$
|
|
|
|
$
|
(1.69
|
)
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.86
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(1.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted loss
per share:
|
|
|
10,596,677
|
|
|
|
11,280,804
|
|
|
|
12,116,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-11
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
Other
|
|
Total
|
Three Years Ended
|
|
|
|
Paid-in
|
|
Retained
|
|
Treasury
|
|
Comprehensive
|
|
Stockholders
|
March 31, 2002
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Stock
|
|
Loss
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 1, 1999
|
|
|
10,605,000
|
|
|
$
|
106,050
|
|
|
$
|
23,059,355
|
|
|
$
|
20,169,055
|
|
|
$
|
|
|
|
$
|
(15,152
|
)
|
|
$
|
43,319,308
|
|
Issuance of common stock purchase warrants
|
|
|
|
|
|
|
|
|
|
|
61,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,201
|
|
Issuance of common stock
|
|
|
28,108
|
|
|
|
281
|
|
|
|
(281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177,889
|
)
|
|
|
|
|
|
|
(177,889
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,901,360
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,901,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2000
|
|
|
10,633,108
|
|
|
|
106,331
|
|
|
|
23,120,275
|
|
|
|
18,267,695
|
|
|
|
(177,889
|
)
|
|
|
(15,152
|
)
|
|
|
41,301,260
|
|
Issuance of common stock
|
|
|
1,533,333
|
|
|
|
15,333
|
|
|
|
4,024,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,040,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,747,630
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,747,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2001
|
|
|
12,166,441
|
|
|
|
121,664
|
|
|
|
27,144,942
|
|
|
|
8,520,065
|
|
|
|
(177,889
|
)
|
|
|
(15,152
|
)
|
|
|
35,593,630
|
|
Issuance of common stock
|
|
|
149,800
|
|
|
|
1,498
|
|
|
|
235,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,500
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,514
|
)
|
|
|
|
|
|
|
(32,514
|
)
|
Stock option compensation
|
|
|
|
|
|
|
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,700,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,861,757
|
)
|
|
|
|
|
|
|
|
|
|
|
(23,861,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2002
|
|
|
12,316,241
|
|
|
$
|
123,162
|
|
|
$
|
30,079,944
|
|
|
$
|
(15,341,692
|
)
|
|
$
|
(210,403
|
)
|
|
$
|
(15,152
|
)
|
|
$
|
14,635,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-12
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,901,360
|
)
|
|
$
|
(9,747,630
|
)
|
|
$
|
(23,861,757
|
)
|
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,370,271
|
|
|
|
5,599,269
|
|
|
|
2,732,313
|
|
|
Minority interest
|
|
|
|
|
|
|
(474,547
|
)
|
|
|
(479,882
|
)
|
|
Bad debts
|
|
|
53,749
|
|
|
|
364,966
|
|
|
|
355,768
|
|
|
Equity in unconsolidated joint venture
|
|
|
(289,768
|
)
|
|
|
699,500
|
|
|
|
|
|
|
Non-cash compensation
|
|
|
61,201
|
|
|
|
|
|
|
|
2,700,000
|
|
|
Write-off of barter credits
|
|
|
|
|
|
|
|
|
|
|
3,973,624
|
|
|
Non-cash revenue barter credits
|
|
|
(377,433
|
)
|
|
|
|
|
|
|
|
|
|
Loss on disposal and write-off of property and
equipment
|
|
|
28,054
|
|
|
|
|
|
|
|
4,580,311
|
|
|
Loss on impairment of asset valuation and
write-off of investment and advances to joint venture
|
|
|
|
|
|
|
7,123,153
|
|
|
|
|
|
|
Changes in deferred income taxes
|
|
|
(702,140
|
)
|
|
|
(551,000
|
)
|
|
|
(6,983,158
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from Factor and accounts receivable
|
|
|
(9,601,301
|
)
|
|
|
9,206,230
|
|
|
|
4,689,024
|
|
|
|
Due to/from affiliates
|
|
|
1,646,936
|
|
|
|
1,678,287
|
|
|
|
(4,206,353
|
)
|
|
|
Inventories
|
|
|
(1,712,620
|
)
|
|
|
860,288
|
|
|
|
1,996,484
|
|
|
|
Prepaid expenses and other
|
|
|
(803,480
|
)
|
|
|
(696,585
|
)
|
|
|
6,006,565
|
|
|
|
Income tax refunds receivable
|
|
|
(1,843,533
|
)
|
|
|
641,266
|
|
|
|
(169,117
|
)
|
|
|
Accounts payable and accruals
|
|
|
10,164,566
|
|
|
|
(12,784,638
|
)
|
|
|
8,755,073
|
|
|
|
Income taxes payable
|
|
|
(112,373
|
)
|
|
|
(252,589
|
)
|
|
|
2,254,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities (continuing and discontinuing)
|
|
|
(1,019,231
|
)
|
|
|
1,665,970
|
|
|
|
2,343,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(3,997,858
|
)
|
|
|
(2,997,987
|
)
|
|
|
(3,436,658
|
)
|
|
Proceeds from disposals of property and equipment
|
|
|
28,661
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, investments and advances
|
|
|
(19,316,841
|
)
|
|
|
(2,587,808
|
)
|
|
|
(1,242,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(23,286,038
|
)
|
|
|
(5,585,795
|
)
|
|
|
(4,678,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in bank credit facility
|
|
|
10,620,661
|
|
|
|
(4,057,466
|
)
|
|
|
(9,971,578
|
)
|
|
Increase (decrease) in long-term obligations
|
|
|
(62,707
|
)
|
|
|
552,222
|
|
|
|
(13,136
|
)
|
|
Increase in due to affiliate
|
|
|
|
|
|
|
|
|
|
|
11,337,691
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
4,600,000
|
|
|
|
236,500
|
|
|
Purchase of treasury stock
|
|
|
(177,889
|
)
|
|
|
|
|
|
|
(32,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
10,380,065
|
|
|
|
1,094,756
|
|
|
|
1,556,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(13,925,204
|
)
|
|
|
(2,825,069
|
)
|
|
|
(778,618
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
18,469,027
|
|
|
|
4,543,823
|
|
|
|
1,718,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
4,543,823
|
|
|
$
|
1,718,754
|
|
|
$
|
940,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,222,412
|
|
|
$
|
1,637,562
|
|
|
$
|
1,106,269
|
|
|
Income taxes paid
|
|
$
|
992,891
|
|
|
$
|
1,740,812
|
|
|
$
|
97,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for license rights and
services
|
|
$
|
|
|
|
$
|
494,429
|
|
|
$
|
|
|
|
Capital leases entered into during the year
|
|
$
|
64,754
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
F-13
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2000, 2001 and 2002
1. Organization
and Summary of Significant Accounting Policies
On February 10, 2002, the Company entered
into an agreement with Jakks Pacific Inc. (Jakks)
for Jakks to acquire all of the outstanding shares of the
Company. In a two-step transaction, Jakks acquired approximately
66% of the Companys outstanding shares from the
Companys principal stockholders pursuant to a stock
purchase agreement effective March 11, 2002, and then will
acquire the remainder pursuant to a definitive merger agreement
that is subject to stockholder approval. For the remaining
Company shares, Jakks will pay $4.50 per share consisting of $3
per share in cash and the remainder in shares valued at $1.50
each.
The financial statements do not reflect any
adjustments related to a step-up in valuation or other
adjustments related to the change in control.
Principles of
consolidation
The consolidated financial statements include the
accounts of Toymax International, Inc. (Toymax and
the Company) and its subsidiaries after elimination
of intercompany accounts and transactions.
Business
The Companys operations consist principally
of its traditional toy products business and the businesses of
its acquired enterprises. The toy products business is conducted
by the Companys subsidiaries, Toymax, Inc.
(TMI)
and Toymax (H.K.) Limited
(Toymax HK)
, which are involved in designing,
marketing and distributing toy products (collectively with the
Yaboom Ltd. joint venture,
Toymax Brands
).
The Companys other ventures include Go Fly A Kite, Inc.
(GFK)
, Funnoodle, Inc., and Funnoodle (H.K.)
Limited (together with Funnoodle (H.K.) Limited,
Funnoodle
, formerly Sun Master Investment
Limited) (collectively
Toymax Enterprises
).
GFK and Funnoodle were formed to acquire the businesses
described in Note 3.
Effective November 30, 2001, the Company
sold the net assets of Monogram International, Inc. and Monogram
Products (H.K.) Limited (collectively
Monogram
) and the Candy Planet division of
TMI to an entity controlled by David Chu, the former chairman of
the Company for $2.25 million. In March 2002, the Company,
in connection with its restructuring (Note 2), abandoned the
operations of Maxverse Interactive, Inc.
(Maxverse)
. Accordingly, the financial
statements have been adjusted to reflect Monogram, Candy Planet
and Maxverse as discontinued operations (Note 16).
Cash and cash
equivalents
Cash and cash equivalents includes investments
with original maturities of three months or less at the date of
acquisition. Such investments, consisting primarily of
investments in commercial paper, are stated at cost, which
approximates market value, and amounted to approximately
$0.6 million and $0.3 million at March 31, 2001 and
2002, respectively.
Inventories
Inventories are stated at the lower of cost
(first-in, first-out basis) or market value. Inventories consist
principally of purchased finished goods.
Property and
equipment
Property and equipment are stated at original
cost. Depreciation of machinery, equipment, molds and furniture
and fixtures is computed by the straight-line method over the
estimated useful lives of the assets.
F-14
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Leasehold improvements are amortized by the
straight-line method over the shorter of their economic lives or
the terms of the leases.
Translation
of foreign currency financial statements
Assets and liabilities of foreign subsidiaries
are translated at year-end rates of exchange, and revenues and
expenses are translated at the average rates of exchange for the
year. Gains and losses resulting from translation are
accumulated in a separate component of stockholders
equity. Gains and losses resulting from foreign currency
transactions (transactions denominated in a currency other than
the functional currency) are included in net income or loss.
Substantially all of the Companys foreign subsidiaries are
located in Hong Kong. Since the value of the Hong Kong dollar
has been tied to the value of the United States dollar, foreign
currency fluctuations have been eliminated.
Income
taxes
Deferred income taxes are recognized based on the
differences between the tax bases of assets and liabilities and
their reported amounts in the financial statements which will
result in taxable or deductible amounts in future years.
Further, the effects of enacted tax law or rate changes are
included in income as part of deferred tax expenses or benefits
in the period that includes the enactment date. A valuation
allowance is recognized if, in the opinion of management, it is
more likely than not that some portion of, or all of, a deferred
tax asset will not be realized.
Revenue
recognition
Sales are recorded upon shipment, free on board
from the point of shipment. The Company provides, as a reduction
of sales, for anticipated returns, allowances and other sales
incentives, based on known and anticipated claims.
Shipping and
handling costs
The consolidated financial statements reflect,
for all periods presented, the adoption of the classification
requirements pursuant to Emerging Issued Task Force
(EITF)
00-10,
Accounting for
Shipping and Handling Fees and Costs,
which was
effective in the Companys fourth quarter of fiscal 2001.
The Company reclassified income from freight charges to
customers to Net sales and warehousing , shipping
and handling costs to Cost of goods sold. Such
costs, net of the related revenue, were historically included in
Selling, general and administrative expenses.
Advertising
Advertising costs are charged to operations as
incurred and were approximately $13.3 million,
$9.5 million and $8.1 million for the years ended
March 31, 2000, 2001 and 2002, respectively.
Advertising costs associated with customer
benefit programs are accrued as the related revenues are
recognized and reflected in Net sales.
Royalties
Minimum guaranteed royalties, as well as
royalties in excess of minimum guarantees, are expensed based on
the sales of related products. The realizability of minimum
guaranteed royalties paid is evaluated by the Company based on
the projected sales of the related products.
F-15
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Research and
development expenses
Research and development expenses are charged to
operations as incurred and are included in selling and
administrative expenses. Research and development expenses for
the years ended March 31, 2000, 2001 and 2002 were
approximately $4.2 million, $3.4 million and
$3.7 million, respectively.
Fair value of
financial instruments
The carrying amounts of certain financial
instruments, including cash, due from Factor, accounts
receivable, accounts payable and bank obligations, approximate
fair value as of March 31, 2001 and March 31, 2002
because of the relatively short-term maturity of these
instruments. Fair value of the amounts due to or from affiliates
cannot be readily determined because of the nature of the terms.
Accounting
for the impairment of long-lived assets
Long-lived assets, which include goodwill and
property and equipment, are evaluated for impairment when events
or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets.
When any such impairment exists, the related assets will be
written down to fair value. In fiscal 2001, the Company
recognized an impairment loss of approximately $1.9 million
related to the valuation of goodwill and the investment in and
advances to the Companys joint venture. See Note 2 for
impairment charges recorded in connection with the
Companys restructuring.
Goodwill
Goodwill represents the excess purchase price
paid over the fair market value of the net assets of the
acquired company. Goodwill was amortized over 10-15 years
on a straight-line basis prior to April 1, 2001. Commencing
fiscal 2002, amortization of goodwill ceased in accordance with
by Statement of Financial Accounting Standards
(
SFAS
) No. 142.
The carrying value of goodwill is based on
managements current assessment of recoverability.
Management evaluates recoverability using both objective and
subjective factors. Objective factors include managements
best estimates of projected future earnings, cash flows and
analysis of historical and recent sales and earnings trends.
Subjective factors include competitive analysis and the
Companys strategic focus.
Earnings
(loss) per share
Basic earnings per share includes no dilution and
is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects, in periods in
which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options and warrants.
Options and warrants to purchase an aggregate of
2,738,620, 2,393,545 and 2,097,910 shares of common stock were
outstanding at March 31, 2000, 2001 and 2002, respectively,
at exercise prices ranging from $3.75 to $10.20 per share in
fiscal 2000, $1.34 to $8.63 per share in fiscal 2001, and $0.94
to $8.63 in fiscal 2002. Such options and warrants are not
included in the computation of diluted earnings per share
because they are anti-dilutive (Note 11).
Accounting
for stock based compensation
The Company accounts for its stock option awards
to employees under the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion
(APB) No. 25,
Accounting for Stock
Issued to Employees.
Under the intrinsic value based
method, compensation cost is the excess, if any, of the
F-16
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
quoted market price of the stock at the grant
date or other measurement date over the amount an employee must
pay to acquire the stock. The Company makes pro forma
disclosures of the net income and earnings per share as if the
fair value based method of accounting had been applied as
required by SFAS No. 123,
Accounting for
Stock-Based Compensation.
The Financial Accounting Standards Board
(FASB) issued Interpretation
(
FIN
) No. 44,
Accounting for
Certain Transactions Involving Stock Compensation.
FIN
No. 44 clarifies the application of APB No. 25 for the
accounting consequences of various modifications of the terms of
a previously fixed stock option. Significant modifications to
the option terms could cause a charge to compensation as the
options are treated as variable options.
Use of
estimates
The preparation of the financial statements in
accordance with generally accepted accounting principles
requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Among the more significant
estimates included in these consolidated financial statements
are the estimated allowance for doubtful accounts receivable and
accrued rebates and allowances and the realizability of
goodwill. Actual results could differ from those and other
estimates.
Concentration
of credit risks
Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally
of cash balances deposited in financial institutions which
exceed FDIC insurance limits, receivables due from Factor and
accounts receivable not sold to a factor.
The Company established an allowance for accounts
receivable based upon factors surrounding the credit risk of
specific customers historical trends and other
information. See Note 13 for information relating to the
concentration of sales to major customers.
Comprehensive
loss
Comprehensive loss refers to revenue, expenses,
gains and losses that under generally accepted accounting
principles are excluded from net loss, as these amounts are
recorded directly as an adjustment to stockholders equity.
The Companys comprehensive loss is comprised of foreign
currency translation adjustments. The comprehensive loss for the
three years ended March 31, 2002 is the same as the
reported net loss.
Recent
Accounting Standards
The FASB issued SFAS No. 141, Business
Combinations, and No. 142, Goodwill and
Intangible Assets in June 2001. SFAS No. 141 requires
the use of the purchase method of accounting and prohibits the
use of the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001. SFAS
No. 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible
assets meet certain criteria. SFAS No. 141 applies to all
business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after
July 1, 2001. It also requires, upon adoption of SFAS
No. 142, that the Company reclassify, if necessary, the
carrying amounts of intangible assets and goodwill based on the
criteria of SFAS No. 141.
In April 2001, the Company elected to adopt SFAS
No. 142. SFAS No. 142 requires, among other things,
that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, SFAS
No. 142 requires that the Company identify reporting units
for the purposes of assessing
F-17
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
potential future impairments of goodwill,
reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets
with an indefinite useful life.
The Companys previous business combinations
were accounted for using the purchase method and as of
April 1, 2001, the net carrying amount of goodwill from
prior purchase transactions was approximately
$14.5 million. Annual amortization of this amount, which
ceased effective April 1, 2001, amounted to approximately
$1.5 million.
The effect of adoption of SFAS No. 142 on
the reported net loss for prior periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Reported net loss
|
|
$
|
(1,901,360
|
)
|
|
$
|
(9,747,630
|
)
|
|
$
|
(23,861,757
|
)
|
Amortization of goodwill, net of tax effect
|
|
|
638,666
|
|
|
|
1,114,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, as adjusted
|
|
$
|
(1,262,694
|
)
|
|
$
|
(8,633,519
|
)
|
|
$
|
(23,861,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net loss
|
|
$
|
(0.18
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(1.97
|
)
|
|
Amortization of goodwill
|
|
|
.06
|
|
|
|
.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share, as adjusted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(1.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In August 2001, the FASB issued SFAS
No. 143,
Accounting for Asset Retirement
Obligations.
SFAS No. 143 requires the fair value
of a liability for an asset retirement obligation to be
recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The adoption of
this statement will have no material impact on the financial
statements.
In October 2001, the FASB issued SFAS
No. 144,
Accounting for the Impairment or Disposal
of Long-Lived Assets.
SFAS No. 144 requires that
those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that
have not yet occurred. The Company has elected to early adopt
SFAS No. 144 in the current fiscal year in connection with
its discontinued operations (Note 16).
Reclassifications
Certain March 31, 2000 and 2001 amounts were
reclassified to conform to the March 31, 2002 presentation.
2. Restructuring
On March 11, 2002 Jakks Pacific, Inc.
acquired approximately 66% of the Company (Note 1). In
connection with that acquisition, the Company began a plan of
reorganization. Included in selling and administrative expenses
is approximately $15.6 million of restructuring charges.
F-18
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the restructuring charge for the
year ended March 31, 2002 is as follows:
|
|
|
|
|
|
|
March 31, 2002
|
|
|
|
Facility closure costs
|
|
$
|
842,000
|
|
Employee termination benefits
|
|
|
1,400,000
|
|
Impairment of fixed assets (Note 5)
|
|
|
2,263,000
|
|
Barter credit write-off (Note 6)
|
|
|
3,974,000
|
|
Stock option compensation (Note 11)
|
|
|
2,700,000
|
|
Termination of agreements
|
|
|
2,200,000
|
|
Other
|
|
|
2,221,000
|
|
|
|
|
|
|
|
|
$
|
15,600,000
|
|
|
|
|
|
|
As a result of the acquisition, the Company
terminated certain of its employees, giving stay bonuses and
severance packages to 20 of its employees.
As a result of the acquisition, the Company
terminated various license agreements and its factor agreement
resulting in a charge. The Company also accrued for minimum
guarantees for royalties associated with discontinued product
lines. Included in accrued liabilities is approximately
$3.6 million related to the restructuring charge, of which
approximately $2.8 million is expected to be paid within
the next six months. The remaining $0.8 million related to
the facility lease, will be paid over the lease term expiring in
April 2004.
3. Business
Acquisitions and Joint Ventures
In December 1998, the Company acquired
substantially all of the operating assets, business operations
and facilities of GFK. The aggregate maximum purchase price of
approximately $6.3 million consisted of up to
$5.9 million in cash and a non-interest bearing contingent
note and $0.4 million in related direct costs. A portion of
the purchase price, $1.3 million, was contingent upon the
achievement of certain operating results for the twelve months
ending August 31, 1999 and $150,000 was contingent upon the
achievement of certain operating results from the date of the
acquisition until August 31, 1999. Both contingencies were
incurred and paid in fiscal 2000. The acquisition has been
accounted for using the purchase method. The Company recorded
approximately $5.8 million of goodwill, including goodwill
related to the contingent payment of $1.5 million, for the
excess of the total purchase price over the fair value of the
net assets acquired.
In November 1999, the Company acquired the
Funnoodle product line from Kidpower, Inc.
(Kidpower), pursuant to an asset purchase agreement
dated October 25, 1999. The Funnoodle product line is a
highly recognized consumer brand of pool and backyard water
recreational products which include the original Funnoodle®
water toys, floating pool mats, lawn sprinkler toys and exercise
mats. The consideration for the acquisition was
$8.7 million paid in cash at the closing, the assumption of
certain commitments of Kidpower in an amount of $500,000, plus
up to $7.0 million payable to Kidpower after the closing if
certain contingencies occur through October 31, 2002. The
Company recorded approximately $8.1 million of goodwill for
the excess of the total purchase price over the fair value of
the net assets acquired. The funding for the acquisition was out
of the working capital of the Company. Based on the occurrence
of certain contingencies contained in the acquisition agreement,
the Company recorded and paid approximately $3.8 million as
additional goodwill through fiscal 2002.
In connection with the Funnoodle acquisition, the
Company entered into a management services agreement dated
November 30, 1999 with Kidpower (the
Kidpower
Management Agreement
). Pursuant to the Kidpower
Management Agreement, Kidpower will manage the day-to-day
operations with respect to the Funnoodle product line. Pursuant
to the Kidpower Management Agreement, a management fee of seven
percent (7%) of the cost of all finished goods with respect to
the Funnoodle product line is payable to
F-19
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Kidpower. The Kidpower Management Agreement,
which has an initial term through November 15, 2002, is
subject to termination or renewal on an annual basis at the
Companys option. In August 2001, the Company terminated
the Kidpower Management Agreement.
In October 1999, the Company and a private
investor formed Yaboom Ltd. (Yaboom), a joint
venture. The Companys investment in Yaboom includes
$1.0 million for the equity ownership and $1.1 million
in non-interest bearing advances. Yaboom was formed to develop,
manufacture and market innovative high-tech consumer products,
which incorporate music and other intellectual property rights
from popular recording artists. Under the terms of the joint
venture, the Company, through a wholly-owned Hong Kong
subsidiary, and the private investor each own fifty percent of
Yaboom. The Company has accounted for the joint venture using
the equity method and intends to permanently reinvest the
earnings derived from the joint venture. Based on the
uncertainty of the operations, the Company recognized an
impairment in the value of the goodwill and investment in and
advances to Yaboom of approximately $1.9 million in fiscal
2001. The equity investment had no value at March 31, 2001
and 2002.
4. Due From
Factor and Accounts Receivable
In the normal course of business, TMI and
Funnoodle sell substantially all of their accounts receivable,
without recourse, to the CIT Group, Inc. (the
Factor
), and receive payment from the Factor
when the accounts are collected.
Effective April 1, 2002, the factoring
agreement was terminated.
Accounts receivable consists mainly of sales not
factored and amounts charged back by the Factor as a result of
disputes primarily relating to unearned discounts and damaged
shipments, net of allowances for possible losses.
5. Property and
Equipment
Property and equipment consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
Estimated
|
|
|
2001
|
|
2002
|
|
Useful Lives
|
|
|
|
|
|
|
|
Machinery, equipment and molds
|
|
$
|
14,829,209
|
|
|
$
|
17,859,717
|
|
|
|
2-5
|
|
Furniture and fixtures
|
|
|
593,854
|
|
|
|
610,027
|
|
|
|
5
|
|
Leasehold improvements
|
|
|
1,067,038
|
|
|
|
1,059,754
|
|
|
|
2-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,490,101
|
|
|
|
19,529,498
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
11,684,176
|
|
|
|
17,995,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,805,925
|
|
|
$
|
1,533,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and
equipment charged to operations were approximately
$2.7 million, $3.5 million and $2.7 million in
2000, 2001 and 2002, respectively. The Company recorded an
impairment charge of $2.3 million on molds and other fixed
assets that will not be utilized as a result of the acquisition
by Jakks (Note 2).
6. Prepaid
Expenses and Other Current Assets
In December 1998 and April 1999, the Company
entered into agreements with a broker of media advertising,
whereby the Company through the Toymax Brands segment sold and
transferred title to merchandise of the Company having a fair
value of approximately $6.9 million in exchange for
approximately $8.7 million in trade credits. The Company
recorded a gross margin on this transaction of approximately
F-20
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$3.2 million. The Company expensed the net
remaining prepaid advertising of approximately $4.0 million
in March 2002 which is not expected to be utilized as a result
of the acquisition by Jakks, which historically has not used
this type of advertising program (Note 2).
7. Bank Credit
Facility
In December 2000, the Company replaced the Toymax
Inc. (TMI) and Go Fly A Kite, Inc. (GFK)
subsidiaries existing $30.0 million credit facility
and the Funnoodle $5.0 million line of credit with a
$40.0 million facility for all of its U.S. based
operating subsidiaries. Borrowings, which are subject to
availability according to a formula based on eligible accounts
receivable and inventory, bear interest at either the
lenders U.S. prime rate or LIBOR plus 2.50%. The
credit agreement, which expires in December 2003, is secured by
the accounts receivable and inventories of the Companys
domestic subsidiaries, as well as other properties, and is
guaranteed by Toymax. The agreement contains certain
restrictions relating to limitations on debt, certain
investments and the payment of dividends. The Agreement was
terminated by mutual consent in March 2002.
Effective April 2000, the Companys Toymax
HK subsidiary renewed its credit facility with The Hongkong and
Shanghai Banking Corporation Limited (
Hongkong
Bank
). The facility provides for a clean export loan
of $1,000,000 and the acceptance of an export letter of credit
guarantee for documents presented with discrepancies of up to
approximately $2.3 million. The facility, which is jointly
available to the Companys affiliates in Hong Kong, was
terminated by mutual consent in April 2002.
8. Related Party
Transactions
The former majority stockholder of the Company
owns significant interests in several other companies, including
Tai Nam Industrial Company Limited (
Tai Nam
)
and Jauntiway Investments Limited
(
Jauntiway
). TMI and Toymax HK have purchased
the majority of their merchandise directly from Tai Nam. The
majority of the merchandise is manufactured in the Peoples
Republic of China (
PRC
) by Jauntiway.
The Company has significant transactions with Tai
Nam. These transactions include purchases of the majority of the
Companys and its subsidiarys merchandise and certain
sales of the subsidiarys products. Tai Nam has
occasionally provided extended payment terms for these purchases.
Prior to the Jakks acquisition (Note 1),
Toymax HK and TMI had an agency agreement with Tai Nam, which
provided for an agency fee of 7% on products purchased. The
agency agreement also requires Tai Nam to provide all
administrative services to Toymax HK.
In September 1997, the Company entered into a
manufacturing agreement with Tai Nam and Jauntiway. This
agreement provides, among other things, that the Company shall
not be required to provide a letter of credit or other security
to Tai Nam or Jauntiway in connection with its purchase orders.
GFK maintains some raw materials for
manufacturing but purchases the majority of its product from
manufacturers in the PRC and Taiwan based upon the
companys product specifications. Prior to the Jakks
acquisition, Tai Nam acted as GFKs agent in Hong Kong for
all products produced in the PRC pursuant to an agency agreement
dated September 1, 2000.
In April 2000, Funnoodle entered into an agency
agreement with Tai Nam, which provides for an agency fee of 7%
on products purchased.
Effective March 11, 2002, all agency
agreements were terminated.
In March 2002, Jakks advanced approximately
$11.3 million to the Company on a non-interest bearing
basis. The funds were used to retire bank and related party debt.
F-21
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of balances and
transactions with affiliated companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2001
|
|
2002
|
|
|
|
|
|
Due to affiliates:
|
|
|
|
|
|
|
|
|
|
Tai Nam
|
|
$
|
6,273,154
|
|
|
$
|
2,066,801
|
|
|
Jakks Pacific, Inc.
|
|
|
|
|
|
|
11,337,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Purchases from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tai Nam
|
|
$
|
56,257,427
|
|
|
$
|
52,865,582
|
|
|
$
|
52,418,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tai Nam
|
|
$
|
475,803
|
|
|
$
|
342,319
|
|
|
$
|
197,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mold purchases from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tai Nam
|
|
$
|
2,275,530
|
|
|
$
|
2,109,445
|
|
|
$
|
2,195,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency fees charged by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tai Nam
|
|
$
|
3,997,980
|
|
|
$
|
3,443,280
|
|
|
$
|
3,329,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursed expenses charged by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tai Nam
|
|
$
|
1,036,903
|
|
|
$
|
15,066
|
|
|
$
|
164,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Income
Taxes
The components of income (loss) before income tax
expense (benefit) and the related provision for income taxes
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Income (loss) before income
taxes
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong Kong
|
|
$
|
3,614,605
|
|
|
$
|
(926,532
|
)
|
|
$
|
1,290,163
|
|
|
U.S.
|
|
|
(7,588,683
|
)
|
|
|
2,042,588
|
|
|
|
(29,215,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,974,078
|
)
|
|
$
|
1,116,056
|
|
|
$
|
(27,925,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong Kong
|
|
$
|
326,005
|
|
|
$
|
291,251
|
|
|
$
|
398,806
|
|
|
U.S. Federal
|
|
|
(1,700,472
|
)
|
|
|
462,287
|
|
|
|
(1,008,787
|
)
|
|
U.S. State and City
|
|
|
(260,483
|
)
|
|
|
184,938
|
|
|
|
93,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,634,950
|
)
|
|
$
|
938,476
|
|
|
$
|
(516,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong Kong
|
|
$
|
82,179
|
|
|
$
|
|
|
|
$
|
97,025
|
|
|
U.S. Federal
|
|
|
(601,058
|
)
|
|
|
348,815
|
|
|
|
(6,913,878
|
)
|
|
U.S. State and City
|
|
|
(53,048
|
)
|
|
|
(199,814
|
)
|
|
|
(116,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(571,927
|
)
|
|
$
|
149,001
|
|
|
$
|
(6,983,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(2,206,877
|
)
|
|
$
|
1,087,477
|
|
|
$
|
(7,499,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The income tax expense (benefit) varies from the
U.S. Federal statutory rate. The following reconciliation
shows the significant differences in the tax at statutory and
effective rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Federal income tax expense (benefit), at
statutory rate of 34%
|
|
$
|
(1,351,187
|
)
|
|
$
|
379,459
|
|
|
$
|
(9,494,721
|
)
|
State income tax expense (benefit), net of
federal tax effect
|
|
|
(206,930
|
)
|
|
|
8,625
|
|
|
|
(81,943
|
)
|
Increase in deferred tax valuation allowance
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
Non-deductible expenses
|
|
|
48,710
|
|
|
|
110,900
|
|
|
|
280,248
|
|
Non-cash compensation
|
|
|
|
|
|
|
|
|
|
|
918,000
|
|
Effect of differences in U.S. and Hong Kong
statutory rates
|
|
|
(820,782
|
)
|
|
|
606,272
|
|
|
|
379,240
|
|
Other
|
|
|
123,312
|
|
|
|
(17,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(2,206,877
|
)
|
|
$
|
1,087,477
|
|
|
$
|
(7,499,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of deferred tax assets/
(liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2001
|
|
2002
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Reserve for sales allowances and possible losses
|
|
$
|
793,118
|
|
|
$
|
457,466
|
|
|
Inventory
|
|
|
629,320
|
|
|
|
812,566
|
|
|
Accrued expenses
|
|
|
385,062
|
|
|
|
671,550
|
|
|
Other
|
|
|
159,448
|
|
|
|
912,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,966,948
|
|
|
|
2,854,494
|
|
|
|
|
|
|
|
|
|
|
Long term:
|
|
|
|
|
|
|
|
|
|
Barter credits
|
|
|
|
|
|
|
1,470,241
|
|
|
Design costs
|
|
|
504,280
|
|
|
|
|
|
|
Property and equipment
|
|
|
317,245
|
|
|
|
303,338
|
|
|
Goodwill, licenses and other intangibles
|
|
|
618,522
|
|
|
|
327,033
|
|
|
Legal fees-trademarks
|
|
|
501,527
|
|
|
|
1,442,768
|
|
|
Federal net operating loss carryforwards
|
|
|
|
|
|
|
4,574,551
|
|
|
State net operating loss carryforwards
|
|
|
425,676
|
|
|
|
941,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,367,250
|
|
|
|
9,059,887
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
4,334,198
|
|
|
|
11,914,381
|
|
Less: Valuation allowance
|
|
|
|
|
|
|
(500,000
|
)
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(198,741
|
)
|
|
|
(295,766
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
4,135,457
|
|
|
$
|
11,118,615
|
|
|
|
|
|
|
|
|
|
|
F-23
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred taxes result from temporary differences
between tax bases of assets and liabilities and their reported
amounts in the financial statements. The temporary differences
result from costs required to be capitalized for tax purposes by
the U.S. Internal Revenue Code, and certain items accrued
for financial reporting purposes in the year incurred but not
deductible for tax purposes until paid.
As of March 31, 2002, the Company has
federal and state net operating loss carryforwards of
$13.7 million and $31.4 million, respectively,
expiring through 2022. Due to the change in control, which
occurred during fiscal 2002, utilization of these losses to
offset future income may be limited under
IRC § 382. A valuation allowance has been
recorded related to the limited realization of state net
operating loss carryforwards. Based on Jakks ability to use the
carryforwards, the Company believes it is more likely than not
that these carryforwards will be utilized. Therefore, no further
allowance was deemed necessary.
10. Capital
Stock
Stock
Repurchase Program
In May 1999, the Company announced that its Board
of Directors had approved the repurchase of up to
$2.0 million of Toymax common stock from time to time on
the open market, as well as through private transactions. The
timing of the stock repurchases and the total number of shares
repurchased will be determined by overall financial and market
conditions. The Companys credit facility restricts it from
purchasing shares of its capital stock in excess of
$2.0 million during any fiscal year. As of March 31,
2002, a total of 66,200 shares of Toymax common stock have
been repurchased for a total purchase price $210,403.
Private
Placement
In December 2000, the Company announced the
private placement of $4.6 million for the purchase of
common stock of Toymax and its subsidiary, Maxverse, had been
accepted. Pursuant to the offering, the Company offered units at
$300,000 per unit consisting of 100,000 shares of Toymax
common stock and 3 million shares of Maxverse, which was
developing wireless communication products for children and
young adults. Through March 31, 2002, 1,533,333 shares of
common stock of Toymax and approximately 46 million shares
common stock of the subsidiary had been issued. The Company
retains controlling interest in the subsidiary. In March 2002,
the Company discontinued the operations of Maxverse
(Note 16).
11. Stock Options
and Warrants
The Stock Option Plan (the
Plan
), which was initiated in fiscal 1998 and
amended in January 1999 and 2000, is administered under the
direction of the Compensation Committee of the Board of
Directors, which has complete discretion to select the optionee
and to establish terms and conditions of each option, subject to
the provisions of the Plan. A total of 3,500,000 shares of
Common Stock were reserved by the Company for issuance upon
exercise of stock options granted or which may be granted under
the Plan.
Stock options outstanding have a life of
10 years for non-qualified options and 5 years if the
grant is an Incentive Stock Option (the
Incentive
Options
), as defined in Section 422 of the
Internal Revenue Code. These options may not be exercised more
than 10 years after the grant or 5 years if the grant
is an Incentive Option to any employee who owns more than 10% of
the outstanding voting power of the Company.
Incentive Options granted may not be less than
100% of the fair market value of the Common Stock as of the date
of the grant or 110% of the fair market value if the grant is to
an employee who owns more than 10% of the outstanding voting
power of the Company.
F-24
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about
stock option activity for the years ended March 31, 2000,
2001 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
Weighted
|
|
|
Option
|
|
Range Per
|
|
Average
|
|
|
Shares
|
|
Share
|
|
Price
|
|
|
|
|
|
|
|
Balance, March 31, 1999
|
|
|
716,500
|
|
|
$
|
6.75 - $8.63
|
|
|
$
|
8.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,948,625
|
|
|
|
3.75 - 7.94
|
|
|
|
4.30
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(26,150
|
)
|
|
|
5.25 - 8.63
|
|
|
|
7.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2000
|
|
|
2,638,975
|
|
|
|
3.75 - 8.63
|
|
|
|
5.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
311,750
|
|
|
|
1.34 - 2.62
|
|
|
|
1.38
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(656,825
|
)
|
|
|
1.34 - 8.63
|
|
|
|
7.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2001
|
|
|
2,293,900
|
|
|
|
1.34 - 8.63
|
|
|
|
4.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,099,000
|
|
|
|
0.94 - 3.75
|
|
|
|
1.74
|
|
|
Exercised
|
|
|
(149,594
|
)
|
|
|
1.30 - 1.82
|
|
|
|
1.58
|
|
|
Cancelled
|
|
|
(1,245,041
|
)
|
|
|
1.30 - 8.63
|
|
|
|
3.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2002
|
|
|
1,998,265
|
|
|
$
|
0.94 - $8.63
|
|
|
$
|
3.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Financial Accounting Standards
No. 123 (
SFAS No. 123
),
Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information regarding
net income and net income per common share as if compensation
costs for the Companys stock option plans had been
determined in accordance with the fair value method prescribed
in SFAS No. 123. Had compensation expense been recorded
under the provisions of SFAS No. 123, the impact on the
Companys net earnings and earnings per share would have
been:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(1,901,360
|
)
|
|
$
|
(9,747,630
|
)
|
|
$
|
(23,861,757
|
)
|
|
Pro forma compensation expense, net of tax
|
|
|
(656,150
|
)
|
|
|
(1,457,066
|
)
|
|
|
(1,566,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
(2,557,510
|
)
|
|
$
|
(11,204,696
|
)
|
|
$
|
(25,428,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.24
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(2.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option granted is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average
assumptions used for all grants in 2000, 2001 and 2002: dividend
yield of 0.00%; risk-free interest rate ranges from 3.97% to
4.81%; an expected life of options ranging from 5 to
10 years for 10-year options and a volatility of 46.5% for
the year ended March 31, 2000, 89% for the year ended
March 31, 2001 and 100% for the year ended March 31,
2002. The weighted average fair value of options granted was
$2.44, $1.09 and $0.91 for the years ended March 31, 2000,
2001 and 2002, respectively.
F-25
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about
stock options outstanding at March 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
Option Price Range
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
$0.94 - $1.30
|
|
|
214,000
|
|
|
$
|
1.25
|
|
$1.34 - $1.47
|
|
|
248,100
|
|
|
$
|
1.39
|
|
$1.63 - $1.63
|
|
|
7,500
|
|
|
$
|
1.63
|
|
$1.82 - $1.82
|
|
|
245,365
|
|
|
$
|
1.82
|
|
$2.00 - $2.15
|
|
|
55,000
|
|
|
$
|
2.07
|
|
$2.62 - $2.62
|
|
|
10,000
|
|
|
$
|
2.62
|
|
$3.75 - $3.75
|
|
|
850,000
|
|
|
$
|
3.75
|
|
$5.25 - $5.25
|
|
|
269,800
|
|
|
$
|
5.25
|
|
$5.31 - $5.31
|
|
|
50,000
|
|
|
$
|
5.31
|
|
$8.63 - $8.63
|
|
|
48,500
|
|
|
$
|
8.63
|
|
|
|
|
|
|
|
|
|
|
$0.94 - $8.63
|
|
|
1,998,265
|
|
|
$
|
3.25
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the Stock Purchase Agreement dated
February 10, 2002 between Jakks Pacific, Inc. and the
Company, the options outstanding on March 11, 2002 were
amended to be fully exercisable for a six-month period
commencing on the earliest of the effective date of the merger,
or its termination, or September 30, 2002. Upon the
expiration of the six-month exercise period, the outstanding
options will terminate. In accordance with FIN No. 44, the
modification of option terms resulted in a $2.7 million
charge to operations and a credit to additional paid in capital.
In conjunction with its initial public offering,
the Company issued warrants to the underwriter to purchase
195,750 shares of Common Stock at an exercise price of
$10.20 per share. There was no charge to operations as a
result of the issuance of the warrants to the underwriter. In
August 1999, the underwriter exercised 106,105 warrants on
a cashless basis, resulting in the issuance of an additional
28,108 shares of the Companys common stock.
On August 30, 1999, the Company issued
10,000 warrants at an exercise price of $5.50 per
warrant in conjunction with the execution of a license
agreement. The warrants, which are fully vested, expire on
August 31, 2002 and resulted in a charge of $61,201 based
on the fair value of the warrants issued.
12. Commitments
and Contingencies
Lease
obligations
The Company leases general and administrative,
warehouse and showroom facilities under non-cancelable operating
leases which expire at various dates. Certain of the leases on
real estate include the payment of property taxes. Additional
warehouse space is leased on a monthly basis.
TMI leases certain equipment under capital
leases. The gross amount of assets recorded under capital leases
is $211,245. Depreciation expense provided on such assets is
included in both cost of goods sold and selling and
administrative expenses in the statements of operations.
F-26
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum lease payments under all leases
with non-cancelable lease terms in excess of one year are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Capital
|
Year Ended March 31,
|
|
Leases
|
|
Leases
|
|
|
|
|
|
2003
|
|
$
|
1,117,554
|
|
|
$
|
15,716
|
|
2004
|
|
|
1,138,744
|
|
|
|
|
|
2005
|
|
|
675,370
|
|
|
|
|
|
2006
|
|
|
637,426
|
|
|
|
|
|
2007
|
|
|
641,120
|
|
|
|
|
|
Thereafter
|
|
|
1,468,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,678,803
|
|
|
$
|
15,716
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
|
|
|
|
926
|
|
|
|
|
|
|
|
|
|
|
Present value of capital lease payments
|
|
|
|
|
|
|
14,790
|
|
Less current portion
|
|
|
|
|
|
|
14,790
|
|
|
|
|
|
|
|
|
|
|
Long-term obligation
|
|
|
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
Rent expense for the years ended March 31,
2000, 2001 and 2002 was approximately $1.1 million,
$1.4 million, and $1.2 million, respectively.
Royalties
The Company has certain licensing agreements
which involve the payment of royalties based on sales. Royalties
for the years ended March 31, 2000, 2001 and 2002 amounted
to approximately $6.4 million, $5.6 million and
$1.8 million, respectively.
Executive
bonus plan
The Companys Executive Bonus Plan (the
Bonus Plan
), is administered by the
Compensation Committee of the Board of Directors (the
Compensation Committee
). The Compensation
Committee determines the key management employees of the Company
who will be eligible to participate in the Bonus Plan and the
amount, if any, of each participants award based on such
participants performance. The aggregate amount of awards
made under the Bonus Plan for a fiscal year may not exceed an
amount equal to 15% of the profit of the Company and its
designated affiliates for such year (as defined), reduced by 15%
of the stockholders equity of the Company and such
affiliates during such year.
Litigation
The Company is involved in various legal
proceedings in the ordinary course of its business activities.
The Company believes that the resolution of such legal
proceedings and claims, individually and in aggregate, are not
likely to have a material adverse effect on its financial
position or results of operations.
In March 2001, George G. Grillo, a product
consultant, filed a complaint against the Company as well as
against Monogram International, Inc., Monogram Products (H.K.)
Ltd., Steven Lebensfeld and David Ki Kwan Chu, in the Supreme
Court of the State of New York, County of Suffolk, alleging
breach of express and implied contracts, violation of New York
State Labor Law, unjust enrichment and unfair competition. The
plaintiff seeks monetary damages totaling $280,000 in
compensatory damages, $2,500,000 in exemplary damages plus costs
and attorneys fees. The Company, which intends to defend
the action vigorously as well as
F-27
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interpose counterclaims, does not believe that
the suit will have a material adverse effect on its financial
position or results of operations, however, there can be no
assurance of the outcome.
The Companys federal tax returns for 1992
through 2000 and New York State returns for 1999 through 2001
are under examination. The tax authorities have raised no issues
to date that would have a material effect on the financial
statements.
13. Major
Customers and Products
Invoiced sales to Toys R US and
WalMart accounted for a total of 43%, 36% and 35% of total
invoiced sales for the years ended March 31, 2000, 2001 and
2002, respectively.
14. Employee
Benefit Plan
The Company has a tax deferred retirement savings
plan that is intended to qualify under Section 401(k) of
the Internal Revenue Code. Eligible participants may contribute
a percentage of their compensation, but not in excess of the
maximum allowed under the Internal Revenue Code. The plan
provides for matching contributions at TMIs option. TMI
made no contributions for the years ended March 31, 2000,
2001 and 2002.
15. Segment and
Geographic Data
The Company operates two reportable segments:
Toymax Brands (primarily toy products, together with the Yaboom
joint venture) and Toymax Enterprises (primarily leisure and
recreational products).
The following tables present summarized
information about the Companys operations by different
geographic areas (net of consolidating eliminations) as of and
for the three years ended March 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toymax
|
|
|
Year Ended March 31, 2000
|
|
Toymax Brands
|
|
Enterprises
|
|
Consolidated
|
|
|
|
|
|
|
|
Revenues-Net sales
|
|
$
|
91,061,966
|
|
|
$
|
18,802,711
|
|
|
$
|
109,864,677
|
|
Income (loss) before income tax
|
|
|
(6,269,276
|
)
|
|
|
2,295,198
|
|
|
|
(3,974,078
|
)
|
Total assets
|
|
|
45,236,966
|
|
|
|
43,836,231
|
|
|
|
89,073,197
|
|
Interest income
|
|
|
533,933
|
|
|
|
|
|
|
|
533,933
|
|
Interest expense
|
|
|
(1,067,436
|
)
|
|
|
(2,306
|
)
|
|
|
(1,069,742
|
)
|
Depreciation and amortization
|
|
|
1,981,742
|
|
|
|
2,388,529
|
|
|
|
4,370,271
|
|
Capital expenditures
|
|
|
2,941,379
|
|
|
|
1,056,479
|
|
|
|
3,997,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toymax
|
|
|
Year Ended March 31, 2001
|
|
Toymax Brands
|
|
Enterprises
|
|
Consolidated
|
|
|
|
|
|
|
|
Revenues-Net sales
|
|
$
|
85,495,922
|
|
|
$
|
29,655,563
|
|
|
$
|
115,151,485
|
|
Income (loss) before income tax
|
|
|
(2,269,190
|
)
|
|
|
3,385,246
|
|
|
|
1,116,056
|
|
Total assets
|
|
|
48,198,647
|
|
|
|
20,888,945
|
|
|
|
69,087,592
|
|
Interest income
|
|
|
183,106
|
|
|
|
64,777
|
|
|
|
247,883
|
|
Interest expense
|
|
|
(1,100,503
|
)
|
|
|
(32,626
|
)
|
|
|
(1,133,129
|
)
|
Depreciation and amortization
|
|
|
2,467,698
|
|
|
|
3,131,571
|
|
|
|
5,599,269
|
|
Capital expenditures
|
|
|
2,258,409
|
|
|
|
739,578
|
|
|
|
2,997,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toymax
|
|
|
Year Ended March 31, 2002
|
|
Toymax Brands
|
|
Enterprises
|
|
Consolidated
|
|
|
|
|
|
|
|
Revenues-Net sales
|
|
$
|
65,568,667
|
|
|
$
|
29,283,585
|
|
|
$
|
94,852,252
|
|
Income (loss) before income tax
|
|
|
(30,651,395
|
)
|
|
|
2,725,744
|
|
|
|
(27,925,651
|
)
|
Total assets
|
|
|
26,775,126
|
|
|
|
29,030,865
|
|
|
|
55,805,991
|
|
Interest income
|
|
|
108,892
|
|
|
|
48,296
|
|
|
|
157,188
|
|
Interest expense
|
|
|
(1,132,740
|
)
|
|
|
(2,651
|
)
|
|
|
(1,135,391
|
)
|
Depreciation and amortization
|
|
|
2,201,867
|
|
|
|
530,446
|
|
|
|
2,732,313
|
|
Capital expenditures
|
|
|
3,116,764
|
|
|
|
319,894
|
|
|
|
3,436,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present information about
the Company by geographic area as of and for three years ended
March 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Long-lived Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
19,754,712
|
|
|
$
|
17,614,988
|
|
|
$
|
11,923,917
|
|
|
Hong Kong
|
|
|
1,340,503
|
|
|
|
1,688,246
|
|
|
|
5,349,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,095,215
|
|
|
$
|
19,303,234
|
|
|
$
|
17,273,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Sales by Geographic Area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
89,473,797
|
|
|
$
|
94,852,985
|
|
|
$
|
81,948,478
|
|
|
Europe
|
|
|
14,027,241
|
|
|
|
13,159,570
|
|
|
|
8,172,258
|
|
|
Canada
|
|
|
3,547,750
|
|
|
|
2,402,269
|
|
|
|
1,362,834
|
|
|
Hong Kong
|
|
|
940,748
|
|
|
|
850,419
|
|
|
|
106,506
|
|
|
Other
|
|
|
1,875,141
|
|
|
|
3,886,242
|
|
|
|
3,262,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,864,677
|
|
|
$
|
115,151,485
|
|
|
$
|
94,852,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Discontinued
Operations
Effective November 30, 2001, the Company
sold the net assets of the Monogram and Candy Planet segments of
the business to an entity controlled by David Chu, the former
Chairman of the Companys board of directors, for $2.25
million. A gain of $0.5 million was recognized on the sale.
In March 2002, the Company decided to abandon and
discontinue the operations of Maxverse, which commenced
operations in fiscal 2001.
F-29
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The results of these operations, which have been
classified as discontinued operations in the accompanying
financial statements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
29,899,125
|
|
|
$
|
16,951,272
|
|
|
$
|
7,358,207
|
|
Income (loss) before income taxes
|
|
|
349,691
|
|
|
|
(12,258,343
|
)
|
|
|
(4,762,047
|
)
|
Income tax expense (benefit)
|
|
|
483,850
|
|
|
|
(2,007,587
|
)
|
|
|
(346,883
|
)
|
Minority interest
|
|
|
|
|
|
|
(474,547
|
)
|
|
|
(479,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
(134,159
|
)
|
|
$
|
(9,776,209
|
)
|
|
$
|
(3,935,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2001, the net assets of
discontinued operations were as follows:
|
|
|
|
|
Due from factor
|
|
$
|
1,933,457
|
|
Account receivable
|
|
|
36,307
|
|
Inventory
|
|
|
1,730,822
|
|
Prepaid expenses and other current assets
|
|
|
1,216,527
|
|
|
|
|
|
|
Current assets of discontinued operations
|
|
|
4,917,113
|
|
|
|
|
|
|
Property and equipment
|
|
|
894,868
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
5,811,981
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
1,090,704
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
1,090,704
|
|
|
|
|
|
|
F-30
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
17.
|
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Year End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
Fiscal Year Ended March 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales Operating income (loss)
|
|
$
|
21,688
|
|
|
$
|
44,348
|
|
|
$
|
34,601
|
|
|
$
|
14,514
|
|
|
$
|
115,151
|
|
|
Income (loss) before income taxes
|
|
|
1,371
|
|
|
|
8,099
|
|
|
|
261
|
|
|
|
(5,068
|
)
|
|
|
4,663
|
|
|
Net income (loss) from continuing operations
|
|
|
1,021
|
|
|
|
7,414
|
|
|
|
(36
|
)
|
|
|
(7,283
|
)
|
|
|
1,116
|
|
|
Net income (loss) from discontinued
operations
|
|
|
597
|
|
|
|
4,869
|
|
|
|
(155
|
)
|
|
|
(5,283
|
)
|
|
|
28
|
|
|
Net income
|
|
|
(846
|
)
|
|
|
(1,314
|
)
|
|
|
(1,444
|
)
|
|
|
(6,172
|
)
|
|
|
(9,776
|
)
|
|
Basic and diluted earnings (loss) per share:
|
|
|
(249
|
)
|
|
|
3,555
|
|
|
|
(1,599
|
)
|
|
|
(11,455
|
)
|
|
|
(9,748
|
)
|
|
|
Continued operations
|
|
$
|
0.06
|
|
|
$
|
0.46
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
|
|
|
|
Discontinued operations
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.86
|
)
|
|
|
Total
|
|
$
|
(0.02
|
)
|
|
$
|
0.34
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.95
|
)
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
20,008
|
|
|
$
|
39,104
|
|
|
$
|
25,613
|
|
|
$
|
10,127
|
|
|
$
|
94,852
|
|
|
Operating income (loss)
|
|
|
(1,050
|
)
|
|
|
7,130
|
|
|
|
(7,295
|
)
|
|
|
(25,117
|
)
|
|
|
(26,332
|
)
|
|
Income (loss) before income taxes
|
|
|
(1,474
|
)
|
|
|
6,750
|
|
|
|
(7,630
|
)
|
|
|
(25,572
|
)
|
|
|
(27,926
|
)
|
|
Net income (loss) from continuing operations
|
|
|
(984
|
)
|
|
|
5,282
|
|
|
|
(5,294
|
)
|
|
|
(19,430
|
)
|
|
|
(20,426
|
)
|
|
Net income (loss) from discontinued
operations
|
|
|
(747
|
)
|
|
|
(444
|
)
|
|
|
(1,110
|
)
|
|
|
(1,634
|
)
|
|
|
(3,935
|
)
|
|
Gain on disposal of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
500
|
|
|
Net income
|
|
|
(1,732
|
)
|
|
|
4,838
|
|
|
|
(5,904
|
)
|
|
|
(21,064
|
)
|
|
|
(23,862
|
)
|
|
Basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued operations
|
|
$
|
(0.08
|
)
|
|
$
|
0.44
|
|
|
$
|
(0.44
|
)
|
|
$
|
(1.61
|
)
|
|
$
|
(1.69
|
)
|
|
|
Discontinued operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.28
|
)
|
|
|
Total
|
|
$
|
(0.14
|
)
|
|
$
|
0.40
|
|
|
$
|
(0.49
|
)
|
|
$
|
(1.74
|
)
|
|
$
|
(1.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of fiscal 2001, based
on continued losses and weak projections for the Companys
Monogram subsidiary and the uncertainty of the operations of the
Companys joint venture, Yaboom, the Company recognized an
impairment loss of approximately $7.1 million related to
the valuation of goodwill and the investment in and advances to
the Companys joint venture.
During the fourth quarter of fiscal 2002, the
Company had significant adjustments primarily related to the
restructuring as a result of the acquisition by Jakks
(Note 2). This affected operating income by approximately
$15.6 million. The Company also discontinued the operations
of Maxverse in the fourth quarter of fiscal 2002 (Note 16).
Furthermore, in the fourth quarter the Company provided for
$0.4 million for U.S. tax on previously untaxed Hong Kong
income.
F-31
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders of
Toymax International, Inc.
The audits referred to in our report dated
May 8, 2002 relating to the consolidated financial
statements of Toymax International, Inc. included the audits of
the financial statement schedule. This financial statement
schedule is the responsibility of the Companys management.
Our responsibility is to express an opinion on this financial
statement schedule based upon our audits.
In our opinion the financial statement schedule
presents fairly, in all material respects, the information set
forth therein.
BDO Seidman, LLP
New York, New York
May 8, 2002
S-1
Toymax International, Inc.
and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
THREE YEARS ENDED MARCH 31,
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
(1)
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
Charged to
|
|
|
|
|
|
|
Beginning
|
|
Costs and
|
|
Other
|
|
|
|
Balance at End
|
Description
|
|
of Period
|
|
Expenses
|
|
Accounts
|
|
Deductions
|
|
of Period
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED VALUATION RESERVES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED MARCH 31, 2000:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for possible losses
|
|
$
|
136,639
|
|
|
$
|
53,749
|
|
|
$
|
200,000
|
(a)
|
|
$
|
110,623
|
|
|
$
|
279,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED MARCH 31, 2001:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for possible losses
|
|
$
|
279,765
|
|
|
$
|
364,966
|
|
|
|
|
|
|
$
|
168,944
|
|
|
$
|
475,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED MARCH 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for possible losses
|
|
$
|
475,787
|
|
|
$
|
355,768
|
|
|
$
|
(211,823
|
)(b)
|
|
$
|
278,747
|
|
|
$
|
340,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a)
|
Acquisition of Monogram International, Inc.
|
|
b)
|
Write-off discontinued operations of Monogram
International
|
S-2
APPENDIX A
AGREEMENT OF MERGER
of
JP/TII ACQUISITION CORP.
with and into
TOYMAX INTERNATIONAL, INC.
dated as of
February 10, 2002
AGREEMENT OF MERGER
OF
JP/TII ACQUISITION CORP.
WITH AND INTO
TOYMAX INTERNATIONAL, INC.
THIS AGREEMENT OF MERGER dated as of
February 10, 2002, by and among JAKKS Pacific, Inc., a
Delaware corporation (JAKKS),
JP/TII Acquisition Corp., a Delaware corporation
(Newco), and Toymax International Inc., a Delaware
corporation (Toymax)
WITNESSETH:
WHEREAS, concurrently herewith, JAKKS is entering
into a Stock Purchase Agreement with certain stockholders of
Toymax named therein, pursuant to which, upon the terms and
subject to the conditions set forth therein, JAKKS shall acquire
a majority of Toymaxs outstanding capital stock; and
WHEREAS, subject to the consummation of the
transactions provided in the Stock Purchase Agreement, JAKKS
desires to become the sole stockholder of Toymax through the
merger of Newco with and into Toymax, in which Toymax shall
survive as a wholly-owned subsidiary of JAKKS and the other
stockholders of Toymax shall receive merger consideration
consisting of cash and securities of JAKKS, all on the terms and
subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises
and the mutual covenants hereinafter set forth, the parties
hereto hereby agree as follows:
1.
Certain
Definitions.
1.1
Account
means any account receivable or other right to payment
arising from the sale of merchandise or services in the
Business, any loan or other extension of credit or any other
sale, lease, exchange or other disposition of any Assets by, or
for the account of, Toymax or a Subsidiary, whether or not in
the ordinary course of business.
1.2
Affiliate
of a Person means another Person directly or indirectly
controlling, controlled by, or under common control with, such
Person; for this purpose, control of a Person means
the power (whether or not exercised) to direct the policies,
operations or activities of such Person by virtue of the
ownership of, or right to vote or direct the manner of voting
of, securities of such Person, or pursuant to agreement or Law
or otherwise.
1.3
Agreement
means this Agreement of Merger, as amended or supplemented.
1.4
Alternative
Action
means any action (a) by Toymaxs
Board of Directors (i) to withdraw its approval or
recommendation of the Merger or (ii) to modify or to
qualify such approval or recommendation in a manner materially
adverse to JAKKS or which would prevent, impede or materially
delay the consummation of the Merger or (iii) to accept or
recommend an Alternative Proposal; or (b) by Toymax or any
Principal Stockholder to enter into any Alternative Agreement.
1.5
Alternative
Agreement
means any written contract, letter of
intent, agreement in principal or similar agreement relating to
any Alternative Transaction.
1.6
Alternative
Proposal
means any bona fide bid, offer or other
proposal relating to an Alternative Transaction.
1.7
Alternative
Transaction
means (a) any merger, consolidation
or other business combination or reorganization pursuant to
which a substantial portion of the Business or the Assets
(including without limitation any portion that accounts for, or
is reasonably expected to generate over the ensuing 12-month
period, 10% or more of Toymaxs Accounts) is sold or
otherwise transferred to, or combined with that or those of,
another Person; (b) a transaction as a result of which any
Person (other than JAKKS, Toymax or a Subsidiary) becomes the
holder, directly or indirectly, of securities of Toymax having
10% or more of the
App-A-1
voting power of all voting securities of Toymax;
or (c) the acquisition, directly or indirectly, by another
Person (other than JAKKS) of control of Toymax, in each case,
other than the Merger.
1.8
Assets
means the assets of Toymax or a Subsidiary, other than any
assets of Candy Planet, Co. (a division of Toymax Inc.) and
of Monogram International, Inc.
1.9
Business
means the business operated by Toymax and the Subsidiaries,
which consists of creating, designing and marketing innovative
and technologically advanced toys and leisure products, but
excluding any business operated by Candy Planet, Co. (a division
of Toymax Inc.) or Monogram International, Inc.
1.10
Cash
Payment
means the portion of the Merger Consideration
payable in cash, in the amount of $3.00 per share of Toymax
Common Stock.
1.11
Certificate
means a certificate that, immediately prior to the Effective
Time, shall represent outstanding shares of Toymax Common Stock.
1.12
Certificate
of Merger
means the certificate of merger,
substantially in the form of Exhibit A, to be filed
pursuant to Section 3.1.
1.13
Closing
means the closing of the Merger as provided in Section 3.1.
1.14
Closing
Date
means the date of the Closing.
1.15
Code
means the Internal Revenue Code of 1986, as amended, and the
treasury regulations promulgated thereunder.
1.16
Consent
means any approval, authorization, consent or ratification by or
on behalf of any Person that is not a party to this Agreement,
or any waiver of, or exemption or variance from, any Material
Contract, Permit or Order, that is required to be obtained in
connection with the consummation of the transactions
contemplated by this Agreement.
1.17
Constituent
Corporation
means Newco or Toymax.
1.18
DGCL
means the Delaware General Corporation Law, as amended.
1.19
Dissenting
Shares
is defined in Section 5.5.
1.20
Effective
Time
is defined in Section 3.1.
1.21 [Intentionally
omitted.]
1.22
Employee
Plan
means an employee benefit plan (including a
multi-employer plan) as defined in Section 3(3) of ERISA.
1.23
ERISA
means the Employee Retirement Income Security Act of 1974,
as amended.
1.24
ERISA
Affiliate
means Toymax, a Subsidiary and any other
Person that is a trade or business that would be deemed to be,
together with Toymax and the Subsidiaries, a single
employer within the meaning of Section 414 of the
Code.
1.25
Exchange
Act
means the Securities Exchange Act of 1934, as
amended.
1.26
Fairness
Opinion
means an opinion of Morgan Lewis
Gethens & Ahn, Inc., or another investment banking or
financial advisory firm reasonably satisfactory to JAKKS and
Toymax, to the effect that the Merger Consideration and the
consideration being paid under the Stock Purchase Agreement are,
on the date hereof, fair, from a financial point of view, to the
holders of outstanding shares of Toymax Common Stock.
1.27
First
Closing
means the closing of the purchase of Toymax
Common Stock pursuant to the Stock Purchase Agreement.
1.28
Fractional
Share Payment
means an amount in cash payable in lieu
of any fractional share of JAKKS Stock that would, but for the
provisions of Section 6.2, be included in the Stock Payment.
App-A-2
1.29
GAAP
means generally accepted accounting principles in the United
States.
1.30
Governmental
Authority
means any United States or foreign federal,
state or local government or governmental authority, agency or
instrumentality, any court or arbitration panel of competent
jurisdiction or the Nasdaq Stock Market, Inc.
1.31
Hazardous
Material
means any contaminant, pollutant or toxic or
hazardous waste, effluent or other substance or material,
including without limitation any radioactive, explosive,
flammable, corrosive or infectious substance or material, or any
substance or material containing friable asbestos,
polychlorinated biphenyls or urea formaldehyde or which is
otherwise subject to any Law, Permit or Order relating to the
protection of the environment or human health or safety.
1.32
HSR
Act
means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
1.33
HSR
Form
means a Notification and Report Form for Certain
Mergers and Acquisitions required to be filed pursuant to the
HSR Act in connection with the Merger.
1.34
Indebtedness
means, as to Toymax and the Subsidiaries on a consolidated
basis (without duplication), (a) indebtedness for borrowed
money or the deferred purchase price of property or services in
respect of which any such Person is liable as obligor;
(b) all obligations evidenced by notes, bonds, debentures
or similar instruments; (c) indebtedness secured by any
Lien on any Assets regardless of whether Toymax or any
Subsidiary shall have assumed or is liable as obligor for such
indebtedness; (d) obligations of any such Person under any
capital lease; (e) license transfer fees; and (f) any
other obligation or liability which would be required under GAAP
to be recorded as indebtedness on a consolidated balance sheet
of Toymax and the Subsidiaries.
1.35
JAKKS
Option
means an option to purchase shares of JAKKS
Stock to be granted pursuant to Section 5.4.
1.36
JAKKS
Stock
means the common stock, par value $.001 per
share, of JAKKS.
1.37
Law
means common law and any statute, rule, regulation or
ordinance of any Governmental Authority and includes any
judicial decision applying or interpreting common law or any
other Law.
1.38
Lease
means a lease pursuant to which Toymax or a Subsidiary holds
a leasehold interest in any Real Property.
1.39
License
Agreement
means a license, royalty agreement or other
agreement pursuant to which Toymax or a Subsidiary has the right
to use or exploit any Trade Right of another Person, which Trade
Right is material to the Business.
1.40
Lien
means any security interest, conditional sale or other title
retention agreement, mortgage, pledge, lien, charge, encumbrance
or other adverse claim or interest.
1.41
Material
Adverse Effect
means a material adverse effect on the
Business, the Assets, or the operations, financial condition or
results of operations of Toymax and the Subsidiaries, taken as a
whole.
1.42
Material
Contract
means any material contract to which Toymax
or a Subsidiary is a party. For the purposes hereof, a contract
is material if (a) it is a License Agreement or
an employment contract; (b) any such contract that provides
for any Person, other than Toymax or a Subsidiary, to use or
exploit, or prohibits or limits such other Persons use of,
a Trade Right of Toymax or a Subsidiary; (c) any
Restrictive Agreement; (d) any such contract that prohibits
any Person, other than Toymax or a Subsidiary, from engaging, or
curtails or restricts the nature or scope of such other
Persons activities, in any line of business or geographic
territory; or (e) any such contract (i) that relates
to (A) a transaction or series of related transactions
involving the expenditure or receipt by Toymax and the
Subsidiaries of an amount in excess of $500,000 or the transfer
of property with a fair market value in excess $500,000,
(B) any Indebtedness in an amount in excess of $500,000,
(C) any Lien on any Assets with a fair market value in
excess of $500,000 or (D) a transaction not in the ordinary
course of the Business, or (ii) as to which any breach or
default thereunder would reasonably be expected to have a
Material Adverse Effect.
App-A-3
1.43
Merger
means the statutory merger of Newco with and into Toymax and
the related transactions provided for herein.
1.44
Merger
Consideration
means the consideration, consisting of
(subject to Section 5.2) the Cash Payment and the Stock
Payment (or any cash payable in lieu thereof, including the
Fractional Share Payment), to be paid on account of the Merger
in respect of the shares of Toymax Common Stock outstanding at
the Effective Time.
1.45
Merger
Document
means this Agreement, the Certificate of
Merger and each other agreement, instrument, certificate or
other document to be delivered at the Closing pursuant to this
Agreement.
1.46
Monogram
Transaction
means the transaction consisting of the
sale of all or substantially all of the assets of Candy Planet,
Co. (a division of Toymax Inc.) and of Monogram International,
Inc., and related transactions.
1.47
Notice
means any notice given to, or any declaration, filing,
registration or recordation made with, any Person.
1.48
Option
means an option or stock appreciation right granted under
any Option Plan or an Other Option.
1.49
Option
Plan
means one of Toymaxs stock option plans
listed on Schedule 1.49.
1.50
Order
means any judgment, order, writ, decree, award, directive,
ruling or decision of any Governmental Authority.
1.51
Other
Option
means an option, warrant or other right to
purchase, or an outstanding security or instrument convertible
into or exchangeable for, Toymax Common Stock, listed on
Schedule 7.7.
1.52
Paying
Agent
means the Person appointed by JAKKS, as set
forth in Section 6.1, to collect and cancel certificates
representing shares of Toymax Common Stock outstanding at the
Effective Time and to disburse the Merger Consideration.
1.53
Payment
Fund
is defined in Section 6.1.
1.54
Permit
means any permit, license, certification, qualification,
franchise or similar privilege issued or granted by any
Governmental Authority.
1.55
Permitted
Lien
means any of the following: (i) statutory
landlords liens and liens for current taxes, assessments
and governmental charges not yet due and payable (or being
contested in good faith); (ii) zoning laws and ordinances
and similar legal requirements; (iii) rights reserved to
any Governmental Authority to regulate the affected property and
restrictions of general applicability imposed by federal or
state securities Laws; (iv) license transfer fees;
(v) Liens to which JAKKS has consented; (vi) Liens
that will be released or terminated at or prior to Closing; and
(vii) other Liens set forth on Schedule 1.55.
1.56
Person
means any natural person, corporation, joint stock company,
limited liability company, partnership, joint venture,
association, trust, Governmental Authority or other entity, or
any group of the foregoing acting in concert.
1.57
Principal
Stockholder
means a stockholder of Toymax who is a
party to the Stock Purchase Agreement.
1.58
Proceeding
means any action, suit, arbitration, audit, investigation or
other proceeding, at law or in equity, before or by any
Governmental Authority.
1.59
Real
Property
means any real property owned by Toymax or in
which Toymax holds a leasehold interest.
1.60
Restrictive
Agreement
means an agreement to which Toymax or any
Subsidiary is a party that prohibits or limits Toymaxs or
a Subsidiarys use of a Trade Right of another Person,
which Trade Right is material to the operation of the Business,
or prohibits Toymax or a Subsidiary from engaging, or materially
App-A-4
curtails or restricts the nature or scope of
Toymaxs or a Subsidiarys activities, in any line of
business or geographic territory.
1.61
SEC
means the United States Securities and Exchange
Commission.
1.62
Securities
Act
means the Securities Act of 1933, as amended.
1.63
Stock
Payment
means the portion of the Merger Consideration
payable by delivery of shares of JAKKS Stock, at the rate of
.0798 share of JAKKS Stock per share of Toymax Common Stock or,
if the Value of JAKKS Stock on the Effective Date is less than
$16.9173, at the rate obtained by dividing $1.35 by the Value of
JAKKS Stock on the Effective Date.
1.64
Stock
Purchase Agreement
means the Stock Purchase Agreement
of even date herewith among JAKKS, Toymax and the Principal
Stockholders.
1.65
Stockholder
Approval
means the adoption, by the affirmative vote
of the holders of a majority of shares of Toymax Common Stock
outstanding on the record date for the Stockholders
Meeting, of resolutions, in form and substance satisfactory to
Toymax, ratifying the Stock Purchase Agreement and adopting this
Agreement and approving the Merger and ratifying the
transactions contemplated by the Stock Purchase Agreement.
1.66
Stockholders
Meeting
means a special meeting of Toymaxs
stockholders (including any postponement or adjournment thereof)
to be held, pursuant to Notice, to consider and vote upon
adoption of the Stock Purchase Agreement and this Agreement and
approval of the Merger and the transactions contemplated by the
Stock Purchase Agreement.
1.67
Subsidiary
means a Person listed on Schedule 1.67.
1.68
Superior
Proposal
is defined in Section 9.6.
1.69
Surviving
Corporation
means, from and after the Effective Time,
Toymax, as the surviving corporation of the Merger.
1.70
Tax
means any United States or foreign federal, state or local
income, excise, sales, property, withholding, social security or
franchise tax or assessment, and any interest, penalty or fine
due thereon or with respect thereto.
1.71
Toymax
Common Stock
means the common stock, par value
$.01 per share, of Toymax.
1.72
Trade
Right
means a patent, claim of copyright, trademark,
trade name, brand name, service mark, logo, symbol, trade dress
or design, or representation or expression of any thereof, or
registration or application for registration thereof, or any
other invention, trade secret, technical information, know-how
or other proprietary right or intellectual property.
1.73
Value
of JAKKS Stock
on any date means the average of the
closing sale price per share of JAKKS Stock as reported on the
Nasdaq National Market over the last ten trading days preceding
(but not including) the last trading day preceding such date.
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2.
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The Constituent Corporations.
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The name and the jurisdiction of incorporation of
each Constituent Corporation are as follows:
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Name
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Place of Incorporation
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Toymax International, Inc.
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Delaware
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JP/ TII Acquisition Corp.
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Delaware
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The surviving corporation is Toymax.
App-A-5
3.1 Subject to the
satisfaction of the conditions set forth in Article 10,
Toymax, as the surviving corporation of the Merger, shall file
the Certificate of Merger in accordance with DGCL
Section 251(c), and the Merger shall be effective as of the
date and time set forth therein (the Effective Time).
3.2 At the Effective
Time, Newco shall be merged with and into Toymax, and the
Constituent Corporations shall thereupon become and constitute a
single corporation. Toymax shall be the surviving corporation of
the Merger and the separate existence of Newco shall cease.
Except as otherwise provided by Law, the Surviving Corporation
shall thereupon, without further act or deed, succeed to all the
rights, privileges, immunities, powers and purposes of each of
the Constituent Corporations; acquire all the business,
property, franchises, claims and causes of action and every
other asset of each of the Constituent Corporations; and assume
and be subject to all the debts and liabilities of each of the
Constituent Corporations.
3.3 The directors,
officers, employees and agents of Newco and the Surviving
Corporation shall be authorized, at and after the Effective
Time, to execute and deliver, in the name of Toymax or Newco,
any assignments, bills of sale, deeds or other instruments and
to take such other actions as are reasonably necessary or
appropriate to vest in the Surviving Corporation, as a result
of, or in connection with, the Merger, all right, title and
interest in and to the Assets and to perfect and to confirm the
same.
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4.
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Certificate of Incorporation; Bylaws; and
Directors and Officers of the Surviving Corporation.
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4.1 From and after
the Effective Time, the Certificate of Incorporation of Newco
shall continue in full force and effect as the Certificate of
Incorporation of the Surviving Corporation, unless and until
amended or restated in the manner provided by applicable Law.
4.2 From and after
the Effective Time, the Bylaws of Newco shall continue in full
force and effect as the Bylaws of the Surviving Corporation,
unless and until revoked or amended in the manner provided by
applicable Law, the Surviving Corporations Certificate of
Incorporation or such Bylaws.
4.3 From and after
the Effective Time, the number of Persons constituting the
entire Board of Directors of the Surviving Corporation shall be
two, and the incumbent directors of Newco immediately prior to
the Effective Time shall thereupon become the directors of the
Surviving Corporation.
4.4 At the Effective
Time, all the incumbent officers of Toymax shall resign (or be
removed) and the incumbent officers of Newco immediately prior
to the Effective Time shall become the officers of the Surviving
Corporation effective as of the Effective Time, it being
expressly understood that no such resignation shall constitute a
breach under any applicable employment contract or arrangement.
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5.
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Merger Consideration; Conversion of
Shares.
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5.1 At the Effective
Time, by virtue of the Merger and without any further act or
deed by any Person, each share of common stock of Newco then
outstanding shall be converted into one share of Toymax Common
Stock, all of which shares shall be validly issued, fully paid
and nonassessable and shall thereafter constitute all of the
issued and outstanding capital stock of the Surviving
Corporation.
5.2 Subject to
Sections 5.5 and 5.6, at the Effective Time, by virtue of
the Merger and without any further act or deed by any Person,
each share of Toymax Common Stock then outstanding (other than
any such share then owned by Toymax, a Subsidiary, JAKKS or
Newco) shall cease to be outstanding and shall be retired and
cancelled, and the holder of each such share immediately prior
to the Effective Time shall cease forthwith to have any right
with respect to any capital stock of the Surviving Corporation,
or any interest therein or in the Assets, but shall thereupon
become entitled to receive the Merger Consideration in respect
of such share. Notwithstanding anything contained herein to the
contrary, if the Value of JAKKS Stock on the Effective Date
exceeds $20.6767, JAKKS, at its option, shall be entitled to pay
the Merger Consideration entirely in cash, in which case, JAKKS
shall pay to each holder of Toymax Common Stock at the Effective
Time a cash amount equal to the sum of (i) the Cash Payment
and (ii) in lieu of the Stock Payment and the
App-A-6
Fractional Share Payment, if any, that would
otherwise be payable to such holder (but for this provision),
cash in the amount of $1.65 per share of Toymax Common Stock.
5.3 At the Effective
Time, by virtue of the Merger and without any further act or
deed by any Person, each share of Toymax Common Stock then
outstanding owned by Toymax, a Subsidiary, JAKKS or Newco shall
cease to be outstanding and shall be retired and cancelled, and
no Merger Consideration shall be payable in respect thereof.
5.4 At the Effective
Time, by virtue of the Merger and without any further act or
deed by any Person, each Option outstanding at the Effective
Time shall expire and terminate, and the holder thereof
immediately prior to the Effective Time shall cease forthwith to
have any right with respect to any capital stock of the
Surviving Corporation, or any interest therein or in the Assets,
except that the holder of each Option on the Effective Date
shall be entitled to receive a JAKKS Option or cash payment,
based on the formula set forth on Schedule 5.4.
5.5 Any other
provision of this Article 5 notwithstanding, any
outstanding shares of Toymax Common Stock, the holder of which
asserts and perfects the right to receive payment for shares
pursuant to DGCL Section 262 (the Dissenting
Shares), shall not be subject to the foregoing provisions
of this Article, and the holder thereof shall have only such
rights as are granted to dissenting stockholders under said DGCL
Section 262; provided, however, that Dissenting Shares as
to which the holder thereof subsequently withdraws his demand
for payment or fails to perfect his dissenters rights
before payment thereof shall thereupon be subject to
Section 5.2 in the same manner as provided herein for other
outstanding shares of Toymax Common Stock (except as to the time
of payment, which shall be as promptly as practicable after
withdrawal of such demand or failure to perfect his
dissenters rights). Toymax shall give to JAKKS prompt
notice of any demands received from holders of Dissenting Shares
for payment of the value of such shares, and JAKKS shall have
the exclusive right to conduct all negotiations and proceedings
with respect to any such demands. Toymax shall not, except with
the prior written consent of JAKKS, voluntarily make any payment
with respect to, or compromise or settle, or offer to compromise
or settle, any such demand for payment. The assertion of any
demand for payment by a holder of Dissenting Shares shall not
prevent, interfere with or delay the consummation of the Merger
and the other transactions contemplated hereby, except as
provided by DGCL Section 262 or as a court of competent
jurisdiction may otherwise Order.
5.6 Any other
provision hereof notwithstanding, if the determination of the
Stock Payment in accordance with Section 1.63 (without
regard to this Section 5.6) would result in a number of
shares of JAKKS Stock which, together with the number of shares
of JAKKS Stock issued at the First Closing pursuant to the Stock
Purchase Agreement, would exceed the maximum number of shares of
JAKKS Stock which could be issued without obtaining stockholder
approval if and as required pursuant to Nasdaq Stock Market
Rule 4350(i)(C) or (D) (the Nasdaq Rule), then,
unless such stockholder approval shall have been obtained prior
to the Effective Date, the number of shares of JAKKS Stock
constituting the aggregate Stock Payment under this Agreement
shall equal the excess of the maximum number of shares of JAKKS
Stock that could be issued in connection with the Merger
(including for this purpose the purchase of shares of Toymax
Common Stock pursuant to the Stock Purchase Agreement) without
obtaining stockholder approval pursuant to the Nasdaq Rule over
the number of shares of JAKKS Stock issued at the First Closing
pursuant to the Stock Purchase Agreement. In such case, each
holder of Toymax Common Stock immediately prior to the Effective
Date shall be entitled to receive, in respect of each such
share, the fraction of a share of JAKKS Stock equal to the
quotient of the number of shares of JAKKS Stock then so issuable
pursuant to the Nasdaq Rule divided by the total number of
shares of Toymax Common Stock outstanding immediately prior to
the Effective Date. JAKKS shall pay to each holder of Toymax
Common Stock immediately prior to the Effective Date an amount
in cash equal to the product of (A) the Value of JAKKS
Stock on the Effective Date and (B) the excess of the
number of shares of JAKKS Stock which, but for the provisions of
this Section 5.6, would have been included in the Stock
Payment to such holder over the number of shares of JAKKS Stock
to be included in the Stock Payment to such holder after giving
effect to the limitation imposed by this Section 5.6.
App-A-7
6.
Payment
Procedures.
6.1 Prior to the
Closing Date, JAKKS shall appoint American Stock Transfer and
Trust Company or another Person (reasonably acceptable to
Toymax), to act as the Paying Agent. Prior to or at the Closing,
JAKKS shall deposit with the Paying Agent, in trust for the
benefit of the holders of Toymax Common Stock outstanding at the
Effective Time, cash in an amount sufficient to pay the Cash
Payment, the Fractional Share Payment, any payment required
pursuant to Section 5.6 or, if applicable, pursuant to
Section 5.2, the total Merger Consideration (the
Payment Fund), and shall enter into a written
agreement with the Paying Agent under which (i) the Paying
Agent shall be required to invest the Payment Fund as directed
by JAKKS; (ii) any interest, dividends or other income
thereon shall be added to and constitute a portion of the
Payment Fund; (iii) if at any time the amount of the
Payment Fund shall exceed the amount of the Cash Payment
remaining to be paid, the Paying Agent shall be required to,
upon request by JAKKS, remit to JAKKS cash in an amount less
than or equal to the amount of such excess; and (iv) if at
any time the amount of the Payment Fund shall be less than the
amount of the Cash Payment remaining to be paid, the Paying
Agent shall promptly give to JAKKS Notice to such effect and
JAKKS shall promptly deliver to the Paying Agent funds in an
amount equal to or greater than the amount of such deficiency.
At, or as promptly as practicable after, the Effective Time,
JAKKS shall authorize and direct the Paying Agent, as transfer
agent and registrar for the JAKKS Stock, to issue certificates
representing the Stock Payment to be made to each holder of
Toymax Common Stock outstanding at the Effective Time.
6.2 JAKKS shall
cause the Paying Agent, promptly after the Effective Time, to
mail to each holder of Toymax Common Stock at the Effective
Time, at such holders address as shown on Toymaxs
regular stockholders list, (a) a letter of transmittal, in
customary form reasonably acceptable to Toymax and the Paying
Agent, which shall state that (i) such holder is entitled
to receive the Merger Consideration in respect of the shares of
Toymax Common Stock so held by such holder upon surrender of his
Certificate or Certificates, as specified therein, including the
amount of the Cash Payment, the amount of the Fractional Share
Payment, any payment required pursuant to Section 5.6 and
the number of whole shares of JAKKS Stock comprising the Stock
Payment, and (ii) such surrender shall be effected, and
risk of loss and title to such Certificate or Certificates shall
pass only upon proper delivery thereof to the Paying Agent, and
(b) instructions specifying the place at which and the
manner in which such Certificate or Certificates are so to be
delivered. No fractional share of JAKKS Stock shall be issued as
part of the Merger Consideration, but in lieu thereof, the
Fractional Share Payment shall be paid in an amount equal to the
product of the fraction of the share that, but for this
provision, would have been issued and $18.797 or, if the Value
of JAKKS Stock on the Effective Date is less than $16.9173, the
Value of JAKKS Stock on the Effective Date. Upon such surrender
of any such Certificate, together which such letter of
transmittal, duly completed and executed in accordance with the
instructions thereto, and the delivery of such other documents
as may reasonably be required by the Paying Agent, the holder of
such Certificate shall be entitled to receive the Merger
Consideration payable in respect of the shares of Toymax Common
Stock represented by such Certificate. JAKKS shall thereupon
cause the Paying Agent to promptly mail to such holder at such
holders address as shown on Toymaxs regular
stockholders list or, if a different address is indicated on the
letter of transmittal, such other address (i) a check
payable to the order of the holder or, if a different Person is
indicated in the letter of transmittal, such other Person, in an
amount equal to the sum of the Cash Payment, the Fractional
Share Payment and any payment required pursuant to
Section 5.6, or, if applicable in accordance with
Section 5.2, the total Merger Consideration, and
(ii) a certificate representing the whole number of shares
of JAKKS Stock included in the Stock Payment registered in the
name of the holder or, if a different Person is indicated in the
letter of transmittal and there is delivered to the Paying Agent
such additional documents as the Paying Agent may reasonably
request to evidence compliance with applicable securities and
other Law and the payment in full of any applicable stock
transfer Taxes, such other Person. No interest shall accrue for
the benefit of, or be payable to, any such holder on account of
the Merger Consideration payable in respect of such shares of
Toymax Common Stock. In the event of a transfer of ownership of
any share of Toymax Common Stock which is not registered in the
stock transfer records for the Toymax Common Stock, the Paying
Agent shall be entitled to, and JAKKS shall cause the Paying
Agent to, pay the Merger Consideration and mail a check and
stock certificate therefor to the transferee thereof, if the
Certificate representing such
App-A-8
shares is presented to the Paying Agent, together
with such documents as the Paying Agent may reasonable request
to evidence such transfer and the payment in full of any
applicable stock transfer Taxes.
6.3 Notwithstanding
the failure of any Certificate to be surrendered as hereinabove
provided, each such Certificate, from and after the Effective
Time, shall not represent any interest in the Surviving
Corporation, or any Assets thereof, but shall represent only the
right of the holder thereof at the Effective Time to receive the
Merger Consideration payable in respect thereof upon surrender
of such Certificate pursuant hereto. The stock transfer books of
Toymax shall be closed immediately at the Effective Time and no
transfer of shares of Toymax Common Stock shall be effective or
registered thereafter.
6.4 If any
Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit to such effect by the Person claiming to
be the holder of such Certificate and, if required by JAKKS, the
posting by such Person of a bond as an indemnity against any
claim that may be made against it with respect to such
Certificate, JAKKS shall cause the Paying Agent to pay to such
Person the Merger Consideration with respect to the shares
represented by such Certificate.
6.5 Promptly after
the Effective Time, JAKKS shall grant to each holder of an
Eligible Option a JAKKS Option payable in respect thereof and
issue and mail to such holder, at the address shown in the
option agreement or certificate relating to such Eligible
Option, a stock option agreement covering such JAKKS Option.
6.6 The Paying Agent
shall be entitled to deduct and withhold from the amount of the
Merger Consideration otherwise payable pursuant to this
Agreement to any holder of shares of Toymax Common Stock at the
Effective Time or any holder of an Eligible Option such amounts
as it is required to deduct and withhold with respect to the
payment of the Merger Consideration or the issuance of the JAKKS
Option under the Code or any corresponding provision of any
other Law relating to Taxes. To the extent that any amount is so
withheld, such amount shall be deemed for all purposes of this
Agreement to have been paid as part of the Merger Consideration
to the holder of the shares of Toymax Common Stock at the
Effective Time or to have been paid to the holder of the
Eligible Option that would otherwise have been entitled actually
to receive such amount.
6.7 None of JAKKS,
the Surviving Corporation, or the Paying Agent, or any officer,
employee or agent thereof, shall be liable to any Person in
respect of any Merger Consideration that is delivered to a
public official pursuant to and in accordance with any
applicable abandoned property, escheat or similar Law.
6.8 If any portion
of the Payment Fund remains undistributed six months after the
Effective Time, JAKKS shall ensure that the balance thereof
shall be delivered to JAKKS or to the Person designated by
JAKKS, and any holder of a Certificate that shall not have
theretofore complied with the provisions of this Article for the
surrender of such Certificate and that shall not have received
the Merger Consideration payable in respect thereof shall
thereafter look only to JAKKS for the payment of such Merger
Consideration. Any portion of the Merger Consideration remaining
unclaimed by holders of shares of Toymax Common Stock at the
Effective Time five years after the Effective Time (or such
earlier date as such amount would otherwise escheat to or become
the property of any Governmental Authority) shall, to the
fullest extent permitted by Law, become the property of the
Surviving Corporation, free and clear of any claims or interests
of any Person previously entitled thereto.
7.
Representations
and Warranties of Toymax.
Toymax hereby represents and warrants to JAKKS as
follows:
7.1 Toymax is a
corporation duly organized, validly existing and in good
standing under the Laws of the State of Delaware and has the
full corporate power and authority to own its Assets and carry
on the Business as and in the places where such Assets are now
located or such Business is now conducted. Complete and correct
copies of Toymaxs Certificate of Incorporation, including
all amendments thereto as of the date hereof, and Toymaxs
Bylaws, including all amendments thereto as of the date hereof,
have been delivered or made available to JAKKS. Toymax is duly
authorized or qualified to transact business as a foreign
corporation in each jurisdiction where such authorization or
qualification is required under applicable Law in light of the
App-A-9
location or character of its Assets or the
operation of the Business (except where the failure to be so
authorized or qualified would not reasonably be expected to have
a Material Adverse Effect), and each such jurisdiction is listed
on Schedule 7.1.
7.2 Toymax has full
corporate power and authority to execute and deliver this
Agreement and each other Merger Document to which it is a party
and to assume and perform its obligations hereunder and
thereunder; provided that Toymax cannot consummate the Merger
unless and until it receives the requisite stockholder approval.
The execution and delivery of this Agreement and each other
Merger Document to which it is a party by Toymax and the
performance of its obligations hereunder and thereunder have
been duly authorized by all requisite corporate action on the
part of Toymax, except for the Stockholder Approval. This
Agreement has been, and each other Merger Document to which it
is a party will be, duly executed and delivered by Toymax, and
this Agreement is, and each other Merger Document to which it is
a party, when so executed and delivered, will be, a legally
valid and binding obligation of Toymax, enforceable against it
in accordance with their respective terms, subject to
(a) bankruptcy, insolvency, reorganization, moratorium or
other similar Laws now or hereafter in effect relating to
creditors rights generally and (b) equitable
principles limiting the availability of specific performance,
injunctive relief and other equitable remedies. Subject to
obtaining the Stockholder Approval, the filing by Toymax of an
HSR Form and the expiration or early termination of the waiting
period under the HSR Act, the filing by Toymax of the proxy
materials relating to the Stockholders Meeting with the
SEC pursuant to Section 14 of the Exchange Act, the filing
of the Certificate of Merger with the Secretary of State of
Delaware, and to obtaining any Toymax Consents (as defined in
Section 7.5), the execution and delivery of this Agreement
by Toymax do not, and the execution and delivery of each other
Merger Document by Toymax and the performance by Toymax of its
obligations hereunder and thereunder will not, violate any
applicable Law or any provision of Toymaxs Certificate of
Incorporation or Bylaws, and do not and will not conflict with
or result in any breach of any condition or provision of, or
constitute a default under, or create or give rise to any
adverse right of termination or cancellation by, or excuse the
performance of, any other Person under, any Material Contract,
or result in the creation or imposition of any Lien upon any of
the Assets, other than any violation, conflict, breach, default,
right of termination or cancellation, excuse of performance or
Lien that, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect.
7.3 As of the date
hereof Toymax has engaged Morgan Lewis Gethens & Ahn, Inc.
to render a Fairness Opinion.
7.4 Toymaxs
Board of Directors has unanimously (a) determined that this
Agreement and the Merger are advisable and in the best interests
of Toymax and its stockholders, (b) approved this Agreement
and the Merger and (c) adopted resolutions recommending
that Toymaxs stockholders adopt this Agreement and approve
the Merger and directing that this Agreement and the Merger be
submitted for consideration by, and to the vote of,
Toymaxs stockholders at the Stockholders Meeting, to
be duly called pursuant to Notice for such purpose, in each
case, subject to its receipt of a Fairness Opinion, and none of
the foregoing actions has been rescinded or amended as of the
date hereof. The holders of record of Toymax Common Stock on the
record date for the Stockholders Meeting shall be the only
Persons entitled under applicable Law and Toymaxs
Certificate of Incorporation and Bylaws to notice of, and to
vote at, the Stockholders Meeting.
7.5 Except for the
filing by Toymax of an HSR Form and the expiration or early
termination of the waiting period under the HSR Act; the filing
by Toymax of the proxy materials relating to the
Stockholders Meeting with the SEC pursuant to
Section 14 of the Exchange Act; and the filing of the
Certificate of Merger with the Secretary of State of Delaware,
and except as set forth on Schedule 7.5, and to
Toymaxs knowledge, no Consent of, or Notice to, any Person
is required as to Toymax in connection with its execution and
delivery of this Agreement or any other Merger Document to which
it is a party, or the performance of its obligations hereunder
or thereunder, or the consummation of the Merger (such Consents
and Notices set forth on Schedule 7.5 are referred to
herein as Toymax Consents), except where the failure
to give such Notices or obtain such consents would not
reasonably be expected to have a Material Adverse Effect.
7.6 Except as set
forth on Schedule 7.6, no Proceeding in which Toymax or a
Subsidiary is a named party is pending or, to Toymaxs
knowledge, threatened against or affecting the Business, the
Assets or
App-A-10
Toymaxs or any Subsidiarys operations
in which an unfavorable Order would reasonably be expected to
have a Material Adverse Effect, or would prohibit, invalidate or
make unlawful, in whole or in part, this Agreement, or the
carrying out of the provisions hereof or thereof or the
transactions contemplated hereby. None of Toymax or any
Subsidiary is in default in respect of any Order, which default
would reasonably be expected to have a Material Adverse Effect,
nor is there any Order enjoining Toymax in respect of, or the
effect of which is to prohibit or restrict Toymaxs
performance of, its obligations under this Agreement.
7.7 The entire
authorized capital stock of Toymax consists of 50,000,000 shares
of Toymax Common Stock, of which 12,214,678 shares are
outstanding (and no shares are held in treasury), and 5,000,000
shares of series preferred stock, par value $.01 per share, none
of which have been issued. All outstanding shares of Toymax
Common Stock are duly authorized, validly issued, fully paid and
nonassessable. Except as set forth on Schedule 7.7, and
except for the Stock Purchase Agreement or as contemplated
hereby, Toymax is not a party to any voting agreement or trust
or other agreement, commitment or arrangement with respect to
the voting or disposition of its capital stock, nor, to
Toymaxs knowledge, is there any such trust, agreement,
commitment or arrangement. Except as set forth on
Schedule 7.7, Toymax is not prohibited or restricted from
paying any dividend upon or making any other distribution in
respect of its capital stock (other than compliance with the
applicable provisions of the DGCL), nor is Toymax obligated to
redeem, purchase or otherwise acquire, or to pay any dividend
upon or make any distribution in respect of, any of its
outstanding capital stock. Except for the Option Plans (and the
Options granted thereunder) and the Other Options, there are no
(a) agreements, commitments or arrangements providing for
the issuance or sale of any of Toymaxs capital stock, or
(b) any options, warrants or rights to purchase, or
securities or instruments convertible into or exchangeable for,
any of Toymaxs capital stock. The Option Plans were duly
authorized and adopted by Toymax (including the approval of
Toymaxs Board of Directors and stockholders) and all
Options granted under any such Option Plan were properly granted
in accordance therewith and with applicable Law. All Other
Options currently unexercised were duly authorized and granted
by all requisite corporate action on the part of Toymax and in
accordance with applicable Law. A sufficient number of shares of
Toymax Common Stock have been duly reserved for issuance upon
the exercise of Options granted under the Option Plans or Other
Options, and no other shares of Toymaxs capital stock are
reserved for issuance. Schedule 7.7 sets forth a complete
and correct list of all Options, including, as to each, the
holder thereof, the date of grant thereof, the total number of
shares of Toymax Common Stock subject thereto, the dates on
which and the number of such shares as to which such Option
becomes exercisable, and the exercise price thereof. All shares
of Toymax Common Stock issuable upon the exercise of Options, if
and when issued and delivered in accordance with the terms
thereof, will be duly authorized, validly issued, fully paid and
nonassessable.
7.8 The entities set
forth on Schedule 1.67 constitute all subsidiaries of
Toymax. Each Subsidiary is a corporation duly organized, validly
existing and in good standing under the Laws of its jurisdiction
of incorporation, and has full corporate power and authority to
own its Assets and carry on its business as and in the places
where such Assets are located or such business is conducted.
Complete and correct copies of the certificate or articles of
incorporation or organization of each Subsidiary, including all
amendments thereto as of the date hereof, and the Bylaws of each
Subsidiary, have been delivered or made available to JAKKS. Each
Subsidiary is duly authorized or qualified to transact business
as a foreign corporation in each jurisdiction where required
under applicable Law in light of the location or character of
its Assets or the operation of its business (except where the
failure to be so authorized or qualified would not reasonably be
expected to have a Material Adverse Effect), and each such
jurisdiction is listed on Schedule 7.8. Except as set forth
on Schedule 7.8, Toymax owns beneficially and of record all
of the outstanding shares of capital stock of each Subsidiary
free and clear of all Liens or any restriction with respect to
the voting or disposition thereof (other than Permitted Liens),
and all such shares are duly authorized, validly issued, fully
paid and nonassessable. Except as set forth in this Agreement or
on Schedule 7.8, no Subsidiary is prohibited or restricted
from paying any dividend upon or making any other distribution
in respect of its capital stock (other than compliance with the
applicable provisions of the DGCL), nor is any Subsidiary
obligated to redeem, purchase or otherwise acquire, or to pay
any dividend upon or make any distribution in respect of, any of
its outstanding capital stock. As of the date hereof, there are
no (a) agreements, commitments or arrangements providing
for the issuance or sale of any capital stock or any Subsidiary,
or (b) any options, warrants or rights to purchase, or
securities or instruments convertible into or exchangeable for,
any capital stock of any Subsidiary. No shares of capital
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stock of any Subsidiary are reserved for
issuance. None of Toymax or any Subsidiary owns or has
subscribed for, or is subject to any obligation to purchase or
otherwise acquire, directly or indirectly, (a) any capital
stock of, or other equity interest or participation in, or
(b) any option, warrant or other right to purchase, or any
security or instrument convertible into or exchangeable for, any
capital stock of, any Person, other than a Subsidiary.
7.9 Toymax is
required to file reports pursuant to Section 13 of the
Exchange Act, and Toymax has timely filed all reports, forms,
statements and documents required to be filed by it under the
Securities Act, the Exchange Act and any applicable rules of the
Nasdaq Stock Market, Inc., all of which reports, forms,
statements and other documents are in material compliance with
applicable Laws. When filed, none of such reports, forms,
statements and other documents (including related notes and
schedules) contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Each
of the consolidated financial statements for the past three
years contained in such reports, forms, statements and other
documents were prepared in accordance with GAAP applied on a
consistent basis, and each such financial statement presented
fairly in all material respects the consolidated financial
position of Toymax and the Subsidiaries at the dates and their
consolidated results of operations and cash flows for each of
the respective periods indicated, subject, in the case of
interim financial statements, to normal recurring year-end
adjustments and the absence of notes. To Toymaxs
knowledge, none of Toymax or any Subsidiary has any material
liability or obligation of any kind, contingent or otherwise,
relating to the Business or its Assets, but which is not
reflected on Toymaxs consolidated balance sheet at
December 31, 2001 or the notes thereto or set forth on
Schedule 7.9.
7.10 Except as set
forth on Schedule 7.10, and other than in connection with
the Monogram Transaction, since December 31, 2001, there
has been no material adverse change in the Business or the
Assets or Toymaxs or any Subsidiarys operations,
financial condition or results of operations, nor has there been
commenced any Proceeding in which an unfavorable Order would
reasonably be expected to have a Material Adverse Effect, and
none of Toymax or any Subsidiary has:
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(a) incurred any material damage,
destruction or similar loss, whether or not covered by
insurance, materially affecting the Business or the Assets;
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(b) other than in the ordinary course of
business, sold, assigned or transferred a material portion of
the Assets or any interest therein, other than the disposal of
defective, obsolete or otherwise unusable Assets;
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(c) incurred any Indebtedness or other
material obligation or liability relating to the Business or the
Assets, except in the ordinary course of business, or paid,
satisfied or discharged any material obligation or liability
relating to the Business or the Assets prior to the due date or
maturity thereof, except current obligations and liabilities in
the ordinary course of business;
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(d) other than in the ordinary course of
business, created, incurred, assumed, granted or suffered to
exist any Lien on any material Asset (other than any Permitted
Lien);
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(e) other than in the ordinary course of
business, waived any right of material value or cancelled,
forgiven or discharged any material debt owed to it or material
claim in its favor; or
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(f) effected any material transaction
relating to the Business or the Assets other than in the
ordinary course of business.
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7.11 Toymax or a
Subsidiary, as the case may be, owns all of the Assets free and
clear of all Liens, except for Permitted Liens and the Liens
listed on Schedule 7.11, all of which were created in the
ordinary course of business. The Assets consisting of equipment
and other tangible property are in sufficiently good operating
condition (normal wear and tear excepted) to be used to conduct
the Business.
7.12 Except as set
forth on Schedule 7.12, there is no breach or default by
Toymax or a Subsidiary or, to Toymaxs knowledge, by any
other party under any Material Contract, each of which is in
full force and effect,
App-A-12
other than any breach or default that would not
reasonably be expected to have a Material Adverse Effect. True
and complete copies of all Material Contracts have been
delivered or made available to JAKKS.
7.13 Except as set
forth on Schedule 7.13, inventory included in the Assets
consists solely of merchandise usable or saleable in the
ordinary course of business. Since December 31, 2001, there
has been no material change in the inventory reflected in
Toymaxs consolidated balance sheet at December 31,
2001, except in the ordinary course of business.
7.14 Except as set
forth on Schedule 7.14, the Accounts result from bona fide
sales to non-Affiliate customers of Toymax or a Subsidiary in
the ordinary course of business.
7.15 Other than any
Toymax Consents, each of Toymax and each Subsidiary has all
Permits and all Consents of Governmental Authorities required
for it to conduct the Business as presently conducted or which
it is otherwise required to have under applicable Law, except
such Permits or Consents which the failure to have would not
reasonably be expected to have a Material Adverse Effect. All
such Permits and Consents are in full force and effect and no
cancellation or suspension of any thereof is pending or, to
Toymaxs knowledge, threatened. Except as set forth on
Schedule 7.15, and subject to obtaining any applicable
Toymax Consents, the applicability and validity of each such
Permit or Consent will not be adversely affected by the
consummation of the transactions contemplated by this Agreement.
To Toymaxs knowledge, Toymax and each Subsidiary is in
compliance with each Law applicable to it and the Business,
including without limitation with respect to occupational
safety, environmental protection and employment practices,
except for such noncompliance which would not, in the aggregate,
reasonably be expected to have a Material Adverse Effect, and
none of them has received any written Notice alleging or
asserting any material violation of or noncompliance with any
such Law.
7.16 Schedule 7.16
is a complete and correct list and a brief description
(including, if applicable, date of application, filing or
registration, as the case may be, and the registration and
application number) of each Trade Right that is a patent or
registered trademark, trade name, service mark or copyright or
any currently pending application therefor, in which Toymax or a
Subsidiary has any right or interest, whether through any
License Agreement or otherwise. Except as otherwise listed on
Schedule 7.16, none of Toymax or any Subsidiary is a
licensor or a licensee in respect of any such Trade Right.
Except as otherwise set forth on Schedule 7.16, to
Toymaxs knowledge, no Trade Right of Toymax or a
Subsidiary relating to the Business conflicts with or infringes
on, and there has been no misappropriation or unauthorized use
by Toymax or a Subsidiary of, any Trade Right of any other
Person, and, to Toymaxs knowledge, no Trade Right of any
other Person conflicts with or infringes on, and there has been
no misappropriation or unauthorized use by any other Person of,
any Trade Right of Toymax or a Subsidiary.
7.17 Schedule 7.17
sets forth a brief description of the Real Property, including
the location or address and the current uses thereof by Toymax.
Each Lease is legal, valid and binding as between Toymax or a
Subsidiary, as the case may be, and each other party thereto,
and Toymax or the applicable Subsidiary, as the case may be, is
a tenant in good standing thereunder, free of any material
breach or default whatsoever and quietly enjoys the Real
Property subject thereto. None of Toymax or any Subsidiary has
assigned any interest in any Lease or sublet any Real Property,
nor is any Real Property used or occupied by any other Person.
Toymax or a Subsidiary, as the case may be, has legal and valid
occupancy Permits for the Real Property to the extent required
under applicable Law. No improvement, fixture or equipment on
the Real Property, nor the lease, use or occupancy thereof, is
in violation of any applicable Law, other than any such
violation that does not materially impair the lease, use or
occupancy of such Real Property. No Real Property (a) is
subject to any Law, Order or Lien which would materially
adversely affect its use or value for the purposes now made of
it or (b) has been condemned or otherwise taken, and, to
Toymaxs knowledge, no condemnation or other taking of any
Real Property is pending or threatened.
7.18 Except as set
forth on Schedule 7.18, no Hazardous Material has been
generated, used, stored, treated, released or disposed of at, or
transported to or from, the Real Property or in connection with
the Business by Toymax, other than in substantial compliance
with applicable Law, and, to Toymaxs knowledge, no Law,
License, Order or Proceeding applicable to Toymax or any
Subsidiary or any Assets requires any clean-up or remediation or
participation in or contribution to any such clean-up or
remediation.
App-A-13
7.19 Toymax has duly
filed all Tax returns and reports required to have been filed by
it to the date hereof, each of which is complete and correct in
all material respects, and Toymax has paid all Taxes due to any
Governmental Authority required to have been paid by it on or
prior to the date hereof and has created sufficient reserves or
made provision for all Taxes accrued but not yet due and payable
by it. Toymax has paid to the proper Governmental Authorities
all customs, duties and similar or related charges required to
be paid by it on or prior to the date hereof with respect to the
importation of goods into the United States. No Governmental
Authority is now asserting or, to Toymaxs knowledge,
threatening to assert, any deficiency or assessment for
additional Taxes with respect to Toymax, nor, to Toymaxs
knowledge, is there any basis for any such deficiency or
assessment. Except as set forth on Schedule 7.19, Toymax
has not been audited by any Governmental Authority with respect
to any fiscal year for which Toymax has filed a Tax return and
for which the applicable statute of limitations has not expired,
and, to Toymaxs knowledge, no such audit has been
threatened or proposed. Toymax has not waived or consented to
any tolling of any limitation period with respect to any Tax
liability. Toymax and the Subsidiaries are, for federal income
tax purposes, members of an affiliated group, which includes no
other Person, and no Subsidiary files any separate return with
respect to any Tax. Toymax has delivered or made available to
JAKKS complete and correct copies of the Tax returns of Toymax
for each of its three most recently ended fiscal years for which
Tax returns have been filed and any subsequent period for which
a return was filed.
7.20 Schedule 7.20
sets forth a complete and correct list of all Employee Plans
either maintained by or to which contributions have been made by
any ERISA Affiliate. Except as set forth on Schedule 7.20,
no ERISA Affiliate has any outstanding material liability on
account of any such Employee Plan for (a) delinquent
contributions owed under any such Employee Plan with respect to
periods prior to the date hereof; (b) fiduciary breaches by
any ERISA Affiliate under ERISA or any other applicable Law; or
(c) income Taxes by reason of non-qualification of any such
Employee Plan which is intended by Toymax to be tax-qualified
under Section 401(a) of the Code. With respect to each such
Employee Plan, Toymax has delivered or made available to JAKKS
copies of (i) the plan, related trust documents and
amendments thereto, (ii) the most recent summary plan
description and, as applicable, annual report, and (iii) as
applicable, the most recent actuarial valuation. No event has
occurred for which, and there exists no condition or set of
circumstances under which, any ERISA Affiliate or any such
Employee Plan could reasonably be expected to be subject to any
material liability under Section 502(i) of ERISA or
Section 4975 of the Code. With respect to each such
Employee Plan, (I) such Employee Plan is in substantial
compliance in all material respects with the requirements
prescribed by all applicable Laws, including without limitation
ERISA and the Code, and Orders, and (II) there is no
Proceeding (other than routine claims for benefits) pending or,
to Toymaxs knowledge, threatened, with respect to any such
Employee Plan or against the assets of any such Employee Plan.
No ERISA Affiliate has any currently outstanding material
liability under Title IV of ERISA (other than for the
payment of Pension Benefit Guaranty Corporation premiums) or
Section 412(f) or (n) of the Code.
7.21 Except as set
forth on Schedule 7.21, none of Toymax or any Subsidiary is
a party to any collective bargaining, union representation or
other labor contract; none of Toymax or any Subsidiary has
received any Notice from any labor union that such union
represents or intends to represent any of the employees of
Toymax or any Subsidiary; and, to Toymaxs knowledge, no
strike or work interruption by any of its or any
Subsidiarys employees is planned, threatened or imminent.
At no time during the past five years has Toymax or any
Subsidiary experienced any strikes, work stoppages or demands
for collective bargaining by any union or labor organization, or
been involved in or the subject of any grievance, dispute or
controversy by or with any union or labor organization or, to
Toymaxs knowledge, any pending or threatened Proceedings
based on or related to any employment grievance, dispute or
controversy or received any Notice of any of the foregoing.
7.22 Except as set
forth on Schedule 7.22, no director, officer or employee of
Toymax or a Subsidiary is or will become entitled to receive any
severance pay or any additional compensation or benefit on
account of this Agreement or the Merger, nor shall entering into
this Agreement or the consummation of the Merger result in the
acceleration of the time of vesting or payment of any
compensation or benefit, except as provided in Section 5.4.
Except as set forth on Schedule 7.22, no Affiliate of
Toymax or any Subsidiary or any relative, associate or agent
thereof has any interest in any Assets, including without
limitation any contract for the
App-A-14
furnishing of services by, or rental of real or
personal property from or to, or requiring payments to, any such
Affiliate.
7.23 Schedule 7.23
is a complete and correct list of the names and addresses of the
five largest customers of Toymax and the Subsidiaries during
Toymaxs fiscal year ended March 31, 2001 and the
total sales to or purchases from such customers or suppliers
made by Toymax and the Subsidiaries during such fiscal year. As
of the date hereof, no customer of Toymax and the Subsidiaries
representing in excess of 5% of their aggregate sales during
such fiscal year has advised Toymax or any Subsidiary that it
intends to terminate, discontinue or substantially reduce its
business with Toymax or any Subsidiary.
7.24 All insurance
maintained by Toymax or any Subsidiary is in full force and
effect. To Toymaxs knowledge, no insurer intends to cancel
or refuse to renew any such insurance and, to Toymaxs
knowledge, there is no basis for any such cancellation or
non-renewal. No insurer has disputed any claim made under any
policy and, to Toymaxs knowledge, no event has occurred
and no circumstance exists which would excuse the performance by
any insurer of any of its obligations under any such policy with
respect to such claim. Since December 31, 1999, none of
Toymax or any Subsidiary has been refused any insurance for
which it has applied, nor has any insurance carried by Toymax or
any Subsidiary been cancelled (other than at the request of
Toymax or a Subsidiary or upon the normal expiration of the
applicable policy).
7.25 Except as set
forth on Schedule 7.25, (a) none of Toymax or any
Subsidiary, or any Affiliate thereof, has employed or engaged
any Person to act as a broker, finder or other intermediary in
connection with the transactions contemplated hereby, and
(b) no Person is entitled to any fee, commission or other
compensation relating to any such employment or engagement by
Toymax or any Subsidiary.
7.26 No
representation or warranty by Toymax in this Agreement, the
Certificate of Merger or the certificate being delivered at
Closing by Toymax pursuant to Section 11.2(b) contains or
will contain any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained
herein or therein, in the light of the circumstances under which
they were made, not misleading.
8.
Representations
and Warranties of JAKKS.
JAKKS hereby represents and warrants to Toymax as
follows:
8.1 Each of JAKKS
and Newco is a corporation duly organized, validly existing and
in good standing under the Laws of the State of Delaware, and
each has full corporate power and authority to own its assets
and carry on its business as and in the places where such assets
are located or such business is conducted. Complete and correct
copies of JAKKS and Newcos respective Certificates
of Incorporation, including all amendments thereto as of the
date hereof, and their respective Bylaws, including all
amendments thereto as of the date hereof, have been delivered or
made available to Toymax. Newco has not conducted any business
to date (other than in connection with its organization and
entering into this Agreement) and is not required to have a
Permit to transact business as a foreign corporation in any
jurisdiction. JAKKS owns beneficially and of record all of the
outstanding shares of Newcos capital stock free and clear
of all Liens or any restriction with respect to the voting or
disposition thereof (other than restrictions of general
applicability imposed by federal or state securities Laws), and
all such shares are duly authorized, validly issued, fully paid
and nonassessable.
8.2 Each of JAKKS
and Newco has full corporate power and authority to execute and
deliver this Agreement and each other Merger Document to which
it is a party and to assume and perform its obligations
hereunder and thereunder. The execution and delivery of this
Agreement and each other Merger Document to which it is a party
by JAKKS and Newco and the performance of their respective
obligations hereunder and thereunder have been duly authorized
by all requisite corporate action on the part of each of them
(including without limitation the adoption of this Agreement and
the approval of the Merger by JAKKS, as the sole stockholder of
Newco). This Agreement has been, and each other Merger Document
to which it is a party will be, duly executed and delivered by
JAKKS and Newco, respectively, and this Agreement is, and each
other Merger Document to which it is a party, when so executed
and delivered, will be, a legally valid and binding obligation
of JAKKS and Newco, respectively, enforceable against each of
them in accordance with their respective terms, subject to
(a) bankruptcy, insolvency, reorganization, moratorium or
other similar Laws now
App-A-15
or hereafter in effect relating to
creditors rights generally, and (b) equitable
principles limiting the availability of specific performance,
injunctive relief and other equitable remedies. Subject to the
filing by JAKKS of an HSR Form and the expiration or early
termination of the waiting period under the HSR Act; the filing
of a statement on Schedule 13D under the Exchange Act; the
filing of a Current Report on Form 8-K under the Exchange
Act; the filing of a Transaction Statement on
Schedule 13E-3 under the Exchange Act; the filing and
effectiveness under the Securities Act of a registration
statement on Form S-4 (or other form suitable for the
registration under such Act of the JAKKS Stock included in the
Stock Payment); and the filing of the Certificate of Merger with
the Secretary of State of Delaware, the execution and delivery
of this Agreement by JAKKS and Newco do not, and the execution
and delivery of each other Merger Document by JAKKS and Newco
and, subject to obtaining the Consent required under the Loan
Agreement among JAKKS, Bank of America, N.A. and the other banks
party thereto, dated October 12, 2001 (the JAKKS Loan
Agreement), the performance by JAKKS and Newco of their
respective obligations hereunder and thereunder will not,
violate any applicable Law or any provision of their respective
Certificates of Incorporation or Bylaws and do not and will not
conflict with or result in any breach of any condition or
provision of, or constitute a default under, or create or give
rise to any adverse right of termination or cancellation by, or
excuse the performance of, any other Person, or result in the
creation or imposition of any Lien upon either of them or any of
their respective assets or the acceleration of the maturity or
date of payment or other performance of any obligation of either
of them, other than any violation, conflict, breach, default,
right of termination or cancellation, excuse of performance,
Lien or acceleration that, individually or in the aggregate,
would not reasonably be expected to have a material adverse
effect on JAKKS, its business, assets or financial condition.
8.3 Except for the
filing by JAKKS of an HSR Form and the expiration or early
termination of the waiting period under the HSR Act; the filing
of a statement on Schedule 13D under the Exchange Act; the
filing of a Current Report on Form 8-K under the Exchange
Act; the filing of a Transaction Statement on
Schedule 13E-3 under the Exchange Act; the filing and
effectiveness under the Securities Act of a registration
statement on Form S-4 (or other form suitable for the
registration under such Act of the JAKKS Stock included in the
Stock Payment), obtaining the Consent required under the JAKKS
Loan Agreement and the filing of the Certificate of Merger with
the Secretary of State of Delaware, no Consent of, or Notice to,
any Person is required as to JAKKS or Newco in connection with
its execution and delivery of this Agreement or any other Merger
Document to which it is a party, or the performance of its
respective obligations hereunder or thereunder, or the
consummation of the Merger.
8.4 No Proceeding is
pending, or, to JAKKS knowledge, threatened against or
affecting the business, assets or operations of JAKKS or Newco
in which an unfavorable Order would prohibit, invalidate or make
unlawful, in whole or in part, this Agreement or any other
Merger Document, or the carrying out of the provisions hereof or
thereof or the transactions contemplated hereby or thereby.
There is no Order enjoining JAKKS or Newco in respect of, or the
effect of which is to prohibit or curtail their performance of,
their respective obligations under this Agreement or any other
Merger Document.
8.5 JAKKS has
delivered to the Stockholders a draft of JAKKS balance
sheet as of December 31, 2001, and of the related
statements of operations and cash flows for JAKKS fiscal
period then ended (collectively, JAKKS Financial
Statements), all of which JAKKS Financial Statements have
been prepared in accordance with GAAP, and present fairly in all
material respects the financial position of JAKKS at such date
and the results of its operations for the period then ended,
subject to normal recurring year-end adjustments and other
adjustments that are not material in the aggregate. JAKKS has no
material liabilities or obligations of any kind, contingent or
otherwise, that are required by GAAP to be reflected on the
balance sheet included in the JAKKS Financial Statements that
are not so reflected thereon, except for any such liabilities or
obligations that have arisen in the ordinary course of business.
8.6 JAKKS has timely
filed all reports, forms, statements and documents required to
be filed by it under the Securities Act of 1933, as amended, the
Securities and Exchange Act of 1934, as amended, and any
applicable rules of the Nasdaq Stock Market, Inc., all of which
reports, forms, statements and other documents were, when filed,
in material compliance with applicable Laws. When filed, none of
such reports, forms, statements and other documents contained
any untrue statement of a material fact or omitted to state
App-A-16
any material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
8.7 Neither JAKKS
nor Newco has employed or engaged any Person to act as a broker,
finder or other intermediary in connection with the transactions
contemplated hereby, and no Person is entitled to any fee,
commission or other compensation relating to any such employment
or engagement by JAKKS or Newco.
8.8 The shares of
JAKKS Stock included in the Merger Consideration have been duly
authorized and, when issued in accordance with the provisions
hereof, shall be validly issued, fully paid and nonassessable.
8.9 No
representation or warranty by JAKKS in this Agreement, the
Certificate of Merger or the certificate being delivered at
Closing by JAKKS pursuant to Section 11.3(c) contains or
will contain any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained
herein or therein, in the light of the circumstances under which
they were made, not misleading.
9.
Certain
Covenants.
9.1 From and after
the date hereof and until the Closing or the termination of this
Agreement, the parties hereto shall use their respective
commercially reasonable efforts, and shall cooperate with each
other, to cause the consummation of the Merger in accordance
with the terms and conditions hereof, including without
limitation giving any Notice to or obtaining the Consent of any
Governmental Authority, or any other Person with respect to any
Material Contract or otherwise. In particular, Toymax and JAKKS
shall use their respective commercially reasonable efforts to
file HSR Forms under the HSR Act as soon as practicable after
the date hereof and to obtain early termination of the waiting
period, including without limitation filing such additional
documents and furnishing such additional information as the
Federal Trade Commission or the Antitrust Division of the
Department of Justice may request; provided that no provision
hereof shall require JAKKS or Toymax to divest any business or
assets or to hold any business or assets separate. The filing
fees payable in respect of the filing of all HSR Forms required
hereunder shall be payable by JAKKS.
9.2 As soon as
practicable after the First Closing, Toymax shall prepare and
file with the SEC preliminary proxy materials relating to the
Stockholders Meeting, including the Notice of such
meeting, proxy statement and form of proxy, in accordance with
the applicable provisions of the Exchange Act, shall use
commercially reasonable efforts to file with the SEC such
additional documents and furnish to the SEC such additional
information as the SEC may request and otherwise respond to the
SECs comments, if any, on the preliminary proxy materials
and any such other documents or information. Toymax shall make
such changes in the proxy materials as are appropriate based on
the SECs comments, if any, and shall cause the proxy
materials to comply as to form in all material respects with the
requirements of the Exchange Act and shall prepare and file
definitive proxy materials in accordance with the applicable
provisions of the Exchange Act. Toymax shall provide to JAKKS a
draft of any proxy materials or other document to be filed with
the SEC in connection with the Stockholders Meeting or the
Merger and advise it of any information to be furnished to the
SEC at a reasonably sufficient time in advance in order to allow
JAKKS to review the same and give to Toymax any comments or
suggestions it may have thereon. Toymax shall also furnish to
JAKKS copies of any correspondence to or from the SEC relating
to the proxy materials and advise JAKKS of the SECs
comments, if any, thereon, and shall confer with JAKKS as to the
appropriate response thereto. Toymax shall pay the filing fee,
if any, applicable to the filing of the proxy materials with the
SEC. JAKKS shall cooperate with Toymax in connection with the
preparation and filing of the proxy materials and in responding
to any SEC comments thereon, and shall provide to Toymax, at
Toymaxs request, any information required to be included
in the proxy materials (including in any amendment or supplement
thereto) in accordance with the Exchange Act and so that the
definitive proxy materials shall not at any time prior to or at
the Effective Time contain any misstatement of a material fact
or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading.
9.3 As soon as
practicable after the First Closing, JAKKS shall prepare and
file with the SEC a statement on Schedule 13D and a Current
Report on Form 8-K with respect to its purchase of Toymax
Common Stock at the First Closing, in accordance with the
applicable provisions of the Exchange Act; a Transaction
Statement on Schedule 13E-3 relating to the Merger, in
accordance with the applicable
App-A-17
provisions of the Exchange Act; and a
registration statement on Form S-4 covering the shares of JAKKS
Stock included in the Merger Consideration (or other form
suitable for the registration of such shares under the
Securities Act), which Form S-4 or other applicable form
will include the proxy statement to be prepared by Toymax
pursuant to Section 9.2, in accordance with the applicable
provisions of the Securities Act. JAKKS shall use commercially
reasonable efforts to file with the SEC such additional
documents and furnish to the SEC such additional information as
the SEC may request and otherwise respond to the SECs
comments, if any, on the registration statement and any such
other documents or information. JAKKS shall make such changes in
the registration statement as are appropriate based on the
SECs comments, if any, and shall use its best efforts to
cause the registration statement to become effective under the
Securities Act. JAKKS shall provide to Toymax a draft of the
registration statement or other document to be filed with the
SEC in connection with the Merger and advise it of any
information to be furnished to the SEC at a reasonably
sufficient time in advance in order to allow Toymax to review
the same and give to JAKKS any comments or suggestions it may
have thereon. JAKKS shall also furnish to Toymax copies of any
correspondence to or from the SEC relating to the registration
statement and advise Toymax of the SECs comments, if any,
thereon, and shall confer with Toymax as to the appropriate
response thereto. JAKKS shall pay the filing fee, if any,
applicable to the filing of the registration statement with the
SEC. Toymax shall cooperate with JAKKS in connection with the
preparation and filing of the registration statement and in
responding to any SEC comments thereon, and shall provide to
JAKKS, at JAKKS request, any information required to be
included in the registration statement (including in any
amendment or supplement thereto) in accordance with the
Securities Act and so that the registration statement shall not
at any time prior to or at the Effective Time contain any
misstatement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
9.4 Toymax shall
take all actions required to call, give Notice of, and hold the
Stockholders Meeting as soon as reasonably practicable
after the date hereof, including printing and mailing definitive
proxy materials. Toymax shall also use commercially reasonable
efforts to solicit the Stockholder Approval, including without
limitation including in the definitive proxy materials the
recommendation of Toymaxs Board of Directors in favor of
the adoption of this Agreement, the approval of the Merger and
the ratification of the Stock Purchase Agreement, unless such
recommendation or the inclusion thereof in the definitive proxy
materials would cause any of Toymaxs directors to breach
his fiduciary duty or cause Toymax or any of its directors,
officers, employees or agents to violate any applicable Law.
9.5 Except as may be
required pursuant to Section 9.6, from and after the date
hereof and until this Agreement is terminated, none of Toymax,
any Subsidiary, any Principal Stockholder, any Affiliate
thereof, or any director, officer, employee or other agent or
representative of any of them, shall, directly or indirectly,
solicit any inquiry, offer or proposal from any Person other
than JAKKS with respect to any transaction involving any sale or
other disposition of the Business or of all or substantially all
of the Assets (other than in the ordinary course of business) or
of all or substantially all of the capital stock of Toymax or
any Subsidiary. Toymax shall promptly advise JAKKS of the
receipt of any such inquiry, offer or proposal and the material
terms thereof.
9.6 Toymax shall not
take any Alternative Action, except, subject to the provisions
of this Section and the payment of the Termination Fee, if
applicable, with respect to any Alternative Proposal that
(a) is made in writing, (b) Toymaxs Board of
Directors determines in good faith in the exercise of its
business judgment is reasonably capable of being completed on
the terms proposed and if so completed would result in an
Alternative Transaction that, from a financial point of view,
would be superior and more beneficial to Toymaxs
stockholders than the Merger, and (c) Toymaxs Board
of Directors determines in good faith that its failure to
consider such Alternative Proposal or to withdraw, modify or
qualify its approval or recommendation of the Merger would cause
it to violate its fiduciary duties under applicable Law (a
Superior Proposal). Prior to entering into any
negotiations or discussions with any other Person with respect
to, or furnishing confidential information or otherwise
responding to, any Superior Proposal, Toymax shall enter into a
confidentiality agreement with such Person (which agreement may
not include any provision granting to such Person an exclusive
right to negotiate with Toymax with respect to an Alternative
Transaction). No provision hereof shall preclude Toymax or its
Board of Directors from complying with the requirements of
Rule 14d-9 or
App-A-18
Rule 14e-2 under the Exchange Act with
regard to the Merger or any Alternative Proposal. Subject to
Toymaxs compliance with the conditions of this
Section 9.6, prior to obtaining the Stockholder Approval,
Toymaxs Board of Directors may withdraw its approval or
recommendation of the Merger, or modify or qualify such approval
or recommendation, or approve or recommend a Superior Proposal
if Toymax shall give to JAKKS written Notice thereof at least
five (5) business days prior thereto. Unless this Agreement
is terminated in accordance with Article 12 prior to the
Stockholders Meeting, notwithstanding Toymaxs
receipt of any Alternative Proposal or any Alternative Action,
Toymax shall hold the Stockholders Meeting and call for a
vote of its stockholders for the adoption of this Agreement and
the approval of the Merger.
9.7 Except as set
forth on Schedule 9.7, from and after the date hereof and
until the Closing, except as otherwise provided elsewhere herein
or as contemplated by the Monogram Transaction, or as JAKKS may
otherwise consent (which consent may not be unreasonably
withheld), Toymax and each Subsidiary shall:
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(a) conduct the Business in its ordinary
course;
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(b) use commercially reasonable efforts to
preserve the Business and Assets and maintain their respective
relationships with customers and other Persons with which they
have material business dealings;
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(c) not enter into any Restrictive Agreement
that would materially adversely affect the operation of the
Business;
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(d) not (i) sell, lease, transfer or
dispose of any material Asset, other than sales in the ordinary
course of business or the disposal of defective, obsolete or
otherwise unusable Assets or (ii) terminate any Material
Contract, except upon expiration of the term thereof as provided
therein and except for any Material Contract that ceases to be
necessary in connection with the operation of the Business;
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(e) use commercially reasonable efforts to
maintain all material Permits and Consents, other than any such
Permits or Consents that cease to be necessary in connection
with the operation of the Business, and to comply in all
material respects with all applicable Orders;
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(f) use commercially reasonable efforts to
maintain in full force and effect (or to replace on
substantially equivalent terms) all currently applicable
material insurance relating to the Business or the Assets;
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(g) except as required under any Material
Contract, Permit or Law applicable to Toymax or a Subsidiary or
otherwise by a Governmental Authority, or in the ordinary course
of business consistent with its past practices, not increase the
compensation or other employment benefits payable to or for the
benefit of any employee, or enter into, adopt or materially
modify any Employee Plan or other agreement, plan, commitment or
arrangement to provide to any employee or other Person any
deferred compensation, retirement, severance or other similar
payment or benefit;
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(h) not make any loan or advance or
otherwise extend any credit to any director or officer of Toymax
or a Subsidiary or any Affiliate of any such director or officer;
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(i) not amend its certificate or articles of
incorporation or organization or Bylaws;
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(j) not merge or consolidate with any other
Person or purchase or otherwise acquire any securities of, or
other equity interest or participation in, any Person (other
than a Subsidiary) or create any joint venture;
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(k) other than pursuant to Toymaxs
current credit facility and other than advances by Affiliates,
not incur or assume any Indebtedness in an amount in excess of
$500,000;
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(l) not acquire (other than in the ordinary
course of business) the business or assets, substantially as a
whole, of any other Person, or make any capital expenditure in
excess of $500,000;
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(m) not declare, set aside or pay any
dividend or make any other distribution in cash, securities or
other property, on or in respect of any capital stock (other
than a cash dividend or distribution by any Subsidiary to Toymax
or any other Subsidiary);
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App-A-19
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(n) not split or reverse-split any capital
stock or effect any other recapitalization or capital
reorganization, or issue or reserve for issuance any capital
stock, other than upon the exercise of an Option outstanding on
the date hereof in accordance with the terms thereof, or issue
or grant any option, warrant or right to purchase, or security
or instrument convertible into or exercisable for, any capital
stock; and
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(o) not enter into, adopt or assume any
agreement, commitment or arrangement which obligates Toymax or
any Subsidiary to act or to refrain from acting in violation of,
or in a manner inconsistent with, any of the foregoing.
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9.8 From and after
the date hereof and until the Closing, Toymax shall furnish to
JAKKS such information with respect to the Business and Assets
as JAKKS may from time to time reasonably request and shall
permit JAKKS and its authorized representatives access, at a
mutually-agreeable time during regular business hours and upon
reasonable prior Notice to Toymax, to conduct, at JAKKS
sole expense and in a manner that does not interfere with
Toymaxs operations, a physical inventory of the Assets, to
inspect the Real Property, to examine the books and records of
Toymax or any Subsidiary and to make inquiries of responsible
Persons designated by Toymax with respect thereto; provided that
any information so disclosed or otherwise made available or
accessible to JAKKS shall not constitute an additional
representation or warranty of Toymax beyond those expressly set
forth in Article 7; and provided further that all such
information shall be subject to Section 9.10.
9.9 From and after
the date hereof and until the Closing, no party hereto shall
make any press release or other public announcement with respect
to this Agreement or the Merger, without the prior written
consent of the other parties (which consent shall not be
unreasonably withheld), unless such announcement is required by
Law, in which case the other parties shall be given Notice of
such requirement prior to such announcement and the parties
shall consult with each other as to the scope and substance of
such disclosure.
9.10 JAKKS and Newco
acknowledge that certain information relating to or concerned
with the Business and the affairs of Toymax and the
Subsidiaries, including without limitation all non-publicly
available Trade Rights, product information, customer and
supplier lists, marketing and sales data, personnel and
financing and Tax matters is proprietary to Toymax and/or its
subsidiaries and that its confidentiality is absolutely
essential to the operation of the Business. Until the Closing,
all of such information shall be subject to that certain
Confidentiality and Non-Disclosure Agreement dated as of
January 10, 2002, between Toymax and JAKKS (the
Confidentiality Agreement) to which the parties
hereby agree to be bound and which is incorporated herein by
this reference.
9.11 From and after
the Effective Time, JAKKS shall:
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(a) cause the Surviving Corporation to, and
the Surviving Corporation shall, subject to any condition or
limitation provided by DGCL Section 145 or other applicable
Law, at all times during the period of the longer of six years
following the Closing Date and the statute of limitations
applicable to any matter for which indemnification may be made
hereunder, indemnify each Person who at any time prior to the
Effective Time shall have been a director or officer of Toymax
or a Subsidiary and hold each such Person harmless from and
against any loss, liability, obligation, damage or expense,
including reasonable attorneys fees and disbursements,
which any of them may suffer or incur in connection with any
claim or Proceeding against any of them based upon or resulting
from any act or omission occurring at or prior to the Effective
Time, including any acts or omissions in connection with this
Agreement or the Merger, in the same manner and to the same
extent as is provided in the certificate or articles of
incorporation or organization, Bylaws and any indemnification
agreement of Toymax or the applicable Subsidiary, on the date
hereof;
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(b) cause the Surviving Corporations
Bylaws at all times during the six-year period following the
Closing Date to include provision for such indemnification and a
provision regarding the elimination or limitation of liability
of all such Persons in the manner and to the extent provided in
the certificate or articles of incorporation or organization, or
the Bylaws of Toymax or the applicable Subsidiary; and
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App-A-20
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(c) cause to be maintained throughout such
six-year period directors and officers liability
insurance substantially equivalent to that provided to such
Persons by Toymax on the date hereof and otherwise consistent
with the requirements of this provision.
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10.
Conditions to
Closing.
10.1 The obligation
of the parties hereto to consummate the Merger in accordance
herewith shall be subject to the satisfaction (or waiver) at or
prior to the Closing of each of the following conditions:
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(a) Toymax shall have received a Fairness
Opinion, which shall not have been withdrawn, rescinded or
adversely updated or modified;
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(b) JAKKS purchase of Toymax Common
Stock from the Principal Stockholders pursuant to the Stock
Purchase Agreement shall have been consummated;
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(c) the Stockholder Approval shall have been
obtained and be in effect;
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(d) the waiting period under the HSR Act
shall have expired or been terminated;
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(e) no Order or Law shall be in effect which
(i) makes illegal or prohibits consummation of the Merger
or (ii) would reasonably be expected to have a Material
Adverse Effect, and no Proceeding which could result in the
enactment or adoption of any such Law or the issuance of any
such Order shall be pending; and
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(f) except for the filing of the Certificate
of Merger, each Consent of, or Notice to, any Governmental
Authority required for the consummation of the Merger and for
the Surviving Corporation to conduct the Business that is set
forth on Schedule 10.1 shall have been obtained or made, as
the case may be.
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10.2 The obligations
of JAKKS and Newco to consummate the Merger in accordance
herewith shall also be subject to the satisfaction (or waiver)
at the Closing of each of the following conditions:
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(a) each of the representations and
warranties made by Toymax herein that is qualified by
materiality or Material Adverse Effect
shall be true, and each of the representations and warranties
made by Toymax herein that is not so qualified shall be true in
all material respects, at and as of the Closing Date;
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(b) Toymax shall have, in all material
respects, performed and complied with all obligations and
conditions contained herein that are to be performed or complied
with by it at or prior to the Closing;
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(c) since the date of this Agreement, no
event shall have occurred and no circumstances shall have
existed which has had or would have a Material Adverse Effect;
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(d) each holder of an Option that does not
by its terms or pursuant to the Option Plan under which it is
granted or Section 5.4 terminate at the Effective Time
shall have executed and delivered to JAKKS an agreement
terminating such Option effective as of the Effective Time; and
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(e) Toymax and the Subsidiaries shall have
executed and/or delivered at the Closing all the documents so to
be executed and/or delivered by them and shall have taken all
other actions at the Closing required to be taken by them
pursuant to Article 11.
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10.3 The obligation
of Toymax to consummate the Merger in accordance herewith shall
also be subject to the satisfaction (or waiver) at the Closing
of each of the following conditions:
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(a) each of the representations and
warranties made by JAKKS herein that is qualified by
materiality or Material Adverse Effect
shall be true, and each of the representations and warranties
made by JAKKS herein that is not so qualified shall be true in
all material respects, at and as of the Closing Date;
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App-A-21
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(b) JAKKS and Newco shall have, in all
material respects, performed and complied with all obligations
and conditions contained herein that are to be performed or
complied with by them at or prior to the Closing; and
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(c) JAKKS and Newco shall have executed
and/or delivered at the Closing all the documents so to have
been executed and/or delivered by them and shall have taken all
other actions at the Closing required to have been taken by them
pursuant to Article 11.
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11.
Closing.
11.1 The Closing
shall be held at the offices of Feder, Kaszovitz, Isaacson,
Weber, Skala & Bass LLP, 750 Lexington Avenue,
New York, New York 10022 on the earliest practicable
date, and in any event on or before the second business day,
after the satisfaction (or waiver) or all conditions to closing
provided in Article 10 (other than any condition which, by
its terms, is to be satisfied at the Closing), or at such other
place or on such other date, and at such time, as the parties
hereto may agree. The execution and/or delivery of each document
to be executed and/or delivered at the Closing and each other
action to be taken at the Closing shall be subject to the
condition that every other document to be executed and/or
delivered at the Closing is so executed and/or delivered and
every other action to be taken at the Closing is so taken, and
all such documents and actions shall be deemed to be executed
and/or delivered or taken, as the case may be, simultaneously.
11.2 At the Closing,
Toymax shall:
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(a) deliver to JAKKS the resignations,
effective at the Effective Time, of all of the respective
directors and officers immediately prior to the Effective Time
of Toymax and each Subsidiary (it being expressly understood
that no such resignation shall constitute a breach under any
applicable employment contract or arrangement);
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(b) deliver to JAKKS a certificate of
Toymaxs chief executive officer or chief financial officer
to the effect that the conditions set forth in
Sections 10.2(a), (b) and (c) have been satisfied, and
setting forth any circumstances that exist as of the Closing
Date, and events that have occurred between the date hereof and
the Closing Date, that result in any of Toymaxs
representations or warranties contained in Article 7 hereof
being untrue in any material respect;
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(c) deliver to JAKKS the agreements referred
to in Section 10.2(d); and
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(d) deliver to JAKKS such other agreements,
instruments, certificates and documents as JAKKS may reasonably
request to effect the consummation of the Merger.
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11.3 At the Closing,
JAKKS shall:
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(a) cause the Certificate of Merger to be
filed with the Secretary of State of Delaware;
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(b) deliver to the Paying Agent written
Notice of the effectiveness of the Merger, authorizing the
Paying Agent to pay the Merger Consideration;
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(c) deliver to Toymax a certificate of
JAKKS chief executive officer or chief financial officer
to the effect that the conditions set forth in
Sections 10.3(a) and (b) have been satisfied, and
setting forth any facts or circumstances that exist as of the
Closing Date, and events that have occurred between the date
hereof and the Closing Date, that result in any of JAKKS
representations or warranties contained in Article 8 hereof
being untrue in any material respect; and
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(d) deliver to Toymax such other agreements,
instruments, certificates and documents as Toymax may reasonably
request to effect the consummation of the Merger.
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App-A-22
12.
Termination.
12.1 This Agreement
may be terminated at any time prior to the Closing:
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(a) by the mutual agreement of JAKKS and
Toymax;
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(b) by Toymax, if Toymax shall not have
received a Fairness Opinion on or before March 31, 2002, or
if the Fairness Opinion is withdrawn, rescinded or adversely
updated or modified;
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(c) if the Closing shall not have occurred
on or before September 30, 2002, or such later date to
which JAKKS and Toymax may agree, by JAKKS or Toymax, upon
written Notice to such effect to the other;
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(d) if the Stock Purchase Agreement shall
have been terminated for any reason;
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(e) by JAKKS or Toymax at any time after the
Stockholders Meeting, if the Stockholder Approval is not
obtained;
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(f) by JAKKS (if JAKKS is not then in breach
or default of any of its representations, warranties, covenants
or other obligations under this Agreement), if (i) there
shall be any material breach of any representation or warranty
by, or any failure to perform any material covenant or other
obligation of, Toymax, and, unless such breach or failure is
incapable of being cured within a period of 30 days after
the giving of written Notice thereof to Toymax, JAKKS gives such
Notice to Toymax and such breach or failure shall not be cured
within 30 days of the giving of such Notice, upon written
Notice of termination to Toymax; or (ii) an Alternative
Action shall have been taken;
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(g) by Toymax (if Toymax is not then in
breach or default of any of its representations, warranties,
covenants or other obligations under this Agreement), if
(i) there shall be any material breach of any
representation or warranty by, or any failure to perform any
material covenant or other obligation of, JAKKS or Newco, and,
unless such breach or failure is incapable of being cured within
a period of 30 days after the giving of written Notice
thereof to the breaching or defaulting party, Toymax gives such
Notice to such party and such breach or failure shall not be
cured within 30 days of the giving of such Notice, upon
written Notice of termination to JAKKS; or (ii) an
Alternative Action shall have been taken with respect to a
Superior Proposal.
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12.2 Subject to the
rights of the other parties hereto, either Constituent
Corporation may, by resolution of its Board of Directors,
abandon the Merger prior to the Effective Time notwithstanding
that the stockholders of either Constituent Corporation shall
have approved and authorized the same; provided that no
abandonment of the Merger by a party in violation of the terms
of this Agreement shall constitute a basis on which JAKKS (in
the case of abandonment by JAKKS or Newco) or the Principal
Stockholders (in the case of abandonment by Toymax) shall be
entitled to terminate the Stock Purchase Agreement.
12.3 Upon
termination of this Agreement pursuant to Section 12.1, all
obligations of the parties shall terminate except those under
the applicable provisions of Article 13; provided that no
such termination shall relieve any party hereto of any liability
to any other party by reason of any breach of or default under
this Agreement.
13.
Miscellaneous.
13.1
Termination
of Representations and Warranties.
No representation or
warranty of any party hereto shall survive the Effective Time or
the termination of this Agreement.
13.2
Limitation
of Authority.
Except as expressly provided herein, no
provision hereof shall be deemed to create any partnership,
joint venture or joint enterprise or association among the
parties hereto, or to authorize or to empower any party hereto
to act on behalf of, obligate or bind any other party hereto.
13.3
Fees and
Expenses.
Except as otherwise expressly provided herein,
each party hereto shall bear such fees and expenses as may be
incurred by it in connection with this Agreement and the Merger.
App-A-23
13.4
Notices.
Any Notice or demand required or permitted to be given or
made hereunder to or upon any party hereto shall be deemed to
have been duly given or made for all purposes if (a) in
writing and sent by (i) messenger or reputable overnight
courier service against receipt, or (ii) certified or
registered mail, postage paid, return receipt requested, or
(b) sent by facsimile, provided that the sender receives a
printed confirmation of receipt, to such party at the following
address:
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to JAKKS or Newco at:
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22619 Pacific Coast Highway
Malibu, California 90265
Attn: President
Fax: (310) 317-8527
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with a copy to:
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Feder, Kaszovitz, Isaacson, Weber, Skala, Bass
& Rhine LLP
750 Lexington Avenue
New York, New York 10022
Attn: Murray L. Skala, Esq.
Fax: (212) 888-7776
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to Toymax at:
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Toymax International, Inc.
125 East Bethpage Road
Plainview, New York 11803
Attn: Michael Sabatino
Fax: (516) 391-9151
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with copies to:
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Brown Raysman Millstein Felder & Steiner
LLP
900 Third Avenue
New York, New York 10022
Attn: Joel M. Handel, Esq.
Fax: (212) 812-3310
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or such other address as any party hereto may at
any time, or from time to time, direct by Notice given to the
other parties in accordance with this Section. Except as
otherwise expressly provided herein, the date of giving or
making of any such Notice or demand shall be, in the case of
clause (a)(i) or (a)(ii), the date of the receipt; and
in the case of clause (b), upon the senders receipt
of printed confirmation of receipt.
13.5
Amendment.
At any time prior to the Effective Time and notwithstanding
that the Stockholder Approval has been obtained, JAKKS and
Toymax may amend this Agreement, if such amendment is authorized
and approved by the respective Boards of Directors of the
Constituent Corporations; provided that, after the Stockholder
Approval is obtained, no such amendment may be made which is
prohibited or which would require further action by
Toymaxs stockholders, pursuant to DGCL Section 251(d)
or other applicable Law; and provided further that no such
amendment shall, unless each Principal Stockholder agrees or
otherwise consents in writing thereto, impose any additional
obligation on such Principal Stockholder, as such, or deprive
such Principal Stockholder of any right, power or privilege,
other than as provided herein prior to such amendment. No
amendment of this Agreement shall be valid or effective, unless
in writing and signed by or on behalf JAKKS and Toymax.
13.6
Waiver.
No course of dealing or omission or delay on the part of any
party hereto in asserting or exercising any right hereunder
shall constitute or operate as a waiver of any such right. No
waiver of any provision hereof shall be effective, unless in
writing and signed by or on behalf of the party to be charged
therewith. No waiver shall be deemed a continuing waiver or
waiver in respect of any other or subsequent breach or default,
unless expressly so stated in writing.
App-A-24
13.7
Governing
Law.
This Agreement shall be governed by, and interpreted
and enforced in accordance with, the Laws of the State of
Delaware without regard to principles of choice of Law or
conflict of Laws.
13.8
Jurisdiction.
Each of the parties hereto hereby irrevocably consents and
submits to the jurisdiction of the Supreme Court of the State of
New York and the United States District Court for the Southern
District of New York in connection with any Proceeding arising
out of or relating to this Agreement or the transactions
contemplated hereby, waives any objection to venue in the County
of New York, State of New York, or such District, and agrees
that service of any summons, complaint, Notice or other process
relating to such Proceeding may be effected in the manner
provided by clause (a)(ii) of Section 13.4.
13.9
Remedies.
In the event of any actual or prospective breach or default
by any party hereto, any other party hereto shall be entitled to
equitable relief, including remedies in the nature of
rescission, injunction and specific performance from any court
of competent jurisdiction. All remedies hereunder are cumulative
and not exclusive, and nothing herein shall be deemed to
prohibit or limit any party from pursuing any other remedy or
relief available at law or in equity for such actual or
prospective breach or default, including the recovery of damages.
13.10
Severability.
The provisions hereof are severable and in the event that any
provision of this Agreement shall be determined to be invalid or
unenforceable in any respect by a court of competent
jurisdiction, the remaining provisions hereof shall not be
affected, but shall, subject to the discretion of such court,
remain in full force and effect, and any invalid or
unenforceable provision shall be deemed, without further action
on the part of the parties hereto, amended and limited to the
extent necessary to render the same valid and enforceable.
13.11
Counterparts.
This Agreement may be executed in counterparts, each of which
shall be deemed an original and which together shall constitute
one and the same agreement.
13.12
Further
Assurances.
Each party hereto shall cooperate with the other
parties hereto and shall promptly execute, deliver, file or
record such agreements, instruments, certificates and other
documents and perform such other and further acts as any other
party hereto may reasonably request or as may otherwise be
reasonably necessary or proper, to consummate and perfect the
transactions contemplated hereby.
13.13
Binding
Effect.
Subject to Section 13.14, this Agreement shall
be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns. This
Agreement is not intended, and shall not be deemed, to create or
confer any right or interest for the benefit of any Person not a
party hereto.
13.1
Assignment.
This Agreement, and each right, interest and obligation
hereunder, may not be assigned by any party hereto without the
prior written consent of the other parties hereto, and any
purported assignment without such consent shall be void and
without effect.
13.15
Titles and
Captions.
The titles and captions of the Articles and
Sections of this Agreement are for convenience of reference only
and do not in any way define or interpret the intent of the
parties or modify or otherwise affect any of the provisions
hereof.
13.16
Grammatical
Conventions.
Whenever the context so requires, each pronoun
or verb used herein shall be construed in the singular or the
plural sense and each capitalized term defined herein and each
pronoun used herein shall be construed in the masculine,
feminine or neuter sense.
13.17
Knowledge.
The qualification or limitation of any statement made herein to
a partys knowledge or to a matter
known to a party refers to the actual knowledge (but
not imputed or constructive knowledge) of the directors,
officers and operational managers of such party, after
reasonable due inquiry.
13.18
References.
The terms herein, hereto,
hereof, hereby and
hereunder, and other terms of similar import, refer
to this Agreement as a whole, and not to any Article, Section or
other part hereof.
App-A-25
13.19
No
Presumptions.
Each party hereto acknowledges that it has
participated, with the advice of counsel, in the preparation of
this Agreement. No party hereto is entitled to any presumption
with respect to the interpretation of any provision hereof or
the resolution of any alleged ambiguity herein based on any
claim that any other party hereto drafted or controlled the
drafting of this Agreement.
13.20
Incorporation
by Reference.
The Exhibits and Schedules hereto are an
integral part of this Agreement and are incorporated in their
entirety herein by this reference.
13.21
Entire
Agreement.
This Agreement embodies the entire agreement of
the parties hereto with respect to the subject matter hereof and
supersedes any prior agreement, commitment or arrangement
relating thereto, other than the Confidentiality Agreement, as
set forth in Section 9.10.
App-A-26
IN WITNESS WHEREOF, JAKKS and the Constituent
Corporations, by their respective duly authorized officers, have
duly executed this Agreement as of the date set forth in the
Preamble hereto.
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TOYMAX INTERNATIONAL INC.
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JAKKS PACIFIC, INC.
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By: /s/ STEVEN A. LEBENSFELD
Name: Steven A. Lebensfeld
Title: CEO
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By: /s/ STEPHEN G. BERMAN
Name: Stephen G. Berman
Title: President
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JP/TII ACQUISITION CORP.
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By: /s/ STEPHEN G. BERMAN
Name: Stephen G. Berman
Title: Vice President
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App-A-27
INDEX TO EXHIBITS AND SCHEDULES
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Exhibit A
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Form of Certificate of Merger
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Schedule 1.49
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Option Plans
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Schedule 1.55
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Permitted Liens
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Schedule 1.67
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Subsidiaries
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Schedule 5.4
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Option Conversion
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Schedule 7.1
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Foreign Qualification
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Schedule 7.5
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Consents and Notices
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Schedule 7.6
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Proceedings
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Schedule 7.7
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Capitalization
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Schedule 7.8
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Subsidiaries
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Schedule 7.9
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Liabilities
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Schedule 7.10
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Material Adverse Changes
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Schedule 7.11
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Liens
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Schedule 7.12
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Significant Contracts
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Schedule 7.13
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Inventory Exceptions
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Schedule 7.14
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Accounts
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Schedule 7.15
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Permits and Consents Exceptions
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Schedule 7.16
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Trade Rights
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Schedule 7.17
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Real Property
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Schedule 7.18
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Hazardous Material
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Schedule 7.19
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Taxes, Customs and Duties
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Schedule 7.20
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Employee Plans
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Schedule 7.21
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Labor
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Schedule 7.22
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Employees, Etc.
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Schedule 7.23
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Customers
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Schedule 7.25
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Brokers Exceptions
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Schedule 9.7
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Exceptions from Ordinary Course
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Schedule 10.1
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Consents and Notices Required for Closing
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App-A-28
EXHIBIT A
CERTIFICATE OF MERGER
OF
JP/ TII ACQUISITION CORP.
WITH AND INTO
TOYMAX INTERNATIONAL, INC.
UNDER SECTION 251 OF THE DELAWARE GENERAL
CORPORATION LAW
The undersigned DOES HEREBY CERTIFY as follows:
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1. The name and
state of incorporation of each of the constituent corporations
are:
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Name
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State of Incorporation
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JP/ TII Acquisition Corp.
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Delaware
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Toymax International, Inc.
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Delaware
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2. An Agreement of
Merger relating to the merger of the constituent corporations
has been approved, adopted, certified, executed and acknowledged
by each of the constituent corporations in accordance with
Section 251 of the Delaware General Corporation Law.
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3. The name of the
surviving corporation is Toymax International, Inc.
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4. The Certificate
of Incorporation of JP/ TII Acquisition Corp. shall continue as
the Certificate of Incorporation of the surviving corporation.
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5. The executed
Agreement of Merger is on file at an office of the surviving
corporation located at 22619 Pacific Coast Highway, Malibu,
California 90265.
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6. A copy of the
Agreement of Merger will be furnished by the surviving
corporation, on request and without cost, to any stockholder of
either constituent corporation.
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7. The merger of the
constituent corporations shall be effective at 4:00 p.m., New
York City time, on the date of filing of this Certificate of
Merger with the Secretary of State of Delaware.
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IN WITNESS WHEREOF, the undersigned has, by its
duly authorized officer, executed this Certificate of Merger on
this day
of ,
2002.
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TOYMAX INTERNATIONAL, INC.
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Name: Stephen G. Berman
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Title: Vice President
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App-A-29
SCHEDULE 5.4
TO
MERGER AGREEMENT
OPTION CONVERSION
(I) The exercise price and number of shares
of JAKKS Stock subject to each JAKKS Option shall be determined
in accordance with the following:
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V =
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lower of (1) the Value of JAKKS Stock on the
Closing Date with respect to the Stock Purchase Agreement and
(2) the Value of JAKKS Stock on the Closing Date with
respect to this Agreement
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E = exercise price of JAKKS Option = R ×
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exercise price of corresponding Toymax Option
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Number of shares
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subject to corresponding
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Toymax Option
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N
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=
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number of shares subject to JAKKS
Option =
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R
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(II) Notwithstanding the foregoing, if the
aggregate number of shares of JAKKS Stock subject to JAKKS
Options being granted as a result of the calculation set forth
in (I), above, together with the aggregate number of shares of
JAKKS Stock issued as part of the Purchase Price under the Stock
Purchase Agreement and as part of the Merger Consideration under
this Merger Agreement, would exceed the maximum number of shares
of JAKKS Stock which could be issued without obtaining
stockholder approval if and as required pursuant to the Nasdaq
Rule (such maximum number, M), then the total number
of shares of JAKKS Stock to be subject to JAKKS Options, the
total number of shares of JAKKS Stock subject to each JAKKS
Option to be granted pursuant to Section 5.4, and the
exercise price of such JAKKS Options, shall each be subject to
adjustment, in accordance with the following:
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(A) The total number of shares of JAKKS
Stock to be subject to JAKKS Options (T) shall be the
excess of M over the aggregate number of shares of JAKKS Stock
issued as part of the Purchase Price under the Stock Purchase
Agreement and as part of the Merger Consideration under this
Merger Agreement.
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(B) The number of shares subject to a JAKKS
Option (N) shall be determined by multiplying the number of
shares subject to the JAKKS Option, calculated as set forth in
(I), above, by F, where:
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T
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F
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=
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Aggregate number of shares of JAKKS
Stock that would be subject to JAKKS
Options, calculated as set forth in (I)
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N = N × F
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(C) Subject to (III), below, the adjusted
exercise price of each JAKKS Option (E) shall be calculated in
accordance with the following formula:
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E = V - (N/N × (V E))
(III) Notwithstanding the foregoing, if the
value of E with respect to a JAKKS Option calculated as set
forth in (II)(C), is less than $0.01, then: (i) E shall be
deemed to equal $0.01, (ii) the holder of the Toymax Option
shall be entitled to receive N JAKKS Options with an exercise
price of $0.01, and (iii) JAKKS shall be required to pay to
the holder of the applicable JAKKS Option cash in an amount
calculated as follows:
Cash
Payment = N × ($0.01 actual
value of E)
App-A-30
APPENDIX B
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT dated as of
February 10, 2002 by and among JAKKS Pacific, Inc., a
Delaware corporation (JAKKS), Toymax International,
Inc., a Delaware corporation (Toymax), and the
stockholders of Toymax listed on Schedule I (the
Stockholders).
WITNESSETH:
WHEREAS, JAKKS desires to acquire Toymax; and
WHEREAS, the parties hereto intend that such
acquisition be effected in two stages, in the first of which
JAKKS shall purchase all of the outstanding capital stock of
Toymax owned by the Stockholders, and, in the second of which a
subsidiary of JAKKS will merge with and into Toymax, and the
stockholders of Toymax other than JAKKS will receive merger
consideration consisting of cash and securities of JAKKS, so
that JAKKS will become the sole stockholder of Toymax, all on
the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises
and the mutual covenants hereinafter set forth, the parties
hereto hereby agree as follows:
1.
Certain
Definitions.
In addition to other capitalized terms defined
elsewhere herein, the following capitalized terms are used
herein as follows:
1.1
Acquisition
means the purchase of the Shares and the related
transactions contemplated by the Acquisition Agreements.
1.2
Acquisition
Agreement
means any of this Agreement and each
agreement to be executed and delivered at the Closing pursuant
to this Agreement, including without limitation the Registration
Rights Agreement, the Employment Agreements and the Employment
Termination Agreements.
1.3
Affiliate
of a Person means another Person directly or indirectly
controlling, controlled by, or under common control with, such
Person; for this purpose, control of a Person means
the power (whether or not exercised) to direct the policies,
operations or activities of such Person by virtue of the
ownership of, or right to vote or direct the manner of voting
of, securities of such Person, or pursuant to agreement or Law
or otherwise.
1.4
Agreement
means this Stock Purchase Agreement, as amended or
supplemented.
1.5
Amendments
means the Termination and Replacement of Manufacturing
Agreement among Toymax, Tai Nam and certain other parties,
substantially in the form of Exhibit A, and the Termination
of Agency Agreements among Toymax, Tai Nam and certain other
parties, as amended or supplemented to date, substantially in
the form of Exhibit B.
1.6
Assets
means the assets of Toymax and the Subsidiaries, other than
any Assets of Candy Planet, Co. (a division of Toymax, Inc.) and
Monogram International, Inc.
1.7
Business
means the business operated by Toymax and the Subsidiaries,
which consists of creating, designing and marketing innovative
and technologically advanced toys and leisure products, but
excluding any business operated by Candy Planet Co. (a division
of Toymax Inc.) or Monogram International, Inc.
1.8
Cash
Payment
means the portion of the Purchase Price
payable in cash.
1.9
Closing
means the closing of the Acquisition as provided in
Article 7.
1.10
Closing
Date
means the date of the Closing.
App-B-1
1.11
Code
means the Internal Revenue Code of 1986, as amended, and the
treasury regulations promulgated thereunder.
1.12
Consent
means any approval, authorization, consent or ratification
by or on behalf of any Person that is not a party to this
Agreement, or any waiver of, or exemption or variance from, any
Contract, Permit or Order that is required to be obtained in
connection with the consummation of the transactions
contemplated by this Agreement.
1.13
Contract
means any material contract (including without limitation
any purchase, sale, supply or service order or agreement,
equipment lease, License Agreement or Lease) to which Toymax or
any of the Subsidiaries is a party. For the purposes hereof, a
Contract is material if (a) it relates to a
transaction or series of transactions involving the expenditure
or receipt by Toymax or a Subsidiary of an amount in excess of
$500,000 (or the transfer of property with a fair market value
in excess of $500,000), (b) a breach or default thereunder
would reasonably be expected to have a Material Adverse Effect,
(c) it relates to any transaction not in the ordinary
course of the Business, or (d) it (i) is a License
Agreement relating to a Trade Right that is material to the
Business or is an employment contract, (ii) prohibits or
materially limits Toymaxs or a Subsidiarys use of a
Trade Right of another Person or (iii) provides for any
other Person to use, or prohibits or limits any other
Persons use of, a Trade Right of Toymax or a Subsidiary.
1.14
Effective
Date
means the effective date of the Merger.
1.15
Employment
Agreements
means the employment agreements,
substantially in the forms of Exhibits C-1 and C 2, to
be entered into at the Closing pursuant to Section 7.7.
1.16
Employment
Termination Agreements
means the employment
termination agreements, substantially in the forms of Exhibits
D-1 and D-2, to be entered into at the Closing pursuant to
Section 7.7.
1.17
Exchange
Factor
means .0798 or, if the Value of JAKKS Stock on
the Closing Date is less than $16.9173, the quotient obtained by
dividing $1.35 by the Value of JAKKS Stock on the Closing Date.
1.18
Fairness
Opinion
means an opinion of Morgan Lewis Gethens &
Ahn, Inc., or another investment banking or financial advisory
firm reasonably satisfactory to JAKKS and Toymax, to the effect
that the Purchase Price and the merger consideration
contemplated to be paid pursuant to the Merger Agreement are, on
the date hereof, fair, from a financial point of view, to the
holders of outstanding shares of Stock.
1.19
Fractional
Share Payment
means an amount in cash payable in lieu
of any fractional share of JAKKS Stock that would, but for the
provisions of Section 2.2(b), be included in the Stock
Payment.
1.20
GAAP
means generally accepted accounting principles in the United
States.
1.21
Governmental
Authority
means any United States or foreign federal,
state or local government or governmental authority, agency or
instrumentality, any court or arbitration panel of competent
jurisdiction or the Nasdaq Stock Market, Inc.
1.22
HSR
Act
means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
1.23
HSR
Form
means a Notification and Report Form for Certain
Mergers and Acquisitions required to be filed pursuant to the
HSR Act in connection with the Acquisition.
1.24
JAKKS
Stock
means the common stock, par value $.001 per
share, of JAKKS.
1.25
Law
means common law and any statute, rule, regulation or
ordinance of any Governmental Authority and includes any
judicial decision applying or interpreting common law or any
other Law.
1.26
License
Agreement
means a license or other agreement pursuant
to which Toymax has the right to use or exploit any Trade Right
of another Person, which Trade Right is material to the Business.
1.27
Lien
means any security interest, conditional sale or other title
retention agreement, mortgage, pledge, lien, charge, encumbrance
or other adverse claim or interest.
App-B-2
1.28
Lien
Report
means a report in customary form of a lien
search or survey, covering security interests and other notice
filings under the Uniform Commercial Code and tax liens and
judgment liens of record in each jurisdiction where Toymax
conducts the Business, upon, against or affecting the Assets.
1.29
Material
Adverse Effect
means a material adverse effect on the
Business, the Assets or the operations, financial condition or
results of operations of Toymax and the Subsidiaries, taken as a
whole.
1.30
Merger
means the statutory merger of TI Subsidiary with and into
Toymax, as contemplated under the Merger Agreement.
1.31
Merger
Agreement
means the Agreement of Merger providing for
the merger of TI Subsidiary with and into Toymax, as amended or
supplemented, which Merger Agreement is being executed
concurrent with the execution of this Agreement.
1.32
Monogram
Transaction
means the transaction consisting of the
sale of all or substantially all of the assets of Candy Planet,
Co. (a division of Toymax Inc.) and of Monogram International
Inc. and related transactions.
1.33
Notice
means any notice given to, or any declaration, filing,
registration or recordation made with, any Person.
1.34 Order means any judgment, order,
writ, decree, award, directive, ruling or decision of any
Governmental Authority.
1.35 Permit means any permit,
license, certification, qualification, franchise or similar
privilege issued or granted by any Governmental Authority.
1.36
Permitted
Lien
means any of the following: (i) statutory
landlords liens and liens for current taxes, assessments
and governmental charges not yet due and payable (or being
contested in good faith); (ii) zoning laws and ordinances
and similar legal requirements; (iii) rights reserved to
any Governmental Authority to regulate the affected property and
restrictions of general applicability imposed by federal or
state securities Laws; (iv) license transfer fees;
(v) Liens to which JAKKS has consented; (vi) Liens
that will be released or terminated at or prior to Closing; and
(vii) other Liens set forth on Schedule 1.36.
1.37
Person
means any natural person, corporation, joint stock company,
limited liability company, partnership, joint venture,
association, trust, Governmental Authority or other entity, or
any group of the foregoing acting in concert.
1.38
Proceeding
means any action, suit, arbitration, audit, investigation or
other proceeding, at law or in equity, before or by any
Governmental Authority.
1.39
Purchase
Price
means the aggregate of the Cash Payment and the
Stock Payment.
1.40
Real
Property
means any real property owned by Toymax or in
which Toymax holds a leasehold interest.
1.41
Registration
Rights Agreement
means the registration rights
agreement, substantially in the form of Exhibit E, to be
entered into at the Closing pursuant to Section 7.5.
1.42
Shares
means shares of Stock owned by a Stockholder.
1.43
Stock
means the common stock, par value $.01 per share, of Toymax.
1.44
Stock
Payment
means the portion of the Purchase Price
payable by delivery of shares of JAKKS Stock.
1.45
Subsidiary
means each subsidiary of Toymax, or any of them, as dictated by
the context.
1.46
Tai
Nam
means Tai Nam Industrial Company Limited.
App-B-3
1.47
Tax
means any United States or foreign federal, state or local
income, excise, sales, property, withholding, social security or
franchise tax or assessment, and any interest, penalty or fine
due thereon or with respect thereto.
1.48
TI
Subsidiary
means JP/TII Acquisition Corp., a Delaware
corporation.
1.49 [Intentionally
Omitted.]
1.50
Toymax
Accountants
means BDO Seidman, LLP, Toymaxs
independent certified public accountants and auditors.
1.51
Trade
Right
means a patent, claim of copyright, trademark,
trade name, brand name, service mark, logo, symbol, trade dress
or design, or representation or expression of any thereof, or
registration or application for registration thereof, or any
other invention, trade secret, technical information, know-how
or other proprietary right or intellectual property.
1.52
Value
of JAKKS Stock
on any date means the average of the
closing sale price per share of JAKKS Stock as reported on the
Nasdaq National Market over the last ten trading days preceding
(but not including) the last trading day preceding such date.
2.
Purchase of
the Toymax Shares; Escrow.
2.1 At the Closing,
subject to the terms and conditions of this Agreement, each
Stockholder shall sell, assign, transfer and deliver to JAKKS
the Shares then owned by such Stockholder.
2.2 At the Closing,
subject to the terms and conditions of this Agreement, JAKKS
shall pay the Purchase Price to the respective Stockholders, as
follows:
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(a) the Cash Payment payable to each
Stockholder, in an amount equal to the product of $3.00 and the
number of Shares owned by such Stockholder on the Closing Date,
plus the Fractional Share Payment payable to such Stockholder,
if any, and
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(b) subject to Sections 2.3 and 2.4,
the Stock Payment payable to each Stockholder, in a number of
shares of JAKKS Stock equal to the product of the Exchange
Factor and the number of Shares owned by such Stockholder on the
Closing Date; provided that no fractional shares of JAKKS Stock
shall be issued as part of the Stock Payment, but in lieu
thereof, the Fractional Share Payment shall be paid in an amount
equal to the product of the fraction of the Share that, but for
this provision, would have been issued and $18.797 or, if the
Value of JAKKS Stock on the Closing Date is less than $16.9173,
the Value of JAKKS Stock on the Closing Date.
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2.3 If the Value of
JAKKS Stock on the Closing Date exceeds $20.6767, JAKKS, at its
option, shall be entitled to pay the Purchase Price entirely in
cash, in which case, JAKKS shall pay to each Stockholder a cash
amount equal to the sum of (i) the Cash Payment and
(ii) in lieu of the Stock Payment and the Fractional Share
Payment, if any, that would otherwise be payable to such
Stockholder (but for this provision), cash in the amount of
$1.65 per share of Stock being acquired from such
Stockholder hereunder.
2.4 Any other
provision hereof notwithstanding, if the determination of the
Stock Payment in accordance with Section 2.2 (without
regard to this Section 2.4) would result in a number of
shares of JAKKS Stock which, together with the number of shares
of JAKKS Stock which would be issuable on the Effective Date
pursuant to Section 5.2 of the Merger Agreement (assuming
that, for the purpose of determining such number of shares of
JAKKS Stock, the Value of JAKKS Stock on the Effective Date
would equal the Value of JAKKS Stock on the Closing Date), would
exceed the maximum number of shares of JAKKS Stock which could
be issued without obtaining stockholder approval if and as
required pursuant to Nasdaq Stock Market Rule 4350(i)(C) or
(D) (the Nasdaq Rule), then the number of shares of
JAKKS Stock constituting the aggregate Stock Payment under this
Agreement shall equal the product of (a) the number of
shares of JAKKS Stock which, after giving effect to the
limitation imposed by the Nasdaq Rule, are to be included in the
aggregate Stock Payment under this Agreement and the Stock
Payment under the Merger Agreement, and (b) a fraction, the
numerator of which is the number of Shares and the denominator
App-B-4
of which is the total number of shares of Stock
outstanding immediately prior to the Closing. In such case,
JAKKS shall deliver to each Stockholder a pro rata portion of
the aggregate Stock Payment based on the number of Shares owned
by such Stockholder on the Closing Date, and shall pay to each
Stockholder an amount in cash equal to the product of
(A) the Value of JAKKS Stock on the Closing Date and
(B) the excess of the number of shares of JAKKS Stock
which, but for the provisions of this Section 2.4 would
have been included in the Stock Payment to such Stockholder over
the number of shares of JAKKS Stock to be included in the Stock
Payment to such Stockholder after giving effect to the
limitation imposed by this Section 2.4.
2.5 (a) Concurrent
with the execution of this Agreement, (i) JAKKS is
delivering to Feder, Kaszovitz, Isaacson, Weber, Skala,
Bass & Rhine LLP (FKIWSB&R) cash
in an amount equal to the aggregate Cash Payment that would be
payable to the Stockholders pursuant to Section 2.2(a),
calculated based on the number of Shares owned by each
Stockholder on the date of this Agreement, to be held in escrow
by FKIWSB&R pending the Closing or earlier termination of
this Agreement; and (ii) the Stockholders are delivering to
Brown Raysman Millstein Felder & Steiner LLP
(BRMF&S and, together with FKIWSB&R, the
Escrow Agents) stock certificates representing the
Shares owned by the Stockholders as of the date hereof, to be
held in escrow by BRMF&S pending the Closing or the earlier
termination of this Agreement.
(b) JAKKS and the Stockholders hereby
appoint the Escrow Agents to serve as escrow agents hereunder in
accordance with the terms hereof, and the Escrow Agents hereby
accept such appointment. Each of the Escrow Agents agrees to
hold and disburse the funds or stock certificates deposited with
it hereunder and to not disburse or deliver any of such funds or
stock certificates except at the Closing (in accordance with
Section 7.4) or otherwise upon three days prior
Notice: (i) signed by JAKKS and delivered to FKIWSB&R
and all of the Stockholders, the case of FKIWSB&R, or
(ii) signed by all of the Stockholders and delivered to
BRMF&S and JAKKS, in the case of BRMF&S.
(c) The Escrow Agents shall have no
obligations hereunder except as expressly set forth herein.
Neither Escrow Agent shall incur any liability with respect to
(a) any action taken or omitted in good faith upon the
advice of its counsel given with respect to any questions
relating to the duties and responsibilities of the Escrow Agents
under this Agreement, or (b) any action taken or omitted in
reliance upon any instrument which such Escrow Agent shall in
good faith believe to be genuine (including the execution of
such instrument, the identity or authority of any Person
executing such instrument, its validity and effectiveness, and
the truth and accuracy of any information contained therein), to
have been signed by a proper Person or Persons and to conform to
the provisions of this Agreement. In addition, neither Escrow
Agent shall be liable to any Person by reason of any loss of any
portion of the funds or the stock certificates deposited with it
hereunder other than any such loss that results from such Escrow
Agents gross negligence of willful misconduct, and neither
Escrow Agent shall be bound in any way by any contract or
agreement between or among the other parties hereto, regardless
of whether such Escrow Agent has knowledge of such contract or
agreement or of its terms or condition.
(d) If this Agreement is terminated,
(i) JAKKS shall be entitled to the release of all funds
then held by FKIWSB&R hereunder upon three days prior
Notice signed by JAKKS and delivered to FKIWSB&R and all of
the Stockholders; and (ii) the Stockholders shall be
entitled to the release of all stock certificates then held by
BRMF&S hereunder upon three days prior Notice signed
by the Stockholders and delivered to BRMF&S and JAKKS.
(e) Each Escrow Agents respective
obligations hereunder shall terminate upon the earliest to occur
of (a) disbursement or release, in accordance with the
terms hereof, of all of the funds or stock certificates
deposited with it hereunder, (b) written consent signed by
JAKKS and all of the Stockholders, and (c) delivery of all
funds or stock certificates then held by its hereunder into a
court of competent jurisdiction upon commencement of an
interpleader action or other Proceeding with respect to such
funds or stock certificates.
App-B-5
2.6 At the Closing:
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(a) each Option (as defined in the Merger
Agreement) held by David Chu or any Stockholder on the Closing
Date shall immediately terminate in accordance with the
applicable Amendment or Employment Termination Agreement, as the
case may be; and
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(b) each Option outstanding on the Closing
Date, other than any Option then held by David Chu or any
Stockholder, shall be deemed amended by this provision, without
any other act or deed by Toymax or the holder of such Option, to
provide that such Option shall remain in full force and effect
(subject to the provisions hereof), and that on the earliest of
the date of termination of this Agreement (if the Merger is
abandoned after the Closing Date), the Effective Date or
September 30, 2002 (such earliest date, the
Acceleration Date), such Option shall be fully
exercisable with respect to all shares of Stock covered thereby,
notwithstanding that pursuant to the provisions thereof
(including any provision of any Option Plan (as defined in the
Merger Agreement) incorporated by reference therein or otherwise
applicable thereto) such Option, but for this provision, would
terminate prior to, or would not be vested or exercisable with
respect to any shares covered thereby on, the Acceleration Date;
and such Option shall remain exercisable during the six-month
period following the Acceleration Date (the New Exercise
Period), notwithstanding that, but for this provision,
such Option would, pursuant to the provisions thereof (including
any provision of any Option Plan incorporated by reference
therein or otherwise applicable thereto) terminate or cease to
be exercisable with respect to any shares covered thereby prior
to the expiration of the New Exercise Period. Upon the
expiration of the New Exercise Period, each such Option shall
terminate.
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3.
Representations
and Warranties of the Stockholders.
The Stockholders, jointly and severally, hereby
represent and warrant to JAKKS as follows:
3.1 Toymax is a
corporation duly organized, validly existing and in good
standing under the Laws of the State of Delaware and has full
corporate power and authority to own the Assets and carry on the
Business as and in the places where such Assets are now located
or such Business is now being conducted. Complete and correct
copies of Toymaxs Certificate of Incorporation, including
all amendments thereto as of the date hereof, and Toymaxs
Bylaws, including all amendments thereto as of the date hereof,
have been delivered or made available to JAKKS. Toymax and each
of the Subsidiaries is duly authorized or qualified to transact
business as a foreign corporation in each jurisdiction where
such authorization or qualification is required under applicable
Law in light of the location or character of the Assets or the
operation of the Business (except where the failure to be so
authorized or qualified would not reasonably be expected to have
a Material Adverse Effect), and each such jurisdiction is listed
on Schedule 3.1. Toymaxs authorized capital stock
consists of 5,000,000 shares of Preferred Stock, par value $.01
per share, none of which is outstanding, and 50,000,000 shares
of Stock, of which 12,214,678 shares are outstanding. Except as
set forth on Schedule I, each Stockholder owns beneficially
and of record all of the Shares set forth opposite such
Stockholders name on Schedule I, free and clear of
all Liens or any restriction with respect to the voting or
disposition thereof (other than Permitted Liens). All of the
Shares are duly authorized, validly issued, fully paid and
non-assessable. Except as set forth on Schedule 3.1, no
shares of capital stock of Toymax are held as treasury stock or
reserved for issuance, and there are no agreements, commitments
or arrangements providing for the issuance or sale of any
thereof, or any issued or outstanding options, warrants or other
rights to purchase, or securities or instruments convertible
into or exchangeable for, any capital stock of Toymax.
3.2 Toymax has full
corporate power and authority, and each Stockholder has the
legal capacity, power and authority, to execute and deliver this
Agreement and each other Acquisition Agreement to which it is a
party and to perform its respective obligations hereunder and
thereunder. The execution and delivery by Toymax of this
Agreement and each other Acquisition Agreement to which it is a
party and the performance of its obligations hereunder and
thereunder have been duly authorized by all requisite corporate
action on its part. This Agreement has been, and each other
Acquisition Agreement to which it is a party will be, duly
executed and delivered by Toymax and each of the Stockholders
that is a party thereto, and this Agreement is, and each other
Acquisition Agreement to which it is a party, when so executed
and delivered, will be, a legally
App-B-6
valid and binding obligation of Toymax and each
of the Stockholders that is a party thereto, enforceable against
each of them in accordance with their respective terms, subject
to (a) bankruptcy, insolvency, reorganization, moratorium
or other similar Laws now or hereafter in effect relating to
creditors rights generally and (b) equitable
principles limiting the availability of specific performance,
injunctive relief and other equitable remedies. Subject to
obtaining the Toymax Consents (as defined in Section 3.3)
and compliance with Section 14(f) of the Securities
Exchange Act of 1934, as amended (the Exchange Act)
and Rule 14f-1 promulgated thereunder, to the
Stockholders knowledge, the execution and delivery of this
Agreement by Toymax and the Stockholders do not, and the
execution and delivery of each other Acquisition Agreement by
Toymax and the Stockholders and the performance by Toymax and
the Stockholders of their respective obligations hereunder and
thereunder will not, violate any provision of Toymaxs
Certificate of Incorporation or Bylaws and do not and will not
conflict with or result in any breach of any condition or
provision of, or constitute a default under, or create or give
rise to any adverse right of termination or cancellation by, or
excuse the performance of, any other Person under, any Contract,
or result in the creation or imposition of any Lien upon any of
the Assets by reason of the terms of, any Contract, Lien or
Order relating to the Business to which Toymax, or any
Stockholder is a party or is subject or which is binding upon
any of them or the Assets.
3.3 Except for the
filing by Toymax of an HSR Form and the expiration or early
termination of the applicable waiting period under the HSR Act
and compliance with Section 14(f) of the Exchange Act and
Rule 14f-1 promulgated thereunder, and except as set forth
on Schedule 3.3, to the Stockholders knowledge, no
Consent of, or Notice to, any Person is required to be obtained
or made by Toymax or any Stockholder in connection with its
execution and delivery of this Agreement or any other
Acquisition Agreement to which it is a party, or the performance
of its obligations hereunder or thereunder (such Consents and
Notices set forth on Schedule 3.3 are referred to herein as
Toymax Consents).
3.4 Except as set
forth on Schedule 3.4, to the Stockholders knowledge,
no Proceeding in which Toymax, a Subsidiary or any of the
Stockholders is a named party is pending, threatened against or
affecting the Business, the Assets or the operations of Toymax
or any Subsidiary in which an unfavorable Order would reasonably
be expected to have a Material Adverse Effect, or would
prohibit, invalidate, or make unlawful, in whole or in part, the
Acquisition, this Agreement or any other Acquisition Agreement,
or the carrying out of the provisions hereof or thereof. To the
Stockholders knowledge, neither Toymax nor any Subsidiary
is in default in respect of any Order, nor is there any Order
enjoining Toymax, any Subsidiary or any Stockholder in respect
of, or the effect of which is to prohibit or restrict
Toymaxs, any Subsidiarys or any Stockholders
performance of, its obligations hereunder or under any
Acquisition Agreement to which it is a party.
3.5 The Stockholders
have delivered to JAKKS Toymaxs consolidated balance sheet
at December 31, 2001 (the Balance Sheet) and
the related consolidated statements or operations and cash flows
for Toymaxs fiscal period then ended (collectively, the
Financial Statements), all of which Financial
Statements have been prepared in accordance with GAAP, and
present fairly in all material respects the consolidated
financial position of Toymax and the Subsidiaries at such date
and the results of their operations for the period then ended,
subject in each case to normal recurring year-end adjustments
and to the absence of notes. To the Stockholders
knowledge, Toymax and the Subsidiaries have no material
liabilities or obligations of any kind, contingent or otherwise,
relating to the Business or the Assets which are not reflected
on the Balance Sheet, except as set forth on Schedule 3.5.
3.6 Each of the
Stockholders is acquiring the shares of JAKKS Stock constituting
the Stock Payment for its own account, for investment and not
with a view to, or in connection with, or with any present
intention of, any resale or other disposition thereof.
3.7 Each Stockholder
(a) is an informed and sophisticated investor,
(b) possesses such knowledge and experience in financial
and business matters that it is capable of evaluating the merits
and risks of its investment under this Agreement, (c) has
engaged and consulted with expert legal, accounting and tax
advisors experienced in the evaluation of transactions such as
the Acquisition, and (d) has conducted a review and
examination of information provided to it regarding JAKKS, JAKKS
Stock, the Acquisition Agreements
App-B-7
and the transactions contemplated thereby,
including information which such Stockholder considers necessary
or advisable to enable it to make an informed decision
concerning its acquisition of JAKKS Stock.
3.8 Except as set
forth on Schedule 3.8, none of Toymax, any Subsidiary or
the Stockholders has employed or engaged any Person to act as a
broker, finder or other intermediary in connection with the
Acquisition, and no Person is entitled to any fee, commission or
other compensation relating to any such employment or engagement
by Toymax, a Subsidiary or a Stockholder. Any fee, commission or
other compensation payable to any Person is solely the
obligation of the Stockholders (and not Toymax or any
Subsidiary) and shall be promptly paid in full by the
Stockholders (and not Toymax or any Subsidiary).
3.9 No
representation or warranty by any Stockholder in this Agreement,
any other Acquisition Agreement or any certificate being
delivered at the Closing pursuant to Section 7.2(d)
contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements or facts
contained herein or therein not misleading.
4.
Representations
and Warranties of JAKKS.
JAKKS hereby represents and warrants to the
Stockholders as follows:
4.1 JAKKS is a
corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has full
corporate power and authority to own its assets and carry on its
business as and in the places where such assets are now owned or
such business is now being conducted. Complete and correct
copies of JAKKS Certificate of Incorporation, including
all amendments thereto as of the date hereof, and Bylaws,
including all amendments thereto as of the date hereof, have
been delivered or made available to the Stockholders.
JAKKS authorized capital stock consists of 1,000,000
shares of preferred stock, par value $.001 per share, none
of which is outstanding, and 25,000,000 shares of JAKKS Stock,
of which 18,826,574 shares are outstanding. Approximately
1,493,600 shares of capital stock of JAKKS are held as treasury
stock, and approximately 2,578,940 shares of capital stock of
JAKKS are reserved for issuance under agreements, commitments or
arrangements providing for the issuance or sale of any thereof,
including outstanding options and warrants to purchase JAKKS
Stock. When issued in accordance with the terms of this
Agreement, the shares of JAKKS Stock constituting the Stock
Payment will be duly authorized, validly issued, fully-paid and
non-assessable.
4.2 JAKKS has full
corporate power and authority to execute and deliver this
Agreement and each other Acquisition Agreement to which it is a
party and to perform its obligations hereunder and thereunder.
The execution and delivery by JAKKS of this Agreement and each
other Acquisition Agreement to which it is a party and the
performance of its obligations hereunder and thereunder have
been duly authorized by all requisite corporate action on its
part. This Agreement has been, and each other Acquisition
Agreement to which it is a party will be, duly executed and
delivered by JAKKS, and this Agreement is, and each other
Acquisition Agreement to which it is a party, when so executed
and delivered, will be, a legally valid and binding obligation
of JAKKS, enforceable against it in accordance with their
respective terms, subject to (a) bankruptcy, insolvency,
reorganization, moratorium or other similar Laws now or
hereafter in effect relating to creditors rights
generally, and (b) equitable principles limiting the
availability of specific performance, injunctive relief and
other equitable remedies. The execution and delivery of this
Agreement by JAKKS do not, and the execution and delivery of
each other Acquisition Agreement by JAKKS and, subject to
obtaining the Consent required under the Loan Agreement among
JAKKS, Bank of America, N.A. and the other banks party thereto,
dated October 12, 2001 (the JAKKS Loan
Agreement), the performance by JAKKS of its obligations
hereunder and thereunder will not, violate any provision of its
Certificate of Incorporation or Bylaws and do not and will not
conflict with or result in any breach of any condition or
provision of, or constitute a default under, or create or give
rise to any adverse right of termination or cancellation by, or
excuse the performance of, any other Person under, any material
agreement to which JAKKS is a party or is subject, or result in
the creation or imposition of any Lien upon it or any of its
assets or the acceleration of the maturity or date of payment or
other performance of any of its obligations or have a material
adverse effect on JAKKS business, assets, operations or
financial condition by reason of the terms of,
App-B-8
any material agreement, license, lease,
indenture, instrument, Lien or Order to which it is a party or
is subject or which relates to or is binding upon it or its
assets.
4.3 Except for the
filing of an HSR Form and the expiration or early termination of
the waiting period under the HSR Act, and except for the Consent
required under the JAKKS Loan Agreement, to JAKKS
knowledge, no Consent of, or Notice to, any Person is required
to be obtained or made by JAKKS in connection with its execution
and delivery of this Agreement or any other Acquisition
Agreement to which it is a party, or the performance of its
obligations hereunder or thereunder.
4.4 No Proceeding is
pending, or, to the best of JAKKS knowledge, threatened,
against or affecting its business, assets, operations or
financial or other condition in which an unfavorable Order would
reasonably be expected to have a material adverse effect on
JAKKS business or assets or to prohibit, invalidate, or
make unlawful, in whole or in part, the Acquisition, this
Agreement or any other Acquisition Agreement, or the carrying
out of the provisions hereof or thereof. JAKKS is not in default
in respect of any Order nor is there any Order enjoining it in
respect of, or the effect of which is to prohibit or curtail its
performance of, its obligations hereunder or thereunder.
4.5 JAKKS is
acquiring the Shares for its own account, for investment and not
with a view to, or in connection with, or with any present
intention of, any resale or other disposition thereof.
4.6
JAKKS (a) is an informed and
sophisticated investor, (b) possesses such knowledge and
experience in financial and business matters that it is capable
of evaluating the merits and risks of its investment under this
Agreement, (c) has engaged and consulted with expert legal,
accounting and tax advisors experienced in the evaluation of
transactions such as the Acquisition, and (d) has conducted
a review and examination of information provided to it regarding
the Stockholders, Toymax, the Business, the Assets, the Shares,
the Acquisition Agreements and the transactions contemplated
thereby, including information which JAKKS considers necessary
or advisable to enable it to make an informed decision
concerning its purchase of the Shares.
4.7 JAKKS has
delivered to the Stockholders a draft of JAKKS balance
sheet as of December 31, 2001, and the related statements
of operations and cash flows for JAKKS fiscal period then
ended (collectively, JAKKS Financial Statements),
all of which JAKKS Financial Statements have been prepared in
accordance with GAAP and present fairly in all material respects
the financial position of JAKKS at such date and the results of
its operations for the period then ended, subject to normal
recurring year-end adjustments and to other adjustments that are
not material in the aggregate. JAKKS has no material liabilities
or obligations of any kind, contingent or otherwise, that are
required by GAAP to be reflected on the balance sheet included
in the JAKKS Financial Statements that are not so reflected
thereon, except for any such liabilities and obligations that
have arisen in the ordinary course of business.
4.8 JAKKS has timely
filed all reports, forms, statements and documents required to
be filed by it under the Securities Act of 1933, as amended (the
Securities Act), the Securities and Exchange Act of
1934, as amended, and any applicable rules of the Nasdaq Stock
Market, Inc., all of which reports, forms, statements and other
documents were, when filed, in material compliance with
applicable Laws. When filed, none of such reports, forms,
statements and other documents contained any untrue statement of
a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading.
4.9 JAKKS has not
employed or engaged any Person to act as a broker, finder or
other intermediary in connection with the Acquisition, and no
Person is entitled to any fee, commission or other compensation
relating to any such employment or engagement by JAKKS. Any fee,
commission or other compensation payable to any Person claiming
to have been employed or engaged by JAKKS in such capacity is
solely the obligation of JAKKS and shall be promptly paid in
full by JAKKS.
4.10 No
representation or warranty by JAKKS in this Agreement or in any
other Acquisition Agreement or in the certificate being
delivered at the Closing pursuant to Section 7.3(b)
contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements or facts
contained herein or therein not misleading.
App-B-9
5.
Certain
Covenants.
5.1 From and after
the date hereof and until the Closing, the parties hereto shall
use their respective commercially reasonable efforts, and shall
cooperate with each other, to cause the consummation of the
Acquisition in accordance with the terms and conditions hereof,
including obtaining the Consent of any Governmental Authority
(and including the expiration or earlier termination of the
waiting period under the HSR Act), or of any other Person with
respect to any Contract or otherwise. Without limiting the
generality of the foregoing, promptly after the date of this
Agreement, each party shall prepare and give (or cause to be
prepared and given) any required Notices under any applicable
Laws or otherwise to the extent reasonably necessary to
consummate the Acquisition. In particular, Toymax and JAKKS
shall each use commercially reasonable efforts to file HSR Forms
under the HSR Act as soon as practicable after the date hereof
and shall file such additional documents and furnish such
additional information as the Federal Trade Commission or the
Antitrust Division of the Department of Justice may request;
provided that no provision hereof shall require JAKKS or Toymax
to divest any business or assets or to hold any business or
assets separate. Each party hereto shall cooperate and consult
with the other parties with regard to, and provide any necessary
information and reasonable assistance to each other party in
connection with, all Notices given and other information
supplied by such party to any Governmental Authority or other
Person in connection with obtaining any Consents or giving any
Notices in connection with this Agreement or the Acquisition.
The filing fees payable in respect of filing all HSR Forms
required hereunder shall be payable by JAKKS.
5.2 From and after
the date hereof and until the Closing, without the prior written
consent of JAKKS:
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(a) no Stockholder shall sell, assign,
transfer (including without limitation by gift) or otherwise
dispose of any Shares owned of record by such Stockholder, or
any interest therein or right thereto; or pledge, hypothecate or
otherwise create, incur or suffer to exist any Lien thereon
(other than any Permitted Lien); or agree or otherwise become
legally obligated to do any thereof; and, unless JAKKS otherwise
consents, no such transfer or disposition of Shares to any
Person shall be valid or effective as between such Stockholder
and such Person unless such Person executes and becomes a party
to this Agreement and each other Acquisition Agreement to which
the Stockholder (as such) transferring such Shares is a party
(and Schedule I hereto shall thereupon be amended
accordingly); and
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(b) no Stockholder shall acquire any Stock,
including without limitation by or through the exercise of any
option, warrant or other right to purchase, or the conversion of
exchange of any security or instrument convertible or
exchangeable for, any Stock.
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5.3 From and after
the date hereof and until the Closing, except as otherwise
provided on Schedule 5.3 or elsewhere herein or as
contemplated by the Monogram Transaction, or as JAKKS may
otherwise consent (which consent shall not be unreasonably
withheld), Toymax shall:
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(a) conduct the Business in its ordinary
course;
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(b) use commercially reasonable efforts to
preserve the Business and the Assets and maintain its
relationships with customers and other Persons with which it has
material business dealings;
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(c) not (i) sell, lease, transfer or
dispose of any material Asset, other than in the ordinary course
of business or the disposal of defective, obsolete or otherwise
unusable Assets, or (ii) terminate any Contract, except
upon expiration of the term thereof as provided therein and
except for any Contract that ceases to be necessary in
connection with the operation of the Business;
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(d) use commercially reasonable efforts to
maintain all material Permits and Consents, other than any such
Permits or Consents that cease to be necessary in connection
with the operation of the Business;
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(e) use its commercially reasonable efforts
to maintain in full force and effect (or to replace the same on
substantially equivalent terms) all currently applicable
insurance relating to the Business or Assets;
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App-B-10
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(f) except as required under a Contract,
Permit, Law or otherwise by any Governmental Authority, or in
the ordinary course of business consistent with Toymaxs
past practices, not increase the compensation or other
employment benefits payable to or for the benefit of any
employee of Toymax;
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(g) except as required under a Contract,
Permit, Law or otherwise by any Governmental Authority, or in
the ordinary course of business consistent with Toymaxs
past practices, not create, incur, assume or suffer any
liability or obligation to any Stockholder or any Affiliate
thereof;
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(h) not amend its Certificate of
Incorporation or Bylaws;
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(i) not merge or consolidate with any other
Person or effect any capital reorganization;
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(j) not acquire any business or material
assets of any other Person or make any capital expenditure in
excess of $500,000, other than in the ordinary course of
business;
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(k) not issue or reserve for issuance any
shares of its capital stock or issue or grant any options,
warrants or other rights to purchase, or securities or
instruments convertible into or exchangeable for, any capital
stock of Toymax, except upon the exercise of options, warrants
or rights to purchase or the conversion or exchange of
securities outstanding on the date hereof, or agree or otherwise
become legally obligated to issue or to grant any thereof;
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(l) not declare, set aside or pay any
dividends; and
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(m) not redeem, repurchase or otherwise
reacquire any Shares or retire or cancel any capital stock.
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5.4 From and after
the date hereof and until the Closing, Toymax shall furnish to
JAKKS such information with respect to the Business and Assets
as JAKKS may from time to time reasonably request and shall
permit JAKKS and its authorized representatives access, at a
mutually-agreeable time and during regular business hours and
upon reasonable prior Notice to Toymax, to conduct, at
JAKKS sole expense and in a manner that does not interfere
with Toymaxs operations, a physical inventory of the
Assets, to inspect the Real Property, to examine the books and
records of Toymax and to make inquiries of responsible Persons
designated by Toymax with respect thereto; provided that any
information so disclosed or otherwise made available or
accessible to JAKKS shall not constitute an additional
representation or warranty of Toymax or any Stockholder beyond
those expressly set forth in Article 3, and provided
further that all such information shall be subject to
Section 5.8.
5.5 From and after
the date hereof and until the Closing, except for press releases
describing the Acquisition to be made by JAKKS and Toymax,
respectively, promptly after the execution of this Agreement,
each substantially in the form of Exhibit G, no party
hereto shall make any press release or other public announcement
with respect to this Agreement or the Acquisition without the
prior written consent of the other parties (which consent shall
not be unreasonably withheld), unless such announcement is
required by Law, in which case the other party or parties hereto
shall be given Notice of such requirement prior to such
announcement and the parties shall consult with each other as to
the scope and substance of such disclosure.
5.6 From and after
the date hereof and until this agreement is terminated, none of
Toymax, any Stockholder, any Affiliate thereof, or any director,
officer, employee or other agent or representative of any of
them, shall, directly or indirectly, solicit, entertain or
consummate any transaction pursuant to any offer or proposal
for, affirmatively respond to any inquiry regarding, or enter
into any substantive negotiations or discussions with any Person
other than JAKKS with respect to, any transaction involving the
sale or other disposition (including without limitation by or
through the merger or consolidation of Toymax with any other
Person) any of the capital stock of Toymax or of the Business or
any of the Assets (other than in the ordinary course of business
and other than the Monogram Transaction). The Stockholders shall
promptly advise JAKKS of the receipt of any such inquiry, offer
or proposal and the material terms thereof.
5.7 JAKKS
acknowledges that certain information relating to or concerned
with the Business and affairs of Toymax, including without
limitation all non-publicly available Trade Rights, product
information, customer and supplier lists, marketing and sales
data, personnel and financing and Tax matters is proprietary to
Toymax, and that its confidentiality is absolutely essential to
the operation of the Business. Until the
App-B-11
Closing, all of such information shall be subject
to that certain Confidentiality and Non-Disclosure Agreement
dated as of January 10, 2002, between Toymax and JAKKS and
in favor of Toymax (the Toymax Confidentiality
Agreement), to which the parties hereby agree to be bound
and which is incorporated herein by this reference.
5.8 Toymax and the
Stockholders acknowledge that certain information relating to or
concerned with the business and affairs of JAKKS, including
without limitation all non-publicly available Trade Rights,
product information, customer and supplier lists, marketing and
sales data, personnel and financing and Tax matters is
proprietary to JAKKS, and that its confidentiality is absolutely
essential to the operation of JAKKS business. Until the
Closing, all of such information shall be subject to that
certain Confidentiality and Non-Disclosure Agreement dated as of
January 10, 2002, between JAKKS and Toymax and in favor of
JAKKS (the JAKKS Confidentiality Agreement), to
which the parties hereby agree to be bound and which is
incorporated herein by this reference.
5.9 As soon as
practicable following the date of this Agreement, JAKKS shall
prepare and file with the Securities and Exchange Commission
(SEC) a registration statement on Form S-3
covering the shares of JAKKS Stock constituting the Stock
Payment (the Registrable Stock) (or other form
suitable for the registration of such shares under the
Securities Act), which Form S-3 or other applicable form
(Registration Statement) will comply with the
applicable provisions of the Securities Act and the applicable
rules promulgated thereunder. JAKKS shall use commercially
reasonable efforts to file with the SEC such additional
documents and furnish the SEC such additional information as the
SEC may request or otherwise respond to the SECs comments,
if any, on the Registration Statement and any such other
documents or information. JAKKS shall make such changes in the
Registration Statement as are appropriate based on the
SECs comments, if any, and shall use commercially
reasonable efforts to cause the Registration Statement to become
effective under the Securities Act on the Effective Date. JAKKS
shall provide to the Stockholders a draft of the Registration
Statement, and shall advise them of any information to be
furnished to the SEC, at a reasonably sufficient time in advance
in order to allow the Stockholders to review the same and give
to JAKKS any comments or suggestions they may have thereon.
JAKKS shall also furnish to the Stockholders copies of any
correspondence to or from the SEC relating to the Registration
Statement and advise Toymax of the SECs comments, if any,
thereon, and shall confer with the Stockholders as to the
appropriate response thereto. The Stockholders shall cooperate
with JAKKS in connection with the preparation and filing of the
Registration Statement and in responding to any SEC comments
thereon, and shall provide to JAKKS, at JAKKS request, any
information required to be included in the Registration
Statement (including in any amendment or supplement thereto) in
accordance with the Securities Act and so that the Registration
Statement shall not at any time prior to or at the time it
becomes effective contain any misstatement of a material fact or
omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading. JAKKS shall also use commercially
reasonable efforts to register and qualify the Registrable
Stock, and to maintain such registration or qualification for so
long as the Registration Statement remains effective, under
applicable state legal requirements, including state blue-sky
laws, for offer and resale to the public. JAKKS shall pay the
filing fee(s), if any, applicable to the filing of the
Registration Statement with the SEC and obtaining any other
registrations or qualifications hereunder. At the Closing, JAKKS
and the Stockholders shall enter into the Registration Rights
Agreement in order to implement the provisions of this
Section 5.9.
5.10 The
Stockholders shall cause five members of Toymaxs board of
directors holding office immediately prior to the Closing to
resign, effective upon the later of the Closing or upon
compliance with the applicable requirements of
Section 14(f) of the Exchange Act. The Stockholders shall
cause the remaining directors to (i) cause the number of
directors constituting the entire board to be increased to
eight, and (ii) elect the then-existing members of
JAKKS board of directors (or their designees) to serve as
the remaining six members of Toymaxs board of directors.
As soon as practicable following the date of this Agreement,
Toymax shall prepare and shall file with the SEC, and shall
deliver to the holders of Stock who are entitled to receive the
same, an information statement, pursuant to Section 14(f)
of the Exchange Act and Rule 14f-1 promulgated thereunder.
App-B-12
5.11 In the event
that JAKKS does not obtain the consent required under the JAKKS
Loan Agreement prior to Closing, or that prior to Closing JAKKS
is in default under the JAKKS Loan Agreement or the JAKKS Loan
Agreement terminates, JAKKS shall use commercially reasonable
efforts to cure any such default, if possible, or, if the JAKKS
Loan Agreement is terminated, to obtain comparable alternative
financing prior to the Closing; provided that nothing in this
provision shall be construed as or imply any condition to
JAKKS obligation to consummate the transactions
contemplated hereby.
5.12 Prior to the
Closing, each of the Stockholders shall transfer to Toymax any
securities of MaxVerse Interactive, Inc. or any other Subsidiary
that are held by such Stockholder, without receiving any
consideration therefor other than the Purchase Price.
5.13 The
Stockholders shall use their respective commercially reasonable
efforts to cause each of Steven Lebensfeld and Harvey Goldberg
to enter into the applicable Employment Agreement and the
applicable Employment Termination Agreement.
5.14 The
Stockholders shall use commercially reasonable efforts to cause
Tai Nam and its Affiliates to, and Toymax shall and shall cause
its applicable Affiliates to, enter into the Amendments.
5.15 Toymax shall
deliver or cause to be delivered to JAKKS a Lien Report or
Reports, dated not earlier than ten business days prior to the
Closing Date, disclosing no material liens (of the type covered
by the Lien Report) on the Assets other than Permitted Liens and
other Liens disclosed in the Financial Statements, other than
such liens that are cured on or prior to the Closing Date.
6.
Conditions to
Closing.
6.1 The obligation
of JAKKS to consummate the Acquisition in accordance herewith
shall be subject to the satisfaction (or waiver) prior to the
Closing of each of the following conditions:
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(a) the representations and warranties made
by the Stockholders herein shall be true in all material
respects on and as of the Closing Date;
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(b) Toymax and the Stockholders shall have,
in all material respects, performed and complied with all
obligations and conditions to be performed or complied with by
them on or prior to the Closing Date hereunder;
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(c) no Order or Law shall be in effect which
prohibits consummation of the Acquisition or the Merger, other
than any such Order or Law that results from a Proceeding
initiated by JAKKS;
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(d) each Toymax Consent that is listed on
Schedule 6.1 shall have been obtained;
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(e) JAKKS and Toymax shall have filed their
respective HSR Forms in accordance with the HSR Act and the
waiting period thereunder shall have expired or been terminated;
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(f) there shall not have occurred, since the
date of this Agreement, any Material Adverse Effect, other than
as disclosed or contemplated hereunder;
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(g) Toymax shall have received the Fairness
Opinion, which shall not have been withdrawn, rescinded or
adversely updated or modified; and
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(h) Toymax, the Stockholders and the other
parties thereto (other than JAKKS) shall have executed and/or
delivered at the Closing all the documents so to be executed
and/or delivered by them and shall have taken all other actions
at the Closing so to be taken by them, pursuant to
Article 7.
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6.2 The obligation
of the Stockholders to consummate the Acquisition in accordance
herewith shall be subject to the satisfaction (or waiver) prior
to or at the Closing of each of the following conditions:
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(a) the representations and warranties made
by JAKKS herein shall be true in all material respects on and as
of the Closing Date;
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(b) JAKKS shall have, in all material
respects, performed and complied with all obligations and
conditions to be performed or complied with by it on or prior to
the Closing Date hereunder;
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App-B-13
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(c) no Order or Law shall be in effect which
prohibits the consummation of the Acquisition or the Merger,
other than any such Order or Law that results from a Proceeding
initiated by JAKKS;
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(d) JAKKS and Toymax shall have filed their
respective HSR Forms in accordance with the HSR Act and the
waiting period thereunder shall have expired or been terminated;
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(e) Toymax shall have received the Fairness
Opinion, which shall not have been withdrawn, rescinded or
adversely updated or modified;
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(f) each Toymax Consent of a Governmental
Authority that is listed on Schedule 6.1 shall have been
obtained;
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(g) the Merger Agreement shall be in full
force and effect; and
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(h) JAKKS and the other parties thereto
(other than Toymax and the Stockholders) shall have executed
and/or delivered at the Closing all the documents and monies so
to be executed and/or delivered by it, and JAKKS shall have
taken all other actions at the Closing so to be taken by it,
pursuant to Article 7.
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7.
Closing.
7.1 The Closing
shall be held at the offices of Feder, Kaszovitz, Isaacson,
Weber, Skala, Bass & Rhine LLP, 750 Lexington
Avenue, New York, New York 10022-1200 on the earliest
practicable date, and in any event within five days, after the
satisfaction (or waiver) of all conditions to the Closing
provided in Article 6 (other than any condition that, by
its terms, is to be satisfied at the Closing), or at such other
place or on such other date, and at such time, as the parties
hereto may agree. The execution and/or delivery of each document
to be executed and/or delivered at the Closing and each other
action to be taken at the Closing shall be subject to the
condition that every other document to be executed and/or
delivered at the Closing is so executed and/or delivered and
every other action to be taken at the Closing is so taken, and
all such documents and actions shall be deemed to be executed
and/or delivered or taken, as the case may be, simultaneously.
7.2 At the Closing,
the Stockholders shall deliver or cause to be delivered to JAKKS:
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(a) certificates representing the Shares,
each duly endorsed for transfer to JAKKS or together with a duly
executed stock power in favor of JAKKS, and with any required
stock transfer stamps affixed thereto;
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(b) copies of any Toymax Consents listed on
Schedule 6.1 that have been obtained and that have not
theretofore been delivered to JAKKS;
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(c) the resignations of five of
Toymaxs directors holding office immediately prior to the
Closing, which resignations shall be effective upon the later of
the Closing and compliance by Toymax with the applicable
provisions of Section 14(f) of the Exchange Act and
Rule 14f-1 promulgated thereunder; and
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(d) a certificate of Toymaxs Chief
Executive Officer or Chief Financial Officer to the effect that
all the conditions to Closing set forth in Sections 6.1(b)
(insofar as related to Toymax) and (f) have been satisfied;
and a certificate of each of the Stockholders to the effect that
all of the conditions to Closing set forth in
Sections 6.1(a), (b) (insofar as related to the
Stockholders) and (c) have been satisfied, and setting
forth any circumstances that exist as of the Closing Date, and
any events that have occurred between the date hereof and the
Closing Date, that result in any of the Stockholders
representations or warranties contained in Article 3 hereof
being untrue in any material respect; provided that the
execution and delivery of such certificate by a Stockholder, by
itself, shall not constitute a basis for any liability of a
Stockholder for breach of any representation or warranty
hereunder, other than as expressly set forth in this Agreement;
and
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(e) true and correct copies of the
resolutions adopted by the board of directors of Toymax
approving this Agreement and the Merger Agreement.
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App-B-14
7.3 At the Closing,
JAKKS shall:
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(a) pay and deliver, or cause to be paid and
delivered, the Purchase Price to the Stockholders, as set forth
in Sections 2.2 and 7.4 and in the manner instructed by the
Stockholders in a Notice given to JAKKS prior to the Closing
Date; and
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(b) deliver to Toymax and the Stockholders a
Certificate of JAKKS Chief Executive Officer to the effect
that all the conditions to Closing set forth in
Sections 6.2(a), (b) and (c) have been satisfied,
and setting forth any circumstances that exist as of the Closing
Date, and any events that have occurred between the date hereof
and the Closing Date, that result in any of JAKKS
representations or warranties contained in Article 4 hereof
being untrue in any material respect.
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7.4 At the Closing:
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(a) JAKKS and the Stockholders shall give
written notice to FKIWSB&R and BRMF&S, signed by JAKKS
and each of the Stockholders, (i) instructing BRMF&S to
release to JAKKS the stock certificates being held by it in
respect of the Shares being acquired by JAKKS pursuant to
Section 2.1, and (ii) instructing FKIWSB&R to
release to each Stockholder (in the manner set forth in a Notice
given by the Stockholders pursuant to Section 7.3(a)) such
amount of cash being held by it in respect of the Cash Payment
and, if sufficient funds are then available in the escrow
account, any Fractional Share Payment payable to such
Stockholder; and the Escrow Agents shall promptly comply with
such instructions.
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(b) If the amount of funds held in escrow by
FKIWSB&R pursuant to Section 2.5 is insufficient to pay
the Cash Payment or the Fractional Share Payment, if any, JAKKS
shall cause FKIWSB&R to pay to each Stockholder that portion
of the amount of funds held in escrow on the Closing Date in the
same proportion as the number of Shares owned by such
Stockholder on the Closing Date bears to the total number of
Shares on the Closing Date, and JAKKS shall pay cash in an
amount equal to the difference between the amount such
Stockholder is entitled to receive on account of the Cash
Payment and Fractional Share Payment, if any, and the amount
paid to such Stockholder by FKIWSB&R from the escrowed funds.
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(c) If, pursuant to Section 2.3, JAKKS
has elected to pay the entire Purchase Price in cash or for any
other reason, JAKKS is paying all or any portion of the Purchase
Price, in addition to the Cash Payment and the Fractional Share
Payment, if any, in cash or if JAKKS is required to make any
other payment at the Closing to the Stockholders, JAKKS shall
cause FKIWSB&R to pay to the Stockholders out of the
escrowed funds available therefor (after the payment of the Cash
Payment and the Fractional Share Payment, if any) such amounts
to which they may be entitled and, if the amount of escrowed
funds so available for such payment is insufficient to make such
payment, JAKKS shall pay to each Stockholder the balance of the
amount to which such Stockholder may be entitled.
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(d) Any escrowed funds remaining after all
payments are made to the Stockholders pursuant to the foregoing
provisions of this Section 7.4 shall be released from
escrow and paid over to JAKKS.
7.5 At the Closing,
JAKKS and the Stockholders shall each execute and deliver to the
others the Registration Rights Agreement.
7.6 [Intentionally
omitted.]
7.7 At the Closing
JAKKS and, each of Steven Lebensfeld and Harvey Goldberg shall
each execute and deliver to the other the applicable Employment
Agreement and Employment Termination Agreement.
7.8 At the Closing,
Toymax shall, and the Stockholders shall cause Tai Nam to,
execute and deliver the Amendments.
8.
Additional
Covenants.
8.1 No party hereto
shall, at any time after the date hereof, directly or indirectly
knowingly disparage or demean, or make, encourage, support or
concur in any statement (written or oral) which disparages or
App-B-15
demeans in any manner, whether for a commercial
purpose or otherwise, any other party hereto or any Affiliate
thereof, or any stockholder, director, officer, employee or
agent of any of them; provided that no provision of this
Section 8.1 shall be construed to prohibit or restrict any
statement by any Person made in furtherance or defense of any
claim or in the course of any Proceeding or the resolution of
any dispute pursuant to Section 8.4.
8.2 From and after
the Closing Date and until the Effective Date, JAKKS shall use
its commercially reasonable efforts to take, and to cause Toymax
to take, all such actions as are reasonably necessary to cause
the Merger to become effective and to consummate the Merger as
provided in the Merger Agreement.
8.3 Prior to the
Effective Date, none of the Stockholders shall sell, short-sell
or otherwise dispose of any of the shares of JAKKS Stock
constituting the Stock Payment; and, during the one-year period
following the Effective Date, no Stockholder shall sell,
short-sell or otherwise dispose of more than 25% of the shares
of JAKKS Stock constituting the Stock Payment received by it
hereunder during any quarterly period.
8.4 From and after
the Closing Date and until the Effective Date, the
newly-constituted board of directors of Toymax (as set forth in
Section 5.10) and the officers of Toymax (JAKKS
Management) shall, in accordance with this provision,
consult with the officers and directors of Toymax holding office
immediately prior to the Closing (Toymax Management)
with respect to any matter significantly affecting Toymax, the
Business or the Assets that arises, occurs, has an effect on
Toymax, the Business or the Assets or that is otherwise
addressed by Toymaxs board of directors during such period
(Material Business Matters). During the period
referred to above, JAKKS Management shall: (i) promptly
inform the appropriate members of the Toymax Management of any
Material Business Matter that comes to its attention,
(ii) shall provide to the Toymax Management all material
facts and information relating thereto and keep the Toymax
Management fully informed regarding the status of any such
Toymax Business Matters and (iii) consult and confer with,
and entertain the recommendations and suggestions made by the
Toymax Management, regarding any Material Business Matters and
shall keep the Toymax Management fully informed regarding the
status of any such Toymax Business Matters.
8.5 If JAKKS and the
Stockholders, or any of them, at any time, disagree with the
determination of any amount made or certified by another party
hereto, such party shall, within thirty (30) days of
delivery of such determination or certificate, give written
Notice (the Dispute Notice) to the other parties to
such effect, setting forth therein any change proposed by it
and, in reasonable detail, its objections to such determination
and the reasons for such dispute. In such event, unless the
parties involved promptly, and, in any event, within thirty
(30) days of the giving of the Dispute Notice, resolve all
such objections and agree upon the determination of the amount
in dispute, the determination thereof shall be promptly referred
to their respective regular independent certified public
accountants, who shall confer and attempt in good faith to
resolve the objections as to such determination set forth in or
arising as a consequence of the Dispute Notice. If, within
thirty (30) days of such referral, such accountants resolve
such dispute and determine the amount, they shall give Notices
to the parties involved to such effect, setting forth therein
the amount as so determined and the basis therefor, and such
determination shall be final and binding on the parties
involved. If such accountants do not make such determination
within such thirty (30) day period, the parties involved
shall refer such dispute to a mutually agreeable
nationally-recognized accounting firm that is
independent with respect to the parties hereto (the
Neutral Accountants). Unless the Neutral Accountants
expressly determine otherwise, each of the parties involved
shall submit to the Neutral Accountants (a) within ten
(10) days of the engagement thereof, and in such form and
manner as they may prescribe, a statement setting forth such
partys position with respect to each of the objections or
other issues set forth in or arising as a consequence of the
Dispute Notice, together with any exhibits or other supporting
documents relating thereto, and send a copy thereof to each
other party involved, and (b) within ten (10) days
thereafter, and in such form and manner as the Neutral
Accountants may prescribe, a rebuttal statement responding to
the initial statement of each other party, together with any
exhibits or other supporting documents relating thereto, and
send a copy thereof to each other party involved. The Neutral
Accountants shall conduct a hearing, if all the parties involved
so request in their respective statements, and may conduct a
hearing, whether or not any (but fewer than all) the parties
involved so request, if the Neutral Accountants reasonably deem
it necessary for the performance of their engagement; provided
that any such hearing shall be held only upon reasonable prior
App-B-16
written Notice to all parties involved and only
if all such parties have an opportunity to appear and present
evidence at such hearing. The Neutral Accountants may require
any party hereto (whether or not a party to the dispute) to
submit or produce additional statements, documents or
information, to appear and testify at any hearing or other
proceeding, or otherwise to produce tangible or oral evidence to
the extent such Neutral Accountants reasonably deem necessary or
appropriate for them to determine the amount in dispute. Based
on such submissions and the evidence presented at any hearing,
the Neutral Accountants shall resolve all obligations and other
issues set forth in or arising as a consequence of the Dispute
Notice and determine the amount in dispute, and give Notice to
the parties involved, setting forth therein such amount and the
basis of determination thereof, such determination to be final
and binding on the parties involved. Upon the determination of
the amount, any payment or adjustment based thereon shall be
promptly made in the manner provided herein. The fees and
expenses of a partys independent certified public
accountants incurred in the determination of such amount as
provided herein shall be separately borne by such party. The
fees and expenses of the Neutral Accountants incurred, if
required pursuant to this Section 8.4, shall be borne and
promptly paid equally by JAKKS, on the one hand, and the
Stockholders, on the other.
8.6 JAKKS agrees and
acknowledges that it has agreed to the arrangements set forth in
Exhibits H-1 and H-2, respectively, with respect to Carmine
Russo and Kenneth Price, and that it is anticipated that at the
Closing JAKKS and such persons will enter into appropriate
agreements reflecting such terms.
9.
Termination.
9.1 This Agreement
may be terminated at any time prior to the Closing:
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(a) by the mutual agreement of JAKKS and the
Stockholders;
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(b) by any party if the Merger Agreement is
terminated; provided that JAKKS shall not be entitled to
terminate this Agreement if the Merger Agreement is terminated
or abandoned by JAKKS in violation of the terms thereof, and the
Stockholders shall not be entitled to terminate this Agreement
if the Merger Agreement is terminated or abandoned by Toymax in
violation of the terms thereof.
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(c) by any party (if such party is not then
in breach or default of any of its representations, warranties,
covenants or other obligations under this Agreement) by giving
written Notice to such effect to the other parties if the
Closing shall not have occurred on or before March 31,
2002, or such later date as the parties shall have agreed upon
prior to the giving of such Notice;
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(d) by JAKKS (if JAKKS is not then in breach
or default of any of its representations, warranties, covenants
or other obligations under this Agreement), upon written Notice
to such effect to the Stockholders in the event of a material
breach by or default of any party hereto other than JAKKS, or by
any party hereto other than JAKKS (if such party is not then in
breach or default of any of its representations, warranties,
covenants or other obligations under this Agreement), upon
written notice to such effect to JAKKS in the event of a
material breach by or default of JAKKS, provided that written
Notice of such breach or default is theretofore given to the
breaching or defaulting party, and such breach or default is not
cured within thirty (30) days of such Notice; or
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(e) by any party if any Governmental
Authority issues an Order or takes any other action restraining,
enjoining or otherwise prohibiting, or seeking material damages
in respect of, any transaction contemplated by any Acquisition
Agreement, and such Order becomes final and non-appealable, or
any Law having the same effect becomes applicable to any party
hereto.
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9.2 Upon termination
of this Agreement pursuant to Section 9.1, all obligations
of the parties shall terminate except those under
Sections 5.7, 5.8, 8.1 and 9.3, Article 10 and the
applicable provisions of Article 11; provided that no such
termination shall relieve any party of any liability to another
party by reason of any breach of or default under this
Agreement, subject to all applicable limitations contained in
this Agreement.
9.3 (a) If the
Closing does not occur, or does not occur with respect to any
Stockholder, as a result of the Stockholders or such
Stockholders failure to transfer its Shares at the Closing
in violation of the terms of
App-B-17
this Agreement, or as a result of a breach by the
Stockholders or such Stockholder of any of the representations
and warranties contained in the last four sentences of
Section 3.1 or in Sections 3.2 through 3.4 (to the
extent that a breach of such representation or warranty would
result in an impairment of JAKKS ownership rights in the
Shares), the Stockholders (or any Stockholder with respect to
which the closing does not occur) shall pay to JAKKS a
termination fee (the Termination Fee) in the amount
of the sum of (i) $1,000,000 for each Stockholder with
respect to which the Closing does not occur, which shall be
payable by wire transfer of immediately available funds to an
account designated by JAKKS within five days after the
termination of this Agreement or, if the Closing occurs as to
any Stockholder, within five days after the Closing; and
(ii) if the non-transferring Stockholder(s) sell their
Shares to a third party within six months following the
termination of this Agreement (or the termination with respect
to such Stockholder, if applicable), the amount of 20% of the
difference between the total purchase price received for the
Shares in such third party sale and the product of $4.50 and the
number of Shares sold, which amount shall be payable by wire
transfer of immediately available funds to an account designated
by JAKKS within five days after the consummation of such sale.
(b) The Termination Fee shall constitute
liquidated damages to JAKKS in respect of all losses,
liabilities, damages and expenses suffered or incurred by JAKKS
by reason of the termination of this Agreement (or the
termination with respect to any Stockholder) pursuant to
Section 9.3(a), and, notwithstanding any other provision
hereof, shall be in lieu of any other remedy or relief otherwise
available to JAKKS by reason thereof. The parties hereto
acknowledge that it would be impracticable to ascertain the
amount of all losses, liabilities, damages and expenses that
would be suffered or incurred by JAKKS under the circumstances
described in Section 9.3(a) and that the amount of the
Termination Fee is a fair and reasonable estimate of such
losses, liabilities, damages and expenses and provides a
reasonable and certain amount to compensate JAKKS therefor.
10.
Indemnification.
10.1 Following the Closing, subject to
Sections 10.4, 10.5 and 11.1, the Stockholders, jointly and
severally, shall indemnify and defend JAKKS and, after the
Closing, Toymax and each stockholder, director, officer,
employee and agent of JAKKS and, after the Closing, Toymax
against, and hold each of them harmless from, any loss,
liability, obligation, damage or expense (including reasonable
attorneys fees and disbursements) which any of them may
suffer or incur incidental to any claim or any Proceeding
against any of them based upon or resulting from the failure of
any of the representations and warranties made by the
Stockholders in the last four sentences of Section 3.1 and
in Sections 3.2 through 3.4 (to the extent that a breach of
such representation or warranty would result in an impairment of
JAKKS ownership rights in the Shares), to be true in all
material respects on the date hereof and on the Closing Date.
10.2 JAKKS shall
indemnify and defend each Stockholder and, prior to the Closing,
Toymax and each director, officer, employee or agent thereof
against, and hold each of them harmless from, any loss,
liability, obligation, damage or expense (including reasonable
attorneys fees and disbursements) which any of them may
suffer or incur incidental to any claim or any Proceeding
against any of them based upon or resulting from:
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(a) the failure of any representation or
warranty made by JAKKS to be true in all material respects on
the date hereof and on the Closing Date; or
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(b) JAKKS failure, in all material
respects, to perform or to comply with any covenant or condition
required hereunder to be performed or complied with by JAKKS.
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10.3 JAKKS shall
indemnify each Stockholder and each other Person who was an
officer or director of Toymax on or after the date of this
Agreement against, and hold each of them harmless from, any
loss, liability, obligation, damage or expense (including
reasonable attorneys fees and disbursements) which any of
App-B-18
them may suffer or incur incidental to any claim
or any Proceeding against any of them based on or resulting from:
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(a) their approval, execution and delivery
of this Agreement and the Merger Agreement and consummation of
the Acquisition and the Merger in accordance with the terms
hereof and of the Merger Agreement and in accordance with
applicable law, but excluding any action constituting fraud or
willful misconduct; and
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(b) actions taken from and after the Closing
with respect to the management and operation of Toymax and the
Business by the board of directors of Toymax or by any officer
of Toymax at the request or direction of the board.
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It is expressly understood and agreed that any
Person who may be entitled to indemnification under this
Section 10.3 but who is not a party to this Agreement is
intended to be a third party beneficiary of the rights created
under this Section 10.3.
10.4 Promptly after
an indemnified party receives Notice of or otherwise becomes
aware of any claim or potential claim, or the commencement or
potential commencement of any Proceeding by a third party,
involving any loss, liability, obligation, damage or expense
referred to in Section 10.1, 10.2 or 10.3, such indemnified
party shall, if a claim for indemnification in respect thereof
is to be made against an indemnifying party, give written Notice
to the latter of the commencement or possibility of such claim
or Proceeding, setting forth in reasonable detail the nature
thereof and the basis upon which such party seeks or may seek
indemnification hereunder; provided that the failure of any
indemnified party to give such Notice shall not relieve the
indemnifying party of its obligations under such Section, except
to the extent that the indemnifying party is actually prejudiced
by the failure to give such Notice. In case any such Proceeding
is brought against an indemnified party, and provided that
proper Notice is duly given, the indemnifying party shall assume
and control the defense thereof insofar as such Proceeding
involves any loss, liability, obligation, damage or expense in
respect of which indemnification may be sought hereunder, with
counsel selected by the indemnifying party (and reasonably
satisfactory to such indemnified party), and, after Notice from
the indemnifying party to such indemnified party of its
assumption of the defense thereof, the indemnifying party shall
not be liable to such indemnified party for any legal or other
expenses subsequently incurred by the indemnified party in
connection with the defense thereof (but the indemnified party
shall have the right, but not the obligation, to participate at
its own cost and expense in such defense by counsel of its own
choice) or for any amounts paid or foregone by the indemnified
party as a result of the settlement or compromise thereof
(without the written consent of the indemnifying party), except
that, if both the indemnifying party and the indemnified party
are named as parties or subject to such Proceeding and either
such party reasonably determines with advice of counsel that a
material conflict of interest between such parties may exist in
respect of such Proceeding, the indemnifying party may decline
to assume the defense on behalf of the indemnified party or the
indemnified party may retain the defense on its own behalf, and,
in either such case, after Notice to such effect is duly given
hereunder to the other party, the indemnifying party shall be
relieved of its obligation to assume the defense on behalf of
the indemnified party, but shall be required to pay any legal or
other expenses, including without limitation reasonable
attorneys fees and disbursements incurred by the
indemnified party in such defense; provided, however, that the
indemnifying party shall not be liable for such expenses on
account of more than one separate firm of attorneys (and, if
necessary, local counsel) at any time representing such
indemnified party in connection with any Proceeding or separate
Proceedings in the same jurisdiction arising out of or based
upon substantially the same allegations or circumstances. If the
indemnifying party shall assume the defense of any such
Proceeding, the indemnified party shall cooperate with the
indemnifying party as reasonably requested by it and shall
appear and give testimony, produce documents and other tangible
evidence, allow the indemnifying party access to the books and
records of the indemnified party and otherwise assist the
indemnifying party in conducting such defense. No indemnifying
party shall, without the consent of the indemnified party, which
consent shall not be unreasonably withheld, consent to entry of
any judgment or enter into any settlement or compromise in
respect of any claim or Proceeding unless: (i) such
judgment, settlement or compromise includes as an unconditional
term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of
such claim or Proceeding, and (ii) such judgment,
settlement or compromise involves solely monetary damages
App-B-19
(and not injunctive or other equitable relief or
any admission of guilt or fault). Provided that proper Notice is
duly given, if the indemnifying party shall fail promptly and
diligently to assume the defense thereof, if and in the manner
required hereunder, the indemnified party may respond to,
contest and defend against such Proceeding (but the indemnifying
party shall have the right to participate at its own cost and
expense in such defense by counsel of its own choice) and may
make in good faith any compromise or settlement with respect
thereto, and recover the entire cost and expense thereof,
including, without limitation, reasonable attorneys fees
and disbursements and all amounts paid or foregone as a result
of such Proceeding, or the settlement or compromise thereof,
from the indemnifying party. Any indemnification required to be
made hereunder shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as
and when bills or invoices are received or loss, liability,
obligation, damage or expense is actually suffered or incurred.
10.5 Any other
provision hereof notwithstanding:
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(a) no indemnifying party shall be required
to indemnify any Person pursuant to Section 10.1 or 10.2(a)
(as the case may be) unless and until, and to the extent that,
the aggregate amount of all losses, liabilities, obligations,
damages and expenses as to which indemnification would be
required from all the Stockholders, collectively, under
Section 10.1, or JAKKS, under Section 10.2(a), as the
case may be, but for the provisions of this Section 10.5,
exceeds $350,000;
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(b) the aggregate amount required to be paid
by the Stockholders under Section 10.1 pursuant to this
Article 10 shall not exceed $15,000,000;
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(c) if the Closing shall occur, the
indemnification obligations provided herein shall terminate with
respect to any claim for indemnification arising under
Section 10.1 or Section 10.2(a) that is not made prior
to the first anniversary of the Closing Date; and
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(d) no indemnified party shall be entitled
to any indemnification under this Article 10 to the extent
that it actually receives or is entitled to receive any amount
in respect of any loss, liability, obligation, damage or expense
from other sources, including without limitation insurance or
third-party indemnity; provided that such indemnified party
shall not be required to commence any Proceeding to collect any
such amount.
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11.
Miscellaneous.
11.1
Survival of
Representations and Warranties.
No representation or
warranty of any party hereto shall survive the Closing or the
termination of this Agreement for any reason, except that the
representations and warranties of the Stockholders set forth in
the last four sentences of Section 3.1, and the
representations and warranties of JAKKS set forth in the last
three sentences of Section 4.1, shall survive the Closing
until, and no party shall be entitled to seek indemnification
with respect thereto pursuant to Section 10.1 or 10.2(a)
following, the first anniversary of the Closing Date.
11.2
Limitation
of Authority.
Except as expressly provided herein, no
provision hereof shall be deemed to create any partnership,
joint venture or joint enterprise or association among the
parties hereto, or to authorize or to empower any party hereto
to act on behalf of, obligate or bind any other party hereto.
11.3
Fees and
Expenses.
Each party hereto shall bear such fees, foregone
opportunities and expenses as may be incurred by it in
connection with this Agreement and the Acquisition.
11.4
Notices.
Any Notice or demand required or permitted to be given or made
hereunder to or upon any party hereto shall be deemed to have
been duly given or made for all purposes if (a) in writing
and sent by (i) messenger or reputable overnight courier
service against receipt, or (ii) certified or registered
mail, postage
App-B-20
paid, return receipt requested, or (b) sent
by facsimile, provided that the sender receives a printed
confirmation of receipt, to such party at the following address:
to JAKKS:
22619 Pacific Coast
Highway
Malibu, California
90265
Attn: President
Fax:
(310) 456-7099
with a copy to:
Feder, Kaszovitz,
Isaacson, Weber, Skala,
Bass & Rhine LLP
750 Lexington Avenue
New York, New York
10022
Attn: Murray L.
Skala, Esq.
Fax:
(212) 888-7776
to Toymax (prior to
the Closing) or any Stockholder at:
Steven A. Lebensfeld
c/o Toymax
International, Inc.
125 East Bethpage
Road
Plainview, New York
11803
Fax:
(516) 391-9151
with a copy to:
Brown Raysman
Millstein Felder & Steiner LLP
900 Third Avenue
New York, New York
10022
Attn: Joel M.
Handel, Esq.
Fax:
(212) 812-3310
to an Escrow Agent:
at its respective
address set forth herein
or such other address as any party hereto may at
any time, or from time to time, direct by Notice given to the
other parties in accordance with this Section. Except as
otherwise expressly provided herein, the date of giving or
making of any such Notice or demand shall be, in the case of
clause (a)(i) or (a)(ii), the date of the receipt, or in the
case of clause (b), the business day next following the date
such Notice or demand is sent.
11.5
Amendment.
Except as otherwise expressly provided herein, no amendment of
this Agreement shall be valid or effective, unless in writing
and signed by or on behalf of the parties hereto.
11.6
Waiver.
No course of dealing or omission or delay on the part of any
party hereto in asserting or exercising any right hereunder
shall constitute or operate as a waiver of any such right. No
waiver of any provision hereof shall be effective, unless in
writing and signed by or on behalf of the party to be charged
therewith. No waiver shall be deemed a continuing waiver or
waiver in respect of any other or subsequent breach or default,
unless expressly so stated in writing.
11.7
Governing
Law.
This Agreement shall be governed by, and interpreted
and enforced in accordance with, the laws of the State of New
York without regard to principles of choice of law or conflict
of laws.
11.8
Arbitration.
Any claim, dispute or controversy between or among any of the
parties hereto (other than a claim, dispute or controversy
subject to Section 8.4), shall be submitted to arbitration
in New York, New York in accordance with the then current
Commercial Arbitration Rules of the American Arbitration
Association. JAKKS, on the one hand, and the Stockholders and,
prior to the Closing, Toymax, on the other,
App-B-21
shall each pay one-half of any filing fees or
other administrative costs to be paid in advance of or during
such Proceeding. There shall be a single arbitrator. The
arbitrator shall render a reasoned decision with respect to such
Proceeding which shall include, in addition to the imposition of
monetary damages or any other remedy or relief available
hereunder, an allocation of the costs thereof. The decision of
the arbitrator shall be final and binding upon the parties to
such Proceeding, and judgment thereon may be entered in any
court of competent jurisdiction. No party hereto shall be liable
for punitive damages, unless such party is found to have
committed fraud or willful malfeasance against another party
hereto.
11.9
Remedies.
Notwithstanding the provisions of Section 11.8, in the
event of any actual or prospective breach or default by any
party hereto, any other party hereto shall be entitled to
equitable relief from any court of competent jurisdiction,
including remedies in the nature of rescission, injunction and
specific performance. Subject to the provisions of
Sections 8.4, 9.3 and 11.8 and Article 10, all
remedies hereunder are cumulative and not exclusive, and nothing
herein shall be deemed to prohibit or limit any party from
pursuing any other remedy or relief available at law or in
equity for such actual or prospective breach or default,
including the recovery of damages; provided, however, that the
indemnification provisions of Article 10 and, if
applicable, the Termination Fee set forth in
Section 9.3(a), shall be the sole and exclusive remedies,
as among the parties hereto, with respect to any claim for
monetary damages under this Agreement.
11.10
Severability.
The provisions hereof are severable and in the event that
any provision of this Agreement shall be determined to be
invalid or unenforceable in any respect by a court of competent
jurisdiction, the remaining provisions hereof shall not be
affected, but shall, subject to the discretion of such court,
remain in full force and effect, and any invalid or
unenforceable provision shall be deemed, without further action
on the part of the parties hereto, amended and limited to the
extent necessary to render the same valid and enforceable.
11.11
Counterparts.
This Agreement may be executed in counterparts, each of
which shall be deemed an original and which together shall
constitute one and the same agreement.
11.12
Further
Assurances.
Each party hereto agrees to cooperate fully with
the other parties in connection with preparing and filing any
Notices or documents in connection with the Acquisition. Each
party hereto shall promptly execute, deliver, file or record
such agreements, instruments, certificates and other documents
and perform such other and further acts as any other party
hereto may reasonably request or as may otherwise be reasonably
necessary or proper, to consummate and perfect the Acquisition.
11.13
Binding
Effect.
Subject to Section 11.14, this Agreement shall
be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns. This
Agreement is not intended, and shall not be deemed, to create or
confer any right or interest for the benefit of any Person not a
party hereto.
11.14
Assignment.
This Agreement, and each right, interest and obligation
hereunder, may not be assigned by any party hereto without the
prior written consent of the other parties hereto, and any
purported assignment without such consent shall be void and
without effect; provided that any Stockholder may assign its
right to receive all or any portion of the Purchase Price
without the consent of any other party hereto.
11.15
Titles and
Captions.
The titles and captions of the Articles and
Sections of this Agreement are for convenience of reference only
and do not in any way define or interpret the intent of the
parties or modify or otherwise affect any of the provisions
hereof.
11.16
Grammatical
Conventions.
Whenever the context so requires, each pronoun
or verb used herein shall be construed in the singular or the
plural sense and each capitalized term defined herein and each
pronoun used herein shall be construed in the masculine,
feminine or neuter sense.
11.17
Knowledge.
The qualification or limitation of any statement made herein
to a Stockholders knowledge or to a matter
known to a Stockholder refers to such
Stockholders actual knowledge (but not imputed or
constructive knowledge), after reasonable inquiry.
App-B-22
11.18
References.
The terms herein, hereto,
hereof, hereby and
hereunder, and other terms of similar import, refer
to this Agreement as a whole, and not to any Article, Section or
other part hereof.
11.19
No
Presumptions.
Each party hereto acknowledges that it has
participated, with the advice of counsel, in the preparation of
this Agreement. No party hereto is entitled to any presumption
with respect to the interpretation of any provision hereof or
the resolution of any alleged ambiguity herein based on any
claim that any other party hereto drafted or controlled the
drafting of this Agreement.
11.20
Exhibits
and Schedules.
The Exhibits and Schedules hereto are an
integral part of this Agreement and are incorporated in their
entirety herein by this reference.
11.21
Entire
Agreement.
This Agreement embodies the entire agreement of
the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements, commitments or arrangements
relating thereto, other than the Toymax Confidentiality
Agreement and the JAKKS Confidentiality Agreement, as set forth
in Sections 5.7 and 5.8.
App-B-23
IN WITNESS WHEREOF, JAKKS and Toymax, by their
respective duly authorized officers, and the other parties
hereto have duly executed this Agreement as of the date set
forth in the Preamble hereto.
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By:
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/s/ STEPHEN G. BERMAN
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Name: Stephen G. Berman
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Title: President
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TOYMAX INTERNATIONAL, INC.
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By:
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/s/ STEVEN A. LEBENSFELD
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Name: Steven A. Lebensfeld
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Title: CEO
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Stockholders:
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BEST PHASE LIMITED
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Name: Chu Ki Kwan
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Title: President
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HARGO BARBADOS LIMITED
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By:
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/s/ GREGORY A. HINKSON
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Name: Gregory A. Hinkson
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Title: Director
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[Signatures continued on following page.]
App-B-24
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By:
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CIBC BANK AND TRUST COMPANY
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(Cayman) Limited
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Secretary
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Name: Neal Griffith
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Title: Authorized Signatory
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Name: Sherene Blackett
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Title: Authorized Signatory
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/s/ STEVEN A. LEBENSFELD
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Steven A. Lebensfeld
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/s/ HARVEY GOLDBERG
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Harvey Goldberg
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Solely for purposes of Section 2.3:
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FEDER, KASZOVITZ, ISAACSON, WEBER, SKALA, BASS
& RHINE LLP
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Name: Geoffrey A. Bass
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Title: Partner
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BROWN RAYSMAN MILLSTEIN FELDER &
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STEINER LLP
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Name: Joel M. Handel
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Title: Partner
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[Continuation of Signature Page to Stock Purchase
Agreement.]
App-B-25
INDEX TO EXHIBITS AND SCHEDULES
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Exhibit A
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Form of Termination and Replacement of
Manufacturing Agreement
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Exhibit B
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Form of Termination of Agency Agreements
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Exhibits C-1, C-2
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Forms of Employment Agreements
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Exhibits D-1, D-2
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Forms of Employment Termination Agreements
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Exhibit E
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Form of Registration Rights Agreement
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Exhibit F
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Intentionally Omitted.
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Exhibit G
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Form of Press Release
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Exhibits H-1, H-2
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Term Sheets for Carmine Russo and Kenneth Price
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Schedule I
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Stockholders, Etc.
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Schedule 1.36
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Permitted Liens
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Schedule 3.1
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Foreign Qualifications; Options, Etc.
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Schedule 3.3
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Toymax Consents
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Schedule 3.4
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Proceedings; Orders
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Schedule 3.5
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Certain Liabilities of Toymax
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Schedule 3.8
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Brokers, Etc.
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Schedule 6.1
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Closing Condition Toymax Consents
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App-B-26
SCHEDULE I
TO
STOCK PURCHASE AGREEMENT
STOCKHOLDERS
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Stockholder
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Number of Shares
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Best Phase Limited
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5,730,335
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Harvey Goldberg
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137,333
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Hargo Barbados Limited
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1,116,833
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Steven A. Lebensfeld
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1,115,567
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TOTAL
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8,100,068
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App-B-27
APPENDIX C
APPRAISAL RIGHTS
SECTION 262 OF DELAWARE GENERAL CORPORATION
LAW APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a
demand pursuant to subsection (d) of this section with
respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or
consolidation nor consented thereto in writing pursuant to
Section 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of the
stockholders shares of stock under the circumstances
described in subsections (b) and (c) of this section.
As used in this section, the word stockholder means
a holder of record of stock in a stock corporation and also a
member of record of a nonstock corporation; the words
stock and share mean and include what is
ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and
the words depository receipt mean a receipt or other
instrument issued by a depository representing an interest in
one or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for
the shares of any class or series of stock of a constituent
corporation in a merger or consolidation to be effected pursuant
to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252,
Section 254, Section 257, Section 258,
Section 263 or Section 264 of this title:
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(1) Provided, however, that no appraisal
rights under this section shall be available for the shares of
any class or series of stock, which stock, or depositary
receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to
vote at the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national market
system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or
(ii) held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote
of the stockholders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
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(2) Notwithstanding paragraph (1) of
this subsection, appraisal rights under this section shall be
available for the shares of any class or series of stock of a
constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264
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of this title to accept for such stock anything
except:
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a. Shares of stock
of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof;
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b. Shares of stock
of any other corporation, or depository receipts in respect
thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of
the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by
more than 2,000 holders;
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c. Cash in lieu of
fractional shares or fractional depository receipts described in
the foregoing subparagraphs a. and b. of this paragraph; or
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d. Any combination
of the shares of stock, depository receipts and cash in lieu of
fractional shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this paragraph.
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App-C-1
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(3) In the event all of the stock of a
subsidiary Delaware corporation party to a merger effected under
Section 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware
corporation.
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(c) Any corporation may provide in its
certificate of incorporation that appraisal rights under this
section shall be available for the shares of any class or series
of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the
certificate of incorporation contains such a provision, the
procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply
as nearly as is practicable.
(d) Apprisal rights shall be perfected as
follows:
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(1) If a proposed merger or consolidation
for which appraisal rights are provided under this section is to
be submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c)
hereof that appraisal rights are available for any or all of the
shares of the constituent corporations, and shall include in
such notice a copy of this section. Each stockholder electing to
demand the appraisal of such stockholders shares shall
deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of such
stockholders shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand
the appraisal of such stockholders shares. A proxy or vote
against the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do so by
a separate written demand as herein provided. Within
10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has
complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
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(2) If the merger or consolidation was
approved pursuant to Section 228 or Section 253 of
this title, each constituent corporation, either before the
effective date of the merger or consolidation, or within ten
days thereafter, shall notify each of the holders of any class
or series of stock of such constituent corporation who are
entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this
section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall
be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent
corporation or that are entitled to appraisal rights. Such
notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of
the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of such notice, demand in writing from
the surviving or resulting corporation the appraisal of such
holders shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand
the appraisal of such holders shares. If such notice did
not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent
corporations shall send a second notice before the effective
date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second
notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder
who is entitled to appraisal rights and who has demanded
appraisal of such holders shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary
or of the transfer agent of the corporation that is required to
give either notice that such notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated,
therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix,
in advance, a record date that shall be not
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App-C-2
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more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or
after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is
fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next
preceding the day on which the notice is given.
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(e) Within 120 days after the effective
date of the merger or consolidation, the surviving or resulting
corporation or any stockholder who has complied with subsections
(a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within
60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw
such stockholders demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within
120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon
written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of
shares not voted in favor of the merger or consolidation and
with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written
statement shall be mailed to the stockholder within 10 days
after such stockholders written request for such a
statement is received by the surviving or resulting corporation
or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by
a stockholder, service of a copy thereof shall be made upon the
surviving or resulting corporation, which shall within
20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly
verified list containing the names and addresses of all
stockholders who have demanded payment for their shares and with
whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the
petition shall be filed by the surviving or resulting
corporation, the petition shall be accompanied by such a duly
verified list. The Register in Chancery, if so ordered by the
Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown
on the list at the addresses therein stated. Such notice shall
also be given by 1 or more publications at least 1 week
before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or
such publication as the Court deems advisable. The forms of the
notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing on such petition, the
Court shall determine the stockholders who have complied with
this section and who have become entitled to appraisal rights.
The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the
Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders
entitled to an appraisal, the Court shall appraise the shares,
determining their fair value exclusive of any element of value
arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In
determining such fair value, the Court shall take into account
all relevant factors. In determining the fair rate of interest,
the Court may consider all relevant factors, including the rate
of interest which the surviving or resulting corporation would
have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting
corporation or by any stockholder entitled to participate in the
appraisal proceeding, the Court may, in its discretion, permit
discovery or other pretrial proceedings and may proceed to trial
upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and
who has submitted such stockholders certificates of stock
to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal
rights under this section.
App-C-3
(i) The Court shall direct the payment of
the fair value of the shares, together with interest, if any, by
the surviving or resulting corporation to the stockholders
entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock
forthwith, and the case of holders of shares represented by
certificates upon the surrender to the corporation of the
certificates representing such stock. The Courts decree
may be enforced as other decrees in the Court of Chancery may be
enforced, whether such surviving or resulting corporation be a
corporation of this State or of any state.
(j) The costs of the proceeding may be
determined by the Court and taxed upon the parties as the Court
deems equitable in the circumstances. Upon application of a
stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the
appraisal proceeding, including without limitation, reasonable
attorneys fees and the fees and expenses of experts, to be
charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the
merger or consolidation, no stockholder who has demanded
appraisal rights as provided in subsection (d) of this
section shall be entitled to vote such stock for any purpose or
to received payment of dividends or other distributions on the
stock (except dividends or other distributions payable to
stockholders of record at a date which is prior to the effective
date of the merger or consolidation); provided, however, that if
no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholders
demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective
date of the merger or consolidation as provided in subsection
(e) of this section or thereafter with the written approval
of the corporation, then the right of such stockholder to an
appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting
corporation to which the shares of such objecting stockholders
would have been converted had they assented to the merger or
consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
App-C-4
APPENDIX D
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-K
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x
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31,
2002
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES ACT OF 1934
Commission File Number: 0-23215
Toymax International, Inc.
(Exact name of registrant as specified in its
charter)
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Delaware
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11-3391335
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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22619 Pacific Coast Highway
Malibu, California 90265
(Address, including zip code, of principal
executive offices)
(310) 456-7799
(Registrants telephone number, including
area code)
Securities registered pursuant to Section
12(b) of the Act:
None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, Par Value $.01 per
Share
(Title of class)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
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. (1) Yes
x
No
o
(2) Yes
x
No
o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.
x
The aggregate market value of the voting stock
held by non-affiliates of the registrant as of June 18,
2002 was $17,681,845. The calculation does not reflect a
determination that persons are affiliates for any other purposes.
Number of shares of common stock outstanding as
of June 18, 2002: 12,316,386.
DOCUMENTS INCORPORATED BY REFERENCE:
None
TOYMAX INTERNATIONAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
Filed with the Securities and Exchange
Commission
For the Fiscal Year Ended March 31,
2002
ITEMS IN FORM 10-K
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Page
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PART I
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Item 1.
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Business
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D-1
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Item 2.
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Properties
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D-9
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Item 3.
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Legal Proceedings
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D-9
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Item 4.
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Submission of Matters to a Vote of Security
Holders
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D-9
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PART II
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Item 5.
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Market for the Registrants Common Equity
and Related Stockholder Matters
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D-10
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Item 6.
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Selected Consolidated Financial Data
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D-11
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Item 7.
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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D-11
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Item 7A.
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Quantitative and Qualitative Disclosures About
Market Risk
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D-17
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Item 8.
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Financial Statements and Supplementary Data
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D-18
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Item 9.
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Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
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D-18
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PART III
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Item 10.
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Directors and Executive Officers of the Registrant
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D-18
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Item 11.
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Executive Compensation
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D-20
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Item 12.
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Security Ownership of Certain Beneficial Owners
and Management
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D-20
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Item 13.
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Certain Relationships and Related Transactions
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D-20
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PART IV
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Item 14.
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Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
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D-21
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Signatures
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D-24
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App-D-i
DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS
This report includes forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. For example, statements included in this
report regarding our financial position, business strategy and
other plans and objectives for future operations, and
assumptions and predictions about future product demand, supply,
manufacturing, costs, marketing and pricing factors are all
forward-looking statements. When we use words like
intend, anticipate, believe,
estimate, plan or expect, we
are making forward-looking statements. We believe that the
assumptions and expectations reflected in such forward-looking
statements are reasonable, based on information available to us
on the date hereof, but we cannot assure you that these
assumptions and expectations will prove to have been correct or
that we will take any action that we may presently be planning.
We have disclosed certain important factors that could cause our
actual results to differ materially from our current
expectations elsewhere in this report. You should understand
that forward-looking statements made in this report are
necessarily qualified by these factors. We are not undertaking
to publicly update or revise any forward-looking statement if we
obtain new information or upon the occurrence of future events
or otherwise.
PART I
In this report, Toymax, the
Company, we, us, and
our refer to Toymax International, Inc. and its
subsidiaries.
Item
1.
Business
Company Overview
Toymax is a consumer leisure products company
that creates, designs and markets innovative and technologically
advanced toys as well as other leisure products, which are sold
in the United States and throughout the world. Toymax products
promote fun and creative play, and are available under several
brands:
Toymax
® toys, such as
R.A.D.
TM
Robot, Mighty
Mos
TM
vehicles, the award-winning
Laser
Challenge
TM
brand,
Creepy
Crawlers
TM
activities brand and
TMX
RC
TM
radio control vehicles;
Funnoodle®
pool and water toys and accessories; and
Go Fly a Kite®
kites, banners,
WindWheels
TM
, weathervanes and wind chimes.
Management believes that the major strengths of Toymax include
its ability to develop and design new toys, such as
Singing
Starz
TM
Video Karaoke
; to identify and
satisfy niche opportunities with brands such as Mighty
Mos; to extend existing core brands such as Laser
Challenge; and to identify acquisitions, such as Go Fly A Kite,
Inc. (GFK), and Funnoodle Inc.
(Funnoodle), that further its plan to diversify into
other leisure product categories and selling seasons.
In 1998, we began to take a number of important
steps designed to better position us for future and balanced
growth through the diversification of our product line. In
December 1998, we acquired the business of
Go Fly A Kite,
Inc.
, a leading developer and marketer of kites, windsocks,
banners, mini flags and WindWheels
TM
. In November
1999, we completed the acquisition of the Funnoodle product
line. Funnoodle Inc. is a leader in the pool and backyard water
recreational products categories.
Effective November 30, 2001, we sold the net
assets of Monogram International, Inc., Monogram Products
(H.K.) Limited and our Candy Plant division to an entity
controlled by David Chu, the former Chairman of our board of
directors.
On March 11, 2002, pursuant to a stock
purchase agreement dated February 10, 2002, certain of our
principal stockholders sold 8,100,065 shares of our common stock
to JAKKS Pacific, Inc. (JAKKS), a designer,
developer, producer and marketer of toys and related products
for approximately $24.3 million in cash and
646,384 shares of JAKKS common stock. As a result of this
transaction and prior open market purchases of our common stock
by JAKKS, as of June 30, 2002, JAKKS owns 8,232,819 shares
of our common stock, representing approximately 66.8% of the
outstanding shares of our common stock.
In connection with the above described stock
purchase agreement, on February 10, 2002, we entered into
an agreement of merger with JAKKS, pursuant to which JAKKS
intends to purchase the remaining
App-D-1
outstanding shares of our common stock in a
merger transaction for consideration of approximately
$12.3 million and 551,282 shares of JAKKS common stock.
On May 21, 2002, We and JAKKS filed a joint
proxy statement/ prospectus with the Securities and Exchange
Commission on Form S-4 in connection with the proposed
merger with JAKKS. Upon the consummation of the merger, we will
become a wholly owned subsidiary of JAKKS and will become a
privately held corporation with no public market for our common
stock. In addition, once the merger with JAKKS is completed, we
will no longer be required to file periodic reports with the
Securities and Exchange Commission.
We have incurred losses for the past three fiscal
years. For the year ended March 31, 2002, we had net sales
of $94.9 million and a pre-tax loss from continuing
operations of $12.3 million, excluding restructuring
charges of $15.6 million, compared to a pre-tax loss from
continuing operations of $1.1 million in fiscal 2001. The
restructuring charges relate to the acquisition by JAKKS of
66.8% of our outstanding common stock, pursuant to which we were
reorganized. The restructuring charges include the write-off of
assets that will not be utilized by the combined companies, the
accrual of certain fees for the early terminations of certain
agreements, severance payments and a one time charge for the
changing of the terms of our stock options.
Our Internet address is www.toymax.com, which
provides information about us and our products. The site also
contains games, information about where to purchase our
products, a strictly monitored kids chat area and hotlinks
to affiliated web sites, such as those of licensors, industry
related parties and financial institutions. Our GFK affiliate
has a separate Internet address at www.goflyakite.com.
Industry and Competition
We compete in several industries, with toys
representing the largest portion. The majority of the toys sold
in the United States are manufactured, either in whole or in
part, overseas where labor rates are comparatively lower than in
the United States. The largest foreign manufacturing market is
the Peoples Republic of China (China),
followed by Japan and Taiwan. Such operations require greater
lead times than domestic manufacturing operations and also
result in greater shipping costs, particularly for larger toys.
The design, production and sale of toy products in the United
States and throughout most of the world are subject to various
regulations.
Toy manufacturers sell their products either
directly to retailers or to wholesalers who carry the product
lines of many manufacturers. There are thousands of retail
outlets in the United States which sell toys and games. These
outlets include: mass merchandisers, small independent toy
stores, gift and novelty shops, grocery and drug chains,
warehouse clubs, e-retailers and mail order catalogs. Despite
the broad number of toy outlets, retail toy sales have been
increasingly generated by a small number of large chains, such
as Toys R Us, Wal-Mart, Kay-Bee, Kmart and Target.
Despite this consolidation in recent years, both at the retail
and manufacturing level, many small and mid-sized companies
continue to compete in the design and development of new toys,
the procurement of licenses, the improvement and expansion of
previously introduced products and product lines and the
marketing and distribution of toy products. This has resulted in
an increased reliance among retailers on the large toy companies
because of their financial stability and ability to support
products through advertising and promotion and to distribute
products on a national basis. Such consolidation may have a
negative effect on small and mid-sized toy companies, such as
Toymax.
The toy industry is highly competitive.
Competition within the industry is based on consumer
preferences, order fulfillment, pricing and new product
development. In recent years, the toy industry has experienced
rapid consolidation. We compete with many toy companies that
have greater financial resources, greater name recognition,
larger sales, marketing and product development departments and
greater economies of scale. Due to the low barriers to entry
into the toy industry, we also compete with smaller domestic and
foreign toy manufacturers, importers and marketers.
We chose to expand into new leisure product
categories in order to decrease reliance on the highly
competitive toy industry. In this regard we acquired GFK and
Funnoodle.
App-D-2
GFK competes in the kite, flag/windsock and lawn
ornament markets in which it is estimated to have a large share.
There are numerous specialty kite manufacturers, which are
characterized by very small volume and higher pricing, and
several larger companies distributing banners and lawn
ornaments. Funnoodle competes primarily in the water and pool
toy market, in which it is a leader.
Seasonality and Backlog
Sales of toy products are seasonal, with the
majority of retail sales occurring in the third and fourth
calendar quarters. We have taken steps to reduce our dependence
on these highly seasonal products, including the acquisitions of
GFK and Funnoodle, which are largely sold in the first and
second calendar quarters. While we have taken these steps to
level sales over the entire year, sales are expected to remain
heavily influenced by the seasonality of our toy products.
The result of these seasonal patterns is that
operating results and demand for working capital vary
significantly by quarter and net losses may be expected in the
first and last quarters of the fiscal year for the foreseeable
future. Orders placed with us for shipment are cancelable until
the date of shipment. The combination of seasonal demand and the
potential for order cancellation makes accurate forecasting of
future sales difficult and causes us to believe that backlog may
not be an accurate indicator of our future sales. Similarly,
financial results for a particular quarter may not be indicative
of results for the entire year.
Products
Our existing product lines and calendar 2002
product introductions and extensions fall into six categories:
Action Toys, Spring/ Summer, Childrens Activity Toys,
Girls Toys, Vehicles and Electronics.
The
Laser Challenge
brand was introduced
in 1996, and continues to be the top-selling laser game. The
Laser Challenge
system uses an advanced infrared light
technology, which is effective at longer firing distances than
competing systems. We continue to redesign and extend the
Laser Challenge
brand, a strategy which supports our
expectation that
Laser Challenge
will be marketed over a
long period of time. In fiscal 2002, we introduced
Laser
Challenge Gotcha Extreme Mini Mayhem
TM
, a compact
sized version of the Extreme segment first introduced in 2000 as
Gotcha Extreme
TM
and extended in 2001 as
Radar Extreme
TM
. In fiscal 2002, we launched
Virtual Paintball
TM
, which combines the
technology and proven play pattern of
Laser Challenge
with the excitement of paintball, one of the fastest growing
alternative sports in the United States.
We entered the Spring/ Summer seasonal business
in fiscal 1999 with the acquisition of GFK, whose product line
includes youth and adult kites and a wide array of decorative
flags, windsocks, door banners, mini flags and the WindWheels
line of colorful lawn ornaments. In fiscal 2001, a series of
kites designed by Joel K. Scholz, a renowned designer, was added
to the GFK product line. In addition, the lawn ornament line was
expanded to include weathervanes and wind chimes. In fiscal
2000, we expanded our seasonal offerings in this category with
the acquisition of the Funnoodle product line. Funnoodle is a
highly recognized brand of pool and recreational products. The
product lines most visible item, the basic Funnoodle, is a
5-foot long, brightly colored, floating foam tube that has been
one of the best selling summer toys in the United States since
its introduction in 1994. The Funnoodle product line continues
to be expanded with the introduction of products such as pool
floats, swim rings, lawn sprinklers, and tumbling and exercise
mats.
We have historically been a significant factor in
Childrens Activity Toys and reestablished ourself in
fiscal 2001 with the successful re-introduction of the Creepy
Crawlers® brand. We extended the brand in fiscal 2002 to
include
Creeple People®
and
Graveyard
Ghoulies
TM
Creator Paks®
, which are
mold and play sets. In fiscal 2002, we re-introduced the
Dollymaker
TM
Fashion Maker
consisting
of a molding oven, molds and
App-D-3
Glamour-Goop
TM
compound whereby girls can design and make mini dolls and
fashions in an endless variety of designs and colors.
Our Girls Toys product line includes the
Beauty Works
TM
brand of role play activities
such as
Nail Salon
and
Fragrance
Designer
TM
; the
Jam Rope
TM
, a
musical jump rope; and the
Talking Tina
® brand of
fashion dolls and soft furniture which fits any
11 1/2 fashion doll.
We introduced the
Mighty
Mos
TM
brand of innovative vehicles late in
fiscal 1998. The first product utilized an infrared key
chain controller to activate these light, sound and motion
vehicles and is marketed in our patented try me
package. In fiscal 2000, the
Mighty Mos Infrared
Vehicles
category was extended to include specialty vehicles
with unique, stunt actions; this line expanded in fiscal 2002 to
include a rollover car and a wheelie quad. The
Mighty
Mos
brand also includes monster trucks and a line of
flywheel powered endurance vehicles. We currently have license
arrangements to produce
Mighty Mos
versions of
Chevrolet, Jeep, Dodge, Mercedes, BMW, Porsche, Audi,
Porsche, Humvee
and
Ford
styles.
Mighty Mos
Jr.
, the pre-school segment of our
vehicle business, is a line of products with moving eyes and
mouth, and speech and motion capabilities. This segment includes
Preston Pushbutton
TM
, a battery operated
programmable robot which walks, talks and has light-up eyes and
mouth;
Denny the Dump Truck
TM
and
Dougie
Chug-Along
TM
, which are infrared remote control
vehicles; and
Rick and Robbie Racers
TM
, which
are infrared remote vehicles which interact with each other as
they race.
We continue to successfully manage our key brands
in this category while expanding our popular T.V. games line of
palm sized controllers that plug directly into a television set
and includes 10 classic video games licensed from Activision.
The controller is completely portable and does not require a
console. Additionally in the current fiscal year, we have
introduced
Singing Starz
TM
Video
Karaoke
, the first home karaoke player with a built in video
camera that puts you on the television screen.
Product Design and Development
We have built a knowledgeable in-house product
development team and a network of independent designers to
create new products. Employees in the Marketing and Research and
Development departments coordinate efforts to design and develop
the majority of our toy and innovative new product lines.
Current technologies have been utilized to redesign, redevelop
and extend major brands and products from the past,
E.G. Creepy Crawlers
and
Popples
. GFK strives
to maintain a product line that displays cutting edge graphics
and reflects current cultural trends. Funnoodle has sought to
develop new products largely by applying extruded foam
manufacturing techniques and designs to traditionally successful
products. Our success is dependent on our ability to continue
these activities. Our sponsored research and development
expenses for fiscal 2000, 2001 and 2002 were $4.2 million,
$3.4 million and $3.7 million, respectively.
We continually evaluate new product ideas
generated by a number of outside designers to maintain access to
a wide range of development talent. When a product is developed
based on the idea presented by an independent designer, we
typically enter into a royalty agreement with the designer.
Licensing
Licensing is a major influence on the leisure
products industry affecting virtually all product categories.
Although historically we have not significantly relied on
entertainment-related licenses, we have marketed and continue to
market products based on licensed popular characters and
trademarks from major entertainment companies and other widely
known corporate trademarks. This allows us to benefit from
pre-existing awareness of a character or brand and from the
marketing efforts and prior goodwill attached to it. A principal
App-D-4
licensor is
Activision©
, as well as
many of the worlds leading auto makers for use of their
most popular model names on our
Mighty Mos
vehicle
line.
In return for the use of the licensed character
or brand name, we typically pay licensing fees based upon net
sales from products marketed under the subject license.
Furthermore, the acquisition of a license generally involves the
payment of non-refundable minimum royalty payments.
Sales and Distribution
We operate in two reporting segments:
(i) Toymax Brands (primarily consisting of sales activities
conducted through Toymax Inc. (TMI); and
(ii) Toymax (H.K.) Limited (THK) and Toymax
Enterprises (consisting of GFK and Funnoodle).
Sales conducted by TMI consist of sales of our
promotional product lines to primarily United
States customers pursuant to customer purchase orders.
Customers purchasing products on this basis include
Toys R Us, Kay-Bee Toys, Costco Wholesale,
Wal-Mart Stores, Inc., and Target Stores, Inc. Sales conducted
by THK consist of sales on a free on board (FOB)
Hong Kong basis which are generally based on letters of credit,
and include sales of primarily lower priced basic products to
the United States and international retailers including
Toys R Us International, Index (U.K.),
Wal-Mart (Canada) and sales of our promotional product lines to
approximately 50 international distributors.
Funnoodle and GFK sales are made primarily to
United States customers, on standard credit terms, pursuant to
customer purchase orders. Sales conducted by GFK are on a COD,
prepaid or credit card basis for those customers who do not
qualify for credit terms. Extended credit terms are periodically
offered to qualifying customers. To a lesser extent, the GFK
operations sell to customers internationally. These
international customers generally purchase products utilizing a
direct letter of credit and shipments are made directly from the
overseas factory on a FOB Hong Kong basis.
Our products are sold in over 45 countries around
the world. The following table depicts our net sales in these
two segments for the last three fiscal years:
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Toymax Brands
|
|
$
|
91,062
|
|
|
$
|
85,496
|
|
|
$
|
65,568
|
|
Toymax Enterprises
|
|
|
18,803
|
|
|
|
29,655
|
|
|
|
29,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
109,865
|
|
|
$
|
115,151
|
|
|
$
|
94,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toymax Brands Sales.
This segments United States sales activities are conducted
through its nationwide network of independent sales
representatives, an in-house sales staff and, with respect to
certain major accounts, by senior management. Comprised of more
than 50 sales executives and 14 sales organizations at
March 31, 2002, this sales network maintains close customer
relationships, develops new accounts and presents new products
to its established customers. Our leading United States
customers (not including THK sales to the United States) include
major toy retailers, mass merchandisers, department stores and
catalog companies. TMI sales constituted 55.3%, 41.0% and 37.5%
of consolidated net sales in fiscal 2000, 2001 and 2002,
respectively.
THK sales are comprised of sales to international
retailers and distributors and to certain United States
retailers. Such sales are conducted on a FOB Hong Kong basis and
generally require either the opening of a letter of credit or
are backed by credit insurance. Since our inception in 1990, we
have emphasized international sales, and today our products are
sold in over 50 countries worldwide. Our international
sales network consists of approximately 50 international
distributors and 11 international sales representative
organizations. In fiscal 2000, 2001 and 2002, Toymax HK sales
accounted for 27.5%, 26.3% and 31.6% of net sales, respectively.
App-D-5
Toymax Enterprises
Sales.
GFK sales are comprised
primarily of sales to kite stores, hobby stores, gift, specialty
and bookstores and toy stores. Products are also distributed by
mail order catalogs, such as L.L. Bean, sporting goods
stores, and other mass-market retailers. In addition to our
in-house sales and customer service staff, GFK employs a network
of 96 independent sales representatives. GFK products are
currently sold to over 20,000 customers.
Funnoodle products were sold through the in-house
sales staff of the prior owner under a servicing agreement and a
network of sales representative organizations primarily to the
largest mass-market chains in the United States The servicing
agreement terminated effective August 2001, and, thereafter,
such activities have been performed by our personnel.
Historically, domestic sales have accounted for substantially
all of Funnoodles sales.
Customers
Only Toys R Us and WalMart each
accounted for more than 10% of invoiced sales during fiscal 2002.
Marketing
We employ a variety of methods to market our new
and existing products. New toys, existing toys and line
extensions are marketed primarily by members of our executive
and sales management at our showrooms in Hong Kong, New York and
Dallas during major international toy shows. We are also
represented at additional toy and kite shows both domestically
and internationally.
Product packaging and placement is a large part
of our overall marketing strategy. Our products are sold in
brightly colored, eye-catching packages with strong brand
identity. All packaging must meet strict guidelines for
communication effectiveness and for the ability to stand out
from the competitive clutter. We utilize try me
packaging whenever possible. We also employ traditional
marketing methods such as couponing, in-store demonstrations
adjacent to our toy products, and public relations.
We currently allocate a significant portion of
our marketing resources to television advertising, which we
believe is the most cost-effective way to reach our primary
target audience of children. The commercials are run on national
television and in local spot television markets to support the
promotional efforts and distribution patterns of our key
retailers. We use other media, such as print and on-line
advertising, when appropriate.
Our GFK subsidiary primarily markets its products
through its annual catalogs. GFKs and Funnoodles
other marketing channels include trade shows, seasonal
brochures, advertisements in trade magazines, personal sales
calls, co-op advertising and telemarketing.
Purchasing and Manufacturing
TMI and THK currently contract for all of their
manufacturing requirements. We believe that this practice
provides us with the most efficient use of our capital at this
time. Tai Nam Industrial Company Limited (Tai Nam),
which is based in Hong Kong, served as our purchasing agent for
our core toy business pursuant to an agency agreement (the
Agency Agreement) which terminated March 11,
2002, between Tai Nam and Toymax NY. Tai Nam is owned by David
Chu, our former Chairman and principal stockholder. As our
purchasing agent, Tai Nam arranged for the manufacturing of our
products based on purchase orders placed with Tai Nam by us. In
addition, Tai Nam handled all shipping documents, letters of
credit, bills and payments, served as liaison with other vendors
and performed quality control functions. For these services, Tai
Nam generally received an agency fee of 7% of the gross invoiced
value of products purchased by us. Pursuant to the Agency
Agreement, we purchase products from Tai Nam at Yantian
(China) FOB prices. We paid all expenses associated with
the making of molds for new products. Pursuant to the Agency
Agreement, we owned the tooling and molds for our products.
Effective March 12, 2002, we perform these functions
directly.
As purchasing agent, Tai Nam arranged for the
manufacturing of our toy products based on purchase orders
placed with Tai Nam by us. The majority of such products have
been and are currently manufactured by Jauntiway Investments
Limited (Jauntiway). Jauntiway is an OEM toy
manufacturer with two ISO
App-D-6
certified manufacturing facilities in the
southern portion of China. Jauntiway is also owned by
Mr. Chu. Since our inception, Jauntiway has been our single
most important manufacturer and we have been Jauntiways
leading customer. In fiscal 2001 and 2002, approximately 60% and
56%, respectively, of all our products were manufactured by
Jauntiway (some utilizing subcontractors). We entered into a
manufacturing agreement with Tai Nam and Jauntiway dated
September 22, 1997. Effective March 11, 2002, this
agreement was terminated and replaced by a new three-year
agreement with standard manufacturing terms.
Manufacturing commitments are made on a purchase
order basis. We base our production schedules on customer
estimates and orders, historical trends, the results of market
research and current market information. We closely monitor
market activity and adjust production schedules accordingly. We
utilize Electronic Data Interchange programs maintained by
certain of our largest customers, which allows us to monitor
actual store sales and inventories, and thereby to schedule our
production to meet anticipated re-orders.
Jauntiway also obtains products or components
from other independent manufacturers located principally in the
southern portion of China, particularly during peak production
periods. These suppliers are selected based on the quality of
their products, prices and service.
The basic raw materials used by Jauntiway in
manufacturing our toy products are petrochemical resin
derivatives. Integrated circuits have also become an important
component of our technologically advanced toys. Costs of
petrochemical derivatives and integrated circuits are affected
by demand and supply as well as the value of the United
States dollar in relation to foreign currencies, and have
been subject to volatility in recent years. There can be no
assurance as to the timing or extent to which we will be able to
pass on any raw material or component price increases to our
customers.
In addition, a large portion of Jauntiways
petrochemical derivates and integrated circuits are imported
from Taiwan via Hong Kong. Any disruption of trade between
Taiwan and China may have a significant adverse effect on
Jauntiways operations and, therefore, could have a
significant adverse effect on our results of operations.
GFK utilizes four manufacturers, three in China
and one in Taiwan, to make approximately 85% of its products,
based upon its product specifications. Tai Nam acted as its
agent in Hong Kong for all products produced in China pursuant
to an agency agreement dated September 1, 2000. This
agreement was also terminated on March 11, 2002.
Manufacturing commitments are made on a purchase order basis.
GFK typically has an annual agreement with each supplier, which
is cancelable at any time. The suppliers are paid primarily on
terms, and occasionally in cash or on terms with a letter of
credit.
The bulk of Funnoodles products are
manufactured through an exclusive outsourcing arrangement with
two United States-based manufacturers. This arrangement allows
us to minimize capital investments in tools and fixtures,
reduces our working capital requirements and eliminates the need
for warehousing facilities. The remainder of Funnoodles
products are manufactured through outsourcing arrangements with
various other contract manufacturers. Although Tai Nam and
Funnoodle did not currently execute an agency agreement,
Funnoodle and Tai Nam do have an existing relationship, whereby
Tai Nam was acting as a purchasing agent for Funnoodle.
Effective March 11, 2002, this arrangement was terminated.
Government and Industry Regulation
We are subject to the provisions of the Federal
Hazardous Substances Act, the Federal Consumer Product Safety
Act, the Flammable Fabrics Act and the regulations promulgated
under each such act. Such acts empower the Consumer Product
Safety Commission (CPSC) to protect the public from
hazardous goods. The CPSC has the authority to exclude from the
market goods that are found to be hazardous and requires a
manufacturer to repurchase such goods under certain
circumstances. We send samples of all of our marketed products
to independent laboratories to test for compliance with the
CPSCs rules and regulations, as well as with the product
standards of the Toy Manufacturers of America, Inc.
(TMA). We are not required to comply with the
product standards of the TMA, but do so voluntarily. Similar
consumer protection laws exist in state and local jurisdictions
within the United States, as well as certain foreign countries.
We
App-D-7
design our products to exceed the highest safety
standards imposed or recommended either by government or
industry regulatory authorities.
We are not required by the United States
government to obtain any quality or safety approvals prior to
sales in the United States. However, prior to shipment, our
products are tested by independent laboratories on behalf of us
and major retailers. We, however, are required to have and have
obtained European Community (CE) approval, Europeans
toy safety standard, for our products sold in Europe.
Our advertising is subject to the Childrens
Television Act of 1990 and the rules promulgated by the United
States Federal Communications Commission as well as the laws of
certain countries that place certain limitations on television
commercials during childrens programming. We are subject
to various other federal, state and local laws and regulations
applicable to our business and believe that we are in
substantial compliance with these laws and regulations.
Tariffs and Duties
In December 1994, the United States approved a
trade agreement pursuant to which import duties on toys, games,
dolls and other specified items were eliminated effective
January 1, 1995 from products manufactured in all most
favored nation countries (including China). The imposition or
increases in quotas, duties, tariffs or other changes or trade
restrictions, which may be imposed in the future, would have a
material adverse effect on our financial condition, operating
results or ability to import products. In particular, our costs
would be increased if Chinas most favored nation status
was revoked. In October 2000, the United States Congress
approved permanent normal trade relations status for
China, which was intended to eliminate the United States
annual review of Chinas trade relations status.
China has signed similar agreements with the European Union and
other World Trade Organization members in order to gain support
for its entry into the World Trade Organization, although such
entry is not guaranteed at this time. However, the imposition of
trade sanctions by the United States or the European Union, or
the loss of permanent normal trade relations status by China
could result in substantial duties on the cost of toy, candy and
kite related products manufactured in China and imported into
the United States and Europe.
In addition, several of our operations and our
primary agent, Tai Nam, are based in Hong Kong, formerly a
British Crown Colony. On July 1, 1997, sovereignty of Hong
Kong reverted back to China. To date, this change has not
impacted our business.
Patents, Trademarks and Proprietary
Technology
We own or control numerous patents and
trademarks, which limit the ability of third parties to directly
compete with us in our major brands. Key patents cover the
Creepy Crawlers Workshop
and the
Creature Creator
ovens, as well as aspects of the
Laser Challenge
system
and infrared remote control vehicles. Key trademarks include
Creepy Crawlers
,
Plasti-Goop
,
Laser Challenge,
Arcadia
,
Mighty Mos
,
R.A.D.
TM
,
Funnoodle, WindWheels
and
WindDesigns
.
Certain of our product lines also incorporate
concepts or technologies created by outside designers, some of
which are patented. In addition, many of our products
incorporate intellectual property rights, such as characters or
brand names that are proprietary to third parties. We typically
enter into a license agreement to acquire the rights to the
concepts, technologies or other rights for use with our
products. These license agreements typically provide for the
retention of ownership of the technology, concepts or other
intellectual property by the licensor and the payment of a
royalty to the licensor. Such royalty payments generally are
based on the net sales of the licensed product for the duration
of the license and, depending on the revenues generated from the
sale of the licensed product, may be substantial. In addition,
such agreements often provide for an advance payment of
royalties and may require us to guarantee payment of a minimum
level of royalties that may exceed the actual royalties
generated from net sales of the licensed product. Some of these
agreements have fixed terms and may need to be renewed or
renegotiated prior to their expiration in order for us to
continue to sell the licensed product.
App-D-8
Inflation
We do not believe that the relatively moderate
rates of inflation in the United States in recent years have had
a significant effect on our operations. Although rates of
inflation in Asia have periodically resulted in an increase in
the cost of manufacturing our products and such increased costs
have had a modest impact on margins, we do not believe that
inflation in Asia has had a materially adverse effect on our
results of operations. We will continue our policy of monitoring
costs and adjusting prices accordingly.
Employees
As of June 28, 2002, we had
56 employees, substantially all of which were full time. We
are not subject to any collective bargaining agreements. We
believe that our relationship with our employees is satisfactory.
Item
2.
Properties
We lease approximately 27,000 square feet of
space in Plainview, New York for corporate offices. The lease
has an annual rental obligation, which ranges from $451,749 in
the third year to $493,638 in the sixth year, followed by a
decrease to $445,941 in the seventh year. This lease expires on
April 30, 2004.
In addition, we lease approximately 14,546 square
feet of space at the Toy Center, 200 Fifth Avenue, New
York, New York, to house our New York City Showroom facility.
This lease has an annual base rental obligation, which ranges
from $400,020 during the first three years to $443,664 in years
seven through ten. This lease expires on April 30, 2010.
We lease approximately 4,754 square feet of space
in Kowloon, Hong Kong, which we use as showroom facilities. The
annual rent under this lease is approximately $128,000. The
lease expires on October 31, 2003.
We lease approximately 25,000 square feet of
office and warehouse space in Clinton, Connecticut under a lease
expiring September 30, 2007. The total lease payments due
under this lease are approximately $963,000.
Item 3.
Legal
Proceedings
Legal Proceedings
In March 2001, George G. Grillo, a product
consultant, filed a complaint against us as well as against
Monogram International, Inc., Monogram Products
(H.K.) Ltd., Steven Lebensfeld and David Ki Kwan Chu, in
the Supreme Court of the State of New York, County of
Suffolk, alleging breach of express and implied contracts,
violation of New York State Labor Law, unjust enrichment
and unfair competition. The plaintiff seeks monetary damages
totaling $280,000 in compensatory damages, $2,500,000 in
exemplary damages plus costs and attorneys fees. We intend
to defend the action vigorously, as well as file counterclaims,
and do not believe that the lawsuit will have a material adverse
effect on our financial position or results of operations,
however, there can be no assurance of the outcome of the lawsuit.
We are involved in various other legal
proceedings and claims incident to the normal conduct of our
business. We believe that such legal proceedings and claims,
individually and in the aggregate, are not likely to have a
material adverse effect on our financial position or results of
operations.
Our federal tax returns for 1992 through 2000 are
under examination by the Internal Revenue Service and the
statute has been extended through December 2002. Our New York
State tax returns for 1999 through 2001 are also under
examination by the New York State Division of Taxation. We
cannot predict at this time what the outcome of the examination
will be or the impact, if any, on our results of operations.
Item
4.
Submission of Matters to a
Vote of Security Holders
No matters were submitted to a vote of security
holders during the fourth quarter of the fiscal year ended
March 31, 2002.
App-D-9
PART II
|
|
Item 5.
|
Market for the Registrants Common
Equity and Related Stockholder Matters
|
Our common stock is traded on the Nasdaq National
Market System under the symbol TMAX. The following
table sets forth the high and low closing sales prices of the
Companys Common Stock in each of the following quarters as
reported by NASDAQ:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Range of
|
|
|
Common Stock
|
|
|
|
|
|
High
|
|
Low
|
|
|
|
|
|
Fiscal 2001:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.25
|
|
|
$
|
2.31
|
|
Second Quarter
|
|
|
3.69
|
|
|
|
2.31
|
|
Third Quarter
|
|
|
2.63
|
|
|
|
1.19
|
|
Fourth Quarter
|
|
|
2.69
|
|
|
|
1.38
|
|
Fiscal 2002:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.50
|
|
|
$
|
1.27
|
|
Second Quarter
|
|
|
1.78
|
|
|
|
0.89
|
|
Third Quarter
|
|
|
1.70
|
|
|
|
0.80
|
|
Fourth Quarter
|
|
|
4.49
|
|
|
|
1.50
|
|
As of June 18, 2002 the number of holders of
record of our common stock was approximately 1,977.
Dividend Policy
Prior to our initial public offering, we declared
and paid dividends to our stockholders in 1993, 1994 and 1995.
We currently intend to retain earnings and we do not plan to pay
dividends on our common stock in the foreseeable future.
Stock Repurchase Program
In May 1999, our board of directors approved the
repurchase of up to $2.0 million of our common stock from
time to time on the open market, as well as through private
transactions. The timing of the stock repurchases and the total
number of shares repurchased will be determined by overall
financial and market conditions. As of June 18, 2002, a total of
66,200 shares of our common stock have been repurchased for a
total purchase price of $210,403. Because of our proposed merger
with JAKKS, as of February 10, 2002, we have ceased
repurchasing shares of our common stock.
App-D-10
Item
6.
Selected Consolidated
Financial Data
Our Selected Consolidated Financial Data Company
has been derived from our audited consolidated financial
statements included in this report. The Selected Consolidated
Financial Data should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes
and Schedules thereto, and Managements Discussion
and Analysis of Financial Condition and Results of
Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 31,
|
|
|
|
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
STATEMENT OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
99,367
|
|
|
$
|
106,495
|
|
|
$
|
109,865
|
|
|
$
|
115,151
|
|
|
$
|
94,852
|
|
Cost of goods sold
|
|
|
55,907
|
|
|
|
65,524
|
|
|
|
75,517
|
|
|
|
72,770
|
|
|
|
71,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
43,460
|
|
|
|
40,971
|
|
|
|
34,348
|
|
|
|
42,381
|
|
|
|
23,428
|
|
Selling and administrative expenses
|
|
|
27,268
|
|
|
|
29,740
|
|
|
|
38,220
|
|
|
|
37,719
|
|
|
|
49,760
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
16,192
|
|
|
|
11,231
|
|
|
|
(3,872
|
)
|
|
|
4,662
|
|
|
|
(26,332
|
)
|
Income (loss) of joint venture
|
|
|
|
|
|
|
|
|
|
|
290
|
|
|
|
(2,560
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
(507
|
)
|
|
|
(196
|
)
|
|
|
144
|
|
|
|
(102
|
)
|
|
|
(615
|
)
|
Interest income (expense), net
|
|
|
(212
|
)
|
|
|
985
|
|
|
|
(536
|
)
|
|
|
(885
|
)
|
|
|
(978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
15,473
|
|
|
|
12,020
|
|
|
|
(3,974
|
)
|
|
|
(1,115
|
)
|
|
|
(27,925
|
)
|
Income tax expense (benefit)
|
|
|
4,133
|
|
|
|
3,275
|
|
|
|
(2,207
|
)
|
|
|
(1,087
|
)
|
|
|
(7,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
11,340
|
|
|
|
8,745
|
|
|
|
(1,767
|
)
|
|
|
29
|
|
|
|
(20,427
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
(129
|
)
|
|
|
(134
|
)
|
|
|
(9,776
|
)
|
|
|
(3,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,340
|
|
|
$
|
8,616
|
|
|
$
|
(1,901
|
)
|
|
$
|
(9,747
|
)
|
|
$
|
(23,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
$
|
1.28
|
|
|
$
|
0.82
|
|
|
$
|
(0.17
|
)
|
|
$
|
|
|
|
$
|
(1.69
|
)
|
|
Discontinued Operations
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.86
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
1.28
|
|
|
$
|
0.81
|
|
|
|
(0.18
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(1.97
|
)
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted average common shares
outstanding
|
|
|
8,847,781
|
|
|
|
10,605,000
|
|
|
|
10,596,677
|
|
|
|
11,280,804
|
|
|
|
12,116,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
|
|
$
|
31,755
|
|
|
$
|
30,417
|
|
|
$
|
6,163
|
|
|
$
|
7,693
|
|
|
$
|
(14,153
|
)
|
Total assets
|
|
|
53,831
|
|
|
|
62,584
|
|
|
|
89,073
|
|
|
|
69,088
|
|
|
|
55,806
|
|
Short-term debt (including current portion of
long term debt)
|
|
|
30
|
|
|
|
37
|
|
|
|
14,666
|
|
|
|
10,000
|
|
|
|
15
|
|
Long-term obligations
|
|
|
47
|
|
|
|
32
|
|
|
|
50
|
|
|
|
1,212
|
|
|
|
|
|
Total stockholders equity
|
|
|
34,703
|
|
|
|
43,319
|
|
|
|
41,301
|
|
|
|
35,594
|
|
|
|
14,636
|
|
|
|
(1)
|
Included in selling and administrative expenses
for year ended March 31, 2002 is $15.6 million of
restructuring charges as described in footnote 2 in the
Toymax consolidated financial statements.
|
|
|
Item 7.
|
Managements Discussion and Analysis
of Financial Condition and Results of Operations
|
Toymax and its subsidiaries is a consumer leisure
products company that creates, designs and markets innovative
and technologically advanced toys as well as other leisure
products, which are sold in the United States and throughout the
world. Toymax products promote fun and creative play, and are
available under
App-D-11
several brands: Toymax® toys, such as
R.A.D.
TM
Robot, Mighty
Mos
TM
vehicles, the award-winning
Laser
Challenge
TM
brand,
Creepy
Crawlers
TM
activities brand and
TMX
RC
TM
radio control vehicles;
Funnoodle®
pool and water toys and accessories;
Go Fly a Kite
® kites, banners,
WindWheels
TM
, weathervanes and wind chimes.
Critical Accounting Policies
Financial Reporting Release No. 60, which
was recently released by the SEC, requires all companies to
include in this item a discussion of critical accounting
policies or methods used in the preparation of financial
statements. Note 1 of the Notes to the Consolidated
Financial Statements includes a summary of the significant
accounting policies and methods used by us in the preparation of
our Consolidated Financial Statements. The following is a brief
discussion of the more critical of these accounting policies and
methods.
Revenue recognition.
Our revenue recognition policy is significant because our
revenue is a key component of our results of operations. In
addition, our revenue recognition determines the timing of
certain expenses, such as commissions and royalties. We follow
very specific and detailed guidelines in measuring revenues;
however, certain judgments affect the application of our revenue
policy. Revenue results are difficult to predict, and any
shortfall in revenue or delay in recognizing revenue could cause
our operating results to vary significantly from quarter to
quarter and could result in future operating losses.
Valuation of long-lived assets and
goodwill.
We assess the impairment of
long-lived assets and goodwill whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger
an impairment review include the following:
|
|
|
|
|
significant underperformance relative to expected
historical or projected future operating results;
|
|
|
|
significant changes in the manner of our use of
the acquired assets or the strategy for our overall business;
|
|
|
|
significant negative industry or economic trends;
|
|
|
|
significant decline in our stock price for a
sustained period; and
|
|
|
|
our market capitalization relative to net book
value.
|
When we determine that the carrying value of
long-lived assets and goodwill may not be recoverable based upon
the existence of one or more of the above indicators of
impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by
our management to be commensurate with the risk inherent in our
current business model. Net long-lived assets and goodwill
amounted to $17.3 million as of March 31, 2002.
In fiscal 2002, Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets became effective and as a result,
we will cease to amortize approximately $14.5 million of
goodwill. We had recorded approximately $1.1 million of
amortization on these amounts during fiscal 2001 and would have
recorded approximately $1.5 million of amortization during
fiscal 2002. In lieu of amortization, we performed an initial
impairment review of our goodwill in fiscal 2002 and an annual
impairment reviews thereafter.
We did not have to record an impairment charge
upon completion of the initial impairment review.
App-D-12
Results of Operations
The following table sets forth the percentages of
net sales of certain income and expense items of Toymax for the
last three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
Net Sales
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
68.7
|
|
|
|
63.2
|
|
|
|
75.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
31.3
|
|
|
|
36.8
|
|
|
|
24.7
|
|
Selling and administrative expenses
|
|
|
34.8
|
|
|
|
32.8
|
|
|
|
52.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3.5
|
)
|
|
|
4.0
|
|
|
|
(27.8
|
)
|
Income (loss) of joint venture
|
|
|
0.3
|
|
|
|
(2.2
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
(0.6
|
)
|
Interest income (expense), net
|
|
|
(0.5
|
)
|
|
|
(0.8
|
)
|
|
|
(1.0
|
)
|
Provision (benefit)for income taxes
|
|
|
(2.0
|
)
|
|
|
(0.9
|
)
|
|
|
(7.9
|
)
|
Income (loss) from continuing operations
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
(21.5
|
)
|
Loss from discontinued operations
|
|
|
(0.1
|
)
|
|
|
(8.5
|
)
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1.7
|
)%
|
|
|
(8.5
|
)%
|
|
|
(25.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For purposes of the fiscal year comparisons
which follow, figures referring to the financial performance of
Toymax Inc. (TMI) and Toymax (H.K.) Limited
(THK), are referred to as Toymax Brands
and those referring to the performance of Go Fly a Kite, Inc.
(GFK), and the Funnoodle product line
(Funnoodle) are referred to as Toymax
Enterprises.
Recent Developments
On March 11, 2002, JAKKS acquired
approximately a 66.8% controlling interest in Toymax. In
connection with this acquisition by JAKKS, Toymax developed and
began to implement a restructuring plan to maximize its future
operating results. The fiscal 2002 results reflect this
restructuring plan. As part of this plan Toymax has determined
not to continue the operations of Maxverse Interactive, Inc,
(Maxverse). Thus, Maxverse is treated as a
discontinued operation along with Monogram International, Inc.
and Candy Plant, which were both sold effective
November 30, 2001.
Fiscal Year Ended March 31, 2002 Compared
With Fiscal Year Ended March 31, 2001
Net Sales.
Net sales
for fiscal 2002 decreased $20.3 million, or 17.6%, to
$94.9 million from $115.2 million in fiscal 2001.
Net sales of Toymax Brands decreased 23.3% to
$65.6 million, or 69.1% of total net sales, from
$85.5 million, or 74.2% of total net sales, in fiscal 2001.
The decrease in net sales was primarily due to a decrease in
sales of IR and programmable vehicles and an increase in sales
discounts and allowances.
Net sales of Toymax Enterprises decreased 1.3% to
$29.3 million, or 30.9% of total net sales, from
$29.7 million, or 25.8% of total net sales, in fiscal 2001.
The decrease in net sales was primarily the result of a decrease
in the selling prices of pool and backyard water recreational
products offset somewhat by an increase in kites and windwheels.
Gross Profit.
Gross
profit for fiscal 2002 decreased by $19.0 million, or
44.7%, to $23.4 million from $42.4 million for fiscal
2001, with a decrease in gross margin from 36.8% of net sales
for fiscal 2001 to 24.7% in fiscal 2002.
App-D-13
The gross profit for Toymax Brands decreased by
$16.9 million, or 53.3%, to $14.8 million, or 22.7% of
net sales, from $31.8 million, or 37.2% of net sales for
fiscal 2001. The decrease in the gross profit and margin was
primarily the result of the decrease in sales volume, along with
the increase in sales discounts and allowances.
The gross profit for Toymax Enterprises decreased
$2.0 million, or 19.0%, to $8.6 million, or 29.3% of
net sales, from $10.6 million, or 35.7% of net sales for
fiscal 2001. The decrease in both gross profit and margin was
primarily the result of reduced selling prices of Toymaxs
pool and backyard water recreation products and to a lesser
extent margins realized by GFK primarily as a result of product
mix.
Selling and Administrative
Expenses.
Selling and administrative
expenses for fiscal 2002 increased by $12.0 million, or
31.9%, to $49.8 million, or 52.5% of net sales, from
$37.7 million, or 32.8% of net sales, for fiscal 2001.
Selling and administrative expenses of Toymax Brands for fiscal
2002 increased by $13.5 million, or 44.1%, to
$44.1 million, or 67.2% of net sales, from
$30.6 million, or 35.8% of net sales, for fiscal 2001. This
increase was a result of the restructuring charge of
$15.6 million relating to the acquisition of approximately
66.8% of Toymax by JAKKS. This charge includes a
$7.1 million write-off of certain assets which will not be
utilized by the combined companies, as well as severance
accruals of $1.4 million, termination costs of certain
agreements of $2.2 million, professional fees and other
charges of $2.2 million and a one time charge of
$2.7 million for changing the terms of the existing stock
options. This charge was offset by decreases in advertising and
royalties related to the decrease in sales. Selling and
administrative expenses of Toymax Enterprises for fiscal 2002
decreased $1.5 million, or 20.0%, to $5.6 million, or
19.4% of net sales, from $7.1 million, or 23.9% of net
sales, for fiscal 2001. The decrease was primarily the result of
a decrease in amortization of goodwill and consulting fees
offset by the restructuring charge.
Operating Income
(Loss).
As a result of the foregoing,
fiscal 2002 had a loss of $26.3 million compared to income
of $4.6 million in fiscal 2001. Toymax Brands incurred an
operating loss of $29.2 million in fiscal 2002 compared to
operating income of $1.2 million in fiscal 2001. Toymax
Enterprises had operating income of $2.9 million in fiscal
2002, compared to operating income of $3.5 million in
fiscal 2001.
Other Income (Expense),
Net.
Net other expense decreased from
$2.8 million, in fiscal 2001, to $0.6 million, in
fiscal 2002. This decrease was the result of the write-off of
advances and the investment in the Yaboom Limited joint venture
of $1.9 million and the equity in the loss of the joint
venture of $0.7 million in fiscal 2001. In fiscal 2002,
there were no such charges.
Interest Income (Expense),
Net.
Net interest expense for fiscal
2002 increased $0.1 million, or 10.5%, to $1.0 million
from $0.9 million in fiscal 2001. The increase in net
interest expense was primarily due to increased bank borrowings
in fiscal 2002.
Income (Loss) Before Income
Taxes.
Loss before income taxes for
fiscal 2002 was $27.9 million, compared to income before
income taxes of $1.1 million in fiscal 2001. In fiscal
2002, Toymax Brands had a loss before income taxes of
$30.6 million, compared to a loss of $2.3 million in
fiscal 2001. Toymax Enterprises had income before taxes of
$2.7 million in fiscal 2002, compared to income before
income taxes of $3.4 million in fiscal 2001.
Provision (Benefit) For Income
Taxes.
The effective rate for fiscal
2002 decreased to a benefit of 26.9% from an effective rate of
97.4% for fiscal 2001. The change in the effective rate is
primarily related to the write-off of the investment in and
advances to the joint venture in fiscal 2001 which did not
result in any income tax benefit.
Income (Loss) From Continuing
Operations.
Loss from continuing
operations was $20.4 million in fiscal 2002, compared to a
nominal profit in fiscal 2001.
Loss From Discontinued
Operations.
The loss from discontinued
operations decreased by $6.3 million, to a net loss of
$3.4 million in fiscal 2002, compared to a loss of
$9.8 million in fiscal 2001.
Net Loss.
As a
result of the foregoing, the net loss for fiscal 2002 increased
$14.1 million to $23.9 million ($1.97 per diluted
share) from $9.7 million ($0.86 per diluted share) for
fiscal 2001.
App-D-14
Fiscal Year Ended March 31, 2001 Compared with
Fiscal Year Ended March 31, 2000
Net Sales.
Net sales
for fiscal 2001 increased $5.3 million, or 5.0%, to
$115.2 million from $109.9 million in fiscal 2000.
Net sales of Toymax Brands decreased 6.1% to
$85.5 million, or 74.2% of total net sales, from
$91.1 million, or 82.9% of total net sales, in fiscal 2000.
The decrease in net sales was primarily due to a decrease in the
sales of electronic toys that was partially offset by an
increase in sales of infrared, radio-controlled and programmable
vehicles.
Net sales of Toymax Enterprises increased 57.7%
to $29.7 million, or 25.8% of total net sales, from
$18.8 million, or 17.1% of total net sales, in fiscal 2000.
The increase was primarily the result of the incorporation of a
full years net sales of Funnoodle, which was acquired in
November 1999.
Gross Profit.
Gross
profit for fiscal 2001 increased by $8.0 million, or 23.4%,
to $42.4 million from $34.3 million the gross margin
also increased from 31.3% in fiscal 2000 to 36.8% in fiscal 2001.
The gross profit of Toymax Brands increased by
$4.1 million, or 14.6%, to $31.8 million, or 37.2% of
net sales, from $27.7 million, or 30.5% of net sales, for
fiscal 2000. The increase in gross margin was primarily
attributable to the decrease in markdowns, allowances and other
promotional costs, which were adversely affected by the product
recall in the prior year.
The gross profit of Toymax Enterprises increased
by $4.0 million, or 60.1%, to $10.6 million, or 35.7%
of net sales, from $6.6 million, or 35.2% of net sales, for
fiscal 2000. The increase in gross profit was primarily due to a
full years net sales of Funnoodle combined with better
pricing.
Selling and Administrative
Expenses.
Selling and administrative
expenses for fiscal 2001 decreased by $0.5 million, or
1.3%, to $37.7 million, or 32.8% of net sales, from
$38.2 million, or 34.8% of net sales, for fiscal 2000.
Selling and administrative expenses of Toymax Brands for fiscal
2001 decreased by $3.1 million, or 9.2%, to
$30.6 million, or 35.8% of net sales, from
$33.7 million, or 37.0% of net sales, for fiscal 2000. The
decrease reflects a decrease in advertising costs of almost 30%,
which was partially offset by higher royalties and research and
development costs. Selling and administrative expenses of Toymax
Enterprises were $7.1 million, or 23.9% of net sales, as
compared to $4.2 million, or 22.4% of net sales in
fiscal 2000. Selling and administrative expenses for Toymax
Enterprises in fiscal 2001 reflect a full years
operating expenses of Funnoodle.
Operating Income
(Loss).
As a result of the foregoing,
the operating income for fiscal 2001 increased by
$8.5 million, or 220.4%, to $4.7 million from an
operating loss of $3.9 million for fiscal 2000. Operating
income for Toymax Brands increased by $7.4 million, or
118.4%, to $1.2 million from an operating loss of
$6.3 million for fiscal 2000. Operating income for
Toymax Enterprises increased by $1.1 million to
$3.5 million from operating income of $2.5 million in
fiscal 2000.
Other Income (Expense),
Net.
In fiscal 2001, Toymax recorded a
write-off of its advances and investment in the Yaboom joint
venture of $1.9 million. Including this charge and the
increase in the Companys equity in the operating loss of
the Yaboom venture in fiscal 2001, net other income for
fiscal 2001 decreased by $3.2 million from
$0.4 million in fiscal 2000 to net other expense of
$2.8 million in fiscal 2001.
Interest Income (Expense),
Net.
Net interest expense for
fiscal 2001 increased by $0.4 million, or 65.1%, to
$0.9 million from $0.5 million in fiscal 2000.
The increase in net interest expense was primarily due to the
use of working capital funds to finance Toymaxs
acquisitions and operations.
Income (Loss) Before Income
Taxes.
Income before taxes for
fiscal 2001 increased by $5.1 million to
$1.1 million, compared to a loss before taxes of
$4.0 million for fiscal 2000. Income before taxes for
Toymax Brands increased by $4.0 million, or 63.8%, to a
loss before taxes of $2.3 million, compared to a loss
before taxes of $6.3 million for fiscal 2000. Income
before taxes for Toymax Enterprises increased by
$1.1 million to $3.4 million, compared to income
before taxes of $2.3 million in fiscal 2000.
Provision (Benefit) for Income
Taxes.
The effective tax rate for
fiscal 2001 increased to 97.4% from a benefit of 55.5% for
fiscal 2000. The increase in the effective tax rate was
primarily a result of the geographic
App-D-15
distribution of income, as well as the reduction
in the tax benefit attributable to the write-off of the
investment in and advances to the joint venture.
Income (Loss) From Continuing
Operations.
Income from continuing
operations increased from a loss of $1.8 million in fiscal
2000, compared to break even in fiscal 2001.
Loss From Discontinued
Operations.
The loss from discontinued
operations increased by $9.7 million, to a net loss of
$9.8 million, in fiscal 2001, from a loss of
$0.1 million in fiscal 2000.
Net Income (Loss).
As a result of the foregoing, the net loss for fiscal 2001
increased $7.8 million to $9.7 million ($0.86 per
diluted share) from $1.9 million ($0.18 per diluted share)
for fiscal 2000.
Liquidity and Capital Resources
Toymax historically has funded its operations and
capital requirements from cash generated from operations and
from financing activities. During fiscal 2002, cash and cash
equivalents decreased $0.8 million to $0.9 million. The
Companys operating activities provided net cash of
$2.3 million, which was primarily due to net loss offset by
net non-cash charges of $0.4 million, an increase in net
operating assets of $25.8 million. Net operating assets
included an increase of $13.2 million in accounts payable
and accrued expenses, which was offset by a decrease in due to
affiliates of $6.3 million and decreases of
$5.0 million from factor and accounts receivable,
$1.8 million in inventories and other assets of
$12.0 million.
Investing activities used $4.7 million in
net cash as compared to $5.6 million in fiscal 2001. Investing
activities in the current year consisted of $3.5 million of
capital expenditures and the payment of $1.2 million of
additional purchase price for the Funnoodle product line.
Investing activities in the prior year included
$2.6 million related to business acquisitions and $3.0
million for capital expenditures. Capital expenditures in both
periods consist principally of the purchase of tooling for new
products and equipment.
Financing activities provided $1.6 million
in net cash, primarily due from funding received by JAKKS of
$11.3 million substantially offset by the repayment of
$10.0 million of bank debt. Toymax also received
$0.2 million from the exercise of stock options.
In March 2002, Toymaxs $25.0 million
bank facility was paid off in full and terminated.
In April 2002, Toymax (H.K.) Limited subsidiary
terminated its credit facility with The Hongkong and Shanghai
Banking Corporation Limited. The facility had provided for an
import line of credit of $500,000 and the acceptance of an
export letter of credit guarantee for documents presented with
discrepancies of up to approximately $2.3 million.
Toymax expects to fund its near-term and
long-term cash requirements from a combination of existing cash
balances, cash flow from operations and borrowings from JAKKS.
There can be no assurance that sufficient cash flows from
operations will materialize or that financing from JAKKS or
under a credit facility will be available in amounts, at rates,
or on terms and conditions acceptable to Toymax. In such event,
additional funding would be required.
In addition to obligations previously discussed,
we have operating leases expiring through April 2010 with
annual lease payments ranging from approximately $625,000 to
$1.1 million.
New Accounting Standards
The Financial Accounting Standards Board
(FASB) issued SFAS No. 141, Business
Combinations, and No. 142, Goodwill and
Intangible Assets. SFAS No. 141 requires the use of
the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS
No. 141 also requires that Toymax recognize acquired
intangible assets apart from goodwill if the acquired intangible
assets meet certain criteria. SFAS No. 141 applies to all
business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after
July 1, 2001. It also requires, upon adoption of SFAS
No. 142, that Toymax reclassify, if necessary, the carrying
amounts of intangible assets and goodwill based on the criteria
of SFAS No. 141.
In April 2001, Toymax elected to adopt SFAS
No. 142. SFAS No. 142 requires, among other things,
that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, SFAS
No. 142 requires that Toymax identify reporting units for
the purposes of assessing potential future
App-D-16
impairments of goodwill, reassess the useful
lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life.
Toymaxs previous business combinations were
accounted for using the purchase method and as of April 1,
2001, the net carrying amount of goodwill from prior purchase
transactions was approximately $14.5 million. Annual
amortization of this amount, which ceased being effective as of
April 1, 2001, amounted to approximately $1.5 million.
In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of
a liability for an asset retirement obligation to be recognized
in the period in which it is incurred if a reasonable estimate
of fair value can be made. The associated asset retirement costs
are capitalized as part of the carrying amount of the long-lived
asset. SFAS No. 143 is effective for fiscal years beginning
after June 18, 2002. We believe the adoption of this statement
will have no material impact on the financial statements.
In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that
have not yet occurred. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after
December 14, 2001 and, generally, is to be applied
prospectively. Toymax has elected to early adopt SFAS
No. 144 in the current fiscal year.
Barter Transaction
In December 1998 and April 1999, Toymax entered
into agreements with a broker of media advertising, whereby
Toymax sold and transferred title to merchandise of Toymax
having a fair value of approximately $6.9 million in
exchange for approximately $8.7 million in trade credits.
In March, 2002, the total remaining net asset balance of
approximately $4.0 million which is not expected to be
utilized as a result of the acquisition by JAKKS, was expensed.
|
|
Item 7A.
|
Quantitative and Qualitative Disclosures
About Market Risk
|
Toymax is exposed to certain market risks, which
arise from transactions entered into in the normal course of
business. Toymaxs primary exposures are changes in
interest rates with respect to its debt and foreign currency
exchange fluctuations.
Interest Rate Risk
The interest payable on Toymaxs revolving
line-of-credit is variable based on LIBOR and/or the prime rates
in the United States and Hong Kong, and therefore, affected by
changes in market interest rates. Toymax does not use derivative
financial instruments.
Foreign Currency Risk
While the Toymax product purchases are transacted
in United States dollars, most transactions among the suppliers
and subcontractors of Jauntiway Investments Limited, an OEM toy
manufacturer that has been Toymaxs most important
manufacturer since inception, are effected in Hong Kong dollars.
Accordingly, fluctuations in Hong Kong monetary rates may have
an impact on Toymaxs cost of goods. However, since 1983,
the value of the Hong Kong dollar has been tied to the value of
the United States dollar, eliminating fluctuations between the
two currencies. Despite the announcements by the Hong Kong
Government that it is determined to maintain such fixed exchange
rate, there can be no assurance that the Hong Kong dollar will
continue to be tied to the United States dollar in the near
future or longer term. Furthermore, appreciation of Chinese
currency values relative to the Hong Kong dollar could increase
the cost to Toymax of the products manufactured in China, and
thereby have a negative impact on Toymax.
App-D-17
|
|
Item 8.
|
Financial Statements and Supplementary
Data
|
The Consolidated Financial Statements and
Financial Statement Exhibits are listed in Item 14 and are
included herein.
|
|
Item 9.
|
Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
|
None.
PART III
Item 10.
Directors
and Executive Officers of the Registrant
Directors and Executive Officers
Our directors and executive officers are as
follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Positions with the Company
|
|
|
|
|
|
Jack Friedman
|
|
|
62
|
|
|
Chief Executive Officer
|
Stephen G. Berman
|
|
|
36
|
|
|
President, Secretary and Director
|
Joel M. Bennett
|
|
|
40
|
|
|
Chief Financial Officer
|
Dan Almagor
|
|
|
49
|
|
|
Director
|
David C. Blatte
|
|
|
37
|
|
|
Director
|
Robert E. Glick
|
|
|
55
|
|
|
Director
|
Joel Handel
|
|
|
66
|
|
|
Director
|
Michael G. Miller
|
|
|
53
|
|
|
Director
|
Murray L. Skala
|
|
|
55
|
|
|
Director
|
Jack Friedman
has
been our Chief Executive Officer since March 2002 and has been
the Chairman, Chief Executive Officer and director of JAKKS
since co-founding JAKKS with Mr. Berman in January 1995.
From January 1989 until January 1995, Mr. Friedman was
Chief Executive Officer, President and a director of THQ. From
1970 to 1989, Mr. Friedman was President and Chief
Operating Officer of LJN Toys, Ltd., a toy and software
company. After LJN was acquired by MCA/ Universal, Inc. in 1986,
Mr. Friedman continued as President until his departure in
late 1988.
Stephen G. Berman
has been our President since March
2002 and has been the President, Chief Operating Officer,
Secretary and one of the directors of JAKKS since co-founding
JAKKS with Mr. Friedman in January 1995. From October 1991
to August 1995, Mr. Berman was a Vice President and
Managing Director of THQ International, Inc., a subsidiary of
THQ. From 1988 to 1991, he was President and an owner of
Balanced Approach, Inc., a distributor of personal fitness
products and services.
Joel M. Bennett
has
been our Chief Financial Officer since March 2002. Since
September 1995, he has been the Chief Financial Officer of JAKKS
and was given the additional title of Executive Vice President
of JAKKS in May 2000. From August 1993 to September 1995, he
served in several financial management capacities at Time Warner
Entertainment Company, L.P., including as Controller of Warner
Brothers Consumer Products Worldwide Merchandising and
Interactive Entertainment. From June 1991 to August 1993,
Mr. Bennett was Vice President and Chief Financial Officer
of TTI Technologies, Inc., a direct-mail computer hardware and
software distribution company. From 1986 to June 1991,
Mr. Bennett held various financial management positions at
The Walt Disney Company, including Senior Manager of Finance for
its international television syndication and production
division. Mr. Bennett holds a Master of Business
Administration degree and is a Certified Public Accountant.
Dan Almagor
has been
a director of Toymax since July 2001. Mr. Almagor has been
the Chairman and Executive Partner of ACG International, Inc., a
company which serves as director and advisor to For-
App-D-18
tune 1000 and privately-held companies,
since 1989. Mr. Almagor has also served as Chairman and
Chief Executive Officer for several public and privately-held
companies.
David C. Blatte
has
been one of our directors since March 2002. From January
1993 to May 2000, Mr. Blatte was a Senior Vice President in
the specialty retail group of the investment banking division of
Donaldson, Lufkin and Jenrette Securities Corporation. Since May
2000, Mr. Blatte has been a principal in Catterton
Partners, a private equity fund. Mr. Blatte is a director
of JAKKS and Case Logic, Inc., a privately-held consumer
products company.
Robert E. Glick
has
been one of our directors since March 2002. For more than
20 years, Mr. Glick has been an officer, director and
principal stockholder in a number of privately-held companies
which manufacture and market womens apparel.
Mr. Glick is a director of JAKKS.
Joel Handel
has been
a director of Toymax since October 1997. Mr. Handel was a
partner in the law firm of Baer Marks & Upham LLP, which
served as counsel to the Company, from 1968 to December 2001.
Mr. Handel has been a partner in the law firm of Brown
Raysman Millstein Felder & Steiner LLP, which serves as
counsel to the Company, since January 2002. From April 1987
through March 1997, Mr. Handel was a member of the Board of
Directors of Tyco Toys, Inc., a company for which Baer Marks
& Upham LLP also served as counsel. Mr. Handel is presently
involved in a pending personal bankruptcy action.
Michael G. Miller
has been one of our directors since
March 2002. From 1979 until May 1998, Mr. Miller was
President and a director of several privately-held affiliated
companies, including a list brokerage and list management
consulting firm, a database management consulting firm, and a
direct mail graphic and creative design firm.
Mr. Millers interests in such companies were sold in
May 1998. Since 1991, he has been President of an advertising
company. Mr. Miller is a director of JAKKS.
Murray L. Skala
has
been one of our directors since March 2002. Since 1976,
Mr. Skala has been a partner of the law firm Feder,
Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine LLP, our
general counsel. Mr. Skala is a director of JAKKS and
Traffix, Inc., a publicly-held company in the business of
telecommunications services and entertainment.
Our directors hold office until the next annual
meeting of stockholders and until their successors are elected
and qualified.
Committees of the Board of Directors
We have an Audit Committee, and a Compensation
Committee. The Board does not have a Nominating Committee and
performs the functions of a Nominating Committee itself.
Audit Committee.
The
primary functions of the Audit Committee are to select or to
recommend to our Board the selection of outside auditors; to
monitor our relationships with our outside auditors and their
interaction with our management in order to ensure their
independence and objectivity; to review, and to assess the scope
and quality of, our outside auditors services, including
the audit of our annual financial statements; to review our
financial management and accounting procedures; and to review
our financial statements with our management and outside
auditors. Messrs. Blatte, Glick and Miller are the current
members of the Audit Committee.
Compensation Committee.
The functions of the Compensation
Committee are to make recommendations to the Board regarding
compensation of management employees and to administer plans and
programs relating to employee benefits, incentives and
compensation. Messrs. Blatte, Glick and Miller are the
current members of the Compensation Committee.
Section 16(a) Beneficial Ownership Reporting
Compliance
To the best of our knowledge, all Forms 3, 4
or 5 required to be filed pursuant to Section 16(a) of the
Exchange Act during or with respect to the fiscal year ended
March 31, 2002 were filed on a timely basis.
App-D-19
Item 11.
Executive
Compensation
We do not pay any compensation to our Named
Officers because our Named Officers are also Named Officers of
JAKKS and each Named Officer receives his compensation from
JAKKS in connection with his duties as a Named Officer of JAKKS.
Item 12.
Security
Ownership of Certain Beneficial Owners and
Management
The following table furnishes information
concerning all persons known to beneficially own 5% or more of
Toymax common stock as of June 18, 2002.
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
Beneficially
|
|
Percent of
|
Name and Address of Beneficial Owner
|
|
Owned
|
|
Class
|
|
|
|
|
|
JAKKS Pacific, Inc.
|
|
|
8,232,819
|
|
|
|
66.8%
|
|
22619 Pacific Coast Highway
Malibu, California 90265
|
|
|
|
|
|
|
|
|
Item 13.
Certain
Relationships and Related Transactions
The following table furnishes information
concerning the ownership by directors, officers and directors
and officers as a group of Toymax common stock as of June 18,
2002.
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
Beneficially
|
|
Percent of
|
Name and Address of Beneficial Owner(1)
|
|
Owned
|
|
Class
|
|
|
|
|
|
Jack Friedman(2)(3)
|
|
|
0
|
|
|
|
*
|
|
Stephen G. Berman(2)(3)
|
|
|
0
|
|
|
|
*
|
|
Joel M. Bennett(2)
|
|
|
0
|
|
|
|
*
|
|
David C. Blatte(3)
|
|
|
0
|
|
|
|
*
|
|
Robert E. Glick(3)
|
|
|
0
|
|
|
|
*
|
|
Michael G. Miller(3)
|
|
|
0
|
|
|
|
*
|
|
Murray L. Skala(3)
|
|
|
0
|
|
|
|
*
|
|
Joel Handel(3)(4)
|
|
|
73,476
|
|
|
|
*
|
|
Dan Almagor(3)(5)
|
|
|
30,000
|
|
|
|
*
|
|
Directors and officers as a group (9 persons)
|
|
|
103,476
|
|
|
|
*
|
|
|
|
(1)
|
The address of Toymaxs directors is 22619
Pacific Coast Highway, Malibu, California 90265.
|
|
(2)
|
Serves as an executive officer of Toymax. None of
Toymaxs executive officers own Toymax stock or have
employment agreements with Toymax. All of Toymaxs
executive officers are executive officers of JAKKS and have
employment agreements with JAKKS.
|
|
(3)
|
Serves as a director of Toymax.
|
|
(4)
|
Includes 73,476 options that will become
exercisable upon the earlier of the effective date of the merger
and September 30, 2002.
|
|
(5)
|
Includes 30,000 options that will become
exercisable upon the earlier of the effective date of the merger
and September 30, 2002.
|
|
*
|
Represents less than 1%.
|
JAKKS owns approximately 66.8% of Toymaxs
common stock. JAKKS also controls the Toymax board of directors
with six members of the Toymax board of directors also being
members of the JAKKS board of directors and/or officers of
JAKKS. Those six individuals owe fiduciary duties to JAKKS and
its stockholders and each of them also owns securities of JAKKS.
App-D-20
Joel Handel, one of Toymaxs directors who
is not an employee, director or officer of JAKKS, is a partner
in the law firm of Brown Raysman Millstein Felder & Steiner,
LLP which provided approximately $905,540 of legal services to
Toymax during Toymaxs fiscal year ended March 31,
2002.
Dan Almagor, one of Toymaxs directors who
is not an employee, director or officer of JAKKS, is a principal
in an investment banking firm that received approximately
$700,000 from Toymax for services rendered thereby in connection
with the stock purchase agreement and which firm is entitled to
receive an additional approximately $300,000 from Toymax upon
completion of the merger.
PART IV
Item
14.
Exhibits, Financial
Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as
part of this report:
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
1.
|
|
Financial Statements
|
|
|
|
|
|
|
Report of independent certified public accountants
|
|
|
D-F-2
|
|
|
|
Consolidated financial statements:
|
|
|
|
|
|
|
|
Balance sheets as of March 31,
2000 and 2001
|
|
|
D-F-3
|
|
|
|
|
Statements of operations for the
three years in the period ended March 31, 2001
|
|
|
D-F-4
|
|
|
|
|
Statements of stockholders
equity for the three years in the period ended March 31,
2001
|
|
|
D-F-5
|
|
|
|
|
Statements of cash flows for the
three years in the period ended March 31, 2001
|
|
|
D-F-6
|
|
|
|
|
Notes to consolidated financial
statements
|
|
|
D-F-7
|
|
2.
|
|
Financial Statement Schedules
|
|
|
|
|
|
|
Report of independent certified public
accountants on the Financial Statement Schedule
|
|
|
D-S-1
|
|
|
|
Schedule Valuation and Qualifying
Accounts for the three years in the period ended March 31,
2001
|
|
|
D-S-2
|
|
The following Exhibits are filed herewith and
made a part hereof:
|
|
|
|
|
|
##2.1
|
|
|
First Amendment to Asset Purchase Agreement dated
April 5, 2000 between the Company, Funnoodle (H.K.) Limited
and Kidpower Inc. and James P. ORourke.
|
|
*3.1(a)
|
|
|
Amended and Restated Certificate of Incorporation
of the Registrant.
|
|
*3.1(b)
|
|
|
Amendment to Amended and Restated Certificate of
Incorporation of the Registrant.
|
|
*3.2
|
|
|
By-Laws of the Registrant.
|
|
*4.1
|
|
|
Specimen Stock Certificate for shares of Common
Stock.
|
|
*4.2
|
|
|
Form of Representatives Warrant Agreement
including Form of Redeemable Warrant Certificate.
|
|
####4.3
|
|
|
Amended and Restated 1997 Stock Option Plan.
|
|
*10.1
|
|
|
Form of 1997 Stock Option Plan.
|
|
*10.2
|
|
|
Executive Bonus Plan.
|
|
*10.3(a)
|
|
|
Agreement of Lease of the Companys offices
at 125 E. Bethpage Road, Plainview, New York.
|
|
****10.3(b)
|
|
|
Amendment to Lease of the Companys offices
at 125 E. Bethpage Road, Plainview, New York.
|
App-D-21
|
|
|
|
|
|
##10.4
|
|
|
Lease of the Companys showroom at
200 Fifth Avenue, New York, New York.
|
|
#10.5
|
|
|
Tenancy Agreement between Petergrand Limited and
Toymax (H.K.) Limited for the Companys showroom at
Concordia Plaza, No. 1 Science Museum Road, Tsimshatsui
East, Kowloon, Hong Kong.
|
|
*10.6(a)
|
|
|
Agency Agreement dated April 1, 1997,
between the Company and Tai Nam.
|
|
****10.6(b)
|
|
|
Second Amendment to the Agency Agreement dated
April 1, 1999, between the Company and Tai Nam.
|
|
***10.7(a)
|
|
|
Credit Facility Agreement dated February 3,
1999 between the Company and State Street Bank and Trust Company
and Congress Talcott Corporation.
|
|
*10.8
|
|
|
Security Agreement with State Street dated
June 17, 1997.
|
|
*10.9(a)
|
|
|
Factoring Agreement dated June 4, 1991
between the Company and Congress Talcott Corporation, as amended.
|
|
##10.9(b)
|
|
|
Amendment to the Collection Factoring Agreement
between the Company and The CIT Group/ Commercial Services,
Inc.
|
|
*10.11
|
|
|
Form of Employment Agreement with Steven
Lebensfeld.
|
|
10.11(a)
|
|
|
Amended and Restated Employment Agreement with
Steven A. Lebensfeld, dated January 1, 2000.
|
|
*10.12
|
|
|
Form of Employment Agreement with Harvey Goldberg.
|
|
10.12(a)
|
|
|
Amended and Restated Employment Agreement with
Harvey Goldberg, dated January 1, 2000.
|
|
*10.13
|
|
|
Form of Employment Agreement with Kenneth Price.
|
|
10.13(a)
|
|
|
Amended and Restated Employment Agreement with
Kenneth Price, dated January 1, 2000.
|
|
10.13(b)
|
|
|
Modification of Employment Agreement with Kenneth
Price, dated February 16, 2000.
|
|
*10.14
|
|
|
Form of Employment Agreement with Carmine Russo.
|
|
10.14(a)
|
|
|
Amended and Restated Employment Agreement with
Carmine Russo, dated January 1, 2000.
|
|
10.14(b)
|
|
|
Amended and Restated Employment Agreement with
Carmine Russo, dated February 16, 2000.
|
|
**10.15
|
|
|
Form of Employment Agreement with Andrew Stein.
|
|
**10.16
|
|
|
Form of Employment Agreement with William A.
Johnson, Jr.
|
|
10.16(a)
|
|
|
Amended and Restated Employment Agreement with
William A. Johnson, Jr., dated January 1, 2000.
|
|
*10.17(a)
|
|
|
Form of Manufacturing Agreement between the
Company, Tai Nam and Jauntiway.
|
|
****10.17(b)
|
|
|
Amendment to Manufacturing Agreement dated
April 1, 1999, between the Company, Tai Nam and Jauntiway.
|
|
*10.18
|
|
|
Form of Amendment to Agency Agreement between the
Company and Tai Nam.
|
|
#10.19
|
|
|
Management Agreement made as of November 30,
1999, between Sun Master Investment Limited and Kidpower, Inc.
|
|
##10.20
|
|
|
Form of Employment Agreement with Barry Shapiro.
|
|
##10.21
|
|
|
Agency Agreement dated March 24, 2000,
between Monogram International Inc., Monogram Products (H.K.)
Limited and Tai Nam.
|
|
##10.22
|
|
|
First Addendum to Loan Agreement, dated
March 28, 2000, by and among Monogram Acquisition, Inc.,
Monogram Acquisition 1, LLC and SunTrust Bank, joined by the
Company.
|
|
##10.23
|
|
|
Receivables Servicing Agreement dated,
April 28, 2000 between Funnoodle (H.K.) Ltd. and Kidpower,
Inc., and The CIT Group/ Commercial Services, Inc.
|
App-D-22
|
|
|
|
|
|
###10.24
|
|
|
Financing Agreement dated, December 27,
2000, among Toymax Inc. Go Fly A Kite, Inc., Monogram
International, Inc. and Funnoodle, Inc. and The CIT Group/
Commercial Services, Inc. and Fleet Capital Corporation.
|
|
##21.1
|
|
|
List of Subsidiaries of the Registrant.
|
|
23.1
|
|
|
Consent of Independent Certified Public
Accountants (Filed herewith)
|
|
|
*
|
Incorporated by reference to the
Registrants Registration Statement on Form S-1
(No. 333-33409).
|
|
**
|
Incorporated by reference to the
Registrants Annual Report on Form 10-K for the year
ended March 31, 1998.
|
|
***
|
Incorporated by reference to the
Registrants Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998.
|
|
****
|
Incorporated by reference to the
Registrants Annual Report on Form 10-K for the year
ended March 31, 1999.
|
|
#
|
Incorporated by reference to the
Registrants Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999.
|
|
##
|
Incorporated by reference to the
Registrants Annual Report on Form 10-K for the year
ended March 31, 2000.
|
|
###
|
Incorporated by reference to the
Registrants Quarterly Report on Form 10-Q for the
quarter ended December 31, 2000.
|
|
####
|
Incorporated by reference to the
Registrants Registration Statement on Form S-8
(No. 333-54522).
|
(b)
Reports on Form 8-K
We filed a Current Report on Form 8-K on the
following dates: (i) February 19, 2002, announcing the
sale of our Monogram subsidiaries to V2 Development Company
Ltd, (ii) February 22, 2002 announcing the merger with
JAKKS and the sale of our common stock by certain principal
stockholders and (iii) March 19, 2002, announcing
JAKKS acquiring control of our company.
App-D-23
SIGNATURES
Pursuant to the requirements of Section 13
or 15 (d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
|
|
TOYMAX INTERNATIONAL, INC.
|
|
(Registrant)
|
|
|
|
|
|
Jack Friedman
|
|
Chief Executive Officer
|
Dated: June 28, 2002
Pursuant to the requirements of the Securities
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ JACK FRIEDMAN
Jack Friedman
|
|
Chief Executive Officer and Director
|
|
June 28, 2002
|
|
/s/ STEPHEN G. BERMAN
Stephen G. Berman
|
|
President and Director
|
|
June 28, 2002
|
|
/s/ JOEL M. BENNETT
Joel M. Bennett
|
|
Chief Financial Officer and Treasurer (Principal
Financial and
Accounting Officer)
|
|
June 28, 2002
|
|
/s/ DAN ALMAGOR
Dan Almagor
|
|
Director
|
|
June 28, 2002
|
|
/s/ DAVID C. BLATTE
David C. Blatte
|
|
Director
|
|
June 28, 2002
|
|
/s/ ROBERT E. GLICK
Robert E. Glick
|
|
Director
|
|
June 28, 2002
|
|
/s/ JOEL M. HANDEL
Joel M. Handel
|
|
Director
|
|
June 28, 2002
|
|
/s/ MICHAEL G. MILLER
Michael G. Miller
|
|
Director
|
|
June 28, 2002
|
|
/s/ MURRAY L. SKALA
Murray L. Skala
|
|
Director
|
|
June 28, 2002
|
App-D-24
INDEX TO FINANCIAL EXHIBITS
CONSOLIDATED FINANCIAL STATEMENTS OF TOYMAX
INTERNATIONAL INC.
|
|
|
FINANCIAL STATEMENTS
|
|
|
Report of Independent Certified Public Accountants
|
|
D-F-2
|
Consolidated Balance Sheets as of March 31,
2001 and 2002
|
|
D-F-3
|
Consolidated Statements of Operations for the
three year period ended March 31, 2002
|
|
D-F-4
|
Consolidated Statements of Stockholders
Equity for the three year period ended March 31, 2002
|
|
D-F-5
|
Consolidated Statements of Cash Flows for the
three year period ended March 31, 2002
|
|
D-F-6
|
Notes to Consolidated Financial Statements
|
|
D-F-7
|
|
FINANCIAL STATEMENT SCHEDULES
|
|
|
Report of independent certified public
accountants on the Financial Statement Schedule
|
|
D-S-1
|
Schedule II Valuation and Qualifying
Accounts for the three years in the period ended March 31,
2002
|
|
D-S-2
|
App-D-F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
The Board of Directors and Stockholders of
Toymax International, Inc.
We have audited the accompanying consolidated
balance sheets of Toymax International, Inc. and Subsidiaries as
of March 31, 2001 and 2002, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three years in the period ended
March 31, 2002. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Toymax International, Inc.
and Subsidiaries at March 31, 2001 and 2002, and the
results of their operations and their cash flows for each of the
three years in the period ended March 31, 2002, in
conformity with accounting principles generally accepted in the
United States of America.
BDO Seidman, LLP
New York, New York
May 8, 2002
App-D-F-2
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2001
|
|
2002
|
|
|
|
|
|
Assets
|
Current:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,718,754
|
|
|
$
|
940,136
|
|
|
Due from Factor
|
|
|
9,241,280
|
|
|
|
9,084,009
|
|
|
Accounts receivable, less allowance for possible
losses of $476,000 and $341,000
|
|
|
6,668,456
|
|
|
|
3,750,699
|
|
|
Inventories
|
|
|
9,220,010
|
|
|
|
8,954,348
|
|
|
Prepaid expenses and other current assets
|
|
|
3,526,569
|
|
|
|
1,233,352
|
|
|
Assets of discontinued operations
|
|
|
4,917,113
|
|
|
|
|
|
|
Income tax refunds receivable
|
|
|
2,236,624
|
|
|
|
2,405,741
|
|
|
Deferred income taxes
|
|
|
1,966,948
|
|
|
|
648,612
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
39,495,754
|
|
|
|
27,016,897
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
4,805,925
|
|
|
|
1,533,625
|
|
Property, equipment and other assets of
discontinued operations, net
|
|
|
894,868
|
|
|
|
|
|
Deferred income taxes
|
|
|
2,168,509
|
|
|
|
10,470,003
|
|
Goodwill, net of accumulated amortization of
$1,984,367
|
|
|
14,497,309
|
|
|
|
15,739,482
|
|
Other assets
|
|
|
7,225,227
|
|
|
|
1,045,984
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,087,592
|
|
|
$
|
55,805,991
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders
Equity
|
Current:
|
|
|
|
|
|
|
|
|
|
Bank credit facility
|
|
$
|
9,971,578
|
|
|
$
|
|
|
|
Accounts payable
|
|
|
7,290,912
|
|
|
|
6,643,487
|
|
|
Accrued expenses
|
|
|
3,649,697
|
|
|
|
6,203,858
|
|
|
Accrued rebates and allowances
|
|
|
2,490,481
|
|
|
|
11,234,533
|
|
|
Due to affiliates
|
|
|
6,273,154
|
|
|
|
13,404,492
|
|
|
Current portion of long-term obligations
|
|
|
27,926
|
|
|
|
14,790
|
|
|
Current liabilities of discontinued operations
|
|
|
1,090,704
|
|
|
|
406,555
|
|
|
Income taxes payable
|
|
|
1,008,062
|
|
|
|
3,262,417
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
31,802,514
|
|
|
|
41,170,132
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
|
1,211,566
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
33,014,080
|
|
|
|
41,170,132
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
479,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value $.01 per share;
5,000,000 shares authorized; none outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, par value $.01 per share;
50,000,000 shares authorized; 12,166,441 and 12,316,241 shares
issued
|
|
|
121,664
|
|
|
|
123,162
|
|
|
Additional paid-in capital
|
|
|
27,144,942
|
|
|
|
30,079,944
|
|
|
Retained earnings (deficit)
|
|
|
8,520,065
|
|
|
|
(15,341,692
|
)
|
|
Treasury stock, 35,000 and 66,200 shares at cost
|
|
|
(177,889
|
)
|
|
|
(210,403
|
)
|
|
Accumulated other comprehensive income
|
|
|
(15,152
|
)
|
|
|
(15,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
35,593,630
|
|
|
|
14,635,859
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,087,592
|
|
|
$
|
55,805,991
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
App-D-F-3
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
109,864,677
|
|
|
$
|
115,151,485
|
|
|
$
|
94,852,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
75,516,553
|
|
|
|
72,769,988
|
|
|
|
71,424,452
|
|
|
Selling and administrative (including
restructuring charges in 2002 of $15,600,000)
|
|
|
38,220,075
|
|
|
|
37,718,929
|
|
|
|
49,760,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,736,628
|
|
|
|
110,488,917
|
|
|
|
121,184,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(3,871,951
|
)
|
|
|
4,662,568
|
|
|
|
(26,332,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
853,041
|
|
|
|
567,065
|
|
|
|
349,071
|
|
|
Interest income
|
|
|
533,933
|
|
|
|
247,883
|
|
|
|
157,188
|
|
|
Interest expense
|
|
|
(1,069,742
|
)
|
|
|
(1,133,129
|
)
|
|
|
(1,135,391
|
)
|
|
Equity in income (loss) of joint venture
|
|
|
289,768
|
|
|
|
(699,500
|
)
|
|
|
|
|
|
Write-off of investment in and advances to joint
venture
|
|
|
|
|
|
|
(1,859,906
|
)
|
|
|
|
|
|
Finance charges
|
|
|
(709,127
|
)
|
|
|
(668,925
|
)
|
|
|
(963,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102,127
|
)
|
|
|
(3,546,512
|
)
|
|
|
(1,593,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
|
(3,974,078
|
)
|
|
|
1,116,056
|
|
|
|
(27,925,651
|
)
|
Income tax expense (benefit)
|
|
|
(2,206,877
|
)
|
|
|
1,087,477
|
|
|
|
(7,499,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(1,767,201
|
)
|
|
|
28,579
|
|
|
|
(20,426,475
|
)
|
Loss from discontinued operations
|
|
|
(134,159
|
)
|
|
|
(9,776,209
|
)
|
|
|
(3,935,282
|
)
|
Gain on disposal of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,901,360
|
)
|
|
$
|
(9,747,630
|
)
|
|
$
|
(23,861,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.17
|
)
|
|
$
|
|
|
|
$
|
(1.69
|
)
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.86
|
)
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(1.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted loss
per share:
|
|
|
10,596,677
|
|
|
|
11,280,804
|
|
|
|
12,116,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
App-D-F-4
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
Other
|
|
Total
|
Three Years Ended
|
|
|
|
Paid-in
|
|
Retained
|
|
Treasury
|
|
Comprehensive
|
|
Stockholders
|
March 31, 2002
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Stock
|
|
Loss
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 1, 1999
|
|
|
10,605,000
|
|
|
$
|
106,050
|
|
|
$
|
23,059,355
|
|
|
$
|
20,169,055
|
|
|
$
|
|
|
|
$
|
(15,152
|
)
|
|
$
|
43,319,308
|
|
Issuance of common stock purchase warrants
|
|
|
|
|
|
|
|
|
|
|
61,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,201
|
|
Issuance of common stock
|
|
|
28,108
|
|
|
|
281
|
|
|
|
(281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177,889
|
)
|
|
|
|
|
|
|
(177,889
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,901,360
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,901,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2000
|
|
|
10,633,108
|
|
|
|
106,331
|
|
|
|
23,120,275
|
|
|
|
18,267,695
|
|
|
|
(177,889
|
)
|
|
|
(15,152
|
)
|
|
|
41,301,260
|
|
Issuance of common stock
|
|
|
1,533,333
|
|
|
|
15,333
|
|
|
|
4,024,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,040,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,747,630
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,747,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2001
|
|
|
12,166,441
|
|
|
|
121,664
|
|
|
|
27,144,942
|
|
|
|
8,520,065
|
|
|
|
(177,889
|
)
|
|
|
(15,152
|
)
|
|
|
35,593,630
|
|
Issuance of common stock
|
|
|
149,800
|
|
|
|
1,498
|
|
|
|
235,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,500
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,514
|
)
|
|
|
|
|
|
|
(32,514
|
)
|
Stock option compensation
|
|
|
|
|
|
|
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,700,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,861,757
|
)
|
|
|
|
|
|
|
|
|
|
|
(23,861,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2002
|
|
|
12,316,241
|
|
|
$
|
123,162
|
|
|
$
|
30,079,944
|
|
|
$
|
(15,341,692
|
)
|
|
$
|
(210,403
|
)
|
|
$
|
(15,152
|
)
|
|
$
|
14,635,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
App-D-F-5
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,901,360
|
)
|
|
$
|
(9,747,630
|
)
|
|
$
|
(23,861,757
|
)
|
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,370,271
|
|
|
|
5,599,269
|
|
|
|
2,732,313
|
|
|
Minority interest
|
|
|
|
|
|
|
(474,547
|
)
|
|
|
(479,882
|
)
|
|
Bad debts
|
|
|
53,749
|
|
|
|
364,966
|
|
|
|
355,768
|
|
|
Equity in unconsolidated joint venture
|
|
|
(289,768
|
)
|
|
|
699,500
|
|
|
|
|
|
|
Non-cash compensation
|
|
|
61,201
|
|
|
|
|
|
|
|
2,700,000
|
|
|
Write-off of barter credits
|
|
|
|
|
|
|
|
|
|
|
3,973,624
|
|
|
Non-cash revenue barter credits
|
|
|
(377,433
|
)
|
|
|
|
|
|
|
|
|
|
Loss on disposal and write-off of property and
equipment
|
|
|
28,054
|
|
|
|
|
|
|
|
4,580,311
|
|
|
Loss on impairment of asset valuation and
write-off of investment and advances to joint venture
|
|
|
|
|
|
|
7,123,153
|
|
|
|
|
|
|
Changes in deferred income taxes
|
|
|
(702,140
|
)
|
|
|
(551,000
|
)
|
|
|
(6,983,158
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from Factor and accounts receivable
|
|
|
(9,601,301
|
)
|
|
|
9,206,230
|
|
|
|
4,689,024
|
|
|
|
Due to/from affiliates
|
|
|
1,646,936
|
|
|
|
1,678,287
|
|
|
|
(4,206,353
|
)
|
|
|
Inventories
|
|
|
(1,712,620
|
)
|
|
|
860,288
|
|
|
|
1,996,484
|
|
|
|
Prepaid expenses and other
|
|
|
(803,480
|
)
|
|
|
(696,585
|
)
|
|
|
6,006,565
|
|
|
|
Income tax refunds receivable
|
|
|
(1,843,533
|
)
|
|
|
641,266
|
|
|
|
(169,117
|
)
|
|
|
Accounts payable and accruals
|
|
|
10,164,566
|
|
|
|
(12,784,638
|
)
|
|
|
8,755,073
|
|
|
|
Income taxes payable
|
|
|
(112,373
|
)
|
|
|
(252,589
|
)
|
|
|
2,254,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities (continuing and discontinuing)
|
|
|
(1,019,231
|
)
|
|
|
1,665,970
|
|
|
|
2,343,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(3,997,858
|
)
|
|
|
(2,997,987
|
)
|
|
|
(3,436,658
|
)
|
|
Proceeds from disposals of property and equipment
|
|
|
28,661
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, investments and advances
|
|
|
(19,316,841
|
)
|
|
|
(2,587,808
|
)
|
|
|
(1,242,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(23,286,038
|
)
|
|
|
(5,585,795
|
)
|
|
|
(4,678,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in bank credit facility
|
|
|
10,620,661
|
|
|
|
(4,057,466
|
)
|
|
|
(9,971,578
|
)
|
|
Increase (decrease) in long-term obligations
|
|
|
(62,707
|
)
|
|
|
552,222
|
|
|
|
(13,136
|
)
|
|
Increase in due to affiliate
|
|
|
|
|
|
|
|
|
|
|
11,337,691
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
4,600,000
|
|
|
|
236,500
|
|
|
Purchase of treasury stock
|
|
|
(177,889
|
)
|
|
|
|
|
|
|
(32,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
10,380,065
|
|
|
|
1,094,756
|
|
|
|
1,556,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(13,925,204
|
)
|
|
|
(2,825,069
|
)
|
|
|
(778,618
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
18,469,027
|
|
|
|
4,543,823
|
|
|
|
1,718,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
4,543,823
|
|
|
$
|
1,718,754
|
|
|
$
|
940,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,222,412
|
|
|
$
|
1,637,562
|
|
|
$
|
1,106,269
|
|
|
Income taxes paid
|
|
$
|
992,891
|
|
|
$
|
1,740,812
|
|
|
$
|
97,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for license rights and
services
|
|
$
|
|
|
|
$
|
494,429
|
|
|
$
|
|
|
|
Capital leases entered into during the year
|
|
$
|
64,754
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
App-D-F-6
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2000, 2001 and 2002
1. Organization
and Summary of Significant Accounting Policies
On February 10, 2002, the Company entered
into two agreements with Jakks Pacific Inc. (Jakks)
for Jakks to acquire all of the outstanding shares of the
Company. In a two-step transaction, Jakks acquired approximately
66% of the Companys outstanding shares from the
Companys principal stockholders pursuant to a stock
purchase agreement effective March 11, 2002, and then will
acquire the remainder pursuant to a definitive merger agreement
that is subject to stockholder approval. For all Company shares,
Jakks will pay $4.50 per share consisting of $3 per share in
cash and the remainder in shares valued at $1.50 each.
The financial statements do not reflect any
adjustments related to a step-up in valuation or other
adjustments related to the change in control.
Principles of
consolidation
The consolidated financial statements include the
accounts of Toymax International, Inc. (Toymax and
the Company) and its subsidiaries after elimination
of intercompany accounts and transactions.
Business
The Companys operations consist principally
of its traditional toy products business and the businesses of
its acquired enterprises. The toy products business is conducted
by the Companys subsidiaries, Toymax, Inc.
(TMI)
and Toymax (H.K.) Limited
(Toymax HK)
, which are involved in designing,
marketing and distributing toy products (collectively with the
Yaboom Ltd. joint venture,
Toymax Brands
).
The Companys other ventures include Go Fly A Kite, Inc.
(GFK)
, Funnoodle, Inc., and Funnoodle (H.K.)
Limited (together with Funnoodle (H.K.) Limited,
Funnoodle
, formerly Sun Master Investment
Limited) (collectively
Toymax Enterprises
).
GFK and Funnoodle were formed to acquire the businesses
described in Note 3.
Effective November 30, 2001, the Company
sold the net assets of Monogram International, Inc. and Monogram
Products (H.K.) Limited (collectively
Monogram
) and the Candy Planet division of
TMI to an entity controlled by David Chu, the former chairman of
the Company for $2.25 million. In March 2002, the Company,
in connection with its restructuring (Note 2), abandoned the
operations of Maxverse Interactive, Inc.
(Maxverse)
. Accordingly, the financial
statements have been adjusted to reflect Monogram, Candy Planet
and Maxverse as discontinued operations (Note 16).
Cash and cash
equivalents
Cash and cash equivalents includes investments
with original maturities of three months or less at the date of
acquisition. Such investments, consisting primarily of
investments in commercial paper, are stated at cost, which
approximates market value, and amounted to approximately
$0.6 million and $0.3 million at March 31, 2001 and
2002, respectively.
Inventories
Inventories are stated at the lower of cost
(first-in, first-out basis) or market value. Inventories consist
principally of purchased finished goods.
Property and
equipment
Property and equipment are stated at original
cost. Depreciation of machinery, equipment, molds and furniture
and fixtures is computed by the straight-line method over the
estimated useful lives of the assets.
App-D-F-7
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Leasehold improvements are amortized by the
straight-line method over the shorter of their economic lives or
the terms of the leases.
Translation
of foreign currency financial statements
Assets and liabilities of foreign subsidiaries
are translated at year-end rates of exchange, and revenues and
expenses are translated at the average rates of exchange for the
year. Gains and losses resulting from translation are
accumulated in a separate component of stockholders
equity. Gains and losses resulting from foreign currency
transactions (transactions denominated in a currency other than
the functional currency) are included in net income or loss.
Substantially all of the Companys foreign subsidiaries are
located in Hong Kong. Since the value of the Hong Kong dollar
has been tied to the value of the United States dollar, foreign
currency fluctuations have been eliminated.
Income
taxes
Deferred income taxes are recognized based on the
differences between the tax bases of assets and liabilities and
their reported amounts in the financial statements which will
result in taxable or deductible amounts in future years.
Further, the effects of enacted tax law or rate changes are
included in income as part of deferred tax expenses or benefits
in the period that includes the enactment date. A valuation
allowance is recognized if, in the opinion of management, it is
more likely than not that some portion of, or all of, a deferred
tax asset will not be realized.
Revenue
recognition
Sales are recorded upon shipment, free on board
from the point of shipment. The Company provides, as a reduction
of sales, for anticipated returns, allowances and other sales
incentives, based on known and anticipated claims.
Shipping and
handling costs
The consolidated financial statements reflect,
for all periods presented, the adoption of the classification
requirements pursuant to Emerging Issued Task Force
(EITF)
00-10,
Accounting for
Shipping and Handling Fees and Costs,
which was
effective in the Companys fourth quarter of fiscal 2001.
The Company reclassified income from freight charges to
customers to Net sales and warehousing , shipping
and handling costs to Cost of goods sold. Such
costs, net of the related revenue, were historically included in
Selling, general and administrative expenses.
Advertising
Advertising costs are charged to operations as
incurred and were approximately $13.3 million,
$9.5 million and $8.1 million for the years ended
March 31, 2000, 2001 and 2002, respectively.
Advertising costs associated with customer
benefit programs are accrued as the related revenues are
recognized and reflected in Net sales.
Royalties
Minimum guaranteed royalties, as well as
royalties in excess of minimum guarantees, are expensed based on
the sales of related products. The realizability of minimum
guaranteed royalties paid is evaluated by the Company based on
the projected sales of the related products.
App-D-F-8
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Research and
development expenses
Research and development expenses are charged to
operations as incurred and are included in selling and
administrative expenses. Research and development expenses for
the years ended March 31, 2000, 2001 and 2002 were
approximately $4.2 million, $3.4 million and
$3.7 million, respectively.
Fair value of
financial instruments
The carrying amounts of certain financial
instruments, including cash, due from Factor, accounts
receivable, accounts payable and bank obligations, approximate
fair value as of March 31, 2001 and March 31, 2002
because of the relatively short-term maturity of these
instruments. Fair value of the amounts due to or from affiliates
cannot be readily determined because of the nature of the terms.
Accounting
for the impairment of long-lived assets
Long-lived assets, which include goodwill and
property and equipment, are evaluated for impairment when events
or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets.
When any such impairment exists, the related assets will be
written down to fair value. In fiscal 2001, the Company
recognized an impairment loss of approximately $1.9 million
related to the valuation of goodwill and the investment in and
advances to the Companys joint venture. See Note 2 for
impairment charges recorded in connection with the
Companys restructuring.
Goodwill
Goodwill represents the excess purchase price
paid over the fair market value of the net assets of the
acquired company. Goodwill was amortized over 10-15 years
on a straight-line basis prior to April 1, 2001. Commencing
fiscal 2002, amortization of goodwill ceased in accordance with
by Statement of Financial Accounting Standards
(
SFAS
) No. 142.
The carrying value of goodwill is based on
managements current assessment of recoverability.
Management evaluates recoverability using both objective and
subjective factors. Objective factors include managements
best estimates of projected future earnings, cash flows and
analysis of historical and recent sales and earnings trends.
Subjective factors include competitive analysis and the
Companys strategic focus.
Earnings
(loss) per share
Basic earnings per share includes no dilution and
is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects, in periods in
which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options and warrants.
Options and warrants to purchase an aggregate of
2,738,620, 2,393,545 and 2,097,910 shares of common stock were
outstanding at March 31, 2000, 2001 and 2002, respectively,
at exercise prices ranging from $3.75 to $10.20 per share in
fiscal 2000, $1.34 to $8.63 per share in fiscal 2001, and $0.94
to $8.63 in fiscal 2002. Such options and warrants are not
included in the computation of diluted earnings per share
because they are anti-dilutive (Note 11).
Accounting
for stock based compensation
The Company accounts for its stock option awards
to employees under the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion
(APB) No. 25,
Accounting for Stock
Issued to Employees.
Under the intrinsic value based
method, compensation cost is the excess, if any, of the
App-D-F-9
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
quoted market price of the stock at the grant
date or other measurement date over the amount an employee must
pay to acquire the stock. The Company makes pro forma
disclosures of the net income and earnings per share as if the
fair value based method of accounting had been applied as
required by SFAS No. 123,
Accounting for
Stock-Based Compensation.
The Financial Accounting Standards Board
(FASB) issued Interpretation
(
FIN
) No. 44,
Accounting for
Certain Transactions Involving Stock Compensation.
FIN
No. 44 clarifies the application of APB No. 25 for the
accounting consequences of various modifications of the terms of
a previously fixed stock option. Significant modifications to
the option terms could cause a charge to compensation as the
options are treated as variable options.
Use of
estimates
The preparation of the financial statements in
accordance with generally accepted accounting principles
requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Among the more significant
estimates included in these consolidated financial statements
are the estimated allowance for doubtful accounts receivable and
accrued rebates and allowances and the realizability of
goodwill. Actual results could differ from those and other
estimates.
Concentration
of credit risks
Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally
of cash balances deposited in financial institutions which
exceed FDIC insurance limits, receivables due from Factor and
accounts receivable not sold to a factor.
The Company established an allowance for accounts
receivable based upon factors surrounding the credit risk of
specific customers historical trends and other
information. See Note 13 for information relating to the
concentration of sales to major customers.
Comprehensive
loss
Comprehensive loss refers to revenue, expenses,
gains and losses that under generally accepted accounting
principles are excluded from net loss, as these amounts are
recorded directly as an adjustment to stockholders equity.
The Companys comprehensive loss is comprised of foreign
currency translation adjustments. The comprehensive loss for the
three years ended March 31, 2002 is the same as the
reported net loss.
Recent
Accounting Standards
The FASB issued SFAS No. 141, Business
Combinations, and No. 142, Goodwill and
Intangible Assets in June 2001. SFAS No. 141 requires
the use of the purchase method of accounting and prohibits the
use of the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001. SFAS
No. 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible
assets meet certain criteria. SFAS No. 141 applies to all
business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after
July 1, 2001. It also requires, upon adoption of SFAS
No. 142, that the Company reclassify, if necessary, the
carrying amounts of intangible assets and goodwill based on the
criteria of SFAS No. 141.
In April 2001, the Company elected to adopt SFAS
No. 142. SFAS No. 142 requires, among other things,
that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, SFAS
No. 142 requires that the Company identify reporting units
for the purposes of assessing
App-D-F-10
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
potential future impairments of goodwill,
reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets
with an indefinite useful life.
The Companys previous business combinations
were accounted for using the purchase method and as of
April 1, 2001, the net carrying amount of goodwill from
prior purchase transactions was approximately
$14.5 million. Annual amortization of this amount, which
ceased effective April 1, 2001, amounted to approximately
$1.5 million.
The effect of adoption of SFAS No. 142 on
the reported net loss for prior periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Reported net loss
|
|
$
|
(1,901,360
|
)
|
|
$
|
(9,747,630
|
)
|
|
$
|
(23,861,757
|
)
|
Amortization of goodwill, net of tax effect
|
|
|
638,666
|
|
|
|
1,114,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, as adjusted
|
|
$
|
(1,262,694
|
)
|
|
$
|
(8,633,519
|
)
|
|
$
|
(23,861,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net loss
|
|
$
|
(0.18
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(1.97
|
)
|
|
Amortization of goodwill
|
|
|
.06
|
|
|
|
.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share, as adjusted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(1.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In August 2001, the FASB issued SFAS
No. 143,
Accounting for Asset Retirement
Obligations.
SFAS No. 143 requires the fair value
of a liability for an asset retirement obligation to be
recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount
of the long-lived asset. SFAS No. 143 is effective for
fiscal years beginning after June 18, 2002. The adoption of this
statement will have no material impact on the financial
statements.
In October 2001, the FASB issued SFAS
No. 144,
Accounting for the Impairment or Disposal
of Long-Lived Assets.
SFAS No. 144 requires that
those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that
have not yet occurred. The Company has elected to early adopt
SFAS No. 144 in the current fiscal year in connection with
its discontinued operations (Note 16).
Reclassifications
Certain March 31, 2000 and 2001 amounts were
reclassified to conform to the March 31, 2002 presentation.
2. Restructuring
On March 11, 2002 Jakks Pacific, Inc.
acquired approximately 66% of the Company (Note 1). In
connection with that acquisition, the Company began a plan of
reorganization. Included in selling and administrative expenses
is approximately $15.6 million of restructuring charges.
App-D-F-11
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the restructuring charge for the
year ended March 31, 2002 is as follows:
|
|
|
|
|
|
|
March 31, 2002
|
|
|
|
Facility closure costs
|
|
$
|
842,000
|
|
Employee termination benefits
|
|
|
1,400,000
|
|
Impairment of fixed assets (Note 5)
|
|
|
2,263,000
|
|
Barter credit write-off (Note 6)
|
|
|
3,974,000
|
|
Stock option compensation (Note 11)
|
|
|
2,700,000
|
|
Termination of agreements
|
|
|
2,200,000
|
|
Other
|
|
|
2,221,000
|
|
|
|
|
|
|
|
|
$
|
15,600,000
|
|
|
|
|
|
|
As a result of the acquisition, the Company
terminated certain of its employees, giving stay bonuses and
severance packages to 20 of its employees.
As a result of the acquisition, the Company
terminated various license agreements and its factor agreement
resulting in a charge. The Company also accrued for minimum
guarantees for royalties associated with discontinued product
lines. Included in accrued liabilities is approximately
$3.6 million related to the restructuring charge, of which
approximately $2.8 million is expected to be paid within
the next six months. The remaining $0.8 million related to
the facility lease, will be paid over the lease term expiring in
April 2004.
3. Business
Acquisitions and Joint Ventures
In December 1998, the Company acquired
substantially all of the operating assets, business operations
and facilities of GFK. The aggregate maximum purchase price of
approximately $6.3 million consisted of up to
$5.9 million in cash and a non-interest bearing contingent
note and $0.4 million in related direct costs. A portion of
the purchase price, $1.3 million, was contingent upon the
achievement of certain operating results for the twelve months
ending August 31, 1999 and $150,000 was contingent upon the
achievement of certain operating results from the date of the
acquisition until August 31, 1999. Both contingencies were
incurred and paid in fiscal 2000. The acquisition has been
accounted for using the purchase method. The Company recorded
approximately $5.8 million of goodwill, including goodwill
related to the contingent payment of $1.5 million, for the
excess of the total purchase price over the fair value of the
net assets acquired.
In November 1999, the Company acquired the
Funnoodle product line from Kidpower, Inc.
(Kidpower), pursuant to an asset purchase agreement
dated October 25, 1999. The Funnoodle product line is a
highly recognized consumer brand of pool and backyard water
recreational products which include the original Funnoodle®
water toys, floating pool mats, lawn sprinkler toys and exercise
mats. The consideration for the acquisition was
$8.7 million paid in cash at the closing, the assumption of
certain commitments of Kidpower in an amount of $500,000, plus
up to $7.0 million payable to Kidpower after the closing if
certain contingencies occur through October 31, 2002. The
Company recorded approximately $8.1 million of goodwill for
the excess of the total purchase price over the fair value of
the net assets acquired. The funding for the acquisition was out
of the working capital of the Company. Based on the occurrence
of certain contingencies contained in the acquisition agreement,
the Company recorded and paid approximately $3.8 million as
additional goodwill through fiscal 2002.
In connection with the Funnoodle acquisition, the
Company entered into a management services agreement dated
November 30, 1999 with Kidpower (the
Kidpower
Management Agreement
). Pursuant to the Kidpower
Management Agreement, Kidpower will manage the day-to-day
operations with respect to the Funnoodle product line. Pursuant
to the Kidpower Management Agreement, a management fee of seven
percent (7%) of the cost of all finished goods with respect to
the Funnoodle product line is payable to
App-D-F-12
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Kidpower. The Kidpower Management Agreement,
which has an initial term through November 15, 2002, is
subject to termination or renewal on an annual basis at the
Companys option. In August 2001, the Company terminated
the Kidpower Management Agreement.
In October 1999, the Company and a private
investor formed Yaboom Ltd. (Yaboom), a joint
venture. The Companys investment in Yaboom includes
$1.0 million for the equity ownership and $1.1 million
in non-interest bearing advances. Yaboom was formed to develop,
manufacture and market innovative high-tech consumer products,
which incorporate music and other intellectual property rights
from popular recording artists. Under the terms of the joint
venture, the Company, through a wholly-owned Hong Kong
subsidiary, and the private investor each own fifty percent of
Yaboom. The Company has accounted for the joint venture using
the equity method and intends to permanently reinvest the
earnings derived from the joint venture. Based on the
uncertainty of the operations, the Company recognized an
impairment in the value of the goodwill and investment in and
advances to Yaboom of approximately $1.9 million in fiscal
2001. The equity investment had no value at March 31, 2001
and 2002.
4. Due From
Factor and Accounts Receivable
In the normal course of business, TMI and
Funnoodle sell substantially all of their accounts receivable,
without recourse, to the CIT Group, Inc. (the
Factor
), and receive payment from the Factor
when the accounts are collected.
Effective April 1, 2002, the factoring
agreement was terminated.
Accounts receivable consists mainly of sales not
factored and amounts charged back by the Factor as a result of
disputes primarily relating to unearned discounts and damaged
shipments, net of allowances for possible losses.
5. Property and
Equipment
Property and equipment consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
Estimated
|
|
|
2001
|
|
2002
|
|
Useful Lives
|
|
|
|
|
|
|
|
Machinery, equipment and molds
|
|
$
|
14,829,209
|
|
|
$
|
17,859,717
|
|
|
|
2-5
|
|
Furniture and fixtures
|
|
|
593,854
|
|
|
|
610,027
|
|
|
|
5
|
|
Leasehold improvements
|
|
|
1,067,038
|
|
|
|
1,059,754
|
|
|
|
2-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,490,101
|
|
|
|
19,529,498
|
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
11,684,176
|
|
|
|
17,995,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,805,925
|
|
|
$
|
1,533,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and
equipment charged to operations were approximately
$2.7 million, $3.5 million and $2.7 million in
2000, 2001 and 2002, respectively. The Company recorded an
impairment charge of $2.3 million on molds and other fixed
assets that will not be utilized as a result of the acquisition
by Jakks (Note 2).
6. Prepaid
Expenses and Other Current Assets
In December 1998 and April 1999, the Company
entered into agreements with a broker of media advertising,
whereby the Company through the Toymax Brands segment sold and
transferred title to merchandise of the Company having a fair
value of approximately $6.9 million in exchange for
approximately $8.7 million in trade credits. The Company
recorded a gross margin on this transaction of approximately
App-D-F-13
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$3.2 million. The Company expensed the net
remaining prepaid advertising of approximately $4.0 million
in March 2002 which is not expected to be utilized as a result
of the acquisition by Jakks, which historically has not used
this type of advertising program (Note 2).
7. Bank Credit
Facility
In December 2000, the Company replaced the Toymax
Inc. (TMI) and Go Fly A Kite, Inc. (GFK)
subsidiaries existing $30.0 million credit facility
and the Funnoodle $5.0 million line of credit with a
$40.0 million facility for all of its U.S. based
operating subsidiaries. Borrowings, which are subject to
availability according to a formula based on eligible accounts
receivable and inventory, bear interest at either the
lenders U.S. prime rate or LIBOR plus 2.50%. The
credit agreement, which expires in December 2003, is secured by
the accounts receivable and inventories of the Companys
domestic subsidiaries, as well as other properties, and is
guaranteed by Toymax. The agreement contains certain
restrictions relating to limitations on debt, certain
investments and the payment of dividends. The Agreement was
terminated by mutual consent in March 2002.
Effective April 2000, the Companys Toymax
HK subsidiary renewed its credit facility with The Hongkong and
Shanghai Banking Corporation Limited (
Hongkong
Bank
). The facility provides for a clean export loan
of $1,000,000 and the acceptance of an export letter of credit
guarantee for documents presented with discrepancies of up to
approximately $2.3 million. The facility, which is jointly
available to the Companys affiliates in Hong Kong, was
terminated by mutual consent in April 2002.
8. Related Party
Transactions
The former majority stockholder of the Company
owns significant interests in several other companies, including
Tai Nam Industrial Company Limited (
Tai Nam
)
and Jauntiway Investments Limited
(
Jauntiway
). TMI and Toymax HK have purchased
the majority of their merchandise directly from Tai Nam. The
majority of the merchandise is manufactured in the Peoples
Republic of China (
PRC
) by Jauntiway.
The Company has significant transactions with Tai
Nam. These transactions include purchases of the majority of the
Companys and its subsidiarys merchandise and certain
sales of the subsidiarys products. Tai Nam has
occasionally provided extended payment terms for these purchases.
Prior to the Jakks acquisition (Note 1),
Toymax HK and TMI had an agency agreement with Tai Nam, which
provided for an agency fee of 7% on products purchased. The
agency agreement also requires Tai Nam to provide all
administrative services to Toymax HK.
In September 1997, the Company entered into a
manufacturing agreement with Tai Nam and Jauntiway. This
agreement provides, among other things, that the Company shall
not be required to provide a letter of credit or other security
to Tai Nam or Jauntiway in connection with its purchase orders.
GFK maintains some raw materials for
manufacturing but purchases the majority of its product from
manufacturers in the PRC and Taiwan based upon the
companys product specifications. Prior to the Jakks
acquisition, Tai Nam acted as GFKs agent in Hong Kong for
all products produced in the PRC pursuant to an agency agreement
dated September 1, 2000.
In April 2000, Funnoodle entered into an agency
agreement with Tai Nam, which provides for an agency fee of 7%
on products purchased.
Effective March 11, 2002, all agency
agreements were terminated.
In March 2002, Jakks advanced approximately
$11.3 million to the Company on a non-interest bearing
basis. The funds were used to retire bank and related party debt.
App-D-F-14
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of balances and
transactions with affiliated companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2001
|
|
2002
|
|
|
|
|
|
Due to affiliates:
|
|
|
|
|
|
|
|
|
|
Tai Nam
|
|
$
|
6,273,154
|
|
|
$
|
2,066,801
|
|
|
Jakks Pacific, Inc.
|
|
|
|
|
|
|
11,337,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Purchases from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tai Nam
|
|
$
|
56,257,427
|
|
|
$
|
52,865,582
|
|
|
$
|
52,418,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tai Nam
|
|
$
|
475,803
|
|
|
$
|
342,319
|
|
|
$
|
197,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mold purchases from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tai Nam
|
|
$
|
2,275,530
|
|
|
$
|
2,109,445
|
|
|
$
|
2,195,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency fees charged by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tai Nam
|
|
$
|
3,997,980
|
|
|
$
|
3,443,280
|
|
|
$
|
3,329,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursed expenses charged by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tai Nam
|
|
$
|
1,036,903
|
|
|
$
|
15,066
|
|
|
$
|
164,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Income
Taxes
The components of income (loss) before income tax
expense (benefit) and the related provision for income taxes
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Income (loss) before income
taxes
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong Kong
|
|
$
|
3,614,605
|
|
|
$
|
(926,532
|
)
|
|
$
|
1,290,163
|
|
|
U.S.
|
|
|
(7,588,683
|
)
|
|
|
2,042,588
|
|
|
|
(29,215,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,974,078
|
)
|
|
$
|
1,116,056
|
|
|
$
|
(27,925,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong Kong
|
|
$
|
326,005
|
|
|
$
|
291,251
|
|
|
$
|
398,806
|
|
|
U.S. Federal
|
|
|
(1,700,472
|
)
|
|
|
462,287
|
|
|
|
(1,008,787
|
)
|
|
U.S. State and City
|
|
|
(260,483
|
)
|
|
|
184,938
|
|
|
|
93,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,634,950
|
)
|
|
$
|
938,476
|
|
|
$
|
(516,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong Kong
|
|
$
|
82,179
|
|
|
$
|
|
|
|
$
|
97,025
|
|
|
U.S. Federal
|
|
|
(601,058
|
)
|
|
|
348,815
|
|
|
|
(6,913,878
|
)
|
|
U.S. State and City
|
|
|
(53,048
|
)
|
|
|
(199,814
|
)
|
|
|
(116,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(571,927
|
)
|
|
$
|
149,001
|
|
|
$
|
(6,983,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(2,206,877
|
)
|
|
$
|
1,087,477
|
|
|
$
|
(7,499,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
App-D-F-15
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The income tax expense (benefit) varies from the
U.S. Federal statutory rate. The following reconciliation
shows the significant differences in the tax at statutory and
effective rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Federal income tax expense (benefit), at
statutory rate of 34%
|
|
$
|
(1,351,187
|
)
|
|
$
|
379,459
|
|
|
$
|
(9,494,721
|
)
|
State income tax expense (benefit), net of
federal tax effect
|
|
|
(206,930
|
)
|
|
|
8,625
|
|
|
|
(81,943
|
)
|
Increase in deferred tax valuation allowance
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
Non-deductible expenses
|
|
|
48,710
|
|
|
|
110,900
|
|
|
|
280,248
|
|
Non-cash compensation
|
|
|
|
|
|
|
|
|
|
|
918,000
|
|
Effect of differences in U.S. and Hong Kong
statutory rates
|
|
|
(820,782
|
)
|
|
|
606,272
|
|
|
|
379,240
|
|
Other
|
|
|
123,312
|
|
|
|
(17,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(2,206,877
|
)
|
|
$
|
1,087,477
|
|
|
$
|
(7,499,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of deferred tax assets/
(liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2001
|
|
2002
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Reserve for sales allowances and possible losses
|
|
$
|
793,118
|
|
|
$
|
457,466
|
|
|
Inventory
|
|
|
629,320
|
|
|
|
812,566
|
|
|
Accrued expenses
|
|
|
385,062
|
|
|
|
671,550
|
|
|
Other
|
|
|
159,448
|
|
|
|
912,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,966,948
|
|
|
|
2,854,494
|
|
|
|
|
|
|
|
|
|
|
Long term:
|
|
|
|
|
|
|
|
|
|
Barter credits
|
|
|
|
|
|
|
1,470,241
|
|
|
Design costs
|
|
|
504,280
|
|
|
|
|
|
|
Property and equipment
|
|
|
317,245
|
|
|
|
303,338
|
|
|
Goodwill, licenses and other intangibles
|
|
|
618,522
|
|
|
|
327,033
|
|
|
Legal fees-trademarks
|
|
|
501,527
|
|
|
|
1,442,768
|
|
|
Federal net operating loss carryforwards
|
|
|
|
|
|
|
4,574,551
|
|
|
State net operating loss carryforwards
|
|
|
425,676
|
|
|
|
941,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,367,250
|
|
|
|
9,059,887
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
4,334,198
|
|
|
|
11,914,381
|
|
Less: Valuation allowance
|
|
|
|
|
|
|
(500,000
|
)
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(198,741
|
)
|
|
|
(295,766
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
4,135,457
|
|
|
$
|
11,118,615
|
|
|
|
|
|
|
|
|
|
|
App-D-F-16
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred taxes result from temporary differences
between tax bases of assets and liabilities and their reported
amounts in the financial statements. The temporary differences
result from costs required to be capitalized for tax purposes by
the U.S. Internal Revenue Code, and certain items accrued
for financial reporting purposes in the year incurred but not
deductible for tax purposes until paid.
As of March 31, 2002, the Company has
federal and state net operating loss carryforwards of
$13.7 million and $31.4 million, respectively,
expiring through 2022. Due to the change in control, which
occurred during fiscal 2002, utilization of these losses to
offset future income may be limited under
IRC § 382. A valuation allowance has been
recorded related to the limited realization of state net
operating loss carryforwards. Based on Jakks ability to use the
carryforwards, the Company believes it is more likely than not
that these carryforwards will be utilized. Therefore, no further
allowance was deemed necessary.
10. Capital
Stock
Stock
Repurchase Program
In May 1999, the Company announced that its Board
of Directors had approved the repurchase of up to
$2.0 million of Toymax common stock from time to time on
the open market, as well as through private transactions. The
timing of the stock repurchases and the total number of shares
repurchased will be determined by overall financial and market
conditions. The Companys credit facility restricts it from
purchasing shares of its capital stock in excess of
$2.0 million during any fiscal year. As of March 31,
2002, a total of 66,200 shares of Toymax common stock have
been repurchased for a total purchase price $210,403.
Private
Placement
In December 2000, the Company announced the
private placement of $4.6 million for the purchase of
common stock of Toymax and its subsidiary, Maxverse, had been
accepted. Pursuant to the offering, the Company offered units at
$300,000 per unit consisting of 100,000 shares of Toymax
common stock and 3 million shares of Maxverse, which was
developing wireless communication products for children and
young adults. Through March 31, 2002, 1,533,333 shares of
common stock of Toymax and approximately 46 million shares
common stock of the subsidiary had been issued. The Company
retains controlling interest in the subsidiary. In March 2002,
the Company discontinued the operations of Maxverse
(Note 16).
11. Stock Options
and Warrants
The Stock Option Plan (the
Plan
), which was initiated in fiscal 1998 and
amended in January 1999 and 2000, is administered under the
direction of the Compensation Committee of the Board of
Directors, which has complete discretion to select the optionee
and to establish terms and conditions of each option, subject to
the provisions of the Plan. A total of 3,500,000 shares of
Common Stock were reserved by the Company for issuance upon
exercise of stock options granted or which may be granted under
the Plan.
Stock options outstanding have a life of
10 years for non-qualified options and 5 years if the
grant is an Incentive Stock Option (the
Incentive
Options
), as defined in Section 422 of the
Internal Revenue Code. These options may not be exercised more
than 10 years after the grant or 5 years if the grant
is an Incentive Option to any employee who owns more than 10% of
the outstanding voting power of the Company.
Incentive Options granted may not be less than
100% of the fair market value of the Common Stock as of the date
of the grant or 110% of the fair market value if the grant is to
an employee who owns more than 10% of the outstanding voting
power of the Company.
App-D-F-17
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about
stock option activity for the years ended March 31, 2000,
2001 and 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
Weighted
|
|
|
Option
|
|
Range Per
|
|
Average
|
|
|
Shares
|
|
Share
|
|
Price
|
|
|
|
|
|
|
|
Balance, March 31, 1999
|
|
|
716,500
|
|
|
$
|
6.75-$8.63
|
|
|
$
|
8.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,948,625
|
|
|
|
3.75- 7.94
|
|
|
|
4.30
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(26,150
|
)
|
|
|
5.25- 8.63
|
|
|
|
7.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2000
|
|
|
2,638,975
|
|
|
|
3.75- 8.63
|
|
|
|
5.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
311,750
|
|
|
|
1.34- 2.62
|
|
|
|
1.38
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(656,825
|
)
|
|
|
1.34- 8.63
|
|
|
|
7.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2001
|
|
|
2,293,900
|
|
|
|
1.34- 8.63
|
|
|
|
4.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,099,000
|
|
|
|
0.94- 3.75
|
|
|
|
1.74
|
|
|
Exercised
|
|
|
(149,594
|
)
|
|
|
1.30- 1.82
|
|
|
|
1.58
|
|
|
Cancelled
|
|
|
(1,245,041
|
)
|
|
|
1.30- 8.63
|
|
|
|
3.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2002
|
|
|
1,998,265
|
|
|
$
|
0.94-$8.63
|
|
|
$
|
3.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Financial Accounting Standards
No. 123 (
SFAS No. 123
),
Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information regarding
net income and net income per common share as if compensation
costs for the Companys stock option plans had been
determined in accordance with the fair value method prescribed
in SFAS No. 123. Had compensation expense been recorded
under the provisions of SFAS No. 123, the impact on the
Companys net earnings and earnings per share would have
been:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(1,901,360
|
)
|
|
$
|
(9,747,630
|
)
|
|
$
|
(23,861,757
|
)
|
|
Pro forma compensation expense, net of tax
|
|
|
(656,150
|
)
|
|
|
(1,457,066
|
)
|
|
|
(1,566,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
(2,557,510
|
)
|
|
$
|
(11,204,696
|
)
|
|
$
|
(25,428,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.24
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(2.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option granted is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average
assumptions used for all grants in 2000, 2001 and 2002: dividend
yield of 0.00%; risk-free interest rate ranges from 3.97% to
4.81%; an expected life of options ranging from 5 to
10 years for 10-year options and a volatility of 46.5% for
the year ended March 31, 2000, 89% for the year ended
March 31, 2001 and 100% for the year ended March 31,
2002. The weighted average fair value of options granted was
$2.44, $1.09 and $0.91 for the years ended March 31, 2000,
2001 and 2002, respectively.
App-D-F-18
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about
stock options outstanding at March 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
Option Price Range
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
$0.94 - $1.30
|
|
|
214,000
|
|
|
$
|
1.25
|
|
$1.34 - $1.47
|
|
|
248,100
|
|
|
$
|
1.39
|
|
$1.63 - $1.63
|
|
|
7,500
|
|
|
$
|
1.63
|
|
$1.82 - $1.82
|
|
|
245,365
|
|
|
$
|
1.82
|
|
$2.00 - $2.15
|
|
|
55,000
|
|
|
$
|
2.07
|
|
$2.62 - $2.62
|
|
|
10,000
|
|
|
$
|
2.62
|
|
$3.75 - $3.75
|
|
|
850,000
|
|
|
$
|
3.75
|
|
$5.25 - $5.25
|
|
|
269,800
|
|
|
$
|
5.25
|
|
$5.31 - $5.31
|
|
|
50,000
|
|
|
$
|
5.31
|
|
$8.63 - $8.63
|
|
|
48,500
|
|
|
$
|
8.63
|
|
|
|
|
|
|
|
|
|
|
$0.94 - $8.63
|
|
|
1,998,265
|
|
|
$
|
3.25
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the Stock Purchase Agreement dated
February 10, 2002 between Jakks Pacific, Inc. and the
Company, the options outstanding on March 11, 2002 were
amended to be fully exercisable for a six-month period
commencing on the earliest of the effective date of the merger,
or its termination, or September 30, 2002. Upon the
expiration of the six-month exercise period, the outstanding
options will terminate. In accordance with FIN No. 44, the
modification of option terms resulted in a $2.7 million
charge to operations and a credit to additional paid in capital.
In conjunction with its initial public offering,
the Company issued warrants to the underwriter to purchase
195,750 shares of Common Stock at an exercise price of
$10.20 per share. There was no charge to operations as a
result of the issuance of the warrants to the underwriter. In
August 1999, the underwriter exercised 106,105 warrants on
a cashless basis, resulting in the issuance of an additional
28,108 shares of the Companys common stock.
On August 30, 1999, the Company issued
10,000 warrants at an exercise price of $5.50 per
warrant in conjunction with the execution of a license
agreement. The warrants, which are fully vested, expire on
August 31, 2002 and resulted in a charge of $61,201 based
on the fair value of the warrants issued.
12. Commitments
and Contingencies
Lease
obligations
The Company leases general and administrative,
warehouse and showroom facilities under non-cancelable operating
leases which expire at various dates. Certain of the leases on
real estate include the payment of property taxes. Additional
warehouse space is leased on a monthly basis.
TMI leases certain equipment under capital
leases. The gross amount of assets recorded under capital leases
is $211,245. Depreciation expense provided on such assets is
included in both cost of goods sold and selling and
administrative expenses in the statements of operations.
App-D-F-19
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum lease payments under all leases
with non-cancelable lease terms in excess of one year are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Capital
|
Year Ended March 31,
|
|
Leases
|
|
Leases
|
|
|
|
|
|
2003
|
|
$
|
1,117,554
|
|
|
$
|
15,716
|
|
2004
|
|
|
1,138,744
|
|
|
|
|
|
2005
|
|
|
675,370
|
|
|
|
|
|
2006
|
|
|
637,426
|
|
|
|
|
|
2007
|
|
|
641,120
|
|
|
|
|
|
Thereafter
|
|
|
1,468,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,678,803
|
|
|
$
|
15,716
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
|
|
|
|
926
|
|
|
|
|
|
|
|
|
|
|
Present value of capital lease payments
|
|
|
|
|
|
|
14,790
|
|
Less current portion
|
|
|
|
|
|
|
14,790
|
|
|
|
|
|
|
|
|
|
|
Long-term obligation
|
|
|
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
Rent expense for the years ended March 31,
2000, 2001 and 2002 was approximately $1.1 million,
$1.4 million, and $1.2 million, respectively.
Royalties
The Company has certain licensing agreements
which involve the payment of royalties based on sales. Royalties
for the years ended March 31, 2000, 2001 and 2002 amounted
to approximately $6.4 million, $5.6 million and
$1.8 million, respectively.
Executive
bonus plan
The Companys Executive Bonus Plan (the
Bonus Plan
), is administered by the
Compensation Committee of the Board of Directors (the
Compensation Committee
). The Compensation
Committee determines the key management employees of the Company
who will be eligible to participate in the Bonus Plan and the
amount, if any, of each participants award based on such
participants performance. The aggregate amount of awards
made under the Bonus Plan for a fiscal year may not exceed an
amount equal to 15% of the profit of the Company and its
designated affiliates for such year (as defined), reduced by 15%
of the stockholders equity of the Company and such
affiliates during such year.
Litigation
The Company is involved in various legal
proceedings in the ordinary course of its business activities.
The Company believes that the resolution of such legal
proceedings and claims, individually and in aggregate, are not
likely to have a material adverse effect on its financial
position or results of operations.
In March 2001, George G. Grillo, a product
consultant, filed a complaint against the Company as well as
against Monogram International, Inc., Monogram Products (H.K.)
Ltd., Steven Lebensfeld and David Ki Kwan Chu, in the Supreme
Court of the State of New York, County of Suffolk, alleging
breach of express and implied contracts, violation of New York
State Labor Law, unjust enrichment and unfair competition. The
plaintiff seeks monetary damages totaling $280,000 in
compensatory damages, $2,500,000 in exemplary damages plus costs
and attorneys fees. The Company, which intends to defend
the action vigorously as well as
App-D-F-20
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interpose counterclaims, does not believe that
the suit will have a material adverse effect on its financial
position or results of operations, however, there can be no
assurance of the outcome.
The Companys federal tax returns for 1992
through 2000 and New York State returns for 1999 through 2001
are under examination. The tax authorities have raised no issues
to date that would have a material effect on the financial
statements.
13. Major
Customers and Products
Invoiced sales to Toys R US and
WalMart accounted for a total of 43%, 36% and 35% of total
invoiced sales for the years ended March 31, 2000, 2001 and
2002, respectively.
14. Employee
Benefit Plan
The Company has a tax deferred retirement savings
plan that is intended to qualify under Section 401(k) of
the Internal Revenue Code. Eligible participants may contribute
a percentage of their compensation, but not in excess of the
maximum allowed under the Internal Revenue Code. The plan
provides for matching contributions at TMIs option. TMI
made no contributions for the years ended March 31, 2000,
2001 and 2002.
15. Segment and
Geographic Data
The Company operates two reportable segments:
Toymax Brands (primarily toy products, together with the Yaboom
joint venture) and Toymax Enterprises (primarily leisure and
recreational products).
The following tables present summarized
information about the Companys operations by different
geographic areas (net of consolidating eliminations) as of and
for the three years ended March 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toymax
|
|
|
Year Ended March 31, 2000
|
|
Toymax Brands
|
|
Enterprises
|
|
Consolidated
|
|
|
|
|
|
|
|
Revenues-Net sales
|
|
$
|
91,061,966
|
|
|
$
|
18,802,711
|
|
|
$
|
109,864,677
|
|
Income (loss) before income tax
|
|
|
(6,269,276
|
)
|
|
|
2,295,198
|
|
|
|
(3,974,078
|
)
|
Total assets
|
|
|
45,236,966
|
|
|
|
43,836,231
|
|
|
|
89,073,197
|
|
Interest income
|
|
|
533,933
|
|
|
|
|
|
|
|
533,933
|
|
Interest expense
|
|
|
(1,067,436
|
)
|
|
|
(2,306
|
)
|
|
|
(1,069,742
|
)
|
Depreciation and amortization
|
|
|
1,981,742
|
|
|
|
2,388,529
|
|
|
|
4,370,271
|
|
Capital expenditures
|
|
|
2,941,379
|
|
|
|
1,056,479
|
|
|
|
3,997,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toymax
|
|
|
Year Ended March 31, 2001
|
|
Toymax Brands
|
|
Enterprises
|
|
Consolidated
|
|
|
|
|
|
|
|
Revenues-Net sales
|
|
$
|
85,495,922
|
|
|
$
|
29,655,563
|
|
|
$
|
115,151,485
|
|
Income (loss) before income tax
|
|
|
(2,269,190
|
)
|
|
|
3,385,246
|
|
|
|
1,116,056
|
|
Total assets
|
|
|
48,198,647
|
|
|
|
20,888,945
|
|
|
|
69,087,592
|
|
Interest income
|
|
|
183,106
|
|
|
|
64,777
|
|
|
|
247,883
|
|
Interest expense
|
|
|
(1,100,503
|
)
|
|
|
(32,626
|
)
|
|
|
(1,133,129
|
)
|
Depreciation and amortization
|
|
|
2,467,698
|
|
|
|
3,131,571
|
|
|
|
5,599,269
|
|
Capital expenditures
|
|
|
2,258,409
|
|
|
|
739,578
|
|
|
|
2,997,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
App-D-F-21
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toymax
|
|
|
Year Ended March 31, 2002
|
|
Toymax Brands
|
|
Enterprises
|
|
Consolidated
|
|
|
|
|
|
|
|
Revenues-Net sales
|
|
$
|
65,568,667
|
|
|
$
|
29,283,585
|
|
|
$
|
94,852,252
|
|
Income (loss) before income tax
|
|
|
(30,651,395
|
)
|
|
|
2,725,744
|
|
|
|
(27,925,651
|
)
|
Total assets
|
|
|
26,775,126
|
|
|
|
29,030,865
|
|
|
|
55,805,991
|
|
Interest income
|
|
|
108,892
|
|
|
|
48,296
|
|
|
|
157,188
|
|
Interest expense
|
|
|
(1,132,740
|
)
|
|
|
(2,651
|
)
|
|
|
(1,135,391
|
)
|
Depreciation and amortization
|
|
|
2,201,867
|
|
|
|
530,446
|
|
|
|
2,732,313
|
|
Capital expenditures
|
|
|
3,116,764
|
|
|
|
319,894
|
|
|
|
3,436,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present information about
the Company by geographic area as of and for three years ended
March 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Long-lived Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
19,754,712
|
|
|
$
|
17,614,988
|
|
|
$
|
11,923,917
|
|
|
Hong Kong
|
|
|
1,340,503
|
|
|
|
1,688,246
|
|
|
|
5,349,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,095,215
|
|
|
$
|
19,303,234
|
|
|
$
|
17,273,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Sales by Geographic Area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
89,473,797
|
|
|
$
|
94,852,985
|
|
|
$
|
81,948,478
|
|
|
Europe
|
|
|
14,027,241
|
|
|
|
13,159,570
|
|
|
|
8,172,258
|
|
|
Canada
|
|
|
3,547,750
|
|
|
|
2,402,269
|
|
|
|
1,362,834
|
|
|
Hong Kong
|
|
|
940,748
|
|
|
|
850,419
|
|
|
|
106,506
|
|
|
Other
|
|
|
1,875,141
|
|
|
|
3,886,242
|
|
|
|
3,262,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,864,677
|
|
|
$
|
115,151,485
|
|
|
$
|
94,852,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Discontinued
Operations
Effective November 30, 2001, the Company
sold the net assets of the Monogram and Candy Planet segments of
the business to an entity controlled by David Chu, the former
Chairman of the Companys board of directors, for $2.25
million. A gain of $0.5 million was recognized on the sale.
In March 2002, the Company decided to abandon and
discontinue the operations of Maxverse, which commenced
operations in fiscal 2001.
App-D-F-22
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The results of these operations, which have been
classified as discontinued operations in the accompanying
financial statements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
2002
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
29,899,125
|
|
|
$
|
16,951,272
|
|
|
$
|
7,358,207
|
|
Income (loss) before income taxes
|
|
|
349,691
|
|
|
|
(12,258,343
|
)
|
|
|
(4,762,047
|
)
|
Income tax expense (benefit)
|
|
|
483,850
|
|
|
|
(2,007,587
|
)
|
|
|
(346,883
|
)
|
Minority interest
|
|
|
|
|
|
|
(474,547
|
)
|
|
|
(479,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
(134,159
|
)
|
|
$
|
(9,776,209
|
)
|
|
$
|
(3,935,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2001, the net assets of
discontinued operations were as follows:
|
|
|
|
|
Due from factor
|
|
$
|
1,933,457
|
|
Account receivable
|
|
|
36,307
|
|
Inventory
|
|
|
1,730,822
|
|
Prepaid expenses and other current assets
|
|
|
1,216,527
|
|
|
|
|
|
|
Current assets of discontinued operations
|
|
|
4,917,113
|
|
|
|
|
|
|
Property and equipment
|
|
|
894,868
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
5,811,981
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
1,090,704
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
1,090,704
|
|
|
|
|
|
|
App-D-F-23
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
17.
|
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Year End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
Fiscal Year Ended March 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales Operating income (loss)
|
|
$
|
21,688
|
|
|
$
|
44,348
|
|
|
$
|
34,601
|
|
|
$
|
14,514
|
|
|
$
|
115,151
|
|
|
Income (loss) before income taxes
|
|
|
1,371
|
|
|
|
8,099
|
|
|
|
261
|
|
|
|
(5,068
|
)
|
|
|
4,663
|
|
|
Net income (loss) from continuing operations
|
|
|
1,021
|
|
|
|
7,414
|
|
|
|
(36
|
)
|
|
|
(7,283
|
)
|
|
|
1,116
|
|
|
Net income (loss) from discontinued
operations
|
|
|
597
|
|
|
|
4,869
|
|
|
|
(155
|
)
|
|
|
(5,283
|
)
|
|
|
28
|
|
|
Net income
|
|
|
(846
|
)
|
|
|
(1,314
|
)
|
|
|
(1,444
|
)
|
|
|
(6,172
|
)
|
|
|
(9,776
|
)
|
|
Basic and diluted earnings (loss) per share:
|
|
|
(249
|
)
|
|
|
3,555
|
|
|
|
(1,599
|
)
|
|
|
(11,455
|
)
|
|
|
(9,748
|
)
|
|
|
Continued operations
|
|
$
|
0.06
|
|
|
$
|
0.46
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
|
|
|
|
Discontinued operations
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.86
|
)
|
|
|
Total
|
|
$
|
(0.02
|
)
|
|
$
|
0.34
|
|
|
$
|
(0.13
|
)
|
|
$
|
(0.95
|
)
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
20,008
|
|
|
$
|
39,104
|
|
|
$
|
25,613
|
|
|
$
|
10,127
|
|
|
$
|
94,852
|
|
|
Operating income (loss)
|
|
|
(1,050
|
)
|
|
|
7,130
|
|
|
|
(7,295
|
)
|
|
|
(25,117
|
)
|
|
|
(26,332
|
)
|
|
Income (loss) before income taxes
|
|
|
(1,474
|
)
|
|
|
6,750
|
|
|
|
(7,630
|
)
|
|
|
(25,572
|
)
|
|
|
(27,926
|
)
|
|
Net income (loss) from continuing operations
|
|
|
(984
|
)
|
|
|
5,282
|
|
|
|
(5,294
|
)
|
|
|
(19,430
|
)
|
|
|
(20,426
|
)
|
|
Net income (loss) from discontinued
operations
|
|
|
(747
|
)
|
|
|
(444
|
)
|
|
|
(1,110
|
)
|
|
|
(1,634
|
)
|
|
|
(3,935
|
)
|
|
Gain on disposal of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
500
|
|
|
Net income
|
|
|
(1,732
|
)
|
|
|
4,838
|
|
|
|
(5,904
|
)
|
|
|
(21,064
|
)
|
|
|
(23,862
|
)
|
|
Basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued operations
|
|
$
|
(0.08
|
)
|
|
$
|
0.44
|
|
|
$
|
(0.44
|
)
|
|
$
|
(1.61
|
)
|
|
$
|
(1.69
|
)
|
|
|
Discontinued operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.28
|
)
|
|
|
Total
|
|
$
|
(0.14
|
)
|
|
$
|
0.40
|
|
|
$
|
(0.49
|
)
|
|
$
|
(1.74
|
)
|
|
$
|
(1.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of fiscal 2001, based
on continued losses and weak projections for the Companys
Monogram subsidiary and the uncertainty of the operations of the
Companys joint venture, Yaboom, the Company recognized an
impairment loss of approximately $7.1 million related to
the valuation of goodwill and the investment in and advances to
the Companys joint venture.
During the fourth quarter of fiscal 2002, the
Company had significant adjustments primarily related to the
restructuring as a result of the acquisition by Jakks
(Note 2). This affected operating income by approximately
$15.6 million. The Company also discontinued the operations
of Maxverse in the fourth quarter of fiscal 2002 (Note 16).
Furthermore, in the fourth quarter the Company provided for
$0.4 million for U.S. tax on previously untaxed Hong Kong
income.
App-D-F-24
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders of
Toymax International, Inc.
The audits referred to in our report dated
May 8, 2002 relating to the consolidated financial
statements of Toymax International, Inc. included the audits of
the financial statement schedule. This financial statement
schedule is the responsibility of the Companys management.
Our responsibility is to express an opinion on this financial
statement schedule based upon our audits.
In our opinion the financial statement schedule
presents fairly, in all material respects, the information set
forth therein.
BDO Seidman, LLP
New York, New York
May 8, 2002
App-D-S-1
Toymax International, Inc.
and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
THREE YEARS ENDED MARCH 31,
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
(1)
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
Charged to
|
|
|
|
|
|
|
Beginning
|
|
Costs and
|
|
Other
|
|
|
|
Balance at End
|
Description
|
|
of Period
|
|
Expenses
|
|
Accounts
|
|
Deductions
|
|
of Period
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED VALUATION RESERVES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED MARCH 31, 2000:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for possible losses
|
|
$
|
136,639
|
|
|
$
|
53,749
|
|
|
$
|
200,000
|
(a)
|
|
$
|
110,623
|
|
|
$
|
279,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED MARCH 31, 2001:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for possible losses
|
|
$
|
279,765
|
|
|
$
|
364,966
|
|
|
|
|
|
|
$
|
168,944
|
|
|
$
|
475,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED MARCH 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for possible losses
|
|
$
|
475,787
|
|
|
$
|
355,768
|
|
|
$
|
(211,823
|
)(b)
|
|
$
|
278,747
|
|
|
$
|
340,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a)
|
Acquisition of Monogram International, Inc.
|
|
b)
|
Write-off discontinued operations of Monogram
International
|
App-D-S-2
APPENDIX E
[LETTERHEAD OF MORGAN, LEWIS, GITHENS & AHN,
INC.]
February 10, 2002
Board of Directors
Toymax International, Inc.
125 East Bethpage Road
Plainview, NY 11803
Gentlemen:
We understand that Toymax International, Inc.
(the Company) has entered into a merger agreement
with JAKKS Pacific, Inc. (the Acquiror) pursuant to
which a wholly-owned subsidiary of the Acquiror will merge with
and into the Company and each share of common stock, par value
$0.01 per share, of the Company, other than any shares held by
the Acquiror, will receive $3.00 in cash plus .0798 shares of
common stock of the Acquiror, subject to certain adjustments
(the Merger Transaction). The terms and conditions
of the Merger Transaction are set forth in more detail in a
definitive merger agreement (the Merger Agreement).
The Merger Transaction is subject to a number of conditions,
including the acquisition by the Acquiror of a majority of the
Companys outstanding common stock from certain of the
Companys existing stockholders (the Stock
Acquisition). The terms and conditions of the Stock
Acquisition are set forth in more detail in a stock purchase
agreement (the Stock Purchase Agreement). The Stock
Acquisition and the Merger Transaction are referred to
collectively herein as the Proposed Transaction.
You have requested our opinion, as investment
bankers, as to the fairness from a financial point of view of
the consideration to be received by the Companys
stockholders in the Proposed Transaction.
In conducting our analysis and arriving at our
opinion as expressed herein, we have reviewed and analyzed,
among other things, the following:
|
|
|
(i) the Merger Agreement dated
February 10, 2002;
|
|
|
(ii) the Stock Purchase Agreement dated
February 10, 2002;
|
|
|
(iii) the Companys Form 10-K for
the year ended March 31, 2001, the Companys Forms
10-Q for the three months ended June 30, 2001 and the six
months ended September 30, 2001, and the Companys
Form 8-K dated November 9, 2001;
|
|
|
(iv) the Acquirors Form 10-K for
the year ended December 31, 2000, and the Acquirors
Forms 10-Q for the three months ended March 31, 2001, the
six months ended June 30, 2001, and the nine months ended
September 30, 2001;
|
|
|
(v) certain other publicly available
information concerning the Company and the Acquiror and the
trading markets for their respective common stocks;
|
|
|
(vi) certain internal information and other
data relating to the Company and the Acquiror and their business
and prospects, including forecasts and projections provided to
us by management of the Company and the Acquiror, respectively;
|
|
|
(vii) certain publicly available information
concerning certain other companies engaged in businesses which
we believe to be generally comparable to the Company and the
Acquiror and the trading markets for certain of such other
companies securities; and
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(viii) the financial terms of certain recent
business combinations which we believe to be relevant.
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We have also met with or spoken to certain
officers and employees of the Company and the Acquiror
concerning their respective businesses and operations, assets,
present condition and prospects and undertook such other
studies, analyses and investigations as we deemed appropriate.
App-E-1
Board of Directors
Toymax International, Inc.
February 10, 2002
Page 2
In arriving at our opinion, we have assumed and
relied upon the accuracy and completeness of the financial and
other information used by us and have not attempted
independently to verify such information, nor do we assume any
responsibility to do so. We have assumed that the forecasts,
projections and other financial information provided to us by
the Company and the Acquiror have been reasonably prepared based
on the best current estimates and judgment of the management of
the Company and the Acquiror, respectively, as to the future
financial condition and results of operations of their
respective businesses. We have visited the Companys
corporate headquarters but have not otherwise conducted a
physical inspection of the properties and facilities of the
Company or the Acquiror, nor have we made or obtained any
independent evaluation or appraisal of such properties and
facilities. We have also taken into account our assessment of
general economic, market and financial conditions and our
experience in similar transactions, as well as our experience in
securities valuation in general. We have not been retained by
the Company to solicit and we have not solicited offers to
acquire or merge with the Company from third parties. Our
opinion necessarily is based upon economic, market, financial
and other conditions as they exist and can be evaluated on the
date hereof and we assume no responsibility to update or revise
our opinion based upon events or circumstances occurring after
the date hereof. However, we reserve the right but have no
obligation to withdraw, revise or modify our opinion based upon
additional information which may be provided to or obtained by
us, which suggests, in our judgment, a material change in the
assumptions upon which our opinion is based.
This letter and the opinion expressed herein are
for the use of the Board of Directors of the Company. This
opinion does not address the Companys underlying business
decision to approve the Proposed Transaction or constitute a
recommendation to the stockholders of the Company as to how such
stockholders should vote or as to any other action such
stockholders should take regarding the Proposed Transaction.
This opinion may not be reproduced, summarized, excerpted from
or otherwise publicly referred to or disclosed in any manner
without our prior written consent (except the Company may
include this opinion in its entirety in any proxy statement or
information statement relating to the transaction sent to the
Companys stockholders).
Based upon and subject to the foregoing, it is
our opinion as investment bankers that the consideration to be
received by the Companys stockholders in the Proposed
Transaction is fair, from a financial point of view, to such
stockholders.
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Very truly yours,
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/s/ MORGAN LEWIS GITHENS & AHN, INC.
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MORGAN LEWIS GITHENS & AHN, INC.
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App-E-2
APPENDIX F
[MORGAN LEWINS LETTERHEAD]
July 9, 2002
Board of Directors
Toymax International, Inc.
22619 Pacific Coast Hwy.
Malibu, CA 90265
Board of Directors
JAKKS Pacific, Inc.
22619 Pacific Coast Hwy.
Malibu, CA 90265
Board of Directors
JP/ TII Acquisition Corp.
c/o JAKKS Pacific, Inc.
22619 Pacific Coast Hwy.
Malibu, CA 90265
Gentlemen:
Toymax International, Inc. (the
Company) entered into a merger agreement dated
February 10, 2002, with JAKKS Pacific, Inc.
(JAKKS) pursuant to which JP/TII Acquisition Corp.,
a wholly-owned subsidiary of JAKKS (Newco), will
merge with and into the Company and each share of common stock,
par value $0.01 per share, of the Company, other than any shares
held by JAKKS, will receive $3.00 in cash plus
0.0798 shares of common stock of JAKKS, subject to certain
customary adjustments (the Merger Transaction). The
terms and conditions of the Merger Transaction are set forth in
more detail in a definitive merger agreement dated
February 10, 2002 (the Merger Agreement). In
addition, on February 10, 2002, the Company and four of the
Companys principal shareholders (the Selling
Shareholders) entered into a stock purchase agreement
pursuant to which the Selling Shareholders sold to JAKKS
approximately 8.1 million shares of common stock of the
Company representing approximately 66.3% of the Companys
outstanding common stock (the Stock Acquisition).
The terms and conditions of the Stock Acquisition are set forth
in more detail in a stock purchase agreement dated
February 10, 2002 (the Stock Purchase
Agreement). The Stock Acquisition and the Merger
Transaction are referred to collectively herein as the
Proposed Transaction. Morgan Lewins & Co.
Inc. (ML&Co.) rendered a written fairness
opinion, dated February 10, 2002, to the Board of Directors
of the Company that the consideration to be received by the
Companys shareholders in the Proposed Transaction is fair,
from a financial point of view, to such shareholders.
Each of the parties involved, JAKKS, Newco and
Toymax, has requested our opinion, as investment bankers, as to
the fairness from a financial point of view of the consideration
to be received by the Companys shareholders in the Merger
Transaction.
In conducting our analysis and arriving at our
opinion as expressed herein, we have reviewed and analyzed,
among other things, the following:
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(i) the Merger Agreement dated
February 10, 2002;
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(ii) the Stock Purchase Agreement dated
February 10, 2002;
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(iii) JAKKS Form S-4 registration
statement filed with the Securities and Exchange Commission on
May 21, 2002, and its Schedule 13E-3 dated
May 22, 2002;
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(iv) certain other publicly available
financial statements and other business and financial
information concerning the Company and JAKKS and the trading
markets for their respective common stocks;
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App-F-1
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(v) certain internal information and other
data relating to the Company and JAKKS and their business and
prospects, including forecasts and projections provided to us by
management of the Company and JAKKS, respectively;
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(vi) certain publicly available information
concerning certain other companies engaged in businesses which
we believe to be generally comparable to the Company and JAKKS
and the trading markets for certain of such other
companies securities; and
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(vii) the financial terms of certain recent
business combinations which we believe to be relevant.
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We have also met with or spoken to certain
officers and employees of the Company and JAKKS concerning their
respective businesses and operations, assets, present condition
and prospects and undertook such other studies, analyses and
investigations as we deemed appropriate.
In arriving at our opinion, we have assumed and
relied upon the accuracy and completeness of the financial and
other information used by us and have not attempted
independently to verify such information, nor do we assume any
responsibility to do so. We have assumed that the forecasts,
projections and other financial information provided to us by
the Company and JAKKS have been reasonably prepared based on the
best current estimates and judgment of the management of the
Company and JAKKS, respectively, as to the future financial
condition and results of operations of their respective
businesses. We have visited the Companys corporate
headquarters but have not otherwise conducted a physical
inspection of the properties and facilities of the Company or
JAKKS, nor have we made or obtained any independent evaluation
or appraisal of such properties and facilities. We have also
taken into account our assessment of general economic, market
and financial conditions and our experience in similar
transactions, as well as our experience in securities valuation
in general. We have not been retained by the Company to solicit
and we have not solicited offers to acquire or merge with the
Company from third parties. Our opinion necessarily is based
upon economic, market, financial and other conditions as they
exist and can be evaluated on the date hereof and we assume no
responsibility to update or revise our opinion based upon events
or circumstances occurring after the date hereof. However, we
reserve the right but have no obligation to withdraw, revise or
modify our opinion based upon additional information which may
be provided to or obtained by us, which suggests, in our
judgment, a material change in the assumptions upon which our
opinion is based.
This letter and the opinion expressed herein are
for the use of the Board of Directors of each of the Company,
JAKKS and Newco. This opinion does not address the underlying
business decision by each of the Company, JAKKS and Newco to
approve the Proposed Transaction or the Merger Transaction or
constitute a recommendation to the shareholders of the Company
as to how such shareholders should vote or as to any other
action such shareholders should take regarding the Merger
Transaction. This opinion may not be reproduced, summarized,
excerpted from or otherwise publicly referred to or disclosed in
any manner without our prior written consent (except the Company
or JAKKS may include this opinion in its entirety in any proxy
statement or information statement relating to the transaction
sent to the Companys or JAKKS shareholders).
Based upon and subject to the foregoing, it is
our opinion as investment bankers that the consideration to be
received by the Companys shareholders in the Merger
Transaction is fair, from a financial point of view, to such
shareholders.
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Very truly yours,
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/s/ MORGAN LEWINS & CO. INC.
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MORGAN LEWINS & CO. INC.
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App-F-2
APPENDIX G
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of earliest event reported):
August 1, 2002 (July 29, 2002)
Toymax International, Inc
(Exact name of registrant as specified in its
charter)
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Delaware
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0-23215
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11-3391335
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(State or other jurisdiction of incorporation
or organization
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(Commission File Number)
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(I.R.S. Employer Identification No.)
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22619 Pacific Coast Highway, Malibu,
California
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90265
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(Address of principal executive
offices)
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(Zip Code)
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Registrants telephone number, including
area code: (310) 456-7799
TOYMAX INTERNATIONAL, INC.
INDEX TO FORM 8-K
FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION
AUGUST 1, 2002
ITEMS IN FORM 8-K
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Page
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Facing page
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Item 4.
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Changes in Registrants Certifying Accountant
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App-G-1
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Item 7.
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Financial Statements and Exhibits
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App-G-1
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Signatures
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App-G-2
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Exhibit Index
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i
Item 4.
Changes
in Registrants Certifying Accountant
BDO Seidman, LLP was previously the principal
accountants for Toymax International, Inc. (the
Registrant). On July 29, 2002, that firms
appointment as the Registrants principal accountants was
terminated by the Registrant. PKF Certified Public Accountants,
A Professional Corporation (PKF) was engaged as the
Registrants principal accountants effective as of that
date. The decision to change accountants was approved by the
Board of Directors of the Registrant.
On March 10, 2002, JAKKS Pacific, Inc.
(JAKKS) acquired approximately 66.8% of the
Registrants outstanding shares of common stock. As a
result of such transaction, the Registrant became a
majority-owned subsidiary of JAKKS. Because PFK is JAKKS
principal accountants, the Registrants and JAKKS
boards of directors determined that it is in the best interests
of both companies to have the same principal accountants.
In connection with the audits of the two fiscal
years ended March 31, 2002, and the subsequent interim
period through July 29, 2002, there were no disagreements
with BDO Seidman, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their
satisfaction would have caused them to make reference in
connection with their opinion to the subject matter of the
disagreement.
The audit reports of BDO Seidman, LLP on the
consolidated financial statements of the Registrant as of and
for the years ended March 31, 2001 and March 31, 2002,
did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit
scope, or accounting principles.
A letter from BDO Seidman, LLP is attached as
Exhibit 16 to this Form 8-K.
During the Registrants two most recent
fiscal years and through the filing date of this Current Report
on Form 8-K, neither the Registrant nor anyone acting on
its behalf consulted with PKF with respect to the application of
accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might
be rendered on the Registrants consolidated financial
statements, or any other matters or reportable events as set
forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
Item 7.
Financial
Statements, Pro Forma Financial Information and
Exhibits
(c) Exhibits
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Exhibit
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Number
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Description
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16
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Letter of BDO Seidman, LLP dated July 29,
2002(1)
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1
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned hereunto duly
authorized.
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TOYMAX INTERNATIONAL, INC.
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Joel M. Bennett
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Chief Financial Officer
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Dated: August 1, 2002
2
APPENDIX H
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d)
OF THE SECURITIES ACT OF 1934
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For the quarterly period ended June 30,
2002
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d)
OF THE SECURITIES ACT OF 1934
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For the transition period
from to
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Commission File Number: 0-23215
Toymax International, Inc.
(Exact name of registrant as specified in its
charter)
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Delaware
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11-3391313
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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22619 Pacific Coast Highway
Malibu, California 90265
(Address, including zip code, of principal
executive offices)
(310) 456-7799
(Registrants telephone number, including
area code)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
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
þ
No
o
APPLICABLE ONLY TO CORPORATE
ISSUERS:
Indicate the number of shares outstanding of each
of the issuers classes of common stock, as of the latest
practicable date.
Common stock, par value $.01, 12,316,586 as of
August 14, 2002.
TOYMAX INTERNATIONAL, INC. AND
SUBSIDIARIES
FORM 10-Q
June 30, 2002
INDEX
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Page
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PART I FINANCIAL
INFORMATION
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Item 1.
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Financial Statements:
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Condensed Consolidated Balance Sheets as of March
31, 2002 and June 30, 2002 (Unaudited)
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Condensed Consolidated Statements of Operations
for the Three Months Ended June 30, 2002 and 2001 (Unaudited)
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Condensed Consolidated Statements of Cash Flows
for the Three Months Ended June 30, 2002 and 2001 (Unaudited)
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Notes to Condensed Consolidated Financial
Statements
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Item 2.
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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Item 3.
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Quantitative and Qualitative Disclosures about
Market Risk
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PART II OTHER
INFORMATION
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Item 1.
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Legal Proceedings
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Item 2.
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Changes in Securities and Use of Proceeds
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Item 3.
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Defaults by the Company upon Its Senior Securities
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Item 4.
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Submission of Matters to a Vote of Security
Holders
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Item 5.
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Other Information
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Item 6.
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Exhibits and Reports on Form 8-K
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Signatures
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1
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Following Cautionary Statement Is Included
in This Quarterly Report Pursuant to the Safe Harbor
Provisions of the Private Securities Litigation Reform Act of
1995:
Certain expectations and projections regarding
the future performance of Toymax International, Inc. and its
subsidiaries (Toymax) discussed in this quarterly
report are forward-looking and are made under the safe
harbor provisions of the Private Securities Litigation
Reform Act of 1995. These expectations and projections are based
on currently available competitive, financial, and economic data
along with Toymaxs operating plans and are subject to
certain future events and uncertainties. Forward-looking
statements can be identified by the use of forward-looking
terminology, such as may, will,
should, expect, anticipate,
estimate, project, continue,
plans, intends or other similar
terminology. Management cautions you that the following factors,
among others, could cause Toymaxs actual consolidated
results of operations and financial position in fiscal 2003 and
thereafter to differ significantly from those expressed in
forward-looking statements:
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Dependence on the timely development,
introduction and customer acceptance of new products, which may
affect Toymaxs ability to successfully redesign, restyle
and extend existing core products and product lines and
successfully bring new products to market.
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Possible weaknesses in economic conditions, both
domestically and internationally, which may negatively affect
the sales of Toymaxs products and the costs associated
with manufacturing and distributing these products.
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Dependence on the success of new licenses, which
Toymax acquires for marketing with new and existing products.
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Toymaxs inability to accurately predict
future consumer demand.
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Increased competitive pressure, both domestically
and internationally, which may negatively affect the sales of
Toymaxs products.
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Changes in consumer preferences, which may
negatively affect Toymaxs business.
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Significant changes in interest rates, both
domestically and internationally, which may negatively affect
Toymaxs cost of financing its operations.
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Currency fluctuations, which may affect
Toymaxs reportable income.
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Development of new technologies, including the
Internet, which may create new risks to Toymaxs ability to
protect its intellectual property rights.
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Changes in laws or regulations, both domestically
and internationally, including those affecting consumer
products, environmental activities or trade restrictions, which
may lead to increased costs or interruption in normal business
operations of Toymax.
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Other factors and risks that may be described
from time to time in Toymaxs public announcements and
filings with the Securities and Exchange Commission.
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2
Results of Operations
For purposes of the fiscal year comparisons
which follow, figures referring to the financial performance of
Toymax Inc. (TMI), Toymax (H.K.) Limited
(THK), are referred to as Toymax Brands and those
referring to the performance of Go Fly A Kite, Inc.
(GFK) and the Funnoodle product line
(Funnoodle) are referred to as Toymax Enterprises.
The operations of Candy Planet, Monogram International, Inc,
Monogram Products (H.K.) Limited (collectively with Monogram
International, Inc.,Monogram) and Maxverse
Interactive, Inc. (Maxverse) are reflected as
discontinued operations.
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Three months ended June 30, 2002
compared with the three months ended June 30,
2001
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On March 11, 2002, Jakks Pacific, Inc
(JAKKS), acquired approximately a 66.8% controlling
interest in Toymax. In connection with this acquisition by
JAKKS, Toymax developed and began to implement a restructuring
plan to maximize its future operating results. As part of this
plan Toymax has determined not to continue the operations of
Maxverse. Thus, for the quarter ended June 30, 2001,
Maxverse is treated as a discontinued operation along with
Monogram and Candy Plant, which were both sold effective
November 30, 2001.
Net Sales.
Net sales
for the quarter ended June 30, 2002 decreased
$1.3 million, or 6.3%, to $18.7 million from
$20.0 million for the quarter ended June 30, 2001.
Net sales of Toymax Brands for the quarter ended
June 30, 2002 increased 5.7% to $7.2 million, or 38.3%
of total net sales, from $6.8 million, or 34.0% of total
net sales for the quarter ended June 30, 2001. The increase
in net sales was primarily due to a concentrated effort to
reduce on hand inventory in connection with the restructuring
plan implemented in March 2002.
Net sales of Toymax Enterprises for the quarter
ended June 30, 2002, decreased 12.5% to $11.6 million,
or 61.7% of total net sales, from $13.2, or 66.0% of total net
sales for the quarter ended June 30, 2001. The decrease in
net sales was primarily due to reduced sales of water leisure
products and wind wheels.
Gross Profit.
Gross
profit for the quarter ended June 30, 2002, increased by
$0.5 million, or 8.8%, to $5.8 million, or 31.1% of
net sales, from $5.4 million, or 26.8% of net sales, for
the quarter ended June 30, 2001.
The gross profit of Toymax Brands for the quarter
ended June 30, 2002 increased by $0.5 million to
$1.7 million, or 24.2% of net sales, from
$1.2 million, or 18.6% of net sales for the quarter ended
June 2001. The increase in gross margin was primarily the result
of product mix. The gross profit of Toymax Enterprises remained
unchanged at $4.1 million or 35.3% of net sales compared to
31.0% of net sales for the quarter ended June 30, 2001. The
increase in the gross profit percentage was primarily due to the
product mix of kites and banners and to a lesser extent water
leisure products.
Selling and Administrative
Expenses.
Selling and administrative
expenses for the quarter ended June 30, 2002 decreased by
$0.9 million, or 14.0%, to $5.5 million from
$6.4 million for the quarter ended June 30, 2001.
Selling and administrative expenses of Toymax
Brands for the quarter ended June 30, 2002 decreased
$0.7 million, or 17.9%, to $3.4 million from
$4.1 million for the quarter ended June 30, 2001. The
decrease was primarily due to the benefits being realized from
the restructuring which began in March 2002. Selling and
administrative expenses of Toymax Enterprises for the quarter
ended June 30, 2002 decreased by $0.2 million, or
7.1%, to $2.1 million from $2.3 million for the
quarter ended June 30, 2001. The decrease was primarily due
to the benefits being realized from the restructuring which
began in March 2002.
Operating Income (Loss).
As a result of the foregoing,
operating income for the quarter ended June 30, 2002
increased by $1.4 million, to $0.3 million from a
operating loss of $1.1 million.
3
The operating loss of Toymax Brands for the
quarter ended June 30, 2002 decreased by $1.2 million
to $1.6 million from $2.8 million for the quarter
ended June 30, 2001. Operating income for Toymax
Enterprises increased by $0.2 million to $2.0 million
from $1.8 million for the quarter ended June 30, 2001.
Other Expense, Net.
Other expense, net decreased to other
income of $0.1 million for the quarter ended June 30,
2002 compared to other expenses of $0.4 million primarily
due to the termination of both the bank facility and the
factoring agreement.
Income (Loss) Before Income Taxes.
Income before income taxes for the
quarter ended June 30, 2002 was $0.4 million compared
to a loss before income taxes of $1.5 million for the
quarter ended June 30, 2001. Toymax Brands had a loss
before income taxes for the quarter ended June 30, 2002 of
$1.6 million compared to a loss of $3.2 million for
the quarter ended June 30, 2001. Toymax Enterprises had
income before income taxes of $2.0 million for the quarter
ended June 30, 2002 compared to $1.7 million for the
quarter ended June 30, 2001.
Provision (Benefit) For Income Taxes.
The effective rate for the quarter
ended June 30, 2002 is 27% compared to a benefit of 33% for
the quarter ended June 30, 2001 which approximates the
expected annual effective rate.
Income (Loss) From Continuing
Operations.
Income from continuing
operations is $0.3 million for the quarter ended
June 30, 2002 compared to a loss of $1.0 million for
the quarter ended June 30, 2001.
Loss From Discontinued Operations.
The loss from discontinue operations
for the quarter ended June 30, 2001 was $0.7 million,
for the quarter ended June 30, 2002 there was no
discontinued operations.
Net Income (Loss).
As a result of the foregoing, net income for the quarter ended
June 30, 2002 increased $2.0 million to
$0.3 million ($0.02 per diluted share) from a net loss of
$1.7 million ($0.14 per diluted share) for the quarter
ended June 30, 2001.
Liquidity and Capital Resources
The Company historically has funded its
operations and capital requirements from cash generated from
operations and from financing activities. During the three
months ended June 30, 2002, cash and cash equivalents
increased $4.1 million to $5.0 million.
Cash used in operating activities was
approximately $2.6 million in 2002, as compared to
$3.4 million in 2001. The increase was primarily due to the
net income for the period and the decrease in prepaid expenses
and inventories, which was partially offset by the increase in
due from factor and accounts receivable and the decrease in
accounts payable and accrued expenses and income taxes payable.
Investing activities used $0.1 million in
net cash in 2002, as compared to $0.8 million in 2001.
Investing activities in the current and prior year periods
consisted of capital expenditures, principally for the purchase
of molds and equipment for new products.
Financing activities provided $6.8 million
in net cash in 2002 primarily due to funding received by JAKKS
partially offset by the decrease in long-term obligations. In
2001, financing activities provided $3.5 million in net
cash due to an increase in our bank credit facility, partially
offset by a decrease in long term obligations.
In March 2002, Toymaxs $25.0 million
bank facility was paid off in full and terminated.
In April 2002, Toymax (H.K.) Limited subsidiary
terminated its credit facility with The Hongkong and Shanghai
Banking Corporation Limited. The facility had provided for an
import line of credit of $500,000 and the acceptance of an
export letter of credit guarantee for documents presented with
discrepancies of up to approximately $2.3 million.
Toymax expects to fund its near-term and
long-term cash requirements from a combination of existing cash
balances, cash flow from operations and borrowings from JAKKS.
There can be no assurance that sufficient cash flows from
operations will materialize or that financing from JAKKS will be
available in
4
amounts, at rates, or on terms and conditions
acceptable to Toymax. In such event, additional funding would be
required.
New Accounting Standards
In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of
a liability for an asset retirement obligation to be recognized
in the period in which it is incurred if a reasonable estimate
of fair value can be made. The associated asset retirement costs
are capitalized as part of the carrying amount of the long-lived
asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. We believe the adoption of this
statement will have no material impact on the financial
statements.
Item
3.
Quantitative and Qualitative
Disclosures About Market Risk
The Company is exposed to certain market risks,
which arise from transactions entered into in the normal course
of business. The Companys primary exposure is to foreign
currency exchange fluctuations.
Foreign Currency Risk
While the Companys product purchases are
transacted in U.S. dollars, most transactions among the
suppliers and subcontractors of Tai Nam Industrial Company
Limited, an OEM toy manufacturer that has been the
Companys most important manufacturer since inception, are
effected in Hong Kong dollars. Accordingly, fluctuations in Hong
Kong monetary rates may have an impact on the Companys
cost of goods. However, since 1983, the value of the Hong Kong
dollar has been tied to the value of the United States dollar,
eliminating fluctuations between the two currencies. Despite the
announcements by the Hong Kong Government that it is determined
to maintain such a fixed exchange rate, there can be no
assurance that the Hong Kong dollar will continue to be tied to
the United States dollar in the near future or longer term.
Furthermore, appreciation of Chinese currency values relative to
the Hong Kong dollar could increase the cost to the Company of
the products manufactured in China, and thereby have a negative
impact on the Company.
PART II.
OTHER INFORMATION
Item 1.
Legal
Proceedings
The Company is involved in various legal
proceedings in the ordinary course of its business activities.
The Company believes that the resolution of such legal
proceedings and claims, individually and in the aggregate, are
not likely to have a material adverse effect on its financial
position or results of operations.
Reference is made to Part I, Item 3, Legal
Proceedings, in the Registrants Annual Report on
Form 10-K for the year ended March 31, 2002.
Item
2.
Changes in Securities and Use
of Proceeds
Reference is made to Part II, Item 5, Market
for the Registrants Common Equity and Related Stockholder
Matters, in the Registrants Annual Report on
Form 10-K for the year ended March 31, 2002.
Under the Companys stock repurchase program
approved by the Board of Directors in May 1999, as of
February 8, 2002, a total of 66,200 shares of Toymax common
stock have been repurchased for a total purchase price of
$210,403.
Item
3.
Defaults By the Company Upon
Its Senior Securities
None.
5
Item
4.
Submission of Matters to a
Vote of Security Holders
None.
Item 5.
Other
Information
At the Companys Annual Meeting of
Stockholders on August 9, 2001, the stockholders approved
that the name of the Company be changed to Ma Enterprises, Inc.
The steps to be taken to effectuate the name change from Toymax
International, Inc. to Ma Enterprises, Inc. are not complete as
of the date of this report.
Item
6.
Exhibits and Reports on Form
8-K
a) Exhibits
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99.1
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Certification of Chief Executive Officer
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99.2
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Certification of Chief Financial Officer
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b) Reports on Form 8-K
A current Report on Form 8-K relating to
changes in our certifying accountants was filed on
August 1, 2002.
6
SIGNATURES
Pursuant to the requirements of the Securities
and Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto
duly authorized.
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TOYMAX INTERNATIONAL, INC.
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(Registrant)
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Joel M. Bennett
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Chief Financial Officer
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(Principal Financial Officer)
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Date: August 14, 2002
7
EXHIBIT 99.1
CERTIFICATION OF CHIEF EXECUTIVE
OFFICER
Pursuant to 18 U.S.C. Section 1350, the
undersigned officer of Toymax International, Inc.
(Toymax), hereby certifies that Toymaxs
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002 (the Report) fully complies with
the requirements of Section 13(a) or 15(d), as applicable,
of the Securities Exchange Act of 1934 and that the information
contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of
Toymax.
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/s/ JACK FRIEDMAN
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Jack Friedman
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President and Chief Executive Officer
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Principal Executive Officer
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Dated: August 14, 2002
EXHIBIT 99.2
CERTIFICATION OF CHIEF FINANCIAL
OFFICER
Pursuant to 18 U.S.C. Section 1350, the
undersigned officer of Toymax International, Inc. (Toymax
), hereby certifies that Toymaxs Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (the
Report) fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934 and that the information contained in the
Report fairly presents, in all material respects, the financial
condition and results of operations of Toymax.
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/s/ JOEL M. BENNETT
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Joel M. Bennett
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Chief Financial Officer
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Principal Financial Officer
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Dated: August 14, 2002
Appendix 2
AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION
OF
JAKKS PACIFIC, INC.
The undersigned, Stephen G. Berman, hereby
certifies that:
A. He is the Secretary of JAKKS Pacific,
Inc., a Delaware corporation (the Corporation).
B. The restated certificate of incorporation
of the Corporation was originally filed with the Secretary of
State of the State of Delaware on January 5, 1996.
C. The amendment and restatement set forth
herein has been duly approved by the board of directors and the
stockholders of the Corporation in accordance with the
applicable provisions of Section 242 and 245 of the
Delaware General Corporation Law.
D. The text of the Corporations
restated certificate of incorporation is hereby amended and
restated to read in its entirety as follows:
ARTICLE 1 The name of the corporation
is JAKKS Pacific, Inc.
ARTICLE 2 The address of the
corporations registered office in the State of Delaware is
30 Old Rudnick Lane, Dover, Delaware 19901, County of Kent, and
the name of its registered agent at such address is Bridge
Service Corp.
ARTICLE 3 The purpose of the
corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law
of Delaware.
ARTICLE 4 The total number of shares
that the Corporation is authorized to issue is 105,000,000,
consisting of 100,000,000 shares of common stock, par value
$0.001 per share, and 5,000,000 shares of preferred stock, par
value $0.001 per share. The board of directors is hereby
expressly granted the authority to issue the preferred stock
from time to time in one or more classes or series and by
resolution or resolutions to establish the number of shares to
be included in each such class or series and to fix the
designations, powers, preferences and rights of the shares of
each such class or series and the qualifications, limitations
and restrictions thereof; and to increase or decrease the number
of shares of any series subsequent to the issue of the shares of
that series, but not below the number of shares of such series
then outstanding.
Each share of preferred stock issued by the
Corporation, if reacquired by the Corporation (whether by
redemption, repurchase, conversion to common stock or other
means), shall upon such reacquisition resume the status of
authorized and unissued shares of preferred stock, undesignated
as to series and available for designation and issuance by the
Corporation in accordance with the immediately preceding
paragraph.
ARTICLE 5 The Corporation is to have
perpetual existence.
ARTICLE 6 In furtherance and not in
limitation of the powers conferred by statute, the board of
directors of the Corporation is expressly authorized to adopt,
amend or repeal bylaws of the Corporation.
ARTICLE 7 No director of the
corporation shall have any personal liability to the corporation
or its stockholders for monetary damages for breach of fiduciary
duty as a director, except that, if and to the extent required
by paragraph (7) of subsection (b) of Section 102
of the General Corporation Law of Delaware.
ARTICLE 8 The corporation shall
indemnify, to the fullest extent permitted by Section 145
of the General Corporation Law of Delaware, each person who may
be so indemnified thereunder.
ARTICLE 9 The Corporation reserves the
right to amend, alter, change or repeal any provision contained
in this certificate of incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.
App-2-1
The foregoing Amended and Restated Certificate of
Incorporation has been duly adopted by the Corporations
board of directors and stockholders in accordance with the
applicable provisions of Section 242 and 245 of the
Delaware General Corporation Law.
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STEPHEN G. BERMAN
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Secretary
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Dated: ,
2002.
App-2-2
Appendix 3
JAKKS PACIFIC, INC.
2002 Stock Award and Incentive Plan
JAKKS PACIFIC, INC.
2002 Stock Award and Incentive Plan
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1. Purpose
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App-3-1
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2. Definitions
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App-3-1
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3. Administration
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App-3-2
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4. Stock Subject to Plan
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App-3-3
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5. Eligibility; Per-Person Award
Limitations
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App-3-4
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6. Specific Terms of Awards
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App-3-4
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7. Performance Awards, Including
Annual Incentive Awards
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App-3-7
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8. Certain Provisions Applicable to
Awards
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App-3-9
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9. Change in Control
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App-3-10
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10. Awards to Non-Employee Directors
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App-3-12
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11. General Provisions
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App-3-12
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App-3-i
JAKKS PACIFIC, INC.
2002 Stock Award and Incentive Plan
1.
Purpose.
The purpose of this 2002 Stock Award and Incentive Plan (the
Plan) is to aid JAKKS Pacific, Inc. a Delaware
corporation (the Company), in attracting, retaining,
motivating and rewarding employees (including executive officers
and employee directors), non-employee directors, and other
persons (including consultants and advisors) who provide
substantial services to the Company or its subsidiaries or
affiliates, to provide for equitable and competitive
compensation opportunities, to recognize individual
contributions and reward achievement of Company goals, and
promote the creation of long-term value for stockholders by
closely aligning the interests of Participants with those of
stockholders. The Plan authorizes stock-based and cash-based
incentives for Participants.
2.
Definitions.
In addition to the terms defined in Section 1 above and
elsewhere in the Plan, the following capitalized terms used in
the Plan have the respective meanings set forth in this Section:
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(a) Annual Incentive Award means
a type of Performance Award granted to a Participant under
Section 7(c) representing a conditional right to receive
cash, Stock or other Awards or payments, as determined by the
Committee, based on performance in a performance period of one
fiscal year or a portion thereof.
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(b) Award means any Option, SAR,
Restricted Stock, Deferred Stock, Stock granted as a bonus or in
lieu of another award, Dividend Equivalent, Other Stock-Based
Award, Performance Award or Annual Incentive Award, together
with any related right or interest, granted to a Participant
under the Plan.
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(c) Beneficiary means the legal
representatives of the Participants estate entitled by
will or the laws of descent and distribution to receive the
benefits under a Participants Award upon a
Participants death, provided that, if and to the extent
authorized by the Committee, a Participant may be permitted to
designate a Beneficiary, in which case the
Beneficiary instead will be the person, persons,
trust or trusts (if any are then surviving) which have been
designated by the Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the
benefits specified under the Participants Award upon such
Participants death. Unless otherwise determined by the
Committee, any designation of a Beneficiary other than a
Participants spouse shall be subject to the written
consent of such spouse.
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(d) Board means the
Companys Board of Directors.
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(e) Change in Control and
related terms have the meanings specified in Section 9.
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(f) Code means the Internal
Revenue Code of 1986, as amended. References to any provision of
the Code or regulation (including a proposed regulation)
thereunder shall include any successor provisions and
regulations.
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(g) Committee means a committee
of two or more directors designated by the Board to administer
the Plan; provided, however, that, directors appointed or
serving as members of a Board committee designated as the
Committee shall not be employees of the Company or any
subsidiary or affiliate. In appointing members of the Committee,
the Board will consider whether a member is or will be a
Qualified Member, but such members are not required to be
Qualified Members at the time of appointment or during their
term of service on the Committee. The full Board may perform any
function of the Committee hereunder, in which case the term
Committee shall refer to the Board.
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(h) Covered Employee means an
Eligible Person who is a Covered Employee as specified in
Section 11(j).
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(i) Deferred Stock means a
right, granted to a Participant under Section 6(e), to
receive Stock or other Awards or a combination thereof at the
end of a specified deferral period.
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App-3-1
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(j) Dividend Equivalent means a
right, granted to a Participant under Section 6(g), to
receive cash, Stock, other Awards or other property equal in
value to all or a specified portion of the dividends paid with
respect to a specified number of shares of Stock.
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(k) Effective Date means the
effective date specified in Section 11(q).
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(l) Eligible Person has the
meaning specified in Section 5.
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(m) Exchange Act means the
Securities Exchange Act of 1934, as amended. References to any
provision of the Exchange Act or rule (including a proposed
rule) thereunder shall include any successor provisions and
rules.
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(n) Fair Market Value shall mean
the amount determined by the Board or the Committee, except that
if the Stock is listed on a national securities exchange (or
traded on the over-the-counter market), the fair market value
shall be the closing price of the Stock on such exchange (or
market as reported by the National Quotation Bureau) on the day
on which an Award is granted hereby (or with respect to a Change
in Control or other event requiring the valuation of the Stock,
the closing price on the appropriate date as determined by the
Board or Committee), or, if there is no trading or closing price
on that day, the closing price on the most recent day preceding
the day for which such prices are available.
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(o) Incentive Stock Option or
ISO means any Option designated as an incentive
stock option within the meaning of Code Section 422 or any
successor provision thereto and qualifying thereunder.
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(p) Option means a right,
granted to a Participant under Section 6(b), to purchase Stock
or other Awards at a specified price during specified time
periods.
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(q) Other Stock-Based Awards
means Awards granted to a Participant under Section 6(h).
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(r) Participant means a person
who has been granted an Award under the Plan which remains
outstanding, including a person who is no longer an Eligible
Person.
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(s) Performance Award means a
right, granted to a Participant under Sections 6(i) and 7,
to receive Awards or payments based upon performance criteria
specified by the Committee.
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(t) Preexisting Plan means the
Companys Third Amended and Restated 1995 Stock Option Plan.
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(u) Qualified Member means a
member of the Committee who is a Non-Employee
Director within the meaning of Rule 16b-3(b)(3) and
an outside director within the meaning of
Regulation 1.162-27 under Code Section 162(m).
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(v) Restricted Stock means Stock
granted to a Participant under Section 6(d) that is subject
to certain restrictions and to a risk of forfeiture.
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(w) Rule 16b-3 means
Rule 16b-3, as from time to time in effect and applicable
to Participants, promulgated by the Securities and Exchange
Commission under Section 16 of the Exchange Act.
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(x) Stock means the
Companys Common Stock, par value $.001 per share, and any
other equity securities of the Company that may be substituted
or resubstituted for Stock pursuant to Section 11(c).
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(y) Stock Appreciation Rights or
SAR means a right granted to a Participant under
Section 6(c).
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3.
Administration.
(a)
Authority of the Committee.
The
Plan shall be administered by the Committee (subject to the
Boards authority to restrict the Committee), which shall
have full and final authority, in each case subject to and
consistent with the provisions of the Plan, to select Eligible
Persons to become Participants; to grant Awards; to determine
the type and number of Awards, the dates on which Awards may be
exercised and on which the risk of forfeiture or deferral period
relating to Awards shall lapse or terminate, the acceleration of
any such dates, the expiration date of any Award, whether, to
what extent, and under what circumstances an
App-3-2
Award may be settled, or the exercise price of an
Award may be paid, in cash, Stock, other Awards, or other
property, and other terms and conditions of, and all other
matters relating to, Awards; to prescribe documents evidencing
or setting terms of Awards (such Award documents need not be
identical for each Participant), amendments thereto, and rules
and regulations for the administration of the Plan and
amendments thereto; to construe and interpret the Plan and Award
documents and correct defects, supply omissions or reconcile
inconsistencies therein; and to make all other decisions and
determinations as the Committee may deem necessary or advisable
for the administration of the Plan. Decisions of the Committee
with respect to the administration and interpretation of the
Plan shall be final, conclusive, and binding upon all persons
interested in the Plan, including Participants, Beneficiaries,
transferees under Section 11(b) and other persons claiming
rights from or through a Participant, and stockholders. The
foregoing notwithstanding, the Board shall perform the functions
of the Committee for purposes of granting Awards under the Plan
to non-employee directors (authority with respect to other
aspects of non-employee director awards is not exclusive to the
Board, however).
(b)
Manner of Exercise of Committee
Authority.
At any time that a member of the Committee is not
a Qualified Member, (i) any action of the Committee
relating to an Award intended by the Committee to qualify as
performance-based compensation within the meaning of
Code Section 162(m) and regulations thereunder may be taken
by a subcommittee, designated by the Committee or the Board,
composed solely of two or more Qualified Members, and
(ii) any action relating to an Award granted or to be
granted to a Participant who is then subject to Section 16
of the Exchange Act in respect of the Company may be taken
either by such a subcommittee or by the Committee but with each
such member who is not a Qualified Member abstaining or recusing
himself or herself from such action, provided that, upon such
abstention or recusal, the Committee remains composed solely of
two or more Qualified Members. Such action, authorized by such a
subcommittee or by the Committee upon the abstention or recusal
of such non-Qualified Member(s), shall be the action of the
Committee for purposes of the Plan. The express grant of any
specific power to the Committee, and the taking of any action by
the Committee, shall not be construed as limiting any power or
authority of the Committee. The Committee may delegate to
officers or managers of the Company or any subsidiary or
affiliate, or committees thereof, the authority, subject to such
terms as the Committee shall determine, to perform such
functions, including administrative functions, as the Committee
may determine. Notwithstanding the foregoing, no action may be
taken pursuant to this Section 3(b) if such action would
result in the loss of an exemption under Rule 16b-3(d) for
Awards granted to Participants subject to Section 16 of the
Exchange Act in respect of the Company and would cause Awards
intended to qualify as performance-based
compensation under Code Section 162(m) to fail to so
qualify.
(c)
Limitation of Liability.
The
Committee and each member thereof, and any person acting
pursuant to authority delegated by the Committee, shall be
entitled, in good faith, to rely or act upon any report or other
information furnished by any executive officer, other officer or
employee of the Company or a subsidiary or affiliate, the
Companys independent auditors, consultants or any other
agents assisting in the administration of the Plan. Members of
the Committee, any person acting pursuant to authority delegated
by the Committee, and any officer or employee of the Company or
a subsidiary or affiliate acting at the direction or on behalf
of the Committee or a delegee shall not be personally liable for
any action or determination taken or made in good faith with
respect to the Plan, and shall, to the extent permitted by law,
be fully indemnified and protected by the Company with respect
to any such action or determination.
4.
Stock Subject
to Plan.
(a)
Overall Number of Shares Available
for Delivery.
Subject to adjustment as provided in
Section 11(c), the total number of shares of Stock reserved
and available for delivery in connection with Awards under the
Plan shall be (i) 2,300,000, plus (ii) the number of
shares that remain available for issuance under the Preexisting
Plan after all awards thereunder have been settled, plus
(iii) the number of shares subject to awards under the
Preexisting Plan that become available in accordance with
Section 4(b) after the Effective Date; provided, however,
that (A) the total number of shares with respect to which
ISOs may be granted shall not exceed the number specified under
clause (i) above and (B) no more than 2,000,000 shares
shall be used
App-3-3
for Awards other than options or SARs. Any shares
of Stock delivered under the Plan shall consist of authorized
and unissued shares or treasury shares.
(b)
Share Counting Rules.
The
Committee may adopt reasonable counting procedures to ensure
appropriate counting, avoid double counting (as, for example, in
the case of tandem or substitute awards) and make adjustments if
the number of shares of Stock actually delivered differs from
the number of shares previously counted in connection with an
Award. Shares subject to an Award or an award under the
Preexisting Plan that is canceled, expired, forfeited, settled
in cash or otherwise terminated without a delivery of shares to
the Participant will again be available for Awards, and shares
withheld in payment of the exercise price or taxes relating to
an Award or Preexisting Plan award and shares equal to the
number surrendered in payment of any exercise price or taxes
relating to an Award or Preexisting Plan award shall be deemed
to constitute shares not delivered to the Participant and shall
be deemed to again be available for Awards under the Plan. In
addition, in the case of any Award granted in substitution for
an award of a company or business acquired by the Company or a
subsidiary or affiliate, shares issued or issuable in connection
with such substitute Award shall not be counted against the
number of shares reserved under the Plan, but shall be available
under the Plan by virtue of the Companys assumption of the
plan or arrangement of the acquired company or business. This
Section 4(b) shall apply to the number of shares reserved
and available for ISOs only to the extent consistent with
applicable regulations relating to ISOs under the Code.
5.
Eligibility;
Per-Person Award Limitations.
Awards may be granted under
the Plan only to Eligible Persons. For purposes of the Plan, an
Eligible Person means an employee of the Company or
any subsidiary or affiliate, including any executive officer, a
non-employee director of the Company, a consultant, advisor or
other person who provides substantial services to the Company or
a subsidiary or affiliate, and any person who has been offered
employment by the Company or a subsidiary or affiliate, provided
that such prospective employee may not receive any payment or
exercise any right relating to an Award until such person has
commenced employment with the Company or a subsidiary or
affiliate. An employee on leave of absence may be considered as
still in the employ of the Company or a subsidiary or affiliate
for purposes of eligibility for participation in the Plan. For
purposes of the Plan, a joint venture in which the Company or a
subsidiary has a substantial direct or indirect equity
investment shall be deemed an affiliate, if so determined by the
Committee. In each calendar year during any part of which the
Plan is in effect, an Eligible Person may be granted Awards
intended to qualify as performance-based
compensation under Code Section 162(m) under each of
Section 6(b), 6(c), 6(d), 6(e), 6(f), 6(g) or 6(h) relating
to up to his or her Annual Limit (such Annual Limit to apply
separately to the type of Award authorized under each specified
subsection, except that the limitation applies to Dividend
Equivalents under Section 6(g) only if such Dividend
Equivalents are granted separately from and not as a feature of
another Award). A Participants Annual Limit, in any
calendar year during any part of which the Participant is then
eligible under the Plan, shall equal 1,000,000 shares plus the
amount of the Participants unused Annual Limit relating to
the same type of Award as of the close of the previous year,
subject to adjustment as provided in Section 11(c). In the
case of an Award which is not valued in a way in which the
limitation set forth in the preceding sentence would operate as
an effective limitation satisfying Treasury
Regulation 1.162-27(e)(4) (including a Performance Award
under Section 7 not related to an Award specified in
Section 6), an Eligible Person may not be granted Awards
authorizing the earning during any calendar year of an amount
that exceeds the Participants Annual Limit, which for this
purpose shall equal $5,000,000 plus the amount of the
Participants unused cash Annual Limit as of the close of
the previous year (this limitation is separate and not affected
by the number of Awards granted during such calendar year
subject to the limitation in the preceding sentence). For this
purpose, (i) earning means satisfying performance
conditions so that an amount becomes payable, without regard to
whether it is to be paid currently or on a deferred basis or
continues to be subject to any service requirement or other
non-performance condition, and (ii) a Participants
Annual Limit is used to the extent an amount or number of shares
may be potentially earned or paid under an Award, regardless of
whether such amount or shares are in fact earned or paid.
6.
Specific Terms
of Awards.
(a)
General.
Awards may be granted on
the terms and conditions set forth in this Section 6. In
addition, the Committee may impose on any Award or the exercise
thereof, at the date of grant or thereafter
App-3-4
(subject to Section 11(e)), such additional
terms and conditions, not inconsistent with the provisions of
the Plan, as the Committee shall determine, including terms
requiring forfeiture of Awards in the event of termination of
employment or service by the Participant and terms permitting a
Participant to make elections relating to his or her Award. The
Committee shall retain full power and discretion with respect to
any term or condition of an Award that is not mandatory under
the Plan. The Committee shall require the payment of lawful
consideration for an Award to the extent necessary to satisfy
the requirements of the Delaware General Corporation Law, and
may otherwise require payment of consideration for an Award
except as limited by the Plan.
(b)
Options.
The Committee is
authorized to grant Options to Eligible Persons on the following
terms and conditions:
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(i)
Exercise Price.
The exercise
price per share of Stock purchasable under an Option (including
both ISOs and non-qualified Options) shall be determined by the
Committee, provided that such exercise price shall be not less
than the Fair Market Value of a share of Stock on the date of
grant of such Option, subject to Sections 6(f) and 9(a).
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(ii)
Option Term; Time and Method of
Exercise.
The Committee shall determine the term of each
Option, provided that in no event shall the term of any ISO or
SAR in tandem therewith exceed a period of ten years from the
date of grant. The Committee shall determine the time or times
at which or the circumstances under which an Option may be
exercised in whole or in part (including based on achievement of
performance goals and/or future service requirements), the
methods by which such exercise price may be paid or deemed to be
paid and the form of such payment (subject to
Section 11(k)), including, without limitation, cash, Stock,
other Awards or awards granted under other plans of the Company
or any subsidiary or affiliate, or other property (including
notes and other contractual obligations of Participants to make
payment on a deferred basis, such as through cashless
exercise arrangements, to the extent permitted by
applicable law), and the methods by or forms in which Stock will
be delivered or deemed to be delivered in satisfaction of
Options to Participants (including deferred delivery of shares
representing the Option profit, at the election of
the Participant or as mandated by the Committee, with such
deferred shares subject to any vesting, forfeiture or other
terms as the Committee may specify).
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(iii)
ISOs.
The terms of any ISO
granted under the Plan shall comply in all respects with the
provisions of Code Section 422, including but not limited
to the requirement that no ISO shall be granted more than ten
years after the Effective Date.
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(c)
Stock Appreciation Rights.
The
Committee is authorized to grant SARs to Eligible Persons on the
following terms and conditions:
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(i)
Right to Payment.
An SAR shall
confer on the Participant to whom it is granted a right to
receive, upon exercise thereof, the excess of (A) the Fair
Market Value of one share of Stock on the date of exercise (or,
in the case of a Limited SAR, the Fair Market Value
determined by reference to the Change in Control Price, as
defined under Section 9(d) hereof) over (B) the grant
price of the SAR as determined by the Committee.
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(ii)
Other Terms.
The Committee shall
determine at the date of grant or thereafter the time or times
at which and the circumstances under which an SAR may be
exercised in whole or in part (including based on achievement of
performance goals and/or future service requirements), the
method of exercise, method of settlement, form of consideration
payable in settlement, method by or forms in which Stock will be
delivered or deemed to be delivered to Participants, and whether
or not an SAR shall be free-standing or in tandem or combination
with any other Award. Limited SARs that may only be exercised in
connection with a Change in Control or other event as specified
by the Committee may be granted on such terms, not inconsistent
with this Section
6(c), as the Committee may determine.
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App-3-5
(d)
Restricted Stock.
The Committee
is authorized to grant Restricted Stock to Eligible Persons on
the following terms and conditions:
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(i)
Grant and Restrictions.
Restricted Stock shall be subject to such restrictions on
transferability, risk of forfeiture and other restrictions, if
any, as the Committee may impose, which restrictions may lapse
separately or in combination at such times, under such
circumstances (including based on achievement of performance
goals and/or future service requirements), in such installments
or otherwise and under such other circumstances as the Committee
may determine at the date of grant or thereafter. Except to the
extent restricted under the terms of the Plan and any Award
document relating to the Restricted Stock, a Participant granted
Restricted Stock shall have all of the rights of a stockholder,
including the right to vote the Restricted Stock and the right
to receive dividends thereon (subject to any mandatory
reinvestment or other requirement imposed by the Committee).
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(ii)
Forfeiture.
Except as otherwise
determined by the Committee, upon termination of employment or
service during the applicable restriction period, Restricted
Stock that is at that time subject to restrictions shall be
forfeited and reacquired by the Company; provided that the
Committee may provide, by rule or regulation or in any Award
document, or may determine in any individual case, that
restrictions or forfeiture conditions relating to Restricted
Stock will lapse in whole or in part, including in the event of
terminations resulting from specified causes.
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(iii)
Certificates for Stock.
Restricted Stock granted under the Plan may be evidenced in
such manner as the Committee shall determine. If certificates
representing Restricted Stock are registered in the name of the
Participant, the Committee may require that such certificates
bear an appropriate legend referring to the terms, conditions
and restrictions applicable to such Restricted Stock, that the
Company retain physical possession of the certificates, and that
the Participant deliver a stock power to the Company, endorsed
in blank, relating to the Restricted Stock.
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(iv)
Dividends and Splits.
As a
condition to the grant of an Award of Restricted Stock, the
Committee may require that any dividends paid on a share of
Restricted Stock shall be either (A) paid with respect to
such Restricted Stock at the dividend payment date in cash, in
kind, or in a number of shares of unrestricted Stock having a
Fair Market Value equal to the amount of such dividends, or (B)
automatically reinvested in additional Restricted Stock or held
in kind, which shall be subject to the same terms as applied to
the original Restricted Stock to which it relates, or
(C) deferred as to payment, either as a cash deferral or
with the amount or value thereof automatically deemed reinvested
in shares of Deferred Stock, other Awards or other investment
vehicles, subject to such terms as the Committee shall determine
or permit a Participant to elect. Unless otherwise determined by
the Committee, Stock distributed in connection with a Stock
split or Stock dividend, and other property distributed as a
dividend, shall be subject to restrictions and a risk of
forfeiture to the same extent as the Restricted Stock with
respect to which such Stock or other property has been
distributed.
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(e)
Deferred Stock.
The Committee is
authorized to grant Deferred Stock to Eligible Persons, which
are rights to receive Stock, other Awards, or a combination
thereof at the end of a specified deferral period, subject to
the following terms and conditions:
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(i)
Award and Restrictions.
Issuance
of Stock will occur upon expiration of the deferral period
specified for an Award of Deferred Stock by the Committee (or,
if permitted by the Committee, as elected by the Participant).
In addition, Deferred Stock shall be subject to such
restrictions on transferability, risk of forfeiture and other
restrictions, if any, as the Committee may impose, which
restrictions may lapse at the expiration of the deferral period
or at earlier specified times (including based on achievement of
performance goals and/or future service requirements),
separately or in combination, in installments or otherwise, and
under such other circumstances as the Committee may determine at
the date of grant or thereafter. Deferred Stock may be satisfied
by delivery of Stock, other Awards, or a combination thereof
(subject to Section 11(k)), as determined by the Committee
at the date of grant or thereafter.
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(ii)
Forfeiture.
Except as otherwise
determined by the Committee, upon termination of employment or
service during the applicable deferral period or portion thereof
to which forfeiture conditions apply (as provided in the Award
document evidencing the Deferred Stock), all Deferred Stock that
is at that time subject to such forfeiture conditions shall be
forfeited; provided that the Committee may provide, by rule or
regulation or in any Award document, or may determine in any
individual case, that restrictions or forfeiture conditions
relating to Deferred Stock will lapse in whole or in part,
including in the event of terminations resulting from specified
causes.
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(iii)
Dividend Equivalents.
Unless
otherwise determined by the Committee, Dividend Equivalents on
the specified number of shares of Stock covered by an Award of
Deferred Stock shall be either (A) paid with respect to
such Deferred Stock at the dividend payment date in cash or in
shares of unrestricted Stock having a Fair Market Value equal to
the amount of such dividends, or (B) deferred with respect
to such Deferred Stock, either as a cash deferral or with the
amount or value thereof automatically deemed reinvested in
additional Deferred Stock, other Awards or other investment
vehicles having a Fair Market Value equal to the amount of such
dividends, as the Committee shall determine or permit a
Participant to elect.
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(f)
Bonus Stock and Awards in Lieu of
Obligations.
The Committee is authorized to grant Stock as a
bonus, or to grant Stock or other Awards in lieu of obligations
of the Company or a subsidiary or affiliate to pay cash or
deliver other property under the Plan or under other plans or
compensatory arrangements, subject to such terms as shall be
determined by the Committee.
(g)
Dividend Equivalents.
The
Committee is authorized to grant Dividend Equivalents to
Eligible Persons, which are rights to receive cash, Stock, other
Awards, or other property equivalent to all or a portion of the
dividends paid with respect to a specified number of shares of
Stock. Dividend Equivalents may be awarded on a free-standing
basis or in connection with another Award. The Committee may
provide that Dividend Equivalents shall be paid or distributed
when accrued or shall be deemed to have been reinvested in
additional Stock, Awards, or other investment vehicles, and
subject to restrictions on transferability, risks of forfeiture
and such other terms as the Committee may specify.
(h)
Other Stock-Based Awards.
The
Committee is authorized, subject to limitations under applicable
law, to grant to Eligible Persons such other Awards that may be
denominated or payable in, valued in whole or in part by
reference to, or otherwise based on, or related to, Stock or
factors that may influence the value of Stock, including,
without limitation, convertible or exchangeable debt securities,
other rights convertible or exchangeable into Stock, purchase
rights for Stock, Awards with value and payment contingent upon
performance of the Company or business units thereof or any
other factors designated by the Committee, and Awards valued by
reference to the book value of Stock or the value of securities
of or the performance of specified subsidiaries or affiliates or
other business units. The Committee shall determine the terms
and conditions of such Awards. Stock delivered pursuant to an
Award in the nature of a purchase right granted under this
Section 6(h) shall be purchased for such consideration,
paid for at such times, by such methods, and in such forms,
including, without limitation, cash, Stock, other Awards, notes,
or other property, as the Committee shall determine. Cash
awards, as an element of or supplement to any other Award under
the Plan, may also be granted pursuant to this Section 6(h).
(i)
Performance Awards.
Performance
Awards, denominated in cash or in Stock or other Awards, may be
granted by the Committee in accordance with Section 7.
7.
Performance
Awards, Including Annual Incentive Awards.
(a)
Performance Awards Generally.
The
Committee is authorized to grant Performance Awards on the terms
and conditions specified in this Section 7. Performance
Awards may be denominated as a cash amount, number of shares of
Stock, or specified number of other Awards (or a combination)
which may be earned upon achievement or satisfaction of
performance conditions specified by the Committee. In addition,
the Committee may specify that any other Award shall constitute
a Performance Award by conditioning the right of a Participant
to exercise the Award or have it settled, and the timing
thereof, upon achievement or satisfaction of such performance
conditions as may be specified by the Committee. The Committee
may use
App-3-7
such business criteria and other measures of
performance as it may deem appropriate in establishing any
performance conditions, and may exercise its discretion to
reduce or increase the amounts payable under any Award subject
to performance conditions, except as limited under Sections 7(b)
and 7(c) in the case of a Performance Award intended to qualify
as performance-based compensation under Code
Section 162(m).
(b)
Performance Awards Granted to Covered
Employees.
If the Committee determines that a Performance
Award to be granted to an Eligible Person who is designated by
the Committee as likely to be a Covered Employee should qualify
as performance-based compensation for purposes of
Code Section 162(m), the grant, exercise and/or settlement of
such Performance Award shall be contingent upon achievement of a
preestablished performance goal and other terms set forth in
this Section 7(b).
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(i)
Performance Goal Generally.
The
performance goal for such Performance Awards shall consist of
one or more business criteria and a targeted level or levels of
performance with respect to each of such criteria, as specified
by the Committee consistent with this Section 7(b). The
performance goal shall be objective and shall otherwise meet the
requirements of Code Section 162(m) and regulations
thereunder (including Regulation 1.162-27 and successor
regulations thereto), including the requirement that the level
or levels of performance targeted by the Committee result in the
achievement of performance goals being substantially
uncertain. The Committee may determine that such
Performance Awards shall be granted, exercised and/or settled
upon achievement of any one performance goal or that two or more
of the performance goals must be achieved as a condition to
grant, exercise and/or settlement of such Performance Awards.
Performance goals may differ for Performance Awards granted to
any one Participant or to different Participants.
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(ii)
Business Criteria.
One or more
of the following business criteria for the Company, on a
consolidated basis, and/or for specified subsidiaries or
affiliates or other business units of the Company shall be used
by the Committee in establishing performance goals for such
Performance Awards: (1) growth in revenues or assets;
(2) earnings from operations, earnings before or after
taxes, earnings before or after interest, depreciation,
amortization, or extraordinary or special items; (3) net
income or net income per common share (basic or diluted);
(4) return on assets, return on investment, return on
capital, or return on equity; (5) cash flow, free cash
flow, cash flow return on investment, or net cash provided by
operations; (6) interest expense after taxes;
(7) economic profit; (8) operating margin or gross margin;
(9) stock price or total stockholder return; and
(10) strategic business criteria, consisting of one or more
objectives based on environmental or safety standards, market
penetration, geographic business expansion goals, cost targets,
customer satisfaction, employee satisfaction, management of
employment practices and employee benefits, supervision of
litigation and information technology, and goals relating to
acquisitions or divestitures of subsidiaries, affiliates or
joint ventures. The targeted level or levels of performance with
respect to such business criteria may be established at such
levels and in such terms as the Committee may determine, in its
discretion, including in absolute terms, as a goal relative to
performance in prior periods, or as a goal compared to the
performance of one or more comparable companies or an index
covering multiple companies.
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(iii)
Performance Period; Timing for
Establishing Performance Goals.
Achievement of performance
goals in respect of such Performance Awards shall be measured
over a performance period of up to one year or more than one
year, as specified by the Committee. A performance goal shall be
established not later than the earlier of (A) 90 days
after the beginning of any performance period applicable to such
Performance Award or (B) the time 25% of such performance
period has elapsed.
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(iv)
Performance Award Pool.
The
Committee may establish a Performance Award pool, which shall be
an unfunded pool, for purposes of measuring performance of the
Company in connection with Performance Awards. The amount of
such Performance Award pool shall be based upon the achievement
of a performance goal or goals based on one or more of the
business criteria set forth in Section 7(b)(ii) during the
given performance period. The Committee may specify the amount
of the Performance Award pool as a percentage of any of such
business criteria, a percentage thereof in excess of a threshold
amount, or as another amount which need not bear a strictly
mathematical relationship to such business criteria.
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App-3-8
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(v)
Settlement of Performance Awards;
Other Terms.
Settlement of such Performance Awards shall be
in cash, Stock, other Awards or other property, in the
Committees discretion. The Committee may increase or
reduce the amount of a settlement otherwise to be made in
connection with such Performance Awards, but may not exercise
discretion to increase any such amount payable to a Covered
Employee in respect of a Performance Award subject to
Section 7(b). Any settlement which changes the form of
payment from that originally specified shall be implemented in a
manner such that the Performance Award and other related Awards
do not, solely for that reason, fail to qualify as
performance-based compensation for purposes of Code
Section 162(m). The Committee shall specify the
circumstances in which such Performance Awards shall be paid or
forfeited in the event of termination of employment by the
Participant or other event (including a Change in Control) prior
to the end of a performance period or settlement of such
Performance Awards.
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(c)
Annual Incentive Awards Granted to
Designated Covered Employees.
The Committee may grant an
Annual Incentive Award to an Eligible Person who is designated
by the Committee as likely to be a Covered Employee. Such Annual
Incentive Award will be intended to qualify as
performance-based compensation for purposes of Code
Section 162(m), and therefore its grant, exercise and/or
settlement shall be contingent upon achievement of
preestablished performance goals and other terms set forth in
this Section 7(c).
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(i)
Grant of Annual Incentive Awards.
Not later than the earlier of 90 days after the beginning
of any performance period applicable to such Annual Incentive
Award or the time 25% of such performance period has elapsed,
the Committee shall determine the Covered Employees who will
potentially receive Annual Incentive Awards, and the amount(s)
potentially payable thereunder, for that performance period. The
amount(s) potentially payable shall be based upon the
achievement of a performance goal or goals based on one or more
of the business criteria set forth in Section 7(b)(ii) in
the given performance period, as specified by the Committee. The
Committee may designate an annual incentive award pool as the
means by which Annual Incentive Awards will be measured,
provided that the portion of such pool potentially payable to
the Covered Employee shall be preestablished. In all cases, the
maximum Annual Incentive Award of any Participant shall be
subject to the limitation set forth in Section 5.
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(ii)
Payout of Annual Incentive
Awards.
After the end of each performance period, the
Committee shall determine the amount, if any, of the Annual
Incentive Award for that performance period payable to each
Participant. The Committee may determine that the amount payable
to any Participant as a final Annual Incentive Award shall be
reduced from the amount of his or her potential Annual Incentive
Award, including a determination to make no final Award
whatsoever, but may not exercise discretion to increase any such
amount. The Committee shall specify the circumstances in which
an Annual Incentive Award shall be paid or forfeited in the
event of termination of employment by the Participant or other
event (including a Change in Control) prior to the end of a
performance period or settlement of such Annual Incentive Award.
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(d)
Written Determinations.
Determinations by the Committee as to the establishment of
performance goals, the amount potentially payable in respect of
Performance Awards and Annual Incentive Awards, the level of
actual achievement of the specified performance goals relating
to Performance Awards and Annual Incentive Awards, and the
amount of any final Performance Award and Annual Incentive Award
shall be recorded in writing in the case of Performance Awards
intended to qualify under Code Section 162(m). Specifically, the
Committee shall certify in writing, in a manner conforming to
applicable regulations under Code Section 162(m), prior to
settlement of each such Award granted to a Covered Employee,
that the performance objective relating to the Performance Award
and other material terms of the Award upon which settlement of
the Award was conditioned have been satisfied.
8.
Certain
Provisions Applicable to Awards.
(a)
Stand-Alone, Additional, Tandem, and
Substitute Awards.
Awards granted under the Plan may, in the
discretion of the Committee, be granted either alone or in
addition to, in tandem with, or in substitution or exchange for,
any other Award or any award granted under another plan of the
Company, any subsidiary or affiliate, or any business entity to
be acquired by the Company or a subsidiary or affiliate, or any
other right of
App-3-9
a Participant to receive payment from the Company
or any subsidiary or affiliate. Awards granted in addition to or
in tandem with other Awards or awards may be granted either as
of the same time as or a different time from the grant of such
other Awards or awards. Subject to Section 11(k), the
Committee may determine that, in granting a new Award, the
in-the-money value of any surrendered Award or award may be
applied to reduce the exercise price of any Option, grant price
of any SAR, or purchase price of any other Award.
(b)
Term of Awards.
The term of each
Award shall be for such period as may be determined by the
Committee, subject to the express limitations set forth in
Section 6(b)(ii).
(c)
Form and Timing of Payment under
Awards; Deferrals.
Subject to the terms of the Plan
(including Section 11(k)) and any applicable Award
document, payments to be made by the Company or a subsidiary or
affiliate upon the exercise of an Option or other Award or
settlement of an Award may be made in such forms as the
Committee shall determine, including, without limitation, cash,
Stock, other Awards or other property, and may be made in a
single payment or transfer, in installments, or on a deferred
basis. The settlement of any Award may be accelerated, and cash
paid in lieu of Stock in connection with such settlement, in the
Committees discretion or upon occurrence of one or more
specified events (subject to Section 11(k)). Installment or
deferred payments may be required by the Committee (subject to
Section 11(e)) or permitted at Participants election
on terms and conditions established by the Committee. Payments
may include, without limitation, provisions for the payment or
crediting of reasonable interest on installment or deferred
payments or the grant or crediting of Dividend Equivalents or
other amounts in respect of installment or deferred payments
denominated in Stock.
(d)
Exemptions from Section 16(b)
Liability.
With respect to a Participant who is then subject
to the reporting requirements of Section 16(a) of the
Exchange Act in respect of the Company, the Committee shall
implement transactions under the Plan and administer the Plan in
a manner that will ensure that each transaction with respect to
such a Participant is exempt from liability under
Rule 16b-3 (or otherwise not subject to liability under
Section 16(b)), except that this provision shall not limit
sales by such a Participant, and such a Participant may engage
in other non-exempt transactions under the Plan. The Committee
may authorize the Company to repurchase any Award or shares of
Stock deliverable or delivered in connection with any Award
(subject to Section 11(k)) to avoid a Participant who is
subject to Section 16 of the Exchange Act incurring
liability under Section 16(b). Unless otherwise specified
by the Participant, equity securities or derivative securities
acquired under the Plan which are disposed of by a Participant
shall be deemed to be disposed of in the order acquired by the
Participant.
(e)
Loan Provisions
. With the
Committees consent, and subject at all times to, and only
to the extent, if any, permitted under and in accordance with,
laws and regulations and other binding obligations or provisions
applicable to the Company, the Company may make, guarantee, or
arrange for a loan or loans to a Participant with respect to the
exercise of any Option or other payment in connection with any
Award, including the payment by a Participant of any or all
federal, state, or local income or other taxes due in connection
with any Award. Subject to such limitations, the Committee shall
have full authority to decide whether to make a loan or loans
hereunder and to determine the amount, terms, and provisions of
any such loan or loans, including the interest rate, if any, to
be charged in respect of any such loan or loans, whether the
loan or loans are to be with or without recourse against the
borrower, the terms on which the loan is to be repaid and
conditions, if any, under which the loan or loans may be
forgiven.
9.
Change in
Control.
(a)
Effect of Change in
Control on Non-Performance Based Awards.
Unless
otherwise provided by the Committee in the Award document, in
the event of a Change in Control, the following
provisions shall apply to non-performance based Awards,
including Awards as to which performance conditions previously
have been satisfied or are deemed satisfied under
Section 9(b):
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(i) All deferral of settlement, forfeiture
conditions and other restrictions applicable to Awards granted
under the Plan shall lapse and such Awards shall be fully
payable as of the time of the Change in Control without regard
to deferral and vesting conditions, except to the extent of any
waiver by the
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Participant or other express election to defer
beyond a Change in Control and subject to applicable
restrictions set forth in Section
11(a);
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(ii) Any Award carrying a right to exercise
that was not previously exercisable and vested shall become
fully exercisable and vested as of the time of the Change in
Control and shall remain exercisable and vested for the balance
of the stated term of such Award without regard to any
termination of employment or service by the Participant other
than a termination for cause (as defined in any
employment or severance agreement between the Company or a
subsidiary or affiliate and the Participant then in effect or,
if none, as defined by the Committee and in effect at the time
of the Change in Control), subject only to applicable
restrictions set forth in Section 11(a); and
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(iii) The Committee may, in its discretion,
determine to extend to any Participant who holds an Option the
right to elect, during the 60-day period immediately following
the Change in Control, in lieu of acquiring the shares of Stock
covered by such Option, to receive in cash the excess of the
Change in Control Price over the exercise price of such Option,
multiplied by the number of shares of Stock covered by such
Option, and to extend to any Participant who holds other types
of Awards denominated in shares the right to elect, during the
60-day period immediately following the Change in Control, in
lieu of receiving the shares of Stock covered by such Award, to
receive in cash the Change in Control Price multiplied by the
number of shares of Stock covered by such Award.
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(b)
Effect of Change in
Control on Performance-Based Awards.
In the event of a
Change in Control, with respect to an outstanding
Award subject to achievement of performance goals and
conditions, such performance goals and conditions will be deemed
to be met if and to the extent so provided by the Committee in
the Award document governing such Award or other agreement with
the Participant.
(c)
Definition of Change in
Control.
A Change in Control shall be
deemed to have occurred if, after the Effective Date, there
shall have occurred any of the following:
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(i) any Person (other than the Company), any
trustee or other fiduciary holding securities under any employee
benefit plan of the Company, or any company owned, directly or
indirectly, by the stockholders of the Company immediately prior
to the occurrence with respect to which the evaluation is being
made in substantially the same proportions as their ownership of
the common stock of the Company) becomes the Beneficial Owner
(except that a Person shall be deemed to be the Beneficial Owner
of all shares that any such Person has the right to acquire
pursuant to any agreement or arrangement or upon exercise of
conversion rights, warrants or options or otherwise, without
regard to the sixty day period referred to in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities
of the Company or any Significant Subsidiary (as defined below),
representing 30% of the combined voting power of the
Companys or such subsidiarys then outstanding
securities;
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(ii) during any period of two consecutive
years, individuals who at the beginning of such period
constitute the Board, and any new director (other than a
director designated by a person who has entered into an
agreement with the Company to effect a transaction described in
clause (i), (iii), or (iv) of this paragraph) whose
election by the Board or nomination for election by the
Companys stockholders was approved by a vote of at least
two-thirds of the directors then still in office who either were
directors at the beginning of the two-year period or whose
election or nomination for election was previously so approved
but excluding for this purpose any such new director whose
initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of
proxies or consents by or on behalf of an individual,
corporation, partnership, group, associate or other entity or
Person other than the Board, cease for any reason to constitute
at least a majority of the Board;
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(iii) the consummation of a merger or
consolidation of the Company or any subsidiary owning directly
or indirectly all or substantially all of the consolidated
assets of the Company (a Significant Subsidiary)
with any other entity, other than a merger or consolidation
which would result in the voting securities of the Company or a
Significant Subsidiary outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving or
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resulting entity) more than 50% of the combined
voting power of the surviving or resulting entity outstanding
immediately after such merger or consolidation; or
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(iv) the stockholders of the Company approve
a plan or agreement for the sale or disposition of all or
substantially all of the consolidated assets of the Company
(other than such a sale or disposition immediately after which
such assets will be owned directly or indirectly by the
Companys stockholders in substantially the same
proportions as their ownership of the Companys common
stock immediately prior to such sale or disposition) in which
case the Board shall determine the effective date of the Change
in Control resulting therefrom.
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For purposes of this definition:
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(A) The term Beneficial Owner
shall have the meaning ascribed to such term in Rule 13d-3
under the Exchange Act (including any successor to such Rule).
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(B) The term Person shall have
the meaning ascribed to such term in Section 3(a)(9) of the
Exchange Act and used in Sections 13(d) and 14(d) thereof,
including group as defined in Section 13(d)
thereof.
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(d)
Definition of Change in Control
Price.
The Change in Control Price means
an amount in cash equal to the higher of (i) the amount of
cash and fair market value of property that is the highest price
per share paid (including extraordinary dividends) in any
transaction triggering the Change in Control or any liquidation
of shares following a sale of substantially all assets of the
Company, or (ii) the highest Fair Market Value per share at
any time during the 60-day period preceding and 60-day period
following the Change in Control.
10.
Awards to
Non-Employee Directors.
Unless otherwise determined by the Board in
writing, non-employee directors of the Company shall be entitled
to receive Options in accordance with the following:
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(a) On the date any non-employee director of
the Company first becomes a director, such person shall
automatically be granted, without further action by the Board or
the Committee, an Option to purchase 37,500 shares of the
Companys Stock.
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(b) On January 1 and July 1 of
each year during the term of this Plan, non-employee directors
of the Company then serving in such capacity, shall each be
granted an Option to purchase 7,500 shares of the Companys
Stock.
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(c) The exercise price of the shares subject
to the Options set forth in Sections 10(a) and 10(b) hereof
shall be the Fair Market Value of the Companys Stock on
the date such Options are granted. All of such Options shall be
non-qualified Options. Unless otherwise determined by the Board
in an award agreement at the time of the Award, the Options
granted pursuant to this Section 10 shall vest entirely on
the date they are granted and shall be exercisable for a period
of ten (10) years.
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(d) Non-employee directors of the Company
include attorneys, accountants, consultants and advisors of the
Company who, in addition to providing services in such capacity,
serve as directors of the Company.
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11.
General
Provisions.
(a)
Compliance with Legal and Other
Requirements.
The Company may, to the extent deemed
necessary or advisable by the Committee, postpone the issuance
or delivery of Stock or payment of other benefits under any
Award until completion of such registration or qualification of
such Stock or other required action under any federal or state
law, rule or regulation, listing or other required action with
respect to any stock exchange or automated quotation system upon
which the Stock or other securities of the Company are listed or
quoted, or compliance with any other obligation of the Company,
as the Committee may consider appropriate, and may require any
Participant to make such representations, furnish such
information and comply with or be subject to such other
conditions as it may consider appropriate in connection with the
App-3-12
issuance or delivery of Stock or payment of other
benefits in compliance with applicable laws, rules, and
regulations, listing requirements, or other obligations.
(b)
Limits on Transferability;
Beneficiaries.
No Award or other right or interest of a
Participant under the Plan shall be pledged, hypothecated or
otherwise encumbered or subject to any lien, obligation or
liability of such Participant to any party (other than the
Company or a subsidiary or affiliate thereof), or assigned or
transferred by such Participant otherwise than by will or the
laws of descent and distribution or to a Beneficiary upon the
death of a Participant, and such Awards or rights that may be
exercisable shall be exercised during the lifetime of the
Participant only by the Participant or his or her guardian or
legal representative, except that Awards and other rights (other
than ISOs and SARs in tandem therewith) may be transferred to
one or more transferees during the lifetime of the Participant,
and may be exercised by such transferees in accordance with the
terms of such Award, but only if and to the extent such
transfers are permitted by the Committee, subject to any terms
and conditions which the Committee may impose thereon (including
limitations the Committee may deem appropriate in order that
offers and sales under the Plan will meet applicable
requirements of registration forms under the Securities Act of
1933 specified by the Securities and Exchange Commission). A
Beneficiary, transferee, or other person claiming any rights
under the Plan from or through any Participant shall be subject
to all terms and conditions of the Plan and any Award document
applicable to such Participant, except as otherwise determined
by the Committee, and to any additional terms and conditions
deemed necessary or appropriate by the Committee.
(c)
Adjustments.
In the event that
any large, special and non-recurring dividend or other
distribution (whether in the form of cash or property other than
Stock), recapitalization, forward or reverse split, Stock
dividend, reorganization, merger, consolidation, spin-off,
combination, repurchase, share exchange, liquidation,
dissolution or other similar corporate transaction or event
affects the Stock such that an adjustment is determined by the
Committee to be appropriate under the Plan, then the Committee
shall, in such manner as it may deem equitable, adjust any or
all of (i) the number and kind of shares of Stock which may
be delivered in connection with Awards granted thereafter,
(ii) the number and kind of shares of Stock by which annual
per-person Award limitations are measured under Section 5,
(iii) the number and kind of shares of Stock subject to or
deliverable in respect of outstanding Awards and (iv) the
exercise price, grant price or purchase price relating to any
Award or, if deemed appropriate, the Committee may make
provision for a payment of cash or property to the holder of an
outstanding Option (subject to Section 11(k)). In addition,
the Committee is authorized to make adjustments in the terms and
conditions of, and the criteria included in, Awards (including
Performance Awards and performance goals and any hypothetical
funding pool relating thereto) in recognition of unusual or
nonrecurring events (including, without limitation, events
described in the preceding sentence, as well as acquisitions and
dispositions of businesses and assets) affecting the Company,
any subsidiary or affiliate or other business unit, or the
financial statements of the Company or any subsidiary or
affiliate, or in response to changes in applicable laws,
regulations, accounting principles, tax rates and regulations or
business conditions or in view of the Committees
assessment of the business strategy of the Company, any
subsidiary or affiliate or business unit thereof, performance of
comparable organizations, economic and business conditions,
personal performance of a Participant, and any other
circumstances deemed relevant; provided that no such adjustment
shall be authorized or made if and to the extent that the
existence of such authority (i) would cause Options, SARs,
or Performance Awards granted under Section 7 to
Participants designated by the Committee as Covered Employees
and intended to qualify as performance-based
compensation under Code Section 162(m) and
regulations thereunder to otherwise fail to qualify as
performance-based compensation under Code
Section 162(m) and regulations thereunder, or
(ii) would cause the Committee to be deemed to have
authority to change the targets, within the meaning of Treasury
Regulation 1.162-27(e)(4)(vi), under the performance goals
relating to Options or SARs granted to Covered Employees and
intended to qualify as performance-based
compensation under Code Section 162(m) and
regulations thereunder.
(d)
Tax Provisions.
(i)
Withholding.
The Company and any
subsidiary or affiliate is authorized to withhold from any Award
granted, any payment relating to an Award under the Plan,
including from a distribution of Stock, or any payroll or other
payment to a Participant, amounts of withholding and other taxes
due or potentially
App-3-13
payable in connection with any transaction
involving an Award, and to take such other action as the
Committee may deem advisable to enable the Company and
Participants to satisfy obligations for the payment of
withholding taxes and other tax obligations relating to any
Award. This authority shall include authority to withhold or
receive Stock or other property and to make cash payments in
respect thereof in satisfaction of a Participants
withholding obligations, either on a mandatory or elective basis
in the discretion of the Committee. Other provisions of the Plan
notwithstanding, only the minimum amount of Stock deliverable in
connection with an Award necessary to satisfy statutory
withholding requirements will be withheld.
(ii)
Requirement of Notification of Code
Section 83(b) Election.
If any Participant shall make
an election under Section 83(b) of the Code (to include in
gross income in the year of transfer the amounts specified in
Code Section 83(b)) or under a similar provision of the
laws of a jurisdiction outside the United States, such
Participant shall notify the Company of such election within ten
days of filing notice of the election with the Internal Revenue
Service or other governmental authority, in addition to any
filing and notification required pursuant to regulations issued
under Code Section 83(b) or other applicable provision.
(iii)
Requirement of Notification Upon
Disqualifying Disposition Under Code Section 421(b).
If
any Participant shall make any disposition of shares of Stock
delivered pursuant to the exercise of an Incentive Stock Option
under the circumstances described in Code Section 421(b)
(relating to certain disqualifying dispositions), such
Participant shall notify the Company of such disposition within
ten days thereof.
(e)
Changes to the Plan.
The Board
may amend, suspend or terminate the Plan or the Committees
authority to grant Awards under the Plan without the consent of
stockholders or Participants; provided, however, that any
amendment to the Plan shall be submitted to the Companys
stockholders for approval not later than the earliest annual
meeting for which the record date is after the date of such
Board action if such stockholder approval is required by any
federal or state law or regulation or the rules of any stock
exchange or automated quotation system on which the Stock may
then be listed or quoted, and the Board may otherwise, in its
discretion, determine to submit other amendments to the Plan to
stockholders for approval; and provided further, that, without
the consent of an affected Participant, no such Board action may
have a material adverse affect on the rights of such Participant
under any outstanding Award.
(f)
Right of Setoff.
The Company or
any subsidiary or affiliate may, to the extent permitted by
applicable law, deduct from and set off against any amounts the
Company or a subsidiary or affiliate may owe to the Participant
from time to time, including amounts payable in connection with
any Award, owed as wages, fringe benefits, or other compensation
owed to the Participant, such amounts as may be owed by the
Participant to the Company, although the Participant shall
remain liable for any part of the Participants payment
obligation not satisfied through such deduction and setoff. By
accepting any Award granted hereunder, the Participant agrees to
any deduction or setoff under this Section 11(f).
(g)
Unfunded Status of Awards; Creation
of Trusts.
The Plan is intended to constitute an
unfunded plan for incentive and deferred
compensation. With respect to any payments not yet made to a
Participant or obligation to deliver Stock pursuant to an Award,
nothing contained in the Plan or any Award shall give any such
Participant any rights that are greater than those of a general
creditor of the Company; provided that the Committee may
authorize the creation of trusts and deposit therein cash,
Stock, other Awards or other property, or make other
arrangements to meet the Companys obligations under the
Plan. Such trusts or other arrangements shall be consistent with
the unfunded status of the Plan unless the Committee
otherwise determines with the consent of each affected
Participant.
(h)
Nonexclusivity of the Plan.
Neither the adoption of the Plan by the Board nor its
submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the
Board or a committee thereof to adopt such other incentive
arrangements, apart from the Plan, as it may deem desirable,
including incentive arrangements and awards which do not qualify
under Code Section 162(m), and such other arrangements may
be either applicable generally or only in specific cases.
(i)
Payments in the Event of Forfeitures;
Fractional Shares.
No fractional shares of Stock shall be
issued or delivered pursuant to the Plan or any Award. The
Committee shall determine whether cash, other
App-3-14
Awards or other property shall be issued or paid
in lieu of such fractional shares or whether such fractional
shares or any rights thereto shall be forfeited or otherwise
eliminated.
(j)
Compliance with Code
Section 162(m)
. It is the intent of the Company that
Options and SARs granted to Covered Employees and other Awards
designated as Awards to Covered Employees subject to
Section 7 shall constitute qualified
performance-based compensation within the meaning of
Code Section 162(m) and regulations thereunder, unless
otherwise determined by the Committee at the time of allocation
of an Award.
Accordingly, the terms of Sections 7(b),
(c), and (d), including the definitions of Covered Employee and
other terms used therein, shall be interpreted in a manner
consistent with Code Section 162(m) and regulations
thereunder. The foregoing notwithstanding, because the Committee
cannot determine with certainty whether a given Participant will
be a Covered Employee with respect to a fiscal year that has not
yet been completed, the term Covered Employee as used herein
shall mean only a person designated by the Committee as likely
to be a Covered Employee with respect to a specified fiscal
year. If any provision of the Plan or any Award document
relating to a Performance Award that is designated as intended
to comply with Code Section 162(m) does not comply or is
inconsistent with the requirements of Code Section 162(m)
or regulations thereunder, such provision shall be construed or
deemed amended to the extent necessary to conform to such
requirements, and no provision shall be deemed to confer upon
the Committee or any other person discretion to increase the
amount of compensation otherwise payable in connection with any
such Award upon attainment of the applicable performance
objectives.
(k)
Certain Limitations Relating to
Accounting Treatment of Awards.
Other provisions of the Plan
notwithstanding, the Committees authority under the Plan
is limited to the extent necessary to ensure that any Option or
other Award of a type that the Committee has intended to be
subject to fixed accounting with a measurement date at the date
of grant or the date performance conditions are satisfied under
APB 25 shall not become subject to variable
accounting solely due to the existence of such authority, unless
the Committee specifically determines that the Award shall
remain outstanding despite such variable accounting.
(l)
Governing Law.
The validity,
construction, and effect of the Plan, any rules and regulations
relating to the Plan and any Award document shall be determined
in accordance with the laws of the State of Delaware, without
giving effect to principles of conflicts of laws, and applicable
provisions of federal law.
(m)
Awards to Participants Outside the
United States.
The Committee may modify the terms of any
Award under the Plan made to or held by a Participant who is
then resident or primarily employed outside of the United States
in any manner deemed by the Committee to be necessary or
appropriate in order that such Award shall conform to laws,
regulations, and customs of the country in which the Participant
is then resident or primarily employed, or so that the value and
other benefits of the Award to the Participant, as affected by
foreign tax laws and other restrictions applicable as a result
of the Participants residence or employment abroad, shall
be comparable to the value of such an Award to a Participant who
is resident or primarily employed in the United States. An Award
may be modified under this Section 11(m) in a manner that
is inconsistent with the express terms of the Plan, so long as
such modifications will not contravene any applicable law or
regulation or result in actual liability under
Section 16(b) of the Exchange Act for the Participant whose
Award is modified.
(n)
Limitation on Rights Conferred under
Plan.
Neither the Plan nor any action taken hereunder shall
be construed as (i) giving any Eligible Person or
Participant the right to continue as an Eligible Person or
Participant or in the employ or service of the Company or a
subsidiary or affiliate, (ii) interfering in any way with
the right of the Company or a subsidiary or affiliate to
terminate any Eligible Persons or Participants
employment or service at any time, (iii) giving an Eligible
Person or Participant any claim to be granted any Award under
the Plan or to be treated uniformly with other Participants and
employees, or (iv) conferring on a Participant any of the
rights of a stockholder of the Company unless and until the
Participant is duly issued or transferred shares of Stock in
accordance with the terms of an Award or an Option is duly
exercised. Except as expressly provided in the Plan and an Award
document, neither the Plan nor any Award document shall confer
on any person other than the Company and the Participant any
rights or remedies thereunder.
App-3-15
(o)
Severability; Entire Agreement.
If any of the provisions of this Plan or any Award document
is finally held to be invalid, illegal or unenforceable (whether
in whole or in part), such provision shall be deemed modified to
the extent, but only to the extent, of such invalidity,
illegality or unenforceability, and the remaining provisions
shall not be affected thereby; provided, that, if any of such
provisions is finally held to be invalid, illegal, or
unenforceable because it exceeds the maximum scope determined to
be acceptable to permit such provision to be enforceable, such
provision shall be deemed to be modified to the minimum extent
necessary to modify such scope in order to make such provision
enforceable hereunder. The Plan and any Award documents contain
the entire agreement of the parties with respect to the subject
matter thereof and supersede all prior agreements, promises,
covenants, arrangements, communications, representations and
warranties between them, whether written or oral with respect to
the subject matter thereof.
(p)
Awards Under Preexisting Plans.
Upon approval of the Plan by stockholders of the Company as
required under Section 11(q) hereof, no further awards
shall be granted under the Preexisting Plan; however, existing
awards under the Preexisting Plan shall continue to be governed
by the terms and conditions of such plan.
(q)
Plan Effective Date and Termination.
The Plan shall become effective if, and at such time as, the
stockholders of the Company have approved it by the affirmative
votes of the holders of a majority of the voting securities of
the Company present, or represented, and entitled to vote on the
subject matter at a duly held meeting of stockholders. Unless
earlier terminated by action of the Board, the Plan will remain
in effect until such time as no Stock remains available for
delivery under the Plan and the Company has no further rights or
obligations under the Plan with respect to outstanding Awards
under the Plan.
(r)
Repricing.
No award that could be
characterized as a repricing shall be made pursuant
to this Plan without shareholder approval.
App-3-16
JAKKS PACIFIC, INC.
Proxy for Annual Meeting of Stockholders to be
held September 27, 2002
Know
all men by these presents, that the undersigned hereby
constitutes and appoints Jack Friedman and Stephen G. Berman,
and each of them, the true and lawful attorneys, agents and
proxies of the undersigned, with full power of substitution, to
represent and vote all of the shares of the common stock of
JAKKS Pacific, Inc. standing in the name of the undersigned at
the close of business on August 27, 2002, at the Annual
Meeting of Stockholders of such Company to be held on
September 27, 2002 at the Sherwood Country Club, 320 West
Stafford Road, Thousand Oaks, California 91361, beginning at
9:00 a.m. local time, and at any and all adjournments
thereof, with all the rights and powers that the undersigned
would possess if personally present, and especially (but without
limiting the general authorization and power hereby given) to
vote as follows.
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS OF THE COMPANY.
x
Please
mark your votes as in this example
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1.
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Election of
Directors
o
For
o
Against
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Nominees are: Jack Friedman, Stephen G.
Berman, David C. Blatte, Robert E. Glick, Michael G. Miller
and Murray L. Skala
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(Instruction:
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To withhold authority to vote for any individual
nominee, write that nominees name in the space provided
below.)
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(Continued and to be signed on the reverse side.)
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2.
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Ratification and approval of the amendment of the
Companys certificate of incorporation (i) to increase
the number of authorized shares of the Companys common
stock, par value $0.001 per share, from 25,000,000 shares
to 100,000,000 shares; (ii) to increase the number of
authorized shares of the Companys preferred stock, par
value $0.001 per share, from 1,000,000 shares, to
5,000,000 shares; and (iii) to implement changes to
reflect recent changes to Delaware law and remove or revise
certain obsolete provisions.
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o
For
o
Against
o
Abstain
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3.
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Ratification of appointment of PKF, Certified
Public Accountants, A Professional Corporation, as the
Companys auditor.
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o
For
o
Against
o
Abstain
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4.
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Ratification and approval of the Companys
2002 Stock Award and Incentive Plan.
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o
For
o
Against
o
Abstain
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5.
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In their discretion upon such other measures as
may properly come before the meeting, hereby ratifying and
confirming all that said proxy may lawfully do or cause to be
done by virtue hereof and hereby revoking all proxies heretofore
given by the undersigned to vote at said meeting or any
adjournment thereof.
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The shares represented by this proxy will be
voted in the manner indicated, and if no instructions to the
contrary are indicated, will be voted FOR all proposals listed
above. Number of shares owned by undersigned:
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Signature:
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Date:
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Signature:
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Date:
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IMPORTANT: Please sign exactly as your name
or names are printed here. Executors, administrators, trustees
and other persons signing in a representative capacity should
give full title.
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