JUST TOYS INC, 10-K, 1999-03-31

JUST TOYS INC
10-K, 1999-03-31
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, 1998, 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, 1999 of shares of the Registrant's
Common Stock, par value $.01 per share (based upon the mean between the bid and
asked price of such stock as reflected in the over-the-counter market on such
date) held by non-affiliates of the Registrant was approximately $726,740.
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.

At March 26, 1999, there were 2,238,869 shares outstanding 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.....................................................10
ITEM 3 - LEGAL PROCEEDINGS..............................................10
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............11

PART II.......................................................................12
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS..................................12
ITEM 6 - SELECTED FINANCIAL DATA........................................15
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................16
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....23
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................23
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................23

PART III......................................................................24
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............24
ITEM 11 - EXECUTIVE COMPENSATION.........................................26
ITEM 12 - SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................28
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................30

PART IV.......................................................................30
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K..........................................30

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This Annual Report on Form 10-K contains "forward looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934. The
statements appear in a number of places in this Annual Report and include
statements regarding the intent, belief or current expectations of Just Toys,
Inc. (the "Company") with respect to, among other things, future business
conditions and the outlook for the Company including trends affecting the
Company's business, financial condition and results of operations. Readers are
cautioned not to place undue reliance on these forward looking statements, which
speak only as of the date hereof. 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 the Far East, dependence on a limited number of customers, competition from
major toy companies, seasonality and quarterly fluctuations, government
regulation, as well as the items set forth under "Business--Certain Cautionary
Factors." Wherever possible, the Company has identified forward looking
statements by words such as "anticipates," "believes," "estimates," "expects"
and similar expressions. 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 junior sporting goods, foam shooting toys
and other toy 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.

The Company's product lines primarily consist of staple toy items such
as junior sporting goods, foam shooting toys and other toy products which do not
require promotional support. The Company's products are sold under its own name
and under established names such as Spalding(R), Louisville Slugger(R) and World
Wrestling Federation(R) pursuant to license arrangements. The Company also sells
a line of PlayTable products that are compatible with most brands of toy
construction blocks and the Welsh line of doll accessories, carriages and
strollers. The Company's products are positioned to meet certain retail price
points and are intended to deliver value to consumers and reasonable profit
margins to retailers.

As of December 31, 1998, the Company sold its Flexitoys construction
block product line to the product's original founder. The Company received
approximately 146,000 shares of its Series B Convertible Redeemable Preferred
Stock as consideration for inventory, fixed assets and intellectual property
associated with the Flexitoys product line.

The Company presented its entire product line to retailers in Hong Kong
and at the Dallas and New York toy shows in January and February 1999.

The Company has a wholly-owned manufacturing subsidiary, Celt Specialty
Partners, Inc. and two wholly-owned foreign subsidiaries, Just Toys Products,
Limited and Joyful World Enterprises, Limited, both of which are incorporated in
Hong Kong.

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In September 1998, the Company retained Gerard Klauer Mattison & Co.,
Inc. ("Gerard Klauer"), an investment banking firm, to identify other toy
companies and product lines of other toy companies for acquisition by the
Company and to assist the Company in the completion and financing of such
transactions. See Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters -- Common Stock Warrant for a description of the warrant
issued to Gerard Klauer in connection with its retention by the Company.

On September 4, 1998, the Company effected a one-for-two reverse stock
split of its common stock, par value $.01 per share ("Common Stock"). See Item
5. Market for Registrants' Common Equity and Related Stockholder Matters --
Market Information and -- Reverse Stock Split for a discussion regarding the
reason for the reverse stock split. All disclosures herein relating to
outstanding shares and the trading prices of the Common Stock and earnings per
share information have been retroactively adjusted to reflect the reverse stock
split.

Products

The Company's line of junior sporting goods include spiral footballs,
foam baseballs and baseball bats, soccer balls and basketballs, mini basketball
hoop sets, batting tee sets and various other junior sporting goods items. The
products are sold under the Company's names as well as licensed names such as
Spalding(R) and Louisville Slugger(R). The Company's junior sporting goods
generally sell at retail for between $2.00 and $50.00, a majority of which sell
at retail for under $15.00.

The Company's toy line consists of many different items including
bendable figures and plastic accessories which are based on licensed characters,
primarily World Wrestling Federation(R) licensed products, 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 toy line generally sell at retail for between $2.00 and $100.00, a majority
of which sell at retail for under $15.00.

Licensing

Some of the Company's products are manufactured under patent and
trademark license agreements. The Company also acquires rights to ideas and
designs for new products from independent inventors and designers. 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 although the Company's spiral footballs are manufactured under a
non-exclusive patent license that extends for the life of the patent. 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. There can be no assurance that any license will be
renewed upon its expiration or that the Company will be able to obtain licenses
that will achieve the same degree of popularity as the Company's existing
licenses. 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, 1998, minimum future guaranteed payments
through 2001 under license agreements aggregated approximately $254,000.

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The Company has six principal licenses. Each of these licenses cover a
number of different products. Such products accounted for approximately 54.1%
and 45.7% of the Company's net sales in 1998 and 1997, respectively. The loss of
any of the Company's principal licenses could have a material adverse effect on
the Company's operations.

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 22.7%, 28.4%
and 30.7% of net sales in 1998, 1997 and 1996, respectively, were derived from
the sale of products manufactured at this facility. As needed, certain of the
products manufactured by Celt can also be obtained from manufacturers in the
Orient.

The Company's operations relating to wooden playtables is based at a
contractor's facility in Arkansas City, Kansas. The Company intends to move to
its Table Toys assembly operations from Arkansas City, Kansas to its Celt
facility in April 1999.

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 warehouse facilities at two primary locations in the U.S., at
which it regularly maintains an inventory of its products, thus enabling the
Company to respond quickly to customer orders. One of these warehouse facilities
is located near the Company's 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

<PAGE>

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.

In 1998, 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.

The Company's net sales to foreign markets in 1998, 1997 and 1996 were
approximately 2.3%, 2.7% and 5.7% 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.

The Company's net sales and gross margin, as a percentage of net sales,
is to some extent 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 Far East, 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.

Customers

The five largest customers of the Company accounted for approximately
71.3%, 75.3% and 71.7% of net sales in 1998, 1997 and 1996, respectively. During
1998, the Company's two largest customers, Toys "R" Us and Wal-Mart, each
represented more than 10% of net sales. Sales to these customers totaled
approximately 55% of net sales. The termination by either of these customers of
its relationship with the Company would have a material adverse effect on the
Company. In 1997 and 1996, the Company's two largest customers, Target and
Wal-Mart, each represented more than 10% of net sales. Sales to these customers
totaled approximately 60% and 57% of net sales in 1997 and 1996, respectively.

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Segment Information

The Company operates its business in two segments which are its United
States and Hong Kong operations. Both segments sell similar products to
customers primarily located in the United States. The United States segment's
net sales result from shipments from the Company's domestic warehouses. The Hong
Kong segment derives its revenue from the Company's FOB Hong Kong sales and by
acting as a third party product sourcing and quality control agent for other toy
companies. See Note 17 - "Business Segments" to the Company's consolidated
financial statements on pages F-24 through F-26 for a report of the Company's
United States and Hong Kong operation's net sales, profit (loss) and total
assets.

Backlog

Total order backlog at December 31, 1998 and 1997 was approximately
$921,000 and $1,193,000, respectively. The Company expects substantially all of
its current order backlog to be filled during 1999. 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 dominated by a small number
of large toy companies. The Company competes with larger, better capitalized
companies which have significantly more resources than the Company to devote to
the design 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 the Company's product mix. 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.

<PAGE>

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.

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 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 Major Customers

For fiscal 1998, the Company's five largest customers accounted for
approximately 71.3% of the Company's net sales. Sales to Toys "R" Us and
Wal-Mart, the Company's two largest customers, aggregated approximately 55% 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

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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 and dominated by a small number
of large toy companies. 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 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.

Reliance on License Agreements

The Company has six principal licenses. Each of these licenses cover a
number of different products. Such products accounted for approximately 54.1% of
the Company's net sales in 1998. The loss of any of the Company's principal
licenses could have a material adverse effect on the Company's operations. In
general, the Company's license agreements have terms of one to three years.
There can be no assurance that any license agreement will be renewed upon its
expiration or that the Company will be able to obtain licenses for additional
licenses that will achieve the same degree of popularity as the Company's
existing licenses.

Year 2000

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number of those computer systems and programs may process a transaction with a
date of the year 2000 as the year "1900", which could cause the system or the
program to fail or create erroneous results before, on or after January 1, 2000
(the "Year 2000 Issue"). The Company has initiated its Year 2000 project which
is intended to reduce the effects on the Company's business of the Year 2000
Issue. See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. The failure to correct a material Year 2000 Issue
could result in an interruption in, or failure of, certain of the Company's
normal business activities or operations. Such failures could materially and
adversely affect the Company's results of operations, liquidity and financial
condition. Because of the general uncertainty inherent in the Year 2000 Issue,
resulting in part from the uncertainty of the Year 2000 readiness of customers,
suppliers and contractors, the Company is unable to assess at this time whether
the consequences of the Year 2000 Issue will have a material impact on the
Company's results of operations, liquidity or financial condition.

Employees

As of December 31, 1998, the Company and its subsidiaries employed 68
persons, 26 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 77 Chairman of the Board of 1995
Directors

Barry Shapiro 56 President, Chief Executive 1995
Officer and Director of the
Company

David Schwartz 39 Chief Financial Officer and 1996
Treasurer

Seymour Rosenthal 68 Secretary 1996

Robert Pagano 44 Vice President--Marketing 1996
and Product Planning

Jerry Carroll 50 Vice President--Domestic 1997
Manufacturing Operations
Larry Scott 49 Vice President--Sales 1997

</TABLE>

<PAGE>

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 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 of 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. Prior to that time, starting in 1990, he
was the Vice President of International Sales of Collegeville Imagineering, Inc.

<PAGE>

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.

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.

The Company leases approximately 3,400 square feet of office space in
Hong Kong under a lease expiring in April 1999. The Company expects to remain in
this space after expiration of the lease, however it is evaluating alternative
office space in Hong Kong. The Company believes that its current facility or
available equivalent facilities will be 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 Company
manufactures its foam balls and related products in that facility. The Company
believes that the facility is suitable for the products manufactured directly by
the Company. The facility is subject to a mortgage which secures the Company's
obligation to its factor, Milberg Factors, Inc. The Company leases warehouse
space near the manufacturing facility in upstate New York primarily for Celt
manufactured products.

The Company utilizes public warehouse facilities in Washington
primarily for products imported from the Far East.

The Company's operations relating to wooden playtables is based at a
contractor's facility in Arkansas City, Kansas. The Company intends to move its
Table Toys assembly operations from Arkansas City, Kansas to its Celt facility
in April 1999.

ITEM 3 - LEGAL PROCEEDINGS

1. 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.

<PAGE>

and the defendant toy manufacturers to cut off supplies to the warehouse clubs
competing with Toys "R" Us. The other 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. Several of these other
defendants have entered into settlement agreements with the plaintiffs in these
actions. The Company does not believe that it participated in any conspiracy or
otherwise violated the antitrust laws.

2. 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, 1998. 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.

<PAGE>

PART II

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

Market Information

The Company's common stock, par value $.01 per share ("Common Stock";
Symbol: JUST), was traded on the Nasdaq National Market from the Company's
initial public offering on October 1, 1992 through October 29, 1998. On October
29, 1998, the Common Stock was delisted from the Nasdaq Stock Market and is now
quoted in the National Quotation Bureau's "Pink Sheets" under the symbol "JUST".
The high and low sale prices for the Common Stock as reported by the Nasdaq
National Market from January 1, 1997 through October 29, 1998 and the high and
low bid prices as reported National Quotations Bureau from October 30, 1998
through December 31, 1998 are as follows:

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

1997
First Quarter $3.375 $2.500
Second Quarter 3.125 2.438
Third Quarter 3.375 2.375
Fourth Quarter 2.813 1.500

1998
First Quarter $2.625 $1.500
Second Quarter 2.875 1.688
Third Quarter 2.000 0.656
Fourth Quarter 1.125 0.688
(through October 29)
Fourth Quarter 0.750 0.250
(October 30 through
December 31)

Effective February 23, 1998, new continued listing standards were
adopted for securities trading on the Nasdaq National Market. The Company's
Common Stock is not in compliance with two of the new requirements, specifically
maintenance of (i) a one dollar per share closing bid price and (ii) a
$5,000,000 market value of public float. The Company presented a plan to a
Nasdaq Listing Qualifications Panel which provides for the taking of action
designed to achieve compliance with the $1.00 per share minimum bid price
requirement allowing the Company's Common Stock to be included on The Nasdaq
SmallCap Market under its continued listing criteria. The plan includes the
one-for-two reverse stock split of the Company's common stock which was approved
by the Company's stockholders on September 1, 1998 and implemented on September
4, 1998. After the close of business on October 29, 1998, the Company was
notified of the Panel's determination that the plan did not enable the common
stock to comply and sustain the requirements for continued listing on the Nasdaq
National Market. The Panel also determined that the common stock's bid price did
not satisfy the requirements for listing on The Nasdaq SmallCap Market. The
Panel further determined to delist the common stock from the Nasdaq Stock Market
effective October 29, 1998. The

<PAGE>

Company has requested that the Nasdaq Review Counsel review the Panel's
decision. There can be no assurance that the Review Counsel will change the
Panel's determinations.

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") and 650,000 shares of non-voting Series B Convertible Redeemable
Preferred Stock, par value $1.00 per share ("Series B Stock"). 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. Such dividends are payable in cash or additional stock at the
Company's election. During 1998, all dividends paid by the Company on the Series
A Stock and Series B Stock were in cash. As long as any shares of either the
Series A Stock or Series B Stock are 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.

Reverse Stock Split

On September 4, 1998 (the "Effective Date"), the Company amended its
certificate of incorporation to effect a one-for-two reverse stock split of its
Common Stock which was approved by the Company's stockholders on September 1,
1998. On the Effective Date, the number of shares of Common Stock held by each
stockholder were deemed to represent one-half of the number of shares of Common
Stock owned immediately prior to the reverse stock split with fractional shares
rounded to the next highest whole share. The number of shares and exercise price
of the Company's outstanding warrants and options for future issuance of Common
Stock were proportionately adjusted in accordance with their terms to reflect
the reverse stock split. The reverse stock split also resulted in the conversion
price of the Series A Stock and the conversion price and the number of shares of
Common Stock issuable upon conversion of the Series B Stock being
proportionately adjusted as provided in each such security's Certificate of
Designations, Preferences and Rights.

Series A Stock

In December 1998, all of the 120,000 outstanding shares of Series A
Stock were converted into 30,000 shares of Common Stock.

Series B Stock

On April 9, 1998, the Company offered to pay and exchange $0.5075 in
cash and one-half of one share of the Company's Common Stock (as adjusted for
the one-for-two reverse stock split) for each share of Series B Stock (the
"Exchange Offer"). The holders of 239,016 shares of Series B Stock, net of
certain adjustments, accepted the Exchange Offer and the Company paid $122,770
in cash and issued 119,508 shares of Common Stock in exchange for the 239,016
shares of Series B Stock. The market value of the Common Stock and carrying
value of the Series B Stock on the date of exchange amounted to $226,389 and
$487,037,

<PAGE>

respectively. The total consideration paid by the Company was less than the
carrying value of the Series B Stock by $137,878, and has been accounted for as
a gain on conversion of the Series B Stock.

Common Stock Warrant

On August 31, 1998, the Company issued a five-year warrant to its
investment banker to purchase up to 250,000 shares of Common Stock with an
exercise price of $2.00 per share. The warrant is exercisable with respect to
50,000 shares of Common Stock. The warrant becomes exercisable with respect to
the remaining 200,000 shares of Common Stock only after the consummation of
certain acquisition transactions by the Company. The number of such shares
subject to exercise is determined by a formula based upon the net sales of the
business or product line acquired by the Company.

Number of Stockholders

As of March 26, 1999, there were approximately 200 holders of record of
the Common Stock. The Company has approximately 1,750 beneficial stockholders of
the Common Stock.

<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>

Years Ended December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $19,347 $23,259 $22,056 $19,588 $ 23,875
Cost of goods sold 11,756 14,505 13,569 13,339 22,996
------- ------- ------- ------- ---------
Gross profit 7,591 8,754 8,487 6,249 879
------- ------- ------- ------- ---------
Expenses:
Merchandising, selling, warehousing and distribution 3,782 3,500 3,575 5,941 9,508
Royalties 884 1,009 710 1,868 3,081
General and administrative 3,251 3,571 3,762 4,506 3,779
-------- ------- ------- ------- ---------
Operating (loss) income (326) 674 440 (6,066) (15,489)
Interest (expense) income, net (576) (615) (533) (216) 182
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)
Provision for income taxes -- -- -- -- (275)
------- ------- ------- ------- ---------
Income (loss) before change in accounting principle
and preferred stock dividends and accretion (902) 66 155 (8,787) (15,796)
Cumulative effect of change in accounting principle -- -- -- -- 75
Preferred stock dividends and accretion (153) (215) (109) -- --
Gain on conversion of Series B Stock 138 -- -- -- --
------- ------- ------- ------- ---------
Net (loss) income attributable to common
stockholders $ (917) $ (149) $ 46 $(8,787) $( 15,721)
======= ======= ======= ======= =========
Basic (loss) earnings per common share:

Before cumulative effect of change in accounting
principle $ (.43) $ (.07) $ .02 $ (4.23) $ (7.62)
Cumulative effect of change in accounting principle -- -- -- -- .04
------- ------- ------- ------- ----------
Basic (loss) earnings per share attributable to
common stockholders $ (.43) $ (.07) $ .02 $ (4.23) $ (7.58)
======= ======= ======= ======= =========
Balance Sheet Data:

Working capital $ 2,164 $ 3,025 $ 2,742 $ 2,273 $ 8,948
Total assets 8,603 9,728 9,986 11,823 23,040
Short-term debt 309 -- -- 360 316
Long-term debt -- -- -- 1,886 2,246
Stockholders' equity 5,262 5,959 6,053 6,008 14,594
</TABLE>

<PAGE>

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

The Company reported a net loss before preferred stock dividends and
accretion of approximately $902,000 for the year ended December 31, 1998,
compared to a profit of approximately $66,000 in the prior year. The net loss in
1998 was primarily attributable to a reduction in the Company's net sales to
$19,347,000 in 1998 from $23,259,000 in 1997.

As of December 31, 1998, the Company sold its Flexitoys construction
block product line to the product's original founder. The Company received
approximately 146,000 shares of its Series B Stock as consideration for
inventory, fixed assets and intellectual property associated with the Flexitoys
product line. The Company acquired this specialty product line in the Table Toys
acquisition in 1996. The Flexitoys product line's sales were not material to the
Company's overall operations.

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
------------------------------------------------------------
1998 1997
vs vs
1998 1997 1996 1997 1996
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0% (16.8%) 5.5%
Cost of goods sold.................................... 60.8 62.4 61.5 (19.0) 6.9
Gross profit.......................................... 39.2 37.6 38.5 (13.3) 3.1
Merchandising, selling, warehousing and
distribution expenses............................... 19.5 15.0 16.2 8.1 (2.1)
Royalties............................................. 4.6 4.3 3.2 (12.3) 42.2
General and administrative expenses................... 16.8 15.4 17.1 (9.0) (5.1)
Operating (loss) income .............................. (1.7) 2.9 2.0 (148.4) 53.2

</TABLE>

Results of Operations

Year Ended December 31, 1998 and 1997

Net Sales

Net sales for 1998 decreased 16.8% to $19,347,000 from $23,259,000 in
1997. The decrease in sales was due primarily to (a) the significant reduction
in inventories at a number of the Company's larger customers during 1998, (b)
the discontinuation in 1997 of the Company's unprofitable product lines, and (c)
a weak toy market in 1998 especially for traditional toys.

<PAGE>

Gross Profit

Gross profit as a percentage of net sales increased to 39.2% in 1998
compared to 37.6% in 1997. This increase resulted primarily from the Company's
efforts to market products with a higher gross profit which include its
selective discontinuance of products the Company believes will not achieve an
acceptable return on investment. Gross profit decreased 13.3% to $7,591,000 in
1998 from $8,754,000 in 1997 as a result of the decease in sales.

The Company's net sales and gross margin, as a percentage of net sales,
is to some extent 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 Far East, 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 increased
8.1% to $3,782,000 for 1998 from $3,500,000 in 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 resulted
in an increase in merchandising expense in 1998. The increase in this expense
was partially offset by a decline in sales commissions as a result of the
decrease in sales.

Royalties

Royalty expense increased as a percentage of net sales to 4.6% in 1998
from 4.3% in 1997 primarily due to an increase in net sales of products subject
to royalties, which are a result of the Company's investment in new products.

General and Administrative Expenses

General and administrative expenses decreased 9.0% to $3,251,000 for
1998 from $3,571,000 in 1997. The Company implemented certain cost control
measures which reduced these expenses in 1997 and 1998.

Operating Profit (Loss)

The Company had an operating loss of $326,000 in 1998 compared with an
operating profit of $674,000 in 1997. This difference is primarily attributable
to the decrease in sales and the resulting decrease in gross profit.

Interest Expense

Interest expense decreased to $590,000 in 1998 as compared to $623,000
in 1997. This change was due primarily to decreased borrowings from Milberg
Factors, Inc. ("Milberg") during the year as a result of lower sales and
inventory levels in 1998.

<PAGE>

Net Income (Loss)

The Company had net loss of $902,000 in 1998 as compared with net
income of $66,000 in 1997. This difference is primarily attributable to the
decrease in sales and the resulting decrease in gross profit.

Basic Loss Per Share Attributable to Common Stockholders

In 1998 and 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.

On April 9, 1998, the Company offered to pay and exchange $.5075 in
cash and one-half of one share of the Company's Common Stock (as adjusted for
the reverse stock split) for each share of Series B Stock. The holders of
239,016 shares of Series B Stock accepted this offer. The total consideration
paid by the Company was less than the carrying value of the Series B Stock
exchanged and $138,000 has been accounted for as a gain on conversion of the
Series B Stock.

Basic loss per share attributable to common stockholders for 1998
totaled $.43 per share compared to a basic loss per share attributable to common
stockholders of $.07 per share in 1997 based upon 2,157,000 and 2,079,000
weighted average shares outstanding during 1998 and 1997, respectively.

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 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 plan to improve its
operations, the Company selectively discontinued those products it believes will
not achieve an acceptable return on investment. During 1997, the Company sold,
at approximately its carrying costs, the then existing inventory in a selected
number of product lines that will no longer be carried. The reduction in the
gross profit margin in 1997 from the comparable period in 1996 was partially
attributable to these transactions.

<PAGE>

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 resulted 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
during the year which were partly offset by the repayment of the mortgage on the
Company's Hong Kong property upon its sale in the second quarter of 1996.

Net 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.

<PAGE>

Basic loss per share attributable to common stockholders for 1997
totaled $.07 per share compared to a basic earnings per share attributable to
common stockholders of $.02 per share in 1996 based upon 2,079,000 and 2,075,000
weighted average shares outstanding during 1997 and 1996, respectively.

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 changes in the Company's product mix. This
concentration increases the risk of (a) underproduction of popular items, (b)
overproduction of less popular items and (c) failure to achieve tight and
compressed shipping schedules. The business of the Company is characterized by
customer order patterns which vary from one year to the next largely because of
the different levels of consumer acceptance of a product line, product
availability, marketing strategies, inventory levels of retailers and
differences in overall economic conditions. The use of just-in-time/quick
response inventory techniques and replenishment programs by larger retailers has
resulted in fewer orders being placed in advance of shipment and more orders 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 $921,000 at December 31, 1998 compared to
$1,193,000 at December 31, 1997.

Liquidity and Capital Resources

The Company's primary sources of liquidity and capital resources in
1998 and 1997 were funds provided from operations and its Milberg credit
facility. At December 31, 1998, working capital was $2,164,000 compared to
approximately $3,025,000 at December 31, 1997.

Inventory levels were $1,002,000 lower at December 31, 1998 compared
with December 31, 1997 as a result of (a) the implementation of new inventory
control systems, (b) the Company selectively discontinuing products it believes
will not achieve an acceptable return on investment in the future and (c) the
sale of the Flexitoys product line.

Cash provided by operating activities in 1998 was $462,000 as compared
with $788,000 in 1997. The decrease in cash provided by operations was a result
of the decrease in sales and the resulting decrease in gross profit in 1998
which was partially offset by the decline in inventory levels in 1998.

Cash used in investing activities was $501,000 and $612,000 for the
years ended 1998 and 1997, respectively, which was primarily attributable to
capital expenditures for fixed assets, including molds and tooling for new
products.

Cash provided by (used in) financing activities was $92,000 and
($115,000) in 1998 and 1997, respectively. Funds borrowed from the Company's
factor were used to reduce the amount of the Series B Stock outstanding pursuant
to the Exchange Offer (as defined below) and to finance the operations of the
business.

<PAGE>

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 0.65% 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 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.

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

Year 2000

Many existing computer systems and programs process transactions using
two digits rather than four digits for the year of a transaction. Unless the
hardware and/or the software has been modified, a significant number of those
computer systems and programs may process a transaction with a date of the year
2000 as the year "1900", which could cause the system or the program to fail or
create erroneous results before, on or after January 1, 2000 (the "Y2K Issue").

The Company's Y2K project is intended to reduce the effects on the
Company's business of the Y2K Issue. The Y2K project involves: (i) an inventory
of Y2K items and an assessment of the Y2K compliance of items determined to be
material to the Company; (ii) upgrading or replacing material items that are
determined not to be Y2K compliant; (iii) testing material items and evaluating
Y2K compliance of the Company's customers, suppliers and contractors; and (iv)
designing and implementing contingency plans. All phases of the project are
being performed by the Company. Testing of the Company's computer systems and
programs as upgraded or replaced under conditions simulating actual use is
scheduled to be completed by June 1999.

The Company's principal computer systems consist of: (i) management
information software ("MIS") for accounts receivable, general ledger, payables,
order entry, sales reporting, inventory tracking and product distribution; (ii)
electronic data interchange ("EDI") for order-taking, invoicing and the like
between the Company and its major customers; (iii) systems involved in the
Company's manufacturing operations such as materials purchasing and
manufacturing scheduling; and (iv) local area network and personal computer
operating systems.

The Company installed a Y2K compliant MIS system at its headquarters in
early 1997 and at its Hong Kong subsidiaries in late 1998. Initial testing has
confirmed such systems' Y2K compliance and the Company plans further testing
throughout the Y2K project. The MIS systems at the Company's United States
manufacturing subsidiary is not currently Y2K compliant. The Company is in the
process of upgrading, replacing and testing the manufacturing subsidiary's MIS
systems. The Company estimates that the upgrading, replacing and testing such
systems will cost approximately $25,000 which will be funded from cash flow from
operations. There is no assurance at this time that software upgrades or
replacements will resolve all of the Company's MIS Y2K issues.

<PAGE>

The Company has installed and successfully tested Y2K compliant EDI
software. The Company is communicating with its customers, contractors and
suppliers to evaluate their EDI Y2K compliance. The Company believes that over
the upcoming months its major customers will continue to test their EDI systems
for internal, intermediary and supplier Y2K compliance. The Company would be
unable to receive and invoice orders from a customer through EDI if the customer
or its EDI intermediaries are not Y2K compliant. Although the Company does not
transmit electronic orders to its contractors and suppliers, delays or
non-delivery of goods to the Company could arise from Y2K Issues affecting their
businesses.

The Company's initial tests have confirmed that the Company's local
area network operating system is Y2K compliant. The Company intends to upgrade
or replace any manufacturing operations software or other personal computer
based software found not to be Y2K compliant. The Company also intends to
replace personal computers found not to be Y2K compliant. The Company expects
the software upgrades and replacements and personal computer replacements to be
completed by June 1999 at an estimated cost of approximately $25,000.

The failure to correct a material Y2K Issue could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Particularly because
of the uncertainty of the Y2K readiness of customers, suppliers and contractors,
the Company is unable to assess at this time whether the consequences of the Y2K
Issue will have a material impact on the Company's results of operations,
liquidity or financial condition.

To date, the Company has not established a contingency plan for
possible Y2K Issues. Where needed, the Company intends to establish contingency
plans based on its testing and evaluation experience.

The Company estimates that the total cost of Y2K compliance will be
approximately $125,000. To date, the cost to the Company of Y2K compliance has
been approximately $75,000.

The cost of Y2K compliance and the referenced completion dates are
based on management's best estimates and may be updated as additional
information becomes available. Reference is made to the first paragraph of Part
I of this report, which addresses forward-looking statements made by the
Company.

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

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 in the Company's product mix. 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.

<PAGE>

Backlog

Total order backlog at December 31, 1998 and 1997 was approximately
$921,000 and $1,193,000, respectively. The Company expects substantially all of
its current backlog to be filled during 1999. 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.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None

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

<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.
<TABLE>
<CAPTION>

Name Age Principal Occupation Director Since
---- --- ----------------------------------------- --------------
<S> <C> <C> <C>
Roger Gimbel 68 Vice Chairman of the Board of Directors;
Chairman of Worldwide Dreams LLC 1992

Charmaine Jefferson 45 Director of the Company; Attorney;
Director, Entertainment Development for
the Disneyland Resort 1995

Howard Kaufman 72 Director of the Company; private investor 1992

Morton J. Levy 77 Chairman of the Board of Directors 1992

Irwin Naitove 81 Director of the Company; private investor 1995

Donald D. Shack 70 Director of the Company; shareholder and
director of the law firm Shack & Siegel, P.C. 1992

Barry Shapiro 56 Director, President and Chief Executive
Officer of the Company 1995
</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 is the Director, Entertainment
Development for the Disneyland Resort. Ms. Jefferson is also President of Kelan
Resources, a non-profit arts management consulting firm. From April 1996 to
November 1997, Ms. Jefferson served as Vice President - Business Affairs for de
Passe Entertainment, Inc. and from November 1997 to June 1998 Ms. Jefferson
served as the Business Affairs Consultant of such company. 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

<PAGE>

of KayBee Stores. 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.

Morton J. Levy was appointed 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 became a
consultant to the Company in 1994 until being hired as Chief Executive Officer
in 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.

Irwin Naitove was appointed a director of the Company in May 1995. Mr.
Naitove has been 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 shareholder and
director 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.

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.

<PAGE>

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 1998.

ITEM 11 - EXECUTIVE COMPENSATION

The Summary Compensation Table below sets forth certain information
concerning compensation paid or accrued in 1998 to the Chief Executive Officer
of the Company and the four executive officers whose total salary and bonus in
1998 exceeded $100,000.

Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation ----------------
---------------------------- Options All Other
Name and Principal Position Year Salary ($) Bonus ($)(1) Awarded (#) Compensation ($)
- ----------------------------------- ------- ---------- -------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
Barry Shapiro(2) 1998 250,000 - - -
President and Chief 1997 237,197 - 50,000 -
Executive Officer 1996 217,778 7,750 15,000 -

David Schwartz(3)(5) 1998 135,000 - - -
Chief Financial Officer and 1997 130,000 - 5,000 -
Treasurer 1996 17,395 500 7,500 -

Robert Pagano(3) 1998 146,000 - - -
Vice President - Marketing and 1997 139,808 - - -
Product Planning 1996 142,850 2,000 10,000 -

Larry Scott (4)(5) 1998 145,000 - - -
Vice President - Sales 1997 138,384 - 7,500 34,039(6)

Jerry Carroll(4)(5) 1998 130,000 - - -
Vice President - Domestic 1997 47,500 - 5,000 30,000(6)
Manufacturing Operations

</TABLE>

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

(1) Represents bonuses paid in 1997 relating to the 1996 fiscal year.
(2) Mr. Shapiro was appointed an executive officer of the Company at the end
of 1994. Mr. Shapiro was appointed Chief Executive Officer of the Company
in July 1997.
(3) Mr. Schwartz and Mr. Pagano were appointed executive officers of the Company
in 1996.
(4) Mr. Scott and Mr. Carroll were appointed executive officers of the Company
in 1997.
(5) Mr. Schwartz started with the Company in November 1996. Mr. Scott started
with the Company in January 1997. Mr. Carroll started with the Company in
August 1997.
(6) Represents amounts paid to Mr. Scott and Mr. Carroll for relocation expenses
and related matters.

<PAGE>

No options to purchase Common Stock were granted in fiscal year 1998 to
the executive officers named in the Summary Compensation Table above.

The following table details the value on December 31, 1998 of options
to purchase Common Stock held by the executive officers named in the Summary
Compensation Table above.

Fiscal Year End Option Values

<TABLE>
<CAPTION>
Number of Unexercised Options at Value of Unexercised in-the-Money
December 31, 1998 Options at December 31, 1998(1)
-------------------------------------- -----------------------------------------
Name Exercisable(#) Unexercisable(#) Exercisable($) Unexercisable($)
------ ----------------- ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Barry Shapiro 22,700 68,050 -- --
David Schwartz 4,000 8,500 -- --
Robert Pagano 4,000 6,000 -- --
Larry Scott 1,500 6,000 -- --
Jerry Carroll 1,000 4,000 -- --
</TABLE>

- --------------
(1) Based on the mean between the bid and asked price of the Common Stock of
$.39 per share as reflected in the over-the-counter market on December 31,
1998.

Compensation Arrangements

The Company has an employee bonus pool based on the Company's profits.
In 1998, the pool consisted of 20% of the first $1,000,000 of pre-tax earnings
after preferred stock dividends and accretion, 15% of the next $1,000,000 of
pre-tax earnings and 10% of all such pre-tax earnings over $2,000,000. No
bonuses were earned for 1998.

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 50,000 shares of Common Stock at an exercise price of $3.00
per share. The option is exercisable by Mr. Shapiro in installments of 12,500
shares when the price of the Common Stock reaches the following stock prices for
a minimum of 30 consecutive trading days: $6.00; $8.00; $10.00; and $12.00.
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.

<PAGE>

Through August 1998, all non-officer directors of the Company who do
not receive compensation from the Company were entitled to receive a fee of
$10,000 per year and options to purchase 2,500 shares of Common Stock at the
market price of the Common Stock on the anniversary of their election as a
member of the Board of Directors. On September 1, 1998, the Board of Directors
reduced the annual fee paid to such non-officer directors to $5,000 and
increased the annual option grant to 5,000 shares of Common Stock.

ITEM 12 - SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information at March 26, 1999,
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 ....................................... 213,116(2) 9.5%
350 Fifth Avenue
New York, New York 10118

Morton J. Levy...................................... 166,198(3) 7.1%
20 Livingstone Avenue
Dobbs Ferry, New York 10522

G. Gimbel\M. Meyers Voting Trust ................... 149,842(4) 6.7%
c/o Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036

Barry Shapiro ...................................... 37,183(5) 1.6%
20 Livingstone Avenue
Dobbs Ferry, New York 10522

Donald D. Shack..................................... 14,000(6) Less than 1%
530 Fifth Avenue
New York, New York 10036

David Schwartz...................................... 7,750(7) Less than 1%
20 Livingstone Avenue
Dobbs Ferry, New York 10522

Howard Kaufman...................................... 5,500(8) Less than 1%
Bishops Estate
Lenox, Massachusetts 01290

Robert Pagano....................................... 5,000(9) Less than 1%
20 Livingstone Avenue
Dobbs Ferry, New York 10522

</TABLE>

Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (1) Class
------------------ ------------------------ ------
<S> <C> <C>
Charmaine Jefferson ................................ 3,000(10) Less than 1%
2003 Victoria Avenue
Los Angeles, California 90016

Irwin Naitove....................................... 3,000(10) Less than 1%
RR1
Box 630
Mount Holly, Vermont 05758

Larry Scott......................................... 3,000(10) Less than 1%
20 Livingstone Avenue
Dobbs Ferry, New York 10522

Jerry Carroll....................................... 1,000(11) Less than 1%
20 Livingstone Avenue
Dobbs Ferry, New York 10522

All directors and executive officers as 461,747(12) 19.2%
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 13 shares of Common Stock owned by the Voting Trust listed below
and 8,500 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 750 shares owned by Mr. Levy as custodian for his grandson under
the Uniform Gifts to Minors Act and 42,000 shares issuable upon exercise
of currently exercisable stock options granted under the Plan and 50,000
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 99,895 shares and Murray Meyers as Trustee has sole
voting power over 49,947 shares.

(5) Includes 23,850 shares issuable upon exercise of currently exercisable
stock options granted under the Plan.

(6) Includes 9,000 shares issuable upon exercise of currently exercisable
stock options granted under the Plan.

(7) Includes 4,000 shares issuable upon exercise of currently exercisable
stock options granted under the Plan.

(8) Includes 5,500 shares issuable upon exercise of currently exercisable
stock options granted under the Plan.

(9) Includes 5,000 shares issuable upon exercise of currently exercisable
stock options granted under the Plan.

<PAGE>

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

(11) Includes 1,000 shares issuable upon exercise of currently exercisable
stock options granted under the Plan.

(12) Includes 160,850 shares issuable upon exercise of currently exercisable
stock options.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During 1998, Morton J. Levy, the Company's Chairman of the Board, was
paid a consulting fee of $75,000 pursuant to a December 1996 agreement with the
Company.

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, 1998 and 1997 F- 3

Consolidated Statements of Operations -
For each of the years ended
December 31, 1998, 1997 and 1996 F- 4

Consolidated Statements of Changes in
Stockholders' Equity -- For each of the
years ended December 31, 1998, 1997 and 1996 F- 5

Consolidated Statements of Cash Flows --
For each of the years ended
December 31, 1998, 1997 and 1996 F- 6

Notes to Consolidated Financial Statements F- 7

(2) Financial Statement Schedules:

Schedule II -- Valuation and Qualifying Accounts F-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.

3.6 Certificate of Amendment of Certificate of Incorporation,
incorporated by reference to Exhibit 3.6 of the Quarterly
Report on Form 10-Q filed with the Securities and Exchange
Commission on October 15, 1998 (the "1998 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").

4.6 Warrant agreement, dated as of August 31, 1998, between the
Company and Gerard Klauer Mattison & Co., Inc., incorporated
by reference to Exhibit 4.4 of the 1998 3rd Quarter 10-Q.

<PAGE>

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").

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, incorporate by reference to Exhibit 2.3 of the July
1996 Form 8-K.

<PAGE>

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.

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.

10.19 Lease, dated December 16, 1997 between the Company and Akzo
Nobel Chemicals, Inc. incorporated by reference to Exhibit 10
of the Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on May 14, 1998.

10.20 Engagement letter, dated August 31, 1998, between the Company
and Gerard Klauer Mattison & Co., Inc., incorporated by
reference to Exhibit 10.1 of the 1998 3rd Quarter 10-Q.

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

<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 Dobbs
Ferry, State of New York, on the 31st day of March, 1999.

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>

Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Morton J. Levy Chairman of the Board March 31, 1999
- ----------------------------
(Morton J. Levy)

/s/ Barry Shapiro President and Chief March 31, 1999
- ---------------------------- Executive Officer,
(Barry Shapiro) Director

/s/ David Schwartz Chief Financial Officer, March 31, 1999
- ---------------------------- Treasurer and Principal
(David Schwartz) Accounting Officer

/s/ Howard Kaufman Director March 31, 1999
- ----------------------------
(Howard Kaufman)

/s/ Roger Gimbel Director March 31, 1999
- ----------------------------
(Roger Gimbel)

/s/ Donald D. Shack Director March 31, 1999
- ----------------------------
(Donald D. Shack)

/s/ Irwin Naitove Director March 31, 1999
- ----------------------------
(Irwin Naitove)

/s/ Charmaine Jefferson Director March 31, 1999
- ----------------------------
(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 AT DECEMBER 31, 1998 AND 1997 F-3

STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996 F-4

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 F-5

STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996 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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated 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
March 12, 1999

F-2

<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS December 31,
-----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash ................................................... $ 267,292 $ 213,789
Accounts receivable, net of allowances of
$458,000 and $688,000 (Note 5) ....................... 364,791 97,778
Inventories (Note 6) ................................... 2,711,685 3,713,981
Prepaid expenses and other current assets (Note 7) ..... 1,871,758 1,750,157
----------- -----------
Total current assets ............................ 5,215,526 5,775,705

Property and equipment, at cost, net of accumulated
depreciation and amortization (Notes 5 and 8) .......... 2,712,369 3,223,172
Goodwill, net of accumulated amortization (Note 3) ........ 544,296 614,836
Other assets .............................................. 131,020 114,535
----------- -----------
TOTAL ........................................... $ 8,603,211 $ 9,728,248
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Due to factor .......................................... $ 308,836 $ -
Accounts payable ....................................... 1,778,177 1,853,246
Accrued liabilities (Note 10) .......................... 964,964 897,153
----------- -----------
Total current liabilities ....................... 3,051,977 2,750,399

Series B Convertible Redeemable Preferred Stock,
650,000 shares authorized, 137,183 and 521,854 shares
issued and outstanding (liquidation value $497,288
and $1,891,721)(Note 4) ................................ 289,405 1,018,990
----------- -----------
Total liabilities ............................... 3,341,382 3,769,389
----------- -----------

Commitments and contingencies (Note 11)

Stockholders' equity:
Preferred stock, $1.00 par value, 2,000,000 shares
authorized (Note 4):
Series A Convertible Redeemable Preferred
Stock, 150,000 shares authorized, 120,000
shares issued and outstanding in 1997
(liquidation value $120,000) ...................... - 120,000
Common stock, $.01 par value, 15,000,000 shares
authorized, 2,238,619 and 2,089,084 issued and
outstanding .......................................... 22,386 20,891
Additional paid-in capital ............................. 30,208,779 29,869,934
Accumulated deficit .................................... (24,969,336) (24,051,966)
----------- -----------
Total stockholders' equity ...................... 5,261,829 5,958,859
----------- -----------

TOTAL ........................................... $ 8,603,211 $ 9,728,248
=========== ===========
</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,
-----------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales (Note 12) ....................... $19,346,789 $23,259,054 $22,055,784

Cost of goods sold ........................ 11,755,755 14,504,663 13,568,684
----------- ----------- -----------
Gross profit .............................. 7,591,034 8,754,391 8,487,100
----------- ----------- -----------
Expenses:
Merchandising, selling,
warehousing and distribution ......... 3,782,159 3,500,068 3,574,716
Royalties .............................. 884,436 1,009,028 709,656
General and administrative ............. 3,250,596 3,570,950 3,762,413

Total ........................... 7,917,191 8,080,046 8,046,785

Operating (loss) income ................... (326,157) 674,345 440,315
Other income (expenses):
Interest expense ....................... (589,605) (623,277) (545,800)
Interest and dividend income ........... 13,291 7,945 12,927
Gain related to investment
in Hong Kong property ................ - - 197,503
Other income ........................... - 7,551 50,469
----------- ----------- -----------
Net (loss) income ......................... (902,471) 66,564 155,414

Preferred stock dividends and
accretion (Note 4) ..................... 152,777 215,081 109,512

Gain on conversion of Series B
Stock (Note 4) ......................... 137,878 - -
----------- ----------- -----------
Net (loss) income attributable to
common stockholders .................... $ (917,370) $ (148,517) $ 45,902
=========== =========== ===========
Weighted average common shares
outstanding ............................ 2,157,387 2,078,732 2,075,000
=========== =========== ===========
Per share data:

Basic and dilutive (loss) income
per share attributable to common
stockholders ........................... $ (.43) $ (.07) $ .02
=========== =========== ===========

</TABLE>

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

<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock
------------------------- ----------------------- Additional
Number Number Paid-in
of Shares Amount of Shares Amount Capital
--------- -------- --------- ------- -----------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1996 ............ 120,000 $120,000 2,075,000 $20,750 $29,816,518

Net income
Preferred stock
dividends and
accretion (Note 4)
--------- -------- --------- ------- -----------
Balance - December 31, 1996 .......... 120,000 120,000 2,075,000 20,750 29,816,518
Conversion of Series B
Stock to Common Stock 8,195 82 31,127
Sale of Common Stock 5,889 59 22,289
Net income
Preferred stock
dividends and
accretion (Note 4)
--------- -------- --------- ------- -----------
Balance - December 31, 1997 .......... 120,000 120,000 2,089,084 20,891 29,869,934

Conversion of Series B
Stock to Common Stock
and other related matters 119,535 1,195 219,145
Conversion of Series A
Stock to Common Stock ............. (120,000) (120,000) 30,000 300 119,700
Net loss
Preferred stock dividends
and accretion (Note 4)
Gain on conversion of
Series B Stock (Note 4)
--------- -------- --------- ------- -----------
Balance - December 31, 1998 .......... -0- $ -0- 2,238,619 $22,386 $30,208,779
========= ======== ========= ======= ===========
</TABLE>

F-4

<PAGE>

Accumulated
Deficit Total
------------ ----------
<S> <C> <C>
Balance - January 1, 1996 ............ $(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

Conversion of Series B
Stock to Common Stock
and other related matters 220,340
Conversion of Series A
Stock to Common Stock .............
Net loss (902,471) (902,471)
Preferred stock dividends
and accretion (Note 4) (152,777) (152,777)
Gain on conversion of
Series B Stock (Note 4) 137,878 137,878
------------ ----------
Balance - December 31, 1998 .......... $(24,969,336) $5,261,829
============ ==========
</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

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ...................................... $(902,471) $66,564 $ 155,414
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization ...................... 900,432 939,030 908,342
Gain on sale of Hong Kong property - - (197,503)
Changes in operating assets and liabilities (net
of the effects of an acquisition in 1996 and
sale in 1998 of Flexitoys):
(Increase) decrease in:
Accounts receivable ......................... (267,013) 189,800 1,492,020
Inventories ................................. 876,603 399,319 (443,094)
Prepaid expenses and other current assets ... (121,601) (603,115) (252,161)
Other assets ................................ (16,485) 5,115 (43,462)
Increase (decrease) in:
Accounts payable ............................ (75,069) 215,297 (332,760)
Accrued liabilities ......................... 67,811 (424,422) (277,157)
--------- --------- -----------
Net cash provided by operating
activities .............................. 462,207 787,588 1,009,639
--------- --------- -----------

Cash flows from investing activities:
Acquisition of property and equipment .................. (500,676) (612,194) (921,047)
Acquisition of certain assets of Table Toys, Inc. ...... - - (1,018,654)
Net proceeds from the sale of the Hong Kong property ... - - 3,166,992
--------- --------- -----------
Net cash (used in) provided by investing
activities .............................. (500,676) (612,194) 1,227,291
--------- --------- -----------

Cash flows from financing activities:
Borrowings from factor ................................. 308,836 - -
Payment of long-term debt .............................. - - (2,246,000)
Proceeds from sale of Common Stock ..................... - 22,348 -
Cash paid in connection with conversion
of Series B Stock (Note 4) ............................ (122,770) - -
Dividends paid ......................................... (94,094) (137,660) (78,666)
--------- --------- -----------
Net cash provided by (used in) financing
activities .............................. 91,972 (115,312) (2,324,666)
--------- --------- -----------

Net increase (decrease) in cash .......................... 53,503 60,082 (87,736)

Cash - beginning of year ................................. 213,789 153,707 241,443
--------- --------- -----------
Cash - end of year ....................................... $ 267,292 $ 213,789 $ 153,707
========= ========= ===========
</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 junior sporting goods, foam shooting toys and other toy 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,
-------------------------------------------------------
1998 1997 1996
---------- ---------- ----------
Assets ................. $1,928,438 $1,507,320 $1,125,694
Liabilities ............ 1,276,221 932,492 894,679
Stockholder's equity ... 652,217 574,828 231,015
Revenues ............... 5,909,658 6,489,345 5,431,127
Net income ............. 77,389 258,974 129,478

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.
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.

As of December 31, 1998, the Company sold its Flexitoys product line to the
product's original founder. The Company received approximately 146,000 shares of
its Series B Stock as consideration for inventory, fixed assets and intellectual
property associated with the Flexitoys product line. The Company had acquired
this specialty product line as part of its acquisition of Table Toys in 1996.

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 1 - Description of Business and Basis of Presentation: (continued)

Recapitalization

Effective September 4, 1998, the Company effected a one-for-two reverse stock
split of its Common Stock. The accompanying financial statements give
retroactive effect to the above recapitalization.

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.

F-8
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 $572,200,
$181,300 and $62,800 during 1998, 1997 and 1996, respectively.

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, 1998, 1997 and 1996 amounted to approximately $79,000,
$144,000 and $225,000, 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.

Securities for issuance of Common Stock excluded from diluted earnings per share
due to anti-dilutive effect are as follows:

1998 1997 1996
------- ------- -------
Stock Options ......................... 330,876 335,624 306,174
Common Stock purchase warrants ........ 327,056 77,056 130,000
Convertible debt ...................... 68,592 290,927 299,122
------- ------- -------
Total ....................... 726,524 703,607 735,296
======= ======= =======

F-9
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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.

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. In connection with the sale of the Flexitoys product line,
the Company wrote off $25,000 of goodwill (net of accumulated amortization of
$5,000). Amortization of goodwill for the years ended December 31, 1998, 1997
and 1996 was approximately $45,500, $45,500 and $22,800, respectively, and
accumulated amortization at December 31, 1998 approximated $108,800.

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.

F-10
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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.

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 30,000 shares of the Company's Common Stock at $7.25 per share. The
value of the warrants was considered not material. Other expenses incurred
include professional and related costs.

F-11
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - Acquisition: (continued)

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 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 ............... $ (6.06)

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 a par value of $1.00 per share of which 120,000 shares were issued and
outstanding at December 31, 1997 (none outstanding at December 31, 1998). 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 was convertible into Common
Stock at a conversion price of $4.00 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.

In December 1998, the holders of all of the outstanding shares of the Series A
Stock converted such shares into 30,000 shares of Common Stock.

F-12
<PAGE>

JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - Preferred Stock: (continued)

Series B Convertible Redeemable Preferred Stock

The Board of Directors of the Company also authorized 650,000 shares of
non-voting Series B Convertible Redeemable Preferred Stock ("Series B Stock")
with a par value of $1.00 per share of which 137,183 shares (521,854 shares at
December 31, 1997) 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 two shares 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.

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 239,016 and 16,389 shares of Series B Stock converted their
shares into 119,508 and 8,195 shares, respectively, of Common Stock in 1998 and
1997, respectively.

On April 9, 1998, the Company offered to pay and exchange $0.5075 in cash and
one half of one share of the Company's Common Stock (as adjusted for the
one-for-two reverse stock split) for each share of Series B Stock (the "Exchange
Offer"). The holders of 239,016 shares of the Series B Stock, net of certain
adjustments, accepted the Exchange Offer and the Company paid $122,770 in cash
and issued 119,508 shares of Common Stock in exchange for the 239,016 shares of
Series B Stock. The market value of the Common Stock and carrying value of the
Series B Stock on the date of exchange amounted to $226,389 and $487,037,
respectively. The total consideration paid by the Company was less than the
carrying value of the Series B Stock by $137,878, and has been accounted for as
a gain on conversion of the Series B Stock.

F-13
<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 (7.75% at December 31, 1998) 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,
----------------------------
1998 1997
----------- -----------
Accounts receivable - factor ................. $ 4,635,787 $ 5,047,225
Borrowings from factor ....................... (4,635,787) (5,023,147)
----------- -----------

Net due from factor .......................... -0- 24,078
Accounts receivable - trade .................. 822,791 761,700
----------- -----------

Total accounts receivable ................. 822,791 785,778

Less: Accounts receivable allowances ......... (458,000) (688,000)
----------- -----------

Total accounts receivable, net of
allowances .............................. $ 364,791 $ 97,778
=========== ===========

The accounts receivable allowances consist of the following:

December 31,
----------------------------
1998 1997
----------- -----------

Returns, allowances and discounts .............. $408,000 $638,000
Doubtful accounts .............................. 50,000 50,000
-------- --------

Total .............................. $458,000 $688,000
======== ========

F-14

<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - Inventories:

Inventories consist of the following:

December 31,
---------------------------
1998 1997
---------- ----------
Finished goods ............................... $2,049,996 $2,643,941
Material components and supplies ............. 661,689 1,070,040
---------- ----------
Total ............................ $2,711,685 $3,713,981
========== ==========

NOTE 7 - Prepaid expenses and other current assets:

Prepaid expenses and other current assets consist of the following:

December 31,
--------------------------
1998 1997
---------- ----------
Prepaid royalties ............................ $ 423,241 $ 342,491
Prepaid insurance ............................ 161,109 202,941
Insurance recoverable ........................ 138,259 --
Development, design and packaging ............ 666,680 641,666
Other ........................................ 482,469 563,059
---------- ----------

Total ............................ $1,871,758 $1,750,157
========== ==========

NOTE 8 - Property and Equipment:

Property and equipment consists of the following:

December 31,
--------------------------
1998 1997
---------- ----------
Property and equipment at cost:
Land ............................... $ 325,000 $ 325,000
Building ........................... 725,000 725,000
Molds and tools .................... 3,440,863 3,106,951
Manufacturing equipment ............ 1,442,695 1,661,323
Furniture, fixtures and
office equipment ............... 1,359,902 1,251,637
Leasehold improvements ............. 179,991 112,389
---------- ----------

7,473,451 7,182,300

Less:
Accumulated depreciation
and amortization ........... 4,761,082 3,959,128
---------- ----------

Total .................... $2,712,369 $3,223,172
========== ==========

F-15

<PAGE>

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 in 1996 for these services.

Consulting fees:

During 1998 and 1997, the Company incurred expenses of $75,000 and $50,000,
respectively, to a director for consulting fees.

NOTE 10 - Accrued Liabilities:

Accrued liabilities consist of the following:

December 31,
---------------------------
1998 1997
---------- ----------
Royalties ............................ $267,575 $213,999
Insurance ............................ 116,796 131,198
Dividends ............................ 99,061 33,246
Deferred rent ........................ 90,532 51,782
Other ................................ 391,000 466,928
-------- --------

Total ......................... $964,964 $897,153
======== ========

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, 1998 as follows:

1999 ..................................... $115,000
2000 ..................................... 139,000
--------
Total .......................... $254,000
========

F-16

<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Leases:

Minimum annual rentals under leases expiring at various times through the year
2008 for showroom, merchandising and warehouse facilities as at December 31,
1998 are as follows:

1999............................... $ 432,000
2000............................... 378,000
2001............................... 400,000
2002............................... 376,000
2003............................... 317,000
Thereafter......................... 1,435,000
----------
Total....................$3,338,000
==========

Rent expense approximated $540,000, $559,000 and $537,000 for 1998, 1997 and
1996, respectively.

Letters of credit:

As of December 31, 1998, the Company had two outstanding letters of credit
totaling $160,000.

Litigation:

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.

Following announcement of the administrative law judge's decision, a series of
private class actions seeking treble damages, expenses and attorneys' fees were
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 including
the Company had allegedly agreed not to sell to other retailers. The Company has
been named as a defendant in the consolidated class action complaint in an
action entitled In re Toys "R" Us Inc. Antitrust Litigation, (97 Civ. 5750),
which is pending in the United States District Court for the Eastern District of
New York and in complaints in the coordinated proceedings entitled In re Toys
"R" Us Antitrust Litigation, Coordinated Proceedings, (J.C.C.P. No. 3270), which
is pending in the Superior Court of California, Alameda County. 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 other 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. Several of these other defendants entered
into settlement agreements with the plaintiffs in these actions. The Company
does not believe that it participated in any conspiracy or otherwise violated
the antitrust laws.

F-17
<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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, 1998 and 1997. 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.

The Company is involved in various litigation and other legal matters which are
being addressed or defended and handled in the ordinary course of business. None
of these matters is expected to result in outcomes having a material adverse
effect on the Company's liquidity, operating results or consolidated financial
position.

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, 1998 and
1997.

Concentration of credit risk:

The Company places its cash in various banking institutions and Milberg. At
times, such amounts might be in excess of the FDIC insurance limit at the
banking institutions. Amounts due from Milberg 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 55%, 60% and 57% of net sales in 1998, 1997 and 1996, respectively. The
termination by any of these customers of its relationship with the Company could
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,
----------------------------
1998 1997
------------ ------------

Deferred Tax Assets:
Estimated allowances ....................$ 195,100 $ 293,000
Depreciation ............................ 165,700 --
Capitalization of
inventory ............................ 52,000 63,000
Net operating loss ...................... 10,986,000 9,932,000
------------ ------------
11,398,800 10,288,000

Deferred Tax Liabilities:

Depreciation ............................ -- (142,000)

Valuation allowance
for deferred taxes .................... (11,398,800) (10,146,000)
------------ ------------

Total ...............................$ -- $ --
============ ============

The valuation allowance at December 31, 1996 was approximately $9,318,000.

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,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Net income (loss):
United States ........... $(979,860) $(192,410) $ 25,936
Foreign ................. 77,389 258,974 129,478
--------- --------- ---------

$(902,471) $ 66,564 $ 155,414
========= ========= =========

Statutory rate .............. $(306,840) $ 22,632 $ 52,841
Utilization of benefit of tax
loss carryforward ........ (12,769) (42,731) (12,381)
Loss from which no tax
benefit was provided .... 333,152 65,419 --
Effect of foreign tax
rate difference ......... (13,543) (45,320) --
Foreign income not subject
to tax .................. -- -- (40,460)
--------- --------- ---------
Total tax provision
(benefit) ............... $ -- $ -- $ --
========= ========= =========

F-19

<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - Income Taxes: (continued)

Undistributed foreign income:

At December 31, 1998, JTP had approximately $1,300,000 of undistributed
accumulated earnings.

Net operating loss:

The Company has a net operating loss carryforward of approximately $25,850,000
as at December 31, 1998. Approximately $966,000 expires by 2008, $14,830,000 by
2009, $5,300,000 by 2010, $986,000 by 2011, $1,604,000 by 2012 and $2,164,000 by
2018. 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 $496,161, $519,514 and $384,114 for 1998,
1997 and 1996, 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:

Weighted Weighted
Average Average
Exercise Number of Price per
Number of Price per Shares Exercisable
Shares Share Exercisable Share
------ ----- ----------- -----
Balance - December 31, 1995 .. 225,624 $ 9.56 70,017 $ 13.12
=======
Granted - 1996 ............... 85,500 3.78
Canceled - 1996 .............. (29,950) (5.56)
------

Balance - December 31, 1996 .. 281,174 $ 8.22 103,149 $ 11.84
=======
Granted - 1997 ............... 83,250 2.92
Canceled pursuant to amendment
offer - 1997 ............... (43,500) (22.20)
Canceled - 1997 .............. (35,300) (5.86)
------

Balance - December 31, 1997 .. 285,624 $ 4.52 99,924 $ 5.78
=======
Granted - 1998 ............... 15,000 1.63
Canceled - 1998 .............. (19,748) (10.88)
------

Balance - December 31, 1998 .. 280,876 $ 3.90 126,835 $ 4.67
======= =======

The exercise price of options outstanding at December 31, 1998 ranged from $0.75
to $8.25 as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Number of Average Average
Number of Shares Contractual Exercise
Exercise Price between: Shares Exercisable Life Price
----------------------- ------ ----------- ---- -----
<S> <C> <C> <C> <C>
$7.25 - $8.25 57,542 42,134 5.95 $7.29
$2.37 - $4.00 213,334 84,701 7.57 $3.12
$0.75 - $1.25 10,000 - 9.72 $1.06
</TABLE>

During 1997, the Company offered holders of options with exercise prices at or
greater than $21.00 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 $3.00 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 48,333 shares with exercise prices at or above $21.00 per share
representing 87.9% of the total options with exercise prices at or above $21.00
per share. As a result, the Company amended their option agreements to the new
exercise price and canceled options to purchase 43,500 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 25,000 shares of Common Stock at an exercise
price of $3.00 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 25,000 shares of the Common Stock
on June 30, 1997 at an exercise price of $2.75, 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 50,000 shares of Common
Stock at an exercise price of $3.00 per share, which was above the market price
on the date of grant. These options are only exercisable by the officer in
installments of 12,500 shares each, once the price of the Company's Common Stock
reaches the following stock prices for a minimum of 30 consecutive trading days:
$6.00; $8.00; $10.00; and $12.00.

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 1998, 1997 and 1996:

1998 1997 1996
---- ---- ----

Risk free rate ........................ 5.50% 6.36% 6.58%
Dividend yield ........................ 0% 0% 0%
Volatility factor of the expected price
of the Company's Common Stock ....... 0.737 0.284 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:

1998 1997 1996
---- ---- ----

Pro forma net loss attributable
to common stockholders ...... $ (991,249) $ (255,791) $(12,250)

Pro forma basic loss per share
attributable to common
stockholders ................ $ (.46) $ (.12) $ (.01)

The weighted average fair value of options granted during the years ended
December 31, 1998, 1997 and 1996 were $1.04, $0.94 and $2.38, respectively.

As of December 31, 1998, 726,524 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 August 31, 1998, the Company issued a five-year warrant to its investment
banker to purchase up to 250,000 shares of Common Stock with an exercise price
of $2.00 per share. The warrant is exercisable with respect to 50,000 shares of
Common Stock. The warrant becomes exercisable with respect to the remaining
200,000 shares of Common Stock only after the consummation of certain
acquisition transactions by the Company. The number of such shares subject to
exercise is determined by a formula based upon the net sales of the business or
product line acquired by the Company. The Company has recorded compensation
expense of $4,500 based on the fair value of these warrants.

On January 1, 1996, the Company issued warrants to its former investment banker
to purchase 50,000 shares of common stock at $7.25 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 30,000 shares of
common stock at $7.25 per share, which expire on June 26, 2001. In 1997,
pursuant to an agreement to issue 5,889 shares of Common Stock for approximately
$3.80 per share to one of the holders of a warrant, the Company canceled
warrants to purchase 2,944 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, 1998 are as
follows:

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

Net sales........ $13,437,131 $5,909,658 $19,346,789
=========== ========== ===========

Operating income
(loss) ....... $ (465,346) $ 139,189 $ (326,157)
=========== ==========
Interest expense,
net........... (576,314)
-----------
Loss before
income taxes.. $ (902,471)
===========

Identifiable
assets at
December 31,
1998 ......... $ 6,667,108 $1,928,438 $ 8,595,546
=========== ==========
Corporate assets 7,665
-----------
Total assets.... $ 8,603,211
===========

* 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, 1997 are as
follows:

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

Net sales....... $16,769,709 $6,489,345 $23,259,054
=========== ========== ===========

Operating income $ 352,031 $ 322,314 $ 674,345
=========== ==========
Interest expense,
net ......... (615,332)
Other income.... 7,551
Income before
income taxes.. $ 66,564
===========

Identifiable
assets at
December 31,
1997.......... $ 8,213,263 $1,507,320 $ 9,720,583
=========== ==========
Corporate assets 7,665
-----------
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-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, 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,
net........... (532,873)
Other income .... 247,972
Income before
income taxes... $ 155,414
===========

Identifiable
assets at
December 31,
1996.......... $ 9,912,752 $1,012,088 $(1,092,426) $ 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-26

<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SCHEDULE II
JUST TOYS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------------

Additions-
Balance at Charged to (1) Balance at
Beginning Costs and Deductions- End of
of Period Expenses Describe Period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998: $ 50,000 $ - $ - $ 50,000
Allowance for doubtful accounts ...............
Allowance for sales returns, discounts and
allowances .................................. 638,000 526,935 756,935 408,000
---------- --------- ---------- ---------

Total .................................. $ 688,000 $ 526,935 $ 756,935 $ 458,000
========== ========= ========== =========

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

Total .................................. $ 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
---------- --------- ---------- ---------

Total .................................. $1,017,000 $ 852,336 $1,266,336 $ 603,000
========== ========= ========== =========
</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 March 12, 1999, 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, 1998.

/s/ERNST & YOUNG LLP

New York, New York
March 12, 1999

<ARTICLE> 5
<CURRENCY> US

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 267,292
<SECURITIES> 0
<RECEIVABLES> 822,791
<ALLOWANCES> 458,000
<INVENTORY> 2,711,685
<CURRENT-ASSETS> 5,215,526
<PP&E> 7,473,451
<DEPRECIATION> 4,761,082
<TOTAL-ASSETS> 8,603,211
<CURRENT-LIABILITIES> 3,051,977
<BONDS> 0
289,405
0
<COMMON> 22,386
<OTHER-SE> 5,239,443
<TOTAL-LIABILITY-AND-EQUITY> 8,603,211
<SALES> 19,346,789
<TOTAL-REVENUES> 19,346,789
<CGS> 11,755,755
<TOTAL-COSTS> 7,917,191
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 589,605
<INCOME-PRETAX> (902,471)
<INCOME-TAX> 0
<INCOME-CONTINUING> (902,471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (902,471)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)

</TABLE>