SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission file number 0-22372
Grand Toys International, Inc.
(Name of small business issuer as specified in its charter)
Nevada 87-0454155
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorportaion or organization)
1710 TransCanada Hwy, Dorval, Quebec, Canada, H9P 1H7
(Address of principal executive offices)
(Zip Code)
Issuer's telephone number, including area code (514) 685-2180
Securities registered pursuant to Section 12 (b) of the Exchange Act: None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Common Stock $.001 par value
Common Stock Redeemable Purchase Warrants
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 issuer was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB. X
The issuer's revenues for the year ended December 31, 1996 were $27,646,251.
The number of shares outstanding of the Issuer's common stock is
7,887,986 (as of February 28, 1997).
The aggregate market value of the voting stock held by non affiliates of
the issuer was approxmiately $5,898,000 (as of February 28, 1997).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Grand Toys International, Inc. 1997 Notice of Annual Meeting
of Stockholders and Proxy Statement, to be filed with the Securities and
Exchange Commission within 120 days after the close of the Issuer's fiscal
year (incorporated into Part III).
Transitional Small Business Disclosure Format: Yes No X
<PAGE>
PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: This form 10-KSB of
Grand Toys International, Inc (the "Company") contains forward-looking
statements that are subject to risks and uncertainties. Statements indicating
that the Company "expects", "estimates" or "beleives", are forward-looking, as
are all other statements concerning future financial results, product offerings
or other events that have not yet occurred. There are many important factors
that could cause actual results or events to differ materially from those
anticipated by the forward-looking statements contained in this Form 10-KSB.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTIONS
Grand Toys International, Inc. (the "Company"), through its Canadian
subsidiary, Grand Toys Ltd. ("Grand Canada"), has been engaged in the toy
business in Canada for over 36 years and currently distributes a wide variety
of toys throughout Canada. Grand Canada's toy business consists of two areas
of operation: (i) the importation and distribution throughout Canada, on an
exclusive basis, of a wide variety of well-known toy products designed and
manufactured throughout the world; and (ii) the sale of toy products
featuring popular characters licensed to the Company. Through a United states
subsidiary, Grand Group Inc. ("Grand US"), the Company had commenced sales
of a proprietary line of toy products in the United States and abroad in the
first quarter of 1994. Due to continued operating losses and a lack of
sufficient capital, Grand US ceased operations in September 1995. On January
4, 1996 an order for relief under Chapter 7 of the United States Bankruptcy
code was entered against Grand US. A trustee was appointed at that time to
supervise the liquidation of Grand US's remaining assets.
Unless the context otherwise requires, references herein to "Grand Toys"
or the "Company" include Grand Toys International, Inc., its subsidiary,
Grand Toys (U.S.) Ltd., Grand Canada, and Grand Concepts Inc which are
subsidiaries of Grand Toys (U.S.) Ltd.
Grand Concept Inc was incorporated in November 1996 and did not commence
active business until 1997. Grand Concepts will distribute various
accessories including backpacks, duffels, handbags and rainwear.
PRODUCTS
Grand Canada imports for distribution in Canada select toys from toy
manufacturers who design, develop and manufacture such toys. These toys are
generally the same products that such manufacturers market and sell in other
countries. In determining which toys to import, Grand Canada examines such
factors as consumer acceptance of the particular toys in other countries,
Canadian consumer tastes based on similar toys distributed previously in
Canada and the potential demand for such toys by Grand Canada's customers,
which is partly determined in advance by exhibiting products to its customers
prior to ordering the product from the toy manufacturer.
The following table sets forth certain toy manufacturers whose toys Grand
Canada distributes in Canada, the type of toys of such manufacturer and the
price range within which Grand Canada sells such toys to retailers.
3
<PAGE>
<TABLE>
<CAPTION>
Toy Products Distributed
Toy Manufacturer by the Company Product Price Range ($)
<S> <C> <C>
Arbor Toys (US) Girls accessories 4.10 - 37.00
Fairland Toys (Hong Kong) Fashion dolls 0.90 - 11.95
Industrias Salver (Mexico) Balls 0.65 - 2.95
Intex (Taiwan) Inflatable water toys 0.55 - 105.00
Krakpol (Poland) Toy tool sets 11.95 - 38.25
Oddzon Products (U.S.) Koosh products 1.50 - 20.90
Processed Plastic (U.S.) Plastic beach & sand toys,
ride-on vehicles & others 0.60 - 37.95
Spectra Star Toys (U.S.) Kites 0.60 - 9.00
Tiger Electronics (U.S.) Games, dolls, hand-held
games, electronic diaries 7.10 - 115.00
Toy Biz (U.S.) Male action figures, dolls 4.95 - 48.50
Unice S.A. (Spain) Balls 1.80 - 3.35
</TABLE>
DESIGN AND DEVELOPMENT
As is common in the toy industry, Grand Canada receives numerous toy
concepts from unaffiliated third parties for new products. Grand Canada does
not employ its own inventors of new toy concepts but if it accepts and
develops a person's concepts for new toys, it will pay royalties on the toys
developed from such concept that are actually sold.
All safety testing of the Company's products is done by the manufacturers
at the manufacturers' factories and is designed to meet certain safety
regulations imposed by the Canadian governmental authorities. The Company
also monitors quality assurance procedures for its products for safety
purposes at its warehouse facilities.
SOURCES OF MANUFACTURING
Grand Canada does not manufacture any of the toy products it distributes.
The toy products are imported and warehoused at the Company's facilities and
subsequently distributed to its customers across Canada.
Approximately 91% of Grand Canada's gross sales in 1996 were of toys
supplied by the following four manufacturers: Tiger Electronics, Inc., Toy
Biz, Processed Plastic and Intex Corp. whose toys, respectively, accounted for
39%, 36%, 9%, and 7% of 1996 gross sales. Other than such manufacturers, no
products of Grand Canada from any other supplier accounted for more than 5%
of gross sales in 1996.
The imported toy products are manufactured for Grand Canada by unaffiliated
third parties principally located in Canada, Mexico, Spain, Poland, the
United States, China, Hong Kong and Taiwan. The manufacturers are chosen by
Grand Canada on the basis of price, availability of payment terms, quality,
reliability and the ability of a manufacturer to meet Grand Canada's delivery
requirements. The use of third-party manufacturers enables Grand Canada to
avoid incurring fixed manufacturing costs but reduces its ability to control
the timing and qaulity of the manufacturing process. Delays in shipments or
defects in material could result in a loss of sales, which could have a
material adverse effect on Grand Canada. All manufacturing services
performed overseas are paid for by either letter of credit or wire transfer.
Payment for such manufacturing is made only upon the proper fulfillment of
terms established by Grand Canada such as adhering to product quality,
design, packaging and shipping standards and proper documentation relating
thereto. Most product purchases are paid for in U.S. dollars. To date,
Grand Canada has not experienced any material delays in the delivery of its
prodcuts or any material defects in the products manufactured for it. Grand
Canada's ability to have its products manufactured outside Canada could be
affected by political or economic disruptions, including labor strikes and
disruptions in the shipping industries.
4
<PAGE>
Although Grand Canada believes that alternative sources of supply are
available, any serious disruption could materially impair Grand Canada's
ability to deliver products in a timely manner. To date, Grand Canada has
not experienced any problems as a result of any political or economic
disruptions.
Although Grand Canada does not supervise the day-to-day manufacturing of
its products, prior to the commencement of manufacturing, Grand Canada and
the manufacturer work together on designing a prototype of the specific
product. The manufacturer is contracturally obligated to manufacture the
products in accordance with the specifications of the prototype.
Grand Canada is not a party to any long-term supply or requirement
agreements with any specific manufacturer or supplier. Grand Canada employs
a large number of toy manufacturers. Such manufacturers may subcontract
for the manufacture of components of the products they make for Grand Canada
with third parties, none of whom are affiliated with Grand Canada.
The principal raw materials used in the production and sale of Grand
Canada's products are plastics, printed fabrics and paper products, all of
which are currently available at reasonable prices from a variety of sources.
Because Grand Canada does not manufacture any of its products, it does not
own any specialized tools or other production equipment.
Grand Canada maintains space in the same building in suburban Montreal,
Canada, where the Company's and Grand Canada's executive offices are
maintained for warehouse, packaging and distribution purposes. Grand Canada
also maintains an inventory of its products at such facilities enabling it to
respond quickly to customer orders.
LICENSING AND DISTRIBUTION AGREEMENTS
CHARACTER LICENSES. Grand Canada's product line includes products featuring
well-known character properties created by others. In order to obtain the
right to manufacture and sell toy products featuring such character
properties, Grand Canada enters into license agreements with the owners of
such properties . Under the terms of the character property license
agreements Grand Canada pays royalties to licensors that generally range from
5% to 12% of sales of the toys utilizing such character properties. To the
extent competition increases among toy companies to obtain character property
licenses, Grand Canada may encounter increased difficulty in obtaining
certain character licenses and may be required to pay greater minimum
guaranteed royalty amounts for them.
Generally, Grand Canada's character property license agreements provide it
with the exclusive right to sell only specific products featuring the
particular character property and limit the territory in which such products
may be sold to Canada. Typically, each such license agreement extends for
one to three years and may be renewable upon payment of certain minimum
guarantees or the attainment of specified sales levels during the term of the
license.
The following table sets forth certain of Grand Canada's character licenses,
the licensor of such character property and the toy products that Grand
Canada markets featuring such character property:
5
<PAGE>
<TABLE>
<CAPTION>
Character Property Licensor Product of Grand Canada
Featuring Such Property
<S> <C> <C>
101 Dalmatians Disney Kites, Hand-Held Games,
Inflatables
Barbie E.M.G. Girls' accessories
Batman Warner Bros. Kites, balls, discs
Cinderella Disney Hand-held games
Donald Duck, Daisy, Goofy,
Pluto Disney Pools, Balls,
Kites
Looney Tunes Warner Kites, Balls
Mickey Mouse, Minni Mouse
Disney Pools, Ball, Kites
Pepsi Pepsico Balls
Pocahontas Disney Hand-held games, kites,
balls, inflatables
Sailor Moon G-Squared Balls
Star Wars Lucas Films Kites, Hand-Held Games
Winnie The Pooh Disney Balls, Hand-Held Games,
Koosh, Plastics
</TABLE>
No one particular character property license resulted in sales in excess of
5% of Grand Canada's sales for the year ended December 31, 1996, and the loss
of any one such license would not have a material adverse effect on Grand
Canada's operations.
LICENSE AND DISTRIBUTION ARRANGEMENTS WITH TOY MANUFACTURERS. Grand Canada
has written license and distribution arrangements with two of the
approximately fifteen toy manufacturers from whom it imports toys for
distribution in Canada. Grand Canada selects products from a master product
list provided to it by the manufacturer. The purchase price, depending on
the arrangement with the supplier, consists of a fixed payment per toy, a
royalty fee based on gross sales of the products by Grand Canada in Canada
or a combination of the two. Pursuant to these agreements, Grand
Canada obtains the exclusive right to import and distribute throughout Canada
the toy products selected by it. Where agreements have been entered into,
they generally extend for one to five years and are generally exclusive for
a specified product or product line. Generally, under such agreements and
arrangements, Grand Canada is responsible for arranging and paying for
shipping and other related costs and expenses. Delivery of products
generally takes approximately one to five weeks.
MARKETING, SALES AND DISTRIBUTION
Grand Canada distributes its toy products throughout Canada through its own
sales representatives. Purchasers of the products include retail chain
stores, department stores, toy specialty stores and wholesalers. Grand
Canada's five largest customers are Toys "R" Us, Wal-Mart, Zellers, Sears
and K Mart, which for the year ending December 31, 1996 accounted for
approximately 26%, 21%, 13%, 9% and 5%, respectively, of gross sales for such
period. No other customer accounted for more than 5% of gross sales in 1996.
Other than purchase orders from its customers, Grand Canada does not have
written agreements with its customers but sells products to customers on
open account with payment terms typically varying from 30 to 90 days. The
termination by one or more of the customers identified above of its
relationship with Grand Canada could have a material adverse effect on the
Company.
Although Grand Canada's policy is not to sell any of its products on
consignment, in accordance with industry practice it may sell, on a case-by-
case negotiated basis, its products on a partial consignment basis. To date,
consignment sales have been insignificant.
Grand Canada employs a sales and marketing staff of eight people, including
its senior management and seven sales persons who make on-site visits to
customers for the purpose of soliciting orders for products. It markets
products at major and regional toy trade shows in Canada. In addition,
Grand Canada maintains showrooms in its suburban Montreal and Toronto
facilities where it exhibits its toy products to customers.
6
<PAGE>
Grand Canada directly, or through its salespersons, takes written orders for
its products from its customers and arranges for the manufacture of its
products as discussed above. Cancellations are generally made in writing and
appropriate steps are taken to notify its manufacturers of such cancellations.
Returns are generally not accepted, although consistent with industry
practices, exceptions to this policy are made on a case-by-case negotiated
basis.
Grand Canada generally ships products to customers within six months of the
date an order is received. The backlog at February 28, 1997 and February
29, 1996 was Canadian $ 4,060,452 and Canadian $ 3,783,774, respectively.
Backlog generally represents written customer orders that will be shipped
within four months. Because customer orders may be canceled at any time
without penalty, the Company believes that backlog may not accurately
indicate sales for any future period.
PRODUCT LIABILITY
The Company maintains product liability coverage for Grand Canada's
operations in the aggregate amount of Canadian $4,000,000. The Company has
not been the subject of any product liability litigation.
COMPETITION
The toy industry is highly competitive and sensitive to changing consumer
preferences and demands. Grand Canada competes in Canada with many companies
with toy products that are better known than those distributed by Grand
Canada. Some of Grand Canada's competitors are substantially larger and more
diversified, and have substantially greater financial and marketing resources
than Grand Canada; as well as greater name recognition, and the ability to
develop and market products similar to, and more competitively priced than,
those distributed by Grand Canada. Grand Canada competes with, among others,
Irwin Toys Ltd, Hasbro Inc., Mattel Inc., and Tyco Inc.
GOVERNMENT REGULATION
Grand Canada is subject to the provisions of various laws, certain of which
have been enacted by the Federal Government of Canada and others which have
been enacted by the government of the Province of Quebec and other Canadian
provinces. The laws of the government of Canada to which the Company is
subject include the Hazardous Products Act which empowers the government to
protect children from hazardous toys and other articles. Under that
legislation the government has the authority to exclude from the market those
articles which are found to be hazardous. Grand Canada is also subject to
the Consumer Packaging and Labeling Act enacted by the government of Canada,
which legislation prohibits the importing into Canada of prepackaged items,
and which prohibits the sale or import or advertising in Canada of items
which have misleading information on their label. The legislation enacted by
the government of the Province of Quebec to which Grand Canada is subject
includes the Consumer Protection Act which prohibits the sale of hazardous
toys and other articles, as well as requiring proper labeling and
instructions to be included with the item to be sold, the Charter of the
French language which requires that all labeling and instructions appear in
the French language, and the Upholstery and Stuffed Articles Act, which
requires that stuffed articles conform to hygienic norms and which obliges
companies to take measures against contamination during transportation and
storage. Similar laws exist in several cities and provinces throughout
Canada and in many jurisdictions throughout the world.
Grand Canada maintains a quality control program to ensure compliance with
all applicable laws.
7
<PAGE>
EMPLOYEES
As of December 31, 1996, the Company employed 42 full-time persons,
including three executive officers, and 2 contract employees. The Company
believes that its relations with its employees are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive offices are located in an approximately
105,000 square foot facility located at 1710 Route TransCanadienne, Dorval,
Quebec, Canada, a suburb of Montreal. Of the space leased at such location,
Grand Canada uses approximately 65,000 square feet for offices, showroom,
assembling, packaging, warehousing and distribution. Grand Canada, in 1995,
sub-let 40,000 square feet of this facility to an unrelated party because the
space was excess to its needs. The lease for the entire premises expires
on December 1, 1998 but Grand Canada has the right to extend the lease for an
additional five-year period. The current monthly rent is Canadian $25,000
(a pro-rata share is paid by sub-lessee) and in the extension period will be
increased each year by a percentage that is equal to 75% of the percentage
increase in the consumer price index for the greater Montreal area. Grand
Canada also leases, pursuant to a lease expiring on December 31, 2000,
approximately 9,000 square feet of showroom and office space at 6427 Northam
Drive, Mississauga, a suburb of Toronto, Canada, at a current rental of
approximately Canadian $6,900 per month.
The Company believes that its current facilities are satisfactory for its
present needs and that insurance coverage is adequate for the premises.
ITEM 3. LEGAL PROCEEDINGS
On November 30, 1995, an involuntary petition under Chapter 7 of the United
States Bankruptcy Code was filed against Grand US in the Bankruptcy Court
(the "Bankruptcy Proceeding"). On January 4, 1996, the United States
Bankruptcy court for the Southern District of New York entered an order for
relief under Chapter 7 of the United States Code and a trustee was appointed
to supervise the liquidation of Grand US. To date, no other proceedings
have occurred in connection with the Bankruptcy.
Other than discussed above or in Note 12 to the Company's Consolidated
Financial Statements included elsewhere herein, the Company is not a party to
, nor is it aware of, any other pending litigation of a material nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Stock Market
under the symbol "GRIN". The following table sets forth the range of high
and low closing representative bid prices for the Company's Common Stock from
January 1, 1995 through December 31, 1996 as reported by NASDAQ, which
represent prices between dealers, do not include retail mark-ups, mark-downs
or commissions and may not represent actual transactions.
8
<PAGE>
<TABLE>
<CAPTION>
Common Stock Representative
Bid Prices
1995 High Low
<S> <C> <C>
First Quarter $3 1/4 $1
Second Quarter $2 3/4 $1 3/4
Third Quarter $3 7/8 $1 9/16
Fourth Quarter $2 3/16 $1
1996
First Quarter $2 5/16 $1
Second Quarter $2 1/8 $1 3/16
Third Quarter $1 3/8 $ 7/8
Fourth Quarter $1 9/16 $ 25/32
</TABLE>
At February 28, 1997 there were approximately 185 record holders of the
Company's Common Stock. However those shares being held at various clearing
houses, including Cede & Company, have not been broken down. Accordingly,
the Company believes there are numerous beneficial owners of the Company's
Common Stock and Redeemable Warrants whose shares are held in "street name".
During the past two years the Company has not paid, and has no current plans
to pay, dividends on its Common Stock. The Company intends to retain
earnings, if any, for use in its business. Any dividends that may be
declared in the future will be determined by the Board of Directors based
upon the Company's financial condition, results of operation, market
conditions and other factors that the board deem relevant.
In December 1996, the Company issued 183,486 of Common shares without
registration under the Securities Act. The shares were issued to four persons
in settlement of a litigation against the Company. The shares issued had a
value of $1.125 per share on the date of issue. The shares issued were
exempt from registration under section 4(2) of the Securities Act as they
were not issued in a transaction involving a public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
Net sales consist of sales of products to customers after deduction of
customer cash discounts, volume rebate allowances and returns of merchandise.
Sales are recorded when the merchandise is shipped.
The cost of goods sold for products imported as finished goods includes the
cost of the product, a currency adjustment (if applicable), duty and other
taxes and freight and brokerage charges. Royalties to Grand Canada's
suppliers not contingent upon the subsequent sales of the suppliers'
products are included in the price paid for such products.
Major components of selling, general and administrative expenses include
payroll and fringe benefits; advertising expense, which includes the cost of
production of television commercials and the cost of air time; advertising
allowances paid to customers for co-operative advertising programs; and
royalty expense. Royalties include payments by Grand Canada to licensors of
character properties and to manufacturers of its toy products if such
payments are contingent upon subsequent sales of the products. Royalties are
usually a percentage of the price at which the product is sold and are payable
once a sale is made.
9
<PAGE>
Accounts receivable are receivables net of an allowance for doubtful
accounts. The allowance is adjusted periodically to reflect the current
status of receivables. Management believes that current reserves for
doubtful accounts are adequate. Sales of product to retailers and
distributors are on an irrevocable basis. Consistent with industry
practices, Grand Canada may make exceptions to this policy on a case-by-case
negotiated basis. Inventory is comprised of finished goods at landed cost.
All amounts are in US$ unless otherwise noted.
RESULTS OF OPERATIONS
The following table sets forth consolidated operations data as a percentage
of net sales for the periods indicated:
<TABLE>
<CAPTION>
For the Twelve Months Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Net sales 100.00% 100.00% 100.00%
Cost of sales 58.57 61.56 64.49
Gross profit 41.43 38.44 35.51
Operating expenses:
Selling, general and
administrative 31.98 35.26 33.75
Bad debt expense .97 0.65 1.00
Depreciation and
amortization .51 0.64 0.85
Interest 1.91 2.13 2.35
Total operating expenses 35.71 38.68 37.95
Loss in non consolidated
subsidiary company - 12.82 24.06
Earnings (loss) before
income taxes 6.06 (13.06) (26.51)
Net earnings (loss) 2.14% (14.31%) (26.51%)
</TABLE>
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31,
1995.
Net Earnings (Loss). Net earnings for 1996 were $591,370 or $0.08 per share
as compared to a net loss of $3,255,747 or $0.51 per share in 1995. The
improvement was attributable to the shut down of the Company's United States
operating subsidiary, Grand US, in 1995 and to the incresed profitability of
the Canadian operation in 1996. The Canadian operation which reported pre-
tax income of $536,553 in 1995 reported pre-tax income of $1,834,816 in 1996 or
an increase of $1,298,263. In 1995 the, Company recorded a loss in its non-
consolidated subsidiary, Grand US, of $2,917,582 as compared to nil in 1996.
Net Sales. Net sales in 1996 were $27,646,251 an increase of $4,890,922
over 1995 net sales of $22,755,329 or by approximately 21.5%. The strength of
Grand Canada's product line coupled with effective advertising and promotion
programs to drive and support the sales had a major impact on net sales in
1996. The product lines that primarily contributed to the sales increase
were: Toy Biz, which included "Spiderman", "X Men", "Hulk" and "Baby
Tumbles" and "Take Care of Me Twins"; Tiger Electronics Inc., which included
hand held electronics games, children's electronic diaries and the "Talkboy"
cassette players; and the Intex "Wet Set" inflatables line which is a line of
inflatable pools, air mattresses and other water related accessories.
Gross Profit. Gross profit increased by $2,706,907 from $8,747,778 in 1995
to $11,454,685 in 1996. The gross profit increased as a direct result of
the increase in sales as well as an increase in the gross profit as a
percentage of sales which increased by approximately 3% in 1996. The sales
mix shifted to products with a higher gross profit percentage.
10
<PAGE>
Selling, General and Administrative. These expenses were $8,841,435 in 1996
compared to $8,023,151 in 1995. The increase in this category is due
primarily to the increase in advertising and promotion expenses. The
expenditure on advertising and sales promotion was increased to drive the
increased sales that the Company experienced. Both television advertising
expense and cooperative advertising rebates to customers were increased.
Further, legal expense increased significantly as a result of the settlement
made in 1996. However, as a percentage of sales, selling general and
administrative expenses decreased by 3.28% to 31.98% in 1996.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31,
1994.
Net Loss. Net loss for 1995 was $3,255,747 or $0.51 per share as compared
to a net loss of $4,395,927 or $0.79 per share in 1994. The improvement was
attributable to the shut down of the Company's United States operating
subsidiary, Grand US, in 1995 and to the turnaround in Canadian operation in
1995. The Canadian operation which incurred a pre-tax loss of $405,464 in
1994 reported pre-tax income of $536,553 in 1995 or an increase of
approximately $942,000.
Loss in non-consolidated Subsidiary Company. The Company recorded a loss in
its non-consolidated subsidiary, Grand US, of $2,917,582 in 1995 compared to
a loss of $3,990,463 in 1994. Due to the liquidation of Grand US under
bankruptcy court supervision, its results of operations are included on one
line only in the statements. The total investment in Grand US has been
entirely written off in the 1995 financial statements.
Net Sales. Net sales in 1995 were $22,755,329 an increase of $6,171,207
over 1994 net sales of $16,584,122 or approximately 37%. The strength of
Grand Canada's product line coupled with effective advertising and promotion
programs to drive and support the sales had a major impact on net sales in
1995. The product lines that primarily contributed to the sales increase
were: Toys Biz, which included "Spiderman", "X-Men", The "Fantastic Four",
and the "Baby Tumbles" Doll; Tiger Electronics Inc., which included hand held
electronics games, children's electronics diaries and the "Talkboy" cassette
players; and the Intex "Wet Set" inflatables line which is a line of
inflatable pools, air mattresses and other water related accessories.
Gross Profit. Gross profit increased by $2,858,820 from $5,888,958 in 1994
to $8,747,778 in 1995. The gross profit increased as a direct result of the
increase in sales as well as an increase in the gross profit as a percentage
of sales which increased by approximately 3% in 1995. The sales mix shifted
to products with a higher gross profit percentage.
Selling, General and Administrative. These expenses were $8,023,151 in 1995
compared to $5,596,452 in 1994. The increase in this category is due
primarily to the increase in advertising and promotion expenses. The
expenditure on advertising and sales promotion was increased to drive the
increased sales that the Company experienced. Both television advertising
expense and cooperative advertising rebates to customers were increased.
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.
In May 1994 the Company sold in an underwritten public offering 1,150,000
shares of its Common Stock at $6.00 per share and Redeemable Warrants at a
purchase price of $.10 per Redeemable Warrant to purchase up to an additional
1,150,000 shares of Common Stock of the Company at an exercise price of $8.00
per share. The Company received net proceeds of $5,027,206 from such
offering. The Redeemable Warrants are redeemable by the Company at a price
of $.10 per warrant provided the Common Stock is trading at price of $9.60
per share for certain periods of time.
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.
11
<PAGE>
In March 1996 Grand Canada entered into a new three year banking arrangement
with a new lending institution. Grand Canada now has a secured line of
credit of Canadian $13,000,000 or its US$ equivalent to enable it to meet its
plans for growth in the future. 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 three years
and it is not repayable on demand. The loan is guaranteed by the Company.
Accounts receivable at December 31, 1996 were $5,229,177 compared to
$6,496,696 at December 31, 1995. The decrease was due to increased
collections. Inventory at December 31, 1996 increased by $803,492 from a
year earlier.
Working capital increased from $2,619,466 at December 31, 1995 to $2,950,379
at December 31, 1996. Net cash provided by operating activities was
$1,732,057 in 1996 compared to $1,581,159 in 1995 and cash for additions to
equipment was $79,256 compared to $107,694 in 1995.
Grand Canada's level of accounts receivable is subject to significant
seasonal variations due to the seasonality of sales. As a result, Grand
Canada 's working capital requirements are greatest during its third and
fourth quarters. In addition, to the extent accounts receivable, inventories
and guarantees and advance payments increase as a result of growth of Grand
Canada's business, Grand Canada could require additional working capital to
fund its operations. Sources of such funding include cash flow from operations,
drawings on the financing facilities, or sales of additional equity or debt
securities by the Company.
If the funds available under the Company's financing agreements, together
with its current cash and cash equivalents are not sufficent 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 financings and additional public or private debt
or equity financings. Management believes that the Company has sufficient
financing at the present time to meet its 1997 forecast.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company, including the notes
thereto, together with the report of independent certified public accountants
thereon, are presented beginning at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTABTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not available.
PART III
Reger to PART IV.
PART IV
The information required by Part III (Items 9 through 12) is incorporated
herein by reference from the Company's definitive proxy statement to be filed
pursuant to regulation 14A within 120 days after the close of the Company's
fiscal year.
12
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) Report of Independent Auditors
Index to Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1996 and December 31, 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Earnings for the Years Ended December 31, 1996,
1995, and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,1996,
1995, and 1994
Notes to Consoldiated Financial Statements
Consents of Independent Auditors to incorporation by reference of financial
statements
<TABLE>
<CAPTION>
Exhibit Number
<S> <C>
** 3.1 Articles of Incorporation, as amended (2)
** 3.2 Amended and Restated By-Laws (2)
** 4.1 Form of certificate evidencing shares of Common Stock (1) and form of
certificate evidencing redeemable Common Stock purchase warrants (1)
**4.2 Form of Underwriter's Common Stock Warrant Agreement
**4.3 Form of Underwriter's Warrant Agreement
**4.4 Form of Warrant Agreement for the public Redeemable Common Stock
Purchase Warrants
**10.2 Letter Agreement dated as of October 28, 1993, by and between the
Company and AMGO relating to the cancellation by AMGO of the rights
of AMGO to the 2,000,000 Earn Out Shares and the grant to AMGO of
1,250,000 stock options.
**10.3 1993 Employee Stock Option Plan (2)
**10.9 Lease of Dorval, Canada facility
**10.10 Lease of Mississauga, Canada facility
*21 Subsidiaries of the Company
*23 Consent of KPMG
* Filed herewith
** Filed as an Exhibit to either the Company's Registration Statement (the
"Registration Statement") on Form SB-2, dated January 27, 1994, or
Amendment No. 1 or Amendment No. 2 to such Registration Statement.
(1) Filed as an Exhibit to the Company's Registration Statement on Form 8-A
dated September 7, 1993 and incorporated herein by reference
(2) Filed July 20, 1993 and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Proxy Statement on Form 14-A dated
April 22, 1996.
</TABLE>
13
<PAGE>
(b) Reports on Form 8-K
A report on Form 8-K was filed on December 24, 1996 reported on Item 5
that the Company had settled a litigation involving a former creditor
of Grand US.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Grand Toys International, Inc.:
We have audited the accompanying consolidated balance sheets of Grand Toys
International, Inc. and subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards which do not differ in any material respects with United
States generally accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Grand
Toys International, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with
accounting principles generally accepted in the United States.
Chartered Accountants
Saint-Laurent, Canada
February 7, 1997
15
<PAGE>
Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Financial Statements Page
<S> <C>
Consolidated Balance Sheets 18, 19
Consolidated Statements of Earnings 20
Consolidated Statements of Stockholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23
</TABLE>
<PAGE>
<TABLE>
Consolidated Balance Sheets
December 31, 1996 and 1995
<CAPTION>
1996 1995
<S> <C> <C>
Assets
Current assets:
Accounts receivable (net of allowance
for doubtful accounts; 1996 - $48,136;
1995 - $36,745) $5,229,177 $6,496,696
Due from affiliated company 325,356 -
Inventory 2,554,384 1,750,892
Prepaid expenses 525,850 157,107
Total current assets 8,634,767 8,404,695
Equipment and leasehold improvements,
net (note 3) 389,281 477,553
Total Assets $9,024,048 $8,882,248
On behalf of the Board:
Director
Director
17
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Bank indebtedness (note 4) $1,633,068 $2,977,715
Trade accounts payable 2,207,896 1,934,948
Other accounts payable and accrued liabilities 509,903 284,761
Royalties payable 354,066 250,462
Income taxes payable 979,455 286,618
Current portion of long-term debt - 50,725
Total current liabilities 5,684,388 5,785,229
Long-term debt (note 5) - 4,390
Loan payable to a director (note 6) 427,129 931,090
Minority interest 100 100
Stockholders' equity:
Capital stock (note 7) 7,888 7,705
Additional paid-in capital 10,593,249 10,422,574
Deficit (7,248,104) (7,839,474)
Cumulative currency translation adjustment (440,602) (429,366)
2,912,431 2,161,439
Commitments and contingencies (notes 11 and 12)
Total liabilities and stockholders' equity $9,024,048 $8,882,248
See accompanying notes to consolidated financial statements.
18
<PAGE>
Consolidated Statements of Earnings
Years ended December 31
<CAPTION>
1996 1995 1994
(Restated
note 2)
<S> <C> <C> <C>
Net sales $27,646,251 $22,755,329 $16,584,122
Cost of goods sold 16,191,566 14,007,551 10,695,164
Gross profit 11,454,685 8,747,778 5,888,958
Operating expenses:
Selling, general and
administrative 8,841,436 8,023,151 5,596,452
Interest 528,660 485,126 390,170
Bad debt expense 268,632 147,184 166,491
Depreciation 140,343 146,539 141,309
9,779,071 8,802,000 6,294,422
Loss of non-consolidated subsidiary
company - 2,917,582 3,990,463
Earnings (loss) before income taxes 1,675,614 (2,971,804) (4,395,927)
Income taxes 1,084,244 283,943 -
Net earnings (loss) $591,370 $(3,255,747) $(4,395,927)
Earnings (loss) per share (note 1) $ 0.08 $ (0.51) $ (0.79)
See accompanying notes to consolidated financial statements.
19
<PAGE>
Consolidated Statements of Stockholders' Equity
Years ended December 31
<CAPTION>
Cumulative
Additional Retained Currency
Common Paid-In Earnings Translation
Stock Capital (Deficit) Adjustment Total
<S> <C> <C> <C> <C> <C>
January 1, 1994 $4,875 $4,659,042 $(187,800) $(383,794) $4,092,323
Public offering
(note 7) 1,150 7,013,850 - - 7,015,000
Share issue costs - (1,987,794) - - (1,987,794)
Net loss for
the year - - (4,395,927) - (4,395,927)
Foreign currency
adjustment - - - (84,882) (84,882)
December 31,
1994 (restated,
note 2) 6,025 9,685,098 (4,583,727) (468,676) 4,638,720
Private placements
(note 7): 1,680 884,005 - - 885,685
Share issue costs - (146,529) - - (146,529)
Net loss for the
year - - (3,255,747) - (3,255,747)
Foreign currency
adjustment - - - 39,310 39,310
December 31, 1995 7,705 10,422,574 (7,839,474) (429,366) 2,161,439
Settlement (note 7) 183 199,817 - - 200,000
Share issue costs - (29,142) - - (29,142)
Net loss for the
year - - 591,370 - 591,370
Foreign currency
adjustment
- - - (11,236) (11,236)
December 31, 1996 $7,888 $10,593,249 $(7,248,104) $(440,602) $2,912,431
See accompanying notes to consolidated financial statements.
20
<PAGE>
Consolidated Statements of Cash Flows
Years ended December 31
<CAPTION>
</TABLE>
<TABLE>
1996 1995 1994
(Restated,
note 2)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) 591,370 (3,255,747) (4,395,927)
Items not affecting cash:
Depreciation 140,343 146,539 141,309
Gain on disposal of equipment (24,224) (21,062) -
Loss of non-consolidated subsidiary - 2,917,582 3,990,463
Changes in operating working capital items
(note 10) 1,024,568 1,793,847 (227,408)
Net cash provided by (used for) operating
activities 1,732,057 1,581,159 (491,563)
Cash flows from financing activities:
(Decrease) increase
in bank indebtedness (1,333,235) (2,048,794) 1,330,607
(Decrease) increase in
loan payable to a director (476,889) 922,414 -
Repayment of long-term debt (55,023) (49,931) (402,267)
Issuance of capital stock,
net of issue costs 170,858 739,156 5,027,206
Other (7,600) (85,219) 101,582
Net cash provided by (used for) financing
activities (1,701,889) (522,374) 6,057,128
Cash flows from investing activities:
Additions to equipment (79,256 ) (107,694) (145,431)
Proceeds on sale of equipment 49,088 21,062 -
Investment in non-consolidated
subsidiary - (972,153) (5,420,134)
Net cash used for investing
activities (30,168) (1,058,785) (5,565,565)
Net change in cash,
being cash at end of year $ - $ - $ -
Supplementary disclosure of cash flow information
Cash paid during the year for:
Interest 528,660 459,643 390,170
Income taxes 182,708 - -
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
Notes to Consolidated Financial Statements
Years ended December 31, 1996
Grand Toys International, Inc. a publicly held company, is organized under the
laws of the state of Nevada. Its principal business activity, through its
wholly-owned Canadian and U.S. (until September 1995) subsidiaries, is the
distribution of toys and related items.
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Principles of consolidation:
These consolidated financial statements, presented in U.S. dollars and in
accordance with accounting principles generally accepted in the United
States, include the accounts of Grand Toys International, Inc. and its
subsidiaries with the exception of Grand Group Inc. (see note 2) (the
"Company"). All significant intercompany balances and transactions have been
eliminated.
(b) Inventory:
Inventory is valued at the lower of cost and net realizable value. Cost is
determined by the first-in, first-out method.
(c) Equipment and leasehold improvements:
Equipment and leasehold improvements are stated at cost less accumulated
depreciation. Depreciation methods and annual rates adopted by the Company
are as follows:
<TABLE>
<CAPTION>
Asset Method Rate
<S> <C> <C>
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
</TABLE>
(d) Revenue:
Sales are recorded net of merchandise returns.
(e) Foreign currency translation:
(i) Grand Toys Ltd., a wholly-owned Canadian subsidiary is classified as a
self-sustaining foreign operation, with assets and liabilities translated
into U.S. 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 year. 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.
(f) Earnings (loss) per share:
Earnings (loss) per share is determined by dividing the weighted average
number of common shares outstanding during the period into net earnings
(loss). Common share equivalents in the form of options and warrants are
excluded from the calculation since they have an antidilutive effect on per
share figures.
22
<PAGE>
The weighted-average number of shares is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C>
7,719,791 6,374,500 5,544,950
</TABLE>
(g) Stock option plan:
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees. As such, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock
exceeded the exercise price. FASB Statement No. 123, which became effective
in 1996, allows entities to continue to apply the provisions of APB Opinion
No. 25 and requires pro forma net earnings and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years
as if the fair-valued-based method denfined in FASB Statement No. 123 had been
applied. This disclosure is included in the notes to these statements.
2. FORMER INVESTMENT IN NON-CONSOLIDATED SUBSIDIARY:
Grand Group Inc., ("Grand Group") a U.S. subsidiary incorporated in August 1993,
started active operations in March 1994 and ceased operations in September
1995. In November 1995, an involuntary petition into bankruptcy was filed
against the company. As a result, Grand Group is being liquidated in a
Chapter 7 proceeding under the United States Bankruptcy Code and a trustee
has been appointed to oversee the liquidation. As control since November
1995 does not rest with Grand Toys International, Inc., the financial
statements of Grand Group are no longer consoldiated in these financial
statements. The figures for 1994, including those disclosed in the notes to
the financial statements, were also restated to exclude Grand Group.
As of December 31, 1995, the cost of the shares as well as all outstanding
advances to the subsidiary had been entirely written off as follows:
<TABLE>
<CAPTION>
<S> <C>
Cost of shares $100
Advances 6,907,945
6,908,045
Subsidiary loss to December 31, 1994 (3,990,463)
Subsidiary loss for the year ended December 31, 1995
up to the value of the investment (2,917,582)
$ -
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
1996 1995
Accumulated Accumulated
Cost depreciation Cost depreciation
<S> <C> <C> <C> <C>
Computer equipment $692,007 $516,083 $627,782 $453,742
Machinery and equipment 373,589 325,419 382,839 323,648
Furniture and fixtures 509,106 448,102 513,444 436,760
Trucks and automobiles 89,305 84,149 191,591 151,846
Telephone equipment 42,716 35,436 42,957 33,807
Leasehold improvements 358,020 266,273 356,886 238,143
$2,064,743 $1,675,462 $2,115,499 $1,637,946
Net book value $389,281 $477,553
</TABLE>
4. BANK INDEBTEDNESS:
On March 28, 1996, the Canadian subsidiary entered into a new three year
banking agreement with a new lending institution. The Company now has a
secured line of credit of $9,500,400 ($13,000,000 Cdn) and can draw down
working capital advances and letters of credit in amounts determined by
percentages of its accounts receivable and inventory. The working capital
advances bear interest at prime plus 1 1/2% and are secured by the
universality of all present and future property both corporeal and incorporeal
owned or thereafter acquired. As at December 31, 1996, the unused portion of
the credit facility is approximately $5,800,000.
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Loan payable, unsecured, bearing interest at the rate
of 7% per annum, payable in blended monthly
installments of $4,415 of principal and interest $ - $55,115
Amount due within one year - (50,725)
$ - $4,390
</TABLE>
6. LOAN PAYABLE TO A DIRECTOR:
The loan payable to a director bear interest at 12% and has no specified
terms of repayment.
7. CAPITAL STOCK:
(a) Authorized capital:
50,000,000, $0.001 par value voting common shares;
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.
24
<PAGE>
(b) Issued and outstanding:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
7,887,986 common shares (1995 - 7,704,500) $ 7,888 $ 7,705
</TABLE>
(c) Share transactions:
(i) Public offering:
May 1994:
1,150,000 shares and warrants were issued for gross proceeds of $7,015,000.
Legal, accounting and other costs incurred in the public offering totalled
$1,987,794 and have been charged to additional paid-in capital.
(ii) Private placements:
July 1995:
30,000 shares were issued for gross proceeds of $60,685.
August 1995:
100,000 shares were issued for services valued at $50,000.
September 1995:
900,000 shares were issued for gross proceeds of $450,000.
October 1995:
300,000 shares were issued for gross proceeds of $150,000.
November 1995:
350,000 were issued for gross proceeds of $175,000.
Legal, accounting and other costs incurred in the private placements totalled
$146,529 and have been charged to additional paid-in capital.
(iii) Settlement:
December 1996:
183,486 shares were issued for a settlement valued at $200,000
Legal costs incurred totalled $29,142 and have been charged to additional
paid-in-capital.
(d) A summary of the number of common shares outstanding and share
transactions since January 1, 1994 is as follows:
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
January 1, 1994 4,874,500
Public offering:
May 1994 1,150,000
December 31, 1994 6,024,500
Private placements:
July 1995 30,000
August 1995 100,000
September 1995 900,000
October 1995 300,000
November 1995 350,000
December 31, 1995 7,704,500
Settlement 183,486
December 31, 1996 7,887,986
</TABLE>
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-
staturtoy Stock Options, all employees (including officers) or non-employee
directors of the Company.
Options have also been granted outside the Option Plan to two directors, key
executives, outside consultants and a supplier. As well, warrants have been
issued to a distributor and to the underwriter pursuant to the public offering.
Under each plan, the exercise price of each option equals the market price of
the Company's stock on the date of grant and an option's maximum term is ten
years.
Details of options and warrants, all of which are exercisable at year end,
are as follows:
26
<PAGE>
<TABLE>
<CAPTION>
Weighted-
average
Other exercise
Option Stock Price Per
plan Options Warrants Total Share
<S> <C> <C> <C> <C> <C>
January 1, 1994 310,500 2,080,000 200,000 2,590,500 $3.27
Granted 590,000 1,125,000 1,400,000 3,115,000 5.91
January 1, 1995 900,500 3,205,000 1,600,000 5,705,500 4.71
Granted - 710,000 - 710,000 2.37
Forfeited - (800,000) - (800,000) (2.25)
January 31, 1996 900,500 3,115,000 1,600,000 5,615,500 4.76
Granted 88,500 2,620,054 - 2,708,554 1.90
Forfeited (666,500) (755,000) - (1,421,500) (3.18)
Expired - - (200,000) (200,000) (7.50)
December 31, 1996 322,500 4,980,054 1,400,000 6,702,554 $3.86
</TABLE>
Pro forma information regarding net earnings and earnings per share is
required by FASB Statement No. 123, and has been determine as if the Company
had accounted for its stock options under the fair value method of that
Statement. The fair value for these options were estimated at the date of
grant using a Black-Scholes option pricing model with the following
assumptions for each of 1996 and 1995: risk-free interest rates ranging from
5.65% - 7.10%, volatility factor of the expected market price for the Company's
common shares of 40% and a weighted-average expected life of the option of
4 years, with no dividends.
The Black-Scholes options valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect their fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options.
The weighted-average grant date fair values of options granted in 1996 and
1995 are $0.67 and $0.73 respectively.
The pro forma losses utilizing the fair value assumptions above for the years
1996 and 1995 would be $1,212,738 and $3,776,897 respectively. Furthermore,
pro forma loss per share would be $0.16 and $0.59 respectively.
27
<PAGE>
9. INCOME TAXES:
(a) The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
(%) (%) (%)
U.S. Federal statutory tax rate 35.0 (35.0) (35.0)
State income tax rate, net of federal tax benefits
10.0 (10.0) (10.00)
U.S. Statutory tax rate 45.0 (45.0) (45.00)
Changes to U.S. tax rate resulting from:
Effect of foreign tax rate differences (4.0) (0.8) 0.1
Expenses producing no tax benefit 19.4 7.0 1.7
Tax benefit of utilization of loss carry forward - (4.7) -
15.4 1.5 1.8
Valuation allowance for deferred tax assets
allocated to income tax expense 4.3 53.1 43.2
Effective tax rate 64.7 9.6 -
</TABLE>
(b) The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1996 are presented below:
<TABLE>
<CAPTION>
<S> <C>
Non-current:
Capital loss carryforwards (note 9 (c)) $2,709,000
Net operating loss carryforwards (note 9c)) 72,000
Net deffered tax asset before valuation allowance 2,781,000
Valuation allowance 2,781,000
Total net deferred tax asset $ -
</TABLE>
The valuation allowance increased by $594,000 in 1996 (1995 - $1,331,200) to
reflect an adjustment to deferred tax assets related to capital loss
carryforwards, and to offset an increase to deferred tax assets related to
the current year's operating loss in the United States.
(c) As of December 31, 1996, the Company has $6,020,000 of capital losses
available for income tax purposes to reduce future capital gains in the
United States, expiring in 2000. It also has $160,000 of net operating
losses available for tax purposes to reduce future taxable income in the
United States, expiring in 2011.
28
<PAGE>
10. CHANGES IN OPERATING WORKING CAPITAL ITEMS:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Decrease (increase) in accounts
receivable
$1,225,804 $(1,791,170) $764,431
Increase in due from affiliated company (326,636) - -
(Increase) decrease in inventory (816,379) 1,911,613 (689,293)
(Increase) decrease in prepaid expenses (352,899) 7,010 96,841
(Increase) decrease in other assets (44,567) 75,757 5,965
Increase (decrease) in trade accounts
payable 282,462 924,676 (85,050)
Increase (decrease) in other accounts
payable and accrued liabilities
254,227 221,348 (315,114)
Increase (decrease) in royalties payable 105,403 160,670 (5,188)
Increase in income taxes 697,153 283,943 -
$1,024,568 $1,793,847 $(227,408)
</TABLE>
11. COMMITMENTS:
The Company has entered into long-term leases with minimum annual rental
payments approximately as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $407,000
1998 419,000
1999 211,000
2000 210,000
2001 141,000
Therafter 442,000
$1,830,000
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 amounted to
approximately $174,000, $209,000 and $270,000 respectively.
12. CONTINGENCIES:
(a) A lawsuit for alleged breach of contract has been filed against the
Canadian subsidiary 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.
The Company has been named in two lawsuits by a supplier of and a lessor to
the US subsidiary, Grand Group Inc. for recovery of amounts totalling
approximately $300,000 although the Company is not party to either contract.
In the opinion of management, the actions are in their early stages and it is
difficult to ascertain the likelihood of an unfavorable outcome to the Company.
(b) The Company's Canadian subsidiary is also contingently liable for
outstanding letters of credit of approximately $1,150,000.
29
<PAGE>
13. EMPLOYEE BENEFIT PLANS:
The Company has a group retirement savings plan for its Canadian employees.
The Company contributes to this plan the lesser of (a) 50% of the employee's
contribution to this plan; (b) 3% of the employee's gross earnings; or (c)
Canadian $3,000 per employee. During the year, the Company contributed
approximately $28,600 (1995 - $29,600) to the retirement savings plan for its
Canadian employees.
14. SEGMENT INFORMATION:
(a) Industry and geographic information:
The Company operates primarily in one industry segment which includes the
assembly (until 1995) and distribution of toys and related items.
The Company's operations are now exclusively in Canada. Previous to
September 1995 it also had operations in the United States (note 2).
(b)Other information:
Sales of the Company's toy products to five customers accounted for 74% of
the Company's gross sales for 1996, two of which represents over 47% or
approximately $13,762,000. For the years 1995 and 1994, five customers
accounted for approximately 66% and 45% of gross sales respectively, two of
which represented over 39% and 20% or $9,171,500 and $3,300,000 in 1995 and
1994 respectively.
Sales of toys purchased from the Company's five largest manufacturers and
suppliers of toys in aggregate accounted for 94% of gross sales for 1996 and
84% and 76% of gross sales for 1995 and 1994 respectively. One supplier
represented 39% of gross sales or approximately $11,489,000 in 1996, and one
supplier represented approximately 32% and 40% of gross sales in the years
1995 and 1994.
15. FINANCIAL INSTRUMENT:
(a) Risk Management Activities:
The Company enters into forward foreign exchange contracts to minimize its
foreign currency exposure on purchases. The contracts oblige the Company to
buy US Dollars in the future at predetermined exchange rates. The Company's
policy is to enter into forward foreign exchange contracts on a portion of its
purchases anticipated in the next selling season.
At December 31, 1996, the Company had purchased contracts to purchase
approximately US$6,000,000 in the next twelve months at an average exchange
rate of $1.3370.
(b) Fair Value:
The fair value of the Company's accounts receivable, bank indebtedness, trade
and other payables approximate their carrying value due to the immediate or
short-term maturity of these financial instruments.
The loan payable to a director is at a rate of interest similar to the
Company's borrowing rate however given that the loan is with a related
party and has no fixed repayment terms, it is not practical to determine
its fair value.
30
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-KSB
OF
GRAND TOYS INTERNATIONAL, INC.
FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996
31
<PAGE>
EXHIBIT 21
The following is a list of the Company's subsidiaries and subsidiaries of
subsidiaries of the Company:
Grand Toys (U.S.) Ltd.
Grand Toys, Ltd.
Grand Concepts, Inc.
32
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference of our report dated
February 7, 1997, in this Annual Report on Form 10-KSB of Grand Toys
International, Inc. for the year ended December 31, 1996.
Chartered Accountants
Saint-Laurent, Canada
March 26, 1997
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 28, 1997 GRAND TOYS INTERNATIONAL, INC.
By: /s/ Stephen Altro
Stephen Altro
President
In accordance with the requirements of the Exchange Act, this report has
been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Stephen Altro President and March 28, 1997
Stephen Altro Director (Principal
Executive Officer)
/s/ Ron Goldenberg Vice President, Chief March 28, 1997
Ron Goldenberg Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and
Accounting Officer)
/s/ David Mars Director March 28, 1997
David Mars
/s/ Elliot Bier Director March 28, 1997
Elliot Bier
/s/James Rybakoff Director March 28, 1997
James Rybakoff
</TABLE>
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 28, 1997 GRAND TOYS INTERNATIONAL, INC.
By:
Stephen Altro
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Stephen Altro President and March 28, 1997
Director (Principal
Executive Officer)
Ron Goldenberg Vice President, Chief March 28, 1997
Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and
Accounting Officer)
David Mars Director March 28, 1997
Elliot Bier Director March 28, 1997
James Rybakoff Director March 28, 1997
35
</TABLE>
