<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
_______________
Commission File Number 0-20612
_______________
JUST TOYS, INC.
(Exact Name of Registrant as specified in its Charter)
_______________
Delaware 13-3677074
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
20 Livingstone Avenue, Dobbs Ferry, New York 10522
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(914) 674-8697
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
The aggregate number of the Registrant's shares outstanding on November 8, 1999
was 2,242,581 shares of Common Stock, par value $.01 per share
<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements:
<S> <C>
Consolidated Balance Sheets - September 30, 1999
and 1998 (unaudited) and December 31, 1998 . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations (unaudited)
for the Three Months and Nine Months Ended September 30, 1999 and 1998 . . . 2
Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 30, 1999 and 1998 . . . . . . . . . . . 3
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . 7
Part II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 13
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
-------------------------------- ------------
1999 1998 1998
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 231,119 $ 414,545 $ 267,292
Accounts receivable, net of allowances of $290,000,
$192,000 and $458,000 (Note 2). . . . . . . . . . . . . 407,881 949,804 364,791
Inventories (Note 3) . . . . . . . . . . . . . . . . . . . 3,228,304 4,065,117 2,711,685
Prepaid expenses and other current assets . . . . . . . . 1,867,087 1,715,735 1,871,758
----------- ----------- -----------
Total current assets . . . . . . . . . . . . . . . . . 5,734,391 7,145,201 5,215,526
Property and equipment, at cost, net of accumulated
depreciation and amortization . . . . . . . . . . . . . . 2,533,486 2,992,308 2,712,369
Goodwill, net of accumulated amortization. . . . . . . . . . 511,635 580,681 544,296
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 124,351 127,175 131,020
----------- ----------- -----------
TOTAL . . . . . . . . . . . . . . . . . . $ 8,903,863 $10,845,365 $ 8,603,211
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to factor . . . . . . . . . . . . . . . . . . . . . . $ 1,404,688 $ 1,827,783 $ 308,836
Accounts payable . . . . . . . . . . . . . . . . . . . . . 2,315,002 2,469,855 1,778,177
Accrued liabilities . . . . . . . . . . . . . . . . . . . 856,698 887,138 964,964
----------- ----------- -----------
Total current liabilities . . . . . . . . . . . . . . 4,576,388 5,184,776 3,051,977
Series B Convertible Redeemable Preferred
Stock, 650,000 shares authorized, 129,261, 292,675
and 137,183 shares issued and outstanding (Note 5)
(liquidation value $468,571, $1,060,947 and $497,288). . . 288,977 605,613 289,405
----------- ----------- -----------
Total liabilities and Series B Stock . . . . . . . . . 4,865,365 5,790,389 3,341,382
----------- ----------- -----------
Commitments and contingencies . . . . . . . . . . . . . . . .
Stockholders' equity (Note 4):
Preferred stock, $1.00 par value, 2,000,000 shares authorized:
Series A Convertible Redeemable Preferred
Stock, 150,000 shares authorized, 120,000
shares issued and outstanding in 1998
(liquidation value $120,000). . . . . . . . . . . . . . -- 120,000 --
Common stock, par value $.01 per share, 15,000,000
shares authorized, 2,242,581, 2,203,673 and 2,238,619
issued and outstanding. . . . . . . . . . . . . . . . 22,426 22,037 22,386
Additional paid-in capital . . . . . . . . . . . . . . . . 30,226,187 30,087,437 30,208,779
Accumulated deficit . . . . . . . . . . . . . . . . . . . (26,210,115) (25,174,498) (24,969,336)
----------- ----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . 4,038,498 5,054,976 5,261,829
----------- ----------- -----------
TOTAL. . . . . . . . . . . . . . . . . . . . $ 8,903,863 $10,845,365 $ 8,603,211
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . $5,555,545 $5,119,646 $12,164,770 $12,611,904
Cost of goods sold . . . . . . . . . . . . . . . 3,468,055 3,096,283 7,399,511 7,566,570
---------- ---------- ----------- -----------
Gross profit . . . . . . . . . . . . . . . . . . 2,087,490 2,023,363 4,765,259 5,045,334
---------- ---------- ----------- -----------
Expenses:
Merchandising, selling, warehousing
and distribution . . . . . . . . . . . . 996,161 989,127 2,775,563 2,711,761
Royalties . . . . . . . . . . . . . . . . . . 281,968 208,053 562,102 517,830
General and administrative . . . . . . . . . 822,622 858,850 2,269,963 2,537,607
---------- ---------- ----------- -----------
Total . . . . . . . . . . . . . . 2,100,751 2,056,030 5,607,628 5,767,198
---------- ---------- ----------- -----------
Operating loss . . . . . . . . . . . . . . . . . (13,261) (32,667) (842,369) (721,864)
---------- ---------- ----------- -----------
Other income (expenses):
Interest expense . . . . . . . . . . . . . . (146,122) (146,925) (355,848) (402,091)
---------- ---------- ----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . (159,383) (179,592) (1,198,217) (1,123,955)
Preferred stock dividends and
accretion (Note 4) . . . . . . . . . . . . (13,839) (31,846) (42,562) (122,493)
Gain on conversion of Series B
Stock (Note 5) . . . . . . . . . . . . . . -- 3,976 -- 123,916
---------- ---------- ----------- -----------
Net loss attributable to
common stockholders . . . . . . . . . . . $ (173,222) $ (207,462) $(1,240,779) $(1,122,532)
========== ========== =========== ===========
Weighted average common shares
outstanding . . . . . . . . . . . . . . . 2,241,169 2,202,848 2,239,587 2,140,680
========== ========== =========== ===========
Per share data:
Basic and dilutive loss per share
attributable to common stockholders . . . . . . $(0.08) $(0.09) $(0.55) $(0.52)
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,198,217) $(1,123,955)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 569,044 624,332
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . . . . . . . . . . (43,090) (852,026)
Inventories . . . . . . . . . . . . . . . . . . . . . . (516,619) (351,136)
Prepaid expenses and other current assets . . . . . . . . 4,671 34,422
Other assets . . . . . . . . . . . . . . . . . . . . . . 6,669 (12,640)
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . . 536,825 616,609
Accrued liabilities . . . . . . . . . . . . . . . . . . . (108,266) (10,015)
----------- -----------
Net cash used in operating activities . . . . . . . . . . . . (748,983) (1,074,409)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . . . . . . . . (357,500) (359,313)
Net cash used in investing activities . . . . . . . . . . . . (357,500) (359,313)
Cash flows from financing activities:
Borrowings from factor . . . . . . . . . . . . . . . . . . . . . . . 1,095,852 1,827,783
Cash paid in connection with conversion
of Series B Stock (Note 5). . . . . . . . . . . . . . . . . . . . . - (117,778)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,542) (75,527)
----------- -----------
Net cash provided by financing activities. . . . . . . . . . . 1,070,310 1,634,478
----------- -----------
Net (decrease) increase in cash . . . . . . . . . . . . . . . . . . . . . . (36,173) 200,756
Cash - beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 267,292 213,789
----------- -----------
Cash - end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 231,119 $ 414,545
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
In the opinion of management, the accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. The results of operations
for the interim periods are not necessarily indicative of the results for a full
year. These consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in Just
Toys, Inc.'s (the "Company") Annual Report on Form 10-K for the year ended
December 31, 1998.
(1) Basic loss per share attributable to common stockholders:
Basic loss per share was calculated by dividing net 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.
(2) Comprehensive Income:
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's financial statements.
(3) Reclassifications:
Certain previously reported amounts have been reclassified to conform
to the 1999 presentation and that of the Form 10-K for the year ended December
31, 1998.
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<PAGE>
Note 2 - Accounts Receivable
Accounts receivable and amounts due from factor consist of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
------------------------ ------------
1999 1998 1998
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Accounts receivable - factor . . . . . . . . . . . . . . . . . $3,249,454 $2,651,234 $4,635,787
Borrowings from factor . . . . . . . . . . . . . . . . . . . . (3,249,454) (2,651,234) (4,635,787)
---------- ---------- ---------
Net due from factor . . . . . . . . . . . . . . . . . . . . . . -- -- --
Accounts receivable - trade. . . . . . . . . . . . . . . . . . 697,881 1,141,804 822,791
---------- ---------- ---------
Total accounts receivable. . . . . . . . . . . . . . . . . 697,881 1,141,804 822,791
Less: Accounts receivable allowances . . . . . . . . . . . . . (290,000) (192,000) (458,000)
---------- ---------- ---------
Total accounts receivable, net of
allowances . . . . . . . . . . . . . . . . . . . . . $ 407,881 $ 949,804 $ 364,791
========== ========== ==========
Note 3 - Inventories
The inventories consist of the following:
September 30, December 31,
------------------------ ------------
1999 1998 1998
---- ---- ----
(Unaudited)
Finished goods. . . . . . . . . . . . . . . . . . . . . . . . . $2,115,833 $2,593,016 $2,049,996
Material components and supplies. . . . . . . . . . . . . . . . 1,112,471 1,472,101 661,689
---------- ---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $3,228,304 $4,065,117 $2,711,685
========== ========== ==========
</TABLE>
Note 4 - Stockholders' Equity
Stockholders' equity consists of the following:
<TABLE>
<CAPTION>
Common Additional Paid-in Accumulated
Stock Capital Deficit Total
------ ------------------ ----------- -----
<S> <C> <C> <C> <C>
Balance December 31, 1998 . . . . . . . . . . . . $22,386 $30,208,779 $(24,969,336) $5,261,829
Conversion of Series B Stock to
Common Stock (Note 5) . . . . . . . . . . . . 40 17,408 -- 17,448
Net loss (unaudited). . . . . . . . . . . . . . . -- -- (1,198,217) (1,198,217)
Preferred Stock dividends and
accretion . . . . . . . . . . . . . . . . . . -- -- (42,562) (42,562)
------- ----------- ------------ ----------
Balance September 30, 1999
(unaudited) . . . . . . . . . . . . . . . . . $22,426 $30,226,187 $(26,210,115) $4,038,498
======= =========== ============ ==========
</TABLE>
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<PAGE>
Note 5 - Conversion of Series B Preferred Stock
On April 9, 1998, the Company offered to pay and exchange $0.5075 in
cash and one share of the Company's Common Stock for each share of Series B
Stock (the "Exchange Offer"). The holders of 232,075 shares of Series B Stock
accepted the Exchange Offer and the Company paid $117,778 in cash and issued
116,038 shares of Common Stock in exchange for the 232,075 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 $218,649 and $460,343, respectively.
The total consideration paid by the Company was less than the carrying value of
the Series B Stock by $123,916, and has been accounted for as a gain on
conversion of the Series B Stock.
Note 6 - Segment Information
Information regarding the Company's business segments for the nine
month period ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
--------------------------------- ----------------------------------
United States Hong Kong United States Hong Kong
------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . $ 8,231,909 $3,932,861 $8,133,724 $4,478,180
Operating income (loss). . . . . . . . $(1,006,360) $ 163,991 $ (802,357) $ 80,493
Identifiable assets (1) . . . . . . . . $ 6,439,866 $2,456,332 $8,193,986 $2,643,714
</TABLE>
(1) Excludes corporate assets of $7,665 at September 30, 1999 and 1998,
respectively.
Note 7 - Litigation
The Company and the plaintiffs in the Toys "R" Us class actions have
agreed to a settlement under which the Company will pay $30,000. The settlement
is subject to court approval.
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<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q 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 Quarterly 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: changes in consumer preferences,
dependence on a limited number of major customers, reliance on manufacturers
based in Asia, competition from major toy companies, seasonality and quarterly
fluctuations, government regulation, as well as the items set forth under
"Business--Certain Cautionary Factors" in the Company's December 31, 1998 Annual
Report on Form 10-K. 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.
Results of Operations
Three Months Ended September 30, 1999 and 1998
Net sales for the three months ended September 30, 1999 increased 8.5%
to $5,556,000 from $5,120,000 in the comparable period in 1998. The increase in
sales is due primarily to the introduction and sale of new products to the
Company's major customers and to improved sales to grocery and drug chains.
Gross profit as a percentage of net sales decreased to 37.6% for the
three months ended September 30, 1999 compared to 39.5% for the three months
ended September 30, 1998. This decrease resulted primarily from changes in the
product mix purchased by retailers and the shipping locations of such products
in the three month period ended September 30, 1999. Gross profit increased 3.2%
to $2,087,000 in the third quarter of 1999 from $2,023,000 in the comparable
period in 1998 as a result of the increase in sales.
The Company's net sales and gross profit, as a percentage of 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 Asia, whether the merchandise is purchased from
overseas sources or is produced domestically and the specific blend of products
shipped to the Company's customers.
Royalty expense increased to $282,000, or 5.1% of net sales, in the
period ended September 30, 1999 from $208,000, or 4.1% of net sales, for the
period ended September 30, 1998 primarily due to an increase in net sales of
products subject to royalties.
General and administrative expenses decreased 4.2% to $823,000 for the
third quarter of 1999 from $859,000 in the comparable 1998 period. This decrease
resulted from cost control measures
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<PAGE>
implemented by the Company. Included in the third quarter 1999 general and
administrative expenses are approximately $100,000 for professional fees
incurred by the Company in connection with its proposed acquisition of 4KIDZ,
Inc. and 4KIDZ Worldwide, Ltd. (collectively "4KIDZ"), which acquisition was
terminated during the period.
The Company had an operating loss of $13,000 in the three months ended
September 30, 1999 compared with an operating loss of $33,000 in the three
months ended September 30, 1998.
Interest expense was $146,000 in the third quarter of 1999 as compared
to $147,000 in the comparable period in 1998.
The Company had a net loss of $159,000 in the third quarter of 1999 as
compared to $180,000 in the third quarter of 1998.
In 1999 and 1998, the Company deducted dividends paid on its preferred
stock outstanding, and the accretion of the Series B Stock to its redemption
value as expenses in computing net loss attributable to common stockholders.
Basic loss per share attributable to common stockholders for the three
months ended September 30, 1999 totaled $.08 per share compared to a basic loss
per share attributable to common stockholders of $.09 per share in the
comparable period in 1998 based upon 2,241,000 and 2,203,000 weighted average
shares outstanding in the three months ended September 30, 1999 and 1998,
respectively. Net loss attributable to common stockholders during the third
quarter of 1998 was reduced by a gain of $3,976 on the conversion of Series B
Stock to Common Stock.
Nine Months Ended September 30, 1999 and 1998
Net sales for the nine months ended September 30, 1999 decreased 3.5%
to $12,165,000 from $12,612,000 in the comparable period in 1998. The decrease
in sales is due primarily to a decline in first quarter shipments from Hong
Kong. The Company believes that this decline resulted from reductions in advance
toy orders from retailers due to concerns over inventory levels and weak fourth
quarter 1998 toy sales. The decline in sales in the first quarter has been
partially offset by increases in sales in the second and third quarters of 1999
from the comparable periods during 1998.
Gross profit as a percentage of net sales decreased to 39.2% for the
nine months ended September 30, 1999 compared to 40.0% for the nine months ended
September 30, 1998. This decrease resulted primarily from changes in the product
mix purchased by retailers and the shipping locations of such products in the
nine month period ended September 30, 1999. Gross profit decreased 5.6% to
$4,765,000 in the third quarter of 1999 from $5,045,000 in the comparable period
in 1998 as a result of the decrease in sales.
The Company's net sales and gross profit, as a percentage of 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 Asia, whether the merchandise is purchased from
overseas sources or is produced domestically and the specific blend of products
shipped to the Company's customers.
-8-
<PAGE>
Royalty expense increased to $562,000, or 4.6% of net sales, in the
period ended September 30, 1999 from $518,000, or 4.1% of net sales, in the
period ended September 30, 1998 primarily due to an increase in net sales of
products subject to royalties.
General and administrative expenses decreased 10.5% to $2,270,000 for
the first nine months of 1999 from $2,538,000 in the comparable 1998 period.
This decrease resulted from (a) cost control measures implemented by the Company
and (b) the reimbursement from an insurance carrier of certain legal expenses
incurred in previous years. Included in the third quarter 1999 general and
administrative expenses are approximately $100,000 for professional fees
incurred by the Company in connection with its proposed acquisition of 4KIDZ,
which acquisition was terminated during the period.
The Company had an operating loss of $842,000 in the nine months ended
September 30, 1999 compared with an operating loss of $722,000 in the nine
months ended September 30, 1998. This difference is primarily attributable to
the decrease in sales and gross profit.
Interest expense decreased to $356,000 in the first nine months of 1999
as compared to $402,000 in the comparable period in 1998. This change was due
primarily to decreased borrowings from Milberg Factors, Inc. ("Milberg") during
the nine-month period ended September 30, 1999 as a result of lower sales and
inventory levels.
The Company had a net loss of $1,198,000 in the first nine months of
1999 as compared to $1,124,000 in the first nine months of 1998. This difference
is primarily attributable to the decrease in sales and gross profit.
In 1999 and 1998, the Company deducted dividends paid on its preferred
stock outstanding, and the accretion of the Series B Stock to its redemption
value as expenses in computing net loss attributable to common stockholders.
Basic loss per share attributable to common stockholders for the nine
months ended September 30, 1999 totaled $.55 per share compared to a basic loss
per share attributable to common stockholders of $.52 per share in the
comparable period in 1998 based upon 2,240,000 and 2,141,000 weighted average
shares outstanding in the nine months ended September 30, 1999 and 1998,
respectively. Net loss attributable to common stockholders during the nine
months ended September 30, 1998 was reduced by a gain of $123,916 on the
conversion of Series B Stock to Common Stock.
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources in
1999 and 1998 were funds provided from operations and its factoring agreement
with Milberg. At September 30, 1999, working capital was $1,158,000 compared to
approximately $2,164,000 at December 31, 1998.
Cash used in operating activities in the first nine months of 1999 was
$749,000 as compared with $1,074,000 in the comparable period in 1998.
Cash used in investing activities was $358,000 and $359,000 for the
nine months ended September 30, 1999 and 1998, respectively, which was primarily
attributable to capital expenditures for fixed assets, including molds and
tooling for new products.
-9-
<PAGE>
Cash provided by financing activities was $1,070,000 and $1,634,000 in
the first nine months of 1999 and 1998, respectively. Funds borrowed from
Milberg were used to finance the operations of the business.
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 Company's
inventory located in the United States. Such advances 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.
During the nine months ended September 30, 1999 and 1998, 7,922 and
229,179 shares of Series B Stock, respectively, were converted into 3,962 and
114,589 shares of Common Stock, respectively.
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 an
ongoing process being performed internally and with various outside third
parties including the Company's customers.
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. In April 1999, the
MIS systems at the Company's United States manufacturing subsidiary were
upgraded to Y2K compliant systems and hardware. Although there is no assurance
that software upgrades or replacements will resolve all of the Company's MIS Y2K
Issues, the Company's testing of such systems has not found any material Y2K
Issues. The Company estimates that
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<PAGE>
the upgrading, replacing and testing of such systems cost approximately $25,000
in 1999 which was funded from cash flow from operations.
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. Nothing has come to the
Company's attention that would lead the Company to believe that its key
customers, contractors and suppliers will not be EDI Y2K compliant prior to
December 31, 1999. The Company believes that 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. In such event, the Company would revert to manual order processing.
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.
To date, the Company's tests have confirmed that the Company's local
area network operating system is Y2K compliant. The Company has upgraded or
replaced any manufacturing operations software or other personal computer based
software found not to be Y2K compliant. The Company also has replaced personal
computers found not to be Y2K compliant. Although there is no assurance that the
hardware and software upgrades or replacements will resolve all of the Company's
Y2K Issues, the Company's testing of such systems has not found any material Y2K
Issues. The Company has completed the software upgrades and replacements and
personal computer replacements by October 1999 at an estimated cost of
approximately $25,000.
The Company has confirmed Y2K compliance of its material
non-information technology systems, which include telephone and alarm systems
and fax machines. The Company is continuing its assessment of other
miscellaneous systems.
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. However, the most likely impact on the Company
would be a reduced level of activity in the early part of the first quarter of
the year 2000, a time at which, as a result of the seasonability of the
Company's business, its activities in sales, manufacturing and sourcing are at
their low.
Although the Company has not yet formulated a formal overall
contingency plan to address difficulties that may arise from Y2K noncompliance
of its principal computer systems or those of key third parties, it has assessed
and will continue to consider its alternatives as the process continues.
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 $120,000.
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 Item
2 of this report, which addresses forward-looking statements made by the
Company.
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<PAGE>
Seasonality
The toy industry is typically seasonal in nature due to the heavy
demand for toy products during the Christmas season. During the past several
years, the Company has experienced a shift in its revenues to the second half of
the year with fourth quarter revenues becoming increasingly significant. The
Company expects that this trend will continue due to industry changes and due to
changes to its product mix. 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.
Backlog
Total order backlog at September 30, 1999 and 1998 was approximately
$1,263,000 and $1,509,000, 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and the plaintiffs in the Toys "R" Us class actions have
agreed to a settlement under which the Company will pay $30,000. The settlement
is subject to court approval.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Certificate of Incorporation, incorporated by reference to Exhibit
3.1 to the Registration Statement on Form S-1 (File No. 33-50878).
3.2 Certificate of Amendment of Certificate of Incorporation
incorporated by reference to Exhibit 3.5 of the Quarterly Report
on Form 10-Q filed with the Securities and Exchange Commission on
November 8, 1996 (the "1996 3rd Quarter 10-Q").
3.3 Certificate of Designations, Preferences and Rights of the Series
A Convertible Redeemable Preferred Stock (included in Exhibit 4.1
hereof).
3.4 Certificate of Designations, Preferences and Rights of the Series
B Convertible Redeemable Preferred Stock (included in Exhibit 4.2
hereof).
3.5 Amended and Restated By-laws incorporated by reference to Exhibit
3.4 to the 1996 3rd Quarter 10-Q.
4.1 Certificate of Designations, Preferences and Rights of the Series
A Convertible Redeemable Preferred Stock, incorporated by
reference to Exhibit 4 of the Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on November 7, 1995.
4.2 Certificate of Designations, Preferences and Rights of the Series
B Convertible Redeemable Preferred Stock, incorporated by
reference to Exhibit 3.2 of the Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 10, 1996 (the
"July 1996 Form 8-K").
+27 Financial Data Schedule
- --------------------------
* Filed herewith
+ Filed with the Securities and Exchange Commission only pursuant to
Article 5 of Regulation S-X.
(b) Reports on Form 8-K -- None
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 11, 1999
JUST TOYS, INC.,
a Delaware corporation
By: /s/ Jerry Carroll
----------------------------------
Jerry Carroll
Chief Operating Officer
By: /s/ David Schwartz
----------------------------------
David Schwartz
Chief Financial Officer and
Principal Accounting Officer
-14-
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