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SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
Form 10 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15
(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission file number 0-22372
Grand Toys International, Inc.
(Exact name of registrant as specified in its charter)
Nevada 98-0163743
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization)
1710 Trans Canada Hwy., Dorval, Quebec, Canada, H9P 1H7
(Address of principal executive offices, Zip Code)
Issuers telephone number, including area code (514) 685-2180
Securities registered pursuant to Section 12 (b) of the Exchange Act:
None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Common Stock $.001 par value
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the Issuer was required to file such
reports) and (2) has been subject to such filing requirements for the past
90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K contained herein, and no disclosure will be contained
to the best of Issuers knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K
The Issuers revenues for the year ended December 31, 2000 were
$12,017,885.
The number of shares outstanding of the Issuers common stock is
3,284,906 (as of February 28, 2001).
The aggregate market value of the voting stock held by non affiliates of
the Issuer was approximately $1,231,840 (as of February 28, 2001)
GRAND TOYS INTERNATIONAL,
INC.
Index to Annual Report on Form 10 K
Filed with the Securities and Exchange Commission
Year ended December 31, 2000
ITEMS IN FORM 10 K
Page
PART I
Item 1. Description of Business
3
Item 2. Description of Property
8
Item 3. Legal Proceedings
9
Item 4. Submission of Matters to a Vote of Security Holders
9
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters
10
Item 6. Selected Financial Data
11
Item 7. Managements Discussion and Analysis or Plan of
Operation
12
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk
17
Item 8. Financial Statements
17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
18
PART III
Item 10. Directors and Executive Officers of the Registrant
20
Item 11. Executive Compensation
22
Item 12. Security Ownership of Certain Beneficial Owners and
Management
26
Item 13. Certain Relationships and Related Transactions
28
PART IV
Item 14. Exhibits, Reports on Form 8 K
28
SIGNATURES
35
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This Form 10-K of Grand Toys International, Inc. (the Company)
contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934, which statements are subject to
risks and uncertainties. Statements indicating that the Company
expects, estimates or believes are forward-looking, as are all other
statements concerning future financial results, product offerings or
other events that have not yet occurred. There are many
important factors that could cause actual results or events to differ
materially from those anticipated by the forward-looking
statements contained in this Form 10-K.
Item 1.
Description of Business:
Introduction
Grand Toys International, Inc. (the Company), through its
Canadian subsidiaries, Grand Toys Ltd. and Grand Concepts Inc.
(collectively Grand Canada) has been engaged in the toy business
in Canada for over 40 years and currently distributes a wide
variety of toys and fashion accessories throughout Canada. Grand
Canadas business consists of four areas of operation: (i) the
importation and distribution throughout Canada, on an exclusive
and non-exclusive basis, of a wide variety of well-known toy
products and fashion accessories including, party goods, stationery
and accessories; (ii) the sale of toy products and fashion
accessories featuring popular characters licensed to the Company;
(iii) earning commissions on the sale of products, represented by
Grand Canada and shipped directly from the overseas vendor to
Canadian customers; and (iv) the sale of proprietary products, such
as puzzles, mobiles, and gift-related items.
The Companys United States subsidiary, Sababa Toys Inc., which
was organized in 2000, distributes proprietary products and
develops product concepts to be sold to third parties or developed
internally. Through the end of fiscal 2000, Sababa Toys Inc.
generated no revenues.
Unless the context otherwise requires, references herein to Grand
Toys or the Company include Grand Toys International, Inc. and
its operating subsidiaries, Grand Toys Ltd., Grand Concepts Inc.,
and Sababa Toys Inc. The Companys revenues are primarily
derived from the operations of Grand Canada. The Companys
other United States Subsidiary, Ark Creations, Inc., which
developed a proprietary line of puzzles, ceased operations during
the fiscal year ended December 31, 2000.
Products
Grand Canada imports into Canada for distribution select toys and
fashion accessories from vendors who typically design, develop and
sell their products in other countries. In determining which items
to import, Grand Canada examines such factors as consumer
acceptance of the particular products in other countries, and
Canadian consumer tastes for such products based on similar
products distributed previously in Canada. In addition, prior to
ordering a product, Grand Canada attempts to predict the
potential demand for such product by exhibiting it to Grand
Canadas existing customers.
The following table sets forth certain vendors whose products
Grand Canada distributes in Canada, the type of products they
manufacture, and the price range within which Grand Canada sells
such products to retailers.
Vendor (Head Office)
Products Distributed
by the Company
Product Price
Range ($)
Grand (H.K.) Ltd. - Affiliate
Proprietary & licensed products
1.52 - 20.23
Intex (Taiwan)
Inflatable water toys
0.27 - 451.14
J.D. Components
P & M Products
Scooters
Arts & Crafts
37.50 - 39.50
1.08 - 15.48
Processed Plastic (U.S.)
Plastic toys, ride-on vehicles, and etc.
0.37 - 31.85
Spectra Star Toys (U.S.)
Kites
0.59 - 12.66
Toy Biz (U.S.)
Male action figures, dolls
3.36 - 95.73
Toymax (U.S.)
Electronic toys
3.43 - 85.92
Unice S.A. (Spain)
Balls
1.11 - 1.86
Design and Development
As is common in the toy and fashion accessory industries, Grand
Canada receives numerous concepts from unaffiliated third parties
for new products. Grand Canada does not employ its own
inventors of new concepts but if it accepts and develops an
inventors concept for a new product, it will pay royalties to the
inventor on sales from that product.
The Company, through its US subsidiary, Sababa Toys Inc.,
develops new concepts to be developed internally or by the other
subsidiaries within the corporate group, or sold to third parties.
Grand Toys International, Inc. develops proprietary products and
uses internal staff to develop the design and development of these
products, to be sold to third parties.
All safety testing of the Companys products is done by the
manufacturers at the manufacturers factories and is designed to
meet safety regulations imposed by the Canadian and United States
governmental authorities. The Company also monitors quality
assurance procedures of the vendors for its products for safety
purposes at its warehouse facilities.
Sources of Product
Approximately 73% of the Companys gross sales in 2000 were
from products supplied by the following four vendors: Toy Biz,
Tiger Electronics, J.D. Components, and Toymax. These
products accounted for 35%, 14%, 13% and 12%, respectively, of
2000 gross sales. Other than the products from the above-
mentioned vendors, no products from any other vendor accounted
for more than 7% of the Companys gross sales in 2000. In
February 1999, Hasbro acquired Tiger Electronics Inc. and
terminated the distribution of Tiger products by Grand Canada
effective December 31, 1999. Grand Toys sold the remaining
Tiger products in its inventory by the end of the first quarter of
2000, after which time all sales of Tiger products ceased.
Therefore, products that accounted for 14% of sales in 2000 are no
longer a part of the Companys product line. This had, and will
continue to have, an adverse effect on the Companys operations.
The Company is sourcing new products and looking at potential
acquisitions. If one or more of the remaining suppliers identified
above were to terminate their relationship with Grand Canada,
such termination may have a material adverse effect on the
Company.
The imported products are manufactured for Grand Canada by
unaffiliated third parties principally located in China, Hong Kong,
Mexico, Spain, United States and the U.K. The manufacturers are
chosen by the vendor on the basis of price, payment terms,
product quality, reliability and the ability of a manufacturer to
meet delivery requirements. For licensed products, the licensors
may have the right to approve the selected manufacturers. The use
of third-party manufacturers enables Grand Canada to avoid
incurring fixed manufacturing costs, but also reduces its ability to
control the timing and quality of the manufacturing process.
Grand Canada does not supervise the day-to-day manufacturing of
its products. However, prior to the commencement of
manufacturing, Grand Canada, the vendor and the manufacturer
work together to design a prototype of the specific product and its
packaging. The manufacturer is contractually obligated to
manufacture the products in accordance with those prototype
specifications. For licensed products, some licensors may be
required to approve the prototype prior to production.
All manufacturing services performed overseas are generally paid
for by either letter of credit or wire transfer. Payment for such
manufacturing is made only upon the proper fulfillment of terms
established by Grand Canada, such as adherence to product
quality, design, packaging and shipping standards, as well as proper
documentation relating thereto. Most product purchases are paid
for in U.S. dollars.
Grand Canada is not a party to any long-term supply or
requirements agreements with any specific manufacturer. All of
Grand Canadas manufacturers may subcontract the manufacture of
components of their products to third parties who are not affiliated
with Grand Canada.
Materials
The principal raw materials used in the production and sale of
Grand Canadas products are plastic, printed fabrics and paper
products. These are all currently available at reasonable prices
from a variety of sources. Because the Company does not
manufacture any of its products on site, it does not own any
specialized tools or other production equipment.
Location
Grand Canada leases a building in suburban Montreal, Canada,
where the Companys and Grand Canadas executive and
administrative offices are located as well as its Canadian
distribution center. The Company also has a showroom in
Mississauga, Ontario, Canada. Sababa Toys Inc. occupies office
premises in New York.
Licensing and Distribution Agreements
Character Licenses
Grand Canadas product line includes products featuring well-
known character properties created by others. In order to obtain
the right to manufacture and sell products featuring such character
properties, Grand Canada enters into license agreements with the
owners of such properties. Under the terms of the character
property license agreements, Grand Canada pays royalties to
licensors that generally range from 10% to 16.5% of net sales of the
products carrying these character properties. To the extent that
competition increases among companies to obtain character
property licenses, Grand Canada may encounter increased
difficulty in obtaining certain character licenses and may be
required to pay greater minimum guaranteed royalty amounts.
Generally, the Companys character property license agreements
provide the Company with the exclusive or non-exclusive right to
sell only specific products featuring the particular character. These
agreements typically limit the sale of such products to Canada.
However, certain agreements allow distribution in the United
States. They generally have terms of one to three years and may
be renewed upon payment of certain minimum guarantees or the
attainment of specified sales levels.
The following table sets forth some of the Companys character
licenses, the licensor for these character properties, the territory of
sale, and the types of products that the Company markets
featuring these character properties.
Character Property
Licensor
(Territory)
Product Featuring Property
Batman
Bear In The Big Blue House
Catdog
Digimon
Donald Duck, Daisy, Goofy,
Pluto,
Warner Bros. (CAN)
Venture (CAN)
Studio Licensing (CAN)
Venture (CAN)
Disney (CAN)
Kites, Balls
Balls
Kites
Foam puzzles, Balls, Bathroom Accessories
Pools, Kites, Bop Bags, Pool Accessories,
Plastics
Harry Potter
Mickey Mouse, Minnie Mouse
Warner Bros. (CAN)
Disney (CAN)
Kites, Balls, Stationery
Pools, Kites, Bop Bags, Pool Accessories,
Plastics
Nascar Racers
Venture (CAN)
Balls, Bathroom Accessories
Nintendo
Pokemon
Power Puff Girls
G-Squared (CAN)
G-Squared (CAN)
Warner Bros. (CAN)
Balls
Stationery, Playballs, Kites
Stationery, Balls
Power Rangers
Rugrats
Sesame Street
Sonic The Hedge Hog
Spider-man
Venture (CAN)
Studio Licensing
E.M.G. (CAN)
Venture (CAN)
Marvel, (CAN)
Balls, Kites
Kites, Balls
Balls, Kites
Balls
Ball, Stationery
Star Wars
G-Squared (CAN)
Stationery
Winnie The Pooh
Disney (CAN)
Plastics, Kites, Bop Bags
NSYNC
Winterland (U.S. & CAN)
Foam Puzzles
Power Rangers
Venture (U.S. & CAN)
Foam Puzzles
Sonic the Hedgehog
Venture (U.S. & CAN)
Foam Puzzles
Spiderman
Marvel (U.S. & CAN)
Foam Puzzles, Form Floor Tiles
Tonka
Hasbro (U.S. & CAN)
Foam Activity Kits
X-Men
Marvel (U.S. & CAN)
Foam Puzzles, Foam Floor Tiles
No one particular character property license resulted in sales in
excess of 3% of Grand Canadas sales revenues for the year ended
December 31, 2000, and the loss of any one such license would not
have a material adverse effect on Grand Canadas operations.
License and Distribution Arrangements with Toy
Vendors
Grand Canada has entered into license and distribution agreements
with four of its approximately fifteen vendors. Grand Canada
selects products from a master product list provided to it by the
vendor. The purchase price, depending on the arrangement with
the supplier, may consist of a fixed payment per item, specified
minimum quantities to be purchased and other conditions, and
occasionally a royalty fee. Pursuant to these agreements, Grand
Canada obtains either the exclusive and non-exclusive right to
import and distribute throughout Canada the products selected by
it. These agreements generally have terms of one to five years and
are usually exclusive for a specified product or product line within
a specific territory. Generally, under these agreements, Grand
Canada is responsible for paying shipping and other related costs
and expenses. If Grand Canada were to be in default under a
license or distribution agreement it may cause such agreement to
be terminated as well as result in liability for certain costs and
penalties.
Marketing, Sales and Distribution
Grand Canada markets its products throughout Canada via its own
sales representatives as well as independent sales agents. Purchasers
of the products include retail chain stores, department stores, toy
specialty stores and wholesalers. Grand Canadas five largest
customers are: Toys R Us, Costco, Wal-Mart, Zellers and
Canadian Tire, which for the year ended December 31, 2000,
accounted for approximately 20%, 17%, 17%, 12% and 4%,
respectively, of the gross sales for this period. No other customer
accounted for more than 4% of gross sales in 2000.
Other than purchase orders from its customers, Grand Canada
does not have written agreements with its customers, but rather
sells products to customers on open account, with payment terms
typically varying from 30 to 90 days. If one or more of the five
customers identified above terminated its relationship with Grand
Canada, a material adverse effect on the Company may occur.
Grand Canada employs a sales and marketing staff of nine people,
including two of its senior managers and seven sales persons who
make on-site visits to customers for the purpose of soliciting orders
for products. It markets products at major and regional toy trade
shows in Canada. In addition, Grand Canada maintains
showrooms in its suburban Montreal and Mississauga facilities.
Grand Canada directly, or through its salespersons, takes written
orders for its products from its customers and arranges for the
manufacture of its products. Cancellations are generally made in
writing and appropriate steps are taken to notify its manufacturers
of such cancellations.
Returns are generally not accepted, although consistent with
industry practices, exceptions to this policy are made on a case-by-
case negotiated basis.
Seasonality
The Companys business is seasonal. The Companys third and
fourth quarter sales revenues have typically been greater than the
first and second quarter sales revenues. This fluctuation is the
result of retailers purchasing products for the holiday selling
season.
Product Liability
The Company maintains product liability coverage for the
Companys operations in the aggregate amount of Canadian
$15,000,000. The Company has not been the subject of any
product liability litigation.
Competition
The toy industry is highly competitive and sensitive to changing
consumer preferences and demands. Grand Canada competes in
Canada with many companies that distribute toy products more
well-known than those distributed by Grand Canada. Some of
Grand Canadas competitors are substantially larger and more
diversified, and have substantially greater financial and marketing
resources than Grand Canada. They may also have greater name
recognition, and the ability to develop and market products similar
to, and more competitively priced than, those distributed by
Grand Canada. Grand Canada competes with, among others,
Irwin Toys Ltd., Hasbro Inc. and Mattel Inc.
Government Regulation
Grand Canada is subject to the provisions of various laws, certain
of which have been enacted by the Federal Government of Canada
and others which have been enacted by the Government of the
Province of Quebec and other Canadian provinces.
Federal
The laws of the Government of Canada to which the Company is
subject include the Hazardous Products Act which empowers the
Government to protect children from hazardous toys and other
articles. Under that legislation the Government has the authority
to exclude from the market those articles which are found to be
hazardous. Grand Canada is also subject to the Consumer
Packaging and Labeling Act enacted by the Government of Canada,
whose legislation prohibits the importation of prepackaged items
into Canada, as well as the sale, importation, or advertising in
Canada of items which have misleading information on their label.
Provincial
The legislation enacted by the Government of the Province of
Quebec to which Grand Canada is subject includes the Consumer
Protection Act which prohibits the sale of hazardous toys and other
articles, and also requires proper labeling and instructions to be
included with the item being sold. Grand Canada is also subject to
the Charter of the French Language, which requires that all labeling
and instructions appear in the French language, as well as the
Upholstery and Stuffed Articles Act, which requires that stuffed
articles conform to hygienic norms, and obligates companies to
take measures against contamination during transportation and
storage. Similar laws exist in several cities and provinces
throughout Canada and in many jurisdictions throughout the
world.
Grand Canada maintains a quality control program to ensure
compliance with all applicable laws.
Employees
As of December 31, 2000, the Company employed 39 full-time
persons, including three executive officers. The Company believes
that its relations with its employees are satisfactory.
Item 2.
Description Of Property:
The Companys principal executive offices are located in an
approximately 105,000 square foot facility located at 1710 Route
Trans-Canada, Dorval, Quebec, Canada, a suburb of Montreal.
The Company uses the facility for offices, showroom,
warehousing and distribution. The lease for the premises expires
on September 1, 2009 but Grand Canada has the right to extend
the lease for an additional five-year period. The current monthly
rent is Canadian $33,350 and during the extension period shall be
increased each year by a percentage that is equal to 75% of the
percentage increase in the consumer price index for the greater
Montreal area.
Grand Canada also leases, pursuant to a lease expiring on January
1, 2005, approximately 9,000 square feet of showroom and office
space at 6427 Northam Drive, Mississauga, Canada, a suburb of
Toronto, at a current rental rate of approximately Canadian $4,350
per month.
Sababa Toys Inc. leases 1,610 square feet of office space at, 119 W,
23rd Street, Suite 505, New York, N.Y., pursuant to a lease expiring
November 1, 2003, at a current rental rate of $4,900 per month.
The Company believes that its current facilities are satisfactory for
its present needs and that insurance coverage is adequate for the
premises.
Item 3.
Legal Proceedings:
On November 30, 1995, an involuntary petition under Chapter 7
of the United States Bankruptcy Code was filed against Grand
Group Inc, a U.S. subsidiary, in the United States Bankruptcy
Court for the Southern District of New York (the Bankruptcy
Proceeding). On January 4, 1996, the Court entered an order for
relief under Chapter 7 of the United States Bankruptcy Code and a
trustee was appointed to supervise the liquidation of Grand Group
Inc. To date, no other proceedings have occurred in connection
with the Bankruptcy.
During the quarter ended December 31, 2000, there were no
material developments to any legal proceedings which have been
previously reported by the Company. See Note 15 of the
Companys Consolidated Financial Statements for the year ended
December 31, 2000, which are an exhibit to this report for a
complete description of material legal proceedings to which the
Company is presently a party.
During the second quarter of 2000, the Company settled the
lawsuit with a former lessor for $264,000.
Other than discussed above or in Note 15 to the Companys
Consolidated Financial Statements included elsewhere herein, the
Company is not a party to, nor is it aware of, any other pending
litigation of a material nature.
Item 4.
Submission of Matters to a Vote of Security
Holders:
On September 28, 2000, Grand held its annual meeting of
stockholders. At the meeting, the following actions took place:
1. The Stockholders re-elected Stephen Altro, David Mars, Elliot
Bier and James Rybakoff as directors of
Grand. The number of votes for and against each of them was
as follows:
Director Name For Against
Withheld Abstain
Stephen Altro 2,785,875 10,180 n/a
38,535
David Mars 2,785,875 10,180 n/a
38,535
Elliot Bier 2,795,095 960 n/a
38,535
James Rybakoff 2,795,315 740
n/a 38,535
2. The Stockholders approved an amendment and restatement of
Grands 1993 Stock Option Plan which
increased the number of shares available for grants under the
plan from 300,000 to 600,000. 890,075 shares were voted for
the amendment, 58,696 shares were voted against the
amendment, 1,864,922 shares were withheld and 20,897 shares
abstained.
3. The Stockholders ratified the approval of KPMG LLP to serve
as Grands auditors for the fiscal year
ending December 31, 2000. 2,816,235 shares were voted for
the appointment, 9,431 shares were voted against the
appointment, no shares were withheld and 8,924 shares
abstained.
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Item 5.
Market For Common Equity and Related
Stockholder Matters:
The Companys Common Stock is traded on the NASDAQ Small-
Cap Stock Market under the symbol GRIN. The following table
sets forth the range of high and low closing representative bid
prices for the Companys Common Stock from January 1, 1999
through December 31, 2000 as reported by Nasdaq.
The figures represent prices between dealers, do not include retail
mark-ups, mark-downs or commissions and may not represent
actual transactions.
Common Stock
Representative
Bid Prices
1999
High ($)
Low ($)
First Quarter
5 5/8
2 1/2
Second Quarter
7 13/16
2 3/4
Third Quarter
30 .25
4 1/8
Fourth Quarter
19 33/64
6
2000
First Quarter
6 7/8
2 1/2
Second Quarter
3 21/32
5/32
Third Quarter
5 3/8
1 .25
Fourth Quarter
2 1/16
1/8
On January 12, 2001, the Company was advised by Nasdaq that it
had failed to meet the requirements for continued listing on the
SmallCap market because the stock traded below $1.00 for a 30-day
period. The Company has until April 12, 2001 to respond,
otherwise proceedings will be initiated to have the stock de-listed.
The Company intends to take steps to place the Company back in
compliance with the requirements for continued listing.
At February 28, 2001 there were approximately 202 record holders
of the Companys Common Stock, however those shares being
held at various clearing houses, including Cede & Company have
not been broken down. Accordingly, the Company believes there
are many more beneficial owners of the Companys Common
Stock whose shares are held in street name, not in the name of the
individual shareholder.
On March 9, 2001, the last reported sales price for the Common
Stock on the Nasdaq SmallCap Market was $0.375 per share.
During the past two years the Company has not paid and has no
current plans to pay dividends on its Common Stock. In 1999,
dividends of $25,000 were declared and paid on the Companys
Series A Preferred Shares. The Company intends to retain
earnings, if any, for use in its business. Any dividends for
Common Stock that may be declared in the future will be
determined by the Board of Directors based upon the Companys
financial condition, results of operation, market conditions and
other factors that the Board deems relevant.
The following securities were issued by the Company between
January 1, 1998 to December 31, 2000 and were not registered
under the Securities Act of 1933, as amended (the Act).
On January 1, 1999, in connection with the acquisition of the
assets of Ark Foundation LLC, the Company issued 200,000 shares
of non-voting Series A Convertible Redeemable Preferred Stock
(Series A Stock) with a stated value of $5.00 per share.
The Series A Stock is convertible beginning January 1, 2000 into
shares of the Companys common stock on a one-for-one basis. A
maximum of 50,000 shares may be converted during any six-
month period.
On each of January 1, 2000 and July 17, 2000 the Company issued
50,000 shares of Common Stock upon the conversion of 100,000
shares of Series A Stock into common stock.
The sale and issuance of securities in the transactions described set
forth above were exempt from registration under the Securities Act
in reliance on Section 4(2) of the Securities Act or Regulation S
promulgated thereunder as transactions by an issuer not involving
a public offering.
Item 6.
Selected Financial Data:
For the Twelve Months Ended December 31:
2000
1999
1998
1997
1996
Net sales
$ 12,017,885
$ 37,260,250
$ 33,177,529
$ 37,299,525
$ 27,646,251
Gross profit
360,170
10,778,909
11,091,548
14,699,141
11,454,685
Unusual items
4,160,164
814,669
- -
- -
- -
Net (loss) earnings
(10,156,713)
(709,466)
(318,302)
1,575,169
591,370
(Loss) earnings per share:
Basic
(3.17)
(0.36)
(0.20)
1.00
0.38
Diluted
(3.17)
(0.36)
(0.20)
0.90
0.37
Weighted average number of
common equivalent shares
3,207,783
2,132,582
1,577,634
1,577,634
1,543,958
Working capital
2,804,596
10,955,614
3,374,528
3,452,266
2,950,379
Long term debt
1,500,000
1,944,444
- -
- -
- -
Redeemable preferred stock
500,000
1,000,000
- -
- -
- -
Cash dividends
- -
25,000
- -
- -
- -
Total Assets
6,546,055
19,118,517
13,889,317
12,187,404
9,024,048
Item 7.
Managements Discussion and Analysis:
Overview
Net sales consist of sales of products to customers after deduction
of customer cash discounts, freight and warehouse allowances,
volume rebate allowances, and returns of merchandise. Sales are
recorded when the merchandise is shipped.
The cost of goods sold for products imported as finished goods
includes the cost of the product in the appropriate domestic
currency, duty and other taxes, and freight and brokerage charges.
Royalties to Grand Canada suppliers not contingent upon the
subsequent sales of the suppliers products are included in the price
paid for such products.
Major components of selling, general and administrative expenses
include: payroll and fringe benefits; advertising expense, which
includes the cost of production of television commercials and the
cost of air time; advertising allowances paid to customers for
cooperative advertising programs; and royalty expense. Royalties
include payments by Grand Canada to licensors of character
properties and to manufacturers of toy products if such payments
are contingent upon subsequent sales of the products. Royalties
are usually a percentage of the price at which the product is sold
and are payable once a sale is made.
Accounts receivable are receivables net of an allowance for
doubtful accounts. The allowance is adjusted periodically to reflect
the current status of receivables. Management believes that current
reserves for doubtful accounts are adequate. Sales of products to
retailers and distributors are on an irrevocable basis. Consistent
with industry practices, Grand Canada may make exceptions to
this policy on a case-by-case negotiated basis. Inventory is
comprised of finished goods at landed cost.
All amounts are in US Dollars ($) unless otherwise noted.
Results of Operations
The following table sets forth consolidated operations data as a
percentage of net sales for the periods indicated:
F
or
th
e
T
we
lve
Months
Ended
December 31,
2000
1999
1998
%
%
%
Net sales
100.00
100.00
100.00
Cost of goods sold
97.00
71.07
66.57
Gross profit
3.00
28.93
33.43
Operating expenses:
Selling, general and administrative
54.07
27.14
26.55
Foreign exchange loss (gain)
Interest on long-term debt
.22
.91
( .48)
- -
3.92
- -
Interest revenue
Interest expense
(1.11)
.25
- -
1.18
- -
2.11
Bad debt expense
.78
.23
.44
Depreciation and amortization
4.13
1.37
.97
Unusual items
34.62
2.19
- -
Total operating expenses
93.87
31.62
33.99
Loss before income taxes
(90.87)
(2.69)
(0.56)
Net loss
(84.51)
(1.90)
(0.96)
Comparison of the year ended December 31, 2000
to the year ended December 31, 1999:
Net Loss
Net loss for 2000 was $10,156,713 or $3.17 loss per share as
compared to a net loss of $709,466 or $0.36 loss per share in 1999.
The decrease was mainly due to the unusual charge of $4,160,164
consisting mainly of prepaid and intangible write-offs and the
decrease in sales and the reduced margins on those sales during the
year. In addition, while the Company did endeavor to reduce
selling, general and administrative expenses for the year, those
deductions did not match, as a percentage, the reduction of the
sales volume. The net loss was further increased by the restriction
of income tax recoveries of a subsidiary to the amount that can be
recovered from taxes paid in prior years. The Company will have
until 2007 to be able to apply unutilized tax losses against future
taxable income.
Net Sales
Net sales in 2000 decreased to $12,017,885 from $37,260,250 for
1999. The lower net sales volume was attributed to the loss, in
2000, of two significant product lines, Tiger Electronics and
Majorette.
The significant softening of the retail market for the types of
products distributed by the Company resulted in significantly
higher customer markdowns, which negatively impacted net sales.
Further, a decrease in the Companys commission revenue
contributed to the decrease.
Gross Profit
Due to the loss of two significant product lines, the lower margins
relating to the 2000 sales volume, and the recording of $1,861,681
as an inventory reserve, of which $263,497 was recorded in the
fourth quarter, due to the decline in market demand for such items
as WWF, WCW, Star Wars and Pokemon products, the gross
profit decreased significantly.
Selling, General and Administrative
Selling, general and administrative expenses in 2000 decreased to
$6,497,677 to $10,111,421 in 1999. However, these costs, as a
percentage of sales, were significantly higher compared to 1999 due
to the much lower sales base. The Company, in anticipation of
the sales volume decline, implemented a cost control program
during the year. Decrease in salary expense, cooperative
advertising rebates to customers, and administrative expense
comprised the majority of the total decrease.
Unusual Items
These expenses are comprised of the following items:
(a) The Company settled a lawsuit by a lessor of certain real
estate for $264,000.
(b) The Company recognized the permanent impairment in
value of goodwill from the acquisition of the assets by its
Ark Creations subsidiary of $2,253,516, as a result of its
decision to cease operations of its subsidiary.
(c) The companys credit line, which was scheduled to expire
in 2001, was terminated in January 2001. As a result, the
Company has taken a charge against earnings of the full
amount of the deferred financing charges of $535,109.
(d) The Company has written off $557,539 as a result of its
decision to abandon its proposed acquisition of Limited
Treasures, Inc. and providing for an allowance on a loan
receivable from Limited Treasures.
(e) The Company has reserved $550,000 to cover a lawsuit
commenced by a supplier against Grand Canada for breach
of contract.
Comparison of the year ended December 31, 1999
to the year ended December 31, 1998:
Net Loss
Net loss for 1999 was $709,466 or $0.36 loss per share as compared
to a net loss of $318,302 or $0.20 loss per share in 1998, a 123%
increase in net loss.
Net Sales
Net sales in 1999 were $37,260,250, an increase of $4,082,721 over
1998 net sales of $33,177,529, or by approximately 12%. This
increase can be attributed to the large volume of sales of Furby
(Tiger Electronics) products in 1999 compared to a more limited
amount in 1998.
Gross Profit
Gross profit in 1999 decreased by $312,639 from $11,091,548 in
1998 to $10,778,909 in 1999 or as a percentage of sales gross profit
decreased from 33.43% to 28.93%. The decline in gross profit can
be primarily attributed to losses on the sale of discontinued or low
margin products that were cleared during the year in excess of
those of the previous year. A change in sales mix also contributed
to the lower margins.
Selling, General and Administrative
Selling, general and administrative expenses were $10,111,421 in
1999 compared to $8,807,026 in 1998. The increase in this
category is due primarily to the costs of operating the Ark
Creations Inc.s facility, which has now been closed, as well as
additional compensation taxes related to the exercise of options by
employees during 1999. As a percentage of net sales, selling,
general and administrative expenses increased by .59 percentage
points to 27.14% in 1999.
Gain on Foreign exchange
The gain of $177,982 resulted from a successful matching of the
Companys US dollar foreign exchange exposure and also a
stabilization of the Canadian dollar.
Unusual Items
As a result of transferring the administration of Ark Creations Inc.
to Canada and closing the facility, the Company incurred expenses
of $432,613 in fixed asset write-offs, severance costs and lease
penalties.
Further, the discontinuance of the Majorette product line resulted
in a penalty of $382,056 for the return of product on hand.
Liquidity and Capital Resources
The Company generally finances its operations through
borrowings under the Companys Credit Agreement with its bank
and 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 being
maintained until December 31, 2000.
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 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.
Accounts receivable at December 31, 2000 were $1,933,370
compared to $8,083,004 at December 31, 1999. The reduction is
caused by the significant decrease in sales, as well as normal cash
collection associated with the final months of the year. Inventory
at December 31, 2000 decreased to $1,991,918 from $6,065,564 as a
result of lower sales volume and inventory writedowns.
Working capital decreased from $10,955,614 at December 31, 1999
to $2,804,596 at December 31, 2000. Net cash provided by
operating activities was $1,223,604 in 2000 compared to net cash
used for operating activities of $1,329,103 in 1999. Cash for
additions to equipment and leasehold improvements was $140,586
compared to $570,081 in 1999.
Significant cash requirements for 2001 are:
a) The market shortfall of the preferred share conversions,
representing $351,774, which includes the January 2001
conversion.
b) The reserve against a breach of contract represents a
maximum cash requirement of $550,000.
c) 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.
d) Grand Canadas tax liability represents cash requirements
approximately $300,000. The repayment terms will be
negotiated with the government, and could extend beyond
December 2001.
e) Development costs for the Companys proprietory
product.
The above items will be offset by partial collections of the
$434,370 owing from Limited Treasures Inc., receivable and
$500,000 was received BY March 29, 2001 from a completed
private placement. Further, the above items are disclosed in the
Financial Statements and other sections within this document.
Grand Canadas accounts receivable level is subject to significant
seasonal variations due to the seasonality of sales. As a result,
Grand Canadas 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 Grand Canadas business, Grand Canada
could require additional working capital to fund its operations.
Sources of such funding include cash flow from operations,
drawings on the financing facilities, or sales of additional equity or
debt securities by the Company.
If the funds available 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 and
additional public or private debt or equity financing.
Effects Of Inflation
The Company does not believe that inflation has had a significant
impact on its financial position or results of operations in the past
three years.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
133, Accounting for Derivative Instruments and Hedging
Activities. This statement addresses the accounting for derivative
instruments, including forward foreign exchange contracts. This
statement, as amended by SFAS No. 137, shall be effective for the
Companys financial statements for December 31, 2000. The
company does not have any derivative instruments.
Item 7a.
Quantitative and Qualitative Disclosures
About Market Risk:
The Company is exposed to certain market risks, which arise from
transactions entered into in the normal course of business. The
Companys primary exposures are changes in interest rates with
respect to its debt and foreign currency exchange fluctuations.
INTEREST RATE RISK The interest payable on the
Companys revolving lines-of-credit are variable based on the prime
rate, and therefore, affected by changes in market interest rates.
The Company does not use derivative financial instruments.
FOREIGN CURRENCY RISK While the 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. 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.
Item 8.
Financial Statements:
The consolidated financial statements of the Company, including
the notes thereto, together with the report of independent
chartered accountants thereon, are presented beginning at page F-1.
Item 9.
Changes in, and Disagreements with
Accountants on Accounting and Financial
Disclosure:
Not applicable
P
A
R
T
I
I
I
Item 10.
Directors and Executive Officers :
Pursuant to the Bylaws of the Company, the number of directors
constituting the full Board of Directors has been fixed by the
Board at four (4). At the Annual Meeting, four (4) individuals will
be elected to serve as directors until the next annual meeting and
until their successors are duly elected, appointed and qualified.
Set forth below is the name, age, principal occupation during the
past five years and other information concerning each nominee.
Name
Age
Position with the Company
Elliot L. Bier
51
Chairman and Director
Stephen Altro
David Mars
James B. Rybakoff
Tania M. Clarke
63
63
34
32
Director
Director
Director
Executive Vice-President and CFO
Elliot L. Bier has been a director of the Company since July 20,
1993. He has been a practicing attorney in Montreal for the last 24
years. He is a senior partner in Adessky Poulin, the Companys
Canadian legal counsel. Since November 16, 2000, Mr. Bier has
served as Chairman of the Company.
Stephen Altro the Chairman, until November 16, 2000, and has
been a director of the Company since July 20, 1993. He has held
similar positions with Grand Canada, the Companys Canadian
operating subsidiary, for over 41 years. From July 20, 1993 to
June 30, 2000, Mr. Altro served as Chairman of the Company. Mr.
Altro co-founded Grand Canada with David Mars in 1961.
David Mars has been the Vice Chairman since 1995 until
November 16, 2000, and has been a director of the Company since
July 20, 1993. He has held similar positions with Grand Canada
for over 41 years. From July 20, 1993 to June 30, 2000, Mr. Mars
served as Vice-Chairman of the Company. Mr. Mars co-founded
Grand Canada with Stephen Altro in 1961.
James B. Rybakoff is the President of Akin Bay Company, L.L.C.,
an NASDAQ member investment bank and brokerage firm,
which Mr. Rybakoff co-founded in 1990. From 1992 to 1993 he
served as an associate for Zilkha & Company, an international
mergers and acquisition investment banking and strategic planning
firm. Mr. Rybakoff was elected as a director in 1996.
Tania M. Clarke is the Executive Vice President and CFO of the
Company since December 4, 2000, and has been with the
Company since May 3, 1993. Prior thereto, Ms. Clarke was
employed by KPMG LLP, as an external auditor for 3 years. Ms.
Clarke is a Canadian Chartered Accountant and a Certified Public
Accountant in the U.S. as of January 2001. Ms. Clarke accepted
this executive position effective December 4, 2000.
Directors are elected annually by the shareholders and hold office
until the next annual meeting and until their respective successors
are elected and qualified. There are no family relationships among
any of the Companys directors and executive officers.
Each of Messrs. Altro and Mars were executive officers of Grand
Group Inc., the Companys former United States Operating
Company (Grand Group). On January 4, 1996, an order for relief
under Chapter 7 of the United States Bankruptcy Code was
entered against Grand Group, at which time a trustee was
appointed to supervise its liquidation.
Executive Officers and Key Employees
In addition to Messr. Bier, the other executive officers are:
R.Ian Bradley President and Chief Executive Officer
Mr. Bradley, 56 years old, began with the Company on January
16, 2001. Mr. Bradley has extensive experience in the toy and
retailing industries, having served in various executive positions
with Mattel Canada Inc. from 1983 to 1997 , where he was
President from 1990 to 1997, and as Vice President Finance &
Administration of Dylex Limited, a leading Canadian retailer,
from 1999 to 2000.
The following persons, although not executive officers, are
regarded by the executives as key employees:
Glennis Carey has been the Director of Marketing for Grand
Canada for 20 years. Prior thereto, Ms. Carey worked for Mattel
International, Inc., in marketing for ten years.
Robert Herbst has been the Director of Operations for Grand
Canada since April 1995. Prior thereto, Mr. Herbst worked at
Grand Canada in various capacities for 20 years.
Paul Newbold has been the Director of Sales for Grand Canada
since December 1, 1999. Prior thereto he worked at Hallmark
(US) in the similar capacity.
Charles Marshall has been Director of Merchandising and Product
Development since July 1998. Prior thereto, Mr. Marshall has
worked in the toy industry for over 30 years in similar positions.
Executive officers are elected by and serve at the discretion of the
Board of Directors. There are no family relationships among any
of our directors and executive officers.
Section 16(a) Beneficial Ownership and Reporting
Compliance
The directors and executive officers of the Company, and the
owners of more than ten (10%) percent of the Companys
outstanding Common Stock, are required to file reports with the
Securities and Exchange Commission and with NASDAQ,
reporting changes in the number of shares of the Companys
Common Stock beneficially owned by them and provide the
Company with copies of all such reports. Based solely on its
review of the copies of such reports furnished to the Company and
written representations from the executive officers and directors,
the Company believes that all reports were timely made for the
year ended December 31, 2000, with the following exceptions: (i)
David Mars, Vice Chairman and Director, reported late on (A) a
Form 4 filed on June 9, 2000. The purchase of 10,000 shares of
Common Stock on April 12, 2000 and (B) a Form 4 filed on May
11, 2000, the sale of 1,000 shares of Common Stock on September
9, 1999, the sale of 20,300 shares of Common Stock on September
17, 1999, the sale of 1,000 shares of Common Stock on October
12, 1999 and the sale of 2,700 shares of Common Stock on
November 29, 1999; (ii); Stephen Altro, Director, reported late on
a Form 4 filed on May 11, 2000, the sale of 1,000 shares of
Common Stock on September 9, 1999, the sale of 20,300 shares of
Common Stock on September 17, 1999, the sale of 1,000 shares of
common Stock on October 12, 1999 and the sale of 2,700 shares of
Common Stock on November 29, 1999, (iii) Ken Cieply, Chief
Financial Officer, filed on July 24, 2000 a Form 3 as a result of his
appointment as Chief Financial Officer on September 20, 1999;
and (iv) Tania Clarke, Chief Financial Officer, filed on March 12,
2001 a Form 3 as a result of her appointment as Chief Financial
Officer on December 1, 2000.
Item 11.
Executive Compensation:
The following table sets forth a summary for the fiscal years ended
December 31, 1998, 1999 and 2000 respectively, of the cash and non-cash
compensation awarded, paid or accrued by the Company to the Companys
CEO and its four most highly compensated officers other than the CEO
who served in such capacity at the end of fiscal 2000. There were no other
executive officers as of the end of fiscal 2000 except as set forth below.
Summary Compensation Table
Annual Compensation
Long-term
Compensation
Awards
Name and
Principal
Position
Year
Salary
($)
Bonus
($)
Other
Annual
Compen-
sation
($)
Options
(#)
All Other
Compen-
sation
($)
Stephen Altro,
Director
2000
1999
1998
102,000(1),(4) ((,
162,000(2)
156,000(3)
- -
50,000(2)
- -
46,000(5)
46,000(6)
42,000(7)
- -
46,750
- -
- -
- -(9)
- -(9)
David Mars,
Director
2000
1999
1998
102,000(1),(4)
162,000(2)
156,000(3)
- -
50,000(2)
- -
40,000(5)
29,000(6)
28,000(7)
- -
46,750
- -
- -
- -(10)
- -(10)
Ken Cieply,
Chief Financial
Officer (8)
2000
1999
1998
95,000(1)
26,000(2)
-
-
-
- -
7,000(5)
1,000(6)
- -
- -
- -
- -
- -
- -
- -
1) Such amounts are based upon an exchange rate of Canadian $1.48 to
United States
$1.00 (the exchange rate on December 31, 2000).
2) Such amounts are based upon an exchange rate of Canadian $1.49 to
United States
$1.00 (the exchange rate on December 31,1999).
3) Such amounts are based upon an exchange rate of Canadian $1.54 to
United States
$1.00 (the exchange rate on December 31, 1998).
4) Mr. Altro and Mr. Mars total salary consists of $84,000 in salary to
June 30, 2000 and
$18,000 in consultants fees fort the period of
July 1 to December 31, 2000.
5) Other annual compensation for Mr. Altro consists of $14,000 for car lease
payments, $12,000 for annual country club dues and 20,000 for life insurance
premiums. For Mr. Mars, it includes $12,000 for car lease payments,
$12,000 for
annual country club dues and $16,000 for life insurance premiums. For Mr.
Cieply it consists of car lease payments.
6) Other annual compensation for Mr. Altro consists of $12,000 for car lease
payments, $11,000 for annual country club dues and $23,000 for life insurance
premiums. For Mr. Mars it includes $2,000 for car lease payments, $11,000 for
annual country club dues and $16,000 for life insurance premiums. For Mr.
Cieply it consists of car lease payments.
7) Other Annual Compensation for Mr. Altro consits of $11,000 for car lease
payments and $11,000 for annual country club dues and $20,000 for life
insurance premiums. For Mr. Mars it includes $11,000 for country club dues and
$17,000 for life insurance premiums.
8) Mr. Cieply was hired on September 20, 1999. Amounts reflect partial year.
9) This amount does not reflect special awards and payments Mr. Altro would be
entitled to receive under Mr. Altros employment agreement if his employment
were to be terminated as a result of a change of control of the Company. Mr.
Altros employment agreement terminated on June 30, 2000.
10) This amount does not reflect special awards and payments Mr. Mars would be
entitled to receive under Mr. Mars employment agreement if his employment
were to be terminated as a result of a change of control of the Company. Mr.
Mars employment agreement terminated on June 30, 2000.
The following table sets forth further information regarding the stock
option grants during fiscal 2000 to the officers named in the Summary
Compensation Table above.
Option Grants in 2000
There were no options granted in 2000, to those persons listed in the
Summary Compensation Table.
Option Exercises in 2000 and Year-End Values
The following table sets forth certain information concerning the exercise
of options by each of the officers listed in the Summary Compensation
Table above during fiscal 2000, including the aggregate amount of gains on
the date of exercise. In addition, the table includes the number of shares
covered by both exercisable and unexercisable stock options as of
December 31, 2000. Also reported are values for in-the-money options
that represent the positive spread between the respective exercise prices of
outstanding stock options and the fair market value of our common stock
as of December 31, 2000, as determined by the closing price of our
common stock on that date as reported by NASDAQ.
Name
Shares
Ac-
quired
On
Exercise
(#)
Value
Realized
$(1)
Number of
Unexercised Options
at Fiscal Year-End
(#)
Value of Unexercised
In-the-Money
Options
At Fiscal Year-End
($)
Exercisable
Unexercisable
Exercisable (2)
Unexercisa
ble
Stephen Altro
- -
- -
46,750
- -
- -
- -
David Mars
- -
- -
46,750
- -
- -
- -
1) Value Realized represents the fair market value of the shares of
common stock underlying the option on the date of exercise less the
aggregate exercise price of the option.
2) Closing stock price on December 31, 2000 was $ 0.34. All unexercised
options granted to Mr. Altro and Mr. Mars had exercise prices in
excess of $ 0.34.
Director Compensation
Directors who are also officers of the Company are not paid any
compensation for attendance at directors meetings or for attending
or participating in any committee meetings but are eligible to
participate in the Companys Stock Option Plan. Non-employee
directors of the Company are compensated for their services and
attendance at meetings through the automatic grant of 500 options
per quarter pursuant to the Companys Amended and Restated
1993 Stock Option Plan. The exercise price of options are granted
to non-employees directors at the market price of the Companys
common stock on the first day of each quarter.
Board Compensation Committee Report on Executive
Compensation
General. The Compensation Committees overall compensation
policy applicable to executive officers is to provide a compensation
package that is intended to attract and retain qualified executives
for us and to provide them with incentives to achieve our goals and
increase shareholder value. The Compensation Committee
implements this policy through salaries, bonuses, stock options, a
retirement savings plan, and employment agreements and
miscellaneous personal benefits.
CEO Compensation.
The philosophy, factors and criteria of the Compensation
Committee and the Board generally applicable to our officers are
also applicable to the Chief Executive Officer. Pursuant to the
terms of his Employment Agreement, Mr. Altro received six
months salary based on an annual salary of $168,000, together with
other benefits, including life insurance through June 30, 2000. Mr.
Altros employment agreement terminated, and he resigned as an
officer, on June 30, 2000. From July 1, 2000 through December
31, 2000, Mr. Altro worked as a consultant of the Company and
received $18,000 in consulting fees, plus other benefits, including
life insurance. Based upon the performance of the Company
through June 30, 2000, the Compensation Committee did not
award a discretionary bonus to Mr. Altro. The new Chief
Executive Officers salary will be based on the factors set forth
above in the Board Compensation Committees Report on
Executive Compensation.
Salaries. The Compensation Committees policy is to provide
salaries (i) that are approximately at the median of the salaries paid
to similar executive officers in similar companies, adjusted in the
Compensation Committees subjective judgment to reflect
differences in duties of the officers and differences in the size and
stage of development of the companies, in order to attract and
retain qualified executives and (ii) that compensate individual
employees for their individual contributions and performance.
The Compensation Committee determines comparable salaries
paid by other companies similar to us through its subjective
evaluation of its members knowledge of salaries paid by other
companies, salary requests of individuals interviewed by us for
open positions and recommendations of management. The
Committee subjectively evaluates this information and our
financial resources and prospects to determine the salary and
severance arrangements for an executive officer. Salaries for fiscal
1999 were determined based on a subjective evaluation of the
factors described above, without giving any specific priority or
weighting to any of the factors.
Bonuses. The Compensation Committees policy is to recommend
bonuses that compensate executive officers for achieving our goals.
In addition, the Compensation Committees policy is to pay
discretionary bonuses, determined near the end of the fiscal year,
to compensate executive officers for performance or achievements
during the fiscal year not covered by bonuses paid earlier in the
year.
Stock Options. The Compensation Committees policy is to award
stock options to each of our officers, employees and directors in
amounts reflecting the participants position and ability to influence
our overall performance, determined based on the Committees
subjective judgment after reviewing the number of options
previously granted to such person, the number of options granted
to persons in similar positions both with us and at other companies
deemed comparable to us (based on the members knowledge of
options granted by other companies), the number of options
remaining available for grant and managements recommendations.
Options are intended to provide participants with an increased
incentive to make contributions to our long-term performance and
growth, to join the interests of participants with the interests of
our shareholders and to attract and retain qualified employees.
The number of options granted to an executive in 2000 were
granted as an inducement for employment.
The Compensation Committees policy is to grant options with a
term of ten years to provide a long-term incentive and to fix the
exercise price of the options at the fair market value of the
underlying shares on the date of grant. Such options only provide
compensation if the price of the underlying shares increases. The
Committees policy is also to provide new executives with options
to attract them to us based on negotiations with new executives,
managements recommendations and the Committees subjective
judgment primarily after reviewing the number of options granted
to similar executives.
Generally, the Compensation Committee reserves the right to pay
compensation to our executives in amounts it deems appropriate
regardless of whether such compensation is deductible for federal
income tax purposes. Options granted to executives in fiscal 1997
are potentially subject to limits on permitted federal income tax
deductions upon exercise of such options, including under current
treasury regulations concerning the $1,000,000 cap on executive
compensation deductions under Section 162(m) of the Internal
Revenue Code of 1986, as amended. The Committee determined to
recommend the grants of options to executives in July 1997 despite
such options potentially being subject to the $1,000,000 cap on
executive compensation. The Committee determined that such
grants were more important to us than the potential loss of related
compensation deductions upon exercise of the options.
Retirement Savings Plan. We have adopted a group retirement
savings plan for our Canadian employees. We contribute to this
plan the lesser of (a) 50% of the employees contribution to this
plan; (b) 3% of the employees gross earnings; or (c) Canadian
$3,000 per employee. During the year ended December 31, 2000,
we contributed approximately $20,000 to the plan.
Employment Agreements and Miscellaneous Personal Benefits. The
Compensation Committees policy has been to have employment
agreements with each of its executive officers to provide them with
specified minimum positions, periods of employment, salaries,
fringe benefits and severance benefits. These benefits are intended
to permit the executive officer to focus his attention on performing
his duties to us, rather than on the security of his employment, and
to provide the officer with benefits deemed by the Compensation
Committee to be suitable for the executives office.
By the Compensation Committee
James B. Rybakoff
Elliot L. Bier
Compensation Committee Interlocks and Insider
Participation
As noted above, the members of the Compensation Committee
during fiscal 2000 were Messrs. Rybakoff and Bier. For a
description of the business relationship between each of them and
the Company see Item 13, Certain Relationships and Related
Transactions. Mr. Rybakoff has never been an officer or employee
of the Company. Mr. Bier was appointed Chairman of the Board
of the Company on November 16, 2000. None of the executive
officers of the Company served as a member of the compensation
committee (or other board committee performing equivalent
functions or, in the absense of such committee, the entire board of
directors) of another entity during 2000.
Performance Graph
The following graph tracks an assumed investment of $100 on the
last trading day of the calendar year indicated below in our
common stock, the NASDAQ Stock Market and the NASDAQ
Non-Financial Stocks sector, assuming full reinvestment of
dividends. Past performance is not necessarily indicative of future
performance.
Item 12
Security Ownership of Certain Beneficial
Owners and Management
Principal Shareholders
The following table sets forth certain information regarding
beneficial ownership of our common stock as of December 31,
2000 by (i) each person (or group of affiliated persons) who is
known by us to own beneficially more than 5% of the outstanding
shares of our common stock, (ii) each of our directors and director
nominees, (iii) each of our executive officers and (iv) all of our
executive officers and directors as a group. Except as indicated in
the footnotes to this table, the persons named in this table have
sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them.
Name and Address of
Beneficial Owner
Number of
Shares
Beneficially
Owned
Percent of Class and
Voting
Power (1)
Ofer Nissim
65 High Ridge Road, Suite 500
Stanford, CT, 06905
475,000 (2)
13%
David Mars
1710 Rte. Transcanadienne
Dorval, Quebec, Canada H9P 1H7
340,750 (3)
9%
Siemens Pension Plan
Freilagerstr 40
Ch 8047 Zuerich, Switzerland
300,000
8%
Stephen Altro
1710 Rte. Transcanadienne
Dorval, Quebec, Canada, H9P 1H7
221,750 (4)
6%
Amgo Investments, Inc.
1710 Rte. Transcanadienne
Dorval, Quebec, Canada H9P 1H7
150,000 (5)
4%
James B. Rybakoff
780 Third Avenue
New York, NY 10017
58,000 (6)
1%
Elliot L. Bier
999 Boul. de Maisonneuve Ouest
Montreal, Quebec, Canada H3A 3L4
3,000 (7)
- -%
Tania M. Clarke
1710 Rte. Transcanadienne
Dorval, Quebec, Canada, H9P 1H7
2,000
- -%
All Executive officers and directors
as a group (four persons)
625,500 (9)
16%
1) Computed on the basis of 3,753,406 shares of common stock
and, with respect to those persons holding warrants or options
to purchase common stock exercisable within sixty (60) days,
the number of shares of common stock that are issuable upon
the exercise thereof.
2) Includes options to purchase 50,000 shares of common stock
executed within sixty (60) days. Mr. Nissims holdings of
425,000 shares is held indirectly through Knox Security
Engineering Corp. and Ark Foundation LLC.
3) Includes options to purchase 46,750 shares of common stock
exercisable within sixty (60) days. Mr. Mars interest in Amgo
is owned of record by 2884330 Canada, Inc., a privately held
corporation controlled by Mr. Mars, of which his wife and
children, the only other shareholders of such corporation, are
minority shareholders. Mr. Mars disclaims beneficial
ownership of 75,000 shares of common stock owned by Amgo
and beneficially owned by Mr. Altro. See Executive
Compensation.
4) Includes options to purchase 46,750 shares of common stock
exercisable within sixty (60) days. Mr. Altros interest in Amgo
is owned of record by 2870304 Canada, Inc., a privately held
corporation controlled by Mr. Altro, of which his wife and
children, the only other shareholders of such corporation, are
minority shareholders. Mr. Altro disclaims beneficial
ownership of 75,000 shares of common stock owned by Amgo
and beneficially owned by Mr. Mars. See Executive
Compensation.
5) Amgo Investments, Inc. (Amgo) is controlled by David Mars
and Stephen Altro.
6) Represents options and warrants to purchase 58,000 shares of
common stock exercisable within sixty (60) days. 55,000 of
such warrants are owned of record by Akin Bay Company
L.L.C. of which Mr. Rybakoff is a controlling member. See
Election of Directors and Certain Transactions.
7) Represents options to purchase 3,000 shares of common stock
exercisable within sixty (60) days. See Directors and Executive
Officers.
8) Represents options to purchase 2,000 shares of common stock.
See Executive Officers.
9) See Footnotes (1) (8).
Item 13.
Certain Relationships and Related
Transactions
During fiscal 2000, Elliot L. Bier and James B. Rybakoff served as
the members of the Companys Compensation Committee. None
of the members of the Companys Compensation Committee,
which served during the fiscal 2000 was an officer or employee of
the Company, or a former officer of the Company.
Mr. Bier is a senior partner in Adessky, Poulin, a Montreal,
Quebec based law firm. The firm of Adessky, Poulin acts as
Canadian counsel to the company and its subsidiaries. During the
fiscal year ended December 31, 2000, the Company paid Adessky,
Poulin an aggregate of $66,384 for legal fees and related
disbursements.
Mr. Rybakoff is a member and a managing director of Akin Bay
Company L.L.C., NASD member firm (Akin Bay). The
Company is a party to an investment banking agreement with
Akin Bay. Pursuant to the terms of the investment banking
agreement, Akin Bay provides investment banking and other
financial advisory services to the Company. In addition, the
Company has also paid Akin Bay to sponsor research reports on
the Company. The investment banking agreement and the
agreement to sponsor research reports was approved the
Companys disinterested directors. The Company believes that the
terms of the investment banking and sponsored research
agreements are substantially similar to those prevailing at the time
for comparable agreements and transactions with other investment
banking firms. During the fiscal year ended December 31, 2000,
the Company paid Akin Bay a total of $251,430 for services
rendered to it.
Grand Toys (H.K.), an affiliate of the Company, was incorporated
by Mr. Altro and Mr. Mars, assist in obtaining competitive
sourcing in the Orient. All transactions of Grand Toys (H.K.) are
on behalf of the Company have no profit element.
Item 14.
Exhibits, Financial Statements and Reports
on Form 8-K
(a) Report of Independent Auditors
Index to Financial statements
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2000 and
December 31, 1999
Consolidated Statements of Operations for the Years
Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders Equity and
Comprehensive Income for the Years Ended December
31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999, and 1998
Notes to Consolidated Financial Statements
Consents of Independent Auditors to incorporation by
reference of financial statements
Exhibit Number
**3.1 Articles of Incorporation, as amended
### 3.2 Certificate of Designations of Series A 5%
Cumulative Convertible Redeemable Preferred
Stock
***3.3 Amended and Restated by-laws
**4.1 Form of certificate evidencing shares of Common
Stock
### 4.2 Form of Certificate of Designations of Series A Cumulative
Convertible Redeemable
Preferred Stock
*4.3 Form of Common Stock Warrant
*4.4 Form of Regulation S Common Stock Subscription
Agreement
*10.1 Loan and Security Agreement dated as of
February 17, 2000 by and between Limited
Treasures, Inc. and the Company.
*10.2 Promissory note dated February 17, 2000,
given by Limited Treasures, Inc. to the
Company in the amount of US$ 700,000.
#10.3 Amended and Restated 1993 Stock Option Plan
*10.9 Lease of Dorval, Canada facility
*10.10 Lease of Mississauga, Canada facility
###10.11 Asset Purchase Agreement, dated as of January
1, 1999, by and among the Company, Ark
Creations, Inc. (formerly Great American
Acquisition Corp.), Ark Foundation LLC and
Ofer Nissim
###10.12 Subordinated Promissory Note, dated January 1,
1999, given by Ark Creations, Inc.(formerly
Great American Acquisition Corp.) to Ark
Foundation in the amount of US$1,500,000
###10.13 Stock Pledge Agreement, dated as of January 1,
1999, in favor of Ark Foundation LLC by the
Company
*11 Valuation and Qualifying Accounts and
Allowances
*21 Subsidiaries of the Company
*23 Consent of KPMG LLP
* Filed herewith
** Filed as an Exhibit to either the companys
Registration Statement (the Registration
Statement) on Form SB-2, dated January 27,
1994, or Amendment No. 1 or Amendment
No. 2 to such Registration Statement.
*** Filed as an Exhibit to the Companys
Registration Statement of Form S-3 dated
December 23, 1996.
# Filed as an Exhibit to the Companys
Registration Statement on Form 8-A dated
September 7, 1993 and incorporated herein by
reference.
## Filed as an Exhibit to the Companys Proxy
Statement on Form Pre 14A dated August 3,
2000.
### Filed as a Exhibit to the Companys 10-K for the
year ended December 31, 1998
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended December 31, 2000.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Exhibits to
Form 10 - K
of
GRAND TOYS INTERNATIONAL, INC.
For the Fiscal Year
Ended December 31, 2000
Schedule 11
GRAND TOYS INTERNATIONAL, INC., AND
SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND
ALLOWANCES
(In thousands)
Balance
At Additions
Balance
Beginning Charged
to Net at End
Of Year Operations
Deductions Of Year
------------- --------------
- - ---------------- -----------
Allowance for Doubtful Accounts
Year Ended December 31, 2000 $90,805 44,512 (111,309)(a) $24,008
Year Ended December 31, 1999 43,143 47,662 0 (a) 90,805
Year Ended December 31, 1998 52,882 43,426 (53,165) (a) 43,143
(a) Includes write-offs, recoveries of previous write-offs and
currency translation adjustments.
THE WARRANT EVIDENCED OR CONSTITUTED
HEREBY, AND ALL SHARES OF COMMON STOCK
ISSUABLE HEREUNDER, HAVE BEEN AND WILL BE
ISSUED WITHOUT REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE
SECURITIES ACT) AND MAY NOT BE SOLD, OFFERED
FOR SALE, TRANSFERRED, PLEDGED OR
HYPOTHECATED WITHOUT REGISTRATION UNDER
THE ACT UNLESS EITHER (i) THE DISPOSITION OF
SUCH SECURITIES IS EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS OR (ii) THE DISPOSITION OF SUCH
SECURITIES IS REGISTERED OR QUALIFIED UNDER
THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS.
WARRANT TO PURCHASE
COMMON STOCK OF GRAND TOYS INTERNATIONAL, INC.
This certifies that _____________________ (the
Holder), for value received, is entitled to purchase from Grand
Toys International, Inc. (the Company) ____________
(_______) shares of the Companys Common Stock, $0.001 par
value per share (the Common Stock), at a per share exercise
price of $0.53 per share (the Per Share Exercise Price). This
right may be exercised at any time after the six month
anniversary of the date hereof up to and including 5:00 p.m.
(New York City time) on the third anniversary of the date
hereof (the Expiration Date).
1. EXERCISE.
(a) To exercise this right the Holder shall surrender to the
Company at its principal office (or at such other location as the Company
may advise the Holder in writing) this warrant, properly endorsed, with the
Subscription Form attached hereto duly filled in and signed and, if
applicable, upon payment in cash or by check of the aggregate Per Share
Exercise Price for the number of shares for which this warrant is being
exercised determined in accordance with the provisions hereof.
(b) In lieu of exercising this warrant for cash, the Holder may
elect to receive shares equal to the value (as determined below) of this
warrant (or the portion thereof being canceled) by surrender of this warrant
at the principal office of the Company, together with the properly endorsed
Subscription Form and notice of such election, in which event the Company
will issue to the Holder a number of shares of Common Stock computed
using the following formula:
X = Y (A-B)
A
Where X = the number of shares of Common Stock to be
issued to the Holder
Y = the number of shares of Common Stock
purchasable under this warrant or, if only a portion of this warrant is being
exercised, the portion of this warrant being canceled (at the date of such
calculation)
A = the Fair Market Value per share of
Common Stock (at the date of such calculation)
B = Per Share Exercise Price (as adjusted to the date
of such calculation)
For purposes of the above calculation, Fair Market
Value per share of Common Stock will be as follows:
(1) If the Common Stock is listed on a
national securities exchange, the Nasdaq National
Market or another nationally recognized trading system
as of the exercise date, the Fair Market Value per share
of Common Stock shall be deemed to be the last
reported sale prices per share of Common Stock thereon
on the trading day on which a sale was made
immediately preceding the exercise date.
(2) If the Common Stock is not listed on a
national securities exchange, the Nasdaq National
Market or another nationally recognized trading system
as of the exercise date, the Fair Market Value per share
of Common Stock shall be deemed to be the amount
most recently determined by the Board of Directors to
represent the fair market value per share of the
Common Stock (including without limitation a
determination for purposes of granting Common Stock
options or issuing Common Stock under an employee
benefit plan of the Company); and, upon request of the
Holder, the Board of Directors (or a representative
thereof) shall promptly notify the Holder of the Fair
Market Value per share of Common Stock .
Notwithstanding the foregoing, if the Board of
Directors has not made such a determination within the
three-month period prior to the exercise date, then
(A) the Board of Directors shall make a determination
of the Fair Market Value per share of Common Stock
within 15 days of a request by the Holder that it do so,
and (B) the exercise of this Warrant pursuant to this
subsection 1(b) shall be delayed until such
determination is made.
2. ISSUANCE OF CERTIFICATES.
Certificates for the shares of Common Stock acquired upon
exercise of this warrant, together with any other securities or property to
which the Holder is entitled upon such exercise, will be delivered to the
Holder by the Company at the Companys expense within a reasonable time
after this warrant has been so exercised. Each stock certificate so delivered
will be in such denominations of Common Stock as may be requested by
the Holder and will be registered in the name of the Holder. In case of a
purchase of less than all the shares that may be purchased under this
warrant, the Company will cancel this warrant and execute and deliver a
new warrant or warrants of like tenor for the balance of the shares
purchasable under this warrant to the Holder within a reasonable time after
surrender of this warrant.
3. SHARES FULLY-PAID, NONASSESSABLE, ETC.
All shares of Common Stock issued upon exercise of this warrant
will, upon issuance, be duly authorized, validly issued, fully-paid and
nonassessable and free from all preemptive rights of any shareholder and
free of all taxes, liens and charges with respect to the issue thereof. The
Company will at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting
the exercise of this warrant, such number of its shares of Common
Stock as
from time to time are sufficient to effect the full exercise of
this warrant. If
at any time the number of authorized but unissued shares of Common Stock
is not sufficient to effect the full exercise of this warrant, the Company will
take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock
to such number of shares as is sufficient for such purpose.
The Company will take all such action as may be necessary to assure that
such securities may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic
securities exchange upon which the Common Stock may be listed;
provided, however, that the Company will not be required to effect a
registration under federal or state securities laws with respect to such
exercise (except as may be set forth in a separate written agreement
between the Company and the Holder).
4. ADJUSTMENTS.
4.1 Adjustment for Stock Splits and Combinations. If the
Company at any time or from time to time during the term of this warrant
effects a subdivision of the outstanding Common Stock, the Per Share
Exercise Price in effect immediately before that subdivision will be
proportionately decreased. Conversely, if the Company at any time or from
time to time during the term of this warrant combines the outstanding
shares of Common Stock into a smaller number of shares, the Per Share
Exercise Price in effect immediately before the combination will be
proportionately increased. Any adjustment under this Section 4.1 will
become effective at the close of business on the date the subdivision or
combination becomes effective.
4.2 Adjustment for Common Stock Dividends and
Distributions. If the Company at any time or from time to time during the
term of this warrant makes, or fixes, a record date for the determination of
holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock, in each such
event the Per Share Exercise Price that is then in effect will be decreased as
of the time of such issuance or, in the event such record date is fixed, as of
the close of business on such record date, by multiplying the Per Share
Exercise Price then in effect by a fraction (a) the numerator of which is the
total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance on the close of business on
such record date, and (b) the denominator of which is the total number of
shares of Common Stock issued and outstanding immediately prior to the
time of such issuance on the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend
or distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the
date fixed therefor, the Per Share Exercise Price will be recomputed
accordingly as of the close of business on such record date and thereafter
the Per Share Exercise Price will be adjusted pursuant to this Section 4.2 to
reflect the actual payment of such dividend or distribution.
4.3 Adjustments for Other Dividends and Distributions.
If the Company at any time or from time to time during the term of this
warrant makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable
in securities of the Company other than shares of Common Stock, in each
such event provision will be made so that the Holder will receive upon
exercise of this warrant, in addition to the number of shares of Common
Stock receivable thereupon, the amount of other securities of the Company
that it would have received had this warrant been exercised on the date of
such event and had it thereafter, during the period from the date of such
event to and including the exercise date, retained such securities receivable
by them as aforesaid, subject to all other adjustments called for during such
period under this Section 4 with respect to the rights of the Holder
hereunder or with respect to such other securities by their terms.
4.4 Adjustment for Reclassification, Exchange and
Substitution. If at any time or from time to time during the term of this
warrant the Common Stock issuable upon the exercise of this warrant is
changed into the same or a different number of shares of any class or
classes of stock, whether by recapitalization, reclassification or otherwise
(other than a recapitalization, subdivision, combination, reclassification or
exchange provided for elsewhere in this Section 4), the Holder will have the
right thereafter to exercise this warrant for the kind and amount of stock
and other securities and property receivable upon such recapitalization,
reclassification or other change into which the shares of Common Stock
issuable upon exercise of this warrant immediately prior to such
recapitalization, reclassification or change could have been converted, all
subject to further adjustment as provided herein or with respect to such
other securities or property by the terms thereof.
4.5 Reorganizations. If at any time or from time to time
during the term of this warrant there is a capital reorganization of the
Common Stock (other than a recapitalization, subdivision, combination,
reclassification or exchange provided for elsewhere in this Section 4), as a
part of such capital reorganization, provision will be made so that the
Holder will thereafter be entitled to receive upon exercise of this warrant
the number of shares of stock or other securities or property of the
Company to which a holder of the number of shares of Common Stock
deliverable upon exercise of this warrant would have been entitled on such
capital reorganization, subject to adjustment in respect of such stock or
securities by the terms thereof.
4.6 Certificate of Adjustment. In each case of an
adjustment or readjustment of the number of shares issuable upon exercise
of this warrant or the Per Share Exercise Price, the Company, at its expense,
will compute such adjustment or readjustment in accordance with the
provisions hereof and prepare a certificate showing such adjustment or
readjustment, and will mail such certificate, by first class mail, postage
prepaid, to the Holder at the Holders address as shown in the Companys
books. The certificate will set forth such adjustment or readjustment,
showing in detail the facts upon which such adjustment or readjustment is
based, including a statement of (a) the Per Share Exercise Price at the time
in effect, and (b) the type and amount, if any, of other property that at the
time would be received upon exercise of this warrant.
4.7 Notices of Record Date. Upon (a) any taking by the
Company of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, (b) any capital reorganization of the
Company, any reclassification or recapitalization of the capital stock of the
Company, any sale of all or substantially all of the assets of the Company or
any voluntary or involuntary dissolution, liquidation or winding up of the
Company or (c) a proposed sale event, the Company will mail to the Holder
at least twenty (20) days prior to the record date specified therein a notice
specifying (1) the date on which any such record is to be taken for the
purpose of such dividend or distribution and a description of such dividend
or distribution, (2) the date on which any such reorganization,
reclassification, recapitalization, asset sale, dissolution, liquidation or
winding up is expected to become effective, and (3) the date, if any, that is
to be fixed as to when the holders of record of Common Stock (or other
securities) will be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, asset sale, dissolution,
liquidation or winding up.
5. TAXES.
The Company will pay all taxes (other than taxes based upon
income) and other governmental charges that may be imposed with respect
to the issue or delivery of shares of Common Stock upon exercise of this
warrant, excluding any tax or other charge imposed in connection with any
transfer involved in the issue and delivery of shares of Common Stock in a
name other than that in which this warrant was registered.
6. REGISTRATION RIGHTS
The shares of Common Stock issuable upon exercise of this
warrant shall have the identical registration rights set forth in Section 4 of
the Subscription Agreement dated as of the date hereof between the Holder
and the Company.
7. CLOSING OF BOOKS.
The Company will at no time close its transfer books against the
transfer of any warrant or of any shares of Common Stock issued or
issuable upon the exercise of any warrant in any manner that interferes with
the timely exercise of this warrant.
8. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY.
Nothing contained in this warrant will be construed as conferring
upon the Holder the right to vote or to consent or to receive notice as a
shareholder of the Company or any other matters or any rights whatsoever
as a shareholder of the Company. No dividends or interest will be payable
or accrued in respect of this warrant or the interest represented hereby or
the shares purchasable hereunder until, and only to the extent that, this
warrant has been exercised.
9. WARRANTS TRANSFERABLE.
Subject to compliance with applicable federal and state securities
laws and the restrictions imposed by any other written agreement between
the Holder and the Company, this warrant and all rights hereunder are
transferable, in whole or in part, without charge to the Holder (except for
transfer taxes), upon surrender of this warrant properly endorsed and in
compliance with the provisions of this warrant.
10. MODIFICATION AND WAIVER.
This warrant and any provision hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the
party against which enforcement of the same is sought.
11. NOTICES.
Any notice required by the provisions of this warrant will be in
writing and will be deemed effectively given: (a) upon personal delivery to
the party to be notified; (b) when sent by confirmed telex or facsimile if
sent during normal business hours of the recipient; if not, then on the next
business day; (c) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (d) one (1) day
after deposit with a nationally recognized overnight courier, specifying next
day delivery, with written verification of receipt. All notices will be
addressed to the Holder at the address of the Holder appearing on the books
of the Company.
12. LOST WARRANTS.
The Company represents and warrants to the Holder that upon
receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction, or mutilation of this warrant and, in the case of any such
loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such warrant, the Company, at its expense,
will make and deliver a new warrant, of like tenor, in lieu of the lost,
stolen,
destroyed or mutilated warrant.
13. FRACTIONAL SHARES.
No fractional shares of Common Stock will be issued upon
exercise of this warrant. If the conversion would result in the issuance of
any fractional share, the Company will, in lieu of issuing any fractional
share, pay cash equal to the product of such fraction multiplied by the
closing bid price of the Companys Common Stock on the date of
conversion.
14. GOVERNING LAW.
This warrant will be construed and enforced in accordance with,
and the rights of the parties will be governed by, the laws of the State of
New York without regard to conflict of laws principles.
The Company has executed this warrant as of this ____ day of
March, 2001.
GRAND TOYS
INTERNATIONAL, INC.
By:__________________________________
Title:_________________________________
HOLDER
By:__________________________________________
Title:_________________________________________
EXHIBIT A TO WARRANT
SUBSCRIPTION FORM
Date: _________________
Grand Toys International, Inc.
Attn: President
Ladies and Gentlemen:
The undersigned hereby elects to exercise the warrant issued to it
by Grand Toys International, Inc. (the Company) dated as of
_____________ and to purchase thereunder
______________________(_______) shares of the Common Stock of the
Company at a purchase price of ______________________
($_____________) per Share, for an aggregate purchase price of
_______________________($_______________) (the Purchase Price).
Very truly yours,
_________________________________________
By:
______________________________________
Title:
___________________________________
REGULATION S SUBSCRIPTION AGREEMENT
GRAND TOYS INTERNATIONAL, INC.
Sir or Madam:
1. Application. The undersigned, intending to be
legally bound, hereby purchases from Grand Toys
International, Inc. (the Company), _______ Units (the Units) at
a purchase price of $0.35 per Unit. Each Unit consists of one
share of the Companys Common Stock, par value $0.001 per
share (the Common Stock) and a warrant to purchase one share
of Common Stock (the Warrant Shares) at an exercise price of
$0.53 per share, on the terms and conditions set forth in that
certain Warrant dated as of the date hereof (the Warrant)
attached hereto as Exhibit A. The Common Stock and the
Warrant Shares shall collectively be known as the Securities.
Simultaneously with the execution of this Subscription
Agreement, the undersigned agrees to execute the Warrant.
The undersigned understands that this subscription may be
accepted or rejected in whole or in part by the Company in its
sole discretion and that this subscription is and shall be
irrevocable unless the Company for any reason rejects this
subscription.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE SEC) UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT),
OR THE SECURITIES ACT OF ANY STATE UNDER ANY STATE
SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER REGULATION S
(REGULATION S) PROMULGATED UNDER THE SECURITIES ACT.
THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS (AS
SUCH TERM IS DEFINED IN REGULATION S) UNLESS THE
SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS,
SALES AND TRANSFERS ARE MADE PURSUANT TO AVAILABLE
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF
THOSE LAWS.
2. Representations and Warranties of the
Subscriber. The undersigned represents and warrants to the
Company as follows:
(a) The undersigned, in making the decision
to purchase the Units, has relied upon independent
investigations made by him or it and his or its representatives,
if any. The undersigned and/or his or its advisors have had a
reasonable opportunity to ask questions of and receive answers
from the Company concerning the Units.
(b) The undersigned has been supplied with
or has sufficient access to all information, including financial
statements and other financial information of the Company,
and has been afforded with an opportunity to ask questions of
and receive answers concerning information to which a
reasonable investor would attach significance in making
investment decisions, so that as a reasonable investor the
undersigned has been able to make the undersigneds decision
to purchase the Units.
(c) The undersigned is able to bear the
substantial economic risks of an investment in the Securities
for an indefinite period of time, has no need for liquidity in
such investment, has made commitments to investments that
are not readily marketable which are reasonable in relation to
the undersigneds net worth and, at the present time, could
afford a complete loss of such investment.
(d) The undersigned has such knowledge
and experience in financial, tax and business matters so as to
enable the undersigned to utilize the information made
available to the undersigned in connection with the offering of
the Units to evaluate the merits and risks of an investment in
the Units and to make an informed investment decision with
respect thereto.
(e) The undersigned understands that the
Securities are being sold in reliance on an exemption from the
registration requirements of federal and state securities laws
under Regulation S promulgated under the Securities Act and
that the Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and
understandings of the undersigned set forth herein in order to
determine the applicability of such exemptions and the
suitability of the undersigned to purchase the Units. The
representations, warranties and agreements contained herein are
true and correct as of the date hereof and may be relied upon by
the Company, and the undersigned will notify the Company
immediately of any adverse change in any such representations
and warranties which may occur prior to the acceptance of this
Subscription Agreement by the Company and will promptly
send the Company written confirmation thereof if requested by
the Company. The representations, warranties and agreements
of the undersigned contained herein shall survive the execution
and delivery of this Subscription Agreement and the purchase
of the Units.
(f) Neither the undersigned nor any person
or entity for whom the undersigned is acting as fiduciary is a
U.S. person. A U.S. person means any one of the following:
(i) any natural person resident in the
United States of America;
(ii) any partnership or corporation
organized or incorporated under the laws of the United States
of America;
(iii) any estate of which any executor
or administrator is a U.S. person;
(iv) any trust of which any trustee is a
U.S. person;
(v) any agency or branch of a foreign
entity located in the United States of America;
(vi) any non-discretionary account or
similar account (other than an estate or trust) held by a dealer
or other fiduciary for the benefit or account of a U.S. person;
(vii) any discretionary account or
similar account (other than an estate or trust) held by a dealer
or other fiduciary organized, incorporated or (if an individual)
resident in the United States of America; and
(viii) any partnership or corporation if:
(A) organized or incorporated
under the laws of any foreign
jurisdiction; and
(B) formed by a U.S. person
principally for the purpose of investing
in securities not registered under the
Securities Act, unless it is organized or
incorporated, and owned, by accredited
investors (as defined in Rule 501(a)
under the Securities Act) who are not
natural persons, estates or trusts.
(g) ALL OFFERS AND SALES OF THE
SECURITIES PRIOR TO THE EXPIRATION OF THE
DISTRIBUTION COMPLIANCE PERIOD AS DEFINED
IN RULE 902 SHALL ONLY BE MADE IN
COMPLIANCE WITH THE SAFE HARBOR
CONTAINED IN REGULATION S, PURSUANT TO
REGISTRATION OF SECURITIES UNDER THE
SECURITIES ACT OR PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT, AND ALL OFFERS AND SALES
AFTER THE DISTRIBUTION COMPLIANCE PERIOD
SHALL BE MADE ONLY PURSUANT TO SUCH A
REGISTRATION OR TO SUCH EXEMPTION FROM
REGISTRATION.
(h) ALL DOCUMENTS RECEIVED BY
THE UNDERSIGNED INCLUDE STATEMENTS TO
THE EFFECT THAT THE SECURITIES HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT
AND MAY NOT BE OFFERED OR SOLD IN THE
UNITED STATES OR TO U.S. PERSONS OR FOR THE
ACCOUNT OR BENEFIT OF A U.S. PERSON (OTHER
THAN DISTRIBUTORS AS DEFINED IN REGULATION
S) DURING THE DISTRIBUTION COMPLIANCE
PERIOD AS DEFINED IN RULE 902 UNLESS THE
SECURITIES ARE REGISTERED UNDER THE
SECURITIES ACT OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS IS AVAILABLE.
(i) IN THE VIEW OF THE SEC, THE
STATUTORY BASIS FOR THE EXEMPTION
CLAIMED FOR THIS TRANSACTION WOULD NOT
BE PRESENT IF THE OFFERING OF UNITS,
ALTHOUGH IN TECHNICAL COMPLIANCE WITH
REGULATION S, IS PART OF A PLAN OR SCHEME
TO EVADE THE REGISTRATION PROVISIONS OF
THE SECURITIES ACT. THE UNDERSIGNED IS
ACQUIRING THE UNITS FOR INVESTMENT
PURPOSES AND HAS NO PRESENT INTENTION TO
SELL THE SECURITIES IN THE UNITED STATES OF
AMERICA TO A U.S. PERSON OR FOR THE
ACCOUNT OR BENEFIT OF A U.S. PERSON.
(j) THE UNDERSIGNED AGREES
THAT THE CERTIFICATES REPRESENTING THE
SECURITIES SHALL CONTAIN A LEGEND TO THE
FOREGOING EFFECT.
(k) Neither the undersigned nor any of his or
its affiliates or agents will, directly or indirectly, maintain any
short position in the Securities or any other securities of the
Company for so long as any of the Securities are owned by the
undersigned.
3. Registration Rights.
3.1 Definitions. For purposes of this Section 3,
defined terms shall have the following meaning:
(i) Exchange Act means the Securities
Exchange Act of 1934, as amended, or any similar Federal
statute, and the rules and regulations of the SEC issued under
the Exchange Act, as they each may, from time to time, be in
effect.
(ii) Investor means each party that has
executed a signature page to this Subscription Agreement and
delivered the purchase price set forth thereon by wire transfer
of immediately available funds.
(iii) Register, Registered and Registration
mean a registration effected by preparing and filing a
registration statement in compliance with the Securities Act
and applicable rules and regulations thereunder, and the
declaration or ordering of the effectiveness of such registration
statement.
(iv) Registrable Shares means (i) any shares of
Common Stock held by the Investor issued pursuant to the terms
of this Subscription Agreement; (ii) the Warrant Shares; and (iii)
any other shares of Common Stock of the Company issued in
respect of the shares described in clauses (i) and (ii) above
(because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events); provided, however, that any
shares described in the foregoing clauses that have been resold to
the public shall cease to be Registrable Shares.
(v) Registration Expenses means all expenses the
Company incurs in complying with Section 3, including, without
limitation, all Registration and filing fees, printing expenses, fees
and disbursements of counsel for the Company, Blue Sky fees
and expenses, and the expenses of any special audits incident to
or required by any such Registration.
(vi) Registration Statement means a registration
statement filed by the Company with the SEC for a public
offering and sale of securities of the Company (other than a
registration statement on Form S-8 or Form S-4, or their
successors, any other form for a limited purpose, any
registration statement covering only securities proposed to be
issued in exchange for securities or assets of another
corporation or a registration statement on Form S-3 solely for
the purpose of registering shares issued in a non-underwritten
offering in connection with a merger, combination or
acquisition).
(vii) Selling Expenses means (i) all underwriting
discounts and selling commissions applicable to the sale of securities
Registered and sold pursuant to Section 3, (ii) any additional costs and
disbursements of counsel for the Company that result from inclusion of
Registrable Shares in the Registration, and (iii) the expenses of qualifying
the securities covered by the Registration in a jurisdiction to the extent that
the jurisdiction requires such qualification expenses to be borne by the
selling security holders.
(viii) Stockholders means the Investor, and any
persons or entities to whom the rights granted under this Subscription
Agreement are transferred by the Investor.
3.2 Piggyback Registration Rights.
(a) Whenever the Company proposes to file a
Registration Statement (other than pursuant to Section 3.3) at any time and
from time to time, other than a Registration relating solely to employee
benefit plans, or a Registration relating solely to a transaction pursuant to
Rule 145 promulgated under the Securities Act or a Registration on any
Registration form which does not permit secondary sales or does not
include substantially the same information as would be required to be
included in a Registration statement covering the sale of the Registrable
Securities, the Company shall, prior to such filing, give written notice to the
Investor of its intention to do so and, upon the written request of Investor
given within 10 days after the Company provides such notice (which
request shall state the intended method of disposition of such Registrable
Shares), the Company shall use its commercially reasonable efforts to cause
all Registrable Shares that the Company has been requested by Investor to
register, to be registered under the Securities Act to the extent necessary to
permit their sale or other disposition in accordance with the intended
methods of distribution specified in the request of such Investor; provided
that the Company shall have the right to postpone or withdraw any
registration effected pursuant to this Section 3 without obligation to
Investor.
(b) In connection with any offering under this
Section 3.2 involving an underwriting, the Company shall not be required
to include any Registrable Shares in such underwriting unless the holders
thereof accept the terms of the underwriting as agreed upon between the
Company and the underwriters selected by it, and then only in such quantity
as will not, in the good faith opinion of the underwriters and the Company,
jeopardize the success of the offering by the Company. If, in the opinion of
the managing underwriter and the Company, the registration of all, or part
of, the Registrable Shares that the holders have requested to be included
would materially and adversely affect such public offering, then the
Company shall be required to include in the underwriting only that number
of Registrable Shares, if any, that the managing underwriter in good faith
believes may be sold without causing such adverse effect. If the number of
Registrable Shares to be included in the underwriting in accordance with
the foregoing is less than the total number of shares that the holders of
Registrable Shares have requested to be included, the holders holding
Registrable Shares who have requested registration shall participate in the
underwriting pro rata based upon their total ownership of shares of
Common Stock of the Company (giving effect to the conversion into
Common Stock of all securities convertible thereinto). If any holder would
thus be entitled to include more shares than such holder requested to be
registered, the excess shall be allocated among other requesting holders pro
rata based upon their total ownership of Registrable Shares.
3.3 Demand Registration Rights. If the Company
receives from Investor a written request or requests that it effect a
Registration and any related qualification or compliance with respect to all
or a part of the Registrable Securities of Investor, the Company shall:
(a) promptly give written notice of the proposed
Registration, and any related qualification or compliance, to all other
holders; and
(b) as soon as practicable, effect such Registration
and all such qualifications and compliances as may be so requested and as
would permit or facilitate the sale and distribution of all or such portion of
the Registrable Securities as are specified in such request, together with all
or such portion of the Registrable Securities of any other shareholder(s)
joining in such request as are specified in a written request given within
twenty (20) days after receipt of such written notice from the Company;
provided, however:
(1) the Company shall not be
required to effect more than two (2) Registrations pursuant to
this Section 3.3 on behalf of the undersigned and all other
persons purchasing securities of the Company on the date
hereof; provided, further, that the Company shall not be
required to effect any Registration within twelve (12) months
after the effective date of any other Registration Statement of
the Company;
(2) the value of the Registrable
Securities for which the undersigned and all other persons
purchasing securities of the Company on the date hereof
request registration hereunder shall be at least $500,000 in the
aggregate; and
(3) if at the time of any request to register
Registrable Shares pursuant to this Section 3.3, the Company is engaged or
has fixed plans approved by the Companys Board of Directors to engage
within 120 days of the time of the request in a registered public offering as
to which the Stockholders may include Registrable Shares pursuant to
Section 3.2 or is engaged in any other activity that, in the good faith
determination of the Companys Board of Directors, would be adversely
affected by the requested Registration to the material detriment of the
Company, then the Company may at its option direct that such request be
delayed for a period not in excess of 180 days from the effective date of
such offering or the date of commencement of such other material activity,
as the case may be, such right to delay a request to be exercised by the
Company not more than once in any one (1) year period.
(c) Subject to the foregoing, the Company shall use
its commercially reasonable efforts to file a registration statement covering
the Registrable Securities and other securities so requested to be Registered
as expeditiously as possible after receipt of Investors request.
3.4 Expenses of Company Registrations. The
Company shall bear all Registration Expenses incurred in connection with
any Registration, qualification or compliance pursuant to this Section 3
(exclusive of Selling Expenses).
3.5 Registration Procedures. In the case of each
Registration, qualification or compliance effected by the Company pursuant
hereto, the Company shall keep Investor advised in writing as to the
initiation of each Registration, qualification and compliance and as to the
completion thereof. At its expense, the Company shall:
(a) prepare and file with the SEC a Registration
Statement with respect to such Registrable Shares and use its
commercially reasonable efforts to cause that Registration
Statement to become and remain effective for the earlier of 270
days or until the completion of the distribution;
(b) as expeditiously as possible prepare and file
with the SEC any amendments and supplements to the
Registration Statement and the prospectus included in the
Registration Statement as may be necessary to keep the
Registration Statement effective, and comply with the
provisions of the Securities Act with respect to the disposition
of all securities covered by such Registration Statement;
(c) as expeditiously as possible furnish to each
selling Stockholder such reasonable numbers of copies of the
registration statement, each amendment and supplement
thereto, prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and
such other documents as the selling Stockholder may
reasonably request in order to facilitate the public sale or other
disposition of the Registrable Shares owned by the selling
Stockholder; and
(d) as expeditiously as possible use its commercially
reasonable efforts to register or qualify the Registrable Shares covered by
the Registration Statement under the securities or Blue Sky laws of such
states as the selling Stockholders shall reasonably request, and do any and
all other acts and things that may be necessary or desirable to enable the
selling Stockholders to consummate the public sale or other disposition in
such states of the Registrable Shares owned by the selling Stockholder;
provided, however, that the Company shall not be required in connection
with this Section 3.5 to qualify as a foreign corporation or execute a general
consent to service of process in any jurisdiction.
If the Company has delivered preliminary or final prospectuses to the
selling Stockholders and after having done so the prospectus is amended to
comply with the requirements of the Securities Act, the Company shall
promptly notify the selling Stockholders and, if requested, the selling
Stockholders shall immediately cease making offers of Registrable Shares
and return all prospectuses to the Company. The Company shall promptly
provide the selling Stockholders with revised prospectuses and, following
receipt of the revised prospectuses, the selling Stockholders shall be free to
resume making offers of the Registrable Shares.
3.6 Indemnification.
In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Subscription
Agreement, the Company will indemnify and hold harmless the
seller of such Registrable Shares, each underwriter of such
seller of such Registrable Shares, and each other person, if any,
who controls such seller or underwriter within the meaning of
the Securities Act or the Exchange Act against any losses,
claims, damages or liabilities, joint or several, to which such
seller, underwriter or controlling person may become subject
under the Securities Act, the Exchange Act, state securities or
Blue Sky laws or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration
Statement under which such Registrable Shares were registered
under the Securities Act, any preliminary prospectus or final
prospectus contained in the Registration Statement, or any
amendment or supplement to such Registration Statement, or
arise out of or are based upon the omission or alleged omission
to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; and the
Company will reimburse such seller, underwriter and each such
controlling person for any legal or any other expenses
reasonably incurred by such seller, underwriter or controlling
person in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that
the Company will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is
based upon any untrue statement or omission made in such
Registration Statement, preliminary prospectus or prospectus,
or any such amendment or supplement, in reliance upon and in
conformity with information furnished to the Company, in
writing, by or on behalf of such seller, underwriter or
controlling person specifically for use in the preparation
thereof.
In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Subscription
Agreement, each seller of Registrable Shares, severally and not
jointly, will indemnify and hold harmless the Company, each
of its dire