<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
----------------
COMMISSION FILE NUMBER 0-20612
----------------
JUST TOYS, INC.
(Exact Name of Registrant as specified in its Charter)
----------------
DELAWARE 13-3677074
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
50 WEST 23RD STREET, NEW YORK, NEW YORK 10010
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(212) 645-6335
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
--- ---
The aggregate number of the Registrant's shares outstanding on November 12, 1997
was 4,175,696 shares of Common Stock, par value $.01 per share.
<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
INDEX
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PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 1997
and 1996 (unaudited) and December 31, 1996.................... 1
Consolidated Statements of Operations (unaudited)
for the Three Months and Nine Months Ended September 30, 1997
and 1996...................................................... 2
Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 30, 1997 and 1996......... 3
Notes to Consolidated Financial Statements (unaudited)........ 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 11
Item 6. Exhibits and Reports on Form 8-K.............................. 11
SIGNATURES ............................................................... 13
<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------------- ------------
1997 1996 1996
------------- ------------- ------------
ASSETS (Unaudited)
Current Assets:
<S> <C> <C> <C>
Cash..................................................... $ 133,172 $ 184,452 $ 153,707
Accounts receivable, net of allowances of $439,000,
$827,000 and $603,000 (Note 2)........................... 714,631 316,709 287,578
Inventories (Note 3)....................................... 3,925,728 4,731,613 4,113,300
Prepaid and refundable income taxes........................ 46,768 46,269 28,914
Prepaid expenses and other current assets.................. 1,358,422 1,126,557 1,118,128
------------ ------------ ----------
Total current assets..................................... 6,178,721 6,405,600 5,701,627
Property and equipment, at cost, net of accumulated
depreciation and amortization.............................. 3,198,916 3,452,570 3,504,468
Goodwill, net of accumulated amortization................... 626,221 - 660,376
Other assets................................................ 168,767 120,555 119,650
------------ ------------ ----------
TOTAL................................................. $ 10,172,625 $ 9,978,725 $9,986,121
============ ============ ==========
LIABILITIES
Current liabilities:
Due to factor.............................................. $ 1,287,475 $ 22,741 -
Accounts payable........................................... 1,309,677 1,309,233 $ 1,637,949
Accrued liabilities........................................ 1,117,535 1,493,684 1,305,604
------------ ------------ --------------
Total current liabilities................................ 3,714,687 2,825,658 2,943,553
Deferred income taxes....................................... 15,971 15,971 15,971
Series B Convertible Redeemable Preferred
Stock, 650,000 shares authorized, 527,397, 538,243
and 538,243 shares issued and outstanding
(liquidation value $1,911,814, $1,951,131 and $1,951,131).. 1,010,095 941,932 972,778
------------ ------------ --------------
Total liabilities and Series B Stock..................... 4,740,753 3,783,561 3,932,302
------------ ------------ --------------
STOCKHOLDERS' EQUITY
Stockholders' equity (Note 4):
Preferred stock, $1.00 par value, 1,000,000 shares
authorized:
Series A Convertible Redeemable Preferred
Stock, 150,000 shares authorized, 120,000
shares issued and outstanding (liquidation value
$120,000)............................................ $ 120,000 $ 120,000 $ 120,000
Common stock, par value $.01 per share, 15,000,000
shares authorized, 4,172,624, 4,150,000 and 4,150,000
issued and outstanding.................................. 41,726 41,500 41,500
Additional paid-in capital................................. 29,838,438 29,795,768 29,795,768
Accumulated deficit........................................ (24,568,292) (23,762,104) (23,903,449)
------------ ------------ --------------
Total stockholders' equity............................... 5,431,872 6,195,164 6,053,819
------------ ------------ --------------
TOTAL................................................. $ 10,172,625 $ 9,978,725 $ 9,986,121
============ ============ ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
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<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales............................ $6,695,500 $6,871,877 $15,656,159 $15,379,904
Cost of goods sold................... 4,349,188 3,936,388 9,870,139 9,181,501
---------- ---------- ----------- -----------
Gross profit......................... 2,346,312 2,935,489 5,786,020 6,198,403
---------- ---------- ----------- -----------
Expenses:
Merchandising, selling, warehousing
and distribution................... 942,888 1,092,519 2,759,807 2,885,433
Royalties............................ 249,706 242,589 577,504 518,627
General and administrative........... 854,046 891,988 2,523,255 2,465,500
---------- ---------- ----------- -----------
Total 2,046,640 2,227,096 5,860,566 5,869,560
---------- ---------- ----------- -----------
Operating income (loss) 299,672 708,393 (74,546) 328,843
---------- ---------- ----------- -----------
Other income (expenses):
Interest expense................... (162,730) (132,255) (426,243) (354,036)
Interest and dividend income....... -- -- -- 3,242
Other income (expense)............. (4,425) (42,665) (1,986) 209,198
---------- ---------- ----------- -----------
Net income (loss).................... 132,517 533,473 (502,775) 187,247
Preferred stock dividends and
accretion (Note 4)................. 52,987 -- 162,068 --
---------- ---------- ----------- -----------
Net income (loss) attributable to
common stockholders................ $ 79,530 $ 533,473 $ (664,843) $ 187,247
========== ========== =========== ===========
Weighted average common shares
outstanding........................ 4,154,982 4,150,000 4,151,782 4,150,000
========== ========== =========== ===========
Per share data:
Net income (loss) attributable to
common stockholders................ $0.02 $0.13 $(0.16) $0.05
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
---- ----
<S> <C> <C>
(Unaudited)
Cash flows from operating activities:
Net income (loss)......................................... $ (502,775) $ 187,247
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................ 724,799 253,747
Gain on sale of property............................. -- (118,707)
Changes in operating assets and
liabilities (net of the effects of acquisitions in
1996):
(Increase) decrease in:
Accounts receivable................................ (427,053) 1,462,889
Inventories........................................ 187,572 (661,407)
Prepaid and refundable income taxes................ (17,854) 202,190
Prepaid expenses and other current assets.......... (240,294) (649,351)
Other assets....................................... (49,117) (44,367)
Increase (decrease) in:
Accounts payable................................... (328,272) (661,476)
Accrued liabilities................................ (188,070) (264,077)
---------- -----------
Net cash used in operating activities................ (841,064) (293,312)
---------- -----------
Cash flows from investing activities:
Cash received from sale of property..................... -- 3,026,047
Purchase of assets of Table Toys........................ -- (391,291)
Acquisition of property and equipment................... (385,091) (175,176)
---------- -----------
Net cash (used in) provided by investing activities... (385,091) 2,459,580
---------- -----------
Cash flows from financing activities:
Borrowings from factor.................................. 1,287,475 22,741
Proceeds from sale of common stock...................... 22,348 --
Payment of long-term debt............................... -- (2,246,000)
Dividends paid.......................................... (104,203) --
---------- -----------
Net cash provided by (used in) financing
activities.......................................... 1,205,620 (2,223,259)
---------- -----------
Net decrease in cash....................................... (20,535) (56,991)
Cash - beginning of period................................. 153,707 241,443
---------- -----------
Cash - end of period....................................... $ 133,172 $ 184,452
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
In the opinion of management, the accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included. The results of
operations for the interim periods are not necessarily indicative of the results
for a full year. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
(1) Loss per share attributable to common stockholders:
Loss per share attributable to common stockholders is based on the weighted
average number of shares and common share equivalents, if dilutive, outstanding
during each period. The preferred stock is not considered to be common stock
equivalents and assumed conversion would be anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. Statement 128 will not have a material
impact on net income (loss) per share for the three and nine months ended
September 30, 1997 and 1996.
(2) Reclassifications
Certain previously reported amounts have been reclassified to conform to
the 1997 presentation and that of the Form 10-K for the year ended December 31,
1996.
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<PAGE>
Note 2 - Accounts Receivable
Accounts receivable and amounts due from factor consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
-------------------------- -------------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
(Unaudited)
Accounts Receivable - factor.......... $ 3,568,414 $ 3,290,986 $ 3,897,563
Borrowings from factor................ (3,568,414) (3,290,986) (3,649,628)
----------- ----------- -----------
Net due from factor................... -0- -0- 247,935
Accounts receivable - trade........... 1,153,631 1,143,709 642,643
----------- ----------- -----------
Total accounts receivable............. 1,153,631 1,143,709 890,578
Less: Accounts receivable allowances.. (439,000) (827,000) (603,000)
----------- ----------- -----------
Total accounts receivable, net of
allowances........................ $ 714,631 $ 316,709 $ 287,578
=========== =========== ===========
</TABLE>
Note 3 - Inventories
The inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
------------------------- ------------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
(Unaudited)
Finished goods.................... $2,630,238 $2,891,530 $2,758,085
Material components and supplies.. 1,295,490 1,840,083 1,355,215
---------- ---------- ----------
Total.......................... $3,925,728 $4,731,613 $4,113,300
========== ========== ==========
</TABLE>
Note 4 - Stockholders' Equity
Stockholders' equity consists of the following:
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
--------- -------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1996................. $120,000 $41,500 $29,795,768 $(23,903,449) $6,053,819
Conversion of 10,846 shares of Preferred
Stock B to Common Stock.................. -- 108 20,440 -- 20,548
Sale of 11,778 shares of Common Stock..... -- 118 22,240 -- 22,358
Cancellation of Warrants.................. -- -- (10) -- (10)
Net loss (unaudited)...................... -- -- -- (502,775) (502,775)
Preferred Stock dividends and accretion... -- -- -- (162,068) (162,068)
-------- ------- ----------- ------------ ----------
Balance September 30, 1997 (unaudited).... $120,000 $41,726 $29,838,438 $(24,568,292) $5,431,872
======== ======= =========== ============ ==========
</TABLE>
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<PAGE>
Note 5 - Litigation
On August 8, 1997, the United States Court of Appeals for the Federal
Circuit affirmed the decision of the United States District Court for the
Northern District of California granting summary judgment in favor of the
Company in the design patent and trade dress lawsuit filed by OddzOn Products,
Inc. in April 1995. In granting the Company summary judgment, the District
Court dismissed OddzOn's claims that the Company's Micro Ultra Pass(R) and Ultra
Pass(R) toy footballs infringed on OddzOn's design patent and constituted trade
dress infringement and unfair competition.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net sales for the three months ended September 30, 1997 decreased 2.6% to
$6,696,000 from $6,872,000 in the comparable period in 1996. Net sales of the
Company's Sports toys decreased 18.0% to $2,186,000 during the third quarter of
1997 from $2,665,000 in the comparable period in 1996. This decrease was offset
by an increase in the Toys category of 7.2% to $4,510,000 in the third quarter
of 1997 from $4,207,000 in the same period of 1996. The increase in sales in
the Toys category was primarily attributable to increased sales from the doll
carriage and stroller line.
Gross profit decreased 20.1% to $2,346,000 in the third quarter of 1997
from $2,935,000 in the comparable period in 1996. Gross profit as a percentage
of net sales was 35.0% for the three months ended September 30, 1997 compared to
42.7% for the three months ended September 30, 1996. As part of the Company's
business plan to improve its operations, the Company has analyzed its product
lines to selectively discontinue those products it believes will not achieve an
acceptable return on investment in the future. During the three months ended
September 30, 1997, the Company sold, at approximately its carrying cost, the
existing inventory in a selected number of product lines that will no longer be
carried in the future. The reduction in the gross profit margin in 1997 from
the comparable period in 1996 is partially attributable to these transactions.
The Company's net sales and gross margin, as a percentage of sales, is
dependent on its mix of business during a given time period. Variables include
such factors as whether merchandise is shipped from a domestic warehouse or
directly from the Orient, whether the merchandise is purchased from overseas
sources or is produced domestically and the specific blend of products shipped
to the Company's customers.
Royalty expense increased 2.9% to $250,000 for the third quarter of 1997
compared to $243,000 in the comparable 1996 period due to an increase in net
sales subject to royalties.
Merchandising, selling, warehousing and distribution expense decreased
13.7% to $943,000 for the third quarter of 1997 from $1,093,000 in the
comparable period in 1996. This change was partly due to decreased warehousing
expenses for the third quarter of 1997.
Operating income was $300,000 in the three months ended September 30, 1997
compared to operating income of $708,000 in the comparable period in 1996. This
difference is primarily attributable to the change in gross profit margin
described above.
Interest expense increased to $163,000 in the three months ended September
30, 1997 as compared to $132,000 in the comparable period in 1996. This
increase was due primarily to increased borrowings from Milberg (as defined
below) during the quarter.
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<PAGE>
Net income was $133,000 in the third quarter of 1997 as compared to net
income of $533,000 in the comparable period in 1996. During the third quarter
of 1997, the Company recorded the dividends paid on its preferred stock
outstanding and the accretion of the Series B Stock issued in 1996 to its
redemption value as a change in stockholder's equity and deducted these expenses
in computing net loss attributable to common stockholders. In the third quarter
of 1996, no material amounts of dividends or accretion were recorded. Net
income per share attributable to common stockholders of $0.02 per share compares
to net income per share attributable to common shareholders of $0.13 per share
on 4,154,982 and 4,150,000 weighted average shares outstanding in the three
months ended September 30, 1997 and 1996, respectively. The Company had 10,846
shares of preferred stock converted into an equivalent number of shares of
Common Stock of the Company as of September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net sales for the nine months ended September 30, 1997 increased 1.8% to
$15,656,000 from $15,380,000 in the comparable period in 1996. Net sales of the
Company's Sports toys decreased 5.7% to $7,304,000 during the first nine months
of 1997 from $7,749,000 in the comparable period in 1996. This decrease was
offset by an increase in the Toys category of 9.4% to $8,352,000 in the first
nine months of 1997 from $7,631,000 in the same period of 1996. The increase in
sales in the Toys category was primarily attributable to increased sales from
the doll carriage and stroller line.
Gross profit decreased 6.7% to $5,786,000 in the first nine months of 1997
from $6,198,000 in the comparable period in 1996. Gross profit as a percentage
of net sales was 37.0% for the nine months ended September 30, 1997 compared to
40.3% for the nine months ended September 30, 1996. As part of the Company's
business plan to improve its operations, the Company has analyzed its product
lines to selectively discontinue those products it believes will not achieve an
acceptable return on investment in the future. During the nine months ended
September 30, 1997, the Company sold, at approximately its carrying costs, the
existing inventory in a selected number of product lines that will no longer be
carried in the future. The reduction in the gross profit margin in 1997 from
the comparable period in 1996 is partially attributable to these transactions.
The Company's net sales and gross margin, as a percentage of sales, is
dependent on its mix of business during a given time period. Variables include
such factors as whether merchandise is shipped from a domestic warehouse or
directly from the Orient, whether the merchandise is purchased from overseas
sources or is produced domestically and the specific blend of products shipped
to the Company's customers.
Merchandising, selling, warehousing and distribution expense decreased
4.4% to $2,760,000 for the third quarter of 1997 from $2,885,000 in the
comparable period in 1996. This change was partly due to decreased warehousing
expenses for the third quarter of 1997.
Royalty expense increased 11.4% to $578,000 for the first nine months of
1997 compared to $519,000 in the comparable 1996 period primarily due to an
increase in net sales subject to royalties.
General and administrative expenses increased 2.3% to $2,523,000 for the
first nine months of 1997 from $2,466,000 in the comparable period in 1996 due
to an increase in noncash charges such as depreciation and amortization
associated with the acquisition by the Company of certain assets of Table Toys,
Inc. in June 1996. These charges were first recorded in the fourth quarter of
1996 upon finalization of the purchase price allocation.
-8-
<PAGE>
Operating loss was $75,000 in the nine months ended September 30, 1997
compared to operating income of $329,000 in the comparable period in 1996.
This difference is primarily attributable to the change in gross profit margin
and the noncash general and administrative expenses described above.
Interest expense increased to $426,000 in the nine months ended September
30, 1997 as compared to $354,000 in the comparable period in 1996. This change
was due primarily to increased borrowings from Milberg during the year which
were partly offset by the repayment of the mortgage on the Company's Hong Kong
property upon its sale in the second quarter of 1996.
Net loss was $503,000 in the first nine months of 1997 as compared to net
income of $187,000 in the comparable period in 1996. During the second
quarter of 1996, the Company recorded a gain of $119,000 from the sale of the
Hong Kong property. During the first nine months of 1997, the Company recorded
the dividends paid on its preferred stock outstanding and the accretion of the
Series B Stock issued in 1996 to its redemption value as a change in
stockholder's equity and deducted these expenses in computing net loss
attributable to common stockholders. In the nine months of 1996, no material
amounts of dividends or accretion were recorded. Net loss per share
attributable to common stockholders was $0.16 per share compared to net income
per share of $0.05 per share on 4,151,782 and 4,150,000 weighted average shares
outstanding in the nine months ended September 30, 1997 and 1996, respectively.
The Company had 10,846 shares of preferred stock converted into an equivalent
number of shares of Common Stock of the Company as of September 30, 1997.
OTHER INFORMATION
During the past several years, the Company has experienced a shift in its
revenue pattern wherein the second half of the year has grown in significance to
its overall business and within that half the fourth quarter has become more
prominent. The Company expects that this trend will continue due to industry
changes and due to changes to its product mix related to the doll carriage and
stroller product lines and the Table Toy product lines which were acquired in
1996. This concentration increases the risk of (a) underproduction of popular
items, (b) overproduction of less popular items and (c) failure to achieve tight
and compressed shipping schedules. The business of the Company is characterized
by customer order patterns which vary from one year to the next largely because
of the different levels of consumer acceptance of a product line, product
availability, marketing strategies, inventory levels of retailers and
differences in overall economic conditions. The use of just-in-time/quick
response inventory techniques and replenishment programs by larger retailers has
resulted in fewer orders being placed in advance of shipment and more orders,
when placed, for immediate delivery. This distorts the comparisons of unshipped
orders at any given date. The Company expects these trends to continue.
Additionally, it is a general industry practice that orders are subject to
amendment or cancellation by customers prior to shipment. Therefore,
comparisons of unshipped orders in any specific period in any given year with
those same periods in preceding years are not necessarily indicative of sales
for an entire year. The Company's unshipped orders were approximately
$1,929,000 at September 30, 1997 compared to approximately $2,430,000 at
September 30, 1996.
In August 1997, the lawsuit described below in Part II--Item 1 Legal
Proceedings was resolved in favor of the Company. Accordingly, the Company
should no longer incur substantial legal fees and expenses to defend this
action.
-9-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at September 30, 1997 was $2,464,000 as
compared to $2,758,000 at December 31, 1996. The decrease is primarily due to
the operating losses incurred in the first nine months of 1997.
Inventory levels were $806,000 lower at September 30, 1997 compared with
September 30, 1996 due to changes made by management in inventory planning due
to the anticipated order patterns of its major customers.
Cash used in investing activities was $385,000 in the period ended
September 30, 1997 which was primarily attributable to capital expenditures for
fixed assets, including molds and tooling for new products. Cash provided by
investing activities was $2,460,000 in the period ending September 30, 1996,
which was attributable to the proceeds for the sale of the Company's Hong Kong
property, partially offset by an investment in equipment, molds and tooling for
new products and the purchase of certain assets of Table Toys.
Cash provided by financing activities was $1,206,000 in the first nine
months of 1997, primarily from borrowings from the Company's factor. Cash used
in financing activities was $2,223,000 in the first nine months of 1996 which
primarily represents the repayment of the principal portion of the mortgage on
the Company's facility in Hong Kong.
The Company's factoring agreement with Milberg Factors, Inc. ("Milberg")
provides for advances equal to the lesser of 85% of total accounts receivable or
$5,000,000. The factoring charge is .65% of receivables. Advances bear
interest at the rate of prime plus one percent. Milberg has also agreed to
advance to the Company, at the Company's request, the lesser of $2,000,000 or
50% of the Company's inventory located in the United States. Such advances will
also bear interest at the rate of prime plus one percent. Additionally, the
factoring arrangement with Milberg is secured by a mortgage on the real property
owned by the Company's manufacturing subsidiary.
The Company believes that its cash flow from operations and available
borrowings will be adequate to meet its obligations for the ensuing year.
SEASONALITY
The toy industry is typically seasonal in nature due to the heavy demand
for toy products during the Christmas season, with the majority of orders being
placed during the first two-thirds of the year for shipment during the third and
fourth quarters, and with the majority of collections from such sales being
received in the fourth quarter.
-10-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 8, 1997, the United States Court of Appeals for the Federal
Circuit affirmed the decision of the United States District Court for the
Northern District of California granting summary judgment in favor of the
Company in the design patent and trade dress lawsuit filed by OddzOn Products,
Inc. in April 1995. In granting the Company summary judgment, the District
Court dismissed OddzOn's claims that the Company's Micro Ultra Pass(R) and Ultra
Pass(R) toy footballs infringed on OddzOn's design patent and constituted trade
dress infringement and unfair competition.
On September 25, 1997, an administrative law judge of the Federal Trade
Commission determined that Toys "R" Us, Inc. had violated the antitrust laws by
entering into arrangements with various toy manufacturers whereby the toy
manufacturers would restrict their business with warehouse clubs. Toys "R" Us
has announced that it will appeal that decision.
Following announcement of the administrative law judge's decision, a series
of private class actions seeking treble damages, expenses and attorneys' fees
have been filed in various federal courts on behalf of consumers who purchased
toys from Toys "R" Us from 1989 to the present which the defendant manufacturers
had allegedly agreed not to sell to other retailers. The complaints allege,
generally, a conspiracy among Toys "R" Us and the defendant toy manufacturers to
cut off supplies to the warehouse clubs competing with Toys "R" Us. The
defendants in these actions include Toys "R" Us, Mattel, Fisher-Price, Hasbro,
Tyco Toys, The Little Tikes Company, Rubbermaid Corporation, Today's Kids,
Binney & Smith, Lego Systems, Sega of America, Tiger Electronics, and Huffy
Corporation. The Company is named as a defendant in many of these actions.
The Company does not believe that it participated in any conspiracy or
otherwise violated the antitrust laws and it intends to defend itself.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Certificate of Incorporation, incorporated by reference to Exhibit 3.1
to the Registration Statement on Form S-1 (File No. 33-50878).
3.2 Certificate of Amendment of Certificate of Incorporation incorporated
by reference to Exhibit 3.5 of the Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on November 8, 1996 (the
"1996 3rd Quarter 10-Q").
3.3 Certificate of Designations, Preferences and Rights of the Series A
Convertible Redeemable Preferred Stock (included in Exhibit 4.1
hereof).
3.4 Certificate of Designations, Preferences and Rights of the Series B
Convertible Redeemable Preferred Stock (included in Exhibit 4.2
hereof).
-11-
<PAGE>
3.5 Amended and Restated By-laws incorporated by reference to Exhibit 3.4
to the 1996 3rd Quarter 10-Q.
4.1 Certificate of Designations, Preferences and Rights of the Series A
Convertible Redeemable Preferred Stock, incorporated by reference to
Exhibit 4 of the Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on November 7, 1995.
4.2 Certificate of Designations, Preferences and Rights of the Series B
Convertible Redeemable Preferred Stock, incorporated by reference to
Exhibit 3.2 of the Current Report on From 8-K filed with the
Securities and Exchange Commission on July 10, 1996 (the "July 1996
Form 8-K").
4.3 Form of Warrant, dated June 26, 1995, issued to various parties in
respect of the aggregate of 60,000 shares of the Company's Common
Stock, incorporated by reference to Exhibit 4.2 of the July 1996 Form
8-K.
/*/10.1 Employment Agreement, dated July 1, 1997 between the Company and
Barry Shapiro.
/+/27 Financial Data Schedule
__________________________
/*/ Filed herewith
/+/ Filed with the Securities and Exchange Commission only pursuant to
Article 5 of Regulation S-X.
(b) Reports on Form 8-K -- None
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1997
JUST TOYS, INC.,
a Delaware corporation
By: /s/ Barry Shapiro
--------------------------------------
Barry Shapiro
Chief Executive Officer
By: /s/ David Schwartz
---------------------------------------
David Schwartz
Chief Financial Officer and
Principal Accounting Officer
-13-
<PAGE>
EXHIBIT 10.1
[Just Toys, Inc. letterhead]
July 1, 1997
Mr. Barry Shapiro
8 Horton Ct.
West Harrison, NY 10604
Dear Barry:
This will confirm your compensation arrangements approved by the
Compensation Committee and the Board of Directors of Just Toys, Inc. (the
"Company").
1. Effective July 1, 1997 in addition to your duties as President of the
Company, you shall become the Company's Chief Executive Officer.
2. Effective July 1, 1997, your base salary will be increased to the rate
of $250,000 per annum.
3. You will continue to be eligible to participate in the Company's Bonus
Plan as established and modified from time to time. With respect to 1997, you
will receive 30% of the available monies under the Bonus Plan and the balance,
after payments to Morton Levy, will be distributed to other officers and
employees of the Company as proposed by you in consultation with the
Compensation Committee.
4. You will receive an option to purchase 100,000 shares of the Company's
Common Stock under the Company's stock option plan at an exercise price of $1.50
per share. The option will become exercisable in four installments of 25,000
shares each based upon the price of the Company's Common Stock reaching the
following stock prices for a minimum of 30 consecutive trading days: $3.00;
$4.00; $5.00; and $6.00. The option will be evidenced by a separate option
agreement in the form attached.
5. (a) In the event of a "change of control" (as defined below) of the
Company and (i) the Company or its successor elects to terminate your employment
without cause within one year following such change in control; or (ii) you
voluntarily elect to terminate your employment with the Company for any reason
within one year following such change in control, then, upon the effective date
of your termination, the Company shall pay you in a lump sum an amount equal to
12 months of your base salary in effect at the time of the change of control and
<PAGE>
Mr. Barry Shapiro -2- July 1, 1997
shall pay and provide you at the Company's expense your full benefits (medical,
insurance, etc.) for twelve months from your date of termination. In addition,
the Company will provide you with reasonable office space consistent with your
status as a senior executive and secretarial assistance for a period of six
months following your date of termination. Such office space and secretarial
assistance may, at the Company's option, be provided in the Company's premises
or elsewhere in a location reasonably acceptable to you.
(b) If either you or the Company or its successor elects to terminate your
employment at the time within one year following a change in control, then, in
such event, if the Company or its successor so requests at the time of such
election, you will continue to be employed by the Company at your then current
salary and benefits for up to an additional six months in order to assist in any
transition; provided however, that you shall be under no obligation to continue
to be so employed if you have elected to terminate your employment with the
Company or its successor for "cause" (as defined below). In the event you
continue your employment as provided in this paragraph, then the amounts payable
to you under Paragraph 5(a) shall be paid upon the termination of such continued
employment.
6. For purposes of Paragraph 5, the following definitions apply:
"change of control" means (i) the acquisition of more than 50% of the
Company's common stock by one person or group of persons acting in concert;
(ii) a sale of all or substantially all of the assets of the Company and
its subsidiaries; (iii) individuals who presently constitute the Board of
Directors of the Company, or who have been recommended for election to the
Board by two-thirds of the Board consisting of individuals who are either
presently on the Board or such recommended successors, cease for any reason
to constitute at least a majority of such Board.
"cause" means (i) you are placed in any position of lesser stature than
Chief Executive Officer of the Company's business, are assigned duties
inconsistent with such position or duties which, if performed, would result
in a significant change in the nature or scope of powers, authority,
functions or duties inherent in such position immediately prior to the
change in control, are assigned performance requirements or working
conditions which are at variance with the performance requirements and
working conditions in effect immediately prior to the change of control,
you are accorded treatment on a general basis which is in derogation of
your status as Chief Executive Officer; (ii) you cease to serve as a member
of the Board of Directors of the Company or its successor; (iii) your base
salary in effect prior to the change in control is reduced; or (iv) you are
required to relocate.
<PAGE>
Mr. Barry Shapiro -3- July 1, 1997
If the foregoing is in accordance with your agreement and understanding,
please execute a copy of this letter below under the words "Accepted and Agreed
to."
Very truly yours,
JUST TOYS, INC.
By: The Compensation Committee
/s/ Roger Gimbel
--------------------------------------
Roger Gimbel
/s/ Charmaine Jefferson
--------------------------------------
Charmaine Jefferson
/s/ Irwin Naitove
--------------------------------------
Irwin Naitove
ACCEPTED AND AGREED TO:
By: /s/ Barry Shapiro
--------------------------
Barry Shapiro
<PAGE>
JUST TOYS, INC.
50 WEST 23RD STREET
NEW YORK, NEW YORK 10010
July 1, 1997
To: Barry Shapiro
We are pleased to confirm that Just Toys, Inc. (the "Company") has granted
to you an option as of July 1, 1997, pursuant to the Company's 1992 Incentive
and Non-Qualified Stock Option Plan (the "Plan"), to purchase 100,000 shares of
common stock, par value $.01 per share, of the Company (the "Common Stock") at a
price of $1.50 per share. This option shall be effective for a period of ten
years commencing on July 1, 1997 (the "Effective Date") and terminating on June
30, 2007. The option issued hereby has been designated by the Stock Option
Committee as a non-qualified option.
This option will be issued in accordance with and is subject to and
conditioned upon all of the terms and conditions of the Plan (a copy of which is
attached hereto as Exhibit A) as from time to time may be amended, provided,
---------
however that no future amendment or termination of the Plan shall, without your
consent, alter in a manner adverse to you or impair any of your rights or
obligations under this option. Reference is made to the terms and conditions of
the Plan, all of which are incorporated by reference in this option agreement as
if fully set forth herein.
This option will become exercisable according to the following vesting
schedule: This option will become exercisable with respect to 25% of the shares
covered by the option when the Fair Market Value (as defined in the Plan) per
share of Common Stock equals or exceeds $3.00 for thirty consecutive trading
days; this option will become exercisable with respect to an additional 25% (50%
in the aggregate) of the shares covered by the option when the Fair Market Value
per share of Common Stock equals or exceeds $4.00 for thirty consecutive trading
days; this option will become exercisable with respect to an additional 25% (75%
in the aggregate) of the shares covered by the option when the Fair Market Value
per share of Common Stock equals or exceeds $5.00 for thirty consecutive trading
days; this option will become exercisable with respect to an additional 25% or
all of the shares covered by the option when the Fair Market Value per share of
Common Stock equals or exceeds $6.00 for thirty consecutive trading days.
<PAGE>
Barry Shapiro -2- July 1, 1997
Unless at the time of the exercise of this option a registration statement
under the Securities Act of 1933, as amended (the "Act"), is in effect as to
such shares, any shares purchased by you upon the exercise of this option shall
be acquired for investment and not for sale or distribution, and if the Company
so requests, upon any exercise of this option, in whole or in part, you will
execute and deliver to the Company a certificate to such effect. The Company
shall not be obligated to issue any shares pursuant to this option, if in the
opinion of counsel to the Company, the shares to be so issued are required to be
registered or otherwise qualified under the Act or under any other applicable
statute, regulation or ordinance affecting the sale of securities, unless and
until such shares have been so registered or otherwise qualified.
You understand and acknowledge that, under existing law, unless at the time
of the exercise of its option a registration statement under the Act is in
effect as to such shares: (i) any shares purchased by you upon exercise of this
option may be required to be held indefinitely unless such shares are
subsequently registered under the Act or an exemption from such registration is
available; (ii) any sales of such shares made in reliance upon Rule 144
promulgated under the Act may be made only in accordance with the terms and
conditions of that Rule (which, under certain circumstances, restrict the number
of shares which may be sold); (iii) in the case of securities to which Rule 144
is not applicable, compliance with Regulation A promulgated under the Act or
some other disclosure exemption will be required; (iv) certificates for shares
to be issued to you hereunder shall bear a legend to the effect that the shares
have not been registered under the Act and that the shares may not be sold,
hypothecated, or otherwise transferred in the absence of an effective
registration statement under the Act relating thereto or an opinion of counsel
satisfactory to the Company that such registration is not required; (v) the
Company will place an appropriate "stop transfer" order with its transfer agent
with respect to such shares; and (vi) the Company has undertaken no obligation
to register the shares or to include the shares in any registration statement
which may be filed by it subsequent to the issuance of the shares to you. In
addition, you understand and acknowledge that the Company has no obligation to
furnish to you information necessary to enable you to make sales under Rule 144.
This option (or installment thereof) is to be exercised by delivering to
the Company a written notice of exercise in the form attached hereto as Exhibit
-------
B, together with payment of the purchase price of the shares to be purchased.
- -
The purchase price is to be paid in cash or, at the discretion of the Stock
Option Committee, by delivering shares of the Company's stock already owned by
you and having a Fair Market Value on the date of exercise equal to the exercise
price of the option, or a combination of such shares and cash, or otherwise in
accordance with the Plan.
<PAGE>
Barry Shapiro - 3 - July 1, 1997
The Company may establish from time to time, appropriate procedures to
provide for payment or withholding of such income or other taxes as may be
required by law to be paid or withheld in connection with the exercise of an
option. You shall pay the Company all such amounts requested by the Company to
permit the Company to take any deduction available to it resulting from the
exercise of an option. The Company may also establish, from time to time,
appropriate procedures to ensure that the Company receives prompt advice
concerning the occurrence of any event which may create, or affect the timing or
amount of, any obligation to pay or withhold any such taxes or which may make
available to the Company any tax deduction resulting from the occurrence of such
event, and you will comply with all such procedures so established.
Kindly evidence your acceptance of this option and your agreement to comply
with the provisions hereof and of the Plan by executing this letter under the
words "Accepted and Agreed To".
Sincerely,
JUST TOYS, INC.
By:_________________________________________
Name: David Schwartz
Title: Chief Financial Officer
ACCEPTED AND AGREED TO:
- --------------------------
Barry Shapiro
<PAGE>
EXHIBIT A
[Just Toys, Inc. 1992 Incentive and Non-Qualified Stock Option Plan omitted]
<PAGE>
EXHIBIT B
---------
Just Toys, Inc.
50 West 23rd Street
New York, New York 10010
Ladies and Gentlemen:
Notice is hereby given of my election to purchase _________ shares of Common
Stock, par value $.01 per share (the "Shares"), of Just Toys, Inc., at a price
of $______ per Share, pursuant to the Company's Stock Option Plan. Enclosed in
payment for the Shares is :
[ ]my check in the amount of $_________.
[ ]*_____ Shares having a total value of $_________, such value being based on
the closing price(s) of the Shares on the date hereof.
The following information is supplied for use in issuing and registering the
Shares purchased hereby:
Number of Certificates and
Denominations__________________
Name__________________
Address__________________
__________________
Social Security Number__________________
Dated: ____________________________
Very truly yours,
____________________________
Barry Shapiro
* Subject to the approval of the Stock Option Committee.
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