<PAGE>
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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 June 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 _____
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Commission File Number 0-20612
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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 August 11, 1999
was 2,242,581 shares of Common Stock, par value $.01 per share
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<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
INDEX
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<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1999
and 1998 (unaudited) and December 31, 1998................................................ 1
Consolidated Statements of Operations (unaudited)
for the Three Months and Six Months Ended June 30, 1999 and 1998.......................... 2
Consolidated Statements of Cash Flows (unaudited)
for the Six Months Ended June 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>
June 30, December 31,
------------------------ ------------
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
ASSETS
Current assets:
Cash....................................................... $ 197,073 $ 432,506 $ 267,292
Accounts receivable, net of allowances of $189,000,
$129,000 and $458,000 (Note 2).......................... 858,848 460,345 364,791
Inventories (Note 3)....................................... 2,882,245 3,849,568 2,711,685
Prepaid expenses and other current assets.................. 1,856,261 1,804,367 1,871,758
----------- ----------- ----------
Total current assets.................................... 5,794,427 6,546,786 5,215,526
Property and equipment, at cost, net of accumulated
depreciation and amortization ............................. 2,617,008 3,126,279 2,712,369
Goodwill, net of accumulated amortization...................... 522,522 592,066 544,296
Other assets................................................... 124,351 105,982 131,020
----------- ----------- ----------
TOTAL............................................... $ 9,058,308 $10,371,113 $8,603,211
=========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to factor.............................................. $ 1,679,707 $ 2,129,010 $ 308,836
Accounts payable........................................... 2,210,256 1,599,450 1,778,177
Accrued liabilities........................................ 673,285 779,119 964,964
----------- ----------- ----------
Total current liabilities............................... 4,563,248 4,507,579 3,051,977
Series B Convertible Redeemable Preferred
Stock, 650,000 shares authorized, 136,684, 294,804
and 137,183 shares issued and outstanding (Note 5)
(liquidation value $495,480, $1,068,665 and $497,288)...... 299,721 598,338 289,405
---------- ----------- ----------
Total liabilities and Series B Stock.................... 4,862,969 5,105,917 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 1997 (liquidation
value $120,000)................................. -- 120,000 --
Common stock, par value $.01 per share, 15,000,000
shares authorized, 2,238,869, 2,075,705 and 2,238,619
issued and outstanding.................................. 22,389 22,026 22,386
Additional paid-in capital................................. 30,209,843 30,090,206 30,208,779
Accumulated deficit........................................ (26,036,893) (24,967,036) (24,969,336)
----------- ----------- -----------
Total stockholders' equity.............................. 4,195,339 5,265,196 5,261,829
----------- ----------- -----------
TOTAL............................................... $ 9,058,308 $10,371,113 $ 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales....................................... $3,791,447 $3,616,623 $6,609,225 $7,492,258
Cost of goods sold.............................. 2,175,409 2,157,283 3,931,456 4,470,287
---------- ---------- ---------- ----------
Gross profit.................................... 1,616,038 1,459,340 2,677,769 3,021,971
---------- ---------- ---------- ----------
Expenses:
Merchandising, selling, warehousing
and distribution......................... 897,971 851,913 1,779,402 1,722,634
Royalties................................... 169,076 149,260 280,134 309,777
General and administrative.................. 783,015 834,328 1,447,341 1,678,757
---------- ---------- ---------- ----------
Total................................ 1,850,062 1,835,501 3,506,877 3,711,168
---------- ---------- ---------- ----------
Operating loss.................................. (234,024) (376,161) (829,108) (689,197)
---------- ---------- ---------- ----------
Other income (expenses):
Interest expense............................ (102,624) (124,588) (209,726) (255,166)
---------- ---------- ---------- ----------
Net loss........................................ (336,648) (500,749) (1,038,834) (944,363)
Preferred stock dividends and
accretion (Note 4)....................... (14,408) (35,941) (28,723) (90,647)
Gain on conversion of Series B
Stock (Note 5)........................... - 119,940 - 119,940
---------- ---------- ---------- ----------
Net loss attributable to
common stockholders...................... $ (351,056) $ (416,750) $(1,067,557) $ (915,070)
========== ========== =========== ==========
Weighted average common shares
outstanding.............................. 2,238,869 2,128,738 2,238,783 2,109,081
========== ========== =========== ==========
Per share data:
Basic and dilutive loss per share
attributable to common stockholders............. $ (0.16) $ (0.20) $ (0.48) $ (0.43)
========== ========== =========== ==========
</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>
Six Months Ended June 30,
-------------------------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $(1,038,834) $ (944,363)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 380,965 408,195
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable..................................... (494,057) (362,567)
Inventories............................................. (170,560) (135,587)
Prepaid expenses and other current assets............... 15,497 (54,210)
Other assets............................................ 6,669 8,553
Increase (decrease) in:
Accounts payable........................................ 432,079 (253,796)
Accrued liabilities..................................... (291,679) (118,034)
----------- -----------
Net cash used in operating activities ...................... (1,159,920) (1,451,809)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment........................... (263,830) (288,532)
----------- -----------
Net cash used in investing activities....................... (263,830) (288,532)
----------- -----------
Cash flows from financing activities:
Borrowings from factor.......................................... 1,370,871 2,129,010
Cash paid in connection with conversion
of Series B Stock (Note 5).................................... - (114,621)
Dividends paid.................................................. (17,340) (55,331)
----------- -----------
Net cash provided by financing activities................... 1,353,531 1,959,058
----------- -----------
Net (decrease) increase in cash........................................ (70,219) 218,717
Cash - beginning of period............................................. 267,292 213,789
----------- -----------
Cash - end of period................................................... $ 197,073 $ 432,506
=========== ===========
</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
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In the opinion of management, the accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. The results of operations
for the interim periods are not necessarily indicative of the results for a full
year. These consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 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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Note 2 - Accounts Receivable
Accounts receivable and amounts due from factor consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
----------------------- ------------
1999 1998 1998
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Accounts receivable - factor......................... $ 1,677,229 $ 1,858,613 $ 4,635,787
Borrowings from factor............................... (1,677,229) (1,858,613) (4,635,787)
----------- ----------- ----------
Net due from factor.................................. - - - - - -
Accounts receivable - trade.......................... 1,047,848 589,345 822,791
----------- ----------- ----------
Total accounts receivable......................... 1,047,848 589,345 822,791
Less: Accounts receivable allowances................. (189,000) (129,000) (458,000)
----------- ----------- ----------
Total accounts receivable, net of
allowances.................................... $ 858,848 $ 460,345 $ 364,791
=========== =========== ==========
</TABLE>
Note 3 - Inventories
- --------------------
The inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
---------------------------- ------------
1999 1998 1998
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Finished goods....................................... $1,643,830 $2,295,443 $2,049,996
Material components and supplies..................... 1,238,415 1,554,125 661,689
---------- ---------- ----------
Total............................................. $2,882,245 $3,849,568 $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).................. 3 1,064 1,067
Net loss (unaudited)...................... (1,038,834) (1,038,834)
Preferred Stock dividends and
accretion.............................. (28,723) (28,723)
------- ----------- ------------ ----------
Balance June 30, 1999
(unaudited)............................ $22,389 $30,209,843 $(26,036,893) $4,195,339
======= =========== ============ ==========
</TABLE>
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Note 5 - Conversion of Series B 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 225,855 shares of Series B Stock
accepted the Exchange Offer and the Company paid $114,621 in cash and issued
225,855 shares of Common Stock in exchange for the 225,855 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 $219,045 and $453,606, respectively.
The total consideration paid by the Company was less than the carrying value of
the Series B Stock by $119,940, 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 six month
period ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
--------------------------------- ------------------------------
United States Hong Kong United States Hong Kong
------------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Net sales ............................. 4,576,514 2,032,711 4,826,340 2,665,918
Operating income (loss)................ (812,405) (16,703) (652,776) (36,421)
Identifiable assets (1)................ 6,219,429 2,831,214 8,562,435 1,801,013
</TABLE>
(1) Excludes corporate assets of $7,665 at June 30, 1999 and 1998, respectively.
Note 7 - Litigation
- -------------------
The Company and the plaintiffs in the Toys "R" Us class actions have
agreed in principle to a settlement under which the Company will pay $30,000.
The settlement is subject to court approval.
Note 8 - Subsequent Event
- -------------------------
On August 2, 1999, the Company announced that it had terminated its
previously announced Letter of Intent to acquire 4KIDZ, Inc. and 4KIDZ
Worldwide, Ltd., two privately held toy companies.
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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 the Far East, 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 June 30, 1999 and 1998
Net sales for the three months ended June 30, 1999 increased 4.8% to
$3,791,000 from $3,617,000 in the comparable period in 1998. The increase in
sales is due primarily to improved sales at grocery and drug chains and
inventory replenishment at retailers that had allowed inventories to drop to low
levels during the prior three months.
Gross profit as a percentage of net sales increased to 42.6% for the
three months ended June 30, 1999 compared to 40.4% for the three months ended
June 30, 1998. This increase resulted primarily from revenues earned by one of
the Company's Hong Kong subsidiaries in its capacity as a product sourcing agent
for unrelated third parties ("Third Party Agent Revenues"). Gross profit
increased 10.7% to $1,616,000 in the second quarter of 1999 from $1,459,000 in
the comparable period in 1998 as a result of the increase in sales and Third
Party Agent Revenues.
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 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.
Royalty expense increased as a percentage of net sales to 4.5% in the
period ended June 30, 1999 from 4.1% for the period ended June 30, 1998
primarily due to an increase in net sales of products subject to royalties.
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<PAGE>
General and administrative expenses decreased 6.2% to $783,000 for the
second quarter of 1999 from $834,000 in the comparable 1998 period. This
decrease resulted from cost control measures implemented by the Company.
The Company had an operating loss of $234,000 in the three months ended
June 30, 1999 compared with an operating loss of $376,000 in the three months
ended June 30, 1998. This difference is primarily attributable to the increase
in sales and Third Party Agent Revenues.
Interest expense decreased to $103,000 in the second quarter of 1999 as
compared to $125,000 in the comparable period in 1998. This change was due
primarily to decreased borrowings from the Company's factor Milberg Factors,
Inc. ("Milberg") during the quarter as a result of lower sales and inventory
levels in the second quarter of 1999.
The Company had a net loss of $337,000 in the second quarter of 1999 as
compared to $501,000 in the second quarter of 1998. This difference is primarily
attributable to the increase in sales and Third Party Agent Revenues.
In 1999 and 1998, 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 loss attributable to common
stockholders.
Basic loss per share attributable to common stockholders for the three
months ended June 30, 1999 totaled $.16 per share compared to a basic loss per
share attributable to common stockholders of $.20 per share in the comparable
period in 1998 based upon 2,239,000 and 2,129,000 weighted average shares
outstanding in the three months ended June 30, 1999 and 1998, respectively. Net
loss attributable to common stockholders during the second quarter of 1998 was
reduced by a gain of $119,940 on the conversion of Series B Stock to Common
Stock.
Six Months Ended June 30, 1999 and 1998
Net sales for the six months ended June 30, 1999 decreased 11.8% to
$6,609,000 from $7,492,000 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. Additionally, as part of its inventory reduction plan,
during the first quarter of 1999 the Company sold certain discontinued
merchandise at lower prices than in the comparable period of 1998.
Gross profit as a percentage of net sales increased to 40.5% for the
six months ended June 30, 1999 compared to 40.3% for the six months ended June
30, 1998. Gross profit decreased 11.4% to $2,678,000 in the second quarter of
1999 from $3,022,000 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 the Orient, whether the merchandise is purchased from
overseas sources or is produced domestically and the specific blend of products
shipped to the Company's customers.
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<PAGE>
Royalty expense decreased to $280,000 in the period ended June 30, 1999
from $310,000 in the period ended June 30, 1998 primarily due to the decrease in
net sales.
General and administrative expenses decreased 13.8% to $1,447,000 for
the first six months of 1999 from $1,679,000 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.
The Company had an operating loss of $829,000 in the six months ended
June 30, 1999 compared with an operating loss of $689,000 in the six months
ended June 30, 1998. This difference is primarily attributable to the decrease
in sales and gross profit.
Interest expense decreased to $210,000 in the first six months of 1999
as compared to $255,000 in the comparable period in 1998. This change was due
primarily to decreased borrowings from Milberg during the six-month period ended
June 30, 1999 as a result of lower sales and inventory levels.
The Company had a net loss of $1,039,000 in the first six months of
1999 as compared to $944,000 in the first six 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 issued in 1996 to its
redemption value as expenses in computing net loss attributable to common
stockholders.
Basic loss per share attributable to common stockholders for the six
months ended June 30, 1999 totaled $.48 per share compared to a basic loss per
share attributable to common stockholders of $.43 per share in the comparable
period in 1998 based upon 2,239,000 and 2,109,000 weighted average shares
outstanding in the six months ended June 30, 1999 and 1998, respectively. Net
loss attributable to common stockholders during the six months ended June 30,
1998 was reduced by a gain of $119,940 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 June 30, 1999, working capital was $1,231,000 compared to
approximately $2,164,000 at December 31, 1998.
Cash used in operating activities in the first six months of 1999 was
$1,160,000 as compared with $1,452,000 in the comparable period in 1998. The
decrease in cash used in operations was a result of the decrease in sales and
gross profit in the six months of 1999.
Cash used in investing activities was $264,000 and $289,000 for the six
months ended June 30, 1999 and 1998, respectively, which was primarily
attributable to capital expenditures for fixed assets, including molds and
tooling for new products.
Cash provided by financing activities was $1,354,000 and $1,959,000 in
the first six months of 1999 and 1998, respectively. Funds borrowed from Milberg
were used to finance the operations of the business.
-9-
<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 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 six months ended June 30, 1999 and 1998, 499 and 227,050
shares of Series B Stock, respectively, were converted into an equivalent number
of shares of Common Stock.
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. Initial testing has
confirmed such systems' Y2K compliance and the Company plans further testing
throughout the Y2K project. In April 1999, the MIS systems at the Company's
United States manufacturing subsidiary were upgraded to Y2K compliant systems
and hardware. The Company estimates that the upgrading, replacing and testing of
such systems have cost approximately $25,000 in 1999 which were 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.
-10-
<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. 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 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. 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.
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 October 1999 at an estimated cost of approximately $25,000.
The Company is continuing its assessment of the compliance of its
non-information technology systems, which include telephone and alarm systems,
fax machines and other miscellaneous systems. It is believed that the majority
of these systems will not be affected by the Y2K Issue and the Company
anticipates that all significant systems not as yet compliant will be by
December 31, 1999.
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.
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 evaluating 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 $100,000.
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.
-11-
<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 June 30, 1999 and 1998 was approximately
$2,439,000 and $2,364,000, 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.
Other Information
On August 2, 1999, the Company announced that it had terminated its
previously announced Letter of Intent to acquire 4KIDZ, Inc. and 4KIDZ
Worldwide, Ltd., two privately held toy companies.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and the plaintiffs in the Toys "R" Us class actions have
agreed in principle to a settlement under which the Company will pay $30,000.
The settlement is subject to court approval.
-12-
<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").
*10.1 Letter Agreement, dated June 24, 1999, between the Company and Gerard
Klauer Mattison & Co., Inc.
*10.2 Letter Agreement, dated May 20, 1999, between the Company and Gerard
Klauer Mattison & Co., Inc.
+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: August 13, 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-
<PAGE>
Exhibit 10.1
[JUST TOYS, INC. LETTERHEAD]
June 24, 1999
Gerard Klauer Mattison & Co., Inc.
529 Fifth Avenue
New York, NY 10017
Gentlemen:
This letter will confirm our understanding that the scope of your
engagement pursuant to the letter agreement dated August 31, 1998 (the
"Engagement letter") between Gerard Klauer Mattison & Co., Inc. and Just Toys,
Inc. shall be expanded to include a "Sale Transaction" (as hereinafter defined).
In reference to the foregoing, we have agreed as follows:
1. The first sentence of Section 1 of the Engagement Letter shall be
amended in its entirety to read as follows:
The Company hereby engages Gerard Klauer as its exclusive financial
advisor for the purpose, among other things, of identifying and
assisting the Company with the structure, evaluation, negotiation
and financing of Acquisition Transactions (as hereinafter defined)
and Sale Transactions (as hereinafter defined).
2. The first paragraph of Section 1 of the Engagement Letter shall be
amended to add the following sentence:
As used in this agreement the term "Sale Transaction" means, whether
effected in one transaction or a series of transactions: (a) any
merger, consolidation, reorganization or other business combination
pursuant to which (i) the Company or the business of the Company is
acquired or combined with another entity, (ii) any subsidiary,
assets or business of the Company is spun-off, dividended or
otherwise distributed to the Company's stockholders or creditors,
(b) an acquisition, directly or indirectly, by a third party of more
than 25% of the capital stock outstanding or a substantial portion
of the Company's assets by way of a tender or exchange offer,
negotiated purchase or otherwise, or (c) the acquisition, directly
or indirectly, by a third party of control of the Company or the
ability to effect such control, through a proxy contest or
otherwise.
<PAGE>
3. The first sentence of the second paragraph of Section 1 of the
Engagement Letter shall be amended to insert the words "and Sale Transactions"
after the words "Acquisition Transactions".
4. The first sentence of Section 3 of the Engagement Letter shall be
amended to insert the words "in connection with Acquisition Transactions" after
the words "pursuant to this agreement" in the second line thereof.
5. The following paragraph shall be added as an additional paragraph to
Section 3 of the Engagement Letter:
In connection with a Sale Transaction, the Company will pay Gerard
Klauer a transaction fee calculated as a percentage of the Purchase
Price (as hereafter defined) in accordance with the following
schedule:
Purchase Price Percentage
-------------- ----------
Up to the first $5.0 million 3.0%
Plus on the next $10.0 million 2.5%
Plus on the amount over $15.0 million 2.0%
In connection with a Sale Transaction involving a tender offer or other
purchase or sale of stock, the transaction fee will be payable and calculated
based on the Purchase Price as though 100% of the outstanding stock on a fully
diluted basis had been acquired for the same per share amount paid in the
transaction or series of transactions in which 50% or more of the Company's
outstanding stock is acquired. Nevertheless, Gerard Klauer's services pursuant
to this Agreement will continue after such first step is accomplished to assist
the Company with a second step merger or similar transaction, at no additional
cost. If less than 50% of the Company's outstanding stock is acquired, the
transaction fee will be payable and calculated on the Purchase Price payable
only with respect to the actual stock acquired.
The term "Purchase Price" means the sum of the aggregate fair market
value of any securities and non-cash consideration, and the aggregate amount of
any cash consideration, received by the Company or the holders of its securities
in connection with a Sale Transaction (including, without limitation, amounts
paid to holders of any warrants, stock purchase rights, convertible securities
or similar rights and to holders of any options or stock appreciation rights
issued by the Company, whether or not vested), plus the amount of any
indebtedness of the Company that is on the acquired Company's balance sheet at
the consummation of the Sale Transaction or is otherwise assumed, refinanced or
extinguished, directly or indirectly, by the acquiring Company (or the surviving
entity in any merger), plus the amount of any payments
<PAGE>
under consulting agreements, agreements not to compete or similar arrangements
(including such payments to management), plus, in the event the Sale Transaction
takes the form of a purchase of assets, (i) the value of any current assets of
the acquired company not purchased, minus (ii) the value of any current
liabilities of the Company not assumed by the acquiring company which were
directly related to the operations that are the subject of the Sale Transaction.
The term "Purchase Price" shall also indicate the present value
(discounted as of the closing date of the Sale Transaction at the rate of 6% per
annum) of the maximum consideration that is or may be payable subsequent to the
closing of a Sale Transaction, including the payment of which is contingent upon
the occurrence or non-occurrence of specified events or the passage of time. The
fair market value of any securities and non-cash consideration received by the
Company or holders of its securities shall be the value determined in good faith
by the Company and Gerard Klauer upon the closing of the Sale Transaction;
provided, however, that to the extent such consideration consists of securities
with an existing public trading market, the value thereof shall be the average
closing price for such notes or securities as reported on the primary exchange
on which such notes or securities are traded for the five trading days prior to
the consummation of the Sale Transaction.
Notwithstanding the foregoing, if the consideration per share is $2.00
or greater, the transaction fee payable in connection with a Sale Transaction
hereunder shall not exceed $100,000 (exclusive of any proceeds received with
respect to any Warrants.)
6. Except as amended hereby, the Engagement Letter shall remain in full
force and effect.
JUST TOYS, INC.
By: /s/ Jerry Carroll
---------------------------------------------
Name: Jerry Carroll
Title: Senior Vice President/Chief Operating
Officer
Agreed To and Accepted:
GERARD KLAUER MATTISON & CO., INC.
By: /s/ Dominic Petito
-------------------------------
Name: Dominic Petito
Title: Senior Managing Director
<PAGE>
Exhibit 10.2
[GERARD KLAUER MATTISON & CO., INC. LETTERHEAD]
May 20, 1999
Just Toys, Inc.
c/o Donald Shack, Esq.
Shack and Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Gentlemen:
Pursuant to our earlier conversation, we have agreed that Gerard Klauer Mattison
& Co., Inc. shall receive a fee of $150,000 for arranging the financing for the
4Kidz acquisiton, which fee shall be due and payable upon the closing of such
transaction.
We have further agreed that the exercise price for our 250,000 warrants (as
adjusted for the reverse stock split) will be re-set from $2.00 to $1.00. Please
acknowledge your agreement and understanding with the foregoing by signing a
copy of this letter in the space indicated below and returning it to my
attention. Thank you.
Sincerely,
/s/ Dominic A. Petito
Dominic A. Petito
Senior Managing Director
Acknowledged and Agreed:
JUST TOYS, INC.
By: /s/ Barry Shapiro
-------------------
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 197,073
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