FORM 10-Q
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: March 31, 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 (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 April 30,1998: 1,577,597
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
GRAND TOYS INTERNATIONAL, INC.
Consolidated Balance Sheets
<CAPTION>
March 31,1998 December 31,1997
<S> <C> <C>
(Unaudited)
Assets
Current assets:
Accounts receivable (net of allowance for
doubtful accounts; 1998 - $67,633; 1997 -
$52,882) $ 4,293,620 $ 6,407,073
Due from affiliated company 11,483 11,730
Inventory 4,303,900 3,866,089
Prepaid expenses 1,014,111 927,290
Total current assets 9,623,114 11,212,182
Equipment and leasehold improvements, net
(note 2) 506,643 480,454
Other assets 497,388 494,768
Total assets $ 10,627,145 $ 12,187,404
Liabilities and Stockholders' Equity
Current liabilities:
Bank indebtedness (note 3) $ 2,114,159 $ 1,985,072
Trade accounts payable 2,475,417 2,191,871
Other accounts payable and accrued
liabilities 565,596 2,694,481
Royalties payable 137,981 178,464
Income taxes payable 653,225 710,028
Total current liabilities 5,946,379 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 (5,452,069) (5,672,935)
Cumulative currency translation
adjustment (468,402) (500,814)
4,680,666 4,427,388
Commitments and contingencies
(notes 8 and 9)
Total liabilities and stockholders' equity $ 10,627,145 $ 12,187,404
</TABLE>
See accompanying notes to consolidated financial statements
<TABLE>
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Earnings (Unaudited)
<CAPTION>
For the three months ended March 31,
1998 1997
<S> <C> <C>
Net sales $ 4,588,511 $ 4,640,217
Cost of goods sold 2,843,822 2,718,084
Gross profit 1,744,689 1,922,133
Operating expenses:
Selling, general and administrative 1,220,711 1,318,993
Interest 101,498 63,501
Bad debt expense 32,867 34,558
Depreciation 36,005 27,502
1,391,081 1,444,555
Earnings before income taxes 353,608 477,578
Income taxes 132,742 267,105
Net earnings $ 220,866 $ 210,473
Earnings per share (note 1(h))
Basic 0.14 0.14
Diluted 0.12 0.14
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Stockholders' Equity (Unaudited)
<CAPTION>
Common Additional Retained Cumulative Total
Stock Paid-In Earnings Currency
Capital (Deficit) Translation
Adjustment
<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 - - 220,866 - 220,866
Foreign currency
translation - - - 32,412 32,412
March 31, 1998 $1,578 $10,599,559 $(5,452,069) $(468,402) $4,680,666
</TABLE>
See accompanying notes to consolidated financial statements
<TABLE>
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Cash Flows (Unaudited)
<CAPTION>
For the three months ended March 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 220,866 $ 210,473
Items not affecting cash:
Depreciation 36,005 27,502
Changes in operating working capital items,
(note 7) (323,014) (1,654,564)
Net cash used for operating activities (66,143) (1,416,589)
Cash flows from financing activities:
Increase in bank indebtedness 117,446 1,870,446
Decrease in loan payable to a director - (430,089)
Other 10,891 19,629
Net cash provided by financing activities 128,337 1,459,986
Cash flows from investing activities:
Additions to equipment (62,194) (43,397)
Proceeds on sale of equipment - -
Net cash used for investing activities (62,194) (43,397)
Net change in cash, being cash at end of year $ - $ -
Supplementary disclosure of cash flow information
Cash paid during the year for:
Interest $ 101,498 $ 63,501
Income taxes 269,953 469,560
</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 March 31, 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 three months ended March 31, 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 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. 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>
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:
<CAPTION>
March 31, 1998 December 31, 1997
Cost Accumulated Cost Accumulated
depreciation depreciation
<S> <C> <C> <C> <C>
Computer equipment $ 976,820 $ 606,239 $ 909,968 $ 576,499
Machinery and equipment 360,870 325,498 358,967 321,939
Furniture and fixtures 491,760 452,587 492,979 449,114
Trucks and automobiles 86,262 83,038 85,809 82,342
Telephone equipment 41,261 35,916 41,044 35,448
Leasehold improvements 346,614 293,665 340,997 283,968
$ 2,303,587 $ 1,796,944 $ 2,229,764 $ 1,749,310
Net book value $ 506,643 $ 480,454
</TABLE>
3. Bank indebtedness:
The Company has a secured line of credit of $9,176,700
(Canadian $13,000,000) 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
11/4 % and are secured by all of the assets of the Company.
As at March 31, 1998, the unused portion of the credit
facility is approximately $6,652,000.
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.
b) Issued and outstanding:
<TABLE>
<CAPTION>
March 31, 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>
<CAPTION>
Option Other Warrants Total Weighted-
plan stock average
options exercise
Price 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 - 1,000 - 1,000 5.50
Forfeited - - - - -
Expired - - - - -
Outstanding, March 31, 1998 64,500 1,661,011 50,000 1,775,511 5.97
</TABLE>
<TABLE>
6. Earnings per share:
<CAPTION>
March 31, 1998
Income Shares Per share
(numerator) (denominator) amount
<S> <C> <C> <C>
Basic EPS
Earnings available to common stockholders $ 220,866 1,577,597 $ 0.14
Effect of dilutive securities
Options - 199,596 (0.02)
Diluted EPS
Earnings available to common
stockholders and assumed conversions $ 220,866 1,777,193 $ 0.12
</TABLE>
Options to purchase 526,511 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:
<CAPTION>
1998 1997
<S> <C> <C>
Decrease in accounts receivable $ 2,125,577 $ 916,368
Decrease (increase) in due from affiliated company 307 (91,362)
Increase in inventory (413,373) (1,282,671)
Increase in prepaid expenses (82,233) (85,622)
Increase (decrease) in trade accounts payable 270,490 (715,768)
Decrease in other accounts payable
and accrued liabilities (2,122,762) (170,791)
Decrease in royalties payable (41,034) (6,874)
Decrease in income taxes (59,986) (217,846)
$ (323,014) $ (1,654,564)
</TABLE>
8. Commitments:
The Company has entered into long-term leases with minimum
annual rental payments approximately as follows:
<TABLE>
<S> <C>
1998 $ 323,000
1999 237,000
2000 235,000
2001 157,000
2002 133,500
Thereafter 398,500
$ 1,484,000
</TABLE>
Rent expense for the periods ended March 31, 1998 and 1997
amounted to approximately $50,891 and $53,208 respectively.
9. 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 former U.S. subsidiary, Grand Group Inc.
for recovery of amounts totaling approximately $300,000
although the Company is not 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) The Company's Canadian subsidiary is also contingently
liable for outstanding letters of credit of approximately
$821,000, as at March 31, 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 March 31, 1998, the Company had not purchased contracts
to purchase 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.
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>
Results of Operation
<CAPTION>
For the three months ended March 31,
1998 1997
% %
<S> <C> <C>
Net sales 100.00 100.00
Cost of goods sold 61.98 58.58
Gross profit 38.02 41.42
Operating expenses:
Selling, general and administrative 26.60 28.43
Interest 2.21 1.37
Bad debt expense .72 .74
Depreciation .78 .59
Total operating expenses 30.31 31.13
Earnings before income taxes 7.71 10.29
Net earnings 4.81 4.54
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 TO THE
THREE MONTHS ENDED MARCH 31, 1997
NET EARNINGS. Net earnings were $220,866 for the first
quarter of 1998 compared to a net earnings of $210,473 for
the same period last year. The increase of $10,393 in net
earnings was mainly due to the decrease in selling, general
and administrative expenses and income tax expense.
NET SALES. Net sales decreased by $51,706 or by 1% over net
sales during the first quarter of 1997. The lower net sales
volume was attributed to the seasonality of the toy industry
and a non-specific decrease across all lines.
GROSS PROFIT. Gross profit for the Company decreased by
$177,444, or, as a percentage of sales, gross profit
decreased from 41.42% to 38.02%. 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. The decrease
in selling, general and administrative expenses of $98,282
compared to those of the first quarter of 1997 was mainly
due to a decrease in cooperative advertising expense.
INCOME TAX EXPENSE. As compared to the same period in 1997,
the decrease in income tax expense was $134,363 or 50%. The
decrease was due to the higher provision taken in the prior
quarter.
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 March 1996, Grand Canada entered into a banking
arrangement with a new lending institution. Grand Canada
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 1/4%. 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 March 31, 1998 were $4,293,620
compared to $6,407,073 at December 31, 1997. Inventory was
$4,303,900 at March 31, 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 $3,676,735 at March 31, 1998. Net cash used for
operating activities was $66,143 in the quarter ended March
31, 1998 compared to net cash used for operations of
$1,416,589 in 1997 and cash used for additions to equipment
was $62,194 compared to $43,397 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 1998 forecast.
PART II - OTHER INFORMATION
ITEM 3. REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
GRAND TOYS INTERNATIONAL, INC.
Signatures
Pursuant to the requirements of the Exchange Act, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 13, 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)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,293,620
<ALLOWANCES> 0
<INVENTORY> 4,303,900
<CURRENT-ASSETS> 9,623,114
<PP&E> 506,643
<DEPRECIATION> 36,005
<TOTAL-ASSETS> 10,627,145
<CURRENT-LIABILITIES> 5,946,379
<BONDS> 0
0
0
<COMMON> 1,578
<OTHER-SE> 4,679,088
<TOTAL-LIABILITY-AND-EQUITY> 10,627,145
<SALES> 4,588,511
<TOTAL-REVENUES> 4,588,511
<CGS> 2,843,822
<TOTAL-COSTS> 2,843,822
<OTHER-EXPENSES> 1,289,583
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,498
<INCOME-PRETAX> 353,608
<INCOME-TAX> 132,742
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 220,866
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.12
</TABLE>
