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SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
Form 10 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required) For the fiscal year ended
December 31, 1999
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission file number 0-22372
Grand Toys International, Inc.
(Exact name of registrant as specified in its charter)
Nevada 87-0454155
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1710 Trans Canada Hwy., Dorval, Quebec, Canada, H9P 1H7
(Address of principal executive offices, Zip Code)
Issuer's telephone number, including area code (514) 685-2180
Securities registered pursuant to Section 12 (b) of the Exchange
Act: None
Securities registered pursuant to Section 12 (g) of the Exchange
Act: Common Stock $.001 par value
Check whether the Issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the Issuer was required
to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained herein, and no disclosure will
be contained to the best of Issuer's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
The Issuer's revenues for the year ended December 31, 1999 were
$37,260,250.
The number of shares outstanding of the Issuer's common stock is
3,184,906 (as of February 25, 2000).
The aggregate market value of the voting stock held by non
affiliates of the Issuer was approximately $12,499,294 (as of
February 25, 2000).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Grand Toys International, Inc. 2000 Notice of
Annual Meeting of Stockholders and Proxy Statement, to be filed
with the Securities and Exchange Commission within 120 days
after the close of the Issuer's fiscal year (incorporated into Part III).
GRAND TOYS INTERNATIONAL, INC.
Index to Annual Report on Form 10 - K
Filed with the Securities and Exchange Commission
Year ended December 31, 1999
ITEMS IN FORM 10 - K
Page
PART I
Item 1. Description of Business 3
Item 2. Description of Property 3
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis or Plan of
Operation 12
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 8. Financial Statements 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 17
PART III
Items 10 - 13 17
PART IV
Item 14. Exhibits, Financial Statements and Reports on
Form 8 - K 17
SIGNATURES 40
PART I
This Form 10-K of Grand Toys International, Inc. (the
"Company") contains forward-looking statements within the
meaning of the Securities Exchange Act of 1934, which statements are subject
to risks and uncertainties. Statements indicating that the Company
"expects", "estimates" or "believes" are forward-looking, as are all other
statements concerning future financial results, product offerings or other
events that have not yet occurred. There are many important factors that
could cause actual results or events to differ materially from those
anticipated by the forward-looking statements contained in this Form 10-K.
Unless otherwise indicated, all information contained in this report
takes into account the one-for-five reverse split of the Company's
Common Stock effected on August 4, 1997.
Item 1.
Description of Business:
Introduction
Grand Toys International, Inc. (the "Company"), through its
Canadian subsidiaries, Grand Toys Ltd. and Grand Concepts Inc.
(collectively "Grand Canada") has been engaged in the toy business in Canada
for over 39 years and currently distributes a wide variety of toys
and fashion accessories throughout Canada. Grand Canada's
business consists of three areas of operation: (i) the importation and
distribution throughout Canada, on an exclusive and non-exclusive basis, of
a wide variety of well-known toy products and fashion accessories
including backpacks, party goods, stationery and accessories;
(ii) the sale of toy products and fashion accessories featuring
popular characters licensed to the Company; and (iii) earning commissions
on the sale of products, represented by Grand Canada and shipped directly
from overseas vendor to Canadian customers. The Company, through its U.S.
subsidiary, Ark Creations Inc,(formerly Ark Puzzles, Inc.) distributes
proprietary and licensed foam puzzles primarily to the U.S. marketplace.
Unless the context otherwise requires, references herein to "Grand Toys" or
the "Company" include Grand Toys International, Inc., and its operating
subsidiaries, Ark Creations, Inc., Grand Toys Ltd., and Grand Concepts Inc.
The Company's revenues are primarily derived from the operations of Grand
Canada.
Products
Grand Canada imports into Canada for distribution select toys and
fashion accessories from vendors who typically design, develop and sell
their products in other countries. In determining which items to import,
Grand Canada examines such factors as consumer acceptance of the particular
products in other countries, and Canadian consumer tastes for such products
based on similar products distributed previously in Canada. In addition,
prior to ordering a product, Grand Canada attempts to predict the potential
demand for such product by exhibiting it to Grand Canada's existing customers.
The following table sets forth certain vendors whose
products Grand Canada distributes in Canada, the type of products
they manufacture, and the price range within which Grand Canada
sells such products to retailers.
Vendor (Head Office) Products Distributed Product Price
by the Company Range ($)
Ark Creations (Canada) -
affiliate Foam puzzles 4.95 - 74.95
Commonwealth (U.S.) Plush 1.60 - 26.09
Intex (Taiwan) Inflatable water toys 0.27 - 451.14
Majorette (France) - DieCast vehicles, radio control
discontinued cars, road race sets
Processed Plastic (U.S.) Plastic beach & sand toys,
ride-on vehicles, etc... 0.37 - 31.85
Spectra Star Toys (U.S.) Kites 0.59 - 12.66
Tiger Electronics (U.S.)- Games,dolls, hand-held games,
discontinued electronic diaries 4.41 - 45.54
Toy Biz (U.S.) Male action figures, dolls 3.36 - 95.73
Toymax (U.S.) Electronic Toys 3.43 - 85.92
Unice S.A (Spain) Balls 1.11 - 1.86
Design and Development
As is common in the toy and fashion accessory industries, Grand
Canada receives numerous concepts from unaffiliated third parties
for new products. Grand Canada does not employ its own
inventors of new concepts but if it accepts and develops an inventor's
concept for a new product, it will pay royalties to the inventor on sales
from that product.
All safety testing of the Company's products is done by the
manufacturers at the manufacturers' factories and is designed to
meet safety regulations imposed by the Canadian
governmental authorities. The Company also monitors quality
assurance procedures of the vendors for its products for safety purposes
at its warehouse facilities.
Sources of Product
Grand Canada does not manufacture any of the products it
distributes. Instead, the products are purchased abroad and imported and
warehoused at the Company's Canadian facilities and subsequently distributed
to its customers in Canada.
Approximately 79% of the Company's gross sales in 1999 were from
products supplied by the following four vendors: Tiger Electronics,
Toy Biz, Majorette and Toymax, whose products, accounted for 49%, 19%, 7%
and 4%, respectively, of 1999 gross sales. Other than the products
from the above-mentioned vendors, no products from any other vendor accounted
for more than 2% of the Company's gross sales in 1999. In February 1999,
Hasbro acquired Tiger Electronics Inc., and terminated the distribution of
Tiger products by Grand Canada effective December 31,1999.
Grand Toys will have sold the remaining Tiger products in its inventory by
the end of the first quarter of 2000, at average selling prices in excess
of its cost. The Company terminated its relationship with Majorette and,
as a result, Majorette products were returned to the vendor in the first
quarter of 2000.In order to terminate the relationship, the Company had to
pay a penalty of $382,056 to Majorette.
Therefore, products that accounted for 56% of sales in 1999 will no longer
be part of the Grand product line for the year 2000 and beyond. The Company
is sourcing new products and looking at potential acquisitions in order to
mitigate the inevitable sales decline. The Company is uncertain at this time if
its efforts will be successful. If one or more of the remaining suppliers
identified above were to terminate their relationship with Grand Canada, such
termination may have a material adverse effect on the Company.
The imported products are manufactured for Grand Canada by unaffiliated third
parties principally located in Mexico, Spain, Poland, the United States, China,
Hong Kong, Thailand, France and Taiwan. The manufacturers are chosen by the
vendor on the basis of price, payment terms, product quality, reliability and
the ability of a manufacturer to meet delivery requirements.
For licensed product, the licensor may have the right to approve the selected
manufacturer. The use of third-party manufacturers enables Grand Canada to avoid
incurring fixed manufacturing costs, but also reduces its ability to control
the timing and quality of the manufacturing process. Delays in shipments or
defects in material could result in a loss of sales, which could have a material
adverse effect on Grand Canada.
To date, Grand Canada has experienced some delays in
the delivery of its products from certain vendors. Delays in
shipments or product defects could result in a loss of sales, which
could have a material adverse effect on the financial condition
of the Company for which it has not been appropriately compensated.
To date, Grand Canada has
not experienced any material defects in the products manufactured
for it for which it has not been appropriately compensated.
Grand Canada's ability to have its products manufactured outside Canada could be
affected by political or economic disruptions, including labor strikes and
disruptions in the shipping industries. Although Grand Canada believes that
alternative supply sources are available, any serious disruption could
materially impair Grand Canada's ability to deliver products
in a timely manner. To date, Grand Canada has not experienced
any problems as a result of any political or economic disruptions.
Grand Canada does not supervise the day-to-day manufacturing of
its products. However, prior to the commencement of
manufacturing, Grand Canada, the vendor and the manufacturer work together
to design a prototype of the specific product and its packaging. The
manufacturer is contractually obligated to manufacture the products in
accordance with those prototype specifications. For licensed products, some
licensors may be required to approve the prototype prior to production.
All manufacturing services performed overseas are generally paid for by
either letter of credit or wire transfer. Payment for such
manufacturing is made only upon the proper fulfillment of terms
established by Grand Canada, such as adherence to product
quality, design, packaging and shipping standards, as well as proper
documentation relating thereto. Most product purchases are paid
for in U.S. dollars.
Grand Canada is not a party to any long-term supply or
requirement agreements with any specific manufacturer. All of our
manufacturers may subcontract the manufacture of components of their products,
that they make for Grand Canada, with third parties who are not affiliated
with Grand Canada.
Materials
The principal raw materials used in the production and sale of
Grand Canada's products are plastic, printed fabrics and paper
products. These are all currently available at reasonable prices
from a variety of sources. Because Grand Canada does not
manufacture any of its products, it does not own any specialized
tools or other production equipment.
Location
Grand Canada leases a building in suburban Montreal, Canada, where the Company's
and Grand Canada's executive and administrative offices are located as well as
its Canadian distribution center.
The Company also has a showroom in Toronto, Canada. Ark Creations Inc.,leases
a warehouse in the U.S. to distribute product to U.S. customers.
Licensing and Distribution Agreements
Character Licenses
Grand Canada's product line includes products featuring well-
known character properties created by others. In order to obtain
the right to manufacture and sell products featuring such character
properties, Grand Canada enters into license agreements with the
owners of such properties. Under the terms of the character
property license agreements, Grand Canada pays royalties to
licensors that generally range from 3% to 14% of net sales of the
products carrying these character properties. To the extent that
competition increases among companies to obtain character
property licenses, Grand Canada may encounter increased
difficulty in obtaining certain character licenses and may be
required to pay greater minimum guaranteed royalty amounts.
Generally, the Company's character property license agreements
provide the Company with the exclusive or non-exclusive right to sell only
specific products featuring the particular character. These agreements
typically limit the sale of such products to Canada.
They generally have terms of one to three years and may be renewed upon
payment of certain minimum guarantees or the attainment of specified sales
levels.
The following table sets forth some of the Company's character licenses,
the licensor for these character properties and the types of products that
the Company markets featuring these character properties.
Character Property Licensor Product Featuring Property
101 Dalmatians Disney Kites, Hand-Held Games, Inflatables
Bug's Life Disney Kites, Hand-Held Games
Donald Duck, Daisy,
Goofy, Pluto Disney Pools, Balls, Kites
Hercules Disney Balls
Lion King Simba's Pride Disney Balls, Kites,
Little Mermaid Disney Balls, Kites, Hand-Held Games
Lots A Leggs Commonwealth Plush
Mickey Mouse,
Minnie Mouse Disney Pools, Balls, Kites, Finger Puppets
Mulan Disney Balls Kites
Winnie The Pooh Disney Balls, Hand-Held Games, Koosh,
Plastics, Finger Puppets
Sesame Street E.M.G. Balls, Koosh, Kites
Star Wars G-Squared Stationery
Rugrats ViaCom Kites, Hand-Held games, Balls
Batman Warner Bros. Kites, Balls, Discs
Looney Tunes Warner Bros. Kites, Balls, Koosh
Happy Hands Finger Friends Finger Puppets
Pokemon G-Squared Leisure product, stationery
Digimon Venture Foam puzzles
Sonic the Hedge Hog Venture Foam puzzles
No one particular character property license resulted in sales in
excess of 5% of Grand Canada's sales revenues for the year ended
December 31, 1999, and the loss of any one such license would
not have a material adverse effect on Grand Canada's operations.
License and Distribution Arrangements with Toy Vendors
Grand Canada has entered into license and distribution agreements
with four of the approximately fifteen vendors. Grand Canada selects
products from a master product list provided to it by the
vendor. The purchase price, depending on the arrangement
with the supplier, may consist of a fixed payment per item, specified minimum
quantities to be purchased and other conditions, and occasionally a royalty
fee. Pursuant to these agreements, Grand Canada obtains the exclusive and
non-exclusive right to import and distribute throughout Canada the products
selected by it. These agreements generally have terms of one to five years
and are usually exclusive for a specified product or product line
within a specific territory. Generally, under these agreements, Grand Canada
is responsible for paying shipping and other related costs and expenses.
If Grand Canada were to be in default with a license or distribution
agreement, it may cause such agreement to be terminated as well as result
in liability for certain costs and penalties.
Marketing, Sales and Distribution
Grand Canada markets its products throughout Canada through
its own sales representatives as well as independent sales agents.
Purchasers of the products include retail chain stores, department stores,
toy specialty stores and wholesalers. Grand Canada's five largest customers
are: Toys 'R'Us; Wal-Mart; Zellers; Sears; and Costco which, for the year
ended December 31, 1999, accounted for approximately 18%, 17%, 15%, 9%
and 5%, respectively, of the gross sales for this period.
No other customer accounted for more than 5% of gross sales in 1999.
Other than purchase orders from its customers, Grand Canada
does not have written agreements with its customers, but rather
sells products to customers on open account, with payment terms
typically varying from 30 to 90 days. If one or more of the
five customers identified above terminated its relationship with
Grand Canada, a material adverse effect on the Company may occur.
Although Grand Canada's policy is not to sell any of its products
on consignment, in accordance with industry practice, it may sell,
on a case-by-case negotiated basis, its products on a partial
consignment basis. Consignment sales have been insignificant.
Grand Canada employs a sales and marketing staff of nine people,
including two of its senior managers and seven sales persons who
make on-site visits to customers for the purpose of soliciting
orders for products. It markets products at major and regional toy
trade shows in Canada. In addition, Grand Canada maintains
showrooms in its suburban Montreal and Toronto facilities.
Grand Canada directly, or through its salespersons, takes written
orders for its products from its customers and arranges for the
manufacture of its products. Cancellations are generally made in writing and
appropriate steps are taken to notify its manufacturers of such cancellations.
Returns are generally not accepted, although consistent with
industry practices, exceptions to this policy are made on a case-by-case
negotiated basis.
Seasonality
The Company's business is seasonal. The Company's third and
fourth quarter sales revenues have typically been greater than the first and
second quarter sales revenues. This fluctuation is the result of retailers
purchasing products for the holiday selling season.
Product Liability
The Company maintains product liability coverage for Grand
Canada's operations in the aggregate amount of Canadian
$10,000,000. The Company has not been the subject of any product
liability litigation.
Competition
The toy industry is highly competitive and sensitive to changing
consumer preferences and demands. Grand Canada competes in
Canada with many companies that distribute toy products more well-known
than those distributed by Grand Canada. Some of Grand
Canada's competitors are substantially larger and more diversified,
and have substantially greater financial and marketing resources
than Grand Canada. They may also have greater name recognition,
and the ability to develop and market products similar to, and
more competitively priced than, those distributed by Grand
Canada. Grand Canada competes with, among others, Irwin Toys
Ltd., Hasbro Inc., and Mattel Inc.
Government Regulation
Grand Canada is subject to the provisions of various laws, certain
of which have been enacted by the Federal Government of Canada
and others which have been enacted by the government of the
Province of Quebec and other Canadian provinces.
Federal
The laws of the Government of Canada to which the Company is
subject include the Hazardous Products Act which empowers the
Government to protect children from hazardous toys and other
articles. Under that legislation the Government has the authority to
exclude from the market those articles which are found to be
hazardous. Grand Canada is also subject to the Consumer Packaging
and Labeling Act enacted by the Government of Canada, whose
legislation prohibits the importation of prepackaged items into
Canada, as well as the sale, importation, or advertising in Canada
of items which have misleading information on their label.
Provincial
The legislation enacted by the Government of the Province of
Quebec to which Grand Canada is subject includes the Consumer
Protection Act which prohibits the sale of hazardous toys and other
articles, and also requires proper labeling and instructions to be
included with the item being sold. Grand Canada is also subject to
the Charter of the French Language, which requires that all labeling
and instructions appear in the French language, as well as the
Upholstery and Stuffed Articles Act, which requires that stuffed articles
conform to hygienic norms, and obligates companies to take
measures against contamination during transportation and storage.
Similar laws exist in several cities and provinces throughout
Canada and in many jurisdictions throughout the world.
Grand Canada maintains a quality control program to ensure
compliance with all applicable laws.
Employees
As of December 31, 1999, the Company employed 46 full-time
persons, including three executive officers. The Company believes that its
relations with its employees are satisfactory.
Item 2.
Description Of Property:
The Company's principal executive offices are located in an
approximately 105,000 square foot facility located at 1710 Route
Trans-Canada, Dorval, Quebec, Canada, a suburb of Montreal.
The Company uses the facility for offices, showroom, warehousing and
distribution. The lease for the premises expires on December 1, 2004 but
Grand Canada has the right to extend the lease for an additional five-year
period. The current monthly rent is $ 23,000 and during the
extension period shall be increased each year by a percentage that is equal
to 75% of the percentage increase in the consumer price index for the
greater Montreal area.
Grand Canada also leases, pursuant to a lease expiring on
December 31, 2000, approximately 9,000 square feet of showroom
and office space at 6427 Northam Drive, Mississauga, Canada, a
suburb of Toronto, at a current rental rate of approximately
Canadian $6,863 per month.
The Company believes that its current facilities are satisfactory for
its present needs and that insurance coverage is adequate for the
premises.
Item 3.
Legal Proceedings:
On November 30, 1995, an involuntary petition under Chapter 7
of the United States Bankruptcy Code was filed against Grand Group Inc, a U.S.
subsidiary, in the United States Bankruptcy Court for the Southern District
of New York (the "Bankruptcy Proceeding"). On January 4, 1996,
the Court entered an order for relief under Chapter 7 of the United
States Bankruptcy Code and a trustee was appointed to supervise
the liquidation of Grand Group Inc. To date, no other proceedings have
occurred in connection with the Bankruptcy.
Other than discussed above or in Note 14 to the Company's
Consolidated Financial Statements included elsewhere herein, the
Company is not a party to, nor is it aware of, any other pending
litigation of a material nature.
Item 4.
Submission of Matters to a Vote of Security
Holders:
None
PART II
Item 5.
Market For Common Equity and Related Stockholder Matters:
The Company's Common Stock is traded on the NASDAQ Small-
Cap Stock Market under the symbol "GRIN". The following table
sets forth the range of high and low closing representative bid
prices for the Company's Common Stock from January 1, 1998
through December 31, 1999 as reported by NASDAQ. The
figures represent prices between dealers, do not include retail
mark-ups, mark-downs or commissions and may not represent
actual transactions.
Common Stock Representative Bid Prices
1998 High ($) Low ($)
First Quarter 7 3/8 5
Second Quarter 7 11/16 5
Third Quarter 6 1/8 2 5/8
Fourth Quarter 8 3/4 1 15/16
1999
First Quarter 5 5/8 2 1/2
Second Quarter 7 13/16 2 3/4
Third Quarter 30 1/4 4 1/8
Fourth Quarter 19 33/64 6
On March 10, 2000, the last reported sales price for the Common
Stock on the NASDAQ Small Cap Market was $4.50 per share.
At February 28, 2000 there were approximately 165 record holders
of the Company's Common Stock, however those shares being
held at various clearing houses,including Cede & Company have not been
broken down. Accordingly, the Company believes there
are many more beneficial owners of the Company's Common
Stock whose shares are held in "street name", not in the name of the
individual shareholder.
During the past two years the Company has not paid, and has no
current plans to pay, dividends on its Common Stock. In 1999, dividends of
$25,000 were declared and paid on the Company's Series A Preferred Shares.
The Company intends to retain earnings, if any, for use in its
business. Any dividends for Common Stock that may be declared in the future
will be determined by the Board of Directors based upon the Company's
financial condition, results of operation, market conditions and
other factors that the Board deem relevant.
The following securites were issued by the Company during the fiscal year
ended December 31, 1999 and were not registered under the Securities Act
of 1933, as amended ("the Act").
On January 1, 1999, in connection with the acquisition of the assets Ark
Foundation LLC, the Comapny issued 200,000 shares of non-voting Series A
Convertible Redeemable Preferred Stock ("Series A Stock") with a stated
value of $5.00 per share.
In October 1999, the Company issued 65,478 shares of Common Stock upon the
exercise of options and warrants.
The sale and issuance of securities in the transactions described set forth
above were exempt from registration under the Securities Act in reliance
on Section 4(2) of the Securities Act or Regulation S promulgated thereunder
as transactions by an involving a public offering.
Item 6.
Selected Financial Data:
For the Twelve Months Ended December 31:
1999 1998 1997 1996 1995
$ $ $ $ $
Net Sales 37,260,250 33,177,529 37,299,525 27,646,251 22,755,329
Gross profit 10,778,909 11,091,548 14,699,141 11,454,685 8,747,778
Unusual items 814,669 - - - -
Net (loss)
earnings (709,466) (318,302) 1,575,169 591,370 (3,255,747)
(Loss) earnings
per share:
Basic (0.36) (0.20) 1.00 0.38 (2.55)
Diluted (0.36) (0.20) 0.90 0.37 (2.55)
Weighted average
number of common
equivalent
shares 2,132,582 1,577,634 1,577,634 1,543,958 1,274,900
Working
capital 10,955,614 3,374,528 3,452,266 2,950,379 2,619,466
Long term debt 1,944,444 - - - 4,390
Preferred Stock 1,000,000 - - - -
Cash dividends 25,000 - - - -
Total Assets 19,118,517 13,889,317 12,187,404 9,024,048 8,882,248
Item 7.
Management's Discussion and Analysis or Plan of Operation:
Overview
Net sales consist of sales of products to customers after deduction
of customer cash discounts, freight and warehouse allowances,
volume rebate allowances, and returns of merchandise. Sales are recorded
when the merchandise is shipped.
The cost of goods sold for products imported as finished goods
includes the cost of the product in the appropriate domestic currency, duty
and other taxes, and freight and brokerage charges. Royalties to Grand Canada
suppliers not contingent upon the subsequent sales of the suppliers' products
are included in the price paid for such products.
Major components of selling, general and administrative expenses
include: payroll and fringe benefits; advertising expense, which
includes the cost of production of television commercials and the
cost of air time; advertising allowances paid to customers for
cooperative advertising programs; and royalty expense. Royalties
include payments by Grand Canada to licensors of character
properties and to manufacturers of toy products if such
payments are contingent upon subsequent sales of the products.
Royalties are usually a percentage of the price at which the product
is sold and are payable once a sale is made.
Accounts receivable are receivables net of an allowance for
doubtful accounts. The allowance is adjusted periodically to reflect
the current status of receivables. Management believes that current
reserves for doubtful accounts are adequate. Sales of products to
retailers and distributors are on an irrevocable basis. Consistent
with industry practices, Grand Canada may make exceptions to this
policy on a case-by-case negotiated basis. Inventory is comprised
of finished goods at landed cost.
All amounts are in US Dollars ($) unless otherwise noted.
Results of Operations
The following table sets forth consolidated operations data as a
percentage of net sales for the periods indicated:
For the Twelve
Months Ended December 31,
1999 1998 1997
% % %
Net sales 100.00 100.00 100.00
Cost of goods sold 71.07 66.57 60.59
Gross profit 28.93 33.43 39.41
Operating expenses:
Selling, general and administrative 27.14 26.55 29.14
Foreign exchange (gain) loss (.48) 3.92 .83
Interest 1.18 2.11 1.47
Bad debt expense .23 .44 .37
Depreciation and amortization 1.37 .97 .65
Unusual items 2.19 - -
Total operating expenses 31.62 33.99 32.46
(Loss) earnings before income taxes (2.69) (0.56) 6.96
Net (loss) earnings (1.90) (0.96) 4.22%
Comparison of the year ended December 31, 1999 to the year ended December 31,
1998:
Net Loss
Net loss for 1999 was $709,466 or $0.36 loss per share as compared to a
net loss of $318,302 or $0.20 loss per share in 1998, a 123% increase in net
loss.
Net Sales
Net sales in 1999 were $37,260,250, an increase of $4,082,721 over
1998 net sales of $33,177,529, or by approximately 12%. This increase can be
attributed to the large volume of sales of Furby products in 1999 compared to
a more limited amount in 1998.
Gross Profit
Gross profit in 1999 decreased by $312,639 from $11,091,548 in
1998 to $10,778,909 in 1999 or as a percentage of sales gross
profit decreased from 33.43% to 28.93%. The decline in gross profit can be
primarily attributed to losses on the sale of discontinued or low margin
products that were cleared during the year in excess of those of the previous
year. A change in sales mix also contributed to the lower margins.
Selling, General and Administrative
Selling, general and administrative expenses were $10,111,421 in
1999 compared to $8,807,026 in 1998. The increase in this
category is due primarily to the costs of operating the Ark Creations Inc.'s
facility, which has now been closed, as well as additional compensation taxes
related to the exercise of options by employees during 1999. As a
percentage of net sales, selling, general and administrative expenses
increased by .59 percentage points to 27.14% in 1999.
Gain on Foreign exchange
The gain of $177,982 resulted from a successful matching of the Company's US
dollar foreign exchange exposure and also a stabilization of the Canadian
dollar.
Unusual Items
As a result of transferring the administration of Ark Creations Inc. to Canada
and closing the facility, the Company incurred expenses of $432,613 in fixed
asset write offs, severance costs and lease penalties.
Further, the discontinuance of the Majorette product line resulted in a penalty
of $382,056 for the return of product on hand.
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997:
Net Earnings
Net loss for 1998 was $318,302 or $0.20 loss per share as compared to net
earnings of $1,575,169 or $1.00 per share in 1997, a 120% decrease.
Net Sales
Net sales in 1998 were $33,177,529 a decrease of $4,121,996 over
1997 net sales of $37,299,525 or by approximately 11%. The decrease was due
to a substantial decrease of a major customer's purchasing for the year, the
decline of the Canadian dollar relative to the U.S. dollar which impacted the
translation of the sales, and lastly as a result of the late delivery of one
major product.
Gross Profit
Gross profit in 1998 decreased by $3,607,593 from $14,699,141 in 1997 to
$11,091,548 in 1998 or as a percentage of sales gross profit
decreased from 39.41% to 33.43%. The sales mix, as well as a weakening of the
Canadian dollar, relative to the U.S. dollar, were major contributors to the
decrease.
Selling, General and Administrative
Selling, general and administrative expenses were $8,807,026 in
1998 compared to $10,869,005 in 1997. The decrease in this
category was due primarily to the decrease in advertising and
promotion expenses. Both television advertising expense and cooperative
advertising rebates to customers were decreased. As a percentage of net
sales, selling, general and administrative expenses decreased by 2.59
percentage points to 26.55% in 1998.
Loss of foreign exchange
The significant and uncharacteristically rapid decline in the Canadian dollar
negatively impacted results in 1998.
Liquidity and Capital Resources
The Company generally finances its operations through borrowings
under the Company's Credit Agreement with its bank and by cash
flow from operations. The inflow of funds during the year due to options
and warrants being excercised has resulted in virtually all short-term
bank debt being eliminated by year end.
In August 1999, the Company entered into a three year banking
arrangement with a new lending institution. Grand Toys has a
secured line of credit of $17,500,000 to enable it to meet its plans.
The Company may draw down working capital advances and letters of credit in
amounts determined by percentages of its accounts receivable and
inventory. Working capital advances taken by the Company bear
interest at prime plus 1 1/4%. The term of the loan is three years.
The Company received $8,441,675 during the year as a result of options and
warrants being exercised.
Accounts receivable at December 31, 1999 were $8,083,003
compared to $7,728,979 at December 31, 1998. Inventory at
December 31, 1999 increased by $1,747,457 from the prior year.
Working capital increased from $3,374,528 at December 31, 1998
to $10,955,614 at December 31, 1999. Net cash used for operating
activities was $1,329,103 in 1999 compared to net cash used for
operating activities of $5,236,155 in 1998. Cash for additions
to equipment and leasehold improvements was $570,081 compared to $347,008
in 1998, as a result of purchases relating to the acquisition of Ark
Creations Inc.
Grand Canada's accounts receivable level is subject to significant seasonal
variations due to the seasonality of sales. As a result, Grand Canada's
working capital requirements are greatest during its third and fourth
quarters. In addition, to the extent accounts receivable, inventories and
guarantees and advance payments increase as a result of growth of Grand
Canada's business, Grand Canada could require additional working capital to
fund its operations. Sources of such funding include cash flow
from operations, drawings on the financing facilities, or sales of
additional equity or debt securities by the Company.
If the funds available under the Company's financing agreements,
together with its current cash and cash equivalents are not
sufficient to meet the Company's cash needs, the Company may
from time to time seek to raise capital from additional sources,
including the extension of its current lending facilities, project-
specific financing and additional public or private debt or equity
financing. Management believes that the Company has sufficient
financing at the present time to meet its 2000 forecast.
Effects Of Inflation
The Company does not believe that inflation has had a significant
impact on its financial position or results of operations in the past
three years.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting of Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities". This statement addresses
the accounting for derivative instruments, including forward foreign exchange
contracts. This statement, as amended by SFAS No. 137, shall be effective for
the Company's financial statements for December 31, 2000. The Company has
not yet determined the impact of this statement on the results of operations.
Item 7a.
Quantitative and Qualitative Disclosures About Market Risk:
The Company is exposed to certain market risks, which arise from transactions
entered into in the normal course of business. The Company's primary exposures
are changes in interest rates with respect to its debt and foreign currency
exchange fluctuations.
INTEREST RATE RISK The intrest payable on the Company's revolving
lines-of-credit are variable based on the prime rate, and therefore,
affected by changes in market interest rates. The Company does not use
derivative financial instruments.
FOREIGN CURRENCY RISK While the Company's product pruchases are transacted
in United Stated dollars, most transactions among the suppliers and
subcontractors are effected in HK dollars. Accordingly, fluctuations in
Hong Kong monetary rates may have an impact on the Company's cost of goods.
Futhermore, appreciation of Chinese currency values relative to the Hong Kong
dollar could increase the cost to the Company of the products manufactured in
the People's Republic of China, and thereby have a negative impact on the
Company. As well since the majority of the Company's sales are in Canadian
dollars, the Company is at risk with regards to the conversion of Canadian
dolalrs to US dollars to pay its suppliers. Therefore, fluctuations in the
conversion rate may have an impact on the Company. The Company may use
derivative financial instruments solely to hedge the effects of such
currency fluctuations.
Item 8.
Financial Statements:
The consolidated financial statements of the Company, including
the notes thereto, together with the report of independent chartered
accountants thereon, are presented beginning at page F-1.
Item 9.
Changes in, and Disagreements with Accountants on Accounting and Financial
Disclosure:
Not applicable
PART III
Items 10. - 13.
The information required by Part III (Items 10 through 13) is
incorporated herein by reference from the Company's definitive
proxy statement to be filed pursuant to regulation 14A within 120
days after the close of the Company's fiscal year.
PART IV
Item 14.
Exhibits, Financial Statements and Reports on Form 8-K
(a) Report of Independent Auditors
Index to Financial statements
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1999 and
December 31, 1998
Consolidated Statements of Loss for the Years Ended December 31, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Earnings for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years
Ended December 31 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Consents of Independent Auditors to incorporation by reference of
financial statements
Exhibit Number
**3.1 Articles of Incorporation, as amended
###3.2 Certificate of Designations of Series A 5% Cumulative Convertible
Redeemable Preferred Stock
***3.3 Amended and Restated by-laws
##4.1 Form of certificate evidencing shares of Common Stock
###4.2 Form of Certificate of Designations of Series A Cumulative Convertible
Redeemable Preferred Stock - To be filed by Amendment
**4.3 Form of Underwriter's Common Stock Warrant Agreement
**4.4 Form of Underwriter's Warrant Agreement
**10.2 Letter Agreement dated as of October 28, 1993, by and between the
Company and AMGO relating to the cancellation by AMGO of the
rights of AMGO to the 2,000,000 Earn Out Shares and the grant to
AMGO of 1,250,000 stock options.
##10.3 Amended and Restated 1993 Stock Option Plan
**10.9 Lease of Dorval, Canada facility
**10.10 Lease of Mississauga, Canada facility
###10.11 Asset Purchase Agreement, dated as of January 1, 1999, by and
among the Company, Ark Creations, Inc. (formerly Great American
Acquisition Corp.), Ark Foundation LLC and Ofer Nissim
###10.12 Subordinated Promissory Note, dated January 1, 1999, given by
Ark Creations, Inc. (formerly Great American Acquisition Corp.)
to Ark Foundation in the amount of US$1,500,000
###10.13 Stock Pledge Agreement, dated as of January 1, 1999, in favor of
Ark Foundation LLC by the Company
###10.14 Loan agreement dated as of August 10, 1999 by and among Grand Toys
Ltd., Grand Concepts Inc., Grand Toys International, Inc., Ark
Puzzles, Inc., Mellon Bank Canada and Mellon Bank, N.A.
*21 Subsidiaries of the Company
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1999.
________________________________________________________________________
* Filed herewith
** Filed as an Exhibit to either the company's Registration
Statement (the "Registration Statement") on Form SB-2, dated January 27,
1994, or Amendment No. 1 or Amendment No. 2 to such Registration
Statement.
*** Filed July 20, 1993 and incorporated herein by reference.
# Filed as an Exhibit to the Company's Registration
Statement on Form 8-A
dated September 7, 1993 and incorporated herein by reference.
## Filed as an Exhibit to the Company's Proxy Statement on Form 14A dated
May 5, 1995.
### Filed as a Exhibit to the Company's 10-K for the year ended
December 31, 1998
#### Filed with Amendment No. 1 to Form S-3# filed on October 7, 1999
Consolidated Financial Statements of
GRAND TOYS INTERNATIONAL, INC.
Years ended December 31, 1999, 1998 and 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Grand Toys International, Inc.
We have audited the accompanying consolidated balance sheets of Grand Toys
International, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Grand
Toys International, Inc.and subsidiaries as of December 31, 1999 and 1998,
and the results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
Chartered Accountants
Montreal, Canada
February 28, 2000
GRAND TOYS INTERNATIONAL, INC.
Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Equity and Comprehensive Income 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
GRAND TOYS INTERNATIONAL, INC.
Consolidated Balance Sheets
December 31, 1999 and 1998
1999 1998
Assets
Current assets:
Accounts receivable (net of allowance for doubtful
accounts; 1999 - $ 90,805; 1998 - $ 43,143) $ 8,083,004 $ 7,728,979
Due from affiliated companies 36,801 224,498
Inventory 6,065,564 4,318,107
Prepaid expenses 940,435 1,030,434
Total current assets 15,125,804 13,302,018
Deferred financing charges 425,434 20,000
Deferred income tax 684,996 -
Equipment and leasehold improvements, net (note 2) 536,157 567,299
Intangibles (net of amortization;1999-$ 123,480;
1998-nil)(note 3) 2,346,126 -
Total assets $ 19,118,517 $ 13,889,317
On behalf of the Board:
_______________________ Director
_______________________ Director
GRAND TOYS INTERNATIONAL, INC.
1999 1998
Liabilities and Stockholders' Equity
Current liabilities:
Bank indebtedness (note 4) $ 429,526 $ 6,782,510
Trade accounts payable 2,186,525 1,671,417
Other accounts payable and accrued liabilities 835,630 1,034,743
Royalties payable 2,286 60,728
Income taxes payable 716,223 378,092
Current portion of long term debt 166,666 -
Total current liabilities 4,336,856 9,927,490
Long term debt (note 5) 1,777,778 -
Minority interest 100 100
Preferred stock (note 6) 1,000,000 -
Stockholders' equity:
Capital stock (note 7) 3,135 1,578
Additional paid-in capital 19,314,677 10,599,559
Deficit (6,725,703) (5,991,237)
Accumulated other comprehensive income -
cumulative currency translation adjustment (588,326) (648,173)
12,003,783 3,961,727
Commitments and contingencies (notes 13 and 14)
Subsequent events (note 18)
Total liabilities and stockholders' equity $ 19,118,517 $ 13,889,317
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Operations
Years ended December 31
1999 1998 1997
Net sales $ 37,260,250 $ 33,177,529 $ 37,299,525
Cost of goods sold 26,481,341 22,085,981 22,600,384
Gross profit 10,778,909 11,091,548 14,699,141
Operating expenses:
Selling, general and
administrative 10,111,421 8,807,026 10,869,005
Foreign exchange (gain) loss (177,982) 1,299,050 309,007
Interest on long term debt 87,192 - -
Interest 351,461 698,840 547,892
Bad debt expense 84,294 145,167 138,756
Depreciation and amortization 511,404 328,524 240,055
Unusual items (note 10) 814,669 - -
11,782,459 11,278,607 12,104,715
(Loss) earnings before income
taxes (1,003,550) (187,059) 2,594,426
Income taxes:
Current (390,912) (131,243) (1,019,257)
Deferred 684,996 - -
294,084 (131,243) (1,019,257)
Net (loss) earnings $ (709,466) $ (318,302) $ 1,575,169
(Loss) earnings per share
(notes 1 (i) and 11):
Basic $ (0.36) $ (0.20) $ 1.00
Diluted (0.36) (0.20) 0.90
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31
Accumulated
Additional other
Capital paid-in comprehensive
s capital Deficit income Total
January 1, 1997 $ 7,888 $ 10,593,249 $ (7,248,104) (440,602) $ 2,912,431
Net earnings for the year - - 1,575,169 - 1,575,169
Foreign currency adjustment - - - (60,212) (60,212)
Total comprehensive income - - - - 1,514,957
Reverse stock split (note 1(i)) (6,310) 6,310 - - -
December 31, 1997 1,578 10,599,559 (5,672,935) (500,814) 4,427,388
Net loss for the year - - (318,302) - (318,302)
Foreign currency adjustment - - - (147,359) (147,359)
Total comprehensive income (465,661)
December 31, 1998 1,578 10,599,559 (5,991,237) (648,173) 3,961,727
Net loss for the year - - (709,466) - (709,466)
Foreign currency adjustment - - - 59,847 59,847
Total comprehensive income - - - - (649,619)
Dividends - - (25,000) - (25,000)
Stock Options (note 7 (c)) 1,557 8,440,118 - - 8,441,675
Warrants (note 8) - 275,000 - - 275,000
December 31, 1999 $ 3,135 $ 19,314,677 $(6,725,703) $(588,326)$ 12,003,783
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
Years ended December 31
1999 1998 1997
Cash flows from operating activities:
Net (loss) earnings $ (709,466) $ (318,302) $ 1,575,169
Items not affecting cash:
Depreciation and amortization 511,404 328,524 240,055
Write off of equipment and leaseholds
improvements 267,613 - -
Deferred income taxes (684,996) - -
Changes in operating working capital
items (note 12) (713,658) (5,246,377) (872,303)
Net cash (used for) provided by
operating activities (1,329,103) (5,236,155) 946,921
Cash flows from financing activities:
(Decrease) increase in bank
indebtedness (6,520,705) 5,044,684 428,026
Share issuance proceeds (note 7 (c)) 8,441,675 - -
Decrease in loan payable to a director - - (422,161)
Increase in long term debt 444,444 - -
Increase in deferred financing charges (511,034) (1,923) (248,613)
Other (20,359) 62,904 54,651
Net cash (used for) provided by
financing activities 1,834,021 5,105,665 (188,097)
Cash flows from investing activities:
Additions to equipment
and leasehold improvements (570,081) (347,008) (245,891)
Acquisition of assets 90,163 - -
Dividends paid (25,000) - -
Decrease (increase) in other assets - 477,498 (508,933)
Net cash provided by (used for)
investing activities (504,918) 130,490 (754,824)
Net change in cash, being cash
at end of year $ - $ - $ -
Supplementary disclosure of cash flow
information
Cash paid during the year for:
Interest $ 438,653 $ 695,896 $ 478,147
Income taxes 148,962 438,440 1,276,603
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
Grand Toys International, Inc., a publicly held company, is organized under the
laws of the State of Nevada. Its principal business activity, through its
wholly-owned Canadian and United States operating subsidiaries, is the
distribution of
toys and related items.
1. Significant accounting policies:
(a) Principles of consolidation:
These consolidated financial statements, presented in U.S. dollars and in
accordance
with accounting principles generally accepted in the United States, include the
accounts of Grand Toys International, Inc. and its subsidiaries (the "Company").
All significant intercompany balances and transactions have been eliminated.
(b) Inventory:
Inventory is valued at the lower of cost, determined by the first in, first out
method, and net realizable value. The only significant class of inventory is
finished goods.
(c) Equipment and leasehold improvements:
Equipment and leasehold improvements are stated at cost less accumulated
depreciation. Depreciation methods and annual rates adopted by the Company are
as follows:
Asset Method Rate
Computer equipment Declining balance 30%
Machinery and equipment Declining balance 20%
Furniture and fixtures Declining balance 20%
Trucks and automobiles Declining balance 30%
Telephone equipment Declining balance 30%
Leasehold improvements Straight-line Term of
lease plus one
renewal term
(d) Deferred financing charges:
Deferred financing charges represent the costs incurred relating to the
negotiation of the banking facility. Deferred financing charges are amortized
over 36 months, the term of the financing.
(e) Intangibles:
Goodwill represents the excess of the purchase price over the fair value of the
net identifiable assets acquired. Goodwill is amortized using the straight
- -line method over a twenty year period. The net book value of goodwill
would be written down if the value were permanently impaired. The
Company assesses impairment by determining whether the unamortized intangible
balances can be recovered through undiscounted future operating cash flows
of the acquired assets over their remaining lives, and the write down would be
to fair value.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1999, 1998 and 1997
1. Significant accounting policies (continued):
(f) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(g) Revenue recognition:
Sales are recognized at the time of shipment of products. The Company estimates
liabilities for returns and allowances at the time of shipment. In addition,
provisions for customer allowances are recorded when the related revenue is
recognized.
(h) Foreign currency translation:
(i) Grand Toys Ltd. and Grand Concepts Inc., wholly-owned Canadian
subsidiaries, use the Canadian dollar as their functional currency and
translate their assets and liabilities into US dollars at the exchange
rates prevailing at the balance sheet date and sales, expenses and cash
flows translated at the average exchange rate for the year.
The resulting currency translation adjustments are accumulated and
reported in other comprehensive income.
(ii) Other monetary assets and liabilities denominated in foreign currencies
are translated at the exchange rates prevailing at the balance sheet
date. Revenues and expenses denominated in foreign currencies are
translated at the rates of exchange prevailing at the transaction
dates. All exchange gains and losses are included in income.
(i) Earnings (loss) per share:
(i) Effective August 4, 1997, the stock of the Company underwent a
one-for-five reverse stock split. For purposes of earnings per share
calculations (note 11), capital stock (note 7(d)) and stock options
and warrants (note 8), the comparative numbers of shares have been
restated to reflect the split.
(ii) Basic earnings (loss) per share is determined by dividing the
weighted-average number of common shares outstanding during the period
into net earnings (loss).
(iii) Diluted earnings (loss) per share gives effect to all potentially
dilutive common shares that existed at December 31, 1999.
(j) Stock option plan:
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees. As such, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeds the
exercise price. FASB Statement No. 123, which became effective in 1996, allows
entities to continue to apply the provisions of APB Opinion No. 25
and requires pro-forma net earnings and pro-forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in FASB Statement No. 123 had been
applied. This disclosure is included in the notes to these statements.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1999, 1998 and 1997
1. Significant accounting policies (continued):
(k) Advertising and promotion:
All costs associated with advertising and promoting products are expensed in
the period incurred.
(l) 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
reporting period. Actual results could differ from those estimates.
(m) Comprehensive income:
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and cumulative currency translation
adjustments and is presented in the consolidated statements of stockholders'
equity and comprehensive income. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
2. Equipment and leasehold improvements:
1999 1998
Accumulated Accumulated
Cost depreciation Cost depreciation
Computer equipment $ 1,286,253 $ 857,726 $ 1,094,822 $ 670,028
Machinery and equipment 458,091 430,434 432,770 356,343
Furniture and fixtures 480,775 454,974 458,318 427,574
Trucks and automobiles 84,335 82,665 80,395 78,122
Telephone equipment 40,339 36,819 38,455 34,261
Leasehold improvements 372,755 323,773 323,042 294,175
$ 2,722,548 $ 2,186,391 $ 2,427,802 $ 1,860,503
Net book value $ 536,157 $ 567,299
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1999, 1998 and 1997
3. Acquisition:
On January 1, 1999, the Company acquired all of the assets of Ark Foudation
LLC,(renamed Ark Creations Inc.) for proceeds of $ 2,500,000.
The Company accounted for the acquisition under the purchase method of
accounting and allocated the purchase price as follows:
Net assets $ 120,557
Patents 1,234,803
Goodwill 1,234,803
$ 2,590,163
The acquisition of the above assets was financed as follows:
Series A 5% Cumulative
Convertible Redeemable Preferred
Stock (note 6) $ 1,000,000
Long-term debt (note 5) 1,500,000
Direct acquisition costs 90,163
$ 2,590,163
Net income for Ark Creations Inc., has been included in the statement of
operations from January 1, 1999. Results of operations for 1998, on a
proforma basis have not been presented because the impact would not be
significant.
In the statement of cash flows, the financing of the assets and the recognition
of the intangibles have not been included as there is no cash impact.
4. Bank indebtedness:
The Company has a secured line of credit of $ 17,500,000 and can
draw down working capital advances and letters of credit in amounts determined
by percentages of its accounts receivable and inventory. The working capital
advances are secured by all of the assets of the Company. The effective
interest rate at December 31, 1999 on the Canadian denominated line was 7.5%
(9.25% at December 31, 1998),which represents prime plus 1 1/4% for both
years. As at December 31, 1999, the unused portion of the credit facility is
approximately $ 16,040,000. Standby fees represent 1/4 % of the unused line
of credit.
5. Long term debt
The Company has long-term indebtedness in the form of an interest
bearing subordinated promissory note in the aggregate principal amount of
$ 1,500,000. Interest is payable quarterly, commencing April 1, 1999 at a rate
of 5.76% per annum until June 1, 1999, 9.76% per annum thereafter until the
first principal installment of $ 500,000 is paid, and 5.76% per annum
thereafter to maturity. The note is secured by a pledge of 375,000 shares
of the Company's common stock. A principal installment of $500,000 shall be
paid upon the achievement of certain sales targets, with a second
installment of $ 500,000 due six months thereafter, and a final installment
of $ 500,000 due three months after the second installment.
The Company has an unsecured term loan of $ 444,444 as at December 31, 1999.
Interest is payable monthly, commencing September 1, 1999, at a rate of 8.75%.
Capital monthly repayments are based on a 36 month term, and the term loan
is renewable August 2002.
GRAND TOYS INTERNATIONAL
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1999, 1998 and 1997
6. Preferred Stock:
Series A. Cumulative Convertible Redeemable Preferred Stock
In connection with the acquisition of the net assets Ark Foundation LLC, the
Company created a class of 200,000 shares of non-voting Series A Convertible
Redeemable Preferred Stock ("Series A Stock") with a stated value of $ 5.00
per share. The Series A Stock ranks senior to the common stock. The Series
A Stock has a cumulative preferred quarterly dividend of 5% per annum of the
par value, payable in cash. The Series A Stock is effectively redeemable and
convertible at determinable prices on determinable dates. The Series A Stock
is convertible beginning on January 1, 2000 into shares of the Company's
common stock.
7. Capital stock:
(a) Authorized capital:
50,000,000, $ 0.001 par value voting common shares;
5,000,000, $ 0.001 par value preferred shares, issuable in series with such
designation, rights and preferences as may be determined from time to time by
the Board of Directors.
(b) Issued and outstanding:
1999 1998
3,134,906 common shares, net of 375,000 shares
(note 5)(1998 - 1,577,634 common shares) (note 1 (i)) $ 3,135 $ 1,578
(c) Share transactions:
(i) Reverse stock split:
- - August 1997:
One-for-five reverse stock split occurred reducing the number of outstanding
shares to 1,577,634.
(iii) Stock options:
- - August 1999
1,491,794 options were exercised for total proceeds of $ 8,044,944,
increasing capital stock by $ 1,492.
- - October 1999
8,478 options and 57,000 warrants were exercised for total proceeds of
$ 396,731 increasing capital stock by $ 65.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1999, 1998 and 1997
7. Capital stock (continued):
(d) Summary of common stock outstanding:
A summary of the number of common stock outstanding and share transactions
since January 1, 1997 is as follows:
January 1, 1997 and 1998, as previously
reported 1,577,597
Adjustment 37
Adjusted balance 1,577,634
Issued on exercise of stock options
and warrants 1,557,272
December 31, 1999 3,134,906
8. Stock options and warrants:
The Company has a stock option plan (the "Option Plan") which provides for the
issuance of up to 300,000 options to acquire common stock of the Company.
Stock options granted under the Option Plan may be Incentive Stock Options
under the requirements of the Internal Revenue Code, or may be Non-statutory
Stock Options which do not meet such requirements. Options may be granted under
the Option Plan to, in the case of Incentive Stock Options, all employees
(including officers) of the Company, or, in the case of Non-statutory Stock
Options, all employees (including officers) or non-employee directors of the
Company.
Options have also been granted outside the Option Plan to two directors, key
executives, outside consultants and a supplier. As well, warrants have been
issued to a director in his capacity as an investment banker, a distributor and
to the underwriter pursuant to the public offering. Some of these options and
warrants have either expired or were forfeited during the year.
In 1999, 55,000 warrants were granted to a director in his capacity as an
investment banker for services rendered. The fair market value of the warrants
was determined to be $ 275,000, which was recorded as deferred financing
charges. The offsetting credit was recorded to additional paid in capital.
In the statement of cash flows, the recognition of the warrants has not been
included as there is no cash impact.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1999, 1998 and 1997
8. Stock options and warrants (continued):
Under each plan, the exercise price of each option equals the market price of
the Company's stock on the grant date and an option's maximum term is ten years.
The range of exercise prices for stock options and warrants outstanding at
December 31, 1999 is $ 4.00 to $ 10.25.
Details of the options and warrants, all of which are exercisable at year-end,
are as follows:
Weighted-
average
Other exercise
Option stock price per
plan options Warrant Total share
January 1, 1997 64,500 996,011 280,000 1,340,511 $0.77
Granted - 1,114,000 - 1,114,000 4.39
Forfeited - (450,000) - (450,000) (18.67)
Expired - - (230,000) (230,000) (40.00)
January 1, 1998 64,500 1,660,011 50,000 1,774,511 6.98
Granted 14,000 284,000 - 298,000 (5.50)
Forfeited - (104,239) - (104,239) (4.51)
Expired (34,400) (5,000) - (39,400) (11.60)
Reclassified (14,000) (41,000) 55,000 - -
January 1, 1999 30,100 1,793,772 105,000 1,928,872 6.79
Granted - 147,500 57,000 204,500 5.42
Forfeited - (280,000) - (280,000) (5.50)
Exercised (18,500) (1,481,772) (57,000) (1,557,272) (5.42)
Expired (6,200) (4,000) (50,000) (60,200) (14.05)
December 31, 1999 5,400 175,500 55,000 235,900 $6.43
Pro-forma information regarding net earnings and earnings per share is required
by FASB Statement No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that statement.
The fair value for these options was estimated at the grant date using a
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 6.29% (4.68% in 1998; 5.95% to 6.07% in 1997), volatility
factor of the expected market price of the Company's common stock of 138%
(114% in 1998 and 40% in 1997) and a weighted-average expected life of
the option of 3 years (3 years in 1998 and 1997), with no dividends.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1999, 1998 and 1997
8. Stock options and warrants (continued):
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 price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect their fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options. The weighted-average grant
date fair values of options granted in 1999, 1998 and 1997 are $ 4.30, $ 3.85
and $ 1.48, respectively.
The pro-forma losses utilizing the fair value assumptions above for the years
1999, 1998 and 1997 would be $ 1,302,196, $ 1,465,142 and $ 75,551,
respectively. Furthermore, pro-forma loss per share would be $ 0.63, $ 0.93
and $ 0.05, respectively.
9. Income taxes:
(a) Income tax expense (recovery) consists of:
Current Deferred Total
Year ended December 31, 1999:
U.S. $ - $ (684,996) $ (684,996)
Canada 390,912 - 390,912
$ 390,912 $ (684,996) $ (294,084)
Year ended December 31, 1998:
U.S. $ 23,267 $ - $ 23,267
Canada 107,976 - 107,976
$ 131,293 $ - $ 131,293
Year ended December 31, 1997:
U.S. $ - $ - $ -
Canada 1,019,257 - $ 1,019,257
$ 1,019,257 $ - $ 1,019,257
(b) The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
1999 1998 1997
(%) (%) (%)
U.S. Federal statutory tax
rate 35.0 35.0 35.0
State income tax rate,
net of federal tax benefits - 10.0 10.0
U.S. statutory tax rate 35.0 45.0 45.0
Changes to U.S. tax rate
resulting from:
Effect of foreign tax
rate differences - (3.9) (5.0)
Expenses producing no tax benefit (20.8) (45.2) 27.4
Tax benefit of utilization of
loss carry forward - - (26.1)
Other 15.1 4.1 0.5
(5.7) - (3.2)
Valuation allowance for
deferred tax assets
allocated to income tax expense - - -
Effective tax rate 29.3 - 41.8
The Company has not provided for income taxes on foreign subsidiaries'
undistributed earnings as of December 31, 1999 because the investments in
the foreign subsidiaries are essentially permanent in duration.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1999, 1998 and 1997
9. Income taxes (continued):
(c) The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1999 are presented below:
Non-current:
Net operating loss carry forwards (note 9 (c)) $ 2,325,000
Net deferred tax asset before valuation allowance 2,325,000
Valuation allowance 1,640,004
Total net deferred tax asset $ 684,996
Realization of the deferred tax assets is dependent on generating sufficient
taxable income prior to expiration of the loss carried forwards. Although
realization is not assured, management believes it is more likely than not
that the recorded deferred tax asset, net of the valuation allowance provided,
will be realized. The valuation allowance decreased by $ 184,996 in 1999
(1998 increase of $ 35,000 and 1997 decrease of $ 991,000) to reflect an
adjustment to deferred tax assets related to loss carry forwards incurred in
the year in the United States.
(d) As of December 31, 1999, the Company has $ 6,642,000 (1998 - $ 5,213,000 )
of net operating losses available for tax purposes to reduce future taxable
income in the United States, beginning to expire in 2009. Approximately
$ 2,000,000 of taxable income must be generated in the U.S. subsidiaries to
allow for the realization of the asset before valuation allowance prior to
the expiration of the losses.
10. Unusual items:
The discontinuance of a major product line resulted in a penalty of $ 382,056
for the return of the product on hand. In addition, as a result of closing
the manufacturing facility of Ark Creations Inc., costs for asset write offs,
severances, and lease penalties were amounting to $ 432,613.
GRAND TOYS INTERNATIONAL, INC.
Notes to Concoslidated Financial Statements, Continued
Years ended December 31, 1999, 1998 and 1997
11. Earnings per share:
Income Shares Per share
(numerator) (denominator) amount
December 31, 1997
Basic EPS
Earnings available to
common stockholders $ 1,575,169 1,577,634 $ 1.00
Effect of dilutive securities
Options - 174,117 (0.10)
Diluted EPS
Earnings available to
common stockholders
and assumed conversions 1,575,169 1,751,751 0.90
December 31, 1998
Basic EPS
Earnings available to
common stockholders $ (318,302) 1,577,63 $ (0.20)
Diluted EPS
Earnings available to
common stockholders
and assumed conversions (318,302) 1,577,634 (0.20)
December 31, 1999
Basic EPS
Earnings available to
common stockholders $ (759,466) 2,132,582 $ (0.36)
Diluted EPS
Earnings available to
common stockholders
and assumed conversions (759,466) 2,132,582 (0.36)
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1999, 1998 and 1997
11. Earnings per share (continued):
Options to purchase 180,900 shares (1998 - 1,823,872) and warrants to purchase
55,000 shares (1998 - 105,000) of the Company's common stock were not included
in the diluted earnings per share calculation as their effect is anti-dilutive.
The Series A Convertible Redeemable preferred stock was also not included as the
effect is anti-dilutive.
12. Changes in operating working capital items:
1999 1998 1997
Decrease (increase) in
accounts receivable $ 6,843 (1,709,085) $ (1,369,171)
(Increase) decrease in due from
affiliated companies (22,408) (213,563) 309,521
Increase in inventory (1,503,618) (713,181) (1,452,278)
Decrease (increase) in prepaid
expenses 362,085 (282,164) (288,387)
Increase (decrease) in trade
accounts payable 428,568 (397,790) 64,278
(Decrease) increase in other
accounts payable and accrued
liabilities (237,011) (1,527,231) 2,267,776
Decrease in royalties
payable (59,920 (109,115) (166,366)
Increase (decrease) in income
taxes payable 311,80 (294,248) (237,676)
$ (713,658) $ (5,246,377) $ (872,303)
13. Commitments:
The Company has entered into long-term leases with minimum annual rental
payments approximately as follows:
2000 $ 454,000
2001 355,000
2002 293,000
2003 261,000
2004 215,000
Thereafter 17,000
$ 1,595,000
Rent expense for the years ended December 31, 1999, 1998 and 1997 amounted to
approximately $ 420,000, $ 224,000 and $ 201,000 respectively.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1999, 1998 and 1997
14. Contingencies:
(a) Lawsuits for alleged breach of contract has been filed against the Canadian
subsidiary by two sales representatives. In addition, the Company has been
sued by a supplier regarading contractual differences for recovery of
amounts totaling approximately $ 150,000. In the opinion of management,
these actions have no merit. At this point in time it is difficult to
ascertain or estimate the value of a settlement, if any.
The Company has been named in a lawsuit by a lessor for recovery of amounts
totaling in excess of $ 300,000. There have been no recent developments
and in the opinion of management it is difficult to ascertain the
likelihood of an unfavorable outcome to the Company.
(b) The Company's Canadian subsidiary is also contigently liable for outstanding
letters of credit or approximately $ 1,030,000 as at December 31, 1999.
15. Employee benefit plans:
The Company has a group retirement savings plan for its Canadian employees.
The Company contributes to this plan the lesser of (a) 50% of the employee's
contribution to this plan; (b) 3% of the employee's gross earnings; or
(c) Cdn.$ 3,000 per employee. During the year, the Company contributed
approximately $ 27,000 (1998 - $ 24,000; 1997 - $ 27,600) to the retirement
savings plan for its Canadian employees.
16. Segment information:
(a) Operating and geographic information:
The Company operates primarily in one segment which includes the
distribution of toys and related items. Virtually all sales are to Canadian
customers. As a result of the acquisition in note 3, $ 2, 469,609 of intangibles
and long-lived assets, at cost, are located in the United States. All other
long-lived assets are located in Canada.
(b) Other information:
Sales of the Company's toy products to five customers accounted for 64% of the
Company's gross sales for 1999, two of which represent over 35% or
approximately $ 13,356,000. For both years 1998 and 1997, five customers
accounted for approximately 64% and 74% of gross sales, two of which
represented over 38% and 43% or $ 13,246,000 and $ 16,935,000 respectively.
Sales of toys purchased from the Company's two largest manufacturers and
suppliers of toys in aggregate accounted for 68% of gross sales for 1999.
The Company's two largest suppliers accounted for 64% and 67% of gross sales
for 1998 and 1997 respectively.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1999, 1998 and 1997
17. Financial instruments:
(a) Foreign currency risk management:
The Company enters into forward foreign exchange contracts to minimize its
foreign currency exposure on purchases. The contracts oblige the Company to
buy US dollars in the future at predetermined exchange rates. The contracts
are not used for trading purposes. The Company's policy is to enter into
forward foreign exchange contracts on a portion of its purchases anticipated
in the next selling season. Gains and losses on forward exchange contracts
are recorded in income and generally offset transaction gains or losses on
the foreign currency cash flows which they are intended to hedge.
At December 31, 1999, the Company had no contracts to purchase US dollars.
(b) Fair values:
Fair value estimates are made as of a specific point in time, using available
information about the financial instruments. These estimates are subjective in
nature and often cannot be determined with precision.
The fair value of the Company's accounts receivable, due from affiliated
companies, bank indebtedness, trade and other payables approximate their
carrying value due to the immediate or short-term maturity of these
financial instruments. The fair market value of long term debt approximates
its amount carrying value.
(c) Credit risk and economic dependence:
For the year ended December 31, 1999, approximately 64% (1998 - 64%) of the
Company's sales were made to five unrelated companies. Three customers,
representing approximately 50% (1998 - 54%) of total sales, individually
accounted for more than 10% (1998 - 10%) of total sales.
The Company regularly monitors its credit risk exposure to these and other
customers and takes steps to mitigate the risk of loss.
(d) Interest rate risk:
The Company's principal exposure to interest rate risk is with respect to its
short-term financing which bears interest at floating rates.
18. Subsequent event:
On February 17, 2000, the Company provided a $ 700,000 bridge loan to a company
which is a prospective acquisition. If the acquisition is not completed, the
loan plus a penalty must be repaid.
19. Comparative figures:
Certain comparative figures have been reclassified to conform with the financial
statement presentation adopted in the current year.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Exhibits to
Form 10 - K
of
GRAND TOYS INTERNATIONAL, INC.
For the Fiscal Year
Ended December 31, 1999
Exhibit 21
The following is a list of the Company's subsidiaries and subsidiaries of
subsidiaries of the Company:
Grand Toys (U.S.) Ltd.
Grand Toys Ltd.
Grand Concepts, Inc.
Ark Creations, Inc.
GRAND TOYS INTERNATIONAL, INC.
Signatures
Years ended December 31
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 28, 2000 GRAND TOYS INTERNATIONAL, INC.
By: /s/ Stephen Altro
Stephen Altro
Chairman
In accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ Stephen Altro March 28, 2000
Stephen Altro President and
Director (Principal
Executive Officer)
/s/ Ken Cieply March 28, 2000
Ken Cieply Executive Vice President,
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and
Accounting Officer)
/s/ David Mars Director March 28, 2000
David Mars
/s/ Elliot Bier Director March 28, 2000
Elliot Bier
/s/James Rybakoff Director March 28, 2000
James Rybakoff
GRAND TOYS INTERNATIONAL, INC.
Signatures
Years ended December 31
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 28, 2000 GRAND TOYS INTERNATIONAL, INC.
By:
Stephen Altro
Chairman
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
March 28, 2000
Stephen Altro President and
Director (Principal
Executive Officer)
March 28, 2000
Ken Cieply Executive Vice President,
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and
Accounting Officer)
Director March 28, 2000
David Mars
Director March 28, 2000
Elliot Bier
James Rybakoff Director March 28, 2000
- - -
- - -
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