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, 1997
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.)
incorporation or organization)
1710 Trans-Canada Hwy., Dorval, Quebec, Canada,
(Address of principal executive offices)
H9P-1H7
(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
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, 1997 were $37,299,525.
The number of shares outstanding of the Issuer's common stock is 1,577,597
(as of February 28, 1998).
The aggregate market value of the voting stock held by non affiliates of the
Issuer was approximately $3,942,000 (as of February 28, 1998).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Grand Toys International, Inc. 1998 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
PART I
This form 10-KSB of Grand Toys International, Inc. (the "Company") contains
forward-looking statements within the meaning of the Securities Exchange Act
of 1934, as amended, which are subject to risks and uncertainties.
Statements indicating that the Company "expects", "estimates" or
"believes" 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.
Unless otherwise indicated, all information contained in this report give effect
to a one-for-five reverse split effected on August 4, 1997.
ITEM 1.
DESCRIPTION OF BUSINESS
INTRODUCTION
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.In November 1996, the Company organized a new
Canadian subsidiary, Grand
Concepts, Inc., ("Grand Concepts"). Grand Concepts, which commenced business
in 1997, distributes various accessories including backpacks, luggage, duffels,
handbags and rainwear.
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
which are subsidiaries of Grand Toys (U.S.) Ltd.
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 they manufacture,
and the price range within which Grand Canada sells such toys to
retailers.
<TABLE>
<CAPTION>
Toy Manufacturer Toy Products Distributed Product
by the Company 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, etc... 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
Toymax (U.S.) Electronic Toys 7.25 - 94.00
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 concept for new toys, it will pay royalties on
the toys developed from such a 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 1997 were of toys
supplied by the following five manufacturers: Tiger Electronics, Toy
Biz, Toymax, Processed Plastics and Intex Corp., whose toys,
respectively, accounted for 36%, 33%, 14%, 4%, and 4% of 1997 gross
sales. Other than the products from the above-mentioned manufacturers,
no products of Grand Canada from any other supplier accounted for more
than 5% of gross sales in 1997.
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 also reduces its ability to control the
timing and quality 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.
To date, Grand Canada has not experienced any material delays in the
delivery of its products 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.
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.
Grand Canada does not supervise the day-to-day manufacturing of its
products. However, prior to the commencement of manufacturing, Grand
Canada and the manufacturer work together to design a prototype of the
specific product. The manufacturer is contractually obligated to
manufacture the products in accordance with the specifications of the
prototype.
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 adherence to product quality, design, packaging and
shipping standards, as well as proper documentation relating thereto.
Most product purchases are paid for in U.S. dollars.
Grand Canada is not a party to any long-term supply or requirement
agreements with any specific manufacturer. Grand Canada
employs a large number of toy manufacturers. These manufacturers may
subcontract for the manufacture of components of the products that they
make for Grand Canada, with third parties who are not affiliated with
Grand Canada.
MATERIALS
The principal raw materials used in the production and sale of Grand
Canada's products are printed fabrics and paper products. These are
all 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.
LOCATION
Grand Canada maintains space in a building in suburban Montreal,
Canada, where the Company's and Grand Canada's executive offices are
also maintained for warehouse, packaging and distribution purposes.
Grand Canada also keeps 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 carrying these character
properties. To the extent that 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 renewed upon payment of
certain minimum guarantees or the attainment of specified sales levels
during the term of the license.
The following table sets forth some of Grand Canada's character
licenses, the licensor for these character properties and the toy
products that Grand Canada markets featuring these character
properties.
<TABLE>
<CAPTION>
CHARACTER PROPERTY LICENSOR PRODUCT OF GRAND
CANADA FEATURING
PROPERTY
<S> <C> <C>
101 Dalmatians Disney Kites, Hand-Held Games,Inflatables
Bambi Disney Balls
Bug's Life Disney Kites, Hand-Held Games
Cinderella Disney Hand-Held games
Donald Duck, Daisy,
Goofy, Pluto Disney Pools, Balls, Kites
Hercules Disney Balls, Hand-Held Games
Hunchback of Notre Dame Disney Balls, Hand-Held Games
Lion King Disney Balls, Kites
Little Mermaid Disney Balls, Kites, Hand-Held Games
Mickey Mouse,
Minnie Mouse Disney Pools, Ball, Kites
Mighty Ducks Disney Balls, Hand-Held Games
Mulan Disney Balls, Kites
Toy Story Disney Balls, Hand-Held Games, Electronic Screamers
Winnie The Pooh Disney Balls, Hand-Held Games, Koosh, Plastics
Barbie E.M.G. Girls' accessories
Sesame Street E.M.G. Balls, Koosh, Kites
Sailor Moon G-Squared Balls
Star Wars G-Squared Kites, Hand-Held Games, Luggage & Accessories
Pepsi Pepsico Balls
Batman Warner Bros. Kites, Balls, Discs
Looney Tunes Warner Bros. Kites, Balls, Koosh
</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,
1997, 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 four
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 and occaisionally a royalty fee.
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 within the territory outlined in the contract. 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; K-Mart; and Sears which, for the year ended December 31,
1997, accounted for approximately 30%, 15%, 14%, 11% and 7%,
respectively, of the gross sales for this period. No other customer
accounted for more than 5% of gross sales in 1997.
Other than purchase orders from its customers, Grand Canada does not
have written agreements with its customers, but rather sells products
to customers on open account, with payment terms typically varying from
30 to 90 days. If one or more of the customers identified above were to
terminate its relationship with Grand Canada, a material adverse effect
on the Company may occur.
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 nine people,
including two of its senior managers 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.
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, 1998 and
February 29, 1997 was Canadian $ 2,901,966 and Canadian $ 4,060,452
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.
SEASONALITY
The Company's business is seasonal. The Company's third quarter sales have
typically been highest in anticipation of the holiday selling season.
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. They may
also have 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. and Mattel 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.
FEDERAL
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, whose legislation prohibits the importation of
prepackaged items into Canada, as well as the sale, importation, or
advertising in Canada of items which have misleading information on
their label.
PROVINCIAL
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, and also
requires proper labeling and instructions to be included with the item
being sold. Grand Canada is also subject to the Charter of the French
Language, which requires that all labeling and instructions appear in
the French language, as well as the Upholstery and Stuffed Articles
Act, which requires that stuffed articles conform to hygienic norms,
and obligates 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.
EMPLOYEES
As of December 31, 1997, the Company employed 43 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 Trans-
Canada, Dorval, Quebec, Canada, in 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. 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 sub-lets 40,000 square feet of this facility to an
unrelated party because the space was in excess of its needs.
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, Canada, a suburb of Toronto, at a
current rental rate of approximately Canadian $7,600 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
United States Bankruptcy Court for the Southern District of New York
(the "Bankruptcy Proceeding"). On January 4, 1996, the Court
entered an order for relief under Chapter 7 of the United States Bankruptcy
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 Small-Cap 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, 1997
as reported by NASDAQ. The figures represent prices between dealers,
do not include retail mark-ups, mark-downs or commissions and may not
represent actual transactions. The prices set forth below have been adjusted
to give effect to the one-for-five reverse stock split effected on
August 4, 1997.
<TABLE>
<CAPTION>
Common Stock Representative
Bid Prices
<S> <C> <C>
High Low
1996
First Quarter $11 9/16 $ 5
Second Quarter $10 5/8 $ 5 7/8
Third Quarter $ 6 7/8 $ 4 3/8
Fourth Quarter $ 7 13/16 $ 3 29/32
1997
First Quarter $ 6 7/8 $ 5 15/32
Second Quarter $ 6 1/4 $ 4 5/8
Third Quarter $ 6 7/16 $ 4 1/2
Fourth Quarter $ 8 3/8 $ 5 5/8
</TABLE>
On March 19, 1998, the last reported sales price for the Common Stock on
the NASDAQ Small Cap Market was $ 6 1/16 per share.
At February 28, 1998 there were approximately 163 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 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.
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 cooperative
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.
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 products 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,
1997 1996 1995
% % %
<S> <C> <C> <C>
Net sales 100.00 100.00 100.00
Cost of goods sold 60.59 58.57 61.56
Gross profit 39.41 41.43 38.44
Operating expenses:
Selling, general and administrative 30.25 31.98 35.26
Interest 1.47 1.91 2.13
Bad debt expense .37 .97 .65
Depreciation and amortization .37 .51 .64
Total operating expenses 32.46 35.37 38.68
Loss in non consolidated
subsidiary company - - 12.82
Earnings (loss) before income taxes 6.96 6.06 (13.06)
Net earnings (loss) 4.22 2.14 (14.31)
</TABLE>
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31,
1996:
NET EARNINGS
Net earnings for 1997 were $1,575,169 or $1.00 per share as compared to
$591,370 or $0.38 per share in 1996, a 156% increase.
NET SALES
Net sales in 1997 were $37,299,525 an increase of $9,653,274 over 1996
net sales of $27,646,251 or by approximately 35%. The strength of
Grand Canada's product line coupled with effective advertising and
promotion programs meant to drive and support the sales, had a major impact on
net sales in 1997. The product lines that primarily contributed to the
sales increase were: Toy Biz, which included the Marvel line of action
figures such as Spiderman, the X-Men and others, as well as a variety
ssette players; and the Intex "Wet Set" inflatables
line which is a line of inflatable pools, air mattresses and other
water related accessories. Further, in 1997 Grand Canada acquired
the distribution rights of a new line, Toymax, which includes
Laser Challenge and Metal Molders.
GROSS PROFIT
Gross profit increased by $3,244,456 from $11,454,685 in 1996 to
$14,699,141 in 1997. The gross profit increased as a direct result of
the increase in sales. The gross profit as a percentage of sales
decreased by approximately 2% in 1997. The product mix, as well as a
weakening of the Canadian dollar, were major contributors to the
decrease.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $11,281,653 in 1997 compared
to $8,841,436 in 1996. 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. However,
as a percentage of net sales, selling general and administrative expenses
decreased by 1.73% to 30.25% in 1997.
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 $0.38 per share as compared to a
net loss of $3,255,747 or $(2.55) 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 increased
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 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. There was also 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.
SELLING, GENERAL AND ADMINISTRATIVE
These expenses were $8,841,436 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.
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.
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 $885,685.
In March 1996, Grand Canada entered into a three year banking
arrangement with a new lending institution. Grand Canada has a secured
line of credit of $9,128,600 US ($13,000,000 CDN) 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 and it is not repayable on demand. The
loan is guaranteed by the Company.
Accounts receivable at December 31, 1997 were $6,407,074 compared to
$5,229,177 at December 31, 1996. The increase was due to increased
sales volume of 34% for the year. Inventory at December 31, 1997
increased by $1,311,705 from a year earlier.
Working capital increased from $2,950,379 at December 31, 1996 to
$3,452,266 at December 31, 1997. Net cash provided by operating
activities was $185,374 in 1997 compared to $1,732,057 in 1996 and cash
for additions to equipment was $245,891 compared to $79,256 in 1996, as
a result of purchases for the new computer system.
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 sufficient
to meet the Company's cash needs, the Company may from time to time
seek to raise capital from additional sources, including the 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 financing at the present time
to meet its 1998 forecast.
EFFECTS OF INFLATION
The Company does not believe that inflation has had a significant impact on its
financial position or results of operations in the past three years.
YEAR 2000 COMPLIANCE
The Company does not expect the cost of converting its computer systems to year
2000 compliance will be material to its financial condition or results of
operations. The Company believes that it will be able to achieve year 2000
compliance by the end of 1999, and does not currently anticipate any disruption
in its operations as a result of any failure by the Company to be in compliance.
The Company does not currently have any information concerning the year 2000
compliance status of its suppliers and customers.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This Statement establishes standards for computing and presenting
earnings per share ("EPS") and applies to all entities with publicly-held common
stock or potential common stock. This Statement replaces the presentation of
primary EPS and fully-diluted EPS with a presentation of basic EPS and diluted
EPS, respectively. Basic EPS excludes dilution and is computed by dividing
earnings available to common shareholders by the weighted-average number of
common shares outstanding for the period. Similar to fully diluted in the
earnings, diluted EPS reflect the potential dilution of securities that could
share in the earnings. This Statement is not expected to have a material effect
on the Company's reported EPS amounts. The Statement is effective for the
Company's financial statements for December 31, 1997.
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 ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE:
Not applicable.
PART III
ITEMS 9 - 12
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.
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, 1997 and December 31, 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Earnings for the Years Ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
Consents of Independent Auditors to incorporation by reference of
financial statements
Exhibit Number
** 3.1 Articles of Incorporation, as amended
** 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, 1993and 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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1997.
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, 1997 and
1996, as well as the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997.
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,
1997 and 1996, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 1997, in
conformity with accounting principles generally accepted in the United
States.
Chartered Accountants
Saint-Laurent, Canada
January 30, 1998
GRAND TOYS INTERNATIONAL, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Years ended December 31, 1997 1996
<S> <C> <C>
Assets
Current assets:
Accounts receivable (net of allowance for doubtful
accounts; 1997 - $52,882; 1996 - $48,136) $ 6,407,073 $ 5,229,177
Due from affiliated company 11,730 325,356
Inventory 3,866,089 2,554,384
Prepaid expenses 927,790 525,850
Total current assets 11,212,182 8,634,767
Equipment and leasehold improvements, net (note 3) 480,454 389,281
Other Assets 494,768 -
Total assets $ 12,187,404 $ 9,024,048
</TABLE>
See accompanying notes to consolidated financial statements.
On behalf of the Board:
Director
Director
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Bank indebtedness (note 4) $ 1,985,072 $ 1,633,068
Trade accounts payable 2,191,871 2,207,896
Other accounts payable and accrued liabilities 2,694,481 509,903
Royalties payable 178,464 354,066
Income taxes payable 710,028 979,455
Total current liabilities 7,759,916 5,684,388
Loan payable to a director (note 5) - 427,129
Minority interest 100 100
Stockholders' equity:
Capital stock (note 6) 1,578 7,888
Additional paid-in capital 10,599,559 10,593,249
Deficit (5,672,935) (7,248,104)
Cumulative currency translation adjustment (500,814) (440,602)
4,427,388 2,912,431
Commitments and contingencies (notes 11 and 12)
Total liabilities and stockholders' equity $ 12,187,404 $ 9,024,048
</TABLE>
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF EARNINGS
<CAPTION>
Years ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Net sales $ 37,299,525 $ 27,646,251 $ 22,755,329
Cost of goods sold 22,600,384 16,191,566 14,007,551
Gross profit 14,699,141 11,454,685 8,747,778
Operating expenses:
Selling, general and administrative 11,281,653 8,841,436 8,023,151
Interest 547,892 528,660 485,126
Bad debt expense 138,756 268,632 147,184
Depreciation 136,414 140,343 146,539
12,104,715 9,779,071 8,802,000
Loss of non-consolidated
subsidiary company (note 2) - - 2,917,582
Earnings (loss) before income taxes 2,594,426 1,675,614 (2,971,804)
Income taxes 1,019,257 1,084,244 283,943
Net earnings (loss) $ 1,575,169 $ 591,370 $ (3,255,747)
Earnings (loss) per share (note 1)
Basic $ 1.00 $ 0.38 $ (2.55)
Diluted $ 0.90 0.37 (2.55)
</TABLE>
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Years ended December 31,
Common Stock Additional Retained Cumulative Total
Paid-In Earnings Currency
Capital (Deficit) Translation
Adjustment
<S> <C> <C> <C> <C> <C>
January 1, 1995 $ 6,025 $ 9,685,098 $ (4,583,727) $ (468,676) $ 4,638,720
Private placements
(note 6): 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 6) 183 199,817 - - 200,000
Share issue costs - (29,142) - - (29,142)
Net earnings 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
Reverse stock split
(note 1(g)) (6,310) 6,310 - - -
Net earnings for
the year - - 1,575,169 - 1,575,169
Foreign currency
adjustment - - - (60,212) (60,212)
December 31, 1997 $ 1,578 $ 10,599,559 $ (5,672,935) $ (500,814) $ 4,427,388
</TABLE>
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,575,169 $ 591,370 $ (3,255,747)
Items not affecting cash:
Depreciation 136,414 140,343 146,539
Gain on sale of equipment - (24,224) (21,062)
Loss of non-consolidated subsidiary - - 2,917,582
Changes in operating working
capital items (note 10) (1,017,275) 1,024,568 1,793,847
Net cash provided by operating activities 694,308 1,732,057 1,581,159
Cash flows from financing activities:
Increase (decrease) in bank indebtedness 428,026 (1,333,235) (2,048,794)
(Decrease) increase in loan
payable to a director (422,161) (476,889) 922,414
Repayment of long-term debt - (55,023) (49,931)
Issuance of capital stock, net of
issue costs - 170,858 739,156
Other 54,651 (7,600) (85,219)
Net cash provided by (used for) financing
activities 60,516 (1,701,889) (522,374)
Cash flows from investing activities:
Additions to equipment (245,891) (79,256) (107,694)
Proceeds on sale of equipment - 49,088 21,062
Other Assets (508,933) - -
Investment in non-consolidated subsidiary - - (972,153)
Net cash used for investing activities (754,824) (30,168) (1,058,785)
Net change in cash, being cash at end of year $ - $ - $ -
Supplementary disclosure of cash flow information
Cash paid during the year for:
Interest $ 487,147 $ 528,660 $ 459,643
Income taxes 1,276,603 182,708 -
</TABLE>
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31,
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 United States (until September 1995)
operating 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 inter-company 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) OTHER ASSETS:
Other assets are recorded at cost and amortized over a period of three years.
Amortization is included in cost of goods sold.
(e) REVENUE:
Sales are recorded net of merchandise returns.
(f) 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.
(g) EARNINGS (LOSS) PER SHARE:
(i) 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.
(ii) Basic earnings (loss) per share is determined by dividing the weighted
average number of common shares outstanding during the period into net earnings
(loss).
(iii) Diluted earnings (loss) per share gives effect to all dilutive potential
common shares that were outstanding during this period. (see note 9)
(h) 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-value-based method
defined 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 Grand Group. 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 consolidated in these financial statements. The
opening deficit for 1995 has been 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>
<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>
<TABLE>
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
<CAPTION>
1997 1996
Cost Accumulated Cost Accumulated
depreciation depreciation
<S> <C> <C> <C> <C>
Computer equipment $ 909,968 $ 576,499 $ 692,007 $ 516,083
Machinery and equipment 358,967 321,939 373,589 325,419
Furniture and fixtures 492,979 449,114 509,106 448,102
Trucks and automobiles 85,809 82,342 89,305 84,149
Telephone equipment 41,044 35,448 42,716 35,436
Leasehold improvements 340,997 283,968 358,020 266,273
$ 2,229,764 $ 1,749,310 $ 2,064,743 $ 1,675,462
Net book value $ 480,454 $ 389,281
</TABLE>
4. BANK INDEBTEDNESS:
The Company has a secured line of credit of $9,128,600 ($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 1/4% and are secured by
all of the assets of the Company. As at December 31, 1997, the
unused portion of the credit facility is approximately $6,500,000.
5. LOAN PAYABLE TO A DIRECTOR:
The loan payable to a director bears interest at 12% and was repaid in the
first quarter of 1997.
6. 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:
<CAPTION>
1997 1996
<S> <C> <C>
1,577,597 common shares (1996 - 7,887,986 common shares - note 1(g)) 1,578 $ 7,888
</TABLE>
c) SHARE TRANSACTIONS:
(i) 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.
(ii) 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.
(iii) 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, 1995 is as follows:
<TABLE>
<S> <C>
January 1, 1995 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
Reverse stock split ( note 1(g)) (6,310,389)
December 31, 1997 1,577,597
</TABLE>
7. STOCK OPTIONS AND WARRANTS:
The Company's stock option plan (the "Option Plan") 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 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.
Some of these options have either expired or were forefeited during the year.
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:
<TABLE>
<CAPTION>
Weighted-average
Other Exercise
Option Stock Price Per
Plan Options Warrants Total Share
<S> <C> <C> <C> <C> <C>
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 1, 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)
January 1, 1997 322,500 4,980,054 1,400,000 6,702,554 3.86
Reverse stock split
(note 1(g)) (258,000) (3,984,043) (1,120,000) (5,362,043) 15.44
Granted - 1,114,000 - 1,114,000 4.39
Forfeited - (450,000) - (450,000) (18.67)
Expired - - (230,000) (230,000) (40.00)
December 31, 1997 64,500 1,660,011 50,000 1,774,511 $6.98
</TABLE>
Pro forma information regarding net earnings and earnings per share is
required by FASB Statement No. 123, and has been determined as if the
Company had accounted for its stock options under the fair value method of
that statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
assumptions for each of 1997 and 1996: risk-free interest rates ranging from
5.95% - 6.07%, volatility factor of the expected market price for the Company's
common stock of 40% and a weighted-average expected life of the option of 3
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 1997 and
1996 are $1.48 and $3.35 respectively.
The pro forma losses utilizing the fair value assumptions above for the years
1997 and 1996 would be $75,551 and $1,212,738 respectively. Furthermore,
pro forma loss per share would be $0.05 and $0.80 respectively.
8. INCOME TAXES:
(a) The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(%) (%) (%)
<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 (10.0)
U.S. Statutory tax rate 45.0 45.0 (45.0)
Changes to U.S. tax rate resulting from:
Effect of foreign tax rate differences (5.0) (4.0) (0.8)
Expenses producing no tax benefit 27.4 19.4 7.0
Tax benefit of utilization of loss carry forward (26.1) - (4.7)
Other 0.5 - -
(3.2) 15.4 1.5
Valuation allowance for deferred tax assets
allocated to income tax expense - 4.3 53.1
Effective tax rate 41.8 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, 1997 are presented below:
<TABLE>
<S> <C>
Non-current:
Net operating loss carry-forwards (note 9(c)) $ 1,790,000
Net deferred tax asset before valuation allowance 1,790,000
Valuation allowance 1,790,000
Total net deferred tax asset $ -
</TABLE>
The valuation allowance decreased by $991,000 in 1997 (1996 - decrease of
$594,000) to reflect an adjustment to deferred tax assets related to
loss carry forwards used in the year in the United States.
(c) As of December 31, 1997, the Company has $5,114,000 of net operating losses
available for tax purposes to reduce future taxable income in the United States,
expiring in 2011.
9. EARNINGS PER SHARE:
During the fourth quarter of 1997, the Company adopted FASB Statement No. 128
"Earnings per share". The new standard has no ipact on the previously presented
earnings per share calculations for 1996 and 1995. The diluted
earnings per share calculation for 1996 has been restated to reflect
the new standard, the 1995 figure is anti-dilutive and has been
shown as equivalent to the basic earnings per share figure.
<TABLE>
<CAPTION>
1997
Income Shares Per share
(numerator) (denominator) amount
<S> <C> <C> <C>
Basic EPS
Earnings available to
common stockholders $ 1,575,169 1,577,597 $ 1.00
Effect of dilutive securities
Options - 174,117 (0.10)
Diluted EPS
Earnings available to
common stockholders and
assumed conversions 1,575,169 1,751,714 0.90
</TABLE>
Options to purchase 601,011 shares and warrants to purchase 40,000 shares of the
Company's common stock were not included in the diluted earnings per share
calculation, as their effect is anti-dilutive.
10. CHANGES IN OPERATING WORKING CAPITAL ITEMS:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
(Increase) decrease in accounts receivable $ (1,369,171) $ 1,225,804 $ (1,791,170)
Decrease (increase) in due from parent company 309,521 (326,636) -
(Increase) decrease in inventory (1,452,278) (816,379) 1,911,613
(Increase) decrease in prepaid expenses (433,359) (397,466) 82,767
Increase in trade accounts payable 64,278 282,462 924,676
Increase in other accounts payable
and accrued liabilities 2,267,776 254,227 221,348
Increase (decrease) in royalties payable (166,366) 105,403 160,670
Increase (decrease) in income taxes payable (237,676) 697,153 283,943
$ (1,017,275) $1,024,568 $ 1,793,847
</TABLE>
11. COMMITMENTS:
The Company has entered into long-term leases with minimum annual rental
payments approximately as follows:
<TABLE>
<S> <C>
1998 $ 443,000
1999 237,000
2000 234,000
2001 152,000
2002 132,000
Thereafter 397,000
$ 1,596,000
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 amounted
to approximately $201,000; $174,000 and $209,000 respectively.
12. CONTINGENCIES:
(a) A lawsuit for alleged breach of contract has been filed against Grand
Canada 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 US 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 $1,350,000, as at December 31,
1997.
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 $27,600 (1996 - $28,600) 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 1997, two of which represents over 43% or
approximately $16,935,000. For the years 1996 and 1995, five customers
accounted for approximately 74% and 66% of gross sales respectively, two of
which represented over 47% and 39% or $13,762,000 and $9,171,500 in 1996
and 1995 respectively.
Sales of toys purchased from the Company's two largest manufacturers and
suppliers of toys in aggregate accounted for 67% of gross sales for 1997 and
75% and 59% of gross sales for 1996 and 1995 respectively.
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.
(b) FAIR VALUES:
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.
SIGNATURES
Years ended December 31, 1997, 1996, 1995
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, 1998 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.
Signature Title Date
/s/ Stephen Altro March 28, 1998
Stephen Altro President and
Director (Principal
Executive Officer)
/s/ Ron Goldenberg March 28, 1998
Ron Goldenberg Vice President, Chief
Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and
Accounting Officer)
/s/ David Mars March 28, 1998
David Mars Director
/s/ Elliot Bier March 28, 1998
Elliot Bier Director
/s/James Rybakoff March 28, 1998
