FORM 10-Q
Securities and Exchange Commission
Washington, DC 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, 1998
[ ] 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 (IRS 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 November 11, 1998:
1,577,597
Index page
Part I. - Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
As at September 30, 1998 and December 31, 1997 3-4
Consolidated Statements of Earnings
For the Three Months and Nine Month Periods
Ended September 30, 1998 and 1997 5
Consolidated Statements of Stockholders' Equity 6
Consolidated Statements of Cash Flows
For The Nine Month Period
Ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8-15
Item 2. Management's Discussion and Analysis or
Plan of Operation 16-18
Part II - Other Information
Item 3. Signatures 19-20
GRAND TOYS INTERNATIONAL, INC.
<TABLE>
Consolidated Balance Sheets
As at September 30, As at December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Accounts receivable (net of
allowance for doubtful
accounts; 1998 - $32,768;
1997 - $52,882) $7,154,726 $6,407,073
Due from affiliated company 12,808 11,730
Inventory 8,045,205 3,866,089
Prepaid expenses 822,170 927,290
Total current assets 16,034,909 11,212,182
Non-current assets:
Equipment and leasehold
improvements, net (note 2) 593,911 480,454
Other assets 461,760 494,768
Total assets $17,090,580 $12,187,404
See accompanying notes to consolidated financial statements.
Liabilities & Stockholders' Equity
Current liabilities:
Bank indebtedness (note 3) $7,630,099 $1,985,072
Trade accounts payable 3,552,561 2,191,871
Other accounts payable
and accrued liabilities 442,096 2,694,481
Royalties payable 45,271 178,464
Income taxes payable 555,061 710,028
Total current liabilities 12,225,088 7,759,916
Minority interest 100 100
Stockholders' equity:
Capital stock (note 4) 1,578 1,578
Additional paid-in capital 10,599,559 10,599,559
Deficit (5,003,384) (5,672,935)
Cumulative currency
translation adjustment (732,361) (500,814)
4,865,362 4,427,388
Commitments and contingencies
(notes 8 and 9)
Total liabilities
and stockholders' equity $17,090,580 $12,187,404
</TABLE>
See accompanying notes to consolidated financial statements
GRAND TOYS INTERNATIONAL, INC.
<TABLE>
Consolidated Statements of Earnings (Unaudited)
For the three months ended September 30, For the nine months ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $8,442,696 $11,562,834 $18,980,164 $21,704,326
Cost of goods sold 5,699,667 7,267,669 12,067,664 13,305,405
Gross profit 2,743,029 4,295,165 6,912,500 8,398,921
Operating expenses:
Selling, general and
administrative 1,767,618 2,469,715 5,275,933 5,651,483
Interest 274,484 130,160 401,731 273,759
Bad debt expense 60,932 38,120 109,338 109,590
Depreciation 70,691 36,693 152,965 95,844
2,173,725 2,674,688 5,939,968 6,130,676
Earnings before income taxes 569,304 1,620,477 972,532 2,268,245
Income taxes 142,802 847,767 302,981 1,212,815
Net earnings $426,502 $772,710 $669,551 $1,055,430
Earnings per share (note 1(h))
Basic $0.27 $0.49 $0.42 $0.67
Diluted 0.25 0.31 0.39 0.47
</TABLE>
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
<TABLE>
Consolidated Statements of Stockholders' Equity
(Unaudited)
Cumulative
Additional Retained Currency
Common Paid-In Earnings Translation
Stock Capital (Deficit) Adjustement Total
<S> <C> <C> <C> <C> <C>
January 1, 1998 $1,578 $10,599,559 $(5,672,935) $(500,814) $4,427,388
Net earnings
for the period - - 669,551 - 669,551
Foreign currency
translation - - - (231,547) (231,547)
September 30, 1998 $1,578 $10,599,559 $(5,003,384) $(732,361) $4,865,392
</TABLE>
See accompanying notes to consolidated financial statements
GRAND TOYS INTERNATIONAL, INC.
<TABLE>
Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings $669,551 $1,055,430
Items not affecting cash:
Depreciation 152,965 95,844
Changes in operating working capital items,
(note 7) (6,582,405) (6,878,523)
Net cash used for operating activities (5,759,888) (5,727,523)
Cash flows from financing activities:
Increase in bank indebtedness 6,024,467 6,253,980
Decrease in loan payable to a director - (422,070)
Other 1,844 61,309
Net cash provided by financing activities 6,026,311 5,893,220
Cash flows from investing activities:
Additions to equipment (266,422) (165,970)
Net cash used for investing activities (266,422) (165,970)
Net change in cash, being cash at end of year $ - $ -
Supplementary disclosure of cash flow information
Cash paid during the year for:
Interest $401,731 $273,759
Income taxes $420,818 $833,296
</TABLE>
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Grand Toys International, Inc. a publicly held company, is
organized under the laws of the State of Nevada. Its
principal business activity, through its Canadian subsidiaries,
is the distribution of toys and related items.
1. 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, 1998.
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 fiscal year ended December 31,
1997 contained in the Company's Annual Report on Form
10-KSB.
The results for the nine months ended september 30, 1998 are not
necessarily indicative of the results for the entire fiscal year
ending December 31, 1998.
b) 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. All significant inter-company 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. Depreciation methods and
annual rates adopted by the Company are as follows:
<TABLE>
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>
e) Other assets:
Other assets are recorded at cost and amortized over a
period of three years. Amortization is included in cost of
goods sold.
f) Revenue:
Sales are recorded net of merchandise returns.
g) Foreign currency translation:
i) Grand Toys Ltd. and Grand Concepts Inc., wholly-
owned Canadian subsidiaries, are classified as self-
sustaining foreign operations, 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.
h) Earnings per share:
i) During the fourth quarter of 1997, the Company
adopted FASB Statement No. 128 "Earnings per
share". The new standard has no impact on the
previously presented earnings per share calculations.
ii) Effective August 4, 1997, the stock of the Company
underwent a one-for-five reverse stock split. For
purposes of earnings per share calculations, the
comparative numbers of shares have been restated to
reflect the split.
iii) Basic earnings per share is determined by dividing
the weighted average number of common shares
outstanding during the period into net earnings.
iv) Diluted earnings per share gives effect to all dilutive
potential common shares that were outstanding
during the period.
i) Stock option plan:
The Company accounts for its stock option plan (the
"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 exceeds
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-value-based method defined in
FASB Statement No. 123 had been applied.
<TABLE>
2. Equipment and leasehold improvements:
September 30, 1998 December 31, 1997
Accumulated Accumulated
Cost depreciation Cost depreciation
<S> <C> <C> <C> <C>
Computer equipment $1,046,280 628,321 $909,968 $576,499
Machinery and equipment 430,204 329,441 358,967 321,939
Furniture and fixtures 460,090 425,391 492,979 449,114
Trucks and automobiles 80,085 77,577 85,809 82,342
Telephone equipment 38,306 33,867 41,044 35,448
Leasehold improvements 318,248 284,704 340,997 283,968
$2,373,212 $1,779,302 $2,229,764 $1,749,310
Net book value $593,911 $480,454
</TABLE>
3. Bank indebtedness:
Grand Toys Ltd. has a secured line of credit of $9,830,300
(Canadian $15,000,000) and it and Grand Concepts 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 1/4 % and are secured by all of the assets of the Company.
As at September 30, 1998, the unused portion of the credit facility
is approximately $3,523,000.
4. 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.
<TABLE>
b) Issued and outstanding:
September 30, 1998 December 31, 1997
<S> <C> <C>
1,577,597 common shares
(1997 - 1,577,597 common shares) $1,578 $1,578
(note 1(h))
</TABLE>
c) Share transactions:
(i) Settlement:
December 1996:
183,486 shares were issued for a settlement valued at $200,000.
Legal costs incurred totaled $29,142 and have been
charged to additional paid-in capital.
(ii) Reverse stock split:
August 1997:
One-for-five reverse stock split occurred reducing the number
of outstanding shares to 1,577,597.
d) Summary of common stock outstanding:
A summary of the number of common stock outstanding
and share transactions since January 1, 1996 is as follows:
<TABLE>
<S> <C>
Settlement 183,486
December 31, 1996 7,887,986
Reverse stock split
(note 1 (h)) (6,310,389)
December 31, 1997 1,577,597
</TABLE>
5. Stock options and warrants:
The Company has a stock option plan (the "Option Plan")
which provides for the issuance of up to 300,000 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.
Options have also been granted outside the Option Plan to
all five 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.
Some of these options and warrants have either expired or
were forfeited during the year.
Under each plan, the exercise price of each option equals
the market price of the Company's stock on the grant date
and an option's maximum term is ten years. Details of the
options and warrants, all of which are exercisable at year-
end, are as follows:
<TABLE>
Other Weighted-average
Option Stock Exercise Price
Plan Options Warrants Total Per Share
<S> <C> <C> <C> <C> <C>
Outstanding,
December 31, 1997 64,500 1,660,011 50,000 1,774,511 6.98
Granted - 283,000 - 283,000 5.49
Forfeited - (104,239) - (104,239) (4.51)
Expired (34,400) (4,000) - (38,460) (11.25)
Outstanding,
September 30, 1998 30,100 1,834,772 50,000 1,914,872 5.89
</TABLE>
<TABLE>
6. Earnings per share:
Income Shares Per share
(numerator) (denominator) amount
<S> <C> <C> <C>
Quarter ending September 30, 1998
Basic EPS
Earnings available to common stockholders $426,502 1,577,597 $0.27
Effect of dilutive securities
Options - 157,339 $(0.02)
Diluted EPS
Earnings available to common stockholders
and assumed conversions $426,502 1,734,936 $0.25
Period ending September 30, 1998
Basic EPS
Earnings available to common stockholders $669,551 1,577,597 $0.42
Effect of dilutive securities
Options - 157,339 $(0.03)
Diluted EPS
Earnings available to common stockholders
and assumed conversions $669,551 1,734,936 $0.39
</TABLE>
Options to purchase 811,772 shares and warrants to
purchase 50,000 shares of the Company's common stock
were not included in the diluted earnings per share
calculation as their effect is anti-dilutive.
<TABLE>
7. Changes in operating working capital items:
1998 1997
<S> <C> <C>
Increase in accounts receivable $(1,171,617) $(4,993,882)
Decrease in due from affiliated company (1,941) 312,054
Increase in inventory (4,626,718) (4,295,920)
Decrease (increase) in prepaid expenses 58,895 (72,811)
Increase in trade accounts payable 1,558,869 1,470,786
(Increase) decrease in other accounts payable
and accrued liabilities (2,161,225) 426,417
Decrease in royalties payable (126,472) (20,958)
(Increase) decrease in income taxes (112,197) 295,791
$(6,582,405) $(6,878,523)
</TABLE>
8. Commitments:
The Company has entered into long-term leases with
minimum annual rental payments approximately as follows:
<TABLE>
<S> <C>
1998 $123,000
1999 250,000
2000 232,000
2001 157,000
2002 133,000
Thereafter 309,000
$1,204,000
Rent expense for the periods ended September 30, 1998 and 1997
amounted to approximately $147,781 and $148,344
respectively.
9. Contingencies:
(a) 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.
The Company has been named in two lawsuits by a supplier
of and a lessor to the former U.S. subsidiary, Grand Group
Inc. for recovery of amounts totaling approximately
$300,000 although the Company is not a party to either
contract. In the opinion of management, there have been no
recent developments and it is difficult to ascertain the
likelihood of an unfavorable outcome to the Company.
b) Grand Toys Ltd. is also contingently
liable for outstanding letters of credit of approximately
$1,635,000, as at September 30, 1998.
10. Financial Instruments:
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 September 30, 1998, the Company purchased contracts to
purchase $5,000,000 US currency.
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.
GRAND TOYS INTERNATIONAL, INC.
Management's Discussion and Analysis of Financial
Condition and Results of Operation
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation
Grand Toys International, Inc. (the "Company"), through its
Canadian subsidiaries, Grand Toys Ltd. ("Grand Canada")
and Grand Concepts, Inc. ("Grand Concepts") has been
engaged in the toy business in Canada for over 35 years and
currently distributes a wide variety of toys and related items
throughout Canada.
</TABLE>
<TABLE>
Results of Operation
For the three months ended September 31, For the nine months ended September 30,
1998 1997 1998 1997
% % % %
<S> <C> <C> <C> <C>
Net sales 100.00 100.00 100.00 100.00
Cost of goods sold 67.51 62.85 63.58 61.30
Gross profit 32.49 37.15 36.42 38.70
Operating expenses:
Selling, general
and administrative 20.94 21.36 27.80 26.05
Interest 3.25 1.13 2.12 1.26
Bad debt expense .72 .33 .58 .50
Depreciation .84 .32 .81 .44
Total operating expenses 25.75 23.14 31.30 28.25
Earnings before income taxes 6.74 14.01 5.12 10.45
Net earnings 5.05 6.68 3.53 4.86
</TABLE>
Comparison of the three months ended September 30, 1998 to
the three months ended September 30, 1997.
Net Earnings. Net earnings were $426,502 for the third
quarter of 1998 compared to a net earnings of $772,710 for
the same period last year. The decrease of $346,208 in net
earnings was mainly due to a decrease in net sales, in addition to
an increases in cost of goods sold and operating expenses.
Net Sales. Net sales decreased by $3,120,138 or by 27% over
net sales during the third quarter of 1997. The decrease is due to a
substantial decrease of a major customer's purchasing for the year,
the decline in the Canadian Dollar relative to the U.S. Dollar which
impacts the translation of the sales, and lastly as a result of the
later delivery of one major product as compared to the prior year.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation, continued:
Gross Profit. Gross profit for the Company decreased by
$1,552,136, or, as a percentage of sales, gross profit
increased from 37.15% to 32.49%. This decrease was
result of a decrease in the Canadian Dollar, relative to the
U.S. Dollar as well as due to the Company's sales mix.
Selling, General and Administrative Expense. The decrease
in selling, general and administrative expenses of $702,097
compared to those of the third quarter of 1997 was
mainly due to decreases in advertising and royalty expense.
Comparison of the nine months ended September 30, 1998 to
the nine months ended September 30, 1997.
Net Earnings. Net earnings were $669,551 for the first nine
months of 1998 compared to a net earnings of $1,055,430 for
the same period last year. The decrease of $385,879 in net
earnings was mainly due to the decrease in net sales, in addition to
an increase in cost of goods sold and operating expenses.
Net Sales. Net sales for the first nine months of 1998 decreased
by $2,724,161 or by 13% over new sales during the first nine months
of 1997. The decrease is due to a substantial decrease of a major
customer's purchasing for the year, the decline in the Canadian Dollar
relative to the U.S. Dollar which impacts the translation of the
sales, and lastly as a result of the later delivery of one major product
as compared to the prior year.
Gross Profit. Gross profit for the Company decreased by
$1,486,421, and as a percentage of sales, gross profit
decreased from 38.70% to 36.42%. The decrease in gross
profit percentage was due to the sales mix in the product
line and a decrease in the value of the Canadian Dollar,
relative to the U.S. Dollar as well as due to the Company's sales mix .
Selling, General and Administrative Expense. The decrease
in selling, general and administrative expenses of $375,550
compared to those of the first nine months of 1997 was
mainly due to decreases in advertising and royalty expenses.
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.
Grand Canada has a secured line of credit of Canadian $13,000,000 or its
US Dollar equivalent to enable it to meet its plans for growth in
the future. The company obtained a temporary override increasing
its line of credit to $15,000,000 or its U.S. Dollar equivalent.
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 1/4%. The term of the loan is three
years. The loan is guaranteed by the Company and is
secured by all of the assets of the Canadian subsidiary.
Accounts receivable at September 30, 1998 were $7,154,726
compared to $6,407,073 at December 31, 1997. Inventory
was $8,045,205 at Septbember 30, 1998 compared to $3,866,089
at December 31, 1997. Due to the seasonality of the toy
industry, inventory levels will fluctuate according to
customer demand.
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 that accounts receivable,
inventories, and guarantees and advance payments increase
as a result of the 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.
Working capital increased from $3,452,266 at December
31, 1997 to $3,809,821 at September 30, 1998. Net cash used for
operating activities was $5,759,888 in the period ended
September 30, 1998 compared to net cash used for operations of
$5,727,249 in the period ended September 30, 1997 and cash used for
additions to equipment was $266,422 compared to $165,970 in 1997.
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 at the present time to meet its upcoming year's forecast.
GRAND TOYS INTERNATIONAL, INC.
Signatures
Item 3. Signatures
Pursuant to the requirements of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: November 12, 1998 GRAND TOYS INTERNATIONAL, INC.
By: /s/ Stephen Altro
Stephen Altro
President and Director
(Principal Executive Officer)
By: /s/ Ron Goldenberg
Ron Goldenberg
Vice President,
Chief Financial Officer,
Secretary, Treasurer
and Director
(Principal Financial and
Accounting Officer)
