ITEM 1 - BUSINESS
Just Toys, Inc. (the "Company") designs, develops, manufactures, markets and distributes a variety of toy and sport products for children of various ages. The Company is a Delaware corporation formed in August 1992. Its business was begun in 1989 and was conducted as a joint venture (the "Joint Venture") until September 1992 when the Company succeeded to the business of the Joint Venture.
Through the acquisition of certain assets of Table Toys, Inc., in June 1996, the Company sells a line of PlayTable products which consist of play tables which are compatible with most brands of toy construction blocks and a line of toy construction blocks. In February 1996, the Company acquired the toy line and rights to the "Welsh" name, which consists of doll accessories, carriages and strollers. The Company has expanded both of these product lines since the time of their acquisition.
The Company presented its entire product line to retailers at the Hong Kong, Dallas and New York Toy Fairs in January and February 1998.
The Company has two wholly owned foreign subsidiaries, Just Toys Products, Limited and Joyful World Enterprises, Limited, both of which are incorporated in Hong Kong.
Products
The Company has categorized its products into two categories: "Toys" and "Sport." The following chart shows the breakdown of the Company's net sales by product category for the years indicated:
Sport
The Company's line of Sport toys include spiral footballs manufactured under a non-exclusive patent license, foam and plastic baseballs, baseball bats, soccer balls and basketballs, mini basketball hoop sets, youth-size hockey sticks, pucks and goals and batting tee sets. The products are sold under the Company's names as well as licensed names such as Spalding(R), National Hockey League(R) and Louisville Slugger(R). The Company's products in its Sport line generally sell at retail for between $2.00 and $50.00.
Toys
The Company's Toys line consists of many different items including bendable figures and miniature figures, some of which are based on licensed characters, play tables, doll strollers and accessories, its Laser Light(R) toys, hand-held toys that project laser-like images, and a line of foam shooting toys. The Company's products in its Toys line generally sell at retail for between $2.00 and $100.00.
Licensing
Some of the Company's products are manufactured under license agreements. A determination to acquire a license must frequently be made before the commercial introduction of the product in which a licensed property appears and license arrangements often require the payment of non-refundable advances or guaranteed minimum royalties. Substantially all of the Company's licenses extend for one to three years. Some licenses are renewable at the option of the Company upon payment of certain minimum guaranteed payments or the attainment of certain sales levels during the initial term of the license. Royalties to licensors typically range from 4% to 12% of sales of the related product. Licenses for some foreign territories require royalties that exceed such range. As of December 31, 1997, minimum future guaranteed payments through 2001 under license agreements aggregated approximately $766,000.
The Company's spiral footballs are manufactured under a non-exclusive patent license that extends for the life of the patent.
Design and Development
The Company relies on its ability to purchase selective product lines and on its management personnel and independent inventors, designers, sculptors, model-makers and engineers for new products. The Company pays royalties to independent inventors and designers based on sales of products developed by them generally ranging from 2% to 6.5%.
Manufacturing
The Company relies on contract manufacturers in the United States and the Far East and on its wholly owned subsidiary, Celt Specialty Partners, Inc. ("Celt"), to manufacture its products. Celt manufactures certain of the Company's foam sport balls as well as other products. Approximately 28.4%, 30.7% and 29.2% of net sales in 1997, 1996 and 1995, respectively, were derived from the sale of products manufactured at this facility. During 1997, the Company upgraded the Celt operations by installing new equipment for the foam line and renting smaller and more efficient warehouse space closer
to its manufacturing facility. As needed, certain of the products manufactured by Celt can also be obtained from manufacturers in the Orient.
Decisions related to the choice of third party manufacturers are based on price, quality of merchandise, reliability and the ability of a manufacturer to meet the Company's timing requirements for delivery. The Company is not a party to long-term contractual or other arrangements with any manufacturer. The Company often uses more than one manufacturer to produce a single product. The Company utilizes public warehouse facilities on both the east and west coasts and in the midwest, at which it regularly maintains an inventory of its products, thus enabling the Company to respond quickly to customer orders. The Company also utilizes warehouse facilities located near its manufacturing facility in upstate New York. Tooling and injection molding are owned by the Company and may be utilized by different manufacturers if the need arises for alternate sources of production.
The principal raw materials used in the production and sale of the Company's products are chemicals for foam, plastics and paper products. Raw materials are generally purchased by the manufacturers who deliver completed products to the Company. The Company believes that an adequate supply of raw materials used in the manufacture of its products is readily available from existing and alternative sources at competitive prices.
Most of the Company's products are manufactured by unaffiliated parties located in the People's Republic of China and Taiwan. The Far East is the largest manufacturing center of toys in the world and most toy companies utilize the services of manufacturers located in the Far East. The majority of the Company's manufacturing in the Far East is performed by five to seven manufacturers. In any particular year, an individual manufacturer may account for more than 10% of the Company's products, depending upon the popularity of the product made by it. While the Company is not dependent on any single manufacturer in the Far East to supply it with products, the Company could be affected by political or economic disruptions affecting businesses in the Far East generally. The Company believes that alternate sources of manufacturing are available outside of the Far East. The Company has two wholly owned subsidiaries based in Hong Kong to maintain contact with manufacturers and subcontractors in the Far East and supervise manufacturing and quality control.
Sales and Marketing
The Company distributes its products in the United States primarily to toy stores, mass merchandisers and, to a lesser extent, discount drug chains, supermarket chains, sporting goods stores, catalogers and gift stores located in the United States. The Company participates in the electronic data interchange program maintained by many of its largest customers. This program allows the Company to monitor store inventory and schedule production to meet anticipated reorders.
The Company's net sales to foreign markets in 1997, 1996 and 1995 were approximately 2.7%, 5.7% and 4.9%, respectively, of total net sales. Sales in foreign countries are generally made directly to independent distributors, some of which are licensees that have acquired foreign distribution rights in respect of categories of products which the Company has the right to distribute domestically. Foreign distributors ordinarily retain their own sales representatives. Sales of products to distributors in foreign countries are in United States dollars which reduces the Company's exposure to fluctuations in monetary rates overseas.
The Company's net sales and gross margin, as a percentage of net sales, is dependent on its mix of business during a given time period. Variables include such issues as whether merchandise is shipped from a domestic warehouse or directly from the Orient, whether the merchandise is purchased from overseas sources or is produced domestically and the specific blend of products shipped to the Company's customers.
The Company does not sell any of its products on consignment. A portion of firm orders, by their terms, may be canceled if shipment is not made by a certain date.
In 1997, the Company maintained an internal sales and marketing staff of 9 people, including its senior management. The Company retains approximately sixteen sales representation firms in the United States who act as independent contractors and who market the Company's products at the major toy trade shows held in New York City and Hong Kong and at regional trade shows. In addition, sales representatives make on-site visits to customers for the purpose of soliciting orders for products.
Customers
The five largest customers of the Company accounted for approximately 75.3%, 71.7% and 67.8% of net sales in 1997, 1996 and 1995, respectively. In each of the past three years, the Company has had two customers, Target and Wal-Mart, each representing more than 10% of net sales. Sales to these customers totaled 60%, 57% and 53% of net sales in 1997, 1996 and 1995, respectively. The termination by either of these customers of its relationship with the Company would have a material adverse effect on the Company.
Backlog
Total order backlog at December 31, 1997 and 1996 was approximately $1,193,000 and $1,780,000, respectively. The Company expects substantially all of such orders to be filled during 1998. Cancellations may materially reduce the amount of sales realized from the Company's backlog. The business of the Company is characterized by customer order patterns which vary from one year to the next largely because of the different levels of consumer acceptance of a product line, product availability, marketing strategies, inventory levels of retailers and differences in overall economic conditions. The use of just-in-time/quick response inventory techniques and replenishment programs by larger retailers has resulted in fewer orders being placed in advance of shipment and more orders for immediate delivery. This distorts the comparisons of unshipped orders at any given date. The Company expects these trends to continue. Additionally, it is a general industry practice that orders are subject to amendment or cancellation by customers prior to shipment. Therefore, comparisons of unshipped orders in any specific period in any given year with those same periods in preceding years are not necessarily indicative of sales for an entire year. Order backlog is also impacted by a shift in the Company's revenues to the second half of the year with fourth quarter revenues becoming increasingly significant. The Company does not consider total order backlog to be a meaningful indicator of future sales.
Competition
The toy industry is highly competitive and the Company competes with many larger, better capitalized companies which have significantly more resources than the Company to devote to the design
and development of new toys, the procurement of licenses and the marketing and distribution of their products. Due to the Company's relatively modest advertising budget, the Company has greater difficulties in obtaining retailer product acceptance than do companies with large advertising budgets.
Seasonality
The toy industry is typically seasonal in nature due to the heavy demand for toy products during the Christmas season. During the past several years, the Company has experienced a shift in its revenues to the second half of the year with fourth quarter revenues becoming increasingly significant. The Company expects that this trend will continue due to industry changes and due to changes to its product mix related to the doll carriage and stroller product lines and the PlayTable product lines which were acquired in 1996. This concentration increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items and (c) failure to achieve tight and compressed shipping schedules.
As a result of the shift in the Company's revenues to the second half of the year, the Company anticipates that it may experience decreased sales and increased losses during the first and second quarters of 1998 compared to the first and second quarters of 1997.
Government Regulation
The Company is subject to the provisions of, among other laws, the Federal Hazardous Substances Act and the Federal Consumer Product Safety Act. These laws empower the Consumer Products Safety Commission (the "CPSC") to protect children from hazardous toys and other articles. The CPSC has the authority to exclude from the market articles which are found to be hazardous and can require a manufacturer to repurchase such toys under certain circumstances. Any such determination by the CPSC is subject to court review. Similar laws exist in some states and cities in the United States and in many jurisdictions throughout the world. The Company maintains a quality control program (including the inspection of goods at factories and the retention of independent testing laboratories in Hong Kong) to ensure compliance with applicable laws. The Company maintains product liability insurance in the amount of $11,000,000.
Certain Cautionary Factors
The following factors, in addition to those discussed elsewhere in this Report, should be considered carefully in evaluating the Company and its business.
Change in Consumer Preferences; Reliance on New Product Introduction
The toy market is characterized by changing consumer preferences and frequent new product introductions which reduce the length of product life cycles. There can be no assurance that any of the Company's current products or product lines will continue to be popular with consumers for any significant period of time or that new products and products lines introduced by the Company will achieve and sustain an acceptable degree of market acceptance. Furthermore, sales of the Company's existing products are expected to decline over time and may decline at rates faster than expected. The Company's success is dependent upon the Company's ability to enhance existing product lines and develop new products and product lines. The failure of the Company's new products and product lines to achieve and sustain market
acceptance and to produce acceptable margins could have a material adverse effect on the Company's financial condition and results of operations.
Dependence on Limited Number of Customers
For fiscal 1997, the Company's five largest customers accounted for 75.3% of the Company's net sales. Sales to Wal-Mart and Target, the Company's two largest customers, aggregated 60% of the Company's net sales during the same period. The Company expects to continue to rely on a relatively small number of customers for a significant percentage of sales for the foreseeable future. Because of the large portion of the Company's sales to the Company's two largest customers and the significant share of the market for toy sales to consumers represented by these same customers, the loss of one of them as a customer, or a significant reduction in sales to any one of them, would have a material adverse effect on the Company's financial condition and results of operations.
Inventory Management
Most of the Company's largest retail customers utilize an electronic inventory management system to track sales of products and rely on reorders being rapidly filled by suppliers rather than maintaining large product inventories. These types of systems put pressure on suppliers like the Company to promptly fill customer orders and shift some of the inventory risk from the retailer to suppliers. The Company generally places orders with manufacturers based in part on advance, non-binding, estimates of orders from its major retail clients. Such estimates may deviate substantially from actual orders. In the event that subsequent orders fall short of original estimates, the Company may be left with excess inventory. Significant excess inventory could result in price discounts and increased inventory carrying costs for the Company. Similarly, if the Company fails to have an adequate supply of products manufactured on a timely basis, the Company may, as a result, lose sales opportunities. Despite the Company's efforts to adjust its production schedule based on market activities, including participating in electronic data interchange programs with its largest retail customers, there can be no assurance that the Company will maintain appropriate inventory levels. Such occurrences may have a material adverse effect on the Company's financial condition and results of operations.
Returns and Markdowns
The Company historically has permitted certain customers to return slow-moving items for credit or has provided price protection by making any price reductions effective as to certain products then held by retailers in inventory. The Company expects that it will continue to be required to make such accommodations in the future. Any significant increase in the amount of returns or markdowns could have a material adverse effect on the Company's financial condition and results of operations.
Competition
The toy industry is highly competitive. Many of the Company's competitors have longer operating histories, broader product lines and greater financial resources and advertising budgets than the Company. In addition, the toy industry has nominal barriers to entry. Competition is based primarily on the ability to design and develop new toys, procure licenses for popular products, characters and trademarks, and successfully market products. Many of the Company's competitors offer similar products or alternatives to
the Company's products. The Company's products compete with other products for retail shelf space. There can be no assurance that shelf space in retail stores will continue to be available to support the Company's existing products or any expansion of the Company's products and product lines. There can also be no assurance that the Company will be able to continue to compete effectively in this marketplace.
Employees
As of December 31, 1997, the Company and its subsidiaries employed 100 persons, 44 of which were engaged in manufacturing.
Executive Officers of the Company
The following table sets forth the names, ages and principal occupations of each of the Company's executive officers and the year in which each was elected an officer.
Morton J. Levy was appointed as the Company's Chairman on March 30, 1995 and also served as the Chief Executive Officer from such date until July 1, 1997. Mr. Levy is a director and officer of each of the Company's subsidiaries. He was appointed a director of the Company in October 1992 and was a consultant to the Company from 1994 until March 1995. Mr. Levy has been engaged in the toy business for over 35 years, having been a founder and principal officer of Gabriel Industries, Inc., a diversified toy manufacturer. For more than five years prior to his engagement as a consultant to the Company, Mr. Levy was a private investor.
Barry Shapiro became the Chief Executive Officer of the Company on July 1, 1997. Mr. Shapiro was appointed President and Chief Operating Officer of the Company on March 30, 1995. Mr. Shapiro
is Chairman of the Company's Hong Kong subsidiaries and a director and officer of each of the Company's subsidiaries. He was appointed a director of the Company in April 1995. Mr. Shapiro has been engaged in the toy business for over 30 years. In November 1994, Mr. Shapiro was appointed Executive Vice President of the Company. From December 1993 until November 1994, he served as Managing Director for the Company's Hong Kong subsidiaries, Joyful World Enterprises, Ltd. and Just Toys Products, Ltd. From October 1991 to November 1993, he was the President of Packaging Specialists, a manufacturer and distributor of protective packaging. From January 1984 to June 1991, Mr. Shapiro was Executive Vice President and General Manager of Imagineering, Inc.
David Schwartz was appointed Chief Financial Officer and Treasurer of the Company in November 1996. Mr. Schwartz is an officer of each of the Company's United States subsidiaries. From January 1996 through November 1996, Mr. Schwartz was self-employed as a consultant to a number of companies in the consumer products business. From May 1994 through December 1995, he was the Chief Financial Officer of Philips Industries, Inc., a distributor of women's hair and cosmetic accessories. From December 1990 through May 1994, Mr. Schwartz was the Controller of Ameriscribe Management Services, Inc., a provider of facilities management services.
Seymour Rosenthal was appointed Secretary of the Company in November 1996. Mr. Rosenthal has been the Director of Internal Operations for the Company since September 1995. From 1993 through 1995, he was a consultant working with various financial institutions in the workout of bankrupt organizations. During 1992, Mr. Rosenthal was the Manager of Operations of Sunweave Linens, a manufacturer and distributor of linens.
Robert Pagano was appointed Vice President - Marketing and Product Planning of the Company in February 1996. From May 1994 through December 1995, Mr. Pagano was the Vice President for Research and Development at Toy Biz, Inc. Prior to that time, starting in November 1991 through May 1994, Mr. Pagano was Vice President--Marketing of the Joint Venture and then of the Company.
Jerry Carroll was appointed Vice President - Domestic Manufacturing Operations of the Company in September 1997. From 1994 through 1997, Mr. Carroll was the Vice President - Operations of Empire Industries, Inc., a manufacturer and distributor of toys. From 1991 through 1994, Mr. Carroll was Vice President-Operations of Marchon, Inc., a manufacturer and distributor of toys.
Larry Scott was appointed Vice President - Sales of the Company in February 1997. From 1994 through 1996, Mr. Scott was the Vice President--Seasonal Product and Regional Sales Manager of Trendmasters, Inc., a manufacturer and distributor of toys. From 1990 to 1994, Mr. Scott was the Vice President of International Sales of Collegeville Imagineering, Inc.
ITEM 2
ITEM 2 - PROPERTIES
On March 1, 1998, the Company moved its principal executive offices and showroom to Dobbs Ferry, New York. The Company leases approximately 12,500 square feet of office space under a lease expiring in April 2008. The Company believes that this facility is suitable for the Company's purposes for the foreseeable future.
The Company leases a showroom in the Toy Center Building at 200 Fifth Avenue, New York, New York, consisting of approximately 3,200 square feet under a lease expiring in April 2008. The showroom is adequate for the Company's purposes for the foreseeable future and has sufficient capacity to accommodate growth in the Company's product line as well as the large size of some of the Company's new products.
Upon selling the Company owned office space to Hong Kong in April 1996, the Company leased approximately 3,400 square feet of office space for a term expiring in April 1999. The Company believes that this facility is adequate for the Company's purposes for the foreseeable future.
The Company's Celt subsidiary owns an approximately 31,000 square foot manufacturing facility on 8 acres of land in Brockport, New York. The facility is made of metal panel and brick and is unencumbered. The Company manufactures its foam balls and related products in that facility. The Company has increased the production capacity of the Celt facility through investment in new equipment and increases in manufacturing efficiencies. The Company believes that the facility is suitable for the Company's current manufacturing activities. The Company leases warehouse space in upstate New York primarily for Celt manufactured products.
The Company utilizes public warehouse facilities in New Jersey, California and Washington primarily for products imported from the Orient.
The Company's operations relating to play tables is based in Arkansas City, Kansas. The Company leases 20,000 square feet of office, warehouse and assembly space relating to this operation under a lease expiring in December 1998. The Company believes that the facility is suitable for the Company's purposes for the foreseeable future. Additionally, public warehouse facilities are utilized in Kansas and Iowa.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
1. On August 8, 1997, the United States Court of Appeals for the Federal Circuit affirmed the decision of the United States District Court for the Northern District of California granting summary judgment in favor of the Company in the design patent and trade dress lawsuit filed by OddzOn Products, Inc. in April 1995. In granting the Company summary judgment, the District Court dismissed OddzOn's claims that the Company's Micro Ultra Pass(R) and Ultra Pass(R) toy footballs infringed on OddzOn's design patent and constituted trade dress infringement and unfair competition.
2. On September 25, 1997, an administrative law judge of the Federal Trade Commission determined that Toys "R" Us, Inc. had violated the antitrust laws by entering into arrangements with various toy manufacturers whereby the toy manufacturers would restrict their business with warehouse clubs. Toys "R" Us has announced that it will appeal that decision.
Following announcement of the administrative law judge's decision, a series of private class actions seeking treble damages, expenses and attorneys' fees have been filed in various federal courts on behalf of consumers who purchased toys from Toys "R" Us from 1989 to the present which the defendant manufacturers had allegedly agreed not to sell to other retailers. The complaints allege, generally, a conspiracy among Toys "R" Us and the defendant toy manufacturers to cut off supplies to the warehouse
clubs competing with Toys "R" Us. The defendants in these actions include Toys "R" Us, Mattel, Fisher- Price, Hasbro, Tyco Toys, The Little Tikes Company, Rubbermaid Corporation, Today's Kids, Binney & Smith, Lego Systems, Sega of America, Tiger Electronics, and Huffy Corporation. The Company is named as a defendant in many of these actions.
The Company does not believe that it participated in any conspiracy or otherwise violated the antitrust laws and it intends to defend itself.
3. The Company received approximately 1,000 complaints concerning its Micro-Bake for Kids(TM) (the "Micro-Bake") product, all of which have been paid or accrued for as of December 31, 1997 and December 31, 1996. The Company discontinued selling this product in 1995. Virtually all of the complaints assert damage to the Micro-Bake product and many complaints assert damage to the consumer's microwave oven. The Company has product liability insurance related to this matter. The Company is expected to be responsible for approximately 50% of such claims and the insurance company is expected to pay the balance.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock, par value $.01 per share ("Common Stock"; Symbol: JUST), has been traded on the Nasdaq National Market since the Company's initial public offering on October 1, 1992. The high and low sale prices for the Common Stock as reported by the Nasdaq National Market from January 1, 1996 through December 31, 1997 are as follows:
Calendar Year High Low ------------- ---- ---
First Quarter $2.000 $1.125 Second Quarter 2.688 1.000 Third Quarter 2.000 1.063 Fourth Quarter 2.313 1.313
First Quarter $1.688 $1.250 Second Quarter 1.563 1.219 Third Quarter 1.688 1.188 Fourth Quarter 1.406 0.750
Effective February 23, 1998, new continued listing standards were adopted for securities trading on the Nasdaq National Market. The standards include a $5,000,000 market value of public float and a one dollar minimum bid price. Under applicable Nasdaq rules, the Company was advised on February 27, 1998 of its non-compliance with each such standard and was given until May 28, 1998 to achieve compliance. The Company may regain compliance if its stock trades at or above the minimum requirements for at least 10 consecutive trade days. In order to achieve the $5,000,000 market value of public float requirement, the stock must trade at a price of approximately $1.40 per share. The Company believes that its stock is eligible for listing on the Nasdaq SmallCap Market and it anticipates determining prior to May 28, 1998 whether listing on the Nasdaq National Market will continue or whether the Company will make application for listing on the Nasdaq Small CapMarket.
Dividends and Distributions
Pursuant to the Company's Certificate of Incorporation, the Company's Board of Directors has authorized 150,000 shares of non-voting Series A Convertible Redeemable Preferred Stock, par value $1.00 per share ("Series A Stock") of which 120,000 shares are issued and outstanding and 650,000 shares of non-voting Series B Convertible Redeemable Preferred Stock, par value $1.00 per share ("Series B Stock") of which 538,243 shares were issued and 521,854 shares are outstanding at December 31, 1997 (16,389 shares were converted to Common Stock during 1997). The Series A Stock and Series B Stock rank senior to the Common Stock with respect to dividends. The Series A Stock and Series B stock have cumulative dividends of $.06 per share and $.25375 per share, respectively, per annum, payable quarterly. As long as any shares of either the Series A Stock or Series B Stock remain outstanding, no cash dividends will be paid on the Common Stock unless, at the time, all accrued and unpaid dividends and applicable sinking fund obligations have been paid or provided for. The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future.
Number of Stockholders
As of March 26, 1998, there were 159 holders of record of the Common Stock. The Company has approximately 1,900 beneficial shareholders of the Common Stock.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data at and for the periods presented. This information should be read in conjunction with the Company's Financial Statements and related Notes.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported net income before preferred stock dividends and accretion of approximately $66,000 for the year ended December 31, 1997, compared to a profit of approximately $155,000 in the prior year.
On June 28, 1996, the Company purchased certain assets of Table Toys. The Table Toys products include a line of play tables which are compatible with most brands of toy construction blocks and a line of toy construction blocks. The acquisition costs totaled approximately $1,961,000 and were financed through a combination of cash and the issuance of warrants and Series B Stock.
On February 1, 1996, the Company acquired the toy line and the rights to use the "Welsh" name for toys. The Welsh toy line consists of doll accessories, carriages and strollers. The cost to acquire this product line required a modest down payment and the balance of the purchase price is based upon a percentage of sales of these products over five years.
The following table sets forth the percentage of net sales for the periods indicated and percentage changes from period to period of certain income and expense items included in "Selected Financial Data".
Results of Operations
Year Ended December 31, 1997 and 1996
Net Sales
Net sales for 1997 increased 5.5% to $23,259,000 from $22,056,000 in 1996 primarily due to increased sales of the Company's Toy products. Net sales of the Company's Sports toys increased 1.9% to $10,779,000 during 1997 from $10,577,000 in 1996. Net sales increased in the Toys category by 8.7% to $12,480,000 in 1997 from $11,479,000 in 1996. The increase in sales in the Toys category was primarily attributable to increased sales from the doll carriage and stroller line.
Gross Profit
Gross profit increased 3.1% to $8,754,000 in 1997 from $8,487,000 in 1996. Gross profit as a percentage of net sales was 37.6% for 1997 compared to 38.5% for 1996. As part of the Company's business
plan to improve its operations, the Company has analyzed its product lines to selectively discontinue those products it believes will not achieve an acceptable return on investment in the future. During 1997, the Company sold, at approximately its carrying costs, the existing inventory in a selected number of product lines that will no longer be carried in the future. The reduction in the gross profit margin in 1997 from the comparable period in 1996 is partially attributable to these transactions.
The Company's net sales and gross margin, as a percentage of net sales, is dependent on its mix of business during a given time period. Variables include such factors as whether merchandise is shipped from a domestic warehouse or directly from the Orient, whether the merchandise is purchased from overseas sources or is produced domestically and the specific blend of products shipped to the Company's customers.
Merchandising, Selling, Warehousing and Distribution Expenses
Merchandising, selling, warehousing and distribution expense decreased 2.1% to $3,500,000 for 1997 from $3,575,000 in 1996. This change was partly due to decreased warehousing expenses during 1997.
During 1997, the Company significantly increased its investment in the development, design and packaging of products to be introduced in 1998. The amortization of such amounts will result in an increase in merchandising expense in 1998.
Royalties
Royalty expense increased 42.2% to $1,009,000 in 1997 compared to $710,000 in 1996 primarily due to an increase in net sales of products subject to royalties.
General and Administrative Expenses
General and administrative expenses decreased 5.1% to $3,571,000 for 1997 from $3,762,000 in 1996. The Company implemented certain cost control measures which reduced these expenses in 1997 and had an approximately $150,000 reduction in legal and professional fees in 1997. These reductions were partly offset by an increase in noncash charges such as depreciation and amortization associated with the acquisition by the Company of certain assets of Table Toys in June 1996, which were only recorded in the second half of 1996.
Operating Profit
The Company had an operating income of $674,000 in 1997 compared with an operating profit of $440,000 in 1996.
Interest Expense
Interest expense increased to $623,000 in 1997 as compared to $546,000 in 1996. This change was due primarily to increased borrowings from Milberg Factors, Inc. ("Milberg") during the year which were partly offset by the repayment of the mortgage on the Company's Hong Kong property upon its sale in the second quarter of 1996.
Net Income
The Company had net income of $66,000 in 1997 as compared with net income of $155,000 in 1996. During 1996, the Company recorded a non-recurring gain on the sale of its Hong Kong property of $198,000.
Basic Income (Loss) Per Share Attributable to Common Stockholders
In 1997, the Company deducted dividends paid on its preferred stock outstanding, and the accretion of the Series B Stock issued in 1996 to its redemption value as expenses in computing net income attributable to common stockholders. During 1996, dividends and accretion were only recorded for the last six months of the year.
Basic loss per share attributable to common stockholders for 1997 totaled $.04 per share compared to a basic earnings per share attributable to common stockholders of $.01 per share in 1996 based upon 4,157,000 and 4,150,000 weighted average shares outstanding during 1997 and 1996, respectively.
Year ended December 31, 1996 and 1995
Net Sales
Net sales in 1996 increased 12.6% to $22,056,000 from $19,588,000 in 1995 primarily due to increased sales of the Company's Sport products.
Net sales of the Company's Sport products increased 31.1% to $10,577,000 in 1996 compared to $8,066,000 in 1995 due primarily to the introduction of new products.
Net sales of the Company's Toys products changed less than 1% due to the sale of discontinued products in 1995, which was offset in 1996 by the addition of the Table Toys and Welsh products.
Gross Profit
Gross profit in 1996 increased 35.8% to $8,487,000 from $6,249,000 in 1995. Gross profit as a percentage of net sales was 38.5% in 1996 as compared to 31.9% in 1995. The increase in the gross profit, in dollars and as a percentage of sales, is primarily due to the increase in sales in 1996 over 1995 and the writedown in 1995 of unamortized tooling of $223,000 and of slow-moving or obsolete inventory of $539,000.
Merchandising, Selling and Distribution Expenses
Merchandising, selling, warehousing and distribution expenses decreased 39.8% to $3,575,000 from $5,941,000 in 1995 due to significant reductions in expenses in this area. In addition, the Company wrote-down barter credits totaling $976,000 in 1995.
Royalties
Royalties decreased 62% to $710,000 from $1,869,000 in 1995. As a percentage of net sales, royalties decreased to 3.2% from 9.5% in 1995. This is primarily due to reduced sales of licensed products in 1996. In addition, the Company expensed prepaid and accrued royalties with respect to products that were discontinued or where sales were below expectations in 1995 totaling $375,000.
General and Administrative Expenses
General and Administrative expenses decreased 16.5% to $3,762,000 in 1996 from $4,506,000 in 1995 due to continued decreases in expenses in this area.
Operating Profit (Loss)
The Company had operating income of $440,000 in 1996 compared with an operating loss of $6,066,000 in 1995.
Gain (Writedown) Related to Investment in Hong Kong Property
The 1996 figures include approximately $198,000 of income from the sale of the Company's Hong Kong property which was recognized because the final selling price was marginally higher than expected and selling expenses were less than expected. In 1995, the Company wrote down the value of its property in Hong Kong to its then estimated realizable value.
Net Income (Loss)
The Company had a net income of $155,000 in 1996 compared to a net loss of $8,787,000 in 1995.
Basic Earnings (Loss) Attributable to Common Stockholders
In 1996, the Company recorded the dividends paid on its preferred stock outstanding, and the accretion of the Series B Stock issued in 1996 to its redemption value, as a change in stockholders' equity during the year and deducted these expenses in computing net income attributable to common stockholders. During 1995, no material amounts of dividends were earned.
Basic earnings per share attributable to common stockholders for 1996 totaled $0.01 per share compared to a basic loss per share attributable to common stockholders of $2.12 per share in 1995 based upon 4,150,000 weighted average shares outstanding in each year.
Other Information
During the past several years, the Company has experienced a shift in its revenues to the second half of the year with fourth quarter revenues becoming increasingly significant. The Company expects that this trend will continue due to industry changes and due to changes to its product mix related to the doll carriage and stroller product lines and the PlayTable product lines which were acquired in 1996. This concentration increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items and (c) failure to achieve tight and compressed shipping schedules. The business of the Company is characterized by
customer order patterns which vary from one year to the next largely because of the difference levels of consumer acceptance of a product line, product availability, marketing strategies, inventory levels of retailers and differences in overall economic conditions. The use of just-in-time/quick response inventory techniques and replenishment programs by larger retailers has resulted in fewer orders being placed in advance of shipment and more orders for immediate delivery. This distorts the comparisons of unshipped orders at any given date. The Company expects these trends to continue. Additionally, it is a general industry practice that orders are subject to amendment or cancellation by customers prior to shipment. Therefore, comparisons of unshipped orders in any specific period in any given year with those same periods in preceding years are not necessarily indicative of sales for an entire year. The Company's unshipped orders were approximately $1,193,000 at December 31, 1997 compared to $1,780,000 at December 31, 1996.
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources in 1997 were funds provided from operations and its Milberg credit facility. The Company's primary sources of liquidity and capital resources in 1996 were funds provided from operations, proceeds from the sale of the Company's Hong Kong facility as well as available credit facilities. At December 31, 1997, working capital was $3,025,000 compared to approximately $2,742,000 at December 31, 1996.
The Company's factoring agreement with Milberg provides for advances equal to the lesser of 85% of total accounts receivable or $5,000,000. The factoring charge is .65% of receivables. Advances bear interest at the rate of prime plus one percent. Milberg has also agreed to advance to the Company, at the Company's request, the lesser of $2,000,000 or 50% of the book value of the Company's eligible inventory located in the United States. Such advances will also bear interest at the rate of prime plus one percent. Additionally, the factoring arrangement with Milberg is secured by a mortgage on the real property owned by the Company's manufacturing subsidiary.
In April 1996, the Company sold its Hong Kong property. In 1995, the Company wrote down the carrying value of the facility by $1,578,000 to reflect the Company's estimate of the net proceeds of the sale. The sale resulted in additional liquidity and reduced costs for the Company by permitting the Company to lease space at a cost below the carrying costs of the former facility. The sale yielded net proceeds to the Company of approximately $842,000 after payment of the mortgage and the costs associated with the sale.
The Company's acquisition of the Welsh product line required a modest down payment. The balance of the purchase price is based upon a percentage of sales of Welsh products over five years.
The purchase price for the Table Toys product line was paid partly in shares of Series B Stock and partly in cash (approximately $400,000). The Company financed the cash portion of this acquisition through borrowings under its credit lines with Milberg. The Series B Stock pays a 7% cumulative dividend payable at the Company's election in cash or preferred stock based upon a liquidation value of $3.625 per share and is subject to mandatory redemption on December 31, 2005. The Company has certain sinking fund obligations with respect to such Series B Stock during the last four years prior to redemption. Accordingly, the Company does not believe that these transactions will have a material adverse affect on the Company's liquidity during the next five years.
During 1997, all dividends paid by the Company on the Series A Stock and Series B Stock were in cash. During 1997, 16,389 shares of Series B Stock were converted into an equivalent number of shares of Common Stock.
To the extent the Company may be required to pay any claims relating to its discontinued Micro-Bake product, the Company believes that its current reserves will be sufficient to cover such payments.
The Company has a bonus pool that enables employees to participate in the Company's profits. The pool for fiscal 1996 and 1997 consists of 20% of the first $1,000,000 of pre-tax earnings, as defined, 15% of the next $1,000,000 of pre-tax earnings and 10% of pre-tax earnings over $2,000,000. For 1996, pre-tax earnings was defined as pre-tax income before preferred stock dividends and accretion. For 1997, pre-tax earnings was defined as pre-tax earnings after deduction for preferred stock dividends and accretion. The bonus pool was approximately $31,000 for 1996. There was no bonus pool for 1997. The bonus pool is intended to provide performance-based compensation and to reward those who contribute to the Company's success. The bonus arrangements should not adversely affect the Company's liquidity since it is only payable if earned.
The Company's net sales and gross margin, as a percentage of net sales, is dependent on its mix of business during a given time period. Variables include such issues as whether merchandise is shipped from a domestic warehouse or directly from the Orient, whether the merchandise is purchased from overseas sources or is produced domestically and the specific blend of products shipped to the Company's customers.
The Company believes that its cash flow from operations and available borrowings will be adequate to meet its obligations for the ensuing year.
Year 2000 Compliance
The Company has reviewed its computer systems and developed a plan to achieve proper processing of transactions in the year 2000 and beyond. As part of the Company's decisions to perform certain administrative functions internally, effective January 1, 1997, the Company installed new software for its main processing systems which is year 2000 compliant. The Company is evaluating the other systems throughout the organization and believes that all of its computer systems will be year 2000 compliant by the middle of 1999. Costs incurred to date to implement the plan have not been material and are not expected to be material to operating results in the future. However, there can be no assurance that the systems of other companies on which the Company's systems rely will also be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems. Any significant disruption of the Company's ability to communicate electronically with its business partners could negatively impact the Company's business, financial condition and results of operations.
Inflation
The Company does not believe that the relatively moderate rates of inflation in recent years have had a significant effect on its net sales or profitability.
Seasonality
The toy industry is typically seasonal in nature due to the heavy demand for toy products during the Christmas season. During the past several years, the Company has experienced a shift in its revenues to the second half of the year with fourth quarter revenues becoming increasingly significant. The Company expects that this trend will continue due to industry changes and due to changes to its product mix related to the doll carriage and stroller product lines and the PlayTable product lines which were acquired in 1996. This
concentration increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items and (c) failure to achieve tight and compressed shipping schedules.
As a result of the shift in the Company's revenues to the second half of the year, the Company anticipates that it may experience decreased sales and increased losses during the first and second quarters of 1998 compared to the first two quarters of 1997.
Backlog
Total order backlog at December 31, 1997 and 1996 was approximately $1,193,000 and $1,780,000, respectively. The Company expects substantially all of such orders to be filled during 1998. Cancellations may materially reduce the amount of sales realized from the Company's backlog. The use of just-in-time/quick response inventory techniques and replenishment programs being used by larger retailers has caused a change in their ordering patterns with fewer orders being placed significantly in advance of shipment. The Company does not consider total order backlog to be a meaningful indicator of future sales.
Certain Cautionary Factors
Certain factors discussed above, in addition to those discussed elsewhere in this Report, should be considered carefully in evaluating the Company and its business. See the introductory paragraph of this Annual Report on Form 10-K. See also "Business -- Manufacturing," " -- Seasonality," "-- Government Regulation" and "-- Certain Cautionary Factors."
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See page.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors
The following table sets forth the names, ages and principal occupations of each of the Company's directors and the year in which each was elected a director.
Roger Gimbel was appointed Vice Chairman of the Board of Directors, Chief Financial Officer and Vice President of the Company in August 1992. Mr. Gimbel resigned as Chief Financial Officer and Vice President of the Company in April 1995. Mr. Gimbel was one of the founders of the Company. Mr. Gimbel is the Chairman of Worldwide Dreams LLC, an importer and distributor of personal accessories, small leather goods and related items.
Charmaine Jefferson was appointed a director of the Company in July 1995. Ms. Jefferson is an attorney and President of Kelan Resources, a non-profit arts management consulting firm. From June 1995 to April 1996, Ms. Jefferson was self-employed as a consultant providing management advice to not-for-profit corporations. From August 1992 to June 1995, Ms. Jefferson was employed as the Executive Director of the Dance Theatre of Harlem, Inc. From 1988 through August 1992, Ms. Jefferson was Deputy and Acting Commissioner for the New York City Department of Cultural Affairs.
Howard Kaufman was appointed a director of the Company in October 1992. Mr. Kaufman has been engaged in the toy business for approximately 34 years, having been a founder and principal officer of KayBee Stores, a division of the Melville Corporation. For more than the past five years, Mr. Kaufman has been a private investor. Mr. Kaufman is also a director of Berkshire Life Insurance Company.
Morton J. Levy was appointed as the Company's Chairman on March 30, 1995 and also served as the Chief Executive Officer from such date until July 1, 1997. Mr. Levy is a director and officer of each of the Company's subsidiaries. He was appointed a director of the Company in October 1992 and was a consultant to the Company from 1994 until March 1995. Mr. Levy has been engaged in the toy business for over 35 years, having been a founder and principal officer of Gabriel Industries, Inc., a diversified toy manufacturer. For more than five years prior to his engagement as a consultant to the Company, Mr. Levy was a private investor.
Irwin Naitove was appointed a director of the Company in May 1995. Mr. Naitove has been engaged in corporate finance for the past 45 years. For more than the past five years, Mr. Naitove has been a private investor.
Donald D. Shack was appointed a director of the Company in August 1992. Mr. Shack is an attorney and, since April 1993, has been a member of the law firm of Shack & Siegel, P.C., general counsel to the Company. From January 1990 through March 1993, Mr. Shack was a member of the law firm of Whitman & Ransom which served as general counsel to the Company during that period. Mr. Shack is also a director of the following publicly-held companies: Andover Togs, Inc., Ark Restaurants Corp. and International Citrus Corporation.
Barry Shapiro became the Chief Executive Officer of the Company on July 1, 1997. Mr. Shapiro was appointed President and Chief Operating Officer of the Company on March 30, 1995. Mr. Shapiro is Chairman of the Company's Hong Kong subsidiaries and a director and officer of each of the Company's subsidiaries. He was appointed a director of the Company in April 1995. Mr. Shapiro has been engaged in the toy business for over 30 years. In November 1994, Mr. Shapiro was appointed Executive Vice President of the Company. From December 1993 until November 1994, he served as Managing Director for the Company's Hong Kong subsidiaries, Joyful World Enterprises, Ltd. and Just Toys Products, Ltd. From October 1991 to November 1993, he was the President of Packaging Specialists, a manufacturer and distributor of protective packaging. From January 1984 to June 1991, Mr. Shapiro was Executive Vice President and General Manager of Imagineering, Inc.
Identification of Executive Officers
See Item 1. "Business -- Executive Officers of the Company."
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Commission and the National Association of Securities Dealers, Inc. Officers, directors and greater than ten percent stockholders are required by the Commission's regulation to furnish the Company with copies of all Forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such forms it has received and written representations that no Form 5 is required to be filed, the Company believes that all of its officers, directors and greater than ten percent beneficial owners complied with all filing requirements applicable to them with respect to transactions during fiscal 1997.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The Summary Compensation Table below sets forth certain information concerning compensation paid or accrued in 1997 to the Chief Executive Officer of the Company and the four executive officers whose total salary and bonus in 1997 exceeded $100,000.
- ------------------- (1) Represents bonuses paid in 1997 relating to the 1996 fiscal year. (2) Mr. Levy was appointed as Chairman and Chief Executive Officer of the Company in 1995. In July 1997, Mr. Shapiro was appointed Chief Executive Officer and Mr. Levy remained as Chairman of the Company. (3) Represents consulting fees paid pursuant to Mr. Levy's agreement with the Company. (4) Mr. Shapiro was appointed as an executive officer of the Company at the end of 1994. (5) Mr. Schwartz and Mr. Pagano were appointed as executive officers of the Company in 1996. (6) Mr. Scott was appointed as an executive officer of the Company in 1997. (7) Mr. Schwartz started with the Company in November 1996. Mr. Scott started with the Company in January 1997. (8) Represents amounts paid to Mr. Scott for relocation expenses and related matters.
The following table sets forth certain information with respect to options to purchase Common Stock granted in fiscal year 1997 under the Company's 1992 Incentive and Non-Qualified Stock Option Plan for the executive officers named in the Summary Compensation Table above.
Option Grants In Last Fiscal Year
The following table details the value on December 31, 1997 of options to purchase Common Stock held by the executive officers named in the Summary Compensation Table above.
Fiscal Year End Option Values
- -------------- (1) Based on closing price of the Common Stock on the Nasdaq National Market on December 31, 1997 of $0.875 per share.
Compensation Arrangements
In 1997, the Compensation Committee of the Board of Directors (the "Compensation Committee") amended the company wide bonus pool that enables employees of the Company to participate in the profits the Company earns in 1997 and 1998. The pool consists of 20% of the first $1,000,000 of such pre-tax earnings after preferred stock dividends and accretion, 15% of the next $1,000,000 of such pre-tax earnings and 10% of all such pre-tax earnings over $2,000,000. No bonuses were earned for 1997.
In December 1996, Mr. Levy entered into an agreement with the Company which provided for Mr. Levy to relinquish the post of Chief Executive Officer of the Company on July 1, 1997, render
consulting services to the Company thereafter and remain as Chairman of the Board. Until June 30, 1997, Mr. Levy received a base salary at the rate of $225,000 per annum. The Company paid Mr. Levy at the rate of $100,000 per annum during the period from July 1, 1997 through December 31, 1997, and will pay Mr. Levy $75,000 per annum during the period from January 1, 1998 through December 31, 1998, and $50,000 per annum during the period from January 1, 1999 through December 31, 1999. Such payments will be made to Mr. Levy's beneficiary in the event of his death. Through December 31, 1999, the Company will provide Mr. Levy with the use of an office, private telephone and secretarial services. In addition, on each of December 5, 1996 and June 30, 1997, the Company granted Mr. Levy a fully vested and exercisable ten year option to purchase up to 50,000 shares of Common Stock at an exercise price equal to the closing price of the Common Stock on the Nasdaq National Market on the grant date ($1.50 on December of 1996; $1.375 on June 30, 1997). Neither of such options is governed by the Company's stock option plan. Both options will remain outstanding for their full term until exercised, whether or not Mr. Levy is still a Director or consultant to the Company.
On July 1, 1997, Mr. Shapiro entered into an employment agreement with the Company in connection with his appointment as Chief Executive Officer. The agreement provides for Mr. Shapiro to be paid $250,000 per year and to participate in the company wide bonus pool. Mr. Shapiro was also granted an option to purchase 100,000 shares of Common Stock at an exercise price of $1.50 per share. The option is exercisable by Mr. Shapiro in installments of 25,000 shares when the price of the Common Stock reaches the following stock prices for a minimum of 30 trading consecutive trading days: $3.00; $4.00; $5.00; and $6.00. Within one year after a change in control (as defined in the agreement) of the Company if Mr. Shapiro's employment with the Company is terminated without cause or if Mr. Shapiro voluntarily elects to terminate his employment with the Company, the Company will (i) pay Mr. Shapiro a lump sum amount equal to 12 months of his base salary in effect at the time of the change in control, (ii) provide Mr. Shapiro with medical, insurance and other benefits for 12 months after termination and (iii) provide Mr. Shapiro use of an office and secretarial assistance for six months after termination. If Mr. Shapiro or the Company elect to terminate Mr. Shapiro's employment within one year following a change in control, at the Company's request Mr. Shapiro will continue to be employed by the Company at his then current salary and benefits for up to six months. However, Mr. Shapiro is under no obligation to continue his employment if he has elected to terminate his employment because (i) his position as Chief Executive Officer or duties, performance requirements or working conditions with respect thereto have been changed, (ii) he ceases to serve as a member of the Board of Directors, (iii) his base salary in effect prior to the change in control is reduced or (iv) he is required to relocate.
All non-officer directors of the Company annually receive a fee of $10,000 per year and options to purchase 5,000 shares at the market price of the Common Stock on the anniversary of their election as a member of the Board of Directors.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information at March 26, 1998, as to shares of Common Stock beneficially owned by (i) each person known by the Company to be the beneficial owner of more than five percent of the outstanding Common Stock, (ii) the Company's directors, the Chief Executive Officer and the other four executive officers identified in the Summary Compensation Table above and (iii) the directors and officers of the Company as a group.
- --------------- (1) Except as otherwise indicated in the following footnotes, the persons listed in the table own of record the shares of Common Stock opposite their name and have sole voting and investment power with respect to such shares of Common Stock.
(2) Includes 25 shares of Common Stock owned by the Voting Trust listed below and 12,000 shares issuable upon exercise of currently exercisable stock options granted under the Company's 1992 Incentive and Non-Qualified Stock Option Plan (the"Plan").
(3) Includes 1,500 shares owned by Mr. Levy as custodian for his grandson under the Uniform Gifts to Minors Act and 73,900 shares issuable upon exercise of currently exercisable stock options granted under the Plan and 100,000 shares issuable upon exercise of a separate currently exercisable stock option.
(4) Based upon information set forth in Schedule 13D filed by Geoffrey Gimbel and Murray Meyers as Trustees under Voting Trust dated as of October 7, 1997 by and between Geoffrey Gimbel, Roger Gimbel, Bradley Meyers, Gary Meyers, Lawrence Meyers, Murray Meyers and Susan Schulman (the "Voting Trust") on or about February 11, 1998. Geoffrey Gimbel as Trustee has sole voting power over 199,784 shares and Murray Meyers as Trustee has sole voting power over 99,884 shares.
(5) Based upon information set forth in Schedule 13G filed by FMR Corp. with the Securities and Exchange Commission on or about February 14, 1998, Fidelity Management and Research Company ("Fidelity"), a wholly-owned subsidiary of FMR Corp., is the beneficial owner of 253,900 shares or 6.1% of the Common Stock of the Company as a result of acting as investment adviser to several investment companies. Mr. Edward C. Johnson 3d, FMR Corp., through its control of Fidelity, and the aforementioned investment companies each has sole power to dispose of these 253,900 shares. The ownership of one investment company, Fidelity Advisor Strategic Opportunities Fund, amounted to 253,900 shares or 6.1% of the Common Stock outstanding at December 31, 1997.
(6) Includes 31,400 shares issuable upon exercise of currently exercisable stock options granted under the Plan.
(7) Includes 12,000 shares issuable upon exercise of currently exercisable stock options granted under the Plan.
(8) Includes 3,000 shares issuable upon exercise of currently exercisable stock options granted under the Plan.
(9) Includes 6,900 shares issuable upon exercise of currently exercisable stock options granted under the Plan.
(10) Includes 6,000 shares issuable upon exercise of currently exercisable stock options granted under the Plan.
(11) Includes 257,700 shares issuable upon exercise of currently exercisable stock options.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Donald D. Shack, a director of the Company, is a shareholder and director of Shack & Siegel, P.C., general counsel to the Company
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements: Page
Index to Financial Statements F- 1
Report of Independent Auditors F- 2
Consolidated Balance Sheets -- December 31, 1997 and 1996 F- 6
Consolidated Statements of Operations -- For each of the years ended December 31, 1997, 1996 and 1995 F- 7
Consolidated Statements of Changes in Stockholders' Equity -- For each of the years ended December 31, 1997, 1996 and 1995 F- 8
Consolidated Statements of Cash Flows -- For each of the years ended December 31, 1997, 1996 and 1995 F- 9
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts
(3) Exhibits:
3.1 Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 33-50878) (the "Form S-1").
3.2 Certificate of Amendment of Certificate of Incorporation incorporated by reference to Exhibit 3.5 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 8, 1996 (the "1996 3rd Quarter 10-Q").
3.3 Certificate of Designations, Preferences and Rights of the Series A Convertible Redeemable Preferred Stock (included in Exhibit 4.1 hereof).
3.4 Certificate of Designations, Preferences and Rights of the Series B Convertible Redeemable Preferred Stock (included in Exhibit 4.2 hereof).
3.5 Amended and Restated By-laws incorporated by reference to Exhibit 3.4 to the 1996 3rd Quarter 10-Q.
4.1 Certificate of Designations, Preferences and Rights of the Series A Convertible Redeemable Preferred Stock, incorporated by reference to Exhibit 4 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 7, 1995 (the "1995 3rd Quarter 10-Q").
4.2 Certificate of Designations, Preferences and Rights of the Series B Convertible Redeemable Preferred Stock, incorporated by reference to Exhibit 3.2 of the Current Report on From 8-K filed with the Securities and Exchange Commission on July 10, 1996 (the "July 1996 Form 8-K").
4.3 Form of Warrant, dated June 26, 1995, issued to various parties in respect of the aggregate of 60,000 shares of the Company's Common Stock, incorporated by reference to Exhibit 4.2 of the July 1996 Form 8-K.
4.4 Stock Option, dated December 5, 1996, granted to Morton J. Levy, incorporated by reference to Exhibit 4.4 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 1997 (the "1997 1st Quarter 10-Q").
4.5 Stock Option, dated June 30, 1997, granted to Morton J. Levy, incorporated by reference to Exhibit 4.4 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 1997 (the "1997 2nd Quarter 10-Q").
10.1 Form of Indemnification Agreement between the Company and each of its Directors, incorporated by reference to Exhibit 10.12 of the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 1995 (the "1995 2nd Quarter 10-Q").
10.2 1992 Incentive and Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 10.4 of the Form S-1.
10.3 Amended and Restated 1992 Incentive and Non-Qualified Stock Option Plan, incorporated by reference to Exhibit 10.3 of the 1996 3rd Quarter 10-Q.
10.4 Form of Underwriters Warrant Agreement between the Company and Gruntal & Co., Incorporated and Gerard Klauer Mattison & Co., Inc., incorporated by reference to Exhibit 10.12 of the Form S-1.
10.5 Factoring Agreement dated as of July 26, 1995 with Milberg Factors, Inc., incorporated by reference to Exhibit 10.17 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 4, 1995 (the "August 1995 Form 8-K").
10.6 Letter dated July 20, 1995 from Milberg Factors, Inc. to the Company, incorporated by reference to Exhibit 10.18 of the August 1995 Form 8-K.
10.7 Amendment dated March 21, 1996 between Milberg Factors, Inc. and the Company, incorporated by reference to Exhibit 10.13 of the 1995 10-K.
10.8 Settlement Agreement dated October 30, 1995 between the Company, Allan Rigberg, Rose Evangelista and JTI Toys, Inc. incorporated by reference to Exhibit 10.10 of the 1995 3rd Quarter 10-Q.
10.9 Warrant Agreement dated as of January 1, 1996 between Just Toys, Inc. and Patricof & Co. Capital Corp., incorporated by reference to Exhibit 10.11 of the Annual Report on Form 10-K with respect to the year ended December 31, 1996 (the "1995 10-K").
10.10 Agreement for Sale and Purchase of the Hong Kong property dated March 22, 1996 between Just Toys Products Limited and Advanced Chemicals Limited, incorporated by reference to Exhibit 10.12 of the 1995 10-K.
10.11 Asset Purchase Agreement dated January 22,1996 between the Company and Table Toys, Inc. (the "Asset Purchase Agreement"), incorporated by reference to Exhibit 2.1 of the July 1996 Form 8-K.
10.12 Amendment dated April 12, 1996 to the Asset Purchase Agreement, incorporated by reference to Exhibit 2.2 of the July 1996 Form 8-K.
10.13 Second Amendment dated April 15, 1996 to the Asset Purchase Agreement, incorporated by reference to Exhibit 2.3 of the July 1996 Form 8-K.
10.14 Agreement, dated December 5, 1996 between the Company and Morton J. Levy incorporated by reference to Exhibit 10.1 of the 1997 1st Quarter 10-Q.
10.15 Security Agreement - Goods and Chattels, dated May 9, 1997 between Milberg Factors, Inc. ("Milberg") and Celt Specialty Partners, Inc. ("Celt") incorporated by reference to Exhibit 10.1 of the 1997 2nd Quarter 10-Q.
10.16 Guaranty, dated May 9, 1997, between Milberg and Celt, incorporated by reference to Exhibit 10.2 of the 1997 2nd Quarter 10-Q.
10.17 Mortgage and Security Agreement, dated May 9, 1997, made by Celt in favor of Milberg incorporated by reference to Exhibit 10.3 of the 1997 2nd Quarter 10-Q.
10.18 Employment Agreement, dated July 1, 1997, between the Company and Barry Shapiro, incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 13, 1997.
21 Subsidiaries of the Company incorporated by reference to Exhibit 10.21 of the 1995 10-K.
*23 Consent of Ernst & Young LLP
*27 Financial Data Schedule
- --------------------------
* Filed herewith
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 31st day of March, 1998.
JUST TOYS, INC.
By: /s/ Barry Shapiro ----------------------------- Barry Shapiro Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been duly signed below by the following persons on behalf of the Company in the capacities and on the date indicated.
FORM 10-K ITEM 14(A)(1) AND (2)
JUST TOYS, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENTS OF JUST TOYS, INC. AND SUBSIDIARIES ARE INCLUDED IN ITEM 8: PAGE NUMBER ------
REPORT OF INDEPENDENT AUDITORS
BALANCE SHEETS AS AT DECEMBER 31, 1997 AND 1996
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTES TO FINANCIAL STATEMENTS
THE FOLLOWING CONSOLIDATED FINANCIAL STATEMENT SCHEDULE OF JUST TOYS, INC. AND SUBSIDIARIES IS INCLUDED IN ITEM 14(A)(2):
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALL OTHER SCHEDULES FOR WHICH PROVISION IS MADE IN THE APPLICABLE REGULATION OF THE SECURITIES AND EXCHANGE COMMISSION ARE NOT REQUIRED UNDER THE RELATED INSTRUCTIONS OR ARE INAPPLICABLE AND, THEREFORE, HAVE BEEN OMITTED.
Report of Independent Auditors
We have audited the accompanying consolidated balance sheets of Just Toys, Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Just Toys, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ERNST & YOUNG LLP
New York, New York February 26, 1998
JUST TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the financial statements.
JUST TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the financial statements.
JUST TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of the financial statements.
JUST TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the financial statements.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Description of Business and Basis of Presentation: - -----------------------------------------------------------
Just Toys, Inc. (the "Company") designs, develops, manufactures, markets and distributes toys and sport products for children of various ages. The Company's principal customers are located in the United States and consist primarily of toy stores and mass merchandisers, and to a lesser extent, discount drug chains, supermarket chains, sporting goods stores, catalogers and gift stores. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Just Toys Products, Limited ("JTP") and Joyful World Enterprises, Limited ("JWE"), which are incorporated in Hong Kong, and Celt Specialty Partners, Inc. ("Celt"), which is a U.S. manufacturer of foam and plastic toys, sporting goods and other specialty toy products. Significant intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements include the following applicable to the foreign subsidiaries:
December 31, ----------------------------------------------- 1997 1996 1995 ---- ---- ----
Assets. . . . . . . . . . . . $1,790,693 $1,125,694 $4,167,473 Liabilities . . . . . . . . . 1,126,589 894,679 4,255,930 Stockholder's equity (deficit) 664,104 41,021 (88,457) Revenues. . . . . . . . . . . 6,395,572 5,431,127 4,772,364 Net income (loss) . . . . . . 349,149 129,478 (2,291,294)
On January 22, 1996, the Company executed an agreement to purchase certain assets of Table Toys, Inc. ("Table Toys"). The PlayTable products include a line of play tables which are compatible with most brands of toy construction blocks and a line of toy construction blocks. The acquisition closed on June 28, 1996. On February 1, 1996, the Company acquired the toy line and the rights to use the "Welsh" name for toys from Welsh Company, Inc. ("Welsh"). The Welsh toy line consists of doll accessories, carriages and strollers.
Reclassification: - -----------------
Certain prior year amounts have been reclassified to conform to the present year's presentation.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Summary of Significant Accounting Policies: - ----------------------------------------------------
Inventories: - ------------
Inventories are stated at the lower of cost (first-in, first-out basis) or market. The Company supplies certain purchased material components used in its product lines to third-party manufacturers.
Property and equipment: - -----------------------
Assets are stated at cost. The Company owns the molds and tools used in production of the Company's products by third-party manufacturers. The molds and tools are depreciated using the straight-line method over the life of the related product licensing agreement, if applicable, or three years, whichever is less. Obsolete molds and tools are written-off when no longer being used. Depreciation and amortization lives and methods used are as follows:
Method Life ------------- ----------- Buildings . . . . . . . . . . . Straight-line 40 Years Molds and tools . . . . . . . . Straight-line 3 Years Manufacturing equipment . . . . Accelerated 7 Years Furniture, fixtures and office equipment . . . . . . . . . . Accelerated 5-7 Years Leasehold improvements. . . . . Straight-line Shorter of life of lease or useful life
Income taxes: - -------------
The Company accounts for income taxes in accordance with Statement of Accounting Standards No. 109 ("SFAS 109"), "Accounting For Income Taxes" which requires use of the liability method of accounting for income taxes. The liability method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The resulting asset or liability is adjusted to reflect changes in the tax laws as they occur.
Product development, design and packaging costs: - ------------------------------------------------
Expenditures for the development, design and packaging of products to be introduced in the coming year are recorded as prepaid expenses and amortized within one year. Amounts expensed for these costs were approximately $181,300, $62,800 and $324,300 during 1997, 1996 and 1995, respectively.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Summary of Significant Accounting Policies: (continued) - ----------------------------------------------------
Royalties: - ----------
The Company enters into agreements to license trademarks, copyrights, patents and inventions. The Company expenses royalties at the time the related product is sold. The agreements may call for minimum amounts of royalties to be paid in advance and throughout the term of the agreement which are nonrefundable in the event that product sales fail to meet certain minimum levels. Advance royalties resulting from such transactions are stated at amounts estimated to be recoverable from future sales of the related products. Prepaid and future guaranteed royalties applicable to discontinued products or where sales were below expectations are also expensed.
Advertising costs: - ------------------
The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 1997, 1996 and 1995 amounted to $154,000, $225,000 and $593,000, respectively.
Earnings (loss) per share attributable to common stockholders: - --------------------------------------------------------------
In 1997, the Financial Accounting Standards Board issued Statement No. 128 ("SFAS 128"), Earnings per Share. SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. The Company's basic earnings (loss) per share attributable to common stockholders was calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of Common Stock outstanding. All options, warrants and preferred stock issued by the Company were antidilutive.
The adoption of SFAS 128 had no effect on the earnings (loss) per share attributable to common stockholders reported by the Company.
Foreign currency translation: - -----------------------------
Assets and liabilities are translated at year-end rates of exchange. Income and expense accounts are translated at the average of exchange rates in effect during the period. Realized foreign exchange transaction gains and losses are included in income and are not material. The cumulative foreign currency adjustment was not material.
Use of estimates: - -----------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - Summary of Significant Accounting Policies: (continued) - ---------------------------------------------------- -----------
Stock-based compensation: - -------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 is effective for transactions after December 15, 1994 and prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights. SFAS 123 requires compensation expense to be recorded (i) using the new fair value method or (ii) using existing accounting rules prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees ("APB 25"), and related interpretations with pro forma disclosure of what net income and earnings would have been had the Company adopted the new fair value method. The Company has elected to continue to account for its stock issued to employees in accordance with APB 25 (see Note 15).
Goodwill: - ---------
Goodwill represents the cost in excess of the fair market value of the net assets acquired of Table Toys. Goodwill is being amortized on a straight-line basis over 15 years. Amortization of goodwill for the years ended December 31, 1997 and 1996 was $45,500 and $22,800, respectively, and accumulated amortization at December 31, 1997 approximated $68,300.
Accretion of Preferred Stock B: - -------------------------------
The redemption value of the Series B Convertible Redeemable Preferred Stock is being accreted using the interest method for redemption on December 31, 2005.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of: - ------------------------------------------------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets to be disposed of. The Company adopted SFAS 121 in the first quarter of 1996 and does not believe that any of its long-lived assets are impaired.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - Acquisition: - ---------------------
On January 22, 1996, the Company entered into an agreement to purchase certain assets of Table Toys. Because Table Toys had filed a petition under Chapter 11 of the Federal Bankruptcy laws, the acquisition was subject to approval by the Bankruptcy Court. The acquisition was approved on May 9, 1996 and closed on June 28, 1996.
The Company accounted for the acquisition under the purchase method of accounting and allocated the purchase price as follows:
Assets acquired:
Inventories. . . . . . . . $ 400,000 Property and Equipment . . 877,439 Goodwill . . . . . . . . . 683,147 ---------- $1,960,586 ==========
The acquisition of the above assets was financed as follows:
Cash paid. . . . . . . . . $ 391,291 Series B Convertible Redeemable Preferred Stock 941,932 Other expenses incurred. . 627,363 ---------- $1,960,586 ==========
The consideration paid for the assets acquired included 538,243 shares of Series B Convertible Redeemable Preferred Stock with a liquidation value of $3.625 per share (See Note 4). Such shares were valued at approximately $1.75 per share at the time of the acquisition. The Company also issued warrants to purchase an aggregate of 60,000 shares of the Company's Common Stock at $3.625 per share. The value of the warrants were considered not material. Other expenses incurred include professional and related costs.
All of the sales, and related cost of sales, of Table Toys products for 1996 are included in the results of operations of the Company for the year ended December 31, 1996. Prior to the Company's acquisition of Table Toys, Table Toys, Inc. incurred an operating loss during the six months ended June 30, 1996 of approximately $565,000 (unaudited), primarily related to the Bankruptcy proceedings. Pro forma unaudited summary results of operations for the year ended December 31, 1995, assuming the acquisition occurred at the beginning of the year, is as follows:
Revenue. . . . . . . . . . $25,082,000 Net loss . . . . . . . . . (12,326,000) Net loss applicable to common stockholders. . . (12,584,000) Basic loss per share applicable to common stockholders . . . . . . $ (3.03)
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Preferred Stock: - -------------------------
Series A Convertible Redeemable Preferred Stock - -----------------------------------------------
The Board of Directors of the Company has authorized 150,000 shares of non-voting Series A Convertible Redeemable Preferred Stock ("Series A Stock") with par value $1.00 per share of which 120,000 shares are issued and outstanding. The Series A Stock ranks senior to the Company's common stock, par value $0.01 per share ("Common Stock") with respect to dividend rights and rights on liquidation, winding-up and dissolution. The Series A Stock has a cumulative preferred quarterly dividend of 6% per annum of the Series A Liquidation Value (as defined below) payable either in cash or additional shares of Series A Stock, at the Company's option. As long as any shares of the Series A Stock remain outstanding, no cash dividends may be paid on the Common Stock nor can Common Stock be acquired by the Company unless all accrued and unpaid dividends have been paid on the Series A Stock. The Series A Stock has a liquidation preference over the Common Stock in an amount equal to $1.00 per share (the "Series A Liquidation Value") plus dividends accrued and unpaid. At the holder's option until December 31, 1998, the Series A Stock is convertible into Common Stock at a conversion price of $2.00 per share (subject to certain adjustments). The Series A Stock is redeemable at the Series A Liquidation Value plus dividends accrued and unpaid at the Company's option at any time.
Series B Convertible Redeemable Preferred Stock - -----------------------------------------------
The Board of Directors of the Company has also authorized 650,000 shares of non-voting Series B Convertible Redeemable Preferred Stock ("Series B Stock") with par value $1.00 per share of which 521,854 shares (538,243 shares at December 31, 1996) are issued and outstanding. The Series B Stock ranks senior to the Common Stock and junior to the Series A Stock with respect to dividend rights and rights on liquidation, winding up and dissolution. The Series B Stock has a cumulative preferred quarterly dividend of 7% per annum of the Series B Liquidation Value (as defined below) payable either in cash or additional shares of Series B Stock, at the Company's option. As long as any shares of the Series B Stock remain outstanding, no cash dividends can be paid on the Common Stock nor can Common Stock be acquired by the Company unless all accrued and unpaid dividends have been paid on the Series B Stock and any required redemptions have been provided for. The Series B Stock has a liquidation preference over the Common Stock in an amount equal to $3.625 per share (the "Series B Liquidation Value") plus dividends accrued and unpaid. At the holder's option, the shares of Series B Stock are convertible in Common Stock at a rate of one share of Common Stock for each share of Series B Stock (subject to certain adjustments). After December 30, 1996, the Series B Stock is redeemable at the Company's option at the Series B Liquidation Value plus dividends accrued and unpaid.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Preferred Stock: (continued) - -------------------------
The Series B Stock is subject to mandatory redemption through the operation of a sinking fund at the Series B Liquidation Value plus dividends accrued and unpaid. The Company is required, at its option, to redeem or set apart for payment, on each December 31 commencing 2001 and ending 2004, an amount sufficient to redeem 10% of the Series B Stock issued and any additional shares issued as dividends on such shares. The Company may apply as a credit against its sinking fund obligations any shares which have been previously redeemed or converted. All remaining and outstanding shares shall be redeemed on December 31, 2005 at the Series B Liquidation Value plus dividends accrued and unpaid.
The holders of 16,389 shares of Series B Stock converted their shares into 16,389 shares of Common Stock in 1997.
NOTE 5 - Accounts Receivable and Allowances: - --------------------------------------------
On July 26, 1995, the Company entered into a Factoring Agreement with Milberg Factors, Inc. ("Milberg") pursuant to which Milberg agreed to purchase the Company's domestic accounts receivable on a non-recourse basis, and to advance to the Company, at the Company's request, the lesser of 85% of total accounts receivable or $1,750,000. Effective February 1, 1996, the agreement was amended to increase the amount of the advance to the lesser of 85% of total accounts receivable or $5,000,000. The factoring charge is .65% of receivables. Advances bear interest at the rate of prime (8.5% at December 31, 1997) plus one percent. Milberg has also agreed to advance to the Company, at the Company's request, the lesser of $2,000,000 or 50% of the Company's inventory located in the United States. Such advances also will bear interest at the rate of prime plus one percent. Additionally, the factoring arrangement with Milberg is secured by a mortgage on the real property owned by Celt.
Accounts receivable and amounts due from factor consists of the following:
December 31, -------------------------------- 1997 1996 ---- ----
Accounts Receivable - factor . . . . . .$ 5,047,225 $ 3,897,563 Borrowings from factor . . . . . . . . . (5,023,147) (3,649,628) ----------- -----------
Net due from factor. . . . . . . . . . . 24,078 247,935 Accounts receivable - trade. . . . . . . 761,700 642,643 ----------- -----------
Total accounts receivable . . . . . . 785,778 890,578
Less: Accounts receivable allowances . . (688,000) (603,000) ----------- -----------
Total accounts receivable, net of allowances . . . . . . . . .$ 97,778 $ 287,578 =========== ===========
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - Accounts Receivable and Allowances: (continued) - --------------------------------------------
The accounts receivable allowances consists of the following:
December 31, --------------------------------- 1997 1996 ---- ----
Returns, allowances and discounts. . . $ 638,000 $ 553,000 Doubtful accounts. . . . . . . . . . . 50,000 50,000 ----------- -----------
Total. . . . . . . . . . . . $ 688,000 $ 603,000 =========== ===========
NOTE 6 - Inventories: - ---------------------
Inventories consist of the following:
December 31, --------------------------------- 1997 1996 ---- ---- Finished goods . . . . . . . . . . . . $ 2,643,941 $ 2,758,085 Material components and supplies . . . 1,070,040 1,355,215 ----------- -----------
Total . . . . . . . . . . . . $ 3,713,981 $ 4,113,300 =========== ===========
NOTE 7 - Prepaid expenses and other current assets: - ---------------------------------------------------
Prepaid expenses and other current assets consist of the following: December 31, --------------------------------- 1997 1996 ---- ---- Prepaid royalties. . . . . . . . . . . $ 342,491 $ 288,881 Prepaid insurance. . . . . . . . . . . 202,941 253,869 Development, design and packaging. . . 641,666 207,793 Other. . . . . . . . . . . . . . . . . 523,790 367,585 ----------- -----------
Total . . . . . . . . . . . . $ 1,710,888 $ 1,118,128 =========== ===========
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - Property and Equipment: - --------------------------------
Property and equipment consists of the following:
December 31, ----------------------- 1997 1996 ---- ---- Property and equipment at cost: Land. . . . . . . . . . . . . . $ 325,000 $ 325,000 Building. . . . . . . . . . . . 725,000 725,000 Molds and tools . . . . . . . . 3,106,951 2,730,935 Manufacturing equipment . . . . 1,661,323 1,698,038 Furniture, fixtures and office equipment. . . . . . . 1,251,637 1,106,402 Leasehold improvements. . . . . 112,389 373,654
7,182,300 6,959,029 Less: Accumulated depreciation and amortization . . . . . 3,959,128 3,454,561 ---------- ----------
T o t a l . . . . . . $3,223,172 $3,504,468 ========== ==========
NOTE 9 - Related Party Transactions: - ------------------------------------
Administrative services: - ------------------------
A principal in RGA Accessories, Inc. ("RGA") is also an officer, director and shareholder of the Company. Effective October 1, 1992, the Company and RGA, its affiliates or other entities in which this director had an ownership interest, entered into various agreements pursuant to which RGA would provide certain administrative and warehouse services, as well as public warehouse facilities, to the Company in the U.S. and Hong Kong. In general, RGA was compensated through December 31, 1995 on a formula based on the Company's sales. Pursuant to the Company's decision to begin assuming these functions internally in 1996, RGA was paid a fixed monthly retainer for its services during 1996. Effective January 1, 1997, the Company no longer utilizes the services of RGA. The Company incurred expenses of $401,700 and $1,073,300 in 1996 and 1995, respectively, for these services.
Consulting fees: - ----------------
During 1997 and 1995, the Company incurred expenses of $50,000 and $27,500, respectively, to a director for consulting fees.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - Accrued Liabilities: - ------------------------------
Accrued liabilities consist of the following:
December 31, ------------------------ 1997 1996 ---- ----
Royalties. . . . . . . . . . . . . $ 213,999 $ 181,311 Insurance. . . . . . . . . . . . . 131,198 160,654 Other. . . . . . . . . . . . . . . 551,956 979,610 ---------- ----------
Total. . . . . . . . . . $ 897,153 $1,321,575 ========== ==========
NOTE 11 - Commitments, Contingencies and Other Matters: - -------------------------------------------------------
License agreements: - -------------------
The Company develops and produces certain products under license agreements with third parties. The amounts paid periodically under the terms of these agreements range from 2% to 12% of the net sales of the licensed products. The Company is obligated for guaranteed minimum royalty and other license payments at December 31, 1997 as follows:
1998. . . . . . . . . . . . . . . $225,000 1999. . . . . . . . . . . . . . . 225,000 2000. . . . . . . . . . . . . . . 225,000 2001. . . . . . . . . . . . . . . 91,000 -------- T o t a l . . . . . . . $766,000 ======== Leases: - -------
Minimum annual rentals under leases expiring at various times through the year 2008 for showroom, merchandising and warehouse facilities as at December 31, 1997 are as follows:
1998. . . . . . . . . . . . . . .$ 519,000 1999. . . . . . . . . . . . . . . 413,000 2000. . . . . . . . . . . . . . . 367,000 2001. . . . . . . . . . . . . . . 388,000 2002. . . . . . . . . . . . . . . 369,000 Thereafter. . . . . . . . . . . . 1,752,000 ---------- T o t a l . . . . . . .$3,808,000 ==========
Rent expense approximated $559,000, $537,000 and $259,000 for 1997, 1996 and 1995, respectively.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Commitments, Contingencies and Other Matters: (continued) - -------------------------------------------------------
Letters of credit: - ------------------
As of December 31, 1997, the Company had two outstanding letters of credit totaling $115,000.
Litigation: - -----------
In October 1995, the Company settled an arbitration proceeding and an accompanying lawsuit brought by the former Chairman of the Board and Chief Executive Officer of the Company, and the former President and Chief Operating Officer of the Company seeking damages for lost compensation by payment of $594,000 and the issuance of 120,000 shares of Series A Stock.
On September 25, 1997, an administrative law judge of the Federal Trade Commission determined that Toys "R" Us, Inc. had violated the antitrust laws by entering into arrangements with various toy manufacturers whereby the toy manufacturers would restrict their business with warehouse clubs. Toys "R" Us has announced that it will appeal that decision.
Following announcement of the administrative law judge's decision, a series of private class actions seeking treble damages, expenses and attorneys' fees have been filed in various federal courts on behalf of consumers who purchased toys from Toys "R" Us from 1989 to the present which the defendant manufacturers had allegedly agreed not to sell to other retailers. The complaints allege, generally, a conspiracy among Toys "R" Us and the defendant toy manufacturers to cut off supplies to the warehouse clubs competing with Toys "R" Us. The defendants in these actions include Toys "R" Us, Mattel, Fisher-Price, Hasbro, Tyco Toys, The Little Tikes Company, Rubbermaid Corporation, Today's Kids, Binney & Smith, Lego Systems, Sega of America, Tiger Electronics, and Huffy Corporation. The Company is named as a defendant in many of these actions.
The Company does not believe that it participated in any conspiracy or otherwise violated the antitrust laws and it intends to defend itself.
The Company received approximately 1,000 complaints concerning its Micro-Bake for KidsTM (the "Micro-Bake") product, all of which have been paid or accrued for as of December 31, 1997 and 1996. The Company discontinued selling this product in 1995. Virtually all of the complaints assert damage to the Micro-Bake product and many complaints assert damage to the consumer's microwave oven. The Company has product liability insurance related to this matter. The Company is expected to be responsible for approximately 50% of such claims and the insurance company is expected to pay the balance.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - Commitments, Contingencies and Other Matters: (continued) - -------------------------------------------------------
Deferred compensation plan: - ---------------------------
Effective January 1, 1996, the Company established a defined contribution plan under Section 401(k) of the Internal Revenue Code. The Company has elected not to make contributions to this plan for the years ended December 31, 1997 and 1996.
Concentration of credit risk: - -----------------------------
The Company places its cash at various banking institutions and Milberg Factors, Inc. At times, such amounts might be in excess of the FDIC insurance limit at the banking institutions. Amounts due from Milberg Factors, Inc. are not covered by insurance.
NOTE 12 - Major Customers: - --------------------------
In each of the past three years, the Company has had two customers which each individually represented greater than 10% of net sales. Sales to these customers totaled 60%, 57% and 53% of net sales in 1997, 1996 and 1995, respectively. The termination by either of these customers of its relationship with the Company would have a material adverse effect on the Company.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - Income Taxes: - -----------------------
The tax effects of principal temporary differences and net operating losses are as follows: Year Ended December 31, ---------------------------- 1997 1996 ---- ---- Deferred Tax Assets: Estimated allowances. . . $ 293,000 $ 254,000 Capitalization of inventory . . . . . . . 63,000 48,000 Net operating loss. . . . 9,932,000 9,035,000 ----------- ----------- 10,288,000 9,337,000
Deferred Tax Liabilities:
Depreciation. . . . . . . (142,000) (35,000)
Valuation allowance for deferred taxes. . . (10,146,000) (9,318,000) ----------- ----------- T o t a l. . . . . . $ - $ (16,000) =========== ===========
The valuation allowance at December 31, 1995 was approximately $9,545,000.
The differences between the statutory Federal income tax rate of 34% and the income taxes reported in the statements of operations are as follows:
Year Ended December 31, -------------------------------------- 1997 1996 1995 ---- ---- ---- Net income (loss): United States. . . . . . . $(282,585) $ 25,936 $ (6,495,630) Foreign. . . . . . . . . . 349,149 129,478 (2,291,294) --------- ----------- ------------
$ 66,564 $ 155,414 $ (8,786,924) ========= =========== ============
Statutory rate . . . . . . . . $ 22,632 $ 52,841 $ (2,987,554) Utilization of benefit of tax loss carryforward . . . . . (16,500) (12,381) Loss from which no tax benefit was provided . . . . 96,079 2,977,820 Effect of foreign tax rate difference. . . . . . . (61,101) Foreign income not subject to tax . . . . . . . . . . . (40,460) Other. . . . . . . . . . . . . (41,110) 9,734 ---------- ----------- ------------ Total tax provision (benefit). . . . . . . . . $ -0- $ -0- $ -0- ========== =========== ============
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - Income Taxes: (continued) - -----------------------
Undistributed foreign income: - -----------------------------
At December 31, 1997, JTP had approximately $1,200,000 of undistributed accumulated earnings. If the amounts were paid in the form of dividends, the Company would apply this income against the net operating loss carryforwards.
Net operating loss: - -------------------
The Company has a net operating loss carryforward of approximately $23,000,000 as at December 31, 1997. Approximately $900,000 expires by 2008, $14,100,000 by 2009, $6,000,000 by 2010 and $1,000,000 by 2012. However, pursuant to Section 382 of the Internal Revenue Code the future utilization of approximately $20,000,000 of these net operating loss carryforwards are significantly limited due to ownership changes. Based on management's estimates, the annual limitation on such net operating loss carryforwards is approximately $500,000.
NOTE 14 - Supplemental Cash Flow Information: - ---------------------------------------------
Payments for interest expense were $519,514, $384,114 and $234,901 for 1997, 1996 and 1995, respectively.
NOTE 15 - Stock Options: - ------------------------
Stock Option Plan - -----------------
Effective August 10, 1992, the Company adopted the 1992 Incentive and Non-Qualified Stock Option Plan (the "Plan"), which will terminate on August 9, 2002. Under the terms of the Plan, options to purchase shares of common stock of the Company intended to qualify as "incentive stock options" and non-qualified stock options may be granted to employees and directors of the Company and independent contractors providing services to the Company. A total of 1,000,000 shares of Common Stock are issuable under the Plan. Options are exercisable within ten years of the date of grant.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - Stock Options: (continued) - ------------------------
Detail of stock options are as follows:
The exercise price of options outstanding at December 31, 1997 ranged from $1.1875 to $10.50.
During 1997, the Company offered holders of options with exercise prices at or greater than $10.50 per share the opportunity to amend their option agreements to (a) reduce the number of shares in their option agreement by 90% and (b) reduce the exercise price to $1.50 per share, which was the market price of the stock on the date of the offer. This offer was accepted by holders of options totaling 96,666 shares with exercise prices at or above $10.50 per share representing 87.9% of the total options with exercise prices at or above $10.50 per share. As a result, the Company amended their option agreements to the new exercise price and canceled options to purchase 87,000 shares of Common Stock.
The Company has not recorded a charge for financial reporting purposes for the issuance and repricing of the above stock options because the options were issued or repriced at exercise prices equal to or greater than the fair value of the Common Stock.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - Stock Options: (continued) - ------------------------
Other - -----
Pursuant to an agreement between a director of the Company and the Company in December 1996, the Company granted the director a fully vested and exercisable ten year option to purchase up to 50,000 shares of Common Stock at an exercise price of $1.50 per share, the market price of the stock at the time of the grant. The Company granted the director an additional fully vested and exercisable ten year option to purchase up to 50,000 shares of the Common Stock on June 30, 1997 at an exercise price of $1.375, the market price of the stock at the time of grant. Neither of such options is governed by the Company's Plan and are subject to stockholder approval. Both of such options will remain outstanding for their full term until exercised, whether or not the director is still affiliated with the Company.
Pursuant to an agreement between an officer of the Company and the Company in July 1997, the Company granted the officer options for 100,000 shares of Common Stock at an exercise price of $1.50 per share, which was above the market price on the date of grant. These options are only exercisable by the officer in installments of 25,000 shares each once the price of the Company's Common Stock reaches the following stock prices for a minimum of 30 trading consecutive trading days: $3.00; $4.00; $5.00; and $6.00.
Pro forma information regarding net loss and loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995:
1997 1996 1995 ---- ---- ---- Risk free rate. . . . . . . . . . . . 6.36% 6.58% 6.58% Dividend yield. . . . . . . . . . . . 0% 0% 0% Volatility factor of the expected price of the Company's Common Stock 0.284 1.051 1.051 Average life (years). . . . . . . . . 5 5 5
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - Stock Options: (continued) - ------------------------
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options. The Company's pro forma information is as follows:
1997 1996 1995 ---- ---- ---- Pro forma net loss attributable to common stockholders . . . . $(255,791) $(12,250) $(8,813,226)
Pro forma basic loss per share attributable to common stockholders . . . . . . . . . $ (.06) $ - $ (2.12)
The weighted average fair value of options granted during the years ended December 31, 1997, 1996 and 1995 were $0.47, $1.19 and $1.26, respectively. Options to purchase 13,332 shares of Common Stock exercisable at $10.50 per share have a remaining weighted average contractual life of 5.4 years (11,998 shares exercisable at December 31, 1997). The weighted-average remaining contractual life of the remaining options outstanding at December 31, 1997 is 8.4 years (weighted average exercise price of $1.97 per share).
As of December 31, 1997, 1,467,212 shares of the Company's Common Stock were reserved for issuance on the exercise of stock options and warrants and the redemption of preferred stock.
NOTE 16 - Warrants: - -------------------
On January 1, 1996, the Company issued warrants to its investment banker to purchase 100,000 shares of common stock at $3.625 per share, which expire on December 31, 2000. In connection with the acquisition of the assets of Table Toys, warrants were issued to various individuals to purchase 60,000 shares of common stock at $3.625 per share, which expire on June 26, 2001. In 1997, pursuant to an agreement to issue 11,778 shares of Common Stock for approximately $1.90 per share to one of the holders of a warrant, the Company canceled warrants to purchase 5,889 shares of Common Stock.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Business Segments: - ----------------------------
Foreign operations and sales for the year ended December 31, 1997 are as follows:
United States Hong Kong* Eliminations Consolidated ------ ---------- ------------ ------------
Net sales. . . . $16,863,482 $6,395,572 $23,259,054 ========== ========= ===========
Operating income $ 254,610 $ 419,735 $ 674,345 ========== ========= Interest expense (623,277) Interest and dividend income 7,945 Other income . . 7,551 Income before income taxes . $ 66,564 ===========
Identifiable assets at December 31, 1997 . . . . . $ 7,952,809 $1,790,693 $ 9,743,502 ========== ========= Corporate assets (15,254) ----------- Total assets . . $ 9,728,248 ===========
* Represents net sales made F.O.B. Hong Kong which are primarily shipped to customers in the United States.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Business Segments: (continued) - ----------------------------
Foreign operations and sales for the year ended December 31, 1996 are as follows:
United States Hong Kong* Eliminations Consolidated ------ ---------- ------------ ------------
Net sales. . . . $16,624,657 $5,431,127 $22,055,784 ========== ========= ===========
Operating income $ 226,720 $ 213,595 $ 440,315 ========== ========= Interest expense (545,800) Interest and dividend income 12,927 Other income . . 247,972 Income before income taxes . $ 155,414 ===========
Identifiable assets at December 31, 1996 . . . . . $ 9,912,752 $1,012,088 $(1,092,456) $ 9,832,414 ========== ========= ========== Corporate assets 153,707 ----------- Total assets . . $ 9,986,121 ===========
* Represents net sales made F.O.B. Hong Kong which are primarily shipped to customers in the United States.
JUST TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - Business Segments: (continued) - ----------------------------
Foreign operations and sales for the year ended December 31, 1995 are as follows:
United States Hong Kong* Eliminations Consolidated ------ ---------- ------------ ------------
Net sales. . . . $14,815,984 $4,772,364 $19,588,348 ========== ========= ===========
Operating (loss) $(5,608,218) $ (457,978) $(6,066,196) ========== ========= Interest expense (357,562) Interest and dividend income 141,440 Write-down of investment in Hong Kong property . . . (1,578,000) Settlement of arbitration & related legal expenses . . . (909,594) Other expense. . (17,012) (Loss) before ----------- income taxes . $(8,786,924) =========== Identifiable assets at December 31, 1995 . . . . . $ 8,822,249 $4,031,835 $(1,272,169) $11,581,915 ========== ========= ========== Corporate assets 241,443 ----------- Total assets . . $11,823,358 ===========
* Represents net sales made F.O.B. Hong Kong which are primarily shipped to customers in the United States.
SCHEDULE II JUST TOYS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(1) Write off of uncollectibles and sales returns, discounts and allowances.