JUST TOYS INC, 10-K, 1998-03-31

JUST TOYS INC
10-K, 1998-03-31
GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 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 Number)

20 Livingstone Avenue, Dobbs Ferry, NY
10522 (Address of principal executives
office) (Zip Code)

Registrant's telephone number, including area code: (914) 674-8697

Securities registered pursuant to Section
12(b) of the Act:

Name of each exchange
Title of each class on which registered
------------------- -------------------
None Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
(Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required
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. X Yes No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]

The aggregate market value at March 26, 1998 of shares of the Registrant's
Common Stock, par value $.01 per share (based upon the closing price per share
of such stock on the Nasdaq National Market) held by non-affiliates of the
Registrant was approximately $3,689,370. Solely for the purposes of this
calculation, shares held by directors and officers of the Registrant have been
excluded. Such exclusion should not be deemed a determination or an admission by
the Registrant that such individuals are, in fact, affiliates of the Registrant.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At March 26, 1998, there were
outstanding 4,179,362 shares of the Registrant's Common Stock, par value $.01
per share.

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JUST TOYS, INC.

Index to Form 10-K

Item Number Page

PART I........................................................................1
ITEM 1 - BUSINESS........................................................1
ITEM 2 - PROPERTIES......................................................8
ITEM 3 - LEGAL PROCEEDINGS...............................................9
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............10

PART II......................................................................10
ITEM 5 - MARKET FOR THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS..............................10
ITEM 6 - SELECTED FINANCIAL DATA........................................12
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............12
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................19
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..........19

PART III.....................................................................20
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............20
ITEM 11 - EXECUTIVE COMPENSATION........................................22
ITEM 12 - SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................25
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................27

PART IV......................................................................27
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.........................................27

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This Annual Report on Form 10-K contains forward looking information
and describes the expectations of Just Toys, Inc. (the "Company") concerning
future business conditions and the outlook for the Company based on currently
available information. Wherever possible, the Company has identified these
forward looking statements by words such as "anticipates," "believes,"
"estimates," "expects" and similar expressions. These forward looking statements
are subject to risks and uncertainties which could cause the Company's actual
results or performance to differ materially from those expressed in these
statements. These risks and uncertainties include the following: reliance on
manufacturers based in China, seasonality and quarterly fluctuations, government
regulation, as well as the items set forth under "Business--Certain Cautionary
Factors." The Company assumes no obligation to update publicly any forward
looking statements, whether as a result of new information, future events or
otherwise.

PART I

ITEM 1 - BUSINESS

Just Toys, Inc. (the "Company") designs, develops, manufactures,
markets and distributes a variety of toy and sport products for children of
various ages. The Company is a Delaware corporation formed in August 1992. Its
business was begun in 1989 and was conducted as a joint venture (the "Joint
Venture") until September 1992 when the Company succeeded to the business of the
Joint Venture.

Through the acquisition of certain assets of Table Toys, Inc., in June
1996, the Company sells a line of PlayTable products which consist of play
tables which are compatible with most brands of toy construction blocks and a
line of toy construction blocks. In February 1996, the Company acquired the toy
line and rights to the "Welsh" name, which consists of doll accessories,
carriages and strollers. The Company has expanded both of these product lines
since the time of their acquisition.

The Company presented its entire product line to retailers at the Hong
Kong, Dallas and New York Toy Fairs in January and February 1998.

The Company has two wholly owned foreign subsidiaries, Just Toys
Products, Limited and Joyful World Enterprises, Limited, both of which are
incorporated in Hong Kong.

Products

The Company has categorized its products into two categories: "Toys"
and "Sport." The following chart shows the breakdown of the Company's net sales
by product category for the years indicated:

Year Ended December 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- ------------------------------ -------------------------------
Product Amount Percentage Amount Percentage Amount Percentage
- --------- ------------------- ----------- ---------------- ---------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sport $ 10,779,000 46.3% $ 10,577,000 48.0% $ 8,066,000 41.2%
Toys $ 12,480,000 53.7% $ 11,479,000 52.0% $ 11,522,000 58.8%
---------- ----- ---------- ----- ---------- -----
$ 23,259,000 100.0% $ 22,056,000 100.0% $ 19,588,000 100.0%

</TABLE>

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Sport

The Company's line of Sport toys include spiral footballs manufactured
under a non-exclusive patent license, foam and plastic baseballs, baseball bats,
soccer balls and basketballs, mini basketball hoop sets, youth-size hockey
sticks, pucks and goals and batting tee sets. The products are sold under the
Company's names as well as licensed names such as Spalding(R), National Hockey
League(R) and Louisville Slugger(R). The Company's products in its Sport line
generally sell at retail for between $2.00 and $50.00.

Toys

The Company's Toys line consists of many different items including
bendable figures and miniature figures, some of which are based on licensed
characters, play tables, doll strollers and accessories, its Laser Light(R)
toys, hand-held toys that project laser-like images, and a line of foam shooting
toys. The Company's products in its Toys line generally sell at retail for
between $2.00 and $100.00.

Licensing

Some of the Company's products are manufactured under license
agreements. A determination to acquire a license must frequently be made before
the commercial introduction of the product in which a licensed property appears
and license arrangements often require the payment of non-refundable advances or
guaranteed minimum royalties. Substantially all of the Company's licenses extend
for one to three years. Some licenses are renewable at the option of the Company
upon payment of certain minimum guaranteed payments or the attainment of certain
sales levels during the initial term of the license. Royalties to licensors
typically range from 4% to 12% of sales of the related product. Licenses for
some foreign territories require royalties that exceed such range. As of
December 31, 1997, minimum future guaranteed payments through 2001 under license
agreements aggregated approximately $766,000.

The Company's spiral footballs are manufactured under a non-exclusive
patent license that extends for the life of the patent.

Design and Development

The Company relies on its ability to purchase selective product lines
and on its management personnel and independent inventors, designers, sculptors,
model-makers and engineers for new products. The Company pays royalties to
independent inventors and designers based on sales of products developed by them
generally ranging from 2% to 6.5%.

Manufacturing

The Company relies on contract manufacturers in the United States and
the Far East and on its wholly owned subsidiary, Celt Specialty Partners, Inc.
("Celt"), to manufacture its products. Celt manufactures certain of the
Company's foam sport balls as well as other products. Approximately 28.4%, 30.7%
and 29.2% of net sales in 1997, 1996 and 1995, respectively, were derived from
the sale of products manufactured at this facility. During 1997, the Company
upgraded the Celt operations by installing new equipment for the foam line and
renting smaller and more efficient warehouse space closer

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to its manufacturing facility. As needed, certain of the products manufactured
by Celt can also be obtained from manufacturers in the Orient.

Decisions related to the choice of third party manufacturers are based
on price, quality of merchandise, reliability and the ability of a manufacturer
to meet the Company's timing requirements for delivery. The Company is not a
party to long-term contractual or other arrangements with any manufacturer. The
Company often uses more than one manufacturer to produce a single product. The
Company utilizes public warehouse facilities on both the east and west coasts
and in the midwest, at which it regularly maintains an inventory of its
products, thus enabling the Company to respond quickly to customer orders. The
Company also utilizes warehouse facilities located near its manufacturing
facility in upstate New York. Tooling and injection molding are owned by the
Company and may be utilized by different manufacturers if the need arises for
alternate sources of production.

The principal raw materials used in the production and sale of the
Company's products are chemicals for foam, plastics and paper products. Raw
materials are generally purchased by the manufacturers who deliver completed
products to the Company. The Company believes that an adequate supply of raw
materials used in the manufacture of its products is readily available from
existing and alternative sources at competitive prices.

Most of the Company's products are manufactured by unaffiliated parties
located in the People's Republic of China and Taiwan. The Far East is the
largest manufacturing center of toys in the world and most toy companies utilize
the services of manufacturers located in the Far East. The majority of the
Company's manufacturing in the Far East is performed by five to seven
manufacturers. In any particular year, an individual manufacturer may account
for more than 10% of the Company's products, depending upon the popularity of
the product made by it. While the Company is not dependent on any single
manufacturer in the Far East to supply it with products, the Company could be
affected by political or economic disruptions affecting businesses in the Far
East generally. The Company believes that alternate sources of manufacturing are
available outside of the Far East. The Company has two wholly owned subsidiaries
based in Hong Kong to maintain contact with manufacturers and subcontractors in
the Far East and supervise manufacturing and quality control.

Sales and Marketing

The Company distributes its products in the United States primarily to
toy stores, mass merchandisers and, to a lesser extent, discount drug chains,
supermarket chains, sporting goods stores, catalogers and gift stores located in
the United States. The Company participates in the electronic data interchange
program maintained by many of its largest customers. This program allows the
Company to monitor store inventory and schedule production to meet anticipated
reorders.

The Company's net sales to foreign markets in 1997, 1996 and 1995 were
approximately 2.7%, 5.7% and 4.9%, respectively, of total net sales. Sales in
foreign countries are generally made directly to independent distributors, some
of which are licensees that have acquired foreign distribution rights in respect
of categories of products which the Company has the right to distribute
domestically. Foreign distributors ordinarily retain their own sales
representatives. Sales of products to distributors in foreign countries are in
United States dollars which reduces the Company's exposure to fluctuations in
monetary rates overseas.

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The Company's net sales and gross margin, as a percentage of net sales,
is dependent on its mix of business during a given time period. Variables
include such issues 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.

The Company does not sell any of its products on consignment. A portion
of firm orders, by their terms, may be canceled if shipment is not made by a
certain date.

In 1997, the Company maintained an internal sales and marketing staff
of 9 people, including its senior management. The Company retains approximately
sixteen sales representation firms in the United States who act as independent
contractors and who market the Company's products at the major toy trade shows
held in New York City and Hong Kong and at regional trade shows. In addition,
sales representatives make on-site visits to customers for the purpose of
soliciting orders for products.

Customers

The five largest customers of the Company accounted for approximately
75.3%, 71.7% and 67.8% of net sales in 1997, 1996 and 1995, respectively. In
each of the past three years, the Company has had two customers, Target and
Wal-Mart, each representing more than 10% of net sales. Sales to these customers
totaled 60%, 57% and 53% of net sales in 1997, 1996 and 1995, respectively. The
termination by either of these customers of its relationship with the Company
would have a material adverse effect on the Company.

Backlog

Total order backlog at December 31, 1997 and 1996 was approximately
$1,193,000 and $1,780,000, respectively. The Company expects substantially all
of such orders to be filled during 1998. Cancellations may materially reduce the
amount of sales realized from the Company's backlog. 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 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. Order backlog is
also impacted by a shift in the Company's revenues to the second half of the
year with fourth quarter revenues becoming increasingly significant. The Company
does not consider total order backlog to be a meaningful indicator of future
sales.

Competition

The toy industry is highly competitive and the Company competes with
many larger, better capitalized companies which have significantly more
resources than the Company to devote to the design

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and development of new toys, the procurement of licenses and the marketing and
distribution of their products. Due to the Company's relatively modest
advertising budget, the Company has greater difficulties in obtaining retailer
product acceptance than do companies with large advertising budgets.

Seasonality

The toy industry is typically seasonal in nature due to the heavy
demand for toy products during the Christmas season. During the past several
years, the Company has experienced a shift in its revenues to the second half of
the year with fourth quarter revenues becoming increasingly significant. 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 PlayTable 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.

As a result of the shift in the Company's revenues to the second half
of the year, the Company anticipates that it may experience decreased sales and
increased losses during the first and second quarters of 1998 compared to the
first and second quarters of 1997.

Government Regulation

The Company is subject to the provisions of, among other laws, the
Federal Hazardous Substances Act and the Federal Consumer Product Safety Act.
These laws empower the Consumer Products Safety Commission (the "CPSC") to
protect children from hazardous toys and other articles. The CPSC has the
authority to exclude from the market articles which are found to be hazardous
and can require a manufacturer to repurchase such toys under certain
circumstances. Any such determination by the CPSC is subject to court review.
Similar laws exist in some states and cities in the United States and in many
jurisdictions throughout the world. The Company maintains a quality control
program (including the inspection of goods at factories and the retention of
independent testing laboratories in Hong Kong) to ensure compliance with
applicable laws. The Company maintains product liability insurance in the amount
of $11,000,000.

Certain Cautionary Factors

The following factors, in addition to those discussed elsewhere in this
Report, should be considered carefully in evaluating the Company and its
business.

Change in Consumer Preferences; Reliance on New Product Introduction

The toy market is characterized by changing consumer preferences and
frequent new product introductions which reduce the length of product life
cycles. There can be no assurance that any of the Company's current products or
product lines will continue to be popular with consumers for any significant
period of time or that new products and products lines introduced by the Company
will achieve and sustain an acceptable degree of market acceptance. Furthermore,
sales of the Company's existing products are expected to decline over time and
may decline at rates faster than expected. The Company's success is dependent
upon the Company's ability to enhance existing product lines and develop new
products and product lines. The failure of the Company's new products and
product lines to achieve and sustain market

5
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acceptance and to produce acceptable margins could have a material adverse
effect on the Company's financial condition and results of operations.

Dependence on Limited Number of Customers

For fiscal 1997, the Company's five largest customers accounted for
75.3% of the Company's net sales. Sales to Wal-Mart and Target, the Company's
two largest customers, aggregated 60% of the Company's net sales during the same
period. The Company expects to continue to rely on a relatively small number of
customers for a significant percentage of sales for the foreseeable future.
Because of the large portion of the Company's sales to the Company's two largest
customers and the significant share of the market for toy sales to consumers
represented by these same customers, the loss of one of them as a customer, or a
significant reduction in sales to any one of them, would have a material adverse
effect on the Company's financial condition and results of operations.

Inventory Management

Most of the Company's largest retail customers utilize an electronic
inventory management system to track sales of products and rely on reorders
being rapidly filled by suppliers rather than maintaining large product
inventories. These types of systems put pressure on suppliers like the Company
to promptly fill customer orders and shift some of the inventory risk from the
retailer to suppliers. The Company generally places orders with manufacturers
based in part on advance, non-binding, estimates of orders from its major retail
clients. Such estimates may deviate substantially from actual orders. In the
event that subsequent orders fall short of original estimates, the Company may
be left with excess inventory. Significant excess inventory could result in
price discounts and increased inventory carrying costs for the Company.
Similarly, if the Company fails to have an adequate supply of products
manufactured on a timely basis, the Company may, as a result, lose sales
opportunities. Despite the Company's efforts to adjust its production schedule
based on market activities, including participating in electronic data
interchange programs with its largest retail customers, there can be no
assurance that the Company will maintain appropriate inventory levels. Such
occurrences may have a material adverse effect on the Company's financial
condition and results of operations.

Returns and Markdowns

The Company historically has permitted certain customers to return
slow-moving items for credit or has provided price protection by making any
price reductions effective as to certain products then held by retailers in
inventory. The Company expects that it will continue to be required to make such
accommodations in the future. Any significant increase in the amount of returns
or markdowns could have a material adverse effect on the Company's financial
condition and results of operations.

Competition

The toy industry is highly competitive. Many of the Company's
competitors have longer operating histories, broader product lines and greater
financial resources and advertising budgets than the Company. In addition, the
toy industry has nominal barriers to entry. Competition is based primarily on
the ability to design and develop new toys, procure licenses for popular
products, characters and trademarks, and successfully market products. Many of
the Company's competitors offer similar products or alternatives to

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the Company's products. The Company's products compete with other products for
retail shelf space. There can be no assurance that shelf space in retail stores
will continue to be available to support the Company's existing products or any
expansion of the Company's products and product lines. There can also be no
assurance that the Company will be able to continue to compete effectively in
this marketplace.

Employees

As of December 31, 1997, the Company and its subsidiaries employed 100
persons, 44 of which were engaged in manufacturing.

Executive Officers of the Company

The following table sets forth the names, ages and principal
occupations of each of the Company's executive officers and the year in which
each was elected an officer.

Name Age Title Officer Since
- --------------------------- -------- ------------------------- -------------------
<S> <C> <C> <C>
Morton J. Levy 76 Chairman of the Board of 1995
Directors
Barry Shapiro 55 President, Chief 1995
Executive Officer and
Director of the Company
David Schwartz 38 Chief Financial Officer 1996
and Treasurer
Seymour Rosenthal 67 Secretary 1996
Robert Pagano 43 Vice President-- 1996
Marketing and Product
Planning
Jerry Carroll 49 Vice President--Domestic 1997
Manufacturing Operations
Larry Scott 48 Vice President - Sales 1997

</TABLE>

Morton J. Levy was appointed as the Company's Chairman on March 30,
1995 and also served as the Chief Executive Officer from such date until July 1,
1997. Mr. Levy is a director and officer of each of the Company's subsidiaries.
He was appointed a director of the Company in October 1992 and was a consultant
to the Company from 1994 until March 1995. Mr. Levy has been engaged in the toy
business for over 35 years, having been a founder and principal officer of
Gabriel Industries, Inc., a diversified toy manufacturer. For more than five
years prior to his engagement as a consultant to the Company, Mr. Levy was a
private investor.

Barry Shapiro became the Chief Executive Officer of the Company on July
1, 1997. Mr. Shapiro was appointed President and Chief Operating Officer of the
Company on March 30, 1995. Mr. Shapiro

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is Chairman of the Company's Hong Kong subsidiaries and a director and officer
of each of the Company's subsidiaries. He was appointed a director of the
Company in April 1995. Mr. Shapiro has been engaged in the toy business for over
30 years. In November 1994, Mr. Shapiro was appointed Executive Vice President
of the Company. From December 1993 until November 1994, he served as Managing
Director for the Company's Hong Kong subsidiaries, Joyful World Enterprises,
Ltd. and Just Toys Products, Ltd. From October 1991 to November 1993, he was the
President of Packaging Specialists, a manufacturer and distributor of protective
packaging. From January 1984 to June 1991, Mr. Shapiro was Executive Vice
President and General Manager of Imagineering, Inc.

David Schwartz was appointed Chief Financial Officer and Treasurer of
the Company in November 1996. Mr. Schwartz is an officer of each of the
Company's United States subsidiaries. From January 1996 through November 1996,
Mr. Schwartz was self-employed as a consultant to a number of companies in the
consumer products business. From May 1994 through December 1995, he was the
Chief Financial Officer of Philips Industries, Inc., a distributor of women's
hair and cosmetic accessories. From December 1990 through May 1994, Mr. Schwartz
was the Controller of Ameriscribe Management Services, Inc., a provider of
facilities management services.

Seymour Rosenthal was appointed Secretary of the Company in November
1996. Mr. Rosenthal has been the Director of Internal Operations for the Company
since September 1995. From 1993 through 1995, he was a consultant working with
various financial institutions in the workout of bankrupt organizations. During
1992, Mr. Rosenthal was the Manager of Operations of Sunweave Linens, a
manufacturer and distributor of linens.

Robert Pagano was appointed Vice President - Marketing and Product
Planning of the Company in February 1996. From May 1994 through December 1995,
Mr. Pagano was the Vice President for Research and Development at Toy Biz, Inc.
Prior to that time, starting in November 1991 through May 1994, Mr. Pagano was
Vice President--Marketing of the Joint Venture and then of the Company.

Jerry Carroll was appointed Vice President - Domestic Manufacturing
Operations of the Company in September 1997. From 1994 through 1997, Mr. Carroll
was the Vice President - Operations of Empire Industries, Inc., a manufacturer
and distributor of toys. From 1991 through 1994, Mr. Carroll was Vice
President-Operations of Marchon, Inc., a manufacturer and distributor of toys.

Larry Scott was appointed Vice President - Sales of the Company in
February 1997. From 1994 through 1996, Mr. Scott was the Vice
President--Seasonal Product and Regional Sales Manager of Trendmasters, Inc., a
manufacturer and distributor of toys. From 1990 to 1994, Mr. Scott was the Vice
President of International Sales of Collegeville Imagineering, Inc.

ITEM 2 - PROPERTIES

On March 1, 1998, the Company moved its principal executive offices and
showroom to Dobbs Ferry, New York. The Company leases approximately 12,500
square feet of office space under a lease expiring in April 2008. The Company
believes that this facility is suitable for the Company's purposes for the
foreseeable future.

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The Company leases a showroom in the Toy Center Building at 200 Fifth
Avenue, New York, New York, consisting of approximately 3,200 square feet under
a lease expiring in April 2008. The showroom is adequate for the Company's
purposes for the foreseeable future and has sufficient capacity to accommodate
growth in the Company's product line as well as the large size of some of the
Company's new products.

Upon selling the Company owned office space to Hong Kong in April 1996,
the Company leased approximately 3,400 square feet of office space for a term
expiring in April 1999. The Company believes that this facility is adequate for
the Company's purposes for the foreseeable future.

The Company's Celt subsidiary owns an approximately 31,000 square foot
manufacturing facility on 8 acres of land in Brockport, New York. The facility
is made of metal panel and brick and is unencumbered. The Company manufactures
its foam balls and related products in that facility. The Company has increased
the production capacity of the Celt facility through investment in new equipment
and increases in manufacturing efficiencies. The Company believes that the
facility is suitable for the Company's current manufacturing activities. The
Company leases warehouse space in upstate New York primarily for Celt
manufactured products.

The Company utilizes public warehouse facilities in New Jersey,
California and Washington primarily for products imported from the Orient.

The Company's operations relating to play tables is based in Arkansas
City, Kansas. The Company leases 20,000 square feet of office, warehouse and
assembly space relating to this operation under a lease expiring in December
1998. The Company believes that the facility is suitable for the Company's
purposes for the foreseeable future. Additionally, public warehouse facilities
are utilized in Kansas and Iowa.

ITEM 3 - LEGAL PROCEEDINGS

1. 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.

2. 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.

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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.

3. The Company received approximately 1,000 complaints concerning its Micro-Bake
for Kids(TM) (the "Micro-Bake") product, all of which have been paid or accrued
for as of December 31, 1997 and December 31, 1996. The Company discontinued
selling this product in 1995. Virtually all of the complaints assert damage to
the Micro-Bake product and many complaints assert damage to the consumer's
microwave oven. The Company has product liability insurance related to this
matter. The Company is expected to be responsible for approximately 50% of such
claims and the insurance company is expected to pay the balance.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5 - MARKET FOR THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

Market Information

The Company's common stock, par value $.01 per share ("Common Stock";
Symbol: JUST), has been traded on the Nasdaq National Market since the Company's
initial public offering on October 1, 1992. The high and low sale prices for the
Common Stock as reported by the Nasdaq National Market from January 1, 1996
through December 31, 1997 are as follows:

Calendar Year High Low
------------- ---- ---

1996
First Quarter $2.000 $1.125
Second Quarter 2.688 1.000
Third Quarter 2.000 1.063
Fourth Quarter 2.313 1.313

1997
First Quarter $1.688 $1.250
Second Quarter 1.563 1.219
Third Quarter 1.688 1.188
Fourth Quarter 1.406 0.750

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Effective February 23, 1998, new continued listing standards were
adopted for securities trading on the Nasdaq National Market. The standards
include a $5,000,000 market value of public float and a one dollar minimum bid
price. Under applicable Nasdaq rules, the Company was advised on February 27,
1998 of its non-compliance with each such standard and was given until May 28,
1998 to achieve compliance. The Company may regain compliance if its stock
trades at or above the minimum requirements for at least 10 consecutive trade
days. In order to achieve the $5,000,000 market value of public float
requirement, the stock must trade at a price of approximately $1.40 per share.
The Company believes that its stock is eligible for listing on the Nasdaq
SmallCap Market and it anticipates determining prior to May 28, 1998 whether
listing on the Nasdaq National Market will continue or whether the Company will
make application for listing on the Nasdaq Small CapMarket.

Dividends and Distributions

Pursuant to the Company's Certificate of Incorporation, the Company's
Board of Directors has authorized 150,000 shares of non-voting Series A
Convertible Redeemable Preferred Stock, par value $1.00 per share ("Series A
Stock") of which 120,000 shares are issued and outstanding and 650,000 shares of
non-voting Series B Convertible Redeemable Preferred Stock, par value $1.00 per
share ("Series B Stock") of which 538,243 shares were issued and 521,854 shares
are outstanding at December 31, 1997 (16,389 shares were converted to Common
Stock during 1997). The Series A Stock and Series B Stock rank senior to the
Common Stock with respect to dividends. The Series A Stock and Series B stock
have cumulative dividends of $.06 per share and $.25375 per share, respectively,
per annum, payable quarterly. As long as any shares of either the Series A Stock
or Series B Stock remain outstanding, no cash dividends will be paid on the
Common Stock unless, at the time, all accrued and unpaid dividends and
applicable sinking fund obligations have been paid or provided for. The Company
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future.

Number of Stockholders

As of March 26, 1998, there were 159 holders of record of the Common
Stock. The Company has approximately 1,900 beneficial shareholders of the Common
Stock.

11
<PAGE>

ITEM 6 - SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data at and
for the periods presented. This information should be read in conjunction with
the Company's Financial Statements and related Notes.
<TABLE>
<CAPTION>

Year Ended December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>

Income Statement Data:
Net sales $ 23,259 $ 22,056 $ 19,588 $ 23,875 $ 42,568
Cost of goods sold 14,505 13,569 13,339 22,996 28,678
---------- ------- -------- ------- -------
Gross profit 8,754 8,487 6,249 879 13,890
---------- ------- -------- ------- -------
Expenses:
Merchandising, selling, warehousing and distribution 3,500 3,575 5,941 9,508 7,210
Royalties 1,009 710 1,868 3,081 4,713
General and administrative 3,571 3,762 4,506 3,779 3,268
---------- ------- -------- ------- -------
Operating income (loss) 674 440 (6,066) (15,489) (1,301)
Interest expense (623) (546) (357) (285) (34)
Interest and dividend income 8 13 141 467 363
Gain (writedown) related to investment in
Hong Kong property - 198 (1,578) -- --
Settlement of arbitration and related legal expenses -- -- (910) -- --
Other income (expense) 7 50 (17) (214) (8)
(Provision)/benefit for income taxes -- -- -- (275) 462
---------- ------- -------- ------- -------
Income (loss) before change in accounting principle
and preferred stock dividends and accretion 66 155 (8,787) (15,796) (518)
Cumulative effect of change in accounting principle -- -- -- 75 --
Preferred stock dividends and accretion (215) (109) -- -- --
---------- ------- -------- ------- -------
Net (loss) income attributable to common
stockholder $ (149) $ 46 $ (8,787) $(15,721) $ (518)
=========== ======= ========= ======== ========

Basic earnings (loss) per common share:

Before cumulative effect of change in accounting
principle $ (.04) $ .01 $ (2.12) $ (3.81) $ (.14)
Cumulative effect of change in accounting principle -- -- -- .02 --
---------- ------- -------- ------- -------
Basic earnings (loss) per share attributable to
common stockholders $ (.04) $ .01 $ (2.12) $ (3.79) $ (.14)
=========== ======= ========= ======== ========

Balance Sheet Data:

Working capital 3,025 2,742 2,273 8,948 25,773
Total assets 9,728 9,986 11,823 23,040 36,997
Short-term debt -- -- 360 316 312
Long-term debt -- -- 1,886 2,246 2,562
Stockholders' equity 5,959 6,053 6,008 14,594 30,396
</TABLE>

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company reported net income before preferred stock dividends and
accretion of approximately $66,000 for the year ended December 31, 1997,
compared to a profit of approximately $155,000 in the prior year.

12
<PAGE>

On June 28, 1996, the Company purchased certain assets of Table Toys.
The Table Toys products include a line of play tables which are compatible with
most brands of toy construction blocks and a line of toy construction blocks.
The acquisition costs totaled approximately $1,961,000 and were financed through
a combination of cash and the issuance of warrants and Series B Stock.

On February 1, 1996, the Company acquired the toy line and the rights
to use the "Welsh" name for toys. The Welsh toy line consists of doll
accessories, carriages and strollers. The cost to acquire this product line
required a modest down payment and the balance of the purchase price is based
upon a percentage of sales of these products over five years.

The following table sets forth the percentage of net sales for the
periods indicated and percentage changes from period to period of certain income
and expense items included in "Selected Financial Data".
<TABLE>
<CAPTION>

Percentage of Net Sales Period to Period
Year Ended December 31, Percentage Changes
------------------------------------------ -----------------------
1997 1996
vs vs
1997 1996 1995 1996 1995
----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales............................................. 100.00% 100.00% 100.00% 5.5% 12.6%
Cost of Goods Sold.................................... 62.4 61.5 68.1 6.9 1.7
Gross Profit.......................................... 37.6 38.5 31.9 3.1 35.8
Merchandising, selling, warehousing and
distribution expenses............................... 15.0 16.2 30.4 (2.1) (39.8)
Royalties............................................. 4.3 3.2 9.5 42.2 (62.0)
General and administrative expenses 15.4 17.1 23.0 (5.1) (16.5)
Operating income (loss)............................... 2.9 2.0 (31.0) 53.2 N/A

</TABLE>

Results of Operations

Year Ended December 31, 1997 and 1996

Net Sales

Net sales for 1997 increased 5.5% to $23,259,000 from $22,056,000 in
1996 primarily due to increased sales of the Company's Toy products. Net sales
of the Company's Sports toys increased 1.9% to $10,779,000 during 1997 from
$10,577,000 in 1996. Net sales increased in the Toys category by 8.7% to
$12,480,000 in 1997 from $11,479,000 in 1996. The increase in sales in the Toys
category was primarily attributable to increased sales from the doll carriage
and stroller line.

Gross Profit

Gross profit increased 3.1% to $8,754,000 in 1997 from $8,487,000 in
1996. Gross profit as a percentage of net sales was 37.6% for 1997 compared to
38.5% for 1996. As part of the Company's business

13
<PAGE>

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 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 net 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 Expenses

Merchandising, selling, warehousing and distribution expense decreased
2.1% to $3,500,000 for 1997 from $3,575,000 in 1996. This change was partly due
to decreased warehousing expenses during 1997.

During 1997, the Company significantly increased its investment in the
development, design and packaging of products to be introduced in 1998. The
amortization of such amounts will result in an increase in merchandising expense
in 1998.

Royalties

Royalty expense increased 42.2% to $1,009,000 in 1997 compared to
$710,000 in 1996 primarily due to an increase in net sales of products subject
to royalties.

General and Administrative Expenses

General and administrative expenses decreased 5.1% to $3,571,000 for
1997 from $3,762,000 in 1996. The Company implemented certain cost control
measures which reduced these expenses in 1997 and had an approximately $150,000
reduction in legal and professional fees in 1997. These reductions were partly
offset by an increase in noncash charges such as depreciation and amortization
associated with the acquisition by the Company of certain assets of Table Toys
in June 1996, which were only recorded in the second half of 1996.

Operating Profit

The Company had an operating income of $674,000 in 1997 compared with
an operating profit of $440,000 in 1996.

Interest Expense

Interest expense increased to $623,000 in 1997 as compared to $546,000
in 1996. This change was due primarily to increased borrowings from Milberg
Factors, Inc. ("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.

14
<PAGE>

Net Income

The Company had net income of $66,000 in 1997 as compared with net
income of $155,000 in 1996. During 1996, the Company recorded a non-recurring
gain on the sale of its Hong Kong property of $198,000.

Basic Income (Loss) Per Share Attributable to Common Stockholders

In 1997, the Company deducted dividends paid on its preferred stock
outstanding, and the accretion of the Series B Stock issued in 1996 to its
redemption value as expenses in computing net income attributable to common
stockholders. During 1996, dividends and accretion were only recorded for the
last six months of the year.

Basic loss per share attributable to common stockholders for 1997
totaled $.04 per share compared to a basic earnings per share attributable to
common stockholders of $.01 per share in 1996 based upon 4,157,000 and 4,150,000
weighted average shares outstanding during 1997 and 1996, respectively.

Year ended December 31, 1996 and 1995

Net Sales

Net sales in 1996 increased 12.6% to $22,056,000 from $19,588,000 in
1995 primarily due to increased sales of the Company's Sport products.

Net sales of the Company's Sport products increased 31.1% to
$10,577,000 in 1996 compared to $8,066,000 in 1995 due primarily to the
introduction of new products.

Net sales of the Company's Toys products changed less than 1% due to
the sale of discontinued products in 1995, which was offset in 1996 by the
addition of the Table Toys and Welsh products.

Gross Profit

Gross profit in 1996 increased 35.8% to $8,487,000 from $6,249,000 in
1995. Gross profit as a percentage of net sales was 38.5% in 1996 as compared to
31.9% in 1995. The increase in the gross profit, in dollars and as a percentage
of sales, is primarily due to the increase in sales in 1996 over 1995 and the
writedown in 1995 of unamortized tooling of $223,000 and of slow-moving or
obsolete inventory of $539,000.

Merchandising, Selling and Distribution Expenses

Merchandising, selling, warehousing and distribution expenses decreased
39.8% to $3,575,000 from $5,941,000 in 1995 due to significant reductions in
expenses in this area. In addition, the Company wrote-down barter credits
totaling $976,000 in 1995.

15
<PAGE>

Royalties

Royalties decreased 62% to $710,000 from $1,869,000 in 1995. As a
percentage of net sales, royalties decreased to 3.2% from 9.5% in 1995. This is
primarily due to reduced sales of licensed products in 1996. In addition, the
Company expensed prepaid and accrued royalties with respect to products that
were discontinued or where sales were below expectations in 1995 totaling
$375,000.

General and Administrative Expenses

General and Administrative expenses decreased 16.5% to $3,762,000 in
1996 from $4,506,000 in 1995 due to continued decreases in expenses in this
area.

Operating Profit (Loss)

The Company had operating income of $440,000 in 1996 compared with an
operating loss of $6,066,000 in 1995.

Gain (Writedown) Related to Investment in Hong Kong Property

The 1996 figures include approximately $198,000 of income from the sale
of the Company's Hong Kong property which was recognized because the final
selling price was marginally higher than expected and selling expenses were less
than expected. In 1995, the Company wrote down the value of its property in Hong
Kong to its then estimated realizable value.

Net Income (Loss)

The Company had a net income of $155,000 in 1996 compared to a net loss
of $8,787,000 in 1995.

Basic Earnings (Loss) Attributable to Common Stockholders

In 1996, 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 stockholders' equity during the year and
deducted these expenses in computing net income attributable to common
stockholders. During 1995, no material amounts of dividends were earned.

Basic earnings per share attributable to common stockholders for 1996
totaled $0.01 per share compared to a basic loss per share attributable to
common stockholders of $2.12 per share in 1995 based upon 4,150,000 weighted
average shares outstanding in each year.

Other Information

During the past several years, the Company has experienced a shift in
its revenues to the second half of the year with fourth quarter revenues
becoming increasingly significant. 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 PlayTable 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

16
<PAGE>

customer order patterns which vary from one year to the next largely because of
the difference 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 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 $1,193,000 at December 31, 1997 compared to
$1,780,000 at December 31, 1996.

Liquidity and Capital Resources

The Company's primary sources of liquidity and capital resources in
1997 were funds provided from operations and its Milberg credit facility. The
Company's primary sources of liquidity and capital resources in 1996 were funds
provided from operations, proceeds from the sale of the Company's Hong Kong
facility as well as available credit facilities. At December 31, 1997, working
capital was $3,025,000 compared to approximately $2,742,000 at December 31,
1996.

The Company's factoring agreement with 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 book value of the
Company's eligible 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.

In April 1996, the Company sold its Hong Kong property. In 1995, the
Company wrote down the carrying value of the facility by $1,578,000 to reflect
the Company's estimate of the net proceeds of the sale. The sale resulted in
additional liquidity and reduced costs for the Company by permitting the Company
to lease space at a cost below the carrying costs of the former facility. The
sale yielded net proceeds to the Company of approximately $842,000 after payment
of the mortgage and the costs associated with the sale.

The Company's acquisition of the Welsh product line required a modest
down payment. The balance of the purchase price is based upon a percentage of
sales of Welsh products over five years.

The purchase price for the Table Toys product line was paid partly in
shares of Series B Stock and partly in cash (approximately $400,000). The
Company financed the cash portion of this acquisition through borrowings under
its credit lines with Milberg. The Series B Stock pays a 7% cumulative dividend
payable at the Company's election in cash or preferred stock based upon a
liquidation value of $3.625 per share and is subject to mandatory redemption on
December 31, 2005. The Company has certain sinking fund obligations with respect
to such Series B Stock during the last four years prior to redemption.
Accordingly, the Company does not believe that these transactions will have a
material adverse affect on the Company's liquidity during the next five years.

During 1997, all dividends paid by the Company on the Series A Stock
and Series B Stock were in cash. During 1997, 16,389 shares of Series B Stock
were converted into an equivalent number of shares of Common Stock.

17
<PAGE>

To the extent the Company may be required to pay any claims relating to
its discontinued Micro-Bake product, the Company believes that its current
reserves will be sufficient to cover such payments.

The Company has a bonus pool that enables employees to participate in
the Company's profits. The pool for fiscal 1996 and 1997 consists of 20% of the
first $1,000,000 of pre-tax earnings, as defined, 15% of the next $1,000,000 of
pre-tax earnings and 10% of pre-tax earnings over $2,000,000. For 1996, pre-tax
earnings was defined as pre-tax income before preferred stock dividends and
accretion. For 1997, pre-tax earnings was defined as pre-tax earnings after
deduction for preferred stock dividends and accretion. The bonus pool was
approximately $31,000 for 1996. There was no bonus pool for 1997. The bonus pool
is intended to provide performance-based compensation and to reward those who
contribute to the Company's success. The bonus arrangements should not adversely
affect the Company's liquidity since it is only payable if earned.

The Company believes that its cash flow from operations and available
borrowings will be adequate to meet its obligations for the ensuing year.

Year 2000 Compliance

The Company has reviewed its computer systems and developed a plan to
achieve proper processing of transactions in the year 2000 and beyond. As part
of the Company's decisions to perform certain administrative functions
internally, effective January 1, 1997, the Company installed new software for
its main processing systems which is year 2000 compliant. The Company is
evaluating the other systems throughout the organization and believes that all
of its computer systems will be year 2000 compliant by the middle of 1999. Costs
incurred to date to implement the plan have not been material and are not
expected to be material to operating results in the future. However, there can
be no assurance that the systems of other companies on which the Company's
systems rely will also be timely converted or that any such failure to convert
by another company would not have an adverse effect on the Company's systems.
Any significant disruption of the Company's ability to communicate
electronically with its business partners could negatively impact the Company's
business, financial condition and results of operations.

Inflation

The Company does not believe that the relatively moderate rates of
inflation in recent years have had a significant effect on its net sales or
profitability.

Seasonality

18
<PAGE>

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.

Backlog

Certain Cautionary Factors

Certain factors discussed above, in addition to those discussed
elsewhere in this Report, should be considered carefully in evaluating the
Company and its business. See the introductory paragraph of this Annual Report
on Form 10-K. See also "Business -- Manufacturing," " -- Seasonality," "--
Government Regulation" and "-- Certain Cautionary Factors."

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See page F-1.

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

19
<PAGE>

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Identification of Directors

The following table sets forth the names, ages and principal
occupations of each of the Company's directors and the year in which each was
elected a director.

Name Age Principal Occupation Director Since
---- --- -------------------- --------------
<S> <C> <C> <C>
Roger Gimbel 67 Vice Chairman of the Board of Directors; 1992
Chairman of Worldwide Dreams LLC

Charmaine Jefferson 44 Director of the Company; attorney; 1995
` President of Kelan Resources

Howard Kaufman 71 Director of the Company; private investor 1992

Morton J. Levy 76 Chairman of the Board of Directors 1992

Irwin Naitove 80 Director of the Company; private investor 1995

Donald D. Shack 69 Director of the Company; member of the law 1992
firm Shack & Siegel, P.C.

Barry Shapiro 55 Director, President and Chief Executive 1995
Officer of the Company
</TABLE>

Roger Gimbel was appointed Vice Chairman of the Board of Directors,
Chief Financial Officer and Vice President of the Company in August 1992. Mr.
Gimbel resigned as Chief Financial Officer and Vice President of the Company in
April 1995. Mr. Gimbel was one of the founders of the Company. Mr. Gimbel is the
Chairman of Worldwide Dreams LLC, an importer and distributor of personal
accessories, small leather goods and related items.

Charmaine Jefferson was appointed a director of the Company in July
1995. Ms. Jefferson is an attorney and President of Kelan Resources, a
non-profit arts management consulting firm. From June 1995 to April 1996, Ms.
Jefferson was self-employed as a consultant providing management advice to
not-for-profit corporations. From August 1992 to June 1995, Ms. Jefferson was
employed as the Executive Director of the Dance Theatre of Harlem, Inc. From
1988 through August 1992, Ms. Jefferson was Deputy and Acting Commissioner for
the New York City Department of Cultural Affairs.

Howard Kaufman was appointed a director of the Company in October 1992.
Mr. Kaufman has been engaged in the toy business for approximately 34 years,
having been a founder and principal officer of KayBee Stores, a division of the
Melville Corporation. For more than the past five years, Mr. Kaufman has been a
private investor. Mr. Kaufman is also a director of Berkshire Life Insurance
Company.

20
<PAGE>

Irwin Naitove was appointed a director of the Company in May 1995. Mr.
Naitove has been engaged in corporate finance for the past 45 years. For more
than the past five years, Mr. Naitove has been a private investor.

Donald D. Shack was appointed a director of the Company in August 1992.
Mr. Shack is an attorney and, since April 1993, has been a member of the law
firm of Shack & Siegel, P.C., general counsel to the Company. From January 1990
through March 1993, Mr. Shack was a member of the law firm of Whitman & Ransom
which served as general counsel to the Company during that period. Mr. Shack is
also a director of the following publicly-held companies: Andover Togs, Inc.,
Ark Restaurants Corp. and International Citrus Corporation.

Barry Shapiro became the Chief Executive Officer of the Company on July
1, 1997. Mr. Shapiro was appointed President and Chief Operating Officer of the
Company on March 30, 1995. Mr. Shapiro is Chairman of the Company's Hong Kong
subsidiaries and a director and officer of each of the Company's subsidiaries.
He was appointed a director of the Company in April 1995. Mr. Shapiro has been
engaged in the toy business for over 30 years. In November 1994, Mr. Shapiro was
appointed Executive Vice President of the Company. From December 1993 until
November 1994, he served as Managing Director for the Company's Hong Kong
subsidiaries, Joyful World Enterprises, Ltd. and Just Toys Products, Ltd. From
October 1991 to November 1993, he was the President of Packaging Specialists, a
manufacturer and distributor of protective packaging. From January 1984 to June
1991, Mr. Shapiro was Executive Vice President and General Manager of
Imagineering, Inc.

Identification of Executive Officers

See Item 1. "Business -- Executive Officers of the Company."

Compliance with Section 16(a) of the Securities Exchange Act

Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities to file reports
of ownership and changes in ownership on Forms 3, 4 and 5 with the Commission
and the National Association of Securities Dealers, Inc. Officers, directors and
greater than ten percent stockholders are required by the Commission's
regulation to furnish the Company with copies of all Forms 3, 4 and 5 they file.

Based solely on the Company's review of the copies of such forms it has
received and written representations that no Form 5 is required to be filed, the
Company believes that all of its officers, directors and greater than ten
percent beneficial owners complied with all filing requirements applicable to
them with respect to transactions during fiscal 1997.

21
<PAGE>

ITEM 11 - EXECUTIVE COMPENSATION

The Summary Compensation Table below sets forth certain information
concerning compensation paid or accrued in 1997 to the Chief Executive Officer
of the Company and the four executive officers whose total salary and bonus in
1997 exceeded $100,000.

Summary Compensation Table
Long-Term
Compensation
----------------
Annual Compensation Options All Other
-----------------------------
Name and Principal Position Year Salary ($) Bonus ($)(1) Awarded (#) Compensation ($)
- ----------------------------------- ------- ----------- -------------- ---------------- --------------------

<S> <C> <C> <C> <C> <C> <C>
Morton J. Levy(2) 1997 113,365 - 50,000 50,000(3)
Chairman of the Board 1996 229,327 9,300 50,000 -
1995 166,833 - 85,000 -

Barry Shapiro(4) 1997 237,197 - 100,000 -
President and Chief 1996 217,778 7,750 30,000 -
Executive Officer 1995 185,000 - 39,000 -

David Schwartz(5)(7) 1997 130,000 - 10,000 -
Chief Financial Officer and 1996 17,395 500 15,000 -
Treasurer

Robert Pagano(5) 1997 139,808 - - -
Vice President - Marketing and 1996 142,850 2,000 20,000 -
Product Planning

Larry Scott (6)(7) 1997 138,384 - 15,000 34,039(8)
Vice President - Sales

</TABLE>

- -------------------
(1) Represents bonuses paid in 1997 relating to the 1996 fiscal year.
(2) Mr. Levy was appointed as Chairman and Chief Executive Officer of the
Company in 1995. In July 1997, Mr. Shapiro was appointed Chief
Executive Officer and Mr. Levy remained as Chairman of the Company.
(3) Represents consulting fees paid pursuant to Mr. Levy's agreement with
the Company.
(4) Mr. Shapiro was appointed as an executive officer of the Company at the
end of 1994.
(5) Mr. Schwartz and Mr. Pagano were appointed as executive officers of the
Company in 1996.
(6) Mr. Scott was appointed as an executive officer of the Company in 1997.
(7) Mr. Schwartz started with the Company in November 1996. Mr. Scott
started with the Company in January 1997.
(8) Represents amounts paid to Mr. Scott for relocation expenses and
related matters.

22
<PAGE>

The following table sets forth certain information with respect to
options to purchase Common Stock granted in fiscal year 1997 under the Company's
1992 Incentive and Non-Qualified Stock Option Plan for the executive officers
named in the Summary Compensation Table above.

Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>

Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option TermZ
- ------------------------------------------------------------------------------- ----------------------------

Percent of Total
Options Granted Exercise
to Employees in Price Expiration
Name Options Granted (#) 1997 ($/Share) Date 5% ($) 10% ($)
------ ------------------- ----- --------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Morton J. Levy 50,000 23.1% 1.3750 6/29/07 43,237 109,570
Barry Shapiro 100,000 46.2% 1.5000 6/30/07 -- 59,765
David Schwartz 10,000 4.6% 1.2810 6/02/07 8,058 20,421
Larry Scott 15,000 6.9% 1.5000 1/06/07 14,150 35,859

</TABLE>

The following table details the value on December 31, 1997 of options
to purchase Common Stock held by the executive officers named in the Summary
Compensation Table above.

Fiscal Year End Option Values

Number of Unexercised Options at Value of Unexercised in-the-Money
DEcember 31, 1997 Options at December 31, 1997(1)
-------------------------------------- -------------------------------------

Name Exercisable (#) Unexercisable (#) Exercisable (#) Unexercisable (#)
- ---- --------------- ----------------- --------------- -----------------

<S> <C> <C> <C> <C>
Morton J. Levy 173,900 27,100 --- ---
Barry Shapiro 29,100 152,400 --- ---
David Schwartz 3,000 22,000 --- ---
Robert Pagano 4,000 16,000 --- ---
Larry Scott --- 15,000 --- ---
</TABLE>

- --------------
(1) Based on closing price of the Common Stock on the Nasdaq National Market
on December 31, 1997 of $0.875 per share.

Compensation Arrangements

In 1997, the Compensation Committee of the Board of Directors (the
"Compensation Committee") amended the company wide bonus pool that enables
employees of the Company to participate in the profits the Company earns in 1997
and 1998. The pool consists of 20% of the first $1,000,000 of such pre-tax
earnings after preferred stock dividends and accretion, 15% of the next
$1,000,000 of such pre-tax earnings and 10% of all such pre-tax earnings over
$2,000,000. No bonuses were earned for 1997.

In December 1996, Mr. Levy entered into an agreement with the Company
which provided for Mr. Levy to relinquish the post of Chief Executive Officer of
the Company on July 1, 1997, render

23
<PAGE>

consulting services to the Company thereafter and remain as Chairman of the
Board. Until June 30, 1997, Mr. Levy received a base salary at the rate of
$225,000 per annum. The Company paid Mr. Levy at the rate of $100,000 per annum
during the period from July 1, 1997 through December 31, 1997, and will pay Mr.
Levy $75,000 per annum during the period from January 1, 1998 through December
31, 1998, and $50,000 per annum during the period from January 1, 1999 through
December 31, 1999. Such payments will be made to Mr. Levy's beneficiary in the
event of his death. Through December 31, 1999, the Company will provide Mr. Levy
with the use of an office, private telephone and secretarial services. In
addition, on each of December 5, 1996 and June 30, 1997, the Company granted Mr.
Levy a fully vested and exercisable ten year option to purchase up to 50,000
shares of Common Stock at an exercise price equal to the closing price of the
Common Stock on the Nasdaq National Market on the grant date ($1.50 on December
of 1996; $1.375 on June 30, 1997). Neither of such options is governed by the
Company's stock option plan. Both options will remain outstanding for their full
term until exercised, whether or not Mr. Levy is still a Director or consultant
to the Company.

On July 1, 1997, Mr. Shapiro entered into an employment agreement with
the Company in connection with his appointment as Chief Executive Officer. The
agreement provides for Mr. Shapiro to be paid $250,000 per year and to
participate in the company wide bonus pool. Mr. Shapiro was also granted an
option to purchase 100,000 shares of Common Stock at an exercise price of $1.50
per share. The option is exercisable by Mr. Shapiro in installments of 25,000
shares when the price of the Common Stock reaches the following stock prices for
a minimum of 30 trading consecutive trading days: $3.00; $4.00; $5.00; and
$6.00. Within one year after a change in control (as defined in the agreement)
of the Company if Mr. Shapiro's employment with the Company is terminated
without cause or if Mr. Shapiro voluntarily elects to terminate his employment
with the Company, the Company will (i) pay Mr. Shapiro a lump sum amount equal
to 12 months of his base salary in effect at the time of the change in control,
(ii) provide Mr. Shapiro with medical, insurance and other benefits for 12
months after termination and (iii) provide Mr. Shapiro use of an office and
secretarial assistance for six months after termination. If Mr. Shapiro or the
Company elect to terminate Mr. Shapiro's employment within one year following a
change in control, at the Company's request Mr. Shapiro will continue to be
employed by the Company at his then current salary and benefits for up to six
months. However, Mr. Shapiro is under no obligation to continue his employment
if he has elected to terminate his employment because (i) his position as Chief
Executive Officer or duties, performance requirements or working conditions with
respect thereto have been changed, (ii) he ceases to serve as a member of the
Board of Directors, (iii) his base salary in effect prior to the change in
control is reduced or (iv) he is required to relocate.

All non-officer directors of the Company annually receive a fee of
$10,000 per year and options to purchase 5,000 shares at the market price of the
Common Stock on the anniversary of their election as a member of the Board of
Directors.

24
<PAGE>

ITEM 12 - SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information at March 26, 1998,
as to shares of Common Stock beneficially owned by (i) each person known by the
Company to be the beneficial owner of more than five percent of the outstanding
Common Stock, (ii) the Company's directors, the Chief Executive Officer and the
other four executive officers identified in the Summary Compensation Table above
and (iii) the directors and officers of the Company as a group.

Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (1) Class
------------------ ------------------------ ------
<S> <C> <C>
Roger Gimbel ....................................... 421,230(2) 10.1%
350 Fifth Avenue
New York, New York 10118
Morton J. Levy...................................... 322,295(3) 7.4%
20 Livingstone Avenue
Dobbs Ferry, New York 10522
G. Gimbel\M. Meyers Voting Trust ................... 299,683(4) 7.2%
c/o Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
FMR Corp. .......................................... 253,900(5) 6.1%
82 Devonshire Street
Boston, Massachusetts 02109
Barry Shapiro ...................................... 58,066(6) 1.4%
20 Livingstone Avenue
Dobbs Ferry, New York 10522
Donald D. Shack..................................... 22,000(7) Less than 1%
530 Fifth Avenue
New York, New York 10036
David Schwartz...................................... 10,500(8) Less than 1%
20 Livingstone Avenue
Dobbs Ferry, New York 10522
Howard Kaufman...................................... 6,900(9) Less than 1%
Bishops Estate
Lenox, Massachusetts 01290
Robert Pagano....................................... 6,000(10) Less than 1%
20 Livingstone Avenue
Dobbs Ferry, New York 10522

</TABLE>

25
<PAGE>

Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (1) Class
------------------ ------------------------ ------
<S> <C> <C>
Charmaine Jefferson ................................ 3,000(8) Less than 1%
2003 Victoria Avenue
Los Angeles, California 90016
Irwin Naitove....................................... 3,000(8) Less than 1%
RR1
Box 630
Mount Holly, Vermont 05758
Larry Scott 3,000(8) Less than 1%
20 Livingstone Avenue
Dobbs Ferry, New York 10522
All directors and executive officers as 859,491(11) 19.4%
a group (twelve persons)..........................
</TABLE>

- ---------------
(1) Except as otherwise indicated in the following footnotes, the persons
listed in the table own of record the shares of Common Stock opposite
their name and have sole voting and investment power with respect to such
shares of Common Stock.

(2) Includes 25 shares of Common Stock owned by the Voting Trust listed below
and 12,000 shares issuable upon exercise of currently exercisable stock
options granted under the Company's 1992 Incentive and Non-Qualified Stock
Option Plan (the"Plan").

(3) Includes 1,500 shares owned by Mr. Levy as custodian for his grandson
under the Uniform Gifts to Minors Act and 73,900 shares issuable upon
exercise of currently exercisable stock options granted under the Plan and
100,000 shares issuable upon exercise of a separate currently exercisable
stock option.

(4) Based upon information set forth in Schedule 13D filed by Geoffrey Gimbel
and Murray Meyers as Trustees under Voting Trust dated as of October 7,
1997 by and between Geoffrey Gimbel, Roger Gimbel, Bradley Meyers, Gary
Meyers, Lawrence Meyers, Murray Meyers and Susan Schulman (the "Voting
Trust") on or about February 11, 1998. Geoffrey Gimbel as Trustee has sole
voting power over 199,784 shares and Murray Meyers as Trustee has sole
voting power over 99,884 shares.

(5) Based upon information set forth in Schedule 13G filed by FMR Corp. with
the Securities and Exchange Commission on or about February 14, 1998,
Fidelity Management and Research Company ("Fidelity"), a wholly-owned
subsidiary of FMR Corp., is the beneficial owner of 253,900 shares or 6.1%
of the Common Stock of the Company as a result of acting as investment
adviser to several investment companies. Mr. Edward C. Johnson 3d, FMR
Corp., through its control of Fidelity, and the aforementioned investment
companies each has sole power to dispose of these 253,900 shares. The
ownership of one investment company, Fidelity Advisor Strategic
Opportunities Fund, amounted to 253,900 shares or 6.1% of the Common Stock
outstanding at December 31, 1997.

(6) Includes 31,400 shares issuable upon exercise of currently exercisable
stock options granted under the Plan.

(7) Includes 12,000 shares issuable upon exercise of currently exercisable
stock options granted under the Plan.

26
<PAGE>

(8) Includes 3,000 shares issuable upon exercise of currently exercisable
stock options granted under the Plan.

(9) Includes 6,900 shares issuable upon exercise of currently exercisable
stock options granted under the Plan.

(10) Includes 6,000 shares issuable upon exercise of currently exercisable
stock options granted under the Plan.

(11) Includes 257,700 shares issuable upon exercise of currently exercisable
stock options.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Donald D. Shack, a director of the Company, is a shareholder and
director of Shack & Siegel, P.C., general counsel to the Company

PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K

(a)(1) Financial Statements: Page

Index to Financial Statements F- 1

Report of Independent Auditors F- 2

Consolidated Balance Sheets --
December 31, 1997 and 1996 F- 6

Consolidated Statements of Operations --
For each of the years ended
December 31, 1997, 1996 and 1995 F- 7

Consolidated Statements of Changes in
Stockholders' Equity -- For each of the
years ended December 31, 1997, 1996 and 1995 F- 8

Consolidated Statements of Cash Flows --
For each of the years ended
December 31, 1997, 1996 and 1995 F- 9

Notes to Consolidated Financial Statements F-10

(2) Financial Statement Schedules:

Schedule II -- Valuation and Qualifying Accounts F-27

27
<PAGE>

(3) 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) (the "Form S-1").

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).

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 (the "1995 3rd Quarter 10-Q").

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.

4.4 Stock Option, dated December 5, 1996, granted to Morton J.
Levy, incorporated by reference to Exhibit 4.4 of the
Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 15, 1997 (the "1997 1st Quarter
10-Q").

4.5 Stock Option, dated June 30, 1997, granted to Morton J. Levy,
incorporated by reference to Exhibit 4.4 of the Quarterly
Report on Form 10-Q filed with the Securities and Exchange
Commission on August 14, 1997 (the "1997 2nd Quarter 10-Q").

10.1 Form of Indemnification Agreement between the Company and each
of its Directors, incorporated by reference to Exhibit 10.12
of the Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on August 14, 1995 (the "1995 2nd
Quarter 10-Q").

28
<PAGE>

10.2 1992 Incentive and Non-Qualified Stock Option Plan,
incorporated by reference to Exhibit 10.4 of the Form S-1.

10.3 Amended and Restated 1992 Incentive and Non-Qualified Stock
Option Plan, incorporated by reference to Exhibit 10.3 of the
1996 3rd Quarter 10-Q.

10.4 Form of Underwriters Warrant Agreement between the Company and
Gruntal & Co., Incorporated and Gerard Klauer Mattison & Co.,
Inc., incorporated by reference to Exhibit 10.12 of the Form
S-1.

10.5 Factoring Agreement dated as of July 26, 1995 with Milberg
Factors, Inc., incorporated by reference to Exhibit 10.17 of
the Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 4, 1995 (the "August 1995 Form
8-K").

10.6 Letter dated July 20, 1995 from Milberg Factors, Inc. to the
Company, incorporated by reference to Exhibit 10.18 of the
August 1995 Form 8-K.

10.7 Amendment dated March 21, 1996 between Milberg Factors, Inc.
and the Company, incorporated by reference to Exhibit 10.13 of
the 1995 10-K.

10.8 Settlement Agreement dated October 30, 1995 between the
Company, Allan Rigberg, Rose Evangelista and JTI Toys, Inc.
incorporated by reference to Exhibit 10.10 of the 1995 3rd
Quarter 10-Q.

10.9 Warrant Agreement dated as of January 1, 1996 between Just
Toys, Inc. and Patricof & Co. Capital Corp., incorporated by
reference to Exhibit 10.11 of the Annual Report on Form 10-K
with respect to the year ended December 31, 1996 (the "1995
10-K").

10.10 Agreement for Sale and Purchase of the Hong Kong property
dated March 22, 1996 between Just Toys Products Limited and
Advanced Chemicals Limited, incorporated by reference to
Exhibit 10.12 of the 1995 10-K.

10.11 Asset Purchase Agreement dated January 22,1996 between the
Company and Table Toys, Inc. (the "Asset Purchase Agreement"),
incorporated by reference to Exhibit 2.1 of the July 1996 Form
8-K.

10.12 Amendment dated April 12, 1996 to the Asset Purchase
Agreement, incorporated by reference to Exhibit 2.2 of the
July 1996 Form 8-K.

10.13 Second Amendment dated April 15, 1996 to the Asset Purchase
Agreement, incorporated by reference to Exhibit 2.3 of the
July 1996 Form 8-K.

10.14 Agreement, dated December 5, 1996 between the Company and
Morton J. Levy incorporated by reference to Exhibit 10.1 of
the 1997 1st Quarter 10-Q.

29
<PAGE>

10.15 Security Agreement - Goods and Chattels, dated May 9, 1997
between Milberg Factors, Inc. ("Milberg") and Celt Specialty
Partners, Inc. ("Celt") incorporated by reference to Exhibit
10.1 of the 1997 2nd Quarter 10-Q.

10.16 Guaranty, dated May 9, 1997, between Milberg and Celt,
incorporated by reference to Exhibit 10.2 of the 1997 2nd
Quarter 10-Q.

10.17 Mortgage and Security Agreement, dated May 9, 1997, made by
Celt in favor of Milberg incorporated by reference to Exhibit
10.3 of the 1997 2nd Quarter 10-Q.

10.18 Employment Agreement, dated July 1, 1997, between the Company
and Barry Shapiro, incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on November 13, 1997.

21 Subsidiaries of the Company incorporated by reference to
Exhibit 10.21 of the 1995 10-K.

*23 Consent of Ernst & Young LLP

*27 Financial Data Schedule

- --------------------------

* Filed herewith

(b) Reports on Form 8-K:

None

30
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 31st day of March, 1998.

JUST TOYS, INC.

By: /s/ Barry Shapiro
-----------------------------
Barry Shapiro
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed below by the following persons on
behalf of the Company in the capacities and on the date indicated.
<TABLE>
<CAPTION>

<S> <C> <C>
Name Title Date
---- ----- ----

/s/ Morton J. Levy Chairman of the Board March 31, 1998
- -------------------------------
(Morton J. Levy)

/s/ Barry Shapiro President and Chief March 31, 1998
- ------------------------------- Executive Officer,
(Barry Shapiro) Director

/s/ David Schwartz Chief Financial Officer, March 31, 1998
- ------------------------------- Treasurer and Principal
(David Schwartz) Accounting Officer

- ------------------------------- Director March __, 1998
(Howard Kaufman)

/s/ Roger Gimbel Director March 31, 1998
- -------------------------------
(Roger Gimbel)

/s/ Donald D. Shack Director March 31, 1998
- -------------------------------
(Donald D. Shack)

/s/ Irwin Naitove Director March 31, 1998
- -------------------------------
(Irwin Naitove)

/s/ Charmaine Jefferson Director March 31, 1998
- -------------------------------
(Charmaine Jefferson)

</TABLE>

<PAGE>

FORM 10-K
ITEM 14(A)(1) AND (2)

JUST TOYS, INC. AND SUBSIDIARIES

LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENTS OF JUST TOYS, INC. AND
SUBSIDIARIES ARE INCLUDED IN ITEM 8:
PAGE
NUMBER
------

REPORT OF INDEPENDENT AUDITORS F-2

BALANCE SHEETS AS AT DECEMBER 31, 1997 AND 1996 F-3

STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995 F-4

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 F-5

STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995 F-6

NOTES TO FINANCIAL STATEMENTS F-7

THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENT SCHEDULE OF
JUST TOYS, INC. AND SUBSIDIARIES IS INCLUDED IN ITEM 14(A)(2):

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS F-27

ALL OTHER SCHEDULES FOR WHICH PROVISION IS MADE IN THE APPLICABLE REGULATION OF
THE SECURITIES AND EXCHANGE COMMISSION ARE NOT REQUIRED UNDER THE RELATED
INSTRUCTIONS OR ARE INAPPLICABLE AND, THEREFORE, HAVE BEEN OMITTED.

F-1
<PAGE>

Report of Independent Auditors

We have audited the accompanying consolidated balance sheets of Just Toys, Inc.
and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about 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.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Just Toys, Inc.
and subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ERNST & YOUNG LLP

New York, New York
February 26, 1998

F-2
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

ASSETS December 31,
-----------------------------------
1997 1996
------ ------
<S> <C> <C>
Current assets:
Cash ............................................. $ 213,789 $ 153,707
Accounts receivable, net of allowances of
$688,000 and $603,000 (Note 5).................. 97,778 287,578
Inventories (Note 6) ............................. 3,713,981 4,113,300
Prepaid and refundable income taxes............... 39,269 28,914
Prepaid expenses and other current assets (Note 7) 1,710,888 1,118,128
----------- -----------
Total current assets ...................... 5,775,705 5,701,627

Property and equipment, at cost, net of accumulated
depreciation and amortization (Notes 5 and 8)..... 3,223,172 3,504,468
Goodwill, net of accumulated amortization (Note 3)... 614,836 660,376
Other assets......................................... 114,535 119,650
----------- -----------
TOTAL...................................... $ 9,728,248 $ 9,986,121
=========== ===========

LIABILITIES

Current liabilities:
Accounts payable ................................. $ 1,853,246 $ 1,637,949
Accrued liabilities (Note 10)..................... 897,153 1,321,575
----------- -----------
Total current liabilities ................. 2,750,399 2,959,524

Series B Convertible Redeemable Preferred Stock,
650,000 shares authorized, 521,854 and 538,243
shares issued and outstanding (liquidation value
$1,891,721 and $1,951,131)(Note 4)................ 1,018,990 972,778
----------- -----------
Total liabilities ......................... 3,769,389 3,932,302
----------- -----------

Commitments and contingencies (Note 11)

STOCKHOLDERS' EQUITY

Stockholders' equity:
Preferred stock, $1.00 par value, 1,000,000 shares
authorized (Note 4):
Series A Convertible Redeemable Preferred
Stock, 150,000 shares authorized, 120,000
shares issued and outstanding (liquidation
value $120,000) ..... ..................... 120,000 120,000
Common stock, $.01 par value, 15,000,000 shares
authorized, 4,178,167 and 4,150,000 issued and
outstanding..................................... 41,782 41,500
Additional paid-in capital ....................... 29,849,043 29,795,768
Accumulated deficit............................... (24,051,966) (23,903,449)
----------- -----------
Total stockholders' equity................. 5,958,859 6,053,819
----------- -----------

TOTAL...................................... $ 9,728,248 $ 9,986,121
=========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-3
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net sales (Note 12)..................... $23,259,054 $22,055,784 $19,588,348

Cost of goods sold ..................... 14,504,663 13,568,684 13,338,943
----------- ----------- -----------

Gross profit............................ 8,754,391 8,487,100 6,249,405
----------- ----------- -----------

Expenses:
Merchandising, selling,
warehousing and distribution....... 3,500,068 3,574,716 5,941,439
Royalties ........................... 1,009,028 709,656 1,868,838
General and administrative........... 3,570,950 3,762,413 4,505,324
----------- ----------- -----------
Total ........................ 8,080,046 8,046,785 12,315,601
----------- ----------- -----------

Operating income (loss)................. 674,345 440,315 (6,066,196)
Other income (expenses):
Interest expense..................... (623,277) (545,800) (357,562)
Interest and dividend income......... 7,945 12,927 141,440
Gain (write down) related to
investment in Hong Kong property... 197,503 (1,578,000)
Settlement of arbitration &
related legal expenses............. (909,594)
Other income (expense)............... 7,551 50,469 (17,012)
----------- ----------- -----------

Net income (loss)....................... 66,564 155,414 (8,786,924)

Preferred stock dividends and
accretion (Note 4)................... 215,081 109,512
----------- ----------- -----------

Net (loss) income attributable to
common stockholders ................. $ (148,517) $ 45,902 $(8,786,924)
=========== =========== ===========

Weighted average common shares
outstanding ......................... 4,157,463 4,150,000 4,150,000
=========== =========== ===========

Per share data:

Basic earnings (loss) per share
attributable to common stockholders.. $ (.04) $ .01 $ (2.12)
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-4
<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock Unrealized
----------------------- ----------------------- Additional Gain (Loss) on
Number Number Paid-in Marketable
of Shares Amount of Shares Amount Capital Securities
--------- ------- --------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance -
January 1, 1995............. 4,150,000 41,500 29,795,768 (81,211)

Shares issued
in arbitration
settlement.................. 120,000 $120,000
Change in unrealized
loss on marketable
securities.................. 81,211
Net loss ......................
------- -------- --------- ------- ----------- --------
Balance -
December 31, 1995........... 120,000 120,000 4,150,000 41,500 29,795,768 - 0 -

Net income ....................
Preferred stock
dividends and
accretion (Note 4)..........
------- -------- --------- ------- ----------- --------
Balance -
December 31, 1996 .......... 120,000 120,000 4,150,000 41,500 29,795,768 - 0 -

Conversion of Series B
Stock to Common
Stock ...................... 16,389 164 31,045
Sale of Common Stock .......... 11,778 118 22,230
Net income ....................
Preferred stock
dividends and
accretion (Note 4)..........
------- -------- --------- ------- ----------- --------
Balance -
December 31, 1997 .......... 120,000 $120,000 4,178,167 $41,782 $29,849,043 - 0 -
======= ======== ========= ======= =========== ========

Accumulated
Deficit Total
----------- -----

Balance -
January 1, 1995............. (15,162,427) 14,593,630

Shares issued
in arbitration
settlement.................. 120,000
Change in unrealized
loss on marketable
securities.................. 81,211
Net loss ...................... (8,786,924) (8,786,924)
------------ -----------
Balance -
December 31, 1995........... (23,949,351) 6,007,917

Net income .................... 155,414 155,414
Preferred stock
dividends and
accretion (Note 4).......... (109,512) (109,512)
------------ -----------
Balance -
December 31, 1996 .......... (23,903,449) 6,053,819

Conversion of Series B
Stock to Common
Stock ...................... 31,209
Sale of Common Stock .......... 22,348
Net income .................... 66,564 66,564
Preferred stock
dividends and
accretion (Note 4).......... (215,081) (215,081)
------------ -----------
Balance -
December 31, 1997 .......... $(24,051,966) $ 5,958,859
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.

F-5
<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
-------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>

Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $ 66,564 $ 155,414 $(8,786,924)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 939,030 908,342 1,774,611
Gain on sale of Hong Kong property . . . . . . . . . . . (197,503)
Write off of barter credits. . . . . . . . . . . . . . . 976,000
Write down of investment in Hong Kong property . . . . . 1,578,000
Issuance of preferred stock in arbitration settlement. . 120,000
Realized and unrealized (gain) loss on marketable
securities. . . . . . . . . . . . . . . . . . . . . . (46,069)
Changes in operating assets and liabilities (net of the
effects of acquisitions in 1996 and 1995):
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . 189,800 1,492,020 592,770
Inventories . . . . . . . . . . . . . . . . . . . 399,319 (443,094) 1,241,092
Prepaid and refundable income taxes . . . . . . . (10,355) 219,545 (182,660)
Prepaid expenses and other current assets . . . . (592,760) (471,706) 253,987
Other assets . . . . . . . . . . . . . . . . . . 5,115 (43,462) 54,004
Increase (decrease) in:
Accounts payable. . . . . . . . . . . . . . . . . 215,297 (332,760) (872,684)
Accrued liabilities . . . . . . . . . . . . . . . (424,422) (277,157) (1,408,229)
Income taxes payable. . . . . . . . . . . . . . . (473,422)
---------- ---------- ----------

Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . . . 787,588 1,009,639 (5,179,524)
---------- ---------- ----------

Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . . . (612,194) (921,047) (1,073,071)
Acquisition of certain assets of Table Toys, Inc. . . . . . (1,018,654)
Net proceeds from the sale of the Hong Kong property . . . . 3,166,992
Purchase of marketable securities. . . . . . . . . . . . . . (2,908,731)
Redemption of marketable securities. . . . . . . . . . . . . 7,551,463
Investment in Celt Specialty Partners, Inc. . . . . . . . . (1,000)
---------- ---------- ----------

Net cash provided by investing activities . . . (612,194) 1,227,291 3,568,661
---------- ---------- ----------

Cash flows from financing activities:
Payment of long-term debt. . . . . . . . . . . . . . . . . . (2,246,000) (316,000)
Proceeds from sale of Common Stock . . . . . . . . . . . . . 22,348
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (137,660) (78,666)
---------- ---------- ----------

Net cash used in financing activities. . . . . . (115,312) (2,324,666) (316,000)
---------- ---------- ----------

Net increase (decrease) in cash. . . . . . . . . . . . . . . . 60,082 (87,736) (1,926,863)

Cash - beginning of year . . . . . . . . . . . . . . . . . . . 153,707 241,443 2,168,306
---------- ---------- ----------

Cash - end of year . . . . . . . . . . . . . . . . . . . . . . $ 213,789 $ 153,707 $ 241,443
========== =========== ===========

</TABLE>

The accompanying notes are an integral part of the financial statements.

F-6

<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - Description of Business and Basis of Presentation:
- -----------------------------------------------------------

Just Toys, Inc. (the "Company") designs, develops, manufactures, markets and
distributes toys and sport products for children of various ages. The Company's
principal customers are located in the United States and consist primarily of
toy stores and mass merchandisers, and to a lesser extent, discount drug chains,
supermarket chains, sporting goods stores, catalogers and gift stores. The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Just Toys Products, Limited ("JTP") and Joyful World
Enterprises, Limited ("JWE"), which are incorporated in Hong Kong, and Celt
Specialty Partners, Inc. ("Celt"), which is a U.S. manufacturer of foam and
plastic toys, sporting goods and other specialty toy products. Significant
intercompany balances and transactions have been eliminated in consolidation.

The consolidated financial statements include the following applicable to the
foreign subsidiaries:

December 31,
-----------------------------------------------
1997 1996 1995
---- ---- ----

Assets. . . . . . . . . . . . $1,790,693 $1,125,694 $4,167,473
Liabilities . . . . . . . . . 1,126,589 894,679 4,255,930
Stockholder's equity (deficit) 664,104 41,021 (88,457)
Revenues. . . . . . . . . . . 6,395,572 5,431,127 4,772,364
Net income (loss) . . . . . . 349,149 129,478 (2,291,294)

On January 22, 1996, the Company executed an agreement to purchase certain
assets of Table Toys, Inc. ("Table Toys"). The PlayTable products include a line
of play tables which are compatible with most brands of toy construction blocks
and a line of toy construction blocks. The acquisition closed on June 28, 1996.
On February 1, 1996, the Company acquired the toy line and the rights to use the
"Welsh" name for toys from Welsh Company, Inc. ("Welsh"). The Welsh toy line
consists of doll accessories, carriages and strollers.

Reclassification:
- -----------------

Certain prior year amounts have been reclassified to conform to the present
year's presentation.

F-7
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - Summary of Significant Accounting Policies:
- ----------------------------------------------------

Inventories:
- ------------

Inventories are stated at the lower of cost (first-in, first-out basis) or
market. The Company supplies certain purchased material components used in its
product lines to third-party manufacturers.

Property and equipment:
- -----------------------

Assets are stated at cost. The Company owns the molds and tools used in
production of the Company's products by third-party manufacturers. The molds and
tools are depreciated using the straight-line method over the life of the
related product licensing agreement, if applicable, or three years, whichever is
less. Obsolete molds and tools are written-off when no longer being used.
Depreciation and amortization lives and methods used are as follows:

Method Life
------------- -----------
Buildings . . . . . . . . . . . Straight-line 40 Years
Molds and tools . . . . . . . . Straight-line 3 Years
Manufacturing equipment . . . . Accelerated 7 Years
Furniture, fixtures and office
equipment . . . . . . . . . . Accelerated 5-7 Years
Leasehold improvements. . . . . Straight-line Shorter of
life of
lease or
useful
life

Income taxes:
- -------------

The Company accounts for income taxes in accordance with Statement of Accounting
Standards No. 109 ("SFAS 109"), "Accounting For Income Taxes" which requires use
of the liability method of accounting for income taxes. The liability method
measures deferred income taxes by applying enacted statutory rates in effect at
the balance sheet date to the differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements. The
resulting asset or liability is adjusted to reflect changes in the tax laws as
they occur.

Product development, design and packaging costs:
- ------------------------------------------------

Expenditures for the development, design and packaging of products to be
introduced in the coming year are recorded as prepaid expenses and amortized
within one year. Amounts expensed for these costs were approximately $181,300,
$62,800 and $324,300 during 1997, 1996 and 1995, respectively.

F-8
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - Summary of Significant Accounting Policies: (continued)
- ----------------------------------------------------

Royalties:
- ----------

The Company enters into agreements to license trademarks, copyrights, patents
and inventions. The Company expenses royalties at the time the related product
is sold. The agreements may call for minimum amounts of royalties to be paid in
advance and throughout the term of the agreement which are nonrefundable in the
event that product sales fail to meet certain minimum levels. Advance royalties
resulting from such transactions are stated at amounts estimated to be
recoverable from future sales of the related products. Prepaid and future
guaranteed royalties applicable to discontinued products or where sales were
below expectations are also expensed.

Advertising costs:
- ------------------

The Company expenses advertising costs as incurred. Advertising costs for the
years ended December 31, 1997, 1996 and 1995 amounted to $154,000, $225,000 and
$593,000, respectively.

Earnings (loss) per share attributable to common stockholders:
- --------------------------------------------------------------

In 1997, the Financial Accounting Standards Board issued Statement No. 128
("SFAS 128"), Earnings per Share. SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. The Company's
basic earnings (loss) per share attributable to common stockholders was
calculated by dividing the net income (loss) attributable to common stockholders
by the weighted average number of shares of Common Stock outstanding. All
options, warrants and preferred stock issued by the Company were antidilutive.

The adoption of SFAS 128 had no effect on the earnings (loss) per share
attributable to common stockholders reported by the Company.

Foreign currency translation:
- -----------------------------

Assets and liabilities are translated at year-end rates of exchange. Income and
expense accounts are translated at the average of exchange rates in effect
during the period. Realized foreign exchange transaction gains and losses are
included in income and are not material. The cumulative foreign currency
adjustment was not material.

Use of estimates:
- -----------------

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.

F-9
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - Summary of Significant Accounting Policies: (continued)
- ---------------------------------------------------- -----------

Stock-based compensation:
- -------------------------

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). SFAS 123 is effective for transactions after December 15, 1994 and
prescribes accounting and reporting standards for all stock-based compensation
plans, including employee stock options, restricted stock, employee stock
purchase plans and stock appreciation rights. SFAS 123 requires compensation
expense to be recorded (i) using the new fair value method or (ii) using
existing accounting rules prescribed by Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations with pro forma disclosure of what net income and earnings would
have been had the Company adopted the new fair value method. The Company has
elected to continue to account for its stock issued to employees in accordance
with APB 25 (see Note 15).

Goodwill:
- ---------

Goodwill represents the cost in excess of the fair market value of the net
assets acquired of Table Toys. Goodwill is being amortized on a straight-line
basis over 15 years. Amortization of goodwill for the years ended December 31,
1997 and 1996 was $45,500 and $22,800, respectively, and accumulated
amortization at December 31, 1997 approximated $68,300.

Accretion of Preferred Stock B:
- -------------------------------

The redemption value of the Series B Convertible Redeemable Preferred Stock is
being accreted using the interest method for redemption on December 31, 2005.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of:
- ------------------------------------------------------------------------

In March 1995, the Financial Accounting Standards Board issued Statement No. 121
("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. SFAS 121 also addresses the accounting
for long-lived assets to be disposed of. The Company adopted SFAS 121 in the
first quarter of 1996 and does not believe that any of its long-lived assets are
impaired.

F-10
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - Acquisition:
- ---------------------

On January 22, 1996, the Company entered into an agreement to purchase certain
assets of Table Toys. Because Table Toys had filed a petition under Chapter 11
of the Federal Bankruptcy laws, the acquisition was subject to approval by the
Bankruptcy Court. The acquisition was approved on May 9, 1996 and closed on June
28, 1996.

The Company accounted for the acquisition under the purchase method of
accounting and allocated the purchase price as follows:

Assets acquired:

Inventories. . . . . . . . $ 400,000
Property and Equipment . . 877,439
Goodwill . . . . . . . . . 683,147
----------
$1,960,586
==========

The acquisition of the above assets was financed as follows:

Cash paid. . . . . . . . . $ 391,291
Series B Convertible
Redeemable Preferred Stock 941,932
Other expenses incurred. . 627,363
----------
$1,960,586
==========

The consideration paid for the assets acquired included 538,243 shares of Series
B Convertible Redeemable Preferred Stock with a liquidation value of $3.625 per
share (See Note 4). Such shares were valued at approximately $1.75 per share at
the time of the acquisition. The Company also issued warrants to purchase an
aggregate of 60,000 shares of the Company's Common Stock at $3.625 per share.
The value of the warrants were considered not material. Other expenses incurred
include professional and related costs.

All of the sales, and related cost of sales, of Table Toys products for 1996 are
included in the results of operations of the Company for the year ended December
31, 1996. Prior to the Company's acquisition of Table Toys, Table Toys, Inc.
incurred an operating loss during the six months ended June 30, 1996 of
approximately $565,000 (unaudited), primarily related to the Bankruptcy
proceedings. Pro forma unaudited summary results of operations for the year
ended December 31, 1995, assuming the acquisition occurred at the beginning of
the year, is as follows:

Revenue. . . . . . . . . . $25,082,000
Net loss . . . . . . . . . (12,326,000)
Net loss applicable to
common stockholders. . . (12,584,000)
Basic loss per share
applicable to common
stockholders . . . . . . $ (3.03)

F-11
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - Preferred Stock:
- -------------------------

Series A Convertible Redeemable Preferred Stock
- -----------------------------------------------

The Board of Directors of the Company has authorized 150,000 shares of
non-voting Series A Convertible Redeemable Preferred Stock ("Series A Stock")
with par value $1.00 per share of which 120,000 shares are issued and
outstanding. The Series A Stock ranks senior to the Company's common stock, par
value $0.01 per share ("Common Stock") with respect to dividend rights and
rights on liquidation, winding-up and dissolution. The Series A Stock has a
cumulative preferred quarterly dividend of 6% per annum of the Series A
Liquidation Value (as defined below) payable either in cash or additional shares
of Series A Stock, at the Company's option. As long as any shares of the Series
A Stock remain outstanding, no cash dividends may be paid on the Common Stock
nor can Common Stock be acquired by the Company unless all accrued and unpaid
dividends have been paid on the Series A Stock. The Series A Stock has a
liquidation preference over the Common Stock in an amount equal to $1.00 per
share (the "Series A Liquidation Value") plus dividends accrued and unpaid. At
the holder's option until December 31, 1998, the Series A Stock is convertible
into Common Stock at a conversion price of $2.00 per share (subject to certain
adjustments). The Series A Stock is redeemable at the Series A Liquidation Value
plus dividends accrued and unpaid at the Company's option at any time.

Series B Convertible Redeemable Preferred Stock
- -----------------------------------------------

The Board of Directors of the Company has also authorized 650,000 shares of
non-voting Series B Convertible Redeemable Preferred Stock ("Series B Stock")
with par value $1.00 per share of which 521,854 shares (538,243 shares at
December 31, 1996) are issued and outstanding. The Series B Stock ranks senior
to the Common Stock and junior to the Series A Stock with respect to dividend
rights and rights on liquidation, winding up and dissolution. The Series B Stock
has a cumulative preferred quarterly dividend of 7% per annum of the Series B
Liquidation Value (as defined below) payable either in cash or additional shares
of Series B Stock, at the Company's option. As long as any shares of the Series
B Stock remain outstanding, no cash dividends can be paid on the Common Stock
nor can Common Stock be acquired by the Company unless all accrued and unpaid
dividends have been paid on the Series B Stock and any required redemptions have
been provided for. The Series B Stock has a liquidation preference over the
Common Stock in an amount equal to $3.625 per share (the "Series B Liquidation
Value") plus dividends accrued and unpaid. At the holder's option, the shares of
Series B Stock are convertible in Common Stock at a rate of one share of Common
Stock for each share of Series B Stock (subject to certain adjustments). After
December 30, 1996, the Series B Stock is redeemable at the Company's option at
the Series B Liquidation Value plus dividends accrued and unpaid.

F-12
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - Preferred Stock: (continued)
- -------------------------

The Series B Stock is subject to mandatory redemption through the operation of a
sinking fund at the Series B Liquidation Value plus dividends accrued and
unpaid. The Company is required, at its option, to redeem or set apart for
payment, on each December 31 commencing 2001 and ending 2004, an amount
sufficient to redeem 10% of the Series B Stock issued and any additional shares
issued as dividends on such shares. The Company may apply as a credit against
its sinking fund obligations any shares which have been previously redeemed or
converted. All remaining and outstanding shares shall be redeemed on December
31, 2005 at the Series B Liquidation Value plus dividends accrued and unpaid.

The holders of 16,389 shares of Series B Stock converted their shares into
16,389 shares of Common Stock in 1997.

NOTE 5 - Accounts Receivable and Allowances:
- --------------------------------------------

On July 26, 1995, the Company entered into a Factoring Agreement with Milberg
Factors, Inc. ("Milberg") pursuant to which Milberg agreed to purchase the
Company's domestic accounts receivable on a non-recourse basis, and to advance
to the Company, at the Company's request, the lesser of 85% of total accounts
receivable or $1,750,000. Effective February 1, 1996, the agreement was amended
to increase the amount of the advance 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 (8.5% at December 31, 1997) 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 also will 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 Celt.

Accounts receivable and amounts due from factor consists of the following:

December 31,
--------------------------------
1997 1996
---- ----

Accounts Receivable - factor . . . . . .$ 5,047,225 $ 3,897,563
Borrowings from factor . . . . . . . . . (5,023,147) (3,649,628)
----------- -----------

Net due from factor. . . . . . . . . . . 24,078 247,935
Accounts receivable - trade. . . . . . . 761,700 642,643
----------- -----------

Total accounts receivable . . . . . . 785,778 890,578

Less: Accounts receivable allowances . . (688,000) (603,000)
----------- -----------

Total accounts receivable, net
of allowances . . . . . . . . .$ 97,778 $ 287,578
=========== ===========

F-13
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - Accounts Receivable and Allowances: (continued)
- --------------------------------------------

The accounts receivable allowances consists of the following:

December 31,
---------------------------------
1997 1996
---- ----

Returns, allowances and discounts. . . $ 638,000 $ 553,000
Doubtful accounts. . . . . . . . . . . 50,000 50,000
----------- -----------

Total. . . . . . . . . . . . $ 688,000 $ 603,000
=========== ===========

NOTE 6 - Inventories:
- ---------------------

Inventories consist of the following:

December 31,
---------------------------------
1997 1996
---- ----
Finished goods . . . . . . . . . . . . $ 2,643,941 $ 2,758,085
Material components and supplies . . . 1,070,040 1,355,215
----------- -----------

Total . . . . . . . . . . . . $ 3,713,981 $ 4,113,300
=========== ===========

NOTE 7 - Prepaid expenses and other current assets:
- ---------------------------------------------------

Prepaid expenses and other current assets consist of the following:
December 31,
---------------------------------
1997 1996
---- ----
Prepaid royalties. . . . . . . . . . . $ 342,491 $ 288,881
Prepaid insurance. . . . . . . . . . . 202,941 253,869
Development, design and packaging. . . 641,666 207,793
Other. . . . . . . . . . . . . . . . . 523,790 367,585
----------- -----------

Total . . . . . . . . . . . . $ 1,710,888 $ 1,118,128
=========== ===========

F-14

<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - Property and Equipment:
- --------------------------------

Property and equipment consists of the following:

December 31,
-----------------------
1997 1996
---- ----
Property and equipment at cost:
Land. . . . . . . . . . . . . . $ 325,000 $ 325,000
Building. . . . . . . . . . . . 725,000 725,000
Molds and tools . . . . . . . . 3,106,951 2,730,935
Manufacturing equipment . . . . 1,661,323 1,698,038
Furniture, fixtures and
office equipment. . . . . . . 1,251,637 1,106,402
Leasehold improvements. . . . . 112,389 373,654

7,182,300 6,959,029
Less:
Accumulated depreciation
and amortization . . . . . 3,959,128 3,454,561
---------- ----------

T o t a l . . . . . . $3,223,172 $3,504,468
========== ==========

NOTE 9 - Related Party Transactions:
- ------------------------------------

Administrative services:
- ------------------------

A principal in RGA Accessories, Inc. ("RGA") is also an officer, director and
shareholder of the Company. Effective October 1, 1992, the Company and RGA, its
affiliates or other entities in which this director had an ownership interest,
entered into various agreements pursuant to which RGA would provide certain
administrative and warehouse services, as well as public warehouse facilities,
to the Company in the U.S. and Hong Kong. In general, RGA was compensated
through December 31, 1995 on a formula based on the Company's sales. Pursuant to
the Company's decision to begin assuming these functions internally in 1996, RGA
was paid a fixed monthly retainer for its services during 1996. Effective
January 1, 1997, the Company no longer utilizes the services of RGA. The Company
incurred expenses of $401,700 and $1,073,300 in 1996 and 1995, respectively, for
these services.

Consulting fees:
- ----------------

During 1997 and 1995, the Company incurred expenses of $50,000 and $27,500,
respectively, to a director for consulting fees.

F-15

<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - Accrued Liabilities:
- ------------------------------

Accrued liabilities consist of the following:

December 31,
------------------------
1997 1996
---- ----

Royalties. . . . . . . . . . . . . $ 213,999 $ 181,311
Insurance. . . . . . . . . . . . . 131,198 160,654
Other. . . . . . . . . . . . . . . 551,956 979,610
---------- ----------

Total. . . . . . . . . . $ 897,153 $1,321,575
========== ==========

NOTE 11 - Commitments, Contingencies and Other Matters:
- -------------------------------------------------------

License agreements:
- -------------------

The Company develops and produces certain products under license agreements with
third parties. The amounts paid periodically under the terms of these agreements
range from 2% to 12% of the net sales of the licensed products. The Company is
obligated for guaranteed minimum royalty and other license payments at December
31, 1997 as follows:

1998. . . . . . . . . . . . . . . $225,000
1999. . . . . . . . . . . . . . . 225,000
2000. . . . . . . . . . . . . . . 225,000
2001. . . . . . . . . . . . . . . 91,000
--------
T o t a l . . . . . . . $766,000
========
Leases:
- -------

Minimum annual rentals under leases expiring at various times through the year
2008 for showroom, merchandising and warehouse facilities as at December 31,
1997 are as follows:

1998. . . . . . . . . . . . . . .$ 519,000
1999. . . . . . . . . . . . . . . 413,000
2000. . . . . . . . . . . . . . . 367,000
2001. . . . . . . . . . . . . . . 388,000
2002. . . . . . . . . . . . . . . 369,000
Thereafter. . . . . . . . . . . . 1,752,000
----------
T o t a l . . . . . . .$3,808,000
==========

Rent expense approximated $559,000, $537,000 and $259,000 for 1997, 1996 and
1995, respectively.

F-16
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - Commitments, Contingencies and Other Matters: (continued)
- -------------------------------------------------------

Letters of credit:
- ------------------

As of December 31, 1997, the Company had two outstanding letters of credit
totaling $115,000.

Litigation:
- -----------

In October 1995, the Company settled an arbitration proceeding and an
accompanying lawsuit brought by the former Chairman of the Board and Chief
Executive Officer of the Company, and the former President and Chief Operating
Officer of the Company seeking damages for lost compensation by payment of
$594,000 and the issuance of 120,000 shares of Series A Stock.

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.

The Company received approximately 1,000 complaints concerning its Micro-Bake
for KidsTM (the "Micro-Bake") product, all of which have been paid or accrued
for as of December 31, 1997 and 1996. The Company discontinued selling this
product in 1995. Virtually all of the complaints assert damage to the Micro-Bake
product and many complaints assert damage to the consumer's microwave oven. The
Company has product liability insurance related to this matter. The Company is
expected to be responsible for approximately 50% of such claims and the
insurance company is expected to pay the balance.

F-17
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - Commitments, Contingencies and Other Matters: (continued)
- -------------------------------------------------------

Deferred compensation plan:
- ---------------------------

Effective January 1, 1996, the Company established a defined contribution plan
under Section 401(k) of the Internal Revenue Code. The Company has elected not
to make contributions to this plan for the years ended December 31, 1997 and
1996.

Concentration of credit risk:
- -----------------------------

The Company places its cash at various banking institutions and Milberg Factors,
Inc. At times, such amounts might be in excess of the FDIC insurance limit at
the banking institutions. Amounts due from Milberg Factors, Inc. are not covered
by insurance.

NOTE 12 - Major Customers:
- --------------------------

In each of the past three years, the Company has had two customers which each
individually represented greater than 10% of net sales. Sales to these customers
totaled 60%, 57% and 53% of net sales in 1997, 1996 and 1995, respectively. The
termination by either of these customers of its relationship with the Company
would have a material adverse effect on the Company.

F-18
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - Income Taxes:
- -----------------------

The tax effects of principal temporary differences and net operating losses are
as follows:
Year Ended December 31,
----------------------------
1997 1996
---- ----
Deferred Tax Assets:
Estimated allowances. . . $ 293,000 $ 254,000
Capitalization of
inventory . . . . . . . 63,000 48,000
Net operating loss. . . . 9,932,000 9,035,000
----------- -----------
10,288,000 9,337,000

Deferred Tax Liabilities:

Depreciation. . . . . . . (142,000) (35,000)

Valuation allowance
for deferred taxes. . . (10,146,000) (9,318,000)
----------- -----------
T o t a l. . . . . . $ - $ (16,000)
=========== ===========

The valuation allowance at December 31, 1995 was approximately $9,545,000.

The differences between the statutory Federal income tax rate of 34% and the
income taxes reported in the statements of operations are as follows:

Year Ended December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
Net income (loss):
United States. . . . . . . $(282,585) $ 25,936 $ (6,495,630)
Foreign. . . . . . . . . . 349,149 129,478 (2,291,294)
--------- ----------- ------------

$ 66,564 $ 155,414 $ (8,786,924)
========= =========== ============

Statutory rate . . . . . . . . $ 22,632 $ 52,841 $ (2,987,554)
Utilization of benefit of tax
loss carryforward . . . . . (16,500) (12,381)
Loss from which no tax
benefit was provided . . . . 96,079 2,977,820
Effect of foreign tax
rate difference. . . . . . . (61,101)
Foreign income not subject
to tax . . . . . . . . . . . (40,460)
Other. . . . . . . . . . . . . (41,110) 9,734
---------- ----------- ------------
Total tax provision
(benefit). . . . . . . . . $ -0- $ -0- $ -0-
========== =========== ============

F-19
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - Income Taxes: (continued)
- -----------------------

Undistributed foreign income:
- -----------------------------

At December 31, 1997, JTP had approximately $1,200,000 of undistributed
accumulated earnings. If the amounts were paid in the form of dividends, the
Company would apply this income against the net operating loss carryforwards.

Net operating loss:
- -------------------

The Company has a net operating loss carryforward of approximately $23,000,000
as at December 31, 1997. Approximately $900,000 expires by 2008, $14,100,000 by
2009, $6,000,000 by 2010 and $1,000,000 by 2012. However, pursuant to Section
382 of the Internal Revenue Code the future utilization of approximately
$20,000,000 of these net operating loss carryforwards are significantly limited
due to ownership changes. Based on management's estimates, the annual limitation
on such net operating loss carryforwards is approximately $500,000.

NOTE 14 - Supplemental Cash Flow Information:
- ---------------------------------------------

Payments for interest expense were $519,514, $384,114 and $234,901 for 1997,
1996 and 1995, respectively.

NOTE 15 - Stock Options:
- ------------------------

Stock Option Plan
- -----------------

Effective August 10, 1992, the Company adopted the 1992 Incentive and
Non-Qualified Stock Option Plan (the "Plan"), which will terminate on August 9,
2002. Under the terms of the Plan, options to purchase shares of common stock of
the Company intended to qualify as "incentive stock options" and non-qualified
stock options may be granted to employees and directors of the Company and
independent contractors providing services to the Company. A total of 1,000,000
shares of Common Stock are issuable under the Plan. Options are exercisable
within ten years of the date of grant.

F-20
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - Stock Options: (continued)
- ------------------------

Detail of stock options are as follows:
<TABLE>
<CAPTION>

Weighted Weighted
Average Average
Exercise Number of Price per
Number of Price per Shares Exercisable
Shares Share Exercisable Share
------ ----- ----------- -----
<S> <C> <C> <C> <C>
Balance - December 31, 1994. . . 388,497 $ 6.96 39,000 $10.90
Granted - 1995 . . . . . . . . . 234,000 2.35 =======
Canceled - 1995. . . . . . . . . (171,250) (6.40)
--------

Balance - December 31, 1995. . . 451,247 $ 4.78 140,033 $ 6.56
Granted - 1996 . . . . . . . . . 171,000 1.89 =======
Canceled - 1996. . . . . . . . . (59,900) (2.78)
--------

Balance - December 31, 1996. . . 562,347 $ 4.11 206,298 $ 5.92
Granted - 1997 . . . . . . . . . 166,500 1.46 =======
Canceled pursuant to amendment
offer - 1997 . . . . . . . . . (87,000) (11.10)
Canceled - 1997. . . . . . . . . (70,600) (2.93)
-------

Balance - December 31, 1997. . . 571,247 $ 2.26 199,848 $ 2.89
======= =======
</TABLE>

The exercise price of options outstanding at December 31, 1997 ranged from
$1.1875 to $10.50.

During 1997, the Company offered holders of options with exercise prices at or
greater than $10.50 per share the opportunity to amend their option agreements
to (a) reduce the number of shares in their option agreement by 90% and (b)
reduce the exercise price to $1.50 per share, which was the market price of the
stock on the date of the offer. This offer was accepted by holders of options
totaling 96,666 shares with exercise prices at or above $10.50 per share
representing 87.9% of the total options with exercise prices at or above $10.50
per share. As a result, the Company amended their option agreements to the new
exercise price and canceled options to purchase 87,000 shares of Common Stock.

The Company has not recorded a charge for financial reporting purposes for the
issuance and repricing of the above stock options because the options were
issued or repriced at exercise prices equal to or greater than the fair value of
the Common Stock.

F-21
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - Stock Options: (continued)
- ------------------------

Other
- -----

Pursuant to an agreement between a director of the Company and the Company in
December 1996, the Company granted the director a fully vested and exercisable
ten year option to purchase up to 50,000 shares of Common Stock at an exercise
price of $1.50 per share, the market price of the stock at the time of the
grant. The Company granted the director an additional fully vested and
exercisable ten year option to purchase up to 50,000 shares of the Common Stock
on June 30, 1997 at an exercise price of $1.375, the market price of the stock
at the time of grant. Neither of such options is governed by the Company's Plan
and are subject to stockholder approval. Both of such options will remain
outstanding for their full term until exercised, whether or not the director is
still affiliated with the Company.

Pursuant to an agreement between an officer of the Company and the Company in
July 1997, the Company granted the officer options for 100,000 shares of Common
Stock at an exercise price of $1.50 per share, which was above the market price
on the date of grant. These options are only exercisable by the officer in
installments of 25,000 shares each once the price of the Company's Common Stock
reaches the following stock prices for a minimum of 30 trading consecutive
trading days: $3.00; $4.00; $5.00; and $6.00.

Pro forma information regarding net loss and loss per share is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value of SFAS 123. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1997, 1996 and 1995:

1997 1996 1995
---- ---- ----
Risk free rate. . . . . . . . . . . . 6.36% 6.58% 6.58%
Dividend yield. . . . . . . . . . . . 0% 0% 0%
Volatility factor of the expected
price of the Company's Common Stock 0.284 1.051 1.051
Average life (years). . . . . . . . . 5 5 5

The Black-Scholes option 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 volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

F-22
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - Stock Options: (continued)
- ------------------------

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. The Company's
pro forma information is as follows:

1997 1996 1995
---- ---- ----
Pro forma net loss attributable
to common stockholders . . . . $(255,791) $(12,250) $(8,813,226)

Pro forma basic loss per share
attributable to common
stockholders . . . . . . . . . $ (.06) $ - $ (2.12)

The weighted average fair value of options granted during the years ended
December 31, 1997, 1996 and 1995 were $0.47, $1.19 and $1.26, respectively.
Options to purchase 13,332 shares of Common Stock exercisable at $10.50 per
share have a remaining weighted average contractual life of 5.4 years (11,998
shares exercisable at December 31, 1997). The weighted-average remaining
contractual life of the remaining options outstanding at December 31, 1997 is
8.4 years (weighted average exercise price of $1.97 per share).

As of December 31, 1997, 1,467,212 shares of the Company's Common Stock were
reserved for issuance on the exercise of stock options and warrants and the
redemption of preferred stock.

NOTE 16 - Warrants:
- -------------------

On January 1, 1996, the Company issued warrants to its investment banker to
purchase 100,000 shares of common stock at $3.625 per share, which expire on
December 31, 2000. In connection with the acquisition of the assets of Table
Toys, warrants were issued to various individuals to purchase 60,000 shares of
common stock at $3.625 per share, which expire on June 26, 2001. In 1997,
pursuant to an agreement to issue 11,778 shares of Common Stock for
approximately $1.90 per share to one of the holders of a warrant, the Company
canceled warrants to purchase 5,889 shares of Common Stock.

F-23

<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17 - Business Segments:
- ----------------------------

Foreign operations and sales for the year ended December 31, 1997 are as
follows:

United
States Hong Kong* Eliminations Consolidated
------ ---------- ------------ ------------

Net sales. . . . $16,863,482 $6,395,572 $23,259,054
========== ========= ===========

Operating income $ 254,610 $ 419,735 $ 674,345
========== =========
Interest expense (623,277)
Interest and
dividend income 7,945
Other income . . 7,551
Income before
income taxes . $ 66,564
===========

Identifiable
assets at
December 31,
1997 . . . . . $ 7,952,809 $1,790,693 $ 9,743,502
========== =========
Corporate assets (15,254)
-----------
Total assets . . $ 9,728,248
===========

* Represents net sales made F.O.B. Hong Kong which are primarily shipped to
customers in the United States.

F-24

<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17 - Business Segments: (continued)
- ----------------------------

Foreign operations and sales for the year ended December 31, 1996 are as
follows:

United
States Hong Kong* Eliminations Consolidated
------ ---------- ------------ ------------

Net sales. . . . $16,624,657 $5,431,127 $22,055,784
========== ========= ===========

Operating income $ 226,720 $ 213,595 $ 440,315
========== =========
Interest expense (545,800)
Interest and
dividend income 12,927
Other income . . 247,972
Income before
income taxes . $ 155,414
===========

Identifiable
assets at
December 31,
1996 . . . . . $ 9,912,752 $1,012,088 $(1,092,456) $ 9,832,414
========== ========= ==========
Corporate assets 153,707
-----------
Total assets . . $ 9,986,121
===========

* Represents net sales made F.O.B. Hong Kong which are primarily shipped to
customers in the United States.

F-25
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - Business Segments: (continued)
- ----------------------------

Foreign operations and sales for the year ended December 31, 1995 are as
follows:

United
States Hong Kong* Eliminations Consolidated
------ ---------- ------------ ------------

Net sales. . . . $14,815,984 $4,772,364 $19,588,348
========== ========= ===========

Operating (loss) $(5,608,218) $ (457,978) $(6,066,196)
========== =========
Interest expense (357,562)
Interest and
dividend income 141,440
Write-down of
investment in
Hong Kong
property . . . (1,578,000)
Settlement of
arbitration &
related legal
expenses . . . (909,594)
Other expense. . (17,012)
(Loss) before -----------
income taxes . $(8,786,924)
===========
Identifiable
assets at
December 31,
1995 . . . . . $ 8,822,249 $4,031,835 $(1,272,169) $11,581,915
========== ========= ==========
Corporate assets 241,443
-----------
Total assets . . $11,823,358
===========

* Represents net sales made F.O.B. Hong Kong which are primarily shipped to
customers in the United States.

F-26

<PAGE>

SCHEDULE II
JUST TOYS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>

- ------------------------------------------------------------------------------------------------------------------------------------

Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
(1)
Additions-
Balance at Charged to Balance at
Beginning Costs and Deductions- End of
of Period Expenses Describe Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts. . . . . . . . . $ 50,000 $ - $ - $ 50,000
Allowance for sales returns, discounts and
allowances . . . . . . . . . . . . . . . . . . 553,000 873,568 788,568 638,000
---------- ---------- ---------- ----------

T o t a l . . . . . . . . . . . . . . . . $ 603,000 $ 873,568 $ 788,568 $ 688,000
========== ========== ========== ==========

Year ended December 31, 1996:
Allowance for doubtful accounts. . . . . . . . . $ 106,000 $ 4,875 $ 60,875 $ 50,000
Allowance for sales returns, discounts and
allowances . . . . . . . . . . . . . . . . . . 911,000 847,461 1,205,461 553,000
---------- ---------- ---------- ----------

T o t a l . . . . . . . . . . . . . . . . $1,017,000 $ 852,336 $1,266,336 $ 603,000
========== ========== ========== ==========

Year ended December 31, 1995:
Allowance for doubtful accounts. . . . . . . . . $ 152,000 $ 28,218 $ 74,218 $ 106,000
Allowance for sales returns, discounts and
allowances . . . . . . . . . . . . . . . . . . 1,055,000 784,469 928,469 911,000
---------- ---------- ---------- ----------

T o t a l . . . . . . . . . . . . . . . . $1,207,000 $ 812,687 $1,002,687 $1,017,000
========== ========== ========== ==========
</TABLE>

(1) Write off of uncollectibles and sales returns, discounts and allowances.

<PAGE>

Exhibit 23

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-69812) pertaining to the 1992 Incentive and Non-Qualified Stock
Option Plan of Just Toys, Inc. of our report dated February 26, 1998, with
respect to the consolidated financial statements and schedule of Just Toys, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1997.

/s/ ERNST & YOUNG LLP
----------------------------

New York, New York
March 27, 1998

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 213,789
<SECURITIES> 0
<RECEIVABLES> 785,778
<ALLOWANCES> 688,000
<INVENTORY> 3,713,981
<CURRENT-ASSETS> 5,775,705
<PP&E> 7,182,300
<DEPRECIATION> 3,959,128
<TOTAL-ASSETS> 9,728,248
<CURRENT-LIABILITIES> 2,750,399
<BONDS> 0
1,018,990
120,000
<COMMON> 41,782
<OTHER-SE> 5,797,077
<TOTAL-LIABILITY-AND-EQUITY> 9,728,248
<SALES> 23,259,054
<TOTAL-REVENUES> 23,259,054
<CGS> 14,504,663
<TOTAL-COSTS> 8,080,046
<OTHER-EXPENSES> (7,551)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 623,277
<INCOME-PRETAX> 66,564
<INCOME-TAX> 0
<INCOME-CONTINUING> 66,564
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,564
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)

</TABLE>