GRAND TOYS INTERNATIONAL INC - 10-Q Quarterly Report

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FORM 10-Q
Securities and Exchange Commission

Washington, D.C. 20549

(Mark One)

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2003

[ ] 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.

GRAND TOYS INTERNATIONAL, INC.

(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

(Registrant's 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 Issuer's classes of common equity, as of November 14, 2003: 2,835,244

GRAND TOYS INTERNATIONAL, INC.


Index to Quarterly Report on Form 10 - Q
Filed with the Securities and Exchange Commission
Period ended September 30, 2003

ITEMS IN FORM 10 - Q	PAGE

Part I - Financial Information Item 1. Consolidated Financial Statements:

Consolidated Balance Sheets
At September 30, 2003 and December 31, 2002	2-3

Consolidated Statements of Operations
For the three Month and Nine Month Periods ended September 30, 2003 and 2002	4

Consolidated Statements of Stockholders' Equity and Comprehensive Income
For the Nine Month Period ended September 30, 2003	5

Consolidated Statements of Cash Flows
For the Nine Month Period ended September 30, 2003 and 2002	6

Notes to Consolidated Financial Statements	7-19

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations	20-30
Item 3. Quantitative and Qualitative Disclosures About Market Risks	30
Item 4. Controls and Procedures	30-31

Part II - Other Information

Item 1. Legal proceedings	31
Item 2. Changes in Securities and Use of Proceeds	31
Item 3. Defaults Upon Senior Securities	31
Item 4. Submission of Matters to a Vote of Security Holders	31
Item 5. Other Information	31
Item 6. Exhibits and Reports on Form 8-K	31-32

Signatures	33-34

Certifications	38-41

GRAND TOYS INTERNATIONAL, INC.

Part I. - Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets

	September 30, 2003	December 31, 2002
	(Unaudited)
Assets

Current assets:
Short-term deposit (note 13(b))	$ 500,000	$ 500,000
Accounts receivable (net of allowance for
doubtful accounts of $ 14,816; 2002 - $12,677)	1,868,418	1,866,110
Current portion of loan receivable (note 2)	159,049	212,739
Due from employees	296	7,595
Inventory	1,858,859	1,148,220
Income taxes recoverable	11,356	-
Prepaid expenses (note 3)	405,349	453,951
Total current assets	4,803,327	4,188,615

Note receivable (note 9)	495,118	884,877

Loan receivable (note 2)	262,236	335,981

Other assets (note 4)	10,911	41,244


Equipment and leasehold improvements, net (note 5)	240,433	252,854



Total assets	$ 5,812,025	$ 5,703,571

GRAND TOYS INTERNATIONAL, INC.

Consolidated Balance Sheets

	September 30, 2003	December 31, 2002
	(Unaudited)
Liabilities and Stockholders' Equity

Current liabilities:
Bank indebtedness (note 6)	$ 93,987	$ 1,130,745
Trade accounts payable	1,123,804	880,028
Other accounts payable and accrued liabilities	545,917	335,157
Loan payable to a director (note 15(b))	-	250,000
Royalties payable	15,247	15,052
Total current liabilities	1,778,955	2,610,982

Deferred gain (note 9)	56,101	497,800

Minority interest	100	100

Stockholders' equity:
Capital stock (note 7):
Voting common stock, $0.001 par value:
12,500,000 shares authorized,
2,835,244 shares issued and outstanding	2,835	2,763
(2002 - 2,762,698 shares)
	2,835	2,763
Additional paid-in capital	22,724,930	22,634,617
Deficit	(18,105,481)	(19,080,756)
Accumulated other comprehensive income-
cumulative currency translation adjustment	(645,415)	(961,935)
	3,976,869	2,594,689

Commitments and contingencies (notes 12 and 13)

Total liabilities and stockholders' equity	$ 5,812,025	$ 5,703,571

See accompanying notes to unaudited consolidated financial statements.

GRAND TOYS INTERNATIONAL, INC.

Consolidated Statements of Operations, (Unaudited)

	For the three months ended		For the nine months ended
		September 30,		September 30,
	2003	2002	2003	2002
Net sales	$ 3,144,655	$ 3,244,053	$ 8,743,408	$ 8,926,608

Cost of goods sold	1,827,910	2,007,983	4,914,249	5,602,170
Gross profit	1,316,745	1,236,070	3,829,159	3,324,438

Other costs and expenses:
General and administrative	1,119,428	686,084	2,429,732	2,226,736
Salaries and fringe benefits (1)	(5,026)	377,490	668,603	1,306,624
Royalties	32,334	18,056	160,100	186,059
Bad debt expense	12,410	9,810	41,859	24,532
Depreciation and amortization	17,882	22,836	51,815	67,420
Foreign exchange (gain) loss	7,986	11,896	(82,734)	16,500
Interest expense	27,296	19,572	74,504	56,527
Interest revenue	(11,335)	(15,940)	(39,660)	(52,113)
	1,200,975	1,129,804	3,304,219	3,832,285
Earnings (loss) before income taxes	115,770	106,266	524,940	(507,847)
Income tax recovery (expense):	8,961	-	8,636	(15,664)
Earnings (loss) from continuing operations	124,731	106,266	533,576	(523,511)

Discontinued operations:
Gain on sale of discontinued operations	208,972	-	441,699	149,541
Loss from discontinued operations	-	-	-	(66,492)
Net earnings (loss)	$ 333,703	$ 106,266	$ 975,275	$ (440,462)
Earnings (loss) per share (note 10):

Continuing operations:
Basic	$ 0.04	$ 0.04	$ 0.19	$ (0.28)
Diluted	0.02	-	0.09	(0.28)

Discontinued operations:
Basic	0.08	0.03	0.16	0.04
Diluted	0.04	-	0.08	0.04

Net earnings (loss):
Basic	0.12	0.04	0.35	(0.24)
Diluted	$ 0.06	$ 0.03	$ 0.17	$ (0.24)

(1) Includes a reimbursement of $309,000 of payroll taxes which was erroneously paid in a prior year.

See accompanying notes to unaudited consolidated financial statements.

GRAND TOYS INTERNATIONAL, INC.

Consolidated Statements of Stockholders' Equity and Comprehensive Income (Unaudited)

	Capital Stock	Additional Paid in Capital	Deficit	Accumulated other comprehensive income	Total

January 1, 2003	$2,763	$22,634,617	$ (19,080,756)	$ (961,935)	$2,594,689

Net earnings for the period	-	-	975,275	-	975,275
Foreign currency adjustment	-	-	-	316,520	316,520

Total comprehensive income					1,291,795

Reverse share issuance
(note 7(d))	(10)	(12,972)	-	-	(12,982)

Share issuance in settlement
of consulting fees (note 7(d))	82	94,918	-	-	95,000

Compensation expense	-	8,367	-	-	8,367
September 30, 2003	$2,835	$22,724,930	$ (18,105,481)	$ ( 645,415)	$ 3,976,869

See accompanying notes to unaudited consolidated financial statements.

GRAND TOYS INTERNATIONAL, INC.

Consolidated Statements of Cash Flows, (Unaudited)

For the nine months ended September 30,

	2003	2002
Cash flows from operating activities:
Net earnings (loss) from continuing operations	$ 533,576	$ (523,511)
Adjustments for:
Depreciation and amortization	51,815	67,420
Consulting expense	95,000	61,254
Amortization of prepaid royalties	28,420	15,094
Amortization of product development costs	2,451	55,674
Compensation expense, net	6,655	(9,850)
Net change in operating working capital
items (note 11)	140,442	(886,013)
Net cash provided by (used for) operating activities from
continuing operations	858,359	(1,219,932)
Discontinued operations:
Net earnings from discontinued operations	441,699	83,049
Adjustments for:
Gain on sale of discontinued operations	(441,699)	(83,049)
Depreciation	-	-
Net change in operating working capital items (note 11)	-	(79,494)
Net cash used for operating activities of discontinued
operations	-	(79,494)
Net cash provided by (used for) operating activities	858,359	(1,299,426)

Cash flows from financing activities:
(Decrease) increase in bank indebtedness	(1,093,484)	869,379
(Decrease) increase in loan payable to a director	(275,546)	250,000
Decrease in due from employees	8,092	376
Reversal of share issuance	(12,982)	-
Share issuance proceeds (note 7 (c))	-	115,000
Decrease in assets of discontinued operations	-	(27,903)
Other	2,501	20,110
Net cash (used for) provided by financing activities	(1,371,419)	1,226,962

Cash flows from investing activities:
Purchase of short term deposit	-	(250,000)
Loan receivable (note (2))	127,435	144,224
Proceeds of note receivable (note (9))	389,759	4,838
Increase in product development costs	(402)	(98,796)
Decrease in other assets	-	160,990
Decrease in other assets of discontinued operations	-	129,461
Additions to equipment and leasehold improvements	(3,732)	(18,253)
Net cash provided by investing activities	513,060	72,464
Net change in cash, being cash at end of year	$ -	$ -

See accompanying notes to unaudited consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Grand Toys International, Inc., a Nasdaq SmallCap listed Company, is organized under the laws of the State of Nevada. Its principal business activity, through its wholly-owned Canadian subsidiary, is the distribution of toys and related items.

Significant accounting policies:

Basis of presentation:

These consolidated financial statements, presented in US dollars and in accordance with accounting principles generally accepted in the United States, include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

Revenue recognition:

Sales are recognized at the time of shipment of products. The Company estimates liabilities and records provisions for customer allowances as a reduction of revenue, when such revenue is recognized.

Inventory:

Inventory is valued at the lower of cost, determined by the first in, first out method, and net realizable value. The only significant class of inventory is finished goods.

Prepaid expenses:

Prepaid expenses primarily include insurance, advances on inventory purchases and current portion of royalties and product development costs.

Prepaid royalties relate to licensing agreements for character properties. These licensing agreements can extend up to three years. Total expense for the period ended September 30, 2003 was $160,100 (2002 - $186,059) and it is shown as royalty expense in the Statements of Operations.

Other assets:

Prepaid royalties are capitalized and amortized as earned in relation to product sales, over a period not to exceed the term of the related agreements. The amounts expected to be recognized in the statement of operations in the fourth quarter of 2003, the year 2004 and 2005 are $104,699, $2,440 and $20,983, respectively.

Prepaid taxes are amortized on a straight line basis over the period to which they relate. The amounts expected to be recognized in the statement of operations in the fourth quarter of 2003 and the year 2004 are $24,953 and $6,164, respectively.

Product development costs for proprietary product lines are capitalized and written off over a period of twenty-four months, the estimated life of a new product. If a product is abandoned, the related costs are written off immediately.

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

1. Significant accounting policies (continued):

Equipment and leasehold improvements:

Equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation methods and annual rates adopted by the Company are as follows:

Asset

Method

Rate/period

Computer equipment

Declining balance

30%

Machinery and equipment

Declining balance

20%

Furniture and fixtures

Declining balance

20%

Trucks and automobiles

Declining balance

30%

Telephone equipment

Declining balance

30%

Leasehold improvements

Straight-line

Term of

lease plus one

renewal term

Foreign currency translation:

Grand Toys Ltd., a wholly-owned Canadian subsidiary, uses the Canadian dollar as its functional currency and translates its assets and liabilities into US dollars at the exchange rate 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.

Other monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate 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.

Earnings per Share:

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

Diluted earnings per share gives effect to all potentially dilutive common shares that existed at September 30, 2003.

Advertising and Promotion:

All costs associated with advertising and promoting products are expensed in the period incurred. Total expense for the period ended September 30, 2003 and 2002 were $434,868 and $386,539. These expenses include media and cooperative advertising and are shown as part of general and administrative expenses in the financial statements.

Slotting fees are recorded as a deduction from gross sales. These fees are determined annually on a customer by customer basis.

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

1. Significant accounting policies (continued):

Employee stock option plan:

The Company accounts for its employee 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. Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for Stock-Based Compensation, 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 as if the fair-value-based method defined in FASB Statement No. 123 had been applied. This disclosure is included in the notes to these statements.

Comprehensive income:

Comprehensive income consists of net income and cumulative currency translation adjustments and is presented in the consolidated statements of stockholders' equity and comprehensive income.

Use of estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Loan receivable:

The loan receivable is due from Limited Treasures Inc. ("Limited Treasures"). The loan is secured by accounts receivable and inventory and personal guarantees of the shareholders of Limited Treasures.

In June 2001, the Company was successful in obtaining judgement against Limited Treasures for $775,000 repayable over 42 months commencing June 2001, ending May 2005. Interest is charged at a rate of 9% per annum. In April 2003, the interest rate charged was revised to 6% per annum and the monthly payment was reduced to $15,000. As a result of these changes, the final payment in May 2005 will be $165,789.

Details are as follows:

September 30,

December 31,

2003

2002

Amount due repayable in monthly payments of principal and

interest of $7,500 until November 30, 2001 and $21,124 per

month until March 2003 and $15,000 per month thereafter

$ 421,285

$ 548,720

Less current portion

159,049

212,739

$ 262,236

$ 335,981

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Prepaid expenses:

September 30, 2003

December 31,2002

Prepaid inventory

$ 52,608

$ 16,580

Royalties

118,033

141,067

Insurance

191,043

269,060

Other

43,665

27,244

$ 405,349

$ 453,951

Other assets:

September 30, 2003

December 31,2002

Prepaid royalties (note 1(e))

$ 128,122

$ 179,630

Product development costs

4,377

5,605

132,499

185,235

Less current portion, included in prepaid expenses

121,588

143,991

$ 10,911

$ 41,244

Equipment and leasehold improvements:

September 30, 2003

December 31, 2002

Cost

Accumulated

depreciation

Cost

Accumulated

depreciation

Computer equipment

$1,422,591

$1,274,679

$1,214,122

$1,054,679

Machinery and equipment

520,826

492,369

449,837

418,560

Furniture and fixtures

535,687

514,565

459,682

437,709

Trucks and automobiles

90,527

90,050

77,461

76,935

Telephone equipment

55,815

47,908

48,595

40,183

Leasehold improvements

279,437

244,879

239,106

207,883

$2,904,883

$2,664,450

$2,488,803

$2,235,949

Net book value

$ 240,433

$ 252,854

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Bank indebtedness:

The Company has a line of credit to finance its inventory and accounts receivable providing for advances of up to $2,537,000 (Cdn$3,425,000). An additional amount of $56,000 (Cdn$75,000) was advanced in 2001 to the Company based on the value of certain of its equipment. The receivable loan has a discount fee of 2% and both the inventory loan and the equipment loan bear interest at Canadian prime plus 7.5%. The latter is being repaid through monthly capital repayments of $1,400 (Cdn$1,875). The agreement is for a period of one year and is renewed automatically, unless prior notice is given by either party.

The loan is secured by a first ranking movable hypothec in the principal amount of $2,963,000 (Cdn $4,000,000) on the universality of all present and future assets of the Company and the assignment of insurance.

The Company had approximately $950,010 of credit available as at September 30, 2003.

There are no debt covenants or cross-default provisions.

Capital stock

Authorized capital also includes 5,000,000, $0.001 par value preferred shares, issuable in series with such designation, rights and preferences as may be determined from time to time by the Board of Directors. There are no shares issued and outstanding at September 30, 2003.

Each Series B Preferred share will automatically be converted, upon approval by the stockholders, into one share of the Company's common stock at an exercise price of $1.00 per share and a warrant to purchase three shares of the Company's common stock at an exercise price of $0.01 per share.

Share transactions:

January 2002

115,000 shares of Series B convertible redeemable preferred stock were issued pursuant to the December 2001 private sale of convertible preferred stock for a total consideration of $115,000, increasing capital stock by $115.

February 2002

As a result of the settlement of the outstanding shortfall on share conversions, 242,213 common shares were issued, increasing capital stock by $242.

June 2002

At the June 2002 Annual Meeting, the stockholders approved the issuance of 915,000 shares of Common Stock and warrants to purchase 2,745,000 shares of Common Stock issuable upon the exercise of warrants upon the conversion of 915,000 shares of the Series B Convertible Redeemable Preferred Stock, which by terms were automatically convertible into Common Stock upon such approval. Accordingly, on such date, the 915,000 shares of Series B

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Capital stock (continued):

Convertible Redeemable Preferred Stock were converted into 915,000 shares of Common Stock and 2,745,000 of warrants.

July 2002

57,787 common shares were issued, on settlement of consulting fees, increasing capital stock by $58.

185,768 common shares were issued in partial satisfaction for outstanding legal fees, increasing capital stock by $186.

October 2002

10,144 shares were issued as a result of the settlement of an outstanding payable, increasing capital stock by $10.

December 2002

66,667 shares were issued as a result of the settlement of an outstanding payable, increasing capital stock by $67.

April 2003

10,144 shares were cancelled as a result of a court settlement.

August 2003

82,609 common shares were issued, for settlement of consulting fees, increasing capital stock by $82 (note 15 (c))

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Capital stock (continued):

A summary of the number of shares of common stock outstanding and share transactions since January 1, 2002 is as follows:

Preferred

Common

Stock

Stock

January 1, 2002

915,000

1,285,119

Share issuance on settlement of shortfall on share conversion

-

242,213

Share issuance related to private placement (note 7(b))

(915,000)

915,000

Share issuance on settlement of consulting fees

-

57,787

Share issuance on settlement of outstanding liabilities

-

262,579

December 31, 2002

-

2,762,698

Reversal of share issuance related to the settlement of an outstanding

liability

-

(10,144)

Share issuance on settlement of consulting fees

-

82,609

September 30, 2003

-

2,835,163

Stock options and warrants:

The Company's amended and restated employee stock option plan (the "Option Plan") provides for the issuance of up to 300,000 options to acquire common stock of the Company. Stock options granted under the Option Plan may be Incentive Stock Options under the requirements of the Internal Revenue Code, or may be Non-statutory Stock Options which do not meet such requirements. Options may be granted under the Option Plan to, in the case of Incentive Stock Options, all employees (including officers) of the Company, or, in the case of Non-statutory Stock Options, all employees (including officers) or non-employee directors of the Company.

Under the option plan, the exercise price of each option granted has been equal to the market price of the Company's stock on the grant date, and an option's maximum term is ten years.

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Stock options and warrants (continued):

Changes in options and warrants are as follows:

Option Plan

Other stock options

Warrants

Total

Weighted-average exercise price per share

January 1, 2003

124,935

196,000

3,157,143

3,478,078

$ 0.46

Granted

95,125

-

-

95,125

0.07

Cancelled

(3,125)

-

-

(3,125)

1.04

Options outstanding

at September 30, 2003

216,935

196,000

3,157,143

3,570,078

$ 0.52

Options exercisable

at September 30, 2003

10,200

15,000

55,000

80,200

$ 6.38

The following table summarizes information about options and warrants outstanding and exercisable at September 30, 2003:

Options outstanding

Options exercisable

Weighted-average

Weighted

Range of

Weighted-average

remaining contractual

average

exercise prices

Number

exercise price

life (yrs)

Number

exercise price

$0.01 - $1.96

3,076,560

$0.12

8.15

60,075

$0.97

$1.98 - $2.99

477,018

2.20

2.38

3,625

2.54

$5.62 - $11.00

1,000

7.78

6.82

1,000

7.78

$16.00 - $87.60

15,500

28.13

4.62

15,500

28.13

3,570,078

$0.52

7.36

80,200

$6.38

Pro-forma information regarding net earnings and earnings per share is required by FASB Statement No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The pro-forma earnings (losses) utilizing the fair value assumptions noted below for the nine-month period ended September 30, 2003 are $767,039 and for the years ended December 2002 and 2001, $(4,988,982) and $(1,831,049) respectively. Furthermore, pro-forma earnings (loss) per share would be $0.28 for the nine-month period ended September 30, 2003, and for the years ended December 2002 and 2001, $(2.42) and $(1.55) respectively.

The fair value for options granted to employees and non-employees was estimated at the grant date using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 4.91% for the nine-month period ended September 30, 2003 (5.63% for the year ended December 2002, and 2.57% for the year ended December 2001) volatility factor of the expected market price of the Company's common stock of 161% for the nine-month period ended September 30, 2003 (149% for the year ended December 2002 and 154% for the year ended December 2001) and a weighted average expected life of the option of 3 years for the nine-month period ended September 30, 2003, (3 years for the years ended December 2002 and 2001), with no dividends. The weighted-

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Stock options and warrants (continued):

average grant date fair values of options and warrants granted are $2.14 for the nine-month period ended September 30, 2003 and for the years ended December 2002 and 2001, $1.47 and $1.14, respectively.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect their fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

In 2002, compensation expense in the amount of $35,200 was recorded relating to options granted to a non-employee.

In 2003, compensation expense in the amount of $8,367 was recorded.

Discontinued operations:

On June 14, 2002, the Company sold its investment in its wholly-owned subsidiary, Sababa Toys Inc. ("Sababa") to the subsidiary's management for $1,065,716. Consideration received by the Company was a promissory note secured by the shares of Sababa.

The promissory note will be repaid from the excess cash after collecting the existing accounts receivable and selling inventories, net of existing liabilities as at June 14, 2002; 10% of net sales of inventories acquired after the date of sale; and any balance owing will be due on June 30, 2005.

As of June 14, 2002, the Company recorded a gain on the sale of $761,584, of which $612,006 was deferred. At December 31, 2002, $497,800 had been classified as deferred and $263,784 was recorded in the statement of operations since cash was collected on the promissory note. At September 30, 2003, the deferred gain was $56,101. The gain of $441,699 recognized in the statement of operations is the amount earned in the nine months ended September 30, 2003.

The gain of $612,006 was derived as a result of the write-off of the accumulated losses and the intercompany balance between Sababa Toys and Grand Toys at the date of sale.

The gain on discontinued operations is recorded when earned through collections of accounts receivable existing at the time of sale and royalties on new sales after June 14, 2002. Because of the difference in timing of the income recorded on an accrual basis versus when the cash is received, the gain shown on the consolidated statements of operations may differ from the cash payments received.

The table below summarizes the period in which the gain is recorded.

Period Recorded

Gain

Quarter 2, 2002

83,049

Quarter 3, 2002

-

Quarter 4, 2002

114,206

Total for 2002

197,292

Quarter 1, 2003

103,002

Quarter 2, 2003

129,725

Quarter 3, 2003

208,972

Total for 2003

441,699

Total gross gain earned in 2002 was $568,206, of which an amount of $276,010 was applied to the settlement of liabilities existing at June 14, 2002 and the balance applied to the note receivable. The fourth quarter payment of $141,239 was received in January 2003.

Total gross gain earned in 2003 was $441,699, of which, $208,222 which represents the third quarter 2003 loan repayment, was received in the fourth quarter .

The statement of operations for Sababa for the period ended June 14, 2002 has been classified as discontinued operations.

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Discontinued operations: (continued):

Details of the statement of operations of Sababa, for the period ended June 30, 2002 are as follows:

June 30, 2002

(6 months)

Net sales

$ 536,120

Cost of goods sold

238,979

Gross profit

297,141

Expenses:

Operating

359,411

Depreciation

3,281

Interest expense

616

Total expenses

363,308

Loss before income taxes

(66,167)

Income tax expense

325

Net loss

$ (66,492)

Earnings per share:

Income

(numerator)

Shares

(denominator)

Per Share

Amount

Quarter ended September 30, 2003

Basic EPS

Earnings from continuing operations

$ 124,731

2,781,288

$ 0.04

Earnings from discontinued operations

208,972

2,781,288

0.08

Earnings applicable to common

stockholders

333,703

2,781,288

0.12

Diluted EPS

Earnings from continuing operations

124,731

5,752,626

0.02

Earnings from discontinued operations

208,972

5,752,626

0.04

Earnings applicable to common

stockholders and assumed

conversions

$ 333,703

5,752,626

$ 0.06

GRAND TOYS INTERNATIONAL, INC.

Notes to Unaudited Consolidated Financial Statements

Earnings per share:(continued):

Income

(numerator)

Shares

(denominator)

Per Share

Amount

Nine months ended September 30, 2003

Basic EPS

Earnings from continuing operations

Asset	Method	Rate/period

Computer equipment	Declining balance	30%
Machinery and equipment	Declining balance	20%
Furniture and fixtures	Declining balance	20%
Trucks and automobiles	Declining balance	30%
Telephone equipment	Declining balance	30%
Leasehold improvements	Straight-line	Term of
		lease plus one
		renewal term

	September 30,	December 31,
	2003	2002
Amount due repayable in monthly payments of principal and
interest of $7,500 until November 30, 2001 and $21,124 per
month until March 2003 and $15,000 per month thereafter	$ 421,285	$ 548,720
Less current portion	159,049	212,739
	$ 262,236	$ 335,981

	September 30, 2003	December 31,2002
Prepaid inventory	$ 52,608	$ 16,580
Royalties	118,033	141,067
Insurance	191,043	269,060
Other	43,665	27,244
	$ 405,349	$ 453,951

	September 30, 2003	December 31,2002
Prepaid royalties (note 1(e))	$ 128,122	$ 179,630
Product development costs	4,377	5,605
	132,499	185,235
Less current portion, included in prepaid expenses	121,588	143,991
	$ 10,911	$ 41,244

	September 30, 2003		December 31, 2002
	Cost	Accumulated depreciation	Cost	Accumulated depreciation
Computer equipment	$1,422,591	$1,274,679	$1,214,122	$1,054,679
Machinery and equipment	520,826	492,369	449,837	418,560
Furniture and fixtures	535,687	514,565	459,682	437,709
Trucks and automobiles	90,527	90,050	77,461	76,935
Telephone equipment	55,815	47,908	48,595	40,183
Leasehold improvements	279,437	244,879	239,106	207,883
	$2,904,883	$2,664,450	$2,488,803	$2,235,949

Net book value	$ 240,433		$ 252,854

	Preferred		Common
	Stock		Stock
January 1, 2002	915,000	1,285,119
Share issuance on settlement of shortfall on share conversion	-	242,213
Share issuance related to private placement (note 7(b))	(915,000)	915,000
Share issuance on settlement of consulting fees	-	57,787
Share issuance on settlement of outstanding liabilities	-	262,579
December 31, 2002	-	2,762,698
Reversal of share issuance related to the settlement of an outstanding
liability	-	(10,144)
Share issuance on settlement of consulting fees	-	82,609
September 30, 2003	-	2,835,163

	Option Plan	Other stock options	Warrants	Total	Weighted-average exercise price per share
January 1, 2003	124,935	196,000	3,157,143	3,478,078	$ 0.46

Granted	95,125	-	-	95,125	0.07
Cancelled	(3,125)	-	-	(3,125)	1.04
Options outstanding
at September 30, 2003	216,935	196,000	3,157,143	3,570,078	$ 0.52

Options exercisable
at September 30, 2003	10,200	15,000	55,000	80,200	$ 6.38

	Options outstanding			Options exercisable
			Weighted-average		Weighted
Range of		Weighted-average	remaining contractual		average
exercise prices	Number	exercise price	life (yrs)	Number	exercise price


$0.01 - $1.96	3,076,560	$0.12	8.15	60,075	$0.97
$1.98 - $2.99	477,018	2.20	2.38	3,625	2.54
$5.62 - $11.00	1,000	7.78	6.82	1,000	7.78
$16.00 - $87.60	15,500	28.13	4.62	15,500	28.13

	3,570,078	$0.52	7.36	80,200	$6.38

Period Recorded	Gain

Quarter 2, 2002	83,049
Quarter 3, 2002	-
Quarter 4, 2002	114,206
Total for 2002	197,292

Quarter 1, 2003	103,002
Quarter 2, 2003	129,725
Quarter 3, 2003	208,972
Total for 2003	441,699

	June 30, 2002
	(6 months)
Net sales	$ 536,120
Cost of goods sold	238,979
Gross profit	297,141
Expenses:
Operating	359,411
Depreciation	3,281
Interest expense	616
Total expenses	363,308
Loss before income taxes	(66,167)
Income tax expense	325
Net loss	$ (66,492)

	Income (numerator)	Shares (denominator)	Per Share Amount

Quarter ended September 30, 2003
Basic EPS
Earnings from continuing operations	$ 124,731	2,781,288	$ 0.04
Earnings from discontinued operations	208,972	2,781,288	0.08
Earnings applicable to common
stockholders	333,703	2,781,288	0.12

Diluted EPS
Earnings from continuing operations	124,731	5,752,626	0.02
Earnings from discontinued operations	208,972	5,752,626	0.04
Earnings applicable to common
stockholders and assumed
conversions	$ 333,703	5,752,626	$ 0.06