FORM 10-QSB
Securities and Exchange Commission Washington, D.C. 20549
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1996
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 0-22372.
GRAND TOYS INTERNATIONAL, INC.
(Exact name of Issuer as specified in its charter)
Nevada 87-0454155
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization identification No.)
1710 Route Transcanadienne, Dorval, Quebec, Canada H9P 1H7
(Address of principal executive offices)
(514) 685-2180
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities
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 { }
Indicate the number of shares outstanding of each of the
issuer's classes of common equity, as of October
28,1996: 7,704,500.
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
GRAND TOYS INTERNATIONAL, INC.
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
1996, (Unaudited) 1995
Assets
Current assets:
<S> <C> <C>
Accounts receivable 9,356,114 6,496,696
(net of allowance for
doubtful accounts;
1996 - $166,772;1995 - $74,228)
Inventory 5,064,889 1,750,892
Prepaid expenses 534,472 157,107
Total current assets 14,955,475 8,404,695
Equipment and leasehold
Improvements, net (note 3) 409,573 477,553
Total assets 15,365,048 8,882,248
Liabilities and Stockholders' Equity
Current liabilities:
Bank indebtedness (note 4) 7,049,123 2,977,715
Trade accounts payable 2,802,933 1,934,948
Other accounts payable and
accrued liabilities 801,972 284,761
Royalties payable 346,837 250,462
Income taxes payable 805,989 286,618
Current portion of
long-term debt 16,446 50,725
Total current liabilities 11,823,291 5,785,229
Long-term debt (note 5) 4,385 4,390
Loans payable to a director
(note 6) 649,369 931,090
Minority interest 100 100
Stockholders' equity:
Capital stock (note 7) 7,705 7,705
Additional paid-in capital 10,393,432 10,422,574
Deficit (7,004,456) (7,839,474)
Cumulative currency translation
adjustment (508,779) (429,366)
Total stockholder's equity 2,887,903 2,161,439
Commitments and contingencies
(notes 9 and 10)
Total liabilities and
stockholders' equity 15,365,048 8,882,248
See accompanying notes to consolidated financial statements.
<PAGE>
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Earnings, (Unaudited)
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1996 1995 1996 1995
(Restated, (Restated,
note 1) note 1)
<S> <C> <C> <C> <C>
Net sales 8,391,261 7,170,724 18,144,695 14,872,640
Cost of goods sold 4,639,577 4,323,786 10,515,448 9,288,848
Gross profit 3,751,684 2,846,937 7,629,247 5,583,792
Operating expenses:
Selling, general and
administrative 2,362,030 1,737,268 5,278,013 4,264,221
Interest 184,404 101,784 363,865 301,614
Bad debt expense 161,159 11,382 219,916 82,360
Depreciation and
amortization 40,349 39,963 103,921 177,821
Sub Total 2,747,578 1,890,398 5,965,714 4,766,016
Loss of non-consolidated
subsidiary company - (3,198,680) - (4,781,377)
Earnings (loss) before
income tax provision
(recovery) 1,004,106 (2,242,140) 1,663,532 (3,963,601)
Income tax provision
(recovery) 521,291 (896,856) 828,513 (1,585,440)
Net earnings (loss) 482,815 (1,345,284) 835,019 (2,378,160)
Per common share (note 2):
Primary 0.06 (0.22) 0.11 (0.39)
Fully diluted 0.05 (0.22) 0.08 (0.39)
See accompanying notes to consolidated financial statements.
<PAGE>
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Cash Flows, (Unaudited)
<CAPTION>
For the nine months ended September 30,
1996 1995
(Restated, note 1)
Cash flows from operating activities:
<S> <C> <C>
Net earnings (loss) 835,019 (2,378,160)
Items not affecting cash:
Depreciation and amortization 103,921 117,821
Gain on disposal of equipment (25,407) (22,070)
Loss of non-consolidated subsidiary - 4,781,377
Changes in operating working capital items:
Increase in accounts receivable (2,852,494) (2,588,660)
(Increase) decrease in inventory (3,300,482) 1,141,123
Increase in prepaid expenses (403,007) (159,370)
Increase in trade accounts payable 863,110 879,608
Increase (decrease) in other accounts
payable and accrued liabilities 411,448 (34,194)
Increase in royalties payable 97,087 109,993
Increase in income taxes payable 517,266 327,991
Other 11,680 57,295
Net cash (used for) provided by
operating activities (3,741,860) 2,232,754
Cash flows from financing activities:
Increase (decrease) in bank
indebtedness 4,071,408 (289,802)
Repayment of long-term debt (34,074) (22,046)
(Repayment) increase of loans payable
to a director (255,798) 894,875
Issuance of capital stock, net of issue
costs (29,142) 510,685
Net cash provided by financing activities 3,752,394 1,093,711
Cash flows from investing activities:
Additions to equipment (35,941) (94,513)
Proceeds on sale of equipment 25,407 22,070
Investment in non-consolidated subsidiary - (3,254,022)
Net cash used for investing activities (10,534) (3,326,465)
Net change in cash, being cash at
end of period $ 0 $ 0
Supplementary disclosure of cash flow
information
Cash paid during the year for:
Interest $363,865 $301,614
Income taxes - -
See accompanying notes to consolidated financial statements.
<PAGE>
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Stockholders' Equity (Unaudited)
<CAPTION>
Cumulative
Additional Retained Currency
Common Paid-In Earnings Translation
Stock Capital (Deficit) Adjustment Total
<S> <C> <C> <C> <C> <C>
January 1, 1996 7,705 10,422,574 (7,839,474) (429,366) 2,161,439
Net earnings for
the period - - 835,019 - 835,019
Share issue costs - (29,142) - - (29,142)
Foreign currency
adjustment - - - (79,412) (79,412)
September 30,
1996 7,705 10,393,432 (7,004,455) (508,779) 2,887,903
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements (Unaudited)
Grand Toys International, Inc., a publicly held company, is organized under
the laws of the state of Nevada. Its principal business activity, through
Grand Toys Ltd., its wholly-owned indirect Canadian subsidiary, is the
distribution of toys and related items.
1.Corporate reorganization:
Grand Group Inc., ("Grand Group"), an indirect subsidiary of Grand Toys
International,Inc., started active operations in March 1994 and ceased
operations in September 1995. In November 1995, an involuntary petition into
bankruptcy was filed against Grand Group. Due to the fact that Grand Group is
being liquidated in a Chapter 7 proceeding under the United States Bankruptcy
Code and that a trustee has been appointed to oversee the liquidation,
control no longer rests with Grand Toys International, Inc. Therefore the
financial statements of Grand Group are not consolidated in these financial
statements. As well, prior period figures, including those disclosed in the
notes to the financial statements, have been restated to exclude Grand Group.
2.Significant accounting policies:
(a)Financial statement presentation
The accompanying consolidated financial statements are not audited for the
mentioned period but include all adjustments (consisting of only normal
recurring accruals) which management considers necessary for the fair
representation of results at September 30, 1996.
Moreover, these financial statements do not purport to contain complete
disclosures in conformity with generally accepted accounting principles and
should be read in conjunction with the Company's audited financial statements
at and for the year ended December 31, 1995 contained in the Company's Annual
Report on Form 10-KSB.
The results for the three and nine months ended September 30, 1996 are not
necessarily indicative of the results for the entire fiscal year ending
December 31, 1996.
(b)Principles of consolidation:
These consolidated financial statements, presented in US dollars and in
accordance with accounting principles generally accepted in the United
States, include the accounts of Grand Toys International, Inc. and its
subsidiaries (the "Company"). All significant intercompany balances and
transactions have been eliminated.
(c)Inventory:
Inventory is valued at the lower of cost and net realizable value. Cost is
determined by the first-in, first-out method.
(d)Equipment and leasehold improvements:
Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization methods and
annual rates adopted by the Company are as follows:
Asset Method Rate
Computer equipment Declining balance 30%
Machinery and equipment Declining balance 20%
Furniture and fixtures Declining balance 20%
Trucks and automobiles Declining balance 30%
Telephone equipment Declining balance 30%
Leasehold improvements Straight-line Term of lease
plus one
renewal term
(e)Revenue:
Sales are recorded net of merchandise returns.
(f)Foreign currency translation:
(i)Grand Toys Ltd., an indirect Canadian subsidiary, is classified as a
self-sustaining foreign operation, with assets and liabilities translated into
US dollars at the exchange rates prevailing at the balance sheet date and
sales, expenses and cash flows translated at the average exchange rate for
the period. The resulting currency translation adjustments are accumulated
and reported as a separate component of stockholders'equity.
(ii) Other monetary assets and liabilities denominated in foreign
currencies are translated at the exchange rates prevailing at the balance
sheet date. Revenues and expenses denominated in foreign currencies are
translated at the rates of exchange prevailing at the transaction dates.
All exchange gains and losses are included in income.
(g)Net earnings (loss) per common share:
Primary net earnings (loss) per common share is determined by dividing the
weighted average number of common shares outstanding during the period into
net earnings (loss) (Note 7). Fully diluted net earnings (loss) per common
share is similarly computed but includes the effect, when dilutive, of the
Company's other potentially dilutive securities (Note 8). The Company's
options and warrants are excluded from the 1995 computation due to their
antidilutive effect during that period. The weighted average number of shares
were as follows:
<TABLE>
<CAPTION>
Three months Nine months
Ended September 30, Ended September 30,
1996 1995 1996 1995
Weighted Average number of Shares Outstanding:
<S> <C> <C> <C> <C>
Primary 7,592,000 6,108,700 7,592,000 6,108,700
Fully diluted 12,861,154 6,108,700 12,861,154 6,108,700
3.Equipment and leasehold improvements:
<CAPTION>
September 30, 1996 December 31, 1995
Accumulated Accumulated
Cost Depreciation Cost Depreciation
<S> <C> <C> <C> <C>
Computer equipment 679,590 499,750 627,782 453,742
Machinery and equipment 377,903 326,487 382,839 323,648
Furniture and fixtures 505,504 445,466 513,444 436,760
Trucks and automobiles 89,722 80,677 191,591 151,846
Telephone equipment 42,916 35,145 42,957 33,807
Leasehold improvements 361,134 259,660 356,886 238,143
Total 2,056,768 1,647,195 2,115,499 1,637,946
Net book value 409,573 447,553
</TABLE>
4.Bank indebtedness:
On March 28, 1996, Grand Toys Ltd. signed a banking agreement with a new
lending institution. The Company now has a secured line of credit of
$9,545,000 (C$13,000,000) to enable it to meet its plans for growth in 1996.
Grand Toys Ltd. may draw down working capital advances and letters of credit
in amounts determined by percentages of its accounts receivable and
inventory. Working capital advances taken by Grand Toys Ltd. bear interest
at prime plus 1 1/2%. The term of the loan is three years and guaranteed by
Grand Toys International, Inc.
5.Long-term debt:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Loans payable, unsecured,bearing interest 20,831 55,115
at the rate of 7% per annum, payable in
blended monthly installments of $4,415 of
principal and interest, due January 1, 1997
Amount due within one year (16,446) (50,725)
Total 4,385 4,390
</TABLE>
6.Loans payable to a director:
The loans payable to a director bear interest 12% per annum. Pursuant to the
new banking agreement detailed in note 4 the loan payable to a director may be
repaid at C$ 150,000 per month until fully repaid, provided certain collateral
covenants are met.
7.Capital Stock:
(a)Authorized capital:
50,000,000, $0.001 par value voting common stock
5,000,000, $0.001 par value preferred shares, issuable in series with such
designation, rights and preferences as may be determined from time to time by
the Board of Directors.
(b)Issued and outstanding:
September 30, December 31,
1996 1995
[S] [C] [C]
7,704,500 common shares 7,705 7,705
8.Stock options and warrants:
The Company has a stock option plan (the "Option Plan") which provides for the
issuance of up to 1,500,000 options to acquire the common stock of the Company.
Stock options granted under the Option Plan may be Incentive Stock Options
under the requirements of the Internal Revenue Code, or may be Non-Statutory
Stock Options which do not meet such requirements. Options may be granted
under the Option Plan to, in the case of Incentive Stock Options, all
employees (including officers) of the Company, or, in the case of Non-
statutory Stock Options, all employees (including officers) or non-employee
directors of the Company.
The Company has granted Options outside the Option Plan and has also issued
warrants as follows:
<TABLE>
<CAPTION>
Employee
Stock Other Exercise
Option Stock Price Per
Details Plan Options Warrants Total Share
<S> <C> <C> <C> <C> <C>
Outstanding,
December 31, 1995 900,500 3,115,000 1,600,000 5,615,500 $1.19 - $12.00
Granted in 1996 88,500 2,415,054 - 2,503,554 $1.47 - $1.53
Cancelled in 1996 (666,500) (755,000) - (1,421,500) $2.06 - $4.38
Exercised in 1996 - - - - -
Outstanding,
September 30, 1996 322,500 4,775,054 1,600,000 6,967,554
</TABLE>
Of the options granted in 1996, 2,127,554 options granted to certain officers
and directors of the Company are subject to increase or decrease based upon
changes in the number of shares of the Company's Common Stock from time to
time outstanding so that the percentage of the issued and outstanding capital
stock represented by such options remains constant.
9.Commitments:
The Company has entered into long-term leases with minimum annual rental
payments approximately as follows:
1996 88,000
1997 433,000
1998 436,000
1999 205,000
Thereafter 779,000
Total 1,941,000
Rent expense for the periods ended September 30, 1996 and 1995 amounted to
$129,795 and $176,835 respectively.
10. Contingencies:
(a) (i)A petition for injunction against the Grand Toys Ltd. with respect to an
alleged infringement of a toy character has been filed. In the opinion of
management, the case should be settled, however, at this point in time it is
difficult to ascertain restimate the value of the settlement.
(ii)A lawsuit for alleged breach of contract has been filed against Grand Toys
Ltd. by a sales representative. In the opinion of management, the case should
be settled, however, at this point in time it is difficult to ascertain or
estimate the value of the settlement, if any.
(b) Grand Toys Ltd. is also contingently liable for letters of credit of
approximately $1,162,000 as at September 30, 1996.
11.Subsequent Events
In October 1996, 100,000 options were issued to an outside director
Item 2. Management's Discussion and Analysis or Plan of Operation
Grand Toys International, Inc., through its Canadian subsidiary, Grand Toys Ltd.
("Grand Canada"), has been engaged in the toy business in Canada for over 35
years and currently distributes a wide variety of toys throughout Canada.
<TABLE>
Results of Operations
<CAPTION>
Three months ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of goods sold 55.29 60.30 57.95 62.46
Gross profit 44.71 39.70 42.05 37.54
Operating expenses:
Selling, general and
administrative 28.15 24.23 29.09 28.67
Interest 2.19 1.42 2.01 2.03
Bad debt expense 1.92 .16 1.21 .55
Depreciation .48 .56 .57 .79
Total operating
expenses 32.74 26.36 32.88 32.05
Earnings before
unusual item 11.97 13.34 9.17 5.49
Loss of non-consolidated
subsidiary - 44.61 - 32.15
Earnings (loss) before
income taxes 11.97 (31.27) 9.17 (26.66)
Net earnings (loss) 5.75% (18.76)% 4.60% (15.99)%
</TABLE>
Comparison of the three months ended September 30, 1996 to the three
months ended September 30, 1995.
Net earnings (loss). Net earnings were $482,815 for the third quarter of 1996
compared to a net loss of $1,345,284 for the same period last year. The
increase of $1,828,099 in net earnings was mainly due to an increase in sales
and gross profit, and the elimination of the effect of the loss in the Company's
non-consolidated subsidiary in 1995.
Net sales. Net sales increased by $1,220,537 or by 17% over net sales during
the third quarter of 1995.The higher net sales volume was attributed to
increased sales in the Oddzon (Koosh), Tiger Electronics (Hand Held Electronic
Games), and Toy Biz (Marvel) product lines. Due to the strength of the
Company's product line , the third quarter of 1996 benefited by earlier
shipments, resulting in increased sales as compared to the same quarter last
year.
Gross profit. Gross profit for the Company increased by $904,746 or from 39.70%
of sales to 44.71% of sales over the third quarter of last year. The increase
in gross profit percentage was due to the sales mix in the product line and the
Company's continuous efforts to decrease the cost of goods sold.
Selling, general and administrative. The increase in selling, general and
administrative expenses of $624,762 over the third quarter of 1995 was mainly
due to increases in advertising, salary, bad debt and bank charges.
Interest expense. Interest expense increased as a result of the higher loan
balance to fund the increase in sales.
Comparison of the nine months ended September 30, 1996 to the nine months
ended September 30, 1995.
Net earnings (loss). Net earnings were $835,019 for nine months of 1996
compared to a net loss of $2,378,160 for the same period last year. The
increase of $3,213,179 in net earnings was mainly due to an increase in sales
and gross profit, and the elimination of the effect of the loss in the
Company's non-consolidated subsidiary in 1995.
Net sales. Net Sales for the first nine months of 1996 increased by $3,272,055
or by 22% over the same period last year. The higher sales volume was
attributed to increased sales in the Oddzon (Koosh), Unice (Balls), Intex
(Inflatables), Tiger Electronics (Hand Held Electronic Games) and Toy Biz
(Marvel) product lines. The strength of the Company's product line resulted
in increased sales as compared to the same period last year.
Gross profit. Gross profit increased by $2,045,455 or 37% over the nine months
ended September 1995. This increase was primarily attributable to the increase
in net sales by the Company. The increase in gross profit percentage was due to
the sales mix in the product line, and the Company's continuous efforts to
decrease the cost of goods sold.
Selling, general and administrative. Selling, general and administrative
expenses increased by $1,013,792 over the same period last year. The increase is
mainly due to increases in advertising, salaries, bad debts, and bank charges.
Interest expense. Interest expense increased as a result of the higher loan
balance to fund the increase in sales.
Liquidity and Capital Resources
The Company generally finances its operations through borrowings under Grand
Canada's Credit Agreement with its bank and by cash flow from operations.
On March 28, 1996 Grand Canada entered into a banking arrangement with a new
lending institution. Grand Canada now has a secured line of credit of
C$13,000,000 to enable it to meet its plans for growth in 1996. Grand Canada
may draw down working capital advances and letters of credit in amounts
determined by percentages of its accounts receivable and inventory. Working
capital advances taken by Grand Canada bear interest at prime plus 1 1/2%.
The term of the loan is three years. The loan is guaranteed by Grand Toys
International Inc. The first drawdown under the new arrangement occurred in
April 1996 at which time the old credit facility was terminated.
Accounts receivable at September 30, 1996 were $9,356,114 compared to $6,496,696
at December 31, 1995. This increase is directly related to the increased sales
volume of $3,272,055. Inventory was $5,064,889 at September 30, 1996 compared
to $1,750,892 at December 31, 1995. Inventory is historically at it's highest
level as of the end of the third quarter, in anticipation of the fourth quarter
shipments. Working capital increased from $2,619,466 at December 31, 1995 to
$3,132,184 at September 30,1996. Net cash used for operating activities was
$3,741,860 in 1996 compared to net cash provided by operations of $2,232,754 in
1995 and cash used for additions to equipment was $35,941 compared to $94,513 in
1995.
Grand Canada's level of accounts receivable is subject to significant seasonal
variations due to the seasonality of sales and is typically highest at the end
of the year. As a result, Grand Canada's working capital requirements are
greatest during its third and fourth quarters.
During 1995 the Company issued 1,680,000 shares of its Common Stock in private
transactions under Regulation S pursuant to which it received gross proceeds of
$835,000.
If the funds available under the Company's financing agreements, together with
its current cash and cash equivalents, are not sufficient to meet the Company's
cash needs, the Company may from time to time seek to raise capital from
additional sources, including extension of its current lending facilities,
project-specific financing and additional public or private debt or equity
financing. Management believes that the Company has sufficient funding for
the balance of this year and 1997.
<PAGE>
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GRAND TOYS INTERNATIONAL, INC.
(Registrant)
/s/ Stephen Altro
Stephen Altro
President and Director
Date: October 28, 1996(Chief Executive Officer)
/s/ Ron Goldenberg
Ron Goldenberg
Vice-President and Director
(Chief Accounting Officer and
Date: October 28, 1996Chief Financial Officer)
