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SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
Form 10 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required) For the fiscal year ended
December 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission file number 0-22372
Grand Toys International, Inc.
(Exact name of registrant as specified in its charter)
Nevada 87-0454155
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1710 Trans Canada Hwy., Dorval, Quebec, Canada, H9P 1H7
(Address of principal executive offices, Zip Code)
Issuer's telephone number, including area code (514) 685-2180
Securities registered pursuant to Section 12 (b) of the Exchange
Act:: None
Securities registered pursuant to Section 12 (g) of the Exchange
Act:: Common Stock $.001 par value
Check whether the Issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the Issuer was required
to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S contained herein, and no disclosure will
be contained to the best of Issuer's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. X
The Issuer's revenues for the year ended December 31, 1998 were
$ 33,177,529.
The number of shares outstanding of the Issuer's common stock is
1,577,597 (as of February 26, 1999).
The aggregate market value of the voting stock held by non
affiliates of the Issuer was approximately $3,824,036 (as of
February 26, 1999).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Grand Toys International, Inc. 1999 Notice of
Annual Meeting of Stockholders and Proxy Statement, to be filed
with the Securities and Exchange Commission within 120 days
after the close of the Issuer's fiscal year (incorporated into Part III).
GRAND TOYS INTERNATIONAL, INC.
Index to Annual Report on Form 10 - K
Filed with the Securities and Exchange Commission
Year ended December 31, 1998
ITEMS IN FORM 10 - K
Page
PART I
Item 1. Description of Business 3
Item 2. Description of Property 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters 9
Item 6. Management's Discussion and Analysis or Plan of
Operation 10
Item 7. Financial Statements 14
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 14
PART III
Items 9 - 12 15
Item 13. Exhibits, List and Reports on Form 8 - K 15
SIGNATURES 89
PART I
This form 10-K of Grand Toys International, Inc. (the
"Company") contains forward-looking statements within the
meaning of the Securities Exchange Act of 1934, as amended,
which statements are subject to risks and uncertainties. Statements
indicating that the Company "expects", "estimates" or "believes"
are forward-looking, as are all other statements concerning future
financial results, product offerings or other events that have not yet
occurred. There are many important factors that could cause
actual results or events to differ materially from those anticipated
by the forward-looking statements contained in this Form 10-K.
Unless otherwise indicated, all information contained in this report
give effect to a one-for-five reverse split effected on August 4, 1997.
Item 1.
Description of Business
Introduction
Grand Toys International, Inc. (the "Company"), through its
Canadian subsidiaries, Grand Toys Ltd. and Grand Concepts Inc.
("Grand Canada") has been engaged in the toy business in Canada
for over 38 years and currently distributes a wide variety of toys
and fashion accessories throughout Canada. Grand Canada's
business consists of two areas of operation: (i) the importation and
distribution throughout Canada, on an exclusive basis, of a wide
variety of well-known toy products and fashion accessories
including backpacks , party goods, stationary and accessories and
(ii) the sale of toy products and fashion accessories featuring
popular characters licensed to the Company. On January 1, 1999,
the Company acquired the assets of the Ark Puzzles, Inc., a
Connecticut based manufacturer of innovative puzzles. In early
January 1999 the Company secured the North American
distribution rights for the Majorette and Solido lines of die cast
vehicles and playsets. Unless the context otherwise requires,
references herein to "Grand Toys" or the "Company" include
Grand Toys International, Inc., its subsidiaries, Grand Toys (U.S.)
Ltd., Ark Puzzles, Inc., and Grand Canada and Grand Concepts,
which are subsidiaries of Grand Toys (U.S.) Ltd.
Products
Grand Canada imports for distribution in Canada select toys and
fashion accessories from manufacturers who design, develop and
manufacture such product. These products are generally the same
products that such manufacturers market and sell in other
countries. In determining which items to import, Grand Canada
examines such factors as consumer acceptance of the particular
products in other countries, Canadian consumer tastes based on
similar products distributed previously in Canada and the potential
demand for such product by Grand Canada's customers, which is
partly determined in advance by exhibiting products to its
customers prior to ordering the product from the manufacturer.
The following table sets forth certain manufacturers whose
products Grand Canada distributes in Canada, the type of products
they manufacture, and the price range within which Grand Canada
sells such products to retailers.
Manufacturer Products Distributed Product Price
by the Company Range ($)
Arbor Toys (US) Girls' accessories 4.10 - 37.00
Ark Puzzles (US) Foam Puzzles 4.95 - 74.95
Commonwealth (U.S.) Plush 3.50 - 95.00
Intex (Taiwan) Inflatable water toys 0.55 - 105.00
Majorette (France) DieCast vehicles, radio control
cars, road race sets 1.00 - 120.00
PMS International (H.K.) Spice Girl accessories .25 - 18.41
Processed Plastic (U.S.) Plastic beach & sand toys,
ride-on vehicles, etc... 0.60 - 37.95
Spectra Star Toys (U.S.) Kites 0.60 - 9.00
Tiger Electronics (U.S.) Games, hand-held games,
electronic diaries 7.10 - 115.00
Toy Biz (U.S.) Male action figures, dolls 4.95 - 48.50
Toymax (U.S.) Electronic Toys 7.25 - 94.00
Unice S.A (Spain) Balls 1.80 - 3.35
Design and Development
As is common in the toy and fashion accessory industries, Grand
Canada receives numerous concepts from unaffiliated third parties
for new products. Grand Canada does not employ its own
inventors of new concepts but if it accepts and develops a person's
concept for a new product, it will pay royalties on the products
developed from such a concept that are actually sold.
All safety testing of the Company's products is done by the
manufacturers at the manufacturers' factories and is designed to
meet certain safety regulations imposed by the Canadian
governmental authorities. The Company also monitors quality
assurance procedures for its products for safety purposes at its
warehouse facilities.
Sources of Manufacturing
Grand Canada does not manufacture any of the products it
distributes. The products are imported and warehoused at the
Company's facilities and subsequently distributed to its customers
across Canada.
Approximately 87% of Grand Canada's gross sales in 1998 were
of products supplied by the following five manufacturers: Toy Biz,
Tiger Electronics, Toymax, PMS International and Processed
Plastics, whose products, respectively, accounted for 36%, 28%,
11%, 9%, and 3% of 1998 gross sales. Other than the products
from the above-mentioned manufacturers, no products of Grand
Canada from any other supplier accounted for more than 2% of
gross sales in 1998. In February 1998, Hasbro acquired Tiger
Electronics Inc., one of Grand Canada's suppliers. Grand Canada
still distributes a major portion of the Tiger line in Canada,
however, there is no guarantee that this distribution will continue
indefinitely. If one or more of the suppliers identified above were
to terminate their relationship with Grand Canada, a material
adverse effect on the Company may occur.
The imported products are manufactured for Grand Canada by
unaffiliated third parties principally located in Canada, Mexico,
Spain, Poland, the United States, China, Hong Kong, Thailand,
France and Taiwan. The manufacturers are chosen by Grand
Canada on the basis of price, availability of payment terms, quality,
reliability and the ability of a manufacturer to meet Grand
Canada's delivery requirements. The use of third-party
manufacturers enables Grand Canada to avoid incurring fixed
manufacturing costs, but also reduces its ability to control the
timing and quality of the manufacturing process. Delays in
shipments or defects in material could result in a loss of sales,
which could have a material adverse effect on Grand Canada.
To date, Grand Canada has not experienced any material delays in
the delivery of its products or any material defects in the products
manufactured for it. Grand Canada's ability to have its products
manufactured outside Canada could be affected by political or
economic disruptions, including labor strikes and disruptions in the
shipping industries. Although Grand Canada believes that
alternative sources of supply are available, any serious disruption
could materially impair Grand Canada's ability to deliver products
in a timely manner. To date, Grand Canada has not experienced
any problems as a result of any political or economic disruptions.
Grand Canada does not supervise the day-to-day manufacturing of
its products. However, prior to the commencement of
manufacturing, Grand Canada and the manufacturer work together
to design a prototype of the specific product. The manufacturer is
contractually obligated to manufacture the products in accordance
with the specifications of the prototype.
All manufacturing services performed overseas are paid for by
either letter of credit or wire transfer. Payment for such
manufacturing is made only upon the proper fulfillment of terms
established by Grand Canada, such as adherence to product
quality, design, packaging and shipping standards, as well as proper
documentation relating thereto. Most product purchases are paid
for in U.S. dollars.
Grand Canada is not a party to any long-term supply or
requirement agreements with any specific manufacturer. Grand
Canada employs a large number of toy manufacturers. These
manufacturers may subcontract for the manufacture of
components of the products that they make for Grand Canada,
with third parties who are not affiliated with Grand Canada.
Materials
The principal raw materials used in the production and sale of
Grand Canada's products are plastic, printed fabrics and paper
products. These are all currently available at reasonable prices
from a variety of sources. Because Grand Canada does not
manufacture any of its products, it does not own any specialized
tools or other production equipment.
Location
Grand Canada maintains space in a building in suburban Montreal,
Canada, where the Company's and Grand Canada's executive
offices are also maintained for warehouse, packaging and
distribution purposes. Grand Canada also keeps an inventory of
its products at such facilities enabling it to respond quickly to
customer orders.
Licensing and Distribution Agreements
Character Licenses
Grand Canada's product line includes products featuring well-
known character properties created by others. In order to obtain
the right to manufacture and sell products featuring such character
properties, Grand Canada enters into license agreements with the
owners of such properties. Under the terms of the character
property license agreements, Grand Canada pays royalties to
licensers that generally range from 5% to 12% of sales of the
products carrying these character properties. To the extent that
competition increases among companies to obtain character
property licenses, Grand Canada may encounter increased
difficulty in obtaining certain character licenses and may be
required to pay greater minimum guaranteed royalty amounts for them.
Generally, Grand Canada's character property license agreements
provide it with the exclusive right to sell only specific products
featuring the particular character property and limit the territory in
which such products may be sold to Canada. Typically, each such
license agreement extends for one to three years and may be
renewed upon payment of certain minimum guarantees or the
attainment of specified sales levels during the term of the license.
The following table sets forth some of Grand Canada's character
licenses, the licensor for these character properties and the
products that Grand Canada markets featuring these character
properties.
Character Property Licensor Product of Grand Canada
Featuring Property
101 Dalmatians Disney Kites, Hand-Held Games, Inflatables
Bug's Life Disney Kites, Hand-Held Games
Donald Duck, Daisy,
Goofy, Pluto Disney Pools, Balls, Kites
Hercules Disney Balls, Hand-Held Games
Hunchback of Notre Dame Disney Balls, Hand-Held Games
Lion King Simba's Pride Disney Balls, Kites,
Little Mermaid Disney Balls, Kites, Hand-Held Games
Lots A Leggs Commonwealth Plush
Mickey Mouse,
Minnie Mouse Disney Pools, Balls, Kites, Finger Puppets
Mighty Ducks Disney Balls, Hand-Held Games
Mulan Disney Balls Kites
Winnie The Pooh Disney Balls, Hand-Held Games, Plastics,
Finger Puppets
Barbie E.M.G. Girls' accessories
Sesame Street E.M.G. Balls, Koosh, Kites
Sailor Moon G-Squared Balls
Star Wars G-Squared Kites, Stationary
Spice Girls PMS Fashion Accessories
Pepsi Pepsico Balls
Rugrats ViaCom Kites, Hand-Held games
Batman Warner Bros. Kites, Balls, Discs
Looney Tunes Warner Bros. Kites, Balls, Koosh
No one particular character property license resulted in sales in
excess of 5% of Grand Canada's sales for the year ended
December 31, 1998, and the loss of any one such license would
not have a material adverse effect on Grand Canada's operations.
License and Distribution Arrangements with Toy Manufacturers
Grand Canada has written license and distribution arrangements
with four of the approximately fifteen manufacturers from whom it
imports products for distribution in Canada. Grand Canada selects
products from a master product list provided to it by the
manufacturer. The purchase price, depending on the arrangement
with the supplier, consists of a fixed payment per item, and
occasionally a royalty fee. Pursuant to these agreements, Grand
Canada obtains the exclusive right to import and distribute
throughout Canada the products selected by it. Where agreements
have been entered into, they generally extend for one to five years
and are generally exclusive for a specified product or product line
within the territory outlined in the contract. Generally, under such
agreements and arrangements, Grand Canada is responsible for
arranging and paying for shipping and other related costs and
expenses. Delivery of products generally takes approximately one
to five weeks.
Marketing, Sales and Distribution
Grand Canada distributes its products throughout Canada through
its own sales representatives. Purchasers of the products include
retail chain stores, department stores, toy specialty stores and
wholesalers. Grand Canada's five largest customers are: Wal-Mart;
Toys "R" Us; Zellers; Sears; and Canadian Tire, which, for the year
ended December 31, 1998, accounted for approximately 19%, 18%, 17%, 7%
and 2%, respectively, of the gross sales for this period.
No other customer accounted for more than 2% of gross sales in 1998.
Other than purchase orders from its customers, Grand Canada
does not have written agreements with its customers, but rather
sells products to customers on open account, with payment terms
typically varying from 30 to 90 days. If one or more of the
customers identified above was to terminate its relationship with
Grand Canada, a material adverse effect on the Company may occur.
Although Grand Canada's policy is not to sell any of its products
on consignment, in accordance with industry practice, it may sell,
on a case-by-case negotiated basis, its products on a partial
consignment basis. To date, consignment sales have been insignificant.
Grand Canada employs a sales and marketing staff of nine people,
including two of its senior managers and seven sales persons who
make on-site visits to customers for the purpose of soliciting
orders for products. It markets products at major and regional toy
trade shows in Canada. In addition, Grand Canada maintains
showrooms in its suburban Montreal and Toronto facilities where
it exhibits its toy products to customers.
Grand Canada directly, or through its salespersons, takes written
orders for its products from its customers and arranges for the
manufacture of its products as discussed above. Cancellations are
generally made in writing and appropriate steps are taken to notify
its manufacturers of such cancellations.
Returns are generally not accepted, although consistent with
industry practices, exceptions to this policy are made on a case-by-case
negotiated basis.
Grand Canada generally ships products to customers within six
months of the date an order is received. The backlog at February 28, 1999
and February 29, 1998 was Canadian $15,680,957 and Canadian $2,901,966
respectively. Backlog generally represents
written customer orders that will be shipped within four months.
Because customer orders may be canceled at any time without
penalty, the Company believes that backlog may not accurately
indicate sales for any future period.
Seasonality
The Company's business is seasonal. The Company's third and
fourth quarter sales have typically been highest in anticipation of
the holiday selling season.
Product Liability
The Company maintains product liability coverage for Grand
Canada's operations in the aggregate amount of Canadian
$8,000,000. The Company has not been the subject of any product
liability litigation.
Competition
The toy industry is highly competitive and sensitive to changing
consumer preferences and demands. Grand Canada competes in
Canada with many companies with toy products that are better
known than those distributed by Grand Canada. Some of Grand
Canada's competitors are substantially larger and more diversified,
and have substantially greater financial and marketing resources
than Grand Canada. They may also have greater name recognition,
and the ability to develop and market products similar to, and
more competitively priced than, those distributed by Grand
Canada. Grand Canada competes with, among others, Irwin Toys
Ltd., Hasbro Inc., and Mattel Inc.
Government Regulation
Grand Canada is subject to the provisions of various laws, certain
of which have been enacted by the Federal Government of Canada
and others which have been enacted by the government of the
Province of Quebec and other Canadian provinces.
Federal
The laws of the government of Canada to which the Company is
subject include the Hazardous Products Act which empowers the
government to protect children from hazardous toys and other
articles. Under that legislation the government has the authority to
exclude from the market those articles which are found to be
hazardous. Grand Canada is also subject to the Consumer Packaging
and Labeling Act enacted by the government of Canada, whose
legislation prohibits the importation of prepackaged items into
Canada, as well as the sale, importation, or advertising in Canada
of items which have misleading information on their label.
Provincial
The legislation enacted by the government of the Province of
Quebec to which Grand Canada is subject includes the Consumer
Protection Act which prohibits the sale of hazardous toys and other
articles, and also requires proper labeling and instructions to be
included with the item being sold. Grand Canada is also subject to
the Charter of the French Language, which requires that all labeling
and instructions appear in the French language, as well as the
Upholstery and Stuffed Articles Act, which requires that stuffed articles
conform to hygienic norms, and obligates companies to take
measures against contamination during transportation and storage.
Similar laws exist in several cities and provinces throughout
Canada and in many jurisdictions throughout the world.
Grand Canada maintains a quality control program to ensure
compliance with all applicable laws.
Employees
As of December 31, 1998, the Company employed 48 full-time
persons, including three executive officers, and 2 contract
employees. The Company believes that its relations with its
employees are satisfactory.
Item 2.
Description Of Property:
The Company's principal executive offices are located in an
approximately 105,000 square foot facility located at 1710 Route
Trans-Canada, Dorval, Quebec, Canada, a suburb of Montreal.
The Company uses the facility for offices, showroom, assembling,
packaging, warehousing and distribution. The lease for the
premises expires on December 1, 2003 but Grand Canada has the
right to extend the lease for an additional five-year period. The
current monthly rent is Canadian $29,400 and in the extension
period will be increased each year by a percentage that is equal to
75% of the percentage increase in the consumer price index for the
greater Montreal area.
Grand Canada also leases, pursuant to a lease expiring on
December 31, 2000, approximately 9,000 square feet of showroom
and office space at 6427 Northam Drive, Mississauga, Canada, a
suburb of Toronto, at a current rental rate of approximately
Canadian $8,200 per month.
The Company believes that its current facilities are satisfactory for
its present needs and that insurance coverage is adequate for the
premises.
Item 3.
Legal Proceedings:
On November 30, 1995, an involuntary petition under Chapter 7
of the United States Bankruptcy Code was filed against Grand US
in the United States Bankruptcy Court for the Southern District of
New York (the "Bankruptcy Proceeding"). On January 4, 1996,
the Court entered an order for relief under Chapter 7 of the United
States Bankruptcy Code and a trustee was appointed to supervise
the liquidation of Grand US. To date, no other proceedings have
occurred in connection with the Bankruptcy.
Other than discussed above or in Note 10 to the Company's
Consolidated Financial Statements included elsewhere herein, the
Company is not a party to, nor is it aware of, any other pending
litigation of a material nature.
Item 4.
Submission of Matters to a Vote of Security
Holders:
None.
PART II
Item 5.
Market For Common Equity and Related Stockholder Matters:
The Company's Common Stock is traded on the NASDAQ Small-
Cap Stock Market under the symbol "GRIN". The following table
sets forth the range of high and low closing representative bid
prices for the Company's Common Stock from January 1, 1997
through December 31, 1998 as reported by NASDAQ. The
figures represent prices between dealers, do not include retail
mark-ups, mark-downs or commissions and may not represent
actual transactions. The prices set forth below have been adjusted
to give effect to the one-for-five reverse stock split effected on
August 4, 1997.
Common Stock Representative Bid Prices
1997 High Low
First Quarter $ 6 7/8 $ 5 15/32
Second Quarter $ 6 1/4 $ 4 5/8
Third Quarter $ 6 7/16 $ 4 1/2
Fourth Quarter $ 8 3/8 $ 5 5/8
1998
First Quarter $7 3/8 $5
Second Quarter $7 11/16 $5
Third Quarter $6 1/8 $2 5/8
Fourth Quarter $8 3/4 $1 15/16
On March 12, 1999, the last reported sales price for the Common
Stock on the NASDAQ Small Cap Market was $ 3 5/8 per share.
At February 28, 1999 there were approximately 185 record holders
of the Company's Common Stock, however those shares being
held at various clearing houses, including Cede & Company, have
not been broken down. Accordingly, the Company believes there
are many more beneficial owners of the Company's Common
Stock whose shares are held in "street name".
During the past two years the Company has not paid, and has no
current plans to pay, dividends on its Common Stock. The
Company intends to retain earnings, if any, for use in its business.
Any dividends that may be declared in the future will be
determined by the Board of Directors based upon the Company's
financial condition, results of operation, market conditions and
other factors that the Board deem relevant.
Item 6.
Management's Discussion and Analysis or Plan of Operation
Overview
Net sales consist of sales of products to customers after deduction
of customer cash discounts, volume rebate allowances, and returns
of merchandise. Sales are recorded when the merchandise is shipped.
The cost of goods sold for products imported as finished goods
includes the cost of the product, a currency adjustment (if
applicable), duty and other taxes, and freight and brokerage
charges. Royalties to Grand Canada's suppliers not contingent
upon the subsequent sales of the suppliers' products are included
in the price paid for such products.
Major components of selling, general and administrative expenses
include: payroll and fringe benefits; advertising expense, which
includes the cost of production of television commercials and the
cost of air time; advertising allowances paid to customers for
cooperative advertising programs; and royalty expense. Royalties
include payments by Grand Canada to licensors of character
properties and to manufacturers of its toy products if such
payments are contingent upon subsequent sales of the products.
Royalties are usually a percentage of the price at which the product
is sold and are payable once a sale is made.
Accounts receivable are receivables net of an allowance for
doubtful accounts. The allowance is adjusted periodically to reflect
the current status of receivables. Management believes that current
reserves for doubtful accounts are adequate. Sales of products to
retailers and distributors are on an irrevocable basis. Consistent
with industry practices, Grand Canada may make exceptions to this
policy on a case-by-case negotiated basis. Inventory is comprised
of finished goods at landed cost.
All amounts are in US$ unless otherwise noted.
Results of Operations
The following table sets forth consolidated operations data as a
percentage of net sales for the periods indicated:
For the Twelve
Months Ended December 31,
1998 1997 1996
% % %
Net sales 100.00 100.00 100.00
Cost of goods sold 66.57 60.59 58.57
Gross profit 33.43 39.41 41.43
Operating expenses:
Selling, general and administrative 26.85 29.42 32.70
Loss (gain) on foreign exchange 3.92 .83 (0.72)
Interest 2.11 1.47 1.91
Bad debt expense .44 .37 .97
Depreciation and amortization .67 .37 .51
Total operating expenses 33.99 32.46 35.37
Earnings (loss) before income taxes (0.56) 6.96 6.06
Net earnings (loss) (0.96) 4.22% 2.14%
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997:
Net Earnings
Net loss for 1998 was $ 318,302 or $0.20 per share as compared to
net earnings of $1,575,169 or $1.00 per share in 1997, a 120% decrease.
Net Sales
Net sales in 1998 were $33,177,529 a decrease of $4,121,996 over
1997 net sales of $37,299,525 or approximately 11%. The
decrease is due to a substantial decrease of a major customer's
purchasing for the year, the decline of the Canadian dollar relative
to the U.S. dollar which impacts the translation of the sales, and
lastly as a result of the later delivery of one major product as
compared to the prior year.
Gross Profit
Gross profit in 1998 decreased by $3,607,593 from $ 14,699,141 in
1997 to $11,091,548 in 1998 or as a percentage of sales gross
profit decreased from 39.41% to 33.43%. The sales mix, as well
as a weakening of the Canadian dollar, relative to the U.S. dollar
were major contributors to the decrease.
Selling, General and Administrative
Selling, general and administrative expenses were $8,908,509 in
1998 compared to $10,972,646 in 1997. The decrease in this
category is due primarily to the decrease in advertising and
promotion expenses. Both television advertising expense, and
cooperative advertising rebates to customers were decreased. As a
percentage of net sales, selling, general and administrative expenses
decreased by 2.57% to 26.85% in 1998.
Loss on foreign exchange
The significant and uncharacteristically rapid decline in the
Canadian dollar negatively impacted results in 1998.
Comparison of the year ended December 31,
1997 to the year ended December 31, 1996:
Net Earnings
Net earnings for 1997 were $1,575,169 or $1.00 per share as
compared to $591,370 or $0.38 per share in 1996, a 166% increase.
Net Sales
Net sales in 1997 were $37,299,525 an increase of $9,653,274 over
1996 net sales of $27,646,251 or by approximately 35%. The
strength of Grand Canada's product line, coupled with effective
advertising and promotion programs meant to drive and support
the sales, had a major impact on net sales in 1997. The product
lines that primarily contributed to the sales increase were: Toy Biz
which included the Marvel line of action figures such as
Spiderman, the X-Men and others, as well as a variety of dolls
including Casey Cartwheel, Magic Stroller Surprise, and the Take
Care of Me Triplets; Tiger Electronics Inc., which included hand held
electronics games, Giga Pets, children's electronic diaries and the
"Talkboy" cassette players; and the Intex "Wet Set" inflatables line
which is a line of inflatable pools, air mattresses and other water
related accessories. Further, in 1997 Grand Canada acquired the
distribution rights of a new line, Toymax, which includes Laser
Challenge and Metal Molders.
Gross Profit
Gross profit increased by $3,244,456 from $11,454,685 in 1996 to
$14,699,141 in 1997. The gross profit increased as a direct result
of the increase in sales. The gross profit as a percentage of sales
decrease by approximately 2% in 1997. The product mix, as well
as a weakening of the Canadian dollar, were major contributors to
the decrease.
Selling, General and Administrative
Selling, general and administrative expenses were $10,972,646 in
1997 compared to $9,039,748 in 1996. The increase in this
category is due primarily to the increase in advertising and
promotion expenses. The expenditure on advertising and sales
promotion was increased to drive the increase in sales that the
Company experienced. Both television advertising expense, and
cooperative advertising rebates to customers were increased.
However, as a percentage of net sales, selling general and
administrative expenses decreased by 3.28% to 29.42% in 1997.
Liquidity and Capital Resources
The Company generally finances its operations through borrowings
under Grand Canada's Credit Agreement with its bank and by cash
flow from operations.
In March 1996, Grand Canada entered into a three year banking
arrangement with a new lending institution. Grand Canada has a
secured line of credit of $9,830,000 US ($15,000,000 CDN) to
enable it to meet its plans for growth in the future. Grand Canada
may draw down working capital advances and letters of credit in
amounts determined by percentages of its accounts receivable and
inventory. Working capital advances taken by Grand Canada bear
interest at prime plus 1 1/4%. The term of the loan is three years.
The loan, which originally was scheduled to expire on April 1,
1999, was extended to June 30, 1999. The Company is presently
renegotiating the loan with its current lender and other institutions.
Failure to obtain a credit facility would have a material adverse
effect on the Company. The loan is guaranteed by the Company.
Accounts receivable at December 31, 1998 were $7,728,979
compared to $6,407,073 at December 31, 1997. Inventory at
December 31, 1998 increased by $452,018 from a year earlier.
Working capital decreased from $3,452,266 at December 31, 1997
to $3,394,528 at December 31, 1998. Net cash used for operating
activities was $5,238,078 in 1998 compared to net cash provided
by operating activities of $694,308 in 1997 and cash for additions
to equipment was $347,008 compared to $245,891 in 1997, as a
result of purchases for the new computer system.
Grand Canada's level of accounts receivable is subject to
significant seasonal variations due to the seasonality of sales. As a
result, Grand Canada's working capital requirements are greatest
during its third and fourth quarters. In addition, to the extent
accounts receivable, inventories and guarantees and advance
payments increase as a result of growth of Grand Canada's
business, Grand Canada could require additional working capital to
fund its operations. Sources of such funding include cash flow
from operations, drawings on the financing facilities, or sales of
additional equity or debt securities by the Company.
If the funds available under the Company's financing agreements,
together with its current cash and cash equivalents are not
sufficient to meet the Company's cash needs, the Company may
from time to time seek to raise capital from additional sources,
including the extension of its current lending facilities, project-
specific financing and additional public or private debt or equity
financing. Management believes that the Company has sufficient
financing at the present time to meet its 1999 forecast.
Effects Of Inflation
The Company does not believe that inflation has had a significant
impact on its financial position or results of operations in the past
three years.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs which
were written using two digits rather than four to define the
applicable year. For example, date-sensitive software may
recognize a date using "00" as the Year 1900 rather than the Year
2000. Such misrecognition could result in system failures or
miscalculations causing disruptions of operations, including,
among others, a temporary inability to process transactions, send
invoices or engage in similar normal business activities.
We have appointed one of our officers to develop a
comprehensive Year 2000 plan with the goal of completing
updates to key systems by December 31, 1999. We have assessed
the scope of our risks related to problems our computer systems
may have in processing date information related to the Year 2000
and believe such risks are not significant.
We have identified all of our significant internal software
applications which contain source codes that may be unable to
appropriately interpret the year 2000 and have already begun to
modify or replace those applications. We have determined that our
computer system is Year 2000 compliant.
In addition, we have inquired of certain of our suppliers and
customers about their progress in identifying and addressing
problems relating to the Year 2000. Several of our customers and
suppliers have informed us that they do not anticipate problems in
their business operations due to Year 2000 compliance issues, and
others have informed us that they have not yet addressed this issue.
We are currently unable to determine the extent to which Year
2000 issues will affect our customers and suppliers, or the extent
to which we would be vulnerable to their failure to remedy any
such problems. However, we anticipate that at least some of our
customers and suppliers will not be Year 2000 compliant when the
time comes, which will result in their inability to purchase from us
or ship to us in a timely manner. We are prepared to focus our
time and effort on monitoring those accounts, providing assistance
if possible and finding alternate sources if absolutely necessary.
Although we do not expect this to occur, the worst case scenario is
that this contingency plan may cause us to incur additional
expenses and delays in the shipments of some of our products.
New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." This Statement
establishes standards for computing and presenting earnings per
share ("EPS") and applies to all entities with publicly-held common
stock or potential common stock. This Statement replaces the
presentation of primary EPS and fully-diluted EPS with a
presentation of basic EPS and diluted EPS, respectively. Basic
EPS excludes dilution and is computed by dividing earnings
available to common shareholders by the weighted-average number
of common shares outstanding for the period. Similar to fully diluted
EPS, diluted EPS reflect the potential dilution of securities that
could share in the earnings. This Statement is not expected to have
a material effect on the Company's reported EPS amounts. The
Statement is effective for the Company's financial statements for
December 31, 1997.
Item 7.
Financial Statements:
The consolidated financial statements of the Company, including
the notes thereto, together with the report of independent certified
public accountants thereon, are presented beginning at page F-1.
Item 8.
Changes in, and Disagreements with Accountants on Accounting and Financial
Disclosure:
Not applicable.
PART III
Items 9. - 12.
The information required by Part III (Items 9 through 12) is
incorporated herein by reference from the Company's definitive
proxy statement to be filed pursuant to regulation 14A within 120
days after the close of the Company's fiscal year.
Item 13.
Exhibits, Financial Statements and Reports on Form 8-K
(a) Report of Independent Auditors
Index to Financial statements
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1998 and
December 31, 1997
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Earnings for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years
Ended December 31 1998, 1997, and 1996
Notes to Consolidated Financial Statements
Consents of Independent Auditors to incorporation by reference of
financial statements
Exhibit Number
**3.1 Articles of Incorporation, as amended
* 3.2 Certificate of Designations of Series A 5% Cumulative Convertible
Redeemable Preferred Stock
***3.3 Amended and Restated by-laws
#4.1 Form of certificate evidencing shares of Common Stock and form of
certificate evidencing redeemable Common Stock purchase warrants
* 4.2 Form of Certificate of Designations of Series A Cumulative Convertible
Redeemable Preferred Stock - To be filed by Amendment
**4.3 Form of Underwriter's Common Stock Warrant Agreement
**4.4 Form of Underwriter's Warrant Agreement
**10.2 Letter Agreement dated as of October 28, 1993, by and between the
Company and AMGO relating to the cancellation by AMGO of the
rights of AMGO to the 2,000,000 Earn Out Shares and the grant to AMGO of
1,250,000 stock options.
##10.3 Amended and Restated 1993 Stock Option Plan
**10.9 Lease of Dorval, Canada facility
**10.10 Lease of Mississauga, Canada facility
*10.11 Asset Purchase Agreement, dated as of January 1, 1999, by and
among the Company, Great American Acquisition Corp., Ark
Foundation LLC and Ofer Nissim
*10.12 Subordinated Promissory Note, dated January 1, 1999, given by Great
American Acquisition Corp. to Ark Foundation in the amount
of US$1,500,000
*10.13 Stock Pledge Agreement, dated as of January 1, 1999, in favor of
Ark Foundation LLC by the Company
*21 Subsidiaries of the Company
*23 Consent of KPMG
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1998.
________________________________________________________________________
* Filed herewith
** Filed as an Exhibit to either the company's Registration
Statement (the "Registration Statement") on Form SB-2, dated January 27,
1994, or Amendment No. 1 or Amendment No. 2 to such Registration Statement.
*** Filed July 20, 1993 and incorporated herein by reference.
# Filed as an Exhibit to the Company's Registration
Statement on Form 8-A
dated September 7, 1993 and incorporated herein by reference.
## Filed as an Exhibit to the Company's Proxy Statement on Form 14A dated
May 5, 1995.
Consolidated Financial Statements of
GRAND TOYS
INTERNATIONAL, INC.
Years ended December 31, 1998, 1997 and 1996
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Grand Toys International, Inc.
We have audited the accompanying consolidated balance sheets of Grand Toys
International, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of earnings, stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards which do not differ in any material respects with United States
generally accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance whether the financial
statements
are free of material misstatement. An audit includes examining, on a test
basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Grand Toys International, Inc. and subsidiaries as of December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
Chartered Accountants
Montreal, Canada
February 12, 1999
Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Earnings 3
Consolidated Statements of Stockholders' Equity and Comprehensive Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
GRAND TOYS INTERNATIONAL, INC.
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
Assets
Current assets:
Accounts receivable (net of allowance for doubtful
accounts; 1998 - $43,143; 1997 - $52,882) $ 7,728,979 $ 6,407,073
Due from affiliated companies 224,498 11,730
Inventory 4,318,107 3,866,089
Prepaid expenses 1,050,434 927,290
Total current assets 13,322,018 11,212,182
Equipment and leasehold improvements, net (note 2) 567,299 480,454
Other assets - 494,768
Total assets $13,889,317 $12,187,404
On behalf of the Board:
_______________________ Director
_______________________ Director
GRAND TOYS INTERNATIONAL, INC.
1998 1997
Liabilities and Stockholders' Equity
Current liabilities:
Bank indebtedness (note 3) $ 6,782,510 $ 1,985,072
Trade accounts payable 1,671,417 72,191,871
Other accounts payable and accrued liabilities 1,034,743 2,694,481
Royalties payable 60,728 178,464
Income taxes payable 378,092 710,028
Total current liabilities 9,927,490 7,759,916
Minority interest 100 100
Stockholders' equity:
Capital stock (note 4) 1,578 1,578
Additional paid-in capital 10,599,559 10,599,559
Deficit (5,991,237) (5,672,935)
Accumulated other comprehensive income -
cumulative currency translation adjustment (648,173) (500,814)
3,961,727 4,427,388
Commitments and contingencies (notes 9 and 10)
Subsequent event (note 14)
Total liabilities and stockholders' equity $13,889,317 $12,187,404
See accompanying notes to consolidated financial statements.
1998 1997 1996
Net sales $ 33,177,529 $ 37,299,525 $ 27,646,251
Cost of goods sold 22,085,981 22,600,384 16,191,566
Gross profit 11,091,548 14,699,141 11,454,685
Operating expenses:
Selling, general and
administrative 8,908,509 10,972,646 9,039,748
Foreign exchange loss (gain) 1,299,050 309,007 (198,312)
Interest 698,840 547,892 528,660
Bad debt expense 145,167 138,756 268,632
Depreciation 227,041 136,414 140,343
11,278,607 12,104,715 9,779,071
(Loss) earnings before income
taxes (187,059) 2,594,426 1,675,614
Current income taxes (131,243) 1,019,257 1,084,244
Net (loss) earnings $ (318,302) $ 1,575,169 $ 591,370
(Loss) earnings per share
(notes 1 (g) and 7):
Basic $ (0.20) $ 1.00 $ 0.38
Diluted (0.20) 0.90 0.37
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended December 31
Acmulated
Additional other
Capital paid-in comprehensive
stock capital Deficit income Total
January 1, 1996 $ 7,705 $ 10,422,574 $ (7,839,474) $ (429,366) $ 2,161,439
Net earnings for the year - - 591,370 - 591,370
Foreign currency adjustment - - - (11,236) (11,236)
Total comprehensive income 580,134
Settlement (note 4 (c)) 183 199,817 - - 200,000
Share issue costs - (29,142) - - (29,142)
December 31, 1996 7,888 10,593,249 (7,248,104) (440,602) 2,912,431
Reverse stock split
(note 1 (g)) (6,310) 6,310 - - -
Net earnings for the year - - 1,575,169 - 1,575,169
Foreign currency adjustment - - - (60,212) (60,212)
Total comprehensive income 1,514,957
December 31, 1997 1,578 10,599,559 (5,672,935) (500,814) 4,427,388
Net loss for the year - - (318,302) - (318,302)
Foreign currency adjustment - - - (147,359) (147,359)
Total comprehensive income (465,661)
December 31, 1998 $ 1,578 $ 10,599,559 $ (5,991,237) $ (648,173) $ 3,961,727
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
Years ended December 31
1998 1997 1996
Cash flows from operating activities:
Net (loss) earnings $(318,302) $1,575,169 $ 591,370
Items not affecting cash:
Depreciation 227,041 136,414 140,343
Gain on sale of equipment - - (24,224)
Changes in operating working capital
items (note 8) (5,146,817) (1,017,275) 1,024,568
Net cash (used for) provided by
operating activities (5,238,078) 694,308 1,732,057
Cash flows from financing activities:
Increase (decrease) in bank
indebtedness 5,044,684 428,026 (1,333,235)
Decrease in loan payable to a director - (422,161) (476,889)
Repayment of long-term debt - - (55,023)
Issuance of capital stock,
net of issue costs - - 170,858
Other 62,904 54,651 (7,600)
Net cash provided by (used for)
financing activities 5,107,588 60,516 (1,701,889)
Cash flows from investing activities:
Additions to equipment (347,008) (245,891) (79,256)
Proceeds on sale of equipment - - 49,088
Decrease (increase) in other assets 477,498 (508,933) -
Net cash provided by (used for)
investing activities 130,490 (754,824) (30,168)
Net change in cash, being cash
at end of year $ - $ - $ -
Supplementary disclosure of cash flow
information
Cash paid during the year for:
Interest $ 695,896 $ 478,147 $ 528,660
Income taxes 438,440 1,276,603 182,708
See accompanying notes to consolidated financial statements.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998, 1997 and 1996
Grand Toys International, Inc., a publicly held company, is organized under the
laws of the State of Nevada. Its principal business activity, through its
wholly-owned Canadian and United States operating subsidiaries, is the
distribution of
toys and related items.
1. Significant accounting policies:
(a) Principles of consolidation:
These consolidated financial statements, presented in U.S. dollars and in
accordance
with accounting principles generally accepted in the United States, include the
accounts of Grand Toys International, Inc. and its subsidiaries (the "Company").
All significant intercompany balances and transactions have been eliminated.
(b) Inventory:
Inventory is valued at the lower of cost, determined by the first in, first out
method, and net realizable value. The only significant class of inventory is
finished goods.
(c) Equipment and leasehold improvements:
Equipment and leasehold improvements are stated at cost less accumulated d
epreciation. Depreciation methods and annual rates adopted by the Company are
as follows:
Asset Method Rate
Computer equipment Declining balance 30%
Machinery and equipment Declining balance 20%
Furniture and fixtures Declining balance 20%
Trucks and automobiles Declining balance 30%
Telephone equipment Declining balance 30%
Leasehold improvements Straight-line Term of
lease plus one
renewal term
(d) Other assets:
Other assets are recorded at cost and amortized over a period of three years.
Amortization is included in cost of goods sold.
(e) Revenue:
Sales are recorded net of merchandise returns.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1998, 1997 and 1996
1. Significant accounting policies (continued):
(f) Foreign currency translation:
(i) Grand Toys Ltd. and Grand Concepts Inc., wholly-owned Canadian subsidiaries,
are classified as self-sustaining foreign operations, with assets and
liabilities translated into US dollars at the exchange rates prevailing at
the balance sheet date and sales, expenses and cash flows translated at the
average exchange rate for the year. The resulting currency translation
adjustments
are accumulated and reported as a separate component of stockholders' equity
and comprehensive income. The Company has not provided for income taxes on
foreign subsidiaries' undistributed earnings as of December 31, 1998 because
such earnings, for the most part, are intended to be reinvested in these
subsidiaries.
(ii) Other monetary assets and liabilities denominated in foreign currencies
are
translated at the exchange rates prevailing at the balance sheet date.
Revenues and expenses denominated in foreign currencies are translated at
the rates of exchange prevailing at the transaction dates. All exchange
gains and losses are included in income.
(g) Earnings (loss) per share:
(i) Effective August 4, 1997, the stock of the Company underwent a one-for-five
reverse stock split. For purposes of earnings per share calculations
(note 7), capital stock (note 4(d)) and stock options and warrants
(note 5), the comparative numbers of shares have been restated to reflect
the split.
(ii) Basic earnings (loss) per share is determined by dividing the weighted-
average
number of common shares outstanding during the period into net earnings (loss).
(iii) Diluted earnings (loss) per share gives effect to all potentially
dilutive
common shares that existed at December 31, 1998.
(h) Stock option plan:
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees. As such, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeds the
exercise price. FASB Statement No. 123, which became effective in 1996, allows
entities to continue to apply the provisions of APB Opinion No. 25
and requires pro-forma net earnings and pro-forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in FASB Statement No. 123 had been
applied. This disclosure is included in the notes to these statements.
1. Significant accounting policies (continued):
(i) Advertising and promotion:
All costs associated with advertising and promoting products are expensed in
the period incurred.
(j) Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(k) Comprehensive income:
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income.
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and cumulative currency translation
adjustments and is presented in the consolidated statements of stockholders'
equity and comprehensive income. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
2. Equipment and leasehold improvements:
1998 1997
Accumulated Accumulated
Cost depreciation Cost depreciation
Computer equipment $1,094,822 $670,028 $909,968 $576,499
Machinery and equipment 432,770 356,343 358,967 321,939
Furniture and fixtures 458,318 427,574 492,979 449,114
Trucks and automobiles 80,395 78,122 85,809 82,342
Telephone equipment 38,455 34,261 41,044 35,448
Leasehold improvements 323,042 294,175 340,997 283,968
$ 2,427,802 $ 1,860,503 $ 2,229,764 $ 1,749,310
Net book value $ 567,299 $ 480,454
3. Bank indebtedness:
The Company has a secured line of credit of $9,830,000 (CAD$15,000,000) and can
draw down working capital advances and letters of credit in amounts determined
by percentages of its accounts receivable and inventory. The working capital
advances are secured by all of the assets of the Company. The effective
interest
rate at December 31, 1998 on the Canadian denominated line was 9.25% (8.00% at
December 31, 1997),
which represents prime plus 1 1/4% for both years.
As at December 31, 1998, the unused portion of the credit facility is
approximately
$1,661,000.
4. Capital stock:
(a) Authorized capital:
50,000,000, $0.001 par value voting common shares;
5,000,000, $0.001 par value preferred shares, issuable in series with such
designation, rights and preferences as may be determined from time to time by
the Board of Directors.
(b) Issued and outstanding:
1998 1997
1,577,597 common shares (1997 - 1,577,597 common
shares) (note 1 (g)) $ 1,578 $ 1,578
(c) Share transactions:
(i) Settlement:
-December 1996:
183,486 shares were issued for a settlement valued at $200,000.
Legal costs incurred in the amount of $29,142 have been charged to additional
paid-in capital.
(ii) Reverse stock split:
- -August 1997:
One-for-five reverse stock split occurred reducing the number of outstanding
shares to 1,577,597.
4. Capital stock (continued):
(d) Summary of common stock outstanding:
A summary of the number of common stock outstanding and share transactions
since January 1, 1996 is as follows:
January 1, 1996 1,540,900
Settlement 36,697
December 31, 1996, 1997 and 1998 1,577,597
5. Stock options and warrants:
The Company has a stock option plan (the "Option Plan") which provides for the
issuance of up to 300,000 options to acquire the common stock of the Company.
Stock options granted under the Option Plan may be Incentive Stock Options
under the requirements of the Internal Revenue Code, or may be Non-statutory
Stock Options which do not meet such requirements. Options may be granted under
the Option Plan to, in the case of Incentive Stock Options, all employees
(including officers) of the Company, or, in the case of Non-statutory Stock
Options, all employees (including officers) or non-employee directors of the
Company.
Options have also been granted outside the Option Plan to two directors, key
executives, outside consultants and a supplier. As well, warrants have been
issued to a director in his capacity as an investment banker, a distributor and
to the underwriter pursuant to the public offering. Some of these options and
warrants have either expired or were forfeited during the year.
Under each plan, the exercise price of each option equals the market price of
the Company's stock on the grant date and an option's maximum term is ten years.
The range of exercise prices for stock options and warrants outstanding at
December 31, 1998 is $2.875 to $37.50.
5. Stock options and warrants (continued):
Details of the options and warrants, all of which are exercisable at year-end,
are as follows:
Weighted-
average
Other exercise
Option stock price per
plan options Warrant Total share
January 1, 1996 180,100 623,000 320,000 1,123,100 $0.95
Granted 17,700 524,011 - 541,711 0.38
Forfeited (133,300) (151,000) - (284,300) (0.64)
Expired - - (40,000) (40,000) (1.50)
January 1, 1997 64,500 996,011 280,000 1,340,511 0.77
Granted - 1,114,000 - 1,114,000 4.39
Forfeited - (450,000) - (450,000) (18.67)
Expired - - (230,000) (230,000) (40.00)
January 1, 1998 64,500 1,660,011 50,000 1,774,511 6.98
Granted 14,000 284,000 - 298,000 (5.50)
Forfeited - (104,239) - (104,239) (4.51)
Expired (34,400) (5,000) - (39,400) (11.60)
Reclassified - (55,000) 55,000 - -
December 31, 1998 44,100 1,779,772 105,000 1,928,872 $ 6.79
Pro-forma information regarding net earnings and earnings per share is required
by FASB Statement No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that statement.
The fair value for these options was estimated at the grant date using a
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 4.68% (5.95% to 6.07% in 1997; 5.65% to 7.10% in 1996),
volatility
factor of the expected market price of the Company's common stock of 114%
(40% in both 1997 and 1996) and a weighted-average expected life of the option
of
3 years (3 years in 1997; 4 years in 1996), with no dividends.
5. Stock options and warrants (continued):
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of
traded options, and because changes in the subjective input
assumptions can materially affect their fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure
of the fair value of its stock options. The weighted-average grant date fair
values of options granted in 1998, 1997 and 1996 are $3.85, $1.48 and $0.67,
respectively.
The pro-forma losses utilizing the fair value assumptions above for the years
1998, 1997 and 1996 would be $1,465,142, $75,551 and $1,212,738, respectively.
Furthermore, pro-forma loss per share would be $0.93, $0.05 and $0.16,
respectively.
6. Income taxes:
(a The effective tax rate for the Company is reconcilable to statutory tax rates
as follows:
1998 1997 1996
(%) (%) (%)
U.S. Federal statutory tax
rate 35.0 35.0 35.0
State income tax rate,
net of federal tax benefits 10.0 10.0 10.0
U.S. statutory tax rate 45.0 45.0 45.0
Changes to U.S. tax rate
resulting from:
Effect of foreign tax
rate differences (3.9) (5.0) (4.0)
Expenses producing no tax benefit (45.2) 27.4 19.4
Tax benefit of utilization of
loss carry forward - (26.1) -
Other 4.1 0.5 -
- (3.2) 15.4
Valuation allowance for
deferred tax assets
allocated to income tax expense - - 4.3
Effective tax rate - 41.8 64.7
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1998, 1997 and 1996
6. Income taxes (continued):
(b) The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1998 are presented below:
Non-current:
Net operating loss carry forwards (note 6 (c)) $ 1,825,000
Net deferred tax asset before valuation allowance 1,825,000
Valuation allowance 1,825,000
Total net deferred tax asset $ -
The valuation allowance increased by $35,000 in 1998 (1997 and 1996 - decrease
of $991,000 and $594,000,respectively) to reflect an adjustment to deferred tax
assets related to loss carry forwards used in the year in the United States.
(c) As of December 31, 1998, the Company has $5,213,000 of net operating losses
available for tax purposes to reduce future taxable income in the United States,
beginning to expire in 2009.
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1998, 1997 and 1996
7. Earnings per share:
During the fourth quarter of 1997, the Company adopted FASB Statement No. 128
"Earnings per share". The new standard had no impact on the previously
presented basic earnings per share calculation for 1996. The diluted earnings
per share calculation for 1996 has been restated to reflect the new standard.
Income Shares Per share
(numerator) (denominator) amount
December 31, 1996
Basic EPS
Earnings available to
common stockholders $ 591,370 1,543,958 $ 0.38
Effect of dilutive securities
Options - 38,701 (0.01)
Diluted EPS
Earnings available to
common stockholders
and assumed conversions 591,370 1,582,659 0.37
December 31, 1997
Basic EPS
Earnings available to
common stockholders $ 1,575,169 1,577,597 $ 1.00
Effect of dilutive securities
Options - 174,117 (0.10)
Diluted EPS
Earnings available to
common stockholders
and assumed conversions 1,575,169 1,751,714 0.90
December 31, 1998
Basic EPS
Earnings available to
common stockholders $ (318,302) 1,577,597 $(0.20)
Effect of dilutive securities
Options - - -
Diluted EPS
Earnings available to
common stockholders
and assumed conversions (318,302) 1,577,597 (0.20)
GRAND TOYS INTERNATIONAL, INC.
Notes to Consolidated Financial Statements, Continued
Years ended December 31, 1998, 1997 and 1996
7. Earnings per share (continued):
Options to purchase 1,823,872 shares (1997 - 601,011) and warrants to purchase
105,000 shares (1997 - 40,000) of the Company's common stock were not included
in the diluted earnings per share calculation as their effect is anti-dilutive.
The subsequent event referred to in note 14 would have materially changed the
number of potential common shares outstanding if the transaction had occurred
before the end of the year.
8. Changes in operating working capital items:
1998 1997 1996
(Increase) decrease in
accounts receivable $(1,709,085) $(1,369,171) $1,225,804
(Increase) decrease in due from
affiliated companies (213,563) 309,521 (326,636)
Increase in inventory (713,181) (1,452,278) (816,379)
Increase in prepaid expenses (182,604) (433,359) (397,466)
(Decrease) increase in trade accounts
payable (397,790) 64,278 282,462
(Decrease) increase in other
accounts payable and accrued
liabilities (1,527,231) 2,267,776 254,227
(Decrease) increase in royalties
payable (109,115) (166,366) 105,403
(Decrease) increase in income
taxes payable (294,248) (237,676) 697,153
$ (5,146,817) $ (1,017,275) $ 1,024,568
9. Commitments:
The Company has entered into long-term leases with minimum annual rental
payments approximately as follows:
1999 $ 392,000
2000 378,000
2001 276,000
2002 253,000
2003 236,000
Thereafter 255,000
$ 1,790,000
Rent expense for the years ended December 31, 1998, 1997 and 1996 amounted to
approximately $224,000; $201,000 and $174,000 respectively.
10. Contingencies:
(a) A lawsuit for alleged breach of contract has been filed against the Canadian
subsidiary by a sales representative. In the opinion of management and counsel
to the Company has advised, based on the available facts that the case will
be settled. However, at this point in time it is difficult to ascertain or
estimate the value of the settlement, if any. The Company has been named in
two lawsuits by a supplier of and a lessor to a former US subsidiary, Grand
Group
Inc., for recovery of amounts totalling approximately $300,000, although the
Company is not party to either contract.
In the opinion of management, there have been no recent developments and it is
difficult to ascertain the likelihood of an unfavorable outcome to the Company.
(b) The Company's Canadian subsidiary is also contingently liable for
outstanding letters of credit of approximately $1,386,000 as at
December 31, 1998.
11. Employee benefit plans:
The Company has a group retirement savings plan for its Canadian employees. The
Company contributes to this plan the lesser of (a) 50% of the employee's
contribution to this plan; (b) 3% of the employee's gross earnings; or (c) Cdn.
$3,000 per employee. During the year, the Company contributed approximately
$24,000 (1997 - $27,600; 1996 - $28,600) to the retirement savings plan for its
Canadian employees.
12. Segment information:
(a) Industry and geographic information:
The Company operates primarily in one industry segment which includes the
distribution of toys and related items. Virtually all sales are to Canadian
customers.
(b) Other information:
Sales of the Company's toy products to five customers accounted for 64% of the
Company's gross sales for 1998, two of which represent over 38% or approximately
$13,246,000. For both years 1997 and 1996, five customers accounted for
approximately 74% of gross sales, two of which represented over 43% and 47% or
$16,935,000 and $13,762,000 respectively.
Sales of toys purchased from the Company's two largest manufacturers and
suppliers of toys in aggregate accounted for 64% of gross sales for 1998. The
Company's two largest suppliers accounted for 67% and 75% of gross sales for
1997 and 1996 respectively.
13. Financial instruments:
(a) Foreign currency risk management:
The Company enters into forward foreign exchange contracts to minimize its
foreign currency exposure on purchases. The contracts oblige the Company to buy
US
dollars in the future at predetermined exchange rates. The contracts are not
used for trading purposes. The Company's policy is to enter into forward
foreign
exchange contracts on a portion of its purchases anticipated in the next selling
season. Gains and losses on forward exchange contracts are recorded in income
and generally offset transaction gains or losses on the foreign currency cash
flows which they are intended to hedge.
At December 31, 1998, the Company had purchased a contract to purchase
US$5,000,000 in the next two months at a rate of $1.525. The fair market value
of this contract at December 31, 1998 is approximately $42,000.
(b) Fair values:
Fair value estimates are made as of a specific point in time, using available
information about the financial instruments. These estimates are subjective in
nature and often cannot be determined with precision.
The fair value of the Company's accounts receivable, due from affiliated
companies,
bank indebtedness, trade and other payables approximate their carrying value due
to the immediate or short-term maturity of these financial instruments.
(c) Credit risk:
For the year ended December 31, 1998, approximately 64% of the Company's sales
were made to five unrelated companies. Three customers, representing
approximately
54% of total sales, individually accounted for more than 10% of total sales.
The Company regularly monitors its credit risk exposure to these and other
customers
and takes steps to mitigate the risk of loss.
(d) Interest rate risk:
The Company's principal exposure to interest rate risk is with respect to its
short-term financing which bears interest at floating rates.
14. Subsequent event:
Effective January 1, 1999, the Company acquired all of the assets of Ark
Foundation
LLC for $2,500,000 consisting of the Company's convertible preferred stock
having
a stated value of $1,000,000 and an interest bearing promissory note of
$1,500,000. The transaction will be accounted for using the purchase method.
Ark Foundation LLC is engaged in the
business of designing, developing, producing, marketing, distributing and
selling
puzzles and puzzle-related products to merchandisers. Advances are outstanding
to Ark Foundation LLC at December 31, 1998 in the amount of $211,311.
15. Uncertainty due to the Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two digits
rather
than four to identify a year. Date-sensitive systems may recognize the year
2000
as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date.
The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
16. Comparative figures:
Certain comparative figures have been reclassified to conform with the financial
statement presentation adopted in the current year.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Exhibits to
Form 10 - K
of
GRAND TOYS INTERNATIONAL, INC.
For the Fiscal Year
Ended December 31, 1998
Exhibit 3.2
Certificate to Set Forth Designations,
Voting Powers, Preferences, Limitations,
Restrictions, and Relative Rights of
Series A 5% Cumulative Convertible
Redeemable Preferred Stock
(Under Section 78.195 of the General Corporation Law
of the State of Nevada)
It is hereby certified that:
I. The name of the corporation is GRAND TOYS INTERNATIONAL, INC. (the
"Corporation").
II. Set forth hereinafter is a statement of the voting powers, preferences,
limitations, restrictions and relative rights of shares of Series A 5%
Cumulative
Convertible Redeemable Preferred Stock hereinafter designated, as contained in
a
resolution of the Board of Directors of the Corporation, pursuant
to a provision of the Articles of Incorporation of the Corporation permitting
the issuance of said Series A 5% Cumulative Convertible Redeemable Preferred
Stock by resolution of the Board of Directors:
1. Designation; Number of Shares.
The designation of said series of Preferred Stock shall be Series A 5%
Cumulative
Convertible Redeemable Preferred Stock (the "Series A Preferred Stock"). The
number of shares of Series A Preferred Stock shall be 200,000. Each share of
Series A Preferred Stock shall have a stated value equal to $5.00 per share (as
adjusted for any stock dividends, combinations or splits with respect to such
shares)(the "Stated Value").
2. Dividends.
(a) The holders of outstanding shares of Series A Preferred Stock shall be
entitled
to receive preferential dividends in cash, out of any funds of the Corporation
legally available at the time for declaration of dividends, before any dividend
or other distribution will be paid or declared and set apart for payment on any
shares of any Common Stock or other class of stock junior to the Series A
Preferred
Stock (the Common Stock and such junior stock being hereinafter collectively
the
"Junior Stock") if, as and when declared at the rate of 5% per annum on the
Stated Value per share, payable quarterly on the first day of the month
following
the end of each calendar quarter, commencing on April 1, 1999.
(b) The dividends on the Series A Preferred Stock at the rates provided above
shall be cumulative whether or not earned, so that if at any time full
cumulative
dividends at the rate aforesaid on all shares of the Series A Preferred Stock
then outstanding from the date from and after which dividends thereon are
cumulative to the end of the quarterly dividend period next preceding such time
shall not have been paid or declared and set apart for payment, or if the full
dividend on all such outstanding Series A Preferred Stock for the then current
dividend period shall not have been paid or declared and set apart for payment,
the amount of the deficiency shall be paid or declared and set apart for payment
(but without interest thereon) before any sum shall be set apart for or applied
by the Corporation or a subsidiary of the
Corporation to the purchase, redemption or other acquisition of any shares of
any other class of stock and
before any dividend or other distribution shall be paid or declared and set
apart
for payment on any Junior Stock and before any sum shall be set aside for or
applied to the purchase, redemption or other acquisition of Junior Stock.
(c) Dividends on all shares of the Series A Preferred Stock shall begin to
accrue
and be cumulative from and after the date of issuance thereof. A dividend
period
shall be deemed to commence
on the day following a quarterly dividend payment date herein specified and to
end
of the next succeeding quarterly dividend payment date herein specified.
3. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding-up of the Corporation, whether
voluntary or involuntary, the holders of the Series A Preferred Stock shall be
entitled to receive, after any required payment or distribution shall be made
on the Series A Preferred Stock, but before any payment or
distribution shall be made on the Junior Stock, out of the assets of the
Corporation available for distribution to stockholders, the Stated Value per
share
of Series A Preferred Stock and all accrued and unpaid dividends to and
including
the date of payment thereof. Upon the payment in full of all amounts
due to holders of the Series A Preferred Stock, the holders of the Common Stock
of the Corporation and any other class of Junior Stock shall receive all
remaining
assets of the Corporation legally available for
distribution. If the assets of the Corporation available for distribution to
the
holders of the Series A Preferred Stock shall be insufficient to permit payment
in full of the amounts payable as aforesaid to the
holders of Series A Preferred Stock upon such liquidation, dissolution or
winding-up, whether voluntary or involuntary, then all such assets of the
Corporation shall be distributed, to the exclusion of the holders of
shares of Junior Stock, ratably among the holders of the Series A Preferred
Stock.
(b) Neither the purchase nor the redemption by the Corporation of shares of any
class of stock, nor the merger or consolidation of the Corporation with or into
any other corporation or corporations, nor the sale or transfer by the
Corporation
of all or any part of its assets, shall be deemed to be a liquidation,
dissolution
or winding-up of the Corporation for the purposes of this paragraph 3.
Holders of the Series A Preferred Stock shall not be entitled, upon the
liquidation,
dissolution or winding-up of the Corporation, to receive any amounts with
respect to such stock other than the amounts referred
to in this paragraph 3.
4. Conversion into Common Stock. Shares of Series A Preferred Stock shall have
the
following conversion rights and obligations:
(a) Subject to the further provisions of this paragraph 4, each holder of
shares of Series A Preferred Stock shall have the right, from time to time
commencing on and after January 1, 2000 (the "Conversion Commencement Date"), to
convert some or all such shares into fully paid and non-assessable
shares of Common Stock of the Corporation (as defined in subparagraph 4(l)
below)
determined in accordance with the Conversion Price provided in paragraph 4(e)
below; provided however, that not more than 50,000 shares of Series A Preferred
Stock may be converted into Common Stock during any six month period following
the Conversion Commencement Date and not more than 100,000 shares of Series
A Preferred Stock may be converted into Common Stock during any one year period
following the Conversion Commencement Date.
(b) Subject to the further provisions of this paragraph 4, the Corporation shall
have the right to cause each holder of shares of Series A Preferred Stock to
convert all or such portion of such
shares into fully paid and non-assessable shares of Common Stock of the
Corporation
at the Conversion Price during the thirty day period following the date on
which
the Closing Bid Price equals or exceeds
140% of the Stated Value (the "Mandatory Conversion Period"). Notice of such
mandatory conversion of the Series A Preferred Stock pursuant to this paragraph
4(b) shall be given by mail or in such other manner
as may be prescribed by resolution of the Board of Directors of the Corporation
not later than the expiration of the Mandatory Conversion Period. As
applicable,
the notice shall specify the number of
shares to be converted, the date of conversion and the Conversion Price per
share.
The "Closing Bid Price" shall mean the closing bid price of the Corporation's
Common
Stock as reported by NASDAQ (or, if not reported by NASDAQ, as reported by such
other exchange or market where traded).
(c) Each share of Series A Preferred Stock shall automatically convert into
fully paid and non-assessable shares of Common Stock of the Corporation at the
Conversion Price on the fourth anniversary of the date of issuance of a share
of Series A Preferred Stock.
(d) If, on the date of conversion of any shares of Series A Preferred Stock
(the
"Evaluation Date") the Closing Bid Price shall be less than the Conversion
Price,
then within ten days after the Corporation's receipt of a notice of conversion,
the Corporation shall pay to the holder of the Series A
Preferred Stock so converted an amount of cash determined by multiplying (i) the
number of shares of Series A Preferred Stock that have been converted by (ii)
the
positive difference, if any, between (A) the Conversion Price and (B) the
Closing Bid Price on the Evaluation Date.
(e) The number of shares of Common Stock issuable upon conversion of each share
of Series A Preferred Stock shall equal (i) the Stated Value per share divided
by
(ii) the Conversion Price.
The "Conversion Price" shall be equal to $5.00 per share of Common Stock,
subject to adjustment as herein provided.
(f) The holder of any certificate for shares of Series A Preferred Stock
desiring
to convert any of such shares or whose shares where converted at the election of
the Corporation pursuant to the provisions of this paragraph 4 shall surrender
such certificate, at the principal office of any transfer
agent for said stock (the "Transfer Agent"), with a written notice of such
election
to convert (if such conversion is voluntary) such shares into Common Stock duly
filled out and executed, and if necessary under the circumstances of such
conversion, with such certificate properly endorsed for, or accompanied
by duly executed instruments of, transfer (and such other transfer papers as
said
Transfer Agent may reasonably require). The holder of the shares so surrendered
for conversion shall be entitled to receive within three (3) business days of
the
Notice of Conversion (except as otherwise provided herein) a
certificate or certificates, which shall be expressed to be fully paid and
non-assessable, for the number of shares of Common Stock to which such
stockholder shall be entitled
upon such conversion, registered in the name of such holder or in such other
name
or names as such stockholder in writing may specify. In the
case of any Series A Preferred Stock which is converted in part only, the holder
of shares of Series A Preferred Stock shall upon delivery of the certificate or
certificates representing Common Stock also receive a new share certificate
representing the unconverted portion of the shares of Series A Preferred
Stock. Nothing herein shall be construed to give any holder of shares of Series
A Preferred Stock surrendering the same for conversion the right to receive any
additional shares of Common Stock or other property which results from an
adjustment
in conversion rights under the provisions of subparagraphs (g)
or (h) of this paragraph 4 until holders of Common Stock are entitled to
receive
the shares or other property giving rise to the adjustment.
In the case of the exercise of the conversion rights set forth in paragraphs 4
(a),
the conversion privilege shall be deemed to have been exercised, and the shares
of Common Stock issuable upon such conversion shall be deemed to have been
issued,
upon the date of receipt by such Transfer Agent for conversion of the
certificate
for such shares of Series A Preferred Stock. In the case of the automatic
conversion set forth in paragraphs 4(b) and 4(c), conversion shall be deemed
to have occurred as provided in paragraphs 4(b) and 4(c). The person or entity
entitled to receive Common Stock issuable upon such conversion shall on the
date
such conversion privilege is deemed to have been exercised and thereafter be
treated for all purposes as the record holder of such Common Stock and shall on
the same date cease to be treated for any purpose as the record holder of such
shares of Series A Preferred Stock so converted.
Notwithstanding the foregoing, if the stock transfer books are closed on the
date such shares are received by the Transfer Agent, the conversion privilege
shall be deemed to have been exercised, and the person or entity shall be
treated
as a record holder of shares of Common Stock, on the next
succeeding date on which the transfer books are open. The Corporation shall not
be required to deliver certificates for shares of its Common Stock or new
certificates
for unconverted shares of its Series A Preferred Stock while the stock transfer
books for such respective classes of stock are duly closed for any
purpose; but the right of surrendering shares of Series A Preferred Stock for
conversion shall not be suspended during any period that the stock transfer
books
of either of such classes of stock are closed.
Upon the conversion of any shares of Series A Preferred Stock, no adjustment
or payment shall be made with respect to such converted shares on account of any
dividend on shares of such stock or on account of any dividend on the Common
Stock,
except that the holder of such converted shares shall be entitled to be paid any
dividends declared on shares of Common Stock after conversion thereof.
If the Corporation shall at any time be liquidated, dissolved or wound-up, the
conversion privilege shall terminate at the close of business on the last
business day next preceding the effective date
of such liquidation, dissolution or winding-up.
The Corporation shall not be required, in connection with any conversion of
Series A Preferred Stock, to issue a fraction of a share of its Common Stock nor
to deliver any stock certificate representing a fraction thereof, but in lieu
thereof the Corporation may make a cash payment equal to such
fraction multiplied by the Closing Bid Price on the date the conversion right
was triggered.
(g) The Conversion Rate shall be subject to adjustment from time to time as
follows:
(i) In case the Corporation shall at any time (A) declare any dividend or
distribution on its Common Stock or other securities of the Corporation other
than the Series A Preferred Stock, (B) split or subdivide the outstanding Common
Stock, (C) combine the outstanding Common Stock into a smaller number of shares
or (D) issue by reclassification of its Common Stock any shares or other
securities of the Corporation,
then, in each such event, the Conversion Rate shall be adjusted proportionately
so that the holders of Series A Preferred Stock shall be entitled to receive the
kind and number of shares or other securities of the Corporation which such
holders
would have owned or have been entitled to receive after the happening of any of
the events described above had such
shares of Series A Preferred Stock been converted immediately prior to the
happening
of such event (or any record date with respect thereto). Such adjustment shall
be made whenever any of the events listed above shall occur. An adjustment made
to the Conversion pursuant to this paragraph 4(g)(i) shall become effective
immediately after the effective date of the event retroactive to the record
date, if any, for the event.
(h) (i) In case of any consolidation or merger of the Corporation with or into
any other corporation (other than a merger or consolidation in which the
Corporation is the surviving or continuing corporation and which does not result
in any reclassification, conversion or change of the outstanding shares of
Common
Stock), then, unless the right to convert shares of Series A Preferred Stock
shall
have terminated, as part of such consolidation or merger, lawful provision
shall be made so that holders of Series A
Preferred Stock shall thereafter have the right to convert each share of Series
A Preferred Stock into the kind and
amount of shares of stock and/or other securities or property receivable upon
such
consolidation or merger by a holder of the number of shares of Common Stock into
which such shares of Series A Preferred Stock might have been converted
immediately prior to such consolidation or merger. Such provision shall also
provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in paragraph (g) of this paragraph 4. The foregoing
provisions of this paragraph 4(h) shall similarly apply
to successive consolidations and mergers.
(ii) In case of any sale or conveyance to another person or entity of the
property
of the Corporation as an entirety, or substantially as an entirety, in
connection
with which shares or other securities or cash or other property shall be
issuable,
distributable, payable or deliverable for outstanding shares of Common Stock,
then,
unless the right to convert such shares shall have terminated, lawful provisio
shall be made so that the holders of Series A Preferred Stock shall thereafter
have
the right to convert each share of the Series
A Preferred Stock into the kind and amount of shares of stock or other
securities
or property that shall be issuable, distributable, payable or deliverable upon
such
sale or conveyance with respect to each share of Common Stock immediately prior
to such conveyance.
(i) Whenever the number of shares to be issued upon conversion of the Series A
Preferred Stock is required to be adjusted as provided in this paragraph 4, the
Corporation shall forthwith compute the adjusted number of shares to be so
issued
and prepare a certificate setting forth such adjusted
conversion amount and the facts upon which such adjustment is based, and such
certificate shall forthwith be filed with the Transfer Agent for the Series A
Preferred Stock and the Common Stock; and the
Corporation shall mail to each holder of record of Series A Preferred Stock
notice of such adjusted conversion price.
(j) In case at any time the Corporation shall propose:
(i) to pay any dividend or distribution payable in shares upon its Common Stock
or make any distribution (other than cash dividends) to the holders of its
Common Stock; or
(ii) to offer for subscription to the holders of its Common Stock any
additional shares of any class or any other rights; or
(iii) any capital reorganization or reclassification of its shares, or the
consolidation or merger of the Corporation with another corporation; or
(iv) the voluntary dissolution, liquidation or winding-up of the Corporation;
then, and in any one or more of said cases, the Corporation shall cause at least
fifteen (15) days prior notice of the date on which (A) the books of the
Corporation
shall close, or a record be taken for such stock dividend, distribution or
subscription rights, or (B) such capital reorganization, reclassification,
consolidation, merger, dissolution, liquidation or winding-up shall take place,
as the case may be, to be mailed to the Transfer Agent for the Series A
Preferred Stock and for the Common Stock and to the
holders of record of the Series A Preferred Stock.
(k) So long as any shares of Series A Preferred Stock shall remain outstanding
and the holders thereof shall have the right to convert the same in accordance
with provisions of this paragraph 4, the Corporation shall at all times reserve
from the authorized and unissued shares of its Common Stock a
sufficient number of shares to provide for such conversions.
(l) The term "Common Stock" as used in this paragraph 4 shall mean Common Stock
of the Corporation as such stock is constituted at the date of issuance thereof
or as it may from time to
time be changed, or shares of stock of any class, other securities and/or
property
into which the shares of Series A Preferred Stock shall at any time become
convertible pursuant to the provisions of this paragraph 4.
(k) The Corporation shall pay the amount of any and all issue taxes which may be
imposed in respect of any issue or delivery of stock upon the conversion of any
shares of Series A Preferred Stock, but all transfer taxes that may be payable
in respect of any change of ownership of Series
A Preferred Stock, or any rights represented thereby, or of stock receivable
upon
conversion thereof, shall be paid by the person or persons surrendering such
stock for conversion.
5. Voting Rights.
Except as required by applicable law, shares of Series A Preferred Stock shall
not entitle its holder to any voting rights, but such holder shall be entitled
to a notice of any stockholders' meeting in
accordance with the By-laws of the Corporation.
6. Status of Converted or Redeemed Stock.
In case any shares of Series A Preferred Stock shall be converted pursuant to
paragraph 4 hereof, or otherwise repurchased or reacquired, the shares so
redeemed,
converted or reacquired shall resume the status of authorized but unissued
shares
of Preferred Stock and shall no longer be designated as
Series A Preferred Stock.
Signed on this 29th day of December, 1998.
GRAND TOYS INTERNATIONAL, INC.
By:_/s/ Ronald Goldenberg_____________
Ronald Goldenberg
Vice President, Chief Financial
Officer and Secretary
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On December 29, 1998, Ronald Goldenberg personally appeared before me, a Notary
Public for the State and County aforesaid, as Vice President, Chief Financial
Officer and Secretary of GRAND TOYS INTERNATIONAL, INC., who acknowledged that
he executed the above instrument.
__/s/ Paul J. Pollock____________
Notary Public
Exhibit 10.11
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated this 30th day of December, 1998 by and between
GRAND TOYS INTERNATIONAL, INC., a Nevada corporation ("Grand"), GREAT AMERICAN
ACQUISITION CORP., a Delaware corporation ("Buyer"), and ARK FOUNDATION LLC, a
Connecticut limited liability company ("Seller") and OFER NISSIM ("Nissim").
RECITALS
WHEREAS, the Seller is engaged in the business of designing, developing,
producing,
marketing, distributing and selling
puzzles and puzzle related products to merchandisers; and
WHEREAS, the Seller desires to sell to the Buyer, and the Buyer desires to
purchase
from the Seller, the Assets owned by the Seller and used in connection with the
Business.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants,
representations, warranties and agreements hereinafter set forth, the parties
hereto agree as follows:
ARTICLE I.
DEFINITIONS
1.1. Definitions: When used herein, the following terms shall have the meanings
set forth below:
"Acquisition Proposal" shall have the meaning set forth in Section 6.2.
"Affiliate" shall mean, with respect to any given Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control
with, such Person. The term "control" (including, with correlative meaning, the
terms "controlled by" and
"under common control with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction
of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise.
"Assets" shall have the meaning set forth in Section 2.1(a).
"Assumed Liabilities" shall have the meaning set forth in Section 2.4(a).
"Balance Sheet" shall have the meaning set forth in Section 4.5(a).
"Benefit Arrangements" shall have the meaning set forth in Section 4.15.
"Business" shall have the meaning set forth in the recitals.
"Cash" shall mean cash and cash equivalents (including marketable securities and
short term investments).
"CERCLA" shall have the meaning set forth in Section 4.9(c).
"Closing" shall have the meaning set forth in Article III.
"Closing Date" shall have the meaning set forth in Article III.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and any
successor statute thereto.
"Contract" shall mean any contract, agreement, lease, license, arrangement,
commitment, sales order, purchase order or any claim or right or any benefit or
obligation arising thereunder or resulting therefrom and currently in effect,
whether oral or written.
"Employee Benefit Plan" shall mean any (i) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan,
(ii) qualified defined contribution
retirement plan or arrangement which is an Employee Pension Benefit Plan,
(iii) qualified defined benefit retirement plan or arrangement which is an
Employee Pension Benefit Plan (including any Multiemployer
Plan), or (iv) Employee Welfare Benefit Plan or material fringe benefit plan or
program.
"Employee Pension Benefit Plan" shall have the meaning set forth in ERISA
Section
3(2).
"Employee Welfare Benefit Plan" shall have the meaning set forth in ERISA
Section
3(1).
"Environmental, Health and Safety Requirements" shall mean all federal, state,
local and foreign statutes, regulations, ordinances and other provisions having
the force or effect of law, all judicial
and administrative orders and determinations, all contractual obligations and
all common law concerning
public health and safety, worker health and safety, and pollution or protection
of the environment,
including without limitation all those relating to the presence, use, production
generation, handling, transportation, treatment, storage, disposal, distribution
labeling, testing, processing, discharge, release,
threatened release, control, or cleanup of any hazardous materials, substances
or wastes, chemical
substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals,
petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or
radiation, each as amended and as now or
hereafter in effect.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the United States Securities Exchange Act of 1934, as
amended.
"Excluded Assets" shall have the meaning set forth in Section 2.1(b).
"Excluded Liabilities" shall have the meaning set forth in Section 2.4(b).
"First Payment" shall have the meaning set forth in Section 2.2(b).
"GAAP" shall mean generally accepted accounting principles in the United States
as of the date of this Agreement consistently applied.
"Grand Common Stock" shall mean the Common Stock of Grand, par value US$.001
per share.
"Grand Shares" shall have the meaning set forth in Section 2.2(a).
"Indemnitees" shall have the meaning set forth in Article IX.
"Indemnitors" shall have the meaning set forth in Article IX.
"Intellectual Property" shall mean any and all (i) inventions (whether
patentable or unpatentable
and whether or not reduced to practice), all improvements thereto, and all
patents, patent applications, and patent disclosures, together with all
reissuances, continuations,
continuations-in-part, revisions, extensions,
and reexaminations thereof, (ii) trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all
goodwill associated therewith, and all applications, registrations, and renewals
in connection therewith, (iii) copyrightable works, all copyrights, and all
applications,
registrations, and renewals in connection
therewith, (iv) mask works and all applications, registrations, and renewals in
connection therewith, (v) trade secrets and confidential business information
(including ideas, research and development, know-how,
formulas, compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, blueprints, sketches, storyboards, models,
engineering drawings, specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals), (vi) computer software (including data and related
documentation),
(vii) other proprietary rights and know-how, (viii)
copies and tangible embodiments of any of the foregoing (in whatever form or
medium)
and (ix) licenses and sublicenses granted and obtained with respect thereto, and
rights thereunder. "Knowledge" (including the phrase "the best of the knowledge
of") shall mean the actual
knowledge after due inquiry of the Person to whom it is attributed.
"Liabilities" shall mean any direct or indirect liability, indebtedness, claim,
loss, damage, deficiency, obligation or responsibility, fixed or unfixed, choate
or inchoate, liquidated or unliquidated, secured or unsecured, accrued, absolute
known or unknown, contingent or otherwise.
"Lien" shall mean any mortgage, lien, pledge, charge, security interest, license
lease, claim, restriction, option, conditional sale or installment Contract or
encumbrance of any kind. "Loss" shall have the meaning set forth in Article IX.
"Material Adverse Effect" shall mean a material adverse effect on the business,
operations, assets (including as applicable the Assets), Liabilities, condition
(financial or otherwise), results of operations or
prospects on the Seller or Grand, as the case may be.
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"Person" shall include an individual, a partnership, a corporation, or a
division
or business unit thereof, a limited liability company, a trust, an
unincorporated
organization, a government or any department or agency thereof and any other
entity.
"Purchase Price" shall have the meaning set forth in Section 2.2(a).
"Secured Note" shall have the meaning set forth in 2.2(a).
"Securities Act" shall mean the United States Securities Act of 1933, as
amended.
"Taxes" or "Tax" shall mean all taxes including without limitation income, gross
receipts, ad valorem, excise, value-added, sales, use, transfer, franchise,
license, stamp, occupation, withholding, employment, payroll, property or
environmental tax or premium, together with any interest, penalty,
addition to tax or additional amount imposed by any governmental body or
authority.
"Third Party Action" shall have the meaning set forth in Article IX.
1.2 Accounting Terms. Unless specifically defined herein, accounting terms
shall
have the meaning specified by GAAP.
ARTICLE II.
PURCHASE AND SALE OF ASSETS
AND ASSUMPTION OF OBLIGATIONS
2.1. Purchase and Sale of Seller's Assets; Excluded Assets.
(a) Upon the terms and subject to the conditions of this Agreement, on the
Closing
Date, Seller shall sell, transfer, convey, assign and deliver to Buyer, and
Buyer
shall purchase, acquire and accept from Seller, all of Seller's right, title and
interest in and to all of its properties, assets, Contracts,
business, goodwill and rights of the Seller as a going concern, of every kind,
nature,
character and description, tangible and intangible, wherever located and whether
or not carried or reflected on the books
and records of Seller on the Closing Date, including, without limitation the
following
(the "Assets"):
(1) all Intellectual Property and all proprietary rights in and to products
owned or licensed by the Seller;(2) all real property, leaseholds and
subleaseholds therein and improvements,
fixtures, and fittings thereon;
(3) all work in process, raw materials, finished goods, goods in transit,
shipping
and packing materials and other tangible personal property (such as machinery,
equipment, inventories of raw materials and supplies, manufactured and purchased
parts, furniture and automobiles);
(4) all Contracts to which the Seller is a party;
(5) all accounts, notes and other receivables and other claims for money or
other obligations due, including barter credits;
(6) all claims, deposits, prepayments, refunds, causes of action, choices in
action, rights of recovery, rights of set off, and rights of recoupment
(including
any such item relating to the payment of Taxes);
(7) all franchises, approvals, permits, licenses, orders, registrations,
certificates,
variances, and similar rights obtained from governments and governmental
agencies;
(8) originals of all books, records, ledgers, files, documents, correspondence,
lists, plats, architectural plans, drawings, and specifications, creative
materials,
advertising and promotional materials, studies, reports, and other printed or
written materials;
(9) all Cash;
(10) all records, documents, files, existing computer print-outs and other
material
owned by or in the possession or under the control of Seller;
(11) all goodwill relating to Seller's Assets, including Seller's corporate name
and all variations thereof;
(12) all personal property of the Seller, including the property listed on
Schedule
2.1(a); and
(13) any other asset of Seller in respect of which there is an Assumed
Liability.
The Assets shall be conveyed free and clear of all Liabilities and Liens,
except the Assumed Liabilities.
(b) Notwithstanding the foregoing, the Assets shall not include (i) the
certificate
of formation, arrangements with registered agents relating to foreign
qualifications, taxpayer and other
identification numbers, seals, minute books or other documents relating to the
organization, maintenance,
and existence of the Seller as a limited liability company or (ii) any of the
rights of the Seller under this
Agreement or any other Contract executed by the Seller in connection with this
Agreement (the "Excluded Assets").
2.2. Consideration; Payment; Allocations.
(a) The consideration for the Assets (the "Purchase Price") will be
US$2,500,000 consisting of the following:
(i) a number of shares of Grand Preferred Stock (the "Grand Shares") having a
stated value of US$1,000,000, the terms and rights of the Grand Shares are set
forth in the Certificate of Designation, in the form of Exhibit A; and
(ii) the issuance by the Buyer to the Seller of an Interest Bearing
Subordinated
Promissory Note, in the form of Exhibit B (the "Secured Note"), in the aggregate
principal amount of US$1,500,000, which shall bear interest at the rate of 5.76%
per annum from Closing through June 1, 1999. Thereafter, the Secured Note shall
bear interest at a rate of 9.76% per annum until
delivery by Buyer of the First Payment. Interest on the unpaid principal of the
Note shall be reduced to 5.76% per annum upon delivery of the First Payment by
Buyer. Interest shall be payable quarterly for receipt on or before the first
day of the
month after the end of each calendar quarter, commencing April 1, 1999. The
Secured Note shall be secured by a pledge of 375,000
shares of Grand Common Stock pursuant to a Stock Pledge Agreement in the form of
Exhibit C.
(b) The Purchase Price shall be paid as follows:
(i) At the Closing, the Buyer shall deliver the Secured Note to the Seller. The
Secured Note shall be paid in three equal installments. The initial installment
of US$500,000 (the "First Payment") on the Secured Note shall be due and payable
upon receipt by the by Buyer or its Affiliates or licensees, subsidiaries,
transferees, agents or any other member of the Grand Group of a minimum of
an aggregate total of US$3,000,000 in orders for goods or products acquired or
derived from Seller's Assets (the "Goods"). The second installment of
US$500,000
shall be due and payable on the six month anniversary of the First Payment. The
third and final installment of US$500,000 shall be due and payable on the nine
month anniversary of the First Payment.
(ii) At the Closing, Grand shall deliver the certificate representing
US$1,000,000
in value of the Grand Shares to the Seller.
(c) The Purchase Price shall be allocated in accordance with a schedule prepared
by the Buyer on a reasonable basis in accordance with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated thereunder and approved by the Seller, which
approval shall not be unreasonably withheld or delayed. The Buyer and the
Seller
shall prepare their respective foreign, federal, state and local Tax returns in
a manner consistent with such allocation. Within
thirty (30) days of the Closing, Buyer will prepare an allocation of the
Purchase
Price among the Assets.
Seller agrees to report this transaction for all purposes consistent with such
allocation, including the filing
of Form 8594, which shall be filed shortly thereafter.
2.3. Instruments of Conveyance and Transfer.
At the Closing, the Seller shall deliver to the Buyer (i) the instruments of
transfer listed in Article
VII and such other good and sufficient instruments of conveyance and transfer,
in form reasonably
satisfactory to the Buyer and Grand as shall be effective to vest in the Buyer
all right, title and interest in
the Assets, subject to no Liens, and (ii) originals of all of the Contracts,
books, records and other data
relating to the Assets and, simultaneously with such delivery, shall deliver to
the Buyer actual possession
and control of the Assets.
2.4. Assumption of Certain Obligations; Excluded Liabilities.
(a) Upon the terms and subject to the conditions of this Agreement, on the
Closing
Date, the Buyer shall assume, pay, perform and discharge the following
Liabilities
of the Seller (the "Assumed Liabilities"):
(1) The Liabilities of Seller set forth on Schedule 2.4(a) other than any
Excluded
Liabilities; and
(2) all obligations of Seller under the Contracts (i) to furnish goods and
services
to another Person after the Closing or (ii) to pay for goods or services that
another Person will
furnish to it after the Closing.
(b) The Buyer shall not be obligated with respect to any of the Assumed
Liabilities
except to the extent that it constitutes a valid and legally enforceable claim
against the Seller. Buyer shall
indemnify Seller against any claim or demand for payment of the Assumed
Liabilities
as provided in Article IX. Except for the Assumed Liabilities and as otherwise
specifically provided for in this Agreement, the
Buyer is not assuming any other Liabilities of Seller (the "Excluded
Liabilities").
2.5. Assignment of Contracts. Anything in this Agreement to the contrary
notwithstanding, this Agreement shall not constitute an agreement to assign any
Contracts, or any benefit arising thereunder
or resulting therefrom, if an attempted assignment thereof, without the consent
of a third Person thereto,
would constitute a material breach thereof or in any way materially affect the
rights of the Buyer or the
Seller thereunder. If such consent is not obtained, or if an attempted
assignment
thereof would be ineffec-
tive or would materially affect the rights of the Buyer or the Seller, the
Seller
shall cooperate with the
Buyer in any arrangement designed to provide for the Buyer enjoyment of the
benefits under any such
Contracts, including, without limitation, enforcement for the benefit of the
Buyer
of any and all rights of
the Seller under such Contracts.
2.6. Further Assurances. From time to time after the Closing, the Seller shall
execute and
deliver such other instruments of transfer and documents related thereto and
take
such other action as the
Buyer may reasonably request in order to more effectively transfer to the
Buyer,
and to place the Buyer in
possession and control of, the Assets, or to enable the Buyer to exercise and
enjoy all rights and benefits of
the Seller with respect thereto. The Buyer shall take such actions as the
Seller
may reasonably request in
order to assure the Buyer's assumption of the Assumed Liabilities.
2.7. Future Discovery of Assets.
(a) If, at any time following the Closing Date, the Seller locates or discovers
any Assets,
other than Excluded Assets, that were not transferred to the Buyer on the
Closing
Date, the Seller and
Nissim agree to promptly notify the Buyer of such location or discovery and to
take all such action necessary to deliver actual possession and control of such
Assets as provided in Section 2.6.
(b) Seller and Buyer each agree to use their respective commercially reasonable
best efforts to take or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable to consummate and make effective
as promptly as practicable, the transactions contemplated
by this Agreement and to cooperate with the other in connection with the
foregoing,
including using its
best efforts (i) to obtain all necessary waivers, consents and approvals from
other parties to contracts and
lease assignments, (ii) to obtain all consents, approvals and authorizations
that are required to be obtained
under any law, (iii) to lift or rescind any order adversely affecting the
ability of the parties hereto to consummate the asset purchase, (iv) to effect
all necessary registrations, filings
and submissions of
information required or requested by governmental authorities, and (v) to
fulfill
all conditions to this Agreement. Seller and Buyer further covenant and agree
to use their respective
reasonable best efforts to
prevent the entry, enactment or promulgation of any pending order or law that
would adversely effect the
ability of the parties to consummate the transactions contemplated by this
Agreement.
ARTICLE III.
CLOSING
The closing (the "Closing") of the transactions contemplated hereby shall be
held at the offices of
Piper & Marbury L.L.P., 1251 Avenue of the Americas, New York, New York 10020,
at 10:00 A.M.,
local time, on December 30, 1998 or within five (5) days after the conditions
contained in Article VII have
been satisfied or waived or at such other place and time as may be agreed upon
by the parties hereto. The time and date of the Closing is referred to herein
as the "Closing Date". At the Closing, in addition to the
sale and transfer of the Assets, there shall be delivered by the parties hereto
such certificates, opinions and other documents as are specified in article VII
hereof.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND NISSIM
The Seller and Nissim represent and warrant to, and agree with, the Buyer and
Grand as follows:
4.1. Organization.
(a) The Seller is a limited liability company duly formed, validly existing and
in good standing under the laws of the State of Connecticut. The Seller has all
requisite power and authority to own, lease and operate its properties and to
carry on its business as now being conducted. The Seller is
duly qualified to do business and is in good standing as a foreign limited
liability company in the jurisdictions set forth on Schedule 4.1, which
jurisdictions constitute the only jurisdictions in which the
property owned, leased or operated by Seller or the nature of the business
conducted by it makes such
qualification necessary. The Seller has heretofore delivered to Buyer true,
accurate and complete copies of
the Articles of Organization and Operating Agreement of Seller as in effect on
the date hereof and minutes
of all meetings of the members of the Seller held through and including the date
of this Agreement. The
Seller is not in violation of any of the provisions of its Articles of
Organization
or Operating Agreement.
(b) The Seller does not have any subsidiaries or Affiliated entities and does
not
otherwise own any shares of stock or any interest in, or control, any other
Person.
4.2. Capitalization. All of the issued and outstanding membership interests of
the Seller are
owned beneficially and of record by Nissim free and clear of all liens, claims,
pledges or other
encumbrances of any kind. As the case may be, all issued and outstanding
membership interests of the Seller are duly authorized, validly issued, fully
paid,
nonassessable and free of preemptive rights and any Liens. There are no other
convertible securities, options, warrants, subscription calls or other rights or
agreements, arrangements or commitments obligating the Seller to issue, transfer
or sell any securities of
the Seller. None of such issued and outstanding membership interests are the
subject of any voting trust
agreement or other agreement relating to the voting thereof or restricting in
any way the sale or transfer thereof.
4.3. Authority Relative to this Agreement. The Seller has full power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the
consummation of the transactions contemplated hereby have been duly
and validly authorized by the sole member of the Seller. No other proceedings
on the part of Seller are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by the Seller and Nissim and constitutes the
valid and binding agreement of Seller and Nissim, enforceable against each of
them in accordance with its terms.
4.4. No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by the Seller and Nissim, as
the
case may be, does not, and the consummation of the transactions contemplated
hereby will not, (i) conflict with
or violate any law, regulation, court order, judgment or decree applicable to
Seller or by which the Assets
are bound or affected, (ii) violate or conflict with the Articles of
Organization of the Seller, or (iii) result in
any breach of or constitute a default (or an event which with notice or lapse
of time or both would become
a default) under, or give to others any rights of termination or cancellation of
, or result in the creation of a Lien on any of the Assets pursuant to any
Contract, permit, license or franchise to which Seller, Nissim or
any of the Assets is bound or affected, except for conflicts, violations,
breaches or defaults which, in the
aggregate, would not have a Material Adverse Effect on Seller, Nissim or the
Assets.
(b) The Seller is not required to submit any notice, report or other filing with
any governmental authority, domestic or foreign, in connection with the
execution,delivery or performance of this Agreement. No waiver, consent,
approval or
authorization of any Person or any governmental or
regulatory authority, domestic or foreign, is required to be obtained or made by
Seller in connection with
the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
4.5. Balance Sheet; No Undisclosed Liabilities.
(a) The Seller has previously delivered to the Buyer and Grand, and Schedule
4.5(a)
contains the trial balance sheet of the Seller as of July 31, 1998 (the
"Balance Sheet"). Except as described
in Schedule 4.5(a), the Balance Sheet (x) was prepared in accordance with GAAP
applied on a consistent basis, (y) is in accordance with the books and records
of
the Seller and (z) present fairly the financial
position and results of operations of the Seller at the dates and for the
periods
to which it relates. Except as described in Schedule 4.5(a), the Seller 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
Balance Sheet were, correct and complete in all material respects, fairly and
accurately reflect and reflected
the income, expenses, Assets and Liabilities of the Seller and provide and
provided a fair and accurate basis
for the preparation of the Balance Sheet of the Seller.
(b) To the best of Seller's knowledge, except as disclosed in Schedule 2.4(a) or
incurred in the ordinary course of business since July 31, 1998 (the "Balance
Sheet Date"), (i) the Seller has no liabilities or obligations material to its
business or condition (financial or otherwise), whether accrued,
absolute, contingent or otherwise and (ii) the Seller owns the properties and
assets reflected in the Balance
Sheet free and clear of any liens, charges, pledges, security interests or other
encumbrances, other than
those which could not reasonably be expected, individually or in the aggregate,
to have a Material Adverse
Effect on the business, assets or financial condition of the Seller taken as a
whole.
4.6. Absence of Certain Changes. Except as set forth on Schedule 4.6, Since
July 31, 1998
the business of the Seller has been conducted only in the ordinary course
consistent with past practice, and
there have not been any events, changes or developments that have had or could
reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect on the
business, assets or financial
condition of the Seller or materially impair the consummation of the
transactions contemplated hereby or
Buyer's ability thereafter to operate the business of the Seller.
4.7. Entire Business; Certain Affiliate Transactions. Except as set forth in
Schedule 4.7, no
portion of the business of the Seller is conducted by Nissim or any member,
manager, officer or employee
of the Seller or their respective Affiliates and all of the Assets necessary for
or used by the Seller in the
conduct of the Seller's business as presently conducted are owned by the Seller.
Except as set forth in Schedule 4.7, all such Assets are exclusively owned or
leased and used by the Seller and not by Nissim or
any manager, member, officer or employee of the Seller or their respective
Affiliates. Schedule 4.7 lists all
Contracts between the Seller, on the one hand, and its officers, managers or
employees and their respective
Affiliates, on the other hand.
4.8. Litigation; Product Liability.
(a) No investigation or review by any governmental entity or regulatory body,
foreign or domestic, with respect to the Seller is pending or, to the knowledge
of the Seller or Nissim, threatened
against the Seller or Nissim, and no governmental entity or regulatory body has
advised the Seller or
Nissim of an intention to conduct the same. Except as set forth in Schedule 4.8
there is no claim, action,
suit, investigation or proceeding pending or, to the knowledge of the Seller or
Nissim, threatened against
or affecting the Seller at law or in equity or before any federal, state,
municipal or other governmental
entity or regulatory body, or which challenges the validity of this Agreement or
any action taken or to be
taken by the Seller pursuant to this Agreement. As of the date hereof, the
Seller is not subject to, nor is
there in existence, any outstanding judgment, award, order, writ, injunction or
decree of any court,
governmental entity or regulatory body relating to Seller.
(b) The Seller does not have any Liability (and there is no basis for any
present or future
action, suit, proceeding, hearing, investigation, charge, complaint, claim, or
demand against either of them
giving rise to any Liability) arising out of any injury to individuals or
property as a result of the ownership,
possession, or use of any product manufactured, sold, leased, licensed or
delivered by the Seller not
covered within the liability limitations of the Seller's insurance policies
currently in force and effect.
4.9. Compliance With Law; Environmental Matters.
(a) The Seller is not in violation of any applicable statute, rule, regulation,
decree or order of any governmental entity applicable to it. Without limiting
the foregoing, (i) the business of Seller
is being conducted in compliance with applicable Environmental, Health and
Safety Requirements and (ii)
there has been no material release at any location of any hazardous substance
generated by Seller or, to the
knowledge of the Seller and Nissim, any other Person. Seller holds all licenses,
permits and authorizations
necessary for the conduct of its business as presently conducted.
(b) Seller has not installed or operated and, to the best of the Seller's and
Nissim's knowledge, none of the following exists at any property or facility
owned or operated by the Seller: (i)
underground storage tanks, (ii) asbestos-containing material in any form or
condition, (iii) materials or
equipment containing polychlorinated biphenyls or (iv) landfills, surface
impoundments or disposal areas.
(c) Except as set forth on Schedule 4.9, neither the Seller nor to the best of
Seller's or
Nissim's knowledge, its predecessors has treated, stored, disposed of, arranged
for or permitted the
disposal of, or transported, handled, or released any substance, including
without limitation any hazardous
substance, or owned or operated any property or facility (and no such property
or facility is contaminated
by any such substance) in a manner that has given or would give rise to
Liabilities, including any Liability
for response costs, corrective action costs, personal injury, property damage,
natural resources damages or
attorney fees, pursuant to the Comprehensive Environmental Response,Compensation
and Liability Act of
1980, as amended ("CERCLA"), the Solid Waste Disposal Act, as amended ("SWDA")
or any other Environmental, Health and Safety Requirements.
(d) No facts, events or conditions relating to the past or present facilities,
properties or operations of the Seller or to the best of Seller's and Nissim's
knowledge its predecessors, will prevent,
hinder or limit continued compliance with Environmental, Health and Safety
Requirements, give rise to any
investigatory, remedial or corrective obligations pursuant to Environmental,
Health and Safety
Requirements, or give rise to any other Liabilities pursuant to Environmental,
Health, and Safety Requirements.
4.10. Contracts. Seller has heretofore furnished to Buyer and Grand a complete
and correct list
of all Contracts, written or oral, to which Seller is a party or by which it or
any of its properties or Assets
are bound. Seller has delivered or made available to Buyer and Grand complete
and correct copies of all
Contracts. Except as set forth on Schedule 4.10, all such Contracts are in full
force and effect, all parties
thereto have performed all obligations required to be performed by them to date
and no parties are in
default in any material respect thereunder. No written claim of default by any
party has been made or is
now pending under any such Contract, and, to the best of Seller's and Nissim's
knowledge, no event has
occurred and is continuing that with notice or the passing of time or both would
constitute a material
default thereunder or would excuse performance by any party thereto. No such
Contract could reasonably
be expected, individually or in the aggregate, to have a Material Adverse Effect
on the business, assets or
financial condition of the Seller.
4.11. Tax Matters. The Seller has timely filed all federal, state, local,
foreign and other Tax
returns and reports required to be filed by it for all taxable periods ending on
or before the date hereof, and
all such returns and reports (including any accompanying schedules or materials)
were and are true,
complete and correct in all respects. All federal, state, local and foreign
taxes including, without limitation,
income, unincorporated business, gross receipts, franchise, profits, property,
capital, intangibles, employ-
ment, payroll, sales, use, occupation, excise or other taxes, fees, stamp taxes,
duties, penalties, assess-
ments, governmental charges or other payments for all periods up to and
including the date hereof have
been duly paid, withheld in accordance with law or have been adequately reserved
for and will be paid
when due. The Seller has not executed or filed with the Internal Revenue
Service or any other taxing
authority any agreement or other document extending or having the effect of
extending the period for
assessment or collection of any Taxes, other than an extension which was timely
made and the returns
timely filed upon the expiration of the applicable extension. The Seller has
not executed or entered into a
closing agreement pursuant to Section 7121 of the Code or any similar provision
of state, local or foreign
law. There are no Tax audits or investigations pending with respect to the
Seller, and the Seller has not
received any notice of the commencement of any such audit or investigation.
There is no Tax deficiency proposed against the Seller, and neither the Seller
nor Nissim has received any notice from any taxing
authority in connection with such Seller's returns or reports, except as set
forth in Schedule 4.11. There
are no Tax Liens (other than for Taxes not yet due and payable) imposed by any
federal, state, local or
foreign authority outstanding against any of the Assets of the Seller. No
Person currently holds, with respect to Tax returns filed, powers of attorney
from the Seller, except as specified in Schedule 4.11.
None of the Assets is pursuant to "tax-exempt use property" within the meaning
of Section 168(h) of the
Code. Treas. Reg. Section 301.7701-3(b)(1)(i), Seller is properly treated, for
Federal tax purposes, as a
disregarded entity, and neither Seller nor Nissim has taken any action
inconsistent with such characterization.
4.12. Real and Personal Property.
(a) The Seller does not own any real property. Schedule 4.12(a) lists and
describes briefly all real property leased or subleased to the Seller. The
Seller has delivered to the Buyer and Grand correct and complete copies of the
leases and subleases listed in Schedule 4.12(b).
(b) The Seller has good and marketable title to, or valid leasehold interests in
all other Assets used or held for use in the conduct of its business, including
without limitation, the Assets reflected
on the Balance Sheet or acquired after the date thereof (other than those which
have been disposed of in
the ordinary course of business since such date), free and clear of any Liens.
All of the Assets owned or
leased by the Seller are in all material respects in good condition and repair,
ordinary wear and tear
excepted, and well maintained. There are no material capital expenditures
currently contemplated or necessary to maintain the current business of the
Seller.
4.13. Intellectual Property.
(a) The Seller owns, or has the right to use pursuant to license, sublicense,
agreement, or permission, all Intellectual Property necessary for the operation
of the business of the Seller and as proposed to be conducted.
Each item of Intellectual Property owned or used by the Seller immediately
prior to the Closing hereunder will be owned or available for use by the Buyer
on identical terms and conditions immediately subsequent to the Closing
hereunder.
The Seller has taken all necessary action to maintain and protect each item of
Intellectual Property that it owns or uses.
(b) The Seller has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties in the United States, and all other
jurisdictions in which the Seller has patents issued or pending as more
particularly set forth on Schedule
4.13 and, to the knowledge of the Seller and Nissim, the Seller has never
received any charge, complaint,
claim, demand, or notice alleging any such interference, infringement,
misappropriation, or violation
(including any claim that the Seller must license or refrain from using any
Intellectual Property rights of any
third party). Except as set forth on Schedule 4.13(b), to the knowledge of the
Seller and Nissim, no third
party has interfered with, infringed upon, misappropriated, or otherwise come
into conflict with any
Intellectual Property rights of the Seller. For purposes of this Section 4.13(b)
the term Intellectual Property shall exclude clause (vii) of the definition of
Intellectual Property.
(c) Schedule 4.13(c) identifies each patent or registration which has been
issued to the
Seller with respect to any of its Intellectual Property or to any Affiliate
relating to the business conducted
by the Seller, identifies each pending patent application or application for
registration which the Seller or
any Affiliate of the Seller has made with respect to any of its Intellectual
Property, and identifies each
license, agreement, or other permission which the Seller has granted to any
third party with respect to any of its Intellectual Property. The Seller has
delivered to Grand correct and complete copies of all such
patents or registrations (as amended to date) and has made available to Grand
correct and complete copies
of all other written documentation evidencing ownership and prosecution (if
applicable) of each such item.
Schedule 4.13(c) also identifies each copyright, trademark and trade name or
unregistered copyright,
trademark and trade name used by the Seller in connection with any of its
businesses and whether such
copyright, trademark or trade name has been registered with any governmental or
regulatory body,
domestic or foreign. With respect to each item of Intellectual Property
identified in Schedule 4.13(c):
(i) the Seller possess all right, title, and interest in and to the item, free
and clear
of any Lien, license or other restriction;
(ii) the item is not subject to any outstanding injunction, judgment, order,
decree, ruling or charge;
(iii) no action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand is pending or, to the knowledge of the Seller, is threatened
which challenges the legality,
validity, enforceability, use or ownership of the item; and
(iv) Except as set forth on Schedule 4.13(c)(iv), the Seller has never agreed to
indemnify any Person for or against any interference, infringement,
misappropriation or other conflict with respect to the item;
(d) Schedule 4.13(d) identifies each item of Intellectual Property that any
Person owns and that the Seller uses pursuant to license, sublicense, agreement
or permission. The Seller has delivered
to the Buyer and Grand correct and complete copies of all such licenses,
sublicenses, agreements, and
permissions (as amended to date). With respect to each item of Intellectual
Property required to be
identified in Schedule 4.13(d):
(i) the license, sublicense, agreement, or permission covering the item is legal
valid, binding, enforceable and in full force and effect;
(ii) the license, sublicense, agreement or permission will continue to be legal,
valid, binding, enforceable and in full force and effect on identical terms
following the consummation of the transactions contemplated hereby;
(iii) no party to the license, sublicense, agreement, or permission is in breach
or default, and no event has occurred which with notice or lapse of time would
constitute a breach or
default or permit termination, modification or acceleration thereunder;
(iv) no party to the license, sublicense, agreement or permission has repudiated
any provision thereof;
(v) with respect to each sublicense, the representations and warranties set
forth
in subsections (i) through (iv) above are true and correct with respect to the
underlying license;
(vi) the underlying item of Intellectual Property is not subject to any
outstanding injunction, judgment, order, decree, ruling or charge;
(vii) no action, suit, proceeding, hearing, investigation, charge, complaint,
claim
or demand is pending or, to the knowledge of the Seller or Nissim, threatened
which challenges the
legality, validity or enforceability of the underlying item of Intellectual
Property; and
(viii) the Seller has not granted any sublicense or similar right with respect
to any such license, sublicense, agreement or permission.
(e) To the knowledge of the Seller and Nissim, Seller will not interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties
as a result of the continued operation of its business as presently conducted
and as presently proposed to be conducted.
4.14. Employee Compensation. Schedule 4.14 contains a true and complete list of
all Persons
employed by the Seller and all agents and consultants engaged by the Seller as
of the date hereof, together
with a statement as to the full amount of compensation or commissions paid or
payable to, or on behalf of,
each such Person for services rendered during the fiscal year ended December 31,
1997 and the current
aggregate base salary rate, commission rate or fee schedule for each such
Person.
On the Closing Date,
other than Liabilities incurred in the ordinary course of business consistent
with historical payments by the
Seller, the Seller will not have any outstanding Liability for payment of wages,
commissions, vacation pay
(whether accrued or otherwise), salaries, fees, bonuses, reimbursable employee
business expenses, pensions, contributions under any employee benefit plans or
any other compensation or perquisites, current
or deferred, under any labor, employment or consulting contracts, whether oral
or written. The Seller has not, because of past practices or previous
commitments with respect to its employees, consultants or
agents, established any rights on the part of such employees, consultants or
agents to receive additional compensation with respect to any period after the
Closing Date, except as and to the extent set forth in
Schedule 4.14.
4.15. Labor Matters.
(a) Grand and the Buyer have been provided with true, complete and correct
copies of,
and Schedule 4.15 sets forth a complete list of, all employment, severance,
termination, consulting, bonus,
profit sharing, percentage compensation, deferred compensation, stock purchase
or stock option plans or
other compensation plans, agreements, commitments or arrangements that the
Seller has with all present or
former directors, officers, employees, consultants or agents thereof or any of
their Affiliates (the "Benefit
Arrangements"). Except as set forth in Schedule 4.15, the Seller has not taken
any action that could be
deemed to trigger, and the consummation of the transactions contemplated hereby
will not be deemed to
trigger, any severance benefits under any of such Benefit Arrangements.
(b) Seller is not a party to, or bound by, any collective bargaining agreement,
contract
or other agreement or understanding with a labor union or labor union
organization. There is no unfair labor practice or labor arbitration proceeding
pending as to which Seller has received written notice, nor,
to the best of Seller's or Nissim's knowledge, is any such proceeding threatened
against Seller, except for
such proceedings that could not reasonably be expected, individually or in the
aggregate, to have a
Material Adverse Effect on the business, assets or financial condition of the
Seller.
4.16. Licenses, Permits and Consents; Compliance with Applicable Law.
(a) The licenses and permits set forth in Schedule 4.16 are the only licenses
and permits which individually or in the aggregate are material to the conduct
of the business of the Seller or any
employee of Seller by reason of such employee's activities on behalf of Seller
under applicable law or by
any governmental entity or regulatory body for the operation of the business of
Seller, and all of such listed
licenses and permits are in full force and effect as of the date hereof and
are transferable to the Buyer. The
Seller has not received notice and, to the knowledge of the Seller and Nissim,
there is no reason to believe,
that any appropriate authority intends to cancel or terminate any of such
licenses or permits or that valid
grounds for such cancellation or termination currently exist.
(b) The Seller is not in violation or breach of any, and the business and
operations of such Seller comply in all material respects and are being
conducted in accordance with, all governing laws,
regulations and ordinances applicable thereto and the Seller is not in violation
of or in default under, any
judgment, award, order, writ, injunction or decree of any court, arbitration
tribunal, governmental entity or regulatory body.
4.17. Insurance. Seller has heretofore furnished to Buyer a complete and
correct list of all
insurance policies maintained by or on behalf of the Seller, and has made
available to Buyer complete and
correct copies of all such policies, together with all riders and amendments
thereto. Seller has not received
written notice that any such policies are not in full force and effect. All
premiums due thereon have been paid. To the best of Seller's and Nissim's
knowledge, it has complied in all material respects with the
provisions of all such policies. The insurance provided under such policies is
and has been adequate, in the
judgment of Seller, to protect its respective asserts and properties.
4.18. Finder's Fee. There is no investment banker, broker, finder or other
intermediary which has been retained by, or is authorized to act on behalf of,
the Seller or its respective Affiliates, if any, who
might be entitled to any fee or commission from Buyer or Grand or its respective
Affiliates upon the consummation of the transactions contemplated hereby or
thereafter, except Akin Bay Company LLC,
which will be compensated by Grand in accordance with a separate agreement.
4.19. Employee Benefit Plans. The Seller does not maintain nor is it
required to contribute to any Employee Benefit Plan.
4.20. Inventory, Receivables and Payables.
(a) The Seller's inventory is in all material respects in good and merchantable
condition and usable or salable at not less than cost in the ordinary course of
business for the purpose for which it is intended. The value of all
inventory items recorded on the Balance Sheet, including finished goods, work-
in-progress and raw materials, and any reserves therefor, has been and will be
determined in accordance
with GAAP. The present quantities of all inventories are reasonable in the
present circumstances of the business of the Seller.
(b) All receivables of the Seller which are or will be reflected on the Balance
Sheet have arisen or will arise in the ordinary course of business out of bona
fide sales and deliveries of goods or other
business transactions. All receivables of the Seller are reflected properly on
its books and records, except
as set forth in Schedule 4.20, are valid receivables subject to no setoffs or
counterclaims, are current and
collectible, and will be collected in accordance with their terms at their
recorded amounts, subject only to
the reserve for bad debts set forth on the face of the Balance Sheet, which
reserve shall be consistent with past practices.
(c) Except as set forth in Schedule 4.20(c), all accounts payable (including,
without limitation, Taxes payable) reflected on the Balance Sheet and all
accounts payable of the Seller arising subsequent to the Balance Sheet Date,
have been and are being paid in the ordinary course of its business
and consistent with past practice.
4.21. Absence of Certain Business Practices. To the best of the Seller's and
Nissim's knowledge, neither the Seller, any director, member, manager, officer,
employee or agent of the Seller nor
any other Person acting on its or their behalf has, directly or indirectly,
within the past five (5) years given
or agreed to give any gift or similar benefit to any customer, supplier,
governmental employee or other
Person who is or may be in a position to help or hinder the business of the
Seller or assist the Seller in
connection with any actual or proposed transaction which (i) might subject
either of the Seller to any damage or penalty in any civil, criminal or
governmental litigation or proceeding, (ii) might have had a
Material Adverse Effect on the Seller if not given in the past or (iii) might
materially adversely affect the
condition (financial or otherwise), business, Assets, Liabilities, operations or
prospects of the Seller or
which might subject the Seller to suit or penalty in any private or governmental
litigation or proceeding if not continued in the future.
4.22. Suppliers and Customers.
(a) Schedule 4.22 sets forth a list of the names of any suppliers of significant
materials
or services with respect to the business and operations of the Seller,
indicating the contractual
arrangements for continued supply from each such supplier. Except as set forth
on Schedule 4.22(a), the
Seller and Nissim have no knowledge or information or reason to believe that any
of such suppliers has
ceased, or intends to cease, to sell goods or services to the Seller or has
substantially reduced, or intends to
substantially reduce, the sale of such goods or services either as a result of
the transactions contemplated
by this Agreement or otherwise or intends to sell such goods and services other
than on terms and condi-
tions similar to those imposed on prior sales to the Seller.
(b) Except as set forth on Schedule 4.22(b), neither the Seller nor Nissim has
any
knowledge that any of such customers has ceased, or intends to cease, to
purchase goods from the Seller
or Buyer, either as a result of the transactions contemplated hereby or
otherwise.
4.23. Product Warranties, Product Return Policies and Service Warranties.
Except as set
forth in Schedule 4.23(a), each product manufactured, sold or delivered by the
Seller has been in
conformity with all applicable contractual commitments and all express and
implied warranties, and the
Seller does not have any Liability for replacement or repair thereof or other
damages in connection
therewith. No product manufactured, sold or delivered by the Seller is subject
to any guaranty, warranty,
or other indemnity beyond the applicable standard terms and conditions of sale.
Schedule 4.23 includes
copies of the standard terms and conditions of sale or lease for the Seller
(containing applicable guaranty,
warranty and indemnity provisions). Schedule 4.23 hereto also describes all
pending and suspected claims
or demands and, to the knowledge of the Seller, threatened claims or demands
, seeking return, replacement
and/or repair of products pursuant to warranties extended by the Seller prior
to the date hereof.
4.24. Forecasts. All forward looking statements made by the Seller and Nissim
(including, but
not limited to, forecasts and projections of revenues, cash flow, income or
losses, capital expenditures, or
other financial items, management plans and objectives for future operations,
statements of future
economic performance, and statements of the assumptions underlying or relating
to any of the foregoing),
were based upon grounds which, to the best of the knowledge of the Seller and
Nissim, were reasonable
when made and were disclosed to Buyer and Grand in good faith.
4.25. Unimpaired Operation. Assuming the receipt of all consents and approvals
required for
the transfer of the Assets, upon consummation of the transactions contemplated
hereby, the Seller will have
sold, assigned, transferred and conveyed to Buyer all of the Assets used in,
held for use by or related to its
business; and the transfer of the Assets to Buyer pursuant to this Agreement
will enable Buyer to operate
the Seller's business in the same manner operated by the Seller immediately
prior to the Closing.
4.26. Securities Law Acknowledgments. The Seller acknowledges that the Grand
Shares are
being and will be offered and sold to the Seller in reliance on specific
exemptions from the registration
requirements of federal and state securities laws. The Seller and any
transferee of the Seller will not sell or
otherwise transfer the Grand Shares without registration under the Securities
Act or an exemption
therefrom, and fully understands and agrees that the Seller or any such
transferee must bear the economic
risk of holding the Grand Shares for an indefinite period of time. Except as
provided in Section 6.14, the
Seller is acquiring the Grand Shares for the Seller's own account for investment
and not with a view to
resale or distribution except in compliance with the Securities Act. The Seller
is aware that an exemption
from the registration requirements of the Securities Act pursuant to Rule 144
promulgated thereunder is
not presently available; that Grand has no obligation to make available an
exemption from the registration
requirements pursuant to such Rule 144 or any successor rule for resale of the
Grand Shares; and that even
if an exemption under Rule 144 were available, Rule 144 permits only routine
sales of securities in limited
amounts in accordance with the terms and conditions of such Rule 144. The
Seller agrees to the placement
of a legend on any certificate or other document evidencing the Grand Shares,
stating that they have not
been registered under the Securities Act (and a stop transfer order may be
placed with respect thereto).
4.27. Accuracy of Representations. The representations and warranties made by
the Seller and Nissim in this Agreement, and in any certificate or schedule
referenced hereby or attached hereto, do not
contain, and will not contain, any statement which is false or misleading with
respect to any material fact
and do not and will not omit to state a material fact required to be stated
herein or therein or necessary in
order to make the statements contained herein or therein not materially false or
misleading. There is no
material fact or condition which could have a Material Adverse Effect on the
Seller which has not been set
forth in this Agreement or described in the Schedules hereto.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF GRAND AND BUYER
Grand and the Buyer hereby jointly and severally represent and warrant to Seller
as follows:
5.1. Organization. Grand and the Buyer each is a corporation duly organized,
validly existing
and in good standing under the laws of its jurisdiction of incorporation and has
all requisite corporate
power and authority to own, lease and operate its properties and to carry on its
business as now being
conducted. Grand and the Buyer each is duly qualified to do business and is in
good standing as a foreign
corporation in each jurisdiction in which the property owned, leased or operated
by Grand or the Buyer or
the nature of the business conducted by it makes such qualification necessary.
Neither Grand nor the
Buyer is in violation of any of the provisions of its Articles of Incorporation
or By-Laws.
5.2. Authority Relative to this Agreement. Each of Grand and the Buyer has full
corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contem-
plated hereby. The execution and delivery of this Agreement and the
consummation of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of Grand and the
Buyer and no other corporate proceedings on the part of Grand or the Buyer are
necessary to authorize
this Agreement or to consummate the transactions contemplated hereby. This
Agreement has been duly
and validly executed and delivered by Grand and the Buyer and constitutes a
valid and binding agreement,
enforceable against each of them in accordance with its terms.
5.3. No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Grand and the Buyer do not,
and
the consummation of the transactions contemplated hereby will not, (i) conflict
with or violate any law,
regulation, court order, judgment or decree applicable to Grand or the Buyer or
by which either of its
properties are bound or affected, (ii) violate or conflict with Articles of
Incorporation or By-Laws of
Grand or the Buyer or (iii) result in any breach of or constitute a default (or
an event which with notice or
lapse of time or both would become a default) under, or give to others any right
of termination or
cancellation of, or result in the creation of a Lien on any of the properties of
Grand or the Buyer pursuant
to any Contract to which Grand or the Buyer is a party or by which Grand, the
Buyer or any of their
respective properties is bound or affected.
(b) Neither Grand nor the Buyer is required to submit any notice, report or
other filing
with any governmental entity or regulatory body, domestic or foreign, in
connection with the execution,
delivery or performance of this Agreement or the consummation of the
transactions contemplated hereby.
No waiver, consent, approval or authorization of any governmental entity or
regulatory body, domestic or
foreign, is required to be obtained or made by Grand or the Buyer in connection
with its execution,
delivery or performance of this Agreement or the consummation of the
transactions contemplated hereby.
5.4. Finder's Fee. There is no investment banker, broker, finder or other
intermediary which
has been retained by, or is authorized to act on behalf of Buyer or Grand who
might be entitled to any fee
or commission from the Seller or Nissim, upon the consummation of the
transactions contemplated hereby
or thereafter. Grand shall compensate Akin Bay Company LLC in accordance with
a separate agreement.
5.5. Accuracy of Representations. The representations and warranties made by
Grand and
Buyer in this Agreement, and in any certificate or schedule referenced hereby or
attached hereto, do not
contain, and will not contain, any statement which is false or misleading with
respect to any material fact
and do not and will not omit to state a material fact required to be stated
herein or therein or necessary in
order to make the statements contained herein or therein not materially false or
misleading. There is no
material fact or condition which could have a Material Adverse Effect on Grand
which has not been set
forth in this Agreement or described in the Schedules hereto.
ARTICLE VI.
COVENANTS
6.1. Conduct of Business.
(a) From the date hereof to the Closing Date, the Seller shall conduct its
business only
in the ordinary course and in substantially the same manner as heretofore
conducted, use its best efforts to
maintain and preserve its business organization intact, retain its present
employees so that they will be
available to the Buyer after the Closing Date, maintain its relationships with
its customers so that they will
be preserved after the Closing Date and shall not take any action which would
result in a breach of any of
the Seller's covenants and agreements set forth herein or cause any of the
representations and warranties
set forth in Article IV hereof to be untrue or incorrect or materially change
any of the representations or
warranties set forth therein had such representations or warranties been made
after the date hereof.
(b) Buyer intends to use the Assets as part of a ongoing business engaged in the
designing, developing, producing, marketing, distributing and selling of puzzles
and puzzle related
products to merchandisers.
6.2. No Solicitation. The Seller shall not, and shall direct and otherwise use
their respective
best efforts to cause their respective officers, managers, partners, financial
advisors, counsel, agents and
Affiliates not to, (i) directly or indirectly solicit, encourage or facilitate
(including by way of furnishing any
non-public information concerning the Seller) the submission of proposals or
offers from any Person other
than Grand or their respective Affiliates relating to any acquisition or
purchase of all or a material part of
the membership interests or assets of, or any merger, consolidation or business
combination with Seller (an
"Acquisition Proposal"), or (ii) participate in any discussions or negotiations
regarding, or furnish any
non-public information to any Person other than Grand and their respective
representatives in connection
with, any Acquisition Proposal by any Person other than Grand or their
respective Affiliates.
6.3. Access to Information; Confidentiality.
(a) Between the date of this Agreement and the Closing Date, the Seller shall
provide
Grand and Grand's prospective lenders and their respective officers, directors,
financial advisors, counsel
and other agents access to all offices of the Seller and to all of their
respective books and records, permit
them to make such inspections as they may require and shall cause the Seller's
officers, managers and
employees to furnish Grand and their prospective lenders and their respective
officers, directors, financial
advisors, counsel and other agents with such financial and operating data and
other information with
respect to the business and properties of the Seller as Grand and its
prospective lenders and their respective
officers, directors, financial advisors, counsel and other agents may from time
to time reasonably request,
and as may be necessary to establish the performance by the Seller of its
covenants under this Agreement
and the accuracy of the Seller's and Nissim's representations and warranties
herein, and in connection with
their preparation of any filing or submission to any governmental entity or
regulatory body.
(b) Grand and the Buyer, on the one hand, and the Seller and Nissim, on the
other hand,
shall hold, and shall use their best efforts to cause their respective officers,
directors, partners, prospective
lenders, financial advisors, counsel and other agents to hold, in strict
confidence, unless compelled to
disclose by judicial or administrative process, or, in the opinion of their
counsel, by other requirements of
law, all documents and information concerning the Seller, the Buyer and Grand,
as the case may be,
furnished to the other in connection with the transactions contemplated by this
Agreement (except to the
extent that such information can be shown to have been (i) in the public domain
through no fault of the
Seller, Nissim, the Buyer or Grand or any of their respective Affiliates; or
(ii) later lawfully acquired
without the breach of any other agreement by the Seller, Nissim, the Buyer or
Grand or their respective
officers, directors, partners, financial advisors, counsel and other agents from
other sources) and will not
release or disclose such information to any other Person, except its respective
officers, directors,
prospective lenders, financial advisors, counsel and other agents in connection
with this Agreement.
(c) Until the later of (i) the expiration of four (4) years from the Closing
(and, if at the
expiration thereof any judicial proceeding is in progress, for such longer
period as such judicial proceeding
is in progress) with respect to books and records of the Seller relating to the
Assets, other than books and
records of the Seller relating to Asset-related Taxes, and (ii) the expiration
of the applicable statutes of
limitation, including any extension or waiver thereof, with respect to books and
records of the Seller
relating to Asset-related Taxes, the Buyer will retain, and, as the Seller and
Nissim may reasonably request,
permit the Seller and its agents to inspect and copy, all books and records of
the Seller that relate to the
period prior to the Closing Date. No access to books and records shall be
required if the Buyer or Grand
shall be prejudiced thereby, including, without limitation, if such access would
cause the compromise of a
claim or defense, breach of an agreement respecting confidentiality or loss of a
legal privilege. At any time
after the fourth (4th) anniversary of the Closing Date or, with respect to
Asset-related Tax matters, the
expiration of all applicable statutes of limitation, including any extension or
waiver thereof, the Buyer shall
be permitted to destroy the books and records; provided, however, that before
destroying any of the books
and records, the Buyer shall give thirty (30) days notice thereof to the Seller
and Nissim and give the Seller
and Nissim reasonable opportunity to copy such books and records to be
destroyed.
6.4. Best Efforts. Subject to the terms and conditions herein provided, the
Seller, Nissim,
Buyer and Grand each agrees to use its respective best efforts to take, or cause
to be taken, all action, and
to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations,
including making all required submissions or filings with governmental entities
and regulatory bodies, to
consummate and make effective the transactions contemplated by this Agreement.
If, at any time after the
Closing Date, any further action is necessary or desirable to carry out the
purposes of this Agreement, the
parties hereto or their officers, directors or representatives shall take all
such necessary action. The Seller,
Nissim, Buyer and Grand will execute any additional instruments necessary to
consummate the transactions
contemplated hereby.
6.5. Consents. The Seller shall use its best efforts to obtain, at its expense,
all consents,
approvals and waivers of third Persons or governmental entities or regulatory
bodies required to transfer the Assets to the Buyer.
6.6. Public Announcements. The Seller and Grand will consult with each other
before issuing
any press release or otherwise making any public statement with respect to the
transactions contemplated
hereby and shall not, except as may be required by law or any listing agreements
with any national
securities exchange, issue any such press release or make any such public
statement without the approval of the Seller and Grand.
6.7. Corporate Name. From and after the Closing Date, the Seller shall forever
cease using the
"Ark Foundation" name and other related trademarks, trade names and related
copyrights, in any context, manner or operations whatsoever.
6.8. Continued Effectiveness of Representations and Warranties. From the date
hereof until
the Closing Date, each of the parties shall use their respective best efforts to
conduct such parties' affairs in
such a manner so that, except as otherwise contemplated or permitted by this
Agreement, the
representations and warranties contained in Articles IV and V, as the case may
be, shall continue to be true
and correct on and as of the Closing Date as if made on the Closing Date and the
parties shall promptly
notify the others of any event, condition or circumstance occurring from the
date hereof through the
Closing Date that would constitute a violation or breach by such party of any of
such representations and warranties.
6.9. Supplements to Exhibits. The Seller and Nissim shall deliver to the Buyer
and Grand, as
soon as possible after they become aware thereof, but not later than at the
Closing, supplemental
information updating the information set forth in the Schedules, so that such
Schedules supplemented by
such information will be true and correct at the Closing as if then made;
provided that the foregoing shall
not be deemed to permit any transaction not otherwise permitted by this
Agreement or to constitute a
waiver by Grand or the Buyer of any misrepresentation or breach by the Seller of
any agreement, covenant
or warranty made herein. Each of the parties agree to disclose to the other(s)
any misrepresentation or
breach of any agreement, covenant or warranty of such party when such breach
becomes known to the applicable party.
6.10. Expenses. Except as otherwise provided herein, whether or not the
transactions
contemplated hereby are consummated, all expenses incurred in connection with
this Agreement and the
transactions contemplated hereby shall be the obligation of the party incurring
such expenses.
6.11. Discharge of Liabilities. From and after the Closing Date, the Seller
shall promptly and
fully pay and discharge all Liabilities as they become due and payable with
respect to the activities of the
Seller, except for the Assumed Liabilities set forth on Schedule 6.11 which the
Buyer shall fully pay and
discharge within ten (10) days after the Closing.
6.12. Tax Matters.
(a) The Seller and Nissim shall cooperate fully with and the Buyer and Grand and
shall
make available or cause to be made available to Grand and the Buyer in a timely
fashion, such Tax data,
prior Tax returns and filings and other information as may be reasonably
required for the preparation by
Grand or the Buyer of any Tax returns, elections, consents or certificates
required to be prepared and filed
by Grand or the Buyer or any audit or other examination by any taxing authority,
or judicial or
administrative proceeding relating to liability for Taxes.
(b) Any sales, transfer, use or other Taxes imposed as a result of the sale
of the Assets
to the Buyer pursuant to this Agreement shall be paid by the Seller. At the
Closing, if required, Grand or
the Buyer shall remit to the Seller such properly completed resale exemption
certificates and other similar
certificates or instruments as are necessary to claim available exemptions from
the payment of sales,
transfer, use or other similar Taxes under applicable law, provided that Grand
or the Buyer shall only be
obligated to provide such certificates or the Seller shall have reasonably
requested at least 10 days prior to
the Closing. All recording, Taxes and fees payable as a result of the public
recordation of the instruments
of conveyance executed and delivered to Grand and Buyer pursuant to this
Agreement shall be allocated
between the Buyer and the Seller in accordance with the customary practice
prevailing in the place where
any such Assets are located.
6.13. Working Capital. During the period commencing on the Closing Date and
ending on the
first anniversary of the Closing, Grand shall make available to the Buyer not
less than US$500,000 in order
to fund the working capital requirements of the Buyer.
6.14. Transfer of the Grand Shares. Notwithstanding anything in Section 4.26 to
the contrary,
Seller shall be entitled to transfer the Grand Shares unless Seller delivers to
Grand a legal opinion from
legal counsel, satisfactory to Grand, which states that such may be transferred
without registration under
the Securities Act, and further provided, that any transferee(s) agree to make
the representations and
warranties set forth in Section 4.26. In addition, upon the first anniversary
of the Closing, the Grand
Shares may be sold in accordance with Rule 144, to the extent that the
provisions of Rule 144 are available.
6.15. Senior Debt. Grand and Buyer agree that, in connection with the
negotiation of any senior
loan agreements, such loan agreements shall permit the Buyer to make the
payments under the Secured
Note as long as Grand, the Buyer and their respective Affiliates are in
compliance with the covenants set
forth therein or are not otherwise in default thereunder.
6.16. Seller's Audit. Until receipt of a minimum of US$3,000,000 in aggregate
of orders and
shipments of the Goods, Seller shall be entitled to audit, on a quarterly basis,
Buyer's and its Affiliates'
books and records with respect to orders and shipments of the Goods (the
"Seller's Audit"). Seller shall
give Buyer forty-five (45) days written notice of its election to conduct the
Seller's Audit. For purposes of
Seller's Audit, Seller's accountant shall be provided reasonable access to the
books and records relating to
orders and shipments of the Goods. Seller shall cause Seller's accountant to
submit to Buyer as soon as
completed, but in no event later than forty five (45) business days after review
of Buyer's books and
records relating to orders and shipment of the Goods, its report with respect to
such orders and shipments (the "Seller's Audit Report").
ARTICLE VII.
CONDITIONS TO CONSUMMATION OF THE ACQUISITION
7.1. Conditions to Obligations of Each Party. The respective obligations of
each party to
effect the transactions contemplated hereby are subject to the satisfaction, at
or prior to the Closing, of the
following conditions:
(a) No statute, rule, regulation, executive order, decree, judgment or
injunction shall
have been enacted, entered, promulgated or be in force by any court or
governmental authority which
prohibits or restricts the consummation of the transactions contemplated hereby;
provided, however, that
the parties hereto shall use their best efforts to have any such order, decree
or injunction vacated.
(b) Buyer, Grand, Nissim and the Seller shall have executed and delivered an
Assignment and Assumption Agreement in the form of Exhibit D.
(c) Nissim shall have executed and delivered that certain Employment Agreement
with
the Buyer in the form of Exhibit E hereto.
7.2. Additional Conditions to Obligations of the Seller. The obligations of the
Seller to
effect the transactions contemplated hereby are also subject to the fulfillment
of the following conditions:
(a) The representations and warranties of Grand and the Buyer set forth in this
Agreement shall be true and correct in all material respects on the date hereof
and shall also be true and
correct in all material respects on the Closing Date with the same force and
effect as if made on and as of
the Closing Date, and Grand and the Buyer shall have performed or complied in
all material respects with
all agreements, conditions and covenants required by this Agreement to be
performed or complied with by
them on or before the Closing Date.
(b) Grand shall have executed and delivered to the Seller the Secured Note.
(c) There shall be no effective injunction, writ or preliminary restraining
order of any
nature issued by a court or governmental agency of competent jurisdiction
directing that the transaction
provided for herein not be consummated as herein provided.
(d) Grand shall have granted to Nissim options to purchase 50,000 shares of
Grand
Common Stock at the Closing Price of Grand Common Stock on the date immediately
preceding the
Closing Date. The form of Stock Option Agreement is attached hereto as Exhibit
F.
(e) Grand shall have executed and delivered the Stock Pledge Agreement.
7.3. Additional Conditions to Obligations of the Buyer and Grand. The
obligations of the
Buyer and Grand to effect the transactions contemplated hereby are also subject
to the following conditions:
(a) The representations and warranties of the Seller and Nissim contained in
this
Agreement shall be true and correct in all material respects on the date hereof
and shall also be true and
correct in all material respects on and as at the Closing Date with the same
force and effect as if made on
and as of the Closing Date, and the Seller and Nissim shall have performed or
complied in all material
respects with all agreements, conditions and covenants required by this
Agreement to be performed or
complied with by them on or before the Closing Date. Grand and the Buyer shall
have received a
certificate of Seller to the foregoing effect.
(b) The Seller shall have delivered to Grand and the Buyer a certificate of the
Managing
Member of the Seller, in the form of Exhibit G, certifying to the resolutions or
other approval of the
members and managers of the Seller authorizing the transactions contemplated
hereby and certifying that
(i) such resolutions or other approvals have not been revoked, suspended or
amended and remain in full
force and effect and (ii) this Agreement has been approved and adopted by the
members of the Seller.
(c) The Buyer shall have received from the Seller the following:
(i) a bill of sale, in the form of Exhibit H; and
(ii) patent, copyright, trademark and trade name assignments, in the form of
Exhibit I;
(iii) such other bills of sale, endorsements, title documents, assignments and
other good and sufficient instruments of conveyance and assignment, reasonably
satisfactory in
form and substance to Grand, Buyer and Piper & Marbury L.L.P., counsel to Grand,
as shall be
necessary for Grand to consummate the transactions contemplated hereby; and
(iv) all other documents that Grand may reasonably request relating to the exis-
tence of the Seller and the authority of the Seller to enter into this Agreement
and to consummate
the transactions contemplated hereby.
(d) All approvals, authorizations, permits and consents required by the Seller
to consummate the transactions contemplated hereby and to conduct the Seller's
business in the ordinary
course after the Closing shall have been obtained on terms and conditions
satisfactory to Grand in its sole
discretion and shall be in full force and effect, and Grand and the Buyer shall
have been furnished with
appropriate evidence, reasonably satisfactory to it of the granting of such
approvals, authorizations and consents.
(e) There shall be no effective injunction, writ or preliminary restraining
order of any
nature issued by a court or governmental body or regulatory entity of competent
jurisdiction directing that
the transactions provided for herein not be consummated as herein provided or
which is reasonably likely
to have any Material Adverse Effect on the Seller.
ARTICLE VIII.
SURVIVAL
All statements contained herein or in any certificate, schedule or other
document delivered pursuant
hereto shall be deemed representations and warranties by the party delivering
the same. All representations
and warranties shall survive the Closing Date until the first anniversary of the
Closing; and provided,
further, that if a claim of misrepresentation or breach is made before the
expiration of the foregoing time
period, such representations and warranties shall survive until the resolution
of such claim.
Notwithstanding the foregoing provisions of this Article VIII, the
representations and warranties set forth
in Section 4.11 (Tax Matters) shall survive until the expiration of all
applicable statutes of limitations, and
the representations and warranties set forth in Section 4.09 (environmental
matters) and 4.13 (intellectual
property) shall survive until March 31, 2000. All representations and
warranties contained in this
Agreement and in the disclosure schedules or in any certificates or other
documents delivered pursuant
hereto shall not be deemed to be waived or otherwise affected by any prior
knowledge of, or any
investigation made by or on behalf of, any party hereto. All covenants and
agreements shall survive the
consummation of the transactions contemplated hereby.
ARTICLE IX.
INDEMNIFICATION
(a) Seller and Nissim agree to indemnify and hold harmless Grand, the Buyer and
their
respective Affiliates from and against any Liabilities, damages, losses, claims,
Liens, costs or expenses
(including reasonable attorneys' fees) of any nature (any or all of the
foregoing are herein referred to as
"Loss") insofar as a Loss (or actions in respect thereof), whether existing or
accruing prior or subsequent
to the Closing Date, arises out of or is based upon (i) any misrepresentation
(or alleged misrepresentation)
or breach (or alleged breach) of any of the warranties, covenants or agreements
made by the Seller or
Nissim in this Agreement or in any certificate, Schedule, document or Exhibit
referenced hereby or
attached hereto, (ii) the ownership, use or operation by Seller of its Assets or
the conduct of its business on
or prior to the Closing Date, (iii) the Liabilities not expressly assumed by
Grand pursuant to this Agree-
ment, including the Excluded Liabilities, or (iv) any court or other
governmental order or decree that the
transfer of the Assets shall be rescinded as a result of, or pursuant to, the
insolvency, bankruptcy,
reorganization or similar event with respect to the Seller arising out of or
relating to any action, suit or
proceeding brought under the United States Bankruptcy Code, or any Tax statute
or law or any other
similar provisions of federal, state or common law.
(b) Grand and the Buyer hereby jointly and severally agree to indemnify and hold
harmless the Seller and Nissim from and against any Liabilities, damages,
losses, claims, Liens, costs or
expenses (including reasonable attorneys' fees) of any nature insofar as a loss
(or actions in respect
thereof), whether existing or accruing prior or subsequent to the Closing Date
(any and all of the foregoing
are herein referred to as "Loss"), arises out of or is based upon (i) any
misrepresentation (or alleged
misrepresentation) or breach (or alleged breach) of any of the warranties,
covenants or agreements made
by Grand or the Buyer in this Agreement or in any certificate, Schedule,
document or Exhibit referenced
hereby or attached hereto, (ii) the ownership, use or operation by Buyer or its
assignees of its Assets or the
conduct of Buyer's or its assignees' business after the Closing Date, (iii) the
Liabilities expressly assumed
by Buyer pursuant to this Agreement, or (iv) any court or other governmental
order or decree that the
transfer of the Assets shall be rescinded as a result of, or pursuant to, the
insolvency, bankruptcy,
reorganization or similar event with respect to the Buyer or Grand arising out
of or relating to any action,
suit or proceeding brought under the United States Bankruptcy Code, or any Tax
statute or law or any
other similar provisions of federal, state or common law.
(c) If any indemnified party receives notice of the assertion of any third-party
claim with
respect to which an indemnifying party is obligated under this Agreement to
provide indemnification, such
indemnified party shall give such indemnifying party written notice thereof
(together with a copy of such
third-party claim, process or other legal pleading) promptly after becoming
aware of such third-party claim,
provided, however, that the failure of any indemnified party to give notice as
provided in this Article IX
shall not relieve any indemnifying party of its obligations under this
Article IX, except to the extent that
such indemnifying party is actually prejudiced by such failure to give notice.
Such notice shall describe
such third-party claim in reasonable detail.
(d) An indemnifying party, at such indemnifying party's own expense and through
counsel chosen by such indemnifying party (which counsel shall be reasonably
acceptable to the
indemnified party), may elect to defend any third-party claim. If an
indemnifying party elects to defend a
third-party claim, then, within ten (10) business days after receiving notice of
such third-party claim (or
sooner, if the nature of such third-party claim so requires), such indemnifying
party shall notify the
indemnified party of its intent to do so, and such indemnified party shall
cooperate in the defense of such
third-party claim (and pending such notice and assumption of defense, an
indemnified party may take such
steps to defend against such third-party claim as, in such indemnifying party's
good faith judgment, is
appropriate to protect its interests). Such indemnifying party shall pay such
indemnifying party's
reasonable out-of-pocket expenses incurred in connection with such cooperation.
Such indemnifying party
shall keep the indemnified party reasonably informed as to the status of the
defense of such third-party
claim. After notice from an indemnifying party to an indemnified party of its
election to assume the
defense of a third-party claim, such indemnifying party shall not be liable to
such indemnified party under
this Article IX for any legal or other expenses subsequently incurred by such
indemnified party in
connection with the defense thereof other than those expenses referred to in the
preceding sentence;
provided, however that such indemnified party shall have the right to employ one
law firm as counsel,
together with a separate local law firm in each applicable jurisdiction
("separate counsel"), to represent
such indemnifying party in any action or group of related actions if, in
such indemnified party's reasonable
judgment at any time, either a conflict of interest between such indemnified
party and such indemnifying
party exists in respect of such claim, or there may be defenses available to
such indemnified party which are
different from or in addition to those available to such indemnifying party
and the representation of both
parties by the same counsel would be inappropriate, and in that event (i) the
reasonable fees and expenses
of such separate counsel shall be paid by such indemnifying party (it being
understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (excluding local
counsel) with respect to any third-party claim (even if against multiple
indemnified parties)), and (ii) each
of such indemnifying party and such indemnified party shall have the right to
conduct its own defense in
respect of such claim. If any indemnifying party elects not to defend against a
third-party claim, or fails to
notify an indemnified party of its election as provided in this Article IX
within the period of ten (10)
business days described above, the indemnified party may defend, compromise, and
settle such third-party
claim and shall be entitled to indemnification hereunder (to the extent
permitted hereunder). The indemnifying party shall not, without the prior
written consent of the indemnified party, settle or
compromise any third-party claim or consent to the entry of any judgment unless
(i) there is no finding or
admission of any violation of law or any violation of the rights of any person
and no effect on any other
claims that may be made against the indemnified party and (ii) the sole relief
provided is monetary damages
that are paid in full by the indemnifying party.
(e) The phrase "third party claim" means an action by or before any governmental
authority or any other claim asserted by a Person other than any party hereto
or their Affiliates which gives
rise to a right of indemnification hereunder.
(f) Amounts payable to Grand or the Buyer pursuant to the indemnification
provided in
section (a) of this Article IX shall be paid to Grand or the Buyers first, as a
set-off against the Secured Note.
ARTICLE X.
TERMINATION; AMENDMENT; WAIVER
10.1. Termination. This Agreement and the transactions contemplated hereby may
be
terminated at any time prior to the Closing:
(a) by mutual written agreement of the Seller, Nissim, Buyer and Grand;
(b) by Grand and the Buyer, on the one hand, or the Seller and Nissim, on the
other
hand, if (i) the transactions contemplated hereby shall violate any non-
appealable final order, decree or
judgment of any court or governmental entity or regulatory body having competent
jurisdiction or (ii) there
shall be a statute, rule or regulation which makes the transactions contemplated
hereby illegal or otherwise
prohibited; or
(c) by the Seller and Nissim, on the one hand, and Grand and the Buyer, on the
other
hand, in the event the other makes a material misrepresentation or breaches a
covenant, agreement or
warranty set forth in this Agreement, but such non-misrepresenting or non-
breaching party's election to
terminate shall not limit, waive or prejudice such party's remedies at law or in
equity.
In the event this Agreement is terminated as provided in Section 10.1(a) or (b),
this Agreement
shall become void and of no further force and effect and no party hereto shall
have any further liability to
any other party hereto, except that Sections 4.18, 5.4, 6.2, 6.3, 6.6, 6.10 and
Article IX shall survive and
continue in full force and effect notwithstanding termination.
10.2. Amendment. This Agreement may only be amended by action taken by the
Seller, Nissim,
Buyer and Grand. This Agreement may not be amended except by an instrument in
writing signed by or on
behalf of the Seller, Nissim, Grand and the Buyer.
10.3. Extension; Waiver. At any time prior to the Closing Date, the Seller,
Nissim, the Buyer
and Grand may (i) extend the time for the performance of any of the obligations
or other acts of the other;
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document,
certificate or writing delivered pursuant hereto or thereto; and (iii) waive
compliance with any of the
agreements or conditions contained herein. Any agreement on the part of any
party to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed by
or on behalf of such party.
ARTICLE XI.
MISCELLANEOUS
11.1. Entire Agreement; Assignment. This Agreement, together with all Schedules
and
Exhibits, constitutes the entire agreement among the parties with respect to the
subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
among the parties or
between any of them with respect to the subject matter hereof other than the
Seller's Promissory Note in
favor of Grand and the Security Agreement relating thereto, all of which are
merged herein. All references
to Sections, Exhibits and Schedules shall be deemed references to such parts of
this Agreement unless the
text requires otherwise. This Agreement shall not be assigned by operation of
law or otherwise, provided
that the Buyer may assign its rights and obligations to any wholly-owned direct
or indirect subsidiary of
Buyer, but no such assignment shall relieve the assigning party of its
obligations hereunder if such assignee
does not perform such obligations.
11.2. Validity; Severability. The invalidity or unenforceability of any
provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which
shall remain in full force and effect unless such enforceability causes this
Agreement to fail in its essential purpose.
11.3. Notices. All notices, requests, claims, demands and other communications
hereunder shall
be in writing and shall be given or made as of the date delivered or mailed if
delivered in person, by
telecopy, cable, telegram or telex, or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties as follows:
if to Grand or the Buyer:
1710 Route Transcanadienne
Dorval, Quebec H9P 1H7
Canada
Telecopy No. (514) 685-2825
Attention: Ron Goldenberg
Executive Vice President and
Chief Financial Officer
with a copy to:
Piper & Marbury L.L.P.
1251 Avenue of the Americas
New York, NY 10020
Telecopy No. (212) 835-6001
Attention: Paul J. Pollock, Esq.
if to the Seller :
c/o Ark Foundation LLC
34 Smith Street
Norwalk, CT 06851
Telecopy No. (203) 855-7660
Attention: Mr. Ofer Nissim
President
with a copy to:
Trow & Sank, P.C.
30 Oak Street
Stamford, CT 06905
Telecopy No. (203) 356-1383
Attention: Mark A. Sank, Esq.
or to such other address as the Person to whom notices is given may have
previously furnished to the
others in writing in the manner set forth above.
11.4. Governing Law. This Agreement shall be governed by and construed in
accordance with
the laws of the State of New York, without giving effect to applicable
principles of conflicts of laws thereof.
11.5. Descriptive Headings; Table of Contents. The descriptive headings herein
are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or
interpretation of this Agreement. The Table of Contents preceding this
Agreement is not a part hereof.
11.6. Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, its successors and assigns.
11.7. Counterparts. This 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 one
and the same agreement.
11.8. Specific Performance. Irreparable damage would occur if any of the
provisions of this
Agreement were not performed in accordance with the terms hereof, and the
parties shall be entitled to
specific performance of the terms hereof, in addition to any other remedy at law
or equity.
11.9. Construction. Each of the parties has participated jointly in the
negotiation and drafting of
this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement
shall be construed as if drafted jointly by the parties and no presumption or
burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement.
Any reference to any federal, state, local or foreign statute or law shall be
deemed also to refer to all rules
and regulations promulgated thereunder, unless the context requires otherwise.
The word "including" shall
mean including without limitation. Nothing in the Schedules shall be deemed
adequate to disclose an
exception to a representation or warranty made herein unless the Schedule
identifies the exception with
reasonable particularity and describes the relevant facts in reasonable detail.
Without limiting the generality
of the foregoing, the mere listing (or inclusion of a copy) of a document or
other item shall not be deemed
adequate to disclose an exception to a representation or warranty made herein
(unless the representation or
warranty relates to the existence of the document or other item itself).
The parties intend that each
representation, warranty and covenant contained herein shall have independent
significance.
11.10. Consultation with Counsel. Seller and Nissim each acknowledge that
neither has obtained
legal advice from Buyer's or Grand's legal counsel. Seller and Nissim further
acknowledge that each has
obtained independent legal advice prior to signing this Agreement and has either
received said independent legal advice.
11.11. Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed
on its
behalf by its officers thereunto duly authorized, or individually, as the case
may be, all as of the day and
year first above written.
GRAND TOYS INTERNATIONAL, INC.
By: /s/ Lawrence Bernstein
Lawrence Bernstein
President
GREAT AMERICAN ACQUISITION CORP.
By: /s/ Lawrence Bernstein
Lawrence Bernstein
President
ARK FOUNDATION LLC
By: /s/ Ofer Nissim
Ofer Nissim
President
Exhibit 10.12
THE SECURITY REPRESENTED HEREBY HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THIS SECURITY CANNOT BE SOLD OR OTHERWISE
TRANSFERRED UNLESS THIS SECURITY IS REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR THE ISSUER IS
FURNISHED WITH AN ACCEPTABLE OPINION OF COUNSEL THAT
AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
SUBORDINATED PROMISSORY NOTE
January 1, 1999 US$1,500,000
GREAT AMERICAN ACQUISITION CORP., a Delaware corporation (the "Company"), hereby
promises to pay to the order of ARK FOUNDATION LLC ("Payee") the principal
amount of
US$1,500,000 (the "Principal Amount"), in accordance with the provisions of this
Subordinated
Promissory Note (this "Note").
By accepting this Note, Payee agrees that this Note shall be subordinated to
Senior Debt of the
Company (as defined in Section 2(a) hereto) upon the terms set forth in
Section 2.
1. Payment of Principal and Interest on Note.
(a) Scheduled Payments. Subject to Section 2 hereof, the Company will repay
in full the
Principal Amount of this Note in three equal installments of US$500,000.
The initial installment of
US$500,000 together with interest thereon and on the unpaid Principal Amount
hereof (the "First
Payment") shall be due and payable upon receipt by the Buyer or its Affiliates
or licensees, subsidiaries,
transferees, agents or any other member of the Grand Group of an aggregate total
of US$3,000,000 in
orders for goods or products acquired or derived from the Payee's Assets (the
"Goods") as provided for in
that certain Asset Purchase Agreement between the Company, Payee, Ofer Nissim
and Grand Toys
International, Inc. (the "Purchase Agreement"). The second installment of
US$500,000 shall be due and
payable on the six month anniversary of the First Payment, if any. The third
and final installment of
US$500,000 shall be due and payable on the nine month anniversary of the First
Payment, if any.
(b) Interest. Interest on the unpaid Principal Amount of this Note shall be
paid so that
Payee receives such amount on or before the first day of the month following the
end of each calendar
quarter commencing on April 1, 1999 at the following rate(s): interest will
accrue on the Principal Amount
at a rate of 5.76% per annum from the date hereof through June 1, 1999; after
June 1, 1999 interest on the
Principal Amount will accrue at a rate of 9.76% per annum until the Company
makes the First Payment;
and after the First Payment is made, interest on the Note shall be reduced to
5.76% per annum until the
payment in full of the Principal Amount.
(c) Optional Prepayment. Subject to Section 2 hereof, the Company may at any
time
prepay all or any portion of the outstanding Principal Amount of this Note
together with interest thereon.
A prepayment of less than all of the outstanding Principal Amount of this Note
will be applied against the
Company's obligation to make the repayment of principal at maturity.
(d) Notice of Prepayment. The Company will give written notice of its election
to prepay
this Note to the Payee in person or by registered or certified mail, return
receipt requested, at least 10 days
prior to the date of prepayment. On the date of prepayment specified in the
Company's notice, the
Company will pay to the Payee, by wire transfer of immediately available funds,
the entire outstanding
principal amount being prepaid, together with all accrued interest thereon
through the date of prepayment.
(e) Set-Off Amounts. Notwithstanding the provisions of Sections 1 (a)-(c),
the Company
shall be entitled to a set-off against the payments of the Principal Amount due
on this Note any amounts
payable to the Company or Grand in accordance with the indemnification
provisions of Article IX of the
Purchase Agreement. In the event that an indemnification claim is pending but
has not been resolved at the
time a payment is otherwise due hereunder, the Company shall be entitled to
withhold from such payment
of Principal Amount an amount equal to the amount of such claim together with
such amount as the
Company shall determine is reasonably necessary to cover the out-of-pocket
expenses to be incurred in
adjudicating such claim. Once the claim has been adjudicated or settled, after
satisfaction of the amounts
payable to the Company or Grand, or it is conclusively determined that the
amount of the claim is covered
by insurance, the Company or Grand shall pay the balance of the payment of the
Principal Amount due under the Note to the Payee.
2. Subordination. The Company's payment of this Note shall be subject to the
following restrictions:
(a) Anything in this Note to the contrary notwithstanding, the obligations of
the Company
in respect of the principal of this Note shall be subordinate and junior in
right of payment, to the extent and
in the manner hereinafter set forth, to the Company's Senior Debt. For purposes
of this Agreement, the
"Senior Debt" shall mean (i) the maximum principal amount of the secured
indebtedness which any
financial institution or other lender is committed, from time to time, to make
or has made available to the
Company pursuant to its loan agreement(s) with the Company (the "Loan
Agreements"), (ii) all interest,
commitment fees, collection fees and audit, servicing and other fees and
expenses which may from time to
time be due under the Loan Agreements accrued to the date of payment, regardless
of whether proceedings
for collection of the same or other proceedings under Title 11 of the United
States Code have been
commenced, (iii) all reimbursements and other fees and obligations of the
Company to the lenders under
the Loan Agreements and (iv) any deferrals, renewals, extensions or refundings
of the Senior Debt and any
indebtedness which refinances the Senior Debt. For purposes of this Section 2
and Section 4 hereof, the
term "Company" shall mean Grand Toys International, Inc. and its subsidiaries,
including the Company.
(b) In the event of any insolvency or bankruptcy proceedings, and any
receivership,
liquidation, reorganization, arrangement, readjustment, composition or other
similar proceedings in
connection therewith, relative to the Company, or to its creditors, as such, or
to its property, or in the
event of any proceedings for voluntary liquidation, dissolution or other
winding-up of the Company,
whether or not involving insolvency or bankruptcy, or in the event of any
assignment by the Company for
the benefit of creditors or in the event of any other marshaling of the assets
of the Company (collectively
referred to as an "Insolvency Event"), subject to clauses (i) and (ii) of
subparagraph 2(e) hereof, the
holders of the Senior Debt shall be entitled to receive payment in full of all
Senior Debt (including interest
thereon accruing after the commencement of any such proceedings) before the
Payee is entitled to receive
any payment on account of principal due upon this Note, and to that end the
holders of Senior Debt shall
be entitled to receive for application in payment thereof any payment or
distribution of any kind or
character, whether in cash or property or securities, which may be payable or
deliverable in any such proceedings in respect of this Note.
(c) After the occurrence and during the continuance of any payment or financial
covenant
default with respect to the Senior Debt which gives the holder of such Senior
Debt the right to accelerate
the maturity of its Senior Debt, including any default which may arise after
giving effect to any payment
made or to be made hereunder, no payment of principal will be made on this Note
and the holder of this
Note will take no action to recover any such amounts until the earlier of (i)
the date such default has been
remedied or the Senior Debt shall have been discharged or (ii) six months from
the occurrence of such default.
(d) Each holder of Senior Debt may at any time, in their discretion, renew or
extend the
time of payment of Senior Debt so held or exercise any of their rights under the
Senior Debt including,
without limitation, the waiver of defaults thereunder, the release, foreclosure
or any other transactions with
respect to collateral, and the amendment of any of the terms or provisions
thereof (or any notice
evidencing or creating the same), all without notice to or assent from the
Payee. No compromise,
alteration, amendment, renewal or other change of, or waiver, consent or other
action in respect of any
liability or obligation under or in respect of, any terms, covenants or
conditions of the Senior Debt (or any
instrument evidencing or creating the same), whether or not such release is
in accordance with the
provisions of the Senior Debt (or any instrument evidencing or creating the
same), shall in any way alter or
affect any of the subordination provisions of this Note.
(e) If, notwithstanding the provisions of this Section 2, any payment or
distribution of any
character (whether in cash, securities or other property) or any security, other
than securities received by
Payee pursuant to the exercise of rights under that certain Stock Pledge
Agreement of even date herewith
by and between Payee and Grand, shall be received by the Payee in contravention
of this Section 2, and
before all the Senior Debt shall have been paid in full, such payment,
distribution or security shall be held in
trust for the benefit of, and shall be immediately paid over or delivered or
transferred to, the holders of the
Senior Debt, or their duly appointed agents, for application of the payment of
all Senior Debt remaining
unpaid, until all of the Senior Debt shall have been paid in full, or such
payment has been provided for;
provided:
(i) no delivery will be made of stock or obligations which are issued by the
Company or any corporation succeeding to the Company or acquiring its property
and assets,
pursuant to reorganization proceedings or dissolution or liquidation proceedings
or upon any
merger, consolidation, sale, lease, transfer or other disposal, if such stock or
obligations are
subordinate and junior at least to the extent provided hereunder to the payment
of Senior Debt to
the extent then outstanding and to the payment of any stock or obligations which
are issued in
exchange for Senior Debt to the extent then outstanding; and
(ii) the Payee will (after all principal and interest owing on such Senior Debt
has
been paid in full) be subrogated to the rights of the holders of such Senior
Debt to receive
distributions applicable to the Senior Debt to the extent that distributions
otherwise payable to the
Payee have been applied to the payment of Senior Debt.
(f) No holder of Senior Debt shall be prejudiced in its right to enforce the
subordination of this Note by any act or failure to act on the part of the
Company.
(g) The provisions of Section 2 are for the purpose of defining the relative
rights of
holders of Senior Debt, on the one hand, and the Payee, on the other hand. No
provision of such Section
will be construed to prevent the Payee from exercising all remedies otherwise
available under this Note or
under applicable law upon the occurrence of any Event of Default, subject to the
rights of the Payee or
holders of the Senior Debt as set forth above to receive cash, assets, stock or
obligations otherwise payable
or deliverable to the Payee. No provision of such Section will be deemed to
subordinate to any extent, any
claim or right of the Payee to any claim against the Company by any creditor or
any other Person except to
the extent expressly provided in such Section. No payments made under the terms
of this Note shall be
subject to the provisios of clause (e) of this Section 2 if such payment or
distribution is made while the
Company and Grand and their respective Affiliates are in compliance with the
covenants set forth in the
documentation defining the Senior Debt or are not otherwise in default
thereunder.
3. Events of Default.
(a) Definition. For the purposes of this Note, an "Event of Default" will be
deemed to have occurred if:
(i) the Company fails to pay when due the installment of principal or interest
then due and payable on this Note, whether or not such payment is prohibited by
paragraph 2
hereof, and such failure has continued for a period of 15 days after the
Company's receipt of written
notice thereof, unless such failure to pay results from a prohibition on such
payments by the holders
of Senior Debt pursuant to Paragraph 2 hereof, in which case such failure to
pay shall have continued for 90 days;
(ii) the Company fails to perform or observe any other provision contained in
this Note or any material failure to perform any material covenant or obligation
set forth in the
Asset Purchase Agreement (as defined below) and such failure continues for a
period of 15 days
after the Company' receipt of written notice thereof; provided, however, that if
such failure cannot
be cured within 15 days, it shall be extended for a reasonable period of time
thereof for so long as
the Company promptly takes steps to cure such default; or
(iii) the Company makes an assignment for the benefit of creditors or admits in
writing its inability to pay its debts generally as they become due; or an
order, judgment or decree is
entered adjudicating the Company bankrupt or insolvent or any order for relief
with respect to the
Company is entered under the Federal Bankruptcy Code; or the Company petitions
or applies to
any tribunal for the appointment of a custodian, trustee, receiver or liquidator
of the Company or of
any substantial part of the assets of the Company, or commences any proceeding
or any such
petition or application is filed, or any such proceeding is commenced, against
the Company and
either (A) the Company by any act indicates its approval thereof, consents
thereto or acquiesces
therein or (B) such petition, application or proceeding is not dismissed within
90 days.
(b) Consequences of Events of Default.
(i) The Payee shall be entitled to exercise its rights under the terms of that
certain Stock Pledge Agreement dated the date hereof given by Grand in favor of
the Payee;
(ii) In the event an Event of Default occurs as set forth in Section (3)(a)(i),
Payee shall also be entitled to additional interest, to accrue at a rate of
9.76% per annum, for each
day such Event of Default continues; and
(iii) The Payee will also have any other rights which such Payee may have
pursuant to applicable law.
4. Amendment and Waiver. Except as otherwise expressly provided herein, the
provisions of
this Note may only be amended by written agreement between the Company and the
Payee. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon the Payee at the time and each future Payee.
5. Cancellation. After all principal owed on this Note has been paid in full,
this Note will be surrendered to the Company for cancellation and will not be
reissued.
6. Place of Payment. Payments of principal and interest are to be delivered to
the Payee at 34 Smith Street, Norwalk, CT 06851 or to such other address or to
the attention of such other Person as specified by prior written notice to the
Company. At the request of the Payee, all payments of principal
and interest on this Note will be made by wire transfer of immediately available
funds to an account which the Payee may designate from time to time.
7. Waiver of Presentment, Demand and Dishonor. Except as expressly set forth
herein, the
Company hereby waives presentment for payment, protest, demand, notice of
protest, notice of
nonpayment, notice of intention to accelerate, notice of acceleration, and
diligence with respect to this
Note, and waives and renounces all rights to the benefits of any statute of
limitations or any moratorium, appraisement, exemption or homestead.
No failure on the part of the Payee hereof to exercise any right or remedy
hereunder with respect to
the Company, whether before or after the happening of an Event of Default, shall
constitute waiver of any
future Event of Default orof any other Event of Default. No failure to
accelerate the debt of the Company
evidenced hereby by reason of an Event of Default or indulgence granted from
time to time shall be
construed to be a waiver of the right to insist upon prompt payment thereafter;
or shall be deemed to be a
notation of this Note or a reinstatement of such debt evidenced hereby or a
waiver of such right of
acceleration or any other right, or be construed so as to preclude the exercise
of any right the Payee may
have, whether by the laws of the state governing this Note, by agreement or
otherwise; and the Company
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.
8. Usury. Notwithstanding any provision to the contrary contained in this
Note, or any and all
other instruments or documents executed in connection herewith, the Payee and
the Company intend that
the obligations evidenced by this Note conform strictly to the applicable usury
laws from time to time in
force. If, under any circumstances whatsoever, fulfillment of any provisions
thereof or any other
document, at the time performance of such provisions shall be due, shall involve
transcending the limit of
validity prescribed by law, then, ipso facto, the obligation to be fulfilled
shall be reduced to the limit of such validity.
9. Assignment. This Note is the Note referred to in the Purchase Agreement and
is subject
to the terms and conditions set forth therein. The Payee shall not sell, assign
or transfer the Note (or any
interest therein) except as ma y be expressly permitted by the Purchase
Agreement. Any such attempted
transfer in violation of this Agreement or the Purchase Agreement shall be void
and of no effect.
10. Terms. All capitalized terms used but not otherwise in this Note shall have
the meaning as
defined in the Purchase Agreement.
11. Governing Law. The validity, construction and interpretation of this Note
will be governed,
construed, and enforced in accordance with the laws of the State of New York
(without giving effect to principles of conflicts of law).
IN WITNESS WHEREOF, the Company has executed and delivered this Note on the
date first
above written.
GREAT AMERICAN ACQUISITION CORP.
By:/s/ Lawrence Bernstein______________
Lawrence Bernstein
President
Exhibit 10.13
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT, dated as of January 1, 1999, is made in favor of
ARK
FOUNDATION LLC ("Pledgee"), by GRAND TOYS INTERNATIONAL, INC. ("Pledgor"). The
signatories to this Agreement may hereinafter also be referred to jointly as the
"Parties".
W I T N E S S E T H:
WHEREAS, pursuant to that certain Subordinated Promissory Note dated January 1,
1999 by
Great American Acquisition Corp. ("Great American") in favor of the Pledgee,
Great American is indebted
to the Pledgee in the principal amount of $1,500,000 (the "Note");
WHEREAS, Great American is an indirect wholly-owned subsidiary of the Pledgor;
and WHEREAS, the Pledgor has agreed to secure its obligations under the Note
with a pledge of 375,000 shares of its common stock.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
herein
contained and for other good and valuable consideration, receipt of which is
hereby acknowledged, the
Parties hereto agree as follows:
1. Definitions. As used in this Agreement:
"Collateral" shall mean the Securities (as hereinafter defined) and all
additional securities
which Pledgor or any successor in interest to Pledgor (with or without
additional consideration) is or
becomes entitled to by virtue of the ownership by such person of any of the
Securities or as the result of
any corporate reorganization, merger, consolidation, stock split, stock
dividend, conversion, preemptive
right or otherwise, and the proceeds thereof.
"Indebtedness" shall mean all obligations, liabilities and debts to
Pledgee under the Note.
"Securities" shall mean the 375,000 shares of Common Stock of Grand Toys
International, Inc.
2. Pledge of Collateral. To secure payment of the Indebtedness, Pledgor hereby
pledges and
deposits with Pledgee the Securities and hereby assigns and grants to Pledgee a
valid and perfected first
lien in all of its right, title and interest in and to (i) the Securities and
(ii) all other items of Collateral now
owned or hereafter acquired by Pledgor. So long as no Event of Default (as
defined in Section 6(a) below)
has occurred and is continuing, (A) the Securities shall be and shall remain
registered in the name of
Pledgor on the books and records of Pledgee, (B) Pledgor shall have the
exclusive right to exercise all
voting and other powers with respect to the Securities, if any, except as
otherwise provided herein and (C)
Pledgee shall not take any actions inconsistent with Pledgor's ownership of the
Securities, except as otherwise provided herein.
3. Binding Agreement. This Agreement, when executed and delivered, will
constitute the
valid and legally binding obligation of Pledgor, enforceable against Pledgor in
accordance with its terms.
4. Stock Splits, Stock Dividends and Other Distributions.
(a) Additional Securities. Pledgor agrees that in the event that Pledgor, by
virtue of its
ownership of the Collateral, becomes, entitled (with or without additional
consideration) to other or
additional securities as the result of any corporate reorganization, merger,
consolidation, stock split, stock
dividend, conversion or preemptive right or otherwise, or the exercise of any
options, warrants or other
rights to purchase shares of Common Stock, Pledgor shall:
(i) Delivery. Permit Pledgee to retain the certificates evidencing the
ownership
by Pledgor of such additional securities and agrees if such certificates are
delivered to Pledgor, to take
possession thereof in trust for Pledgee;
(ii) Assignment Separate from Certificate. Deliver to Pledgee an assignment
or
stock power with respect to such securities in form and substance satisfactory
to Pledgee, in its sole
discretion, executed in blank by Pledgor; and
(iii) Additional Documents. Deliver to Pledgee such other certificates, forms
and
other instruments as Pledgee may request in connection with such pledge.
(b) Additional Collateral. Pledgor agrees that such additional securities
shall constitute
a portion of the Collateral and be subject to this Agreement in the same manner
and to the same extent as
the Securities pledged hereby to Pledgee on the date hereof.
5. Representations and Warranties.
Pledgor hereby represents and warrants as follows:
(a) Pledgor has good and marketable title to the Collateral;
(b) None of the Collateral is subject to a pledge, claim, lien, security
interest, charge,
option, restriction or other encumbrance except for (i) the security interest
created by this Agreement, and
(ii) applicable restrictions on transfer under the Securities Act of 1933, as
amended (the "Securities Act"),
and the applicable state securities laws; and
(c) Pledgor has full power, authority and legal right to execute and deliver
this
Agreement and to pledge the Collateral pursuant to this Agreement. The pledge
of the Collateral by
Pledgor does not contravene any judgment or order of any court or regulatory
authority or of any
agreement or instrument to which Pledgor is a party or by which Pledgor or any
of its properties is bound
or constitutes a default thereunder.
6. Default and Remedies.
(a) Occurrence. An Event of Default hereunder shall occur if Pledgor shall
fail to
perform or observe any covenant or agreement contained in the Note or this
Agreement, or if a
representation or warranty contained in this Agreement shall be untrue in any
material respect, or if
Pledgor fails to pay the Indebtedness when due.
(b) Notice. Upon the occurrence of an Event of Default, Pledgor shall provide
immediate written notice to Pledgee stating that an Event of Default of which
Pledgor has, or should
reasonably be expected to have, knowledge has occurred and setting forth all
facts and circumstances
relating to such Event of Default.
(c) Remedies. If an Event of Default shall occur and be continuing, Pledgee,
at its option, may:
(i) Registration. Cause the Collateral to be registered in its name or in the
name of its nominee;
(ii) Voting Power. Exercise all voting powers pertaining to the Collateral
and otherwise act with respect thereto as though Pledgee were the owner thereof;
(iii) Distributions. Receive all dividends and all other distributions of any
kind whatsoever on all or any part of such Collateral;
(iv) Collection, Conversion. Exercise any and all rights of collection,
conversion or exchange, and any and all other rights, privileges, options or
powers of Pledgor pertaining or relating to
such Collateral; (v) Sale of Collateral. Subject to any applicable state or
federal securities laws,
sell, assign and deliver the whole, or from time to time, any part of the
Collateral at any broker's board or
at any private sale or at public auction, with or without demand for performance
or advertisement of the
time or place of sale or adjournment thereof or otherwise, and free from any
right of redemption (all of
which hereby expressly are waived by Pledgor) for cash, for credit or for other
property, for immediate or
future delivery, and for such price and on such terms as Pledgee in its sole
discretion may determine; and
(vi) Registration Rights. In the event that, following an Event of Default,
the
Pledgee shall acquire the Collateral to satisfy the obligations hereunder of
Great American under the Note,
Pledgor shall, at the demand of the Pledgee if all of the Securities cannot be
freely transferred, promptly file
a Registration Statement under the Securities Act of 1933 (the "Act"), covering
the resale of the
Collateral. The Pledgor shall have no obligation to register the Securities or
to maintain the effectiveness
of a registration statement if all of such Securities can be sold pursuant to
Rule 144 promulgated under the Act.
(vii) Other Remedies. Exercise any other remedy specifically granted under this
Agreement or any other remedy now or hereafter existing in equity, or at law, by
virtue of statute or otherwise.
With respect to the actions described in each of subsections (ii), (iv) and
(v) above, Pledgor
hereby irrevocably constitutes and appoints Pledgee its proxy and attorney-
in-fact with full power of
substitution and acknowledges that the constitution and appointment of such
proxy and attorney-in-fact are
coupled with an interest and are irrevocable.
(d) Pledgee May Bid. At any sale made pursuant to Section 6(c) above, Pledgee
may
bid for and purchase, free from any right of equity or redemption on the part
of Pledgor (the same hereby
being waived and released by Pledgor), any part or all of the Collateral that
is offered for sale, and Pledgee,
upon compliance with the terms of sale, may hold, retain and dispose of such
Collateral without further accountability therefor.
(e) Proceeds of Sale. The proceeds of any sale of the whole or any part of the
Collateral and any other moneys at the time held by Pledgee under the provisions
of this Agreement shall
be applied (i) first to the payment of the costs and expenses of such
collection, sale or other realization,
including out-of-pocket costs and expenses of Pledgee and the reasonable fees
and expenses of its agents
and counsel, and (ii) second, to the payment of the Indebtedness.
(f) No Duty of Pledgee. Pledgee shall not have any duty to exercise any of the
rights,
privileges, options or powers or to sell or otherwise realize upon any of the
Collateral, as hereinbefore
authorized, and Pledgee shall not be responsible for any failure to do so or
delay in so doing.
(g) Effect of Sale. Any sale of all or any portion of the Collateral pursuant
to Section
6(c) above shall operate to divest all right, title and interest of Pledgor to
the Collateral which is the subject of any such sale.
(h) Notice. Pledgee shall give not less than ten (10) business days prior
written notice
to Pledgor by facsimile or overnight courier of any sale pursuant to this
Section 6 in accordance with the
provisions of Section 9(h) below which Pledgor agrees shall be deemed reasonable
notice. Such notice
shall be deemed to have been given upon the sending of a facsimile with
confirmation of transmission or on
the next business day if sent by overnight courier service.
7. Pledgee's Obligations, Custodial Agreement, Performance Rights, Pledge Does
Not
Make Pledgee Shareholder. Pledgee shall not have any duty to protect, preserve
or enforce rights against
the Collateral other than a duty of reasonable custodial care of any such
collateral in its possession.
8. Termination of Pledge Agreement. Upon the payment and performance in full
of all
of the Indebtedness, Pledgee shall deliver to Pledgor the Collateral in its
possession and this Agreement
thereupon shall terminate and the Securities shall be returned by the Pledgee to
the Pledgor.
9. Miscellaneous.
(a) Exercise of Rights. Pledgor unconditionally agrees that if an Event
of Default has
occurred and is continuing, Pledgee may exercise its rights and remedies
hereunder prior to, concurrently
with, or subsequent to the exercise by Pledgee of its rights and remedies
against Pledgor or any other
person. The obligations of Pledgor under this Agreement shall be absolute and
unconditional and shall
remain in full force and effect.
(b) Modification. Any modification or waiver of any provision of this
Agreement, or
any consent to any departure by Pledgor therefrom, shall not be effective in any
event unless the same is in
writing and signed by Pledgee and then such modification, waiver or consent
shall be effective only in the
specific instance and for the specific purpose given. Any notice to or demand
on Pledgor in any event not
specifically required of Pledgee hereunder shall not entitle Pledgor to any
other or further notice or demand
in the same, similar or other circumstances unless specifically required
hereunder.
(c) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE
LAWS AND DECISIONS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
PRINCIPLES Of CONFLICTS OF LAW CONTAINED THEREIN.
(d) Severability. In the event that any provision of this Agreement is deemed
to be
invalid by reason of the operation of any law, or by reason of the
interpretation placed thereon by any court
or any governmental body, this Agreement shall be construed as not containing
such provision and any and
all other provisions hereof which otherwise are lawful and valid shall remain in
full force and effect.
(e) Successors and Assigns. This Agreement shall inure to the benefit of the
successors,
assigns and participants of Pledgee and shall be binding upon the successors
and assigns of Pledgor.
(f) Counterparts. This Agreement may be executed in one or more counterparts,
each
of which shall be deemed to be an original, but all of which when taken together
shall be deemed to be one and the same instrument.
(g) Headings. The various headings in this Agreement are inserted for
convenience only
and shall not affect the meaning or interpretation of this Agreement or any
provision thereof.
(h) Notices. All notices, consents, requests and demands to or upon the
respective
parties hereto shall be in writing and mailed or delivered to the party for whom
it is intended at such
address as may from time to time be designated in a notice mailed or delivered
to the other party as herein
provided; provided that, unless and until some other address be so designated,
all notices or
communications by Pledgor to Pledgee shall be mailed or delivered to Pledgee at
its executive offices at:
Ark Foundation LLC, 34 Smith Street, Norwalk, CT 06851 Attn: Ofer Nissim with a
copy to Mark A.
Sank, Esq., Trow & Sank, P.C. 30 Oak Street, Stamford, CT 06905 and all notices
or communication by
Pledgee to Pledgor mailed to Pledgor at Great American Acquisition Corp., 1710
Route Transcanadienne,
Dorval, Quebec, H9P 1H7 Canada, Attn: Ron Goldenberg.
IN WITNESS WHEREOF, Pledgor and Pledgee have caused this Agreement to be
executed as of the date first above written.
ARK FOUNDATION LLC
By: /s/ Ofer Nissim
Ofer Nissim
President
GRAND TOYS INTERNATIONAL, INC.
By:___/s/ Lawrence Bernstein___________
Lawrence Bernstein
President
Exhibit 21
The following is a list of the Company's subsidiaries and subsidiaries of
subsidiaries of the Company:
Grand Toys (U.S.) Ltd.
Grand Toys Ltd.
Grand Concepts, Inc.
Ark Puzzles, Inc.
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our report dated February 12,
1999, in this Annual Report on Form 10-K of Grand Toys International, Inc. for
the year ended December 31, 1998.
Chartered Accountants
Montreal, Canada
March 29, 1999
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 28, 1999 GRAND TOYS INTERNATIONAL, INC.
By: /s/ Stephen Altro
Stephen Altro
Chairman
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/ Stephen Altro March 28, 1999
Stephen Altro Chairman and
Director (Principal
Executive Officer)
/s/ Ron Goldenberg March 28, 1999
Ron Goldenberg Vice President, Chief
Financial Officer, Secretary,
Treasurer and Director
(Principal Financial and
Accounting Officer)
/s/ Lawrence Bernstein President March 28, 1999
Lawrence Bernstein
/s/ David Mars Director March 28, 1999
David Mars
/s/ Elliot Bier Director March 28, 1999
Elliot Bier
/s/James Rybakoff Director March 28, 1999
James Rybakoff
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 28, 1999 GRAND TOYS INTERNATIONAL, INC.
By:
Stephen Altro
Chairman
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
March 28, 1999
Stephen Altro Chairman and
Director
March 28, 1999
Ron Goldenberg Vice President, Chief
Financial Officer, Secretary,
Treasurer and Director
Lawrence Bernstein President March 28, 1999
Director March 28, 1999
David Mars
Director March 28, 1999
Elliot Bier
James Rybakoff Director March 28, 1999
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