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SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
Form 10 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15
(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission file number 0-22372
Grand Toys International, Inc.
(Exact name of registrant as specified in its charter)
Nevada 98-0163743
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization)
1710 Trans Canada Hwy., Dorval, Quebec, Canada, H9P 1H7
(Address of principal executive offices, Zip Code)
Issuers telephone number, including area code (514) 685-2180
Securities registered pursuant to Section 12 (b) of the Exchange Act:
None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Common Stock $.001 par value
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the Issuer was required to file such
reports) and (2) has been subject to such filing requirements for the past
90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K contained herein, and no disclosure will be contained
to the best of Issuers knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K
The Issuers revenues for the year ended December 31, 2000 were
$12,017,885.
The number of shares outstanding of the Issuers common stock is
3,284,906 (as of February 28, 2001).
The aggregate market value of the voting stock held by non affiliates of
the Issuer was approximately $1,231,840 (as of February 28, 2001)
GRAND TOYS INTERNATIONAL,
INC.
Index to Annual Report on Form 10 K
Filed with the Securities and Exchange Commission
Year ended December 31, 2000
ITEMS IN FORM 10 K
Page
PART I
Item 1. Description of Business
3
Item 2. Description of Property
8
Item 3. Legal Proceedings
9
Item 4. Submission of Matters to a Vote of Security Holders
9
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters
10
Item 6. Selected Financial Data
11
Item 7. Managements Discussion and Analysis or Plan of
Operation
12
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk
17
Item 8. Financial Statements
17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
18
PART III
Item 10. Directors and Executive Officers of the Registrant
20
Item 11. Executive Compensation
22
Item 12. Security Ownership of Certain Beneficial Owners and
Management
26
Item 13. Certain Relationships and Related Transactions
28
PART IV
Item 14. Exhibits, Reports on Form 8 K
28
SIGNATURES
35
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This Form 10-K of Grand Toys International, Inc. (the Company)
contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934, which statements are subject to
risks and uncertainties. Statements indicating that the Company
expects, estimates or believes are forward-looking, as are all other
statements concerning future financial results, product offerings or
other events that have not yet occurred. There are many
important factors that could cause actual results or events to differ
materially from those anticipated by the forward-looking
statements contained in this Form 10-K.
Item 1.
Description of Business:
Introduction
Grand Toys International, Inc. (the Company), through its
Canadian subsidiaries, Grand Toys Ltd. and Grand Concepts Inc.
(collectively Grand Canada) has been engaged in the toy business
in Canada for over 40 years and currently distributes a wide
variety of toys and fashion accessories throughout Canada. Grand
Canadas business consists of four areas of operation: (i) the
importation and distribution throughout Canada, on an exclusive
and non-exclusive basis, of a wide variety of well-known toy
products and fashion accessories including, party goods, stationery
and accessories; (ii) the sale of toy products and fashion
accessories featuring popular characters licensed to the Company;
(iii) earning commissions on the sale of products, represented by
Grand Canada and shipped directly from the overseas vendor to
Canadian customers; and (iv) the sale of proprietary products, such
as puzzles, mobiles, and gift-related items.
The Companys United States subsidiary, Sababa Toys Inc., which
was organized in 2000, distributes proprietary products and
develops product concepts to be sold to third parties or developed
internally. Through the end of fiscal 2000, Sababa Toys Inc.
generated no revenues.
Unless the context otherwise requires, references herein to Grand
Toys or the Company include Grand Toys International, Inc. and
its operating subsidiaries, Grand Toys Ltd., Grand Concepts Inc.,
and Sababa Toys Inc. The Companys revenues are primarily
derived from the operations of Grand Canada. The Companys
other United States Subsidiary, Ark Creations, Inc., which
developed a proprietary line of puzzles, ceased operations during
the fiscal year ended December 31, 2000.
Products
Grand Canada imports into Canada for distribution select toys and
fashion accessories from vendors who typically design, develop and
sell their products in other countries. In determining which items
to import, Grand Canada examines such factors as consumer
acceptance of the particular products in other countries, and
Canadian consumer tastes for such products based on similar
products distributed previously in Canada. In addition, prior to
ordering a product, Grand Canada attempts to predict the
potential demand for such product by exhibiting it to Grand
Canadas existing customers.
The following table sets forth certain vendors whose products
Grand Canada distributes in Canada, the type of products they
manufacture, and the price range within which Grand Canada sells
such products to retailers.
Vendor (Head Office)
Products Distributed
by the Company
Product Price
Range ($)
Grand (H.K.) Ltd. - Affiliate
Proprietary & licensed products
1.52 - 20.23
Intex (Taiwan)
Inflatable water toys
0.27 - 451.14
J.D. Components
P & M Products
Scooters
Arts & Crafts
37.50 - 39.50
1.08 - 15.48
Processed Plastic (U.S.)
Plastic toys, ride-on vehicles, and etc.
0.37 - 31.85
Spectra Star Toys (U.S.)
Kites
0.59 - 12.66
Toy Biz (U.S.)
Male action figures, dolls
3.36 - 95.73
Toymax (U.S.)
Electronic toys
3.43 - 85.92
Unice S.A. (Spain)
Balls
1.11 - 1.86
Design and Development
As is common in the toy and fashion accessory industries, Grand
Canada receives numerous concepts from unaffiliated third parties
for new products. Grand Canada does not employ its own
inventors of new concepts but if it accepts and develops an
inventors concept for a new product, it will pay royalties to the
inventor on sales from that product.
The Company, through its US subsidiary, Sababa Toys Inc.,
develops new concepts to be developed internally or by the other
subsidiaries within the corporate group, or sold to third parties.
Grand Toys International, Inc. develops proprietary products and
uses internal staff to develop the design and development of these
products, to be sold to third parties.
All safety testing of the Companys products is done by the
manufacturers at the manufacturers factories and is designed to
meet safety regulations imposed by the Canadian and United States
governmental authorities. The Company also monitors quality
assurance procedures of the vendors for its products for safety
purposes at its warehouse facilities.
Sources of Product
Approximately 73% of the Companys gross sales in 2000 were
from products supplied by the following four vendors: Toy Biz,
Tiger Electronics, J.D. Components, and Toymax. These
products accounted for 35%, 14%, 13% and 12%, respectively, of
2000 gross sales. Other than the products from the above-
mentioned vendors, no products from any other vendor accounted
for more than 7% of the Companys gross sales in 2000. In
February 1999, Hasbro acquired Tiger Electronics Inc. and
terminated the distribution of Tiger products by Grand Canada
effective December 31, 1999. Grand Toys sold the remaining
Tiger products in its inventory by the end of the first quarter of
2000, after which time all sales of Tiger products ceased.
Therefore, products that accounted for 14% of sales in 2000 are no
longer a part of the Companys product line. This had, and will
continue to have, an adverse effect on the Companys operations.
The Company is sourcing new products and looking at potential
acquisitions. If one or more of the remaining suppliers identified
above were to terminate their relationship with Grand Canada,
such termination may have a material adverse effect on the
Company.
The imported products are manufactured for Grand Canada by
unaffiliated third parties principally located in China, Hong Kong,
Mexico, Spain, United States and the U.K. The manufacturers are
chosen by the vendor on the basis of price, payment terms,
product quality, reliability and the ability of a manufacturer to
meet delivery requirements. For licensed products, the licensors
may have the right to approve the selected manufacturers. The use
of third-party manufacturers enables Grand Canada to avoid
incurring fixed manufacturing costs, but also reduces its ability to
control the timing and quality of the manufacturing process.
Grand Canada does not supervise the day-to-day manufacturing of
its products. However, prior to the commencement of
manufacturing, Grand Canada, the vendor and the manufacturer
work together to design a prototype of the specific product and its
packaging. The manufacturer is contractually obligated to
manufacture the products in accordance with those prototype
specifications. For licensed products, some licensors may be
required to approve the prototype prior to production.
All manufacturing services performed overseas are generally paid
for by either letter of credit or wire transfer. Payment for such
manufacturing is made only upon the proper fulfillment of terms
established by Grand Canada, such as adherence to product
quality, design, packaging and shipping standards, as well as proper
documentation relating thereto. Most product purchases are paid
for in U.S. dollars.
Grand Canada is not a party to any long-term supply or
requirements agreements with any specific manufacturer. All of
Grand Canadas manufacturers may subcontract the manufacture of
components of their products to third parties who are not affiliated
with Grand Canada.
Materials
The principal raw materials used in the production and sale of
Grand Canadas products are plastic, printed fabrics and paper
products. These are all currently available at reasonable prices
from a variety of sources. Because the Company does not
manufacture any of its products on site, it does not own any
specialized tools or other production equipment.
Location
Grand Canada leases a building in suburban Montreal, Canada,
where the Companys and Grand Canadas executive and
administrative offices are located as well as its Canadian
distribution center. The Company also has a showroom in
Mississauga, Ontario, Canada. Sababa Toys Inc. occupies office
premises in New York.
Licensing and Distribution Agreements
Character Licenses
Grand Canadas product line includes products featuring well-
known character properties created by others. In order to obtain
the right to manufacture and sell products featuring such character
properties, Grand Canada enters into license agreements with the
owners of such properties. Under the terms of the character
property license agreements, Grand Canada pays royalties to
licensors that generally range from 10% to 16.5% of net sales of the
products carrying these character properties. To the extent that
competition increases among companies to obtain character
property licenses, Grand Canada may encounter increased
difficulty in obtaining certain character licenses and may be
required to pay greater minimum guaranteed royalty amounts.
Generally, the Companys character property license agreements
provide the Company with the exclusive or non-exclusive right to
sell only specific products featuring the particular character. These
agreements typically limit the sale of such products to Canada.
However, certain agreements allow distribution in the United
States. They generally have terms of one to three years and may
be renewed upon payment of certain minimum guarantees or the
attainment of specified sales levels.
The following table sets forth some of the Companys character
licenses, the licensor for these character properties, the territory of
sale, and the types of products that the Company markets
featuring these character properties.
Character Property
Licensor
(Territory)
Product Featuring Property
Batman
Bear In The Big Blue House
Catdog
Digimon
Donald Duck, Daisy, Goofy,
Pluto,
Warner Bros. (CAN)
Venture (CAN)
Studio Licensing (CAN)
Venture (CAN)
Disney (CAN)
Kites, Balls
Balls
Kites
Foam puzzles, Balls, Bathroom Accessories
Pools, Kites, Bop Bags, Pool Accessories,
Plastics
Harry Potter
Mickey Mouse, Minnie Mouse
Warner Bros. (CAN)
Disney (CAN)
Kites, Balls, Stationery
Pools, Kites, Bop Bags, Pool Accessories,
Plastics
Nascar Racers
Venture (CAN)
Balls, Bathroom Accessories
Nintendo
Pokemon
Power Puff Girls
G-Squared (CAN)
G-Squared (CAN)
Warner Bros. (CAN)
Balls
Stationery, Playballs, Kites
Stationery, Balls
Power Rangers
Rugrats
Sesame Street
Sonic The Hedge Hog
Spider-man
Venture (CAN)
Studio Licensing
E.M.G. (CAN)
Venture (CAN)
Marvel, (CAN)
Balls, Kites
Kites, Balls
Balls, Kites
Balls
Ball, Stationery
Star Wars
G-Squared (CAN)
Stationery
Winnie The Pooh
Disney (CAN)
Plastics, Kites, Bop Bags
NSYNC
Winterland (U.S. & CAN)
Foam Puzzles
Power Rangers
Venture (U.S. & CAN)
Foam Puzzles
Sonic the Hedgehog
Venture (U.S. & CAN)
Foam Puzzles
Spiderman
Marvel (U.S. & CAN)
Foam Puzzles, Form Floor Tiles
Tonka
Hasbro (U.S. & CAN)
Foam Activity Kits
X-Men
Marvel (U.S. & CAN)
Foam Puzzles, Foam Floor Tiles
No one particular character property license resulted in sales in
excess of 3% of Grand Canadas sales revenues for the year ended
December 31, 2000, and the loss of any one such license would not
have a material adverse effect on Grand Canadas operations.
License and Distribution Arrangements with Toy
Vendors
Grand Canada has entered into license and distribution agreements
with four of its approximately fifteen vendors. Grand Canada
selects products from a master product list provided to it by the
vendor. The purchase price, depending on the arrangement with
the supplier, may consist of a fixed payment per item, specified
minimum quantities to be purchased and other conditions, and
occasionally a royalty fee. Pursuant to these agreements, Grand
Canada obtains either the exclusive and non-exclusive right to
import and distribute throughout Canada the products selected by
it. These agreements generally have terms of one to five years and
are usually exclusive for a specified product or product line within
a specific territory. Generally, under these agreements, Grand
Canada is responsible for paying shipping and other related costs
and expenses. If Grand Canada were to be in default under a
license or distribution agreement it may cause such agreement to
be terminated as well as result in liability for certain costs and
penalties.
Marketing, Sales and Distribution
Grand Canada markets its products throughout Canada via its own
sales representatives as well as independent sales agents. Purchasers
of the products include retail chain stores, department stores, toy
specialty stores and wholesalers. Grand Canadas five largest
customers are: Toys R Us, Costco, Wal-Mart, Zellers and
Canadian Tire, which for the year ended December 31, 2000,
accounted for approximately 20%, 17%, 17%, 12% and 4%,
respectively, of the gross sales for this period. No other customer
accounted for more than 4% of gross sales in 2000.
Other than purchase orders from its customers, Grand Canada
does not have written agreements with its customers, but rather
sells products to customers on open account, with payment terms
typically varying from 30 to 90 days. If one or more of the five
customers identified above terminated its relationship with Grand
Canada, a material adverse effect on the Company may occur.
Grand Canada employs a sales and marketing staff of nine people,
including two of its senior managers and seven sales persons who
make on-site visits to customers for the purpose of soliciting orders
for products. It markets products at major and regional toy trade
shows in Canada. In addition, Grand Canada maintains
showrooms in its suburban Montreal and Mississauga facilities.
Grand Canada directly, or through its salespersons, takes written
orders for its products from its customers and arranges for the
manufacture of its products. Cancellations are generally made in
writing and appropriate steps are taken to notify its manufacturers
of such cancellations.
Returns are generally not accepted, although consistent with
industry practices, exceptions to this policy are made on a case-by-
case negotiated basis.
Seasonality
The Companys business is seasonal. The Companys third and
fourth quarter sales revenues have typically been greater than the
first and second quarter sales revenues. This fluctuation is the
result of retailers purchasing products for the holiday selling
season.
Product Liability
The Company maintains product liability coverage for the
Companys operations in the aggregate amount of Canadian
$15,000,000. The Company has not been the subject of any
product liability litigation.
Competition
The toy industry is highly competitive and sensitive to changing
consumer preferences and demands. Grand Canada competes in
Canada with many companies that distribute toy products more
well-known than those distributed by Grand Canada. Some of
Grand Canadas competitors are substantially larger and more
diversified, and have substantially greater financial and marketing
resources than Grand Canada. They may also have greater name
recognition, and the ability to develop and market products similar
to, and more competitively priced than, those distributed by
Grand Canada. Grand Canada competes with, among others,
Irwin Toys Ltd., Hasbro Inc. and Mattel Inc.
Government Regulation
Grand Canada is subject to the provisions of various laws, certain
of which have been enacted by the Federal Government of Canada
and others which have been enacted by the Government of the
Province of Quebec and other Canadian provinces.
Federal
The laws of the Government of Canada to which the Company is
subject include the Hazardous Products Act which empowers the
Government to protect children from hazardous toys and other
articles. Under that legislation the Government has the authority
to exclude from the market those articles which are found to be
hazardous. Grand Canada is also subject to the Consumer
Packaging and Labeling Act enacted by the Government of Canada,
whose legislation prohibits the importation of prepackaged items
into Canada, as well as the sale, importation, or advertising in
Canada of items which have misleading information on their label.
Provincial
The legislation enacted by the Government of the Province of
Quebec to which Grand Canada is subject includes the Consumer
Protection Act which prohibits the sale of hazardous toys and other
articles, and also requires proper labeling and instructions to be
included with the item being sold. Grand Canada is also subject to
the Charter of the French Language, which requires that all labeling
and instructions appear in the French language, as well as the
Upholstery and Stuffed Articles Act, which requires that stuffed
articles conform to hygienic norms, and obligates companies to
take measures against contamination during transportation and
storage. Similar laws exist in several cities and provinces
throughout Canada and in many jurisdictions throughout the
world.
Grand Canada maintains a quality control program to ensure
compliance with all applicable laws.
Employees
As of December 31, 2000, the Company employed 39 full-time
persons, including three executive officers. The Company believes
that its relations with its employees are satisfactory.
Item 2.
Description Of Property:
The Companys principal executive offices are located in an
approximately 105,000 square foot facility located at 1710 Route
Trans-Canada, Dorval, Quebec, Canada, a suburb of Montreal.
The Company uses the facility for offices, showroom,
warehousing and distribution. The lease for the premises expires
on September 1, 2009 but Grand Canada has the right to extend
the lease for an additional five-year period. The current monthly
rent is Canadian $33,350 and during the extension period shall be
increased each year by a percentage that is equal to 75% of the
percentage increase in the consumer price index for the greater
Montreal area.
Grand Canada also leases, pursuant to a lease expiring on January
1, 2005, approximately 9,000 square feet of showroom and office
space at 6427 Northam Drive, Mississauga, Canada, a suburb of
Toronto, at a current rental rate of approximately Canadian $4,350
per month.
Sababa Toys Inc. leases 1,610 square feet of office space at, 119 W,
23rd Street, Suite 505, New York, N.Y., pursuant to a lease expiring
November 1, 2003, at a current rental rate of $4,900 per month.
The Company believes that its current facilities are satisfactory for
its present needs and that insurance coverage is adequate for the
premises.
Item 3.
Legal Proceedings:
On November 30, 1995, an involuntary petition under Chapter 7
of the United States Bankruptcy Code was filed against Grand
Group Inc, a U.S. subsidiary, in the United States Bankruptcy
Court for the Southern District of New York (the Bankruptcy
Proceeding). On January 4, 1996, the Court entered an order for
relief under Chapter 7 of the United States Bankruptcy Code and a
trustee was appointed to supervise the liquidation of Grand Group
Inc. To date, no other proceedings have occurred in connection
with the Bankruptcy.
During the quarter ended December 31, 2000, there were no
material developments to any legal proceedings which have been
previously reported by the Company. See Note 15 of the
Companys Consolidated Financial Statements for the year ended
December 31, 2000, which are an exhibit to this report for a
complete description of material legal proceedings to which the
Company is presently a party.
During the second quarter of 2000, the Company settled the
lawsuit with a former lessor for $264,000.
Other than discussed above or in Note 15 to the Companys
Consolidated Financial Statements included elsewhere herein, the
Company is not a party to, nor is it aware of, any other pending
litigation of a material nature.
Item 4.
Submission of Matters to a Vote of Security
Holders:
On September 28, 2000, Grand held its annual meeting of
stockholders. At the meeting, the following actions took place:
1. The Stockholders re-elected Stephen Altro, David Mars, Elliot
Bier and James Rybakoff as directors of
Grand. The number of votes for and against each of them was
as follows:
Director Name For Against
Withheld Abstain
Stephen Altro 2,785,875 10,180 n/a
38,535
David Mars 2,785,875 10,180 n/a
38,535
Elliot Bier 2,795,095 960 n/a
38,535
James Rybakoff 2,795,315 740
n/a 38,535
2. The Stockholders approved an amendment and restatement of
Grands 1993 Stock Option Plan which
increased the number of shares available for grants under the
plan from 300,000 to 600,000. 890,075 shares were voted for
the amendment, 58,696 shares were voted against the
amendment, 1,864,922 shares were withheld and 20,897 shares
abstained.
3. The Stockholders ratified the approval of KPMG LLP to serve
as Grands auditors for the fiscal year
ending December 31, 2000. 2,816,235 shares were voted for
the appointment, 9,431 shares were voted against the
appointment, no shares were withheld and 8,924 shares
abstained.
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Item 5.
Market For Common Equity and Related
Stockholder Matters:
The Companys Common Stock is traded on the NASDAQ Small-
Cap Stock Market under the symbol GRIN. The following table
sets forth the range of high and low closing representative bid
prices for the Companys Common Stock from January 1, 1999
through December 31, 2000 as reported by Nasdaq.
The figures represent prices between dealers, do not include retail
mark-ups, mark-downs or commissions and may not represent
actual transactions.
Common Stock
Representative
Bid Prices
1999
High ($)
Low ($)
First Quarter
5 5/8
2 1/2
Second Quarter
7 13/16
2 3/4
Third Quarter
30 .25
4 1/8
Fourth Quarter
19 33/64
6
2000
First Quarter
6 7/8
2 1/2
Second Quarter
3 21/32
5/32
Third Quarter
5 3/8
1 .25
Fourth Quarter
2 1/16
1/8
On January 12, 2001, the Company was advised by Nasdaq that it
had failed to meet the requirements for continued listing on the
SmallCap market because the stock traded below $1.00 for a 30-day
period. The Company has until April 12, 2001 to respond,
otherwise proceedings will be initiated to have the stock de-listed.
The Company intends to take steps to place the Company back in
compliance with the requirements for continued listing.
At February 28, 2001 there were approximately 202 record holders
of the Companys Common Stock, however those shares being
held at various clearing houses, including Cede & Company have
not been broken down. Accordingly, the Company believes there
are many more beneficial owners of the Companys Common
Stock whose shares are held in street name, not in the name of the
individual shareholder.
On March 9, 2001, the last reported sales price for the Common
Stock on the Nasdaq SmallCap Market was $0.375 per share.
During the past two years the Company has not paid and has no
current plans to pay dividends on its Common Stock. In 1999,
dividends of $25,000 were declared and paid on the Companys
Series A Preferred Shares. The Company intends to retain
earnings, if any, for use in its business. Any dividends for
Common Stock that may be declared in the future will be
determined by the Board of Directors based upon the Companys
financial condition, results of operation, market conditions and
other factors that the Board deems relevant.
The following securities were issued by the Company between
January 1, 1998 to December 31, 2000 and were not registered
under the Securities Act of 1933, as amended (the Act).
On January 1, 1999, in connection with the acquisition of the
assets of Ark Foundation LLC, the Company issued 200,000 shares
of non-voting Series A Convertible Redeemable Preferred Stock
(Series A Stock) with a stated value of $5.00 per share.
The Series A Stock is convertible beginning January 1, 2000 into
shares of the Companys common stock on a one-for-one basis. A
maximum of 50,000 shares may be converted during any six-
month period.
On each of January 1, 2000 and July 17, 2000 the Company issued
50,000 shares of Common Stock upon the conversion of 100,000
shares of Series A Stock into common stock.
The sale and issuance of securities in the transactions described set
forth above were exempt from registration under the Securities Act
in reliance on Section 4(2) of the Securities Act or Regulation S
promulgated thereunder as transactions by an issuer not involving
a public offering.
Item 6.
Selected Financial Data:
For the Twelve Months Ended December 31:
2000
1999
1998
1997
1996
Net sales
$ 12,017,885
$ 37,260,250
$ 33,177,529
$ 37,299,525
$ 27,646,251
Gross profit
360,170
10,778,909
11,091,548
14,699,141
11,454,685
Unusual items
4,160,164
814,669
- -
- -
- -
Net (loss) earnings
(10,156,713)
(709,466)
(318,302)
1,575,169
591,370
(Loss) earnings per share:
Basic
(3.17)
(0.36)
(0.20)
1.00
0.38
Diluted
(3.17)
(0.36)
(0.20)
0.90
0.37
Weighted average number of
common equivalent shares
3,207,783
2,132,582
1,577,634
1,577,634
1,543,958
Working capital
2,804,596
10,955,614
3,374,528
3,452,266
2,950,379
Long term debt
1,500,000
1,944,444
- -
- -
- -
Redeemable preferred stock
500,000
1,000,000
- -
- -
- -
Cash dividends
- -
25,000
- -
- -
- -
Total Assets
6,546,055
19,118,517
13,889,317
12,187,404
9,024,048
Item 7.
Managements Discussion and Analysis:
Overview
Net sales consist of sales of products to customers after deduction
of customer cash discounts, freight and warehouse allowances,
volume rebate allowances, and returns of merchandise. Sales are
recorded when the merchandise is shipped.
The cost of goods sold for products imported as finished goods
includes the cost of the product in the appropriate domestic
currency, duty and other taxes, and freight and brokerage charges.
Royalties to Grand Canada suppliers not contingent upon the
subsequent sales of the suppliers products are included in the price
paid for such products.
Major components of selling, general and administrative expenses
include: payroll and fringe benefits; advertising expense, which
includes the cost of production of television commercials and the
cost of air time; advertising allowances paid to customers for
cooperative advertising programs; and royalty expense. Royalties
include payments by Grand Canada to licensors of character
properties and to manufacturers of toy products if such payments
are contingent upon subsequent sales of the products. Royalties
are usually a percentage of the price at which the product is sold
and are payable once a sale is made.
Accounts receivable are receivables net of an allowance for
doubtful accounts. The allowance is adjusted periodically to reflect
the current status of receivables. Management believes that current
reserves for doubtful accounts are adequate. Sales of products to
retailers and distributors are on an irrevocable basis. Consistent
with industry practices, Grand Canada may make exceptions to
this policy on a case-by-case negotiated basis. Inventory is
comprised of finished goods at landed cost.
All amounts are in US Dollars ($) unless otherwise noted.
Results of Operations
The following table sets forth consolidated operations data as a
percentage of net sales for the periods indicated:
F
or
th
e
T
we
lve
Months
Ended
December 31,
2000
1999
1998
%
%
%
Net sales
100.00
100.00
100.00
Cost of goods sold
97.00
71.07
66.57
Gross profit
3.00
28.93
33.43
Operating expenses:
Selling, general and administrative
54.07
27.14
26.55
Foreign exchange loss (gain)
Interest on long-term debt
.22
.91
( .48)
- -
3.92
- -
Interest revenue
Interest expense
(1.11)
.25
- -
1.18
- -
2.11
Bad debt expense
.78
.23
.44
Depreciation and amortization
4.13
1.37
.97
Unusual items
34.62
2.19
- -
Total operating expenses
93.87
31.62
33.99
Loss before income taxes
(90.87)
(2.69)
(0.56)
Net loss
(84.51)
(1.90)
(0.96)
Comparison of the year ended December 31, 2000
to the year ended December 31, 1999:
Net Loss
Net loss for 2000 was $10,156,713 or $3.17 loss per share as
compared to a net loss of $709,466 or $0.36 loss per share in 1999.
The decrease was mainly due to the unusual charge of $4,160,164
consisting mainly of prepaid and intangible write-offs and the
decrease in sales and the reduced margins on those sales during the
year. In addition, while the Company did endeavor to reduce
selling, general and administrative expenses for the year, those
deductions did not match, as a percentage, the reduction of the
sales volume. The net loss was further increased by the restriction
of income tax recoveries of a subsidiary to the amount that can be
recovered from taxes paid in prior years. The Company will have
until 2007 to be able to apply unutilized tax losses against future
taxable income.
Net Sales
Net sales in 2000 decreased to $12,017,885 from $37,260,250 for
1999. The lower net sales volume was attributed to the loss, in
2000, of two significant product lines, Tiger Electronics and
Majorette.
The significant softening of the retail market for the types of
products distributed by the Company resulted in significantly
higher customer markdowns, which negatively impacted net sales.
Further, a decrease in the Companys commission revenue
contributed to the decrease.
Gross Profit
Due to the loss of two significant product lines, the lower margins
relating to the 2000 sales volume, and the recording of $1,861,681
as an inventory reserve, of which $263,497 was recorded in the
fourth quarter, due to the decline in market demand for such items
as WWF, WCW, Star Wars and Pokemon products, the gross
profit decreased significantly.
Selling, General and Administrative
Selling, general and administrative expenses in 2000 decreased to
$6,497,677 to $10,111,421 in 1999. However, these costs, as a
percentage of sales, were significantly higher compared to 1999 due
to the much lower sales base. The Company, in anticipation of
the sales volume decline, implemented a cost control program
during the year. Decrease in salary expense, cooperative
advertising rebates to customers, and administrative expense
comprised the majority of the total decrease.
Unusual Items
These expenses are comprised of the following items:
(a) The Company settled a lawsuit by a lessor of certain real
estate for $264,000.
(b) The Company recognized the permanent impairment in
value of goodwill from the acquisition of the assets by its
Ark Creations subsidiary of $2,253,516, as a result of its
decision to cease operations of its subsidiary.
(c) The companys credit line, which was scheduled to expire
in 2001, was terminated in January 2001. As a result, the
Company has taken a charge against earnings of the full
amount of the deferred financing charges of $535,109.
(d) The Company has written off $557,539 as a result of its
decision to abandon its proposed acquisition of Limited
Treasures, Inc. and providing for an allowance on a loan
receivable from Limited Treasures.
(e) The Company has reserved $550,000 to cover a lawsuit
commenced by a supplier against Grand Canada for breach
of contract.
Comparison of the year ended December 31, 1999
to the year ended December 31, 1998:
Net Loss
Net loss for 1999 was $709,466 or $0.36 loss per share as compared
to a net loss of $318,302 or $0.20 loss per share in 1998, a 123%
increase in net loss.
Net Sales
Net sales in 1999 were $37,260,250, an increase of $4,082,721 over
1998 net sales of $33,177,529, or by approximately 12%. This
increase can be attributed to the large volume of sales of Furby
(Tiger Electronics) products in 1999 compared to a more limited
amount in 1998.
Gross Profit
Gross profit in 1999 decreased by $312,639 from $11,091,548 in
1998 to $10,778,909 in 1999 or as a percentage of sales gross profit
decreased from 33.43% to 28.93%. The decline in gross profit can
be primarily attributed to losses on the sale of discontinued or low
margin products that were cleared during the year in excess of
those of the previous year. A change in sales mix also contributed
to the lower margins.
Selling, General and Administrative
Selling, general and administrative expenses were $10,111,421 in
1999 compared to $8,807,026 in 1998. The increase in this
category is due primarily to the costs of operating the Ark
Creations Inc.s facility, which has now been closed, as well as
additional compensation taxes related to the exercise of options by
employees during 1999. As a percentage of net sales, selling,
general and administrative expenses increased by .59 percentage
points to 27.14% in 1999.
Gain on Foreign exchange
The gain of $177,982 resulted from a successful matching of the
Companys US dollar foreign exchange exposure and also a
stabilization of the Canadian dollar.
Unusual Items
As a result of transferring the administration of Ark Creations Inc.
to Canada and closing the facility, the Company incurred expenses
of $432,613 in fixed asset write-offs, severance costs and lease
penalties.
Further, the discontinuance of the Majorette product line resulted
in a penalty of $382,056 for the return of product on hand.
Liquidity and Capital Resources
The Company generally finances its operations through
borrowings under the Companys Credit Agreement with its bank
and by cash flow from operations, and sales of equity securities.
The inflow of funds, in 1999, due to options and warrants being
exercised resulted in virtually all short-term bank debt being
eliminated by December 31, 1999 and a cash position being
maintained until December 31, 2000.
In 1999, the Company received $8,441,675 as a result of the
issuance of 1,557,272 shares upon the exercise of options and
warrants. These share transactions allowed the Company to
eliminate virtually all of its bank debt by December 31, 1999, and
remain debt free in 2000 with the exception of letters of credit.
In August 1999, the Company entered into a three year banking
arrangement with a lending institution. Grand Toys had secured a
line of credit of $17,500,000 to enable it to meet its plans. The
Company was able to draw down working capital advances and
letters of credit in amounts determined by percentages of its
accounts receivable and inventory.
Working capital advances taken by the Company bore interest at
prime plus 1.25%. The term of the loan was three years. In
October 2000, the banking agreement was amended to reduce the
line of credit to $3,500,000 and to expire in January 2001. The
credit facility expired on January 5, 2001.
The Company is seeking to obtain a new credit facility. Failure to
obtain a credit facility would have a material adverse effect on the
Company because the Company would not have the capital
necessary to make product purchases. This would force the
Company to curtail or cease business operations.
Accounts receivable at December 31, 2000 were $1,933,370
compared to $8,083,004 at December 31, 1999. The reduction is
caused by the significant decrease in sales, as well as normal cash
collection associated with the final months of the year. Inventory
at December 31, 2000 decreased to $1,991,918 from $6,065,564 as a
result of lower sales volume and inventory writedowns.
Working capital decreased from $10,955,614 at December 31, 1999
to $2,804,596 at December 31, 2000. Net cash provided by
operating activities was $1,223,604 in 2000 compared to net cash
used for operating activities of $1,329,103 in 1999. Cash for
additions to equipment and leasehold improvements was $140,586
compared to $570,081 in 1999.
Significant cash requirements for 2001 are:
a) The market shortfall of the preferred share conversions,
representing $351,774, which includes the January 2001
conversion.
b) The reserve against a breach of contract represents a
maximum cash requirement of $550,000.
c) The class action lawsuit may require a minimal cash outlay
due to the fact that any settlement will be covered by the
Companys directors and officers (D & O) liability
insurance.
d) Grand Canadas tax liability represents cash requirements
approximately $300,000. The repayment terms will be
negotiated with the government, and could extend beyond
December 2001.
e) Development costs for the Companys proprietory
product.
The above items will be offset by partial collections of the
$434,370 owing from Limited Treasures Inc., receivable and
$500,000 was received BY March 29, 2001 from a completed
private placement. Further, the above items are disclosed in the
Financial Statements and other sections within this document.
Grand Canadas accounts receivable level is subject to significant
seasonal variations due to the seasonality of sales. As a result,
Grand Canadas working capital requirements are greatest during
its third and fourth quarters. In addition, to the extent accounts
receivable, inventories, guarantees and advance payments increase
as a result of growth of Grand Canadas business, Grand Canada
could require additional working capital to fund its operations.
Sources of such funding include cash flow from operations,
drawings on the financing facilities, or sales of additional equity or
debt securities by the Company.
If the funds available to the Company for current cash and cash
equivalents are not sufficient to meet the Companys cash needs,
the Company may from time to time seek to raise capital from
additional sources, including project-specific financing and
additional public or private debt or equity financing.
Effects Of Inflation
The Company does not believe that inflation has had a significant
impact on its financial position or results of operations in the past
three years.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
133, Accounting for Derivative Instruments and Hedging
Activities. This statement addresses the accounting for derivative
instruments, including forward foreign exchange contracts. This
statement, as amended by SFAS No. 137, shall be effective for the
Companys financial statements for December 31, 2000. The
company does not have any derivative instruments.
Item 7a.
Quantitative and Qualitative Disclosures
About Market Risk:
The Company is exposed to certain market risks, which arise from
transactions entered into in the normal course of business. The
Companys primary exposures are changes in interest rates with
respect to its debt and foreign currency exchange fluctuations.
INTEREST RATE RISK The interest payable on the
Companys revolving lines-of-credit are variable based on the prime
rate, and therefore, affected by changes in market interest rates.
The Company does not use derivative financial instruments.
FOREIGN CURRENCY RISK While the Companys product
purchases are transacted in United States dollars, most transactions
among the suppliers and subcontractors are effected in HK dollars.
Accordingly, fluctuations in Hong Kong monetary rates may have
an impact on the Companys cost of goods. Furthermore,
appreciation of Chinese currency values relative to the Hong Kong
dollar could increase the cost to the Company of the products
manufactured in the Peoples Republic of China, and thereby have
a negative impact on the Company. Since the majority of the
Companys sales are in Canadian dollars, the Company is at risk
with regards to the conversion of Canadian dollars to US dollars to
pay its suppliers. Therefore, fluctuations in the conversion rate
may have an impact on the Company. The Company may use
derivative financial instruments solely to hedge the effects of such
currency fluctuations.
Item 8.
Financial Statements:
The consolidated financial statements of the Company, including
the notes thereto, together with the report of independent
chartered accountants thereon, are presented beginning at page F-1.
Item 9.
Changes in, and Disagreements with
Accountants on Accounting and Financial
Disclosure:
Not applicable
P
A
R
T
I
I
I
Item 10.
Directors and Executive Officers :
Pursuant to the Bylaws of the Company, the number of directors
constituting the full Board of Directors has been fixed by the
Board at four (4). At the Annual Meeting, four (4) individuals will
be elected to serve as directors until the next annual meeting and
until their successors are duly elected, appointed and qualified.
Set forth below is the name, age, principal occupation during the
past five years and other information concerning each nominee.
Name
Age
Position with the Company
Elliot L. Bier
51
Chairman and Director
Stephen Altro
David Mars
James B. Rybakoff
Tania M. Clarke
63
63
34
32
Director
Director
Director
Executive Vice-President and CFO
Elliot L. Bier has been a director of the Company since July 20,
1993. He has been a practicing attorney in Montreal for the last 24
years. He is a senior partner in Adessky Poulin, the Companys
Canadian legal counsel. Since November 16, 2000, Mr. Bier has
served as Chairman of the Company.
Stephen Altro the Chairman, until November 16, 2000, and has
been a director of the Company since July 20, 1993. He has held
similar positions with Grand Canada, the Companys Canadian
operating subsidiary, for over 41 years. From July 20, 1993 to
June 30, 2000, Mr. Altro served as Chairman of the Company. Mr.
Altro co-founded Grand Canada with David Mars in 1961.
David Mars has been the Vice Chairman since 1995 until
November 16, 2000, and has been a director of the Company since
July 20, 1993. He has held similar positions with Grand Canada
for over 41 years. From July 20, 1993 to June 30, 2000, Mr. Mars
served as Vice-Chairman of the Company. Mr. Mars co-founded
Grand Canada with Stephen Altro in 1961.
James B. Rybakoff is the President of Akin Bay Company, L.L.C.,
an NASDAQ member investment bank and brokerage firm,
which Mr. Rybakoff co-founded in 1990. From 1992 to 1993 he
served as an associate for Zilkha & Company, an international
mergers and acquisition investment banking and strategic planning
firm. Mr. Rybakoff was elected as a director in 1996.
Tania M. Clarke is the Executive Vice President and CFO of the
Company since December 4, 2000, and has been with the
Company since May 3, 1993. Prior thereto, Ms. Clarke was
employed by KPMG LLP, as an external auditor for 3 years. Ms.
Clarke is a Canadian Chartered Accountant and a Certified Public
Accountant in the U.S. as of January 2001. Ms. Clarke accepted
this executive position effective December 4, 2000.
Directors are elected annually by the shareholders and hold office
until the next annual meeting and until their respective successors
are elected and qualified. There are no family relationships among
any of the Companys directors and executive officers.
Each of Messrs. Altro and Mars were executive officers of Grand
Group Inc., the Companys former United States Operating
Company (Grand Group). On January 4, 1996, an order for relief
under Chapter 7 of the United States Bankruptcy Code was
entered against Grand Group, at which time a trustee was
appointed to supervise its liquidation.
Executive Officers and Key Employees
In addition to Messr. Bier, the other executive officers are:
R.Ian Bradley President and Chief Executive Officer
Mr. Bradley, 56 years old, began with the Company on January
16, 2001. Mr. Bradley has extensive experience in the toy and
retailing industries, having served in various executive positions
with Mattel Canada Inc. from 1983 to 1997 , where he was
President from 1990 to 1997, and as Vice President Finance &
Administration of Dylex Limited, a leading Canadian retailer,
from 1999 to 2000.
The following persons, although not executive officers, are
regarded by the executives as key employees:
Glennis Carey has been the Director of Marketing for Grand
Canada for 20 years. Prior thereto, Ms. Carey worked for Mattel
International, Inc., in marketing for ten years.
Robert Herbst has been the Director of Operations for Grand
Canada since April 1995. Prior thereto, Mr. Herbst worked at
Grand Canada in various capacities for 20 years.
Paul Newbold has been the Director of Sales for Grand Canada
since December 1, 1999. Prior thereto he worked at Hallmark
(US) in the similar capacity.
Charles Marshall has been Director of Merchandising and Product
Development since July 1998. Prior thereto, Mr. Marshall has
worked in the toy industry for over 30 years in similar positions.
Executive officers are elected by and serve at the discretion of the
Board of Directors. There are no family relationships among any
of our directors and executive officers.
Section 16(a) Beneficial Ownership and Reporting
Compliance
The directors and executive officers of the Company, and the
owners of more than ten (10%) percent of the Companys
outstanding Common Stock, are required to file reports with the
Securities and Exchange Commission and with NASDAQ,
reporting changes in the number of shares of the Companys
Common Stock beneficially owned by them and provide the
Company with copies of all such reports. Based solely on its
review of the copies of such reports furnished to the Company and
written representations from the executive officers and directors,
the Company believes that all reports were timely made for the
year ended December 31, 2000, with the following exceptions: (i)
David Mars, Vice Chairman and Director, reported late on (A) a
Form 4 filed on June 9, 2000. The purchase of 10,000 shares of
Common Stock on April 12, 2000 and (B) a Form 4 filed on May
11, 2000, the sale of 1,000 shares of Common Stock on September
9, 1999, the sale of 20,300 shares of Common Stock on September
17, 1999, the sale of 1,000 shares of Common Stock on October
12, 1999 and the sale of 2,700 shares of Common Stock on
November 29, 1999; (ii); Stephen Altro, Director, reported late on
a Form 4 filed on May 11, 2000, the sale of 1,000 shares of
Common Stock on September 9, 1999, the sale of 20,300 shares of
Common Stock on September 17, 1999, the sale of 1,000 shares of
common Stock on October 12, 1999 and the sale of 2,700 shares of
Common Stock on November 29, 1999, (iii) Ken Cieply, Chief
Financial Officer, filed on July 24, 2000 a Form 3 as a result of his
appointment as Chief Financial Officer on September 20, 1999;
and (iv) Tania Clarke, Chief Financial Officer, filed on March 12,
2001 a Form 3 as a result of her appointment as Chief Financial
Officer on December 1, 2000.
Item 11.
Executive Compensation:
The following table sets forth a summary for the fiscal years ended
December 31, 1998, 1999 and 2000 respectively, of the cash and non-cash
compensation awarded, paid or accrued by the Company to the Companys
CEO and its four most highly compensated officers other than the CEO
who served in such capacity at the end of fiscal 2000. There were no other
executive officers as of the end of fiscal 2000 except as set forth below.
Summary Compensation Table
Annual Compensation
Long-term
Compensation
Awards
Name and
Principal
Position
Year
Salary
($)
Bonus
($)
Other
Annual
Compen-
sation
($)
Options
(#)
All Other
Compen-
sation
($)
Stephen Altro,
Director
2000
1999
1998
102,000(1),(4) ((,
162,000(2)
156,000(3)
- -
50,000(2)
- -
46,000(5)
46,000(6)
42,000(7)
- -
46,750
- -
- -
- -(9)
- -(9)
David Mars,
Director
2000
1999
1998
102,000(1),(4)
162,000(2)
156,000(3)
- -
50,000(2)
- -
40,000(5)
29,000(6)
28,000(7)
- -
46,750
- -
- -
- -(10)
- -(10)
Ken Cieply,
Chief Financial
Officer (8)
2000
1999
1998
95,000(1)
26,000(2)
-
-
-
- -
7,000(5)
1,000(6)
- -
- -
- -
- -
- -
- -
- -
1) Such amounts are based upon an exchange rate of Canadian $1.48 to
United States
$1.00 (the exchange rate on December 31, 2000).
2) Such amounts are based upon an exchange rate of Canadian $1.49 to
United States
$1.00 (the exchange rate on December 31,1999).
3) Such amounts are based upon an exchange rate of Canadian $1.54 to
United States
$1.00 (the exchange rate on December 31, 1998).
4) Mr. Altro and Mr. Mars total salary consists of $84,000 in salary to
June 30, 2000 and
$18,000 in consultants fees fort the period of
July 1 to December 31, 2000.
5) Other annual compensation for Mr. Altro consists of $14,000 for car lease
payments, $12,000 for annual country club dues and 20,000 for life insurance
premiums. For Mr. Mars, it includes $12,000 for car lease payments,
$12,000 for
annual country club dues and $16,000 for life insurance premiums. For Mr.
Cieply it consists of car lease payments.
6) Other annual compensation for Mr. Altro consists of $12,000 for car lease
payments, $11,000 for annual country club dues and $23,000 for life insurance
premiums. For Mr. Mars it includes $2,000 for car lease payments, $11,000 for
annual country club dues and $16,000 for life insurance premiums. For Mr.
Cieply it consists of car lease payments.
7) Other Annual Compensation for Mr. Altro consits of $11,000 for car lease
payments and $11,000 for annual country club dues and $20,000 for life
insurance premiums. For Mr. Mars it includes $11,000 for country club dues and
$17,000 for life insurance premiums.
8) Mr. Cieply was hired on September 20, 1999. Amounts reflect partial year.
9) This amount does not reflect special awards and payments Mr. Altro would be
entitled to receive under Mr. Altros employment agreement if his employment
were to be terminated as a result of a change of control of the Company. Mr.
Altros employment agreement terminated on June 30, 2000.
10) This amount does not reflect special awards and payments Mr. Mars would be
entitled to receive under Mr. Mars employment agreement if his employment
were to be terminated as a result of a change of control of the Company. Mr.
Mars employment agreement terminated on June 30, 2000.
The following table sets forth further information regarding the stock
option grants during fiscal 2000 to the officers named in the Summary
Compensation Table above.
Option Grants in 2000
There were no options granted in 2000, to those persons listed in the
Summary Compensation Table.
Option Exercises in 2000 and Year-End Values
The following table sets forth certain information concerning the exercise
of options by each of the officers listed in the Summary Compensation
Table above during fiscal 2000, including the aggregate amount of gains on
the date of exercise. In addition, the table includes the number of shares
covered by both exercisable and unexercisable stock options as of
December 31, 2000. Also reported are values for in-the-money options
that represent the positive spread between the respective exercise prices of
outstanding stock options and the fair market value of our common stock
as of December 31, 2000, as determined by the closing price of our
common stock on that date as reported by NASDAQ.
Name
Shares
Ac-
quired
On
Exercise
(#)
Value
Realized
$(1)
Number of
Unexercised Options
at Fiscal Year-End
(#)
Value of Unexercised
In-the-Money
Options
At Fiscal Year-End
($)
Exercisable
Unexercisable
Exercisable (2)
Unexercisa
ble
Stephen Altro
- -
- -
46,750
- -
- -
- -
David Mars
- -
- -
46,750
- -
- -
- -
1) Value Realized represents the fair market value of the shares of
common stock underlying the option on the date of exercise less the
aggregate exercise price of the option.
2) Closing stock price on December 31, 2000 was $ 0.34. All unexercised
options granted to Mr. Altro and Mr. Mars had exercise prices in
excess of $ 0.34.
Director Compensation
Directors who are also officers of the Company are not paid any
compensation for attendance at directors meetings or for attending
or participating in any committee meetings but are eligible to
participate in the Companys Stock Option Plan. Non-employee
directors of the Company are compensated for their services and
attendance at meetings through the automatic grant of 500 options
per quarter pursuant to the Companys Amended and Restated
1993 Stock Option Plan. The exercise price of options are granted
to non-employees directors at the market price of the Companys
common stock on the first day of each quarter.
Board Compensation Committee Report on Executive
Compensation
General. The Compensation Committees overall compensation
policy applicable to executive officers is to provide a compensation
package that is intended to attract and retain qualified executives
for us and to provide them with incentives to achieve our goals and
increase shareholder value. The Compensation Committee
implements this policy through salaries, bonuses, stock options, a
retirement savings plan, and employment agreements and
miscellaneous personal benefits.
CEO Compensation.
The philosophy, factors and criteria of the Compensation
Committee and the Board generally applicable to our officers are
also applicable to the Chief Executive Officer. Pursuant to the
terms of his Employment Agreement, Mr. Altro received six
months salary based on an annual salary of $168,000, together with
other benefits, including life insurance through June 30, 2000. Mr.
Altros employment agreement terminated, and he resigned as an
officer, on June 30, 2000. From July 1, 2000 through December
31, 2000, Mr. Altro worked as a consultant of the Company and
received $18,000 in consulting fees, plus other benefits, including
life insurance. Based upon the performance of the Company
through June 30, 2000, the Compensation Committee did not
award a discretionary bonus to Mr. Altro. The new Chief
Executive Officers salary will be based on the factors set forth
above in the Board Compensation Committees Report on
Executive Compensation.
Salaries. The Compensation Committees policy is to provide
salaries (i) that are approximately at the median of the salaries paid
to similar executive officers in similar companies, adjusted in the
Compensation Committees subjective judgment to reflect
differences in duties of the officers and differences in the size and
stage of development of the companies, in order to attract and
retain qualified executives and (ii) that compensate individual
employees for their individual contributions and performance.
The Compensation Committee determines comparable salaries
paid by other companies similar to us through its subjective
evaluation of its members knowledge of salaries paid by other
companies, salary requests of individuals interviewed by us for
open positions and recommendations of management. The
Committee subjectively evaluates this information and our
financial resources and prospects to determine the salary and
severance arrangements for an executive officer. Salaries for fiscal
1999 were determined based on a subjective evaluation of the
factors described above, without giving any specific priority or
weighting to any of the factors.
Bonuses. The Compensation Committees policy is to recommend
bonuses that compensate executive officers for achieving our goals.
In addition, the Compensation Committees policy is to pay
discretionary bonuses, determined near the end of the fiscal year,
to compensate executive officers for performance or achievements
during the fiscal year not covered by bonuses paid earlier in the
year.
Stock Options. The Compensation Committees policy is to award
stock options to each of our officers, employees and directors in
amounts reflecting the participants position and ability to influence
our overall performance, determined based on the Committees
subjective judgment after reviewing the number of options
previously granted to such person, the number of options granted
to persons in similar positions both with us and at other companies
deemed comparable to us (based on the members knowledge of
options granted by other companies), the number of options
remaining available for grant and managements recommendations.
Options are intended to provide participants with an increased
incentive to make contributions to our long-term performance and
growth, to join the interests of participants with the interests of
our shareholders and to attract and retain qualified employees.
The number of options granted to an executive in 2000 were
granted as an inducement for employment.
The Compensation Committees policy is to grant options with a
term of ten years to provide a long-term incentive and to fix the
exercise price of the options at the fair market value of the
underlying shares on the date of grant. Such options only provide
compensation if the price of the underlying shares increases. The
Committees policy is also to provide new executives with options
to attract them to us based on negotiations with new executives,
managements recommendations and the Committees subjective
judgment primarily after reviewing the number of options granted
to similar executives.
Generally, the Compensation Committee reserves the right to pay
compensation to our executives in amounts it deems appropriate
regardless of whether such compensation is deductible for federal
income tax purposes. Options granted to executives in fiscal 1997
are potentially subject to limits on permitted federal income tax
deductions upon exercise of such options, including under current
treasury regulations concerning the $1,000,000 cap on executive
compensation deductions under Section 162(m) of the Internal
Revenue Code of 1986, as amended. The Committee determined to
recommend the grants of options to executives in July 1997 despite
such options potentially being subject to the $1,000,000 cap on
executive compensation. The Committee determined that such
grants were more important to us than the potential loss of related
compensation deductions upon exercise of the options.
Retirement Savings Plan. We have adopted a group retirement
savings plan for our Canadian employees. We contribute to this
plan the lesser of (a) 50% of the employees contribution to this
plan; (b) 3% of the employees gross earnings; or (c) Canadian
$3,000 per employee. During the year ended December 31, 2000,
we contributed approximately $20,000 to the plan.
Employment Agreements and Miscellaneous Personal Benefits. The
Compensation Committees policy has been to have employment
agreements with each of its executive officers to provide them with
specified minimum positions, periods of employment, salaries,
fringe benefits and severance benefits. These benefits are intended
to permit the executive officer to focus his attention on performing
his duties to us, rather than on the security of his employment, and
to provide the officer with benefits deemed by the Compensation
Committee to be suitable for the executives office.
By the Compensation Committee
James B. Rybakoff
Elliot L. Bier
Compensation Committee Interlocks and Insider
Participation
As noted above, the members of the Compensation Committee
during fiscal 2000 were Messrs. Rybakoff and Bier. For a
description of the business relationship between each of them and
the Company see Item 13, Certain Relationships and Related
Transactions. Mr. Rybakoff has never been an officer or employee
of the Company. Mr. Bier was appointed Chairman of the Board
of the Company on November 16, 2000. None of the executive
officers of the Company served as a member of the compensation
committee (or other board committee performing equivalent
functions or, in the absense of such committee, the entire board of
directors) of another entity during 2000.
Performance Graph
The following graph tracks an assumed investment of $100 on the
last trading day of the calendar year indicated below in our
common stock, the NASDAQ Stock Market and the NASDAQ
Non-Financial Stocks sector, assuming full reinvestment of
dividends. Past performance is not necessarily indicative of future
performance.
Item 12
Security Ownership of Certain Beneficial
Owners and Management
Principal Shareholders
The following table sets forth certain information regarding
beneficial ownership of our common stock as of December 31,
2000 by (i) each person (or group of affiliated persons) who is
known by us to own beneficially more than 5% of the outstanding
shares of our common stock, (ii) each of our directors and director
nominees, (iii) each of our executive officers and (iv) all of our
executive officers and directors as a group. Except as indicated in
the footnotes to this table, the persons named in this table have
sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them.
Name and Address of
Beneficial Owner
Number of
Shares
Beneficially
Owned
Percent of Class and
Voting
Power (1)
Ofer Nissim
65 High Ridge Road, Suite 500
Stanford, CT, 06905
475,000 (2)
13%
David Mars
1710 Rte. Transcanadienne
Dorval, Quebec, Canada H9P 1H7
340,750 (3)
9%
Siemens Pension Plan
Freilagerstr 40
Ch 8047 Zuerich, Switzerland
300,000
8%
Stephen Altro
1710 Rte. Transcanadienne
Dorval, Quebec, Canada, H9P 1H7
221,750 (4)
6%
Amgo Investments, Inc.
1710 Rte. Transcanadienne
Dorval, Quebec, Canada H9P 1H7
150,000 (5)
4%
James B. Rybakoff
780 Third Avenue
New York, NY 10017
58,000 (6)
1%
Elliot L. Bier
999 Boul. de Maisonneuve Ouest
Montreal, Quebec, Canada H3A 3L4
3,000 (7)
- -%
Tania M. Clarke
1710 Rte. Transcanadienne
Dorval, Quebec, Canada, H9P 1H7
2,000
- -%
All Executive officers and directors
as a group (four persons)
625,500 (9)
16%
1) Computed on the basis of 3,753,406 shares of common stock
and, with respect to those persons holding warrants or options
to purchase common stock exercisable within sixty (60) days,
the number of shares of common stock that are issuable upon
the exercise thereof.
2) Includes options to purchase 50,000 shares of common stock
executed within sixty (60) days. Mr. Nissims holdings of
425,000 shares is held indirectly through Knox Security
Engineering Corp. and Ark Foundation LLC.
3) Includes options to purchase 46,750 shares of common stock
exercisable within sixty (60) days. Mr. Mars interest in Amgo
is owned of record by 2884330 Canada, Inc., a privately held
corporation controlled by Mr. Mars, of which his wife and
children, the only other shareholders of such corporation, are
minority shareholders. Mr. Mars disclaims beneficial
ownership of 75,000 shares of common stock owned by Amgo
and beneficially owned by Mr. Altro. See Executive
Compensation.
4) Includes options to purchase 46,750 shares of common stock
exercisable within sixty (60) days. Mr. Altros interest in Amgo
is owned of record by 2870304 Canada, Inc., a privately held
corporation controlled by Mr. Altro, of which his wife and
children, the only other shareholders of such corporation, are
minority shareholders. Mr. Altro disclaims beneficial
ownership of 75,000 shares of common stock owned by Amgo
and beneficially owned by Mr. Mars. See Executive
Compensation.
5) Amgo Investments, Inc. (Amgo) is controlled by David Mars
and Stephen Altro.
6) Represents options and warrants to purchase 58,000 shares of
common stock exercisable within sixty (60) days. 55,000 of
such warrants are owned of record by Akin Bay Company
L.L.C. of which Mr. Rybakoff is a controlling member. See
Election of Directors and Certain Transactions.
7) Represents options to purchase 3,000 shares of common stock
exercisable within sixty (60) days. See Directors and Executive
Officers.
8) Represents options to purchase 2,000 shares of common stock.
See Executive Officers.
9) See Footnotes (1) (8).
Item 13.
Certain Relationships and Related
Transactions
During fiscal 2000, Elliot L. Bier and James B. Rybakoff served as
the members of the Companys Compensation Committee. None
of the members of the Companys Compensation Committee,
which served during the fiscal 2000 was an officer or employee of
the Company, or a former officer of the Company.
Mr. Bier is a senior partner in Adessky, Poulin, a Montreal,
Quebec based law firm. The firm of Adessky, Poulin acts as
Canadian counsel to the company and its subsidiaries. During the
fiscal year ended December 31, 2000, the Company paid Adessky,
Poulin an aggregate of $66,384 for legal fees and related
disbursements.
Mr. Rybakoff is a member and a managing director of Akin Bay
Company L.L.C., NASD member firm (Akin Bay). The
Company is a party to an investment banking agreement with
Akin Bay. Pursuant to the terms of the investment banking
agreement, Akin Bay provides investment banking and other
financial advisory services to the Company. In addition, the
Company has also paid Akin Bay to sponsor research reports on
the Company. The investment banking agreement and the
agreement to sponsor research reports was approved the
Companys disinterested directors. The Company believes that the
terms of the investment banking and sponsored research
agreements are substantially similar to those prevailing at the time
for comparable agreements and transactions with other investment
banking firms. During the fiscal year ended December 31, 2000,
the Company paid Akin Bay a total of $251,430 for services
rendered to it.
Grand Toys (H.K.), an affiliate of the Company, was incorporated
by Mr. Altro and Mr. Mars, assist in obtaining competitive
sourcing in the Orient. All transactions of Grand Toys (H.K.) are
on behalf of the Company have no profit element.
Item 14.
Exhibits, Financial Statements and Reports
on Form 8-K
(a) Report of Independent Auditors
Index to Financial statements
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2000 and
December 31, 1999
Consolidated Statements of Operations for the Years
Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders Equity and
Comprehensive Income for the Years Ended December
31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999, and 1998
Notes to Consolidated Financial Statements
Consents of Independent Auditors to incorporation by
reference of financial statements
Exhibit Number
**3.1 Articles of Incorporation, as amended
### 3.2 Certificate of Designations of Series A 5%
Cumulative Convertible Redeemable Preferred
Stock
***3.3 Amended and Restated by-laws
**4.1 Form of certificate evidencing shares of Common
Stock
### 4.2 Form of Certificate of Designations of Series A Cumulative
Convertible Redeemable
Preferred Stock
*4.3 Form of Common Stock Warrant
*4.4 Form of Regulation S Common Stock Subscription
Agreement
*10.1 Loan and Security Agreement dated as of
February 17, 2000 by and between Limited
Treasures, Inc. and the Company.
*10.2 Promissory note dated February 17, 2000,
given by Limited Treasures, Inc. to the
Company in the amount of US$ 700,000.
#10.3 Amended and Restated 1993 Stock Option Plan
*10.9 Lease of Dorval, Canada facility
*10.10 Lease of Mississauga, Canada facility
###10.11 Asset Purchase Agreement, dated as of January
1, 1999, by and among the Company, Ark
Creations, Inc. (formerly Great American
Acquisition Corp.), Ark Foundation LLC and
Ofer Nissim
###10.12 Subordinated Promissory Note, dated January 1,
1999, given by Ark Creations, Inc.(formerly
Great American Acquisition Corp.) to Ark
Foundation in the amount of US$1,500,000
###10.13 Stock Pledge Agreement, dated as of January 1,
1999, in favor of Ark Foundation LLC by the
Company
*11 Valuation and Qualifying Accounts and
Allowances
*21 Subsidiaries of the Company
*23 Consent of KPMG LLP
* Filed herewith
** Filed as an Exhibit to either the companys
Registration Statement (the Registration
Statement) on Form SB-2, dated January 27,
1994, or Amendment No. 1 or Amendment
No. 2 to such Registration Statement.
*** Filed as an Exhibit to the Companys
Registration Statement of Form S-3 dated
December 23, 1996.
# Filed as an Exhibit to the Companys
Registration Statement on Form 8-A dated
September 7, 1993 and incorporated herein by
reference.
## Filed as an Exhibit to the Companys Proxy
Statement on Form Pre 14A dated August 3,
2000.
### Filed as a Exhibit to the Companys 10-K for the
year ended December 31, 1998
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended December 31, 2000.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Exhibits to
Form 10 - K
of
GRAND TOYS INTERNATIONAL, INC.
For the Fiscal Year
Ended December 31, 2000
Schedule 11
GRAND TOYS INTERNATIONAL, INC., AND
SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND
ALLOWANCES
(In thousands)
Balance
At Additions
Balance
Beginning Charged
to Net at End
Of Year Operations
Deductions Of Year
------------- --------------
- - ---------------- -----------
Allowance for Doubtful Accounts
Year Ended December 31, 2000 $90,805 44,512 (111,309)(a) $24,008
Year Ended December 31, 1999 43,143 47,662 0 (a) 90,805
Year Ended December 31, 1998 52,882 43,426 (53,165) (a) 43,143
(a) Includes write-offs, recoveries of previous write-offs and
currency translation adjustments.
THE WARRANT EVIDENCED OR CONSTITUTED
HEREBY, AND ALL SHARES OF COMMON STOCK
ISSUABLE HEREUNDER, HAVE BEEN AND WILL BE
ISSUED WITHOUT REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE
SECURITIES ACT) AND MAY NOT BE SOLD, OFFERED
FOR SALE, TRANSFERRED, PLEDGED OR
HYPOTHECATED WITHOUT REGISTRATION UNDER
THE ACT UNLESS EITHER (i) THE DISPOSITION OF
SUCH SECURITIES IS EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS OR (ii) THE DISPOSITION OF SUCH
SECURITIES IS REGISTERED OR QUALIFIED UNDER
THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS.
WARRANT TO PURCHASE
COMMON STOCK OF GRAND TOYS INTERNATIONAL, INC.
This certifies that _____________________ (the
Holder), for value received, is entitled to purchase from Grand
Toys International, Inc. (the Company) ____________
(_______) shares of the Companys Common Stock, $0.001 par
value per share (the Common Stock), at a per share exercise
price of $0.53 per share (the Per Share Exercise Price). This
right may be exercised at any time after the six month
anniversary of the date hereof up to and including 5:00 p.m.
(New York City time) on the third anniversary of the date
hereof (the Expiration Date).
1. EXERCISE.
(a) To exercise this right the Holder shall surrender to the
Company at its principal office (or at such other location as the Company
may advise the Holder in writing) this warrant, properly endorsed, with the
Subscription Form attached hereto duly filled in and signed and, if
applicable, upon payment in cash or by check of the aggregate Per Share
Exercise Price for the number of shares for which this warrant is being
exercised determined in accordance with the provisions hereof.
(b) In lieu of exercising this warrant for cash, the Holder may
elect to receive shares equal to the value (as determined below) of this
warrant (or the portion thereof being canceled) by surrender of this warrant
at the principal office of the Company, together with the properly endorsed
Subscription Form and notice of such election, in which event the Company
will issue to the Holder a number of shares of Common Stock computed
using the following formula:
X = Y (A-B)
A
Where X = the number of shares of Common Stock to be
issued to the Holder
Y = the number of shares of Common Stock
purchasable under this warrant or, if only a portion of this warrant is being
exercised, the portion of this warrant being canceled (at the date of such
calculation)
A = the Fair Market Value per share of
Common Stock (at the date of such calculation)
B = Per Share Exercise Price (as adjusted to the date
of such calculation)
For purposes of the above calculation, Fair Market
Value per share of Common Stock will be as follows:
(1) If the Common Stock is listed on a
national securities exchange, the Nasdaq National
Market or another nationally recognized trading system
as of the exercise date, the Fair Market Value per share
of Common Stock shall be deemed to be the last
reported sale prices per share of Common Stock thereon
on the trading day on which a sale was made
immediately preceding the exercise date.
(2) If the Common Stock is not listed on a
national securities exchange, the Nasdaq National
Market or another nationally recognized trading system
as of the exercise date, the Fair Market Value per share
of Common Stock shall be deemed to be the amount
most recently determined by the Board of Directors to
represent the fair market value per share of the
Common Stock (including without limitation a
determination for purposes of granting Common Stock
options or issuing Common Stock under an employee
benefit plan of the Company); and, upon request of the
Holder, the Board of Directors (or a representative
thereof) shall promptly notify the Holder of the Fair
Market Value per share of Common Stock .
Notwithstanding the foregoing, if the Board of
Directors has not made such a determination within the
three-month period prior to the exercise date, then
(A) the Board of Directors shall make a determination
of the Fair Market Value per share of Common Stock
within 15 days of a request by the Holder that it do so,
and (B) the exercise of this Warrant pursuant to this
subsection 1(b) shall be delayed until such
determination is made.
2. ISSUANCE OF CERTIFICATES.
Certificates for the shares of Common Stock acquired upon
exercise of this warrant, together with any other securities or property to
which the Holder is entitled upon such exercise, will be delivered to the
Holder by the Company at the Companys expense within a reasonable time
after this warrant has been so exercised. Each stock certificate so delivered
will be in such denominations of Common Stock as may be requested by
the Holder and will be registered in the name of the Holder. In case of a
purchase of less than all the shares that may be purchased under this
warrant, the Company will cancel this warrant and execute and deliver a
new warrant or warrants of like tenor for the balance of the shares
purchasable under this warrant to the Holder within a reasonable time after
surrender of this warrant.
3. SHARES FULLY-PAID, NONASSESSABLE, ETC.
All shares of Common Stock issued upon exercise of this warrant
will, upon issuance, be duly authorized, validly issued, fully-paid and
nonassessable and free from all preemptive rights of any shareholder and
free of all taxes, liens and charges with respect to the issue thereof. The
Company will at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting
the exercise of this warrant, such number of its shares of Common
Stock as
from time to time are sufficient to effect the full exercise of
this warrant. If
at any time the number of authorized but unissued shares of Common Stock
is not sufficient to effect the full exercise of this warrant, the Company will
take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock
to such number of shares as is sufficient for such purpose.
The Company will take all such action as may be necessary to assure that
such securities may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic
securities exchange upon which the Common Stock may be listed;
provided, however, that the Company will not be required to effect a
registration under federal or state securities laws with respect to such
exercise (except as may be set forth in a separate written agreement
between the Company and the Holder).
4. ADJUSTMENTS.
4.1 Adjustment for Stock Splits and Combinations. If the
Company at any time or from time to time during the term of this warrant
effects a subdivision of the outstanding Common Stock, the Per Share
Exercise Price in effect immediately before that subdivision will be
proportionately decreased. Conversely, if the Company at any time or from
time to time during the term of this warrant combines the outstanding
shares of Common Stock into a smaller number of shares, the Per Share
Exercise Price in effect immediately before the combination will be
proportionately increased. Any adjustment under this Section 4.1 will
become effective at the close of business on the date the subdivision or
combination becomes effective.
4.2 Adjustment for Common Stock Dividends and
Distributions. If the Company at any time or from time to time during the
term of this warrant makes, or fixes, a record date for the determination of
holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock, in each such
event the Per Share Exercise Price that is then in effect will be decreased as
of the time of such issuance or, in the event such record date is fixed, as of
the close of business on such record date, by multiplying the Per Share
Exercise Price then in effect by a fraction (a) the numerator of which is the
total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance on the close of business on
such record date, and (b) the denominator of which is the total number of
shares of Common Stock issued and outstanding immediately prior to the
time of such issuance on the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend
or distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the
date fixed therefor, the Per Share Exercise Price will be recomputed
accordingly as of the close of business on such record date and thereafter
the Per Share Exercise Price will be adjusted pursuant to this Section 4.2 to
reflect the actual payment of such dividend or distribution.
4.3 Adjustments for Other Dividends and Distributions.
If the Company at any time or from time to time during the term of this
warrant makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable
in securities of the Company other than shares of Common Stock, in each
such event provision will be made so that the Holder will receive upon
exercise of this warrant, in addition to the number of shares of Common
Stock receivable thereupon, the amount of other securities of the Company
that it would have received had this warrant been exercised on the date of
such event and had it thereafter, during the period from the date of such
event to and including the exercise date, retained such securities receivable
by them as aforesaid, subject to all other adjustments called for during such
period under this Section 4 with respect to the rights of the Holder
hereunder or with respect to such other securities by their terms.
4.4 Adjustment for Reclassification, Exchange and
Substitution. If at any time or from time to time during the term of this
warrant the Common Stock issuable upon the exercise of this warrant is
changed into the same or a different number of shares of any class or
classes of stock, whether by recapitalization, reclassification or otherwise
(other than a recapitalization, subdivision, combination, reclassification or
exchange provided for elsewhere in this Section 4), the Holder will have the
right thereafter to exercise this warrant for the kind and amount of stock
and other securities and property receivable upon such recapitalization,
reclassification or other change into which the shares of Common Stock
issuable upon exercise of this warrant immediately prior to such
recapitalization, reclassification or change could have been converted, all
subject to further adjustment as provided herein or with respect to such
other securities or property by the terms thereof.
4.5 Reorganizations. If at any time or from time to time
during the term of this warrant there is a capital reorganization of the
Common Stock (other than a recapitalization, subdivision, combination,
reclassification or exchange provided for elsewhere in this Section 4), as a
part of such capital reorganization, provision will be made so that the
Holder will thereafter be entitled to receive upon exercise of this warrant
the number of shares of stock or other securities or property of the
Company to which a holder of the number of shares of Common Stock
deliverable upon exercise of this warrant would have been entitled on such
capital reorganization, subject to adjustment in respect of such stock or
securities by the terms thereof.
4.6 Certificate of Adjustment. In each case of an
adjustment or readjustment of the number of shares issuable upon exercise
of this warrant or the Per Share Exercise Price, the Company, at its expense,
will compute such adjustment or readjustment in accordance with the
provisions hereof and prepare a certificate showing such adjustment or
readjustment, and will mail such certificate, by first class mail, postage
prepaid, to the Holder at the Holders address as shown in the Companys
books. The certificate will set forth such adjustment or readjustment,
showing in detail the facts upon which such adjustment or readjustment is
based, including a statement of (a) the Per Share Exercise Price at the time
in effect, and (b) the type and amount, if any, of other property that at the
time would be received upon exercise of this warrant.
4.7 Notices of Record Date. Upon (a) any taking by the
Company of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, (b) any capital reorganization of the
Company, any reclassification or recapitalization of the capital stock of the
Company, any sale of all or substantially all of the assets of the Company or
any voluntary or involuntary dissolution, liquidation or winding up of the
Company or (c) a proposed sale event, the Company will mail to the Holder
at least twenty (20) days prior to the record date specified therein a notice
specifying (1) the date on which any such record is to be taken for the
purpose of such dividend or distribution and a description of such dividend
or distribution, (2) the date on which any such reorganization,
reclassification, recapitalization, asset sale, dissolution, liquidation or
winding up is expected to become effective, and (3) the date, if any, that is
to be fixed as to when the holders of record of Common Stock (or other
securities) will be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, asset sale, dissolution,
liquidation or winding up.
5. TAXES.
The Company will pay all taxes (other than taxes based upon
income) and other governmental charges that may be imposed with respect
to the issue or delivery of shares of Common Stock upon exercise of this
warrant, excluding any tax or other charge imposed in connection with any
transfer involved in the issue and delivery of shares of Common Stock in a
name other than that in which this warrant was registered.
6. REGISTRATION RIGHTS
The shares of Common Stock issuable upon exercise of this
warrant shall have the identical registration rights set forth in Section 4 of
the Subscription Agreement dated as of the date hereof between the Holder
and the Company.
7. CLOSING OF BOOKS.
The Company will at no time close its transfer books against the
transfer of any warrant or of any shares of Common Stock issued or
issuable upon the exercise of any warrant in any manner that interferes with
the timely exercise of this warrant.
8. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY.
Nothing contained in this warrant will be construed as conferring
upon the Holder the right to vote or to consent or to receive notice as a
shareholder of the Company or any other matters or any rights whatsoever
as a shareholder of the Company. No dividends or interest will be payable
or accrued in respect of this warrant or the interest represented hereby or
the shares purchasable hereunder until, and only to the extent that, this
warrant has been exercised.
9. WARRANTS TRANSFERABLE.
Subject to compliance with applicable federal and state securities
laws and the restrictions imposed by any other written agreement between
the Holder and the Company, this warrant and all rights hereunder are
transferable, in whole or in part, without charge to the Holder (except for
transfer taxes), upon surrender of this warrant properly endorsed and in
compliance with the provisions of this warrant.
10. MODIFICATION AND WAIVER.
This warrant and any provision hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the
party against which enforcement of the same is sought.
11. NOTICES.
Any notice required by the provisions of this warrant will be in
writing and will be deemed effectively given: (a) upon personal delivery to
the party to be notified; (b) when sent by confirmed telex or facsimile if
sent during normal business hours of the recipient; if not, then on the next
business day; (c) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (d) one (1) day
after deposit with a nationally recognized overnight courier, specifying next
day delivery, with written verification of receipt. All notices will be
addressed to the Holder at the address of the Holder appearing on the books
of the Company.
12. LOST WARRANTS.
The Company represents and warrants to the Holder that upon
receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction, or mutilation of this warrant and, in the case of any such
loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such warrant, the Company, at its expense,
will make and deliver a new warrant, of like tenor, in lieu of the lost,
stolen,
destroyed or mutilated warrant.
13. FRACTIONAL SHARES.
No fractional shares of Common Stock will be issued upon
exercise of this warrant. If the conversion would result in the issuance of
any fractional share, the Company will, in lieu of issuing any fractional
share, pay cash equal to the product of such fraction multiplied by the
closing bid price of the Companys Common Stock on the date of
conversion.
14. GOVERNING LAW.
This warrant will be construed and enforced in accordance with,
and the rights of the parties will be governed by, the laws of the State of
New York without regard to conflict of laws principles.
The Company has executed this warrant as of this ____ day of
March, 2001.
GRAND TOYS
INTERNATIONAL, INC.
By:__________________________________
Title:_________________________________
HOLDER
By:__________________________________________
Title:_________________________________________
EXHIBIT A TO WARRANT
SUBSCRIPTION FORM
Date: _________________
Grand Toys International, Inc.
Attn: President
Ladies and Gentlemen:
The undersigned hereby elects to exercise the warrant issued to it
by Grand Toys International, Inc. (the Company) dated as of
_____________ and to purchase thereunder
______________________(_______) shares of the Common Stock of the
Company at a purchase price of ______________________
($_____________) per Share, for an aggregate purchase price of
_______________________($_______________) (the Purchase Price).
Very truly yours,
_________________________________________
By:
______________________________________
Title:
___________________________________
REGULATION S SUBSCRIPTION AGREEMENT
GRAND TOYS INTERNATIONAL, INC.
Sir or Madam:
1. Application. The undersigned, intending to be
legally bound, hereby purchases from Grand Toys
International, Inc. (the Company), _______ Units (the Units) at
a purchase price of $0.35 per Unit. Each Unit consists of one
share of the Companys Common Stock, par value $0.001 per
share (the Common Stock) and a warrant to purchase one share
of Common Stock (the Warrant Shares) at an exercise price of
$0.53 per share, on the terms and conditions set forth in that
certain Warrant dated as of the date hereof (the Warrant)
attached hereto as Exhibit A. The Common Stock and the
Warrant Shares shall collectively be known as the Securities.
Simultaneously with the execution of this Subscription
Agreement, the undersigned agrees to execute the Warrant.
The undersigned understands that this subscription may be
accepted or rejected in whole or in part by the Company in its
sole discretion and that this subscription is and shall be
irrevocable unless the Company for any reason rejects this
subscription.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE SEC) UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT),
OR THE SECURITIES ACT OF ANY STATE UNDER ANY STATE
SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER REGULATION S
(REGULATION S) PROMULGATED UNDER THE SECURITIES ACT.
THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED IN THE UNITED STATES OR TO U.S. PERSONS (AS
SUCH TERM IS DEFINED IN REGULATION S) UNLESS THE
SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT
AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS,
SALES AND TRANSFERS ARE MADE PURSUANT TO AVAILABLE
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF
THOSE LAWS.
2. Representations and Warranties of the
Subscriber. The undersigned represents and warrants to the
Company as follows:
(a) The undersigned, in making the decision
to purchase the Units, has relied upon independent
investigations made by him or it and his or its representatives,
if any. The undersigned and/or his or its advisors have had a
reasonable opportunity to ask questions of and receive answers
from the Company concerning the Units.
(b) The undersigned has been supplied with
or has sufficient access to all information, including financial
statements and other financial information of the Company,
and has been afforded with an opportunity to ask questions of
and receive answers concerning information to which a
reasonable investor would attach significance in making
investment decisions, so that as a reasonable investor the
undersigned has been able to make the undersigneds decision
to purchase the Units.
(c) The undersigned is able to bear the
substantial economic risks of an investment in the Securities
for an indefinite period of time, has no need for liquidity in
such investment, has made commitments to investments that
are not readily marketable which are reasonable in relation to
the undersigneds net worth and, at the present time, could
afford a complete loss of such investment.
(d) The undersigned has such knowledge
and experience in financial, tax and business matters so as to
enable the undersigned to utilize the information made
available to the undersigned in connection with the offering of
the Units to evaluate the merits and risks of an investment in
the Units and to make an informed investment decision with
respect thereto.
(e) The undersigned understands that the
Securities are being sold in reliance on an exemption from the
registration requirements of federal and state securities laws
under Regulation S promulgated under the Securities Act and
that the Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and
understandings of the undersigned set forth herein in order to
determine the applicability of such exemptions and the
suitability of the undersigned to purchase the Units. The
representations, warranties and agreements contained herein are
true and correct as of the date hereof and may be relied upon by
the Company, and the undersigned will notify the Company
immediately of any adverse change in any such representations
and warranties which may occur prior to the acceptance of this
Subscription Agreement by the Company and will promptly
send the Company written confirmation thereof if requested by
the Company. The representations, warranties and agreements
of the undersigned contained herein shall survive the execution
and delivery of this Subscription Agreement and the purchase
of the Units.
(f) Neither the undersigned nor any person
or entity for whom the undersigned is acting as fiduciary is a
U.S. person. A U.S. person means any one of the following:
(i) any natural person resident in the
United States of America;
(ii) any partnership or corporation
organized or incorporated under the laws of the United States
of America;
(iii) any estate of which any executor
or administrator is a U.S. person;
(iv) any trust of which any trustee is a
U.S. person;
(v) any agency or branch of a foreign
entity located in the United States of America;
(vi) any non-discretionary account or
similar account (other than an estate or trust) held by a dealer
or other fiduciary for the benefit or account of a U.S. person;
(vii) any discretionary account or
similar account (other than an estate or trust) held by a dealer
or other fiduciary organized, incorporated or (if an individual)
resident in the United States of America; and
(viii) any partnership or corporation if:
(A) organized or incorporated
under the laws of any foreign
jurisdiction; and
(B) formed by a U.S. person
principally for the purpose of investing
in securities not registered under the
Securities Act, unless it is organized or
incorporated, and owned, by accredited
investors (as defined in Rule 501(a)
under the Securities Act) who are not
natural persons, estates or trusts.
(g) ALL OFFERS AND SALES OF THE
SECURITIES PRIOR TO THE EXPIRATION OF THE
DISTRIBUTION COMPLIANCE PERIOD AS DEFINED
IN RULE 902 SHALL ONLY BE MADE IN
COMPLIANCE WITH THE SAFE HARBOR
CONTAINED IN REGULATION S, PURSUANT TO
REGISTRATION OF SECURITIES UNDER THE
SECURITIES ACT OR PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT, AND ALL OFFERS AND SALES
AFTER THE DISTRIBUTION COMPLIANCE PERIOD
SHALL BE MADE ONLY PURSUANT TO SUCH A
REGISTRATION OR TO SUCH EXEMPTION FROM
REGISTRATION.
(h) ALL DOCUMENTS RECEIVED BY
THE UNDERSIGNED INCLUDE STATEMENTS TO
THE EFFECT THAT THE SECURITIES HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT
AND MAY NOT BE OFFERED OR SOLD IN THE
UNITED STATES OR TO U.S. PERSONS OR FOR THE
ACCOUNT OR BENEFIT OF A U.S. PERSON (OTHER
THAN DISTRIBUTORS AS DEFINED IN REGULATION
S) DURING THE DISTRIBUTION COMPLIANCE
PERIOD AS DEFINED IN RULE 902 UNLESS THE
SECURITIES ARE REGISTERED UNDER THE
SECURITIES ACT OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS IS AVAILABLE.
(i) IN THE VIEW OF THE SEC, THE
STATUTORY BASIS FOR THE EXEMPTION
CLAIMED FOR THIS TRANSACTION WOULD NOT
BE PRESENT IF THE OFFERING OF UNITS,
ALTHOUGH IN TECHNICAL COMPLIANCE WITH
REGULATION S, IS PART OF A PLAN OR SCHEME
TO EVADE THE REGISTRATION PROVISIONS OF
THE SECURITIES ACT. THE UNDERSIGNED IS
ACQUIRING THE UNITS FOR INVESTMENT
PURPOSES AND HAS NO PRESENT INTENTION TO
SELL THE SECURITIES IN THE UNITED STATES OF
AMERICA TO A U.S. PERSON OR FOR THE
ACCOUNT OR BENEFIT OF A U.S. PERSON.
(j) THE UNDERSIGNED AGREES
THAT THE CERTIFICATES REPRESENTING THE
SECURITIES SHALL CONTAIN A LEGEND TO THE
FOREGOING EFFECT.
(k) Neither the undersigned nor any of his or
its affiliates or agents will, directly or indirectly, maintain any
short position in the Securities or any other securities of the
Company for so long as any of the Securities are owned by the
undersigned.
3. Registration Rights.
3.1 Definitions. For purposes of this Section 3,
defined terms shall have the following meaning:
(i) Exchange Act means the Securities
Exchange Act of 1934, as amended, or any similar Federal
statute, and the rules and regulations of the SEC issued under
the Exchange Act, as they each may, from time to time, be in
effect.
(ii) Investor means each party that has
executed a signature page to this Subscription Agreement and
delivered the purchase price set forth thereon by wire transfer
of immediately available funds.
(iii) Register, Registered and Registration
mean a registration effected by preparing and filing a
registration statement in compliance with the Securities Act
and applicable rules and regulations thereunder, and the
declaration or ordering of the effectiveness of such registration
statement.
(iv) Registrable Shares means (i) any shares of
Common Stock held by the Investor issued pursuant to the terms
of this Subscription Agreement; (ii) the Warrant Shares; and (iii)
any other shares of Common Stock of the Company issued in
respect of the shares described in clauses (i) and (ii) above
(because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events); provided, however, that any
shares described in the foregoing clauses that have been resold to
the public shall cease to be Registrable Shares.
(v) Registration Expenses means all expenses the
Company incurs in complying with Section 3, including, without
limitation, all Registration and filing fees, printing expenses, fees
and disbursements of counsel for the Company, Blue Sky fees
and expenses, and the expenses of any special audits incident to
or required by any such Registration.
(vi) Registration Statement means a registration
statement filed by the Company with the SEC for a public
offering and sale of securities of the Company (other than a
registration statement on Form S-8 or Form S-4, or their
successors, any other form for a limited purpose, any
registration statement covering only securities proposed to be
issued in exchange for securities or assets of another
corporation or a registration statement on Form S-3 solely for
the purpose of registering shares issued in a non-underwritten
offering in connection with a merger, combination or
acquisition).
(vii) Selling Expenses means (i) all underwriting
discounts and selling commissions applicable to the sale of securities
Registered and sold pursuant to Section 3, (ii) any additional costs and
disbursements of counsel for the Company that result from inclusion of
Registrable Shares in the Registration, and (iii) the expenses of qualifying
the securities covered by the Registration in a jurisdiction to the extent that
the jurisdiction requires such qualification expenses to be borne by the
selling security holders.
(viii) Stockholders means the Investor, and any
persons or entities to whom the rights granted under this Subscription
Agreement are transferred by the Investor.
3.2 Piggyback Registration Rights.
(a) Whenever the Company proposes to file a
Registration Statement (other than pursuant to Section 3.3) at any time and
from time to time, other than a Registration relating solely to employee
benefit plans, or a Registration relating solely to a transaction pursuant to
Rule 145 promulgated under the Securities Act or a Registration on any
Registration form which does not permit secondary sales or does not
include substantially the same information as would be required to be
included in a Registration statement covering the sale of the Registrable
Securities, the Company shall, prior to such filing, give written notice to the
Investor of its intention to do so and, upon the written request of Investor
given within 10 days after the Company provides such notice (which
request shall state the intended method of disposition of such Registrable
Shares), the Company shall use its commercially reasonable efforts to cause
all Registrable Shares that the Company has been requested by Investor to
register, to be registered under the Securities Act to the extent necessary to
permit their sale or other disposition in accordance with the intended
methods of distribution specified in the request of such Investor; provided
that the Company shall have the right to postpone or withdraw any
registration effected pursuant to this Section 3 without obligation to
Investor.
(b) In connection with any offering under this
Section 3.2 involving an underwriting, the Company shall not be required
to include any Registrable Shares in such underwriting unless the holders
thereof accept the terms of the underwriting as agreed upon between the
Company and the underwriters selected by it, and then only in such quantity
as will not, in the good faith opinion of the underwriters and the Company,
jeopardize the success of the offering by the Company. If, in the opinion of
the managing underwriter and the Company, the registration of all, or part
of, the Registrable Shares that the holders have requested to be included
would materially and adversely affect such public offering, then the
Company shall be required to include in the underwriting only that number
of Registrable Shares, if any, that the managing underwriter in good faith
believes may be sold without causing such adverse effect. If the number of
Registrable Shares to be included in the underwriting in accordance with
the foregoing is less than the total number of shares that the holders of
Registrable Shares have requested to be included, the holders holding
Registrable Shares who have requested registration shall participate in the
underwriting pro rata based upon their total ownership of shares of
Common Stock of the Company (giving effect to the conversion into
Common Stock of all securities convertible thereinto). If any holder would
thus be entitled to include more shares than such holder requested to be
registered, the excess shall be allocated among other requesting holders pro
rata based upon their total ownership of Registrable Shares.
3.3 Demand Registration Rights. If the Company
receives from Investor a written request or requests that it effect a
Registration and any related qualification or compliance with respect to all
or a part of the Registrable Securities of Investor, the Company shall:
(a) promptly give written notice of the proposed
Registration, and any related qualification or compliance, to all other
holders; and
(b) as soon as practicable, effect such Registration
and all such qualifications and compliances as may be so requested and as
would permit or facilitate the sale and distribution of all or such portion of
the Registrable Securities as are specified in such request, together with all
or such portion of the Registrable Securities of any other shareholder(s)
joining in such request as are specified in a written request given within
twenty (20) days after receipt of such written notice from the Company;
provided, however:
(1) the Company shall not be
required to effect more than two (2) Registrations pursuant to
this Section 3.3 on behalf of the undersigned and all other
persons purchasing securities of the Company on the date
hereof; provided, further, that the Company shall not be
required to effect any Registration within twelve (12) months
after the effective date of any other Registration Statement of
the Company;
(2) the value of the Registrable
Securities for which the undersigned and all other persons
purchasing securities of the Company on the date hereof
request registration hereunder shall be at least $500,000 in the
aggregate; and
(3) if at the time of any request to register
Registrable Shares pursuant to this Section 3.3, the Company is engaged or
has fixed plans approved by the Companys Board of Directors to engage
within 120 days of the time of the request in a registered public offering as
to which the Stockholders may include Registrable Shares pursuant to
Section 3.2 or is engaged in any other activity that, in the good faith
determination of the Companys Board of Directors, would be adversely
affected by the requested Registration to the material detriment of the
Company, then the Company may at its option direct that such request be
delayed for a period not in excess of 180 days from the effective date of
such offering or the date of commencement of such other material activity,
as the case may be, such right to delay a request to be exercised by the
Company not more than once in any one (1) year period.
(c) Subject to the foregoing, the Company shall use
its commercially reasonable efforts to file a registration statement covering
the Registrable Securities and other securities so requested to be Registered
as expeditiously as possible after receipt of Investors request.
3.4 Expenses of Company Registrations. The
Company shall bear all Registration Expenses incurred in connection with
any Registration, qualification or compliance pursuant to this Section 3
(exclusive of Selling Expenses).
3.5 Registration Procedures. In the case of each
Registration, qualification or compliance effected by the Company pursuant
hereto, the Company shall keep Investor advised in writing as to the
initiation of each Registration, qualification and compliance and as to the
completion thereof. At its expense, the Company shall:
(a) prepare and file with the SEC a Registration
Statement with respect to such Registrable Shares and use its
commercially reasonable efforts to cause that Registration
Statement to become and remain effective for the earlier of 270
days or until the completion of the distribution;
(b) as expeditiously as possible prepare and file
with the SEC any amendments and supplements to the
Registration Statement and the prospectus included in the
Registration Statement as may be necessary to keep the
Registration Statement effective, and comply with the
provisions of the Securities Act with respect to the disposition
of all securities covered by such Registration Statement;
(c) as expeditiously as possible furnish to each
selling Stockholder such reasonable numbers of copies of the
registration statement, each amendment and supplement
thereto, prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act, and
such other documents as the selling Stockholder may
reasonably request in order to facilitate the public sale or other
disposition of the Registrable Shares owned by the selling
Stockholder; and
(d) as expeditiously as possible use its commercially
reasonable efforts to register or qualify the Registrable Shares covered by
the Registration Statement under the securities or Blue Sky laws of such
states as the selling Stockholders shall reasonably request, and do any and
all other acts and things that may be necessary or desirable to enable the
selling Stockholders to consummate the public sale or other disposition in
such states of the Registrable Shares owned by the selling Stockholder;
provided, however, that the Company shall not be required in connection
with this Section 3.5 to qualify as a foreign corporation or execute a general
consent to service of process in any jurisdiction.
If the Company has delivered preliminary or final prospectuses to the
selling Stockholders and after having done so the prospectus is amended to
comply with the requirements of the Securities Act, the Company shall
promptly notify the selling Stockholders and, if requested, the selling
Stockholders shall immediately cease making offers of Registrable Shares
and return all prospectuses to the Company. The Company shall promptly
provide the selling Stockholders with revised prospectuses and, following
receipt of the revised prospectuses, the selling Stockholders shall be free to
resume making offers of the Registrable Shares.
3.6 Indemnification.
In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Subscription
Agreement, the Company will indemnify and hold harmless the
seller of such Registrable Shares, each underwriter of such
seller of such Registrable Shares, and each other person, if any,
who controls such seller or underwriter within the meaning of
the Securities Act or the Exchange Act against any losses,
claims, damages or liabilities, joint or several, to which such
seller, underwriter or controlling person may become subject
under the Securities Act, the Exchange Act, state securities or
Blue Sky laws or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration
Statement under which such Registrable Shares were registered
under the Securities Act, any preliminary prospectus or final
prospectus contained in the Registration Statement, or any
amendment or supplement to such Registration Statement, or
arise out of or are based upon the omission or alleged omission
to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; and the
Company will reimburse such seller, underwriter and each such
controlling person for any legal or any other expenses
reasonably incurred by such seller, underwriter or controlling
person in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that
the Company will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is
based upon any untrue statement or omission made in such
Registration Statement, preliminary prospectus or prospectus,
or any such amendment or supplement, in reliance upon and in
conformity with information furnished to the Company, in
writing, by or on behalf of such seller, underwriter or
controlling person specifically for use in the preparation
thereof.
In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Subscription
Agreement, each seller of Registrable Shares, severally and not
jointly, will indemnify and hold harmless the Company, each
of its directors and officers and each underwriter (if any) and
each person, if any, who controls the Company or any such
underwriter within the meaning of the Securities Act or the
Exchange Act, and any other seller of Registrable Shares or
any such sellers partners, directors or officers and each person,
if any, who controls such seller within the meaning of the
Securities Act and the Exchange Act, against any losses,
claims, damages or liabilities, joint or several, to which the
Company, such directors and officers, underwriter, selling
Stockholder or controlling person may become subject under
the Securities Act, Exchange Act, state securities or Blue Sky
laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of
a material fact contained in any Registration Statement under
which such Registrable Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus
contained in the Registration Statement, or any amendment or
supplement to the Registration Statement, or arise out of or are
based upon any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading, and each such seller of
Registrable Shares will reimburse the Company for any legal or
any other expenses reasonably incurred by the Company in
connection with investigating or defending any such loss,
claim, damage, liability or action if the statement or omission
was made in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of such
seller, specifically for use in connection with the preparation of
such Registration Statement, prospectus, amendment or
supplement; provided, however, that the obligations of such
Stockholders hereunder shall be limited to an amount equal to
the net proceeds received by each selling Stockholder of
Registrable Shares sold as contemplated herein.
Each party entitled to indemnification under this
Section 3.6 (the Indemnified Party) shall give notice to the
party required to provide indemnification (the Indemnifying
Party) promptly after such Indemnified Party has actual
knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense
of any such claim or any litigation resulting therefrom;
provided, that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not
be unreasonably withheld); and, provided, further, that the
failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its
obligations under this Subscription Agreement, except to the
extent that the Indemnifying Partys ability to defend against
such claim or litigation is impaired as a result of such failure to
give notice. The Indemnified Party may participate in such
defense at such partys expense; provided, however, that the
Indemnifying Party shall pay such expense if representation of
such Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or
potential differing interests between the Indemnified Party and
any other party represented by such counsel in such
proceeding. No Indemnifying Party in the defense of any such
claim or litigation shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter
into any settlement that does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect of
such claim or litigation, and no Indemnified Party shall consent
to entry of any judgment or settle such claim or litigation
without the prior written consent of the Indemnifying Party.
Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be
reasonably required in connection with the defense of such
claim and litigation resulting therefrom.
In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this
Section 3.6 is due in accordance with its terms but for any
reason is held to be unavailable to an Indemnified Party in
respect to any losses, claims, damages and liabilities referred to
herein, then the Indemnifying Party shall, in lieu of
indemnifying such Indemnified Party, contribute to the amount
paid or payable by such Indemnified Party as a result of such
losses, claims, damages or liabilities to which such party may
be subject in proportion as is appropriate to reflect the relative
fault of the Indemnifying Party on the one hand and the
Indemnified Party on the other hand in connection with the
statements or omissions that resulted in such losses, claims,
damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party
and the Indemnified Party shall be determined by reference to,
among other things, whether the untrue or alleged untrue
statement of material fact related to information supplied by the
Indemnifying Party or the Indemnified Party and the parties
relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Investor agree that it would not be just
and equitable if contribution pursuant to this Section 3.6 were
determined by pro rata allocation or by any other method of
allocation that does not take account of the equitable
considerations referred to above. Notwithstanding the
provisions of this paragraph of Section 3.6, (a) in no case shall
any one Investor be liable or responsible for any amount in
excess of the net proceeds received by such Investor from the
offering of Registrable Shares and (b) the Company shall be
liable and responsible for any amount in excess of such
proceeds; provided, however, that no person guilty of
fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution for
any person who was not guilty of such fraudulent
misrepresentation. Any party entitled to contribution will,
promptly after receipt of notice of commencement of any
action, suit or proceeding against such party or parties under
this Section, notify such party or parties from whom such
contribution may be sought, but the omission so to notify such
party or parties from contribution may be sought shall not
relieve such party from any other obligation it or they may
have thereunder or otherwise under this Section. No party shall
be liable for contribution with respect to any action, suit,
proceeding or claim settled without its prior written consent,
which consent shall not be unreasonably withheld.
4. Miscellaneous.
(a) This Subscription Agreement and
the documents referred to herein constitute the entire agreement
between the parties hereto with respect to the subject matter
hereof and together supersede all prior discussions or
agreements in respect thereof.
(b) This Subscription Agreement
may be executed in two or more counterparts, each of which
shall be deemed to be an original, but all of which shall
constitute a single document.
(c) This Subscription Agreement
shall be governed by and construed in accordance with the laws
of the State of New York. Any dispute arising out of or in
connection with this Subscription Agreement shall be settled
by arbitration in accordance with the rules of the American
Arbitration Association then in effect. The location of any
hearing shall be New York, New York.
(d) Any notice required by the
provisions of this Subscription Agreement shall be in writing
and shall be deemed effectively given: (a) upon personal
delivery to the party to be notified; (b) when sent by confirmed
telex or facsimile if sent during normal business hours of the
recipient; if not, then on the next business day; (c) five (5) days
after having been sent by registered or certified mail, return
receipt requested, postage prepaid; or (d) one (1) day after
deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of
receipt. All notices will be addressed to the undersigned at the
address of the set forth on the signature page of this
Subscription Agreement.
(e) This Subscription Agreement
shall survive the death or disability of the undersigned and
shall be binding upon the undersigneds heirs, executors,
administrators, successors and permitted assigns.
(f) All pronouns and any variations
thereof used herein shall be deemed to refer to the masculine,
feminine, neuter, singular or plural as the identity of the person
or persons referred to may require.
(g) Each provision of this
Subscription Agreement shall be considered separable and if
for any reason any provision or provisions hereof are
determined to be invalid or contrary to applicable law, such
invalidity or illegality shall not impair the operation of or affect
the remaining portions of this Subscription Agreement.
(h) Paragraph titles are for
descriptive purposes only and shall not control or alter the
meaning of this Subscription Agreement as set forth in the text.
[signature page follows]
IN WITNESS WHEREOF, the undersigned has executed this
Subscription Agreement as of March __, 2001.
Number of Shares Purchased:
Aggregate Purchase Price:
_________________
__________
Residence or Business
Address:
Street
City State Zip Code
Mailing Address (if
different
from Residence or
Business
Address):
Street
City State Zip Code
ACCEPTED AND AGREED TO:
GRAND TOYS INTERNATIONAL, INC.
By:
Name:
Title:
Dated as of: March __, 2001
LOAN AND SECURITY AGREEMENT
LOAN AND SECURITY AGREEMENT, dated as of
February 17, 2000 (as amended, modified or supplemented,
the Agreement), by and among LIMITED TREASURES,
INC., a California corporation (Borrower) and GRAND
TOYS INTERNATIONAL, INC., a Nevada corporation
(Lender).
PRELIMINARY STATEMENTS
A. The parties are currently in the process of
negotiating the potential acquisition (the Acquisition) of all
of the assets of Borrower by Lender pursuant to an Asset
Purchase Agreement to be entered into by and among
Borrower, Lender, the Pledgors (as defined below) and
Limited Treasures Acquisition Corp., a Delaware
corporation, (the Asset Purchase Agreement) (capitalized
terms used but not otherwise defined herein shall have the
meaning ascribed thereto in Article I hereof).
B. Borrower has certain contractual obligations
and working capital needs for which financing is required
prior to the consummation of the Acquisition (including the
conduct of due diligence and other preliminary activities).
C. Borrower has requested Lender to extend a loan
on the Closing Date in the principal amount of Seven
Hundred Thousand Dollars ($700,000) and Lender is willing
to extend such credit to Borrower on the terms and subject
to the conditions set forth herein.
D. Borrower is willing to secure all of its
Obligations under the Loan Documents by granting to
Lender a security interest in and lien upon all of its existing
and after-acquired personal and real property.
E. Each Guarantor (as defined below) is willing to
guarantee all of the Obligations of Borrower to Lender
under the Loan Documents.
F. The Pledgors (as defined below) collectively
own one hundred percent (100%) in the
aggregate of the issued and outstanding
common stock of Borrower and each Pledgor is
willing to pledge to Lender all of his/her
interests in the capital stock of Borrower as the
collateral for the Guaranty Agreements (as
defined below).
G.
NOW, THEREFORE, in consideration of the foregoing and
the mutual covenants contained in this Agreement, the
parties agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Defined Terms. As used in this Agreement,
the following terms have the meanings specified below:
Account Debtor means any Person as to whom Borrower is a
creditor, and includes any Person obligated to Borrower
pursuant to any Account, Instrument, Chattel Paper,
General Intangible, Document, Investment Property, charter
or lease, and includes any guarantor, endorser, or surety of
any of the foregoing Collateral, and any Person that
provides security for any of the foregoing Collateral, and
any maker or endorser of any Item of Payment given to
Borrower other than cash.
Accounts means accounts as defined in Article 9 of the UCC,
and includes all obligations for the payment of money
arising out of Borrowers rendition of services, or sale, lease
or other disposition of Borrowers goods or other property,
and includes all rentals, lease payments, and other moneys
earned and to be earned, due and to become due, under any
lease, and all rights of stoppage in transit, replevin,
repossession and reclamation and other rights and remedies
of an unpaid vendor, lienor or secured party, and all
guaranties or other contracts of suretyship with respect to
any of the foregoing property, and all deposits, letters of
credit, and other security for the obligation of any Account
Debtor relating in any way to any of the foregoing property,
and all credit and other insurance for any of the foregoing
property and all contract rights.
Acquisition shall having the meaning set forth in the
Preliminary Statements.
Acquisition Co. means Limited Treasures Acquisition Corp, a
Delaware corporation.
Act of Bankruptcy, when used in reference to any Person,
means the occurrence of any of the following with respect to
such Person: (i) such Person shall have made an assignment
for the benefit of his or its creditors; (ii) such Person shall
have admitted in writing his or its inability to pay his or its
debts as they become due; (iii) such Person shall have filed a
voluntary petition in bankruptcy; (iv) such Person shall have
been adjudicated a bankrupt or insolvent; (v) such Person
shall have filed any petition or answer seeking for himself or
itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under
any present or future Applicable Law pertinent to such
circumstances; (vi) such Person shall have filed or shall file
any answer admitting or not contesting the material
allegations of a bankruptcy, insolvency or similar petition
filed against such Person; (vii) such Person shall have sought
or consented to, or acquiesced in, the appointment of any
trustee, receiver, or liquidator of such Person or of all or any
substantial part of the properties of such Person;
(viii) 60 days shall have elapsed after the commencement of
an action against such Person seeking reorganization,
arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future
Applicable Law without such action having been dismissed
or without all orders or proceedings thereunder affecting the
operations or the business of such Person having been
stayed, or if a stay of any such order or proceedings shall
thereafter be set aside and the action setting it aside shall not
be timely appealed; or (ix) 60 days shall have expired after
the appointment, without the consent or acquiescence of
such Person of any trustee, receiver or liquidator of such
Person or of all or any substantial part of the assets and
properties of such Person without such appointment having
been vacated.
Act of Dissolution, when used in reference to any Person
(other than an individual), shall mean the occurrence of any
action initiating, or any event that results in, the dissolution,
liquidation, winding-up or termination of such Person.
Affiliate means, when used with respect to a specified Person,
another Person that directly, or indirectly through one or
more intermediaries, Controls or is Controlled by or is
under common Control with the Person specified.
Applicable Law(s), when used in the singular, shall mean any
applicable federal, state or local law, ordinance, order,
regulation, rule or requirement of any governmental or
quasi-governmental agency, instrumentality, board,
commission, bureau or other authority having jurisdiction,
and, when used in the plural, shall mean all such applicable
federal, state and local laws, ordinances, orders, regulations,
rules and requirements.
Asset Purchase Agreement shall having the meaning set forth
in the Preliminary Statements.
Bank Accounts means any and all depositary accounts,
including any and all other demand, time, savings, passbook
and like accounts, collateral accounts, cash management
accounts, safe-keeping accounts, and safe-deposit boxes, and
including any and all amounts and contents therein and
thereof and all of Borrowers rights under agreements relating
thereto, and all of Borrowers rights relating to the storage
and retrieval thereof and access thereto.
Borrowers Business means Borrowers business of designing,
developing, producing, marketing, distributing and selling a
proprietary line of plush bean-bag bears to merchandisers.
Business Day means any day other than a Saturday, Sunday or
day on which banks in New York City are authorized or
required by law to close.
Capital Lease Obligations of any Person means the
obligations of such Person to pay rent or other amounts
under any lease of (or other arrangement conveying the right
to use) real or personal property, or a combination thereof
which obligations are required to be classified and accounted
for as capital leases on a balance sheet of such Person under
GAAP, and the amount of such obligations is the capitalized
amount thereof determined in accordance with GAAP.
Chattel Paper means chattel paper, as that term is defined in
Article 9 of the UCC.
Closing means the consummation of the Transaction.
Closing Date means the date of the Transaction hereunder.
Code means the Internal Revenue Code of 1986, as amended
from time to time.
Collateral shall have the meaning specified in Section 7.1.
Colorado Guarantor means Limited Treasures Colorado,
Inc., a Colorado corporation, and its permitted successors
and assigns.
Colorado Guaranty means the Guaranty Agreement executed
by the Colorado Guarantor in favor of Lender.
Colorado Pledge Agreement means the Pledge Agreement
executed by Peter Schaffer in favor of Lender with respect to
his equity interest in Limited Treasures Colorado, Inc.
Control means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of
voting securities, by contract or otherwise, and the terms
Controlling and Controlled have meanings correlative
thereto.
Default means any event or condition that upon notice, lapse
of time or both would constitute an Event of Default.
Documents means documents, as that term is defined in
Article 9 of the UCC.
Dollars or $ means lawful money of the United States of
America.
Equipment means equipment, as that term is defined in
Article 9 of the UCC and goods that are or are to become
fixtures.
Event of Default shall have the meaning specified in Article
VIII.
Financial Officer of any corporation means the chief financial
officer or principal accounting officer of such corporation.
Fixed Rate means the fixed interest rate of twelve percent
(12%) per annum.
GAAP means generally accepted accounting principles
applied on a consistent basis.
General Intangibles means general intangibles, as defined in
Article 9 of the UCC, of every kind and description, and
including all (i) advertisements in any medium (and other
marketing and promotional materials in any medium),
brochures, signs, stationery, business forms, packaging and
shipping materials, telephone numbers, post office addresses,
mailing addresses, e-mail addresses, so-called web sites and
addresses and all codes and rights relating thereto, programs
and software, licenses, permits, consents, and approvals of
any Governmental Authorities and other Persons, federal,
state, and local tax refund claims, financing statements in
which Borrowers interest appears as a secured party or
lessor, and things in action, (ii) Intellectual Property, (iii) to
the extent not otherwise included as Intellectual Property,
all goodwill associated with or related to any of the
foregoing or Borrower or Borrowers business, (iv) all
obligations and indebtedness owing to Borrower (other than
Accounts), and (v) all rights and claims in respect of refunds
for taxes paid.
Governmental Authority(ies) means any Federal, state, local
or foreign court or governmental agency, authority,
instrumentality or regulatory body.
Guarantors means, collectively, the Stockholder Guarantors,
the Limited Recourse Guarantors and the Colorado
Guarantor, and each of their respective permitted successors
and assigns, and Guarantor means each of the foregoing.
Guaranty of or by any Person means any obligation,
contingent or otherwise, of such Person guaranteeing or
having the economic effect of guaranteeing any Indebtedness
of any other Person (the primary obligor) in any manner,
whether directly or indirectly, and including any obligation
of such Person, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of)
such Indebtedness or to purchase (or to advance or supply
funds for the purchase of) any security for the payment of
such Indebtedness, (b) to purchase or lease property,
securities or services for the purpose of assuring the owner of
such Indebtedness of the payment of such Indebtedness or (c)
to maintain working capital, equity capital or any other
financial statement condition or liquidity of the primary
obligor so as to enable the primary obligor to pay such
Indebtedness; provided, however, that the term Guarantee
shall not include endorsements for collection or deposit in
the ordinary course of business.
Guaranty Agreement means any Guaranty Agreement made
by any Guarantor in favor of Lender, including the
Stockholder Guaranty, the Limited Recourse Guaranty and
the Colorado Guaranty.
Held Items shall have the meaning set forth in Section 7.1(g).
Indebtedness of any Person means (in each case, whether such
obligation is with full or limited recourse) (a) any obligation
of such Person for borrowed money, (b) any obligation of
such Person evidenced by a bond, debenture, note or other
similar instrument, (c) any obligation of such Person to pay
the deferred purchase price of property or services, except a
trade account payable that arises in the ordinary course of
business but only if and so long as the same is payable on
customary trade terms, (d) any obligation of such Person as
lessee under a capital lease, (e) any obligation of such Person
to purchase securities or other property that arises out of or
in connection with the sale of the same or substantially
similar securities or property, (f) any non-contingent
obligation of such Person to reimburse any other Person in
respect of amounts paid under a letter of credit or other
Guaranty issued by such other Person to the extent that such
reimbursement obligation remains outstanding after it
becomes non-contingent, (g) any obligation with respect to
an interest rate or currency swap or similar obligation
obligating such Person to make payments, whether
periodically or upon the happening of a contingency, except
that if any agreement relating to such obligation provides for
the netting of amounts payable by and to such Person
thereunder or if any such agreement provides for the
simultaneous payment of amounts by and to such Person,
then in each such case, the amount of such obligation shall
be the net amount thereof, (h) any Indebtedness of others
secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by)
a Lien on any asset of such Person, provided that the amount
of such indebtedness at any date shall be deemed to be the
lesser of the fair market value at such date of the asset subject
to the Lien securing such indebtedness and the amount of
the Indebtedness secured and (i) any Indebtedness of others
Guaranteed by such Person.
Information Systems and Equipment means all computer
hardware, firmware and software, as well as other
information processing systems, or any equipment
containing embedded microchips, whether directly owned,
licensed, leased, operated or otherwise controlled by
Borrower or any of its Subsidiaries, including through third-
party service providers, and which, in whole or in part, are
used, operated, relied upon, or integral to, Borrowers or any
of its Subsidiaries conduct of their business.
Instruments means promissory notes or other instruments or
agreements evidencing Borrowers right to payment from any
Person or Persons, and including, without limitation, all of
Borrowers instruments as defined in Article 9 of the UCC,
and letters of credit.
Intellectual Property means, collectively, all of Borrowers
now owned and hereafter acquired intellectual property,
including, without limitation the following: (a) all patents
(including all rights corresponding thereto throughout the
world, and all improvements thereon); (b) all trademarks
(including service marks, trade names and trade secrets, and
all goodwill associated therewith), (c) all copyrights
(including all renewals, extensions and continuations
thereof); (d) all applications for patents, trademarks or
copyrights and all applications otherwise relating in any way
to the subject matter of such patents, copyrights and
trademarks; (e) all patents, copyrights, trademarks or
applications therefor arising after the date of this Agreement;
(f) all reissues, continuations, continuations-in-part and
divisions of the property described in the preceding clauses
(a), (b), (c), (d), and (e), including, without limitation, any
claims by Borrower against third parties for infringement
thereof; and (g) all rights to sue for past, present and future
infringements or violations of any such patents, trademarks,
and copyrights.
Interest means any ownership or profit-sharing interest
(howsoever designated) in any general or limited
partnership, trust, limited liability company, private
company or joint venture, and all agreements, instruments
and documents convertible, in whole or in part, into any one
or more of the foregoing.
Interim Financial Statements shall have the meaning specified
in Section 4.6.
Inventory means inventory as defined in Article 9 of the
UCC, including all raw materials, work in process, parts,
components, assemblies, supplies and materials used or
consumed in Borrowers business, all goods, wares and
merchandise, finished or unfinished, held for sale or lease or
leased or furnished or to be furnished under contracts of
service or hire.
Investment Property means securities (whether certificated or
uncertificated), security entitlements, securities accounts,
commodity contracts, commodity accounts and other
investment property as defined in Article 8 or Article 9, as
the case may be of the UCC.
Investments means, collectively, (a) ownership or purchase of
any stock, evidence of Indebtedness, Interest in or other
security of another Person, (b) any loan, advance,
contribution to capital, extension of credit (except for
current trade and customer accounts receivable for inventory
sold or services rendered in the ordinary course of business
and payable in accordance with customary trade terms) to
another Person, and (c) any acquisition after Closing of any
business or business unit of another Person (whether
acquired by purchase of assets or securities), or any
commitment or option to acquire any of the foregoing items
(a) through (c) if, in the case of an option, the aggregate
consideration paid for such option was in excess of $100.
Item of Payment means as to any Person, all checks, drafts,
cash, and other remittances of payment of, or on account of,
any Accounts, Instruments, Chattel Paper, Documents, or
General Intangibles, or received as proceeds of the sale or
lease of any property or as payment for any services
rendered.
Licenses means, collectively, all rights, licenses, permits and
authorizations now or hereafter issued by any Governmental
Authority reasonably necessary in connection with the
operation or conduct of Borrowers Business.
Lien means, with respect to any asset, (a) any mortgage, deed
of trust, lien, pledge, encumbrance, charge or security
interest in or on such asset, (b) the interest of a vendor or a
lessor under any conditional sale agreement, capital lease or
title retention agreement (or any financing lease having
substantially the same economic effect as any of the
foregoing) relating to such asset and (c) in the case of
securities, any purchase option, call or similar right of a
third party with respect to such securities.
Limited Recourse Guaranty means the Guaranty Agreement
executed by each of the Limited Recourse Guarantors in
favor of Lender.
Limited Recourse Guarantors means Peter Schaffer, Jan
OConnor, Sam Watts and Charles Copeland, and their
respective permitted successors and assigns.
Loan means the loan in the amount of $700,000 made by
Lender to Borrower pursuant to Section 2.1.
Loan Documents means, collectively, this Agreement, the
Note, the Stockholder Guaranty, the Limited Recourse
Guaranty, the Colorado Guaranty, any other Guaranty
Agreement, the Security Documents, and all other
instruments and documents executed and delivered in
connection with the Transaction.
Loan Party means Borrower, each Guarantor and each
Pledgor.
Lucky Star means Lucky Star Toys, Inc., a California
corporation.
Lucky Star Agreement means an agreement among Lucky
Star, Borrower and Lender, pursuant to which Lucky Star
agrees that in consideration of the payment to be made to
Lucky Star as described in Section 2.2(ii) hereof, (x) Lucky
Star will agree that the payment date of the balance of
Borrowers existing account balance with Lucky Star shall be
extended to February 15, 2001, and that no finance charges,
late fees or other assessments shall accrue on such balance
during such period and (y) Lucky Star agrees that at any time
Acquisition Co. acquires the business or assets of Borrower,
then Borrower shall be entitled to transfer, and Acquisition
Co. shall be entitled to assume, such existing account balance
referred to in (x) above upon the extended terms referred to
in (x) above.
Material Adverse Effect means (a) a materially adverse effect
on the business, operations, prospects or condition, financial
or otherwise, of Borrower, (b) a material impairment of the
ability of Borrower or any other Loan Party to perform any
of its obligations under any Loan Document or (c) a material
impairment of the rights of or benefits available to Lender
under any Loan Document.
Maturity Date means July 1, 2000.
Note means the promissory note dated of even date in the
principal amount of $700,000 from Borrower made payable
to Lender and evidencing Borrowers repayment obligation
for the Loan.
Obligations means all loans and advances pursuant to this
Agreement or otherwise, all debts, liabilities and obligations,
for the performance of covenants, tasks or duties or for
payment of monetary amounts (whether or not such
performance is then required or contingent, or such amounts
are liquidated or determinable) owing by any Loan Party to
Lender and all covenants and duties regarding such amounts,
of any kind or nature, present or future, whether or not
evidenced by any note, agreement or other instrument,
arising under this Agreement or any of the other Loan
Documents. The term includes all principal, interest
(including all interest that accrues after the commencement
of any case or proceeding in bankruptcy after the insolvency
of, or for the reorganization of any Loan Party, whether or
not allowed in such proceeding), fees, charges, expenses,
attorneys fees, and any other sum chargeable to any Loan
Party under this Agreement or any other Loan Document.
Other Personalty shall have the meaning set forth in Section
7.1(g).
Permitted Investments means:
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the
United States of America (or by any agency thereof to the
extent such obligations are backed by the full faith and credit
of the United States of America), in each case maturing within
one year from the date of acquisition thereof;
(b) investments in commercial paper maturing within 270
days from the date of acquisition thereof and having, at such
date of acquisition, the highest credit rating obtainable from
Standard & Poors Ratings Service or from Moodys Investors
Service, Inc.;
(c) investments in certificates of deposit, bankers acceptances
and time deposits maturing within one (1) year from the date
of acquisition thereof issued or guaranteed by or placed with,
and money market deposit accounts issued or offered by any
domestic office of any commercial bank organized under the
laws of the United States of America or any State thereof that
has a combined capital and surplus and undivided profits of
not less than $500,000,000; and
(d) Investments in any Wholly Owned Subsidiary of
Borrower, which Wholly Owned Subsidiary has joined this
Agreement and the other Loan Documents as a borrower and
granted Lender a lien on all the Collateral owned by such
Wholly Owned Subsidiary.
Person means any natural person, corporation, business trust,
joint venture, association, company, partnership or
government, or any agency or political subdivision thereof.
Permitted Restrictive Covenant means (a) any covenant or
restriction contained in any Loan Document or Senior Debt
Document, (b) any covenant or restriction binding upon any
Person at the time such Person becomes a Subsidiary of
Borrower, or (c) any covenant or restriction that (i) is not
more burdensome than an existing Permitted Restrictive
Covenant that is such by virtue of clause (b) or (c); (ii) is
contained in a contract constituting a renewal, extension or
replacement of the contract in which such existing Permitted
Restrictive Covenant is contained; and (iii) is binding only
on the Person or Persons bound by such existing Permitted
Restrictive Covenant.
Pledgors means, collectively, Daniel Atkins, Mark Atkins,
Teresa Atkins, Betty Atkins, Bruce Minor, Peter Schaffer,
Jon OConnor, Sam Watts and Charles Copeland, and
Pledgor means each of the foregoing.
Prepayment Amount shall mean the amount of the Loan
which is prepaid from time to time in accordance with
Section 2.7.
Proceeds shall mean all cash and non-cash proceeds as the
term is used in Article 9 of the UCC and all other amounts
received in respect of any sale, exchange, lease, license or
other disposition of any Collateral, and including insurance
proceeds.
Products shall have the meaning set forth in Section 7.1(g).
Real Property shall mean, collectively, all real property
owned by Borrower or in which Borrower has a leasehold
interest and all real property hereafter acquired by Borrower
in fee or by means of a leasehold interest, including all real
property on which Borrowers Business is now or hereafter
conducted, together with all goods located on any such real
property that are or may become fixtures under the law of
the jurisdiction in which such real property is located.
Receiver means any receiver, trustee, custodian, liquidator, or
similar fiduciary.
Responsible Officer of any corporation means any executive
officer or Financial Officer of such corporation and any
other officer or similar official thereof responsible for the
administration of the obligations of such corporation in
respect of this Agreement.
Restricted Payment means (i) any dividend or other
distribution, direct or indirect, on account of any shares of
any class of capital stock or other equity interest of
Borrower or any of its Subsidiaries now or hereafter
outstanding (other than a dividend payable solely in shares
of that class of stock), (ii) any redemption, defeasance,
retirement, sinking fund or similar payment, purchase or
other acquisition for value, direct or indirect, of any shares
of any class of capital stock or other equity interests of
Borrower or any of its Subsidiaries or any warrants, options
or rights to purchase any such capital stock or equity
interests, in any case, now or hereafter outstanding, (iii) any
payment or prepayment of principal of, premium, if any, or
interest on, and any redemption, purchase, retirement,
defeasance, sinking fund or similar payment with respect to,
any Indebtedness, and (iv) any payment made to redeem,
purchase, repurchase or retire, or to obtain the surrender of,
any outstanding warrants, options or other rights to acquire
shares of any class of capital stock or other equity interests
of Borrower or any of its Subsidiaries now or hereafter
outstanding.
Security Documents means this Agreement, the UCC-1
Financing Statements filed in connection herewith, the
Stockholder Pledge Agreement, the Colorado Pledge
Agreement and each of the security agreements and other
instruments and documents executed and delivered pursuant
to any of the foregoing or pursuant to Section 5.13.
Stockholder Guaranty means the Guaranty Agreement
executed by each of the Stockholder Guarantors in favor of
Lender.
Stockholder Guarantors means Daniel Atkins, Mark Atkins,
Teresa Atkins, Betty Atkins, Douglas Atkins and Bruce
Minor, and their respective permitted successors and assigns.
Stockholder Pledge Agreement means the Pledge Agreement
executed by each of the Pledgors in favor of Lender with
respect to their respective equity interests in Borrower.
Subsidiary means, with respect to any Person (herein referred
to as the parent), any corporation, partnership, limited
liability company, association or other business entity (a) of
which securities or other ownership interests representing
more than 50% of the equity or more than 50% of the
ordinary voting power or more than 50% of the general
partnership interests are, at the time any determination is
being made, owned, controlled or held, or (b) that is, at the
time any determination is made, otherwise Controlled, by
the parent or one or more subsidiaries of the parent or by
the parent and one or more subsidiaries of the parent.
Transaction shall have the meaning specified in Section 4.2.
Transfer means the sale, assignment, lease, transfer,
mortgaging, encumbering or other disposition, whether
voluntary or involuntary, and whether or not consideration
is received therefor.
Taxes shall have the meaning specified in Section 2.9(a).
Transferee shall have the meaning specified in Section 2.9(a).
Transfer of Borrowers Business means one or more
transactions resulting in either: (i) the Transfer of all or
substantially all of the assets of Borrower to any other
Person or (ii) a merger or consolidation of Borrower with
another Person in which Borrower is not the surviving or
successor entity.
UCC means the Uniform Commercial Code as the same
may, from time to time, be enacted and in effect in the State
of New York; provided however that in the event that, by
reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of Lenders security
interest in any Collateral is governed by the Uniform
Commercial Code as enacted and in effect in a jurisdiction
other than the State of New York, the term UCC shall mean
the Uniform Commercial Code as enacted and in effect in
such other jurisdiction solely for purposes of the provisions
hereof relating to such attachment, perfection or priority
and for purposes of definitions related to such provisions.
Wholly Owned Subsidiary of any Person means a subsidiary
of such Person of which securities (except for directors
qualifying shares) or other ownership interests representing
100% of the equity or 100% of the ordinary voting power or
100% of the general partnership interests are, at the time any
determination is being made, owned, controlled or held by
such Person or one or more wholly owned subsidiaries of
such Person or by such Person and one or more wholly
owned subsidiaries of such Person.
Year 2000 Issues With respect to any Person, anticipated
costs, problems and uncertainties associated with the
inability of certain computer applications and imbedded
systems to effectively handle data, including dates, on and
after January 1, 2000, as it affects the business, operations,
and financial condition of such Person, and such Persons
customers, suppliers and vendors.
SECTION 1.2 Terms Generally. (a) The definitions in
Section 1.1 apply equally to both the singular and plural
forms of the terms defined. Whenever the context may
require, any pronoun includes the corresponding masculine,
feminine and neuter forms. The words include, includes and
including are deemed to be followed by the phrase without
limitation. All references herein to Articles, Sections,
Exhibits and Schedules are deemed references to Articles and
Sections of, and Exhibits and Schedules to, this Agreement
unless the context shall otherwise require. Except as
otherwise expressly provided herein, (a) any reference in this
Agreement to any Loan Document means such document as
amended, restated, supplemented or otherwise modified
from time to time and (b) all terms of an accounting or
financial nature are construed in accordance with GAAP, as
in effect from time to time.
(b) Unless otherwise defined or specified herein, all
accounting terms used herein shall have the meanings
customarily given in accordance with GAAP, and all financial
computations to be made under this Agreement shall, unless
otherwise specifically provided herein, be made in accordance
with GAAP applied on a basis consistent with the Financial
Statements delivered to Lender on the Closing Date. The
Financial Statements required to be delivered hereunder from and
after the Closing Date and all financial records shall be
maintained in accordance with GAAP as in effect as of the date
of the Financial Statements delivered to Lender on the Closing
Date or, if GAAP shall change from the basis used in preparing
the Financial Statements delivered to Lender on the Closing Date,
the certificates required to be delivered pursuant to Section 5.1
demonstrating compliance with the covenants contained herein
shall include calculations setting forth the adjustments necessary
to demonstrate how Borrower is in compliance with the financial
covenants based upon GAAP as in effect on the Closing Date.
ARTICLE II
THE LOAN
SECTION 2.1 The Loan. Subject to the terms and
conditions and relying upon the representations and
warranties herein set forth, Lender will make the Loan to
Borrower on the Closing Date. Lender shall make the Loan
as a single advance on the proposed date thereof by wire
transfer of immediately available funds to such account as
Borrower may designate not later than 11:00 am., New York
City time.
SECTION 2.2 Use of Proceeds. Borrower shall use the
proceeds of the Loan solely for the following purposes and
in the following order:
(i) Two Hundred Eighty-Three Thousand Dollars ($283,000)
shall be used to immediately pay Borrowers obligations
owed to National Football League Properties Inc. (NFL) in
respect of accrued royalty obligations owed pursuant to
certain license agreements by and between Borrower and
NFL;
(ii) Two Hundred Fifty Thousand Dollars ($250,000) shall
be used to pay Lucky Star in respect of, and to be applied as
a reduction of, Borrowers existing outstanding account
balance to Lucky Star, provided that the Lucky Star
Agreement has been executed and delivered by Lucky Star;
and
(iii) after giving effect to the payments in Sections 2.2(i) and
2.2(ii) above, the balance of the proceeds of the Loan, i.e.,
One Hundred Sixty-Seven Thousand Dollars ($167,000),
shall be used to pay down Borrowers existing trade payables,
and for future trade payables incurred in the ordinary course
of business and for working capital used in the ordinary
course of business, all in such order as Borrower deems
appropriate; provided that no payments made pursuant to
this Section 2.2(iii) shall be made to any officer, director,
employee, shareholder or Affiliate of Borrower.
SECTION 2.3 Evidence of Debt. The Loan shall be evidenced
by the Note made by Borrower payable to the order of
Lender in the principal amount of Seven Hundred Thousand
Dollars ($700,000), dated as of the Closing Date.
SECTION 2.4 Repayment of Loan. All unpaid principal
amounts, accrued and unpaid interest, and other obligations
of Borrower to Lender due and owing hereunder shall be
paid upon the earlier of (i) the date of acceleration of the
Loan pursuant to Article VIII and (ii) the Maturity Date.
SECTION 2.5 Interest on Loan. Subject to the provisions of
Section 2.7, the Loan shall bear interest (computed on the
basis of the actual number of days elapsed over a year of 360
days) at the Fixed Rate. Interest shall be paid on the first day
of each month, commencing March 1, 2000.
SECTION 2.6 Default Interest. Upon the occurrence of an
Event of Default, Borrower shall on demand from Lender
from time to time pay interest, to the extent permitted by
law, on the unpaid principal amount of the Loan at the
Fixed Rate plus 3.00%.
SECTION 2.7 Voluntary Prepayment. Borrower may at any
time and from time to time prepay, without penalty or
premium, the Loan, in whole or in part, upon at least three
(3) Business Days prior written or telecopy notice (or
telephone notice promptly confirmed by written or telecopy
notice) to Lender before 11:00 a.m., New York City time.
Lender shall cooperate with Borrower and any other lender
or investor of Borrower in connection with the prepayment
of the Loan, including signing and delivering to Borrower
simultaneously with such prepayment all releases and
termination statements necessary to release the Guarantors
and the Pledgors and terminate all security interests granted
to secure the Loan, in each case upon the repayment in full
of all Obligations.
SECTION 2.8 Payments.
(a) On each of May 1, 2000 and on June 1, 2000, Borrower
shall make monthly payments of principal on the Loan in the
amount of One Hundred Thousand Dollars ($100,000) plus
interest on the Loan, and on July 1, 2000, Borrower shall pay
to Lender the remaining principal balance on the Loan plus
accrued interest on the Loan, on each such date not later than
12:00 (noon), New York City time, on the date when due in
immediately available dollars, to Lender at its offices located
at 1710 Route Transcanadienne, Dorval, Quebec, H9P 1H7,
Canada. Each such payment shall not be subject to any set-
off, counterclaim, recoupment, defense or other claim, right
or action which any Loan Party, or any other Person, may
have against Lender.
(b) In the event the Asset Purchase Agreement is not
signed within thirty (30) days of the making of the Loan,
Lender may, at its option, exercised by written notice to
Borrower, require Borrower to repay the Loan, together with
all accrued and unpaid interest thereon, in full, in which case
the Loan, together with all accrued and unpaid interest
thereon, shall be payable by Borrower in full not later than
forty-five (45) days from the date Lender gives such written
notice to Borrower.
(c) Whenever any payment (including principal of or interest
on the Loan or other amounts) hereunder or under any other
Loan Document shall become due, or otherwise would occur,
on a day that is not a Business Day, such payment may be
made on the next succeeding Business Day, and such
extension of time shall in such case be included in the
computation of interest.
SECTION 2.9 Taxes.
(a) Any and all payments by or on behalf of Borrower
hereunder and under any other Loan Document shall be
made, in accordance with Section 2.8, free and clear of and
without deduction for any and all current or future taxes,
levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, excluding (i) income taxes
imposed on the net income of Lender (or, subject to Section
9.4(c), any transferee or assignee thereof (any such entity a
Transferee)) and (ii) franchise taxes imposed on the net
income of Lender (or Transferee), in each case by the
jurisdiction under the laws of which Lender (or Transferee) is
organized or any political subdivision thereof (all such
nonexcluded taxes, levies, imposts, deductions, charges,
withholdings and liabilities, collectively or individually, being
called Taxes). If Borrower must deduct any Taxes from or in
respect of any sum payable hereunder or under any other
Loan Document to Lender (or any Transferee), (i) the sum
payable shall be increased by the amount (an additional
amount) necessary so that after making all required
deductions (including deductions applicable to additional
sums payable under this Section 2.9) Lender (or Transferee),
as the case may be, shall receive an amount equal to the sum it
would have received had no such deductions been made, (ii)
Borrower shall make such deductions and (iii) Borrower shall
pay the full amount deducted to the relevant Governmental
Authority in accordance with applicable law.
(b) In addition, Borrower will pay to the relevant
Governmental Authority in accordance with applicable law
any current or future stamp or documentary taxes or any
other excise or property taxes, charges or similar levies that
arise from any payment made hereunder or under any other
Loan Document or from the execution, delivery or
registration of, or otherwise with respect to, this Agreement
or any other Loan Document (Other Taxes).
(c) Borrower will indemnify Lender (or Transferee) for the
full amount of Taxes and Other Taxes paid by Lender (or
Transferee), as the case may be, and any liability (including
penalties, interest and expenses (including reasonable
attorneys fees and expenses)) arising therefrom or with
respect thereto, whether or not such Taxes or Other Taxes
were correctly or legally asserted by the relevant
Governmental Authority. A certificate as to the amount of
such payment or liability prepared by Lender (or Transferee)
absent manifest error, shall be final conclusive and binding
for all purposes. Such indemnification shall be made within
thirty (30) days after the date Lender (or Transferee), as the
case may be, makes written demand therefor.
(d) As soon as practicable after the date of any payment of
Taxes or Other Taxes by Borrower to the relevant
Governmental Authority, Borrower will deliver to Lender, at
its address referred to in Section 9.1, the original or a
certified copy of a receipt issued by such Governmental
Authority evidencing payment thereof. If there is a refund of
any additional amount paid by Borrower, Borrower shall be
entitled to receive such refund.
ARTICLE III
CONDITIONS
SECTION 3.1 Conditions to Closing. The obligation of
Lender to enter into this Agreement and to perform its
obligations hereunder is subject to the satisfaction of the
following conditions on or prior to the Closing Date:
(a) The representations and warranties set
forth in Article IV hereof shall be true and correct on and as of
the date of the Transaction. No event has occurred and is
continuing, or would result from the making of the Loan or the
application of the proceeds thereof, which would constitute a
Default or an Event of Default.
(b) Borrower and each other Loan Party shall
be in compliance with all the terms and provisions set forth
herein and in each other Loan Document on its part to be
observed or performed, and at the time of and immediately
after the Transaction, no Event of Default or Default shall have
occurred and be continuing.
(c) Lender shall have received the following
items:
(i) a favorable written opinion of
Patton Boggs, LLP, counsel for Borrower and the other
Loan Parties (A) dated the Closing Date, (B) addressed
to Lender, and (C) covering such matters relating to the
Loan Documents and the Transaction as Lender shall
reasonably request, and Borrower hereby requests such
counsel to deliver such opinion;
(ii) (A) a counterpart of this
Agreement for each party hereto, duly executed and
delivered by each such Person, (B) the Stockholder
Guaranty, duly executed and delivered by each
Stockholder Guarantor, (C) the Limited Recourse
Guaranty, duly executed and delivered by each Limited
Recourse Guarantor, (D) the Colorado Guaranty, duly
executed and delivered by the Colorado Guarantor, (E)
the Stockholder Pledge Agreement, duly executed and
delivered by each Pledgor, and the stock certificates
pledged thereunder and related stock powers, duly
executed in blank, (F) the Colorado Pledge Agreement,
duly executed and delivered by Peter Schaffer, and the
stock certificate(s) pledged thereunder and related stock
power(s), duly executed in blank, ,and (G) the Note,
duly executed and delivered by Borrower.
(iii) (A) a copy of the certificate or
articles of incorporation, including all amendments
thereto, of Borrower, certified as of a recent date by the
Secretary of State of the state of its organization, and a
certificate as to the good standing of Borrower as of a
recent date, from such Secretary of State; (B) a
certificate of the Secretary or Assistant Secretary of
Borrower dated the Closing Date and certifying (1) that
attached thereto is a true and complete copy of the by-
laws of Borrower as in effect on the Closing Date and at
all times since a date prior to the date of the resolutions
described in clause (2) below, (2) that attached thereto
is a true and complete copy of resolutions duly adopted
by the Board of Directors of Borrower authorizing the
execution, delivery and performance of the Loan
Documents to which such Person is a party and that
such resolutions have not been modified, rescinded or
amended and are in full force and effect, (3) that the
certificate or articles of incorporation of Borrower have
not been amended since the date of the last amendment
thereto shown on the certificate of good standing
furnished pursuant to clause (A) above, and (4) as to the
incumbency and specimen signature of each officer
executing any Loan Document or any other document
delivered in connection herewith on behalf of
Borrower; (C) a certificate of another officer as to the
incumbency and specimen signature of the Secretary or
Assistant Secretary executing the certificate pursuant to
(B) above; and (D) such other documents as Lender
may reasonably request;
(iv) all amounts due and payable on
or prior to the Closing Date, including, to the extent
invoiced, reimbursement or payment of all out-of-
pocket expenses required to be reimbursed or paid by
Borrower hereunder or under any other Loan
Document;
(v) the results of a search of the UCC
or equivalent filings made with respect to Borrower in
the states (or other jurisdictions) in which the chief
executive office of Borrower is located, any offices of
Borrower in which records have been kept relating to
accounts receivable and the other jurisdictions in which
other assets of Borrower are located and UCC filings
(or equivalent filings), together with copies of the
financing statements (or similar documents) disclosed
by such search, and accompanied by evidence
satisfactory to Lender that the Liens indicated in any
such financing statement (or similar document) would
be permitted under Section 6.2 or has been released;
(vi) the Interim Financial Statements;
and
(v) the Lucky Star Agreement, in
form and substance satisfactory to Lender, executed and
delivered by all parties thereto, which agreement shall
be in full force and effect.
(d) After giving effect to the transactions
contemplated hereby, Borrower shall have outstanding no
Indebtedness other than (A) the extension of credit under this
Agreement and (B) the Indebtedness listed on Schedule 4.6 and
Schedule 4.7.
(e) All legal matters incident to this
Agreement, the Loan and the other Loan Documents shall be
satisfactory to Lender.
(f) Lender shall have received such other
documents, instruments and information as Lender may
reasonably request.
(g) All consents from, authorizations by and
filings with Governmental Authorities and other Persons that
are necessary or, in the reasonable discretion of Lender,
advisable, in connection with the Transaction shall have been
obtained and shall be in full force and effect.
(h) Lender shall have received a certificate
from the Secretary of State of Borrowers jurisdiction of
organization certifying as to Borrowers good standing in such
state as of a date not earlier than ten (10) Business Days prior
to the Closing Date.
(i) Each document (including, without
limitation, any UCC financing statement) required by the
Security Documents or under law or reasonably requested by
Lender to be delivered to Lender or to be filed, registered or
recorded in order to create in favor of Lender, a perfected Lien
on all Collateral, prior and superior in right to any other Person
(other than with respect to Liens expressly permitted by
Section 6.3), shall have been filed or be in proper form for
filing, registration or recordation in each jurisdiction in which
the filing, registration or recordation thereof is so required or
requested.
(j) Lender shall have received a copy of, or a
certificate as to coverage under, the insurance policies of
Borrower and its Subsidiaries satisfying the requirements of
Section 4.19 and the applicable provisions of the Security
Documents, each of which shall be endorsed or otherwise
amended to include a lenders loss payable endorsement and to
name Lender as an additional insured, in form and substance
reasonably satisfactory to Lender.
(k) There shall be no proceedings, inquiries,
injunctions or restraining orders of any Governmental
Authority threatened, pending or entered or any Applicable
Law in effect which in any case, in the opinion of Lender,
relates to the transactions contemplated by this Agreement, or
would reasonably be expected to have a material adverse effect
on the transactions contemplated by this Agreement or the
business, operations, condition (financial or otherwise) or
prospects of Borrower.
(l) Since November 30, 1999, there shall not
have occurred any material adverse change in the business or
financial condition of Borrower and its Subsidiaries, taken as a
whole or in the consolidated results of operations of Borrower
and its Subsidiaries compared with the consolidated results of
their operations for the same periods of the prior year.
(m) The capital, tax, legal, organizational and
corporate structure of Borrower, and its Subsidiaries shall be
satisfactory to Lender.
(n) Borrower shall have executed and
delivered to Lender all documents which Lender determines are
reasonably necessary to consummate the transactions
contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
In order to induce Lender to enter into the Transaction,
Borrower hereby represents and warrants to Lender that:
SECTION 4.1 Organization; Powers.
Borrower (i) is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its
organization, (ii) has all requisite power and authority to own
its property and assets and to carry on its business as now
conducted and as proposed to be conducted, (iii) is qualified
to do business in, and is in good standing in, every jurisdiction
where such qualification is required, except where the failure
so to qualify could not reasonably be expected to result in a
Material Adverse Effect, and (iv) has the corporate power
and authority to execute, deliver and perform its obligations
under each of the Loan Documents and each other agreement
or instrument contemplated hereby, and to borrow
hereunder.
SECTION 4.2 Authorization. The execution, delivery and
performance by Borrower of each of the Loan Documents
and the obligations hereunder (collectively, the Transaction)
to which it is a party (a) have been duly authorized by all
requisite corporate and, if required, stockholder action on
the part of Borrower and (b) will not (i) violate (A) any
provision of law, statute, rule or regulation, or of the
certificate or articles of incorporation or other constitutive
documents or by-laws of Borrower, (B) any order of any
Governmental Authority or (C) any provision of any
indenture, agreement or other instrument to which
Borrower is a party or by which it or any of its property is
or may be bound, (ii) result in a breach of or constitute
(alone or with notice or lapse of time or both) a default
under, or give rise to any right to accelerate or to require the
prepayment, repurchase or redemption of any obligation
under any such indenture, agreement or other instrument or
(iii) result in the creation or imposition of any Lien upon or
with respect to any property or assets now owned or
hereafter acquired by Borrower.
SECTION 4.3 Enforceability. This Agreement has been duly
executed and delivered by Borrower and constitutes, and
each other Loan Document when executed and delivered by
Borrower will constitute, a legal, valid and binding
obligation of Borrower enforceable against Borrower in
accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer
and other similar laws relating to or affecting creditors rights
generally from time to time in effect and to general
principles of equity (including, without limitation, concepts
of materiality, reasonableness, good faith and fair dealing),
regardless or whether considered in a proceeding in equity or
at law.
SECTION 4.4 Governmental Approvals. No action, consent
or approval or registration or filing with or any other action
by any Governmental Authority is or will be required in
connection with the Transaction, except for such as have
been made or obtained and are in full force and effect.
SECTION 4.5 Executive Office; Locations; Names; FEIN. As
of the Closing Date, the current location of Borrowers chief
executive office and principal place of business and each
other office or place of business is set forth in Schedule 4.5.
None of such locations has changed within the twelve (12)
months preceding the Closing Date. Borrower has not
changed its name or used any other name or any trade name
within the twelve (12) years immediately preceding the
Closing Date. In addition, Schedule 4.5 lists the federal
employer identification number of Borrower.
SECTION 4.6 Financial Condition. Borrower has
previously delivered to Lender and Schedule 4.6 contains the
unaudited balance sheet of Borrower as at November 30,
1999 (the November 30 1999 Balance Sheet) and the related
statements of income and retained earnings and statements
of cash flows for the interim period ended November 30,
1999 (such income statement and the November 30, 1999
Balance Sheets are referred to herein as the Interim Financial
Statements). Except as described in Schedule 4.6, the Interim
Financial Statements (x) were prepared in accordance with
GAAP applied on a consistent basis, (y) are in accordance
with the books and records of Borrower and (z) present
fairly the financial position and results of operations of
Borrower at the dates and for the periods to which they
relate subject to normal year end adjustments. Except as
described in Schedule 4.6, Borrower has maintained its books
of account in accordance with GAAP applied on a consistent
basis, and such books and records are, and during the periods
covered by the Interim Financial Statements were, correct
and complete in all material respects, fairly and accurately
reflect and reflected the income, expenses, assets and
liabilities of Borrower and provide and provided a fair and
accurate basis for the preparation of the Interim Financial
Statements and of the Tax returns and reports of Borrower.
SECTION 4.7 Indebtedness. Except as disclosed in the
Interim Financial Statements or listed on Schedule 4.7
attached hereto, Borrower has no material indebtedness,
liabilities or obligations of any nature (whether liquidated or
unliquidated, mature or not yet mature, absolute or
contingent, secured or unsecured), arising out of any
transaction entered into or any state of facts existing prior
hereto, including, without limitation, liabilities or
obligations on account of taxes or government charges,
penalties, interest or fines thereon or in respect thereof, and
Borrower does not know of any basis for any claim against
Borrower, as of the date of this Agreement or of any debt,
liability or obligation other than those described in this
Section 4.7 or elsewhere in this Agreement. Borrower is not
in default or alleged to be in default in any material respect
with respect to any of its liabilities listed in the Interim
Financial Statements.
SECTION 4.8 Deposits and Disbursement Accounts. Schedule
4.8 lists all banks and other financial institutions at which
Borrower maintains deposits and/or other accounts as of the
Closing Date, and such Schedule correctly identifies the
name, address and telephone number of each depositary, the
name in which the account is held, a description of the
purpose of the account, and the complete account number.
SECTION 4.9 Ownership and Control. Attached hereto as
Schedule 4.9 is an accurate and complete list of the following
information: (a) the authorized capitalization of Borrower
as of the date hereof; (b) the number of shares of each class of
Borrowers issued capital stock and the number of
outstanding shares thereof; (c) a description of all convertible
securities and all options, warrants and similar rights held
with respect to Borrowers capital stock; (d) the names of the
record owners of all such shares of capital stock and all such
convertible securities, options, warrants and similar rights;
and (e) the number of shares held by each such record
owner. All shares of capital stock of Borrower and all
convertible securities, options, warrants and similar rights
held with respect to Borrowers capital stock have been duly
authorized and validly issued, are fully paid and
nonassessable (in the case of capital stock), and are owned of
record and, to Borrowers knowledge, beneficially, as set
forth on Schedule 4.9 attached hereto. Except as listed in
Schedule 4.9 attached hereto, there are no outstanding
options, warrants, convertible securities or other stock
purchase rights issued by Borrower as of the date hereof, and
to the best of Borrowers knowledge, there are no sale
agreements, pledges, proxies, voting trusts, powers of
attorney or other agreements or instruments binding upon
Borrowers shareholders with respect to beneficial and record
ownership of, or voting rights with respect to, Borrowers
capital stock as of the date hereof.
SECTION 4.10 No Material Adverse Change. Since the
ending date of the Interim Financial Statements (and, for the
purposes of this Section 4.10, assuming the accuracy of the
Interim Financial Statements), Borrower has not: (i) suffered
any material change in its condition (financial or otherwise)
or its overall business prospects; (ii) entered into any
material transactions or incurred any material debt,
obligation or liability (whether liquidated or unliquidated,
mature or not yet mature, absolute or contingent, secured or
unsecured) other than the Obligations; (iii) sustained any
material loss or damage to its Real Property or personal
property, whether or not insured; (iv) suffered any material
interference with its business or operations, present or
proposed; and (v) made any Transfer, abandonment or other
disposition of any of its Real Property or personal property
or any interest therein or relating thereto, that is material to
the financial position or prospects of Borrower.
SECTION 4.11 Title to Properties; Possession Under
Leases.
(a) Borrower has good and marketable title to,
or valid leasehold interests in, all its material properties and
assets, except for minor defects in title that do not interfere
with its ability to conduct its business as currently conducted or
to utilize such properties and assets for their intended purposes
All such material properties and assets are free and clear of
Liens, other than Liens expressly permitted by Section 6.2.
(b) Borrower has full, complete, indefeasible
and marketable title to all of the Collateral it purports to own
absolutely free and clear of any claims, defects, liens, security
interests, pledges, title retention agreements or other
encumbrances. Except as identified on Schedule 6.2, no UCC
financing statement that names Borrower as a debtor or which
lists any of the Collateral as collateral (other than those that
name Lender as the secured party) has been filed in any place,
and Borrower has not signed any financing statement or any
security agreement authorizing any other secured party
thereunder to file any such financing statement.
(c) None of Borrowers Equipment and
Inventory is located at a location other that one or more of the
locations identified in Schedule 4.5.
SECTION 4.12 Subsidiaries. Schedule 4.12 sets forth
as of the Closing Date a list of all Subsidiaries of Borrower
and the percentage ownership interest of Borrower therein.
The shares of capital stock or other ownership interests so
indicated on Schedule 4.12 are fully paid and non-assessable
and are owned by Borrower, directly or indirectly, free and
clear of all Liens. None of the Subsidiaries has any assets.
Schedule 4.12 also sets forth all joint ventures and
partnerships of Borrower with any other Person.
SECTION 4.13 Officers, Directors, and Affiliates.
Attached hereto as Schedule 4.13 is an accurate and complete
list of all directors, officers, and Affiliates of Borrower.
Other than the Persons listed in Schedule 4.13, there are no
other Persons controlling Borrowers Business.
SECTION 4.14 Litigation; Compliance with Laws
(a) Except as set forth on Schedule 4.14 (the
Litigation Schedule), there are no actions, suits or proceedings
at law or in equity or by or before any Governmental Authority
now pending or, to the knowledge of Borrower, threatened
against or affecting Borrower or any other Loan Party, or any
business, property or rights of any such Person (i) that involve
any Loan Document or the Transaction or (ii) as to which there
is a reasonable possibility of an adverse determination and that,
if adversely determined, could reasonably be expected,
individually or in the aggregate, to result in a Material Adverse
Effect.
(b) Neither Borrower nor any of its material
properties or assets is in violation of nor will the continued
operation of its material properties and assets as currently
conducted violate, any law, rule or regulation, or is in default
with respect to any judgment, writ, injunction, decree or order
of any Governmental Authority, where such violation or
default could reasonably be expected to result in a Material
Adverse Effect.
(c) Except for matters set out in the Litigation
Schedule, Borrower is not in breach of, default under, or in
violation of (where such breach, default or violation would
have a material adverse effect on Borrower): (a) any
Applicable Law, decree, or order that may result in a Material
Adverse Effect; or (b) any material deed, lease, loan agreement,
commitment, bond, note, deed of trust, restrictive covenant,
license, indenture, contract, or other agreement, instrument or
obligation to which it is a party or by which it is bound or to
which its assets (including, but not limited to, the Collateral)
are subject.
SECTION 4.15 Investment Company Act; Public
Utility Holding Company Act. Borrower is not (a) an
investment company as defined in, or subject to regulation
under, the Investment Company Act of 1940 or (b) a holding
company as defined in, or subject to regulation under, the
Public Utility Holding Company Act of 1935.
SECTION 4.16 Use of Proceeds. Borrower will use the
proceeds of the Loan only for the purposes specified in
Section 2.2.
SECTION 4.17 Tax Returns. Borrower has filed or
caused to be filed all Federal, state, local and foreign tax
returns or materials required to have been filed by it or has
filed extensions therefor and has paid or caused to be paid all
taxes due and payable by it and all assessments received by it,
except taxes that are being contested in good faith by
appropriate proceedings and for which Borrower shall have
set aside on its books adequate reserves. Borrower has
previously provided true, correct and complete copies of all
tax returns (including all required schedules) for Borrower
during the three (3) tax years prior to the tax year in which
the Closing occurs.
SECTION 4.18 No Material Misstatements. No
information, report, financial statement, exhibit or schedule
furnished by or on behalf of Borrower to Lender in
connection with the Transaction or negotiation of any Loan
Document or included therein or delivered pursuant thereto
contained, contains or will contain any material
misstatement of fact or omitted, omits or will omit to state
any material fact necessary to make the statements therein,
in the light of the circumstances under which they were, are
or will be made, not misleading.
SECTION 4.19 Insurance. Attached hereto as
Schedule 4.19 is an accurate and complete list of all insurance
policies and binders presently providing coverage to
Borrower or any of its assets, including all insurance
providing coverage with respect to any of the Collateral.
Such insurance is in full force and effect and all premiums
have been duly paid. Borrower has furnished to Lender
appropriate insurance certificates and accurate and complete
copies of the insurance binders or policies for all of the
insurance listed in Schedule 4.19, in each case listing Lender
as loss payee. Borrower has insurance in such amounts and
covering such risks and liabilities as are in accordance with
normal industry practice.
SECTION 4.20 Labor Matters. As of the date hereof,
there are no strikes, lockouts or slowdowns against
Borrower pending or, to the actual knowledge of Borrower,
threatened. The hours worked by and payments made to
employees of Borrower have not been in violation of the
Fair Labor Standards Act or any other applicable federal
state, local or foreign law dealing with such matters. All
payments due from Borrower, or for which any claim may
be made against Borrower on account of wages and
employee health and welfare insurance and other benefits,
have been paid or accrued as a liability on the books of
Borrower. The consummation of the Transaction will not
give rise to any right of termination or right of renegotiation
on the part of any union under any collective bargaining
agreement to which Borrower is bound.
SECTION 4.21 Solvency. Immediately after the
consummation of the Transaction to occur on the Closing
Date and after giving effect to the application of the proceeds
of the Loan, (a) the fair value of the assets of Borrower, at a
fair valuation, will exceed its respective debts and liabilities,
subordinated, contingent or otherwise; (b) the present fair
saleable value of the property of Borrower will be greater
than the amount that will be required to pay the probable
liability of its debts and other liabilities, subordinated,
contingent or otherwise, as such debts and other liabilities
become absolute and matured, (c) Borrower on a
consolidated basis will be able to pay its debts and liabilities,
subordinated, contingent or otherwise, as and when such
debts and liabilities become absolute and matured; and (d)
Borrower on a consolidated basis will not have unreasonably
small capital with which to conduct the businesses in which
it is engaged as such businesses are now conducted and are
proposed to be conducted following the Closing Date.
SECTION 4.22 Security Documents. This Agreement is
effective to create in favor of Lender, a legal, valid and
enforceable security interest in the Collateral and, when
financing statements in appropriate form are filed in the
appropriate offices, this Agreement shall constitute a fully
perfected Lien on, and security interest in, all right, title and
interest of the grantors thereunder in such Collateral, in each
case prior and superior in right to any other Person, other than
with respect to Liens expressly permitted by Section 6.2.
SECTION 4.23 Borrowers Business. Borrower has
been exclusively engaged in the operation of Borrowers
Business.
SECTION 4.24 Intellectual Property. As of the
Closing Date, Borrower owns or has rights to use all
Intellectual Property necessary to continue to conduct its
business as now or heretofore conducted by it or proposed
to be conducted by it, and each patent, trademark, copyright
and License is listed, together with application or
registration numbers, as applicable in Schedule 4.29.
Borrower conducts its business and affairs without
infringement of or interference with any Intellectual
Property of any other Person.
SECTION 4.25 Year 2000. All Information Systems
and Equipment are either Year 2000 Compliant, or any
reprogramming, remediation, or any other corrective action,
including the internal testing of all such Information
Systems and Equipment, has been completed by December
31, 1999. Further, to the extent that such reprogramming,
remediation and testing action is required, the cost thereof,
as well as the cost of the reasonably foreseeable consequences
of failure to become Year 2000 Compliant, to Borrower and
its Subsidiaries (including, without limitation,
reprogramming errors and the failure of other systems or
equipment) will not result in a Default or a Material Adverse
Effect.
SECTION 4.26 Perfection Certificate. The
information contained in the perfection certificate attached
here to as Exhibit A (the Perfection Certificate) is true,
accurate and complete in all respects.
ARTICLE V
AFFIRMATIVE COVENANTS
So long as this Agreement shall remain in effect and until the
principal of and interest on the Loan and all Obligations,
expenses or amounts payable under any Loan Document
shall have been paid in full, unless Lender shall otherwise
consent in writing, Borrower hereby covenants and agrees to
the following:
SECTION 5.1 Existence; Businesses and Properties.
(a) Borrower will do or cause to be done all
things necessary to preserve, renew and keep in full force and
effect its legal existence.
(b) Borrower will do or cause to be done all
things necessary to obtain, preserve, renew, extend and keep in
full force and effect the rights, licenses, permits, franchises,
authorizations, patents, copyrights, trademarks and trade names
material to the conduct of its business; maintain and operate
such business in substantially the manner in which it is
presently conducted and operated; comply in all material
respects with all applicable laws, rules, regulations and decrees
and orders of any Governmental Authority, whether now in
effect or hereafter enacted; and at all times maintain and
preserve all property material to the conduct of such business
and keep such property in good repair, working order and
condition (ordinary wear and tear excepted) and from time to
time make, or cause to be made, all needful and proper repairs,
renewals, additions, improvements and replacements thereto
necessary in order that the business carried on in connection
therewith may be properly conducted at all times.
SECTION 5.2 Insurance. Borrower will keep its insurable
properties adequately insured at all times by financially
sound and reputable insurers; maintain such other insurance,
to such extent and against such risks, including fire and other
risks insured against by extended coverage, as is customary
with companies in the same or similar businesses operating
in the same or similar locations, including commercial
general liability insurance against claims for personal injury
or death or property damage occurring upon, in, about or in
connection with the use of any properties owned, occupied
or controlled by it; and maintain such other insurance as
may be required by law.
SECTION 5.3 Obligations and Taxes. Borrower will pay its
Indebtedness and other obligations promptly and in
accordance with their terms and pay and discharge promptly
when due all taxes, assessments and governmental charges or
levies imposed upon it or upon its income or profits or in
respect of its property, before the same shall become
delinquent or in default, as well as all lawful claims for labor,
materials and supplies or otherwise that, if unpaid, might
give rise to a Lien upon such properties or any part thereof,
provided, however, that such payment and discharge shall not
be required with respect to any such tax, assessment charge,
levy or claim so long as the validity or amount thereof shall
be contested in good faith by appropriate proceedings and
Borrower shall have set aside on its books adequate reserves
with respect thereto in accordance with GAAP and such
contest operates to suspend collection of the contested
obligation, tax, assessment or charge and enforcement of a
Lien.
SECTION 5.4 Financial Statements, Reports, etc. Borrower
will furnish to Lender
(a) within forty-five (45) days after the end of
each fiscal quarters, its consolidated and consolidating balance
sheet and related statements of operations, stockholders equity
and cash flows showing the financial condition of Borrower, as
of the close of such fiscal quarter and the results of its
operations during such fiscal quarter and the then elapsed
portion of the fiscal year, all certified by its Financial Officer as
fairly presenting the financial condition and results of
operations of Borrower on a consolidated basis in accordance
with GAAP, subject to normal year-end audit adjustments;
(b) within thirty (30) days after the end of
each month, its unaudited balance sheet and related statements
of income and retained earnings and statements of cash flow
for such month, prepared in accordance with GAAP;
(c) concurrently with any delivery of balance
sheets under sub-paragraph (a) or (b) above, a certificate of a
Financial Officer of Borrower opining on or certifying such
statements (which certificate, when furnished by an accounting
firm, may be limited to accounting matters and disclaim
responsibility for legal interpretations) certifying that no Event
of Default or Default has occurred or, if such an Event of
Default or Default has occurred, specifying the nature and
extent thereof and any corrective action taken or proposed to be
taken with respect thereto;
(d) promptly after entering into the same,
copies of all shareholder agreements, material employment
agreements and other material agreements of Borrower;
(e) promptly, from time to time, such other
information regarding the operations, business affairs and
financial condition of Borrower, or compliance with the terms
of any Loan Document, as Lender may reasonably request.
SECTION 5.5 Litigation and Other Notices. Each Loan Party
will furnish to Lender prompt written notice of the
following:
(a) any Event of Default or Default,
specifying the nature and extent thereof and the corrective
action (if any) taken or proposed to be taken with respect
thereto;
(b) the filing or commencement of or any
threat or notice of intention of any Person to file or commence,
any action, suit or proceeding, whether at law or in equity or by
or before any Governmental Authority, against Borrower or
any Affiliate thereof that could reasonably be expected to result
in a Material Adverse Effect; and
(c) any development that has resulted in, or
could reasonably be expected to result in, a Material Adverse
Effect.
SECTION 5.6 Maintaining Records; Access to Properties and
Inspections. Borrower will keep proper books of record and
account in which full, true and correct entries in conformity
with GAAP and all requirements of law are made of all
dealings and transactions in relation to its business and
activities. Borrower will permit any representatives
designated by Lender to visit and inspect the financial
records and the properties of Borrower at reasonable times
during normal business hours and as often as reasonably
requested and to make extracts from and copies of such
financial records, and permit any representatives designated
by Lender to discuss the affairs, finances and condition of
Borrower with the officers thereof and independent
accountants therefor.
SECTION 5.7 Compliance with Laws. Borrower will
comply with all federal, state, local and foreign laws and
regulations applicable to it.
SECTION 5.8 Year 2000 Issues. Borrower shall take all
action necessary to assure that Borrowers computer based
systems are able to operate and effectively process data
including dates on and after January 1, 2000.
SECTION 5.9. Further Assurances. Borrower will
execute any and all further documents, financing statements,
agreements and instruments, and take all further action that
may be required under applicable law, or that Lender may
reasonably request, in order to effectuate the transactions
contemplated by the Loan Documents. Borrower shall
deliver or cause to be delivered to Lender all such
instruments and documents (including legal opinions and
lien searches) as Lender may reasonably request to evidence
compliance with this Section.
ARTICLE VI
NEGATIVE COVENANTS
So long as this Agreement shall remain in effect and until the
principal of and interest on the Loan, all expenses or
amounts payable under any Loan Document have been paid
in full, unless Lender shall otherwise consent in writing,
Borrower hereby covenants and agrees to the following
without the prior written consent of Lender:
SECTION 6.1 Indebtedness. Borrower shall not incur,
create, assume or permit to exist any Indebtedness other
than (i) Indebtedness existing on the date hereof and set forth
in the Interim Financial Statements or Schedule 4.7, (ii)
Indebtedness created hereunder and under the other Loan
Documents, and (iii) Indebtedness incurred to effect
prepayment in full of the Loan and all other Obligations,
provided that such Indebtedness is incurred simultaneously
with the repayment in full of all such Obligations.
SECTION 6.2 Liens. Borrower shall not create, incur,
assume or permit to exist any Lien on any property or assets
(including stock or other securities of any Person, including
any Subsidiary) now owned or hereafter acquired by it or on
any income or revenues or rights in respect of any thereof
except:
(a) Liens on property or assets of Borrower
existing on the date hereof and set forth in Schedule 6.2;
provided that such Liens shall secure only those obligations
that they secure on the date hereof;
(b) any Lien existing on any property or asset
prior to the acquisition thereof by Borrower; provided that (i)
such Lien is not created in contemplation of or in connection
with such acquisition and (ii) such Lien does not apply to any
other property or assets of Borrower;
(c) Liens for taxes not yet due or which are
being contested in compliance with Section 5.3;
(d) carriers, warehousemens, mechanics,
materialmens, repairmens or other like Liens arising in the
ordinary course of business and securing obligations that are
not due and payable or which are being contested in
compliance with Section 5.3;
(e) pledges and deposits made in the ordinary
course of business in compliance with workers compensation
unemployment insurance and other social security laws or
regulations;
(f) deposits to secure the performance of bids,
trade contracts (other than for Indebtedness), leases (other than
Capital Lease Obligations), statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a
like nature incurred in the ordinary course of business;
(g) zoning restrictions, easements, rights-of-
way, restrictions on use of real property and other similar
encumbrances incurred in the ordinary course of business
which, in the aggregate, are not substantial in amount and do
not materially detract from the value of the property subject
thereto or interfere with the ordinary conduct of the business of
Borrower; and
(h) any Lien created under the Loan
Documents.
SECTION 6.3 Sale and Lease-Back Transactions. Borrower
shall not enter into any arrangement, directly or indirectly,
with any Person whereby it shall sell or transfer any
property, real or personal, used or useful in its business,
whether now owned or thereafter acquired, and thereafter
rent or lease such property or other property that it intends
to use for substantially the same purpose or purposes as the
property being sold or transferred.
SECTION 6.4 Investments, Loans and Advances. Borrower
shall not make any Investments except:
(a) Investments by Borrower and its
Subsidiaries existing on the date hereof; provided that there
shall be no increase in such Investment after the Closing Date;
and
(b) Permitted Investments.
SECTION 6.5 Mergers, Consolidations, Sales of Assets and
Acquisitions.
Borrower shall not merge into or consolidate with any other
Person, or permit any other Person to merge into or
consolidate with it, or sell, transfer, lease or otherwise dispose
of in one transaction or in a series of transactions) all or any
substantial part of its assets (whether now owned or hereafter
acquired) or any capital stock of any Subsidiary of Borrower,
or purchase, lease or otherwise acquire (in one transaction or
a series of transactions) all or any substantial part of the
assets of any other Person, except that (a) Borrower and any
Subsidiary of Borrower may purchase and sell inventory in
the ordinary course of business, (b) if at the time thereof and
immediately after giving effect thereto no Event of Default or
Default shall have occurred and be continuing (i) any Wholly
Owned Subsidiary of Borrower may merge into Borrower in
a transaction in which Borrower is the surviving corporation
and (ii) any Wholly Owned Subsidiary of Borrower may
merge into or consolidate with any other Wholly Owned
Subsidiary of Borrower in a transaction in which the
surviving entity is a Wholly Owned Subsidiary of Borrower
and no Person other than Borrower or a Wholly Owned
Subsidiary of Borrower receives any consideration, (c)
Borrower may transfer assets to its Wholly Owned
Subsidiaries of Borrower so long as such Wholly Owned
Subsidiary of Borrower has joined this Agreement and the
other Loan Documents as a Borrower and granted Lender a
lien on all the Collateral owned by such Wholly Owned
Subsidiary of Borrower, and (d) Borrower may enter into the
Acquisition. In addition, Borrower may not transfer or in any
other manner convey or dispose (excluding Inventory sold
and Equipment disposed of in the ordinary course of business)
of an equitable, beneficial or legal interest in (i) the Collateral,
(ii) assets necessary to operate Borrowers Business, or
(iii) other assets unless Borrower applies the proceeds to
promptly replace or upgrade the transferred assets or to
repay the Loan, except that Borrower may enter into the
Acquisition.
SECTION 6.6 Dividends and Distributions; Restrictions on
Ability of Subsidiaries to Pay Dividends.
(a) Borrower shall not declare or pay, directly
or indirectly, any dividend or make any other distribution (by
reduction of capital or otherwise), whether in cash, property,
securities or a combination thereof (other than a dividend or
distribution of any shares of common stock of Borrower), with
respect to any shares of its capital stock or directly or indirectly
redeem, purchase, retire or otherwise acquire for value (or
permit any of its Subsidiaries to purchase or acquire) any
shares of any class of its capital stock or set aside any amount
for any such purpose; provided, however, that Borrower may,
on a one time basis, distribute, prior to the consummation of
the Acquisition, an amount not in excess of One Hundred
Sixty-Five Thousand Dollars ($165,000) to Daniel Atkins for
the purpose of enabling him to make required tax payments;
provided further, however, that after giving effect to such
distribution to Daniel Atkins, Borrower shall have not less than
Ten Thousand Dollars ($10,000) of available cash.
(b) Borrower shall not permit its Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the
ability of any such Subsidiary to (i) pay any dividends or make
any other distributions on its capital stock or any other interest
or (ii) make or repay any loans or advances to Borrower or the
parent of such Subsidiary.
SECTION 6.7 Transactions with Affiliates. Except as agreed
to in writing by Lender, Borrower shall not sell or transfer
any property or assets to, or purchase or acquire any
property or assets from, or otherwise engage in any other
transactions with, any of its Affiliates, except that Borrower
may engage in any of the foregoing transactions with any of
its Wholly Owned Subsidiaries and Borrower or any
Subsidiary of Borrower may engage in any of the foregoing
transactions in the ordinary course of business at prices and
on terms and conditions not less favorable to Borrower or
such Subsidiary than could be obtained on an arms-length
basis from unrelated third parties.
SECTION 6.8 Business of Borrower and Subsidiaries.
Borrower shall not engage at any time in any business or
business activity other than the business currently conducted
by it and business activities reasonably incidental thereto.
Borrower shall not acquire or create any new Subsidiary
unless such subsequently acquired or organized Subsidiary
executes a joinder to the Note and this Agreement, in form
acceptable to Lender.
SECTION 6.9 Change of Corporate Name or Location; Change
in Fiscal Year. Borrower shall not (a) change its corporate
name or (b) change its chief executive office, principal place
of business, other places of business or locations at which
Collateral is held or stored, or the location of its records
concerning the Collateral, in any case without at least thirty
(30) days prior written notice to Lender and after Lenders
written acknowledgement that any reasonable action
requested by Lender in connection therewith, including to
continue the perfection of any Liens in favor of Lender in
any Collateral, has been completed or taken, and provided
that any such new location shall be in the United States.
Notwithstanding the foregoing, Borrower shall provide at
least five (5) days prior written notice with respect to any
relocation of a place of business other than Borrowers chief
executive office or principal place of business. Borrower
shall not change its fiscal year.
SECTION 6.10 Intellectual Property.
(a) Except in the ordinary course of its
business, Borrower will not Transfer or grant an exclusive or
non-exclusive license relating to, or otherwise dispose of any
of the Intellectual Property without the prior written consent of
Lender.
(b) Borrower shall not file any application for
the issuance of a patent or trademark with the United States
Patent and Trademark Office or any similar office or agency in
the United States or any other country, unless Borrower has by
prior written notice informed Lender of such action and, upon
request of Lender, Borrower shall execute and deliver to
Lender any and all assignments, agreements, instruments,
documents and such other papers as may be requested by
Lender to effect an assignment of such application to Lender in
the manner provided by the Security Documents after an Event
of Default.
(c) Borrower will render any assistance
reasonably necessary to Lender without cost in any proceeding
before the United States Patent and Trademark Office or any
similar office or agency in the United States or any other
country to maintain each application for any patents,
copyrights, trademarks or other Intellectual Property, including,
without limitation, the filing of all renewals and paying all
annuities.
(d) Borrower shall not infringe on or interfere
with any Intellectual Property of any other Person in any
material respect.
SECTION 6.11 No Sale of Assets. Borrower shall
not, and shall not permit any of its Subsidiaries to, directly or
indirectly, sell, lease, assign, transfer or otherwise dispose of any
assets, whether now owned or hereafter acquired, other than (a)
inventory in the ordinary course of business, (b) obsolete or worn
out property disposed of in the ordinary course of business, or (c)
in connection with the Asset Purchase Agreement.
SECTION 6.12 No Guaranties. Except as otherwise
provided by this Agreement, Borrower shall not, and shall not
permit any of its Subsidiaries to, directly or indirectly, issue or
assume any Guaranty with respect to the liabilities of any other
Person, including any Subsidiary or Affiliate of Borrower, except
by the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of
business.
SECTION 6.13 No Restricted Payments. Borrower
shall not, and shall not permit any of its Subsidiaries to, directly
or indirectly, declare, pay or make any Restricted Payment,
except:
(a) any dividends or distributions to Borrower
from any of its Subsidiaries; and
(b) payments on the Obligations.
SECTION 6.14 Issuance of Capital Stock. Borrower
shall not, and shall not permit any of its Subsidiaries to, issue,
sell, distribute, or otherwise transfer its capital stock or other
equity interests to any Person, except (i) dividends permitted by
Section 6.6, and (ii) dispositions by any Subsidiary of Borrower
of such Subsidiarys capital stock or other equity interests to
Borrower.
SECTION 6.15 Additional Restrictive Covenants.
Borrower shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or suffer to exist
or become effective (a) any consensual restriction limiting the
ability (whether by covenant, event of default, subordination or
otherwise and including any such the effect of which is to require
the providing of equal and ratable security to any other Person in
the event a Lien is granted to or for the benefit of Lender) to (i)
pay dividends or make any other distributions on shares of its
capital stock or other equity interests held by Borrower or any
other Subsidiary; (ii) pay any liability owed to Borrower or any
other Subsidiary; (iii) make any loans or advances to or other
Investments in Borrower or in any other Subsidiary of Borrower;
or (iv) create or permit to exist any Lien upon the assets of
Borrower or any Subsidiary, other than Liens permitted under
Section 6.2; or (b) any contractual obligation which may restrict
or inhibit Lenders rights or ability to sell or otherwise dispose of
the Collateral or any part thereof after the occurrence of an Event
of Default; other than Permitted Restrictive Covenants.
SECTION 6.16 No Additional Subsidiaries.
Borrower will not, and shall not permit any of its Subsidiaries to,
directly or indirectly, form or acquire any new Subsidiaries unless
such newly formed or acquired Subsidiary becomes a co-
borrower with Borrower under the Loan Documents and enters
into such agreements and documents reasonably requested by
Lender in connection therewith.
ARTICLE VII
SECURITY PROVISIONS
SECTION 7.1 Security Interest. To further secure the
Obligations, and without limiting the legal operation and
effect of any other Loan Document, Borrower hereby
collaterally assigns to Lender, and grants Lender a security
interest in, all of Borrowers Property described below, now
owned and hereafter acquired, created or arising, and all of
Borrowers Property listed on any Schedule to this
Agreement, now owned and hereafter acquired, created or
arising, and in each case regardless of where such Property
may be located and whether such Property may be in the
possession of Borrower, Lender, or a third party, and, if any
of such Property may be held or stored with any Person
other than a Borrower, together with all of Borrowers rights
now owned and hereafter acquired, created or arising
relating to the storage and retrieval thereof and access
thereto (all of which Property described below or listed on
any such Schedule and all such rights of storage, retrieval and
access being referred to herein as Collateral):
(a) All of Borrowers Accounts; and
(b) All of Borrowers Bank Accounts; and
(c) All of Borrowers Chattel Paper; and
(d) All of Borrowers Documents; and
(e) All of Borrowers Equipment; and
(f) All of Borrowers General Intangibles; and
(g) All of Borrowers moneys, cash
equivalents, securities and other property, now or hereafter held
or received by, or in transit to, Lender, whether for
safekeeping, pledge, custody, transmission, collection or
otherwise, and any balances, sums and credits of Borrower held
by Lender at any time existing (Held Items); and
(h) All of Borrowers Instruments; and
(i) All of Borrowers Inventory; and
(j) All of Borrowers Investment Property; and
(k) All of Borrowers right, title and interest in
any tangible or intangible personal property that is not
described within the other defined terms included within the
definition of Collateral (Other Personalty); and
(l) All Proceeds; and
(m) All products of Collateral (Products); and
(n) All of Borrowers books, records,
documents, ledger cards, invoices, bills of lading and other
shipping evidence, credit files, computer programs, tapes,
discs, diskettes, and other data and software storage medium
and devices, customer lists, mailing lists, mailing labels,
business forms and stationery, and other property and general
intangibles evidencing or relating to Borrowers Accounts,
Inventory, Chattel Paper, General Intangibles, Investment
Property, and/or other Collateral, or any Account Debtor,
(including any rights of Borrower with respect to the foregoing
maintained with or by any other Person) (Records).
SECTION 7.2 Chattel Paper and Instruments. Borrower shall
mark or stamp the first page and the signature page of all
Chattel Paper with a legend clearly and conspicuously
stating that such Chattel Paper is subject to a continuing
security interest in favor of Lender, and promptly upon
Lenders request from time to time, and at Borrowers sole
cost and expense, and without limiting the effect of any
other provision of this Agreement or any other Loan
Document, Borrower shall: (i) deliver to Lender such
Chattel Paper, and execute and deliver to Lender such
assignments of Chattel Paper and related endorsements of
Chattel Paper, as Lender may request, and shall cause the
makers of the Chattel Paper to deliver to Lender such
acknowledgments of the assignments of Chattel Paper as
Lender may request; and (ii) deliver to Lender such
Instruments, and execute and deliver to Lender such
collateral assignments of Instruments and related
endorsements of Instruments, as Lender may request, and
shall cause the makers of the Instruments to deliver to
Lender such acknowledgments of assignment of Instruments
as Lender may request.
SECTION 7.3 Equipment. Borrower shall use the
Equipment solely in the conduct of its business and in a
careful and proper manner. Borrower shall keep all of its
Equipment at its principal place of business or at the Real
Property and shall not change the location of any material
portion of the Equipment without providing Lender with
thirty (30) days prior written notice thereof.
SECTION 7.4 Inventory. Borrower shall store all of the
Inventory in a careful, secure and proper manner at its
principal place of business or at the Real Property and shall
not change the location of any material amount of the
Inventory without providing Lender with thirty (30) days
prior written notice thereof.
SECTION 7.5 Additional Collateral. If Borrower proposes
to acquire additional property that would constitute
Collateral, and if the security interest of Lender would not
be a first priority perfected security interest upon acquisition
of such property, then except with respect to permitted
Liens, as to which this Section shall not apply, Borrower
shall, before acquiring such property, notify Lender of the
intended acquisition and take whatever actions Lender may
require in order that, upon the acquisition of such property,
Lender will have a first priority perfected security interest
therein.
SECTION 7.6 Covenant Regarding Receivables. Borrower
shall not rescind or cancel any Indebtedness evidenced by any Accounts or
modify any term thereof or make any adjustment with respect thereto, or
extend or renew the same, or compromise or settle any dispute, claim, suit
or legal proceeding relating thereto or sell any Accounts or interest therein,
without the prior written consent of Lender, except as permitted by Section
7.7 hereof. Borrower shall timely fulfill all obligations on their part to be
fulfilled under or in connection with the Accounts.
Section 7.7 Collection. Borrower shall take all
commercially reasonable actions to cause to be collected from the Account
Debtor of each of the Accounts, as and when due (including Accounts that
are delinquent, such Accounts to be collected in accordance with generally
accepted commercial collection procedures), any and all amounts owing
under or on account of such Accounts, and apply forthwith upon receipt
thereof all such amounts as are so collected to the outstanding balance of
such Accounts, except that, prior to the occurrence of an Event of Default,
Borrower may allow in the ordinary course of business (a) a refund or
credit due as a result of returned or damaged merchandise and (b) such
extensions of time to pay amounts due in respect of Accounts and such
other modifications of payment terms in respect of Accounts as shall be
commercially reasonable in the circumstances, all in accordance with
Borrowers ordinary course of business consistent with its collection
practices as in effect from time to time. The costs and expenses (including
attorneys fees and the allocated costs of internal counsel) of collection,
whether incurred by Borrower or Lender, shall be paid by Borrower.
SECTION 7.8 Further Assurances of Collateral. Borrower
shall execute such further agreements, documents, financing
statements and other instruments as may reasonably be
requested by Lender in order to perfect the security interests
granted herein. To the extent that possession of the
Collateral may be necessary or advisable to perfect the
collateral assignment and security interests granted hereby,
Borrower shall deliver such Collateral to Lender upon the
request of Lender; provided that before the occurrence of an
Event of Default, Lender shall not require physical
possession of Collateral if such possession would materially
impair Borrowers ability to transact business in a
commercially reasonably manner. Without limiting the
generality of the foregoing, Borrower hereby covenants and
agrees that all Liens granted to Lender under this Agreement
and/or any other Loan Documents, are, and shall at all times
be, first priority Liens, subject only to permitted Liens, and
that no Property of Borrower shall be subject to any Lien
(regardless of priority) except for permitted Liens.
ARTICLE VIII
EVENTS OF DEFAULT
AND REMEDIES
SECTION 8.1 Events of Default. If any of the following
events (Events of Default) occur:
(a) any representation or warranty made or
deemed made in or in connection with any Loan Document or
the Loan hereunder, or any representation, warranty, statement
or information contained in any report, certificate, financial
statement or other instrument furnished in connection with or
pursuant to any Loan Document, proves to have been
materially false or misleading when so made, deemed made or
furnished and a period of ten (10) Business Days shall have
elapsed after the occurrence of such event;
(b) default is made in the payment of any
principal of the Loan when and as the same shall become due
and payable, whether at the due date thereof or at a date fixed
for prepayment thereof or by acceleration thereof or otherwise;
(c) default is made in the payment of any
interest on the Loan or any other amount (other than an amount
referred to in (b) above) due under any Loan Document, when
and as the same becomes due and payable, and such default
continues unremedied for a period of ten (10) Business Days;
(d) default is made in the due observance or
performance by Borrower of any covenant, condition or
agreement contained in Section 5.1(a) or in Articles VI or VII,
and such default continues unremedied for a period of ten (10)
Business Days;
(e) default is made in the due observance or
performance by any Loan Party of any covenant, condition or
agreement contained in any Loan Document (other than those
specified in (b), (c) or (d) above) and such default continues
unremedied for a period of thirty (30) days after notice thereof
from Lender to Borrower or after such Loan Party has
knowledge of the occurrence thereof;
(f) Borrower (i) fails to pay any principal or
interest, regardless of amount due, in respect of any
Indebtedness in a principal amount in excess of $10,000, when
and as the same becomes due and payable, or (ii) fails to
observe or perform any other term, covenant, condition or
agreement contained in any agreement or instrument
evidencing or governing any such Indebtedness if the effect of
any failure referred to in this clause (ii) is to cause, or to permit
the holder or holders of such Indebtedness or a trustee on its or
their behalf (with or without the giving of notice, the lapse of
time or both) to cause, such Indebtedness to become due prior
to its stated maturity, and such default continues unremedied
for a period of ten (10) Business Days;
(g) an Act of Bankruptcy or Act of
Dissolution shall have occurred with respect to Borrower or
any other Loan Party;
(h) one or more judgments for the payment of
money in an aggregate amount in excess of $100,000
(excluding any portion thereof that an insurance company of
recognized standing and creditworthiness has agreed in a
writing reasonably satisfactory to Lender to pay) is rendered
against any Loan Party, and the same shall remain
undischarged for a period of thirty (30) consecutive days
during which execution is not effectively stayed, or any action
is legally taken by a judgment creditor to levy upon assets or
properties of Borrower to enforce any such judgment; or
(i) any security interest purported to be
created by any Security Document shall cease to be, or shall be
asserted by any Loan Party not to be, a valid, perfected, first
priority (except as otherwise expressly provided in this
Agreement or such Security Document) security interest in the
securities, assets or properties covered thereby;
then, and in every such event (other than an event with respect to
Borrower described in paragraph (g) above) and at any time
thereafter during the continuance of such event, Lender may by
notice to Borrower, take either or both of the following actions, at
the same or different times: declare the principal amount then
outstanding to be forthwith due and payable in whole or in part,
whereupon the principal amount so declared to be due and
payable, together with accrued interest thereon and all other
liabilities of Borrower accrued hereunder and under any other
Loan Document, shall become forthwith due and payable,
without presentment demand, protest or any other notice of any
kind, all of which are hereby expressly waived by Borrower,
anything contained herein or in any other Loan Document to the
contrary notwithstanding; and in any event with respect to
Borrower described in paragraph (g) above, the principal of the
Loan then outstanding, together with accrued interest thereon and
all other liabilities of Borrower accrued hereunder and under any
other Loan Document, shall automatically become due and
payable, without presentment demand, protest or any other notice
of any kind, all of which are hereby expressly waived by
Borrower, anything contained herein or in any other Loan
Document to the contrary notwithstanding.
SECTION 8.2 Other Remedies. In addition to the foregoing,
upon the occurrence of an Event of Default, Lender may do
any of the following:
(a) Collect and enforce payment of all of
Borrowers Deposit Accounts, Accounts, General Intangibles,
Chattel Paper, Instruments and Documents and rights and
remedies with respect to such Property as would otherwise be
exercised by Borrower, including: the power to take
possession of and endorse in the name of Borrower, any Items
of Payment of any kind and any other documents received; the
power to extend the time of payment of, the time to sue for, and
the time to give acquittances for, monies due; and the power to
withdraw proceeds deposited in the name of Borrower in any
bank or savings institution.
(b) Sell or otherwise dispose of the stock
Collateral and sell or otherwise dispose of the non-stock
Collateral, or any part thereof, at public or private sale (or at
any brokers board or on any securities exchange) or otherwise,
for cash, upon credit or for future delivery as Lender shall
deem appropriate. Each such purchaser at any such sale shall
hold the property sold absolutely, free from any claim or right
on the part of Borrower, and Borrower hereby waives (to the
extent permitted by law) all rights of redemption, stay and
appraisal that Borrower now has or may at any time in the
future have under any rule of law or statute now existing or
hereafter enacted. Lender shall give Borrower at least five (5)
days written notice (which Borrower agrees is reasonable
notice within the meaning of Section 9-504(3) of the UCC) of
Lenders intention to make any sale of Collateral owned by
Borrower, as the case may be. Such notice, in the case of a
public sale, shall state the time and place for such sale and, in
the case of a sale at a brokers board or on a securities exchange,
shall state the board or exchange at which such sale is to be
made and the day on which the Collateral, or portion thereof,
will first be offered for sale at such board or exchange.
Any such public sale shall be held at such time or times
within ordinary business hours and at such place or places as
Lender may fix and state in the notice of such sale, and at any
such sale, the Collateral, or portion thereof, to be sold may be
sold in one lot as an entirety or in separate parcels, as Lender
may (in its discretion) determine. Lender shall not be
obligated to make any sale of any Collateral if Lender shall
determine not to do so, regardless of the fact that notice of
sale of such Collateral shall have been given. Lender may,
without notice or publication, adjourn any public or private
sale or cause the same to be adjourned from time to time by
announcement at the time and place fixed for sale. Such sale
may, without further notice, to Borrower or anyone else, be
made at the time and place to which the same was so
adjourned. In case any sale of all or any part of the Collateral
is made on credit or for future delivery, the Collateral so sold
may be retained by Lender until the sale price is paid by the
purchaser or purchasers thereof, but Lender shall not incur
any liability in case any such purchaser or purchasers shall
fail to take up and pay for Collateral so sold and, in case of
any such failure, such of the Collateral may be sold again
upon notice to Borrower as set forth in this Section.
At any public sale made pursuant to this Section, Lender
may bid for or purchase, free (to the extent permitted by law)
from any right of redemption, stay or appraisal on the part of
Borrower (all said rights being also hereby waived and
released to the extent permitted by law), the Collateral or any
part thereof offered for sale and may make payment on
account thereof by using any claim then due and payable to
Lender from Borrower as a credit against the purchase price.
Lender may, upon compliance with the terms of sale, hold,
retain and dispose of such property without further
accountability to Borrower therefor. For purposes hereof, a
written agreement to purchase the Collateral or any portion
thereof shall be treated as a sale thereof. Lender shall be free
to carry out such sale pursuant to such agreement, and
Borrower shall not be entitled to the return of the Collateral
or any portion thereof subject thereto, notwithstanding the
fact that after Lender shall have entered into such an
agreement, all Events of Default shall have been remedied
and the Obligations paid in full.
(c) As an alternative to exercising the power
of sale herein conferred upon Lender, Lender may proceed by a
suit or suits at law or in equity to foreclose this Agreement and
to sell the Collateral or any portion thereof pursuant to a
judgment or decree of a court or courts having competent
jurisdiction or pursuant to a proceeding by a court-appointed
Receiver. Upon any sale of Collateral by Lender (including a
sale pursuant to a power of sale granted by statute or under a
judicial proceeding), the receipt of Lender or of the officer
making the sale shall be a sufficient discharge to the purchaser
or purchasers of the Collateral being sold, and such purchaser
or purchasers shall not be obligated to see to the application of
any part of the purchase money paid over to Lender or such
officer or be answerable in any way for the misapplication
thereof.
Borrower agrees that in selling or otherwise disposing of
the Collateral and in exercising Lenders rights and remedies
to the Collateral, Lender and/or any Receiver and/or any
designee of Lender and/or any Receiver shall have the
unrestricted and irrevocable right (so long as not violative of
law) to advertise, sell, lease, license or otherwise dispose of the
Collateral under and together with, and shall otherwise have
the unrestricted and irrevocable right to use, without
limitation, in connection therewith, any and all of Borrowers
advertisements in any medium (and other marketing and
promotional materials in any medium), brochures, signs,
stationery, business forms, packaging and shipping materials,
programs, software, licenses, permits, consents, approvals,
and Intellectual Property relating to such Collateral and/or
Borrowers business, and all agreements with employees and
former employees relating to any of the foregoing. Borrower
shall indemnify and hold harmless Lender and any Receiver,
and their designees, shareholders, directors, officers,
employees, agents, attorneys, accountants, and other advisors,
from and against any and all claims (including claims for
royalties and/or money damages and/or claims for injunctive
relief), liabilities, damages, royalties, and penalties of any
Person, and Lenders and any Receivers costs and expenses
(including attorneys fees) and those of their designees,
shareholders, directors, officers, employees, agents, attorneys,
accountants, and other advisors, incurred to defend against
any thereof.
(d) With regard to all Collateral so collected,
sold or otherwise disposed of, to the extent permitted by
applicable law, Lender shall have absolute discretion as to the
time of application of any such proceeds, moneys or balances
in accordance with this Agreement, first, to the settlement of all
Liens on the Collateral prior to Lenders Lien; second, to the
payment of all costs incurred in connection with the
enforcement of the Loan Documents and exercise of remedies;
and third, to the payment of all Obligations, and, in case of any
deficiency, Lender may collect such deficiency from Borrower
(provided however, nothing in this provision shall be construed
in derogation or limitation of any guaranty of payment or used
to construe any guaranty of payment as being merely a
guaranty of collection).
SECTION 8.3 Intellectual Property Remedies. In addition to
all other rights and remedies, Lender, following the
occurrence of an Event of Default hereunder shall have the
following rights and remedies with respect to the Intellectual
Property, each of which may be exercised without notice to,
or consent by, Borrower except as expressly provided for
herein:
(a) Lender may require that Borrower and all
Affiliates of Borrower immediately discontinue any existing
use of the Intellectual Property and that neither Borrower nor
any Affiliate of Borrower make any further use of the
Intellectual Property for any purpose whatsoever;
(b) Upon ten (10) days prior notice to
Borrower, Lender may grant one or more exclusive or non-
exclusive license or licenses relating to any of the Intellectual
Property for such term or terms, on such conditions, and in
such manner, as Lender shall in its sole discretion deem
appropriate. Such license or licenses may be general, special or
otherwise, and may be granted on an exclusive or non-
exclusive basis throughout the United States of America, its
territories and possessions and all foreign countries;
(c) Upon ten (10) days prior notice to
Borrower, Lender may assign, sell or otherwise dispose of the
Intellectual Property or any part thereof, either with or without
special conditions or stipulations. Lender shall have the power
to purchase the Intellectual Property or any part thereof, and
Lender shall also have the power to execute all assurances and
to perform all other acts that Lender may, in Lenders sole
discretion, deem appropriate or proper to complete such
assignment, sale or disposition;
(d) Lender may first apply the proceeds
actually received from any such license, assignment, sale or
other disposition of Intellectual Property to the reasonable costs
and expenses thereof, including, without limitation to,
reasonable attorneys fees and all legal, travel and other
expenses that may be incurred by Lender. Thereafter, Lender
may apply any remaining proceeds to such of the Obligations
as Lender may in its sole discretion determine. Borrower shall
remain liable to Lender for any Obligations or reasonable
expenses remaining unpaid after the application of such
proceeds, and Borrower will pay Lender on demand any such
unpaid amount, together with interest at the default rate of
interest specified herein; and
(e) If any such license, assignment, sale or
other disposition of the Intellectual Property (or any part
thereof) is made after the occurrence of an Event of Default
under any of the Loan Documents, Borrower shall supply to
Lender or Lenders designee, Borrowers knowledge and
expertise relating to the manufacture and sale of the products
according to the patented inventions, Borrowers customer lists,
and other records relating to the distribution of any products
related thereto.
To the extent there may be any inconsistency between this
Section 8.3 and the Collateral Assignment of Trademarks and
Patents, the Collateral Assignment of Trademarks and Patents
shall control.
SECTION 8.4 Receiver. If an Event of Default shall occur
and be continuing, Lender shall be entitled as a matter of
right and to the extent permitted by law, without notice to
any Loan Party, and without regard to the adequacy of
security, to the immediate ex parte appointment of a
Receiver by a court having jurisdiction in order to carry out
all rights and remedies available to Lender upon such Event
of Default, and to manage, protect and preserve the
Collateral, and any other Property of Borrower and
continue to operate or liquidate Borrowers business and to
collect all revenues and profits thereof and apply the same to
the payment of all expenses and other charges of such
receivership, custodianship or similar appointment,
including compensation of the Receiver and to the payment
of the Obligations, and to the payment of such other claims
and expenses as may appear appropriate. If Lender shall
apply for the appointment of, or the taking of possession by,
a Receiver, to hold, operate or liquidate all or any substantial
part of the properties or assets of Borrower, Borrower
hereby consents to any such appointment and taking of
possession. Borrower shall deliver to any Receiver so
appointed upon Lenders request all original Records, and
any other records, books, and other information regarding
the Collateral, and any other Property of Borrower and the
operations of the business of Borrower.
SECTION 8.5 Waivers. Borrower waives presentment,
demand, notice of dishonor, and protest, and all demands
and notices of any action taken by Lender under this
Agreement, except as otherwise provided herein, are hereby
waived, and any indulgence of Lender, substitution for,
exchange of or release of collateral, or addition or release of
any person liable on the collateral is hereby assented and
consented to and shall not operate or be claimed to operate
to release or exonerate any other collateral or person or any
claim of Lender.
SECTION 8.6 Attorney-In-Fact. Borrower hereby
irrevocably appoints Lender as its attorney-in-fact, with
power of substitution, to do each of the following in the
name of Borrower or in the name of Lender or otherwise,
for the use and benefit of Lender, but at the cost and expense
of Borrower, and without notice to Borrower:
(a) notify the debtors or other party(ies)
obligated under any of the Accounts, Chattel Paper or General
Intangibles to make payments thereon directly to Lender, and
to take control of the cash and non-cash proceeds of any
Collateral;
(b) compromise, extend, or renew any of the
Collateral or deal with the same as it may deem advisable;
(c) release, make exchanges, substitutions, or
surrender of all or any part of the Collateral;
(d) remove from Borrowers place of business
all Records relating to or evidencing any of the Collateral or
without cost or expense to Lender, make such use of Borrowers
place(s) of business as may be reasonably necessary to
administer, control and collect the Collateral;
(e) repair, alter or supply goods, if any,
necessary to fulfill in whole or in part the purchase order of any
account debtor;
(f) demand, collect, receipt for and give
renewals, extensions, discharges and releases of any of the
Collateral;
(g) institute and prosecute legal and equitable
proceedings to enforce collection of, or realize upon, any of the
Collateral;
(h) settle, renew, extend, compromise,
compound, exchange or adjust claims with respect to any of the
Collateral or any legal proceedings brought with respect
thereto;
(i) endorse the name of Borrower upon any
items of payment relating to the Collateral or upon any proof of
claim in bankruptcy against an account debtor;
(j) institute and prosecute legal and equitable
proceedings to reclaim any of the goods sold to any debtor
obligated on an Account, Chattel Paper, or General Intangible
at a time when such debtor was insolvent;
(k) receive and open all mail addressed to
Borrower and notify the postal authorities to change the
address for the delivery of mail to Borrower to such address as
Lender may designate; and
(l) execute and deliver on behalf of Borrower
one or more instruments of assignment of the Intellectual
Property (or application, letters patent or recording relating
thereto), in form suitable for filing, recording or registration.
Notwithstanding anything in this Section 8.6 to the contrary,
Lender shall not exercise the foregoing power of attorney at any
time except during the continuation of an Event of Default.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Notices. Notices and other communications
provided for herein shall be in writing and shall be delivered
by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:
If to Borrower:
11375 Sunrise Park Drive
Suite 800
Rancho Cordova, CA 95742
Attention:
Telecopy:
with a copy to:
Patton Boggs LLP
Suite 1900
1660 Lincoln Street
Denver, CO 80264
Attention: Michael Hoog, Esq.
Telecopy: (303) 830-9239
If to Lender:
1710 Route Transcanadienne
Dorval, Quebec H9P 1H7
Canada
Attention: Mr. Stephen Altro
Telecopy: (514) 685-2825
with a copy to:
Piper Marbury Rudnick & Wolfe
LLP
1251 Avenue of the Americas
New York, New York 10020
Attention: David J. Fisher, Esq.
Telecopy: (212) 835-6001
and
Adessky, Poulin
Place Canada Trust
18th etage
999 Boul. De Maisonneuve Quest
Montreal, Quebec H3A 3L4
Canada
Attention: Elliot L. Bier, Esq.
Telecopy: (514) 288-2697
All notices and other communications given to any party hereto
in accordance with the provisions of this Agreement shall be
deemed to have been given on the date of receipt if delivered by
hand or overnight courier service or sent by telecopy or on the
date five (5) Business Days after dispatch by certified or
registered mail if mailed, in each case delivered, sent or mailed
(properly addressed) to such party as provided in this Section 9.1
or in accordance with the latest unrevoked direction from such
party given in accordance with this Section 9.1.
SECTION 9.2 Survival of Agreement. All covenants,
agreements, representations and warranties made by
Borrower herein and in the certificates or other instruments
prepared or delivered in connection with or pursuant to this
Agreement or any other Loan Document shall be considered
to have been relied upon by Lender and shall survive the
making by Lender of the Loan, regardless of any
investigation made by Lender or on its behalf and shall
continue in full force and effect as long as the principal of or
any accrued interest on the Loan or any other amount
payable under this Agreement or any other Loan Document
is outstanding and unpaid. The provisions of Sections 2.9,
and 9.5 shall remain operative and in full force and effect
regardless of the expiration of the term of this Agreement,
the consummation of the transactions contemplated hereby,
the repayment of the Loan, the invalidity or
unenforceability of any term or provision of this Agreement
or any other Loan Document, or any investigation made by
or on behalf of Lender.
SECTION 9.3 Binding Effect. This Agreement shall become
effective when it shall have been executed by Borrower and
Lender and when Lender shall have received counterparts
hereof which, when taken together, bear the signatures of
each of the other parties hereto, and thereafter shall be
binding upon and inure to the benefit of the parties hereto
and their respective permitted successors and assigns.
SECTION 9.4 Successors and Assigns.
(a) Whenever in this Agreement any of the
parties hereto is referred to, such reference shall be deemed to
include the permitted successors and assigns of such party; and
all covenants, promises and agreements by or on behalf of
Borrower or Lender that are contained in this Agreement shall
bind and inure to the benefit of their respective successors and
assigns.
(b) Borrower shall not assign or delegate any
of its rights or duties hereunder without the prior written
consent of Lender, and any attempted assignment or delegation
without such consent shall be null and void.
(c) Lender shall not assign or delegate any of
its rights or duties hereunder to a Transferee without the prior
written consent of Borrower, and any attempted assignment or
delegation without such consent shall be null and void.
Notwithstanding the foregoing, the notice and consent
requirements of this paragraph (c) shall be in effect only so
long as no Event of Default has occurred and is continuing.
SECTION 9.5 Expenses; Indemnity.
(a) Borrower hereby agrees to pay all out-of-
pocket expenses (i) incurred by Lender (x) in connection with
the preparation and administration of this Agreement and the
other Loan Documents and (y) in connection with any
amendments, modifications or waivers of the provisions hereof
or thereof (whether or not the transactions hereby or thereby
contemplated shall be consummated) and (ii) incurred by
Lender in connection with the enforcement or protection of its
rights in connection with this Agreement and the other Loan
Documents, including any suit, action, claim or other activity
of Lender to collect the Obligations or any portion thereof, and
in connection with the Transaction hereunder, including, in
each case, the reasonable fees, charges and disbursements of
Piper Marbury Rudnick & Wolfe LLP, counsel for Lender,
and, in connection with any such enforcement or protection, the
reasonable fees, charges and disbursements of any other
counsel for Lender, provided that Borrower shall only be liable
for the fees, charges and disbursements of Piper Marbury
Rudnick & Wolfe LLP incurred in connection with Section
9.5(a)(i) in an amount not to exceed Fifteen Thousand Dollars
($15,000).
(b) Borrower will indemnify Lender, and its
directors, officers, employees and agents (each such Person
being called an Indemnitee) against, and to hold each
Indemnitee harmless from, any and all losses, claims, damages,
liabilities and related expenses, including reasonable counsel
fees, charges and disbursements, incurred by or asserted against
any Indemnitee arising out of in any way connected with, or as
a result of (i) the execution or delivery of this Agreement or
any other Loan Document or any agreement or instrument
contemplated thereby, the performance by the parties thereto of
their respective obligations thereunder or the consummation of
the Transaction and the other transactions contemplated
thereby, (ii) the use of the proceeds of the Loan, (iii) any claim,
litigation investigation or proceeding relating to any of the
foregoing, whether or not any Indemnitee is a party thereto, or
(iv) any actual or alleged presence or release of hazardous
materials on any property owned or operated by Borrower, or
any environmental claim, suit or proceeding related in any way
to Borrower relating to any environmental issue; provided that
such indemnity shall not as to any Indemnitee, be available to
the extent that such losses, claims, damages, liabilities or
related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have
resulted from the gross negligence or willful misconduct of
such Indemnitee.
(c) The provisions of this Section 9.5 shall
remain operative and in full force and effect regardless of the
expiration of the term of this Agreement the consummation of
the transactions contemplated hereby, the repayment of the
Loan, the invalidity or unenforceability of any term or
provision of this Agreement or any other Loan Document, or
any investigation made by or on behalf of Lender. All amounts
due under this Section 9.5 shall be payable on written demand
therefor.
SECTION 9.6 Waiver of Consequential and Punitive
Damages. Borrower and Lender hereby waive to the fullest
extent permitted by law all claims to consequential and
punitive damages in any lawsuit or other legal action
brought by any of them against any other of them in respect
of any claim among or between any of them arising under
this Agreement, the other Loan Documents, or any other
agreement or agreements between or among any of them at
any time, including any such agreements, whether written or
oral, made or alleged to have been made at any time prior to
the Closing Date, and all agreements made hereafter or
otherwise, and any and all claims arising under common law
or under any statute of any state or the United States of
America, including any thereof in contract, tort, strict
liability or otherwise, whether any such claims be now
existing or hereafter arising, now known or unknown. In
making this waiver, Lender and Borrower acknowledge and
agree that there shall be no claims for consequential or
punitive damages made by Lender against Borrower and
there shall be no claims for consequential or punitive
damages made against Lender by Borrower. Lender and
Borrower acknowledge and agree that this waiver of claims
for consequential damages and punitive damages is a material
element of the consideration for this Agreement.
SECTION 9.7 Applicable Law. THIS AGREEMENT AND
THE OTHER LOAN DOCUMENTS (OTHER THAN
AS EXPRESSLY SET FORTH IN OTHER LOAN
DOCUMENTS) SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE STATE OF NEW YORK (EXCLUDING
NEW YORK CONFLICTS OF LAWS PROVISIONS).
SECTION 9.8 Waivers; Amendment.
(a) No failure or delay of Lender in exercising
any power or right hereunder or under any other Loan
Document shall operate as a waiver thereof nor shall any single
or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right
or power, preclude any other or further exercise thereof or the
exercise of any other right or power. The rights and remedies
of Lender hereunder and under the other Loan Documents are
cumulative and are not exclusive of any rights or remedies that
it would otherwise have. No waiver of any provision of this
Agreement or any other Loan Document or consent to any
departure by Borrower therefrom shall in any event be effective
unless the same shall be permitted by paragraph (b) below, and
then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. No
notice or demand on Borrower in any case shall entitle
Borrower to any other or further notice or demand in similar or
other circumstances.
(b) Neither this Agreement nor any provision
hereof may be waived, amended or modified except pursuant to
an agreement or agreements in writing entered into by
Borrower and Lender.
SECTION 9.9 Interest Rate Limitation. Notwithstanding
anything herein to the contrary, if at any time the interest
rate applicable to the Loan, together with all fees, charges,
warrants and other amounts which are treated as interest on
the Loan under applicable law (collectively the Charges),
shall exceed the maximum lawful rate (the Maximum Rate)
which may be contracted for, charged, taken, received or
reserved by Lender holding the Loan in accordance with
applicable law, the rate of interest payable in respect of the
Loan hereunder, together with all Charges payable in respect
thereof shall be limited to the Maximum Rate.
SECTION 9.10 Entire Agreement. This Agreement
and the other Loan Documents constitute the entire contract
between the parties relative to the subject matter hereof.
Any other previous agreement among the parties with
respect to the subject matter hereof is superseded by this
Agreement and the other Loan Documents. Nothing in this
Agreement or in the other Loan Documents, expressed or
implied, is intended to confer upon any party other than the
parties hereto and thereto any rights, remedies, obligations
or liabilities under or by reason of this Agreement or the
other Loan Documents.
SECTION 9.11 Independent Agreements.
BORROWER HEREBY ACKNOWLEDGES AND AGREES
THAT THE ASSET PURCHASE AGREEMENT IS AN
INDEPENDENT AGREEMENT BETWEEN LENDER
AND BORROWER AND THAT ALL OF THE
AGREEMENTS, OBLIGATIONS, TERMS AND
PROVISIONS SET FORTH IN THIS AGREEMENT AND
THE OTHER LOAN DOCUMENTS SHALL, SUBJECT
TO THE PROVISIONS OF SECTION 9.18, REMAIN IN
FULL FORCE AND EFFECT IRRESPECTIVE OF
WHETHER THE ASSET PURCHASE AGREEMENT IS
EXECUTED AND IRRESPECTIVE OF WHETHER THE
ACQUISITION IS CONSUMMATED. IN
FURTHERANCE OF THE FOREGOING, BORROWER
HEREBY ACKNOWLEDGES AND AGREES THAT IT
SHALL, SUBJECT TO THE PROVISIONS OF SECTION
9.18, ABIDE BY ALL THE TERMS AND PROVISIONS OF
THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, INCLUDING WITHOUT LIMITATION,
ITS OBLIGATION TO REPAY THE LOAN, TOGETHER
WITH ACCRUED INTEREST, AND ALL OTHER
OBLIGATIONS IN ACCORDANCE WITH THE TERMS
OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, REGARDLESS OF WHETHER THE
ASSET PURCHASE AGREEMENT IS EXECUTED AND
REGARDLESS OF WHETHER THE ACQUISITION IS
CONSUMMATED, WITHOUT SET-OFF OR
COUNTERCLAIM, AND HEREBY FOREVER WAIVES
ANY DEFENSE TO SUCH REPAYMENT, OR TO ITS
AGREEMENTS AND OBLIGATIONS UNDER THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS
BASED ON A CLAIM THAT THE ASSET PURCHASE
AGREEMENT WAS NOT EXECUTED OR THAT THE
ACQUISITION WAS NOT CONSUMMATED.
SECTION 9.12 WAIVER OF JURY TRIAL. EACH
PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY
OR INDIRECTLY ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT OR ANY
OF THE OTHER LOAN DOCUMENTS. EACH
PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF
ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER
PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING
WAIVER AND (B) ACKNOWLEDGES THAT IT AND
THE OTHER PARTIES HERETO HAVE BEEN
INDUCED TO ENTER INTO THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS, AS
APPLICABLE, BY, AMONG OTHER THINGS, THE
MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION 9.12.
SECTION 9.13 Severability. In the event any one or
more of the provisions contained in this Agreement or in
any other Loan Document should be held invalid, illegal or
unenforceable in any the validity, legality and enforceability
of the remaining provisions contained herein and therein
shall not in any way be affected or impaired thereby (it being
understood that the invalidity of a particular provision in a
particular jurisdiction shall not in and of itself affect the
validity of such provision in any other jurisdiction). The
parties shall endeavor in good faith negotiations to replace
the invalid, illegal or unenforceable provisions with valid
provisions the economic effect of which comes as close as
possible to that of the invalid, illegal or unenforceable
provisions.
SECTION 9.14 Counterparts. This Agreement may be
executed in counterparts (and by different parties hereto on
different counterparts), each of which shall constitute an
original but all of which when taken together shall
constitute a single contract and shall become effective as
provided in Section 9.3. Delivery of an executed signature
page to this Agreement by facsimile transmission shall be as
effective as delivery of a manually signed counterpart of this
Agreement.
SECTION 9.15 Heading. Article and Section headings
and the Table of Contents used herein are for convenience of
reference only, are not part of this Agreement and are not to
affect the construction of or to be taken into consideration
in interpreting, this Agreement.
SECTION 9.16 Jurisdiction; Consent to Service of
Process.
(a) Borrower hereby irrevocably and
unconditionally submits, for itself and its property, to the
nonexclusive jurisdiction of any New York State court or
Federal court of the United States of America sitting in the
State of New York, and any appellate court from any thereof,
in any action or proceeding arising out of or relating to this
Agreement or the other Loan Documents, or for recognition or
enforcement of any judgment and each of the parties hereto
hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and
determined in the State of New York or, to the extent permitted
by law, in such Federal court. Each of the parties hereto agrees
that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit
on the judgment or in any other manner provided by law.
Nothing in this Agreement shall affect any right that Lender
may otherwise have to bring any action or proceeding relating
to this Agreement or the other Loan Documents against
Borrower or its properties in the courts of any jurisdiction.
(b) Borrower hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and
effectively do so, any objection which it may now or hereafter
have to the laying of venue of any suit action or proceeding
arising out of or relating to this Agreement or the other Loan
Documents in any New York State or Federal court. Each of
the parties hereto hereby irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum
to the maintenance of such action or proceeding in any such
court.
(c) Each party to this Agreement irrevocably
consents to service of process in the manner provided for
notices in Section 9.1. Nothing in this Agreement will affect
the right of any party to this Agreement to serve process in any
other manner permitted by law.
SECTION 9.17 Relationship of the Parties; Advice of
Counsel. This Agreement provides for the making of an
investment by Lender, in its capacity as an investor, in
Borrower, in its capacity as a borrower, and for the payment
of interest and repayment of principal by Borrower to
Lender. The provisions herein for compliance with financial
covenants, if any, and delivery of financial statements are
intended solely for the benefit of Lender to protect its
interests as a lender in assuring payments of interest and
repayment of principal, and nothing contained in this
Agreement shall be construed as permitting or obligating
Lender to act as a financial or business advisor or consultant
to Borrower, as permitting or obligating Lender to control
Borrower or to conduct Borrowers operations, as creating
any fiduciary obligation on the part of Lender to Borrower,
or as creating any joint venture, agency or other relationship
between the parties other than as explicitly and specifically
stated in this Agreement. Lender is not (and shall not be
construed as) a partner, joint venturer, alter-ego, manager,
controlling person, operator or other business participant of
any kind of Borrower; neither Lender nor Borrower intend
that Lender assume such status, and, accordingly, Lender
shall not be deemed responsible for (or a participant in) any
acts or omissions of Borrower or any of its partners. Each of
Lender and Borrower represents and warrants to the other
that it has had the advice of experienced counsel of its own
choosing in connection with the negotiation and execution
of this Agreement and with respect to all matters contained
herein.
SECTION 9.18 Termination. Upon payment in full
of the Loan and all other Obligations, this Agreement shall
terminate and all guaranties and security interests granted in
connection herewith shall, at the expense of Borrower, be
released and terminated, and Lender shall cooperate with
Borrower or any other Loan Party to release all Collateral
and to execute all releases and termination statements that
Borrower shall reasonably request to effect such release.
Upon the consummation of the acquisition of all of
Borrowers assets or stock by Lender or any of its
Subsidiaries, Lender or such Subsidiary shall assume liability
for the Loan, and all Guaranty Agreements, Pledge
Agreements and security interests granted hereunder shall
terminate and Lender shall cooperate with Borrower or any
other Loan Party to release all Collateral and to execute all
releases and termination statements that Borrower shall
reasonably request to effect such release.
IN WITNESS WHEREOF, the parties hereto have caused
this Loan and Security Agreement to be duly executed by
their respective authorized officers under seal as of the day
and year first above written.
BORROWER:
LIMITED
TREASURES, INC.
By:_/s/ Daniel
Atkins
Name: Daniel
Atkins
Title: President
LENDER:
GRAND TOYS
INTERNATIONAL, INC.
By: /s/ Stephen
Altro
Name: Stephen
Altro
Title: Chairman
EXHIBITS AND SCHEDULES
Exhibit A Perfection Certificate
Schedule 4.5 Executive Offices:
FEIN
Schedule 4.6 Financial Statements
Schedule 4.7 Indebtedness
Schedule 4.8 Bank Accounts
Schedule 4.9 Ownership and
Control of Borrower
Schedule 4.11 Leases
Schedule 4.12 Subsidiaries
Schedule 4.13 Directors, Officers and
Affiliates
Schedule 4.14 Litigation
Schedule 4.20 Insurance
Schedule 4.22 Employment Contracts
Schedule 4.29 Intellectual Property
Schedule 6.2 Liens
PROMISSORY NOTE
$700,000.00 February 17, 2000
FOR VALUE RECEIVED, LIMITED TREASURES, INC., a
Delaware corporation (Borrower), promises to pay to the order
of GRAND TOYS INTERNATIONAL, INC., a Nevada
corporation (Lender, which term shall also include any
subsequent holder of this Note), the principal sum of Seven
Hundred Thousand and no/100 Dollars ($700,000), together
with interest until paid as set forth in this Note.
This Note is the Note referred to in that certain Loan and
Security Agreement between Borrower and Lender dated on or
about the same date as this Note (the Loan Agreement), and
this Note is one of the Loan Documents referred to in the Loan
Agreement. Capitalized terms used in this Note but not
defined in this Note shall have the meanings given them in the
Loan Agreement. The captions on the Sections of this Note are
for convenience only and shall not be used for purposes of
interpretation or construction of this Note.
SECTION 1. Term. The term of this Note shall commence
on the Closing Date and shall mature on July 1, 2000 (referred
to herein as the Maturity Date).
SECTION 2. Repayment. Principal and interest shall accrue
and be payable on the outstanding unpaid principal balance of
this Note at the rate of interest determined in accordance with
the Loan Agreement. Borrower shall make principal plus
interest payments in the amount, at the time, and in the
manner set forth in the Loan Agreement. Each such payment
shall not be subject to any set-off, counterclaim, recoupment,
defense of other claim, right or action which any Loan Party,
or any other Person, may have against Lender.
SECTION 3. Prepayment. Borrower may prepay this Note in
whole or in part as expressly permitted by the terms of the
Loan Agreement.
SECTION 4. Default; Acceleration. Upon any default in
payment under this Note or the occurrence of any other Event
of Default, and upon certain other events as specified in the
Loan Agreement, the unpaid principal with interest and all
other sums evidenced by this Note shall, at the option of
Lender and in Lenders discretion, become immediately due and
payable upon demand. Under certain circumstances, as set
forth in the Loan Agreement, the unpaid principal and interest
due under this Note shall become automatically due and
payable without notice and demand. In the event of such
acceleration, Borrower shall discharge its obligations by paying
all sums due under this Note and the other Loan Documents
with interest at the Default Rate from the date such acceleration
is declared. Lenders failure to exercise this right to accelerate
the payments due on this Note shall not constitute a waiver of
Lenders right to accelerate in the event of any subsequent
default.
SECTION 5. Certain Obligor Waivers. As to this Note and
any other Loan Document, Borrower and each other Loan
Party, if any, severally waive all applicable exemption rights,
whether under any state constitution, homestead laws or
otherwise, and also severally waive valuation and appraisement,
presentment, notice of dishonor, and protest, notice of demand
and nonpayment of this Note, and notice of acceleration and
expressly agree that the maturity of this Note, or any payment
under this Note, may be extended from time to time without in
any way affecting the liability of Borrower or the liability of
any other Loan Party.
If Lender transfers this Note to another holder who takes this
Note for value and without actual knowledge of a claim or
defense of the Borrower against any prior holder of this Note,
such transferee shall not be subject to any claims, setoffs or
defenses that Borrower may have against any holder of this
Note prior to such transfer, and such transferee shall have all of
the rights of a holder in due course against Borrower even if,
absent this provision, such transferee would not qualify as a
holder in due course under applicable law.
SECTION 6. Preservation of Rights. No failure on the part of
Lender to exercise any right or remedy hereunder, whether
before or after the happening of a default shall constitute a
waiver thereof, and no waiver of any past default shall
constitute waiver of any future default or of any other default.
No failure to accelerate the debt evidenced hereby by reason of
default hereunder, or acceptance of a past due installment, or
indulgence granted from time to time shall be construed to be a
waiver of the right to insist upon prompt payment thereafter or
to impose late charges retroactively or prospectively, or shall be
deemed to be a novation of this Note or a reinstatement of the
debt evidenced hereby or a waiver of such right or acceleration
or any other right, or be construed so as to preclude the
exercise of any right that Lender may have, whether by the
laws of the State of New York, by agreement, or otherwise; and
Borrower and each endorser or guarantor hereby expressly
waives the benefit of any statute or rule of law or equity that
would produce a result contrary to or in conflict with the
foregoing. This Note may not be changed orally, but only by
an agreement in writing signed by the party against whom such
agreement is sought to be enforced.
SECTION 7. New York Law. Borrower hereby
acknowledges, consents and agrees that the provisions of this
Note and the rights of all parties mentioned herein shall be
governed by the laws of the State of New York and interpreted
and construed in accordance with such laws (excluding,
however, New York conflict of law principles).
SECTION 8. Jurisdiction; Venue. The provisions of the Loan
Agreement regarding jurisdiction and venue are incorporated
herein by reference.
SECTION 9. MUTUAL WAIVER OF JURY TRIAL. BORROWER
AND LENDER WAIVE ALL RIGHTS TO TRIAL BY JURY OF ANY
CLAIMS OF ANY KIND ARISING UNDER OR RELATING IN ANY
WAY TO THIS NOTE AND/OR TO THE OTHER LOAN
DOCUMENTS. BORROWER AND LENDER ACKNOWLEDGE
THAT THIS IS A WAIVER OF A LEGAL RIGHT AND REPRESENT
TO EACH OTHER THAT THESE WAIVERS ARE MADE
KNOWINGLY AND VOLUNTARILY AFTER CONSULTATION
WITH COUNSEL OF THEIR CHOICE. BORROWER AND LENDER
AGREE THAT ALL SUCH CLAIMS SHALL BE TRIED BEFORE A
JUDGE OF A COURT HAVING JURISDICTION WITHOUT A JURY.
SECTION 10. Severability. In case any provision (or any part
of any provision) contained in this Note shall for any reason be
held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall not affect any
other provision (or remaining part of the affected provision) of
this Note, but this Note shall be construed as if such invalid,
illegal, or unenforceable provision (or part thereof) had never
been contained herein but only to the extent such provision (or
part thereof) is invalid, illegal, or unenforceable.
SECTION 11. Time. Time is of the essence of this Note.
IN WITNESS WHEREOF, and intending to be legally bound
hereby Borrower executes this Note under seal as of the date
first written above.
LIMITED
TREASURES,
INC.
By: /s/ Daniel
Atkins(SEAL)
Name: Daniel
Atkins
Title:
President
THIS AGREEMENT DATED the 7th day of November, 2000
B E T W E E N:
ORLANDO CORPORATION
(Hereinafter called the Landlord)
OF THE FIRST PART
- - and -
GRAND TOYS LTD.
(Hereinafter called the Tenant)
OF THE SECOND PART
WHEREAS by a lease dated the 23rd day of October, 1990 made
between Orlando Corporation as
landlord and Grand Toys Ltd. as tenant (the lease), the Landlord
demised and leased unto the Tenant the premises
described therein and municipally known as 6427 Northam Drive,
Mississauga, Ontario,
AND WHEREAS by a consent to assignment dated that 18th day
of March. ! 993 (the consent to
Assignment) the Lease was assigned to 2892774 Canada Inc.;
AND WHEREAS 2892774 Canada Inc. changed its name to
Grand Toys Ltd. by way of Articles of
Amendment effective the 27th day of March. l 993 ;
AND WHEREAS the parties have agreed to extend the Lease as
hereinafter set forth.
NOW THEREFORE THIS AGREEMENT WITNESSES that in
consideration of the premises
and covenants hereinafter contained and other good and valuable
consideration the parties hereto agree as follows:
EFFECTIVE AS OF JANUARY 1, 2001
I . The Lease is extended for a term of five (5) years to be
computed from the l st day of January, 200 1 and fully
to be completed and ended on the 3 Ist day of December, 2005 (the
Extended Term).
2. The Extended Term shall be upon the same terms and
conditions as are contained in the Lease, save and
except for the following:
(a) The Calculation of Basic Rent pursuant to paragraph (c) of
Section 2 of the Lease for the Extended
Term shall be 9,000 square feet multiplied by $5.80 per square foot
per annum.
(b) The following paragraph shall be added to the Lease as Section
2 (f):
(e) Capital Tax means the taxes or excises imposed by any and all
taxing
authorities having jurisdiction, upon the Landlord and/or the
owners of the Building based upon or
computed by reference to the capital employed or invested by the
Landlord and/or the owners of the
Building on the Lands, the Building and improvements thereto.
(c) Section 2 (k) of the Lease (Definition of Taxes) is deleted and
replaced by the following:
(k) taxes means all taxes rates duties, levies and assessments
whatsoever
(imposed by any and all taxing authorities having jurisdiction)
levied, charged or assessed upon the
Complex or upon any part or parts thereof and all improvements
now or hereafter erected or placed
on the Lands or charged against the Landlord on account thereof,
including but not limited to local
improvement charges (but excluding profit and excess profit taxes
and taxes assessed upon the
income of the Landlord). In addition to the foregoing, Taxes shall
include any and all taxes,
charges, levies or assessments which may in the future be levied.
charged or assessed in lieu thereof
or in addition thereto. Taxes shall also include all costs and
expenses incurred by the Landlord in
obtaining or attempting to obtain a reduction or prevent an
increase in the amount thereof and the
cost of all consultants, solicitors and accountants retained by the
Landlord with respect thereto.
Taxes shall also include a management fee of up to fifteen ( 15%)
per annum of the foregoing
Initial
Landlord Tenant
- -2-
amounts incurred for the Landlords services in administering.
determining and appealing the
Taxes, as may be applicable.
(d) The following paragraph shall be added to the Lease as Section
2 (n):
(n) Complex means the land described in Schedule tB attached to
the Lease and the
Buildings.
(e) The Basic Rent payable by, the Tenant pursuant to paragraph
(a) of Section 4 of the Lease for the
Extended Tenu shall be as follows:
During the Extended Term the sum of $52,200.00 per annum to be
paid in advance in equal
consecutive monthly installments of $4,350.00 payable on the first
day of each and every month of
the Extended Term, the first of such payments to be made on the
1st day January, 200 l .
(f) Article 5 of the Lease (Taxes) is deleted and replaced by the
following:
ARTICLE 5 - TAXES
Taxes Payable by Landlord
5.(a) The Landlord shall pay the Taxes charged on the Complex to
the applicable taxing
authority, subject to reimbursement by the Tenant as hereinafter
Set out. The Landlord shall have
no obligation to contest or litigate the imposition of any Taxes.
The Landlord may defer payment of
Taxes to the extent permitted by law if it diligently pursues or
causes to be pursued the contest or
appeal of the Taxes.
Taxes Payable by Tenant
5. (b) (i) If there is no separate assessment for Taxes with respect to
the Premises, or if
there is a separate assessnent, but such separate assessment,
together with all
other separate assessments relating to the Complex, do not
aggregate the total
assessment for the Taxes for the Complex, then until such time as
there is a
separate assessment for Taxes with respect to the Premises which,
together with
all other such separate assessments, aggregate the total assessment
for Taxes for
the Complex, and the Landlord so directs as Set out in paragraph
(ii) of this
Section 5. the Tenant shall pay as Additional Rent its
Proportionate Share of the
Taxes for the Complex, adjusting the occupied tax rate for the
Tenants specific
use of the Premises provided that the Landlord at its option, may
apportion the
total assessment for Taxes for the Complex amongst the learnable
premises of the
Complex including the Premises. based on generally accepted real
estate
appraisal practices. lf there is no separate assessment for Taxes as
herein
provided and the Complex is not fully assessed as a commercial or
industrial
property for determination of Iaxes in any Year, then the Landlord
shall adjust
the Taxes to an amount that would have been determined if the
Complex were
fully assessed as an occupied commercial or industrial property. If
the Premises
are at any time during the Term assessed for the support of
Separate Schools or if
the Taxes are increased by reason of any installations made in or
upon or any
alterations made in or to the Premises by the Tenant or by the
Landlord on behalf
of the Tenants the Tenant shall pay the amount of such increase
forthwith to the
Landlord upon receipt of notice thereof.
(ii) If there is a separate assessment for Taxes with respect to the
Premises. (which
separate assessment shall be deemed to include the valuation of the
Premises as
determined from time to time by the assessor for realty taxation
purposes of the
Complex. as evidenced by such documentation (including, without
limitations the
assessors valuation and/or working papers) that may be available
to the Landlord,
from time to time) and if such separate assessment together with all
other separate
assessments for the Complex aggregate the total assessment for
Taxes for the
Complex, and if the Landlord so directs, the Tenant shall pay as
Additional Rent
the amount calculated by multiplying the assessment for the
Premises by the
applicable tax rate pertaining to the tenants use of the Premises on
an occupied
basis, which amount shall, for the purposes of this paragraph only
and
notwithstanding anything else herein contained. be the Tenants (Proportionate
Share of Taxes for the Complex.
Initial
Landlord Tenant
- -3 -
Tenants Business and Other Taxes
5. (c) In addition to the Taxes payable by the Tenant pursuant to
Section 5.(b), the Tenant shall
pay to the lawful taxing authorities or to the Landlord if the
Landlord so directs:
(i) all taxes rates, duties assessments and other charges that are
levied rated
charged or assessed against or in respect of- all improvements
equipment and
facilities of the Tenant on or in the Premises or the Complex or any
part thereof
(ii) every tax and license fee which is levied rated. charged or
assessed against or in
respect of and every business carried on in the Premises or in respect
of the use or
occupancy thereof or any part of the Lands by the Tenant and every
subtenant or
licensee of the Tenant or against the Landlord on account of its
interest in the
Complex, and whether in any case, any such taxes rates duties
assessments or
license fees are rated charged or assessed by any federal provincial
municipal
school or other body during the Term,
(iii) the full amount of any taxes in the nature of a business transfer
tax, value added
tax, sales tax or any other tax levied rated charged or assessed in
respect of the
Rent payable by the Tenant under this Lease or in respect of the
rental of space
under this Lease whether characterized as a goods and services tax
sales tax
value added tax business transfer tax or otherwise and
(iv) Capital Tax in respect of the Premises.
Payment of Taxes
5. (d) (i) The Landlord shall be entitled at any time or times in any
Year upon at least
fifteen ( 15) days notice to the Tenant to require the Tenant to pay to
the Landlord
the Tenants Proportionate Share of the Taxes for such Year in equal
monthly
installments. Such monthly amount shall be determined by dividing
the Tenants
Proportionate Share of Taxes by the number of months for the
period from
January 1 st in each Year of the Term until the due date of the final
installment of
Taxes as established by the applicable taxing authority from time to
time in each
Year (Installment Period) and shall be paid by the Tenant to the
Landlord,
monthly as Additional Rent. on the date for payment of monthly
rental payments
during the Installment Period. The Landlord shall be entitled
subsequently during
such Year upon at least fifteen ( 1 5) days notice to the Tenant to
revise its
estimate of the amount of increase in such Taxes and the said
monthly installment
shall be revised accordingly. All amounts received under this
provision in any
Year on account of the estimated amount of such Taxes shall be
applied in
reduction of the actual amount of such Taxes for such Year. If the
amount
received is less than the Tenants Proportionate Share of the actual
Taxes, the
Tenant shall pay any deficiency to the Landlord as Additional Rent
within fifteen
( l 5) days following receipt by the Tenant of notice of the amount of
such
deficiency, lf the amount received is greater than the Tenants
Proportionate
Share of the actual Taxes. the Landlord shall either refund the excess
to the
Tenant as soon as possible after the end of the Year in respect of
which such
payments were made or at the Landlords option shall apply such
excess against
any amounts owing or becoming due to the Landlord by the Tenant
(ii) Taxes payable pursuant to paragraphs (i) and (ii) of Section 5.
(c) shall be paid by
the Tenant when due if separate tax bills are issued and other-wise
shall be paid to
the Landlord within ten ( 1 0) days written demand therefor.
(iii) Taxes payable pursuant to paragraphs (iii) and (iv) of Section 5.
(c) shall be paid
to the Landlord within ten ( 10) days written demand therefor or at
such time or
times as the Landlord from time to time determines by notice in
writing to the
Tenant.
(iv) If the Term of this Lease commences or ends on any day other
than the first or last
days respectively, of a Year, the Tenant shall be liable only for the
portion of the
Taxes for such Year as falls within the Term. determined on a per
diem basis.
(g) The following paragraph shall be added to the Lease as Section l
l . (iv):
4(iv) In the event that the rental payable under any such sublease or
assignment is in
excess of the rent reserved hereunder or is in excess of the
proportionate rent
Initial
Landlord Tenant
- -4-
reserved in the event of the sublease or assignment of part of the
Premises,
whether the excess be in the form of cash, goods or services from
the subtenant or
assignee or anyone acting on its behalf, such excess shall be payable
to the
Landlord by the Tenant immediately upon receipt thereof, in the
event that such
excess is represented by goods or services rendered to the Tenant or
its nominee,
the value of those goods or services shall be determined by the
Landlord and the
Tenant and that value shall be paid in cash to the Landlord herein
immediately
upon such determination.
(h)Section 16 of the Lease (intent of Lease) is amended by deleting
the words (and capital taxes from
the third line.
(i)The last three (3) paragraphs on page 20 of the Lease, starting
with the words In consideration of
the Tenant covenants to pay rent and ending with the words upon
receipt by the Landlord of the
Statutory Declaration. is deleted in its entirety.
2.It is agreed that nothing contained in this Agreement shall be
deemed to alter, vary or change any provision
of the Lease, save as expressly set forth herein, and the parties
hereby confirm that the Lease and this Agreement shall
henceforth be read and construed together and are in full force and
effect.
3.This Agreement shall enure to the benefit of and the binding upon
the parties hereto, their respective
successors and permitted assigns.
IN WITNESS WHEREOF the parties hereto have executed this
agreement as of the day and year
first above written.
ORLANDO CORPORATION
Per:
Authorized signing officer
Name:
Title:
Per:
Authorized signing officer
Name:
Title.
We Have Authority to Bind the Corporation
GRAND TOYS LTD.
Authorized signing officer
Name: Title : Per:
Authorized signing officer
Name:
Title:
I/We Have Authority to Bind the Corporation
Initial
L.andlord Fcnatlt
Exhibit 21
The following is a list of the Companys subsidiaries:
Grand Toys (U.S.) Ltd.
Grand Toys Ltd.
Grand Concepts, Inc.
Ark Creations, Inc.
Sababa Toys, Inc.
Exhibit 23
INDEPENDENT AUDITORS
CONSENT
We hereby consent to the incorporation by reference in
the Registration Statement on Form S-8 (No. 333-68957)
of Grand Toys International, Inc. of our reports dated
March 29, 2001 relating to the financial statements,
which appear in this Form 10K.
Chartered Accountants
Montreal, Canada
March 29, 2001
GRAND TOYS INTERNATIONAL,
INC.
Signatures
Years ended December 31
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: March 30, 2001 GRAND TOYS
INTERNATIONAL, INC.
By: /s/
President
and CEO
In accordance with the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title
Date
/s/
March 30, 2001
R. Ian Bradley President and
CEO (Principal
Executive Officer)
/s/ Tania M. Clarke
March 30, 2001
Tania M. Clarke Executive Vice President,
and Chief
Financial Officer,
(Principal Financial
and Accounting Officer)
/s/ David Mars Director
March 30, 2001
David Mars
/s/ Elliot Bier Director
March 30, 2001
Elliot Bier
/s/James Rybakoff Director
March 30, 2001
James Rybakoff
/s/Stephen Altro Director
March 30, 2001
Stephen Altro
GRAND TOYS INTERNATIONAL,
INC.
Signatures
Years ended December 31
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: March 30, 2001 GRAND TOYS
INTERNATIONAL, INC.
By:
President
and CEO
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title
Date
R. Ian Bradley President and
March 30, 2001
CEO (Principal
Executive Officer)
March 30, 2001
Tania M. Clarke Executive Vice President,
and Chief
Financial Officer,
(Principal Financial
and Accounting Officer)
Director
March 30, 2001
David Mars
Director
March 30, 2001
Elliot Bier
James Rybakoff Director
March 30, 2001
Stephen Altro Director
March 30, 200
Consolidated Financial Statements of
GRAND TOYS
INTERNATIONAL, INC.
Years ended December 31, 2000, 1999 and 199
INDEPENDENT AUDITORS REPORT
The Board of Directors and Stockholders
Grand Toys International, Inc.
We have audited the consolidated balance sheets of Grand
Toys International, Inc. as at December 31, 2000 and 1999 and
the consolidated statements of operations, stockholders equity
and comprehensive income and cash flows for each of the
years in the three-year period ended December 31, 2000.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
With respect to the consolidated financial statements for the
year ended December 31, 2000, we conducted our audit in
accordance with United States generally accepted auditing
standards. With respect to the consolidated financial
statements for each of the years in the two-year period ended
December 31, 1999, we conducted our audits in accordance
with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an 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
at December 31, 2000 and 1999 and the results of its operations
and its cash flows for each of the years in the three year period
ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going
concern. As discussed in note 1 (a) to the consolidated
financial statements, the Company has suffered recurring losses
and has had its line of credit cancelled by its banker, which
raise substantial doubt about its ability to continue as a going
concern. These consolidated financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
Chartered Accountants
Montreal, Canada
February 28, 2001, except as to note 19(b), which is as of
March 29, 2001
GRAND TOYS INTERNATIONAL,
INC.
Consolidated Financial Statements
Years ended December 31, 2000, 1999 and 1998
Financial Statements
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders Equity and
Comprehensive Income F-7
Consolidated Statements of Cash Flows F-8
Notes to Consolidated Financial Statements F-9
GRAND TOYS INTERNATIONAL,
INC.
Consolidated Balance Sheets
December 31, 2000 and 1999
2000 1999
Assets
Current assets:
Cash $ 211,515 $ -
Accounts receivable (net of allowance for doubtful
accounts of $24,008; 1999 - $90,805) (note 2) 1,933,370 8,083,004
Due from employees and affiliated company 40,551 36,801
Inventory 1,991,918 6,065,564
Income taxes recoverable 464,455 -
Prepaid expenses 762,234 940,435
Total current assets 5,404,043 15,125,804
Deferred financing charges - 425,434
Deferred income taxes (note 11 (c)) 684,996 684,996
Equipment and leasehold improvements, net (note 3) 457,016 536,157
Intangibles (net of amortization in 1999 of $123,480) (note 4) - 2,346,126
Total assets $ 6,546,055 $ 19,118,517
On behalf of the Board:
_______________________ Director
_______________________ Director
GRAND TOYS INTERNATIONAL,
INC.
Years ended December 31, 2000 and 1999
2000 1999
Liabilities and Stockholders Equity
Current liabilities:
Bank indebtedness (note 5) $ - $ 429,526
Trade accounts payable 1,610,029 2,186,525
Other accounts payable and accrued liabilities 965,990 835,630
Royalties payable 23,428 2,286
Income taxes payable - 716,223
Current portion of long term debt - 166,666
Total current liabilities 2,599,447 4,336,856
Long term debt (note 6) 1,500,000 1,777,778
Minority interest 100 100
Preferred stock (note 7) 500,000 1,000,000
Stockholders equity:
Capital stock (note 8) 3,235 3,135
Additional paid-in capital 19,696,577 19,314,677
Deficit (16,882,416) (6,725,703)
Accumulated other comprehensive income -
cumulative currency translation adjustment (870,888) (588,326)
1,946,508 12,003,783
Commitments and contingencies (notes 14 and 15)
Subsequent events (note 19)
Total liabilities and stockholders equity $ 6,546,055
19,118,517
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL,
INC.
Consolidated Statements of Operations
Years ended December 31
2000 1999 1998
Net sales $ 12,017,885 $ 37,260,250 $ 33,177,529
Cost of goods sold 11,657,715 26,481,341 22,085,981
Gross profit 360,170 10,778,909 11,091,548
Operating expenses:
Selling, general and administrative 6,497,677 10,111,421 8,807,026
Depreciation and amortization 496,059 511,404 328,524
Interest on long term debt 109,800 87,192 -
Bad debt expense 94,072 84,294 145,167
Other interest expense 30,477 351,461 698,840
Foreign exchange loss (gain) 26,667 (177,982) 1,299,050
Interest revenue (134,072) - -
Unusual items (note 10) 4,160,164 814,669 -
11,820,844 11,782,459 11,278,607
Loss before income taxes (10,920,674) (1,003,550) (187,059)
Income taxes (note 11):
Current recovery (expense) 763,961 (390,912) (131,243)
Deferred - 684,996 -
763,961 294,084 (131,243)
Net loss $ (10,156,713) $ (709,466) $ (318,302)
Loss per share (notes 1 (j) and 12):
Basic $ (3.17) $ (0.36) $ (0.20)
Diluted (3.17) (0.36) (0.20)
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Stockholders Equity and Comprehensive Income
Years ended December 31
Capital Stock
Additional paid
in capital
Deficit
Accumulated
other
comprehensive
income
Total
January 1, 1998
$ 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
Net loss for the year
- -
- -
(709,466)
- -
(709,466)
Foreign currency adjustment
- -
- -
- -
59,847
59,847
Total comprehensive income
- -
- -
- -
- -
(649,619)
Dividends
- -
- -
(25,000)
- -
(25,000)
Stock Options (note 8(c))
1,557
8,440,118
- -
- -
8,441,675
Warrants (note 9)
- -
275,000
- -
- -
275,000
December 31, 1999
3,135
19,314,677
(6,725,703)
(588,326)
12,003,783
Net loss for the year
- -
- -
(10,156,713)
- -
(10,156,713)
Foreign currency adjustment
- -
- -
- -
(282,562)
(282,562)
Total comprehensive income
- -
- -
- -
- -
(10,439,275)
Shortfall on share conversion
(note 7)
-
(118,000)
- -
- -
(118,000)
Share conversion (note 8(c))
100
499,900
- -
- -
500,000
December 31, 2000 $3,235 $ 19,696,577
$(16,882,416) $ (870,888) $1,946,508
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
Years ended December 31
2000 1999 1998
Cash flows from operating activities:
Net loss $ (10,156,713) $ (709,466) $ (318,302)
Adjustments for:
Loss on disposal of equipment 3,470 - -
Depreciation and amortization 496,059 511,404 328,524
Write-off of deferred financing 535,109 - -
Write-off of intangibles 2,253,516 - -
Write-down of inventory 1,861,681 - -
Write-off of deferred acquisition charges 123,168 - -
Write-down of account receivable 434,371 - -
Write-off of equipment and leaseholds
improvements - 267,613 -
Deferred income taxes - (684,996) -
Changes in operating working capital
items (note 13) 5,672,943 (713,658) (5,246,377)
Net cash provided by (used for) operating activities 1,223,604
(1,329,103) (5,236,155)
Cash flows from financing activities:
(Decrease) increase in bank indebtedness (426,299) (6,520,705) 5,044,684
(Decrease) increase in long term debt (444,444) 444,444 -
Increase in deferred financing charges (26,460) (511,034) (1,923)
Share issuance proceeds (note 8 (c)) - 8,441,675 -
Other 278 (20,359) 62,904
Net cash (used for) provided by financing
activities (896,925) 1,834,021 5,105,665
Cash flows from investing activities:
Additions to equipment and leasehold improvements (140,586)
(570,081) (347,008)
Proceeds on disposal of equipment 25,422 - -
Acquisition of assets - 90,163 -
Dividends paid - (25,000) -
Decrease in other assets - - 477,498
Net cash (used for) provided by
investing activities (115,164) (504,918) 130,490
Net change in cash, being cash at end of year $ 211,515 $ - $ -
Supplementary disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 109,800 $ 438,653 $ 695,896
Income taxes 467,900 148,962 438,440
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 2000, 1999 and 1998
Grand Toys International, Inc., a Nasdaq SmallCap listed Company, is
organized under the laws of the State of Nevada. Its principal
business activity, through its wholly-owned Canadian and United
States operating subsidiaries, is the distribution of toys and related
items.
1. Significant accounting policies:
(a) Basis of Presentation:
The accompanying financial statements have been prepared on a
going concern basis which contemplate continuity of operations,
realization of assets and liquidation of its liabilities in the ordinary
course of business and do not reflect adjustments that might result if
the Company cannot continue as a going concern. The Company has
incurred a significant operating loss in the current year primarily as a
result of the loss of one of its major product lines and the reduced
market demand for certain other products which resulted in a
significant write down of inventories. The Company also recognized
the permanent impairment of patents and goodwill and wrote-off the
balance to nil.
In addition, in October 2000 the Companys banking agreement was
amended to reduce the line of credit from $17,500,000 to $3,500,000
and change the expiry date to January 5, 2001. The credit facility was
not extended beyond January 5, 2001. The Company is seeking a new
line of credit with another bank and the application is contingent on
the Company furnishing audited financial statements and completion
of due diligence procedures.
The above matters raise substantial doubt about the Companys ability
to continue as a going concern. The Companys ability to continue as a
going concern will depend on its return to profitable operations and
the successful conclusion of the negotiations with the financial
institution referred to above.
(b) 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.
(c) 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.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
(d) Equipment and leasehold improvements:
Equipment and leasehold improvements are stated at cost less
accumulated depreciation. Depreciation methods and annual rates
adopted by the Company are as follows:
Asset Method Rate
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
Declinin
g balance 30%
Leasehold improvements
Straight-line Term of
lease plus one
renewal term
e) Deferred financing charges:
Deferred financing charges represent the costs incurred relating to the
negotiation of the banking facility. Deferred financing charges are
amortized over 36 months, the term of the financing.
f) Intangibles:
Goodwill represents the excess of the purchase price over the fair value
of the net identifiable assets acquired. Goodwill is amortized
using the straight-line method over a twenty year period. The net book
value of goodwill would be written down if the value were permanently
impaired. The Company assesses impairment by determining whether
the unamortized intangible balances can be recovered through
undiscounted future operating cash flows of the acquired assets over
their remaining lives, and the write down would be to fair value.
g) Impairment of long-lived Assets and long-lived Assets to be Disposed
of:
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of. This
Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
h) Revenue recognition:
Sales are recognized at the time of shipment of products. The Company
estimates liabilities for returns and allowances at the time of shipment.
In addition, provisions for customer allowances are recorded when the
related revenue is recognized.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
i) Foreign currency translation:
(i) Grand Toys Ltd. and Grand Concepts Inc., wholly-owned Canadian
subsidiaries, use the Canadian dollar as their functional currency
and translate their assets and liabilities into US dollars at the
exchange rates prevailing at the balance sheet date and sales,
expenses and cash flows are translated at the average exchange rate
for the year. The resulting currency translation adjustments are
accumulated and reported in other comprehensive income.
(ii) Other monetary assets and liabilities denominated in foreign
currencies are translated at the exchange rates prevailing at the
balance sheet date. Revenues and expenses denominated in foreign
currencies are translated at the rates of exchange prevailing at the
transaction dates. All exchange gains and losses are included in
income.
j) Earnings (loss) per share:
(i) Basic earnings (loss) per share is determined by dividing the
weighted-average number of common shares outstanding
during the period into net earnings (loss).
(ii) Diluted earnings (loss) per share gives effect to all potentially
dilutive common shares
that existed at December 31, 2000.
k) 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.
l) Advertising and promotion:
All costs associated with advertising and promoting products are
expensed in the period incurred.
m) 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.
n) 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 Companys financial position or results of operations.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
2. Accounts Receivable:
December 31, 2000 December 31, 1999
Trade receivables $ 1,479,421 $ 7,166,705
Due from Limited Treasures, Inc. 434,370 -
Other 43,587 1,007,104
Allowance for doubtful accounts (24,008) (90,805)
Total Accounts Receivable $ 1,933,370 $ 8,083,004
3. Equipment and leasehold improvements
2000 1999
Accumulated Accumulated
Cost depreciation Cost depreciation
Computer equipment $ 1,259,425 $ 952,836 $ 1,286,253 $ 857,726
Machinery and equipment 464,258 422,610 458,091 430,434
Furniture and fixtures 509,616 448,742 480,775 454,974
Trucks and automobiles 81,494 80,365 84,335 82,665
Telephone equipment 44,770 37,851 40,339 36,819
Leasehold improvements 369,451 329,594 372,755 323,773
$ 2,729,014 $ 2,271,998 $ 2,722,548 $ 2,186,391
Net book value $ 457,016 $ 536,157
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
4. Acquisition:
On January 1, 1999, Ark Creations, Inc., a wholly-owned subsidiary,
acquired all of the assets of Ark Foundation LLC, for an aggregate of
$2,500,000, consisting of the Companys convertible preferred stock having a
stated value of $1,000,000 and an interest bearing promissory note of Ark
Creations, Inc. in the principal amount of $1,500,000.
The Company accounted for the acquisition under the purchase method of
accounting and allocated the purchase price as
follows:
N Net assets
$ 120,557
Patents
1,234,803
Goodwill
1,234,803
$ 2,590,163
The acquisition of the above assets was financed as follows:
Long-term debt (note 6)
Series A 5% Cumulative
Convertible Redeemable Preferred
Stock (note 7)
$ 1,500,000
1,000,000
Direct acquisition costs
90,163
$ 2,590,163
Net income for Ark Creations Inc., has been included in the statement of
operations from January 1, 1999. Results of operations for 1998 on a
proforma basis have not been presented because the impact would not be
significant. The Company terminated the operations of Ark Creations Inc.
during 2000. Accordingly, the Company recognized the permanent
impairment in value of goodwill and patents of $2,253,516. The impairment
is included in the caption, unusual items, in the Statement of Operations.
In the statement of cash flows for 1999, the financing of the assets and the
recognition of the intangibles have not been included as there is no cash
impact.
5. Bank indebtedness:
During 2000, the Company had secured line of credit of $ 17,500,000 and
could draw down working capital advances and letters of credit in amounts
determined by percentages of its accounts receivable and inventory. The
working capital advances were secured by all of the assets of the Company.
The effective interest rate for 2000 on the Canadian denominated line for
2000 was 7.75% (1999 7.50%; 1998 9.25%),
which represents prime
plus 1.25% for all years. As at December 31, 2000 the unused portion of the
credit facility is approximately $3,211,515. Standby fees represent .25% of
the unused line of credit. In October 2000, the banking agreement was
amended to reduce the line of credit to $3,500,000 and change the expiry
date to January 5, 2001. The credit facility terminated on January 5, 2001.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
6. Long term debt:
The Companys subsidiary, Ark Creations, Inc., has long term indebtedness
in the form of an interest bearing subordinated promissory note in the
aggregate principal amount of $1,500,000 (see note 4). Interest is payable
quarterly, commencing April 1, 1999 at a rate of 5.76% per annum until
June 1, 1999, 9.76% per annum thereafter until the first principal installment
of $500,000 is paid, and 5.76% per annum thereafter to maturity. The note
is secured by a pledge by the Company of 375,000 shares of the Companys
common stock. A principal installment of $500,000 is payable upon the
achievement of certain sales targets, with a second installment of $ 500,000
due six months thereafter, and a final installment of $500,000 due three
months after the second installment. Ark Creations, Inc., ceased operations
during 2000 and accordingly ceased making interest payments required
under the note. The holder of the note has since caused the 375,000 pledged
shares to be registered in his name, although he has not yet taken any action
to enforce his rights.
7. Preferred Stock:
Series A Cumulative Convertible Redeemable Preferred Stock
In connection with the acquisition of the assets of Ark Foundation LLC, the
Company created and issued a class of 200,000 shares of non-voting Series
A Convertible Redeemable Preferred Stock (Series A Stock) with a stated
value of $5.00 per share. The Series A Stock ranks senior to the common
stock. The Series A Stock has a cumulative preferred quarterly dividend of
5% per annum of the par value, payable in cash. The Series A Stock is
redeemable and convertible at determinable prices on determinable dates.
The Series A Stock is convertible beginning on January 1, 2000 into shares
of the Companys common stock on a one-for-one basis. A maximum of
50,000 shares may be converted during any six-month period. If upon
conversion, the market value of the common stock of the Company is less
than $5.00 per share, the Company is obligated to make up the difference
between the market price and $5.00.
The following conversions took place
? January 1, 2000 - 50,000 shares
? July 17, 2000 - 50,000 shares
The Company recognized a shortfall of $118,000 for the conversion of July
17, 2000 between the market value of the common stock and the stated
value. The Company is in disagreement with the holder as to the actual date
of conversion. A difference does exist, in the calculated shortfall, between
these dates.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
8. 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:
2000 1999
100,000 preferred shares, Series A stock (1999 - 200,000) (note 7)
$ 500,000
$ 1,000,000
3,234,906 common shares (1999 - 3,184,906) 3,235 3,135
The outstanding common shares noted above are net of the 375,000
shares discussed in note 6.
(c) Share transactions:
(i)
? August 1999:
1,491,794 options were exercised for total proceeds of
$8,044,944, increasing capital stock by $1,492.
? October 1999
8,478 options and 57,000 warrants were exercised for total
proceeds of $396,731 increasing capital stock by $65.
? January 2000
50,000 Series A Stock preferred shares converted to 50,000
common shares increasing capital stock by $50.
? July 2000
50,000 Series A Stock preferred shares converted to 50,000
common shares increasing capital stock by $50.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
(d) Summary of common stock outstanding:
A summary of the number of common stock outstanding and share
transactions since January 1, 1999 is as follows:
January 1, 1999 1,577,634
Issued on exercise of stock options and warrants 1,577,272
Adjusted balance 3,134,906
Preferred share conversion (note 7) 100,000
December 31, 2000 3,234,906
9. Stock options and warrants:
The Company has a stock option plan (the Option Plan), as amended and
restated which provides for the issuance of up to 600,000 options to acquire
common stock of the Company. Stock options granted under the Option
Plan may be Incentive Stock Options under the requirements of the Internal
Revenue Code, or may be Non-statutory Stock Options which do not meet
such requirements. Options may be granted under the Option Plan to, in the
case of Incentive Stock Options, all employees (including officers) of the
Company, or, in the case of Non-statutory Stock Options, all employees
(including officers) or non-employee directors of the Company.
Options have also been granted outside the Option Plan to two directors, key
executives, outside consultants and a supplier. As well, warrants issued to a
director in his capacity as an investment banker and a distributor are issued.
Some of these options and warrants have either expired or were forfeited.
In 1999, 55,000 warrants were granted to a director in his capacity as an
investment banker for services rendered. The fair market value of the
warrants was determined to be $275,000, which was recorded as deferred
financing charges. The offsetting credit was recorded to additional paid in
capital. In the statement of cash flows for 1999, the recognition of the
warrants has not been included, as there is no cash impact.
In 2000, 200,000 performance based options were issued under the option
plan.
Under the option plan the exercise price of each option granted has been
equal to the market price of the Companys stock on the grant date and an
options maximum term is ten years. The range of exercise prices for stock
options and warrants outstanding at December 31, 2000 is $ 0.31 to $ 21.90.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
9. 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 Warrants Total share
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 (14,000) (41,000) 55,000 - -
January 1, 1999 30,100 1,793,772 105,000 1,928,872 6.79
Granted - 147,500 57,000 204,500 5.42
Forfeited - (280,000) - (280,000) (5.50)
Exercised (18,500) (1,481,772) (57,000) (1,557,272) (5.42)
Expired (6,200) (4,000) (50,000) (60,200) (14.05)
December 31, 1999 5,400 175,500 55,000
6.43
Reclassified 2,000 (2,000) ? ? ?
Granted 539,570 ? ? 539,570 1.74
Cancelled (1,600) (20,000) ? (21,600) (6.99)
December 31, 2000 545,370 153,500 55,000 753,870 $ 3.07
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 5.19% (6.29% in 1999, and 4.68% in
1998) volatility factor of the expected market price of the Companys
common stock of 164 % (138% in 1999 and 114% in 1998) and a weighted-
average expected life of the option of 3 years, (3 years in 1999 and 1998),
with no dividends.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
9. 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 Companys 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 managements 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 2000,
1999 and 1998 are $ 1.50, $ 4.30 and $ 3.85, respectively.
The pro-forma losses utilizing the fair value assumptions above for the years
2000, 1999 and 1998 would be $10,347,760 $ 1,302,196 and $ 1,465,142,
respectively. Furthermore, pro-forma loss per share would be $ 3.42, $ 0.63
and $ 0.93, respectively.
10. Unusual items:
These expenses comprised the following items:
(a) The Company settled a lawsuit by a lessor of certain real estate for
$264,000.
(b) The Company recognized the permanent impairment in value of
goodwill and patents from the acquisition of the assets by its Ark
Creations subsidiary of $2,253,516, as a result of its decision to cease
operations of its subsidiary.
(c) The Companys credit line, which was scheduled to expire in 2001, was
terminated in January 2001. As a result, the Company has taken a
charge against earnings of the full amount of the deferred financing
charges of $535,109.
(d) The Company has written off $557,539 as a result of its decision to
abandon its proposed acquisition of Limited Treasures, Inc., and
providing for an allowance on a loan receivable from Limited
Treasures.
(e) The Company reserved $550,000 to cover a lawsuit commenced by a
supplier against Grand Canada for breach of contract.
(f) In 1999, the company discontinued a major product line which resulted
in a penalty of $382,056 and closed the manufacturing facility of Ark
Creations Inc. which resulted in costs of $432,613 in asset write-offs,
severances and lease penalties.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
11. Income taxes:
(a) Income tax expense (recovery) consists of:
Current Deferred Total
Year ended December 31, 1998:
U.S $ 23,267 $ - $ 23,267
Canada 107,976 - 107,976
$ 131,243 $ - $ 131,243
Year ended December 31, 1999:
U.S $ - $ (684,996) $ (684,996)
Canada 390,912 - 390,912
$ 390,912 $ (684,996) $ (294,084)
Year ended December 31, 2000:
U.S $ 12,308 $ - $ 12,308
Canada (776,269) - (776,269)
$ (763,961) $ - $ (763,961)
(b) The effective tax rate for the Company is reconcilable to statutory tax
rates as follows:
2000 1999 1998
(%) (%) (%)
U.S. Federal statutory tax rate 35.0 35.0 35.0
State income tax rate, net of federal tax benefits ? ? 10.0
U.S. statutory tax rate 35.0 35.0 45.0
Changes to U.S. tax rate resulting from:
Effect of foreign tax rate differences ? ? (3.9)
Expenses producing no tax benefit 0.8 (20.8) (45.2)
Tax benefit of utilization of loss carry forward (20.9) ? ?
Other (7.8) 15.1 4.1
(27.9) (5.7) ?
Effective tax rate 7.1 29.3 ?
The Company has not provided for income taxes on foreign subsidiaries
undistributed earnings as of December 31, 2000
because the investments in the foreign subsidiaries are essentially
permanent in duration.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
11. Income taxes (continued):
(c) The tax effects of temporary differences that give rise to deferred tax
assets at December 31, 2000 are presented below:
2000 1999
Non-current:
Net operating loss carry forwards $ 4,454,423 $ 2,325,000
Valuation allowance 3,769,427 1,640,004
Total net deferred tax asset $ 684,996 $ 684,996
Realization of the deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the loss carry forwards.
Although realization is not assured, management believes it is more
likely than not that the recorded deferred tax asset, net of the valuation
allowance provided, will be realized. The valuation allowance
increased in 2000 by $2,129,423 due to the current years loss (1999
decrease of $ 184,996).
As of December 31, 2000, the Company has $ 8,350,000 (1999 - $
6,642,000) of net operating losses available for tax purposes to reduce
future taxable income in the United States, beginning to expire in 2009.
Approximately $2,000,000 of taxable income must be generated by the
U.S. operations to allow for the realization of the deferred tax asset
before the valuation allowance, prior to the expiration of the losses.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
12. Earnings per share:
Income Shares Per share
(numerator) (denominator) amount
December 31, 1998
Basic EPS
Earnings available to
common stockholders $ (318,302) 1,577,634 $ (0.20)
Diluted EPS
Earnings available to
common stockholders
and assumed conversions (318,302) 1,577,634 (0.20)
December 31, 1999
Basic EPS
Earnings available to
common stockholders $ (759,466) 2,132,582 $ (0.36)
Diluted EPS
Earnings available to
common stockholders
and assumed conversions (759,466) 2,132,582 (0.36)
December 31, 2000
Basic EPS
Earnings available to $ (10,156,713) 3,207,783 $ (3.17)
common stockholders
Diluted EPS
Earnings available to
common stockholders (10,156,713) 3,207,783 (3.17)
and assumed conversions
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 2000, 1999 and 1998
12. Earnings per share (continued):
Options to purchase 3,000 shares (1999 - 180,900) and warrants to purchase
55,000 shares issued in 1999 of the Companys common stock were not
included in the diluted earnings per share calculation as their effect is anti-
dilutive. The Series A convertible redeemable preferred stock was also not
included as the effect is anti-dilutive.
13. Changes in operating working capital items:
2000 1999 1998
Decrease (increase) in accounts
receivable $ 5,531,835 $ 6,843
$ (1,709,085)
Increase in due from employees and
an affiliated company (5,047) (22,408) (213,563)
Decrease (increase) in inventory 2,058,123 (1,503,618)
(713,181)
Increase in income taxes recoverable (469,707) - -
Increase (decrease) in prepaid expenses (278,799) 362,085
(282,164)
(Decrease) increase in trade accounts
payable (518,932) 428,568 (397,790)
Increase ( decrease) in other accounts
payable and accrued liabilities 33,965
(237,011) (1,527,231)
Increase (decrease) in royalties payable
21,433 (59,920)
(109,115)
(Decrease) increase in income taxes payable (699,928) 311,803
(294,248)
$ 5,672,943 $ (713,658) $ (5,246,377)
14. Commitments:
The Company has entered into long-term leases with minimum annual rental
payments approximately as follows:
2001 $ 414,000
2002 396,000
2003 372,000
2004 251,000
2005 13,000
$ 1,446,000
Rent expense for the years ended December 31, 2000, 1999 and 1998
amounted to approximately $526,000, $420,000 and $224,000
respectively.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31,2000 1999 and 1998
15. Contingencies:
(a) Lawsuits for alleged breach of contract have been filed against the
Canadian subsidiary by two former sales representatives. In the
opinion of management, these actions have no merit. At this point in
time it is difficult to ascertain or estimate the value of a settlement, if
any.
(b) On or about April 7, 2000, an action against the Company and certain
of its current directors and a former director was filed in the United
States District Court for the Southern District of New York by Robert
VanDyke, purportedly representing himself and a class of similarly
situated purchasers of the companys common stock. The class-action
complaint seeks damages and rescission and alleges that the
Companys August 4, 1999 press release announcing an exclusive
license to manufacture and distribute products in Canada based upon
the Pokemon video game and television series was misleading
because the license had not yet been executed and, when ultimately
executed three weeks later, was non-exclusive. The complaint further
alleges that this affected the market price of the Companys stock
during the three week period. On November 7, 2000 the action was
dismissed against two of the Companys directors.
The Company believes that the suit will be settled at a minimal cost to
the Company as a result of any settlement being covered by the
directors and officers (D & O) liability insurance policy.
(c) The Company has been named in a lawsuit for breach of contract in a
licensing dispute, for recovery totaling in excess of $600,000. A
defense is being filed against the plaintiff, and management has
reserved $550,000 in the event the results are unfavorable.
(d) The Companys Canadian subsidiary is also contingently liable for
outstanding letters of credit amounting to $500,000 as at December
31, 2000.
16. 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 employees contribution to this plan; (b) 3% of the employees
gross earnings; or (c) Cdn. $3,000 per employee. During the year, the
Company contributed approximately $20,000 (1999-$27,000; 1998 -
$24,000) to the retirement savings plan for its Canadian employees.
17. Segment information:
(a) Operating and geographic information:
The Company operates primarily in one segment which includes the
distribution of toys and related items. Virtually all sales are to Canadian
customers. The majority of long-lived assets are located in Canada.
(b) Other information:
Sales of the Companys toy products to five customers accounted for
69% of the Companys gross sales for 2000, two of which represent over
69% or approximately $8,470,000. For both years 1999 and 1998, five
customers accounted for approximately 64% of gross sales, two of
which represented over 35% and 38% or $13,356,000 and $13,246,000
respectively.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31,2000 1999 and 1998
17. Segment information, continued:
Sales of toys purchased from the Companys two largest manufacturers
and suppliers of toys in aggregate accounted for 49% of gross sales for
2000. The Companys two largest suppliers accounted for 68% and 64%
of gross sales for 1999 and 1998 respectively.
18. 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
Companys policy is to enter into forward foreign exchange contracts on
a portion of its purchases anticipated in the next selling season. Gains
and losses on forward exchange contracts are recorded in income and
generally offset transaction gains or losses on the foreign currency cash
flows which they are intended to hedge.
At December 31, 2000, the Company had no contracts to purchase US
dollars.
(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 Companys 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. The fair market value of long term debt could not
be determined as the repayment terms cannot be identified.
(c) Credit risk and economic dependence:
For the year ended December 31, 2000, approximately 69% (1999 -
64%) of the Companys sales were made to five unrelated companies.
Three customers, representing approximately 53% (1999 50%) of
total sales, individually accounted for more than 17% (1999 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 Companys principal exposure to interest rate risk is with respect to
its short-term financing which bears interest at floating rates.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31,2000 1999 and 1998
19. Subsequent events:
a) On January 2, 2001, 50,000 shares of Series A convertible redeemable
preferred stock were converted to common stock. The shortfall between
the market price and the guaranteed rate of $5.00 per share represents
$233,774.
b) On March 29, 2001, the Company completed a private placement for
$500,000.