(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission File No. 0-22372.

(Exact Name of Registrant as Specified in its Charter)

Nevada 98-0163743

(State or other jurisdiction of (I.R.S. Employer

incorporation or organization Identification No.)

1710 Route Transcanadienne, Dorval, Quebec, Canada, H9P 1H7

(Address of principal executive offices)

(514) 685-2180

(Registrants telephone number, including Area Code)

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No _____

Indicate the number of shares outstanding of each of the Issuers classes of common equity, as of August 14, 2001: 5,088,477.

Consolidated Balance Sheets

Consolidated Statements of Operations (Unaudited)

1. Significant accounting policies:

(a) Basis of Presentation:

(b) Principles of consolidation:

(d) Product development:

Notes to Consolidated Financial Statements

6. Revenue recognition:

Sales are recognized at the time of shipment of products. The Company estimates liabilities for returns and allowances at the time of shipment. In addition, provisions for customer allowances are recorded when the related revenue is recognized

7. Foreign currency translation:

(i) Grand Toys Ltd. and Grand Concepts Inc., wholly-owned Canadian subsidiaries of the Company, use the Canadian dollar as their functional currency and translate their assets and liabilities into US dollars at the exchange rates prevailing at the balance sheet date and sales, expenses and cash flows are translated at the average exchange rate for the year. The resulting currency translation adjustments are accumulated and reported in other comprehensive income.

(ii) Other monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies are translated at the rates of exchange prevailing at the transaction dates. All exchange gains and losses are included in income.

8. Earnings (loss) per share:

(i) Basic earnings (loss) per share is determined by dividing the weighted-average number of common shares outstanding during the period into net earnings (loss).

(ii) Diluted earnings (loss) per share gives effect to all potentially dilutive common shares that existed at June 30, 2001.

9. Stock option plan:

The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. FASB Statement No. 123, which became effective in 1996, allows entities to continue to apply the provisions of APB Opinion No. 25 and requires pro-forma net earnings and pro-forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in FASB Statement No. 123 had been applied.

 

 

 

Notes to Consolidated Financial Statements

 

 

1. Significant accounting policies, continued:

 

10. Advertising and promotion:

All costs associated with advertising and promoting products are expensed in the period incurred.

11. Use of estimates:

2. Cash:

6. Redeemable preferred stock:

Series A Cumulative Convertible Redeemable Preferred Stock

Notes to Consolidated Financial Statements

6. Capital stock:

2. Issued and outstanding:

• January 2001

• February 2001

• March 2001

Notes to Consolidated Financial Statements

7. Capital stock, continued:

6. Stock options and warrants:

Details of the options and warrants, all of which are exercisable at June 30, 2001, are as follows:

Notes to Consolidated Financial Statements

9. Unusual items:

10. Loss per share:

Before extraordinary item $ (741,343) 5,088,477 $ (0.15)

Gain on debt extinguishment 695,538 5,088,477 0.14

Earnings available to

Common stockholders (45,805) 5,088,477 (0.01)

Earnings available to

common stockholders

and assumed conversions (45,805) 5,088,477 (0.01)

Notes to Consolidated Financial Statements

Options to purchase 2,000 shares (December 2000 3,000) and the warrants to purchase shares of the Companys common stock were not included in the diluted earnings per share calculation as their effect is anti-dilutive. The Series A Preferred stock was also not included as the effect is anti-dilutive.

1. Lawsuits for alleged breach of contract have been filed against the Canadian subsidiary by two former sales representatives. In the opinion of management, these actions have no merit. At this point in time it is difficult to ascertain or estimate the value of a settlement, if any.

Notes to Consolidated Financial Statements

2. On or about April 7, 2000, an action against the Company and certain of its current directors and a former director was filed in the United States District Court for the Southern District of New York by Robert VanDyke, purportedly representing himself and a class of similarly situated purchasers of the Companys common stock. The class-action complaint seeks damages and rescission and alleges that the Companys August 4, 1999 press release announcing an exclusive license to manufacture and distribute products in Canada based upon the "Pokemon" video game and television series was misleading because the license had not yet been executed and, when ultimately executed three weeks later, was non-exclusive. The complaint further alleges that this affected the market price of the Companys stock during the three-week period. On November 7, 2000 the action was dismissed against two of the Companys directors.

3. The Company has been named in a lawsuit for breach of contract in a licensing dispute, for recovery totaling in excess of $600,000. A defense is being filed against the plaintiff, and management had reserved, at December 31, 2000, $550,000 in the event the results are unfavorable. During the second quarter of 2001, the Company adjusted the reserve to $100,000 as a result of a favorable court judgement.
4. The Companys Canadian subsidiary has fully collaterized outstanding letters of credit amounting to $300,000 as at June 30, 2001.

14. Financial instruments:

1. Foreign currency risk management:

The Company enters into forward foreign exchange contracts to minimize its foreign currency exposure on purchases. The contracts oblige the Company to buy US dollars in the future at predetermined exchange rates. The contracts are not used for trading purposes. The Companys policy is to enter into forward foreign exchange contracts on a portion of its purchases anticipated in the next selling season. Gains and losses on forward exchange contracts are recorded in income and generally offset transaction gains or losses on the foreign currency cash flows which they are intended to hedge.

At June 30, 2001, the Company had no contracts to purchase US dollars.

2. Fair values:

Notes to Consolidated Financial Statements

15. Segment information:

1. Operating and geographic information:

 

The Company operates primarily in one segment which includes the distribution of toys and related items. Virtually all sales are to Canadian customers.

 

2. Other information:

15. Subsequent event:

This Form 10-Q contains forward-looking statements about events and circumstances that have not yet occurred. For example, statements including terms such as the Company "expects" or "anticipates" are forward-looking statements. Investors should be aware that the Company's actual results may differ materially from the Company's expressed expectations because of risks and uncertainties about the future. The Company will not necessarily update the information in this Form 10-Q if and when any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect the Company's future results and performance include, but are not limited to, the following: intense competition and pricing pressures in the toy industry; the general consolidation in the toy industry; whether the Company's general strategy with respect to the toy industry and the Company's implementation of that strategy will correctly anticipate key trends in the toy industry; the Company's ability to retain its product lines; the Company's relationships with retailers and other issues with respect to the Company's distribution channels. Additional information about factors that could affect future results and events is included elsewhere in this Form 10-Q, in the Companys fiscal 2000 Form 10-K and in other reports filed with the Securities and Exchange Commission.

Net sales consist of sales of products to customers after deduction of customer cash discounts, freight and warehouse allowances, volume rebate allowances, and returns of merchandise. Sales are recorded when the merchandise is shipped.

The cost of goods sold for products imported as finished goods includes the cost of the product in the appropriate domestic currency, duty and other taxes, and freight and brokerage charges. Royalties to suppliers not contingent upon the subsequent sales of the suppliers products are included in the price paid for such products.

Major components of selling, general and administrative expenses include: payroll and fringe benefits; advertising expense, which includes the cost of production of television commercials and the cost of air time; advertising allowances paid to customers for cooperative advertising programs; and royalty expense. Royalties include payments by the Company to licensors of character properties and to manufacturers of its toy products if such payments are contingent upon subsequent sales of the products. Royalties are usually a percentage of the price at which the product is sold and are payable once a sale is made.

Accounts receivable are receivables net of an allowance for doubtful accounts and other trade discounts. The allowance is adjusted periodically to reflect the current status of receivables. Management believes that current reserves are adequate. Sales of products to retailers and distributors are on an irrevocable basis. Consistent with industry practices, the Company may make exceptions to this policy on a case-by-case negotiated basis. Inventory is comprised of finished goods at landed cost.

The following table sets forth consolidated operations data as a percentage of net sales for the periods indicated:

Net Loss:

Net loss was $45,805 for the second quarter of 2001 compared to a net loss of $1,481,098 for the same quarter of 2000. The decrease in loss of $1,435,293 was primarily due to the increase in gross profit, a reduction in expenses, a reversal of accrual and the recognition of a gain on extinguishment of debt.

Net Sales:

Net sales decreased by $318,684 or by 15% over net sales of the second quarter of 2000. For 2000, net sales were comprised mainly of low and negative margin sales. In 2001, net sales decreased, however gross profit increased, as a result of the Companys emphasis on profitable sales and tighter inventory control.

Gross Profit:

Selling, General and Administrative Expenses:

The decrease in selling, general and administrative expenses of $33,366 compared to those of the second quarter of 2000 was mainly due to decreases in advertising and salary expenses and aggregate decreases in other expenses, as a result of the cost cutting measures implemented. The Company continues to conduct reviews of all aspects of its operations to reduce costs and improve profitability.

Depreciation and Amortization:

As a result of the complete write-off of deferred financing and intangibles in 2000, depreciation and amortization expense decreased significantly in the second quarter of 2001.

Unusual items:

Net Loss:

Net loss was $630,922 for the first six months of 2001 compared to net loss of $2,304,192 for the same period last year. The decrease of $1,673,270 in net loss was mainly due to the increase sales margins during the period., reductions in expenses and the recognition of gain on extinguishment of debt. However selling, general and administrative expenses did not reduce in proportion to the sales decrease even though total outlays did decrease.

Net Sales:

Net sales decreased by $1,593,735 or by 28% over net sales during the first half of 2000. For 2000, net sales were comprised mainly of low and negative margin sales. In 2001, net sales decreased, however gross profit increased, as a result of the Companys emphasis on profitable sales and tighter inventory control.

Gross Profit:

Gross profit for the Company increased by $916,828, as a percentage of sales, gross profit increased from 2.71% to 26.40%. Despite the decrease in net sales, gross profit increased as a result of the sales mix in the product line.

The increased gross profit in 2001 results from the Companys continued emphasis on higher margin sales and minimized sales of discontinued products by tighter inventory control. In addition commissions on FOB sales increased as compared to the same quarter of 2000. In 2000, the lower gross profit percentage was associated with the recording of significant inventory write-downs. Retailers continue to be cautious in placing fall orders but retail offtake is encouraging.

Selling, General and Administrative Expenses:

The decrease in selling, general and administrative expenses of $411,251 compared to those of the first six months of 2000 was due to a decrease in cooperative advertising as well as a decline in other expenses including compensation due to lower staffing levels. However, these costs, as a percentage of sales, were significantly higher this period compared to the same period of 2000 due to the much lower sales base.

Unusual Items:

The Company generally finances its operations through borrowings with its bank, by cash flow from operations, and sales of equity securities. The inflow of funds, in 1999, due to options and warrants being exercised resulted in virtually all short-term bank debt being eliminated by December 31, 1999 and a cash position maintained through June 30, 2001, as a result of a private sale of common stock.

In 1999, the Company received $8,441,675 as a result of the issuance of 1,557,272 shares upon the exercise of options and warrants. These share transactions allowed the Company to eliminate virtually all of its bank debt by December 31, 1999, and remain debt free in 2000 and up to June 2001 with the exception of letters of credit.

In August 1999, the Company entered into a three year banking arrangement with a lending institution. Grand Toys had secured a line of credit of $17,500,000 to enable it to meet its plans. The Company was able to draw down working capital advances and letters of credit in amounts determined by percentages of its accounts receivable and inventory. Working capital advances taken by the Company bore interest at prime plus 1.25%. The term of the loan was three years. In October 2000, the banking agreement was amended to reduce the line of credit to $3,500,000 and to expire in January 2001. The credit facility expired on January 5, 2001.

The Company is seeking to obtain a new credit facility. Failure to obtain a credit facility would have a material adverse effect on the Company because the Company would not have the capital necessary to make product purchases. This would force the Company to curtail or cease business operations.

In March 2001, the Company received $500,000 from a private sale of its common stock.

During June 2001, the Company secured a line of credit of $660,000 and could draw down working capital advances determined by percentages of its accounts receivable. The receivable advances were secured by all of the assets of the Company.

In June 2001, the Company received $600,000 as a result of the factoring of the Canadian subsidiary receivables. The Canadian subsidiary receivables are pledged as security.

Accounts receivable at June 30, 2001 were $1,448,050 compared to $1,933,370 at December 31, 2000. The current quarter sales were mainly to mass retailers. Inventory at June 30, 2001 decreased to $1,586,044 from $1,991,918 at December 31, 2000. Managements focus on maintaining manageable and current inventory levels led to a lower inventory value as at June 30, 2001.

Working capital decreased from $2,804,596 at December 31, 2000 to $1,938,793 at June 30, 2001. Net cash used for operating activities was 486,468 in 2001 compared to net cash provided by operating activities of $2,395,267 in 2000. Cash for additions to equipment and leasehold improvements was $22,964 in 2001 compared to $76,372 for 2000.

Significant potential cash requirements for 2001 are:

1. The market shortfall of the preferred share conversions of July 2000 and January 2001, representing a total of $350,810.

2. The reserve against a breach of contract represents a maximum cash requirement of $550,000 at December 31, 2001. In June 2001, the reserve was adjusted to $100,000 as a result of a favourable court judgment.
3. The class action lawsuit may require a minimal cash outlay due to the fact that any settlement will be covered by the Companys directors and officers (D & O) liability insurance.
4. Grand Canadas tax liability represents a cash outlay of approximately $177,000. The repayment terms will be negotiated with the government and could extend beyond December 2001.

The above items will be or have been offset by partial collections of the $478,629 owing from Limited Treasures Inc. receivable, $500,000 received from a completed private sale of its common stock in March 2001, and Canadian income taxes recoverable of $269,000.

The Companys accounts receivable level is subject to significant seasonal variations due to the seasonality of sales. As a result, the Companys working capital requirements are greatest during its third and fourth quarters. In addition, to the extent accounts receivable, inventories, guarantees and advance payments increase as a result of growth of the Companys business, the Companys could require additional working capital to fund its operations. Sources of such funding include cash flow from operations, drawings on the financing facilities, or sales of additional equity or debt securities by the Company.

If the funds available to the Company for current cash and cash equivalents are not sufficient to meet the Companys cash needs, the Company may from time to time seek to raise capital from additional sources, including project-specific financing, additional public or private debt or equity financing.

The Company does not believe that inflation has had a significant impact on its financial position or results of operations in the past three years.

None

The Company is exposed to certain market risks, which arise from transactions entered into in the normal course of business. The Companys primary exposures are changes in interest rates with respect to its debt and foreign currency exchange fluctuations.

FOREIGN CURRENCY RISK While the Companys product purchases are transacted in United States dollars; most transactions among the suppliers and subcontractors are effected in HK dollars. Accordingly, fluctuations in Hong Kong monetary rates may have an impact on the Companys cost of goods. Furthermore, appreciation of Chinese currency values relative to the Hong Kong dollar could increase the cost to the Company of the products manufactured in the Peoples Republic of China, and thereby have a negative impact on the Company. As well since the majority of the Companys sales are in Canadian dollars, the Company is at risk with regards to the conversion of Canadian dollars to US dollars to pay its suppliers. Therefore, fluctuations in the conversion rate may have an impact on the Company. The Company may use derivative financial instruments solely to hedge the effects of such currency fluctuations.

On June 5, 2001, the Company and the plaintiffs signed a stipulation of settlement, with respect to the class action lawsuit commenced on or about April 7, 2000, which settled the suit for $1,975,000. The settlement has received preliminary approval from the court, subject to notice to the members of the class. A hearing has been scheduled for September 2001, to finalize the settlement.

During the quarter ended June 30, 2001, there were no other material developments to any legal proceedings which have been previously reported by the Company.

Other than discussed above or in Note 13 to the Companys Consolidated Financial Statements, the Company is not a party to, nor is it aware of, any other pending litigation of a material nature.

None

The Companys subsidiary, Ark Creations, Inc., had long term indebtedness in the form of an interest bearing subordinated promissory note in the aggregate principal amount of $1,500,000 in connection with the acquisition by Ark Creations of the assets of Ark Foundation, LLC. Pursuant to the terms of the promissory note, interest was payable quarterly, at a rate of 9.76% per annum until the first principal installment of $500,000 was paid, and 5.76% per annum thereafter to maturity. A principal installment of $500,000 was payable upon the achievement of certain sales targets, with a second installment of $500,000 due six months thereafter, and a final installment of $500,000 due nine months after the first installment. The note was secured by a pledge by the Company of 375,000 shares of the Companys common stock.

Ark Creations, Inc., ceased operations on March 30, 2000 after it was determined that Ark Creations was not financially viable. As a result of the cessation of Ark Creations business, it ceased making the interest payments required under the note. As a result of the default by Ark Creations, the holder of the note caused the 375,000 pledged shares to be registered in its name. However, the holder did not take any other action to enforce its rights, and as a result, the promissory note remained outstanding.

As a result of the closing of Ark Creations and the registration of the pledged shares, the Company eliminated the liability associated with the promissory note in June 2001, and the Company recognized $1,195,123 as a gain on forgiveness of the debt equal to the difference between the principal amount of the promissory note and the value of the pledged shares.

None

None

No reports on Form 8-K were filed during the quarter ended June 30, 2001.

Pursuant to the requirements of the Security Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

By: /s/ R. Ian Bradley