Edgar Filing: JANEX INTERNATIONAL INC

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 10549

FORM 10-QSB

(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from: not applicable

Commission File No. 0-17927

JANEX INTERNATIONAL, INC.
(Name of small business issuer in its charter)

COLORADO 84-1034251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1609 FOURTH STREET 07724
BERKELEY, CALIFORNIA (Zip Code)
(Address of principal executive offices)

Issuer's telephone number, including area code: (510) 524-7400

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, NO PAR VALUE
--------------------------
(TITLE OF CLASS)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes _X_ No __

As of June 13, 2001, the issuer had 17,692,896 shares of its common stock and
5,000,000 shares of preferred stock issued and outstanding. There are a
substantial number of additional shares committed for issuance. See Part II,
Item 5, Other Information in this Report.

JANEX INTERNATIONAL, INC.
TABLE OF CONTENTS

PART I
ITEM 1. FINANCIAL STATEMENTS...............................................3
CONSOLIDATED BALANCE SHEETS...............................................3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED).........................4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED).........................5
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)................................6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)....................7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION...........................................14

PART II OTHER INFORMATION.................................................18
ITEM 1. LEGAL PROCEEDINGS.................................................18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.........................20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............21
ITEM 5. OTHER INFORMATION.................................................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................24
SIGNATURES.................................................................26

PAGE 2

JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

March 31, 2001
December 31, 2000 (Unaudited)
----------------- --------------

ASSETS
Current assets:
Cash and cash equivalents ........................ $ 5,079 $ 24,641
Accounts receivable, net.......................... -- 538,934
Inventories, net ................................ -- 652,378
Other current assets ............................. 17,818 217,634
------------ ------------
Total current assets ................................. 22,897 1,433,587

Property and equipment, net .......................... -- 333,803
Goodwill, net......................................... -- 821,828
------------ ------------
Total assets ......................................... $ 22,897 $ 2,589,218
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Note payable - Shareholder ....................... $ -- $ 128,849
Notes payable - Banks ............................ 331,943 1,451,942
Accounts payable ................................. 1,361,423 2,024,936
Accrued expenses ................................. 1,063,750 1,352,220
Due to Futech Interactive Products, Inc. ......... 1,606,199 1,687,199
Loans Payable .................................... 228,183 250,063
Due to Related Parties............................ 228,183 313,640
------------ ------------
Total current liabilities ............................ 4,601,498 7,208,849

Shareholders' deficit:
Class A convertible preferred stock, no par value:
Authorized shares - 5,000,000
Issued and outstanding shares - 5,000,000 at
December 31, 2000 and March 31, 2001,
Respectively ................................... 569,022 569,022
Common stock, no par value:
Authorized shares - 20,000,000
Issued and outstanding shares - 12,740,259 and
17,240,259 at December 31, 2000 and March 31,
2001, respectively ............................. 16,289,321 16,515,971
Less: Treasury stock, at cost: 15,330,129 at
December 31, 2000 and March 31, 2001 ........... (3,056,083) (3,056,083)
Additional paid-in capital ....................... 554,517 570,767
Accumulated deficit .............................. (26,027,904) (26,382,184)
------------ ------------
(11,671,127) (11,782,507)
Due to Related Parties ............................... 7,092,526 7,092,526

Due to Bank .......................................... -- 70,350
------------ ------------
Total Shareholders' Deficit .......................... (4,578,601) (4,619,631)
------------ ------------
Total liabilities and shareholders' deficit .......... $ 22,897 $ 2,589,218
============ ============

See accompanying summary of accounting policies and notes to
Financial statements.

PAGE 3

JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

For the Three Months Ended March 31,
-------------- --------------
2000 2001
-------------- --------------

Sales ........................................ $ 2,530 $ 622,483
Royalty Income ............................... 5,956 --

Less: Returns and Allowances ............... -- (3,593)
Discounts - Domestic ................. -- (31,846)
Discounts - International ............ -- (58,576)
Freight .............................. -- 18,609
Miscellaneous Charges ................ -- 563
------------ ------------
Net Sales .................................... 2,530 547,640

Cost of Sales ................................
Direct ..................................... (430) (272,652)
Indirect ................................... -- (53,891)
------------ ------------
Total Cost of Sales .......................... (430) (326,542)

Gross margin ............................ 8,056 221,097

Operating Expenses:
Selling, general and
administrative ........................ 178,774 444,670
Stock based compensation ................ 6,070,950 62,500
Depreciation and amortization ........... 10,005 32,154
------------ ------------
Loss from operations ......................... (6,251,673) (318,227)
------------ ------------
Other income (expense)
Interest expense ........................ (7,398) (26,179)
Other income (expense) .................. -- --
------------ ------------
Total other income (expense) ................. (7,398) (26,179)

Net Earnings before R&D ...................... (6,259,071) (344,406)
R&D Project Expense ...................... -- (9,874)
------------ ------------
Loss before income taxes ..................... (6,259,071) (354,280)
Income tax provision ......................... (2,000) --
------------ ------------
Net Loss ..................................... $ (6,261,071) $ (354,280)
============ ============

Loss per common share ........................ $ (0.33) $ (0.02)
============ ============
Weighted average number of Common
shares outstanding ........................... 18,920,728 15,817,703
============ ============

See accompanying summary of accounting policies and notes to
financial statements.

PAGE 4

JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

For the Three Months Ended March 31,
------------------------------------
2000 2001
------ ------

Cash flows from operating activities

Net loss .................................................. $(6,261,071) $(354,280)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation ......................................... 10,005 32,154
Stock based compensation ............................. 6,070,950 62,500
Allowance for doubtful accounts....................... -- 5,353
Imputed interest...................................... -- 16,250

Changes in operating assets and liabilities:
Accounts receivable .................................. (5,956) 232,484
Inventories .......................................... -- (12,517)
Other current assets ................................. 7,254 (4,512)
Accounts payable ..................................... 163,350 51,749
Accrued expenses ..................................... 138,694 --
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES ..................... (15,468) 29,181

Cash flows from investing activities
Paid for DaMert acquisition........................... -- (220,000)
Cash provided by DaMert at acqusition................. -- 64,861
----------- -----------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES .......... -- (155,139)

Cash flows from financing activities
Advances (reductions) from Futech Interactive
Products, Inc. ...................................... 20,260 --
Payments on borrowings................................ -- (180,000)
Increase in loans..................................... -- 11,880
Loans from related parties............................ -- 313,640
----------- -----------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES .......... 20,260 145,520
----------- -----------
Net change in cash and cash equivalents ................... 4,792 19,562

Cash and cash equivalents, beginning of year .............. 3,920 5,079
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................. $ 8,712 $ 24,641
=========== ===========

Supplemental cash flow Information:

Cash paid for interest ............................... $ 3,858 $ 26,969
Cash paid for income taxes ........................... $ -- $ --
Non-cash investing activity:
Acquisition of DaMert................................ -- $ 1,534,500

See accompanying summary of accounting policies and notes to
financial statements.

PAGE 5

JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO-FORMA STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31,

2000 2001
---- ----

Sales $ 1,027,200 $ 1,289,709
=========== ===========
Loss from continuing operations $ 6,688,105 $ 434,416
=========== ===========
Net loss $ 6,688,105 $ 434,416
=========== ===========
Loss per share $ (0.30) $ (0.02)
============ ============
Weighted average shares outstanding 22,420,728 19,317,703
=========== ===========

The pro forma data above assumes that the acquisition of DaMert Company
occurred at the beginning of each quarter, January 1, 2000 and 2001.

The pro forma results include adjustments as follows:

(1) reduction of interest cost of $70,000 in 2000 and $74,000 in
2001;

(2) amortization of goodwill of $44,000 in 2000 and $65,000 in 2001;

(3) imputed interest on $1,300,000 at 10% ($32,500) for 2000 and
2001;

(4) earnings per share, is based on the weighted average of
historical shares outstanding plus the issuance, in both
periods, of 3,500,000 shares in connection with the
acquisition.

PAGE 6

JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Janex International, Inc. and subsidiaries (including DaMert Toys and
Games, Inc.) (the Company) are in the business of developing,
marketing, and selling toys and functional children's products which
are manufactured by subcontractors. The Company sells its products
both domestically and internationally.

The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All inter-company accounts
and transactions have been eliminated in consolidation. All balance
sheet accounts of the Company's foreign subsidiaries are translated at
the current exchange rate, at the balance sheet date, while income
statement items are translated at the average currency exchange rates
for each period presented. The resulting translation adjustments, if
significant (at the periods under review, the adjustment was not
significant), are recorded as comprehensive income.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.

The financial statements have been prepared assuming the Company will
continue as a going concern. The Company has incurred significant
operating losses in the past several years, continuing negative net
worth, and negative working capital at March 31, 2001, and has
continued to experience a significant decline in revenues. The Company
has nominal cash and is experiencing a severe working capital
deficiency. Accordingly, management has been unable to devote
resources to the development of products or sales. Currently, the
Company does not have sufficient authorized and unissued shares of
common stock to execute its business and financial plans. The Company
expects that the absence of available shares of common stock will
make it substantially more difficult for it to raise capital, as any
transaction involving its common stock will have to be made subject
to an increase in the number of authorized shares of such stock. As
soon as practicable, the Company plans to seek stockholder approval
of an increase in the number of authorized shares of common stock.

The Company experienced a severe shortage of capital during 2000,
which had the effect of substantially curtailing the Company's
operating activities, to the point that the Company had essentially
become inactive from an operating point of view. In order to restart
the Company's business operations, the Company seeks to acquire
businesses that focus on children's toys and educational products.

On February 15, 2001, the Company completed the acquisition of DaMert
Company, which is focused on the production, marketing and
distribution of toys and gifts. The consolidated statement of
operations for the three months ended March 31, 2001 includes the
operations of DaMert Toys and Games, Inc. from February 16, 2001 to
March 31, 2001. The Company's ultimate ability to continue as a going
concern depends on market acceptance of products, an increase in
revenues, and the achievement of operating profits and positive cash
flow. The Company will also require additional financial resources
from other sources to provide near-term operating cash to enable the
Company to execute its plans to move toward profitability. Management
believes that future financings, the acquisitions described elsewhere
in this Form 10Q-SB and additional sales to be generated from new
product lines that are being developed, will be sufficient to allow
the Company to continue in operation. These factors raise
significant doubt as to the Company's ability to continue as a going
concern.

PAGE 7

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is
determined using the average cost method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed
principally by the straight-line method over the estimated useful
lives of the assets which range from three to ten years for molds,
machinery and equipment, and furniture and fixtures.

FAIR VALUE OF FINANCIAL INSTRUMENTS

At March 31, 2001, the Company has the following financial
instruments: cash and cash equivalents, accounts payable, accrued
expenses, and short-term debt. The carrying value of cash and cash
equivalents, accounts payable, and accrued expenses and short term
debt approximates their fair value based on the liquidity of these
financial instruments or based on their short-term nature.

INTANGIBLE ASSETS

Intangible assets consist of goodwill.

Costs of business acquisitions in excess of net asset of subsidiaries
acquired (goodwill) are amortized on a straight-line basis over a ten
year period. The Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate that
the assets might be impaired and the estimated undiscounted cash flows
from those assets are less than the carrying amounts of those assets.
This methodology includes intangible assets acquired. Goodwill
relating to specific intangible assets is included in the related
impairment measurements to the extent it is identified with such
assets.

Management reviews goodwill periodically for possible impairment.
This policy includes recognizing write-downs if it is probable that
measurable undiscounted future cash flows and/or the aggregate net
cash flows of an asset, as measured by current revenues and costs
(exclusive of depreciation) over the asset's remaining depreciable
life, are not sufficient to recover the net book value of an asset.

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

The Company transacts business on a credit basis with its customers.
The Company routinely assesses the financial strength of its customers
and, as a consequence, believes that its trade accounts receivable
credit risk exposure is limited. The Company does not require
collateral to support customer receivables. The Company
maintains an allowance for potential credit losses and such losses
have been within management's expectations.

REVENUE RECOGNITION

The Company recognizes revenue upon shipment of the product to the
customer, with appropriate allowances made for estimated returns and
uncollectible accounts.

PAGE 8

INCOME TAXES

Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) 109 "Accounting for Income
Taxes." The statement employs an asset and liability approach for
financial accounting and reporting of deferred income taxes.
Generally, SFAS 109 allows for recognition of deferred tax assets in
the current period for the future benefit of net operating loss
carryforwards and items for which expenses have been recognized for
financial statement purposes but will be deductible in future periods.
A valuation allowance is recognized, if the weight of available
evidence indicates that it is more likely than not that some portion
or all of the deferred tax assets will not be realized.

STOCK-BASED COMPENSATION

The company accounts for stock-based employee compensation
arrangements in accordance with provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and complies with the disclosure provisions of SFAS No.
123, "Accounting for Stock Based Compensation." Under APB Opinion No.
25, compensation expense for employees is based on the excess, if any,
on the date of grant, of the fair value of the company's stock over
the exercise price.

LOSS PER SHARE

Loss per common share is calculated in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share,"
(Statement 128). Basic earnings per share is computed using the
weighted average number of common shares outstanding. Diluted earnings
per common share include the potential exercise of employee stock
options. Common share equivalents have been excluded from the
calculation of loss per share for all periods presented, as their
effect is anti-dilutive.

COMPREHENSIVE LOSS/INCOME

As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," (Statement 130). Statement 130 establishes new
rules for the reporting and display of comprehensive loss/income and
its components. The components, relative to the company, include the
effect of foreign currency translation. Comprehensive loss for the
Company is the same as net loss for all periods presented as the
effect of foreign currency translation is not material.

PENSION PLAN

The Company has a 401K Plan for the benefit of the employees of the
Company. Under the provisions of the 401K, employees may make
contributions on a tax-deferred basis to their 401K accounts, up to
the legal limits provided for by United States income tax regulations.
The Company, at its discretion, may contribute a portion of the
Company's profits to the 401K. Such contributions are allocated
between members of the 401K plan based on a pre-stated formula.
Employer contributions vest with 401K participants at the rate of 20%
per year, beginning in year two and ending in year six of employment.
The Company did not make contributions to the 401K for 1999 and 2000,
or for the three months ended March 31, 2001.

NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board (FASB) issued several
pronouncements and interpretations and the Securities and Exchange
Commission (SEC) issued several Staff Accounting Bulletins (SAB).
Certain of these pronouncements may have future applicability,
Statement of Financial Accounting Standards (SFAS) No. 132 "Employers
Disclosures about Pensions and other Postretirement Benefits,"
effective June 15, 2000, and No. 137 "Accounting for Derivative
Instruments and Hedging Activities," effective June 15, 2000 would not
have impacted the financial statements as the Company has not
participated in derivative transactions nor does the company have a
defined benefit plan.

In December 1999, the SEC issued SAB No. 101 "Revenue Recognition in
Financial Statements". SAB 101 summarizes certain areas of the SEC's
views in applying generally accepted accounting principles to revenue
recognition in

PAGE 9

financial statements. The Company believes that its current
revenue recognition policies comply with SAB 101.

In March 2000 the FASB issued FASB Interpretation No. 44 "Accounting
for Certain Transactions involving Stock Compensation", and
interpretations of Accounting Principles Board No. 25. This
interpretation is effective July 1, 2000. The effects of applying this
interpretation would be recognized on a prospective basis from July 1,
2000. The impact of this interpretation is not expected to be
material.

In August 1999, the SEC issued SAB No. 99 "Materiality". SAB 99
provides that exclusive reliance on certain quantitative benchmarks to
assess materiality in preparing financial statements is inappropriate;
misstatements are not immaterial simply because they fall beneath a
numerical threshold. Management believes the company is in compliance
with SAB 99.

3. NOTES PAYABLE - BANKS

Notes payable banks consist of the following:

Acquisition note $1,120,000
Short-term note 331,942
----------
$1,451,942
==========

(a) Acquisition Note

The Acquisition Note is payable as follows: $400,000 due May 15,
2001 (in default) and $712,000 payable in five equal quarterly
installments of $116,667 beginning August 15, 2001, and one final
quarterly payment of $136,666. The note is guaranteed by the
Chairman and Chief Executive Officer.

(b) Short-term note

The Short-term note is due July 1, 2001

4. LITIGATION

See PART II. ITEM 1. LEGAL PROCEEDINGS in this Form 10Q-SB.

5. STOCK OPTIONS AND STOCK BASED COMPENSATION

A summary of the Company's stock option activity and related
information is as follows:

WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------------- ----------------

Balance, December 31, 1998 45,000 $ 1.67
----------------
Granted
Exercised
Forfeited (25,000) (1.25)
--------------- ----------------
Balance, December 31, 1999 20,000 2.13

Granted 5,940,000 $ (1.45)
Exercised (5,730,000)
Forfeited (20,000) 2.13
--------------- ----------------
Balance, December 31, 2000 210,000 $ 0
and march 31, 2001
=============== ================

The exercise price for options outstanding as of March 31, 2001 is
$.001 per share.

In March 2000, the Company adopted the 2000 Combination Stock Option
Plan and amended and restated such plan in October, 2000 and June
2001("the Plan"). This Plan is to be made available to employees of
the Company and its subsidiaries and to individuals whose services
contribute to the growth and

PAGE 10

development of the Company. Options to purchase up to 9,075,000
shares may be issued under the Plan, and options may be awarded
for up to ten (10) years.

In February 2001, the Company granted Vincent Goett, its chairman,
immediately exercisable options to purchase 1,000,000 shares of common
stock at a price of $.001 per share. The options have since been
exercised.

6. COMMON STOCK

The Company had 100,000 warrants outstanding with an exercise price of
$.64 per share, which expired unexercised on March 26, 2001.

7. ACQUISITIONS

By 1999, it was apparent to Company management that the level of sales
was not sufficient to sustain the Company as a going concern without
significant growth in revenue and profitability, and that there would
need to be a substantial increase in the Company's business volume and
product availability to support future growth. Accordingly, during
1999, Company management sought acquisitions of, and relationships
with, companies having complementary products. The Company entered
into a global merger agreement that involved the Company combining
with several other companies. The proposed merger transaction was not
consummated and the parties withdrew from the overall transaction. The
Company believes that the focus of the Company's management on the
acquisitions had an adverse impact upon the Company's financial
condition and results of operations.

As a result, the Company experienced a severe shortage of capital
during 2000, which had the effect of substantially curtailing the
Company's operating activities, to the point that the Company had
essentially become inactive from an operating point of view. In order
to restart the Company's business operations, the Company has sought
to acquire businesses that focus on children's toys and educational
products.

In February 2001, the Company completed the acquisition of DaMert
Company, which is focused on the production, marketing and
distribution of toys and gifts. In connection with the Acquisition of
DaMert, the Company paid the following consideration: (i) 2,000,000
shares of common stock; (ii) a promissory note in the approximate
amount of $129,000 to an officer of DaMert (in replacement of a note
in the same amount owed by DaMert to such officer); (iii) the issuance
of an aggregate of 3,000,000 shares of common stock to Amresco
Financial I, L.P. ("Amresco") (a creditor of DaMert), of which
1,500,000 shares were issued at the closing of the acquisition and the
remaining 1,500,000 shares are issuable by June 15, 2001 (Company
currently in default); (iv) $220,000 in cash was paid (at or before
the closing) to Amresco in satisfaction of certain indebtedness of
DaMert; and (v) a promissory note, personally guaranteed by Vincent
Goett, the Company's Chairman, in the principal amount of $1,300,000
was issued to Amresco (the note is payable as follows: $180,000 by
April 15, 2001 (paid); $400,000 by May 15, 2001 (Company currently in
default); and the $720,000 is payable beginning August 15, 2001 in
five equal installments of $116,667 and one final quarterly
installment of $136,666). In addition, the Company issued options to
purchase an aggregate of 1,000,000 shares of the Company's common
stock, at a price of $.001 per share to Fred and Gail DaMert (who are
employees of DaMert). See Note 10, Subsequent Events, for a
description of certain Company defaults under the agreement with
Amresco. The note is secured by certain personal property of the
Company.

In the event that the quoted price of the Company's common stock does
not average at least $1.00 per share, over a twenty-day trading period
during the 24 months following the closing, the Company will be
obligated to pay Fred and Gail DaMert in the aggregate (in cash or
stock at their option) an amount equal to the excess of $1 million
over the product of 1 million and the highest 20 day average quoted
price of the common stock during the 24 months following the closing.

See Note 10, Subsequent Events, for a description of the Company's
acquisition of certain assets of Futech Interactive Products, Inc.

PAGE 11

8. RELATED PARTY BORROWINGS

In January 2001, the Company's Board of Directors authorized the
Company to borrow up to $1,300,000 from an affiliate of Vincent Goett,
Palmilla Ventures Limited Partnership ("Palmilla Ventures") (which
borrowings may consist of Mr. Goett's personal guarantee of Company
obligations), of which, as of April 12, 2001, approximately $312,000
has already been advanced to or for the benefit of the Company. Of the
aggregate $312,000 advanced, approximately $31,000 has been advanced
to or for the benefit of Janex, approximately $61,000 has been
advanced on behalf of Janex to Futech as a down-payment on the
$150,000 due at closing of the asset purchase, and the remaining
$220,000 was used as a portion of the consideration given in
connection with the acquisition of the DaMert Company. The advances
made by Palmilla Ventures are payable on demand and bear interest at
the rate of 10% per annum. Such advances are secured by all the assets
of the Company and DaMert Toys and Games, Inc., the Company's
wholly-owned subsidiary. If the Company defaults on its obligations
under the note, the secured party (or any assignee) would be able to
force a sale of the assets constituting the collateral to satisfy the
debt. As additional consideration for making the $1,300,000 loan to
the Company, the Company has agreed to issue Palmilla Ventures that
number of shares of common stock equal to approximately 19% of the
issued and outstanding common stock, on a fully-diluted basis, after
giving effect to certain specified transactions. Based on the amount
advanced to date (approximately $312,000 of the total $1.3 million),
the Company is obligated to issue Palmilla Ventures that number of
shares of common stock equal to approximately 4.6% of the issued and
outstanding common stock on a fully-diluted basis, after giving effect
to certain specified transactions. In addition, in connection with the
acquisition of DaMert in February 2001, Vincent Goett personally
guaranteed approximately $1,300,000 of the obligation of the DaMert
Company to Amresco Financial I, L.P. (a creditor of DaMert). In
consideration of making this guarantee, the Company has agreed to
issue Mr. Goett (or his designee) that number of shares of common
stock equal to approximately 19% of the issued and outstanding common
stock, on a fully-diluted basis, after giving effect to certain
specified transactions. The issuance of the foregoing shares is
subject to an increase to 125,000,000 in the number of authorized and
unissued shares of the Company's common stock.

See Note 10, Subsequent Events, for a description of related party
transactions occurring after March 31, 2001.

9. ACCOUNTS RECEIVABLE FINANCING

In March 2001, the Company entered into an agreement of Purchase of
Accounts whereby the Company sells its interest in certain accounts
receivable. The purchaser will advance 80% of the receivables sold
with the balance being retained by the purchaser subject to certain
provisions as to the collection period of the account(s) sold. At
March 31, 2001 approximately $85,000 of receivables were sold.

10. SUBSEQUENT EVENTS

ACQUISITION OF FUTECH

On May 29, 2001, the Company, acquired certain assets of Futech
Interactive Products, Inc., an Arizona corporation ("Futech"), by
virtue of an asset purchase. Futech had previously filed for
protection from creditors under Chapter 11 of the United States
Bankruptcy Code. The United States Bankruptcy Court handling the
Futech bankruptcy proceeding approved the Company's purchase of
certain Futech assets. The acquired assets of Futech consist of, among
other things, accounts receivable, physical inventory, furniture and
fixtures, and customer lists.

The consideration paid by the Company for the acquired assets
consisted of: (i) an aggregate of up to approximately 22 million
shares of Janex common stock; (ii) the assumption of an aggregate of
approximately $3 million of indebtedness; and (iii) the payment of
approximately $150,000 in cash. The shares of common stock are
issuable within approximately 150 days.

$2,000,000 of the $3,000,000 of indebtedness assumed by the Company is
to be personally guaranteed by Vincent Goett, the Company's
Chairman/CEO. The

PAGE 12

$150,000 paid to/on behalf of Futech by the Company in connection with
the closing of the acquisition was loaned to the Company by Palmilla
Ventures Limited Partnership, a limited partnership controlled by
Vincent Goett, the Company Chairman/CEO.

Prior to the acquisition, Vincent W. Goett, then Chairman of the Board
and a significant shareholder of the Company, was interim Chief
Executive Officer and a significant shareholder of Futech.

RELATED PARTY TRANSACTIONS

In May 2001, the Company's Board of Directors authorized the Company
to borrow up to an additional $2,000,000 (in addition to the
$1,300,000 previously authorized) (See Note 8, Related Party
Borrowings) from an affiliate of Vincent Goett, Palmilla Ventures
Limited Partnership ("Palmilla Ventures") (which borrowings may take
the form of Mr. Goett's personal guarantee of loans to the Company by
third parties and discharge of accrued salary owing by the Company to
Mr. Goett). Any such advances made by Palmilla Ventures are to bear
interest at the rate of 10% per annum. To the extent Mr. Goett "loans"
such additional amounts to the Company, then, as additional
consideration for making such loans to the Company, the Company has
agreed to issue Palmilla Ventures that number of shares of common
stock equal to up to approximately 19% of the issued and outstanding
common stock, on a fully-diluted basis, after giving effect to certain
specified transactions (assuming the full $2,000,000 is advanced; if
less than the full $2,000,000 is advanced, Mr. Goett will be entitled
to a pro rata number of shares). In addition, in connection with the
acquisition of DaMert, Vincent Goett personally guaranteed
approximately $1,300,000 of the obligation of the DaMert Company to
Amresco Financial I, L.P. (a creditor of DaMert). In consideration of
making this guarantee, the Company has agreed to issue Mr. Goett (or
his designee) that number of additional shares of common stock equal
to approximately 19% of the issued and outstanding common stock, on a
fully-diluted basis, after giving effect to certain specified
transactions. The issuance of the foregoing shares is subject to an
increase to 125,000,000 in the number of authorized and unissued
shares of our common stock. As further consideration to Mr. Goett for
loans to the Company and personal guarantee of Company obligations,
the Board of Directors in May, 2001 authorized the Company to assume
$331,000 of personal indebtedness of Mr. Goett, which indebtedness is
payable in September 2002.

In May 2001, the Board of Directors authorized the Company to pay
Vincent Goett $400,000 for inventory of children's products owned by
Mr. Goett, having a cost basis to Mr. Goett of $275,000. The $400,000
will be due in May of 2002 and is non-interest bearing.

In May 2001, the Board of Directors authorized the Company to acquire
a patent from Vincent Goett in exchange for 8,000,000 shares of the
Company's common stock. The patent concerns the use of liquid crystal
display technology in conjunction with Futech's conductive ink
technology.

In June 2001, two stockholders surrendered an aggregate 2,000,000
shares of Company common stock to the Company. One of the stockholders
surrendered 500,000 shares of common stock and the other stockholder,
Frederick A. DaMert and Gail Patton DaMert, as trustees of DaMert
Trust, surrendered 1,500,000 shares. In consideration of the surrender
of the 2,000,000 shares, in addition to agreeing to replace the
2,000,000 shares upon an increase to 125,000,000 in the number of
authorized common shares of the Company, the Company agreed to issue
an aggregate 1,250,000 shares to the surrendering stockholders as
compensation for surrendering their shares. Of the 1,250,000
compensation shares, 1,000,000 of such shares are issuable to Gail
Patton DaMert and Frederick A. DaMert, as trustees of DaMert Trust.
Gail Patton DaMert and Frederick A. DaMert are officers of DaMert Toys
and Games, Inc., the Company's wholly-owned subsidiary. The foregoing
stock issuances are all subject to an increase to 125,000,000 in the
number of the Company's authorized common shares.

LOAN DEFAULTS

As described above, pursuant to a promissory note in the principal
amount of $1,300,000, the Company was obligated to pay Amresco
$400,000 on May 15,

PAGE 13

2001, which the Company has not paid as of June 22, 2001. On May 16,
2001, counsel for Amresco Financial delivered a default notice to the
Company alleging, among other defaults, failure to make the $400,000
payment on May 15, 2001. The default notice states that if the alleged
defaults are not cured by May 23, 2001, Amresco intends to, among
other things, foreclose on its interest in all collateral pledged as
security for the loan, including all assets of DaMert Toys and Games,
Inc. Further, the Company has not yet issued to Amresco the 1,500,000
shares of common stock that it was obligated to issue June 15, 2001
under the Agreement with Amresco. The Company is currently in
discussions with Amresco regarding the notice of default and the stock
issuance.

STOCK OPTIONS

During the quarter ended June 30, 2001, the Company issued options to
purchase an aggregate 1,995,000 shares of common stock, of which
995,000 were issued to a consultant of the Company at an exercise
price of $.02 per share and 1,000,000 were issued to Vincent Goett,
the Company's Chairman/CEO, at an exercise price of $.001 per share.
As of the grant date, the quoted price of the common stock on the OTC
Bulletin Board was $.05.

JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

OVERVIEW

As described above, in February 2001, the Company completed the
acquisition of DaMert Company, which is focused on the production,
marketing and distribution of toys and gifts. The acquisition of
DaMert had a significant impact on the Company's operations during the
current quarter. The DaMert acquisition has resulted in a substantial
increase in revenues, as well as associated operating expenses. In
addition, in May 2001, the Company completed the acquisition of
certain assets of Futech. See Part II. Item 5, Other Information.

As a result of consummating the DaMert and Futech acquisitions, the
Company expects to generate substantially more revenue in fiscal 2001,
compared to fiscal 2000. The Company also expects to incur
substantially greater expenses in 2001, compared to the prior year.
The Company expects to incur negative cash flow for the foreseeable
future. The accounts of both Janex and DaMert have been consolidated
for the first time in the interim financial statements for the period
ended March 31, 2001 (See Part I. Item 1, Financial Statements). The
consolidated statement of operations for the quarter ended March 31,
2001 reflects the operations of DaMert from February 16, 2001 to March
31, 2001. The pro-forma financial statements for the three months
ended March 31, 2000 and 2001, have been prepared as if the
acquisition occurred as of the beginning of the periods.

For a description of the DaMert and Futech acquisitions, see Part II.
Item 5, Other Information.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000

The following discussion compares the results of operations of the
Company for the three months ended March 31, 2000 and the consolidated
results of operations of the Company and its wholly-owned subsidiary,
DaMert, for the three months ended March 31, 2001. The consolidated
results of operations for the quarter ended March 31, 2001 include the
operations of DaMert from February 16, 2001 to March 31, 2001.

NET LOSS

Net Loss for the three months ended March 31, 2001 was $354,280, as
compared to a net loss of $6,261,071 for the comparable period in
2000. Excluding $6,070,950 in stock-based (non-cash) compensation for
the prior quarter, net loss for the prior quarter would have been
$190,121.

PAGE 14

NET SALES

Net Sales for the three months ended March 31, 2001 were $547,640,
consisting entirely of DaMert sales, as compared to $2,530 for the
three months ended March 31, 2000. Our lack of operating capital is
having an adverse effect upon our ability to fund growth in the
Company's business.

At March 31, 2001, the Company had a backlog of approximately $269,727
of unfilled orders, compared to no backlog at March 31, 2000. The
backlog is exclusively for DaMert product.

GROSS PROFIT

Gross profit was $221,097 for the three months ended March 31, 2001,
as compared to a gross profit of $8,056, for the three months ended
March 31, 2000. Gross profit is equal to revenues less the cost of
goods sold and royalties paid.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Selling, general and administrative ("SG&A") expenses were $444,670
for the three months ended March 31, 2001 (of which Janex incurred
$199,454 and DaMert incurred $281,288), compared to $178,774 for the
three months ended March 31, 2000, resulting in an increase of $20,680
for the Janex portion of the expense, and of $302,968 for the
consolidated company. The increase in SG&A for Janex is attributable
primarily to added general provisions for the legal and accounting
expenses associated with the acquisitions of DaMert and Futech.

STOCK-BASED COMPENSATION

For the three months ended March 31, 2001, the Company incurred
stock-based compensation (non-cash) in the amount of $62,500, compared
to $6,070,950 during the three months ended March 31, 2000. The
decrease in stock based compensation is due to a decrease in the
number of stock options granted and stock issuances in the period to
employees and consultants for services rendered. The Company expects
that it will incur additional stock based compensation in future
periods.

DEPRECIATION AND AMORTIZATION

Janex had fully depreciated all of its fixed assets as of December 31,
2000, resulting in no depreciation provision for the three months
ended March 31, 2001. Depreciation and amortization for DaMert in the
three months ended March 31, 2001 was $32,154.

SEASONALITY AND QUARTERLY FLUCTUATIONS

The Company's business normally follows closely that of other
companies with children-oriented product lines, which tend to generate
the greater part of both sales and profits during the Christmas
selling season. The Company expects that sales will be higher in the
third and fourth quarters of the year, as compared to the first and
second quarters of the year.

LIQUIDITY AND CAPITAL RESOURCES

We continue to experience a severe working capital deficiency and
negative cash flow. We currently have no cash reserves, and are unable
to meet our financial obligations as they become due or implement our
business plans. We have an immediate and urgent need for cash.

Our working capital deficiency at March 31, 2001 was $4,088,063
(excluding $1,687,199 which Futech claimed we owed it and which was
discharged in connection with our acquisition of Futech in May 2001),
compared to a working capital deficiency of $2,972,402 at December
31, 2000 (excluding $1,606,199 Futech claimed we owed it and which
has been discharged), an increase in working capital deficiency of
$1,115,661. The increase of approximately $1,115,000 in our working
capital deficiency is due primarily to an increase of $1,269,000 in
notes payable in relation to the acquisition of DaMert, an increase of
$952,000 in accounts payable and accrued expenses, and a $314,000
increase in due to related parties, partially offset by an increase of
$539,000 in accounts receivable, $652,000 in inventory, and $200,000
in other current assets.

PAGE 15

Although we completed the acquisition of the DaMert Company in
February, 2001 and are now generating revenue, we are continuing to
incur negative cash flow. Further, our working capital deficiency has
increased significantly in connection with completing the Futech
acquisition in May 2001. The completion of the Futech acquisition will
also exacerbate our cash flow problems until we are able to benefit
from expected increases in sales.

Based on current cash on hand, we need to raise additional funds
immediately in order to continue as a going concern. We are attempting
to reduce the working capital deficiency by raising additional capital
in the form of either debt or equity financings. We have experienced
difficulty raising the capital we need to fund our operations. We are
also reviewing operating expenses, with a view to reducing them
wherever possible. We may not be able to raise sufficient funds to
reduce the working capital deficiency or to fund our costs and
expenses. Currently, we do not have sufficient authorized and unissued
shares of common stock to execute our business and financial plans. We
expect that the absence of available shares of common stock will make
it substantially more difficult for us to raise capital, as any
transaction involving our common stock will have to be made subject to
an increase in the number of authorized shares of such stock. As soon
as we obtain the necessary funds, we plan to seek stockholder approval
of an increase in the number of authorized shares of our common stock.
If we are unable to raise sufficient capital in a timely fashion to
reduce the working capital deficiency and to fund our operations, our
business will be materially and adversely affected and we will not be
able to continue as a going concern. Our lack of operating capital is
currently having an adverse affect on our ability to generate
revenues.

Our auditors' report as of December 31, 2000 indicates, and our
auditors continue to believe, that certain factors raise substantial
doubt about our ability to continue as a going concern. Our auditors
issued a going concern opinion on both our and DaMert's financial
statements because:

- each of us has nominal cash;
- each of us has experienced declining revenues;
- we have continuing negative net worth;
- we have a severe working capital deficiency;
- we do not have sufficient authorized and unissued shares of
common stock to execute our business and financing plans; and
- each of us has recurring losses.

Our ultimate ability to continue as a going concern depends on: (1)
obtaining additional capital to provide near-term operating cash; and
(2) generating positive cash flow.

Based upon our current budget and business planning, we believe that
we will need approximately $4,000,000 of additional capital to fund
our planned operations over the next twelve months. We cannot be sure
that we will be able to internally generate or raise sufficient funds
to continue our operations, or that our auditors will not issue
another going concern opinion.

We are involved in various legal proceedings, as described in Part II,
Item 1: Legal Proceedings. In connection with such proceedings,
default judgments in the aggregate amount of approximately $500,000
have been entered against us. We currently do not have the ability to
pay these judgments. The enforcement of these judgments will have a
material adverse effect on our business and financial condition and
our ability to continue as a going concern.

In connection with our acquisition of DaMert, we issued a promissory
note, personally guaranteed by Vincent Goett, our Chairman, in the
principal amount of $1,300,000 to Amresco (then a creditor of DaMert),
payable as follows: $180,000 by April 15, 2001 (paid); $400,000 by May
15, 2001 (Company currently in default); and the remaining $720,000 is
payable beginning August 15, 2001 in five equal quarterly installments
of $116,667 and one final

PAGE 16

quarterly installment of $136,666. This $1,300,000 promissory note is
secured by certain personal property of the Company. The Company was
not able to pay Amresco the $400,000 that was due on May 15, 2001. On
May 16, 2001, counsel for Amresco delivered a default notice to the
Company alleging, among other defaults, failure to make the
$400,000 payment on May 15, 2001. The default notice states that if
the alleged defaults are not cured by May 23, 2001, Amresco intends
to, among other things, foreclose on its interest in all collateral
pledged as security for the loan, including all assets of DaMert Toys
and Games, Inc. Further, the Company has not yet issued to Amresco the
1,500,000 shares of common stock that it was obligated to issue June
15, 2001 under the Agreement with Amresco. The Company is currently in
discussions with Amresco regarding the notice of default and the stock
issuance. Due to the Company's default under the note, the secured
party (or any assignee) could proceed to force a sale of the Company
assets constituting the collateral to satisfy the debt.

In the event that the quoted price of the Company's common stock does
not average at least $1.00 per share over a twenty-day trading period
during the 24 months following the closing of the DaMert acquisition,
the Company will be obligated to pay Fred and Gail DaMert in the
aggregate (in cash or stock at their option) an amount equal to the
excess of $1 million over the product of 1 million and the highest
20-day average quoted price of the common stock during the 24 months
following the closing. Based on the current quoted price of the common
stock, we could be subject to a potentially significant liability
(over $900,000).

In connection with completion of the Futech acquisition, we are
obligated to repay approximately $3,000,000 of bank indebtedness we
assumed as follows: (i) with respect to $1,500,000 of such
indebtedness, interest only will be payable monthly over three years
and the principal ($1,500,000) will be payable on the third
anniversary of the closing of the transaction (May 2004); and (ii)
with respect to the remaining $1,500,000 of indebtedness, principal
($1,500,000) and interest will be payable in thirty-six equal monthly
installments commencing on the closing of the transaction. This
indebtedness will be secured by certain collateral acquired from
Futech. Repayment of principal and interest on this indebtedness is
estimated to cost approximately 75,000 per month, with a $1,500,000
principal payment due in 2004.

At April 12, 2001, we were indebted to our Chairman in the amount of
approximately $312,000. This indebtedness is payable on demand and
secured by all the assets of the Company and DaMert. If the Company
defaults on its obligations under the note, the secured party (or any
assignee) would be able to force a sale of the assets constituting the
collateral to satisfy the debt. In addition, our board of directors
has authorized us to acquire childrens' products inventory owned by
Mr. Goett for $400,000, which will be due and payable May 2002.

As further consideration to Mr. Goett for loans to the Company and
personal guarantee of Company obligations, the Board of Directors in
May, 2001 authorized the Company to assume $331,000 of personal
indebtedness of Mr. Goett, which indebtedness is payable in September
2002.

At March 31, 2001, the Company has $332,000 outstanding under a line
of credit that bears interest at the bank's prime rate (8.00% at March
31, 2001) plus 0.25%. The debt has been extended from time to time and
is currently due July 1, 2001. The note is personally guaranteed by
three significant shareholders, one of whom is a director and former
President of the Company. The note is collateralized by certificates
of deposit in the name of the shareholders and a UCC Security
Agreement executed by the Company covering all corporate assets. If
the Company defaults on its obligations under the note, the secured
party (or any assignee) would be able to force a sale of the assets
constituting the collateral to satisfy the debt. Interest on the note
has been paid by one of the guarantors.

CASH FLOWS

Our operating activities generated $29,000 of cash for the three
months ended March 31, 2001, as compared to using $15,488 for the
comparable prior period.

PAGE 17

The cash generated by our operating activities is primarily
attributable to the operations of DaMert since the date of
acquisition.

Our investing activities used $155,000 during the three months
ended March 31, 2001, compared to generating no cash during the same
period in 2000. The increase in cash used by investing activities is
a result of our acquisition of DaMert.

As of March 31, 2001, subject to the availability of operating
capital, we plan to make capital expenditures over the next twelve
months of up to $800,000 to fund new product development, including
initial licensing charges and tooling.

INFLATION

We do not believe that inflation has had a significant impact on our
costs and profits during the past two years.

FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this report that are
subject to a number of risks and uncertainties including, without
limitation, those described below and other risks and uncertainties
indicated from time to time in our filings with the SEC. These
forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include the information concerning possible
or assumed future results of operations. Also, when we use words such
as "believe," "expect," "anticipate" or similar expressions, we are
making forward-looking statements. Readers should understand that the
following important factors, in addition to those discussed in the
referenced SEC filings, could affect our future financial results, and
could cause actual results to differ materially from those expressed
in our forward-looking statements:

* the implementation of our growth strategy, including our ability to
consummate the planned acquisitions;

* the effects of the DaMert and Futech acquisitions and new
relationships with complementary companies;

* the availability of additional capital;

* variations in stock prices and interest rates;

* fluctuations in quarterly operating results; and

* other risks and uncertainties described in our filings with the SEC.

We make no commitment to disclose any revisions to forward-looking
statements, or any facts, events or circumstances after the date
hereof that may bear upon forward-looking statements.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

PAGE 18

On May 16, 2000, Golden Books Family Entertainment, Inc., as plaintiff
("Golden Books"), served us with a Second Amended Complaint which
names Futech, Vincent W. Goett ("Goett"), and us as defendants. We
were not named in the original complaint or the first amended
complaint. The case was pending in the United States Bankruptcy court
for the Southern District of New York (Bankruptcy case No. 99-10030).
In March, 2001, Golden Books and the Company entered into a
stipulation to suspend this litigation until the earliest to occur of:
(1) the closing of the transactions contemplated by the Agreement with
Futech for the Purchase and Sale of Assets, as amended (the
"Agreement"); (2) rescission or invalidation of the Agreement; or (3)
July 2, 2001.

The proceeding originally commenced in June 1999. The Second Amended
Complaint alleges, among other things, (i) that Futech is indebted to
Golden Books in the amount of $1 million under a promissory note dated
August 14, 1996 ("Note"), (ii) that Futech has defaulted on its
obligations under the Note, (iii) that Goett has personally guaranteed
performance of Futech's obligations under the Note, (iv) that Goett in
January 2000 caused Futech to transfer all or virtually all of its
assets to the Company, and (v) that the transfer was made by Goett and
Futech knowingly with intent to deplete Futech of assets and that we
accepted the transfer knowingly and with intent to assist Goett and
Futech in depleting Futech of assets and thereby rendering it
judgment-proof or, in the alternative, that Futech, on or about
January 2000, transferred to us Futech's Interactive Books division
and all of the assets and liabilities thereof. On the basis of the
foregoing, the Second Amended Complaint alleges that Futech, Goett and
the Company (or in the alternative Goett and the Company) are jointly
and severally liable for the $1 million under the Note, plus interest,
costs and reasonable attorney's fees.

The Second Amended Complaint also alleges (i) that Futech transferred
its assets to us with intent to hinder, delay or defraud Golden Books
in pursuit of its claim against Futech, (ii) that such transfer was
made without receiving a reasonably equivalent value for the transfer,
(iii) that Futech was insolvent at the time of transfer (or became
insolvent as a result), (iv) that the transfer included all or
substantially all of Futech's assets to the Company, (v) that the
transfer of Futech assets to us was a "fraudulent conveyance" under
Arizona law, and (vi) that Goett conspired with Futech and Janex to
effect the asset transfer with the intent and for the purpose of
hindering, delaying and defrauding Futech's creditors, including
rendering Futech judgment-proof, and that such conduct was malicious
and intended to injure Golden Books.

Based on the foregoing, Golden Books claims it is entitled to
garnishment, avoidance of the transfer, and attachment or other
provisional remedy and $1 million, plus interest and punitive damages.

As described above, we have consummated the planned acquisition of the
specified Futech assets (excluding assets constituting collateral of
Golden Books) and, further, the U.S. Bankruptcy Court has approved the
acquisition of such assets. Consequently, we believe that we have
strong defenses against the foregoing claims and intend to vigorously
defend against them. Although we believe that we have strong defenses,
no assurance can be given as to the outcome of the litigation, which
could have a material adverse effect on us.

On June 20, 2000, Jon Weber, d/b/a Alma Designs, as plaintiff
("Weber"), served us with a Complaint which names Futech and us as
defendants. The case is pending in the United States District court
for the Northern District of California, San Jose Division (Case No.
CA-00 20670). The Complaint alleges, among other things, (i) that the
defendants solicited the plaintiff to ship goods valued in excess of
$240,000, and failed to pay for the goods after their sale, (ii) that
Futech issued purchase orders to the plaintiff, (iii) that we are the
parent company of Futech, and that we caused Futech to transfer
substantially all of its liquid assets to us, and (iv) that the
defendants fraudulently induced the plaintiff to ship the merchandise
knowing that it did not have sufficient funds to pay the amount due
and with the intent of not paying the amounts due. On the basis of the
foregoing, the Complaint demands judgment for $243,000, interest and
costs and punitive damages of $200,000. On August 2, 2000, the Court
awarded a Default Judgment

PAGE 19

against us and Futech in the amount of approximately $237,000. We are
not the parent company of Futech and, although we have consummated the
acquisition of Futech's assets, we did so pursuant to Bankruptcy Court
approval. We intend to attempt to have the Default Judgment vacated,
as we believe that we have strong defenses against the foregoing
claims. We cannot assure you that we will be able to have the Default
Judgment vacated, and we have accrued the full amount of the default
judgment as of December 31, 2000. Even if we are able to have the
Default Judgment vacated, we cannot give you any assurance as to the
outcome of the litigation, which could have a material adverse affect
on us.

On January 26, 2000, Caterpillar, Inc., as plaintiff ("Caterpillar"),
served us with a Complaint which names us and Futech as defendants.
The case was pending in the Circuit Court of the Tenth Judicial
Circuit of Illinois, Peoria County (case No. 00 L26). The Complaint
alleged that we are indebted to Caterpillar in the amount of $45,000
in unpaid minimum royalty payments under a Trademark Merchandise
License Agreement dated April 15, 1997. On May 23, 2000, the Court
awarded a Default Judgment against us and Futech in the amount of
$60,621.80.

On May 16, 2000, A.H. Warner Properties. L.L.C., as plaintiff
("Warner"), served us with a Complaint which names us, Futech, and
others as defendants. The case was pending in the Superior Court of
the State of California for the County of Los Angeles (case No.
00B03229). The Complaint alleges that we are indebted to Warner for
unpaid rent pursuant to a lease for a property located in Woodland
Hills, California, and seeks judgment for the debt and interest, legal
fees and expenses. The lease on the subject property expired on June
30, 2000. On July 17, 2000, the Court awarded a Default Judgment
against us in the amount of approximately $22,000.

On June 30, 2000, CarrAmerica Realty Corporation, L.P., as Plaintiff,
served us with a Complaint which names us and others as defendants. On
July 7, 2000 we were served with a first amended Complaint which
changed the Plaintiff to CarrAmerica Realty, L.P. ("Carr"). The case
is pending in the Superior Court of the State of Arizona in and for
the County of Maricopa (case No. CV2000-012389). The Complaint alleges
that, on or about June 1, 2000, we issued a check for $61,812.78 which
was returned to Carr for insufficiency of funds. The Complaint further
alleges that we intended to defraud Carr. We issued the check to Carr
in payment of a portion of the rent owed by Futech Interactive
Products, Inc. ("Futech") to Carr on a property located in Phoenix,
Arizona. Carr seeks judgment against us for twice the amount of the
check (that is, $123,635.56), in addition to interest, court costs and
reasonable attorneys' fees. On September 14, 2000 we answered the
amended Complaint and asserted several affirmative defenses. The
outcome of this litigation is uncertain and could materially adversely
affect our financial condition.

On October 24, 2000 Carr served us and Futech, among others, with a
Complaint for forcible entry and detainer. The case was filed in the
Superior Court of the State of Arizona, in and for the County of
Maricopa (case no. CU2000-019259). The Complaint alleges that Carr's
lease with Futech was deemed rejected by operation of law in
connection with Futech's bankruptcy proceeding and sought to have all
the defendants vacate the leased premises. We have stipulated to a
judgment ordering the defendants (including us) to vacate the premises
leased by Futech at 2999 North 44th Street, Phoenix, Arizona, and we
have since vacated such premises.

On March 8, 2001, Carr filed a motion for summary judgment against us,
seeking judgment in the approximate amount of $75,000. The Company has
not filed a responsive pleading and the due date for such pleading has
passed. The Company anticipates that a judgment will be entered
against it in the approximate amount of $75,000.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In February, 2001, in connection with our acquisition of DaMert, we
issued (i) 2,000,000 shares of common stock to Fred and Gail DaMert,
the then stockholders of DaMert Company, and (ii) 1,500,000 shares of
common stock to Amresco, a creditor of DaMert.

PAGE 20

The Company believes that the foregoing transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933, as
amended. The transaction was exempt based on the following facts:
there was no general solicitation, there was a limited number of
investors, each of whom was an "accredited investor" (within the
meaning of Regulation D under the Securities Act of 1933, as amended)
and/or was sophisticated about business and financial matters, and
each such investor had the opportunity to ask questions of our
management and to review our filings with the Securities and Exchange
Commission.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As described above, pursuant to a promissory note in the principal
amount of $1,300,000, the Company was obligated to pay Amresco
$400,000 on May 15, 2001, which the Company has not paid as of June
22, 2001. On May 16, 2001, counsel for Amresco Financial delivered a
default notice to the Company alleging, among other defaults, failure
to make the $400,000 payment on May 15, 2001. The default notice
states that if the alleged defaults are not cured by May 23, 2001,
Amresco intends to, among other things, foreclose on its interest in
all collateral pledged as security for the loan, including all assets
of DaMert Toys and Games, Inc. Further, the Company has not yet issued
to Amresco the 1,500,000 shares of common stock that it was obligated
to issue June 15, 2001 under the Agreement with Amresco. The Company
is currently in discussions with Amresco regarding the notice of
default and the stock issuance. The Company's default could have a
material adverse effect on the Company's financial condition and its
ability to continue as a going concern.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the Company's security
holders during the three months ended March 31, 2001, through the
solicitation of proxies or otherwise.

ITEM 5. OTHER INFORMATION

RELATED PARTY TRANSACTIONS

PAGE 21

equal to approximately 19% of the issued and outstanding common stock,
on a fully-diluted basis, after giving effect to certain specified
transactions. The issuance of the foregoing shares is subject to an
increase to 125,000,000 in the number of authorized and unissued
shares of our common stock.

$2,000,000 of the $3,000,000 of indebtedness assumed by the Company is
to be personally guaranteed by Vincent Goett, the Company's
Chairman/CEO. The $150,000 paid to/on behalf of Futech by the Company
in connection with the closing of the acquisition was loaned to the
Company by Palmilla Ventures Limited Partnership, a limited
partnership controlled by Vincent Goett, the Company Chairman/CEO.

Prior to the acquisition, Vincent W. Goett, then Chairman of the Board
and a significant shareholder of the Company, was interim Chief
Executive Officer and a significant shareholder of Futech.

In May 2001, the Company's Board of Directors authorized the Company
to borrow up to an additional $2,000,000 (in addition to the
$1,300,000 previously authorized) (See Note 9, Related Party
Borrowings) from an affiliate of Vincent Goett, Palmilla Ventures
Limited Partnership ("Palmilla Ventures") (which borrowings may take
the form of Mr. Goett's personal guarantee of loans to the Company by
third parties and discharge of accrued salary owing by the Company to
Mr. Goett). Any such advances made by Palmilla Ventures are to bear
interest at the rate of 10% per annum. To the extent Mr. Goett "loans"
such additional amounts to the Company, then, as additional
consideration for making such loans to the Company, the Company has
agreed to issue Palmilla Ventures that number of shares of common
stock equal to up to approximately 19% of the issued and outstanding
common stock, on a fully-diluted basis, after giving effect to certain
specified transactions (assuming the full $2,000,000 is advanced; if
less than the full $2,000,000 is advanced, Mr. Goett will be entitled
to a pro rata number of shares). In addition, in connection with the
acquisition of DaMert, Vincent Goett personally guaranteed
approximately $1,300,000 of the obligation of the DaMert Company to
Amresco Financial I, L.P. (a creditor of DaMert). In consideration of
making this guarantee, the Company has agreed to issue Mr. Goett (or
his designee) that number of additional shares of common stock equal
to approximately 19% of the issued and outstanding common stock, on a
fully-diluted basis, after giving effect to certain specified
transactions. The issuance of the foregoing shares is subject to an
increase to 125,000,000 in the number of authorized and unissued
shares of our common stock. As further consideration to Mr. Goett for
loans to the Company and personal guarantee of Company obligations,
the Board of Directors in May, 2001 authorized the Company to assume
$331,000 of personal indebtedness of Mr. Goett, which indebtedness is
payable in September 2002.

In May 2001, the Board of Directors authorized the Company to purchase
from Vincent Goett for $400,000 children's products inventory owned by
Mr. Goett, having a cost basis to Mr. Goett of $275,000. The $400,000
is due in May of 2002 and is non-interest bearing.

PAGE 22

Because the Company did not have sufficient authorized but unissued
shares of common stock to execute its business and financial plans, in
March 2000, Palmilla Ventures, an affiliate of Vincent Goett (the
Company's Chairman), agreed to surrender to the Company an aggregate
of 10 million shares of its common stock so that such shares could be
restored to the status of authorized but unissued shares of common
stock. Of the aggregate 10 million shares surrendered, 1,159,952 (6.0%
of the outstanding common stock prior to surrender) were being held
for the benefit of Dan Lesnick, the then Chief Operating Officer (now,
President) and a Director, 2,182,417 (11.4% of the outstanding common
stock prior to surrender) were being held for the benefit of Mr. And
Mrs. Howard Moore, and 1,657,631 (8.6% of the outstanding common stock
prior to surrender) were being held for the benefit of Mr. Les
Friedland, a former President.

Under this Agreement, as soon as possible following an increase to
65,000,000 in the number of authorized but unissued shares, the
Company will return the 10 million shares surrendered and will issue
the surrendering shareholders, PRO RATA, based on the number of shares
surrendered, an aggregate of 2 million additional shares of common
stock as compensation for surrendering their shares.

In addition, if the price of the Company's common stock is lower when
the 10 million replacement shares are issued than it was on the date
the shares were surrendered, the surrendering shareholders will be
issued additional shares, PRO RATA, based on the number of shares
surrendered, such that the total replacement shares issued is equal in
value on the replacement date to the value of the shares surrendered
on the date of surrender. For example, if the value of 10 million
shares on the date of surrender was $15 Million and the market price
of the Company's common stock on the replacement date was $1.00, the
surrendering shareholders would be issued 15 million shares of common
stock on the replacement date to replace the $15 Million in value
surrendered at the surrender date. For purposes of this arrangement,
the "price" of the common stock is based on a five day trailing
average closing price, as quoted on the OTC Bulletin Board.

On March 9, 2000, the date of surrender of the 10 million shares, the
five-day trailing average closing price of the common stock was $1.79,
as quoted on the OTC Bulletin Board. Based on the quoted price of the
common stock, the value of the 10 million shares surrendered was $17.9
million. On June 8, 2001, the five-day trailing average closing price
of the common stock was $.074, as quoted on the OTC Bulletin Board. If
the Company were to replace, as of June 8, 2001, the 10 million shares
surrendered, the Company would be obligated to issue approximately
241.9 million shares of its common stock in replacement of the 10
million shares originally surrendered.

In November, 2000, Palmilla Ventures surrendered to the Company an
additional 4,697,129 shares of its common stock. These shares are to
be re-issued upon an increase to 125,000,000 in the number of
authorized shares of common stock.

PAGE 23

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(A) EXHIBITS. The following exhibits have been or are being filed herewith, and
are numbered in accordance with Item 601 of Regulation S-B:

EXHIBIT
NUMBER DESCRIPTION

2.7 Agreement for Purchase and Sale of Assets between Futech Interactive
Products, Inc. ("Futech") and the Company, dated as of October 23,
2000. (Superceded by Exhibit 2.8 hereto)(1)

2.8 Agreement for Purchase and Sale of Assets between among others the
Company and Futech, dated as of May 15, 2001 (Superceded by Exhibit
2.7 hereto) (2)

2.9 Merger Agreement between, among others, the Company and DaMert Company
dated March 2000, as amended by the First Amendment thereto dated May
10, 2000. (Superceded by Exhibit 2.11 hereto)(3)

2.10 Merger Agreement between, among others, the Company and DaMert
Company, dated November 9, 2000. (Superceded by Exhibit 2.11 hereto)
(1)

2.11 Merger Agreement between, among others, the Company and DaMert
Company, dated February 14, 2001. (Supercedes Exhibits 2.9 and 2.10
hereto) (4)

3.1 Articles of Incorporation. (5)

3.2 Amendment No. 1 to Articles of Incorporation. (6)

3.3 Statement of Resolution Establishing Series for Shares. (6)

3.4 Amendment No. 2 to Articles of Incorporation. (6)

3.5 Bylaws of the Company. (7)

3.6 Articles of Amendment to Articles of Incorporation, dated August 11,
1994 and filed on August 16, 1994. (8)

4.1 Specimen Common Stock Certificate. (6)

16 Letter of BDO Seidman, LLP. (9)

16.1 Letter of Ernst & Young, LLP. (10)

99.1 Amended and Restated 2000 Combination Stock Option Plan. (11)

--------------------------------------------------------------------------------
(1) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 2000.

(2) Incorporated by reference to an Exhibit to the Company's Current
Report on Form 8-K filed on June 13, 2001.

(3) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2000.

(4) Incorporated by reference to an Exhibit to the Company's Current
Report on Form 8-K filed March 1, 2001.

(5) Incorporated by reference to Exhibit 3(a) to the Company's
Registration Statement on Form 8-A, filed with the Commission on
August 15, 1989 and declared effective on September 1, 1989.

(6) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-1 filed August 8, 1990.

PAGE 24

(7) Incorporated by reference to Exhibit 3(b) to the Company's
Registration Statement on Form 8-A, filed with the Commission on
August 15, 1989 and declared effective on September 1, 1989.

8) Incorporated by reference to an exhibit to the Company's Registration
Statement filed with the Commission December 20, 1994.

(9) Incorporated by reference to Exhibit 16 to the Company's Form 8-K
filed with the Commission of March 10, 1999.

(10) Incorporated by reference to Exhibit 16 to the Company's Form 8-K
filed with the Commission on April 28, 2000.

(11) Incorporated by reference to Exhibit 99.1 to the Company's Form S-8
Registration Statement filed June 13, 2001 filed with the Commission
on November 21, 2000.

(B) REPORTS ON FORM 8-K

The Company filed on March 1, 2001 a Current Report on Form 8-K dated
February 15, 2001 to report the acquisition of DaMert Company.

PAGE 25

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated: June 21, 2001 JANEX INTERNATIONAL, INC.

By: /s/ Vincent Goett
-----------------------
Vincent Goett,
Chief Executive Officer

In accordance with the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant in the capacities
and on the dates indicated.

Signatures Title Date
---------- ----- ----

/s/ Vincent Goett Chairman, President, June 21, 2001
--------------------------- Chief Executive Officer
Vincent Goett (principal executive
Officer and director)

/s/ Daniel Lesnick
--------------------------- Director June 21, 2001
Daniel Lesnick (director)

PAGE 26

EXHIBIT INDEX