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, 1999
[ ] 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, 1999:
1,577,597
Index to Annual Report on Form 10 - Q
Filed with the Securities and Exchange Commission
Period ended March 31, 1999
ITEMS IN FORM 10 - Q
Page
Part I - Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
at March 31, 1999 and December 31, 1998 3-4
Consolidated Statements of Earnings
For The Three Month Period
Ended March 31, 1999 and 1998 5
Consolidated Statements of Stockholders' Equity
and Comprehensive Income 6
Consolidated Statements of Cash Flows
For The Three Month Period
Ended March 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 8-16
Item 2. Management's Discussion and Analysis or
Plan of Operation 16-20
Item 3. Quantitative and Qualitative Disclosures
About Market Risks
Part II - Other Information
Item 3. Reports on Form 8K 21
Signatures 22-23
Part I. - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
<TABLE>
<C> <C>
<S> March 31, December 31,
1999 1998
(Unaudited)
Assets
Current assets:
Accounts receivable (net of allowance for doubtful
accounts; 1999 - $54,384; 1998 - $43,143) $6,564,852 $7,728,979
Due from affiliated companies 17,919 224,498
Inventory 8,011,437 4,318,107
Prepaid expenses 1,693,569 1,050,434
Total current assets 16,287,777 13,322,018
Equipment and leasehold improvements,
net (note 2) 832,362 567,299
Goodwill (note 3) 2,379,443 -
Total assets $ 19,499,582 $13,889,317
</TABLE>
Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
March 31, December 31,
1999 1998
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Bank indebtedness (note 4) $8,379,590 $6,782,510
Trade accounts payable 2,684,103 1,671,417
Other accounts payable and accrued liabilities 337,502 1,034,743
Royalties payable 69,432 60,728
Income taxes payable 866,660 378,092
Total current liabilities 12,337,287 9,927,490
Balance of purchase price payable (note 5) 1,500,000 -
Minority interest 100 100
Preferred stock (note 6) 1,000,000 -
Stockholders' equity:
Capital stock (note 7) 1,578 1,578
Additional paid-in capital 10,599,559 10,599,559
Deficit (5,657,220) (5,991,237)
Accumulated other comprehensive income -
cumulative currency translation adjustment (281,722) (648,173)
4,662,195 3,961,727
Commitments and contingencies (notes 10 and 11)
Total liabilities and stockholders' equity $ 19,499,582 $ 13,889,317
</TABLE>
See accompanying notes to consolidated financial statements.
Consolidated Statements of Earnings (Unaudited)
<TABLE>
<S> <C> <C>
For the three months ended March 31,
1999 1998
Net sales $8,626,916 $4,588,511
Cost of goods sold 5,990,128 2,843,822
Gross profit 2,636,787 1,744,689
Operating expenses:
Selling, general and administrative 1,728,390 1,284,608
Foreign exchange gain (137,041) (63,897)
Interest 127,679 101,498
Bad debt expense 37,902 32,867
Depreciation 67,990 36,005
1,824,920 1,391,081
Earnings before income taxes 811,867 353,608
Current income taxes 477,850 132,742
Net earnings $334,017 $220,866
Earnings per share (note 1(h))
Basic 0.21 0.14
Diluted 0.21 0.12
</TABLE>
See accompanying notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Cumulative
Common Additional Retained Currency
Stock Paid-In Earnings Translation
Capital (Deficit) Adjustment Total
January 1, 1999 $1,578 $10,599,559 $(5,991,237) $(648,173) $3,961,727
Net earnings
for the period - - 334,017 - 334,017
Foreign currency
translation - - - 366,451 366,451
Total comprehensive
income - - - - 700,468
March 31, 1999 $1,578 $10,599,559 $(5,657,220) $(281,722) $4,662,195
</TABLE>
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
For the three months
ended March 31,
<S> <C> <C>
1999 1998
Cash flows from operating activities:
Net earnings $334,017 $ 220,866
Items not affecting cash:
Depreciation 67,990 36,005
Changes in operating working
capital items, (note 9) (2,080,748) (323,014)
Net cash used for operating activities (1,678,736) (66,143)
Cash flows from financing activities:
Increase in bank indebtedness 1,546,123 117,446
Other 64,036 10,891
Net cash provided by financing activities 1,610,159 128,337
Cash flows from investing activities:
Additions to equipment (51,981) (62,194)
Acquisition 120,558 -
Net cash used for investing activities 68,577 (62,194)
Net change in cash, being cash at end of year $ - $ -
Supplementary disclosure of cash flow information
Cash paid during the year for:
Interest $127,679 $ 101,498
Income taxes - 269,953
</TABLE>
See accompanying notes to consolidated financial statements.
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
wholly-owned Canadian and United States operating subsidiaries, is the
manufacture and 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, 1999.
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, 1998 contained in the Company's Annual Report on Form 10-K.
The results for the three months ended March 31, 1999 are not necessarily
indicative of the results for the entire fiscal year ending December 31, 1999.
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.
Notes to Consolidated Financial Statements
1. Significant accounting policies, continued:
d) Equipment,leasehold improvements and goodwill:
Equipment and leasehold improvements are stated at cost less accumulated
depreciation. Depreciation methods and annual rates adopted by the Company
are as follows:
<TABLE>
<S> <C> <C>
Asset Method Rate
Computer equipment Declining balance 30%
Machinery and equipment Declining balance 20%
Furniture and fixtures Declining balance 20%
Trucks and automobiles Declining balance 30%
Telephone equipment Declining balance 30%
Leasehold improvements Straight-line Term of
lease plus one
renewal term
Goodwill Straight-line 15 years
</TABLE>
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.
1. Significant accounting policies, continued:
g) Earnings per share:
i) Basic earnings per share is determined by dividing the weighted average
number of common shares outstanding during the period into net earnings.
ii) Diluted earnings per share gives effect to all potential dilutive common
shares that were outstanding during the period.
h) 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.
Notes to Consolidated Financial Statements
2. Equipment and leasehold improvements:
<TABLE>
March 31, December 31,
1999 1998
<S> <C> <C> <C> <C>
Cost Accumulated Accumulated
depreciation Cost depreciation
Computer equipment $1,426,040 $708,127 $1,094,822 $670,028
Machinery and equipment 435,560 384,575 432,770 356,343
Furniture and fixtures 461,595 432,180 458,318 427,574
Trucks and automobiles 80,971 78,852 80,395 78,122
Telephone equipment 38,730 34,717 38,455 34,261
Leasehold improvements 329,351 301,435 323,042 294,175
$2,772,247 $1,939,885 $2,427,802 $1,860,503
Net book value $ 832,362 $ 567,299
</TABLE>
3. Acquisition
On January 1, 1999, the Company acquired all of the assets of Ark Foundation LLC
for $2,500,000 consisting of the Company's convertible preferred stock having a
stated value of $1,000,000 and an interest bearing promissory note in the
principal amount of $1,500,000.
The Company accounted for the acquisition under the purchase method of
accounting and allocated the purchase price as follows:
Net Assets $ 120,557
Goodwill 2,379,443
$ 2,500,000
The acquisition of the above assets was financed as follows:
Series A 5% Cumulative Convertible
Redeemable Preferred Stock (note 6) $ 1,000,000
Long-term debt (note 5) 1,500,000
$ 2,500,000
4. Bank indebtedness:
The Company has a secured line of credit of $9,939,000 (CA $15,000,000) 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 are secured by all of the assets of the Company the
effective interest rate at March 31, 1999 on the Canadian denominated line was
8.00% which represents the lender's prime plus 1 1/4%. As at March 31, 1999,
the unused portion of the credit facility was approximately $ 1,000,000.
5. Long-Term Debt
The Company has long-term indebtedness in the form of a subsidiary's interest
bearing subordinated promissory note in the aggregate
principal amount of $1,500,000. Interest is payable quarterly, commencing
April 1, 1999 at a rate of 5.76% per annum. The note is secured by a pledge of
375,000 shares of the Company's common stock.
6. Preferred Stock
Series A Cumulative Convertible Redeemable Preferred Stock
In connection with the acquisition of Ark Foundation LLC the Company created a
class of 200,000 shares of non-voting
Series A Convertible Redeemable Preferred Stock ("Series A Stock") with a par
stated value of $5.00 per share. The Series A Stock ranks senior to the common
stock.
The Series A Stock has a cumulative preferred quarterly dividend of 5% per annum
of the par value, payable in cash. The Series A stock is convertible beginning
on January 1, 2000 into shares of the Company's common stock.
7. Capital stock:
a) Authorized capital:
50,000,000, $0.001 par value voting common shares;
5,000,000, $0.001 par value preferred shares, issuable in series with such
designation, rights and preferences as may be determined from time to time by
the Board of Directors.
b) Issued and outstanding:
<TABLE>
<S> <C> <C>
March 31, December 31,
1999 1998
1,577,597 common shares (1998 - 1,577,597
common shares) $ 1,578 $ 1,578
(note 1(h))
</TABLE>
8. 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-qualified 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-qualified Stock Options, all employees (including officers) or non-employee
directors of the Company.
Options have also been granted outside the Option Plan to three directors, key
executives, outside consultants and a supplier. As well, warrants have been
issued to a director in his capacity as an investment banker, 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 the 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.
The range of exercise prices for stock options and warrants outstanding at
March 31, 1999 is $2.88 to $37.50.
Details of the options and warrants, all of which are exercisable at year-end,
are as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Weighted-
average
Option Other exercise
Plan Stock price per
Options Warrants Total Share
January 1, 1999 44,100 1,779,772 105,000 1,928,872 $6.79
Granted 50,000 1,000 - 51,000 3.98
Forfeited - (1,000) - (1,000) (4.38)
Expired - - - - -
March 31, 1999 94,100 1,779,772 105,000 1,978,872 5.83
</TABLE>
<TABLE>
<S> <C> <C> <C>
Income Shares Per share
(numerator) (denominator) amount
March 31, 1999
Basic EPS
Earnings available to
common stockholders $ 334,017 1,577,597 $ 0.30
Effect of dilutive securities
Options - 115 -
Diluted EPS
Earnings available to
common stockholders
and assumed conversions 334,017 1,577,712 0.30
</TABLE>
Options to purchase 1,870,872 shares and warrants to purchase 105,000 shares of
the Company's common stock were not included in the diluted earnings per share
calculation as their effect is anti-dilutive.
9. Changes in operating working capital items:
<TABLE>
<S> <C> <C>
For the three months
ended March 31,
1999 1998
Decrease in accounts receivable $1,216,923 $ 2,125,577
Decrease in due from affiliated company 206,680 307
Increase in inventory (3,657,018) (413,373)
Increase in prepaid expenses (636,679) (82,233)
Increase in trade accounts payable 999,411 270,490
Decrease in other accounts payable and accrued
liabilities (703,437) (2,122,762)
Increase (decrease) in royalties payable 8,257 (41,034)
Increase (decrease) in income taxes 485,120 (59,986)
$(2,080,743) $(323,014)
</TABLE>
10. Commitments:
The Company has entered into long-term leases with minimum annual rental
payments approximately as follows:
<TABLE>
<S> <C>
1999 $ 299,000
2000 385,000
2001 283,000
2002 255,000
2003 236,000
Thereafter 255,000
$ 1,713,000
</TABLE>
Rent expense for the period ended March 31, 1999 and 1998 amounted to
approximately $86,145 and $50,891 respectively.
11. 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.
The Company has been named in a lawsuit by a lessor Company on behalf of its
former U.S.
subsidiary, Grand Group for recovery of $277,718.44 for a lease co-signed by
the Company. The amount of the settlement cannot be ascertained as at
March 31, 1999.
b) The Company's Canadian subsidiary, Grand Toys Ltd., is also contingently
liable for
outstanding letters of credit of approximately $450,000, as at March 31, 1999.
12. Segment Information
The Company operates primarily in one industry segment which includes the
distribution of toys and related items. Virtually all sales are to Canadian
customers.
13. Financial instruments:
(a) Foreign currency risk management:
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 contracts are not
used for trading purposes. The Company's policy is to enter into forward
foreign exchange contracts on a portion of its purchases anticipated in the next
selling season. Gains and losses on forward exchange contracts are recorded in
income and generally offset transaction gains or losses on the foreign currency
cash flows which they are intended to hedge.
At March 31, 1999, the Company had purchased a contract to purchase US
$5,000,000 in the next two months at a rate of 1.4925. The fair market value of
this contract at March 31, 1999 is approximately $95,000.
(b) Fair values:
Fair value estimates are made as of a specific point in time, using available
information
about the financial instruments. These estimates are subjective in nature and
often cannot be determined with precision.
The fair value of the Company's accounts receivable, due from affiliated
companies, bank indebtedness, trade and other payables approximate their
carrying value due to the
immediate or short-term maturity of these financial instruments.
(c) Interest rate risk:
The Company's principal exposure to interest rate risk is with respect to its
short-term financing which bears interest at floating rates.
14. Uncertainty due to the Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two digits
rather than
four to identify a year. Date-sensitive systems may recognize the year 2000 as
1900 or
some other date, resulting in errors when information using year 2000 dates is
processed.
In addition, similar problems may arise in some systems which use certain dates
in 1999 to
represent something other than a date. The effects of the Year 2000 Issue may
be
experienced before, on, or after January 1, 2000, and, if not addressed, the
impact on
operations and financial reporting may range from minor errors to significant
systems
failure which could affect an entity's ability to conduct normal business
operations. It is not possible to be certain that all aspects of the Year 2000
Issue affecting the entity,
including those related to the efforts of customers, suppliers, or other third
parties, will be fully resolved.
15. Comparative figures:
Certain comparative figures have been reclassified to conform with the financial
statement presentation adopted in the current year.
Item 2. Management's Discussion and Analysis or Plan of Operation
Forward looking statements
This Form 10Q contains forward-looking statements about events and circumstances
that have not yet occured. For example, statements including terms such as the
Company "expects" or "anticipates" are forward-looking statements. Investors
should be aware that the Company's actual results may differ materially from the
Company's expressed expectations because of risks and uncertainties about the
future. The Company will not necessarily update the information in this Form
10Q
if and when any forward-looking statement later turns out to be inaccurate.
Risks and uncertainties that may affect the Company's future results and
performance include, but are not limited to, the following: intense competition
and pricing pressures in the toy industry; the general consolidation in the toy
industry; whether the Company's general strategy with respect to the toy
industry and the Company's implementation of that strategy will correctly
anticipate key trends in the toy industry; the Company's ability to expand its
product lines; the Company's relationships with retailers and other issues
with respect to the Company's distribution channels. Additional information
about factors that could affect future results and events is included elsewhere
in this Form 10Q, in the Company's fiscal 1998 Form 10K and in other reports
filed with the Securities and Exchange Commission.
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 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 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.
Item 2. Management's Discussion and Analysis or Plan of Operation cont'd
Overview cont'd
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,
the Company 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>
<S> <C> <C>
For the Three
Months Ended March 31,
1999 1998
% %
Net sales 100.00 100.00
Cost of goods sold 69.44 61.98
Gross profit 30.56 38.02
Operating expenses:
Selling, general and administrative 20.03 28.00
Gain on foreign exchange (1.59) 1.39
Interest 1.48 2.21
Bad debt expense .44 .72
Depreciation and amortization .79 .78
Total operating expenses 21.15 30.31
Earnings before income taxes 9.41 7.71
Net earnings 3.87 4.81
</TABLE>
Comparison of the three months ended March 31, 1999 to the three months ended
March 31, 1998
Net Earnings.
Net earnings were $334,017 for the first quarter of 1999 compared to a net
earnings of $220,866 for the same period last year. The increase of $113,151 in
net earnings was mainly
due to the decrease in selling, general and administrative expenses.
Net Sales.
Net sales increased by $4,038,404 or by 88% over net sales during the first
quarter of 1998. The increase is due to the significant increases in the sale
of the product lines. Furby (Tiger Electronics) and WCW Wrestlers
(Toy biz Inc.)
Gross Profit.
Gross profit for the Company increased by $892,098, or, as a percentage of
sales, gross profit decreased from 38.02% to 30.56%. The decrease in gross
profit percentage was due to the product line, primarily due to the lower gross
margins associated with the Furby product line and the discontinuance
of other product lines.
Selling, General and Administrative Expenses.
The increase in selling, general and administrative expenses of $443,781
compared to those of the first quarter of 1998 was mainly due to a decrease in
cooperative advertising expense. However, as a percentage of sales a decrease
of 7.97% was experienced.
Income Tax Expense.
As compared to the same period in 1998, the increase in income tax expense was
$345,109 due to higher earnings in the period.
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 three year banking arrangement with
a new
lending institution. Grand Canada has a secured line of credit of $9,939,000
US ($15,000,000 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. The loan,
which originally
was scheduled to expire on April 1, 1999, was extended to June 30, 1999.
The Company is presently renegotiating the loan with its current lender and
other institutions. Failure to obtain a credit facility would have a material
adverse effect on the Company. The loan is guaranteed by the Company.
Accounts receivable at March 31, 1999 were $6,564,852 compared to $7,728,979 at
December 31, 1998. Inventory was $8,011,437 at March 31, 1999 compared to
$4,318,107 at December 31, 1998. 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.
Liquidity and Capital Resources cont'd
Working capital increased from $3,452,266 at December 31, 1998 to $3,950,490 at
March 31, 1999. Net cash used for operating activities was $1,276,729 in the
quarter ended March 31, 1999 compared to net cash used for operations of
$66,143 in 1998 and cash used for additions to equipment was $51,981 compared to
$62,194 in 1998.
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 1999 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 Year 2000 issue is the result of computer programs which were written using
two digits rather than four to define the applicable year. For example,
date-sensitive software may
recognize a date using "00" as the Year 1900 rather than the Year 2000. Such
misrecognition could result in system failures or miscalculations causing
disruptions of operations, including,
among others, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
We have appointed one of our officers to develop a comprehensive Year 2000 plan
with the goal of completing updates to key systems by December 31, 1999.
We have assessed the
scope of our risks related to problems our computer systems may have in
processing date
information related to the Year 2000 and believe such risks are not significant.
We have identified all of our significant internal software applications which
contain source
codes that may be unable to appropriately interpret the year 2000 and have
already begun to
modify or replace those applications. We have determined that our computer
system is Year 2000 compliant. In addition, we have inquired of certain of our
suppliers and customers
about their progress in identifying and addressing problems relating to the
Year 2000. Several of our customers and suppliers have informed us that they
do not anticipate problems in their
business operations due to Year 2000 compliance issues, and others have informed
us that they have not yet addressed this issue. We are currently unable to
determine the extent to
which Year 2000 issues will affect our customers and suppliers, or the extent to
which we would be vulnerable to their failure to remedy any such problems.
However, we anticipate
that at least some of our customers and suppliers will not be Year 2000
compliant when the
time comes, which will result in their inability to purchase from us or ship to
us in a timely manner.
We are prepared to focus our time and effort on monitoring those accounts,
providing
assistance if possible and finding alternate sources if absolutely necessary.
Although we do not expect this to occur, the worst case scenario is that this
contingency plan may cause us to
incur additional expenses and delays in the shipments of some of our products.
New Accounting Pronouncements
In March 1998, 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 EPS, 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, 1998.
Part II - Other Information
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Impact of Foreign Currency Rate Changes.
During fiscal year 1998, most local currencies of our international subsidiaries
weakened against the U.S. dollar. As of March 31, 1999, the currency of our
Canadian subsidiaries has strengthened. Because we translated foreign
currencies into U.S. dollars for reporting purposes, currency fluctuations can
have an impact, on the Company's results. See note 13 (a) of the Financial
Statements.
Item 3. Reports on Form 8-K
No reports on Form 8-K were file during the quarter ended March 31, 1999
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 12, 1999 GRAND TOYS INTERNATIONAL, INC.
By: /s/ Stephen Altro
Stephen Altro
Chairman
By: /s/ Ron Goldenberg
Ron Goldenberg
Vice President, Chief Financial
Officer, Secretary, Treasurer and
Director (Principal Financial and
Accounting Officer)
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 12, 1999 GRAND TOYS INTERNATIONAL, INC.
By:
Stephen Altro
Chairman
(Principal Executive Officer)
By:
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-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 6,564,852
<ALLOWANCES> 54,384
<INVENTORY> 8,011,437
<CURRENT-ASSETS> 16,287,777
<PP&E> 832,362
<DEPRECIATION> 67,990
<TOTAL-ASSETS> 19,499,582
<CURRENT-LIABILITIES> 12,337,287
<BONDS> 0
1,000,000
0
<COMMON> 1,578
<OTHER-SE> 4,660,617
<TOTAL-LIABILITY-AND-EQUITY> 19,499,582
<SALES> 8,626,916
<TOTAL-REVENUES> 0
<CGS> 5,990,128
<TOTAL-COSTS> 1,824,920
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 127,679
<INCOME-PRETAX> 811,867
<INCOME-TAX> 477,850
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 334,017
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
