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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, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission file number 0-22372
Grand Toys International, Inc.
(Exact name of registrant as specified in its charter)
Nevada 87-0454155
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1710 Trans Canada Hwy., Dorval, Quebec, Canada, H9P 1H7
(Address of principal executive offices, Zip Code)
Issuer's telephone number, including area code (514) 685-2180
Securities registered pursuant to Section 12 (b) of the Exchange
Act:: None
Securities registered pursuant to Section 12 (g) of the Exchange
Act:: Common Stock $.001 par value
Check whether the Issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the Issuer was required
to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S contained herein, and no disclosure will
be contained to the best of Issuer's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. X
The Issuer's revenues for the year ended December 31, 1998 were
$ 33,177,529.
The number of shares outstanding of the Issuer's common stock is
1,577,597 (as of February 26, 1999).
The aggregate market value of the voting stock held by non
affiliates of the Issuer was approximately $3,824,036 (as of
February 26, 1999).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Grand Toys International, Inc. 1999 Notice of
Annual Meeting of Stockholders and Proxy Statement, to be filed
with the Securities and Exchange Commission within 120 days
after the close of the Issuer's fiscal year (incorporated into Part III).
GRAND TOYS INTERNATIONAL, INC.
Index to Annual Report on Form 10 - K
Filed with the Securities and Exchange Commission
Year ended December 31, 1998
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 9
Item 6. Management's Discussion and Analysis or Plan of
Operation 10
Item 7. Financial Statements 14
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 14
PART III
Items 9 - 12 15
Item 13. Exhibits, List and Reports on Form 8 - K 15
SIGNATURES 89
PART I
This form 10-K of Grand Toys International, Inc. (the
"Company") contains forward-looking statements within the
meaning of the Securities Exchange Act of 1934, as amended,
which statements are subject to risks and uncertainties. Statements
indicating that the Company "expects", "estimates" or "believes"
are forward-looking, as are all other statements concerning future
financial results, product offerings or other events that have not yet
occurred. There are many important factors that could cause
actual results or events to differ materially from those anticipated
by the forward-looking statements contained in this Form 10-K.
Unless otherwise indicated, all information contained in this report
give effect to a one-for-five reverse split effected on August 4, 1997.
Item 1.
Description of Business
Introduction
Grand Toys International, Inc. (the "Company"), through its
Canadian subsidiaries, Grand Toys Ltd. and Grand Concepts Inc.
("Grand Canada") has been engaged in the toy business in Canada
for over 38 years and currently distributes a wide variety of toys
and fashion accessories throughout Canada. Grand Canada's
business consists of two areas of operation: (i) the importation and
distribution throughout Canada, on an exclusive basis, of a wide
variety of well-known toy products and fashion accessories
including backpacks , party goods, stationary and accessories and
(ii) the sale of toy products and fashion accessories featuring
popular characters licensed to the Company. On January 1, 1999,
the Company acquired the assets of the Ark Puzzles, Inc., a
Connecticut based manufacturer of innovative puzzles. In early
January 1999 the Company secured the North American
distribution rights for the Majorette and Solido lines of die cast
vehicles and playsets. Unless the context otherwise requires,
references herein to "Grand Toys" or the "Company" include
Grand Toys International, Inc., its subsidiaries, Grand Toys (U.S.)
Ltd., Ark Puzzles, Inc., and Grand Canada and Grand Concepts,
which are subsidiaries of Grand Toys (U.S.) Ltd.
Products
Grand Canada imports for distribution in Canada select toys and
fashion accessories from manufacturers who design, develop and
manufacture such product. These products are generally the same
products that such manufacturers market and sell in other
countries. In determining which items to import, Grand Canada
examines such factors as consumer acceptance of the particular
products in other countries, Canadian consumer tastes based on
similar products distributed previously in Canada and the potential
demand for such product by Grand Canada's customers, which is
partly determined in advance by exhibiting products to its
customers prior to ordering the product from the manufacturer.
The following table sets forth certain manufacturers 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.
Manufacturer Products Distributed Product Price
by the Company Range ($)
Arbor Toys (US) Girls' accessories 4.10 - 37.00
Ark Puzzles (US) Foam Puzzles 4.95 - 74.95
Commonwealth (U.S.) Plush 3.50 - 95.00
Intex (Taiwan) Inflatable water toys 0.55 - 105.00
Majorette (France) DieCast vehicles, radio control
cars, road race sets 1.00 - 120.00
PMS International (H.K.) Spice Girl accessories .25 - 18.41
Processed Plastic (U.S.) Plastic beach & sand toys,
ride-on vehicles, etc... 0.60 - 37.95
Spectra Star Toys (U.S.) Kites 0.60 - 9.00
Tiger Electronics (U.S.) Games, hand-held games,
electronic diaries 7.10 - 115.00
Toy Biz (U.S.) Male action figures, dolls 4.95 - 48.50
Toymax (U.S.) Electronic Toys 7.25 - 94.00
Unice S.A (Spain) Balls 1.80 - 3.35
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 a person's
concept for a new product, it will pay royalties on the products
developed from such a concept that are actually sold.
All safety testing of the Company's products is done by the
manufacturers at the manufacturers' factories and is designed to
meet certain safety regulations imposed by the Canadian
governmental authorities. The Company also monitors quality
assurance procedures for its products for safety purposes at its
warehouse facilities.
Sources of Manufacturing
Grand Canada does not manufacture any of the products it
distributes. The products are imported and warehoused at the
Company's facilities and subsequently distributed to its customers
across Canada.
Approximately 87% of Grand Canada's gross sales in 1998 were
of products supplied by the following five manufacturers: Toy Biz,
Tiger Electronics, Toymax, PMS International and Processed
Plastics, whose products, respectively, accounted for 36%, 28%,
11%, 9%, and 3% of 1998 gross sales. Other than the products
from the above-mentioned manufacturers, no products of Grand
Canada from any other supplier accounted for more than 2% of
gross sales in 1998. In February 1998, Hasbro acquired Tiger
Electronics Inc., one of Grand Canada's suppliers. Grand Canada
still distributes a major portion of the Tiger line in Canada,
however, there is no guarantee that this distribution will continue
indefinitely. If one or more of the suppliers identified above were
to terminate their relationship with Grand Canada, a material
adverse effect on the Company may occur.
The imported products are manufactured for Grand Canada by
unaffiliated third parties principally located in Canada, Mexico,
Spain, Poland, the United States, China, Hong Kong, Thailand,
France and Taiwan. The manufacturers are chosen by Grand
Canada on the basis of price, availability of payment terms, quality,
reliability and the ability of a manufacturer to meet Grand
Canada's delivery requirements. The use of third-party
manufacturers enables Grand Canada to avoid incurring fixed
manufacturing costs, but also reduces its ability to control the
timing and quality of the manufacturing process. Delays in
shipments or defects in material could result in a loss of sales,
which could have a material adverse effect on Grand Canada.
To date, Grand Canada has not experienced any material delays in
the delivery of its products or any material defects in the products
manufactured for it. Grand Canada's ability to have its products
manufactured outside Canada could be affected by political or
economic disruptions, including labor strikes and disruptions in the
shipping industries. Although Grand Canada believes that
alternative sources of supply are available, any serious disruption
could materially impair Grand Canada's ability to deliver products
in a timely manner. To date, Grand Canada has not experienced
any problems as a result of any political or economic disruptions.
Grand Canada does not supervise the day-to-day manufacturing of
its products. However, prior to the commencement of
manufacturing, Grand Canada and the manufacturer work together
to design a prototype of the specific product. The manufacturer is
contractually obligated to manufacture the products in accordance
with the specifications of the prototype.
All manufacturing services performed overseas are paid for by
either letter of credit or wire transfer. Payment for such
manufacturing is made only upon the proper fulfillment of terms
established by Grand Canada, such as adherence to product
quality, design, packaging and shipping standards, as well as proper
documentation relating thereto. Most product purchases are paid
for in U.S. dollars.
Grand Canada is not a party to any long-term supply or
requirement agreements with any specific manufacturer. Grand
Canada employs a large number of toy manufacturers. These
manufacturers may subcontract for the manufacture of
components of the products that they make for Grand Canada,
with third parties who are not affiliated with Grand Canada.
Materials
The principal raw materials used in the production and sale of
Grand Canada's products are plastic, printed fabrics and paper
products. These are all currently available at reasonable prices
from a variety of sources. Because Grand Canada does not
manufacture any of its products, it does not own any specialized
tools or other production equipment.
Location
Grand Canada maintains space in a building in suburban Montreal,
Canada, where the Company's and Grand Canada's executive
offices are also maintained for warehouse, packaging and
distribution purposes. Grand Canada also keeps an inventory of
its products at such facilities enabling it to respond quickly to
customer orders.
Licensing and Distribution Agreements
Character Licenses
Grand Canada's product line includes products featuring well-
known character properties created by others. In order to obtain
the right to manufacture and sell products featuring such character
properties, Grand Canada enters into license agreements with the
owners of such properties. Under the terms of the character
property license agreements, Grand Canada pays royalties to
licensers that generally range from 5% to 12% of 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 for them.
Generally, Grand Canada's character property license agreements
provide it with the exclusive right to sell only specific products
featuring the particular character property and limit the territory in
which such products may be sold to Canada. Typically, each such
license agreement extends for one to three years and may be
renewed upon payment of certain minimum guarantees or the
attainment of specified sales levels during the term of the license.
The following table sets forth some of Grand Canada's character
licenses, the licensor for these character properties and the
products that Grand Canada markets featuring these character
properties.
Character Property Licensor Product of Grand Canada
Featuring Property
101 Dalmatians Disney Kites, Hand-Held Games, Inflatables
Bug's Life Disney Kites, Hand-Held Games
Donald Duck, Daisy,
Goofy, Pluto Disney Pools, Balls, Kites
Hercules Disney Balls, Hand-Held Games
Hunchback of Notre Dame Disney Balls, Hand-Held Games
Lion King Simba's Pride Disney Balls, Kites,
Little Mermaid Disney Balls, Kites, Hand-Held Games
Lots A Leggs Commonwealth Plush
Mickey Mouse,
Minnie Mouse Disney Pools, Balls, Kites, Finger Puppets
Mighty Ducks Disney Balls, Hand-Held Games
Mulan Disney Balls Kites
Winnie The Pooh Disney Balls, Hand-Held Games, Plastics,
Finger Puppets
Barbie E.M.G. Girls' accessories
Sesame Street E.M.G. Balls, Koosh, Kites
Sailor Moon G-Squared Balls
Star Wars G-Squared Kites, Stationary
Spice Girls PMS Fashion Accessories
Pepsi Pepsico Balls
Rugrats ViaCom Kites, Hand-Held games
Batman Warner Bros. Kites, Balls, Discs
Looney Tunes Warner Bros. Kites, Balls, Koosh
No one particular character property license resulted in sales in
excess of 5% of Grand Canada's sales for the year ended
December 31, 1998, and the loss of any one such license would
not have a material adverse effect on Grand Canada's operations.
License and Distribution Arrangements with Toy Manufacturers
Grand Canada has written license and distribution arrangements
with four of the approximately fifteen manufacturers from whom it
imports products for distribution in Canada. Grand Canada selects
products from a master product list provided to it by the
manufacturer. The purchase price, depending on the arrangement
with the supplier, consists of a fixed payment per item, and
occasionally a royalty fee. Pursuant to these agreements, Grand
Canada obtains the exclusive right to import and distribute
throughout Canada the products selected by it. Where agreements
have been entered into, they generally extend for one to five years
and are generally exclusive for a specified product or product line
within the territory outlined in the contract. Generally, under such
agreements and arrangements, Grand Canada is responsible for
arranging and paying for shipping and other related costs and
expenses. Delivery of products generally takes approximately one
to five weeks.
Marketing, Sales and Distribution
Grand Canada distributes its products throughout Canada through
its own sales representatives. Purchasers of the products include
retail chain stores, department stores, toy specialty stores and
wholesalers. Grand Canada's five largest customers are: Wal-Mart;
Toys "R" Us; Zellers; Sears; and Canadian Tire, which, for the year
ended December 31, 1998, accounted for approximately 19%, 18%, 17%, 7%
and 2%, respectively, of the gross sales for this period.
No other customer accounted for more than 2% of gross sales in 1998.
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
customers identified above was to terminate its relationship with
Grand Canada, a material adverse effect on the Company may occur.
Although Grand Canada's policy is not to sell any of its products
on consignment, in accordance with industry practice, it may sell,
on a case-by-case negotiated basis, its products on a partial
consignment basis. To date, consignment sales have been insignificant.
Grand Canada employs a sales and marketing staff of nine people,
including two of its senior managers and seven sales persons who
make on-site visits to customers for the purpose of soliciting
orders for products. It markets products at major and regional toy
trade shows in Canada. In addition, Grand Canada maintains
showrooms in its suburban Montreal and Toronto facilities where
it exhibits its toy products to customers.
Grand Canada directly, or through its salespersons, takes written
orders for its products from its customers and arranges for the
manufacture of its products as discussed above. 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.
Grand Canada generally ships products to customers within six
months of the date an order is received. The backlog at February 28, 1999
and February 29, 1998 was Canadian $15,680,957 and Canadian $2,901,966
respectively. Backlog generally represents
written customer orders that will be shipped within four months.
Because customer orders may be canceled at any time without
penalty, the Company believes that backlog may not accurately
indicate sales for any future period.
Seasonality
The Company's business is seasonal. The Company's third and
fourth quarter sales have typically been highest in anticipation of
the holiday selling season.
Product Liability
The Company maintains product liability coverage for Grand
Canada's operations in the aggregate amount of Canadian
$8,000,000. 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 with toy products that are better
known than those distributed by Grand Canada. Some of Grand
Canada's competitors are substantially larger and more diversified,
and have substantially greater financial and marketing resources
than Grand Canada. They may also have greater name recognition,
and the ability to develop and market products similar to, and
more competitively priced than, those distributed by Grand
Canada. Grand Canada competes with, among others, Irwin Toys
Ltd., Hasbro Inc., and Mattel Inc.
Government Regulation
Grand Canada is subject to the provisions of various laws, certain
of which have been enacted by the Federal Government of Canada
and others which have been enacted by the government of the
Province of Quebec and other Canadian provinces.
Federal
The laws of the government of Canada to which the Company is
subject include the Hazardous Products Act which empowers the
government to protect children from hazardous toys and other
articles. Under that legislation the government has the authority to
exclude from the market those articles which are found to be
hazardous. Grand Canada is also subject to the Consumer Packaging
and Labeling Act enacted by the government of Canada, whose
legislation prohibits the importation of prepackaged items into
Canada, as well as the sale, importation, or advertising in Canada
of items which have misleading information on their label.
Provincial
The legislation enacted by the government of the Province of
Quebec to which Grand Canada is subject includes the Consumer
Protection Act which prohibits the sale of hazardous toys and other
articles, and also requires proper labeling and instructions to be
included with the item being sold. Grand Canada is also subject to
the Charter of the French Language, which requires that all labeling
and instructions appear in the French language, as well as the
Upholstery and Stuffed Articles Act, which requires that stuffed articles
conform to hygienic norms, and obligates companies to take
measures against contamination during transportation and storage.
Similar laws exist in several cities and provinces throughout
Canada and in many jurisdictions throughout the world.
Grand Canada maintains a quality control program to ensure
compliance with all applicable laws.
Employees
As of December 31, 1998, the Company employed 48 full-time
persons, including three executive officers, and 2 contract
employees. The Company believes that its relations with its
employees are satisfactory.
Item 2.
Description Of Property:
The Company's principal executive offices are located in an
approximately 105,000 square foot facility located at 1710 Route
Trans-Canada, Dorval, Quebec, Canada, a suburb of Montreal.
The Company uses the facility for offices, showroom, assembling,
packaging, warehousing and distribution. The lease for the
premises expires on December 1, 2003 but Grand Canada has the
right to extend the lease for an additional five-year period. The
current monthly rent is Canadian $29,400 and in the extension
period will be increased each year by a percentage that is equal to
75% of the percentage increase in the consumer price index for the
greater Montreal area.
Grand Canada also leases, pursuant to a lease expiring on
December 31, 2000, approximately 9,000 square feet of showroom
and office space at 6427 Northam Drive, Mississauga, Canada, a
suburb of Toronto, at a current rental rate of approximately
Canadian $8,200 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 US
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 US. To date, no other proceedings have
occurred in connection with the Bankruptcy.
Other than discussed above or in Note 10 to the Company's
Consolidated Financial Statements included elsewhere herein, the
Company is not a party to, nor is it aware of, any other pending
litigation of a material nature.
Item 4.
Submission of Matters to a Vote of Security
Holders:
None.
PART II
Item 5.
Market For Common Equity and Related Stockholder Matters:
The Company's Common Stock is traded on the NASDAQ Small-
Cap Stock Market under the symbol "GRIN". The following table
sets forth the range of high and low closing representative bid
prices for the Company's Common Stock from January 1, 1997
through December 31, 1998 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. The prices set forth below have been adjusted
to give effect to the one-for-five reverse stock split effected on
August 4, 1997.
Common Stock Representative Bid Prices
1997 High Low
First Quarter $ 6 7/8 $ 5 15/32
Second Quarter $ 6 1/4 $ 4 5/8
Third Quarter $ 6 7/16 $ 4 1/2
Fourth Quarter $ 8 3/8 $ 5 5/8
1998
First Quarter $7 3/8 $5
Second Quarter $7 11/16 $5
Third Quarter $6 1/8 $2 5/8
Fourth Quarter $8 3/4 $1 15/16
On March 12, 1999, the last reported sales price for the Common
Stock on the NASDAQ Small Cap Market was $ 3 5/8 per share.
At February 28, 1999 there were approximately 185 record holders
of the Company's Common Stock, however those shares being
held at various clearing houses, including Cede & Company, have
not been broken down. Accordingly, the Company believes there
are many more beneficial owners of the Company's Common
Stock whose shares are held in "street name".
During the past two years the Company has not paid, and has no
current plans to pay, dividends on its Common Stock. The
Company intends to retain earnings, if any, for use in its business.
Any dividends that may be declared in the future will be
determined by the Board of Directors based upon the Company's
financial condition, results of operation, market conditions and
other factors that the Board deem relevant.
Item 6.
Management's Discussion and Analysis or Plan of Operation
Overview
Net sales consist of sales of products to customers after deduction
of customer cash discounts, 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, a currency adjustment (if
applicable), duty and other taxes, and freight and brokerage
charges. Royalties to Grand Canada's 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 its toy products if such
payments are contingent upon subsequent sales of the products.
Royalties are usually a percentage of the price at which the product
is sold and are payable once a sale is made.
Accounts receivable are receivables net of an allowance for
doubtful accounts. 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$ unless otherwise noted.
Results of Operations
The following table sets forth consolidated operations data as a
percentage of net sales for the periods indicated:
For the Twelve
Months Ended December 31,
1998 1997 1996
% % %
Net sales 100.00 100.00 100.00
Cost of goods sold 66.57 60.59 58.57
Gross profit 33.43 39.41 41.43
Operating expenses:
Selling, general and administrative 26.85 29.42 32.70
Loss (gain) on foreign exchange 3.92 .83 (0.72)
Interest 2.11 1.47 1.91
Bad debt expense .44 .37 .97
Depreciation and amortization .67 .37 .51
Total operating expenses 33.99 32.46 35.37
Earnings (loss) before income taxes (0.56) 6.96 6.06
Net earnings (loss) (0.96) 4.22% 2.14%
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997:
Net Earnings
Net loss for 1998 was $ 318,302 or $0.20 per share as compared to
net earnings of $1,575,169 or $1.00 per share in 1997, a 120% decrease.
Net Sales
Net sales in 1998 were $33,177,529 a decrease of $4,121,996 over
1997 net sales of $37,299,525 or approximately 11%. The
decrease is due to a substantial decrease of a major customer's
purchasing for the year, the decline of the Canadian dollar relative
to the U.S. dollar which impacts the translation of the sales, and
lastly as a result of the later delivery of one major product as
compared to the prior year.
Gross Profit
Gross profit in 1998 decreased by $3,607,593 from $ 14,699,141 in
1997 to $11,091,548 in 1998 or as a percentage of sales gross
profit decreased from 39.41% to 33.43%. The sales mix, as well
as a weakening of the Canadian dollar, relative to the U.S. dollar
were major contributors to the decrease.
Selling, General and Administrative
Selling, general and administrative expenses were $8,908,509 in
1998 compared to $10,972,646 in 1997. The decrease in this
category is due primarily to the decrease in advertising and
promotion expenses. Both television advertising expense, and
cooperative advertising rebates to customers were decreased. As a
percentage of net sales, selling, general and administrative expenses
decreased by 2.57% to 26.85% in 1998.
Loss on foreign exchange
The significant and uncharacteristically rapid decline in the
Canadian dollar negatively impacted results in 1998.
Comparison of the year ended December 31,
1997 to the year ended December 31, 1996:
Net Earnings
Net earnings for 1997 were $1,575,169 or $1.00 per share as
compared to $591,370 or $0.38 per share in 1996, a 166% increase.
Net Sales
Net sales in 1997 were $37,299,525 an increase of $9,653,274 over
1996 net sales of $27,646,251 or by approximately 35%. The
strength of Grand Canada's product line, coupled with effective
advertising and promotion programs meant to drive and support
the sales, had a major impact on net sales in 1997. The product
lines that primarily contributed to the sales increase were: Toy Biz
which included the Marvel line of action figures such as
Spiderman, the X-Men and others, as well as a variety of dolls
including Casey Cartwheel, Magic Stroller Surprise, and the Take
Care of Me Triplets; Tiger Electronics Inc., which included hand held
electronics games, Giga Pets, children's electronic diaries and the
"Talkboy" cassette players; and the Intex "Wet Set" inflatables line
which is a line of inflatable pools, air mattresses and other water
related accessories. Further, in 1997 Grand Canada acquired the
distribution rights of a new line, Toymax, which includes Laser
Challenge and Metal Molders.
Gross Profit
Gross profit increased by $3,244,456 from $11,454,685 in 1996 to
$14,699,141 in 1997. The gross profit increased as a direct result
of the increase in sales. The gross profit as a percentage of sales
decrease by approximately 2% in 1997. The product mix, as well
as a weakening of the Canadian dollar, were major contributors to
the decrease.
Selling, General and Administrative
Selling, general and administrative expenses were $10,972,646 in
1997 compared to $9,039,748 in 1996. The increase in this
category is due primarily to the increase in advertising and
promotion expenses. The expenditure on advertising and sales
promotion was increased to drive the increase in sales that the
Company experienced. Both television advertising expense, and
cooperative advertising rebates to customers were increased.
However, as a percentage of net sales, selling general and
administrative expenses decreased by 3.28% to 29.42% in 1997.
Liquidity and Capital Resources
The Company generally finances its operations through borrowings
under Grand Canada's Credit Agreement with its bank and by cash
flow from operations.
In March 1996, Grand Canada entered into a three year banking
arrangement with a new lending institution. Grand Canada has a
secured line of credit of $9,830,000 US ($15,000,000 CDN) to
enable it to meet its plans for growth in the future. Grand Canada
may draw down working capital advances and letters of credit in
amounts determined by percentages of its accounts receivable and
inventory. Working capital advances taken by Grand Canada bear
interest at prime plus 1 1/4%. The term of the loan is three years.
The loan, which originally was scheduled to expire on April 1,
1999, was extended to June 30, 1999. The Company is presently
renegotiating the loan with its current lender and other institutions.
Failure to obtain a credit facility would have a material adverse
effect on the Company. The loan is guaranteed by the Company.
Accounts receivable at December 31, 1998 were $7,728,979
compared to $6,407,073 at December 31, 1997. Inventory at
December 31, 1998 increased by $452,018 from a year earlier.
Working capital decreased from $3,452,266 at December 31, 1997
to $3,394,528 at December 31, 1998. Net cash used for operating
activities was $5,238,078 in 1998 compared to net cash provided
by operating activities of $694,308 in 1997 and cash for additions
to equipment was $347,008 compared to $245,891 in 1997, as a
result of purchases for the new computer system.
Grand Canada's level of accounts receivable is subject to
significant seasonal variations due to the seasonality of sales. As a
result, Grand Canada's working capital requirements are greatest
during its third and fourth quarters. In addition, to the extent
accounts receivable, inventories and guarantees and advance
payments increase as a result of growth of Grand Canada's
business, Grand Canada could require additional working capital to
fund its operations. Sources of such funding include cash flow
from operations, drawings on the financing facilities, or sales of
additional equity or debt securities by the Company.
If the funds available under the Company's financing agreements,
together with its current cash and cash equivalents are not
sufficient to meet the Company's cash needs, the Company may
from time to time seek to raise capital from additional sources,
including the extension of its current lending facilities, project-
specific financing and additional public or private debt or equity
financing. Management believes that the Company has sufficient
financing at the present time to meet its 1999 forecast.
Effects Of Inflation
The Company does not believe that inflation has had a significant
impact on its financial position or results of operations in the past
three years.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs which
were written using two digits rather than four to define the
applicable year. For example, date-sensitive software may
recognize a date using "00" as the Year 1900 rather than the Year
2000. Such misrecognition could result in system failures or
miscalculations causing disruptions of operations, including,
among others, a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
We have appointed one of our officers to develop a
comprehensive Year 2000 plan with the goal of completing
updates to key systems by December 31, 1999. We have assessed
the scope of our risks related to problems our computer systems
may have in processing date information related to the Year 2000
and believe such risks are not significant.
We have identified all of our significant internal software
applications which contain source codes that may be unable to
appropriately interpret the year 2000 and have already begun to
modify or replace those applications. We have determined that our
computer system is Year 2000 compliant.
In addition, we have inquired of certain of our suppliers and
customers about their progress in identifying and addressing
problems relating to the Year 2000. Several of our customers and
suppliers have informed us that they do not anticipate problems in
their business operations due to Year 2000 compliance issues, and
others have informed us that they have not yet addressed this issue.
We are currently unable to determine the extent to which Year
2000 issues will affect our customers and suppliers, or the extent
to which we would be vulnerable to their failure to remedy any
such problems. However, we anticipate that at least some of our
customers and suppliers will not be Year 2000 compliant when the
time comes, which will result in their inability to purchase from us
or ship to us in a timely manner. We are prepared to focus our
time and effort on monitoring those accounts, providing assistance
if possible and finding alternate sources if absolutely necessary.
Although we do not expect this to occur, the worst case scenario is
that this contingency plan may cause us to incur additional
expenses and delays in the shipments of some of our products.
New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." This Statement
establishes standards for computing and presenting earnings per
share ("EPS") and applies to all entities with publicly-held common
stock or potential common stock. This Statement replaces the
presentation of primary EPS and fully-diluted EPS with a
presentation of basic EPS and diluted EPS, respectively. Basic
EPS excludes dilution and is computed by dividing earnings
available to common shareholders by the weighted-average number
of common shares outstanding for the period. Similar to fully diluted
EPS, diluted EPS reflect the potential dilution of securities that
could share in the earnings. This Statement is not expected to have
a material effect on the Company's reported EPS amounts. The
Statement is effective for the Company's financial statements for
December 31, 1997.
Item 7.
Financial Statements:
The consolidated financial statements of the Company, including
the notes thereto, together with the report of independent certified
public accountants thereon, are presented beginning at page F-1.
Item 8.
Changes in, and Disagreements with Accountants on Accounting and Financial
Disclosure:
Not applicable.
PART III
Items 9. - 12.
The information required by Part III (Items 9 through 12) is
incorporated herein by reference from the Company's definitive
proxy statement to be filed pursuant to regulation 14A within 120
days after the close of the Company's fiscal year.
Item 13.
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, 1998 and
December 31, 1997
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Earnings for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years
Ended December 31 1998, 1997, and 1996
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 and form of
certificate evidencing redeemable Common Stock purchase warrants
* 4.2 Form of Certificate of Designations of Series A Cumulative Convertible
Redeemable Preferred Stock - To be filed by Amendment
**4.3 Form of Underwriter's Common Stock Warrant Agreement
**4.4 Form of Underwriter's Warrant Agreement
**10.2 Letter Agreement dated as of October 28, 1993, by and between the
Company and AMGO relating to the cancellation by AMGO of the
rights of AMGO to the 2,000,000 Earn Out Shares and the grant to AMGO of
1,250,000 stock options.
##10.3 Amended and Restated 1993 Stock Option Plan
**10.9 Lease of Dorval, Canada facility
**10.10 Lease of Mississauga, Canada facility
*10.11 Asset Purchase Agreement, dated as of January 1, 1999, by and
among the Company, Great American Acquisition Corp., Ark
Foundation LLC and Ofer Nissim
*10.12 Subordinated Promissory Note, dated January 1, 1999, given by 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
*21 Subsidiaries of the Company
*23 Consent of KPMG
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1998.
________________________________________________________________________
* Filed herewith
** Filed as an Exhibit to either the company's Registration
Statement (the "Registration Statement") on Form SB-2, dated January 27,
1994, or Amendment No. 1 or Amendment No. 2 to such Registration Statement.
*** Filed July 20, 1993 and incorporated herein by reference.
# Filed as an Exhibit to the Company's Registration
Statement on Form 8-A
dated September 7, 1993 and incorporated herein by reference.
## Filed as an Exhibit to the Company's Proxy Statement on Form 14A dated
May 5, 1995.
Consolidated Financial Statements of
GRAND TOYS
INTERNATIONAL, INC.
Years ended December 31, 1998, 1997 and 1996
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Grand Toys International, Inc.
We have audited the accompanying consolidated balance sheets of Grand Toys
International, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of earnings, stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards which do not differ in any material respects with United States
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance whether the financial
statements
are free of material misstatement. An audit includes examining, on a test
basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Grand Toys International, Inc. and subsidiaries as of December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
Chartered Accountants
Montreal, Canada
February 12, 1999
Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Earnings 3
Consolidated Statements of Stockholders' Equity and Comprehensive Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
GRAND TOYS INTERNATIONAL, INC.
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
Assets
Current assets:
Accounts receivable (net of allowance for doubtful
accounts; 1998 - $43,143; 1997 - $52,882) $ 7,728,979 $ 6,407,073
Due from affiliated companies 224,498 11,730
Inventory 4,318,107 3,866,089
Prepaid expenses 1,050,434 927,290
Total current assets 13,322,018 11,212,182
Equipment and leasehold improvements, net (note 2) 567,299 480,454
Other assets - 494,768
Total assets $13,889,317 $12,187,404
On behalf of the Board:
_______________________ Director
_______________________ Director
GRAND TOYS INTERNATIONAL, INC.
1998 1997
Liabilities and Stockholders' Equity
Current liabilities:
Bank indebtedness (note 3) $ 6,782,510 $ 1,985,072
Trade accounts payable 1,671,417 72,191,871
Other accounts payable and accrued liabilities 1,034,743 2,694,481
Royalties payable 60,728 178,464
Income taxes payable 378,092 710,028
Total current liabilities 9,927,490 7,759,916
Minority interest 100 100
Stockholders' equity:
Capital stock (note 4) 1,578 1,578
Additional paid-in capital 10,599,559 10,599,559
Deficit (5,991,237) (5,672,935)
Accumulated other comprehensive income -
cumulative currency translation adjustment (648,173) (500,814)
3,961,727 4,427,388
Commitments and contingencies (notes 9 and 10)
Subsequent event (note 14)
Total liabilities and stockholders' equity $13,889,317 $12,187,404
See accompanying notes to consolidated financial statements.
1998 1997 1996
Net sales $ 33,177,529 $ 37,299,525 $ 27,646,251
Cost of goods sold 22,085,981 22,600,384 16,191,566
Gross profit 11,091,548 14,699,141 11,454,685
Operating expenses:
Selling, general and
administrative 8,908,509 10,972,646 9,039,748
Foreign exchange loss (gain) 1,299,050 309,007 (198,312)
Interest 698,840 547,892 528,660
Bad debt expense 145,167 138,756 268,632
Depreciation 227,041 136,414 140,343
11,278,607 12,104,715 9,779,071
(Loss) earnings before income
taxes (187,059) 2,594,426 1,675,614
Current income taxes (131,243) 1,019,257 1,084,244
Net (loss) earnings $ (318,302) $ 1,575,169 $ 591,370
(Loss) earnings per share
(notes 1 (g) and 7):
Basic $ (0.20) $ 1.00 $ 0.38
Diluted (0.20) 0.90 0.37
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31
Acmulated
Additional other
Capital paid-in comprehensive
stock capital Deficit income Total
January 1, 1996 $ 7,705 $ 10,422,574 $ (7,839,474) $ (429,366) $ 2,161,439
Net earnings for the year - - 591,370 - 591,370
Foreign currency adjustment - - - (11,236) (11,236)
Total comprehensive income 580,134
Settlement (note 4 (c)) 183 199,817 - - 200,000
Share issue costs - (29,142) - - (29,142)
December 31, 1996 7,888 10,593,249 (7,248,104) (440,602) 2,912,431
Reverse stock split
(note 1 (g)) (6,310) 6,310 - - -
Net earnings for the year - - 1,575,169 - 1,575,169
Foreign currency adjustment - - - (60,212) (60,212)
Total comprehensive income 1,514,957
December 31, 1997 1,578 10,599,559 (5,672,935) (500,814) 4,427,388
Net loss for the year - - (318,302) - (318,302)
Foreign currency adjustment - - - (147,359) (147,359)
Total comprehensive income (465,661)
December 31, 1998 $ 1,578 $ 10,599,559 $ (5,991,237) $ (648,173) $ 3,961,727
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
Years ended December 31
1998 1997 1996
Cash flows from operating activities:
Net (loss) earnings $(318,302) $1,575,169 $ 591,370
Items not affecting cash:
Depreciation 227,041 136,414 140,343
Gain on sale of equipment - - (24,224)
Changes in operating working capital
items (note 8) (5,146,817) (1,017,275) 1,024,568
Net cash (used for) provided by
operating activities (5,238,078) 694,308 1,732,057
Cash flows from financing activities:
Increase (decrease) in bank
indebtedness 5,044,684 428,026 (1,333,235)
Decrease in loan payable to a director - (422,161) (476,889)
Repayment of long-term debt - - (55,023)
Issuance of capital stock,
net of issue costs - - 170,858
Other 62,904 54,651 (7,600)
Net cash provided by (used for)
financing activities 5,107,588 60,516 (1,701,889)
Cash flows from investing activities:
Additions to equipment (347,008) (245,891) (79,256)
Proceeds on sale of equipment - - 49,088
Decrease (increase) in other assets 477,498 (508,933) -
Net cash provided by (used for)
investing activities 130,490 (754,824) (30,168)
Net change in cash, being cash
at end of year $ - $ - $ -
Supplementary disclosure of cash flow
information
Cash paid during the year for:
Interest $ 695,896 $ 478,147 $ 528,660
Income taxes 438,440 1,276,603 182,708
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998, 1997 and 1996
Grand Toys International, Inc., a publicly held company, is organized under the
laws of the State of Nevada. Its principal business activity, through its
wholly-owned Canadian and United States operating subsidiaries, is the
distribution of
toys and related items.
1. Significant accounting policies:
(a) Principles of consolidation:
These consolidated financial statements, presented in U.S. dollars and in
accordance
with accounting principles generally accepted in the United States, include the
accounts of Grand Toys International, Inc. and its subsidiaries (the "Company").
All significant intercompany balances and transactions have been eliminated.
(b) Inventory:
Inventory is valued at the lower of cost, determined by the first in, first out
method, and net realizable value. The only significant class of inventory is
finished goods.
(c) Equipment and leasehold improvements:
Equipment and leasehold improvements are stated at cost less accumulated d
epreciation. Depreciation methods and annual rates adopted by the Company are
as follows:
Asset Method Rate
Computer equipment Declining balance 30%
Machinery and equipment Declining balance 20%
Furniture and fixtures Declining balance 20%
Trucks and automobiles Declining balance 30%
Telephone equipment Declining balance 30%
Leasehold improvements Straight-line Term of
lease plus one
renewal term
(d) Other assets:
Other assets are recorded at cost and amortized over a period of three years.
Amortization is included in cost of goods sold.
(e) Revenue:
Sales are recorded net of merchandise returns.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1998, 1997 and 1996
1. Significant accounting policies (continued):
(f) Foreign currency translation:
(i) Grand Toys Ltd. and Grand Concepts Inc., wholly-owned Canadian subsidiaries,
are classified as self-sustaining foreign operations, with assets and
liabilities translated into US dollars at the exchange rates prevailing at
the balance sheet date and sales, expenses and cash flows translated at the
average exchange rate for the year. The resulting currency translation
adjustments
are accumulated and reported as a separate component of stockholders' equity
and comprehensive income. The Company has not provided for income taxes on
foreign subsidiaries' undistributed earnings as of December 31, 1998 because
such earnings, for the most part, are intended to be reinvested in these
subsidiaries.
(ii) Other monetary assets and liabilities denominated in foreign currencies
are
translated at the exchange rates prevailing at the balance sheet date.
Revenues and expenses denominated in foreign currencies are translated at
the rates of exchange prevailing at the transaction dates. All exchange
gains and losses are included in income.
(g) Earnings (loss) per share:
(i) Effective August 4, 1997, the stock of the Company underwent a one-for-five
reverse stock split. For purposes of earnings per share calculations
(note 7), capital stock (note 4(d)) and stock options and warrants
(note 5), the comparative numbers of shares have been restated to reflect
the split.
(ii) Basic earnings (loss) per share is determined by dividing the weighted-
average
number of common shares outstanding during the period into net earnings (loss).
(iii) Diluted earnings (loss) per share gives effect to all potentially
dilutive
common shares that existed at December 31, 1998.
(h) Stock option plan:
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees. As such, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeds the
exercise price. FASB Statement No. 123, which became effective in 1996, allows
entities to continue to apply the provisions of APB Opinion No. 25
and requires pro-forma net earnings and pro-forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in FASB Statement No. 123 had been
applied. This disclosure is included in the notes to these statements.
1. Significant accounting policies (continued):
(i) Advertising and promotion:
All costs associated with advertising and promoting products are expensed in
the period incurred.
(j) Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(k) Comprehensive income:
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income.
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and cumulative currency translation
adjustments and is presented in the consolidated statements of stockholders'
equity and comprehensive income. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
2. Equipment and leasehold improvements:
1998 1997
Accumulated Accumulated
Cost depreciation Cost depreciation
Computer equipment $1,094,822 $670,028 $909,968 $576,499
Machinery and equipment 432,770 356,343 358,967 321,939
Furniture and fixtures 458,318 427,574 492,979 449,114
Trucks and automobiles 80,395 78,122 85,809 82,342
Telephone equipment 38,455 34,261 41,044 35,448
Leasehold improvements 323,042 294,175 340,997 283,968
$ 2,427,802 $ 1,860,503 $ 2,229,764 $ 1,749,310
Net book value $ 567,299 $ 480,454
3. Bank indebtedness:
The Company has a secured line of credit of $9,830,000 (CAD$15,000,000) and can
draw down working capital advances and letters of credit in amounts determined
by percentages of its accounts receivable and inventory. The working capital
advances are secured by all of the assets of the Company. The effective
interest
rate at December 31, 1998 on the Canadian denominated line was 9.25% (8.00% at
December 31, 1997),
which represents prime plus 1 1/4% for both years.
As at December 31, 1998, the unused portion of the credit facility is
approximately
$1,661,000.
4. Capital stock:
(a) Authorized capital:
50,000,000, $0.001 par value voting common shares;
5,000,000, $0.001 par value preferred shares, issuable in series with such
designation, rights and preferences as may be determined from time to time by
the Board of Directors.
(b) Issued and outstanding:
1998 1997
1,577,597 common shares (1997 - 1,577,597 common
shares) (note 1 (g)) $ 1,578 $ 1,578
(c) Share transactions:
(i) Settlement:
-December 1996:
183,486 shares were issued for a settlement valued at $200,000.
Legal costs incurred in the amount of $29,142 have been charged to additional
paid-in capital.
(ii) Reverse stock split:
- -August 1997:
One-for-five reverse stock split occurred reducing the number of outstanding
shares to 1,577,597.
4. Capital stock (continued):
(d) Summary of common stock outstanding:
A summary of the number of common stock outstanding and share transactions
since January 1, 1996 is as follows:
January 1, 1996 1,540,900
Settlement 36,697
December 31, 1996, 1997 and 1998 1,577,597
5. Stock options and warrants:
The Company has a stock option plan (the "Option Plan") which provides for the
issuance of up to 300,000 options to acquire the common stock of the Company.
Stock options granted under the Option Plan may be Incentive Stock Options
under the requirements of the Internal Revenue Code, or may be Non-statutory
Stock Options which do not meet such requirements. Options may be granted under
the Option Plan to, in the case of Incentive Stock Options, all employees
(including officers) of the Company, or, in the case of Non-statutory Stock
Options, all employees (including officers) or non-employee directors of the
Company.
Options have also been granted outside the Option Plan to two directors, key
executives, outside consultants and a supplier. As well, warrants have been
issued to a director in his capacity as an investment banker, a distributor and
to the underwriter pursuant to the public offering. Some of these options and
warrants have either expired or were forfeited during the year.
Under each plan, the exercise price of each option equals the market price of
the Company's stock on the grant date and an option's maximum term is ten years.
The range of exercise prices for stock options and warrants outstanding at
December 31, 1998 is $2.875 to $37.50.
5. Stock options and warrants (continued):
Details of the options and warrants, all of which are exercisable at year-end,
are as follows:
Weighted-
average
Other exercise
Option stock price per
plan options Warrant Total share
January 1, 1996 180,100 623,000 320,000 1,123,100 $0.95
Granted 17,700 524,011 - 541,711 0.38
Forfeited (133,300) (151,000) - (284,300) (0.64)
Expired - - (40,000) (40,000) (1.50)
January 1, 1997 64,500 996,011 280,000 1,340,511 0.77
Granted - 1,114,000 - 1,114,000 4.39
Forfeited - (450,000) - (450,000) (18.67)
Expired - - (230,000) (230,000) (40.00)
January 1, 1998 64,500 1,660,011 50,000 1,774,511 6.98
Granted 14,000 284,000 - 298,000 (5.50)
Forfeited - (104,239) - (104,239) (4.51)
Expired (34,400) (5,000) - (39,400) (11.60)
Reclassified - (55,000) 55,000 - -
December 31, 1998 44,100 1,779,772 105,000 1,928,872 $ 6.79
Pro-forma information regarding net earnings and earnings per share is required
by FASB Statement No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that statement.
The fair value for these options was estimated at the grant date using a
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 4.68% (5.95% to 6.07% in 1997; 5.65% to 7.10% in 1996),
volatility
factor of the expected market price of the Company's common stock of 114%
(40% in both 1997 and 1996) and a weighted-average expected life of the option
of
3 years (3 years in 1997; 4 years in 1996), with no dividends.
5. Stock options and warrants (continued):
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of
traded options, and because changes in the subjective input
assumptions can materially affect their fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure
of the fair value of its stock options. The weighted-average grant date fair
values of options granted in 1998, 1997 and 1996 are $3.85, $1.48 and $0.67,
respectively.
The pro-forma losses utilizing the fair value assumptions above for the years
1998, 1997 and 1996 would be $1,465,142, $75,551 and $1,212,738, respectively.
Furthermore, pro-forma loss per share would be $0.93, $0.05 and $0.16,
respectively.
6. Income taxes:
(a The effective tax rate for the Company is reconcilable to statutory tax rates
as follows:
1998 1997 1996
(%) (%) (%)
U.S. Federal statutory tax
rate 35.0 35.0 35.0
State income tax rate,
net of federal tax benefits 10.0 10.0 10.0
U.S. statutory tax rate 45.0 45.0 45.0
Changes to U.S. tax rate
resulting from:
Effect of foreign tax
rate differences (3.9) (5.0) (4.0)
Expenses producing no tax benefit (45.2) 27.4 19.4
Tax benefit of utilization of
loss carry forward - (26.1) -
Other 4.1 0.5 -
- (3.2) 15.4
Valuation allowance for
deferred tax assets
allocated to income tax expense - - 4.3
Effective tax rate - 41.8 64.7
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1998, 1997 and 1996
6. Income taxes (continued):
(b) The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1998 are presented below:
Non-current:
Net operating loss carry forwards (note 6 (c)) $ 1,825,000
Net deferred tax asset before valuation allowance 1,825,000
Valuation allowance 1,825,000
Total net deferred tax asset $ -
The valuation allowance increased by $35,000 in 1998 (1997 and 1996 - decrease
of $991,000 and $594,000,respectively) to reflect an adjustment to deferred tax
assets related to loss carry forwards used in the year in the United States.
(c) As of December 31, 1998, the Company has $5,213,000 of net operating losses
available for tax purposes to reduce future taxable income in the United States,
beginning to expire in 2009.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1998, 1997 and 1996
7. Earnings per share:
During the fourth quarter of 1997, the Company adopted FASB Statement No. 128
"Earnings per share". The new standard had no impact on the previously
presented basic earnings per share calculation for 1996. The diluted earnings
per share calculation for 1996 has been restated to reflect the new standard.
Income Shares Per share
(numerator) (denominator) amount
December 31, 1996
Basic EPS
Earnings available to
common stockholders $ 591,370 1,543,958 $ 0.38
Effect of dilutive securities
Options - 38,701 (0.01)
Diluted EPS
Earnings available to
common stockholders
and assumed conversions 591,370 1,582,659 0.37
December 31, 1997
Basic EPS
Earnings available to
common stockholders $ 1,575,169 1,577,597 $ 1.00
Effect of dilutive securities
Options - 174,117 (0.10)
Diluted EPS
Earnings available to
common stockholders
and assumed conversions 1,575,169 1,751,714 0.90
December 31, 1998
Basic EPS
Earnings available to
common stockholders $ (318,302) 1,577,597 $(0.20)
Effect of dilutive securities
Options - - -
Diluted EPS
Earnings available to
common stockholders
and assumed conversions (318,302) 1,577,597 (0.20)
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1998, 1997 and 1996
7. Earnings per share (continued):
Options to purchase 1,823,872 shares (1997 - 601,011) and warrants to purchase
105,000 shares (1997 - 40,000) of the Company's common stock were not included
in the diluted earnings per share calculation as their effect is anti-dilutive.
The subsequent event referred to in note 14 would have materially changed the
number of potential common shares outstanding if the transaction had occurred
before the end of the year.
8. Changes in operating working capital items:
1998 1997 1996
(Increase) decrease in
accounts receivable $(1,709,085) $(1,369,171) $1,225,804
(Increase) decrease in due from
affiliated companies (213,563) 309,521 (326,636)
Increase in inventory (713,181) (1,452,278) (816,379)
Increase in prepaid expenses (182,604) (433,359) (397,466)
(Decrease) increase in trade accounts
payable (397,790) 64,278 282,462
(Decrease) increase in other
accounts payable and accrued
liabilities (1,527,231) 2,267,776 254,227
(Decrease) increase in royalties
payable (109,115) (166,366) 105,403
(Decrease) increase in income
taxes payable (294,248) (237,676) 697,153
$ (5,146,817) $ (1,017,275) $ 1,024,568
9. Commitments:
The Company has entered into long-term leases with minimum annual rental
payments approximately as follows:
1999 $ 392,000
2000 378,000
2001 276,000
2002 253,000
2003 236,000
Thereafter 255,000
$ 1,790,000
Rent expense for the years ended December 31, 1998, 1997 and 1996 amounted to
approximately $224,000; $201,000 and $174,000 respectively.
10. Contingencies:
(a) A lawsuit for alleged breach of contract has been filed against the Canadian
subsidiary by a sales representative. In the opinion of management and counsel
to the Company has advised, based on the available facts that the case will
be settled. However, at this point in time it is difficult to ascertain or
estimate the value of the settlement, if any. The Company has been named in
two lawsuits by a supplier of and a lessor to a former US subsidiary, Grand
Group
Inc., for recovery of amounts totalling approximately $300,000, although the
Company is not party to either contract.
In the opinion of management, there have been no recent developments and it is
difficult to ascertain the likelihood of an unfavorable outcome to the Company.
(b) The Company's Canadian subsidiary is also contingently liable for
outstanding letters of credit of approximately $1,386,000 as at
December 31, 1998.
11. Employee benefit plans:
The Company has a group retirement savings plan for its Canadian employees. The
Company contributes to this plan the lesser of (a) 50% of the employee's
contribution to this plan; (b) 3% of the employee's gross earnings; or (c) Cdn.
$3,000 per employee. During the year, the Company contributed approximately
$24,000 (1997 - $27,600; 1996 - $28,600) to the retirement savings plan for its
Canadian employees.
12. Segment information:
(a) Industry and geographic information:
The Company operates primarily in one industry segment which includes the
distribution of toys and related items. Virtually all sales are to Canadian
customers.
(b) Other information:
Sales of the Company's toy products to five customers accounted for 64% of the
Company's gross sales for 1998, two of which represent over 38% or approximately
$13,246,000. For both years 1997 and 1996, five customers accounted for
approximately 74% of gross sales, two of which represented over 43% and 47% or
$16,935,000 and $13,762,000 respectively.
Sales of toys purchased from the Company's two largest manufacturers and
suppliers of toys in aggregate accounted for 64% of gross sales for 1998. The
Company's two largest suppliers accounted for 67% and 75% of gross sales for
1997 and 1996 respectively.
13. Financial instruments:
(a) Foreign currency risk management:
The Company enters into forward foreign exchange contracts to minimize its
foreign currency exposure on purchases. The contracts oblige the Company to buy
US
dollars in the future at predetermined exchange rates. The contracts are not
used for trading purposes. The Company's policy is to enter into forward
foreign
exchange contracts on a portion of its purchases anticipated in the next selling
season. Gains and losses on forward exchange contracts are recorded in income
and generally offset transaction gains or losses on the foreign currency cash
flows which they are intended to hedge.
At December 31, 1998, the Company had purchased a contract to purchase
US$5,000,000 in the next two months at a rate of $1.525. The fair market value
of this contract at December 31, 1998 is approximately $42,000.
(b) Fair values:
Fair value estimates are made as of a specific point in time, using available
information about the financial instruments. These estimates are subjective in
nature and often cannot be determined with precision.
The fair value of the Company's accounts receivable, due from affiliated
companies,
bank indebtedness, trade and other payables approximate their carrying value due
to the immediate or short-term maturity of these financial instruments.
(c) Credit risk:
For the year ended December 31, 1998, approximately 64% of the Company's sales
were made to five unrelated companies. Three customers, representing
approximately
54% of total sales, individually accounted for more than 10% of total sales.
The Company regularly monitors its credit risk exposure to these and other
customers
and takes steps to mitigate the risk of loss.
(d) Interest rate risk:
The Company's principal exposure to interest rate risk is with respect to its
short-term financing which bears interest at floating rates.
14. Subsequent event:
Effective January 1, 1999, the Company acquired all of the assets of Ark
Foundation
LLC for $2,500,000 consisting of the Company's convertible preferred stock
having
a stated value of $1,000,000 and an interest bearing promissory note of
$1,500,000. The transaction will be accounted for using the purchase method.
Ark Foundation LLC is engaged in the
business of designing, developing, producing, marketing, distributing and
selling
puzzles and puzzle-related products to merchandisers. Advances are outstanding
to Ark Foundation LLC at December 31, 1998 in the amount of $211,311.
15. Uncertainty due to the Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two digits
rather
than four to identify a year. Date-sensitive systems may recognize the year
2000
as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date.
The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
16. Comparative figures:
Certain comparative figures have been reclassified to conform with the financial
statement presentation adopted in the current year.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Exhibits to
Form 10 - K
of
GRAND TOYS INTERNATIONAL, INC.
For the Fiscal Year
Ended December 31, 1998
Exhibit 3.2
Certificate to Set Forth Designations,
Voting Powers, Preferences, Limitations,
Restrictions, and Relative Rights of
Series A 5% Cumulative Convertible
Redeemable Preferred Stock
(Under Section 78.195 of the General Corporation Law
of the State of Nevada)
It is hereby certified that:
I. The name of the corporation is GRAND TOYS INTERNATIONAL, INC. (the
"Corporation").
II. Set forth hereinafter is a statement of the voting powers, preferences,
limitations, restrictions and relative rights of shares of Series A 5%
Cumulative
Convertible Redeemable Preferred Stock hereinafter designated, as contained in
a
resolution of the Board of Directors of the Corporation, pursuant
to a provision of the Articles of Incorporation of the Corporation permitting
the issuance of said Series A 5% Cumulative Convertible Redeemable Preferred
Stock by resolution of the Board of Directors:
1. Designation; Number of Shares.
The designation of said series of Preferred Stock shall be Series A 5%
Cumulative
Convertible Redeemable Preferred Stock (the "Series A Preferred Stock"). The
number of shares of Series A Preferred Stock shall be 200,000. Each share of
Series A Preferred Stock shall have a stated value equal to $5.00 per share (as
adjusted for any stock dividends, combinations or splits with respect to such
shares)(the "Stated Value").
2. Dividends.
(a) The holders of outstanding shares of Series A Preferred Stock shall be
entitled
to receive preferential dividends in cash, out of any funds of the Corporation
legally available at the time for declaration of dividends, before any dividend
or other distribution will be paid or declared and set apart for payment on any
shares of any Common Stock or other class of stock junior to the Series A
Preferred
Stock (the Common Stock and such junior stock being hereinafter collectively
the
"Junior Stock") if, as and when declared at the rate of 5% per annum on the
Stated Value per share, payable quarterly on the first day of the month
following
the end of each calendar quarter, commencing on April 1, 1999.
(b) The dividends on the Series A Preferred Stock at the rates provided above
shall be cumulative whether or not earned, so that if at any time full
cumulative
dividends at the rate aforesaid on all shares of the Series A Preferred Stock
then outstanding from the date from and after which dividends thereon are
cumulative to the end of the quarterly dividend period next preceding such time
shall not have been paid or declared and set apart for payment, or if the full
dividend on all such outstanding Series A Preferred Stock for the then current
dividend period shall not have been paid or declared and set apart for payment,
the amount of the deficiency shall be paid or declared and set apart for payment
(but without interest thereon) before any sum shall be set apart for or applied
by the Corporation or a subsidiary of the
Corporation to the purchase, redemption or other acquisition of any shares of
any other class of stock and
before any dividend or other distribution shall be paid or declared and set
apart
for payment on any Junior Stock and before any sum shall be set aside for or
applied to the purchase, redemption or other acquisition of Junior Stock.
(c) Dividends on all shares of the Series A Preferred Stock shall begin to
accrue
and be cumulative from and after the date of issuance thereof. A dividend
period
shall be deemed to commence
on the day following a quarterly dividend payment date herein specified and to
end
of the next succeeding quarterly dividend payment date herein specified.
3. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding-up of the Corporation, whether
voluntary or involuntary, the holders of the Series A Preferred Stock shall be
entitled to receive, after any required payment or distribution shall be made
on the Series A Preferred Stock, but before any payment or
distribution shall be made on the Junior Stock, out of the assets of the
Corporation available for distribution to stockholders, the Stated Value per
share
of Series A Preferred Stock and all accrued and unpaid dividends to and
including
the date of payment thereof. Upon the payment in full of all amounts
due to holders of the Series A Preferred Stock, the holders of the Common Stock
of the Corporation and any other class of Junior Stock shall receive all
remaining
assets of the Corporation legally available for
distribution. If the assets of the Corporation available for distribution to
the
holders of the Series A Preferred Stock shall be insufficient to permit payment
in full of the amounts payable as aforesaid to the
holders of Series A Preferred Stock upon such liquidation, dissolution or
winding-up, whether voluntary or involuntary, then all such assets of the
Corporation shall be distributed, to the exclusion of the holders of
shares of Junior Stock, ratably among the holders of the Series A Preferred
Stock.
(b) Neither the purchase nor the redemption by the Corporation of shares of any
class of stock, nor the merger or consolidation of the Corporation with or into
any other corporation or corporations, nor the sale or transfer by the
Corporation
of all or any part of its assets, shall be deemed to be a liquidation,
dissolution
or winding-up of the Corporation for the purposes of this paragraph 3.
Holders of the Series A Preferred Stock shall not be entitled, upon the
liquidation,
dissolution or winding-up of the Corporation, to receive any amounts with
respect to such stock other than the amounts referred
to in this paragraph 3.
4. Conversion into Common Stock. Shares of Series A Preferred Stock shall have
the
following conversion rights and obligations:
(a) Subject to the further provisions of this paragraph 4, each holder of
shares of Series A Preferred Stock shall have the right, from time to time
commencing on and after January 1, 2000 (the "Conversion Commencement Date"), to
convert some or all such shares into fully paid and non-assessable
shares of Common Stock of the Corporation (as defined in subparagraph 4(l)
below)
determined in accordance with the Conversion Price provided in paragraph 4(e)
below; provided however, that not more than 50,000 shares of Series A Preferred
Stock may be converted into Common Stock during any six month period following
the Conversion Commencement Date and not more than 100,000 shares of Series
A Preferred Stock may be converted into Common Stock during any one year period
following the Conversion Commencement Date.
(b) Subject to the further provisions of this paragraph 4, the Corporation shall
have the right to cause each holder of shares of Series A Preferred Stock to
convert all or such portion of such
shares into fully paid and non-assessable shares of Common Stock of the
Corporation
at the Conversion Price during the thirty day period following the date on
which
the Closing Bid Price equals or exceeds
140% of the Stated Value (the "Mandatory Conversion Period"). Notice of such
mandatory conversion of the Series A Preferred Stock pursuant to this paragraph
4(b) shall be given by mail or in such other manner
as may be prescribed by resolution of the Board of Directors of the Corporation
not later than the expiration of the Mandatory Conversion Period. As
applicable,
the notice shall specify the number of
shares to be converted, the date of conversion and the Conversion Price per
share.
The "Closing Bid Price" shall mean the closing bid price of the Corporation's
Common
Stock as reported by NASDAQ (or, if not reported by NASDAQ, as reported by such
other exchange or market where traded).
(c) Each share of Series A Preferred Stock shall automatically convert into
fully paid and non-assessable shares of Common Stock of the Corporation at the
Conversion Price on the fourth anniversary of the date of issuance of a share
of Series A Preferred Stock.
(d) If, on the date of conversion of any shares of Series A Preferred Stock
(the
"Evaluation Date") the Closing Bid Price shall be less than the Conversion
Price,
then within ten days after the Corporation's receipt of a notice of conversion,
the Corporation shall pay to the holder of the Series A
Preferred Stock so converted an amount of cash determined by multiplying (i) the
number of shares of Series A Preferred Stock that have been converted by (ii)
the
positive difference, if any, between (A) the Conversion Price and (B) the
Closing Bid Price on the Evaluation Date.
(e) The number of shares of Common Stock issuable upon conversion of each share
of Series A Preferred Stock shall equal (i) the Stated Value per share divided
by
(ii) the Conversion Price.
The "Conversion Price" shall be equal to $5.00 per share of Common Stock,
subject to adjustment as herein provided.
(f) The holder of any certificate for shares of Series A Preferred Stock
desiring
to convert any of such shares or whose shares where converted at the election of
the Corporation pursuant to the provisions of this paragraph 4 shall surrender
such certificate, at the principal office of any transfer
agent for said stock (the "Transfer Agent"), with a written notice of such
election
to convert (if such conversion is voluntary) such shares into Common Stock duly
filled out and executed, and if necessary under the circumstances of such
conversion, with such certificate properly endorsed for, or accompanied
by duly executed instruments of, transfer (and such other transfer papers as
said
Transfer Agent may reasonably require). The holder of the shares so surrendered
for conversion shall be entitled to receive within three (3) business days of
the
Notice of Conversion (except as otherwise provided herein) a
certificate or certificates, which shall be expressed to be fully paid and
non-assessable, for the number of shares of Common Stock to which such
stockholder shall be entitled
upon such conversion, registered in the name of such holder or in such other
name
or names as such stockholder in writing may specify. In the
case of any Series A Preferred Stock which is converted in part only, the holder
of shares of Series A Preferred Stock shall upon delivery of the certificate or
certificates representing Common Stock also receive a new share certificate
representing the unconverted portion of the shares of Series A Preferred
Stock. Nothing herein shall be construed to give any holder of shares of Series
A Preferred Stock surrendering the same for conversion the right to receive any
additional shares of Common Stock or other property which results from an
adjustment
in conversion rights under the provisions of subparagraphs (g)
or (h) of this paragraph 4 until holders of Common Stock are entitled to
receive
the shares or other property giving rise to the adjustment.
In the case of the exercise of the conversion rights set forth in paragraphs 4
(a),
the conversion privilege shall be deemed to have been exercised, and the shares
of Common Stock issuable upon such conversion shall be deemed to have been
issued,
upon the date of receipt by such Transfer Agent for conversion of the
certificate
for such shares of Series A Preferred Stock. In the case of the automatic
conversion set forth in paragraphs 4(b) and 4(c), conversion shall be deemed
to have occurred as provided in paragraphs 4(b) and 4(c). The person or entity
entitled to receive Common Stock issuable upon such conversion shall on the
date
such conversion privilege is deemed to have been exercised and thereafter be
treated for all purposes as the record holder of such Common Stock and shall on
the same date cease to be treated for any purpose as the record holder of such
shares of Series A Preferred Stock so converted.
Notwithstanding the foregoing, if the stock transfer books are closed on the
date such shares are received by the Transfer Agent, the conversion privilege
shall be deemed to have been exercised, and the person or entity shall be
treated
as a record holder of shares of Common Stock, on the next
succeeding date on which the transfer books are open. The Corporation shall not
be required to deliver certificates for shares of its Common Stock or new
certificates
for unconverted shares of its Series A Preferred Stock while the stock transfer
books for such respective classes of stock are duly closed for any
purpose; but the right of surrendering shares of Series A Preferred Stock for
conversion shall not be suspended during any period that the stock transfer
books
of either of such classes of stock are closed.
Upon the conversion of any shares of Series A Preferred Stock, no adjustment
or payment shall be made with respect to such converted shares on account of any
dividend on shares of such stock or on account of any dividend on the Common
Stock,
except that the holder of such converted shares shall be entitled to be paid any
dividends declared on shares of Common Stock after conversion thereof.
If the Corporation shall at any time be liquidated, dissolved or wound-up, the
conversion privilege shall terminate at the close of business on the last
business day next preceding the effective date
of such liquidation, dissolution or winding-up.
The Corporation shall not be required, in connection with any conversion of
Series A Preferred Stock, to issue a fraction of a share of its Common Stock nor
to deliver any stock certificate representing a fraction thereof, but in lieu
thereof the Corporation may make a cash payment equal to such
fraction multiplied by the Closing Bid Price on the date the conversion right
was triggered.
(g) The Conversion Rate shall be subject to adjustment from time to time as
follows:
(i) In case the Corporation shall at any time (A) declare any dividend or
distribution on its Common Stock or other securities of the Corporation other
than the Series A Preferred Stock, (B) split or subdivide the outstanding Common
Stock, (C) combine the outstanding Common Stock into a smaller number of shares
or (D) issue by reclassification of its Common Stock any shares or other
securities of the Corporation,
then, in each such event, the Conversion Rate shall be adjusted proportionately
so that the holders of Series A Preferred Stock shall be entitled to receive the
kind and number of shares or other securities of the Corporation which such
holders
would have owned or have been entitled to receive after the happening of any of
the events described above had such
shares of Series A Preferred Stock been converted immediately prior to the
happening
of such event (or any record date with respect thereto). Such adjustment shall
be made whenever any of the events listed above shall occur. An adjustment made
to the Conversion pursuant to this paragraph 4(g)(i) shall become effective
immediately after the effective date of the event retroactive to the record
date, if any, for the event.
(h) (i) In case of any consolidation or merger of the Corporation with or into
any other corporation (other than a merger or consolidation in which the
Corporation is the surviving or continuing corporation and which does not result
in any reclassification, conversion or change of the outstanding shares of
Common
Stock), then, unless the right to convert shares of Series A Preferred Stock
shall
have terminated, as part of such consolidation or merger, lawful provision
shall be made so that holders of Series A
Preferred Stock shall thereafter have the right to convert each share of Series
A Preferred Stock into the kind and
amount of shares of stock and/or other securities or property receivable upon
such
consolidation or merger by a holder of the number of shares of Common Stock into
which such shares of Series A Preferred Stock might have been converted
immediately prior to such consolidation or merger. Such provision shall also
provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in paragraph (g) of this paragraph 4. The foregoing
provisions of this paragraph 4(h) shall similarly apply
to successive consolidations and mergers.
(ii) In case of any sale or conveyance to another person or entity of the
property
of the Corporation as an entirety, or substantially as an entirety, in
connection
with which shares or other securities or cash or other property shall be
issuable,
distributable, payable or deliverable for outstanding shares of Common Stock,
then,
unless the right to convert such shares shall have terminated, lawful provisio
shall be made so that the holders of Series A Preferred Stock shall thereafter
have
the right to convert each share of the Series
A Preferred Stock into the kind and amount of shares of stock or other
securities
or property that shall be issuable, distributable, payable or deliverable upon
such
sale or conveyance with respect to each share of Common Stock immediately prior
to such conveyance.
(i) Whenever the number of shares to be issued upon conversion of the Series A
Preferred Stock is required to be adjusted as provided in this paragraph 4, the
Corporation shall forthwith compute the adjusted number of shares to be so
issued
and prepare a certificate setting forth such adjusted
conversion amount and the facts upon which such adjustment is based, and such
certificate shall forthwith be filed with the Transfer Agent for the Series A
Preferred Stock and the Common Stock; and the
Corporation shall mail to each holder of record of Series A Preferred Stock
notice of such adjusted conversion price.
(j) In case at any time the Corporation shall propose:
(i) to pay any dividend or distribution payable in shares upon its Common Stock
or make any distribution (other than cash dividends) to the holders of its
Common Stock; or
(ii) to offer for subscription to the holders of its Common Stock any
additional shares of any class or any other rights; or
(iii) any capital reorganization or reclassification of its shares, or the
consolidation or merger of the Corporation with another corporation; or
(iv) the voluntary dissolution, liquidation or winding-up of the Corporation;
then, and in any one or more of said cases, the Corporation shall cause at least
fifteen (15) days prior notice of the date on which (A) the books of the
Corporation
shall close, or a record be taken for such stock dividend, distribution or
subscription rights, or (B) such capital reorganization, reclassification,
consolidation, merger, dissolution, liquidation or winding-up shall take place,
as the case may be, to be mailed to the Transfer Agent for the Series A
Preferred Stock and for the Common Stock and to the
holders of record of the Series A Preferred Stock.
(k) So long as any shares of Series A Preferred Stock shall remain outstanding
and the holders thereof shall have the right to convert the same in accordance
with provisions of this paragraph 4, the Corporation shall at all times reserve
from the authorized and unissued shares of its Common Stock a
sufficient number of shares to provide for such conversions.
(l) The term "Common Stock" as used in this paragraph 4 shall mean Common Stock
of the Corporation as such stock is constituted at the date of issuance thereof
or as it may from time to
time be changed, or shares of stock of any class, other securities and/or
property
into which the shares of Series A Preferred Stock shall at any time become
convertible pursuant to the provisions of this paragraph 4.
(k) The Corporation shall pay the amount of any and all issue taxes which may be
imposed in respect of any issue or delivery of stock upon the conversion of any
shares of Series A Preferred Stock, but all transfer taxes that may be payable
in respect of any change of ownership of Series
A Preferred Stock, or any rights represented thereby, or of stock receivable
upon
conversion thereof, shall be paid by the person or persons surrendering such
stock for conversion.
5. Voting Rights.
Except as required by applicable law, shares of Series A Preferred Stock shall
not entitle its holder to any voting rights, but such holder shall be entitled
to a notice of any stockholders' meeting in
accordance with the By-laws of the Corporation.
6. Status of Converted or Redeemed Stock.
In case any shares of Series A Preferred Stock shall be converted pursuant to
paragraph 4 hereof, or otherwise repurchased or reacquired, the shares so
redeemed,
converted or reacquired shall resume the status of authorized but unissued
shares
of Preferred Stock and shall no longer be designated as
Series A Preferred Stock.
Signed on this 29th day of December, 1998.
GRAND TOYS INTERNATIONAL, INC.
By:_/s/ Ronald Goldenberg_____________
Ronald Goldenberg
Vice President, Chief Financial
Officer and Secretary
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On December 29, 1998, Ronald Goldenberg personally appeared before me, a Notary
Public for the State and County aforesaid, as Vice President, Chief Financial
Officer and Secretary of GRAND TOYS INTERNATIONAL, INC., who acknowledged that
he executed the above instrument.
__/s/ Paul J. Pollock____________
Notary Public
Exhibit 10.11
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated this 30th day of December, 1998 by and between
GRAND TOYS INTERNATIONAL, INC., a Nevada corporation ("Grand"), GREAT AMERICAN
ACQUISITION CORP., a Delaware corporation ("Buyer"), and ARK FOUNDATION LLC, a
Connecticut limited liability company ("Seller") and OFER NISSIM ("Nissim").
RECITALS
WHEREAS, the Seller is engaged in the business of designing, developing,
producing,
marketing, distributing and selling
puzzles and puzzle related products to merchandisers; and
WHEREAS, the Seller desires to sell to the Buyer, and the Buyer desires to
purchase
from the Seller, the Assets owned by the Seller and used in connection with the
Business.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants,
representations, warranties and agreements hereinafter set forth, the parties
hereto agree as follows:
ARTICLE I.
DEFINITIONS
1.1. Definitions: When used herein, the following terms shall have the meanings
set forth below:
"Acquisition Proposal" shall have the meaning set forth in Section 6.2.
"Affiliate" shall mean, with respect to any given Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control
with, such Person. The term "control" (including, with correlative meaning, the
terms "controlled by" and
"under common control with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction
of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise.
"Assets" shall have the meaning set forth in Section 2.1(a).
"Assumed Liabilities" shall have the meaning set forth in Section 2.4(a).
"Balance Sheet" shall have the meaning set forth in Section 4.5(a).
"Benefit Arrangements" shall have the meaning set forth in Section 4.15.
"Business" shall have the meaning set forth in the recitals.
"Cash" shall mean cash and cash equivalents (including marketable securities and
short term investments).
"CERCLA" shall have the meaning set forth in Section 4.9(c).
"Closing" shall have the meaning set forth in Article III.
"Closing Date" shall have the meaning set forth in Article III.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and any
successor statute thereto.
"Contract" shall mean any contract, agreement, lease, license, arrangement,
commitment, sales order, purchase order or any claim or right or any benefit or
obligation arising thereunder or resulting therefrom and currently in effect,
whether oral or written.
"Employee Benefit Plan" shall mean any (i) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan,
(ii) qualified defined contribution
retirement plan or arrangement which is an Employee Pension Benefit Plan,
(iii) qualified defined benefit retirement plan or arrangement which is an
Employee Pension Benefit Plan (including any Multiemployer
Plan), or (iv) Employee Welfare Benefit Plan or material fringe benefit plan or
program.
"Employee Pension Benefit Plan" shall have the meaning set forth in ERISA
Section
3(2).
"Employee Welfare Benefit Plan" shall have the meaning set forth in ERISA
Section
3(1).
"Environmental, Health and Safety Requirements" shall mean all federal, state,
local and foreign statutes, regulations, ordinances and other provisions having
the force or effect of law, all judicial
and administrative orders and determinations, all contractual obligations and
all common law concerning
public health and safety, worker health and safety, and pollution or protection
of the environment,
including without limitation all those relating to the presence, use, production
generation, handling, transportation, treatment, storage, disposal, distribution
labeling, testing, processing, discharge, release,
threatened release, control, or cleanup of any hazardous materials, substances
or wastes, chemical
substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals,
petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or
radiation, each as amended and as now or
hereafter in effect.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the United States Securities Exchange Act of 1934, as
amended.
"Excluded Assets" shall have the meaning set forth in Section 2.1(b).
"Excluded Liabilities" shall have the meaning set forth in Section 2.4(b).
"First Payment" shall have the meaning set forth in Section 2.2(b).
"GAAP" shall mean generally accepted accounting principles in the United States
as of the date of this Agreement consistently applied.
"Grand Common Stock" shall mean the Common Stock of Grand, par value US$.001
per share.
"Grand Shares" shall have the meaning set forth in Section 2.2(a).
"Indemnitees" shall have the meaning set forth in Article IX.
"Indemnitors" shall have the meaning set forth in Article IX.
"Intellectual Property" shall mean any and all (i) inventions (whether
patentable or unpatentable
and whether or not reduced to practice), all improvements thereto, and all
patents, patent applications, and patent disclosures, together with all
reissuances, continuations,
continuations-in-part, revisions, extensions,
and reexaminations thereof, (ii) trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all
goodwill associated therewith, and all applications, registrations, and renewals
in connection therewith, (iii) copyrightable works, all copyrights, and all
applications,
registrations, and renewals in connection
therewith, (iv) mask works and all applications, registrations, and renewals in
connection therewith, (v) trade secrets and confidential business information
(including ideas, research and development, know-how,
formulas, compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, blueprints, sketches, storyboards, models,
engineering drawings, specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals), (vi) computer software (including data and related
documentation),
(vii) other proprietary rights and know-how, (viii)
copies and tangible embodiments of any of the foregoing (in whatever form or
medium)
and (ix) licenses and sublicenses granted and obtained with respect thereto, and
rights thereunder. "Knowledge" (including the phrase "the best of the knowledge
of") shall mean the actual
knowledge after due inquiry of the Person to whom it is attributed.
"Liabilities" shall mean any direct or indirect liability, indebtedness, claim,
loss, damage, deficiency, obligation or responsibility, fixed or unfixed, choate
or inchoate, liquidated or unliquidated, secured or unsecured, accrued, absolute
known or unknown, contingent or otherwise.
"Lien" shall mean any mortgage, lien, pledge, charge, security interest, license
lease, claim, restriction, option, conditional sale or installment Contract or
encumbrance of any kind. "Loss" shall have the meaning set forth in Article IX.
"Material Adverse Effect" shall mean a material adverse effect on the business,
operations, assets (including as applicable the Assets), Liabilities, condition
(financial or otherwise), results of operations or
prospects on the Seller or Grand, as the case may be.
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"Person" shall include an individual, a partnership, a corporation, or a
division
or business unit thereof, a limited liability company, a trust, an
unincorporated
organization, a government or any department or agency thereof and any other
entity.
"Purchase Price" shall have the meaning set forth in Section 2.2(a).
"Secured Note" shall have the meaning set forth in 2.2(a).
"Securities Act" shall mean the United States Securities Act of 1933, as
amended.
"Taxes" or "Tax" shall mean all taxes including without limitation income, gross
receipts, ad valorem, excise, value-added, sales, use, transfer, franchise,
license, stamp, occupation, withholding, employment, payroll, property or
environmental tax or premium, together with any interest, penalty,
addition to tax or additional amount imposed by any governmental body or
authority.
"Third Party Action" shall have the meaning set forth in Article IX.
1.2 Accounting Terms. Unless specifically defined herein, accounting terms
shall
have the meaning specified by GAAP.
ARTICLE II.
PURCHASE AND SALE OF ASSETS
AND ASSUMPTION OF OBLIGATIONS
2.1. Purchase and Sale of Seller's Assets; Excluded Assets.
(a) Upon the terms and subject to the conditions of this Agreement, on the
Closing
Date, Seller shall sell, transfer, convey, assign and deliver to Buyer, and
Buyer
shall purchase, acquire and accept from Seller, all of Seller's right, title and
interest in and to all of its properties, assets, Contracts,
business, goodwill and rights of the Seller as a going concern, of every kind,
nature,
character and description, tangible and intangible, wherever located and whether
or not carried or reflected on the books
and records of Seller on the Closing Date, including, without limitation the
following
(the "Assets"):
(1) all Intellectual Property and all proprietary rights in and to products
owned or licensed by the Seller;(2) all real property, leaseholds and
subleaseholds therein and improvements,
fixtures, and fittings thereon;
(3) all work in process, raw materials, finished goods, goods in transit,
shipping
and packing materials and other tangible personal property (such as machinery,
equipment, inventories of raw materials and supplies, manufactured and purchased
parts, furniture and automobiles);
(4) all Contracts to which the Seller is a party;
(5) all accounts, notes and other receivables and other claims for money or
other obligations due, including barter credits;
(6) all claims, deposits, prepayments, refunds, causes of action, choices in
action, rights of recovery, rights of set off, and rights of recoupment
(including
any such item relating to the payment of Taxes);
(7) all franchises, approvals, permits, licenses, orders, registrations,
certificates,
variances, and similar rights obtained from governments and governmental
agencies;
(8) originals of all books, records, ledgers, files, documents, correspondence,
lists, plats, architectural plans, drawings, and specifications, creative
materials,
advertising and promotional materials, studies, reports, and other printed or
written materials;
(9) all Cash;
(10) all records, documents, files, existing computer print-outs and other
material
owned by or in the possession or under the control of Seller;
(11) all goodwill relating to Seller's Assets, including Seller's corporate name
and all variations thereof;
(12) all personal property of the Seller, including the property listed on
Schedule
2.1(a); and
(13) any other asset of Seller in respect of which there is an Assumed
Liability.
The Assets shall be conveyed free and clear of all Liabilities and Liens,
except the Assumed Liabilities.
(b) Notwithstanding the foregoing, the Assets shall not include (i) the
certificate
of formation, arrangements with registered agents relating to foreign
qualifications, taxpayer and other
identification numbers, seals, minute books or other documents relating to the
organization, maintenance,
and existence of the Seller as a limited liability company or (ii) any of the
rights of the Seller under this
Agreement or any other Contract executed by the Seller in connection with this
Agreement (the "Excluded Assets").
2.2. Consideration; Payment; Allocations.
(a) The consideration for the Assets (the "Purchase Price") will be
US$2,500,000 consisting of the following:
(i) a number of shares of Grand Preferred Stock (the "Grand Shares") having a
stated value of US$1,000,000, the terms and rights of the Grand Shares are set
forth in the Certificate of Designation, in the form of Exhibit A; and
(ii) the issuance by the Buyer to the Seller of an Interest Bearing
Subordinated
Promissory Note, in the form of Exhibit B (the "Secured Note"), in the aggregate
principal amount of US$1,500,000, which shall bear interest at the rate of 5.76%
per annum from Closing through June 1, 1999. Thereafter, the Secured Note shall
bear interest at a rate of 9.76% per annum until
delivery by Buyer of the First Payment. Interest on the unpaid principal of the
Note shall be reduced to 5.76% per annum upon delivery of the First Payment by
Buyer. Interest shall be payable quarterly for receipt on or before the first
day of the
month after the end of each calendar quarter, commencing April 1, 1999. The