<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1999
REGISTRATION NO. 333-80131
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
<TABLE>
<S> <C>
Futech Interactive Products Futech Toys & Games, Inc.
(Delaware) Inc. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CHARTER)
Nevada
Delaware (STATE OR OTHER JURISDICTION OF INCORPORATION OR
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
ORGANIZATION)
3944
3944 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
NUMBER)
91-1980816
86-0957283 (I.R.S. EMPLOYER IDENTIFICATION NO.)
(I.R.S. EMPLOYER IDENTIFICATION NO.)
Futech Toys & Games, Inc.
Futech Interactive Products (Delaware) Inc. c/o Fundex Games, Ltd.
2999 North 44th Street, Suite 225 2257 Directors Row
Phoenix, Arizona 85018-7247 Indianapolis, Indiana 46241
(602) 808-8765 (317) 248-1080
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICE) EXECUTIVE OFFICE)
</TABLE>
------------------------
FREDERICK B. GRETSCH, SR.
Secretary
Futech Interactive Products (Delaware) Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
P. ROBERT MOYA, ESQ.
QUARLES & BRADY LLP
ONE EAST CAMELBACK ROAD, SUITE 400
PHOENIX, ARIZONA 85012-1649
TELEPHONE: (602) 230-5500
FACSIMILE: (602) 230-5598
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G. check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
CALCULATION OF REGISTRATION FEE
The registration fee was previously calculated and paid with the filing on
June 7, 1999 of the Registrants' initial registration statement on Form S-4.
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<PAGE> 2
This Pre-Effective Amendment No. 2 to the registration statement is being
filed for the purpose of filing auditors' consents including their reports on
the financial statements, and updating factual information as necessary
elsewhere in the registration statement. This registration statement is not yet
effective and is still under review by the SEC. This registration statement will
be further amended prior to any request by the registrants that it be declared
effective by the SEC.
This filing contains a form of prospectus/proxy statement and five of
prospectus/proxy statement supplements, one for each of the five merging
companies that are parties to the merger agreement. We intend and expect that
the shareholders of a particular merging company will receive the
prospectus/proxy statement supplement that relates to that merging company,
bound together with the prospectus/proxy statement. The shareholders of any
merging company will also have the opportunity to receive, upon request, the
prospectus supplements for all or any of the other merging companies. Thus, for
example, the shareholders of Janex will automatically receive the final
prospectus/proxy statement supplement that relates to Janex, bound together with
the prospectus/proxy statement for the transaction as a whole, and they will
also have the opportunity to receive, upon request, the supplements that relate
to Futech, Fundex, Trudy and DaMert.
<PAGE> 3
Subject to Completion, dated August 6, 1999
FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.
FUTECH INTERACTIVE PRODUCTS, INC.
JANEX INTERNATIONAL, INC.
TRUDY CORPORATION
FUNDEX GAMES, LTD.
DAMERT COMPANY
PROSPECTUS/PROXY STATEMENT
This prospectus/proxy statement, together with the related prospectus/proxy
statement supplement for each of the merging companies identified below,
constitutes the prospectus of Futech Interactive Products (Delaware) Inc. ("New
Futech") and Futech Toys & Games, Inc., ("New Sub") in connection with the offer
and issuance of their securities pursuant to the Merger Agreement dated as of
June 7, 1999, by and among Janex International, Inc., Futech Interactive
Products, Inc., Trudy Corporation, Fundex Games, Ltd., DaMert Company, New
Futech and New Sub. Under the Merger Agreement, first Futech and then Janex,
Trudy, and DaMert will merge with and into New Futech, which will survive the
mergers, and Fundex will merge into New Sub, which will survive as a
wholly-owned subsidiary of New Futech. Each share of outstanding stock of any of
the merging companies immediately prior to the mergers (other than dissenting
shares) will be converted into the right to receive a combination of cash,
shares of New Futech stock and promissory notes of New Futech or New Sub, each
in specified amounts for each merging company. See "DESCRIPTION OF THE MERGERS
AND THE MERGER AGREEMENT" beginning at page 14. Outstanding options for shares
of Futech, Janex, Trudy and Fundex will also be converted into options for
shares of common stock of New Futech, and employment agreements with key
executives (including affiliates of the merging companies) will provide for
additional options for New Futech common stock. Assuming no outstanding Futech,
Janex or Fundex options or warrants are exercised prior to the mergers, a
minimum aggregate of 5,867,628 shares and a maximum aggregate of 5,955,297
shares of New Futech common stock, a minimum aggregate of $768,330 and a maximum
aggregate of up to $2,116,830 in cash and a minimum aggregate of $5,751,500 and
a maximum aggregate of $7,100,000 in promissory notes of New Futech or New Sub,
will be issued to the stockholders of Janex, Futech, Trudy, Fundex and DaMert in
the mergers. In addition, certain outstanding indebtedness in the amount of
$10,000,000 is expected to be exchanged for 2,222,222 shares of New Futech
preferred stock shortly after the mergers. Former stockholders of Fundex may
exchange their New Futech common stock for the license rights in the "Phase 10"
family of games and former stockholders of Trudy may become entitled to receive
additional shares of New Futech common stock or to exchange the New Futech
shares or debentures in the future under certain circumstances.
This prospectus/proxy statement and the related prospectus/proxy statement
supplement for the applicable merging company also are being furnished to you
and the other stockholders of each merging company in connection with the
solicitation of proxies by your board of directors for use at the Special
Meeting of Stockholders at which your directors will ask you to consider and
vote upon a proposal to approve and adopt the Merger Agreement.
The mergers cannot be consummated unless: (a) stockholders of Futech,
Janex, Trudy, Fundex and DaMert, voting separately at their respective meetings
of stockholders, each approve the mergers, and (b) other conditions included in
the Merger Agreement are either satisfied or waived. See "DESCRIPTION OF THE
MERGERS AND THE MERGER AGREEMENT."
This prospectus/proxy statement and the related prospectus/proxy statement
supplement are first being mailed to stockholders of Futech, Janex, Trudy,
Fundex and DaMert on or about , 1999.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY
STATEMENT AND THE RELATED PROSPECTUS/PROXY STATEMENT SUPPLEMENT. THE PROPOSED
MERGERS ARE COMPLEX TRANSACTIONS. WE STRONGLY URGE YOU TO READ AND CONSIDER
CAREFULLY THIS PROSPECTUS/PROXY STATEMENT AND THE RELATED PROSPECTUS/PROXY
STATEMENT SUPPLEMENT IN THEIR ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO
UNDER "RISK FACTORS" BEGINNING ON PAGE 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus/proxy statement or the accompanying prospectus/proxy statement
supplement is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus/proxy statement is , 1999.
<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/PROXY STATEMENT AND THE ACCOMPANYING PROSPECTUS/PROXY
STATEMENT SUPPLEMENT. NEITHER NEW FUTECH NOR ANY OF THE MERGING COMPANIES HAS
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEW FUTECH AND NEW SUB ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS PROXY/ STATEMENT AND THE
ACCOMPANYING PROSPECTUS/PROXY STATEMENT SUPPLEMENT IS ACCURATE ONLY AS OF THE
DATE ON THE FRONT OF THESE DOCUMENTS. THE BUSINESS, FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND PROSPECTS OF NEW FUTECH OR OF ANY OF THE MERGING COMPANIES MAY
HAVE CHANGED SINCE THAT DATE.
TABLE OF CONTENTS
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SUMMARY..................................................... 1
Brief Description of Parties.............................. 1
New Futech's Business Strategy............................ 3
Summary Description of Merger and Merger Agreement........ 4
Conditions to the Mergers................................. 4
Dissenters' Rights; Comparison of Stockholders' Rights.... 5
Procedures for Exchange of Certificates................... 5
Phase 10 Rights of Fundex Stockholders; Conditional Rights
of Trudy Stockholders.................................. 5
Other Interests of Certain Persons in the Mergers;
Conflicts of Interest.................................. 5
Certain Federal Income Tax Consequences................... 6
Comparative Market Price and Dividend Information......... 6
Comparative Historical and Pro Forma Per Share Data....... 7
Restrictions on Resales by Affiliates of the Merging
Companies.............................................. 7
RISK FACTORS................................................ 8
DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT......... 14
Effective Time and Consequences........................... 14
Basic Terms of Merger Agreement........................... 14
Exchange of Shares........................................ 17
Background of the Mergers................................. 17
Special Arrangements Relating to New Sub and "Phase 10"
Assets................................................. 20
Employment Agreements with Affiliates..................... 21
Other Aspects of the Merger Agreement; Certain Covenants
of the Merging Companies............................... 21
Indemnification by New Futech and by Certain
Stockholders........................................... 23
Regulatory Matters........................................ 23
Conditions to Closing..................................... 24
Dissenters' Rights........................................ 24
Termination of the Merger Agreement....................... 24
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
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UNAUDITED PRO FORMA FINANCIAL DATA.......................... 25
NEW FUTECH'S BUSINESS....................................... 32
Company Overview.......................................... 32
Competitive Advantages.................................... 33
Business Strategy......................................... 33
Sales Strategy............................................ 34
Marketing Strategy........................................ 35
Public Relations Strategy................................. 35
Growth Strategy........................................... 35
Overview of Operating Units and Their Industries.......... 38
Licensing Technology and Other Rights to Other
Companies.............................................. 43
Recent Acquisitions....................................... 44
Reasons for Mergers....................................... 44
Specific Reasons for Previous Acquisitions and Proposed
Mergers................................................ 45
Integration of Merging Companies' Facilities.............. 46
Integration of Management of Managing Companies........... 47
Strategy for Future Acquisitions.......................... 48
Product Design............................................ 48
Proprietary Product Lines................................. 49
Strategy for Licensing Characters......................... 53
Proprietary Technology and Patented Technology............ 54
Manufacturing............................................. 54
Customer Base............................................. 54
Markets................................................... 55
Competition............................................... 55
Research and Development.................................. 56
Distribution and Logistics................................ 56
Employees................................................. 57
Properties................................................ 57
Government Regulations.................................... 58
Legal Proceedings......................................... 58
NEW FUTECH'S MANAGEMENT..................................... 59
Directors and Executive Officers.......................... 59
Management Team........................................... 61
Employment Agreements..................................... 61
Executive Compensation.................................... 63
Compensation of Directors................................. 64
1999 Stock Option Plan.................................... 65
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 68
NEW FUTECH'S STOCKHOLDERS................................... 71
</TABLE>
ii
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<TABLE>
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DESCRIPTION OF NEW FUTECH CAPITAL STOCK..................... 73
EXPERTS..................................................... 73
LEGAL MATTERS............................................... 74
WHERE YOU CAN FIND MORE INFORMATION......................... 74
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDICES
Appendix A -- Merger Agreement............................ A-1
Appendix B -- Certificate of Futech Interactive Products
(Delaware) Inc. ....................................... B-1
</TABLE>
iii
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SUMMARY
This summary should be read in conjunction with the more detailed
information appearing elsewhere in this prospectus/proxy statement and the
related prospectus/proxy statement supplement for each of the merging companies.
In the narrative portion of this document, all references to shares of stock are
stated in quantities that reflect the exchange ratio in the mergers, unless
indicated otherwise (this excludes the F-pages).
BRIEF DESCRIPTION OF PARTIES
NEW FUTECH. New Futech is a newly-organized Delaware corporation that has
been formed to be the surviving parent corporation under the Merger Agreement.
New Futech has had no operations prior to the date of this prospectus/proxy
statement. Under the Merger Agreement, first Futech and then Janex, Trudy and
DaMert will merge with and into New Futech, which will survive the mergers. As a
part of the mergers, New Futech will change its name to "Futech Interactive
Products, Inc." New Futech's address is:
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
NEW SUB. New Sub is a newly-organized Nevada corporation that has been
formed to be the surviving subsidiary corporation of New Futech under the Merger
Agreement. New Sub has had no operations prior to the date of this
prospectus/proxy statement. Under the Merger Agreement, Fundex will merge with
and into New Sub, which will survive that merger as a wholly-owed subsidiary of
New Futech. The stock of New Sub will be pledged to the former stockholders of
Fundex to secure the promissory notes of New Sub issued to them in connection
with the mergers. In addition, the former stockholders of Fundex who do not
elect the All Cash Alternative will receive a conditional option to purchase New
Sub's license to market the "Phase 10" family of games in 2002 in exchange for
the New Futech stock they receive in the mergers (but not the cash or promissory
notes), exercisable only if either (a) the promissory notes of New Sub are not
paid when due or (b) the stock has not achieved targeted liquidity and a
valuation of at least $7.50 per share ($4,500,000 in the aggregate, if no
stockholders elect the All Cash Alternative) within three years after the
completion of the mergers. See "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT." New Sub's address is:
Futech Toys & Games, Inc.
c/o Fundex Games, Ltd.
2257 Directors Row
Indianapolis, Indiana 46241
(317) 248-1080
FUTECH. Futech designs, publishes, hires subcontractors to manufacture and
markets interactive, educational, promotional and entertainment products (i.e.,
books, game boards with sound capabilities and specialty post cards) targeted
primarily towards children. Futech's patented technology utilizes specialized
conductive ink to print interactive touch points. These touch points trigger
speech, music and sound effects. Futech also distributes proprietary products,
as well as those of third party publishers, to warehouse clubs, mass
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market retailers, national book chains, specialty and independent retailers and
major toy chains. Futech's address is:
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
JANEX. Janex was incorporated in Colorado in 1986. Janex designs, hires
subcontractors to manufacture and markets children's toys, banks, flashlights
and battery operated toothbrushes marketed under the brand name Janex. Janex
incorporates licensed characters into many of its products, and sells its
products to United States mass merchant retailers, toy specialty stores and
department stores. Janex's address is:
Janex International, Inc.
c/o Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
TRUDY. Trudy Corporation was initially organized as a Connecticut
corporation under the name "Norwest Manufacturing Corporation" in 1979. Trudy,
which does business under the name Soundprints, publishes juvenile story books
and audio-cassettes which are sold in conjunction with contract manufactured
educational toys to the retail and mail order markets. Trudy's address is:
Trudy Corporation
353 Main Avenue
Norwalk, CT 06851-1552
(203) 846-2274
FUNDEX. Fundex Games, Ltd. was originally incorporated in the State of
Indiana as "Third Quarter, Inc." in 1991. Fundex develops, markets, and
distributes a variety of games and toys for both children and adults, including:
- card games, puzzles and board games, including the Phase 10 card game and
its sister products;
- skill and action games for children;
- games, puzzles and toys featuring characters licensed from third parties;
and
- spring and summer toys for children, including jump ropes, water toys and
water games.
Fundex's address is:
Fundex Games, Ltd.
2237 Directors Row
Indianapolis, Indiana 46241
(317) 248-1080
DAMERT. DaMert Company was founded in 1973 and incorporated in 1979.
DaMert creates and produces toy and gift products targeted primarily to children
ages 6-12 with nature and science themes. Presently, the product base includes
over 200 toys, gifts and
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puzzles selling through catalogs, museums, department stores, specialty stores
and toy stores nationwide. DaMert's address is:
DaMert Company
1609 Fourth Street
Berkeley, California 94710
(510) 524-7400
NEW FUTECH'S BUSINESS STRATEGY
Through the mergers, New Futech will become a diversified children's
product company that designs, develops and distributes proprietary children's
products such as books, games, toys and stationary. Many of New Futech's
products will incorporate its proprietary interactive technologies, which we
expect to provide significant competitive advantages when combined with the
synergy of the five merging companies.
We expect to operate using an entrepreneurial style of management with five
separate business operating units. Each unit will have a vice president
responsible for its performance, including day-to-day operations, products and
sales. Corporate management and staff will be responsible for support and
coordination of the five business units.
New Futech's objective is to become a significant designer, developer and
distributor of affordable children's products. While the mergers are a major
step toward achieving this objective, New Futech intends to expand product
lines, enhance product brand awareness, enhance operational efficiencies, expand
distribution, strengthen and accelerate research and development, penetrate
international markets, raise additional capital, capitalize on proprietary brand
names and pursue additional, big name licenses, enhance gross profit margins,
enter supplementary education channels of distribution, and take advantage of
expected public relations opportunities.
New Futech will begin with a diversified base of established retail
customers (representing over 26,000 retail locations) that we believe will allow
us to significantly expand sales, especially the distribution of our proprietary
products. With our experienced management team, we believe the mergers will
provide the opportunity to attain profitable growth into the future.
On a pro forma basis, the combined companies in this merger have combined,
recurring losses from operations, combined negative cash flows, and combined
negative working capital. As a result of the merger and after the merger, New
Futech has, and will have, capital needs for which we will need to raise
additional funds. These capital needs include cash payments for acquisition of
the companies in this merger, payment of debt acquired as a result of this
merger, lease commitments, development of products lines, upgrade or replacement
of computer systems, development of internet services, research and development
costs, promotion and advertising costs, and working capital for continuing
operations. Presently New Futech does not have financial resources to finance
all these needs, however we are in discussions and negotiations with commercial
banks, investment banks, and private investors to raise the necessary capital.
On May 24, 1999 Futech retained Schroder & Co., Inc. to act as its exclusive
financial advisor to perform general investment banking services. Although there
are no assurances that we will be successful in our fund-raising activities, we
believe the necessary capital will be available for our financial needs.
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<PAGE> 10
SUMMARY DESCRIPTION OF MERGER AND MERGER AGREEMENT
Under the Merger Agreement, first Futech and then Janex, Trudy, and DaMert
will merge with and into New Futech, which will survive the mergers, and Fundex
will merge into New Sub, which will survive as a wholly-owned subsidiary of New
Futech. Each share of outstanding stock of any of the merging companies
immediately prior to the mergers (other than dissenting shares) will be
converted into the right to receive a combination of cash, shares of New Futech
stock, and promissory notes of New Futech or New Sub, each in specified amounts
for each merging company. See "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT." Outstanding options for shares of Futech, Janex Trudy and Fundex
will also be converted into options for shares of common stock of New Futech,
and employment agreements with key executives (including affiliates of the
merging companies) will provide for additional options for New Futech Common
Stock. Assuming no outstanding options or warrants are exercised prior to the
mergers, a minimum aggregate of 5,867,628 and a maximum aggregate of up to
5,955,297 shares of New Futech common stock, a minimum aggregate of $768,330 and
a maximum aggregate of up to $2,116,830 in cash and a minimum aggregate of
$5,751,500 a maximum aggregate up to $7,100,000 in promissory notes of New
Futech or New Sub will be issued to the shareholders of Janex, Futech, Trudy,
Fundex and DaMert in the mergers, not counting conversions of outstanding
options or new options granted in connection with employment agreements. Certain
outstanding indebtedness in the amount of $10,000,000 is expected to be
exchanged for 2,222,222 shares of New Futech preferred stock shortly after the
mergers. In addition, unless the New Futech stock becomes publicly traded at a
value of at least $7.50 per share by the fifth anniversary of the closing, Trudy
shareholders will receive additional shares or a right to exchange their shares
for five year debentures under certain circumstances. See "DESCRIPTION OF THE
MERGERS AND THE MERGER AGREEMENT."
Fundex will merge with and into New Sub, which will survive that merger as
a wholly-owed subsidiary of New Futech. The stock and assets of New Sub will be
pledged to the former stockholders of Fundex to secure the promissory notes
issued to them in connection with the mergers. In addition, the former
stockholders of Fundex will receive a conditional option to purchase New Sub's
license to market the "Phase 10" family of games in 2002 in exchange for the New
Futech stock they receive in the mergers (but not the cash or promissory notes),
exercisable only if the promissory notes have not been repaid or the New Futech
stock received by the former Fundex stockholders in the mergers has not achieved
targeted liquidity and a valuation of at least $7.50 per share (an aggregate of
$4,500,000 if no Fundex stockholders elect the All Cash Alternative in the
mergers) within three years after the completion of the mergers. See
"DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT."
CONDITIONS TO THE MERGERS
The mergers cannot occur unless each class of outstanding voting stock of
each of the merging companies, by the affirmative vote of a majority of the
outstanding shares, votes to approve the mergers. Futech has the right to
terminate the Merger Agreement if holders who are otherwise entitled to receive
5% or more of the aggregate merger consideration to stockholders of all of the
merging companies combined (based on an assumed value of $7.50 per share of New
Futech common stock) exercise their dissenters' rights with respect to the
mergers. The mergers are also subject to a number of conditions of the type that
are customary in business combination transactions. See "DESCRIPTION OF THE
MERGERS AND THE MERGER AGREEMENT."
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DISSENTERS' RIGHTS; COMPARISON OF STOCKHOLDER RIGHTS
Each stockholder of each of the merging companies will have the right to
dissent from the mergers and receive the fair value of his or her stock instead
of receiving the merger consideration described in the Merger Agreement (see
page 14 for a description of the merger agreement). The particular requirements
applicable to the stockholders of each merging company who may wish to dissent
are described in the prospectus/proxy statement supplement for that merging
company. The prospectus/proxy statement supplement also compares the rights of
stockholders of the merging company under its articles or certificate of
incorporation, bylaws and applicable state law with the rights of stockholders
of New Futech under its certificate of incorporation, bylaws and Delaware law.
Copies of the supplements provided to the stockholders of any merging company
will be provided without charge upon request to New Futech by any stockholder of
another merging company.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
Promptly after the effective time of the mergers, the exchange agent under
the Merger Agreement will mail to each record holder of an outstanding share of
stock of any of the merging companies, other than stockholders who perfect their
dissenters' rights under applicable law, a form of letter of transmittal and
instructions for use in surrendering their old stock certificates for
certificates representing shares of New Futech stock, promissory notes and cash.
Until surrendered as contemplated in the merger agreements, and except for
stockholders who dissent, after the mergers the old stock certificates will
represent only the right to receive the applicable consideration under the
Merger Agreement, without interest. See "DESCRIPTION OF THE MERGERS AND THE
MERGER AGREEMENT -- Exchange of Shares."
PHASE 10 RIGHTS OF FUNDEX STOCKHOLDERS; CONDITIONAL RIGHTS OF TRUDY STOCKHOLDERS
If the mergers occur, Fundex will merge with and into New Sub, which will
survive that merger as a wholly-owned subsidiary of New Futech. The stock and
assets of New Sub will be pledged to the former stockholders of Fundex to secure
the promissory notes issued to them in connection with the mergers. In addition,
the former stockholders of Fundex will receive a conditional option to purchase
New Sub's license to market the "Phase 10" family of games in 2002 in exchange
for the New Futech stock they receive in the mergers (but not the cash or
promissory notes), exercisable only if the promissory notes have not been repaid
or the New Futech stock received by the former Fundex stockholders in the
mergers has not achieved targeted liquidity and a valuation of at least $7.50
per share (an aggregate of $4,500,000 if no Fundex stockholders elect the All
Cash Alternative in the mergers) within three years after the completion of the
mergers. In addition, unless the New Futech becomes publicly traded at a value
of at least $7.50 per share by the fifth anniversary of the mergers, Trudy
stockholders will receive additional shares or a right to exchange their shares
for five year debentures. See "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT."
OTHER INTERESTS OF CERTAIN PERSONS IN THE MERGERS; CONFLICTS OF INTEREST
Some of the current officers and directors of the merging companies will
become officers, directors and employees of New Futech after the merger, and
some of them or their affiliates will receive employment contracts or other long
term service contracts with New Futech. In addition, New Futech has promised to
repay certain indebtedness of the
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<PAGE> 12
merging companies to those persons and has promised to secure the release of
their outstanding personal guarantees and collateral pledges with respect to
outstanding obligations of certain of the merging companies. See "CERTAIN
TRANSACTIONS." These agreements could create a conflict of interest for the
affected officers and directors of the merging companies. The board of directors
of each merging company was aware of these conflicts and considered them and
other matters in determining that they should recommend approval of the mergers.
See "DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT -- Background of the
Mergers" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The mergers are intended to be "tax free reorganizations" so that no gain
or loss will be recognized by either the merging companies or their stockholders
with respect to the portion of the merger consideration that consists of common
stock of New Futech, except that a gain or loss will be recognized by the
minority shareholders of Janex in connection with its merger into New Futech.
Gain or loss also will be recognized by the other stockholders with respect to
the portion of the merger consideration to them that consists of cash (including
cash in lieu of fractional shares), or promissory notes, or certain other
property of New Futech or New Sub. However, no request has been or will be made
for a ruling from the Internal Revenue Service. We urge the stockholders of each
of the merging companies to consult their own tax advisors regarding all tax
consequences of the mergers. See "THE MERGERS AND RELATED
TRANSACTIONS -- Certain Federal Tax Matters" in the prospectus/proxy statement
supplement applicable to each merging company.
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION
There is no public trading market for the securities of New Futech or of
Futech, Fundex or DaMert. For purposes of the merger negotiations, the parties
valued New Futech stock at about $7.50 per share, though no appraisal or other
independent valuation was obtained. Janex common stock is traded on the OTC
Bulletin Board under the symbol "JANX." Janex Preferred Stock is not traded.
There is no established public trading market for Trudy common stock, although
it is traded sporadically on the OTC Bulletin Board under the symbol "TRDY." The
following table sets forth the high and low bid prices per share for the Janex
common stock for each fiscal quarter from January 1, 1997, through June 30,
1999, as reported by the National Association of Securities Dealers and the OTC
Bulletin Board and as adjusted to reflect the conversion of shares of Janex
stock not held by Futech into shares of common stock of New Futech in the
mergers. The historical quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and do not necessarily represent actual
transactions. On June 4, 1999 (the
6
<PAGE> 13
business day before the Merger Agreement was signed), the closing price of the
Janex common stock was $0.23 per share.
<TABLE>
<CAPTION>
PRICE PER
NEW FUTECH
SHARE RECEIVED IN
HISTORICAL PRICES MERGERS
------------------ ------------------
JANEX COMMON STOCK HIGH LOW HIGH LOW
- ------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
1st Quarter..................... $1.44 $0.56 $43.20 $16.80
2nd Quarter..................... 0.75 0.31 22.50 9.30
3rd Quarter..................... 0.67 0.05 20.10 1.50
4th Quarter..................... 0.55 0.13 16.50 3.90
Year Ended December 31, 1998
1st Quarter..................... 0.50 0.19 15.00 5.70
2nd Quarter..................... 0.48 0.19 14.40 5.70
3rd Quarter..................... 0.24 0.07 7.20 2.10
4th Quarter..................... 0.39 0.12 11.70 3.60
Year Ending December 31, 1999
1st Quarter..................... 0.35 0.17 10.50 5.10
2nd Quarter..................... 0.27 0.16 8.10 4.80
</TABLE>
As of March 31, 1999, there were approximately 781 and one stockholder(s)
of record of Janex common and preferred stock, respectively, as shown on the
records of its transfer agent. On the same date, there were 61 record holders of
Fundex common stock, 126 record holders of Futech common stock, three record
holders of Futech preferred stock, one record holder of DaMert common stock and
1,484 holders of Trudy common stock.
None of the merging companies has paid dividends on its common stock and
none of them anticipates paying dividends in the foreseeable future.
UNAUDITED PRO FORMA FINANCIAL DATA
New Futech is a newly organized corporation with no historical operations.
For information about the pro forma operating results and book value of New
Futech, see "UNAUDITED PRO FORMA FINANCIAL DATA."
RESTRICTIONS ON RESALES BY AFFILIATES OF THE MERGING COMPANIES
In connection with the mergers, we expect each affiliate of any of the
merging companies will not be permitted to sell shares of New Futech Common
Stock received in the mergers except in compliance with Rule 145 or otherwise in
compliance with the Securities Act.
7
<PAGE> 14
RISK FACTORS
In addition to the other information included in this prospectus/proxy
statement and in the prospectus/proxy statement supplement applicable to you,
you should carefully consider the risks described below in determining whether
to approve the Merger Agreement.
NEW FUTECH WILL INITIALLY DEPEND HEAVILY ON BORROWINGS.
Based on the most recently available balance sheets of each of the merging
companies and the terms of the Merger Agreement (including the required payments
of cash and promissory notes to stockholders of the merging companies), after
the mergers New Futech's consolidated current assets will be about $15,000,000,
its consolidated current liabilities will be about $41,000,000, its total
consolidated liabilities will be about $58,000,000, and its consolidated
tangible net worth will be about $3,000,000. Thus, about 95% of New Futech's
total consolidated capital will be from borrowings. Of this amount, $9,000,000
is under loan agreements that are currently in default and will need to be
replaced or renegotiated shortly after the mergers. The high level of borrowing
poses substantial risks to New Futech and its stockholders, which may include:
- New Futech may be unable to obtain necessary funding or to replace
existing loan agreements that are in default;
- New Futech will incur additional borrowing costs if interest rates rise;
and
- New Futech will be more vulnerable to competition, downturns in its
business and general economic factors.
Also, New Futech may not be able to further expand or replace current
sources of borrowing with ones equally or more favorable to New Futech, which
may limit its ability to expand or may force it to discontinue some of its
operations.
NEW FUTECH WILL NEED ADDITIONAL EQUITY WITHIN THE NEXT SEVERAL MONTHS.
Our high initial debt and the capital needed to grow our business as
planned will require us to raise additional capital in the public or private
debt or equity markets soon after the mergers. If we are unable to obtain the
needed capital, we may be required to sell some or all of our assets, and we may
be unable to continue as a going concern. The independent auditors' reports on
the financial statements of Futech, Janex and Trudy raise substantial doubt as
to those companies' ability to continue as going concerns.
THE MERGERS AND OTHER RECENT GROWTH PLACE NEW DEMANDS ON NEW FUTECH'S
MANAGEMENT.
Substantial risks are presented by the merger of the five companies and by
the recent acquisitions and other structural changes by several of those
companies. These risks include:
- potential losses or inefficiencies from integrating new people and
operations;
- extra costs of making technical, operational and administrative changes;
- extra efforts required for creating and preserving relationships with new
suppliers and customers;
- potential losses from management's focus on other challenges; and
8
<PAGE> 15
- higher costs from reliance on outside sources for working capital.
We cannot be certain we will be successful in managing these risks and
minimizing these additional costs. Indeed, Janex's revenues and operating
results declined significantly in the first quarter following Futech's
acquisition of a controlling interest in Janex, partly for these reasons.
NEW FUTECH AND THE MERGING COMPANIES HAVE NO COMBINED OPERATING HISTORY.
Although this prospectus/proxy statement includes certain pro forma
operating and balance sheet information for the combined enterprise after the
mergers occur, all of the merging companies are still operating more or less
independently. Stockholders should not assume its historical operations would
have matched that information had the mergers occurred at the beginning of 1998,
or that its future operations will do so. Combining the operations could
increase costs or reduce revenues or both.
NEW FUTECH COULD LOSE KEY PERSONNEL.
New Futech's success for the foreseeable future will depend upon the
efforts of all of its executive officers, many of whom are entrepreneurs who
have little experience working cooperatively within a management structure and
who have not had occasion to work cooperatively with each other in the past.
Strains from these new relationships, as well as normal attrition, could cause
the loss of key personnel, which could lead to less effective management and
unfavorable operating results. New Futech will not maintain key person life
insurance on the lives of any of its executive officers, and it might be unable
to prevent key people from leaving to work in other enterprises, even
competitive ones.
THE MERGING COMPANIES RELY ON A FEW KEY CUSTOMERS
New Futech and the merging companies have depended on a few key customers
for a large percentage of their sales. These include Futech, which relied on
Sam's Club and Costco Wholesale for 51.5% of its 1998 net revenues, Janex, which
relied on Toys 'R Us and Target for 53% of its 1998 net revenues, Trudy, which
relied on Advanced Marketing Services, Inc. for 28.8% of its 1999 revenues, and
Fundex, which relied on Wal-Mart for 18% of its 1998 revenue. The loss of any of
these key customers could materially and adversely affect our business.
NEW FUTECH COULD LOSE KEY RELATIONSHIPS WITH THIRD PARTIES.
New Futech is highly dependent upon preserving mutually beneficial
relationships with a variety of third parties, including:
- contract manufacturers for each of its product lines, some of whom would
be difficult or impossible to replace on short notice;
- large retail chains that purchase substantial portions of some product
lines;
- key licensing relationships with inventors, authors, publishers and
others; and
- key relationships with banks and other sources of debt and equity
financing.
Although the mergers may reduce these risks somewhat compared with the
individual merging companies by increasing the number of product lines and
distribution channels, the disruption of any of these key relationships for any
reason would materially and adversely affect our financial condition and results
of operations.
9
<PAGE> 16
NEW FUTECH'S INTERACTIVE TALKING PAGES TECHNOLOGY USES A SPECIALIZED
MANUFACTURING PROCESS.
The manufacturing process of New Futech's interactive talking Pages
technology utilizes a specialized process and specialized equipment to print and
cure conductive ink and dielectric material to the structure of the pages in the
book or gameboard. A major printing company in Hong Kong and China is currently
the Company's sole manufacturer to perform the printing and binding process for
books that incorporate this technology. If Futech is forced to use another
printer, New Futech could experience serious delays and/or possible cost
over-runs during the transition.
NEW FUTECH COULD BE HARMED BY UNKNOWN OR UNDISCLOSED LIABILITIES OR OTHER
PROBLEMS OF THE MERGING COMPANIES.
As the surviving corporations in the mergers, New Futech and New Sub will
be responsible for all liabilities and obligations of all of the merging
companies, whether or not they were known or disclosed to the other parties
prior to the mergers, and they may have no recourse or only limited recourse
against the former stockholders of a merging company with unanticipated
liabilities or other problems.
NEW FUTECH COULD OWE ADDITIONAL STOCK OR NOTES IN THE MERGERS OR COULD LOSE THE
RIGHTS TO THE PHASE 10 LICENSE OR OTHER ASSETS.
If New Sub fails to pay the promissory notes issued to the former
shareholders of Fundex when due, they could foreclose on the stock of New Sub
and effectively take back the business of Fundex and any profits from Janex's
toy business. Also, unless either (a) Futech or another party offers to buy for
at least $7.50 per share the Futech stock acquired in the mergers by those
Fundex stockholders who do not elect the All Cash Alternative or (b) by the
third anniversary of the mergers the New Futech stock develops an active trading
market at an average price of $7.50 per share, those former Fundex stockholders
will have the right to exchange their New Futech stock for the license rights to
the "Phase 10" family of games. Similarly, the former Trudy stockholders will
receive additional New Futech common stock if and to the extent New Futech's
initial public trading price is less than $7.50 per share, and they also will
have the right to exchange their New Futech stock for promissory notes if the
New Futech stock is not publicly traded within five years after the mergers.
Thus, if New Futech's business or stock price performs more poorly than the
parties hope and expect, or if New Futech is unable to create a public market
for its stock, New Futech could lose a valuable portion of its toys and games
operations, or it could be required to issue additional stock or promissory
notes. We cannot accurately predict these matters.
FUTURE ACQUISITIONS MAY CREATE TRANSITIONAL CHALLENGES.
New Futech's business strategy includes further growth through strategic
acquisitions, though we have not yet committed to any further business
combinations or acquisitions. This business strategy depends upon the
availability of suitable merger or acquisition candidates at reasonable
valuations, upon New Futech's ability to obtain capital for those transactions
and upon New Futech's ability to quickly resolve transitional challenges. These
transitional challenges include:
- integration of product lines, sales forces and contract manufacturers;
- decisions regarding divestitures and other charges;
10
<PAGE> 17
- extra costs associated with employee turnover or layoffs;
- risks of disruption in production or delivery cycles; and
- loss of sales momentum, among others.
We have only limited experience in managing these challenges, and we cannot
assure you that we will be able to do so successfully.
NEW FUTECH'S INTERNATIONAL OPERATIONS POSE SPECIAL POLITICAL AND ECONOMIC RISKS.
Some of New Futech's manufacturing and product sourcing operations are
based in China and elsewhere in the Pacific Rim. See "DESCRIPTION OF NEW
FUTECH'S BUSINESS." These international operations present New Futech with
special risks, including those associated with:
- new regulatory requirements;
- foreign currency fluctuations;
- trade or foreign currency exchange restrictions;
- potential political or economic instability; and
- cultural differences.
We cannot assure you that we will be successful in managing all of these
risks.
NEW FUTECH'S PRODUCTS COULD BECOME OBSOLETE OR COULD LOSE FAVOR WITH CONSUMERS.
Consumer tastes and preferences can change rapidly in our markets, and
competing products or new technologies for responding to consumer needs and
wishes can be introduced at any time. Our success will depend upon our ability
to deliver products which consumers desire at acceptable prices. The success of
our products depends upon a number of factors, including:
- creating or obtaining the successful product ideas;
- completing an attractive and appropriate product design in a timely and
efficient fashion;
- arranging for the manufacture and assembly of the products in a timely
and efficient manner;
- designing and implementing effective sales and marketing strategies; and
- delivering the product on time, on budget, and in high quality.
We cannot assure you that we will succeed in designing and producing
products which consumers desire at the times they want those products and at
prices they are willing to pay. If we do not consistently succeed in these
respects, that failure will have adverse effects on our results of operations
and financial condition.
MARKET DEMAND FOR NEW FUTECH'S PRODUCTS MAY DECLINE.
The demand for New Futech's products depends upon economic and competitive
conditions and consumer preferences in the markets and product lines in which it
competes or may compete in the future. A portion of the merging companies'
product lines have experienced recent sales declines, are always subject to
sales fluctuations, and we cannot be
11
<PAGE> 18
sure there will not be further declines, or declines for other of our product
lines, in the future.
NEW FUTECH'S PRODUCTS ARE IN HIGHLY COMPETITIVE MARKETS.
Many companies compete with New Futech with respect to one or more of its
products, and some of those companies have greater financial and other resources
than we do. Our anticipated product lines are also in highly competitive
industries. Raw material and contract manufacturing costs fluctuate and we
cannot always match cost increases with increases in the prices of our products.
To compete successfully, our products must excel in terms of technology, design,
quality, price competitiveness, durability and safety, and they must reach the
consumer quickly and through convenient and efficient distribution channels. We
cannot assure you that we will be able to meet each of these requirements better
than our competitors.
OUR GEOGRAPHICALLY DISBURSED OPERATIONS PRESENT MANAGEMENT AND LOGISTICAL
CHALLENGES.
We will initially have operations in California, Wisconsin, Indiana,
Illinois, New Jersey and Connecticut, as well as in China through its Hong Kong
subsidiaries. Most of our vendor manufacturers for its products are in Asia. Our
expected substantial number of diverse and geographically disbursed operations
may make it more difficult to quickly identify both opportunities and
operational difficulties and to respond to them appropriately. They also create
logistical difficulties in assuring the timely and efficient delivery of raw
materials and components to the manufacturing locations and finished products to
our customers.
OUR REVENUES AND FINANCIAL RESULTS VARY FROM QUARTER TO QUARTER.
Most of our products are often purchased as gifts, so a substantial portion
of our production must occur in advance of, and a substantial portion of our
sales generally occur during, the holiday selling seasons. This and other
factors are likely to cause our operating results to vary significantly from
quarter to quarter.
NEW FUTECH MUST CONTEND WITH THE YEAR 2000 ISSUE.
The Year 2000 issue concerns the potential exposure related to the
erroneous generation of business and financial information resulting from the
fact that certain computer systems and programs use two digits, rather than
four, to define the applicable year of business transactions and other matters
involving time or date functions. These programs may process data incorrectly or
stop processing data altogether. We rely heavily on vendor supplied technology
and recognize the potential business risks if either our systems or those of our
suppliers, customers, shippers, sales agents or others experience substantial
disruptions.
STOCKHOLDERS WILL NOT RECEIVE DIVIDENDS FOR THE FORESEEABLE FUTURE.
Our highly leveraged financial structure, together with the substantial
capital requirements we will need to expand our current product lines and
distribution channels and to make strategic acquisitions, make it unlikely that
dividends will be paid on our common stock for the foreseeable future.
12
<PAGE> 19
STOCKHOLDERS MAY BE UNABLE TO TRADE THE NEW FUTECH STOCK.
There is currently no public market for our common stock and other
securities that stockholders will receive in the mergers. Although we have
promised to use our best efforts to obtain a listing of the common stock on a
nationally recognized exchange or market at the earliest practical opportunity,
it cannot predict whether our common stock will trade actively. The promissory
notes that we will issue in the mergers will not trade on any market.
THERE HAS BEEN NO INDEPENDENT VALUATION OF THE NEW FUTECH STOCK.
None of the companies participating in the mergers engaged an independent
financial advisor to provide an estimate of value of any of the merging
companies or of New Futech or an opinion concerning the fairness of the merger
consideration to be received by the stockholders. Even if an active trading
market develops for the New Futech common stock, we have no independent basis
for any prediction about the price levels at which it might be expected to
trade.
NEW FUTECH'S CHARTER PROVISIONS MAY DISCOURAGE TAKE-OVER OFFERS.
Our directors are elected for three year terms and can be removed from
office during their terms only for "cause." In addition, as a Delaware
corporation, we are subject to certain restrictions on "business combinations"
with "interested stockholders." These provisions may tend to discourage
take-over offers that are not supported by our current management, even if those
offers may be in the best interests of the stockholders.
NEW FUTECH HAS AN UNRESOLVED DISPUTE ARISING FROM A PRIOR ACQUISITION.
We have an unresolved dispute with Gary R. "Joe" Billings arising from
Futech's acquisition of XYZ in 1998 and termination of his contract for cause.
New Futech could be required to pay Mr. Billings alleged damages of $1,150,000
plus costs and attorneys' fees, resulting from an alleged wrongful termination.
New Futech admits it owes Mr. Billings certain other amounts in connection with
the acquisition and has accrued such amounts in Futech's financial statements.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
SAFE HARBOR DISCLOSURE: FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus/proxy statement and each related prospectus/proxy statement
supplement contains or incorporates by reference forward-looking statements. The
factors identified above in this section are important factors (but not
necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, New Futech or any of the merging companies.
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, we caution that,
while such assumptions or bases are believed to be reasonable and are made in
good faith, assumed facts or bases almost always vary from actual results, and
the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. We cannot promise that statements of
expectation or belief will be achieved or accomplished. The words "believe,"
"expect," and "anticipate" and similar expressions identify forward-looking
statements throughout these materials.
13
<PAGE> 20
DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT
EFFECTIVE TIME AND CONSEQUENCES
Provided that all conditions to the consummation of the mergers contained
in the Merger Agreement have been satisfied or waived, the mergers will become
effective at 11:59 p.m. on the date that the certificate of merger or other
appropriate documents are filed with the applicable government officer or
agencies in the states in which each of the merging companies is incorporated
(the "Effective Time"). It is anticipated that the Effective Time will occur on
the date of closing of the Merger Agreement ("Closing"). Assuming the
stockholders of each of the merging companies have approved the mergers at their
respective stockholders' meetings, the Closing is expected to take place on or
about September , 1999 ("Closing Date"), although no assurance can be given in
this regard and the parties have the discretion to agree upon a different date.
As of the Effective Time, (a) first Futech and then Trudy, Janex and DaMert
will merge with and into New Futech, with New Futech continuing in existence as
the surviving corporation and changing its name to "Futech Interactive Products,
Inc." and (b) Fundex will merge with and into New Sub, which will be the
surviving corporation and a wholly-owned subsidiary of New Futech. New Futech
will possess all the properties, assets and rights of Futech, Trudy, Janex and
DaMert and will similarly become liable for all debts, liabilities and other
obligations of Futech, Trudy, Janex and DaMert. Similarly, New Sub will possess
all the properties, assets and rights of Fundex and will similarly become liable
for all debts, liabilities and other obligations of Fundex. The Board of
Directors and the executive officers of New Futech and New Sub will be the
persons described under the heading "NEW FUTECH'S MANAGEMENT." Some executive
officers of the merging companies will become employees of the surviving
corporation under revised job titles. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS." The Certificate of Incorporation and Bylaws of New Futech that
are attached as Appendix B will be the Certificate of Incorporation and Bylaws
of New Futech without any amendment except the name change mentioned above.
BASIC TERMS OF MERGER AGREEMENT
CONVERSION OF OUTSTANDING STOCK INTO CASH, STOCK AND PROMISSORY NOTES OF NEW
FUTECH OR NEW SUB
At the Effective Time of the Mergers, and on the terms described in the
Merger Agreement, all of the issued and outstanding shares of common and
preferred stock of each of the merging companies (other than any shares held by
another merging company or by New Futech or New Sub, all of which shall be
canceled, and dissenting shares (see "Dissenters' Rights")), will be converted
into the right to receive the consideration described in the table below.
However, the Merger Agreement provides that the holders of up to
approximately 29% of the outstanding stock of Fundex (i.e. all Fundex
stockholders except Carl E. Voigt, III and Carl E. Voigt, IV, who have agreed
not to receive this right) may elect instead to receive cash at the rate of
$2.84 per Fundex share (the "All Cash Alternative"). In that case the remaining
Fundex stockholders will receive:
- a one year promissory note in an aggregate amount equal to $4,500,000
minus the amount paid to stockholders who elect the All Cash Alternative;
plus
- approximately .3693 shares of New Futech common stock per Fundex share;
plus
14
<PAGE> 21
- their pro rata proportion (shared among all Fundex stockholders who do
not elect the All Cash Alternative) of .184635 shares of New Futech for
each of the Fundex shares as to which the All Cash Alternative is
selected.
In addition, if at the time the New Futech common stock is first traded and
listed on a U.S. registered securities exchange, its average closing price over
a specified 15 day period is less than $7.50 per share, the former Trudy
stockholders will receive additional shares of New Futech common stock in an
amount sufficient to cause the value of all such stock issued to them to equal
$3,000,000. If by the fifth anniversary of the closing the New Futech common
stock is still not publicly traded as described above, each former Trudy
stockholder will have the right to exchange New Futech stock for unsecured five
year debentures bearing interest at prime and with a principal amount equal to
$7.50 per share exchanged.
An aggregate of $10,000,000 of Futech indebtedness to three of its
stockholders will become indebtedness of New Futech after the mergers that will
thereafter be exchanged for 2,222,222 shares of New Futech Series A convertible
preferred stock with substantially similar terms and conditions as the Futech
preferred stock except that the new preferred stock will bear a dividend equal
to 10% of the related investment amount per annum.
The table below does not include options issued in connection with
employment agreements or options issued in exchange for outstanding options of
the merging companies. It assumes that no currently outstanding options or
warrants are exercised prior to the mergers except that it assumes that all
outstanding options for DaMert and Trudy common stock will be exercised prior to
or in connection with the mergers. If any outstanding options for Trudy common
stock are not exercised, the portion of the merger consideration allocable to
those shares will be reserved by New Futech pending their later exercise. The
consideration payable with respect to outstanding shares will not be affected.
Options and warrants for common stock of Futech or Janex will be converted into
options for New Futech stock in the ratio of one New Futech share for every 30
Janex or Futech shares.
Approximately 79% of the stock of Janex is owned by Futech and is reflected
in the exchange ratio of Futech.
15
<PAGE> 22
The table below also assumes that options for 52.63* shares of DaMert
common stock will be exercised immediately before the mergers and 42.10* shares
of DaMert common stock will be issued in exchange for outstanding stock
appreciation rights. A total of $200,000 in cash and 21,333 shares of New Futech
common stock will be paid by New Futech to the business broker of DaMert. An
additional $283,000 will be paid by new Futech to an investment banking firm, as
a transaction fee, for the inclusion of DaMert in this merger. A total of
$43,670 in cash will be paid by New Futech to the business broker of Trudy.
- -------------------------
* These share quantities do not reflect the exchange ratio in the mergers.
<TABLE>
<CAPTION>
APPROXIMATE PER SHARE
AGGREGATE CONSIDERATION CONSIDERATION
--------------------------------------- ----------------------------
COMMON COMMON
MERGING COMPANY CASH NOTES SHARES CASH NOTES SHARES
- --------------- ---------- ---------- ------------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Futech(1)............ $ 0 $ 0 4,121,920 $ 0 $ 0 .0391
Janex................ 0 0 162,230 0 0 .0333
Fundex(2)............ 0 4,500,000 600,000 0 2.7696 .3693
Trudy(3)............. 456,330 0 400,000 .0014 0 .0012
DaMert(4)............ 312,000 2,600,000 671,147 285.00 2,375.00 613.07
---------- ---------- ---------
Totals............... $ 768,330 $7,100,000 5,955,297
</TABLE>
- -------------------------
(1) In connection with the purchase of net assets of XYZ Group, Inc., Futech
owes $2,867,334 to Gary (Joe) Billings, which can be paid in cash or 477,889
shares of common stock which are included in the number above.
(2) The notes to the former Fundex stockholders, which will be due one year
after closing and bear interest at the rate of 10% per annum until due, will
be issued by New Sub and secured by a subordinated pledge of its assets and
a pledge of the New Sub stock. The notes will also be fully and
unconditionally guaranteed by New Futech. The amounts shown assume that no
Fundex stockholders elect the All Cash Alternative described above. If
stockholders elect the All Cash Alternative with respect to approximately
29% of Fundex's outstanding shares (the maximum possible amount under the
Merger Agreement), they would receive $1,348,500 in cash. The remaining
Fundex stockholders would receive an aggregate of $3,151,500 in Notes of New
Sub (approximately $2.7404 per remaining Fundex share) and an aggregate of
512,331 common shares of New Futech (approximately .4455 New Futech shares
per Fundex share). Substantial penalties will apply should New Futech
default on its payment obligations on the promissory notes.
(3) The amounts shown in the "Aggregate Consideration" columns assume that all
outstanding options for Trudy common stock are exercised prior to or in
connection with the mergers. If any options are not exercised prior to the
mergers the aggregate merger consideration will be proportionately reduced,
but the consideration per outstanding Trudy share will not be affected.
Trudy stockholders may in the future receive additional shares of New Futech
common stock, or may obtain the right to exchange their New Futech common
stock for a five-year debenture, all as described above.
16
<PAGE> 23
(4) The notes of New Futech that are issued to the DaMert stockholders will be
secured by a lien on the DaMert assets that is subordinated to DaMert's
existing or refinanced bank debt. The Notes are payable, without interest,
$520,000 within 30 days after the closing and the remaining $2,080,000
within seven months after the closing. Substantial penalties will apply
should New Futech default on its payment obligations on the promissory
notes, including the issuance of additional New Futech stock.
EXCHANGE OF SHARES
At or before the Effective Time, New Futech will deposit with American
Securities Transfer & Trust, Inc. (or another bank or trust company selected by
Futech), in its capacity as exchange agent under the Merger Agreement (the
"Agent"), the cash, promissory notes, options and stock of New Futech payable
pursuant to the terms of the Merger Agreement.
Promptly after the Effective Time, the Agent will mail to each record
holder of an outstanding certificate or certificates, which immediately prior to
the Effective Time represented outstanding shares of any of the merging
companies (the "Certificates"), a form letter of transmittal (the "Transmittal
Form") and instructions for use in effecting the surrender of Certificates in
exchange for the corresponding portion of the merger consideration. Stockholders
should not surrender their Certificates with their proxy cards. Upon surrender
to the Agent of a Certificate, together with the Transmittal Form duly executed
and any other required documents, the holder of the Certificate will be entitled
to receive in exchange therefor the corresponding portion of the merger
consideration and such Certificate will then be canceled. No interest will be
paid or accrued on the merger consideration payable upon the surrender of the
Certificate. If payment is to be made to a person other than the person in whose
name the Certificate surrendered is registered, it will be a condition of
payment that the Certificate so surrendered shall be properly endorsed or
otherwise in proper form for transfer and that the person requesting such
payment shall pay transfer or other taxes required by reason of the payment to a
person other than the registered holder of the Certificate surrendered or
establish to the satisfaction of the Agent that such tax has been paid or is not
applicable. Until so surrendered, each Certificate (other than Certificates
representing Dissenting Shares) shall represent for all purposes solely the
right to receive the corresponding portion of the merger consideration, without
any interest thereon. Any funds remaining with the Agent six months following
the Effective Time shall be delivered to New Futech, after which time former
stockholders of and of the merging companies, subject to applicable law, shall
look only to New Futech for payment of their claims for the merger consideration
for their shares, without interest.
After the close of business on the day prior to the Effective Time, there
no stock transfers will be permitted on the stock transfer books of any of the
merging companies. If, after the Effective Time, Certificates are presented to
the surviving corporation, they will be canceled and exchanged as provided
above.
BACKGROUND OF THE MERGERS
APRIL, 1998
Mr. Vincent W. Goett, Chairman and CEO of Futech, telephoned Les Friedland,
President of Janex, to express interest in Janex and a possible merger of the
two companies.
17
<PAGE> 24
AUGUST, 1998
Mr. Goett arranged for Janex's executives and counsel to visit Futech's
Phoenix, Arizona offices. During the meeting, the possibilities of a merger
between the two companies were discussed as well as a review of the products and
financial condition of Janex. At the end of the meeting, a tentative agreement
was reached resulting in a proposed term sheet drafted by Futech's counsel.
Subsequent to the visit, negotiations continued regarding Futech's acquisition
of shares and debt from certain stockholders of Janex holding a majority of
Janex's common stock. The negotiations culminated in a Letter of Intent between
Futech and those Janex stockholders dated August 24, 1998. Beginning August 30,
1998 and lasting for approximately a week, members of Futech management and
counsel visited the offices of Janex to perform due diligence procedures.
SEPTEMBER, 1998
On September 3, 1998, Mr. Goett telephoned Chip Voigt, President of Fundex,
to express interest in working together on the development, marketing and
production of certain game products utilizing Futech's proprietary technology
and exploring additional business synergies between the companies. On September
11, 1998, Mr. Goett arranged for Fundex executives to visit the Futech offices
in Phoenix. During the meeting, they toured the Futech facilities and discussed
Futech's proprietary technologies, Fundex' proprietary products, Fundex's
distribution facility, Fundex's sales network, and the possibilities for a
merger between the two companies.
On September 30, 1998, the Stock Purchase and Sale Agreement between
certain majority Janex stockholders and Futech was signed. Pursuant to that
agreement, Futech acquired a controlling interest in Janex on December 11, 1998.
NOVEMBER, 1998
In early November, 1998, Mr. Goett, having become aware of Trudy's interest
in acquisition candidates, placed a telephone call to William W. Burnham,
Trudy's CEO. Trudy's CFO, William Carney, returned the call to Mr. Goett. After
reviewing Futech's recent history and acquisition strategy, Mr. Goett expressed
interest in learning more about Trudy. A confidentiality agreement between the
two companies was signed on November 11, 1998. On November 16 and 17, 1998 at an
annual strategic planning retreat, Trudy management decided to continue merger
negotiations with Futech. On November 23 and 24, 1999, a meeting was held at
Futech's Phoenix offices with Futech management and Trudy management and
principal advisor. Basic terms of an agreement for Futech to acquire Trudy were
agreed to at these meetings.
DECEMBER, 1998
On December 11, 1998, details of the terms pursuant to which Futech would
acquire Trudy were discussed at a special Trudy Board of Directors meeting. The
terms were unanimously approved. On December 18, 1998, a Letter of Intent was
signed by both Trudy and Futech.
On December 11, 1998, the basic terms of a merger of Futech with and into
Janex were approved by the Board of Directors of Janex, subject to approval of
the stockholders of both companies. The parties later agreed to revise their
agreement to include all of the merging companies.
18
<PAGE> 25
JANUARY, 1999
On January 7, 1999, Fundex's President, Chip Voigt, and Fundex's counsel
met with Mr. Goett and Mr. Melvin J. Sauder, Futech's President, to further
discuss the structure of a possible merger of Futech and Janex.
On January 16, 1999, DaMert's consultant was informed by a Futech
consultant that Futech was a prospective strategic buyer for DaMert. Futech's
consultant introduced DaMert to Mr. Goett, in a January 25, 1999 meeting, where
Mr. Goett was provided a detailed written information book about DaMert.
FEBRUARY, 1999
Mr. Sauder visited the DaMert booth at the New York Toy Fair in early
February, 1999. On February 18, 1999, Mr. Goett discussed Futech's serious
interest in a business combination that would include DaMert. Shortly
thereafter, DaMert sent product samples and financial information to Mr. Goett.
MARCH, 1999
On March 1, 1999, Trudy's Board of Directors held a special meeting to
review the proposed merger with Futech and, after discussion and consideration,
approved and authorized the execution of a merger agreement. Each of Trudy and
Futech signed and delivered this original merger agreement on March 3, 1999,
subject to the approval of the stockholders of both companies. The parties later
agreed to reverse their merger agreement to include all of the merging
companies.
Over the two months beginning with the January 7, 1999, lengthy
negotiations continued between Fundex and Futech. The negotiations culminated in
a letter of intent between Futech and Fundex dated March 5, 1999. Since that
time, both parties continued to engage in extensive discussions to negotiate the
final terms of the Merger Agreement and have conducted extensive due diligence
with regard to each other's business.
DaMert's Chairman, Fred DaMert, along with an advisor, visited Futech in
Phoenix on March 4, 1999 and engaged in detailed negotiations with Mr. Goett and
other Futech executives. At this time, basic terms of an acquisition of DaMert
by Futech or its affiliate were agreed upon, subject to stockholder approval.
Fred DaMert and Gail DaMert, DaMert's CEO, visited Futech's offices the
following week. A letter of intent was signed on March 24, 1999. Thereafter
ensued a period of due diligence, strategic planning, structural decisions,
personnel assignments and merger documentation.
APRIL, 1999
During the months of April and May, all five companies involved in the
mergers continued due diligence procedures on all the companies involved in the
mergers and continued negotiations toward mutually acceptable terms for the
mergers. The parties determined, for a variety of reasons, that creating New
Futech and New Sub for the purposes of effecting the mergers, was desirable.
MAY, 1999
On May 24, 1999, the principals from all five companies involved in the
mergers met at the Futech offices in Phoenix, Arizona to negotiate remaining
issues in anticipation of signing the Merger Agreement.
19
<PAGE> 26
During the week of May 24, 1999, the respective Boards of Directors of
Futech, Janex, Trudy and DaMert approved the mergers and Merger Agreement.
JUNE, 1999
On June 7, 1999, Fundex's Board of Directors approved the mergers and
Merger Agreement and thereupon the Merger Agreement was signed and delivered by
all of the merging companies, subject to approval of their respective
stockholders and the other conditions specified in the Merger Agreement.
REASONS FOR MERGERS
For a complete discussion on the reasons for the mergers, see "Reasons for
the Mergers" and "Specific Reasons for Previous Acquisitions and Proposed Merger
Partners" beginning on page 44 of the prospectus/proxy statement.
SPECIAL ARRANGEMENTS RELATING TO NEW SUB AND "PHASE 10" ASSETS
While the other merging companies combine directly with New Futech, Fundex
will merge with and into New Sub, which also is expected to manage Janex's
operations after the mergers.
The one-year promissory notes issued by New Sub to the Fundex stockholders
who do not elect the All Cash Alternative in the mergers will be fully and
unconditionally guaranteed by New Futech and secured by a subordinated pledge of
New Sub's assets and by a pledge of all of the issued and outstanding stock of
New Sub. Since New Sub will manage the operations of Janex after the mergers,
any profits from those operations will also effectively secure the promissory
notes. In addition, Fundex and Futech are parties to a loan and license
agreement permitting Fundex (and New Sub) to borrow up to $1,500,000 from
Futech. Up to $750,000 of those loans may be forfeited as a penalty if New
Futech defaults on its notes to the former Fundex stockholders and as a result
they foreclose on the stock of New Sub.
In addition to receiving collateral for their promissory notes, the
stockholders of Fundex who do not elect the All Cash Alternative will receive a
limited form of price protection for the New Futech common stock that they
receive in the mergers. For a 60 day period beginning on the third anniversary
of the mergers, and assuming that the conditions described in the next paragraph
have not occurred, the former Fundex shareholders acting together can elect to
exchange the shares of New Futech common stock that they receive in the mergers
for all of New Sub's license rights in the "Phase 10" family of games currently
being sold by Fundex. The Merger Agreement requires New Futech to preserve those
license rights and to cause the Phase 10 licenses to be free of any liens by the
second anniversary of the mergers unless this right has been previously
terminated as described in the next paragraph.
The right of the former Fundex stockholders to reacquire the Phase 10
license rights will expire early, and therefore cannot be exercised, if the
one-year promissory notes issued in the mergers to the Fundex stockholders are
repaid in accordance with their terms and thereafter either of the following two
conditions is satisfied at any time before the former Fundex stockholders
reacquire the Phase 10 licenses:
- after the expiration of any lockup agreement with underwriters that
applies to the former Fundex stockholders, the average daily closing
price of New Futech common stock on its principal trading market for any
15 consecutive trading days
20
<PAGE> 27
equals or exceeds $7.50 per share (after adjustment for any stock splits,
stock dividends or similar transactions) and a trading volume of at least
40,000 shares per trading day; or
- New Futech offers to buy, or presents a bona fide third party offer to
buy, all of the New Futech stock owned by the former Fundex stockholders
(after adjustment for any stock splits, stock dividends or similar
transactions) at a price of at least $7.50 per share, with a closing date
not more than 60 days after the offer is made, whether or not the offer
is accepted.
The Merger Agreement provides that Carl E. ("Chip") Voigt, IV, who is
currently the CEO of Fundex, will be a director and vice president of the
toys/games division of New Futech as well as a director and president of New
Sub. Carl E. ("Pete") Voigt, III will be the vice president of New Sub. In
connection with these positions each of them will receive three year employment
contracts providing for a base salary of $150,000 per year and options for
33,333 shares of New Futech stock (vesting in three annual installments) with an
exercise price of $4.50 per share.
EMPLOYMENT AGREEMENTS WITH AFFILIATES
The employment agreements with Carl E. Voigt, III and Carl E. Voigt, IV,
are described in the preceding paragraph.
Fred DaMert and Gail Patton DaMert, who are currently the owners and
principal executives of DaMert, will be employed by New Futech after the
mergers. Each will receive a three year employment agreement providing for a
base salary of $120,000 per year, without stock options.
William W. Burnham, who is presently one of the principal stockholders and
executive officers of Trudy, will be employed as the Vice President -- Specialty
Items of New Futech. Mr. Burnham will also be a director of New Futech and will
receive a three year employment agreement providing for a base salary of
$100,000 per year and stock options for a total of 20,000 shares of New Futech
stock, vesting in equal, annual installments and with an exercise price of $7.50
per share. His employment contract includes a one-time signing bonus of $10,000.
See "NEW FUTECH'S MANAGEMENT" for a description of the employment
agreements of New Futech's other executive officers.
OTHER ASPECTS OF THE MERGER AGREEMENT; CERTAIN COVENANTS OF THE MERGING
COMPANIES
Each merging company has agreed that, during the period prior to the
Effective Time (except as expressly permitted by the Merger Agreement), it will
use its best efforts to preserve its present relationships with employees,
customers and others with which it has business relationships, will not take
actions other than in the ordinary course of business which would or might have
a material adverse effect upon its financial condition, and will not pay or
incur benefits to stockholders, officers or directors other than as is
consistent with past activities and practices.
21
<PAGE> 28
In addition, each merging company has agreed that, during the period prior
to the Effective Time, it will not (except as expressly permitted by all of the
merging companies in writing):
- change its Articles or Certificate of Incorporation or Bylaws;
- change the number of shares of stock issued and outstanding (other than
to cause its equity securities, including options and equity
participation interests, to conform to the capitalization described in
Section 3.02 of the merging company's Disclosure Schedule);
- merge or consolidate with or into any other corporation or other entity;
- declare or pay any dividend or repurchase or otherwise acquire any shares
of stock; or
- increase the compensation payable to or to become payable to any
shareholder, director, officer, employee or agent, or to pay any bonus,
severance payment or other compensation to any shareholder, director,
officer, employee or agent, or enter into any agreement of any type which
is not terminable by the merging company on no more than 30 days notice.
Fred DaMert and Gail Patton DaMert have, as part of the Merger Agreement,
satisfied certain bonus, change of control and stock appreciation right
obligations of DaMert that would otherwise be due in connection with the
mergers. However, stock appreciation rights equal to 4% of the aggregate
consideration received by the DaMert stockholders in the mergers will continue
to be outstanding and will be exchanged for 42.10 shares (does not reflect the
exchange ratio in the mergers) of DaMert common stock prior to and in connection
with the mergers.
In the Merger Agreement, New Futech promises to obtain releases of
affiliates of the merging companies from certain personal guarantees of
business-related loans, as described in the following table. New Futech may be
required to refinance the related loans in order to obtain the required
releases.
<TABLE>
<CAPTION>
APPROXIMATE
LOAN BALANCE
AS OF
GUARANTOR LENDER LOAN DESCRIPTION JUNE 30, 1999
- --------- ------ ---------------- -------------
<S> <C> <C> <C>
Fred DaMert & Gail Patton Wells Fargo Bank Line of Credit Facility $2,824,000
DaMert
Carl E. Voigt IV & Carl E. Norwest Business Credit Revolving Credit Facility 1,669,748
Voigt III, and spouses
Carl E. Voigt IV & Carl E. Liberty Bidco Term Loan 1,000,000
Voigt III, and spouses Investment Corporation
Les Friedland, Dan Lesnick & Tinton Falls State Bank Line of Credit Facility 257,000
Howard Moore
William W. Burnham First Union Bank Revolving Credit Agreement 697,234
William W. Burnham First Union Bank Term Note 186,099
</TABLE>
New Futech has also agreed, as part of the Merger Agreement, to repay
certain loans owing by Trudy to William W. Burnham and two of his family members
in the aggregate amount (including accrued interest through January 31, 1999) of
$800,000. Interest will continue to accrue on the portion of the debt owing to
the two family members ($172,253 as of April 30, 1999). Beginning on the closing
date of the mergers, interest will accrue on
22
<PAGE> 29
the outstanding balance at the rate of 4% per annum. At the closing, New Futech
will repay 25% of the outstanding balance, and thereafter will repay three equal
amounts of principal plus all accrued interest at six month intervals.
New Futech has also agreed, as a part of the Merger Agreement, to repay
certain promissory notes owing by Futech to certain former stockholders of
Janex. The promissory notes, which were issued on September 30, 1998, in
connection with Futech's purchase of certain Janex securities, have an aggregate
outstanding principal amount of $750,000.
New Futech has also agreed to assume repayment of loans owing by DaMert to
Fred DaMert in the aggregate principal amount of $128,849.
The Merger Agreement also contains numerous representations and warranties
on the part of each merging company and certain of controlling shareholders that
are customary in merger transactions.
INDEMNIFICATION BY NEW FUTECH AND BY CERTAIN STOCKHOLDERS
The Merger Agreement provides that New Futech will indemnify each merging
company and its officers, directors and employees against liabilities and
expenses reasonably incurred by them in connections with claims by their
stockholders with respect to the mergers or related matters.
In addition, each merging company and the stockholders identified below
have agreed to indemnify New Futech and its officers, directors and controlling
persons against liabilities or expenses they incur in connection with a material
breach of the representations, warranties and covenants of that merging company
and those stockholders, respectively, in the Merger Agreement. This indemnity
will expire 18 months after the Closing. It applies only if the amounts involved
exceed $100,000 and is subject to the maximum amount of $2,000,000 with respect
to matters that the merging company and its stockholders are not aware of at the
time of Closing, specified in the following table:
<TABLE>
<CAPTION>
THRESHOLD MAXIMUM
COMPANY STOCKHOLDERS AMOUNT INDEMNIFICATION
- ------- ------------ --------- ---------------
<S> <C> <C> <C>
Futech Vincent W. Goett $100,000 $2,000,000
Janex None 100,000 2,000,000
Trudy William W. Burnham 100,000 2,000,000
Fundex Carl E. (Chip) Voigt IV 100,000 2,000,000
Carl E. (Pete) Voigt III
DaMert Fred DaMert 100,000 2,000,000
Gail Patton DaMert
</TABLE>
REGULATORY MATTERS
The mergers are not subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act, or any other regulatory approvals.
23
<PAGE> 30
CONDITIONS TO CLOSING
The obligation of each of the merging companies to consummate the mergers
is subject to the satisfaction of certain conditions, which the other parties
may waive in whole or in part, including the following (among others):
- The Merger Agreement must have been approved by the stockholders of each
merging company.
- No court or governmental authority can have done anything that restricts
or prohibits the mergers and related transactions.
- No court or administrative action or investigation can be pending
challenging or seeking material damages in connection with the mergers or
related transactions, or seeking to limit New Futech's full rights of
ownership or operation which is reasonably likely to have a material
adverse effect on any party to the Merger Agreement.
- The representations and warranties of each merging company and its
signing shareholders in the Merger Agreement must be true in all material
respects on the Effective Time with the same force and effect as though
made on and as of the Effective Time, and the merging company and its
signing stockholders must have complied in all material respects with
their agreements and covenants under the Merger Agreement.
- Any material consents and assignments, and all filings required to be
made by any merging company in connection with the Merger Agreement must
have been obtained and made.
- There must have been no material adverse change in the operations, assets
and financial condition of any merging company, its assets must have been
maintained, and it must have conducted its business diligently and
substantially in the same manner (with no material contracts or
commitments outside the ordinary course of business) since the date of
the Merger Agreement.
- New Futech must have entered into/executed and delivered to the other
parties thereto employment agreements as described under "Employment
Agreements with Affiliates," above.
DISSENTERS' RIGHTS
Stockholders who do not vote in favor of the mergers and who comply with
the requirements of the state laws applicable to the company in which they own
stock will be able to exercise dissenters' rights and, if the mergers actually
occur, will receive the fair value of their shares in cash rather than the
merger consideration described in the Merger Agreement. The requirements that
apply to the stockholders of each merging company are set forth in the
prospectus/proxy statement supplement for that merging company.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated by mutual consent of each merging
company and its signing Shareholders. In addition, the Merger Agreement may be
terminated by Futech's Board of Directors, if dissenters' rights are exercised
by shareholders who would otherwise be entitled to receive 5% or more of the
total merger consideration to be received by stockholders in all of the merging
companies combined.
24
<PAGE> 31
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data of the Company presents
the unaudited pro forma consolidated statements of operations for the year ended
December 31, 1998, and for the three months ended March 31, 1999, and the
unaudited pro forma consolidated balance sheet as of March 31, 1999.
The unaudited pro forma combined consolidated statement of operations for
the year ended December 31, 1998, has been adjusted to give effect to the
following transactions as if such transactions had occurred January 1, 1998: 1)
the Company's acquisition of substantially all of the assets of Gick Publishing,
Inc., completed on March 31, 1998; 2) the Company's acquisition of substantially
all of the assets of XYZ Group, Inc., completed April 29, 1998; 3) the Company's
acquisition of 52% of the outstanding stock and certain shareholder loans of
Janex, completed December 11, 1998; 4) the proposed transactions described in
this prospectus/proxy statement and related supplements, including the pending
mergers with Fundex, Trudy, DaMert and the minority interest of Janex.
In addition, the unaudited pro forma as adjusted consolidated statement of
operations for the year ended December 31, 1998, gives effect to the conversion
of certain acquired shareholder notes of Janex into common and preferred stock
of Janex as if such conversion had occurred on January 1, 1998.
The unaudited pro forma combined consolidated statements of operations for
the three months ended March 31, 1999 has been adjusted to give effect to the
pending mergers with Fundex, Trudy, DaMert and the minority interest of Janex as
if the mergers had occurred January 1, 1999.
The unaudited pro forma combined consolidated balance sheet at March 31,
1999 gives effect to the pending mergers with Fundex, Trudy, DaMert and the
minority interest of Janex as if they had occurred on March 31, 1999.
The pro forma adjustments represent, in the opinion of management, all
adjustments required by the Securities and Exchange Commission for pro forma
presentation and are based upon available information and certain assumptions
considered reasonable under the circumstances. The ultimate amounts recorded
upon completion of the merger could differ. The unaudited pro forma consolidated
financial data presented herein does not purport to present what the Company's
financial position or results of operations would actually have been have the
events leading to the pro forma adjustments in fact occurred on the date or at
the beginning of the periods indicated or to project the Company's financial
position or results of operations for any future date or period.
The Unaudited Pro Forma Consolidated Financial Data should be read in
conjunction with the consolidated financial statements of Futech and the
financial statements of each of the companies involved in the merger and the
notes thereto and management's discussions thereof elsewhere in this prospectus.
25
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
IN THOUSANDS (EXCEPT PER SHARE DATA)
HISTORICAL JANEX XYZ GICK FUNDEX TRUDY DAMERT
COMPANY INT'L(8) GROUP(8) PUBLISHING(8) GAMES CORP. CORP.
---------- -------- -------- ------------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $ 6,033 $3,056 $ 4,812 $1,016 $8,577 $3,617 $6,837
Technology licensing fee...... 2,000 0 0 0 0 0 0
Cost of goods sold............ 4,296 1,957 5,378 825 5,694 2,108 4,292
------- ------ ------- ------ ------ ------ ------
Gross profit................ 3,737 1,099 (566) 191 2,883 1,509 2,545
Selling, general &
administrative.............. 5,869 1,258 1,091 307 2,465 2,012 2,482
Research and development...... 230 0 0 0 0 86 547
Depreciation and
amortization................ 1,343 314 61 27 231 63 182
------- ------ ------- ------ ------ ------ ------
Operating income (loss)..... (3,705) (473) (1,718) (143) 187 (652) (666)
Interest expense.............. (1,945) (210) (217) (28) (246) (125) (212)
Other, net.................... (144) 4 0 0 56 17 (1)
------- ------ ------- ------ ------ ------ ------
Net loss before taxes......... $(5,794) $ (679) $(1,935) $ (171) $ (3) $ (760) $(879)
======= ====== ======= ====== ====== ====== ======
Weighted average common shares
outstanding................. 80,277
Janex acquisition shares
issued......................
XYZ acquisition shares
issued......................
Gick acquisition shares
issued......................
Fundex acquisition shares
issued......................
Trudy acquisition shares
issued......................
DaMert acquisition shares
issued......................
Loss per share(6)............. $ (0.07)
<CAPTION>
IN THOUSANDS (EXCEPT PER SHARE DATA)
PRO FORMA TOTAL
COMBINED ADJ. PRO FORMA
-------- --------- ---------
<S> <C> <C> <C> <C>
Net sales..................... $33,948 $ 33,948
Technology licensing fee...... 2,000 2,000
Cost of goods sold............ 24,550 24,550
-------- -------- ------- --------
Gross profit................ 11,398 11,398
Selling, general &
administrative.............. 15,484 15,484
Research and development...... 863 863
Depreciation and
amortization................ 2,221 1,794 (1) 4,015
-------- -------- ------- --------
Operating income (loss)..... (7,170) (8,964)
Interest expense.............. (2,983) (1,469) (2),(3) (4,452)
Other, net.................... (68) (68)
-------- -------- ------- --------
Net loss before taxes......... $(10,221) $(13,484)
======== ======== ======= ========
Weighted average common shares
outstanding................. (76,993) (4) 3,284
Janex acquisition shares
issued...................... 287 (4),(7) 287
XYZ acquisition shares
issued...................... (4) 0
Gick acquisition shares
issued...................... (4) 0
Fundex acquisition shares
issued...................... 512 (4),(5) 512
Trudy acquisition shares
issued...................... 400 (4) 400
DaMert acquisition shares
issued...................... 692 (4) 692
--------
5,175
========
Loss per share(6)............. $ (2.61)
========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations.
26
<PAGE> 33
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(1) Represents the Company's estimate of amortization of goodwill and other
acquired intangibles.
(2) Represents the additional interest expense on the additional borrowings
incurred by the Company to consummate these transactions.
(3) Represents the elimination of interest expense on certain loans to Janex by
its former shareholders which were acquired by the Company and converted to
equity.
(4) The number of shares outstanding and to be issued have been adjusted to
reflect the applicable exchange ratio in the mergers, including shares to be
issued to brokers.
(5) Calculation assumes that all selling shareholders with an option to receive
cash or stock elect to receive cash, and further assumes that such cash will be
made available through additional debt incurred.
(6) Loss per share has been determined in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Common share equivalents
have been excluded from the calculation of loss per share for all columns
presented, as their effect is anti-dilutive.
(7) Reflects the conversion of 3,750,000 shares of Futech preferred stock issued
as part of the Janex acquisition into 125,000 shares of New Futech common stock.
(8) Represents historical results of the company prior to its acquisition by
Futech during 1998.
27
<PAGE> 34
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
IN THOUSANDS (EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA TOTAL
HISTORICAL FUNDEX TRUDY DAMERT COMBINED ADJUSTMENTS PRO FORMA
---------- ------ ------ -------- -------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 2,518 $ 935 $ 386 $ 1,257 $ 5,096 $ 5,096
Cost of goods sold................. 2,071 620 732 737 4,160 4,160
------- ------ ------ -------- ------- -------
Gross profit..................... 447 315 (346) 520 936 936
SG&A............................... 1,911 280 516 429 3,136 3,136
Research and development........... 0 0 29 231 260 260
Depreciation and amortization...... 520 77 (32) 38 603 311(1) 914
------- ------ ------ -------- ------- -------
Operating loss................... (1,984) (42) (859) (178) (3,063) (3,374)
Interest expense................... (832) (77) (25) (46) (980) (359)(2) (1,339)
------- ------ ------ -------- ------- -------
Other income (expense) net......... 100 10 37 0 147 147
Net loss......................... $(2,716) $ (109) $ (847) $ (224) $(3,896) $(4,566)
======= ====== ====== ======== ======= =======
Weighted average shares
outstanding...................... 82,632 (79,270)(3) 3,362
Janex acquisitions -- shares
issued........................... 287(3),(5) 287
XYZ acquisition -- shares issued... 0(3) 0
Gick acquisition -- shares
issued........................... 0 0
Fundex acquisition -- shares
issued........................... 512(3),(4) 512
Trudy acquisition -- shares
issued........................... 400(3) 400
DaMert acquisition -- shares
issued........................... 692(3) 692
-------
5,253
=======
Loss per share(6).................. $ (0.03) $ (0.87)
======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations.
28
<PAGE> 35
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(1) Represents the Company's preliminary estimate of amortization of goodwill
and other acquired intangibles.
(2) Represents the additional interest expense on the additional borrowings
incurred by the Company to consummate these transactions.
(3) The number of shares outstanding and to be issued have been adjusted to
reflect the applicable exchange ratio in the mergers, including shares to be
issued to brokers.
(4) Calculation assumes that all selling shareholders with an option to receive
cash or stock elect to receive cash, and further assumes that such cash will be
made available through additional debt incurred.
(5) Reflects the conversion of $3,750,000 shares of Futech preferred stock
issued as part of the Janex acquisition into 125,000 shares of New Futech common
stock.
(6) Loss per share has been determined in accordance with statement of financial
Accounting Standards No. 128, "Earnings Per Share." Common share equivalents
have been excluded from the calculation of loss per share for all columns
presented, as their effect is anti-dilutive.
29
<PAGE> 36
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
IN THOUSANDS (EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA TOTAL PRO
HISTORICAL FUNDEX TRUDY DAMERT COMBINED ADJUSTMENTS FORMA
---------- ------ ------ ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash......................... $ 184 $ 5 $ 1 $ 0 $ 190 $ $ 190
Accounts receivable.......... 1,688 842 246 888 3,664 3,664
Inventory.................... 5,151 2,019 1,501 1,311 9,982 9,982
Prepaid and other............ 560 323 51 143 1,077 1,077
-------- ------ ------ ------ -------- --------
Total current assets......... 7,583 3,189 1,799 2,342 14,913 14,913
Property and equipment....... 1,079 297 114 474 1,964 1,964
Intangible assets............ 16,163 498 205 0 16,866 19,818(1) 36,684
Due from company CEO......... 1,596 0 0 0 1,596 1,596
Other assets................. 90 584 0 23 697 697
-------- ------ ------ ------ -------- --------
Total assets................. $ 26,511 $4,568 $2,118 $2,839 $ 36,036 $ 55,854
======== ====== ====== ====== ======== ========
Accounts payable............. $ 5,541 $ 747 $ 309 $ 198 $ 6,795 $ 6,795
Accrued expenses............. 2,121 472 169 131 2,893 2,893
Notes payable -- current..... 27,762 97 1,596 2,245 31,700 31,700
-------- ------ ------ ------ -------- --------
Total current liabilities.... 35,424 1,316 2,074 2,574 41,388 41,388
Long-term debt............... 6,545 2,129 172 133 8,979 8,112(2) 17,091
Redeemable stock............. -- -- -- -- -- 6,818(2) 6,818
Stockholders' equity
(deficit).................. (15,458) 1,123 (128) 132 (14,331) 4,888(3) (9,443)
-------- ------ ------ ------ -------- --------
$ 26,511 $4,568 $2,118 $2,839 $ 36,036 $ 55,854
======== ====== ====== ====== ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.
30
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
(1) Represents the Company's preliminary estimates of the adjustment needed to
record the tangible and intangible assets acquired at fair value.
(2) Represents the additional borrowings incurred and issuance of redeemable
stock by the Company to consummate these acquisitions. Additional borrowings
also include borrowings to satisfy the cash option of Fundex, assuming all
selling shareholders with an option to receive cash or stock elect to receive
cash.
(3) Represents elimination of the equity accounts of the acquired companies and
the issuance of the Company's common stock to consummate these acquisitions.
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<PAGE> 38
NEW FUTECH'S BUSINESS
COMPANY OVERVIEW
Following the mergers New Futech will be a diversified children's products
company that designs, develops and distributes proprietary children's products
such as books, games, toys and stationery. New Futech expects to incorporate
Futech's patented Talking Pages(TM) technology and other interactive
technologies into strategically selected products in each product line,
providing significant competitive advantages through its unique interactive
features.
Subsequent to the integration of the companies included in the mergers, New
Futech expects to operate using an entrepreneurial style with five separate
business operating units:
- publishing;
- toys and games;
- futechinteractive.com;
- stationery and novelties; and
- specialty and educational products.
Through these operating units, New Futech expects to, among other things:
- develop and distribute interactive products with patented technology to
be strategically included in each of the Company's product lines (i.e.
publishing, toys, games, stationery, entertainment, etc.);
- develop, publish and distribute children's books (i.e. story books,
nature books, and self-help/child development books, etc.);
- develop and distribute toys and games (i.e. board games, family games,
card games, science games, etc.);
- develop and distribute patented, mailable foam-core post cards and other
foam-core hobby and craft items (i.e. foam-core picture frames) and
specialty products;
- develop new generations of interactive products including books and games
to be played with family and friends through the Internet;
- continue to develop futechinteractive.com, an interactive web site which,
among other things, sells products directly to consumers using state of
the art commerce technology and provides purchasing capability and
information about products to retail customers;
- act as a distributor for approximately 65 major publishing companies; and
- license its patented interactive technology to book and toy manufacturers
on a non-exclusive basis.
Due to its experienced sales force and more than twenty years of experience
in the distribution field, New Futech has established nationwide distribution
into every major retail channel. The company distributes to over 26,000 retail
stores including major retailers such as Wal-Mart, K-Mart, Toys R Us, and
Target. New Futech is EDI integrated with major accounts and can respond to
orders within forty-eight hours of the placement of orders. Each of the major
distribution centers can easily be expanded within
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<PAGE> 39
sixty days to accommodate new distribution opportunities as they are presented
in the future.
COMPETITIVE ADVANTAGES
New Futech expects to benefit from the synergy created through the mergers
and believe competitive advantages will be created by:
- merging the benefits of its patented interactive technology, "Futech
Interactive inside", with its well-established, well-recognized brand
names such as Talking Pages, Soundprints, Little Tiger Press, and Joy
Berry (in the publishing industry) and Fundex and DaMert (in the toys and
games industry);
- enhancing our research and development of new technologies;
- developing and launching of successful new proprietary products;
- continuing to foster the small business mentality of each operating unit
through an entrepreneurial style of doing business;
- taking advantage of new clout with major retailers resulting from merging
five companies and an extensive combined list of proprietary products;
- improving price competitiveness and reducing production costs through
shifting manufacturing to overseas and also by taking advantage of the
greater economies of scale created through merging the manufacturing of
the products of five separate companies;
- increasing product and brand awareness through working closely with major
licensors to create new and successful products utilizing well-recognized
licensed characters;
- increasing revenue through the distribution of each operating unit's
products into the sales and distribution venues of the other merging
companies; and
- improving the focus of the business units on strategic and long-term
planning.
BUSINESS STRATEGY
Subsequent to the mergers, we expect to operate five separate business
operating units; publishing, toys and games, futechinteractive.com, stationery
and novelties, and specialty and educational products. Each business operating
unit will have a New Futech vice president responsible for the budget,
performance and day-to-day operations of the business unit. Each operating unit
will be responsible for product development for the unit and will maintain
separate sales forces and sales representative groups to sell their products.
However, coordinated sales efforts between operating units are expected to occur
for certain major retail customers. Sales people from each operating unit are
expected to be encouraged to cross-sell products from other operating units into
their customers' stores if the specific products are not previously sold in the
same stores.
Our corporate management and staff will be responsible for support and
coordination of the five operating units. Corporate support functions will
include accounting and finance (including the raising of necessary capital),
business analysis, coordination of contract manufacturing, product research and
development (overall direction, new technology, overall image and coordination,
final approvals), marketing (including corporate advertising, graphics support,
image, research), human resources, information services, and general management
direction and coordination.
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<PAGE> 40
Subsequent to the mergers, Futech Interactive Products, Inc. will be the
surviving corporate name to be used in operations. Futech Interactive will be
the technology inside interactive products ("Futech Interactive inside"). The
established goodwill of the names of the merging companies will be retained
through using their names as product brand names as follows:
- The Soundprints, Little Tiger Press and Gold Star Publishing names will
continue to be used as publishing imprints, but each will be designated
as A Futech Interactive Company to create an umbrella corporate image.
Talking Pages will continue to be used for the interactive publishing
products with the same designation;
- The Fundex name will be used as the brand name for mass market toys and
games. DaMert will be used as the brand name associated with specialty
and science related toys and games. In the same way as the publishing
imprints, they will also each be designated in the branding as A Futech
Interactive Company;
- The Gick name has not been used by Futech since 1998. This line of
products was changed to Brite Ideas, and will continue to be Brite Ideas,
a Futech Interactive Company;
- The Janex name is expected to be phased out during 1999. The product line
name Malibu Fun Stuff will be used for their swimming, bath and beach
products (including the Wet Pets line of products). A new name is
currently being developed for the product line which includes electric
toothbrushes, clocks and flashlights. Both lines will carry the A Futech
Interactive Company descriptor; and
- Futech Interactive Products, Inc. will be used as the corporate name.
Futech Interactive will also be used as "Futech Interactive inside",
representing the technology inside each of our interactive products.
SALES STRATEGY
The Company will consist of five business operating units plus corporate
offices. As in the managing of the business units, the overall corporate sales
strategy is to manage the sales of each business unit through the business unit
itself and to coordinate company-wide synergistic sales opportunities at the
corporate level. Each business unit operates in separate and unique industry
environments and requires different types and mixes of employees and sales
representative groups to be successful. The sales groups for the respective
business units currently are as follows:
Publishing -- Ten employees and 42 sales representative groups representing
168 individual commissioned representatives.
Toys and Games -- Six employees and 26 sales representative groups
representing approximately 150 individual commissioned representatives.
Futechinteractive.com -- No sales group is expected to be required for this
business unit.
Stationery & Novelties -- Two employees and 20 sales representative groups
representing 115 individual commissioned representatives.
Specialty and Educational Products -- Two employees, and is in the process
of developing a representative group base and telemarketing staff.
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<PAGE> 41
MARKETING STRATEGY
We intend to implement a major advertising and marketing initiative to
promote greater market recognition of our technology, trade names and products.
For the balance of 1999 and 2000, we expect to spend at least $1,400,000 in
promotion and advertising to achieve our short and long-term advertising and
marketing objectives. We plan to achieve our promotion and advertising goals by:
- increasing product brand awareness through product reviews, articles and
media coverage;
- creating a fund to purchase shelf space with major retailers and increase
its exposure in the mass market;
- creating and strategically placing trade advertisements in industry trade
magazines to promote our products to a broad base of retailers including
mass market and specialty retailers;
- mailing our interactive corporate brochures to major Fortune 500
companies, leading media products companies and advertising agencies; and
- attending a variety of trade shows to promote our image and product brand
awareness.
PUBLIC RELATIONS STRATEGY
Futech has hired Phase Two Strategies, a major national public relations
firm, to plan and implement our comprehensive, synergistic public relations
strategy. Phase Two is initially focusing its efforts on introducing New Futech
and its products to the media through press releases, media pitches, direct
mailings and follow-up phone calls in a concerted effort to garner editorials
and other positive attention from the media. Phase Two is planning an author
tour for Joy Berry during the summer and fall of 1999 in an effort to garner
attention for New Futech through the established connections, recognizable name,
and the press's interest in her child development books and videos.
GROWTH STRATEGY
Our objective is to become a significant designer, developer and
distributor of affordable proprietary children's products such as books, games,
toys and stationery. We also intend to apply our technology to strategically
create unique, interactive advertising specialty and promotional materials. We
plan to achieve this strategy through the following initiatives:
- Expand Proprietary Product Lines -- We plan to capitalize on our existing
products and its unique technology by expanding its product lines,
increasing our licensed products and seeking new applications for our
technology. During 1999, we expect to introduce more than 200 new books,
games, toys and stationery products (for more detailed information about
these products, see "Proprietary Product Lines" in this section).
Utilizing newly acquired licenses, additional products are already in
initial development and we expect them to be launched in late 1999 and
early 2000.
- Enhance Product Brand Awareness -- We expect to spend at least $1,400,000
during 1999 and 2000 to enhance product brand awareness (for more
detailed information, see "Marketing Strategy" in this section). In
addition, we have hired Phase Two Strategies, a major national public
relations firm, to plan and implement a comprehensive, synergistic public
relations strategy (for more detailed informa-
35
<PAGE> 42
tion, see "Public Relations Strategy" in this section). These strategies
should allow the Company to differentiate its products and technology from
the competition, attract new customers and strategic partners, generate
increased consumer sales and position the Company as the industry
innovator and category leader.
- Enhance Operational Efficiencies -- We intend to enhance the operating
efficiencies of the merged businesses. We intend to eliminate duplication
of efforts and non-essential personnel, improve manufacturing
productivity, increase distribution, refine logistics and enhance
customer service. More specifically, we intend to:
- consolidate many of the financial and administrative functions of the
merged businesses in Phoenix, Arizona;
- utilize the East and West coast facilities to save shipping time and
money in fulfilling large mass market orders;
- attempt to increase the average order size to our customers by
offering a broader selection of product lines which will allow us to
apply its fixed transaction and processing costs to a larger order;
- utilize its conductive ink/printed circuitry technology to reduce
costs and increase margins on certain existing product lines; and
- relocate additional domestic production capabilities to off shore
facilities to reduce manufacturing costs.
- Expand Distribution -- We plan to increase revenue by expanding the
distribution of our products. Strategies to achieve these goals include:
- marketing our new line of electronic books to mass market retailers
and national book chains;
- expanding the distribution of our post card and electronic post card
line to mass market retailers, national drug chains and supermarkets;
- increasing the distribution and licensing of our trade publishing
titles from Soundprints, Little Tiger Press and Gold Star Publishing
into the mass market, mass market books, supplementary education and
mail order channels of distribution; and
- increasing the product categories and title selections purchased from
publishers and distributed to the warehouse club market and increasing
this distribution to additional classes of trade.
- Strengthen and Accelerate Research and Development -- From Futech's
initial patent issued in 1992, we intend to continue developing our
technology in electronic audio/visual response interaction utilizing the
application of special printed circuitry and electronic components.
Through this process, Futech has discovered new innovations and
applications which have been patented, thereby increasing its scope of
product design. We intend to conduct substantially all of our research
and development efforts at our soon to be consolidated research and
development facility in Berkeley, California. Our research and
development initiatives are to:
- continue to refine and enhance our patented technology, creating new
cutting edge technologies;
- accelerate the research and development of related applications of the
current technology;
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<PAGE> 43
- acquire other synergistic intellectual properties to expand the
capabilities of our patented technology for enhanced distribution
direct to consumers' homes and schools electronically through the
Internet; and
- develop new products for use on the Internet.
- Penetrate International Markets -- We intend to expand the distribution
of our products in international markets. We will have exclusive
distribution of certain product lines in Canada through a publishers
representative. We will also utilize a United Kingdom-based publishing
company with whom Futech has an agreement to distribute certain New
Futech titles in the European market. We intend to concentrate initially
on expansion into English speaking countries such as Canada and the
United Kingdom while pursuing the translations of its printed publishing
products in the future. Through the merger with Trudy (Soundprints) and
DaMert, with their international publishing and toy distribution
experience, we will be able to better take advantage of potential
international publishing and distribution opportunities. DaMert already
distributes its products in 48 countries.
Futech recently signed a European distribution agreement for it's Brite
Ideas product line with H&H HandelsGesmbH, an Austrian distributor of
stationery products. This distribution agreement provides the opportunity
to expand the Brite Ideas product line to approximately 60 new European
and Asian countries.
Additionally, we are in discussions for distribution or licensing
agreements with several foreign game and toy manufacturing and
distribution companies. These companies range from major international
toys and games manufacturing companies to foreign publishing companies.
Some discussions are based on potential technology licensing agreements
to allow for the production of new toys and games products
internationally. Others are conducted along the lines of potential
distribution of foreign translations of existing publishing products.
- Raise Additional Capital -- To expand our business, we expect to raise
additional capital in the public or private debt or equity markets as
soon as practicable after the mergers. On May 24, 1999 Futech retained
Schroder & Co., Inc. to act as its exclusive financial advisor to perform
general investment banking services. Vincent W. Goett, our CEO, is
currently talking to additional potential investors to raise additional
capital.
- Capitalize on Proprietary Brand Names and Pursue Additional "Big Name"
Licenses -- We were focused on establishing and supporting brand names
and product formats that can be leveraged across multiple distribution
channels. We believe many of our existing brands are well recognized,
including Talking Pages, Talking Pages Plus, Talking Pages Deluxe, Kinda
Like a Card, Better Than a Letter, Little Tiger Press, Soundprints, Gold
Star Publishing, Phase 10, Fundex Games, DaMert Company, Brite Ideas,
Malibu Fun Stuff, Wet Pets, Musical Mail, and Look, Listen & Learn. We
also intend to continue to pursue additional big name licenses to further
improve consumer awareness (for more information on licensing, see
"Strategy for Licensing Characters" discussion in this section).
- Enhance Gross Profit Margin -- Proprietary products provide us with much
higher margins than third party distribution products. As we sell more
proprietary products as a percentage of overall sales, we will further
enhance gross profit margin.
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<PAGE> 44
- Enter Supplementary Education Channels of Distribution -- With the
addition of Soundprints and Gold Star Publishing book titles and DaMert
Company science and nature products and games, we hope to be able to
enter the supplementary education channels of distribution. Products sold
in these channels of distribution are generally sold at higher gross
profit margins and with less seasonal volume fluctuations than products
sold in the general retail market.
With the federal initiative to reduce classroom sizes through an
augmentation of certified teaching professionals, significant increases
in government and state funds are being allocated to local school boards.
The purchasing decisions for library and classroom teaching materials are
being made at the teacher level as opposed to the state level. This has
stimulated double digit increases in supplementary instructional material
spending over the past three years.
- Take Advantage of Public Relations Opportunities -- We expect to create
exciting public relations events to enhance company, product and brand
awareness. To assist in these efforts, we have hired Phase Two
Strategies, a major national public relations firm, to plan and implement
a comprehensive, synergistic public relations strategy (for more detailed
information, see "Public Relations Strategy" discussion in this section).
Among the opportunities expected are:
- the introduction of our first interactive board game, in conjunction
with NASCAR and five of its best drivers;
- announcements of additional licensing agreements for interactive
publishing and interactive games;
- publicity resulting from Joy Berry's author tour and potential
television deal;
- the introduction of oKID.com, futechinteractive.com and
superstarkidsclub.com;
- the announcement of the merger agreements; and
- announcements relating to Generation 2000 Futech technology.
OVERVIEW OF OPERATING UNITS AND THEIR INDUSTRIES
PUBLISHING
The main office, sales, operations and distribution for the publishing
business operating unit are located in Waukesha, Wisconsin. Additional
distribution to the mass market will be for the East, through the Norwalk,
Connecticut facility, and for the West, through the Berkeley, California
facility. Our officer responsible for this business unit is William E. Hermes,
Vice President -- Publishing. Within publishing, New Futech will focus on
interactive publishing, children's trade publishing and book distribution for
third party publishers.
- INTERACTIVE PUBLISHING. Interactive publishing consists of books and
games containing sound, promotional publishing and specialty products.
Interactive sound technology did not appear until the early 1980's. Early
stage products used electronics more suited for motion than
interactivity. Books containing sound first appeared on the market in the
early 1980's in the form of a piano keyboard attached to a hard cover
book featuring easy-to-play, familiar children's songs. These books were
generally low-tech products featuring a single-sound computer chip and a
low-quality speaker. With the introduction of low cost microchips and
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<PAGE> 45
microprocessors, the cost for incorporating speech technology, sound
effects and music into products dropped dramatically in the mid-1980's.
Improved technology allowed story books to be enhanced by an electronic
sound pad.
New Futech expects to publish interactive electronic books and a
series of electronic fold out play boards that incorporate its patented
conductive ink technology. These products contain up to 42 touch points
or switches that are embedded in the surface of the play boards, covers
and pages of the books. When a touch point is pushed, it triggers a
switch and a microchip delivers an audible message. Depending on the
format, the audible message consists of speech, music and/or sound
effects. The ability to embed sound within a book significantly enhances
the story line, facilitates the educational process, draws the reader
into the pages and enriches the reading experience.
We expect to publish four formats of electronic books under the
brand names of Look, Listen & Learn, Talking Pages, Talking Pages Plus
and Talking Pages Deluxe. These formats will feature entertainment,
educational and religious titles and will retail for $5 to $15. We
believe this price range compares favorably with similar electronic
publishing products which typically retail between $10 and $20. Depending
on the format, the books contain anywhere from 10 to 250 musical sounds,
voices or sound effects, as well as various interactive play options. We
intend to sell these books to major mass market retailers, national book
chains and independent retailers in the United States and
internationally. Futech is also developing numerous new Interactive
Publishing product formats incorporating various licensed characters.
In 1999, Futech brought its own interactive publishing products to
market for the first time. The first interactive publishing products (six
titles of Talking Pages interactive books) were placed in retail stores
during the second quarter and met with favorable consumer response.
Initial shipments have sold well, with a one-third sell-through of the
products placed in retail stores during the first week. An additional
one-third of the products sold during the second week. These preliminary
results have exceeded our expectations. In addition to the excellent
consumer response, initial retailer response has also been outstanding.
The majority of the Company's 1999 interactive publishing product
introductions will arrive in retail stores in July and August in
preparation for the 1999 holiday selling season. Orders have already been
received on these products from many major mass retailers, including
Target, Kmart, Sam's Clubs, Costco and Meijer Stores.
- CHILDREN'S TRADE PUBLISHING. The trade publishing industry is diverse.
Thousands of publishers release a wide variety of consumer books into the
market, including hard cover best sellers, paperback best sellers, trade
paperbacks, audio books, children's books, computer books, religious
books, gardening books, travel books, gift books, novelty books,
electronic books and others. The dominant players in the area of consumer
books are Simon & Schuster, Inc., McGraw-Hill Companies, Inc., Harcourt
Brace, Golden Books Family Entertainment, Random House, Inc., Penguin
Putnam, Inc., Scholastic, Inc., Andrews & McMeel Publishing,
HarperCollins, Avon Books, Inc., and Houghton Mifflin Company, and
others.
Futech has a publishing agreement with Magi Publications, a United
Kingdom publisher. The agreement allows Futech to publish and distribute
several children's picture book formats in the United States under the
brand name Little Tiger Press, which is an established brand name that
has been marketed in the United States
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<PAGE> 46
since 1996. Magi has been operating since 1988 producing an extensive
list of new titles each year and has an excellent catalog of back list
titles. New Futech will continue to publish and import titles from Magi's
United Kingdom-based authors and illustrators. In addition, New Futech
will work with Magi to publish and distribute additional titles from the
European and Australian markets and develop new formats of Magi books.
Futech has licensed certain of Little Tiger Press' United States
paperback rights through various book clubs such as Scholastic, Inc.,
Troll Communications, LLC and Book-of-the-Month Club for United States
specialty distribution.
Futech has also entered a joint venture (Gold Star Publishing, LLC)
with renowned author Joy Berry to develop, produce and distribute
children's self-improvement products (i.e. Earning an Allowance, Self
Esteem, Discipline, Handling Emergencies, etc.). During 1999, Gold Star
is publishing 80 new books, kits and videos which are expected to be
available during the third quarter. Previously, Joy Berry has sold more
than 80 million books through various direct mail and book club catalogs.
Through the joint venture, Futech has exclusive distribution rights to
all new Gold Star products plus approximately 250 of Joy Berry's 280
previously published titles.
- BOOK DISTRIBUTION FOR THIRD PARTY PUBLISHERS. Futech currently acts as a
non-exclusive distributor for approximately 65 major publishing houses
such as Random House, Inc., Simon & Schuster, Inc., Scholastic Inc.,
Bantam Doubleday Dell, Avon Books, HarperCollins Publishers and others
through its distribution facility in Waukesha, Wisconsin. The largest
demand for distribution services originates from the warehouse club
segment of the retail market (i.e. Sam's Clubs, Costco, BJ's). These
customers require various customized services such as collating and
shrink wrapping custom packages along with direct shipments to each
individual store. During 1999, Futech has been named the exclusive book
distributor for two major retail store chains, Imaginarium and Coles
Department Stores.
We plan to dramatically increase our book distribution business. AMS
(Advance Marketing Services) is the current overall market leader for
book distribution to warehouse clubs (with more than $400 million annual
sales to warehouse clubs). Futech has previously focused on children's
books, but has begun diversifying into other book segments such as audio
books. we plan to continue this diversification into hard and soft cover
best sellers, paperbacks, computer books, cook books, gardening books,
self-help and religious books.
We also plan to take advantage of the warehouse clubs' desire to
diversify their supplier base to a second supplier. In order to grow this
business, We must improve its service through lower prices, offering more
extensive programs, improving its inventory management systems, improving
its retail customer reporting systems, offering volume discounts on its
proprietary lines tied to increased volume from book distribution, and
concentrating on services and products not currently addressed by AMS.
TOYS AND GAMES
The main office for the toys and games business operating unit along with
sales, operations and distribution for the mass market will be located in
Indianapolis, Indiana. Sales, operations and distribution for the specialty
market will be located in Berkeley, California. Additional distribution to the
mass market will be for the East, through the
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<PAGE> 47
Norwalk, Connecticut facility, and for the West, through the Berkeley,
California facility. The New Futech officer responsible for this business unit
will be Carl (Chip) E. Voigt, IV, Vice President -- Toys and Games. We expect to
utilize the Fundex brand name for mass market toys and games, the DaMert Company
brand name for specialty toys and games, and the Malibu Fun Stuff brand name for
swimming pool, bath, and bathroom toys and games. The Janex line of products
will continue to use the Janex brand name for the short-term, but is expected to
be changed to a new brand name by the end of 1999.
Toys, games and interactive games encompass many product categories
including: conventional board games, electronic board games and book and toy
packages. The market for interactive toys and games has grown in recent years
due to parents' interest in combining entertainment with educating their
children. We expect to establish a competitive advantage by designing products
which provide high quality play processes, interactive capabilities, educational
experiences and superior value to the consumer at competitive prices. The
interactive board game products are expected to be sold at retail for $15 to
$30. We believe this price point compares favorably with similar electronic game
and toy products which typically retail between $30 and $100.
Examples of interactive games that Futech is developing are three NASCAR
board games called Racing Legends NASCAR Real Life Racing, which feature board
games with sounds. These products include collectible diecast race cars of
drivers Dale Earnhardt, Jeff Gordon, Rusty Wallace, Dale Jarrett, or Dale
Earnhardt, Jr. As the child plays along by pressing a dice icon on the board
game's surface they move the race cars around the track. The track is divided
into spaces which feature sound effects and play options that determine the
outcome of the game. Sound effects include straight away and curve racing
sounds, screeching tires, crashes, and even pit stop sounds with wrenches and
air guns. The first racer to circle the track the pre-determined number of laps
and cross the finish line wins.
FUTECHINTERACTIVE.COM
The main office for the futechinteractive.com business operating unit will
be located in Phoenix, Arizona. Distribution for futechinteractive.com will be
located in Norwalk, Connecticut. The officer responsible for this business unit
is Vincent W. Goett, Chief Executive Officer.
We intend to focus on and make substantial investments into the Internet
and continue Futech's web site development activities. Futech launched its
interactive Internet web site, www.futechinteractive.com in March, 1999.
Following close behind, Futech introduced its commerce addition to the web site
on April 30, 1999. Consumer visitors to the web site can now order from a
selection of hundreds of products, order replacement batteries, play interactive
online games and learn general information about the Company. The web site also
provides email links to key personnel, current press releases, a map of Futech
locations, catalog order forms, listings of current Futech job opportunities, in
a general interactive environment that makes visiting the site fun. Previous
online customers can conveniently return and track their orders directly from
the web site. Customer contact forms are available to provide easy communication
with Futech representatives.
An Arizona based commerce solution company provides the purchasing
capabilities including online credit card processing, shipping options and order
tracking. A web site marketing company is diligently working to improve Futech's
listing on web based search engines such as Yahoo. We anticipate a gradually
increasing number of web site hits and
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orders as a result of this marketing effort. Custom music has also been written
to add to the unique experience of visiting the Futech web site.
The creation of the Futech web site has required the use of the most
up-to-date, high end graphic design software and programming. Web site tracking
capabilities allow us to know how many people visit the site, which web browser
they use, and what time they visited.
During 1999, we expect to launch a change to its commerce store name.
oKID.com, The Online Kid Site, is expected to debut and include many new
features. A virtual town, the oKID Town, is expected to allow web site visitors
to explore the web site in a unique, yet familiar fashion. Each section of the
site will be created utilizing information from our products. Most sections are
expected to promote sales of our products and provide interactive learning
experiences for kids. A major location in the oKID town is expected to be the
Town Mall. At the mall, virtual stores are expected to be created for each type
of New Futech product (i.e. toy store, book store, card store, etc.). We expect
to sell store front space to other vendors of children's related products. The
oKID Town is expected to include among other things, an on-line arcade, a space
station, a religious center, a zoo, a kids' club, a race track, a harbor, a
school house, a construction site and a post office. Free e-mail will be made
available for teachers. Chat rooms are expected to allow visitors to discuss a
number of educational subjects. Children are expected to be able to find e-mail
pen pals. Integrated search engines are expected to allow visitors to quickly
find any product or page in the site. The site is also expected to have search
capabilities for a visitor to find product recommendations by age, gender,
product type, or combinations of any of these. Additionally, the web site is
expected to recognize previous customers and their orders, thus allowing it to
recommend additional products. Gift wrapping is expected to be an option for
store customers as well as the ability to send friends personalized messages on
Brite Ideas foam cards.
oKID.com is expected to be hosted at our corporate office on two Alpha
servers connected to the Internet backbone by multiple T-1 lines. These servers
and lines are expected to deliver extremely fast connections and download times
as well as facilitate our increased web site customization.
A significant portion of our future game development is expected to include
Internet game play. We anticipate the oKID web site will not only be an
excellent online resource, but an exciting jump into the new millennium for
consumers, teachers, students and investors.
STATIONERY AND NOVELTIES
The main office, sales, operations and distribution for the stationery and
novelties business operating unit will be located in Waukesha, Wisconsin.
Additional distribution to the mass market will be for the East, through the
Norwalk, Connecticut facility, and for the West, through the Berkeley,
California facility. The officer responsible for this business unit will be R.
Bradford Turner, Vice President -- Stationery and Novelties. One of our
short-term strategic acquisition goals is to acquire a company or companies that
will provide us with additional brands and lines of products, operations
management depth, a separate distribution facility and extensive distribution
channels for the Stationery and Novelties business operating unit.
Among the stationery products, we expect to distribute over 150 foam-based
post cards to approximately 3,900 stores, including 2,500 independent, specialty
retailers and to
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chains such as Michael's Stores, Inc., FabriCenter of America and Linens' N
Things. The post cards are currently being tested at Eckerd Drugs and an
expanded test is expected soon. The post cards are marketed under the Better
Than A Letter and Kinda Like A Card brand names. We intend to utilize our sound
technology and produces and markets a complete line of interactive post cards
called Musical Mail.
Another soon to be released line, which will utilize Futech's innovative
sound technology, is Fan Mail. Fan Mail is a line of electronic post cards
featuring such drivers as Jeff Gordon, Dale Earnhardt, Rusty Wallace, Dale
Jarrett and Dale Earnhardt, Jr. Each card features a variety of photos of
driver's race cars, and such captured moments as winning big races. Race fans
can purchase a card specific to a particular racer that is authentically
autographed. These cards contain actual commentary with driver and race
statistics. This product line will be sold at actual racing events. This line
also could potentially feature a collection of famous movie stars all printed in
black and white. Press the printed icon on the card's surface and the recipient
would hear a famous quote or song by the featured star.
SPECIALTY AND EDUCATIONAL PRODUCTS
The main offices, sales, operations and distribution facility for the
specialty and educational products business operating unit will be located in
Norwalk, Connecticut. The officer responsible for this business unit is William
W. Burnham, Vice President -- Specialty and Educational Products.
The specialty and educational products operating unit includes direct mail
distribution, educational channels of distribution, specialty advertising and
other premium incentive channels of distribution of products from all other
operating business units. It also is expected to include the production of
variations of New Futech products from other operating units to meet the needs
of the described channels of distribution. One example of such a product
variation is the Aditude corporate advertising version of the Brite Ideas
mailable foam-core post cards.
We expect to utilize our conductive ink and sound technology to produce
interactive brochures, interactive mailable foam core advertisements and other
interactive promotional materials using the brand name, Aditude. Advertising for
the next generation. These innovative products will offer a company a unique way
to promote its advertising message by stimulating three of the five human
senses; sight, sound and touch. We expect to market these new products to
Fortune 500 companies and advertising agencies nationwide. They can be custom
designed with full-color art, music, speech and sound effects of the client's
choice and can be custom cut in about any shape and size. They are U. S. Post
Office approved for direct mailing or can be handed out at events and expos. The
recipient simply presses a printed icon on the card's surface to activate up to
one minute of promotional messages. The disposable unit is expected to include
enough battery power for up to 45 minutes of continuous play.
LICENSING TECHNOLOGY AND OTHER RIGHTS TO OTHER COMPANIES
We expect to license certain applications of our patented technology to
other companies while reserving all applications for its own products and
formats. On August 14, 1996, Futech entered into a joint venture with Golden
Books Family Entertainment, Inc., the world's largest publisher of children's
books. In January, 1998, Futech transformed its agreement with Golden into a
five-year, non-exclusive licensing agreement and received a
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$2 million up-front, non-refundable guarantee for the non-exclusive use of the
technology. Golden Books recently filed for bankruptcy protection for
reorganizational purposes.
We also expect to license certain United States paperback publishing rights
of its books to various book clubs (i.e. Scholastic, Inc., Troll Communications,
LLC and Book-of-the-Month Club) for specialty distribution. When these companies
license the paperback rights, we will provide them with films which will allow
them to produce their own low cost paperback editions. A substantial royalty
guarantee to New Futech will be included in the contract, and an advance on the
guarantee will be paid by these companies to New Futech for the rights to
produce the books. These companies distribute these special editions to students
and schools throughout the United States. They distribute flyers/order blanks
directly to children so the product can be ordered via mail order. They also
participate in school book fairs at which they set up book displays at schools
for a one week period and sell directly to students and teachers. Sales of these
editions often average 100,000 copies or more.
We also expect to license certain foreign publishing rights of our books to
various foreign publishers. Procedures similar to those discussed above for book
clubs (i.e. contracts and guarantees) are involved with this type of licensing.
Trudy brings extensive experience in foreign publishing licenses to New Futech
through its licensing of Soundprints products abroad.
RECENT ACQUISITIONS
In addition to the proposed merger agreements with Janex, Trudy, Fundex and
DaMert, Futech has completed several additional acquisition and joint venture
agreements during 1998 and 1999:
- on March 31, 1998, Futech purchased the net assets of Gick, a distributor
of foam-based post cards, stationery, specialty crafts and hobby items,
based in Irvine, California, for an asset purchase price of $2.2 million
plus assuming $1.0 million in liabilities;
- on May 1, 1998, Futech purchased the net assets of XYZ Group, Inc., a
Midwest distributor of children's books, adult books, audio books,
activity games and related educational products, for an asset purchase
price of $7.9 million plus assuming $10.4 million in liabilities;
- Futech has agreed in principle to significantly expand the
co-publishing/distribution agreement with Magi Publications (London,
England), an agreement originally reached between XYZ and Magi. The terms
of the new agreement are in negotiation. However, we expect that the
agreement will grant New Futech exclusive North American publishing
rights for all Little Tiger Press titles, substantially increased gross
profit margins on Little Tiger Press titles, and shared future increased
market value of the Little Tiger imprint. We also expect New Futech to
maintain a right of first refusal in the case of sale of the Little Tiger
Press imprint.
REASONS FOR MERGERS
Most of the industries represented in the mergers, (i.e. publishing, toys
and games, and stationery and novelties) have experienced tremendous
consolidation. Smaller companies find it very difficult to compete with the
larger conglomerates, especially for
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product placement in the mass retail market. Simply stated, the reason for the
mergers is to provide the merging companies the opportunity to better compete in
their industries.
Through the mergers, New Futech expects to provide several advantages to
the merging companies that they would otherwise not enjoy on their own:
- necessary financial resources through the ability to raise public
capital;
- mass and diverse product presentation to allow the opportunity to sell to
the mass retail market;
- current New Futech patented technology to be incorporated into existing
and future product lines;
- new technology provided through ongoing research and development not
available to small, individual companies;
- access to popular key licenses to be incorporated into existing and
future product lines;
- access to more experienced and deeper management; and
- broader company strength (through a broader product base and expected
improved financial strength) to withstand potential aggression from large
competitors designed to eliminate smaller competition.
SPECIFIC REASONS FOR PREVIOUS ACQUISITIONS AND PROPOSED MERGERS
UNIVERSAL OPPORTUNITIES IN ALL ACQUISITIONS AND MERGERS:
- expand product lines;
- integrate Futech technology into existing proprietary products;
- improve profitability through reduced costs and enhanced operational
efficiencies; and
- expand domestic and international distribution coverage in the
publishing, toys, games, and stationery and industries.
SPECIFIC TO XYZ:
- long-standing exclusive distribution arrangement with New Futech;
- excellent facilities for centralized distribution of books from the
Midwest;
- experienced management within the publishing distribution industry;
- experience with book production in the Orient;
- complete sales management and rep. groups within retail book industry;
and
- experience with New Futech technology in the publishing industry.
SPECIFIC TO GICK:
- experience within the gift and novelty industries;
- sales and representative groups in specialty retail industry; and
- exclusive patents on mailable foam core products.
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SPECIFIC TO FUNDEX:
- facility for centralized distribution of toys and games from the Midwest;
- experienced management within the toys and games industry;
- successful designer of award-winning games;
- experience with toys and games production in Asia;
- complete sales management and representative network within the retail
toys and games industry; and
- with the country's number three selling card game (Phase 10), enabling
nationwide toys and games distribution.
SPECIFIC TO JANEX:
- good relationship with Toys 'R' Us;
- extensive experience, success and name recognition with licensed products
and within the licensing industry; and
- experience in Letter of Credit/FOB Hong Kong business.
SPECIFIC TO TRUDY:
- experienced management within the publishing industry;
- strong publishing back-list including twelve Parents' Choice award
winning titles;
- East coast distribution facility;
- East coast fulfillment center for mail order and commerce;
- experience in licensing of educational opportunities such as Smithsonian
and The Nature Conservancy; and
- experience in premium, supplemental education and other specialty
industries.
SPECIFIC TO DAMERT:
- West coast distribution facility;
- West coast fulfillment center for mail order and commerce;
- experienced management within the specialty toy retail industry; and
- product development team and facility to consolidate with existing New
Futech's research and development equipment for future New Futech
technological advances.
INTEGRATION OF MERGING COMPANIES' FACILITIES
Subsequent to the mergers, we will be divided into five business operating
units: publishing, toys and games, futechinteractive.com, stationery and
novelties, and specialty and educational products operated utilizing six
facilities:
- the corporate offices will be located in the Futech facility in Phoenix,
Arizona and will include the Internet services business operating unit;
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- the publishing operating unit and stationery and novelties operating unit
and major distribution facility for both units will be located in the
Futech facility in Waukesha, Wisconsin;
- the sales office will continue to be located in Chicago, Illinois;
- the toys and games operating unit and major distribution warehouse for
mass market toys and games will be located in the Fundex facility in
Indianapolis, Indiana;
- Internet distribution, direct mail catalog distribution, East coast mass
retail distribution for publishing, toys and games and stationery and
novelties, the specialty and educational products operating unit, along
with New Futech's publisher and related editorial and graphics staff will
be located in the Trudy facility in Norwalk, Connecticut; and
- the major distribution warehouse for the specialty channel of
distribution for toys and games and the West coast mass retail
distribution for publishing, toys and games and stationery and novelties
will be located in the DaMert facility in Berkeley, California, along
with all research and development equipment and personnel.
INTEGRATION OF MANAGEMENT OF MERGING COMPANIES
Integration of the management from each of the companies involved in the
mergers are as follows:
- Futech management will become the management of the surviving parent
company and will continue intact with the exception of William Hermes,
currently Futech's Vice President of Sales and Brad Turner, currently
Futech's Vice President of Marketing. Mr. Hermes will become Vice
President of Publishing and will be responsible for the publishing
operating unit. Mr. Turner will become Vice President of Stationery and
Novelties and will be responsible for the stationery and novelties
operating unit.
- Fundex President, Carl E.(Chip) Voigt, IV, will become Vice President of
Toys and Games and will be responsible for the toys and games operating
unit. The remainder of Fundex management will become responsible for the
mass market portion of the toys and games division, including the
products previously in the Janex product line.
- DaMert Chairman, Frederick A. DaMert, will become the Vice President of
Research and Development and will be responsible for the development of
New Futech technologies. DaMert CEO, Gail DaMert, will become Vice
President of Business Integration and Analysis and will be responsible
for the operations of the Berkeley, California facility, the specialty
stores channel of distribution of the toys and games division and will
add responsibilities related to business analysis and integration of
acquisitions.
- Trudy President, William W. Burnham, will become Vice President of
Specialty and Educational Products and will be responsible for the
specialty and educational products operating unit, the operations of the
Connecticut facility, and assist with New Futech business strategy and
acquisitions. Trudy Vice President, Elisabeth Prial, will become New
Futech's Publisher and will be responsible for the development and
marketing of all New Futech publishing products.
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- Janex Vice President and Chief Operating Officer, Daniel Lesnick, will
devote his time to developing licensing opportunities for all the New
Futech operating units and assist as needed in the future development of
the Janex product line and in the contracting of overseas manufacturing.
STRATEGY FOR FUTURE ACQUISITIONS
New Futech will continue to evaluate acquisition prospects subsequent to
the mergers. With the advent of the mergers, the anticipated breadth of New
Futech's product line will have been clearly defined (see "Business Strategy"
discussion in this section). The strategy for future acquisitions is to provide
additional depth to the five previously defined operating units such as
additional brands and lines of products within the toys and games unit,
additional imprints within the publishing unit, additional educational products
within both the toys and games and/or publishing unit, additional stationery
brands and lines of products within the stationery and novelties unit,
additional operations management depth, distribution facilities and distribution
channels as needed in the stationery and novelties unit.
PRODUCT DESIGN
We expect to conduct our own engineering, research and development, while
it continually refines and enhances existing technology. We will have the
combined talents of the merging companies, which will provide product
development expertise in proprietary publishing (both trade and interactive
books), toys and games and stationery and novelty items. We expect to employ a
talented team of approximately 15 capable and inventive product designers. This
design team takes products from inception to manufacturing, including
prototyping, coordinating the required production materials, illustrating,
scripting, editing, mold design and technology development for the products. The
team also acts as a support service to manufacturers of our products. Combined
with a team of outside creative partners of artists, editors, inventors, and
excellent resources and talents available through licensing partners, we expect
to demonstrate its commitment to innovative new products through our product
development and proprietary technology.
Some of the product lines in the New Futech family of products are based on
licensing agreements allowing for the use of popular characters, such as Disney
or other popular sports and pop culture figures such as NASCAR Racing drivers
and WCW professional wrestlers. Within these product lines, we will continually
look for new characters to license. A popular culture character can be used to
extend the life of an existing product or create a new book, product or game.
When new licenses are acquired, the licensors specify exactly which products
into which the licensed characters can be incorporated and the territory in
which the products can be sold. Our proprietary technology and diverse product
lines will give us an additional advantage when negotiating new licensing
agreements.
New products are initially selected based on what we believe will be
successful. However, in order to avoid the expense of producing product that may
not sell, we will utilize varying forms of market research and consumer testing.
Feedback from this testing is also used in developing packaging and retail
pricing strategies.
Although we have a product design staff, we also expect to work in
conjunction with outside inventors and product designers throughout the United
States. Generally, outside concepts for new toys and games are reviewed and
refined internally and a decision is then made whether to accept and develop the
new game, toy or educational product. If the new
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idea is accepted a royalty will be paid to the inventor ranging from 1% to 10%
and a commitment to sell a minimum number of items is usually set.
We plan to broaden the application of Futech's patented interactive
conductive ink technology to new types of interactive books, interactive board
games and interactive puzzles. New product designs will focus initially on newly
available licenses plus integrating existing proprietary books, toys and games
from the merging companies with Futech's proprietary technology to create a
broad and deep range of interactive books, toys, games and educational products.
PROPRIETY PRODUCT LINES
We expect to benefit from an extensive consolidated list of new products,
many already existing, more expected to be developed quickly. We anticipate that
our product lines will bring increased clout with the major mass-market
retailers who generally prefer working with larger vendors offering extensive
lists of proprietary products. We expect to be able to offer large retailers
like Wal-Mart, K-Mart and Costco, a product line that includes books, toys and
games, stationery and crafts, along with new and exciting interactive products.
Below is a summary of our anticipated 1999 product lines. Many of these products
have projected release dates in the second and third quarter to coincide with
the holiday selling season.
PUBLISHING
Interactive publishing for kids
- Talking Pages Picture Books, four-color, twelve page interactive story
books with illustrations, published in four titles.
- Talking Pages Prayer Books, four-color, twelve page interactive prayer
books with illustrations, published in two titles.
- Talking Pages Plus Books, four-color, twelve page learning books with
multi-game playing capabilities, published in two titles.
- Talking Pages Deluxe Books, four-color, twelve page non-fiction
interactive learning books, published in two titles.
- Look, Listen and Learn, gate-fold style interactive educational play
boards, published in four titles.
- NASCAR Stats and Standings, 4-color, 24 page book and a collectible
diecast race car featuring popular NASCAR drivers such as Jeff Gordon,
Dale Earnhardt, Rusty Wallace and Dale Jarrett.
- NASCAR Track Sounds, electronic books featuring full-color photography,
speech and sound effects of current season racing moments from a variety
of racing legends with the same drivers as above plus Dale Earnhardt, Jr.
- Talking Pages Plus Bible Stories, similar to the Talking Pages Prayer
book line, but featuring eight different religious stories (i.e. Creation
Story, Easter Story, Christmas Story, Moses, Gideon, Jonah and the Whale,
Noah's Ark, David and Goliath).
- Additional licensed books are expected to be available in the fourth
quarter of 1999 and first quarter of 2000. These books are very early in
development, but will be based on the significant newly acquired
licenses.
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- Utilizing existing publishing products from New Futech's proprietary
imprints (Soundprints, Little Tiger Press and Gold Star Publishing),
additional interactive products are expected to be added in early 2000.
Little Tiger Press picture books for kids
- Nine new hardcover picture books (Another Fine Mess, How to Be a Happy
Hippo, Little Bunny Bopkin, Little Tiger's Big Surprise, Love is a
Handful of Honey, Nine Naughty Kittys, One, Two, Three, Oops!, Selfish
Crocodile, and Smudge).
- Four new anthologies (Bible Stories for the Young, Counting Leopard's
Spots, Not-So-Grizzly Bear Stories, and The Fox and the Rooster).
- Two new cloth books (Bedtime Little Tiger and Where's Smudge's Ball).
- Four new seasonal titles (Hurry Santa!, Laura's Christmas Star, Little
Bear's Christmas, and Shhh!).
- Three new board and flap books (Little Tiger Goes to School, I Don't Want
to Take a Bath, and I Don't Want to Go to Bed).
- Three new paperback books (I Don't Want to Take a Bath, and I Don't Want
to Go to Bed, and Dora's Eggs).
- Over fifty backlist titles.
Gold Star Publishing (Joy Berry's) books for kids
- Six new board books in the Teach Me About Series for kids under four
years old (Potty Training, Bathtime, Bedtime, Mealtime, Crying,
Separation).
- Six new kits in the Teach Me About Series (same titles as above)
including board books, activity charts and diplomas.
- Six new paperback books in the A Fun and Easy Way series for kids six to
twelve (Clean Your Room, Be a Good Pet Owner, Earn Your Allowance, Be
Good, Do Homework and Schoolwork, Get Good Grades).
- Six new paperback books in the Good Manners series for kids six to twelve
(When Eating, When in Public, When Talking, When Telephoning, When
Entertaining, When Visiting).
- Ten new paperback books in the Good Answers to Tough Questions series for
parents and children of all ages (About Dependence and Separation, About
Change and Moving, About Divorce, About Stepfamilies, About Weight
Problems, About Substance Abuse, About Physical Disabilities, About
Traumatic Experiences, About Disasters, About Death).
- Three new paperback books in the Bee Safe Series for children of all ages
(Bee Careful, Bee Prepared, Bee a Lifesaver).
- Six new paperback books in the Six Simplified Steps series for parents
and children of all ages (Successful Parent, Relationships, Discipline,
Self-Esteem, Good Kids, Happy Kids).
- Three new paperback books in the Sensational Seasons and Holidays series
for all children (Experiencing October, November and December).
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- Six new paperback books in the Get Over It series for adolescents
(Criticism and Rejection, Fear, Bad Habits, Rude People, Stress, Tough
Situations).
- Six new paperback books in the Go For It series for adolescents (Be a
Winner, Be Liked, Be a Star, Great Future, Be Happy, Be Beautiful).
- Six new paperback books in the Work It series for adolescents (Goals,
Creativity, Intelligence, Control, Organization, Assertiveness).
- Four new paperback books in the Let's Talk About series for kids six to
twelve (Feeling Disappointed, Feeling Frustrated, Feeling Jealous, Being
Good).
Soundprints
- Smithsonian Institution Series -- via an exclusive license from the
Smithsonian Institution. These products include realistic wildlife plush
toys, storybooks and audio cassettes, and are also available in
educational kits.
- Four new board book titles (New Baby Giraffe, Panda's Busy Day, Orang
Utan's Playtime, Rhinoceros's Bathtime).
- One new title in the Backyard series (Coyote at Pinon Place).
- One new title in the Oceanic series (Survival in the Sea).
- One new title in the Odyssey series (Run With Me, Nike!).
- 60 title backlist in four different series (Oceanic, Backyard, Odyssey,
Wild Heritage).
- The Nature Conservancy Series -- via an exclusive license from The Nature
Conservancy. The first four titles in the habitat series were introduced
in the spring of 1997. These products also include realistic wildlife
plush toys, storybooks and audio cassettes, and are also available in
educational kits.
- Two new titles (Along the Luangwa, Mountain Mists); and
- 10 title backlist.
- Make Friends Around the World Series (a picture book and doll series
about children from foreign lands).
- Two new titles (The Legend of the Kite for China, Eva's Summer Vacation
for the Czech Republic).
- Two previously published titles.
TOYS AND GAMES
For the mass market utilizing the Fundex brand
- NASCAR interactive board games. Three NASCAR board games called Racing
Legends NASCAR Real Life Racing feature board games with sounds. These
products include collectible diecast race cars of drivers Dale Earnhardt,
Jeff Gordon, Rusty Wallace, Dale Jarrett, or Dale Earnhardt, Jr. As the
child plays along by pressing a dice icon on the board game's surface
they move the race cars around the track. The track is divided into
spaces which feature sound effects and play options that determine the
outcome of the game. Sound effects include straight away and curve racing
sounds, screeching tires, crashes, and even pit stop sounds
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with wrenches and air guns. The first racer to circle the track the
pre-determined number of laps and cross the finish line wins.
- Phase 10. A card game for ages eight to adult. Phase 10 is currently the
second best-selling card game in the United States and the world, with
over 6 million units sold. Sister products are Phase 10 Dice, Phase 10
UPSETS and Take Five.
- Wooden Games. These include competitively priced and quality made wood
versions of several classic games such as labyrinths, chess, checkers,
Chinese checkers and mancala.
- Basic Board and Mini Games. A comprehensive line of traditional board
games such as chess and checkers that retails in the $2.99 to $9.99 price
range.
For the mass market utilizing the Malibu Fun Stuff brand
- A line of swimming, bath and beach toys that include Wee Wet Pets, Wet
Pet Babies, and Water Wings.
For the mass market utilizing the Janex brand
- Most of the Janex products incorporate licensed fantasy characters. The
product line currently includes the following: battery operated Power
Toothbrush and Stand, battery operated Power Flashlight, Action/Talking
Alarm Clock, and Role Play Gear.
For the mass market, book trade market or specialty toy market: books plus audio
and plush toys
- Soundprints titles (for detailed information about Soundprints titles,
see the publishing product section).
For the specialty toy market
- Puzzles/Brainteasers. This product line includes the cardboard Triazzle
Puzzle Collection and the plastic 3D Slide Puzzle Collection. Triazzle
Puzzles are manufactured under a long-term exclusive agreement with the
inventor.
- Glow-in-the-Dark. A line of items using "Glow-in-the-Dark" plastics and
inks including stickers, balls and mobiles.
- Great Gizmos and Rainbows. A line of science related toys that are
educational and fun.
- Activity Kits. A series of "All about . . ." activity planners that
teaches children about topics from Animation to Rainbows to Planets and
Stars.
- Discovery Kits. A series of compact kits to teach kids more about the
world around them. Topics include Constellations, Bird Watching and
Geology.
- Out-of-this-World Games. A line of family games incorporating lights and
sound, including Alien Autopsy and Impact Zone, winner of the 1998 T.O.Y.
award (toy of the year award).
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STATIONERY AND NOVELTIES (UTILIZING THE BRITE IDEAS BRAND)
- Patented mailable foam-core post cards:
- 12 products in the Musical Mail (interactive) line;
- 36 products in the Better Than a Letter line; and
- 55 products in the Kinda Like a Card line.
- Crafts and novelties:
- 48 products in the Little Bits line;
- 12 products in the Bigger Bits line;
- 6 products in the Banners line;
- 6 products in the Little Bits Frame Kits line;
- 4 products in the Little Bits of Cheer line;
- 12 products in the Make a Memory do-it-yourself frame line.
STRATEGY FOR LICENSING CHARACTERS
One of our long-term strategies in product development is to create a
balance between licensed and non-licensed products. Through the merger with
Janex, Futech gained a new level of experience and access into the licensing
industry. Janex's long-standing relationships with most key domestic licensors
provides the us opportunity to better fulfill this strategy quickly.
Our strategy involves four levels to the licensing balance:
- The first level includes licenses familiar to all consumers. Futech
currently has a license and distribution agreement with Action
Performance and sub-licenses through Action Performance with NASCAR, Jeff
Gordon, Dale Earnhardt, Rusty Wallace, Dale Jarrett and Dale Earnhardt,
Jr. to produce interactive books, interactive games, Fan Mail, book and
car packages, and various other toy products such as toothbrushes and
clocks. Futech has also agreed to terms for additional licenses and
distribution agreements with three significant licensors for additional
interactive books and post cards (definitive agreements for all three are
currently in negotiation). In addition, Futech currently has licensing
and distribution agreements for various toy products with The Walt Disney
Company for Hercules, Warner Brothers Corporation for Looney Tunes,
Children's Television Workshop for Sesame Street, Leisure Concepts for
World Championship Wrestling, Inc. for WCW characters, The Lyons Group
for Barney, Saban Merchandising, Inc. for Power Rangers in Space, Lionel
LLC for Lionel Trains, New Line Cinema Productions, Inc. for Lost in
Space, Turner Home Entertainment, Inc. for Jonny Quest, and MCA/Universal
Merchandising, Inc. for Lost World. Trudy also has licensing and
distribution agreements with the Smithsonian Institution and The Nature
Conservancy for Soundprints books, audio cassettes and plush toys. We
intend to continue to pursue additional licensing and strategic
agreements for publishing, toys, games, stationery and its electronic
products.
- The second level includes potential license agreements with other
publishers and manufacturers to develop joint venture products. We are
currently working with a major game manufacturer and a major publisher to
determine how our interactive
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book technology can be successfully applied through joint venture
products to some of their most successful licenses. We have also
initiated discussions with a religious publisher to develop religious
books exclusively for the religious markets.
- The third level includes our exclusive imprints and licenses. Futech has
a long-term agreement with Magi Publishers of London, England to
exclusively publish and distribute products using the Little Tigers Press
imprint and license.
- The fourth level includes our non-licensed, New Futech branded
proprietary products using branding such as Phase 10, Soundprints,
Talking Pages, Wet Pets, Gold Star Publishing and Brite Ideas. By
maintaining proprietary products not associated to third party licenses,
we expect to be able to balance against the risks of being dependent on
other companies.
PROPRIETARY TECHNOLOGY AND PATENTED TECHNOLOGY
The Company's proprietary technology relates to printed audible signals,
visual circuitry and associated electrical components such as switches,
batteries, speakers and liquid crystal displays (LCD). This technology is
applied to produce books and play boards that emit speech, music and sound
effects or other visual signals activated by pressing switches embedded in the
surface of the product. Upon pressing a designated point on the page or surface
of the product a microchip is activated and a speech, music, or sound effect
response is emitted. In certain products light emitting diodes (LEDs) or liquid
crystal diodes (LCDs) provide visual enhancement.
The Company holds six United States patents and four foreign patents
relating to its conductive ink technology. This technology is applicable to a
variety of products and industries including electronic publishing, promotional
publishing, interactive advertising, electronic greeting cards and other
sound-based consumer products. Futech has acquired four additional patents to
strengthen its current technology position. Futech was also recently granted a
patent for a game board apparatus for selectively providing sensory game
enhancement.
MANUFACTURING
Futech subcontracts with third parties to manufacture of its own electronic
books, including Talking Pages and Talking Pages Plus, in conjunction with one
of the largest commercial printers in China. Trudy's and Futech's trade books
are manufactured by a variety of printers located in Belgium, Italy, Singapore
and China. Futech has a variety of electronic products and learning games that
are manufactured by companies throughout Asia. Our specialty products, including
promotions and specialty post cards, will be manufactured domestically. The
sound module for Futech's electronic greeting cards are manufactured in China.
Plush toys are manufactured in China, Bangladesh, and Sri Lanka.
CUSTOMER BASE
We expect to have a diversified base of well established retail customers.
The merged companies have distributed a wide variety of products to the mass
market to over 26,000 retail locations and list most of the country's largest
retailers as their customers. Current customers include some of the most
recognized names in retailing such as Toys 'R' Us, Walmart, Kmart, Target, Baby
Superstores, Inc., Kohl's Corporation, Sam's Club, Costco Wholesale Corporation,
BJ's Wholesale Corporation, Walden, Barnes & Noble, B. Daltons, Borders Group,
Inc., Waldenbooks, Michael's, TJ Max, QVC, Inc., Nordstroms, Inc., Safeway Inc.,
Eckerd Corporation, Rite-Aid Corporation, Scholastic, The Nature
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Company, Galyans, The Museum Company and others. We believe these long-standing
relationships will allow the Company to significantly expand the distribution of
its proprietary products.
MARKETS
Given the numerous applications of its interactive, patented technology, we
believe we are well positioned to be a competitive force in a variety of
markets. These markets include interactive games, interactive publishing, trade
publishing, promotional publishing, book distribution, games, toys, stationery,
novelties, mail order, Internet, advertising and promotion and supplementary
education to libraries and classrooms. Specifically, there has been an explosion
of super bookstore construction led by Borders and Barnes and Noble. This has
led to increased book sales category growth. In addition, on line ordering of
books through eCommerce sites such as barnesandnoble.com and amazon.com is
growing rapidly such that this distribution channel is now up to a 7% share of
all book sales. Accordingly, our interactive web site will offer consumers and
retail customers an attractive alternative for purchasing direct along with new
technology games to play on the Internet.
With the federal initiative to reduce classroom sizes through an
augmentation of certified teaching professionals, significant increases in
government and state funds are being allocated to local school boards. The
purchasing decisions for library and classroom teaching materials are being made
at the teacher level as opposed to the state level. This has stimulated double
digit increases in supplementary instructional material spending over the past
three years.
COMPETITION
We expect to operate in highly competitive markets. Some of our competitors
are significantly larger than us and have substantially greater resources
available for developing and marketing their products.
In interactive publishing, one major publisher, Publications International,
Inc., currently has a much larger share of the market than we expect to
initially have, partly because we have just begun to deliver these products to
the market. We believe that we will be able to gain significant market share
over the next few years.
In trade publishing, our competition includes thousands of publishers
including Simon & Schuster, Inc., McGraw-Hill Companies, Inc., Harcourt Brace,
Golden Books Family Entertainment, Random House, Inc., Penguin Putnam, Inc.,
Scholastic, Inc., Andrews & McMeel Publishing, HarperCollins, Avon Books, Inc.,
and Houghton Mifflin. Subsequent to the mergers, New Futech will attempt to gain
additional market share through its three strong trade publishing imprints
(Little Tiger, Soundprints, Gold Star Publishing). We are not aware of any
significant direct competitors with its licensed, plush toys packaged with an
educational book and audio cassette (Soundprints line) or its kids self-help
products (Gold Star Publishing line).
The book distribution market to warehouse clubs is currently controlled by
one distributor, Advanced Marketing Services (AMS), which has over 95% of total
sales. In 1990, there were ten warehouse club chains in the country and eight
book distributors servicing those chains. Due to consolidations and
acquisitions, there are only three major chains remaining (Costco, Sam's Club
and B.J.'s). As a result of the mergers, we will be able to compliment the scope
of its distributed books and will have additional distribution facilities to
improve our customer service. We also hope to benefit from the warehouse clubs'
desire to maintain an alternative supplier to AMS.
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The toys and games market is highly competitive and includes numerous small
manufacturers, but is dominated by two industry giants controlling approximately
50% of the market, Hasbro, Inc. and Mattel, Inc. The industry is sensitive to
changing consumer preferences and demands. Competition is based primarily on
price, quality and play value. In recent years, the industry has experienced
rapid consolidation, driven by the desire of industry leaders to offer a range
of products across a broader variety of categories.
The key competitors in specialty toys can be identified for each product
category as follows:
- puzzles/brainteasers: Binary Arts, Bedazzled
- Glow-in-the-Dark: Great Explorations, Illuminations
- Activity Kits: Creativity for Kids, Curiosity Kits
- Science Toys: Wild Planet
- Rainbows: White Eagle, Lightrix
- Games: University Games, Briarpatch.
All of these competitors are small in size, relative to the toy
manufacturers in other segments of the business.
There are no major competitors in the Brite Ideas (foam-core post cards)
line of products. However, Hallmark Cards and Gibson Greetings are fiercely
competitive in the stationery line as a whole.
RESEARCH AND DEVELOPMENT
Futech is in the process of consolidating its research and development
resources into its facility in Berkeley, California. In addition, Futech
maintains a liaison with individual inventors and companies involved in the
development of related technologies that are utilized to enhance and expand
Futech's products.
DISTRIBUTION AND LOGISTICS
We expect to operate state-of-the-art distribution facilities in the East,
Midwest and West. We will be EDI (electronic data interface) integrated to
receive orders and invoice its major customers. In addition, we will have a
custom bar-code-based inventory management system and computerized shipping
system in its warehouse. High speed packing machines, labeling machines and
conveyors allow for quick processing of customers' orders, allowing us to
respond to orders within forty-eight hours of the placement of orders. A
computerized rate shopper allows us to determine the most economical and fastest
way to ship products to its customers, thereby controlling its overall freight
expenses and providing exceptional service. All of the major distribution
centers can easily be expanded within thirty to sixty days to accommodate major
new distribution opportunities as they are presented in the future. With the
addition of its West and East coast distribution facilities, we will be able to
service our East and West coast customers in the mass retail market in two days
instead of the previous five days.
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EMPLOYEES
No New Futech employee is a member of a union. We consider our relations
with its employees to be good. Initially, we expect to employ approximately the
following number of full-time employees in its locations:
- corporate office and futechinteractive.com operating unit, Phoenix,
Arizona-17 employees;
- publishing and stationery and novelties operating units and distribution
centers, Waukesha, WI -- 42 employees;
- toys and games operating unit, mass market sales and distribution center,
Indianapolis, IN -- 21 employees;
- specialty toys and games distribution, West coast distribution center,
and research and development facility, Berkeley, CA -- 27 employees;
- specialty and educational products operating unit, East coast, direct
mail and eCommerce distribution center, Norwalk, CT -- 21 employees; and
- sales office, Highland Park, IL -- 1 employee.
The merging companies employed a total of 129 employees as of May 1, 1999.
PROPERTIES
Our facilities will be comprised as listed below. We believe that these
facilities are adequate for our current requirements and that suitable
additional space is readily available if needed.
- corporate office and futechinteractive.com operating unit: 9,628 sq. ft.
at 2999 North 44th Street, Suite 225, Phoenix, AZ. Lease expires on
February 1, 2003;
- publishing and stationery operating units and distribution centers:
58,000 sq. ft. of warehouse and office space at N16 W23390 Stoneridge
Drive, Waukesha, Wisconsin. The lease expires June 30, 2002;
- toys and games operating unit, mass market sales and distribution center:
32,000 sq. ft. at 2237 Directors Row, Indianapolis, IN. The lease expires
in five years with a renewal option for three additional years;
- specialty toys and games distribution, West coast distribution center,
and research and development facility: 32,000 sq. ft. of office and
warehouse space at 1609 Fourth Street, Berkeley, CA. It is divided into
24,000 sq. ft. of warehouse and 8,000 sq. ft. of office space. The lease
expires December 1, 2001 and provides for one six-year extension option
at a fair market rental rate for a similar industrial gross lease;
- specialty and educational products operating unit, East coast, direct
mail and commerce distribution center: 27,000 sq. ft. of office and
warehouse space at 353 Main Avenue, Norwalk, CT. The lease expires
December 31, 2004;
- sales office: 650 sq. ft. of office space at 580 Roger Williams Avenue,
Suite 21, Highland Park, IL. The lease expires June 30, 2002;
- toys and games showroom and office space: 1,000 sq. ft. at Toy Center
South, 200 Fifth Avenue, Room 516, New York, NY. The showroom is used to
exhibit products for the International Toy Fair in February each year and
is used as an
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office for the balance of the year. A larger space will be needed as the
number of products and product lines continue to grow. The lease expires
April 30, 2006;
- previous office space: 1,000 sq. ft. in Laguna Hills, CA is currently
sub-leased. The lease expires June 30, 2000; and
- previous office space: 4,662 sq. ft. at 21700 Oxnard Street, Woodland
Hills, CA is currently sub-leased to a third party for the balance of the
lease. The lease expires December 31, 2000.
GOVERNMENT REGULATIONS
We endeavor to comply with all applicable regulations through a program of
quality inspections and product testing. We expect to maintain product liability
insurance in the amount of $2,000,000.
LEGAL PROCEEDINGS
Futech is involved in one material legal proceeding as a defendant in Gary
Roy, a/k/a Joe, Billings v. Futech Interactive Products, Inc. This action was
initiated on November 20, 1998 in Waukesha County Circuit Court of Wisconsin.
Mr. Billings, a Director of Futech, alleges Futech wrongfully terminated his
employment and failed to perform according to the terms of the Agreement for
Purchase and Sale of Assets of XYZ. Mr. Billings claims damages resulting from
the wrongful termination equal approximately $1,150,000 plus costs and
attorneys' fees. This suit was dismissed pending arbitration. Futech admits it
owes Mr. Billings certain other amounts in connection with the acquisition of
XYZ and has accrued such amounts in Futech's financial statements. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
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NEW FUTECH'S MANAGEMENT
The following table sets forth information regarding the executive officers
and directors of New Futech following the completion of the mergers:
DIRECTORS AND EXECUTIVE OFFICERS
The following table describes the person who will initially be directors
and executive officers of New Futech following the mergers:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Vincent W. Goett..................... 35 Chairman of the Board, Chief Executive
Officer, President and Director
Joseph K. Petter..................... 56 Chief Operating Officer
Frederick B. Gretsch, Sr............. 53 Chief Financial Officer, Treasurer and
Secretary
Carl E. (Chip) Voigt, IV............. 38 Vice President, Games/Toys and Director
William W. Burnham................... 56 Vice President, Specialty Items and
Director
Roderick L. Turner................... 66 Director
Gary A. Oman......................... 50 Director
Robert J. Rosepink................... 48 Director
F. Keith Withycombe.................. 54 Director
</TABLE>
VINCENT W. GOETT. Mr. Goett has served as Chairman and Chief Executive
Officer and Director of Futech since March 1995. Mr. Goett has served as
Chairman of the Board, Chief Executive Officer, President and Director of Janex
since December 11, 1998. Mr. Goett joined Futech as its Chief Operating Officer
on January 5, 1995. From August 1991 to January 1995, Mr. Goett owned and
operated Paradise International, an investment business engaged in acquisition
and joint venture activities. From September 1985 to August 1991, Mr. Goett was
President of Westplex, Inc. which effected major investments in commercial real
estate. Mr. Goett attended Arizona State University. Mr. Goett is the son-in-law
of Roderick L. Turner, a director of Futech, and brother-in-law of R. Bradford
Turner, who is Vice President, Stationary/Novelties of Futech.
JOSEPH K. PETTER. Mr. Petter has served as Chief Operating Officer of
Futech since February 1997. Mr. Petter has served as Chief Operating Officer of
Janex since December 11, 1998. Mr. Petter joined Futech as Vice President of
Operations in March 1996. Prior to joining Futech, from July 1989 to December
1995, Mr. Petter was a Division Vice President of ADVO, Inc., a direct mail
marketing company. From 1970 to 1989, Mr. Petter was a Group or Senior Manager
with several different operating companies of the Dun & Bradstreet Corporation.
Mr. Petter completed the Executive Management Program from the University of
Chicago and received his B.S. in Industrial Engineering from the Illinois
Institute of Technology.
FREDERICK B. GRETSCH, SR. Mr. Gretsch has served as Chief Financial
Officer, Secretary and Treasurer of Futech since September 1997. Mr. Gretsch has
been Chief Financial Officer, Treasurer, Secretary and Director of Janex since
December 11, 1998. He has served in various financial and marketing positions
throughout his career. Prior to joining Futech, from May 1996 to December 1996,
Mr. Gretsch was Treasurer of Vail Resorts, Inc., a ski resort company and from
November 1995 to May 1996, he was Treasurer of Cable Systems International, a
copper wire and cable manufacturing company. From February 1992 to February
1995, Mr. Gretsch was Director of Treasury Operations at
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General Dynamics Corporation, a defense contractor. From June 1975 to December
1991, he was Vice President at Citicorp/Citibank, a major bank holding company.
From October 1968 to June 1975, Mr. Gretsch was manager of Sales Accounting and
Administrator of Finance at RCA, a diversified corporation. Mr. Gretsch received
his Masters degree in Business Administration from Columbia University and his
B.A. in Economics from Georgetown University.
CARL E. (CHIP) VOIGT, IV. Mr. Voigt is the President and Chief Executive
Officer of Fundex Games, Ltd., and he has held those positions since he
co-founded Fundex in 1991. Mr. Voigt has been engaged in the toy and game
industry for over 15 years. Prior to his activities on behalf of Fundex, Mr.
Voigt spent four years as a manufacture's representative in the toy and game
industry. Mr. Voigt received a Bachelor of Science degree in Industrial
Management from Purdue University.
WILLIAM W. BURNHAM. Mr. Burnham has been President of Trudy Corporation
since 1979, prior to which he served in marketing and sales positions for
Pepsico and Vlasic Foods. Mr. Burnham received a B.S. from Trinity College and
an M.B.A. from Columbia University.
RODERICK L. TURNER. Mr. Turner has served as Director of Futech since July
1995. Mr. Turner retired as Senior Executive Vice President of Colgate
Palmolive, Inc. in 1992 with 30 years of service in various executive management
positions within Colgate. Since 1992, Mr. Turner has been engaged in
entrepreneurial interests along with the management of his personal investments.
Mr. Turner is the father-in-law-of Vincent Goett, an officer and director of
Futech, and father of R. Bradford Turner, an officer of Futech. Mr. Turner
received his BA in Business from Cornell University.
GARY A. OMAN. Mr. Oman has served as a Director of Futech since January
1996. Mr. Oman has been a Vice President of Coldwell Banker Success Realty since
1991. From 1973 to 1991, Mr. Oman was a real estate investment consultant and
entrepreneur. Prior to his business interests in real estate investments, Mr.
Oman was in the education profession. Mr. Oman attended Mankato State College
where he studied Educational Administration.
ROBERT J. ROSEPINK. Mr. Rosepink has served as a Director of Futech since
January 1998. Mr. Rosepink has been a partner of Rosepink & Estes, a law firm
specializing in estate planning, probate and trust law since 1988. Mr. Rosepink
was a partner at the law firm of Snell & Wilmer in Phoenix, Arizona from 1985 to
1988 and an associate and shareholder at the law firm of Fennemore, Craig, von
Ammon, Udall & Powers in Phoenix, Arizona from 1975 to 1985. Mr. Rosepink
received his J.D. degree, with honors, from George Washington University.
F. KEITH WITHYCOMBE. Mr. Withycombe has served as a Director of Futech
since November, 1998. Mr. Withycombe was President and Chief Operating Officer
of Evans Withycombe Residential, Inc. from 1994 to 1996, and President of Evans
Withycombe Inc. from 1981 to 1994. Mr. Withycombe received a B.S. in Engineering
from the United States Air Force Academy and a M.S. in Engineering from Arizona
State University.
Board Compensation Committee Report on Executive Compensation. In the
absence of a separate compensation committee, the Futech Board of Directors
reviewed the compensation payable to the persons mentioned below. The Board
believed that the salary payable and stock options awarded to the President and
Chief Executive Officer reflected his contributions to us, demonstrated by his
vision and leadership with respect to our financing and acquisition strategies.
The Board felt that the salary payable and stock options awarded to the Chief
Operating Officer appropriately compensated him for
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overseeing all of our manufacturing operations, both domestic and international.
The Board determined that the salary payable and stock options awarded to the
Chief Financial Officer, Treasurer, and Secretary reflected his contributions to
our progress in improving its financial position and instituting more extensive
financial controls consistent with the company's growth.
MANAGEMENT TEAM
- WILLIAM E. HERMES, VICE PRESIDENT -- PUBLISHING. Mr. Hermes joined
Futech in October, 1998. Prior to joining Futech, Mr. Hermes was Vice
President of Sales with Kidsbooks, Inc. in Chicago. Mr. Hermes was Vice
President of Sales and part owner of XYZ Distributors, and prior to that
was Manager of National Accounts with Sight & Sound, Inc. Mr. Hermes
worked as Military Sales Manager with Western Publishing and also worked
in packaged good sales with Kraft Foods. Mr. Hermes graduated in 1982
from the University of Wisconsin.
- R. BRADFORD TURNER, VICE PRESIDENT -- STATIONERY AND NOVELTIES. Mr.
Turner joined Futech in October, 1998. Prior to joining the Company, Mr.
Turner served as Group Marketing Manager for the Kellogg's Company,
responsible for regional promotions, media and advertising for their
Latin American operations. Previously, Mr. Turner served as Regional
Account Director for the Leo Burnett Advertising Agency, and in various
account management positions in Young & Rubicam and Foote, Cone and
Belding. Mr. Turner has a Bachelor of Arts from Tulane University.
- ELISABETH T. PRIAL, VICE PRESIDENT -- PUBLISHER. Mrs. Prial joined Trudy
in 1991 and was appointed Vice President of Sales for Trudy Corporation
in 1994. In 1996, Mrs. Prial became Publisher of Trudy. Prior to joining
Trudy, she worked in juvenile publishing with Warner Books, Putnam
Publishing, Bantam Books, and others. Mrs. Prial attended the Fashion
Institute of Technology in New York.
- FREDERICK A. DAMERT, VICE PRESIDENT -- RESEARCH AND DEVELOPMENT. Mr.
DaMert was the founder and Chairman of the Board of DaMert Company. He
owned and operated the DaMert for 26 years, and was responsible for
creating and sourcing toy and gift products. Mr. DaMert attended San
Francisco State University.
- GAIL PATTON DAMERT, PH. D. VICE PRESIDENT -- BUSINESS INTEGRATION AND
ANALYSIS. Mrs. DaMert became a member of the DaMert Board of Directors in
1983. In 1989, she joined DaMert as the Director of Finance. In 1994, she
became DaMert's Chief Executive Officer. Prior to 1989, Mrs. DaMert was a
systems engineering manager at Lockheed Missiles and Space Company. She
holds a B. A. Degree in Mathematics and Astronomy from Smith College, and
a Ph. D. in Astronomy from State University of New York at Stony Brook.
EMPLOYMENT AGREEMENTS
During 1997, in return for services rendered, Futech granted Vincent W.
Goett 333,333 options to purchase common stock at an exercise price of $1.50 per
share, expiring in 2009.
VINCENT W. GOETT, the Chairman of the Board, President and Chief Executive
Officer of Futech, entered into an employment agreement with Futech dated
December 31, 1997. Under the agreement, Mr. Goett is entitled to an annual base
salary of not less than $200,000 in the first year of the agreement and $350,000
in the second year of the
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agreement, plus a bonus at Futech's discretion. In addition, Futech agreed to
grant Mr. Goett options to purchase a total of 233,333 shares of Futech's common
stock at an exercise price of $3.00 per share, exercisable as follows: 66,667 on
December 31, 1998; 66,667 on December 31, 1999; 33,333 on December 31, 2000;
33,333 on December 31, 2001; and the remaining 33,333 on December 31, 2002. The
agreement terminates on December 31, 2002, unless earlier terminated, and is
renewable for additional one year periods. His agreement will remain in full
force and will be assumed by New Futech in the mergers.
JOSEPH K. PETTER, Chief Operating Officer of Futech, entered into an
employment agreement with Futech dated February 1, 1997. Under the agreement,
Mr. Petter is entitled to $125,000 per year for the first year and $175,000 for
the second through fifth years of employment. The agreement terminates January,
2002. Mr. Petter also entered into a confidentiality agreement with Futech dated
March 4, 1996. His agreement will remain in full force and will be assumed by
New Futech in the mergers.
FREDERICK B. GRETSCH, SR., Chief Financial Officer, Secretary and Treasurer
of Futech, entered into an employment agreement with Futech dated September 2,
1997. Under the agreement, Mr. Gretsch is entitled to an annual base salary of
not less than $125,000. The agreement terminates on December 31, 2000. Mr.
Gretsch also entered into a confidentiality agreement with Futech in connection
with his employment. His agreement will remain in full force and will be assumed
by New Futech in the mergers.
WILLIAM E. HERMES, Executive Vice President -- Sales, entered into an
employment agreement with Futech dated April 1, 1999. Under the agreement, Mr.
Hermes is entitled to an annual salary of not less than $125,000. The agreement
terminates on April 1, 2002. Mr. Hermes also entered into a confidentiality
agreement with Futech in connection with his employment. His agreement will
remain in full force and will be assumed by New Futech in the mergers.
The Merger Agreement provides that Carl E. Voigt, IV, who is currently the
CEO of Fundex, will be a director and vice president of the toys/games division
of New Futech as well as a director and president of New Sub. Carl E. Voigt, III
will be the vice president of New Sub. In connection with these positions each
of them will receive three year employment contracts providing for a base salary
of $150,000 per year and options for 33,333 shares of New Futech stock (vesting
in three annual installments) with an exercise price of $4.50 per share.
FRED DAMERT AND GAIL PATTON DAMERT, who are currently the owners and
principal executives of DaMert, will be employed as Vice President -- Research
and Development and Vice President -- Business Integration and Analysis,
respectively, of New Futech after the mergers. The each will receive a three
year employment agreement providing for a base salary of $120,000 per year,
without stock options.
WILLIAM BURNHAM, who is presently one of the principal stockholders and
executive officers of Trudy, will be employed as the Vice President -- Specialty
Items of New Futech. Mr. Burnham will also be a director of New Futech. Mr.
Burnham will receive a three year employment agreement providing for a base
salary of $100,000 per year and stock options for a total of 20,000 shares of
New Futech stock, vesting in equal, annual installments and with an exercise
price of $7.50 per share.
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EXECUTIVE COMPENSATION
The following tables set forth for the year ended December 31, 1998, the
compensation awarded to, earned by, or paid to Futech's Chief Executive Officer
and the other Futech executive officers who were serving as executive officers
at December 31, 1998, and whose aggregate compensation exceeded $100,000. These
tables do not include information about 1998 compensation of executive officers
of the other merging companies. New Futech's employment agreements with its
executive officers, including those with executive officers of the other merging
companies, are described under the heading "Employment Agreements," above. The
stock option awards shown in the tables below have been adjusted for the
conversion ratio into New Futech stock options resulting from the mergers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
--------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS/SARS(#)(1) COMPENSATION
- --------------------------- --------- -------- --------------------- ------------
<S> <C> <C> <C> <C>
Vincent W. Goett........... $200,000 -- 1,398,333(2) --
Chief Executive Officer
Joseph K. Petter........... $176,042 -- 83,333 --
Chief Operating Officer
Frederick B. Gretsch,
Sr....................... $129,594 -- 116,667 --
Chief Financial Officer,
Secretary and Treasurer
</TABLE>
- -------------------------
(1) Consists entirely of stock options. The amounts shown has been adjusted for
the 1-for-30 exchange ratio in the mergers.
(2) Of the amount shown, 331,667 are owned by Mr. Goett and his spouse and the
remainder are owed by Palmilla Management Trust, which they control.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------
NUMBER
OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED TO EXERCISE OF
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION GRANT DATE
NAME (#) FISCAL YEAR ($/SH) DATE PRESENT VALUE(2)
---- ------------ ------------ ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Vincent W. Goett......... 41,667 2.43% 1.50 1/3/04 12,500
240,000 14.01% 1.50 3/31/04 72,000
50,000 2.92% 1.50 5/5/04 15,000
33,333 1.95% 1.50 6/24/04 10,000
200,000 11.67% 1.50 8/10/04 60,000
700,000 40.86% 1.50 12/3/08 210,000
133,333 7.78% 1.50 12/15/04 40,000
Frederick B. Gretsch,
Sr. ................... 83,333 4.86% 4.50 1/29/08 25,000
33,333 1.95% 4.50 6/29/08 10,000
Joseph K. Petter......... 83,333 4.86% 4.50 1/29/08 25,000
</TABLE>
- -------------------------
(1) The number of options and the exercise price have been adjusted to reflect
the assumed reverse-split ratio of 1:30.
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<PAGE> 70
(2) The fair value for these options/warrants was estimated at the date of grant
using the minimum value pricing model assuming a risk-free interest rate of
5.38%; dividend yield of 0%; and a weighted average expected life of five
years.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTIONS/SAR
VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR-END FISCAL YEAR-END
SHARES VALUE (#) ($)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE(1),(2)
---- ----------- -------- --------------- --------------------
<S> <C> <C> <C> <C>
Vincent W. Goett................. none n/a 1,341,667 $0
1,189,999 $0
Frederick B. Gretsch, Sr......... none n/a 83,333 $0
108,333 $0
Joseph K. Petter................. none n/a 83,333 $0
91,667 $0
</TABLE>
- -------------------------
(1) There were no in-the-money options or warrants as of the last fiscal year
end. The company has no SARs.
(2) Fair market value for options and warrants was based upon management's
estimate of the fair value of the Company's common stock of $1.50 and using
the minimum value option valuation method.
COMPENSATION OF DIRECTORS
STANDARD ARRANGEMENTS
As compensation for their services, non-employee directors are granted
options each year to purchase 833.33 shares of common stock of New Futech at a
price of $1.50 per share. Additionally, directors are reimbursed for
out-of-pocket expenses that are incurred in connection with their duties
associated with our business.
OTHER ARRANGEMENTS
In December 1998, as consideration for a personal guarantee of a line of
credit with a bank, the following directors received warrants to purchase common
stock of New Futech.
F. Keith Withycombe received warrants to purchase the equivalent of 700,000
shares of New Futech at an exercise price of $1.50 per share. These warrants are
exercisable starting in December 1998 and expire in December 2008. The fair
value of the warrants at the time of issuance was $420,000.
Robert J. Rosepink received warrants to purchase the equivalent of 133,333
shares of New Futech at an exercise price of $1.50 per share. These
warrants are exercisable starting in December 1998 and expire in December 2008.
The fair value of the warrants at the time of issuance was $80,000.
Vincent W. Goett received warrants to purchase the equivalent of 700,000
shares of New Futech at an exercise price of $1.50 per share. These warrants are
exercisable starting
64
<PAGE> 71
in December 1998 and expire in December 2008. The fair value of the warrants at
the time of issuance was $420,000.
1999 STOCK OPTION PLAN
The 1999 Stock Option Plan (the "1999 Plan") will be adopted by the Board
of Directors of New Futech and approved by New Futech's stockholders. A total of
1,000,000 shares of New Futech Common Stock will be reserved for issuance under
the 1999 Plan. The 1999 Plan will survive the merger.
Purposes. The purpose of the 1999 Plan is to attract and retain the best
available directors and employees of the Company or any parent or subsidiary or
affiliate of New Futech which now exists or hereafter is organized or acquired
by or acquires New Futech, as well as appropriate third parties who can provide
valuable services to New Futech, to provide additional incentive to such persons
and to promote the success of the business of the Company.
Administration. The 1999 Plan is administered by the Board of Directors or
a Committee of the Board of Directors appointed by the Board and constituted so
as to permit the 1999 Plan to comply with Rule 16b-3. The administering body is
referred to herein as the "Committee." The Committee determines the persons to
whom stock options will be granted, the terms of such grants and the number of
shares subject to options. The 1998 Plan provides for the grant of options which
qualify as "Incentive Stock Options" (sometimes referred to herein as "ISOs")
under Section 422 of the Code and non-statutory stock options which do not
specifically qualify for favorable income tax treatment under the Code
(sometimes referred to herein as "NSOs").
Eligibility and Participation. Any employee of New Futech or any of its
subsidiaries is eligible to receive options under the 1999 Plan. Non-employee
directors are eligible to receive only NSOs under the 1999 Plan while employee
directors are eligible for both ISOs and NSOs. In addition, any other individual
whose participation the Committee determines is in the best interests of the
Company is eligible to receive only NSOs under the 1999 Plan. The Committee has
complete discretion to determine which eligible individuals are to receive
option grants. In general, the only consideration received by New Futech for the
grant of an award will be past services or the expectation of future services,
or both. The 1999 Plan does not confer on any participant in the 1999 Plan (a
"Participant") any right with respect to continued employment or other services
to New Futech and will not interfere in any manner with the right of New Futech
to terminate a Participant's employment or other services
Stock Subject to the 1999 Plan. The aggregate number of shares which may
be issued pursuant to the exercise of options granted under the 1999 Plan is
1,000,000 shares of New Futech's Common Stock, subject to adjustments in certain
circumstances, including reorganizations, recapitalizations, stock splits,
reverse stock splits, stock dividends and the like. If any outstanding option
grant under the 1999 Plan for any reason expires or is terminated, the shares of
Common Stock allocable to the unexercised portion of the option grant shall
again be available for options under the 1999 Plan as if no options had been
granted with respect to those shares.
Limitations on Awards. No grants are required to be made during any
calendar year. No ISO may be exercised more than ten years from the date of
grant (five years in the case of a grant to a Participant owning more than 10%
or more of the total combined voting power of all classes of stock of the
Company or any ISO Group member),
65
<PAGE> 72
immediately after the date the Participant ceases to perform services for the
Company or any ISO Group member (for reasons other than death or disability),
one year after the date the Participant ceases to perform services for the
Company or any ISO Group member if cessation is due to death or disability, or
the date the Participant ceases to perform services for the Company or any ISO
Group member if cessation is for cause. No NSO may be exercised more than ten
years from the date of grant, one year after the date the Participant ceases to
perform services for the Company or any Affiliated Group member (for reasons
other than death, disability, retirement or cause), two years after the date the
Participant cease to perform services for the Company or any Affiliated Group
member if cessation is due to death, disability or retirement, or the date the
Participant ceases to perform services for the Company or any Affiliated Group
member if cessation is for cause.
Pricing and Payment of Options. The per share exercise price of each stock
option granted under the 1999 Plan will be established by the Committee at the
time of grant. Subject to the provisions of the Internal Revenue Code of 1986,
as amended, grants to Participants may be either ISOs or NSOs. In the case of an
ISO, the per share exercise price may be no less than 100% of the fair market
value of a share of Common Stock on the date of grant (110% in the case of a
Participant who owns, directly or indirectly, 10% or more of the outstanding
voting power of all classes of stock of the Company). The per share exercise
price of a Non-qualified Stock Option may be any amount determined in good faith
by the Committee. With respect to ISOs, the aggregate fair market value of the
Common Stock for which one or more options granted to a Participant may become
exercisable during any one calendar year may not exceed $1,000,000. The fair
market value of the Common Stock equals the closing price on the date in
question on the principal exchange or other market on which the stock is then
traded.
Under the 1999 Plan, the purchase price of an option is payable upon
exercise: (i) in cash; (ii) by check; (iii) to the extent permitted by the
particular option grant, by transferring to the Company shares of Common Stock
of the Company at their fair market value as of the option exercise date
(provided that the Participant held the shares of stock for at least six
months); or (iv) through a sale and remittance procedure by which a Participant
delivers concurrent written instructions to a Company-designated brokerage firm
to sell immediately the purchased Common Stock and remit to the Company
sufficient funds to pay for the options exercised and by which the certificates
for the purchased Common Stock are delivered directly to the brokerage firm. The
Company may also extend and maintain, or arrange for the extension and
maintenance of, credit to a Participant to finance the purchase of shares
pursuant to the exercise of options, on such terms as may be approved by the
Board of Directors or the Committee, subject to applicable regulations of the
Federal Reserve Board and any other applicable laws or regulations in effect at
the time such credit is extended.
The Committee may require, as a condition to exercise of an option, that
the Participant pay to the Company, in cash or in shares of the Common Stock of
the Company, the entire amount of taxes which the Company is required to
withhold by reason of such exercise, in such amount as the Committee or the
Board of Directors may determine. Alternatively, the Participant may elect,
subject to rules adopted by the Committee or the Board of Directors, or New
Futech may require that New Futech withhold from the shares to be issued that
number of shares having a fair market value equal to the amount which the New
Futech is required to withhold.
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<PAGE> 73
Exercise. As described above, the Committee has the authority to determine
the vesting and exercise provisions of all grants under the 1999 Plan. In
general under the 1999 Plan, no option shall be exercisable during the lifetime
of a Participant by any person other than the Participant, his or her guardian
or legal representative.
Accelerating Events. The options granted under the 1999 Plan become fully
exercisable if New Futech is dissolved or liquidated, subject to certain
reorganizations, mergers, or consolidations, is acquired or subject to a hostile
takeover attempt, undergoes a change in control or if there is an announcement
or proxy solicitation relating to such events.
Termination or Amendment of the 1999 Plan. The Board of Directors may
amend or modify the 1999 Plan at any time; provided, that stockholder approval
shall be obtained for any action for which stockholders approval is required in
order to comply with Rule 16b-3, the Code, or other applicable laws or
regulatory requirements within such time periods prescribed. The 1999 Plan will
terminate on January 29, 2008, unless sooner terminated by the Board of
Directors.
Option Grants. No options have been granted under the 1999 Plan.
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<PAGE> 74
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 17, 1997, Futech entered into an Agreement for Purchase and Sale
of Assets with XYZ, pursuant to which Futech has purchased substantially all of
the assets of XYZ at the closing on May 1, 1998. Mr. Billings, a Director of
Futech, was the sole shareholder of XYZ. The agreement requires Futech to pay
the following consideration: (i) $1 million in cash; (ii) $4 million in a
12-month, no interest note; (iii) $2,867,334 in cash or in shares of common
stock at $.20 a share ($6.00 for New Futech shares); and (iv) an additional
$1,000,000 to be added to the total amount, if the $4,000,000 is not paid by
April 30, 1999. This additional $1,000,000 is now due and both the $4,000,000
and the additional $1,000,000 bear interest at 10%. Futech has previously paid
$1 million in cash. As the sole shareholder of XYZ, a subchapter S corporation,
Mr. Billings received the cash and shares of common stock constituting the
purchase price for XYZ.
Pursuant to the Agreement for Purchase and Sale of Assets with XYZ, Futech
assumed a $7 million line of credit from Republic Acceptance Corporation made by
XYZ. The line of credit generally bears interest at prime plus 2.5%. Mr.
Billings personally guaranteed the loan. Additionally, the loan is secured with
the inventory and accounts receivable of XYZ.
On January 1, 1997, Futech entered into an agreement which allows the chief
executive officer to borrow funds from time to time. The outstanding balance
bears interest at prime plus 1% and is due on December 31, 2001 on the amounts
outstanding. There is an option to renew the agreement for an additional 3
years. As of December 31, 1998 the balance due to Futech was $1,440,270. As of
June 30, 1999 the balance was $1,819,430.
In April 1997, Roderick L. Turner, a director and stockholder loaned Futech
$350,000, with interest at 10%, due July 2, 1999. This loan was subsequently
amended to be due on demand. In lieu of payment, Mr. Turner could receive
840,000 common shares at $0.50 per share (28,000 shares at $15.00 for New Futech
shares). On March 1, 1999, the lender and Futech agreed to amend the loan
agreement, whereby the loan plus interest (totaling $417,083.33) was converted
to 2,780,555.533 shares of common stock at $0.15 per share (92,685 shares or
$4.50 per share for New Futech shares). In connection with the original loan,
Futech paid Mr. Goett $35,000 and issued 1,000,000 shares of common stock
(33,333 in New Futech shares) as a loan origination fee.
On October 29, 1997 Roderick L. Turner and Vincent W. Goett loaned Futech
$245,000, with interest at 10%, due December 31, 1997. This loan was
subsequently amended to be due on demand. This loan was repaid January 14, 1998.
In connection with this loan, Futech issued Mr. Goett 500,000 shares of common
stock (16,667 in New Futech shares) as a loan origination fee.
At various times in 1997, Mr. Turner and Mr. Goett loaned Futech
$3,000,000, with interest at 10%, due in 1998 and 1999. This loan was
subsequently amended to be due on demand. In connection with the loans, Futech
paid Mr. Goett $300,000 and issued 7,000,000 shares of common stock (233,333 in
New Futech shares) as a loan origination fee.
On January 2, 1998, Mr. Turner and Mr. Goett loaned Futech $2,500,000, with
interest at 10% due April 30, 1998. In connection with this loan, Futech paid
Mr. Goett $250,000 and issued 2,500,000 shares of common stock (83,333 in New
Futech shares) as a loan origination fee. Later in the year the loan fee and
stock were re-characterized as a loan and stock options.
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<PAGE> 75
On March 31, 1998, Mr. Goett personally guaranteed $3.6 million of a $4
million line of credit newly established with Republic Bank. In connection with
this guarantee, Futech paid Mr. Goett $360,000 and issued 7,200,000 shares of
common stock (240,000 in New Futech shares) as a loan origination fee. Later in
the year, the loan fee and stock were re-characterized as a loan and stock
options.
On May 5, 1998, Mr. Turner and Mr. Goett loaned Futech $1,500,000 with
interest at 10% due May 5, 2000. At the same time, Mr. Turner and Mr. Goett
signed a subordination agreement with Republic Bank to subordinate all of their
debt to Republic. In connection with the loan and the subordination fee, Futech
paid Mr. Goett $500,000 and issued 3,000,000 shares of common stock (100,000 in
New Futech shares) as a loan origination fee. Later in the year, the loan fee
and stock were re-characterized as a loan and stock options.
On June 1, 1998, Futech entered a Patent Licensing and Purchase Agreement
with Grand Slam Investments, L.L.C., which is controlled by Vincent W. Goett.
Under the agreement, Grand Slam grants Futech exclusive, world-wide rights to
use two patents owned by Grand Slam. Under the agreement, Futech would make 12
monthly royalty payments of $10,000 beginning June 1, 1998. On June 30, 1999,
Futech would purchase the patents for $1,500,000. Alternatively, Futech had the
right to purchase the patents at an earlier date of December 30, 1998 for a
reduced cost of $1,000,000. This agreement was amended on December 9, 1998
whereby Futech agreed to pay $650,000 on December 9, 1998 and $850,000 on or
before June 1, 1999. Additionally the monthly royalty payments of $10,000 were
suspended as of December 31, 1998. The $850,000 payment has not been made.
On June 24, 1998, Mr. Turner and Mr. Goett loaned Futech $1,000,000, with
interest at 10%, due December 24, 1998. In connection with the loan, Futech paid
Mr. Goett $100,000 and issued 2,000,000 shares of common stock (66,667 in New
Futech shares) as a loan origination fee. Later in the year, the loan fee and
stock were re-characterized as a loan and stock options.
On August 3, 1998, Mr. Turner loaned Futech $300,000, with no interest, due
upon receipt of the $2,000,000 listed below. No repayment was made and on March
1, 1999, the lender and Futech agreed to amend the loan agreement, whereby
interest was added to the loan at 10% per annum. Additionally, on March 1, 1999,
the loan plus interest (totaling $314,601) was converted to 2,097,342.47 shares
of common stock (69,911 New Futech shares).
On August 10, 1998, Vincent and Melissa Goett loaned Futech $2,000,000,
with interest at 10%, due on September 1, 1999. In connection with the loan,
Futech paid Mr. Goett $200,000 and issued 8,000,000 shares of common stock
(266,667 in New Futech shares) as a loan origination fee. Later in the year, the
loan fee and stock were re-characterized as a loan and stock options.
On December 3, 1998, F. Keith Withycombe, a director, and Vincent W. Goett
personally guaranteed a $7 million line of credit newly established with Bank of
America. In return for their personal guarantees, Mr. Withycombe and Mr. Goett
each received warrants for 21,000,000 common stock shares (700,000 in New Futech
shares) exercisable at $0.05 per share ($1.50 per share in New Futech shares).
In connection with this transaction, Robert J. Rosepink, a director, received
warrants for 4,000,000 shares of common stock (133,333 in New Futech shares)
exercisable at $0.05 per share ($1.50 per
69
<PAGE> 76
share in New Futech shares). Additionally, as part of this agreement, Mr. Goett
may take a loan advance of $300,000.
On December 15, 1998, Mr. Turner and Mr. Goett agreed to extend the due
date of their combined $8,000,000 loans, and Vince and Melissa Goett agreed to
extend the due date of the $2,000,000 loan to December 15, 1999. In connection
with this extension, Mr. Turner and the Goetts received options for a combined
8,000,000 shares of common stock (266,667 in New Futech shares) exercisable at
$0.05 per share ($1.50 per share in New Futech shares).
On May 21, 1999, F. Keith Withycombe, a director, agreed to provide a
secured $2,000,000 line of credit to Futech. The line of credit is due on
December 1, 1999 and interest accrues at prime plus 1% per annum. Mr. Withycombe
agreed to subordinate this secured loan to the $7,000,000 loan to Futech from
Bank of America National Trust and Savings Association. As consideration for
this loan Futech agreed to issue warrants for 9,000,000 shares of Futech common
stock (300,000 in New Futech shares) exercisable at $0.05 per share ($1.50 per
share in New Futech shares). As consideration for facilitating this loan Futech
agreed to issue Robert J. Rosepink, a director, warrants for 2,000,000 shares of
Futech common stock (66,667 shares of New Futech common stock) exercisable at
$0.05 per share ($1.50 per share in New Futech Shares). Additionally, Vincent W.
Goett received warrants for 5,000,000 shares of Futech common stock (166,667
shares of New Futech common stock) exercisable at $0.05 per share ($1.50 per
share in New Futech shares).
On May 31, 1999 Futech Interactive Products and Newtech Consulting, a 3%
owner of New Futech, agreed to convert outstanding debt, including interest,
totaling $1,158,630 into $50,000 cash, a $200,000 note bearing interest at 8%
due by June 30, 1999, and 3,634,520 shares of Futech common stock. Futech paid
$50,000 on May 31. No other payments have been made under this agreement. Futech
signed an agreement on March 31, 1999 with Trudy that, in the event the merger
did not occur by June 1, 1999, Futech would assist in providing the working
capital needs of Trudy, if needed, to maintain sales momentum until the closing.
The agreement also states that Futech will assure that Trudy is not in default
under any of the loan agreements, including its borrowings from First Union.
On June 7, 1999, Fundex and Futech entered into a loan and licensing
agreement pursuant to which (a) Futech agreed to loan Fundex $250,000 upon
signing the Merger Agreement, an initial $500,000 prior to the closing of the
merger, and an additional $750,000 loan or other financial assistance as
required pending the mergers, and (b) a nonexclusive license to use Futech's
game board technology pending the mergers in exchange for a royalty equal to 50%
of net operating profits on the associated products. The debt must be repaid
with interest at the rate of 10% per annum two years after the date of the
agreement. If New Futech defaults on the promissory notes issued to the Fundex
stockholders and as a result they foreclose on the stock of New Sub, $750,000 of
the balance due under these loans will be forfeited by New Futech as a penalty.
To date, Futech has loaned $100,000 under this agreement.
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<PAGE> 77
NEW FUTECH STOCKHOLDERS
PRO FORMA SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the stock ownership as of a recent date for each of
the merging companies is included in the prospectus/proxy statement supplement
for the particular merging company. The following table sets forth pro forma
information with respect to the beneficial ownership of New Futech's common
stock by each of New Futech's directors, by the executive officers named in the
summary Compensation Table, by the executive officers and directors of New
Futech as a group and by each person known to New Futech that will be the
beneficial owner of more than five percent of the outstanding common stock upon
completion of the mergers, based on their stock ownership in the respective
merging companies as of May 1, 1999. The percentages assume that none of the
eligible Fundex stockholders elects the All Cash Alternative and that no
additional shares are issued to the Trudy stockholders as described above in
"DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT -- Basic Terms of the
Merger Agreement."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO
MERGER(1)(2)
-------------------
IDENTITY OF STOCKHOLDER OR GROUP NUMBER PERCENT
- -------------------------------- --------- -------
<S> <C> <C>
Vincent W. and Melissa Turner Goett(3)...................... 2,734,297 34.6%
Debra McTaggart(4).......................................... 508,576 8.5%
Roderick L. Turner(5)....................................... 703,886 11.5%
Gary A. Oman(6)............................................. 95,854 1.6%
Robert J. Rosepink(7)....................................... 220,146 3.6%
Joseph K. Petter(8)......................................... 47,924 0.8%
Gary R. "Joe" Billings(9)................................... 477,889 7.4%
Frederick B. Gretsch, Sr.(10)............................... 38,889 0.6%
F. Keith Withycombe(11)..................................... 1,000,000 14.3%
DaMert Trust UDT 9/28/98(12)................................ 613,070 10.3%
Carl E. Voigt IV(13)........................................ 231,264 3.9%
William W. Burnham(14)...................................... 133,157 2.2%
All Directors and Executive Officers as a Group (9
persons).................................................. 5,225,706 55.9%
</TABLE>
- -------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") and generally includes voting or
investment power with respect to securities. In accordance with SEC rules,
shares which may be acquired upon exercise of stock options which are
currently exercisable or which become exercisable within 60 days of the
date of the table are deemed beneficially owned by the optionee. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons or entities named in the table above have sole
voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
(2) Includes shares issuable upon the exercise of options which are currently
exercisable or become exercisable within 60 days of May 1, 1999 as
applicable for each of the following individuals: Vincent W. & Melissa
Turner Goett, Roderick L. Turner, Robert J. Rosepink, Joseph K. Petter,
Frederick B. Gretsch, Sr., F. Keith Withycombe and Patricia A. Withycombe
(H&W).
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<PAGE> 78
(3) 700,000 share options are currently exercisable by Vincent W. Goett,
331,666 options are currently exercisable jointly by Vincent and Melissa
Goett and 33,333 warrants as well as 866,667 warrants are currently
exercisable by Palmilla Management Trust (Goett Family Trust). 71,600
shares are owned of record by Vincent Goett; 61,667 shares are owned of
record by Mr. Goett's spouse, Melissa Goett; 520,475 shares are owned of
record jointly by Vincent and Melissa Goett; and 10,000 are owned of record
by three minor children of the Goetts. 333 shares are owned by purchase of
Janex stock from broker.
(4) 133,333 shares are owned of record by Newtech Consulting, Inc., which is
controlled by Stephen McTaggart; 183,412 shares are owned of record by Mr.
McTaggart's spouse, Debra McTaggart; 100,000 shares owned of record by
Pacific Ranch, LP, which is controlled by Debra McTaggart; and 4,000 shares
are owned of record by the six minor children of the McTaggarts.
(5) Roderick L. Turner is the father-in-law of Vincent W. Goett. 30,000 are in
a family trust controlled by Mr. Turner. 240,857 shares are owned
individually, 45,459 shares are owned by Terry C. Turner, Mr. Turner's
wife. 125,000 options are currently exercisable by Mr. Turner. Mr. Turner
has also converted two separate loans with Futech to shares yet-to-be
received for a total of 162,597 additional shares.
(6) Indicated shares are owned of record by The Oman Family Trust, of which
Gary Oman and his wife, Sherri Oman, are trustees.
(7) 16,667 shares are owned of record by Robert J. Rosepink. Mr. Rosepink
currently has 200,000 warrants that are exercisable.
(8) 10,000 shares are held in Joseph K. Petter's Individual Retirement Account,
and 6,667 shares are held by Mr. Petter individually. Mr. Petter currently
has 27,778 option that are exercisable.
(9) From the sale of XYZ, Mr. Gary R. "Joe" Billings is due 477,889 shares or
cash of $2,867,334 upon the merger being completed.
(10) Mr. Frederick B. Gretsch, Sr. currently has 38,889 options that are
exercisable.
(11) Mr. F. Keith Withycombe & Patricia A. Withycombe (H&W) currently have
1,000,000 warrants that are exercisable.
(12) Indicated shares are owned of record by the DaMert Trust UDT September 28,
1998, of which Frederick A. DaMert and his wife Gail Patton DaMert, are
trustees.
(13) All shares are owned of record by Carl E. Voigt, IV.
(14) All shares are owned of record by William W. Burnham.
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<PAGE> 79
DESCRIPTION OF NEW FUTECH CAPITAL STOCK
The following description of New Futech's capital stock is a summary only
and is subject to, and qualified in its entirety by, reference to New Futech's
Certificate of Incorporation and Bylaws, copies of which are included as an
exhibit to this prospectus/proxy statement, and by reference to Delaware law
under which New Futech is incorporated.
COMMON STOCK
The current authorized capital of New Futech consists of 45,000,000 shares
of common stock, par value $.0001 per share. As of June 30, 1999, there were no
shares of common stock issued and outstanding. In connection with the mergers,
New Futech is obligated to issue a minimum aggregate of 5,867,628 and a maximum
aggregate of 5,955,297 shares of New Futech common stock to Trudy, Janex,
Fundex, DaMert and Futech stockholders. There are also 1,000,000 shares of New
Futech common stock reserved for issuance pursuant to New Futech's 1999 Stock
Option Plan pursuant to which no shares have been granted.
Each share of New Futech's common stock is entitled to one vote. The
directors of New Futech are elected to serve a three-year term on a staggard
board. Pursuant to its Certificate of Incorporation, New Futech's board of
directors may amend the bylaws. New Futech's bylaws provide for removal of a
director, with cause, by the affirmative vote of a majority of all shares
entitled to vote at an election of directors.
Holders of capital stock of New Futech do not have preemptive or other
subscription rights to purchase or subscribe for unissued stock or other
securities of New Futech.
PREFERRED STOCK
The current authorized capital of New Futech consists of 5,000,000 shares
of preferred stock, having a par value of one-tenth of one cent ($.001) per
share. In addition, New Futech expects to issue 2,222,222 shares of preferred
stock in exchange for $10,000,000 principal amount of its outstanding debt. Each
share of New Futech preferred stock is entitled to one vote.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the following
financial statements of certain companies that are included in Futech
Interactive Products' registration statement filed on Form S-4 (Registration No.
333-80131) as set forth in their reports (which each contain an explanatory
paragraph describing conditions that raise substantial doubt about each
company's ability to continue as a going concern as described in Note 1 to each
financial statement), which are included in the registration statement. The
following financial statements are included in reliance on Ernst & Young LLP's
reports, given on their authority as experts in accounting and auditing:
- Futech Interactive Products, Inc. as of December 31, 1997 and 1998 and
for each of the two years in the period ended December 31, 1998.
- Janex International Corporation as of December 31, 1998 and for year then
ended.
- Trudy Corporation d/b/a Soundprints as of March 31, 1999 and for year
then ended.
The financial statements of Fundex Games, Ltd. as of December 31, 1998 and
1997 and for the years then ended and Janex International, Inc. as of December
31, 1997 and
73
<PAGE> 80
for the year then ended, included in the prospectus/proxy statement have been
audited by BDO Seidman, LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
authority of said firm experts in accounting and auditing.
The annual financial statements of DaMert Company included herein as of and
for the fiscal years ended December 31, 1998 and 1997, have been audited by
Armanino McKenna LLP, independent public accountants, as set forth elsewhere in
the prospectus/proxy, given on their authority as experts in accounting and
auditing.
The annual financial statements of XYZ Group, Inc. as of December 31, 1997,
and for the year then ended and the financial statements of XYZ Group, Inc. as
of April 30, 1998, and for the four-month period then ended have been audited by
Virchow, Krause & Company, LLP, as set forth elsewhere in the prospectus/proxy,
given on their authority as experts in accounting and auditing.
The financial statements of Gick Publishing, Inc. as of September 30, 1997,
and for the eleven months then ended have been audited by Sparks, Nelson &
Jacobson CPA's, independent public accountants, as set forth elsewhere in the
prospectus/proxy statement, given on their authority as experts in accounting
and auditing.
The financial statements of Trudy Corporation as of March 31, 1998, and for
the year then ended, have been audited by Abrams and Company, P.C., independent
public accountants, as set forth in their report elsewhere in this
prospectus/proxy statement, given on their authority as experts in accounting
and auditing.
Janex has agreed to indemnify and hold harmless BDO Seidman, LLP for any
and all liabilities, costs or expenses of any nature whatsoever incurred by BDO
Seidman, LLP in defending itself in a lawsuit brought because of the re-issuance
of BDO Seidman, LLP's report on its audit of Janex's 1997 financial statements.
In accordance with the agreement, the indemnification will be void if a court,
after adjudication, finds BDO Seidman, LLP to be liable for malpractice. A copy
of the indemnification agreement is attached as Exhibit 10.25J.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for New Futech by Quarles & Brady LLP, Phoenix, Arizona. Certain legal
matters in connection with the mergers will be passed upon for Futech by Quarles
& Brady LLP, Phoenix, Arizona.
WHERE YOU CAN FIND MORE INFORMATION
New Futech has filed Registration Statements on Form S-4 and Form 8-A with
the SEC. These registration statements contain some information that is not
included in this prospectus/proxy statement or in any prospectus/proxy statement
supplements provided to the stockholders of each of the merging companies. New
Futech will also file annual, quarterly and special reports, proxy statements
and other information with the SEC. Similarly, Janex and Trudy each file annual,
quarterly and special reports, proxy statements and other information with the
SEC. These SEC filings are available to the public over the Internet at the
SEC's web site at http.//www.sec.gov. You may also read and copy any document
filed by New Futech or any of the merging companies at the SEC's public
74
<PAGE> 81
reference rooms in Washington, D.C., New York, and Chicago. You can call the SEC
at 1-800-732-0330 for further information about the public reference rooms.
The SEC allows New Futech and the merging companies to "incorporate by
reference" some of the information we file with them, which means we are assumed
to have disclosed important information to you when we refer you to documents
that are on file with the SEC. The information we have incorporated by reference
is an important part of this prospectus/proxy statement and the related
prospectus/proxy statement supplement, and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future documents we file with
the SEC under Sections 13(a), 13(c), l4 or 15(d) of the Securities Exchange Act
of 1934 until the mergers occur.
- Annual Reports on Form 10-KSB of Janex for the fiscal year ended December
31, 1998, and of Trudy for the fiscal year ended March 31, 1999.
- Quarterly Reports on Form 10-QSB of Janex for the quarter ended March 31,
1999 and of Trudy for the quarters ended June 30, 1998, September 30,
1998 and December 31, 1998.
- Current Reports on Form 8-K of Janex dated February 25, 1999 and of Trudy
dated December 18, 1998 and April 12, 1999.
You may request a copy of these documents at no cost by writing to us at
the following address:
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
Attn: Frederick B. Gretsch, Sr.
Telephone: 602-808-8765
Although we are already sending to you the prospectus/proxy statement
supplement that relates specifically to your company, we will also send you the
prospectus/proxy statement supplement for any or all of the other merging
companies, without charge, upon request to us at the address stated above.
You should rely only on the information provided in or incorporated by
reference (and not later changed) in the prospectus/proxy statement or any
prospectus/proxy statement supplement. Neither New Futech nor any of the merging
companies has authorized anyone else to provide you with additional or different
information. New Futech and New Sub are not making an offer of any securities in
any state where the offer is not permitted. You should not assume that the
information in this prospectus/proxy statement or any prospectus/proxy statement
supplement is accurate as of any date other than the date on the front of these
documents.
75
<PAGE> 82
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Futech Interactive Products, Inc. and Subsidiary
Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors......... F-4
Consolidated Balance Sheets as of December 31, 1997 and
1998 and March 31, 1999 (unaudited).................... F-5
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998 and the three months ended
March 31, 1998 (unaudited) and March 31, 1999
(unaudited)............................................ F-6
Consolidated Statements of Shareholders' Deficit for the
years ended December 31, 1997 and 1998 and the three
months ended March 31, 1999 (unaudited)................ F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998, and the three months ended
March 31, 1998 (unaudited) and March 31, 1999
(unaudited)............................................ F-8
Notes to Consolidated Financial Statements................ F-10
Janex International, Inc. and Subsidiaries
Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors......... F-29
Report of BDO Seidman, LLP, Independent Certified Public
Accountants............................................ F-30
Consolidated Balance Sheets as of December 31, 1997 and
1998 and March 31, 1999 (unaudited).................... F-31
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1998 and the three months ended
March 31, 1998 (unaudited) and March 31, 1999
(unaudited)............................................ F-32
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1997 and 1998 and the
three months ended March 31, 1999 (unaudited).......... F-33
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1998, and the three months ended
March 31, 1998 (unaudited) and March 31, 1999
(unaudited)............................................ F-34
Notes to Consolidated Financial Statements................ F-35
Trudy Corporation
Financial Statements
Report of Ernst & Young LLP, Independent Auditors......... F-49
Report of Abrams and Company, P.C., Independent
Auditors............................................... F-50
Balance Sheets as of March 31, 1998 and March 31, 1999.... F-51
Statements of Operations for the years ended March 31,
1998 and 1999.......................................... F-53
Statements of Shareholders' Equity (Deficit) for the years
ended March 31, 1998 and 1999.......................... F-54
Statements of Cash Flows for the years ended March 31,
1998 and March 31, 1999................................ F-55
Notes to the Financial Statements......................... F-56
</TABLE>
F-1
<PAGE> 83
<TABLE>
<S> <C>
Fundex Games, Ltd.
Financial Statements
Report of BDO Seidman, LLP, Independent Certified Public
Accountants............................................ F-66
Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999 (unaudited)................................... F-67
Statements of Operations for the years ended December 31,
1997 and 1998 and the three months ended March 31, 1999
(unaudited)............................................ F-68
Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1998 and the three months ended
March 31, 1998 (unaudited) and March 31, 1999
(unaudited)............................................ F-69
Statements of Cash Flows for the years ended December 31,
1997 and 1998, and the three months ended March 31,
1998 (unaudited) and March 31, 1999 (unaudited)........ F-70
Notes to the Financial Statements......................... F-71
DaMert Company
Financial Statements
Report of Armanino McKenna LLP, Independent Auditors...... F-78
Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999 (unaudited)................................... F-79
Statements of Operations for the years ended December 31,
1997 and 1998 and the three months ended March 31, 1998
(unaudited) and March 31, 1999 (unaudited)............. F-81
Statements of Shareholders' Equity for the years ended
December 31, 1997 and 1998 and the three months ended
March 31, 1999 (unaudited)............................. F-82
Statements of Cash Flows for the years ended December 31,
1997 and 1998, and the three months ended March 31,
1998 (unaudited) and March 31, 1999 (unaudited)........ F-83
Notes to the Financial Statements......................... F-84
XYZ Group, Inc
Financial Statements
Report of Virchow, Krause & Company, LLP, Independent
Auditors............................................... F-88
Balance Sheet as of December 31, 1997..................... F-89
Statement of Operations and Retained Deficit for the year
ended December 31, 1997................................ F-90
Statement of Cash Flows for the year ended December 31,
1997................................................... F-91
Notes to the Financial Statements......................... F-92
Report of Virchow, Krause & Company, LLP, Independent
Auditors............................................... F-97
Balance Sheet as of April 30, 1998........................ F-98
Statement of Operations and Retained Deficit for the four
months ended April 30, 1998............................ F-99
Statement of Cash Flows for the four months ended April
30, 1998............................................... F-100
Notes to the Financial Statements......................... F-101
</TABLE>
F-2
<PAGE> 84
<TABLE>
<S> <C>
Gick Publishing, Inc.
Financial Statements
Report of Sparks, Nelson & Jacobson CPA's, Independent
Auditors............................................... F-105
Balance Sheet as of September 30, 1997.................... F-106
Statement of Operations for the eleven months ended
September 30, 1997..................................... F-107
Statement of Stockholders' Equity for the eleven months
ended September 30, 1997............................... F-108
Statement of Cash Flows for the eleven months ended
September 30, 1997..................................... F-109
Notes to the Financial Statements......................... F-111
</TABLE>
F-3
<PAGE> 85
FUTECH INTERACTIVE PRODUCTS, INC.
FINANCIAL STATEMENTS
<PAGE> 86
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Futech Interactive Products, Inc.
We have audited the accompanying consolidated balance sheets of Futech
Interactive Products, Inc. and subsidiary as of December 31, 1997 and 1998, and
the related consolidated statements of operations, shareholders' deficit, and
cash flows for each of the two years in the 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 the consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Futech Interactive Products, Inc. and subsidiary at December 31, 1997 and 1998,
and the consolidated results of its operations and its cash flows for the each
of the two years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company's recurring losses and net capital deficiency raise substantial doubt
about its ability to continue as a going concern. Additionally, the majority of
the Company's debt is due within one year. Management's plans as to those
matters are also described in Note 1. The 1998 consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Phoenix, Arizona
March 5, 1999, except for
Note 17 as to which the date
is June 7,1999
F-4
<PAGE> 87
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 5,701 $ 186,743 $ 184,044
Accounts receivable, less allowance for doubtful
accounts of $0, $768,470, and $673,927 at December
31, 1997, 1998, and March 31, 1999, respectively..... -- 2,315,960 1,687,865
Inventory, less allowance of $0, $196,270, $211,270 at
December 31, 1997, 1998, and March 31, 1999,
respectively......................................... -- 4,118,483 5,151,336
Prepaid expenses and other.............................. 46,178 438,268 559,296
------------ ------------ ------------
Total current assets...................................... 51,879 7,059,454 7,582,541
Property and equipment, net............................... 241,334 1,075,189 1,078,422
Intangible assets, net.................................... -- 16,598,320 16,163,122
Due from Company chief executive officer.................. -- 1,440,270 1,595,803
Advances for acquisitions................................. 225,000 -- --
Other assets.............................................. -- 41,598 90,921
------------ ------------ ------------
Total assets.................................... $ 518,213 $ 26,214,831 $ 26,510,809
============ ============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable........................................ $ 495,171 $ 6,117,307 $ 5,541,107
Accrued expenses........................................ 552,924 2,281,160 2,121,114
Due to Company's chief executive officer................ 204,717 -- --
Notes payable
Related party........................................ 5,627,000 12,500,000 11,857,510
Other................................................ 24,668 16,806,520 15,904,508
------------ ------------ ------------
Total current liabilities................................. 6,904,480 37,704,987 35,424,239
Notes payable
Related party........................................... 913,000 -- --
Other................................................... 1,332,571 2,450,000 6,545,000
Advance from Joint Venture................................ 2,000,000 -- --
Shareholders' deficit:
Preferred stock, no par value:
Authorized shares -- 100,000,000
Issued and outstanding shares -- 0, 3,750,000, and
3,750,000 at December 31, 1997, 1998, and March 31,
1999, respectively................................. -- 750,000 750,000
Common stock, no par value:
Authorized shares -- 235,000,000
Issued and outstanding shares -- 80,242,457,
80,278,457 and 87,339,078 at December 31, 1997,
1998, and March 31, 1999, respectively............. 19,736,236 20,909,236 21,968,081
Unearned compensation................................... (1,550,000) (987,059) (847,957)
Accumulated deficit..................................... (28,818,074) (34,612,333) (37,328,554)
------------ ------------ ------------
Total shareholders' deficit..................... (10,631,838) (13,940,156) (15,458,430)
------------ ------------ ------------
Total liabilities and shareholders' deficit..... $ 518,213 $ 26,214,831 $ 26,510,809
============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 88
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- -------------------------
1997 1998 1998 1999
------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net product sales............. $ -- $ 6,032,910 $ -- $ 2,518,276
Technology fee................ -- 2,000,000 2,000,000 --
------------ ----------- ----------- -----------
Total revenues................ -- 8,032,910 2,000,000 2,518,276
Cost of sales................. -- 4,295,578 -- 2,070,976
------------ ----------- ----------- -----------
Gross profit.................. -- 3,737,332 2,000,000 447,300
Operating expenses:
Selling, general and
administrative........... 3,563,905 5,869,146 566,226 1,911,630
Research and development.... 6,732,875 229,480 76,831 --
Depreciation and
amortization of
intangibles.............. 55,491 1,343,197 107,551 520,767
Loss on Joint Venture....... 1,393,778 -- -- --
------------ ----------- ----------- -----------
Income (loss) from
operations.................. (11,746,049) (3,704,491) 1,249,392 (1,985,097)
Other expense:
Loan origination fees and
related amortization..... 2,460,000 241,250 -- 154,787
Interest.................... 221,134 1,704,444 109,385 676,732
Other, net.................. -- 144,074 (6,448) (100,395)
------------ ----------- ----------- -----------
2,681,134 2,089,768 102,937 731,124
------------ ----------- ----------- -----------
Net income (loss)............. $(14,427,183) $(5,794,259) $ 1,146,455 $(2,716,221)
============ =========== =========== ===========
Net income (loss) per common
share, basic and diluted.... $ (0.23) $ (0.07) $ 0.01 $ (0.03)
============ =========== =========== ===========
Weighted average number of
shares outstanding
Basic and diluted........... 63,824,659 80,277,175 80,257,857 82,631,997
============ =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 89
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK TOTAL
------------------------ -------------------- DEFERRED ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT DEFICIT
---------- ----------- --------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996...... 59,154,257 $11,385,802 -- -- -- $(14,390,891) $ (3,005,089)
Conversion of notes payable to
common stock.................. 500,000 153,384 -- -- -- -- 153,384
Sales of common stock........... 863,200 215,800 -- -- -- -- 215,800
Compensatory stock options...... -- 3,050,000 -- -- $(1,050,000) -- 2,000,000
Common stock issued for
services...................... 225,000 56,250 -- -- -- -- 56,250
Common stock issued in
connection with
acquisitions.................. 9,000,000 2,250,000 -- -- -- -- 2,250,000
Common stock issued for loan
fees.......................... 8,500,000 2,125,000 -- -- -- -- 2,125,000
Common stock issued for loan
guarantee..................... 2,000,000 500,000 -- -- (500,000) -- --
Net loss........................ -- -- -- -- -- (14,427,183) (14,427,183)
---------- ----------- --------- -------- ----------- ------------ ------------
Balance at December 31, 1997...... 80,242,457 19,736,236 -- -- (1,550,000) (28,818,074) (10,631,838)
Conversion of notes payable to
common stock.................... 36,000 18,000 -- -- -- -- 18,000
Preferred stock issued in
connection with acquisition..... -- -- 3,750,000 $750,000 -- -- 750,000
Compensatory stock
options/warrants................ -- 1,155,000 -- -- -- -- 1,155,000
Amortization of unearned
compensation.................... -- -- -- -- 562,941 -- 562,941
Net loss........................ -- -- -- -- -- (5,794,259) (5,794,259)
---------- ----------- --------- -------- ----------- ------------ ------------
Balance at December 31, 1998...... 80,278,457 20,909,236 3,750,000 750,000 (987,059) (34,612,333) (13,940,156)
Conversion of notes payable to
common stock (unaudited)........ 7,060,621 1,058,845 -- -- -- -- 1,058,845
Amortization of unearned
compensation (unaudited)........ -- -- -- -- 139,102 -- 139,102
Net loss (unaudited).............. -- -- -- -- -- (2,716,221) (2,716,221)
---------- ----------- --------- -------- ----------- ------------ ------------
Balance at March 31, 1999
(unaudited)..................... 87,339,078 $21,968,081 3,750,000 $750,000 $ (847,957) $(37,328,554) $(15,458,430)
========== =========== ========= ======== =========== ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 90
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- --------------------------
1997 1998 1998 1999
------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...... $(14,427,183) $(5,794,259) 1,146,455 (2,716,221)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation......... 55,491 227,459 24,217 146,748
Amortization......... 2,460,000 1,356,988 135,834 528,806
Recognition of
deferred
revenue........... -- (2,000,000) (2,000,000) --
Loss on Joint
Venture........... 1,393,778 -- -- --
Equity-based
expenses.......... 3,971,250 210,000 -- 52,500
Litigation
settlement........ 1,620,000 -- -- --
Provision for
uncollectible
accounts.......... -- 343,145 -- (94,542)
Write-off of advance
on discontinued
acquisition....... -- 200,000 -- --
Changes in operating
assets and
liabilities, net of
effects of businesses
acquired:
Accounts
receivable...... -- 951,675 20,688 722,637
Inventories....... -- 198,370 (46,160) (1,032,853)
Prepaid expenses
and other....... (46,178) (162,038) -- (121,028)
Accounts
payable......... (69,147) 124,812 (58,797) (576,200)
Accrued expenses
and other....... 369,307 (141,030) (76,212) (160,048)
------------ ----------- ----------- -----------
Net cash provided by
(used in) operating
activities........... (4,672,682) (4,484,878) (853,975) (3,250,201)
</TABLE>
F-8
<PAGE> 91
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- --------------------------
1997 1998 1998 1999
------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INVESTING ACTIVITIES
Purchases of property
and equipment, net... (152,921) (38,499) (28,586) (149,982)
Purchases of
businesses........... -- (2,939,195) (1,931,910) --
Advances for
acquisitions......... (225,000) (100,000) (100,000) --
Product development
costs................ -- -- -- (7,004)
Investment in Joint
Venture.............. -- -- -- (49,323)
------------ ----------- ----------- -----------
Net cash used in
investing
activities........... (377,921) (3,077,694) (2,060,496) (206,309)
------------ ----------- ----------- -----------
FINANCING ACTIVITIES
Net proceeds (payments)
on notes payable..... 5,826,502 9,388,601 3,610,150 3,609,344
Net change in
borrowings from
Company chief
executive officer.... (1,056,590) (1,644,987) (460,000) (155,533)
Proceeds from stock
sales................ 215,800 -- -- --
------------ ----------- ----------- -----------
Net cash provided by
(used in) financing
activities........... 4,985,712 7,743,614 3,150,150 3,453,811
------------ ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents.......... (64,891) 181,042 235,679 (2,699)
Cash and cash
equivalents at
beginning of
period............... 70,592 5,701 5,701 186,743
------------ ----------- ----------- -----------
Cash and cash
equivalents at end of
period............... $ 5,701 $ 186,743 $ 241,380 $ 184,044
============ =========== =========== ===========
</TABLE>
See accompanying notes.
F-9
<PAGE> 92
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Futech Interactive Products, Inc. and subsidiary ("Futech" or "the
Company") own proprietary technology which the Company believes will enable cost
effective production of printed materials containing printed circuitry. The
Company also develops, manufacturers (through subcontractors), markets and sells
toys and functional children's products and also distributes books to large
retailers and wholesale clubs. The Company previously operated under the name of
Futech Educational Products, Inc. and on January 29, 1998, changed its name.
The consolidated financial statements include the accounts of the Company
and its subsidiary. All intercompany accounts and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the December 31, 1998 presentation.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has incurred
operating losses to date and has negative net worth and negative working capital
at December 31, 1998. To date, the Company has been funded through debt and
equity infusions from certain principal shareholders. The inability of the
Company to attract additional capital and ultimately, to achieve profitability,
could result in discontinuation of the Company's business.
The Company's ultimate ability to continue as a going concern depends on
the market acceptance of products including those utilizing its proprietary
technology, and the achievement of operating profits and positive cash flow.
Management believes that the completed and pending acquisitions and the planned
proceeds from supplemental shareholder loans and advances, as needed, will be
sufficient to allow the Company to continue in operation. Management also has
commitments in place to convert substantially all of its non-bank debt into
shares of preferred stock during 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet at March 31, 1999 and the
consolidated statements of operations, stockholders' equity and cash flows for
the three-month periods ended March 31, 1998 and 1999 are unaudited and have
been prepared on the same basis as the audited consolidated financial statements
included herein. In the opinion of management, such unaudited consolidated
financial statements include all adjustments necessary to present fairly the
information set forth herein, which consist solely of normal
F-10
<PAGE> 93
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
recurring adjustments. The results of operations for such interim periods are
not necessarily indicative of results for the full year.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers' financial
condition and requires no collateral from its customers. Receivables from two
customers at December 31, 1998 comprise the majority of the Company's net
accounts receivable, as follows:
<TABLE>
<S> <C> <C>
Sam's Club.......................................... $ 744,518 32.2%
Costco Wholesale.................................... 447,315 19.3
---------- ----
$1,191,833 51.5%
========== ====
</TABLE>
For the year ended December 31, 1998, Costco Wholesale represented 29
percent of net sales. No other customer represented greater than 10 percent of
net product sales.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
on various methods which approximate the first-in, first-out method. Inventories
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
Finished goods......................... $3,122,439 $3,833,231
Work-in-process........................ 996,044 1,318,105
---------- ----------
$4,118,483 $5,151,336
========== ==========
</TABLE>
The Company has entered into an exclusive distributorship agreement with
Magi Publications to distribute books in the United States. The books are
initially received on a consignment basis. Upon receipt, a deposit of $1.00 per
book is paid to the manufacturer. These deposits total $295,498 as of December
31, 1998 and are included as inventory in the accompanying consolidated balance
sheets.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the
assets which range from three to seven years.
F-11
<PAGE> 94
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1998, the Company has the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses, and long-term debt. The carrying value of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses approximates their
fair value based on the liquidity of these financial instruments or based on
their short-term nature. The carrying value of long-term debt approximates fair
market value based on the market interest rates available to the Company for
debt of similar risk and maturities.
INTANGIBLE ASSETS
Intangible assets resulting from business acquisitions, consist of cost in
excess of net assets of subsidiaries acquired (goodwill), trademarks, patents,
assembled workforce costs, loan fees and product development costs. All
intangibles are being amortized on a straight-line basis. Goodwill, trademarks
and patents are being amortized over a 15 year period. Assembled workforce costs
are being amortized over twelve months. Loan fees are amortized over the life of
the related loan, from one to two years. Product development costs are being
amortized over the life of the related product, from two to five years.
ADVERTISING
The Company expenses advertising as incurred. Advertising expense for the
years ended December 31, 1997 and 1998 and the three months ended March 31, 1998
and 1999 was not material.
REVENUE RECOGNITION
Revenue is recognized upon shipment of the product, with appropriate
allowances made for estimated returns and uncollectible accounts.
INCOME TAXES
Income taxes have been accounted for under the asset and liability method
in accordance with SFAS No. 109, "Accounting for Income Taxes" (Statement 109).
Under the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations in the period
that includes the enactment date.
F-12
<PAGE> 95
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25, to
the extent that the exercise price of the Company's employee stock options
equals management's estimate of the fair value of the underlying stock on the
date of grant, no compensation expense is recognized.
Deferred expense on stock and compensatory stock options issued to officers
and directors for services or other consideration to be received in the future
are offset against equity and are amortized to expense over the period of
benefit.
COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted FASB's SFAS No. 130, "Reporting
Comprehensive Income" (Statement 130). Statement 130 establishes new rules for
the reporting and display of comprehensive loss and its components, and
accordingly, the adoption of this statement had no impact on the Company's net
loss or shareholders' equity. Comprehensive loss is the same as net loss as
there are no necessary adjustments reported in shareholders' deficit.
LOSS PER SHARE COMPUTATION
The Company determines loss per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," (Statement
128). Under Statement 128, the Company presents basic and diluted earnings per
share. Basic earnings per share is computed using the weighted average number of
common shares. Diluted earnings per share is computed using the weighted average
number of dilutive common share equivalents during the period. Potential
dilutive common share equivalents include employee stock options using the
treasury stock method, preferred stock, and dilutive convertible securities
using the if-converted method. Common share equivalents have been excluded from
the calculation of loss per share for the years ended December 31, 1997 and 1998
and for the three months ended March 31, 1999 and 1998, as their effect is
either not dilutive or is anti-dilutive.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Effective January 1, 1998, the Company adopted the SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (Statement
131). Statement 131 established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers (see Note 14).
F-13
<PAGE> 96
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
3. ACQUISITIONS
On March 31, 1998, the Company acquired substantially all of the assets of
Gick Publishing, Inc. ("Gick"), for cash consideration of $2,020,000 plus the
assumption of certain liabilities totaling $940,452. Gick manufactures and sells
foam-based greeting cards and products.
The Gick acquisition was funded, in part, through a bank loan of $4,000,000
obtained on March 31, 1998. The loan bears interest at prime plus 2.5 percent
and is due on demand. The Company's chief executive officer ("Goett") has
guaranteed the loan personally up to $3,600,000.
On April 29, 1998, the Company acquired substantially all of the assets of
XYZ Group Inc. ("XYZ"), a wholesaler and distributor of books and various book
products including children's electronic toys and book and toy combination
products. The agreement requires Futech to pay consideration of $1,000,000 in
cash, $4,000,000 in a 12-month, noninterest bearing note, $2,867,334 in cash or
in shares of common stock, and an additional $1,000,000, if the $4,000,000 is
not paid by April 30, 1999. As the note was not been repaid by April 30, 1999,
the additional $1,000,000 and $400,000 in back interest are now due and both the
$4,000,000 and the additional $1,000,000 bear interest at 10 percent. The
additional charges have been recorded as expense in the period in which the
additional payments became liabilities of Futech.
As part of the agreement with XYZ, Futech assumed a $7 million line of
credit which bears interest at prime plus 2.5 percent and is personally
guaranteed by the former owner of XYZ. Additionally, the loan is collateralized
with the inventory and accounts receivable of XYZ.
On December 11, 1998, the Company acquired approximately 73 percent of the
outstanding common stock and 100 percent of the outstanding preferred stock of
Janex International, Inc., ("Janex") a developer, marketer and seller of toys
and children's products, for consideration of $1,500,000, consisting of a
$750,000 note payable and $750,000 payable with 3,750,000 shares of the
Company's preferred stock. The note payable bears interest at 10 percent and is
payable 30 days after the merger of Futech into Janex. Janex is a publicly
traded New Jersey based Nasdaq "pink sheet" company which trades under the
symbol "JANX."
The Company's Series A preferred stock is convertible into common stock on
a one-for-one basis, has voting rights, and has no par value. The preferred
stock is senior to the Company's common stock and the holder of the shares is
entitled to one vote per share.
All of these transactions were accounted for using the purchase method of
accounting. For all acquisitions, the acquired tangible and identifiable
intangible assets and liabilities have been recorded at their estimated fair
values at the dates of acquisition with any excess purchase price reflected as
goodwill, which is being amortized over the life of the underlying assets.
Purchase accounting values for all acquisitions are assigned on a preliminary
basis and are subject to adjustment when final information as to the fair values
F-14
<PAGE> 97
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
of the net assets acquired is available. The operations of the acquired
businesses are included in the statements of operations from the date of
acquisition.
The Company is currently awaiting final purchase price allocation data from
its independent valuation advisors. The final purchase price allocation is not
expected to change materially.
A summary of the purchase price allocations for these acquisitions is as
follows:
<TABLE>
<CAPTION>
GICK XYZ JANEX
---------- ------------ -----------
<S> <C> <C> <C>
Tangible assets acquired...... $ 869,254 $ 7,381,257 $ 908,559
Goodwill...................... -- 6,741,699 3,160,315
Trademarks.................... -- 3,900,000 --
Patents....................... 2,128,108 -- --
Other intangibles............. -- 290,000 179,774
Less: preferred stock
issued...................... -- -- (750,000)
Less: notes issued............ -- (6,867,334) (750,000)
Less: liabilities assumed..... (940,452) (10,403,504) (2,666,735)
---------- ------------ -----------
Cash purchase price........... $2,056,910 $ 1,042,118 $ 81,193
========== ============ ===========
</TABLE>
The following table sets forth the unaudited pro forma results of
operations for each year in which acquisitions occurred and for the immediately
preceding year as if the acquisitions were consummated at the beginning of the
immediately preceding year:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Total revenues............................. $ 29,027,979 $15,885,780
Net loss................................... (20,599,550) (9,288,731)
Net loss per common share, basic and
diluted.................................. $ (0.32) $ (0.12)
</TABLE>
F-15
<PAGE> 98
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Molds.............................. $ -- $ 267,806 $ 267,806
Machinery and equipment............ 46,955 242,793 254,269
Office furniture and equipment..... 311,268 762,667 890,970
Vehicles........................... 30,000 49,575 49,575
Leasehold improvements............. 20,369 55,962 66,164
-------- ---------- ----------
408,592 1,378,803 1,528,784
Accumulated depreciation and
amortization..................... 167,258 303,614 450,362
-------- ---------- ----------
$241,334 $1,075,189 $1,078,422
======== ========== ==========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999
---- ----------- -----------
<S> <C> <C> <C>
Goodwill............................. $-- $ 9,744,114 $ 9,744,114
Trademarks........................... -- 3,900,000 3,900,000
Patents.............................. -- 2,128,108 2,128,108
Loan fees............................ -- 1,245,000 1,384,103
Product development costs............ -- 130,402 137,406
Assembled workforce.................. -- 290,000 290,000
-- ----------- -----------
-- 17,437,624 17,583,731
Less amortization.................... -- 839,304 1,420,609
-- ----------- -----------
$-- $16,598,320 $16,163,122
== =========== ===========
</TABLE>
F-16
<PAGE> 99
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Accrued interest....................... $ 89,595 $ 577,417 $ 739,482
Accrued salaries and benefits.......... 346,991 431,207 431,207
Accrued royalties...................... -- 175,773 203,429
Accrued commissions.................... -- 154,063 72,045
Accrued returns and allowances......... -- 483,122 435,986
Other.................................. 116,338 459,578 238,965
-------- ---------- ----------
$552,924 $2,281,160 $2,121,114
======== ========== ==========
</TABLE>
7. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Notes payable to shareholders, due
December 15, 1999, interest from
prime + 0.5 percent (8.25 percent
at December 31, 1998) to 10
percent payable at maturity....... $3,350,000 $10,650,000 $10,000,000
$4.0 million line of credit with a
bank, interest at prime rate + 2.5
percent (10.25 percent at December
31, 1998) due monthly. $3.6
million is personally guaranteed
by the Company's CEO.............. -- 4,000,000 4,000,000
$7.0 million line of credit with a
bank, interest at prime + 2.5
percent (10.25 percent at December
31, 1998) due monthly, secured by
inventory and accounts receivable
of XYZ, and guaranteed by the
former owner of XYZ............... -- 3,456,446 2,945,532
</TABLE>
F-17
<PAGE> 100
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
$7.0 million line of credit with a
bank, due December 1, 2000,
interest at prime + 1.0 percent
(8.75 percent at December 31,
1998) due monthly, personally
guaranteed by the Company's CEO
and a director/warrant holder..... -- 2,450,000 6,545,000
Note payable to Newtech, past due
(See Note 10)..................... 1,300,000 1,000,000 1,000,000
Note payable to Golden Books, due
June 1, 1999, interest at prime
plus 1 percent (8.75 percent at
December 31, 1998) payable at
maturity.......................... 1,000,000 1,000,000 1,000,000
Note payable for purchase of patent
due June 1, 1999 (See Note 13).... 1,620,000 850,000 857,510
Note payable to former owner of XYZ,
payable in cash (up to $2,867,334
may be paid in common stock) (See
Note 3)........................... -- 6,867,334 6,867,334
Notes payable, due April 1999 to
June 1999, interest at 10 percent,
payable at maturity convertible
into common stock at $0.50 per
share............................. $ 332,571 $ 363,148 $ 41,091
Note payable to shareholders, repaid
in 1998........................... 270,000 -- --
Notes payable to shareholders in
connection with the acquisition of
Janex (See Note 3)................ -- 750,000 750,000
</TABLE>
F-18
<PAGE> 101
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
$400,000 line of credit with a bank,
due July 1, 1999, interest at
prime rate plus .25 percent (8.00
percent at December 31, 1998)
payable monthly, collateralized by
all assets of Janex and personally
guaranteed by two shareholders.... -- 257,000 257,000
Other............................... 24,668 112,592 43,551
---------- ----------- -----------
7,897,239 31,756,520 34,307,018
Less current portion................ 5,651,668 29,306,520 27,762,018
---------- ----------- -----------
Notes payable, noncurrent........... $2,245,571 $ 2,450,000 $ 6,545,000
========== =========== ===========
</TABLE>
Future maturities of notes payable are as follows at December 31, 1998:
<TABLE>
<S> <C>
1999.................................................. $29,306,520
2000.................................................. 2,450,000
-----------
$31,756,520
===========
</TABLE>
Certain of the Company's borrowing arrangements contain covenants including
restrictions on levels of indebtedness and the restriction of dividend payments.
On March 1, 1999, the conversion price on Futech's convertible debt was
reduced from $0.50 per share to $0.15 per share, and holders of debt totaling
$327,408 converted their debt into 2,182,723 shares of common stock. Additional
loans totaling $731,684 were converted into 4,877,898 shares of common stock at
a conversion rate of $0.15 per share.
Cash paid for interest for the years ended December 31, 1997, 1998 and the
three-month periods ended March 31, 1998 and 1999 was approximately $188,000,
$837,000, $109,000, and $677,000, respectively.
8. RELATED PARTY TRANSACTIONS
In April 1997, Roderick L. Turner ("Turner"), a director and stockholder
loaned Futech $350,000, with interest at 10 percent, due July 2, 1999. This loan
was subsequently amended to be due on demand. In lieu of payment, on March 1,
1999, Turner agreed to convert the loan plus interest (totaling $417,083) into
2,780,555 shares of common stock. In connection with the original loan, Futech
paid Goett $35,000 and issued 1,000,000 shares of common stock as a loan
origination fee.
On October 29, 1997, Turner and Goett loaned Futech $245,000, with interest
at 10 percent, due December 31, 1997. This loan was subsequently amended to be
due on
F-19
<PAGE> 102
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
demand. This loan was repaid January 15, 1998. In connection with this loan,
Futech issued Goett 500,000 shares of common stock as a loan origination fee.
At various times in 1997, Turner and Goett loaned Futech $3,000,000, with
interest at 10 percent, due in 1998 and 1999. These loans were subsequently
amended to be due on demand. In connection with the loans, Futech paid Goett
$300,000 and issued 7,000,000 shares of common stock as a loan origination fee.
The 8,500,000 shares of common stock issued to Goett as loan fees in 1997,
along with $335,000 in loan fees paid in cash, were charged to expense in 1997,
as the related loans were due on demand. The 8,500,000 shares received by Goett
were valued at $2,125,000 ($.25 per share) based on contemporaneous third party
transactions.
On January 2, 1998, Turner and Goett loaned Futech $2,500,000 with interest
at 10 percent due April 30, 1998. In connection with this loan, Futech issued
options to purchase 2,500,000 shares of common stock at $0.05 per share as a
loan origination fee and gave Goett the right to borrow $250,000 from the
Company.
On March 31, 1998, Goett personally guaranteed $3.6 million of a $4 million
line of credit newly established with a bank. In connection with this guarantee,
Futech issued options to purchase 7,200,000 shares of common stock at $0.05 per
share as a loan origination fee and gave Goett the right to borrow $360,000 from
the Company.
On May 5, 1998, Turner and Goett loaned Futech $1,500,000 with interest at
10 percent due May 5, 2000. At the same time, Turner and Goett signed an
agreement to subordinate all of their debt to a bank. In connection with the
loan and the subordination, Futech issued options to purchase 3,000,000 shares
of common stock at $0.05 per share as a loan origination fee and gave Goett the
right to borrow $500,000 from the Company.
On June 24, 1998, Mr. Turner and Mr. Goett loaned Futech $1,000,000, with
interest at 10 percent, due December 24, 1998. In connection with the loan,
Futech issued options to purchase 2,000,000 shares of common stock at $0.05 per
share as a loan origination fee and gave Goett the right to borrow $100,000 from
the Company.
On August 3, 1998, Turner loaned Futech $300,000, with no interest, due
upon receipt of the $2,000,000 listed below. No repayment was made and on March
1, 1999, and the loan agreement was amended to add interest at 10 percent per
annum since inception. On March 1, 1999, the loan plus interest (totaling
$314,604) was converted to 2,097,342 shares of common stock.
On August 10, 1998, Goett and his wife loaned Futech $2,000,000, with
interest at 10 percent, due on September 1, 1999. In connection with the loan,
Futech issued options to purchase 8,000,000 shares of common stock at $0.05 per
share as a loan origination fee and gave Goett the right to borrow $200,000 from
the Company.
On December 3, 1998, Goett and a director of the Company personally
guaranteed a $7 million line of credit newly established with a bank. In return
for their personal guarantees, Goett and the director each received warrants to
purchase 21,000,000 common
F-20
<PAGE> 103
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
stock shares exercisable at $0.05 per share. In connection with this
transaction, another director received warrants to purchase 4,000,000 shares of
common stock exercisable at $0.05 per share as the facilitator of this
transaction. Additionally, as part of this agreement, Goett may borrow $300,000
from the Company.
On December 15, 1998, Turner and Goett agreed to extend the due date of
their combined $8,000,000 loans, and Goett and his wife agreed to extend the due
date of the $2,000,000 loan to December 15, 1999. In connection with this
extension, Turner and the Goetts received options for a combined 8,000,000
shares of common stock exercisable at $0.05 per share.
The value of the 76,700,000 options granted to Goett, his wife, Turner, and
two directors has been capitalized and amortized over the term of the related
loan. In accordance with SFAS No. 123, fair value was determined using the
minimum value method and a fair value of $0.05 per share. The fair value of
Futech's common stock was estimated by management, in the absence of any recent
third party stock sales. The total calculated fair value of the options granted
for loan fees in 1998 is $1,155,000. Of this amount, $155,000 was amortized to
expense is 1998 and $1,000,000 remains capitalized at year-end.
Goett periodically may provide working capital advances to the Company
which are generally collateralized by a second lien on the Company's assets.
These advances are net of periodic draws taken by Goett. These advances do not
bear interest. At December 31, 1997 the net amount due to Goett was $204,717 and
is reflected as due to Company's chief executive officer in the balance sheet.
There was no such amount outstanding at December 31, 1998.
In 1997, the Company entered an agreement which allows the chief executive
officer to borrow funds from time to time based on the amount of financing he
raises on behalf of the Company. The outstanding balance bears interest at prime
plus 1 percent (8.75 percent at December 31, 1998) and is due on December 31,
2001. As of December 31, 1998, the balance due to the Company was $1,440,270.
9. LEASE COMMITMENTS
The Company leases operating facilities and certain equipment under
noncancelable operating leases. Rent expense was $117,354, $512,918, $37,917,
and $165,484 during the years ended December 31, 1997, and 1998, and the three
month periods ended March 31, 1998 and 1999, respectively. Future minimum
payments under noncancelable operating
F-21
<PAGE> 104
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
leases with initial terms of one year or more consisted of the following at
December 31, 1998:
<TABLE>
<S> <C>
1999................................................. $ 612,078
2000................................................. 485,106
2001................................................. 247,418
2002................................................. 126,431
----------
Total minimum lease payments......................... $1,471,033
==========
</TABLE>
10. NEWTECH CONSULTING
The Company had an agreement with Newtech Consulting, Inc. ("Newtech"), an
entity owned by Goett and the former owner of the Company, whereby monthly
payments are made to fund research and development efforts. Under the terms of
the arrangement, the Company paid $25,000 per month through December 2000 for
the first right to purchase intellectual property rights to the technologies
developed by Newtech. Such payments were charged to research and development
expense as incurred. This agreement was verbally cancelled in October 1998.
In October 1997, the Company acquired certain intellectual property from
Newtech for consideration of a $2,000,000 note payable and 3,000,000 shares of
common stock valued at $750,000. The fair value of the consideration given,
$2,750,000, was charged to research and development expense, as the underlying
technologies have not been commercialized, and the recoverability of the amount
paid is uncertain. The note bears interest at 10 percent and was due on April
30, 1998. The balance of this past due loan is $1,000,000 at December 31, 1998.
In December 1997, Goett sold his 50 percent interest back to Newtech. As
partial consideration for his ownership interest, Newtech gave Goett 50 percent
of the Futech note receivable. Goett redeemed this note back to the Company to
offset prior borrowings. As a result, only $1,000,000 of the original Newtech
note is outstanding as of December 31, 1997 and 1998.
In December 1997, the Company entered into an agreement to purchase the
assets of Newtech. As consideration for the assets acquired, Futech issued a
note payable of $300,000 and 6,000,000 shares of common stock valued at
$1,500,000. The note was paid in February 1998.
11. STOCK-BASED COMPENSATION
On September 26, 1997, Goett received an option to purchase 10,000,000
shares of common stock at $0.05 per share as compensation for services rendered
to the Company. The options were fully vested upon issuance. The Company
recognized a charge of $2,000,000 in 1997 for the difference between the
exercise price of the shares under option
F-22
<PAGE> 105
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
and the fair value of the Company's stock, as determined based on
contemporaneous third-party transactions.
As part of his employment agreement dated December 31, 1997, Goett received
options to purchase 7,000,000 shares at $0.10 per share. The options vest 29
percent in years one and two, and 14 percent in years three, four and five. The
difference between the option price and management's estimated fair value of the
Company's common stock on the date of grant has been recorded as $1,050,000 of
unearned compensation and will be amortized to expense over the vesting period.
On January 29, 1998, the Board of Directors approved the 1998 Stock Option
Plan (Plan) under which 7,200,000 shares of the Company's common stock have been
reserved. As of December 31, 1998, the Plan had not been implemented; however,
the Company expects full implementation by 2000.
The Company has issued nonqualified options and warrants outside of the
Plan. A summary of the Company's stock option and warrant activity, and related
information for the years ended December 31, 1997 and 1998 and the three-month
period ended March 31, 1999 follows:
<TABLE>
<CAPTION>
OPTIONS/ WEIGHTED-AVERAGE
WARRANTS EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Outstanding, at December 31, 1996........ -- $ --
Granted.................................. 17,750,000 .08
Exercised................................ -- --
Forfeited................................ -- --
----------- ----
Outstanding, at December 31, 1997........ 17,750,000 .08
Granted.................................. 86,150,000 .07
Exercised................................ -- --
Forfeited................................ -- --
----------- ----
Outstanding, at December 31, 1998........ 103,900,000 .07
Granted.................................. 15,850,000 $.05
Exercised................................ -- --
Forfeited................................ -- --
Outstanding, at March 31, 1999........... 119,750,000 $.07
=========== ====
Exercisable at December 31, 1998......... 58,700,000
===========
Exercisable at March 31, 1999............ 73,833,334
===========
Weighted-average fair value of options/
warrants granted during 1998........... $.01
====
</TABLE>
F-23
<PAGE> 106
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
Exercise prices for options/warrants outstanding as of December 31, 1998
ranged from $.05 to $.25. The weighted-average remaining contractual life of
those options is 8.98 years.
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if the Company had accounted for its employee stock
options and warrants under the fair value method of that Statement. The fair
value for these options/warrants was estimated at the date of grant using the
minimum value pricing model assuming a risk-free interest rate of 5.38 percent;
dividend yield of 0 percent; and a weighted-average expected life of five years
for the years ended December 31, 1997 and 1998.
Option/warrant valuation models require the input of highly subjective
assumptions. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
No options were issued prior to January 1, 1997. All option grants are
nonqualified. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the applicable vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1997 1998
------------ -----------
<S> <C> <C>
Net loss.................................... $(14,427,183) $(5,794,259)
Pro forma expense for stock options under
SFAS No. 123.............................. (2,102,500) --
Actual expense for stock options under APB
No. 25.................................... 2,000,000 --
------------ -----------
Pro forma net loss.......................... $(14,529,683) $(5,794,259)
============ ===========
</TABLE>
The fair value of all employee stock options issued in 1998 and accounted
for using APB 25 was $0.
12. INVESTMENT IN JOINT VENTURE
During 1997, the Company terminated a joint venture with Golden Books (the
"Joint Venture"). Pursuant to the termination agreement, the Company is
obligated to pay a one-time termination fee of $1,000,000 (including repayment
of $250,000 previously advanced). The termination fee was charged to expense in
1997, and the related note payable was guaranteed by Goett. In exchange for this
guarantee, Goett received 2,000,000 shares of common stock which had a fair
value of $500,000 on the date of issuance. The value of such shares will be
amortized to expense over the note term. The Company also agreed to assume the
cost of certain patent infringement litigation brought by the Joint Venture
against a competitor.
F-24
<PAGE> 107
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
Effective January 1, 1998, the Company entered into a technology and
licensing agreement with Golden Books whereby the remaining $2,000,000 advance
from the Joint Venture was converted into a nonrefundable technology payment
from Golden. This $2,000,000 advance was recognized as revenue in 1998.
13. COMMITMENTS AND CONTINGENCIES
Futech is a defendant in an action entitled Gary Roy, a/k/a Joe, Billings
v. Futech Interactive Products, Inc. This action was initiated on November 20,
1998 in Waukesha County Circuit Court of Wisconsin. Mr. Billings, a Director of
Futech, alleges Futech wrongfully terminated his employment and failed to
perform according to the terms of the Agreement for Purchase and Sale of Assets
of XYZ. Mr. Billings claims damages resulting from the wrongful termination
equal approximately $1,150,000 plus costs and attorneys' fees. This suit was
dismissed pending arbitration. Although the outcome of the arbitration cannot be
determined at this time, management does not believe it will be material to the
operations, financial position, or cash flows of the Company.
On December 22, 1998, Premier Publishing, Inc. filed a complaint in
Wisconsin against the Company alleging, among other things, conversion and
breach of contract related to the termination of a proposed deal for Futech to
acquire Premier. Discovery is currently ongoing. The outcome of this matter
cannot be determined at this time.
In addition to these matters, the Company is a party to other litigation in
the ordinary course of business. Management, after taking into account the
opinion of counsel, believes the ultimate outcome of such matters will not have
a material adverse effect on the Company's financial position.
During 1997, Grand Slam Investments, L.L.C., ("Grand Slam") which is
controlled by Goett, settled a lawsuit against the Company and certain of its
shareholders regarding patent rights. Under the settlement, Grand Slam acquired
certain patent rights which the plaintiffs allege that Futech had licensed but
not paid for. The cost of this settlement, $1,620,000, was charged to expense in
1997, as this transaction was entered into on behalf of Futech by Grand Slam,
and Futech had no use for the patent rights acquired by Grand Slam.
On July 1, 1998, Futech entered a patent licensing and purchase agreement
to formalize its repayment arrangement with Grand Slam. Under the agreement,
Grand Slam grants Futech exclusive, world-wide rights to use patent rights
acquired by Grand Slam. Under this agreement, Futech made monthly royalty
payments of $10,000 through December 31, 1998. This agreement was amended on
December 9, 1998 whereby Futech agreed to pay $650,000 on December 9, 1998 and
$850,000 on or before June 1, 1999 and the monthly payments of $10,000 were
suspended. The balance due under this agreement at December 31, 1998 is
$850,000.
F-25
<PAGE> 108
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
14. SEGMENT INFORMATION
Prior to its acquisition of Janex in December 1998, the Company had no
reportable segments. Subsequent to the Janex acquisition, the Company began
monitoring operating results for two segments. The distribution segment operates
in the United States and includes the former businesses of Gick and XYZ. The
Janex segment operates primarily in Hong Kong and includes the former Janex
business.
The operating results of the Janex segment and the long-lived assets held
overseas are not material as of or for the year ended December 31, 1998, and for
the three month period ended March 31, 1999.
15. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1998
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........... $4,000,000 $ 7,000,000
Other...................................... 4,000,000 4,000,000
---------- -----------
8,000,000 11,000,000
Less valuation reserve..................... 8,000,000 11,000,000
---------- -----------
Net deferred tax assets...................... $ -- $ --
========== ===========
</TABLE>
Gross deferred taxes and the related valuation allowance increased by
$3,000,000 at December 31, 1998 due to the losses incurred. The Company has
fully reserved for its deferred tax assets due to the uncertainty of recovery
from future operations. The Company has no income tax expense or benefit and
therefore tax expense differs from the federal statutory rate by the amount of
such rate. The reason for such difference is an increase in valuation reserves
provided for deferred tax assets.
At December 31, 1998 the Company has net operating loss carryforwards for
federal income tax purposes of $18,000,000 which begin to expire in 2015, to the
extent not previously utilized. These losses are limited for tax purposes under
both the separate return limitation year rules and Internal Revenue Code section
382 which limit the annual utilization of net operating losses.
F-26
<PAGE> 109
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
16. PENDING TRANSACTIONS
On March 4, 1999, the Company signed a letter of intent to acquire all the
outstanding stock of Fundex Games, Ltd. ("Fundex"), for consideration of
$9,000,000, of which $4,500,000 is payable in 18,000,000 shares of the Company's
common stock. The acquisition will be accounted for as a purchase. Fundex
develops, markets, and sells games and toys nationwide. Closing of the
transaction is contingent upon a number of conditions. Fundex is a privately
held Indianapolis, Indiana based company.
On February 26, 1999, the Company entered into a definitive agreement to
acquire all the outstanding stock of Trudy Corporation d/b/a Soundprints
("Soundprints") for consideration of $3,500,000, of which $3,000,000 is payable
in 12,000,000 shares of the Company's common stock, plus the guarantee of
certain debt to existing Soundprints shareholders. The acquisition will be
accounted for as a purchase. Soundprints designs, manufacturers, and markets
plush stuffed animals and publishes children's books and audio cassettes. Trudy
Corporation is a publicly traded Norwalk, Connecticut based, Nasdaq "pink
sheeted" company which trades under the symbol "TRDY."
On March 24, 1999, the Company signed a letter of intent to acquire all the
outstanding shares of DaMert Company for consideration of approximately
$8,300,000, of which approximately $5,200,000 is payable in 20,774,400 shares of
the Company's common stock. The acquisition will be accounted for as a purchase.
DaMert produces, distributes, and sells products to toy gift stores and catalog
retailers. DaMert is a privately held, Berkley, California based company.
17. SUBSEQUENT EVENTS
In accordance with its Agreement for Purchase and Sale of Assets with XYZ,
on May 1, 1999, Futech recorded an additional liability of $1,000,000 in the
form of a contractual penalty for the late payment on its note to XYZ's former
owner. Additionally, interest of $400,000 was recorded and the Company also
began to accrue interest on the total $5,000,000 liability at 10% per annum.
On May 13, 1999, one of the Company's lenders agreed to extend the maturity
date of two lines of credit totaling $11.0 million to December 31, 1999. In
connection with this agreement, the company must repay $25,000 per month from
June 1999 to December 1999.
On June 7, 1999, Fundex and Futech entered into a loan and licensing
agreement pursuant to which Futech agreed to loan Fundex $250,000 upon signing a
merger agreement with Futech, an additional $500,000 prior to the closing of the
merger, and an additional $750,000 loan or other financial assistance as
required pending the mergers, and a nonexclusive license to use Futech's game
board technology pending the mergers in exchange for a royalty equal to 50
percent of net operating profits on the associated products. The debt must be
repaid with interest at the rate of 10 percent per annum two years after the
date of the agreement. If Futech defaults on certain promissory notes issued
F-27
<PAGE> 110
FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(THE INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
to the Fundex stockholders as part of the merger, Futech will forfeit $750,000
of the balance due under these loans as a penalty.
On May 21, 1999, F. Keith Withycombe, a director, agreed to provide a
secured $2,000,000 line of credit to Futech. The line of credit is due on
December 1, 1999 and interest accrues at prime plus 1% per annum. Mr. Withycombe
agreed to subordinate this secured loan to the $7,000,000 loan to Futech from
Bank of America National Trust and Savings Association. As consideration for
this loan Futech agreed to issue warrants for 9,000,000 shares of Futech common
stock (300,000 in New Futech shares) exercisable at $0.05 per share ($1.50 per
share in New Futech shares). As consideration for facilitating this loan Futech
agreed to issue Robert J. Rosepink, a director, warrants for 2,000,000 shares of
Futech common stock (66,667 shares of New Futech common stock) exercisable at
$0.05 per share ($1.50 per share in New Futech Shares). Additionally, Vincent W.
Goett received warrants for 5,000,000 shares of Futech common stock (166,667
shares of New Futech common stock) exercisable at $0.05 per share ($1.50 per
share in New Futech shares).
On May 31, 1999 Futech Interactive Products and Newtech Consulting, a 3%
owner of New Futech, agreed to convert outstanding debt, including interest,
totaling $1,158,630 into $50,000 cash, a $200,000 note bearing interest at 8%
due by June 30, 1999, and 3,634,520 shares of Futech common stock. Futech paid
$50,000 on May 31, 1999. No other payments have been made under this agreement.
Futech signed an agreement on March 31, 1999 with Trudy that, in the event
the merger did not occur by June 1, 1999, Futech would assist in providing the
working capital needs of Trudy, if needed, to maintain sales momentum until the
closing. The agreement also states that Futech will assure that Trudy is not in
default under any of the loan agreements, including its borrowings from First
Union.
On May 27, 1999, the Company's Board of Directors reduced the exercise
price on options to purchase 10,800,000 shares of common stock. The exercise
price prior to this action varied from $0.20 to $0.25. The new exercise price is
$0.15.
F-28
<PAGE> 111
JANEX INTERNATIONAL, INC.
FINANCIAL STATEMENTS
<PAGE> 112
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Janex International, Inc.
We have audited the accompanying consolidated balance sheet of Janex
International, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Janex International, Inc. at December 31, 1998 and the consolidated results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company's recurring losses and net capital deficiency raise substantial doubt
about its ability to continue as a going concern. Management's plans as to those
matters are also described in Note 1. The 1998 consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
April 7, 1999
F-29
<PAGE> 113
REPORT OF BDO SEIDMAN, LLP,
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Janex International, Inc.
Eatontown, New Jersey
We have audited the accompanying consolidated balance sheet of Janex
International, Inc. as of December 31, 1997, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Janex
International, Inc. as of December 31, 1997, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations, including a net loss of $3,174,851 for the year ended
December 31, 1997, and has negative working capital of $1,782,770 and a net
stockholders' deficit of $2,049,126 at December 31, 1997. The Company has also
been slow and delinquent in paying its accounts payables and other obligations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. There is no assurance that the Company will be able to realize
its recorded assets and liquidate its liabilities in the normal course of
business. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
--------------------------------------
Woodbridge, NJ
March 30, 1998
F-30
<PAGE> 114
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 164,672 $ 62,412 $ 17,733
Certificate of deposit........................ 100,000 --
Accounts receivable, less allowance for
doubtful accounts of $10,439, $26,000 and
$26,000 at December 31, 1997, 1998, and
March 31, 1999 respectively................ 225,826 162,710 201,058
Inventories................................... 173,107 131,098 35,033
Prepaid royalties............................. 61,626 59,934 141,934
Other current assets.......................... 19,925 25,257 22,805
------------ ------------ ------------
Total current assets............................ 745,156 441,411 418,563
Property and equipment, net..................... 395,165 258,103 212,417
Intangible assets, net.......................... 448,815 405,625 402,072
Other assets.................................... 119,664 -- --
============ ============ ============
Total assets.......................... $ 1,708,800 $ 1,105,139 $ 1,033,052
============ ============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Advance from parent........................... $ -- $ 621,080 $ 1,226,799
Accounts payable.............................. 685,725 602,715 366,569
Accrued expenses.............................. 1,373,899 1,203,277 969,835
Notes payable -- other........................ 468,302 257,000 257,000
------------ ------------ ------------
Total current liabilities............. 2,527,926 2,684,072 2,820,203
Notes payable to related parties................ 1,230,000 -- --
Shareholders' deficit:
Class A convertible preferred stock, no par
value:
Authorized shares -- 5,000,000 Issued and
outstanding shares -- none and 5,000,000
and 5,000,000 at December 31, 1997, 1998,
and March 31, 1999 respectively.......... -- 569,022 569,022
Common stock, no par value:
Authorized shares -- 20,000,000 Issued and
outstanding shares -- 7,989,028, 18,098,750
and 18,098,750 at December 31, 1997, 1998,
March 31, 1999 respectively................ 11,618,816 12,803,327 12,803,327
Additional paid-in capital.................... 554,517 554,517 554,517
Accumulated deficit........................... (14,222,459) (15,505,799) (15,714,017)
------------ ------------ ------------
Total shareholders' deficit........... (2,049,126) (1,578,933) (1,787,151)
------------ ------------ ------------
Total liabilities and shareholders'
deficit............................ $ 1,708,800 $ 1,105,139 $ 1,033,052
============ ============ ============
</TABLE>
See accompanying notes.
F-31
<PAGE> 115
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales..................... $ 5,596,979 $ 3,117,599 $1,608,557 $ 222,346
Cost of sales................. 3,354,114 1,633,627 769,735 187,037
Royalty expense............... 651,422 380,969 54,859 5,355
----------- ----------- ---------- -----------
Gross profit.................. 1,591,443 1,103,003 783,963 29,954
Operating expenses:
Selling, general and
administrative........... 2,208,106 1,755,882 424,536 154,928
Depreciation and
amortization............. 551,951 376,283 75,244 73,408
Write-off of goodwill and
intangible assets........ 1,643,386 -- -- --
----------- ----------- ---------- -----------
Income/(loss) from
operations.................. (2,812,000) (1,029,162) 284,183 (198,382)
Other income (expense):
Interest income............. 21,461 8,833 157 --
Interest expense............ (389,401) (260,533) (57,325) (5,520)
Other income (expense)...... 8,637 3,268 1,375 409
----------- ----------- ---------- -----------
Net loss before income
taxes....................... (3,171,303) (1,277,594) 228,390 (203,493)
Provision for income taxes.... (3,548) (5,746) (5,083) (4,725)
----------- ----------- ---------- -----------
Net loss...................... $(3,174,851) $(1,283,340) $ 223,307 $ (208,218)
=========== =========== ========== ===========
Basic and diluted net loss per
common share................ $ (0.55) $ (0.13) $ 0.02 $ (0.01)
=========== =========== ========== ===========
Weighted average number of
shares outstanding.......... 5,745,439 10,261,070 9,005,267 18,098,750
=========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-32
<PAGE> 116
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CLASS A CONVERTIBLE TOTAL
COMMON STOCK PREFERRED STOCK ADDITIONAL SHAREHOLDERS'
------------------------ -------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- ----------- --------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........ 5,296,721 11,268,816 -- -- 554,517 (11,047,608) 775,725
Issuance of common stock.......... 2,692,307 350,000 -- -- -- -- 350,000
Net loss.......................... -- -- -- -- -- (3,174,851) (3,174,851)
---------- ----------- --------- -------- -------- ------------ -----------
Balance at December 31, 1997........ 7,989,028 11,618,816 -- -- 554,517 (14,222,459) (2,049,126)
Sale of common stock.............. 1,923,077 250,000 -- -- -- -- 250,000
Common stock issued for
services....................... 175,000 22,750 -- -- -- -- 22,750
Stock issued upon conversion of
notes payable.................. 8,011,645 911,761 5,000,000 569,022 -- -- 1,480,783
Net loss.......................... -- -- -- -- -- (1,283,340) (1,283,340)
---------- ----------- --------- -------- -------- ------------ -----------
Balance at December 31, 1998........ 18,098,750 $12,803,327 5,000,000 $569,022 $554,517 $(15,505,799) $(1,578,933)
Net loss (unaudited).............. -- -- -- -- -- (208,218) (208,218)
---------- ----------- --------- -------- -------- ------------ -----------
Balance at March 31, 1999
(unaudited)....................... 18,098,750 $12,803,327 5,000,000 $569,022 $554,517 $(15,714,017) $(1,787,151)
========== =========== ========= ======== ======== ============ ===========
</TABLE>
See accompanying notes.
F-33
<PAGE> 117
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................ $(3,174,851) $(1,283,340) $ 223,307 $(208,218)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation............................... 272,088 218,659 42,623 45,686
Amortization of intangible assets.......... 1,921,291 157,624 32,621 27,722
Amortization of loan fees.................. 214,292 116,863 20,273 --
Provision (credit) for doubtful accounts... (192,195) 22,561 14,341 --
Write-off of inventory..................... -- 299,000 -- --
Unrealized foreign exchange losses......... -- 3,268 -- --
Issuance of common stock for services...... -- 22,750 -- --
Changes in operating assets and
liabilities:
Accounts receivable...................... 196,848 40,555 (158,250) (38,348)
Inventories.............................. 396,530 (256,991) 19,942 96,065
Prepaid expenses and other............... 289,160 (4,107) (131,275) (79,548)
Accounts payable......................... (123,583) (83,010) 168,692 (236,146)
Accrued expenses and other............... 523,600 80,161 (332,788) (233,442)
----------- ----------- --------- ---------
Net cash provided by (used in) operating
activities................................. 323,180 (666,007) (100,514) (626,229)
INVESTING ACTIVITIES
Purchases of property and equipment.......... (190,898) (81,567) (6,483) --
Product development costs.................... (106,084) (114,464) (19,998) (24,168)
Decrease in certificate of deposit........... 400,000 100,000 -- --
----------- ----------- --------- ---------
Net cash provided by (used in) investing
activities................................. 103,018 (96,031) (26,481) (24,168)
FINANCING ACTIVITIES
Advances from parent......................... -- 621,080 -- 605,718
Proceeds from line of credit................. -- 257,000 (96,415) --
Net payments on notes payable................ (712,167) (219,189) (11,004) --
Proceeds (payments) from loans
payable -- agent........................... (200,975) (249,113) -- --
Issuance of stockholder notes payable........ 115,000 -- -- --
Proceeds from issuance of common stock....... 350,000 250,000 250,000 --
----------- ----------- --------- ---------
Net cash provided by (used in) financing
Activities................................. (448,142) 659,778 142,581 605,718
----------- ----------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................ (21,944) (102,260) 15,586 (44,679)
Cash and cash equivalents at beginning of
period..................................... 186,616 164,672 164,672 62,412
----------- ----------- --------- ---------
Cash and cash equivalents at end of period... $ 164,672 $ 62,412 $ 180,258 $ 17,733
=========== =========== ========= =========
</TABLE>
See accompanying notes.
F-34
<PAGE> 118
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Janex International, Inc. and subsidiaries (the Company) are in the
business of developing, marketing and selling toys and functional children's
products which are manufactured by subcontractors. The Company sells its
products primarily to U.S.-based retailers and their Hong Kong subsidiaries.
On December 11, 1998, approximately 79 percent of the Company's outstanding
stock was acquired by Futech Interactive Products, Inc. ("Futech"). See Note 7.
Because the minority interest exceeds 20 percent, the Company did not establish
a new basis of accounting upon the acquisition.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All inter-company accounts and transactions
have been eliminated in consolidation. All balance sheet accounts of the
Company's foreign subsidiaries are translated at the current exchange rate at
balance sheet date, while income statement items are translated at the average
currency exchange rates for each period presented. The resulting translation
adjustments, if significant (for the years ended December 31, 1997 and 1998, and
the three-month period ended March 31, 1999, the adjustment was not
significant), are recorded as comprehensive income.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain reclassifications have been made to 1997 consolidated financial
statements to conform to the 1998 presentation.
The financial statements have been prepared assuming the Company will
continue as a going concern. The Company has incurred significant operating
losses in the past three years and has negative net worth and negative working
capital at December 31, 1998. These factors raise significant doubt as to the
Company's ability to continue as a going concern.
The Company's ultimate ability to continue as a going concern depends on
the market acceptance of products, and the achievement of operating profits and
positive cash flow. The Company will also require additional financial resources
from its new parent or other sources to provide near term operating cash to
enable the Company to execute its plans to move toward profitability. Management
believes that the financial resources of its new parent company, in addition to
sales to be generated from new product lines that are being developed, will be
sufficient to allow the Company to continue in operation.
F-35
<PAGE> 119
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet at March 31, 1999 and the
consolidated statements of operations, stockholders' equity and cash flows for
the three-month periods ended March 31, 1998 and 1999 are unaudited and have
been prepared on the same basis as the audited consolidated financial statements
included herein. In the opinion of management, such unaudited consolidated
financial statements include all adjustments necessary to present fairly the
information set forth herein, which consist solely of normal recurring
adjustments. The results of operations for such interim periods are not
necessarily indicative of results for the full year.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
on various methods which approximate the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the
assets which range from two to five years for molds, machinery and equipment,
and furniture and fixtures. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the lease term.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1998, the Company has the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and long-term debt. The carrying value of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses approximates their
fair value based on the liquidity of these financial instruments or based on
their short-term nature. The carrying value of long-term debt approximates fair
market value based on the market interest rates available to the Company for
debt of similar risk and maturities.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and product development costs.
Costs of business acquisitions in excess of net asset of subsidiaries
acquired (goodwill) are amortized on a straight-line basis over a ten year
period. The Company records impairment losses on long-lived assets used in
operations when events and
F-36
<PAGE> 120
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less then the carrying
amounts of those assets. This methodology includes intangible assets acquired.
Goodwill relating to specific intangible assets is included in the related
impairment measurements to the extent it is identified with such assets.
Product development costs consist of product design and development
(through subcontractors) for the various toys and children's products the
Company sells. The designs are stated at the lower of cost or net realizable
value and amortized on a straight-line basis over a one to five year period.
Management reviews goodwill and other intangible assets periodically for
possible impairment. This policy includes recognizing write-downs if it is
probable that measurable undiscounted future cash flows and/or the aggregate net
cash flows of an asset, as measured by current revenues and costs (exclusive of
depreciation) over the asset's remaining depreciable life, are not sufficient to
recover the net book value of an asset. During 1997, the Company wrote off
goodwill, licensing relationships and trademarks from certain previous
acquisitions totaling $1,643,386, because they were considered to have no future
value.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company transacts business on a credit basis with its customers. The
Company routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk exposure is
limited. The Company does not require collateral to support customer
receivables. However, foreign receivable are generally secured by a letter of
credit. The Company maintains allowance for potential credit losses and such
losses have been within management's expectations.
The Company's two largest customers totaled approximately 53 percent and 52
percent of net sales in 1997 and 1998 (see Note 13). The loss of any of these
major customers could have a material adverse effect on the results of the
Company's operations.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of the product to the
customer, with appropriate allowances made for estimated returns and
uncollectible accounts.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) 109 "Accounting for Income Taxes." The statement
employs an asset and liability approach for financial accounting and reporting
of deferred income taxes. Generally, SFAS 109 allows for recognition of deferred
tax assets in the current period for the future benefit of net operating loss
carry forward and items for which expenses have been recognized for financial
statement purposes but will be deductible in future periods. A
F-37
<PAGE> 121
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
valuation allowance is recognized, if the weight of available evidence is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
STOCK-BASED COMPENSATION
As permitted by SFAS 123, "Accounting for Stock-Based Compensation," the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. Under APB 25, to the extent that
the exercise price of the Company's employee stock options equals management's
estimate of the fair value of the underlying stock on the date of grant, no
compensation expense is recognized.
Deferred expense on stock and options issued to officers and directors for
services or other consideration to be received in the future are offset against
equity and are amortized to expense over the period of benefit.
The pro-forma effects of SFAS 123 are not presented in these financial
statements because they do not have a material effect on earnings per share
calculations.
LOSS PER SHARE
Loss per share is calculated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," (Statement 128).
Basic earnings per share is computed using the weighted average number of common
shares. Diluted earnings per share is computed using the weighted average number
of common share equivalents during the period. Common share equivalents include
employee stock options using the treasury method and dilutive convertible
securities using the if-converted method. Common share equivalents have been
excluded from the calculation of loss per share for all periods presented, as
their effect is anti-dilutive.
COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (Statement 130). Statement 130 establishes new rules for
the reporting and display of comprehensive loss and its components.
Comprehensive loss for the Company is the same as net loss for all periods
presented.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Effective January 1, 1998, the Company adopted the SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (Statement
131). Statement 131 established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers (see Note 13).
F-38
<PAGE> 122
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Work in progress...................... $135,364 $ -- --
Finished goods........................ 37,743 131,098 35,033
-------- -------- ------
$173,107 $131,098 35,033
======== ======== ======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
---------- ---------- ---------
<S> <C> <C> <C>
Molds............................. $1,756,229 1,837,826 1,837,826
Machinery and equipment........... 146,593 146,593 146,593
Leasehold improvements............ 3,866 3,866 3,866
---------- ---------- ---------
$1,906,688 $1,988,285 1,988,285
Less accumulated depreciation and
amortization.................... 1,511,523 1,730,182 1,775,868
---------- ---------- ---------
$ 395,165 $ 258,103 212,417
========== ========== =========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Goodwill......................... $ 422,220 $ 422,220 $ 422,220
Product development costs........ 1,009,165 1,047,290 1,071,459
---------- ---------- ----------
1,431,385 1,469,510 1,493,679
Less amortization................ 982,570 1,063,885 1,091,607
---------- ---------- ----------
$ 448,815 $ 405,625 $ 402,072
========== ========== ==========
</TABLE>
F-39
<PAGE> 123
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
---------- ---------- ---------
<S> <C> <C> <C>
Allowance for returns and
allowances....................... $ 334,763 $ 334,763 $334,763
Accrued royalties.................. 588,608 182,628 210,468
Accrued commissions................ 80,721 154,063 163,894
Accrued interest................... 137,341 1,770 3,540
Other accrued expenses............. 232,466 530,053 257,170
---------- ---------- --------
$1,373,899 1,203,277 $969,835
========== ========== ========
</TABLE>
7. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Revolving Credit Agreement, converted to
equity in 1998.............................. $ 615,000 $ --
Promissory notes to two shareholders,
converted to equity in 1998................. 500,000 --
Commission loan to shareholder, converted to
equity in 1998.............................. 115,000 --
---------- ----------
$1,230,000 $ --
========== ==========
</TABLE>
On December 11, 1998, Futech purchased 5,219,046 shares of common stock and
shareholder loans (including interest of $250,784) of $1,480,783 from certain of
the Company's majority stockholders. Subsequently, the shareholder loans were
converted into 8,011,645 shares of common stock and 5,000,000 shares of
preferred stock. After such conversion, Futech owns approximately 79 percent of
the Company's outstanding stock.
Until December 1998, the Company had the ability to borrow up to $900,000
under a Revolving Credit Agreement (the "Agreement") with a significant
shareholder of the Company that expires on October 19, 1999. The Agreement bore
interest at 9.5 percent payable quarterly. The Agreement was secured by all of
the assets of Janex Corporation, and the guarantee of the Company. As additional
consideration, on April 19, 1996, the Company granted the Lender warrants to
purchase up to 900,000 shares of the Company's common stock, exercisable at a
price of $1.45 per share through April 19, 2000. The warrants were immediately
exercisable. The Company has used $150,000 under the
F-40
<PAGE> 124
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
Agreement as security to issue a stand-by letter of credit in connection with
the loan payable to the Company's Hong Kong agent. This agreement ended and all
warrants were canceled on December 11, 1998.
In connection with the acquisition of Janex Corporation in 1993, the
Company issued promissory notes to two stockholders totaling $1,000,000, payable
in semi-annual installments over a three-year period. On June 28, 1996, the note
holders agreed to extend the payment date for all remaining payments to February
1, 1998, subject to payment of interest at the rate of 9.5 percent per annum,
retroactive to January 1, 1996. On August 4, 1997, the note holders agreed to
further extend the payment date to February 1, 1999. Quarterly interest payments
commenced on September 1, 1996. In connection with the extension of the notes,
the Company entered into a warrant agreement with each of the note holders,
providing for the issuance of up to 282,994 warrants to one of them and up to
167,994 warrants to the other, to acquire a total of 450,988 shares of the
Company's common stock, exercisable at a price of $1.45 per share through June
28, 2000. The warrants vested in six-month increments over the term of the loan,
and if the loan was paid off early, certain of the warrants would be voided. The
agreement ended and all warrants were canceled on December 11, 1998.
The Company charged to operations $214,292 and $116,863 of imputed interest
expense from the issuance of stock purchase warrants noted above for the years
ended December 31, 1997 and 1998, respectively.
8. NOTES PAYABLE -- OTHER
The Company may borrow up to $400,000 under a line of credit agreement with
a bank. Borrowings under the line bear interest at the bank's prime rate plus
0.25 percent (8.0 percent at March 31, 1999). The line is secured by all of the
Company's assets and is personally guaranteed by two shareholders. Borrowings
under the line are due July 1, 1999. Borrowing capacity of $143,000 is available
at December 31, 1998.
Through 1998, the Company had the ability to borrow up to $450,000 from its
Hong Kong agent for the payment of product development and tooling costs. Any
loans are to be repaid from collections of certain customer invoices at the rate
of 5 percent of the invoice amount, with interest at two percent above the Hong
Kong prime rate. All borrowings under this arrangement were repaid in 1998. Any
borrowings are secured by certain tooling, as well as an irrevocable stand-by
letter of credit for $150,000.
Pursuant to a supplementary agency agreement, the Company had the ability
to borrow an additional $200,000 from its Agent provided that the Company issues
to the Agent an irrevocable stand-by letter of credit for $100,000. Any advance
under this facility is to be repaid within 60 days from the date of advance with
interest at 2 percent above the Hong Kong prime rate. As of December 31, 1997
and 1998, the Company had no borrowing under this credit facility.
F-41
<PAGE> 125
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
The Company had borrowed $340,000 under a private unsecured loan. At
December 31, 1997, the balance outstanding against this facility was $219,189,
which bore interest at prime plus 2 percent. This loan was repaid in 1998.
9. INCOME TAXES
The income tax provision, all of which is current, consists of the
following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1997 1998
------- ------
<S> <C> <C>
Current:
Federal........................................... $ -- $ --
State............................................. 3,548 5,746
Foreign........................................... -- --
------- ------
$ 3,548 $5,746
======= ======
</TABLE>
The Company's net deferred tax asset and deferred tax asset valuation
allowance are comprised of the following temporary differences and carry
forwards:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Net operating loss carry-forward.............. $3,405,971 $3,600,000
Other, net.................................... (218,384) --
---------- ----------
Net deferred tax assets....................... 3,187,587 3,600,000
Less: Valuation allowance..................... (3,187,587) (3,600,000)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
Because of the Company's recurring losses, the net deferred tax assets have
a 100 percent valuation allowance at December 31, 1997 and 1998.
The income tax provision differs from the amount computed by applying the
U.S. Federal income tax rate (34 percent) because of the effect of foreign
losses not deductible in the U.S. return and the tax effect of unrecognized net
operating loss deductions.
At December 31, 1997 and 1998, the Company had federal net operating loss
(NOL) carryforwards of approximately $9,273,000 and $10,000,000, respectively.
The Company also had state net operating loss (NOL) carryforwards. NOL
carryforwards may be available to offset future taxable income. If not used, the
federal and state NOL carryforwards will expire through 2018 and 2003,
respectively. Federal tax rules impose limitations on the use of NOL
carryforwards from a change in ownership. The losses
F-42
<PAGE> 126
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
before taxes related to the foreign subsidiaries for the years ended December
31, 1997 and 1998 were $883,494 and $839,248, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company maintains a noncancelable operating lease on its former
facility. Effective April 1, 1997, the Company entered into an agreement to
sublease a portion of the former facility to a third party for the balance of
the lease. Effective May 1, 1998, the entire facility was subleased to a
different third party. The Company also leased other facilities under a
noncancelable operating lease, which expired on March 31, 1998. The monthly
rental income derived from the sublease was slightly less than rent expense. The
difference was not material.
Future minimum payments under these noncancelable operating leases with
initial terms of one year or more consisted of the following at December 31,
1998:
<TABLE>
<S> <C>
1999............................................... $102,000
2000............................................... 102,000
--------
Total minimum lease payments....................... $204,000
========
</TABLE>
Net rental expense was approximately $68,000 and $37,000, $13,200 and
$5,100 for the years ended December 31, 1997 and 1998, and the three-month
periods ended March 31, 1998 and 1999, respectively.
At December 31, 1998, the Company has commitments for minimum guaranteed
royalties under licensing agreements as follows:
<TABLE>
<S> <C>
1999............................................... $268,959
2000............................................... 35,000
--------
Total minimum royalty payments..................... $303,959
========
</TABLE>
Total royalty expense was approximately $651,000 and $381,000 for the years
ended December 31, 1997 and 1998, respectively.
During the year ended December 31, 1996, holders of certain warrants
threatened to sue the Company, claiming that the Company was obligated to
register the stock underlying the warrants and to use its best efforts to
maintain the registration statement effective during the period the warrants are
exercisable, and that the Company had failed to meet these obligations. On March
26, 1996, the Company entered into a Settlement Agreement and Specific Release
with the warrant holder under which the Company issued additional warrants to
purchase 100,000 shares of the Company's common stock, at a price of $.64 per
share, in exchange for a release from any and all prior claims relating to
violations of the warrant agreement and failure to update the registration
statement. These warrants expire on March 26, 2001.
F-43
<PAGE> 127
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
11. STOCK-BASED COMPENSATION
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding, December 31, 1997............ 1,846,236 (1.45)
Granted................................. -- --
Exercised............................... -- --
Forfeited............................... (1,801,236) (1.45)
---------- ------
Outstanding, December 31, 1998............ 45,000 $ 1.67
========== ======
Exercisable at December 31, 1998.......... 45,000
==========
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 range from
$1.25 to $2.13 per share. The weighted-average remaining contractual life of
those options is 1.9 years.
The fair value of options and warrants is estimated on the date of grants
utilizing the Black-Scholes option pricing model with the following weighted
average assumptions for years ended 1997, and 1998: expected life of 4.4 years,
expected volatility of 22.5 percent, risk-free interest rate of 6 percent and a
0 percent dividend yield.
Option valuation models require the input of highly subjective assumptions.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the applicable vesting period. The pro
forma effect of SFAS No. 123 was not material for any year presented.
12. COMMON STOCK
The Company has the following shares reserved for future issuance at
December 31, 1998:
<TABLE>
<S> <C>
Warrants at $7.50 per share, expiring May 9, 1999......... 1,725,000
Warrants at $0.64 per share, expiring March 26, 2001...... 100,000
Stock Options............................................. 45,000
---------
1,870,000
=========
</TABLE>
All warrants outstanding are fully exercisable.
F-44
<PAGE> 128
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
In October 1996, the Company issued 150,000 shares of common stock to the
former owners of an acquired company in exchange for cancellation of certain
earn-out provisions. The common stock was valued at $1.00 per share, which was
management's estimate of the fair value at the time. Accordingly, $150,000 was
recorded as compensation expense.
The Company currently has 1,725,000 Public Warrants issued and outstanding,
which were issued in connection with the 1991 Public Offering. Each such warrant
entitles the holder to acquire one share of Common Stock at a price of $7.50 per
share. The expiration date of the Public Warrants was extended from May 9, 1996
to May 9, 1999.
On August 27, 1997, the Company issued 2,307,692 shares of common stock at
fair market value for a total purchase price of $300,000 in a private placement
with two shareholders of the Company.
On October 4, 1997, the Company issued 384,615 shares of common stock at
fair market value for a total purchase price of $50,000 in a private placement.
On January 14, 1998, the Company issued 1,346,153 shares of common stock at
fair market value for a total purchase price of $175,000 in a private placement
with two shareholders of the Company.
13. SEGMENT INFORMATION
The Company operates exclusively in the children's products industry. For
geographical reporting, revenues are attributed to the geographic location from
which goods are shipped. Intercompany sales are recorded at cost.
In 1997, customer A and customer B represented 39 percent and 14 percent of
the Company's net sales, respectively. In 1998, customer A and customer B
represented 47 percent and 5 percent of the Company's net sales, respectively.
Sales to these customers were made by the Hong Kong segment.
F-45
<PAGE> 129
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
A summary of the Company's operations by geographical area for the years
ended December 31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
ADJUSTMENTS
UNITED HONG AND
STATES KONG ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER
31, 1997
Net sales:
Customers.......... $ 856,975 $4,740,004 $ -- $ 5,596,979
Intercompany....... 1,844,086 22,621 (1,866,707) --
----------- ---------- ----------- -----------
Total revenue........ 2,701,061 4,762,625 (1,866,707) 5,596,979
Operating income
(loss)............. (3,767,147) 955,147 -- (2,812,000)
Interest expense..... (350,405) (38,996) -- (389,401)
Depreciation and
amortization....... (214,368) (337,583) -- (551,951)
Total assets......... 7,848,088 676,523 (6,815,811) $ 1,708,800
YEAR ENDED DECEMBER
31, 1998
Net sales:
Customers.......... $ 65,683 $3,051,916 $ -- $ 3,117,599
Intercompany....... 1,222,267 6,685 (1,228,952) --
----------- ---------- ----------- -----------
Total revenue........ 1,287,950 3,058,601 (1,228,952) 3,117,599
Operating loss....... (82,950) (946,212) -- (1,029,162)
Interest expense..... (234,976) (25,557) -- (260,533)
Depreciation and
amortization....... (123,702) (252,581) -- (376,283)
Total assets......... 3,055,804 801,894 (2,752,559) $ 1,105,139
</TABLE>
F-46
<PAGE> 130
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
A summary of the Company's operations by geographical area for the three
months ended March 31, 1998, and 1999 were as follows:
<TABLE>
<CAPTION>
ADJUSTMENTS
UNITED HONG AND
STATES KONG ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
THREE MONTH PERIOD
ENDED MARCH 31,
1998
Net sales:
Customers............ $ 15,679 $1,592,878 -- $1,608,557
Intercompany......... 1,952 (1,952) --
--------- ---------- -------- ----------
Total revenue........ 15,679 1,594,830 (1,952) 1,608,557
Operating income
(loss)............. (391,413) 675,596 -- 284,183
Interest expense..... (49,085) (8,240) -- (57,325)
Depreciation and
amortization....... (27,052) (48,192) -- (75,244)
THREE MONTH PERIOD
ENDED MARCH 31,
1999
Net sales:
Customers............ $ 119,354 $ 102,992 $ -- $ 222,346
Intercompany......... -- -- -- --
--------- ---------- -------- ----------
Total revenue........ 119,354 102,992 222,346
Operating loss....... (156,504) (41,878) -- (198,382)
Interest expense..... (5,319) (201) -- (5,520)
Depreciation and
Amortization....... (24,887) (48,521) -- (73,408)
</TABLE>
14. RELATED PARTY TRANSACTIONS
The Company pays sales commissions at the rate of 4 percent of net sales to
a company owned by a former stockholder and current director, relating to
customers located in New York, New Jersey, Connecticut and Pennsylvania.
Commissions on such sales of approximately $2,450,000 and $1,625,000 amounted to
$98,166 and $65,154 for the years ended December 31, 1997 and 1998,
respectively, which are included in selling, general and administrative
expenses. Accrued commissions included in accrued expenses and accounts payable,
on such sales amounted to $68,262 and $134,754 as of December 31, 1997 and 1998,
respectively. The Company also rented showroom space from this major
F-47
<PAGE> 131
JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE-MONTH PERIODS ENDED MARCH
31, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)
stockholder for which the Company paid $26,000 during 1997. No such expense was
incurred in 1998. In addition, the Company utilized the services of a public
warehouse facility in Baltimore, Maryland that is owned by the father of a
former stockholder for a fee based on the amount of goods received and shipped.
Fees amounted to $20,911 for the year ended December 31, 1997. No such fees were
incurred in 1998 or 1999.
F-48
<PAGE> 132
TRUDY CORPORATION
FINANCIAL STATEMENTS
<PAGE> 133
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Trudy Corporation
We have audited the accompanying balance sheet of Trudy Corporation as of
March 31, 1999, and the related statements of operations, shareholders' equity
(deficit), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about 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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Trudy Corporation at March
31, 1999, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company's operating
loss, deficiency in net assets, and default under its borrowing agreement raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to those matters are also described in Note 1. The March 31, 1999
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/S/ ERNST & YOUNG LLP
Phoenix, Arizona
June 11, 1999
F-49
<PAGE> 134
REPORT OF ABRAMS AND COMPANY, P.C., INDEPENDENT AUDITORS
To The Stockholders
Trudy Corporation
Norwalk, Connecticut
We have audited the accompanying balance sheet of Trudy Corporation as of
March 31, 1998, and the related statements of operations, shareholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about 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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Trudy Corporation as of
March 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ ABRAMS AND COMPANY, P.C.
--------------------------------------
Melville, NY
June 26, 1998, except as to
Note 18a, the dates
of which are July 10, 1998
and August 5, 1998
F-50
<PAGE> 135
TRUDY CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ -- $ 624
Accounts receivable, net of allowance for doubtful
accounts of $31,361 and $50,044 at March 31,
1998 and 1999, respectively.................... 321,898 246,049
Inventories, net.................................. 1,574,901 1,501,204
Prepaid expenses and other current assets......... 105,730 50,842
Deferred income taxes............................. 59,000 --
----------- -----------
Total current assets...................... 2,061,529 1,798,719
Property and equipment, net......................... 129,769 114,185
Pre-publication costs and royalty advances.......... 379,546 205,212
Deferred income taxes............................... 319,000 --
----------- -----------
Total assets.............................. $ 2,889,844 $ 2,118,116
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Checks drawn in excess of cash balances........... $ 23,517 $ --
Accounts payable and accrued expenses............. 295,176 477,696
Line of credit in default......................... -- 770,000
Long-term debt in default......................... 49,350 200,349
Current portion of notes payable -- related
parties........................................ 287,612 626,322
----------- -----------
Total current liabilities................. 655,655 2,074,367
Bank note payable................................... 388,688 --
Long-term debt...................................... 200,651 --
Notes payable to related parties.................... 161,276 171,408
Shareholders' equity (deficit):
Common stock: $.0001 par value:
Authorized shares -- 850,000,000
Issued and outstanding shares -- 331,222,249 at
March 31, 1998 and 1999...................... 33,123 33,123
Additional paid-in capital........................ 4,000,316 4,000,316
</TABLE>
F-51
<PAGE> 136
<TABLE>
<CAPTION>
MARCH 31
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Accumulated deficit............................... (2,549,865) (4,161,098)
----------- -----------
Total shareholders' equity (deficit)...... 1,483,574 (127,659)
----------- -----------
Total liabilities and shareholders' equity
(deficit).............................. $ 2,889,844 $ 2,118,116
=========== ===========
</TABLE>
See accompanying notes.
F-52
<PAGE> 137
TRUDY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net sales......................................... $ 4,977,599 $ 3,390,884
Cost of sales..................................... 2,730,401 2,168,685
------------ ------------
Gross profit...................................... 2,247,198 1,222,199
Operating expenses:
Selling, general and administrative............. 2,168,322 2,355,787
Depreciation and amortization................... 17,449 22,175
------------ ------------
Income (loss) from operations..................... 61,427 (1,155,763)
Other income (expense):
Interest expense................................ (102,099) (111,604)
Other income.................................... 35,904 34,134
------------ ------------
Net loss before income taxes...................... (4,768) (1,233,233)
Income tax benefit (provision).................... 152,000 (378,000)
------------ ------------
Net income (loss), before extraordinary item...... 147,232 (1,611,233)
Extraordinary item, net of income taxes of
$40,000......................................... 56,320 -
------------ ------------
Net income (loss)................................. $ 203,552 $ (1,611,233)
============ ============
Net income (loss) per share:
Basic and diluted............................... $ 0.00 $ 0.00
============ ============
Weighted average shares used in computation:
Basic and diluted............................... 324,598,187 331,222,249
============ ============
</TABLE>
See accompanying notes.
F-53
<PAGE> 138
TRUDY CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
----------- ------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at April 1,
1997............... 324,457,249 $32,446 $3,993,698 $(2,753,417) $ 1,272,727
Issuance of common
stock........... 6,765,000 677 6,618 -- 7,295
Net income......... -- -- -- 203,552 203,552
----------- ------- ---------- ----------- -----------
Balance at March 31,
1998............... 331,222,249 33,123 4,000,316 (2,549,865) 1,483,574
Net loss........... -- -- -- (1,611,233) (1,611,233)
----------- ------- ---------- ----------- -----------
Balance at March 31,
1999............... 331,222,249 $33,123 $4,000,316 $(4,161,098) $ (127,659)
=========== ======= ========== =========== ===========
</TABLE>
See accompanying notes.
F-54
<PAGE> 139
TRUDY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
------------------------
1998 1999
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................... $ 203,552 $(1,611,233)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Extraordinary item.................................. (56,320) --
Depreciation........................................ 17,449 22,175
Amortization of pre-publication costs............... 107,137 140,121
(Gain)/loss on disposal of property and equipment... (300) 53,080
Loss on write down of pre-publication costs and
royalty advances................................. -- 199,901
Provision for losses on accounts receivable......... 45,157 33,596
Provision for slow moving inventory................. 50,000 205,000
Deferred income taxes............................... (162,000) 378,000
Changes in operating assets and liabilities:
Accounts receivable.............................. (193,358) 42,253
Inventories...................................... (220,311) (131,303)
Prepaid expenses and other current assets........ (16,116) 54,888
Prepaid income taxes............................. (20,124) --
Accounts payable and accrued expenses............ (50,532) 182,520
--------- -----------
Net cash used in/(provided by) operating activities... (295,766) (431,002)
INVESTING ACTIVITIES
Purchases of property and equipment................... (81,679) (59,671)
Pre-publication and royalty advances, net............. (135,500) (165,688)
Proceeds from sale of equipment....................... 300 --
--------- -----------
Net cash used in investing activities................. (216,879) (225,359)
FINANCING ACTIVITIES
Net proceeds on short-term borrowings................. (105,598) 706,637
Proceeds from issuance of loans -- long-term.......... 648,822 --
Repayment of loans -- long-term....................... (40,813) (49,652)
Proceeds from exercise of common stock options........ 7,295 --
--------- -----------
Net cash provided by financing activities............. 509,706 656,985
--------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... (2,939) 624
Cash and cash equivalents at beginning of year........ 2,939 --
--------- -----------
Cash and cash equivalents at end of year.............. $ -- $ 624
========= ===========
Cash paid for interest................................ $ 85,003 $ 78,027
Cash paid for income taxes............................ 35,957 --
</TABLE>
See accompanying notes.
F-55
<PAGE> 140
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Trudy Corporation (Company) designs, manufactures and markets plush stuffed
animals and publishes children's books and audiocassettes for sale to both
retail and wholesale customers, both domestically and internationally. All
Company product is sold under the trade name of Soundprints.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred operating
losses, negative working capital and has failed to meet certain provisions of
its credit agreement at March 31, 1999. The Company has been funded through
loans from certain principal shareholders. The inability of the Company to
attract additional capital and ultimately, to achieve profitability, could
result in discontinuation of the Company's business.
The Company's ultimate ability to continue as a going concern depends on
the market acceptance of products utilizing its proprietary agreements with
certain licensees, and the achievement of operating profits and positive cash
flow.
The Company is party to a merger agreement dated June 4, 1999 with Futech
Interactive Products, Inc. ("Futech") and certain other companies and
shareholders thereof. Under the terms of the merger, Futech will acquire all of
the Company's outstanding stock for $456,330 in cash (net of broker's fee of
$43,670) and 400,000 shares of Futech stock. Futech has also agreed to provide
working capital advances to the Company and to assure that the Company is not in
default under any of its credit agreements. Futech has also agreed to repay
approximately $800,000 of loans and interest payable to the Company's president
and his family. However, management has no assurances that Futech currently has
the financial resources to honor these commitments. The merger is subject to
closing conditions, including shareholder approval. The Company is depending
upon additional financial resources that it expects to receive from Futech.
Should the merger with Futech not occur, management plans to obtain additional
financial resourcing from yet to be identified third parties and/or seek
potential acquirers who would provide additional resources.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain amounts shown in the prior year financial statements have been
reclassified to conform with the current year financial statement presentation.
F-56
<PAGE> 141
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due from customers and also include
$25,761 of expenses related to the merger with Futech which will be reimbursed
by Futech.
The Company transacts business on a credit basis with its customers. The
Company routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk exposure is
limited. The Company does not require collateral or other security to support
credit sales, but provides an allowance for bad debts based on historical
experience and specifically identified risks.
The Company's largest customer, Advanced Marketing Services, Inc., totaled
approximately 35.2 percent and 28.8 percent of net sales in 1998 and 1999.
INVENTORIES
Inventories, which consist principally of finished goods, are stated at the
lower of cost or market. Cost is determined by various methods which approximate
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the
assets which range from five to seven years for machinery and equipment, and
furniture and fixtures. Leasehold improvements are amortized over the shorter of
their estimated useful lives or the lease term.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At March 31, 1999, the Company has the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and long-term debt. The carrying value of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses approximates their
fair value based on the liquidity of these financial instruments or based on
their short-term nature. The carrying value of long-term debt approximates fair
market value based on the market interest rates available to the Company for
debt of similar risk and maturities.
REVENUE
The Company recognizes revenue upon shipment of the product to the
customer, with appropriate allowances made for estimated returns and
uncollectible accounts.
F-57
<PAGE> 142
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
The Company sells certain goods under a license from the Smithsonian
Institution ("Smithsonian"). Sales with the Smithsonian name approximated 90
percent and 80 percent of net sales in the years ended March 31, 1998 and 1999,
respectively.
INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The
statement employs an asset and liability approach for financial accounting and
reporting of deferred income taxes. Generally, SFAS 109 allows for recognition
of deferred tax assets in the current period for the future benefit of net
operating loss carryforwards and items for which expenses have been recognized
for financial statement purposes but will be deductible in future periods. A
valuation allowance is recognized, if on the weight of the available evidence it
is more likely than not that some portion or all of the deferred tax assets will
not be realized.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25, to
the extent that the exercise price of the Company's employee stock options
equals management's estimate of the fair value of the underlying stock on the
date of grant, no compensation expense is recognized.
Deferred expense on stock and options issued to officers and directors for
services or other consideration to be received in the future are offset against
equity and are amortized to expense over the period of benefit.
The Company periodically issues shares of its common stock to employees and
vendors for services provided to the Company. Shares issued for services are
valued at the Company's estimate of fair value of the common stock at the date
of issuance.
LOSS PER SHARE COMPUTATION
Loss per share is computed in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," (Statement 128).
Basic earnings per share is computed using the weighted average number of common
shares. Diluted earnings per share is computed using the weighted average number
of common shares and common share equivalents during the period. Dilutive common
share equivalents consist of employee stock options using the treasury method
and dilutive convertible securities using the if-converted method.
COMPREHENSIVE LOSS
As of April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (Statement 130). Statement 130 establishes new rules for
the reporting and
F-58
<PAGE> 143
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
display of comprehensive income and its components. Comprehensive loss for the
Company is the same as net loss for all periods presented.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Effective April 1, 1998, the Company adopted the FASB's SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (Statement
131). Statement 131 established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company has determined it has no reportable segments
under Statement 131.
ADVERTISING
Advertising costs are expensed as incurred, except for catalogs and
brochures which are all amortized over the period benefited not to exceed the
publication date of the new brochure or twelve months, whichever is less.
Included in prepaid expenses and other current assets are prepaid catalogs and
brochures of approximately $53,000 and $22,000 at March 31, 1998 and March 31,
1999, respectively.
Advertising expense was approximately $76,000 and $58,000, respectively,
for the years ended March 31, 1998 and 1999.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Raw materials................................. $ 50,880 $ 58,439
Finished goods................................ 1,574,021 1,697,765
---------- ----------
1,624,901 1,756,204
Reserve for slow-moving inventory............. 50,000 255,000
---------- ----------
$1,574,901 $1,501,204
========== ==========
</TABLE>
F-59
<PAGE> 144
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31
--------------------
1998 1999
-------- --------
<S> <C> <C>
Machinery and equipment.......................... $343,806 $311,987
Furniture and fixtures........................... 34,630 47,909
-------- --------
378,436 359,896
Accumulated depreciation......................... 248,667 245,711
-------- --------
$129,769 $114,185
======== ========
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
MARCH 31
--------------------
1998 1999
-------- --------
<S> <C> <C>
Accounts payable................................. $206,234 $225,359
Accrued royalties................................ 22,385 156,037
Accrued payroll.................................. 34,271 29,164
Accrued interest................................. 2,758 18,261
Commissions payable.............................. 12,777 13,685
Other............................................ 16,751 35,190
-------- --------
$295,176 $477,696
======== ========
</TABLE>
5. COMMITMENTS
LINE OF CREDIT IN DEFAULT
The Company had a loan agreement with a bank which provided up to $1.2
million of available funds at an interest rate of the bank's prime rate plus
0.25 percent (8.0 percent at March 31, 1999). The loan agreement expired on June
15, 1999. The line is collateralized by eligible accounts receivable and
inventory as well as personal guarantees of certain shareholders.
LONG-TERM DEBT IN DEFAULT
Long-term debt consists of a promissory note collateralized by the assets
of the Company. The terms of the note are for monthly installments of $6,207
including interest at 8.75 percent, until April 30, 2002 when all remaining
principal and interest is due.
F-60
<PAGE> 145
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
COMPLIANCE WITH FINANCIAL COVENANTS
Certain financial covenants are required to be met in connection with the
long-term debt and line of credit agreement including tangible net worth and
indebtedness. At March 31, 1999, the Company has failed to meet these
requirements. As a result of this noncompliance, there are various options
available to the lending institution including the immediate repayment of
outstanding balances of both loans. The bank many also increase the interest
rate of the loans to a default rate, which is 300 basis points higher than the
stated rate.
In accordance with SFAS No. 78, "Classification of Obligations That Are
Callable by the Creditor," the Company has classified the balance of the term
loan and line of credit borrowings as a current liability. Management of the
Company has met with the lenders in an attempt to restructure the credit
facility, or otherwise satisfactorily resolve the defaults. It is not possible,
however, to predict at this time the success of management's efforts. No
assurance can be given that the outcome of the Company's negotiating efforts
with the lenders will not adversely affect the Company's business, financial
condition, results of operations and cash flows.
NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following:
<TABLE>
<CAPTION>
MARCH 31
--------------------
1998 1999
-------- --------
<S> <C> <C>
$365,387 in aggregated promissory notes to the
president of the Company at interest rates
varying between 8 to 12 percent. Note terms
have passed and payments are made as cash flows
permit. Notes are collateralized by cash,
accounts receivable, inventory, and furniture
and fixtures................................... $287,612 $287,422
$28,900 promissory note to the president,
collateralized by cash, accounts receivable,
inventory, and furniture and fixtures, payable
in total including 8 percent interest on July
10, 1999....................................... -- 28,900
$310,000 promissory note to the president,
collateralized by cash, accounts receivable,
inventory and furniture and fixtures, payable
in total including 8 percent interest on
October 5, 1998................................ -- 310,000
</TABLE>
F-61
<PAGE> 146
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
<TABLE>
<CAPTION>
MARCH 31
--------------------
1998 1999
-------- --------
<S> <C> <C>
$101,326 family loan at 10 percent interest,
noncompounding. There are no established
repayment terms................................ 161,276 171,408
-------- --------
448,888 797,730
Less current portion............................. 287,612 626,322
-------- --------
$161,276 $171,408
======== ========
</TABLE>
On May 28, 1999, a director of the Company and wife of the Company's
president loaned the Company $140,000 to meet immediate cash needs. The note
bears interest at 8 percent and was due (but not paid) on July 2, 1999.
As of March 31, 1998, the president agreed to forgive the approximately
$96,000 of interest in addition to amending the Company's borrowing terms to
omit any future interest on his loan. Accordingly, such amount, net of related
income taxes is reflected as an extraordinary item.
LEASE COMMITMENTS
The Company leases its building from a related party and miscellaneous
other items under noncancelable operating leases. Rent expense was approximately
$106,000 and $108,000 during the years ended March 31, 1998 and 1999,
respectively. Future minimum payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at March 31, 1999:
<TABLE>
<S> <C>
2000....................................................... $111,524
2001....................................................... 111,681
2002....................................................... 111,260
2003....................................................... 110,000
2004....................................................... 110,000
Thereafter................................................. 27,500
--------
Total minimum lease payments............................... $581,965
========
</TABLE>
OTHER COMMITMENTS
The Smithsonian has granted the Company a nontransferable license to
utilize the names "Smithsonian Institution" and "Smithsonian" for products and
purposes as defined in the license agreement. The agreement expires on September
30, 2002. The agreement
F-62
<PAGE> 147
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
requires the Company to pay royalties of 5 percent on products sold using the
Smithsonian name. The Company has guaranteed the following minimum royalty
amounts:
<TABLE>
<CAPTION>
PERIOD AMOUNT
- ------ --------
<S> <C>
October 1, 1998 -- September 30, 1999...................... $ 95,000
October 1, 1999 -- September 30, 2000...................... 100,000
October 1, 2000 -- September 30, 2001...................... 105,000
October 1, 2001 -- September 30, 2002...................... 110,000
</TABLE>
The Company is also a guarantor on an installment loan made to Noreast
Management LLC ("Noreast") a limited liability company of which the Company's
president is a member. The Company leases its current facility from Noreast. The
purpose of the loan was to fund improvements to the facility currently occupied
by the Company. The loan is payable in 95 monthly installments of $3,125, plus
interest at 9.5 percent. At March 31, 1999, the balance of the installment loan
was $200,000.
6. INCOME TAXES
The Company's provision (benefit) for income taxes consists of the
following:
<TABLE>
<CAPTION>
MARCH 31
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Current -- State............................ $ 10,000 $ --
Deferred -- Federal......................... (162,000) 378,000
----------- -----------
$ (152,000) $ 378,000
=========== ===========
</TABLE>
The provision (benefit) for income tax differs from the U.S. federal
statutory rate as follows:
<TABLE>
<CAPTION>
MARCH 31
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Income tax provision (benefit) at statutory
rate...................................... (39.0)% (34.0)%
Net operating loss for which no current
benefit has been taken.................... -- 34.0
Establishment of valuation reserve for
deferred tax assets....................... -- 30.7
State income tax net of federal benefit..... 138.4 --
Effect of graduated rate on statutory
rate...................................... (85.6) --
Utilization of net operating loss........... (332.6) --
----------- -----------
Income tax provision (benefit).............. (318.8)% 30.7%
=========== ===========
</TABLE>
F-63
<PAGE> 148
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
The deferred tax assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Reserves and accruals....................... $ 65,000 $ 157,000
Net operating loss carryforwards............ 1,061,000 1,156,000
----------- -----------
Total gross deferred tax assets... 1,126,000 1,313,000
Less valuation allowance.................... (748,000) (1,313,000)
----------- -----------
$ 378,000 $ --
=========== ===========
Current..................................... $ 59,000 $ --
Non-current................................. 319,000 --
----------- -----------
$ 378,000 $ --
=========== ===========
</TABLE>
The Company has a net operating loss carryforward of $3,400,000 for Federal
income tax purposes, which begins to expire in 2004, to the extent not
previously utilized.
The realization of the Company's deferred tax assets is dependent on future
profits, which are not assured, accordingly, a valuation allowance equal to the
net deferred tax assets has been provided at March 31, 1999. The valuation
allowance for deferred tax assets decreased $324,000 during the year ended March
31, 1998 due to the utilization of net operating loss carryforwards and
increased by $565,000 during the year ended March 31, 1999 due to the
establishment of valuation reserves against all net deferred tax assets.
7. STOCK-BASED COMPENSATION
The Company has stock options outstanding under its 1987 Stock Option Plan
("the Plan"). No further options may be granted under the Plan. Existing options
expire upon the earlier of employee termination or ten years from the date of
grant. Options outstanding have exercise prices from $0.001 to $0.002 and have a
weighted average remaining life of 65 months.
F-64
<PAGE> 149
TRUDY CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
A summary of the Company's stock option activity, and related information
is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
---------- ---------
<S> <C> <C>
Outstanding at April 1, 1997.................. 21,603,500 $0.001
Granted....................................... -- --
Exercised..................................... (6,765,000) 0.001
Forfeited/canceled............................ (158,500) 0.011
---------- ------
Outstanding at March 31, 1998................. 14,680,000 0.001
Granted....................................... -- --
Exercised..................................... -- --
Forfeited..................................... -- --
---------- ------
Outstanding at March 31, 1999................. 14,680,000 $0.001
========== ======
Exercisable at end of year.................... 14,680,000
==========
</TABLE>
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the minimum value option
pricing model assuming a risk-free interest rate of 5 percent; dividend yield of
0 percent; and a weighted-average expected life of the option of 5 years for the
year ended March 31, 1999. Pro forma expense under SFAS No. 123 was not material
in the years ended March 31, 1998 and 1999.
Option valuation models require the input of highly subjective assumptions.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
8. BENEFIT PLAN
Effective January 1, 1999, the Company adopted a 401(k) Retirement Plan,
which covers substantially all employees of the Company that have completed one
year of service. The plan permits participants to contribute to the plan,
subject to Internal Revenue Code restrictions, and the plan directs the Company
to make matching contributions of 50 percent on the first 3 percent of employee
contributions. During the year ended March 31, 1999, the Company made $2,260 in
matching contributions to the Plan and paid $830 in administrative expenses.
F-65
<PAGE> 150
FUNDEX GAMES, LTD.
FINANCIAL STATEMENTS
<PAGE> 151
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Fundex Games, Ltd.
We have audited the accompanying balance sheets of Fundex Games, Ltd. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about 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.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fundex Games, Ltd. at
December 31, 1998 and 1997, and the results of its operations and cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/S/ BDO SEIDMAN, LLP
Chicago, Illinois
March 17, 1999
F-66
<PAGE> 152
FUNDEX GAMES LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash................................................ $ 130,348 $ 41,214 $ 5,651
Accounts receivable -- trade, less allowance for
doubtful accounts of $70,000, $138,000 and 34,000
for December 31, 1997, 1998 and March 31, 1999.... 1,313,920 1,690,571 842,392
Income tax receivable (Note 5)...................... 20,000 -- --
Inventories (Note 2)................................ 2,447,204 1,907,939 2,018,710
Prepaid expenses (Notes 3 and 4).................... 254,021 212,111 322,929
---------- ---------- ----------
Total Current Assets......................... 4,165,493 3,851,835 3,189,682
---------- ---------- ----------
Property and Equipment
Machinery, equipment and tooling.................... 445,743 540,628 556,682
Furniture and fixtures.............................. 31,261 45,046 48,786
Leasehold improvements.............................. 47,746 47,746 47,746
---------- ---------- ----------
524,750 633,420 653,214
Less accumulated depreciation and amortization...... 177,608 316,466 356,531
---------- ---------- ----------
Net Property and Equipment............................ 347,142 316,954 296,683
---------- ---------- ----------
Other Assets
Loan costs (Note 1)................................. -- 334,846 313,210
Patent/Trademarks Costs............................. -- -- 11,763
Intangible game rights (Note 9)..................... 280,706 204,146 185,006
Prepaid trade credits (Note 1)...................... -- 571,591 571,591
---------- ---------- ----------
Total Other Assets........................... 280,706 1,110,583 1,081,570
---------- ---------- ----------
Total Assets................................. $4,793,341 $5,279,372 $4,567,935
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt (Note 8)....... $ -- $ 49,717 $ 88,326
Accounts payable.................................... 1,226,744 538,180 746,939
Distribution payable to stockholders................ 9,008 9,008 9,008
Accrued liabilities
Commissions....................................... 156,010 65,581 93,603
Royalties and licenses (Notes 3 and 4)............ 75,791 104,981 38,548
Pension (Note 10)................................. 173,472 247,759 143,227
Other............................................. 293,531 300,579 165,376
---------- ---------- ----------
Total Current Liabilities.................... 1,934,556 1,315,805 1,285,027
Deferred Rent (Note 6)................................ 23,616 29,304 30,726
Long-Term Debt, less current maturities (Note 8)...... 1,600,000 2,702,021 2,128,872
---------- ---------- ----------
Total Liabilities............................ 3,558,172 4,047,130 3,444,625
---------- ---------- ----------
Commitments (Notes 4, 6, 7 and 10)
Stockholders' Equity
Preferred stock, $1 par value; 1,000,000 shares
authorized; none issued or outstanding............ -- -- --
Common stock, $.001 par value; 8,000,000 shares
authorized; 1,624,824 issued and outstanding on
December 31, 1997, 1998, and March 31, 1999....... 1,625 1,625 1,625
Paid-in capital..................................... 2,019,901 2,019,901 2,019,901
Accumulated deficit................................. (786,357) (789,284) (898,216)
---------- ---------- ----------
Total Stockholders' Equity................... 1,235,169 1,232,242 1,123,310
---------- ---------- ----------
Total Liabilities and Stockholder's Equity... $4,793,341 $5,279,372 $4,567,935
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE> 153
FUNDEX GAMES, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- --------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales (Note 12)......... $7,797,681 $8,576,702 1,117,470 $ 935,019
Cost of Sales............... 5,098,750 5,693,644 818,697 619,685
----------- ---------- ---------- ---------
Gross profit................ 2,698,931 2,883,058 298,773 315,334
Selling, General and
Administrative Expenses
(Note 3).................. 3,810,056 2,695,853 413,088 357,565
----------- ---------- ---------- ---------
Operating income (loss)..... (1,111,125) 187,205 (114,315) (42,231)
----------- ---------- ---------- ---------
Other Income (Expense)
Royalty income............ 28,009 51,816 9,276 10,000
Interest income........... 5,343 3,947 2,189 0
Interest expense.......... (86,419) (245,895) (40,386) (76,701)
----------- ---------- ---------- ---------
(53,067) (190,132) (28,921) (66,701)
----------- ---------- ---------- ---------
Net Loss.................... $(1,164,192) $ (2,927) $ (143,236) $(108,932)
=========== ========== ========== =========
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE> 154
FUNDEX GAMES, LTD.
STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------ PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1997.................... 1,225,000 $1,225 $ 454,900 $ 377,835 $ 833,960
Net loss, for the year
ended 1997.............. -- -- -- (1,164,192) (1,164,192)
Conversion of bridge loan
(Note 11)............... 122,910 123 437,077 -- 437,200
Issuance of 207,100 shares
and 103,550 warrants in
private placement (Note
11)..................... 207,100 207 767,645 -- 767,852
Exercise of 69,814
warrants (Note 11)...... 69,814 70 360,279 -- 360,349
--------- ------ ---------- ----------- -----------
Balance, December 31,
1997.................... 1,624,824 1,625 2,019,901 (786,357) 1,235,169
Net loss, for the year
ended 1998.............. -- -- -- (2,927) (2,927)
--------- ------ ---------- ----------- -----------
Balance, December 31,
1998.................... 1,624,824 1,625 2,019,901 (789,284) 1,232,242
Net loss, for the three
months ended March 31,
1999 (unaudited)........ -- -- -- (108,932) (108,932)
--------- ------ ---------- ----------- -----------
Balance, March 31, 1999
(unaudited)............. 1,624,824 $1,625 $2,019,901 $ (898,216) $ 1,123,310
========= ====== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE> 155
FUNDEX GAMES LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss......................... $(1,164,192) $ (2,927) $(143,236) $(108,932)
Adjustments to reconcile net loss
to net cash used in operating
activities
Depreciation and
amortization................ 179,894 230,512 46,616 77,141
Deferred rent................. 5,688 5,688 1,422 1,422
Changes in assets and
liabilities
(Increase) decrease in
accounts receivable...... (246,388) (376,651) 458,583 848,179
Decrease (increase) in
inventories.............. (1,548,583) 539,265 572,782 (110,771)
Decrease (increase) in
prepaid expenses and
other assets............. (145,036) 61,910 13,421 (110,818)
Increase in prepaid trade
credits.................. -- (571,591) (546,505) --
(Decrease) increase in
accounts payable......... 214,415 (688,564) (294,951) 208,759
Increase (decrease) in
accrued liabilities...... 267,970 20,096 (86,673) (278,146)
----------- ----------- --------- ---------
Net cash provided by (used in)
operating activities............. (2,436,232) (782,262) 21,459 526,834
----------- ----------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures............. (201,433) (108,670) (9,960) (19,794)
Expenditures for patents......... -- -- -- (12,713)
----------- ----------- --------- ---------
Net cash (used in) investing
activities....................... (201,433) (108,670) (9,960) (32,507)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from note payable....... -- 1,000,000 -- --
Deferred loan costs.............. -- (349,940) -- 4,650
Repayment of note payable........ (40,000) -- -- --
Repayment of line of credit...... -- (1,600,000) -- (534,540)
Distribution to stockholders..... (61,092) -- -- --
Net proceeds from line of
credit........................ 1,600,000 1,751,738 --
Net proceeds from private
placement..................... 767,852 -- -- --
Net proceeds from exercise of
warrants...................... 360,349 -- -- --
----------- ----------- --------- ---------
Net cash provided by (used in)
financing activities............. 2,627,109 801,798 -- (529,890)
----------- ----------- --------- ---------
Net Increase (Decrease) in cash.... (10,556) (89,134) 11,499 (35,563)
Cash, at beginning of period....... 140,904 130,348 130,348 41,214
----------- ----------- --------- ---------
Cash, at end of period............. $ 130,348 $ 41,214 $ 141,847 $ 5,651
=========== =========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for interest........... $ 253,251 $ 64,229 $ 40,386 $ 76,601
=========== =========== ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES
Conversion of bridge loan to
equity........................ $ 437,200 $ -- $ -- $ --
=========== =========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE> 156
FUNDEX GAMES, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES
BUSINESS
Fundex Games, Ltd. (the "Company") develops, manufactures (through
subcontractors), markets and sells games and toys nationwide through discount
retailers, specialty toy retailers, toy wholesalers, drug and grocery retailers
and certain catalog and specialty accounts from its Indianapolis, Indiana
facility. The Company's principal products include card games, children's board
games, skill and action games, family games, puzzles and spring and summer toys.
The Company's products are manufactured to the Company's specifications by
manufacturers based in the United States, Taiwan, Philippines and China.
INTERIM FINANCIAL STATEMENTS
The financial statements as of March 31, 1999 and with respect to the three
months ended March 31, 1998 and 1999 are unaudited. In the opinion of
management, the financial statements contain all adjustments, including normal
recurring accruals, necessary for the fair presentation of the results of such
periods. The information is not necessarily indicative of the results of
operations to be expected for the fiscal year.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the financial statements. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
The Company primarily provides credit, in the normal course of business, to its
customers. The Company performs ongoing credit evaluations of its customers and
maintains allowances for potential credit losses, if necessary.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
F-71
<PAGE> 157
FUNDEX GAMES, LTD.
NOTES TO FINANCIAL -- (CONTINUED)
PREPAID TRADE CREDITS
Prepaid trade credits represent the estimated fair value of trade credits
received in exchange for inventory. The trade credits, together with specified
cash payments, can be redeemed for a variety of services. The credits expire on
December 31, 2003.
ADVERTISING
The Company generally expenses production costs of print and television
advertisements as of the first date the advertisement runs. Advertising expenses
included in selling, general and administrative expenses were $1,672,368,
$269,117, $4,032 and $15,325 for December 31, 1997 and 1998, and for March 31,
1998 and 1999, respectively. As of December 31, 1997, advertising costs of
$41,488 were included in prepaid expenses.
MACHINERY AND EQUIPMENT
Machinery and equipment are carried at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures................................ 3-5
Machinery, equipment and tooling...................... 3-7
</TABLE>
Leasehold improvements are amortized over the lesser of the lease term or
the useful life of the property.
INCOME TAXES
As of January 1, 1997, the Company switched from an S corporation to a C
corporation. The Company recognizes deferred tax assets for the expected future
tax consequences of temporary differences between the tax basis and financial
reporting basis of certain assets based upon currently enacted tax rates
expected to be in effect when such amounts are realized.
DEFERRED LOAN COSTS
Deferred loan costs represent the costs incurred in obtaining the mezzanine
financing and the credit facility. These costs are being amortized by use of the
interest method over the life of the debt.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
establishes accounting and reporting standards for derivative instruments and
for hedging contracts. This standard is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. When the Company adopts this
statement, it is not expected to have a material impact on the Company's
financial statements or their presentation.
F-72
<PAGE> 158
FUNDEX GAMES, LTD.
NOTES TO FINANCIAL -- (CONTINUED)
\ 2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
------------ ------------ ----------
<S> <C> <C> <C>
Raw Materials.................. $1,004,075 $ 828,179 $ 763,144
Finished goods................. 1,443,129 1,079,760 1,255,566
---------- ---------- ----------
$2,447,204 $1,907,939 $2,018,710
========== ========== ==========
</TABLE>
3. ROYALTIES
The Company's products are generally acquired by the Company from others or
developed for the Company by unaffiliated third parties. If the Company accepts
and develops a third party's concept for a new game, it generally pays a royalty
to the inventor on games sold which were developed from the concept, often with
a commitment to manufacture and sell a minimum number. Royalties paid to the
inventors range from 1% to 6% of the wholesale sales price for each unit sold by
the Company. Royalty expense was $330,678 and $363,778 for the years ended
December 31, 1997, and 1998, and $41,412 and $47,872 for the three months ended
March 31, 1998 and 1999, respectively. The Company may pay advance royalties to
an inventor on products where a significant amount of development has been done
by the inventor. At December 31, 1997 and 1998, and at March 31, 1999,
respectively, advance royalties were $193,434, 177,684 and 190,646,
respectively.
4. LICENSE AGREEMENTS
During 1996, the Company entered into an exclusive agreement with Hollywood
Ventures Corporation ("HVC") for certain properties and characters associated
with "The Big Comfy Couch" for use on board games, paperboard puzzles and wooden
puzzles. Shipment of these products began in July 1996. Under the renewal terms
of the license, the Company has the exclusive rights for the above products
through December 31, 1999. The Company has agreed to pay the licensor royalties
in the amount of 8% of the sales of the products and has guaranteed a minimum of
$45,000 in royalties during the license term. The Company has incurred more than
the guaranteed minimum. See Note 3.
The Company has entered into an additional exclusive agreement with HVC for
the use of "The Big Comfy Couch" name and logo on an inflatable couch to be
functional as furniture for children. Shipments of this product began in the
fourth quarter of 1996. Under the terms of this license the Company had
exclusive rights for such product through December 31, 1999. The Company has the
right to renew the agreement for one additional year provided the Company
generates sales which produce royalties to HVC of at least $200,000. The Company
has agreed to pay HVC royalties in the amount of 8% of sales and has guaranteed
a minimum of $40,000 in royalties. This license applies to the United States and
Canada. The Company has incurred more than the guaranteed minimum. See Note 3.
F-73
<PAGE> 159
FUNDEX GAMES, LTD.
NOTES TO FINANCIAL -- (CONTINUED)
5. TAXES ON INCOME
As of January 1, 1997, the Company switched from an S corporation to a C
corporation.
The Company has approximately $1,000,000 of net operating loss
carryforwards (expiring in 2012), which can be utilized to offset future taxable
income. The deferred tax asset of $340,000 has been fully offset by a valuation
allowance because realization is not considered likely at this time.
6. LEASES
The Company leases its industrial and office facilities in Indianapolis,
Indiana under an operating lease that expires March 31, 2002. In addition,
beginning January 1, 1996, the Company leased a showroom and office space in New
York, New York under an operating lease that expires April 30, 2006. Rental
payments under this lease did not begin until July 1, 1996. Generally accepted
accounting principles require total minimum rental payments to be recognized as
rent expense on a straight-line basis over the term of the lease. Accordingly,
total rental expense under these leases was $155,718, $192,581, $47,598 and
$50,300 for the years ended December 31, 1997 and 1998, and the three months
ended March 31, 1998 and 1999, respectively. The excess of such charges over
amounts required to be paid under the lease agreement is carried as a noncurrent
liability on the Company's balance sheet.
The Company leases various equipment under operating leases. The leases
expire through December 2003. Total rental expense under these leases was
$31,447, $42,577, $10,108, and $11,881 for the years ended December 31, 1997 and
1998, and the three months ended March 31, 1998 and 1999, respectively.
Minimum future rental payments as of December 31, 1998 under all of these
leases are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
- ------------
<S> <C>
1999............................................... $221,836
2000............................................... 233,156
2001............................................... 214,080
2002............................................... 83,588
2003............................................... 41,362
Thereafter......................................... 83,300
--------
Total.............................................. $877,322
========
</TABLE>
7. STOCK OPTION PLANS
The Company's Board of Directors and stockholders adopted the 1996 Employee
Stock Option Plan and the 1996 Stock Plan for Non-Employee Directors (the
"Plans") in September 1996. The Plans permit the granting of awards to
employees, directors and independent contractors in the form of stock options.
Options are designated at the time of
F-74
<PAGE> 160
FUNDEX GAMES, LTD.
NOTES TO FINANCIAL -- (CONTINUED)
grant as Incentive Stock Options intended to qualify under Section 422 of the
Internal Revenue Code or Non-Qualified Options which do not qualify. A total of
300,000 shares of the Company's common stock have been reserved pursuant to the
Plans.
The Company granted 53,000 and 76,000 options during 1997 and 1998 under
the Employee Stock Option Plan at an exercise price of $4.00 and $3.00 per
share, respectively. These options vest ratably over five or 10 years and are
exercisable from 2002 through 2008. No compensation cost was recognized as the
exercise price exceeded the fair value at the grant date.
The Company also granted 6,000 options during 1997 and 1998 under the Stock
Plan for nonemployee directors at an exercise price of $4.00 per share. These
options vest ratably over 10 years and are exercisable through 2007 and 2008,
respectively. No compensation cost was recognized as the exercise price exceeded
the fair value at the grant date.
The Company accounts for options under APB Opinion No. 25, under which no
compensation cost is recognized when exercise price equals or exceeds the fair
value at the grant date.
The weighted-average, grant date fair value of stock options granted to
employees during the year and the weighted-average significant assumptions used
to determine those fair values, using a modified Black-Sholes option pricing
model, and the pro forma effect on earnings of the fair value accounting for
stock options under Statement of Financial Accounting Standards No. 123, are as
follows:
<TABLE>
<CAPTION>
1997 1998
----------- --------
<S> <C> <C>
Weighted average fair value per options
Granted...................................... $ 1.52 $ 0.81
Significant assumptions (weighted Average)
Risk-free interest rate at grant date........ 6.03% 4.57%
Expected stock price volatility.............. -- --
Expected dividend payout..................... -- --
Expected option life (years)................. 8.3 7.6
Net loss
As reported.................................. (1,164,192) (2,927)
Pro forma.................................... (1,253,762) (69,267)
</TABLE>
8. NOTES PAYABLE
(a) In July 1996, the Company obtained a credit facility from an outside
group of investors to provide up to $500,000 in bridge financing, at an interest
rate of 10% per annum. As of December 31, 1996, $413,000 of the $500,000 had
been drawn down. These bridge notes were converted into common stock during
1997. See Note 11.
(b) In January 1997, the Company obtained a commitment for a $2,500,000
credit facility from a bank with interest at LIBOR plus three points. The
facility matured in May 1998. The line was repaid in October 1998 with the new
credit facility discussed in Note 8(d).
F-75
<PAGE> 161
FUNDEX GAMES, LTD.
NOTES TO FINANCIAL -- (CONTINUED)
(c) In August 1998, the Company obtained mezzanine financing in the amount
of $1,000,000 due in July 2003 with interest-only payments for 12 months at
prime plus 3 1/2%. Thereafter, interest and principal payments will be made in
equal monthly installments to amortize the principal over the term of the note.
The note includes certain financial covenants and is collateralized by
substantially all the assets of the Company. In conjunction with the note, the
Company signed a revenue participation agreement with the holder of the note
which calls for payment of 1.25% of net sales for the term of the note or until
repaid. During 1998, the Company incurred approximately $53,000 of additional
interest under this participation agreement. Additional interest incurred for
the three months ended March 31, 1999 was approximately $16,500.
This note is subordinate to the Company's main credit facility.
(d) In October 1998, the Company replaced and repaid the credit facility
discussed in Note 8(b) with a $2,500,000 revolving credit facility with interest
at prime plus 1%. The facility matures in October 2001, with interest payments
only until maturity. The borrowing availability will be based on 80% of eligible
accounts receivable, 40% of eligible parts inventory and 60% of eligible
finished goods inventory less the reserve for accrued cooperative advertising.
The facility is secured by substantially all the assets of the Company and
personal guarantees of the principal stockholders. The facility also calls for
certain minimum financial statement covenants to be met. As of December 31, 1998
and March 31, 1999, $1,751,738 and $1,217,198, respectively, has been drawn down
on the line.
The aggregate amount of long-term debt maturing in each of the next five
years is as follows: 1999 -- $49,717; 2000 -- $161,596; 2001 -- $1,933,828;
2002 -- $205,184; and 2003 -- $401,413.
9. INVESTMENT IN JOINT VENTURE
In December 1995, the Company entered into a joint venture with a
partnership for the development, design and sale of new products. The venture,
which was 50% owned by the Company, did not commence operations until 1996. On
August 28, 1996, the Company purchased the remaining 50% of the joint venture,
which consisted primarily of tooling costs, and the rights to four fully
developed games. The consideration paid was 75,000 shares of the Company's stock
and 75,000 warrants to purchase stock at 120% of the proposed public offering
price. The value assigned to the stock and the warrants was 65% of the proposed
1996 public offering price ($5.20 and $.065, respectively). The proposed
offering was not consummated. The cost in excess of the tangible assets acquired
($382,787) was assigned to intangible game rights and is being amortized over 60
months.
10. RETIREMENT PLAN
The Company established a contributory salary reduction simplified pension
plan pursuant to Section 408(k) of the Internal Revenue Code covering all its
employees. Employer contributions to the plan are discretionary. Also, the
Company established a money purchase plan and trust. This plan provides for
contributions by the Company equal to 10% of eligible wages.
F-76
<PAGE> 162
FUNDEX GAMES, LTD.
NOTES TO FINANCIAL -- (CONTINUED)
The amounts charged against operations were $91,397, $74,287, $21,600 and
$(104,532) for the years ended December 31, 1997 and 1998, and the three months
ended March 31, 1998 and 1999, respectively.
Subsequent to year end, the Company terminated both plans and determined
that the final distribution under these plans is approximately $48,000.
Therefore, the Company will recognize approximately $200,000 in income in 1999
as a reversal of the accrued liability recorded at December 31, 1998.
In April 1999, the Company established a Simple IRA plan pursuant to
Section 408(p) of the Internal Revenue Code covering all full-time employees.
Employer contributions to the plan are set at a matching of employee's
contribution, up to a maximum of 3%.
11. EQUITY TRANSACTIONS
(a) In April 1997, the Company completed the private placement of 207,100
shares of the Company's $.001 par value common stock at a price of $4.20 per
share. Each share had two detachable warrants to purchase additional shares.
103,550 warrants were exercisable on or before May 15, 1997 at an exercise price
of $5.50. An additional 103,550 warrants were exercisable on or before December
31, 1997 at an exercise price of $6.30, but only if the May 15 warrants were
exercised. Proceeds to the Company, after deducting selling commissions of
$52,200 and offering expenses of $25,000, were $767,851. During 1997, 53,000
warrants were exercised and 50,550 warrants expired.
(b) In connection with the private placement, the holders of the bridge
loans outstanding (Note 8(a)) converted their loans into common stock. The
conversion price was $3.36 per share. In addition, each bond holder received a
$4.20 warrant, which expires five years from the exchange date. The bond holders
also received two warrants -- 61,455 $5.50 warrants, which expired May 15, 1997,
and 61,455 $6.30 warrants, which expired December 31, 1997 and were only
exercisable if the May 15, 1997 warrants were exercised. During 1997, 16,814
warrants were exercised and 106,096 warrants expired.
12. CUSTOMER AND PRODUCT CONCENTRATION
During the year ended December 31, 1998, sales to one customer accounted
for 18% of revenues. During the year ended December 31, 1997, sales to three
customers accounted for 20%, 13% and 13% of revenues, respectively. During the
quarters ended March 31, 1998 and 1999, sales to one customer accounted for 46%
and 55% of revenues, respectively.
The Company derived 35% and 34% of net sales for the years ended December
31, 1997 and 1998, respectively, from its "Phase 10" product line. The Company
derived 57% and 70% of net sales for the three month periods ended March 31,
1998 and 1999, respectively, from its "Phase 10" product line.
F-77
<PAGE> 163
DAMERT COMPANY
FINANCIAL STATEMENTS
<PAGE> 164
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
DaMert Company
Berkeley, California
We have audited the accompanying balance sheets of DaMert Company as of
December 31, 1998 and 1997, and the related statements of income, stockholder's
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about 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.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DaMert Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ ARMANINO MCKENNA LLP
February 19, 1999
(except for Note 9, as to which
the date is April 21, 1999)
F-78
<PAGE> 165
DAMERT COMPANY
BALANCE SHEETS -- ASSETS
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
------------ ------------ ----------
<S> <C> <C> <C>
ASSETS
-----------
Current assets
Cash........................................ $ 350 $ 52,334 $ 349
Accounts receivable (net of allowance for
doubtful accounts of $22,000 in 1998 and
$40,000 in 1997).......................... 1,765,871 952,590 888,210
Inventory, net of reserve................... 1,215,106 1,452,955 1,311,412
Prepaid expenses and other current assets... 168,638 144,901 143,178
---------- ---------- ----------
Total current assets........................ 3,149,965 2,602,780 2,343,149
---------- ---------- ----------
Property and equipment
Office equipment............................ 382,151 341,114 341,114
Vehicles.................................... 42,345 -- --
Molds....................................... 553,157 698,785 732,178
Equipment................................... 50,586 56,053 56,053
---------- ---------- ----------
1,028,239 1,095,952 1,129,345
Less accumulated depreciation............... (542,840) (618,257) (655,757)
---------- ---------- ----------
485,399 477,695 473,588
---------- ---------- ----------
Other assets
Deposits.................................... 22,080 22,080 22,080
---------- ---------- ----------
Total assets...................... $3,657,444 $3,102,555 $2,838,817
========== ========== ==========
</TABLE>
F-79
<PAGE> 166
DAMERT COMPANY
BALANCE SHEETS -- LIABILITIES AND EQUITY
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
------------ ------------ ----------
<S> <C> <C> <C>
LIABILITIES AND EQUITY
-----------------------------------
Current liabilities
Accounts payable............................ $ 145,918 $ 124,804 $ 198,024
Accrued expenses............................ 158,488 100,928 132,053
Line of credit.............................. 1,908,895 1,863,205 1,924,594
Current portion of notes payable............ 20,065 520,065 320,065
Other....................................... 1,271 -- --
---------- ---------- ----------
Total current liabilities................... 2,234,637 2,609,002 2,574,736
---------- ---------- ----------
Long-term liabilities
Notes payable, net of current portion....... 26,753 9,386 4,370
Notes payable -- stockholder................ 128,849 128,849 128,849
---------- ---------- ----------
Total long-term liabilities................. 155,602 138,235 133,219
---------- ---------- ----------
Total liabilities................. 2,390,239 2,747,237 2,707,955
---------- ---------- ----------
Stockholders' equity
Common stock (5,000 shares authorized, 1,000
shares issued and outstanding, no stated
value).................................... 10,000 10,000 10,000
Retained earnings........................... 1,257,205 345,318 120,862
---------- ---------- ----------
1,267,205 355,318 130,862
---------- ---------- ----------
Total liabilities and equity...... $3,657,444 $3,102,555 $2,838,817
========== ========== ==========
</TABLE>
F-80
<PAGE> 167
DAMERT COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
DECEMBER 31, 1997 DECEMBER 31, 1998 MARCH 31, 1998 MARCH 31, 1999
-------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales..................... $8,876,462 100.0% $6,837,280 100.0% $1,163,084 100.0% $1,256,848 100.0%
Cost of sales............. 5,328,453 60.0% 4,291,854 62.8% 696,072 59.8% 736,611 58.6%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Gross profit.............. 3,548,009 40.0% 2,545,426 37.2% 467,012 40.2% 520,237 41.4%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Operating expenses
Product development....... 488,638 5.5% 546,706 8.0% 138,261 11.9% 86,822 6.9%
Marketing................. 1,320,380 14.9% 998,802 14.6% 283,889 24.4% 230,800 18.4%
General and
administrative.......... 1,647,803 18.6% 1,878,005 27.5% 464,787 40.0% 426,271 33.9%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total operating
expenses................ 3,456,821 38.9% 3,423,513 50.1% 886,937 76.3% 743,893 59.2%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Income (loss) before
taxes................... 91,188 1.0% (878,087) (12.8)% (419,925) (36.1)% (223,656) (17.8)%
Provision for income
taxes................... 1,431 0.0% 800 0.0% 800 0.1% 800 0.1%
---------- ----- ---------- ----- ---------- ----- ---------- -----
Net income (loss)......... $ 89,757 1.0% $ (878,887) (12.9)% $ (420,725) (36.2)% $ (224,456) (17.9)%
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
F-81
<PAGE> 168
DAMERT COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK NO PAR VALUE
--------------------------
NUMBER OF
SHARES ISSUED RETAINED
AND OUTSTANDING DOLLARS EARNINGS
--------------- ------- ----------
<S> <C> <C> <C>
Balance, December 31, 1996.............. 1,000 $10,000 $1,352,448
Net income.............................. -- -- 89,757
Stockholder distributions............... -- -- (185,000)
----- ------- ----------
Balance, December 31, 1997.............. 1,000 10,000 1,257,205
Net loss................................ -- -- (878,887)
Stockholder distributions............... -- -- (33,000)
----- ------- ----------
Balance, December 31, 1998.............. 1,000 10,000 345,318
Unaudited Net loss...................... -- -- (224,456)
----- ------- ----------
Unaudited Balance, March 31, 1999....... 1,000 $10,000 $ 120,862
===== ======= ==========
</TABLE>
F-82
<PAGE> 169
DAMERT COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1998 1998 1999
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................... $ 89,757 $(878,887) $(420,725) $(224,456)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities
Depreciation........................ 135,970 182,083 31,500 37,500
Loss on disposal of property and
equipment......................... -- 16,866
Deferred taxes...................... 831 -- -- --
Changes in assets and liabilities
Accounts receivable................. (662,842) 813,281 929,469 64,380
Inventory........................... (24,005) (237,849) 33,094 141,543
Prepaid expenses and other current
assets............................ (38,098) 23,737 (30,386) 1,723
Accounts payable.................... (23,790) (21,114) (16,106) 73,220
Accrued expenses.................... (140,486) (57,560) (4,592) 31,125
Other............................... (1,667) (1,271) (1,271) 0
---------- --------- --------- ---------
Net cash used in operating
activities........................ (664,330) (160,714) 520,983 125,035
---------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and
equipment......................... (189,618) (191,245) (48,428) (33,393)
---------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) borrowing
on line of credit................. 1,051,402 (45,690) (434,138) 61,389
Borrowing on term loan.............. -- 502,698
Repayment of term loan.............. (20,065) (20,065) (4,199) (205,016)
Stockholder distributions........... (185,000) (33,000) (33,000) 0
---------- --------- --------- ---------
Net cash provided by financing
activities........................ 846,337 403,943 (471,337) (143,627)
---------- --------- --------- ---------
Increase (decrease) in cash......... (7,611) 51,984 1,218 (51,985)
Cash at beginning of period......... 7,961 350 350 52,334
---------- --------- --------- ---------
Cash at end of period............... $ 350 $ 52,334 $ 1,568 $ 349
========== ========= ========= =========
</TABLE>
F-83
<PAGE> 170
DAMERT COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
AND FOR MARCH 31, 1999 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
DaMert Company (the Company) is engaged in the business of producing,
distributing, and selling products to toy gift stores and catalog retailers
throughout the United States, Canada and Europe.
INVENTORY
Inventory is valued at the lower of cost or market. Cost is determined by
using the average cost method. Inventory consists primarily of finished goods
for sale. The Company maintains a reserve for future obsolete or excess
inventory. The balance of the reserve was $44,849, $38,453 and $38,684 at
December 31, 1998, 1997 and March 31, 1999, respectively.
DEPRECIATION
Depreciation is computed on individual assets over their estimated useful
lives by the straight-line method. Lives range from 3 to 7 years for all assets.
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repair
are charged to expense as incurred. For the years ended December 31, 1998 and
1997, and for the three month periods ending March 31, 1999 and 1998
depreciation expense was $182,083, $135,970, $37,500 and $31,500, respectively.
INCOME TAXES
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporation income
taxes, the shareholders of an S corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision or liability for
federal income taxes has been included in the financial statements. The Company
is subject to minimum state taxes, which have been provided for.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain amounts and disclosures. Actual results could
differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 1997 financial statements have been reclassified to
conform to the December 31, 1998 and March 31, 1999 presentations.
F-84
<PAGE> 171
DAMERT COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEAR 2000 ISSUE
Like other organizations and individuals around the world, the Company
could be adversely affected if the computer systems it uses and those used by
significant third parties (e.g., vendors, customers, third party administrators)
do not properly process and calculate date-related information and data. This is
commonly known as the "Year 2000 issue." Management is assessing its computer
systems and business processes and intends to initiate actions to address the
Year 2000 needs identified. Management is also assessing the actions being taken
by significant third parties that interface with the Company. At this time,
management is not able to determine the impact, including the costs of
remediation of the Year 2000 issue on the Company.
2. PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan that was revised as of January
1, 1996. The plan covers all eligible employees. Employees may defer a portion
of their salary under the plan. The Company makes a non-elective matching
contribution of 10% of the employee's salary deferral. Employees are immediately
vested in the balance of their matching account. The employer may also make
discretionary contributions at the discretion of the Board of Directors. There
were no discretionary contributions for the years 1998 and 1997 or for the three
month period ending March 31, 1999.
3. LINE OF CREDIT
The Company has a $2,500,000 revolving credit line expiring May 15, 1999,
secured by the Company's accounts receivable and inventory. Interest rates in
1999, 1998, and 1997 were prime plus three-fourths of a percent (8.50% at March
31, 1998). The outstanding balances at December 31, 1998 and 1997 and for the
three month period ending March 31, 1999 were $1,863,205, $1,908,895, and
$1,924,594 respectively. At December 31, 1998, the Company was not in compliance
with certain financial covenants required by the credit agreement (see Note 9).
F-85
<PAGE> 172
DAMERT COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
12-31-97 12-31-98 3-31-99
-------- --------- ---------
<S> <C> <C> <C>
Notes payable to stockholder in
monthly payments of interest only
at 9%, unsecured.................. $128,849 $ 128,849 $ 128,849
Note payable to bank at prime plus
3.75% (11.5% at December 31,
1998), due December 15, 1998 (past
due; see Note 9).................. -- 500,000 300,000
Equipment notes payable in monthly
installments of $1,672, plus
interest at 9%, secured by
equipment......................... 46,818 29,451 24,435
-------- --------- ---------
175,667 658,300 453,284
Less current maturity of long-term
debt.............................. (20,065) (520,065) (320,065)
-------- --------- ---------
$155,602 $ 138,235 $ 133,219
======== ========= =========
</TABLE>
The anticipated principal payments required on the Company's long-term debt
during the next three fiscal years are: 1999 -- $520,065; 2000 -- $9,386; and
thereafter -- $128,849. Interest expense incurred was $211,746 in 1998 and
$180,152 in 1997.
5. OPERATING LEASES
The Company leased its facilities beginning December 1, 1995. The lease
term is for six years with one six-year extension option. Base monthly rent for
the initial six-year term was fixed at $23,295. Rent for the option period shall
be set at the then fair market rental rate for a similar industrial gross lease.
In addition to the base rent, the Company is liable for its share of any
increase in operating expenses over the base year operating expenses. During the
years ended December 31, 1998 and 1997, total rent expense was $288,653 and
$283,071, respectively. Future minimum payments on the Company's facilities
lease are $279,540 for 1999, $279,540 for 2000 and $256,245 for 2001.
6. COMMITMENTS
The Company has a master licensing agreement with a major designer of one
of the Company's product lines, which expires on December 31, 2001. The Company
also has a separate international licensing agreement with the designer, which
includes a guaranteed royalty of $24,000 annually through 2001.
7. STOCK COMPENSATION PLANS
On February 29, 1996, the Company granted an option to one employee to
purchase 52.63 shares of common stock in the Company for $1. The option expires
on March 3, 2024. The option is exercisable only with the consent of the
Company, or upon the sale of
F-86
<PAGE> 173
DAMERT COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
at least 50% or a public offering of the Company's stock. There were no stock
options granted, exercised, forfeited or expired in 1998 or 1997.
The Company has granted stock appreciation rights ("SARs") to certain
employees. The SARs earn a proportionate share of the increase in the value of
the Company, payable in cash upon the sale of at least 50% or a public offering
of the Company's stock, or the termination of employment. Under the agreements,
the value of the Company is defined as the net book value of the Company unless
and until a sale or public offering establishes a different value. The
employees' interests in the SARs vest 20% annually over 5 years. In 1998, the
Company's net losses reduced the net book value of the Company so as to reduce
the liability for the SARs to $0 and resulted in the recognition of a $26,128
offset to compensation expense. The compensation expense recognized for the SARs
was $3,673 in 1997. Because this liability may ultimately be settled based on
the value of the Company in a sale or stock offering rather than book value, the
liability for the SARs and the related compensation expense is an estimate that
is subject to material change in the near term.
8. YEAR 2000 ISSUE
Like other organizations and individuals around the world, the Company
could be adversely affected if the computer systems it uses and those used by
significant third parties (e.g., vendors, customers, third party administrators)
do not properly process and calculate date-related information and data. This is
commonly known as the "Year 2000 issue." Management is assessing its computer
systems and business processes and intends to initiate actions to address the
Year 2000 needs identified. Management is also assessing the actions being taken
by significant third parties that interface with the Company. At this time,
management is not able to determine the impact, including the costs of
remediation of the Year 2000 issue on the Company.
9. SUBSEQUENT EVENT
In 1998, the Company sustained a substantial net loss. This net loss caused
the Company to be in violation of its credit agreements with its bank, due to
the Company's inability to meet certain financial ratio and net income
covenants. As of December 31, 1998, the Company had made all interest payments
but had not made the $500,000 principal payment that was due December 15, 1998.
Under the provisions of the credit agreements, these covenant violations and
failure to make a principal payment when due give the bank the right to declare
all outstanding balances immediately due and payable. As a result of these
circumstances, on March 24, 1999 the Company agreed in principle to be acquired
by Futech Interactive Products, Inc. and the bank agreed to waive the
enforcement of its default rights until June 30, 1999. This may not be
sufficient extension to allow the merger to close. DaMert will have to
renegotiate the extension and cannot be certain it will be approved.
F-87
<PAGE> 174
XYZ GROUP, INC.
FINANCIAL STATEMENTS
<PAGE> 175
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
XYZ Group, Inc.
Waukesha, Wisconsin
We have audited the accompanying balance sheets of XYZ Group, Inc. (an S
corporation) as of December 31, 1997, and the statements of operations and
retained deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about 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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of XYZ Group, Inc. as of
December 31, 1997 and the results of its operations and its cash flows for the
periods then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,361,635 for 1997 and has incurred net
losses for each of the past four years. At December 31, 1997, current
liabilities exceed current assets by $2,275,710, and total liabilities exceed
total assets by $1,763,394. The recorded liabilities include $772,637 of notes
to shareholders. These factors, and others discussed in Note 11 raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
VIRCHOW, KRAUSE & COMPANY, LLP
/s/ VIRCHOW, KRAUSE & COMPANY, LLP
-----------------------------------------
Waukesha, Wisconsin
February 12, 1998
F-88
<PAGE> 176
XYZ GROUP, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 23,106
Accounts receivable....................................... 3,465,545
Inventories............................................... 3,887,990
Deposit -- Inventory consignment.......................... 114,407
Prepaid expenses.......................................... 194
-----------
Total Current Assets.............................. 7,491,242
-----------
Property and Equipment
Vehicles.................................................. 47,566
Machinery................................................. 234,180
Furniture and fixtures.................................... 818,779
Leasehold improvements.................................... 38,985
-----------
Less: accumulated depreciation............................ (627,194)
-----------
Net Property and Equipment............................. 512,316
-----------
Total Assets...................................... $ 8,003,558
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 4,856,072
Accrued liabilities....................................... 70,088
Notes payable -- current portion....................... -0-
Notes payable -- financial institutions................ 4,068,155
Notes payable -- shareholder........................... 772,637
Total Current Liabilities......................... 9,766,952
-----------
Stockholders' Equity
Common stock, $1 par, 56,000 shares authorized; 20,632
shares issued and 19,600 shares outstanding............ 20,632
Treasury stock (1,032 shares at cost)..................... (1,032)
Additional paid-in capital................................ 154,570
Retained deficit.......................................... (1,937,564)
-----------
Total Stockholder's Equity........................ (1,763,394)
-----------
Total Liabilities and Stockholder's Equity........ $ 8,003,558
===========
</TABLE>
See accompanying notes to financial statements and independent auditors' report.
F-89
<PAGE> 177
XYZ GROUP, INC.
STATEMENT OF OPERATIONS AND RETAINED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENT OF
1997 REVENUES
----------- ----------
<S> <C> <C>
NET SALES................................................. $18,188,674 100.00
COST OF GOODS SOLD........................................ 15,406,497 84.70
----------- ------
Gross profit............................................ 2,782,177 15.30
----------- ------
OPERATING EXPENSES
Selling................................................. 1,461,816 8.04
Shipping and receiving.................................. 1,201,088 6.60
General and administrative.............................. 845,471 4.65
----------- ------
Total Operating Expenses............................. 3,508,375 19.29
----------- ------
Operating Income (Loss)............................ (726,198) (3.99)
----------- ------
OTHER INCOME (EXPENSE)
Loss on disposal of assets.............................. (29,826) (0.16)
Interest expense........................................ (616,789) (3.39)
Miscellaneous income.................................... 11,178 0.06
----------- ------
Net Other Income (Expense)........................... (635,437) (3.49)
----------- ------
NET LOSS........................................... (1,361,635) (7.48)
======
Retained Deficit -- Beginning of Year..................... (575,929)
-----------
RETAINED DEFICIT -- END OF YEAR......................... $(1,937,564)
===========
</TABLE>
See accompanying notes to financial statements and independent auditors' report.
F-90
<PAGE> 178
XYZ GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net loss.................................................. $(1,361,635)
Adjustments to reconcile net loss to operating cash flows
Depreciation........................................... 191,608
Loss on disposal of assets............................. 29,826
Changes in operating assets and liabilities
Accounts receivable.................................. 674,710
Inventories.......................................... (259,537)
Deposit -- inventory consignment..................... (97,866)
Prepaid expenses..................................... 49,479
Accounts payable..................................... 1,297,159
Accrued liabilities.................................. (3,901)
-----------
Net cash flows provided by operating activities............. 519,843
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment..................................... (145,990)
Proceeds from sale of equipment........................... 8,032
-----------
Net cash flows used in investing activities................. (137,958)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for purchase of treasury stock................... (1,032)
Proceeds from bank loans.................................. -0-
Reductions in bank loans.................................. (360,420)
Reductions in shareholder loans........................... -0-
Checks written in excess of balance....................... -0-
-----------
Net cash flows provided by (used in) financing activities... (361,452)
-----------
Net Increase (Decrease) in Cash and Cash Equivalents........ 20,433
Cash and Cash Equivalents -- Beginning of Year.............. 2,673
-----------
Cash and Cash Equivalents -- End of Year.................... $ 23,106
===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for interest.................... $ 561,468
</TABLE>
See accompanying notes to financial statements and independent auditors' report.
F-91
<PAGE> 179
XYZ GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
XYZ Group, Inc. was incorporated in the state of Wisconsin in August, 1990,
to distribute children's books, electronic books and other child related
educational materials throughout the United States.
CASH AND CASH EQUIVALENTS
For purposes of financial statement reporting, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
INVENTORIES
Inventories in 1997 are stated at the lower of cost using the average cost
method. Inventories consist of finished goods. The inventory values at December
31, 1997 contain an allowance of $170,000 for goods expected to be returned. In
addition the December 31, 1997 value includes a reserve for inventory
obsolescence of $250,000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major expenditures for property
and equipment and those which substantially increase useful lives are
capitalized. Maintenance, repairs, and minor renewals are expensed as incurred.
When assets are retired or otherwise disposed of, their costs and related
accumulated depreciation are removed from the accounts and resulting gains or
losses are included in income.
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using both
accelerated and straight-line methods of depreciation. Depreciation expense for
the period ended December 31, 1997 was $191,608.
SALES POLICIES
The general Company policy on sales is that sales are final and that
merchandise is not returnable, with the exception of defective merchandise and
special Christmas titles. However, there has evolved a Company practice of
accepting returns from its large warehouse retailers on a preapproved basis.
Items returned without a return authorization number are not accepted. In
conjunction with this policy the Company has estimated and recorded a reserve
for the financial impact of the returns. The provision is based on historical
experience with known exceptions and is consistently applied over the periods
presented.
F-92
<PAGE> 180
XYZ GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 -- (CONTINUED)
ADVERTISING COSTS
Advertising expense is charged to expense as incurred. XYZ Group, Inc. also
receives advertising credits from publishers. Advertising expense for the period
ended December 31, 1997 was $33,868.
S CORPORATION
Income taxes have not been provided for XYZ Group, Inc. because the
shareholders elected to be treated as a small business corporation for income
tax purposes as provided in Section 1372(a) of the Internal Revenue Code. As
such, the corporation's income or loss is passed to the shareholders and
combined with their other income and deductions to determine taxable income on
their respective tax returns.
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.
NOTE 2 -- ACCOUNTS RECEIVABLE
Accounts receivable are aged as follows:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
0 - 30 Days............................................... $ 950,705
31 - 60 Days............................................... 1,770,350
61 - 90 Days............................................... 738,258
91 - 120 Days.............................................. 95,678
121 Days and Over.......................................... 190,755
Less: Allowance for doubtful accounts................. (77,731)
Less: Allowance for currency exchange................. (2,470)
Less: Allowance for returns........................... (200,000)
----------
Net Accounts Receivable.......................... $3,465,545
==========
</TABLE>
NOTE 3 -- CONCENTRATION OF CREDIT RISK
The Company periodically has bank deposits in excess of federally insured
amounts. The Company has not experienced any losses on these deposits.
F-93
<PAGE> 181
XYZ GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 -- (CONTINUED)
The Company performs ongoing credit evaluations of its customers' financial
condition and requires no collateral from its customers. The Company services
two major warehouse clubs which comprise the vast majority of the Company's
receivables, as follows:
<TABLE>
<CAPTION>
PERCENT OF
1997 BALANCE
---------- ----------
<S> <C> <C>
Customer A.............................................. $1,843,968 53.2
Customer B.............................................. 1,060,005 30.6
---------- ----
Total......................................... $2,903,973 83.8
========== ====
</TABLE>
For the year ended December 31, 1997, the Company had the following major
customers each of whose purchases exceeded 10% of total sales. Sales to those
customers were as follows:
<TABLE>
<CAPTION>
PERCENT OF
1997 BALANCE
----------- ----------
<S> <C> <C>
Customer A............................................. $10,761,474 59.5
Customer B............................................. 4,052,186 22.4
----------- ----
Total........................................ $14,813,660 81.9
=========== ====
</TABLE>
NOTE 4 -- INVENTORY CONSIGNMENT
XYZ Group, Inc. has entered into an exclusive distributorship agreement
with Magi Publications to distribute books in the United States. The books are
purchased on a consignment basis at 65% of retail price, payable in installments
of $.50 per book when the books are ready for shipment, and an additional $.50
per book is paid when received and inspected by XYZ Group, Inc. The balance due
is paid within 60 days of sale. Magi Publications retains title to the books
until full payment has been received by them. Therefore, advances paid by the
Company are recorded as deposits until the final payment is made. The
distributorship agreement may be terminated upon 180 days written notice by
either party.
NOTE 5 -- NOTE PAYABLE -- FINANCIAL INSTITUTIONS
A financing agreement was entered into between XYZ Group, Inc. and Republic
Acceptance Corporation on August 1, 1995 and was amended in July 1996. The
agreement shall continue in force until terminated by either party with 30 days
prior written notice. The total amount available to borrow is based on various
percentages of eligible accounts receivable and inventory as defined in the
agreement. The maximum aggregate amount shall not exceed $7,000,000. Interest is
calculated on the net balance owed at the close of each day, computed on the
basis of actual days elapsed at the reference rate publicly announced by First
Bank National Association, plus an incremental interest rate amount of 3.25%.
F-94
<PAGE> 182
XYZ GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 -- (CONTINUED)
The Republic Acceptance Corporation financing agreement is secured and
collateralized by a general business security agreement including substantially
all assets of the Company, an unlimited personal guarantee by the company's
major shareholder, Gary R. Billings, and the assignment of a life insurance
policy on the life of Gary R. Billings. The principal amount outstanding on this
agreement as of December 31, 1997 was $4,068,155.
NOTE 6 -- NOTE PAYABLE -- SHAREHOLDER
Note payable -- shareholder at December 31, 1997 consists of a demand note
in the amount of $772,637 payable to the majority shareholder, Gary R. Billings,
bearing interest at prime plus 1%. Interest is payable monthly. A subordination
agreement exists between Gary R. Billings and Republic Acceptance Corporation
with respect to this note.
NOTE 7 -- LEASE COMMITMENTS
The Company leases office and warehouse facilities at N16 W23390 Stoneridge
Drive, Waukesha, Wisconsin. The lease, which commenced July 1, 1997 and
terminates June 30, 2002, is a triple net lease with base rent as follows:
<TABLE>
<S> <C>
Commencement through June 30, 1999.......................... $18,734 per month
July 1, 1999 through June 30, 2000.......................... $19,296 per month
July 1, 2000 through June 30, 2001.......................... $20,164 per month
July 1, 2001 through June 30, 2002.......................... $21,072 per month
</TABLE>
Minimum annual future rental payments for the office and warehouse
facilities are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 224,808
1999........................................................ 226,494
2000........................................................ 234,156
2001........................................................ 244,692
2002........................................................ 189,648
----------
Total Minimum Payments Required............................. $1,119,798
==========
</TABLE>
In addition to the base rent the Company is obligated to pay as additional
rent their share, as defined in the lease, of all taxes, utilities, repairs and
maintenance, and impounds for insurance premiums and property taxes.
NOTE 8 -- TREASURY STOCK
On May 9, 1997, the Company purchased 1,032 shares of common stock which
are recorded in treasury stock at cost for $1,032.
F-95
<PAGE> 183
XYZ GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 -- (CONTINUED)
NOTE 9 -- PENSION AND PROFIT SHARING PLAN
XYZ Group, Inc. maintains a 401(k) savings plan for all eligible employees.
The Company matches employee contributions at a rate of twenty five percent of
employee contributions up to a maximum Company contribution of one percent of
includable wages. The total amount contributed by XYZ Group, Inc. for the year
ended December 31, 1997 was $5,665.
NOTE 10 -- RELATED PARTY TRANSACTIONS
The Company made purchases from Premier Publishing, Inc., a related party,
of $934,465 for the year ended December 31, 1997. The Company's accounts payable
balance owed to Premier Publishing, Inc. as of December 31, 1997 was $93,367.
The Company received $64,542 of rent and management fees from Premier
Publishing, Inc. for the year ended December 31, 1997.
NOTE 11 -- GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses in recent years. In addition, the Company has used substantial
amounts of working capital in its operations. Further, at December 31, 1997,
current liabilities exceed current assets by $2,275,710 and total liabilities
exceed total assets by $1,763,394. The recorded liabilities include $772,637 of
notes to shareholders.
The Company, as of October 17, 1997, has entered into an agreement for
purchase and sale of assets with Futech Educational Products, Inc. The agreement
is contingent on the private placement success of Futech, Inc. At the date of
issuance of these statements, no estimate of success of the private placement
and sale of assets can be determined. However, management expects to complete a
successful placement and ultimate sale by June of 1998.
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon either continued operations of
the Company or the sale as defined above. Management believes that actions
presently being taken to revise the Company's operating and financial
requirements provide the opportunity for the Company to continue as a going
concern.
F-96
<PAGE> 184
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
XYZ Group, Inc.
Waukesha, Wisconsin
We have audited the accompanying balance sheet of XYZ Group, Inc. as of
April 30, 1998 and the statements of operations and retained deficit and cash
flows for the four month period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about 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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of XYZ Group, Inc. as of April
30, 1998 and the results of its operations and its cash flows for the four
months then ended in conformity with generally accepted accounting principles.
/s/ VIRCHOW, KRAUSE & COMPANY, LLP
Waukesha, Wisconsin
March 23, 1999
F-97
<PAGE> 185
XYZ GROUP, INC.
BALANCE SHEET
APRIL 30, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Accounts receivable....................................... $ 2,853,436
Other receivables......................................... 7,838
Inventories............................................... 3,948,053
Inventory on consignment.................................. 184,241
Prepaid expenses.......................................... 6,542
-----------
Total Current Assets 7,000,110
-----------
PROPERTY AND EQUIPMENT
Vehicles.................................................. 70,104
Machinery................................................. 234,180
Furniture and fixtures.................................... 815,373
Leasehold Improvements.................................... 38,985
Less: accumulated depreciation......................... (681,225)
-----------
Net Property and Equipment........................... 477,417
-----------
TOTAL ASSETS...................................... $ 7,477,527
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Checks in excess of bank balance.......................... $ 348,122
Accounts payable.......................................... 3,861,639
Accrued liabilities....................................... 338,110
Note payable -- financial institutions.................... 5,855,633
Note payable -- shareholder............................... 772,637
-----------
Total Current Liabilities......................... 11,176,141
-----------
STOCKHOLDERS' DEFICIT
Common stock, $1 par, 56,000 shares authorized; 20,632
shares issued and 19,600 shares outstanding............ 20,632
Treasury stock (1,032 shares at cost)..................... (1,032)
Additional paid-in capital................................ 154,570
Retained deficit.......................................... (3,872,784)
-----------
Total Stockholders' Deficit....................... (3,698,614)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT....... $ 7,477,527
===========
</TABLE>
See accompanying notes to financial statements.
F-98
<PAGE> 186
XYZ GROUP, INC.
STATEMENT OF OPERATIONS AND RETAINED DEFICIT
FOR THE FOUR MONTHS ENDED APRIL 30, 1998
<TABLE>
<S> <C>
NET SALES................................................... $ 4,812,204
COST OF GOODS............................................... 5,378,394
-----------
Gross Profit.............................................. (566,190)
-----------
OPERATING EXPENSES
Selling................................................... 506,550
Shipping and receiving.................................... 361,036
General and administrative................................ 284,678
-----------
Total Operating Expenses.......................... 1,152,264
-----------
Operating Loss......................................... (1,718,454)
-----------
OTHER INCOME (EXPENSE)
Interest expense.......................................... (217,340)
Miscellaneous income...................................... 574
-----------
Net Other Income (Expense)............................. (216,766)
-----------
NET LOSS............................................. (1,935,220)
RETAINED DEFICIT -- Beginning of Year....................... (1,937,564)
-----------
RETAINED DEFICIT -- END OF PERIOD......................... $(3,872,784)
===========
</TABLE>
See accompanying notes to financial statements.
F-99
<PAGE> 187
XYZ GROUP, INC.
STATEMENT OF CASH FLOWS
FOR THE FOUR MONTHS ENDED APRIL 30, 1998
<TABLE>
<S> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net loss.................................................. $(1,935,220)
Adjustments to reconcile net loss to net cash flows used
in operating activities
Depreciation........................................... 60,961
Changes in operating assets and liabilities
Accounts receivable.................................. 612,109
Other receivables.................................... (7,838)
Inventories.......................................... (60,063)
Deposit -- inventory consignment..................... (69,834)
Prepaid expenses..................................... (6,348)
Accounts payable..................................... (994,433)
Accrued liabilities.................................. 268,022
-----------
Net Cash Flows Used in Operating Activities....... (2,132,644)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment..................................... (26,062)
-----------
Net Cash Flows Used in Investing Activities....... (26,062)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loans.................................. 1,787,478
Reductions in bank loans.................................. 0
-----------
Net Cash Flows Provided by Financing Activities... 1,787,478
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS......... (371,228)
CASH AND CASH EQUIVALENTS -- Beginning of Year.............. 23,106
-----------
CHECKS IN EXCESS OF BANK BALANCE -- END OF PERIOD......... $ (348,122)
===========
Supplemental cash flow disclosures
Cash paid during the period for interest.................. $ 197,861
</TABLE>
See accompanying notes to financial statements.
F-100
<PAGE> 188
XYZ GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
XYZ Group, Inc. was incorporated in the state of Wisconsin in August, 1990,
to distribute children's books, electronic books and other child related
educational materials throughout the United States.
The Company, as of October 17, 1997, entered into an agreement for the
purchase and sale of its assets with Futech Interactive Products, Inc. As of May
5, 1998 an amended agreement was finalized and the Company sold all of its
assets and most of its liabilities to Futech Interactive Products, Inc. In view
of the sale, it is no longer necessary to address the issue of a going concern
for the Company. Per the agreement, Futech Interactive Products, Inc. received
all inventory, accounts receivable, fixed assets, and other assets of XYZ Group,
as well as assumed all of the liabilities of the Company with the exception of
the officer note to shareholder. The sale was consummated with physical proceeds
exchanged on May 5, 1998.
CASH AND CASH EQUIVALENTS
For purposes of financial statement reporting, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
INVENTORIES
Inventories in 1998, which consist of finished goods, are stated at the
lower of cost or market using the average cost method. The inventory values at
April 30, 1998 contain an allowance of $705,000 for goods expected to be
returned. In addition, the April 30, 1998 value includes a reserve for inventory
obsolescence of $1,115,000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major expenditures for property
and equipment and those which substantially increase useful lives are
capitalized. Maintenance, repairs, and minor renewals are expensed as incurred.
When assets are retired or otherwise disposed of, their costs and related
accumulated depreciation are removed from the accounts and resulting gains or
losses are included in income.
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using both
accelerated and straight-line methods of depreciation. Depreciation expense for
the periods ended April 30, 1998 was $60,961.
SALES POLICIES
The general Company policy on sales is that sales are final and that
merchandise is not returnable, with the exception of defective merchandise and
special Christmas titles. However, there has evolved a Company practice of
accepting returns from its large warehouse retailers on a preapproved basis.
Items returned without a return authorization number are not accepted. In
conjunction with this policy the Company has estimated and
F-101
<PAGE> 189
XYZ GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998 -- (CONTINUED)
recorded a reserve for the financial impact of the returns. The provisions is
based on historical experience with known exceptions and is consistently applied
over the period presented.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred. XYZ Group, Inc. also
receives advertising credits from publishers. Advertising expense for the period
ended April 30, 1998 was $10,974.
S CORPORATION
Income taxes have not been provided for XYZ Group, Inc. because the
shareholder has elected to be treated as a small business corporation for income
tax purposes as provided in Section 1372(a) of the Internal Revenue Code. As
such, the corporation's income or loss is passed to the shareholders and
combined with their other income and deductions to determine taxable income on
their respective tax returns.
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.
NOTE 2 -- ACCOUNTS RECEIVABLE
Accounts receivable are aged as follows:
<TABLE>
<S> <C>
0-30 Days................................................. $ 885,929
31-60 Days................................................ 1,473,686
61-90 Days................................................ 1,216,942
91-120 Days............................................... 120,529
121 Days and Over......................................... 156,024
----------
Total Aged Accounts Receivable.......................... 3,853,110
Less: Allowance for doubtful accounts................ (149,674)
Less: Allowance for returns.......................... (850,000)
----------
Net Accounts Receivable............................ $2,853,436
==========
</TABLE>
NOTE 3 -- CONCENTRATION OF CREDIT RISK
The Company periodically has bank deposits in excess of federally insured
amounts. The Company has not experienced any losses on these deposits.
The Company performs ongoing credit evaluations of its customers' financial
condition and requires no collateral from its customers. The Company services
two major warehouse
F-102
<PAGE> 190
XYZ GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998 -- (CONTINUED)
clubs which comprise the vast majority of the Company's receivables, as follows
(at Gross):
<TABLE>
<S> <C>
Customer A............................................. $3,311,420
Customer B............................................. 404,255
----------
Total........................................ $3,715,675
==========
</TABLE>
For the four months ended April 30, 1998, the Company had the following
major customers each of whose purchases exceeded 10% of total sales. Sales to
those customers were as follows:
<TABLE>
<S> <C>
Customer A............................................. $2,788,320
Customer B............................................. 880,571
----------
Total........................................ $3,668,891
==========
</TABLE>
NOTE 4 -- INVENTORY CONSIGNMENT
XYZ Group, Inc. has entered into an exclusive distributorship agreement
with Magi Publications to distribute books in the United States. The books are
purchased on a consignment basis at 65% of retail price, payable in installments
of $.50 per book when the books are ready for shipment, and an additional $.50
per book is paid when received and inspected by XYZ Group, Inc. The balance due
is paid within 60 days of sale. Magi Publications retains title to the books
until full payment has been received by them. Therefore, advances paid by the
Company are recorded as deposits until the final payment is made. The
distributorship agreement may be terminated upon 180 days written notice by
either party.
NOTE 5 -- NOTE PAYABLE -- FINANCIAL INSTITUTIONS
A financing agreement was entered into between XYZ Group, Inc. and Republic
Acceptance Corporation on August 1, 1995 and was amended in July 1996. The
agreement shall continue in force until terminated by either party with 30 days
prior written notice. The total amount available to borrow is based on various
percentages of eligible accounts receivable and inventory as defined in the
agreement. The maximum aggregate amount shall not exceed $7,000,000. Interest is
calculated on the net balance owed at the close of each day, computed on the
basis of actual days elapsed at the reference rate publicly announced by First
Bank National Association, plus an incremental interest rate amount of 3.25%
The Republic Acceptance Corporation financing agreement is secured and
collateralized by a general business security agreement including substantially
all assets of the Company, an unlimited personal guarantee by the company's
major shareholder, Gary R. Billings, and the assignment of a life insurance
policy on the life of Gary R. Billings. The principal amount outstanding on this
agreement as of April 30, 1998 was $5,855,633.
NOTE 6 -- NOTE PAYABLE -- SHAREHOLDER
Note payable -- shareholder at April 30, 1998 consists of a demand note in
the amount of $772,637 payable to the majority shareholder, Gary R. Billings,
bearing interest
F-103
<PAGE> 191
XYZ GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998 -- (CONTINUED)
at prime plus 1%. Interest is payable monthly. A subordination agreement exists
between Gary R. Billings and Republic Acceptance Corporation with respect to
this note.
NOTE 7 -- LEASE COMMITMENTS
The Company leases office and warehouse facilities at N16 W23390 Stoneridge
Drive, Waukesha, Wisconsin. The lease, which commenced July 1, 1997 and
terminates June 30, 2002, is a triple net lease with base rent as follows:
<TABLE>
<S> <C>
Commencement through June 30, 1999.......... $18,734 per month
July 1, 1999 through June 30, 2000.......... $19,296 per month
July 1, 2000 through June 30, 2001.......... $20,164 per month
July 1, 2001 through June 30, 2002.......... $21,072 per month
</TABLE>
Minimum annual future rental payments for the office and warehouse
facilities are as follows:
<TABLE>
<S> <C>
1998................................................. $149,872
1999................................................. 228,180
2000................................................. 236,760
2001................................................. 247,416
2002................................................. 126,432
--------
Total Minimum Payments Required............ $988,660
========
</TABLE>
Lease expense for the four months ended April 30, 1998 was $74,936. The
lease has subsequently been assumed by Futech as a condition of sale.
In addition to the base rent the Company is obligated to pay as additional
rent their share, as defined in the lease, of all taxes, utilities, repairs and
maintenance, and impounds for insurance premiums and property taxes.
NOTE 8 -- PENSION AND PROFIT SHARING PLAN
XYZ Group, Inc. maintains a 401(k) savings plan for all eligible employees.
The Company matches employee contributions at a rate of twenty five percent of
employee contributions up to a maximum Company contribution of one percent of
includable wages. The total amounts contributed by XYZ Group, Inc. for the four
months ended April 30, 1998 were $1,969.
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Company made purchases from Premier Publishing, Inc., a related party,
of $316,733 for the four months ended April 30, 1998. The Company's accounts
payable balance owed to Premier Publishing, Inc. as of April 30, 1998 was
$11,736. The Company received $15,332 of management fees from Premier
Publishing, Inc. for the four months ended April 30, 1998.
F-104
<PAGE> 192
GICK PUBLISHING, INC.
FINANCIAL STATEMENTS
<PAGE> 193
Independent Auditors' Report
Board of Directors
Gick Publishing, Inc.
We have audited the accompanying balance sheet of GICK PUBLISHING, INC. as of
September 30, 1997 and the related statement of operations, stockholders' equity
and cash flows for the eleven months then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about 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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GICK PUBLISHING, INC. as of
September 30, 1997, and the results of its operations and its cash flows for the
eleven months then ended in conformity with generally accepted accounting
principles.
/s/ SPARKS, NELSON & JACOBSON
--------------------------------------
Sparks, Nelson & Jacobson CPAs
Santa Ana, CA
November 5, 1997
F-105
<PAGE> 194
GICK PUBLISHING INC.
BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1997
----------
<S> <C>
ASSETS
Current assets
Cash...................................................... $ 1,530
Accounts receivable -- net of allowance for doubtful
accounts of $95,000.................................... 906,384
Inventory................................................. 676,264
Advances to stockholders.................................. 36,000
Prepaid expenses and other current assets................. 25,816
----------
Total current assets................................... 1,645,994
Property, equipment and improvements........................ 461,371
Other assets................................................ 77,878
----------
Total assets........................................... $2,185,243
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit............................................ $ 401,085
Accounts payable.......................................... 378,497
Accrued liabilities....................................... 190,618
Income taxes payable...................................... 33,425
Current portion of long-term debt......................... 104,260
----------
Total current liabilities.............................. 1,107,885
Long-term debt, net of current portion...................... 806,323
Commitments and contingencies............................... --
Stockholders' equity
Common stock, no par value, authorized 1,000,000 shares;
8,400 shares issued; 6,400 shares outstanding.......... 6,400
Retained earnings......................................... 264,635
----------
271,035
----------
Total liabilities and stockholders' equity............. $2,185,243
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE> 195
GICK PUBLISHING, INC.
STATEMENT OF OPERATIONS
FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Net sales................................................... $4,791,751
Cost of goods sold (including inventory write-downs of
$225,000)................................................. 3,365,981
Gross profit........................................... 1,425,770
Selling, general and administrative expenses................ 1,655,508
Operating income (loss)................................ (229,738)
Other income (expense)
Federal tax expense....................................... --
State tax expense......................................... --
Debt forgiveness.......................................... --
Interest expense -- income taxes.......................... --
Rental income............................................. 69,300
Miscellaneous income...................................... 7,528
Interest expense.......................................... (96,640)
Gain (loss) on sale of assets............................. --
----------
(19,812)
----------
Net earnings (loss).................................... $ (249,550)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE> 196
GICK PUBLISHING, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS
------ --------
<S> <C> <C>
Balance -- October 31, 1996............................... $6,400 $514,185
Net loss for eleven months................................ (249,550)
------ --------
Balance -- September 31, 1997............................. $6,400 $264,635
====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE> 197
GICK PUBLISHING, INC.
STATEMENT OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1997
---------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)....................................... $(249,550)
Adjustment to reconcile net earnings to net cash used in
operating activities:
Forgiveness of debt.................................... --
Depreciation and amortization.......................... 138,017
Loss on disposition of assets.......................... --
(Increase) decrease in accounts receivable............. (172,919)
(Increase) decrease in inventories..................... 345,987
(Increase) decrease in prepaid expenses................ (7,074)
(Increase) decrease in cash surrender value of life
insurance............................................. (7,014)
(Increase) decrease in accounts payable................ 51,496
(Increase) decrease in income tax payable.............. (57,000)
(Increase) decrease in accrued liabilities............. (71,865)
---------
Total adjustments.................................... 219,628
---------
Net cash used in operating activities..................... (29,922)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (17,774)
Proceeds from sale of equipment........................... --
Proceeds from sale of marketable securities............... --
(Payments) refunds of deposits............................ 13,013
---------
Net cash used in investing activities..................... (4,761)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt................................ (42,350)
Net increase (decrease) in line of credit................. 1,084
Payments of loan fees..................................... (6,000)
Stockholder distributions................................. --
Stockholder loans......................................... (36,000)
---------
Net cash used in financing activities..................... (83,266)
---------
Net increase in cash........................................ (117,949)
Cash at beginning of year................................... 119,479
---------
Cash at end of year......................................... $ 1,530
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-109
<PAGE> 198
GICK PUBLISHING, INC.
STATEMENT OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1997
--------
<S> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for:
Interest............................................... $175,000
Taxes.................................................. 57,000
Non-cash investing and financing activities:
Transfer of trade account payable to note payable......... $150,000
--------
Equipment purchase financed with installment plan......... $ 10,000
--------
IRS payment financed with installment plan................ $ 35,000
--------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-110
<PAGE> 199
GICK PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Gick Publishing, Inc. (the Company) is engaged in the distribution as a
"value added" reseller of various arts and crafts materials and greeting cards
to arts and crafts distribution outlets as well as retail outlets throughout the
nation. The Company also conducts business under the following trade or
fictitious names: The Gick Companies, Gick Crafts, Quack-Ups!, Magickal Ink, and
Future Crafts Today.
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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
September 30, 1997 inventories reflect a valuation allowance of $225,000
necessary to reduce certain inventories to their estimated net realizable
values. It is at least reasonably possible that this estimate will change in
1998; however, no estimate can currently be made of any additional loss that is
at least reasonably possible.
CASH AND CASH EQUIVALENTS
For the purposes of reporting cash flows, the Company considers all cash
and money market accounts which are not subject to withdrawal restrictions or
penalties to be cash or cash equivalents.
INVENTORY
Inventories are stated at the lower of weighted average cost or market. A
reserve for obsolescence is maintained for inventory items that are slow moving.
The reserve is based on the estimated net realizable value of the inventory in
excess of one year of product sales for each individual item.
F-111
<PAGE> 200
GICK PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997
DEPRECIATION
Property and equipment are carried at cost. Depreciation is computed using
the straight-line or declining balance method based on the estimated useful life
of the various items as follows:
<TABLE>
<CAPTION>
USEFUL LIFE
ASSET IN YEARS
- ----- -----------
<S> <C>
Automobiles................................................. 3 - 5
Furniture and equipment..................................... 5 - 7
Computer equipment.......................................... 3 - 7
Machinery and equipment..................................... 5 - 7
Building and improvements................................... 15 - 20
</TABLE>
When assets are retired, traded or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is included in the statement of operations except for
exchanges. Expenditures for maintenance and repairs are charged to operating
expenses as incurred; betterments are capitalized.
AMORTIZATION
Loan acquisition costs are being amortized using the straight-line method
over the term of the related loan. Organization and trademark costs are
amortized using the straight-line method over five years.
INCOME TAXES
Effective November 1, 1989 the Company elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code and comparable state
regulations. Under those provisions, the Company does not pay federal corporate
income taxes on its taxable income. Instead, the stockholders are liable for
individual federal and state income taxes on their respective share of the
Company's taxable income.
As an "S" corporation with a Section 444 fiscal year-end election in
effect, the Company is required to have on deposit with the IRS a payment under
Code Section 7519, which is presented as an other current asset.
F-112
<PAGE> 201
GICK PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997
NOTE 2 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are summarized by major
classifications as follows:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Building and improvements................................. $ 718,396
Automobile................................................ 18,639
Computer equipment........................................ 99,293
Furniture and fixtures.................................... 24,149
Machinery and equipment................................... 379,253
Office equipment.......................................... 53,472
Tools and dies............................................ 86,527
-----------
1,379,729
Less accumulated depreciation............................. (1,249,714)
-----------
Net book value............................................ 130,015
Land...................................................... 331,356
-----------
$ 461,371
-----------
</TABLE>
NOTE 3 -- LINE OF CREDIT
The Company has a line of credit with a financial company, secured by
accounts receivable, inventory, equipment and general intangibles and personally
guaranteed by the stockholders. Advances up to $600,000 may be taken, limited to
80% of qualified accounts receivable. Covenants in the agreement include
provisions for limitations on incurring additional debt as well as additions to
fixed assets. There also is an early termination fee of $60,000 if paid before
August 25, 1998. Interest is payable monthly (minimum of $2,500) at the
financial company's reference rate plus 5.25% (the reference rate at September
30, 1997 was 8.5%).
NOTE 4 -- LONG TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Note payable to a bank, payable in monthly installments of
$5,958 including interest adjusted monthly at a rate of
2.25% above the 11th District Cost of Funds Index Rate,
with a CAP of 14.17%, current rate of 7.103%, at September
30, 1997, due and payable on April 3, 2017, secured by a
trust deed on building occupied by the Company. .......... $ 740,135
</TABLE>
F-113
<PAGE> 202
GICK PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Notes payable to a bank, payable in monthly installments
aggregating $2,340 including interest at prime plus 2
(10.5% at September 30, 1997) and 10.25% due through
December 15, 1998, secured by equipment. ................. 26,120
Note payable to vendor, payable in monthly installments of
$6,922 including interest at 10% due September 1999. ..... 144,328
---------
910,583
Less current portion........................................ (104,260)
---------
Long-term debt.............................................. $ 806,323
=========
</TABLE>
Scheduled principal maturities of long-term debt as of September 30, 1997
are as follows:
<TABLE>
<S> <C>
Year ending October 31,
1997........................................................ $104,260
1998........................................................ 104,200
1999........................................................ 21,100
2000........................................................ 22,600
2001........................................................ 24,200
Thereafter.................................................. 634,223
--------
$910,583
========
</TABLE>
NOTE 5 -- COMMITMENTS
The Company leases approximately 30,200 square feet of warehouse space
under a five-year noncancelable lease expiring June, 1998. There is an option to
renew the lease for an additional 5 years at a rate equivalent to 95% of the
prevailing market rate as of the first day of the option period.
The following schedule shows the composition of total rental expense for
all operating leases except those with terms of a month or less that were not
renewed:
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED
SEPTEMBER 30, 1997
-------------------
<S> <C>
Minimum rentals...................................... $157,200
Less: Sublease rentals............................... (69,300)
--------
$ 87,900
--------
</TABLE>
During the period ended September 30, 1997 the Company entered into royalty
agreements, for certain designs, with four individual commercial artists. The
agreements call for payments of 5% and 8% of gross receipts for each of the
individual designs sold. The royalty expense for the period ended September 30,
1997 was $22,000.
F-114
<PAGE> 203
GICK PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997
NOTE 6 -- EMPLOYEE BENEFIT PLANS
The Company amended their profit sharing plan as of May 1, 1995 and adopted
a 401(k) retirement plan. The plan covers all employees who are at least 21
years of age with one or more years of service. Under the plan the Company may,
at its discretion, make matching contributions of a percentage of each
participant's deferred compensation or lump sum non-elective contribution. The
Company has contributed or accrued contributions to its 401(k) plan $19,500 for
the eleven months ended September 30, 1997.
NOTE 7 -- MAJOR CUSTOMERS
The Company sells its products nationwide. The Company performs ongoing
credit evaluations of its customers' financial conditions and, generally,
requires no collateral from its customers. The Company's three largest customers
accounts for a material portion of the Company's sales. The three largest
customer sales amounts for the eleven months ended September 30, 1997 were:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 %
---------- ----
<S> <C> <C>
Customer 1.......................................... $ 850,700 17.8
Customer 2.......................................... 550,700 11.5
Customer 3.......................................... 342,000 7.1
---------- ----
$1,743,400 36.4
</TABLE>
Customer 2 has indicated that they will not be continuing to purchase any
product after the Christmas season, resulting in the loss of total sales to this
customer.
NOTE 8 -- CONTINGENCIES
The shareholders of the Company have entered into an agreement to sell
substantially all of the assets and liabilities of the Company. This factor
creates an uncertainty about the Company's ability to continue its current
operations. The financial statements do not include any adjustments that might
be necessary if the Company is unable to continue its current operations.
F-115
<PAGE> 204
APPENDIX A
JANEX INTERNATIONAL, INC. FUNDEX GAMES, LTD.
GLOBAL MERGER AGREEMENT
1999
FUTECH INTERACTIVE PRODUCTS, INC.
DAMERT COMPANY TRUDY CORPORATION
<PAGE> 205
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION
-------
<S> <C>
ARTICLE I
THE MERGERS
The Mergers................................................. 1.1
The Merger of Futech into New Futech...................... 1.1.1
The Merger Into New Futech................................ 1.1.2
The Merger Into New Sub................................... 1.1.3
Agreement is Conditional on Merger of All Merging
Companies.............................................. 1.1.4
Effective Time.............................................. 1.2
Effect of the Mergers....................................... 1.3
Certificate of Incorporation; Bylaws........................ 1.4
Directors and Officers...................................... 1.5
Consideration for the Merger, Conversion of Securities...... 1.6
Shares of Dissenting Holders................................ 1.7
Exchange of Securities and Payment of Merger
Consideration............................................. 1.8
Exchange Agent............................................ 1.8.1
Exchange Procedures....................................... 1.8.2
No Further Ownership Rights in Stock of Merging
Companies.............................................. 1.8.3
Termination of Exchange Fund.............................. 1.8.4
Delivery to a Public Official............................. 1.8.5
Proxy Statements; Registration Statement.................... 1.9
Meetings of Stockholders.................................... 1.10
Vote Required............................................... 1.11
Appropriate Action; Consents; Filings....................... 1.12
Shareholders' Agreement to Vote............................. 1.13
ARTICLE II
ADDITIONAL AGREEMENTS
Notification of Certain Matters............................. 2.1
Public Announcements........................................ 2.2
Access to Customer Files and Other Records.................. 2.3
Due Diligence Investigation; Confidentiality................ 2.4
Employment Agreements....................................... 2.5
Interim Events.............................................. 2.6
401(K) Plan................................................. 2.7
Employment Agreements....................................... 2.8
</TABLE>
i
<PAGE> 206
<TABLE>
<CAPTION>
SECTION
-------
<S> <C>
Indemnification............................................. 2.9
Revisions of Loans.......................................... 2.10
Expenses and Costs of Mergers............................... 2.11
Restrictive Covenants....................................... 2.12
Other Agreements for Particular Parties..................... 2.13
Other Discussions........................................... 2.14
Best Efforts to Register Stock.............................. 2.15
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION
OF
EACH MERGING COMPANY
AND
ITS SHAREHOLDERS
Due Incorporation........................................... 3.1
Capitalization.............................................. 3.2
Subsidiaries................................................ 3.3
Financial Information....................................... 3.4
Taxes....................................................... 3.5
Material Changes............................................ 3.6
Title to Assets; Liens...................................... 3.7
Litigation.................................................. 3.8
Compliance with Laws........................................ 3.9
Insurance................................................... 3.10
Licenses.................................................... 3.11
Hazardous Materials......................................... 3.12
Judgments Against the Merging Company and/or Business....... 3.13
Complete Sale............................................... 3.14
Assets in Good Condition.................................... 3.15
Disclosure Materials........................................ 3.16
Defaults.................................................... 3.17
Material Contracts.......................................... 3.18
Outstanding Liabilities..................................... 3.19
Inventory................................................... 3.20
Receivables................................................. 3.21
Employees................................................... 3.22
No Conflicts................................................ 3.23
Violations of Law........................................... 3.24
</TABLE>
ii
<PAGE> 207
<TABLE>
<CAPTION>
SECTION
-------
<S> <C>
Condition and Sufficiency of Assets......................... 3.25
Bank Accounts............................................... 3.26
Environmental Matters....................................... 3.27
Intellectual Property....................................... 3.28
Customers and Suppliers..................................... 3.29
Changes to the Merging Company's Documents.................. 3.30
Stockholders Agreements and Other Agreements................ 3.31
Certain Payments............................................ 3.32
Filings Complete............................................ 3.33
Products.................................................... 3.34
Patents..................................................... 3.35
Indemnification; Survival................................... 3.36
ARTICLE IV
CONDITIONS OF MERGER
Conditions to Obligation of Each Party to Effect the
Merger.................................................... 4.1
Stockholder Approval...................................... 4.1.1
No Order.................................................. 4.1.2
No Challenge.............................................. 4.1.3
Representations; Warranties and Covenants................. 4.1.4
Consents Obtained......................................... 4.1.5
No Material Adverse Change................................ 4.1.6
Opinions of Counsel....................................... 4.1.7
Assignments............................................... 4.1.8
Maintenance of Assets..................................... 4.1.9
Ordinary Course of Business............................... 4.1.10
Special Conditions for Particular Parties................... 4.2
ARTICLE V
TERMINATION, AMENDMENT AND WAIVER
Termination................................................. 5.1
Effect of Termination....................................... 5.2
Amendment................................................... 5.3
Waiver...................................................... 5.4
</TABLE>
iii
<PAGE> 208
<TABLE>
<CAPTION>
SECTION
-------
<S> <C>
ARTICLE VI
GENERAL PROVISIONS
Tax Treatment............................................... 6.1
Further Assurances.......................................... 6.2
Severability................................................ 6.3
Entire Agreement............................................ 6.4
Assignment.................................................. 6.5
Parties in Interest......................................... 6.6
Successors and Assigns...................................... 6.7
Governing Law............................................... 6.8
Modification................................................ 6.9
Attorney's Fees............................................. 6.10
Counterparts................................................ 6.11
Notices..................................................... 6.12
Paragraph Titles and Headings............................... 6.13
Brokerage, Finder's or Financial Advisor's Commissions...... 6.14
Miscellaneous............................................... 6.15
LIST OF EXHIBITS
List of Directors and Officers of New Futech and New Sub.... 1.5
Merger Consideration and Conversion of Stock Options........ 1.6
Form of Promissory Notes Constituting Merger
Consideration.......................................... 1.6-A
Fundex Stock Options and Conversion to Shares of New
Futech................................................. 1.6-B
Votes Required for Merger Approval.......................... 1.11
Terms of Employment Agreements.............................. 2.8.1
Job Description for William Burnham....................... 2.8.1-1
Form for Employment Agreements.............................. 2.8.2
Provisions Regarding Shareholder Loans and Guarantees....... 2.10
Other Agreements for Particular Parties..................... 2.13
Disclosure Schedules........................................ 3
Disclosure Schedule of DaMert Company..................... 3-A
DaMert Disclosure Regarding Employees.................. 3A-3.22
DaMert Disclosure Regarding Bank Accounts.............. 3A-3.26
DaMert Disclosure Regarding Customers and Suppliers.... 3A-3.29
DaMert Disclosure Regarding Patents.................... 3A-3.35
</TABLE>
iv
<PAGE> 209
<TABLE>
<CAPTION>
SECTION
-------
<S> <C>
Disclosure Schedule of Fundex Games, Ltd.................. 3-B
Fundex Disclosure Regarding Capitalization............. 3B-3.2
Fundex Disclosure Regarding Outstanding Liabilities.... 3B-3.19
Fundex Disclosure Regarding Employees.................. 3B-3.22
Fundex Disclosure Regarding No Conflicts............... 3B-3.23
Fundex Disclosure Regarding Patents.................... 3B-3.35
Disclosure Schedule of Futech Interactive Products,
Inc.................................................... 3-C
Futech Disclosure Regarding Stock Options, Warrants,
etc................................................... 3C-3.2
Futech Disclosure Regarding Litigation................. 3C-3.8
Futech Disclosure Regarding Outstanding Liabilities.... 3C-3.19
Futech Disclosure Regarding Changes to Futech
Documents............................................. 3C-3.30
Futech Disclosure Regarding Patents.................... 3C-3.35
Disclosure Schedule of Janex International, Inc........... 3-D
Janex Disclosure Regarding Outstanding Liabilities..... 3D-3.19
Janex Disclosure Regarding Employees................... 3D-3.22
Disclosure Schedule of Trudy Corporation.................. 3-E
Allowed Excess Liabilities.................................. 3.36
Form of Legal Opinion....................................... 4.1.7
Conditions for Particular Merging Companies................. 4.2
Surviving Provisions of Letters of Intent................... 6.5
Mailing List for Notices.................................... 6.13
Brokerage Fees Payable...................................... 6.14
</TABLE>
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MERGER AGREEMENT
THIS MERGER AGREEMENT, dated as of June 4, 1999 (the "Agreement"), is among
Futech Interactive Products, Inc., an Arizona corporation ("FUTECH"), Trudy
Corporation, a Delaware corporation ("TRUDY"), Fundex Games, Ltd., a Nevada
corporation ("FUNDEX"), DaMert Company, a California corporation ("DAMERT"),
Janex International, Inc., a Colorado corporation ("JANEX"), Futech Interactive
Products (Delaware) Inc., a newly formed Delaware corporation ("FUTECH
DELAWARE"), Futech Toys & Games, Inc., a newly formed Nevada corporation ("NEW
SUB") (collectively, the "MERGING COMPANIES"), and those shareholders of Futech,
Trudy, Fundex, DaMert and Janex identified on the signature pages of this
Agreement (the "SHAREHOLDERS"). This Agreement terminates and supersedes the
Agreement and Plan of Merger, dated February 26, 1999, between Futech and Trudy.
This Agreement does not terminate or supersede the letter agreement, dated March
3, 1999, on "Soundprints" letterhead, relating to, among other things, Futech's
obligation to provide Trudy with certain working capital.
Upon the terms and subject to the conditions of this Agreement (a) Futech
will merge into Futech Delaware, (b) then Trudy, DaMert and Janex will each
merge simultaneously with and into Futech Delaware, which will be the surviving
corporation, and (c) then Fundex will merge with and into New Sub, which will be
the surviving corporation and a wholly-owned subsidiary of Futech Delaware. The
parties intend that said Mergers (the "MERGERS") will qualify as reorganizations
under Section 368 of the Internal Revenue Code of 1986 as amended (the "CODE").
By executing this Agreement, each of the Merging Companies and their
respective Shareholders represent and warrant to the other Merging Companies and
Shareholders that:
(i) the board of directors of the Merging Company has determined that the
Mergers are fair to the Merging Company and its stockholders,
including any stockholders that are not parties to this Agreement, and
(ii) the board of directors of the Merging Company has approved and adopted
this Agreement and the transactions contemplated by it, and recommends
approval and adoption of this Agreement by its stockholders.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements in this Agreement, and intending to be legally bound by this
Agreement, the Merging Companies and Shareholders agree as follows:
ARTICLE I
The Mergers
1.1 THE MERGERS.
1.1.1 The Merger of Futech Into New Futech. Upon the terms and
subject to the conditions set forth in this Agreement, and in accordance
with applicable law, immediately prior to the Effective Time (as defined in
Section 1.2), Futech will merge with and into Futech Delaware. As a result
of this merger, the separate corporate existence of Futech will cease and
Futech Delaware will continue as the surviving corporation of the Merger.
1.1.2 The Merger into New Futech. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with applicable
law, at the
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Effective Time (as defined in Section 1.2) each of Trudy, DaMert and Janex
will merge with and into Futech Delaware. As a result of this Merger, the
separate corporate existence of each of Trudy, DaMert and Janex will cease
and Futech Delaware will continue as the surviving corporation ("NEW
FUTECH") of the Merger.
1.1.2 The Merger into New Sub. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with applicable
law, at the Effective Time Fundex will merge with and into New Sub. As a
result of this Merger, the separate corporate existence of Fundex will
cease and New Sub will continue as the surviving corporation of this
Merger.
1.1.3 Agreement is Conditional on Merger of All Merging
Companies. The obligations of each Merging Company under this Agreement
are conditional upon all of the Merging Companies being included in the
Mergers.
1.2 EFFECTIVE TIME. As promptly as practicable after the satisfaction or,
if permissible, waiver of the conditions set forth in Article IV below, the
Merging Companies and Shareholders will cause the Mergers to be consummated by
filing articles of merger or other appropriate documents with the applicable
government offices or agencies in such form as required by, and executed in
accordance with the relevant provisions of, applicable law (11:59 p.m. on the
date of effectiveness of the last such filing being the "EFFECTIVE TIME").
Immediately prior to the filings, the closing of the Mergers (the "CLOSING")
will be held at the offices of Futech, at 2999 North 44th Street, Suite 225,
Phoenix, Arizona 85018-7247.
1.3 EFFECT OF THE MERGERS. At the Effective Time, the effect of each
Merger will be as provided in the provisions of applicable law. Without limiting
the generality of the foregoing, and subject to it, at the Effective Time,
except as otherwise provided in this Agreement:
(i) all the property, rights, privileges, powers and franchises of
Trudy, Futech, Futech Delaware, DaMert and Janex will vest in New
Futech, and all debts, liabilities and duties of Trudy, Futech,
Futech Delaware, DaMert and Janex will become the debts,
liabilities and duties of New Futech; and
(ii) all the property rights, privileges, powers and franchises of
Fundex will vest in New Sub, and all debts, liabilities and duties
of Fundex will become the debts, liabilities and duties of New
Sub.
1.4 CERTIFICATE OF INCORPORATION; BYLAWS. At the Effective Time, the
Certificate of Incorporation and the Bylaws of Futech Delaware, as in effect
immediately prior to the Effective Time, will be the Certificate of
Incorporation and the Bylaws of New Futech, except that the Certificate of
Incorporation and Bylaws will be revised to change the name of New Futech to
"Futech Interactive Products, Inc." The Articles of Incorporation and Bylaws of
New Sub will not be affected by the Mergers.
1.5 DIRECTORS AND OFFICERS. At the Effective Time, the directors and
officers of New Futech and of New Sub will be the persons listed on EXHIBIT 1.5,
each to hold office in accordance with the charter documents of New Futech and
New Sub, respectively, until their successors are duly elected or appointed and
qualified.
1.6 CONSIDERATION FOR THE MERGER, CONVERSION OF SECURITIES. At the
Effective Time, by virtue of the Mergers and without any action on the part of
the Merging Companies, the Shareholders or the holders of any of the following
securities, except as provided in Section 1.7 below, each of the issued and
outstanding shares of capital stock of each of the
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Merging Companies (other than shares owned by any of the Merging Companies or by
New Futech or by New Sub, which shares will be canceled, retired and will cease
to exist without the delivery of any consideration) will be converted into the
right to receive that amount of cash, promissory notes of New Futech, or shares
of common stock of New Futech specified in or determined in accordance with
EXHIBIT 1.6 (collectively, the "MERGER CONSIDERATION"). Approximately 70% of the
stock of Janex is owned by Futech, and the shares of New Futech that would
otherwise be issued to shareholders of Janex will be issued directly to
shareholders of Futech as though they owned the Janex stock directly. The
options to acquire capital stock of any of the Merging Companies issued and
outstanding at the Effective Time will be converted into options to acquire
common stock of New Futech to and only to the extent and as specified in or
determined in accordance with EXHIBIT 1.6.
As of the Effective Time, and except as otherwise provided in Section 1.7
below, the outstanding securities of the Merging Companies will no longer be
outstanding and will automatically be canceled, retired and will cease to exist,
and each holder of a certificate representing any shares of any Merging Company
will cease to have any rights with respect to those shares, except the right to
receive the consideration issuable for those shares upon the surrender of such
certificate in accordance with Section 1.8, without interest.
The Merging Companies and the Shareholders have agreed upon values of the
stock of New Futech for purposes of determining the number of shares to be
issued under this Agreement as consideration for the Mergers, and also as
consideration under the Employment Agreements described in this Agreement. No
representation or warranty has been made by Futech, Futech Delaware, or New
Futech, or any other person or entity, as to the value of the New Futech stock
to be issued pursuant to this Agreement, and the parties to acquire said stock
take full risk and responsibility as to said value, other than as expressly
provided for in this Agreement.
Wherever New Futech stock is to be issued, New Futech may in its discretion
pay cash in lieu of issuing fractional shares, based upon a value of $7.50 per
share. Also, New Futech may in its discretion pay cash in lieu of all or a
portion of any amounts due under any Promissory Notes described on EXHIBIT 1.6.
All New Futech stock issued pursuant to this Agreement, including any stock
issued pursuant to the Employment Agreements referred to herein, shall be
registered with the Securities Exchange Commission, subject to all restrictions
required by law, if any, to be placed on said stock and subject to all
restrictions placed upon said stock by the underwriter(s) of the stock. All such
stock shall be eligible to participate, on the same terms and in the same
proportions as granted to other shareholders of New Futech, in any "piggy-back"
or other registration rights which may be made available, between the Closing
and one year thereafter, to any shareholder of New Futech.
1.7 SHARES OF DISSENTING HOLDERS. Any issued and outstanding shares of
any Merging Company held by persons who object to the Mergers and comply with
all provisions of applicable law concerning the right of such holders to dissent
from a Merger and demand appraisal of their shares ("DISSENTING HOLDERS") will
be deemed to be converted, as of the Effective Time, into the right to receive
the amount of cash, promissory notes and common stock of New Futech calculated
in accordance with EXHIBIT 1.6. The consideration to be received by such
Dissenting Holders will be held back and not issued by New Futech until such
time, and in any event not prior to the Effective Time, that such Dissenting
Holder has either withdrawn his demand for appraisal or lost his right of
appraisal, pursuant to the applicable law. After the Dissenting Holder has
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withdrawn his demand for appraisal, or lost his right of appraisal, and upon
surrender, in the manner provided by Section 1.8.2, of the certificate or
certificates that formerly evidenced the shares of stock of a Merging Company
owned by the Dissenting Holder, such Dissenting Holder will be entitled to
receive from New Futech the consideration calculated in accordance with EXHIBIT
1.6, without interest.
If any Dissenting Holders are entitled to receive payment of the fair value
of such shares held by them in accordance with applicable law, then New Futech
will make such payment in full satisfaction of the Dissenting Holders' rights to
receive the consideration calculated in accordance with EXHIBIT 1.6 and New
Futech will have no obligation to issue the consideration calculated in
accordance with EXHIBIT 1.6 that was to be received by any Dissenting Holder who
received payment of the fair value of such shares held by such Dissenting
Holders.
Prior to the Effective Time, each Merging Company will give to New Futech
and each other Merging Company notice of any demands by Dissenting Holders.
Futech, prior to the Effective Time, and New Futech after the Effective Time,
will have the right to participate in all negotiations and proceedings with
respect to any such demands. A Merging Company will not, except with the prior
written consent of Futech, prior to the Effective Time, and New Futech after the
Effective Time, voluntarily make any payment with respect to, or settle or offer
to settle, any such demand for payment.
Futech shall be entitled to terminate this Agreement in its entirety, at
the election of Futech's Board of Directors, if dissenter's rights are exercised
by shareholders who would receive five percent (5%) or more of total
consideration referred to on EXHIBIT 1.6.
1.8 EXCHANGE OF SECURITIES AND PAYMENT OF MERGER CONSIDERATION.
1.8.1 Exchange Agent. As soon as necessary and practicable to permit
the Exchange Agent to perform its obligations under this Agreement, but in
no event later than the Closing Date, Futech, Futech Delaware and/or New
Futech will deposit with American Securities Transfer & Trust, Inc. or such
other bank or trust company selected by Futech (the "EXCHANGE AGENT"), for
the benefit of the Shareholders of the Merging Companies, for exchange in
accordance with this Agreement, cash, promissory notes and common stock of
New Futech, in amounts equal to the Merger Consideration calculated in
accordance with EXHIBIT 1.6.
1.8.2 Exchange Procedures. As soon as reasonably practicable after
the Closing Date, the Exchange Agent will mail to each holder of record on
the Effective Date a certificate or certificates which immediately prior to
the Closing Date represented outstanding shares of any of the Merging
Companies (the "OLD CERTIFICATES") whose shares were converted into the
right to receive a share of the Merger Consideration pursuant to Section
1.6:
(i) a letter of transmittal to be executed by the holder (which
will specify that delivery of the Old Certificates will be
effected, and risk of loss and title to the Old Certificates
will pass, only upon delivery of the Old Certificates to the
Exchange Agent, and which will be in such form and have such
other provisions as New Futech may reasonably specify); and
(ii) instructions for surrender of the Old Certificates in exchange
for the applicable share of the Merger Consideration.
Upon surrender to the Exchange Agent of an Old Certificate for
cancellation, together with such letter of transmittal, duly executed by
the holder, the holder of
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such Old Certificate will be entitled to receive the portion of the Merger
Consideration which such holder has the right to receive pursuant to
Section 1.6, and the Old Certificate so surrendered will be canceled. If a
transfer of ownership of capital stock has not been registered in the
transfer records of the Merging Company, then the portion of the Merger
Consideration payable in respect of that capital stock may be issued to a
transferee if the Old Certificate representing that capital stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid.
In the case of any lost, mislaid, stolen or destroyed Old Certificate,
the holder may be required, as a condition precedent to the delivery to
such holder of the portion of the Merger Consideration applicable thereto,
to deliver to New Futech an affidavit and personal indemnity (or a bond in
a reasonably sufficient amount) with reference to the circumstances of such
loss or destruction as New Futech may reasonably request.
Until surrendered as contemplated by this Section 1.8, each Old
Certificate will be deemed at any time after the Closing Date to represent
only the right to receive upon such surrender the applicable portion of the
Merger Consideration as contemplated by this Section 1.8.
1.8.3 No Further Ownership Rights in Stock of Merging Companies. The
payments and deliveries made under this Agreement upon surrender for
exchange of equity securities of the Merging Companies in accordance with
the terms of this Agreement will be deemed to have been issued in full
satisfaction of all rights pertaining to such equity securities of the
Merging Companies after the Closing Date. If, after the Closing Date, Old
Certificates are presented to the Surviving Corporation or its transfer
agent for any reason, such Old Certificates will be canceled and exchanged
as provided in this Agreement.
1.8.4 Termination of Exchange Fund. Any portion of the Merger
Consideration which remains undistributed to holders of Old Certificates at
the end of six months after the Closing Date will be delivered to New
Futech upon demand by New Futech, and any holders of Old Certificates who
have not complied with this Section 1.8 will then look only to New Futech
for payment of their claim for the corresponding portion of the Merger
Consideration.
1.8.5 Delivery to a Public Official. None of the parties to this
Agreement will be liable to any holder of equity securities of the Merging
Companies for any portion of the Merger Consideration otherwise due under
this Agreement that is delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.9 PROXY STATEMENTS; REGISTRATION STATEMENT. As promptly as practicable
after the execution of this Agreement, the Merging Companies will prepare and
file with the SEC preliminary proxy materials which will constitute the Proxy
Statements of those Merging Companies that have securities registered under the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") and the
Registration Statement with respect to the common stock of New Futech to be
issued in connection with the Mergers. Each Merging Company which does not have
securities registered under the Exchange Act will prepare appropriate notices,
disclosure materials and proxies for special stockholder meetings of its
shareholders.
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As promptly as practicable after comments, if any, are received from the
SEC on the materials filed with the SEC and the furnishing by the Merging
Companies of all required information, the Merging Companies will file with the
SEC a combined Proxy Statement or Proxy Statements and Registration Statement on
Form S-4 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), and Form 8-A promulgated under the Exchange Act (or on such
other form as will be appropriate), relating to the approval, as and if
required, of the Merger by the stockholders of the Merging Companies, and will
use all reasonable efforts to cause the Registration Statements to become
effective as soon as practicable.
Subject to the applicable fiduciary duties of directors of the Merging
Companies, as determined by such directors after consultation with independent
legal counsel, the Proxy Statements will include the recommendation of the Board
of Directors of each of the Merging Companies in favor of the Merger.
1.10 MEETINGS OF STOCKHOLDERS. Promptly after the S-4 becomes effective,
but subject to Section 1.9 above, each of the Merging Companies will take all
action necessary in accordance with applicable law and its Articles or
Certificate of Incorporation and Bylaws to convene a meeting of their respective
stockholders to consider the Mergers. Each of the Merging Companies will consult
with each other and will use all reasonable efforts to hold the stockholders'
meetings on the same day. Subject to the applicable fiduciary duties of
directors, as determined by such directors after consultation with independent
legal counsel, each of the Merging Companies will use its best efforts to
solicit from its stockholders proxies in favor of the Mergers and will take all
other action necessary or advisable to secure the vote or consent of
stockholders required by applicable law to approve the Mergers.
1.11 VOTE REQUIRED. Each of the Merging Companies and its Shareholders
represents and warrants that Exhibit 1.11 accurately describes the only vote or
votes of the holders of any class or series of stock of that Merging Company
that is necessary to approve the Mergers.
1.12 APPROPRIATE ACTION; CONSENTS; FILINGS. Each Merging Company and its
Shareholders will use all reasonable efforts to:
(i) take, or cause to be taken, all appropriate action, and do, or cause
to be done, all things necessary, proper or advisable under
applicable law to consummate and make effective the transactions
contemplated by this Agreement;
(ii) obtain all consents, licenses, permits, waivers, approvals,
authorizations or orders required under law (including, without
limitation, all foreign and domestic federal, state and local
governmental and regulatory rulings and approvals and from parties
to contracts) required in connection with the authorization,
execution and delivery of this Agreement and the consummation by
them of the transactions contemplated by this Agreement, including,
without limitation, the Mergers; and
(iii) make all necessary filings, and thereafter make any other required
submissions, with respect to this Agreement and the Mergers
required under (A) the Securities Act and the Exchange Act and the
rules and regulations thereunder, and any other applicable federal
or state securities laws, (B) the Hart-Scott-Rodino Act (if
applicable), and (C) any other applicable law.
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The Merging Companies and the Shareholders will cooperate with each other
in connection with the making of all such filings, including providing copies of
all such documents upon request to the non-filing parties and their advisors
prior to filing and, if requested, to accept all reasonable additions, deletions
or changes suggested in connection with such filings. Each Merging Company and
its Shareholders will furnish all information required for any application or
other filing to be made pursuant to the rules and regulations of any applicable
law (including all information required to be included in the Proxy Statements
and the Registration Statement) in connection with the transactions contemplated
by this Agreement. If at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, then the
proper officers and directors of each party to this Agreement will use all
reasonable efforts to take all such necessary action.
1.13 SHAREHOLDERS' AGREEMENT TO VOTE. Each of the Shareholders hereby
agrees to vote said Shareholder's shares of stock in the Merging Companies in
favor of the Mergers as set out in this Agreement.
ARTICLE II
ADDITIONAL AGREEMENTS
2.1 NOTIFICATION OF CERTAIN MATTERS. Each Merging Company and its
Shareholders will give prompt notice to the other parties to this Agreement, of:
(i) the occurrence, or non-occurrence, of any event the occurrence,
or non-occurrence, of which would be likely to cause any
representation or warranty contained in this Agreement to be
untrue or inaccurate in any material respect; and
(ii) the failure of the Merging Company to comply with or satisfy any
material covenant, condition or agreement to be complied with or
satisfied by it under this Agreement.
2.2 PUBLIC ANNOUNCEMENTS. Each Merging Company will consult with the
other Merging Companies before issuing any press release or otherwise making any
public statements with respect to the Mergers, except as may be required by law.
2.3 ACCESS TO CUSTOMER FILES AND OTHER RECORDS. For a period of seven
years following the Closing, where there is a legitimate purpose not injurious
to New Futech, or if there is an audit by any taxing authority, other
governmental inquiry, or litigation or prospective litigation to which any
Shareholder is or may become a party, the affected Shareholders will be granted
access, at reasonable times and after reasonable notice, to all customer files
and other records transferred to New Futech pursuant to this Agreement.
2.4 DUE DILIGENCE INVESTIGATION. Each Merging Company will have the
period of time up to and through the date of this Agreement (the "DUE DILIGENCE
PERIOD") in which to conduct any due diligence investigations of the other
Merging Companies, including UCC-1 searches, which it may deem necessary or
appropriate to ascertain the financial viability and value of the other Merging
Companies. Throughout the Due Diligence Period, each Merging Company, and its
agents, will have the right to inspect:
(i) all books, records and computer systems maintained by the other
Merging Companies, in order to authenticate and audit all
financial information provided to it;
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(ii) all equipment and machinery used in the operations of the other
Merging Companies to verify that it is in an acceptable state of
repair;
(iii) all material agreements to which the other Merging Companies are
parties; and
(iv) all facilities and physical operations of the other Merging
Companies, including facilities warehousing inventory.
Each Merging Company will be given access to the other parties' federal and
state income tax returns, sales tax returns, financial statements (internal and
those issued to third parties), personal property tax returns, and all other
governmental filings, for the three previous years for the purpose of conducting
due diligence investigations.
Each Merging Company and its respective representatives will further have
the authority to communicate with the creditors, debtors, suppliers, agents and
employees of the other Merging Companies. Each Merging Company agrees to aid the
others in the investigations and evaluations of the operations and financial
condition of the other Merging Companies and their assets, and to provide
whatever information and documents any Merging Company reasonably deems
necessary or appropriate to the making of an informed decision regarding the
Mergers, provided such information or documents are available or can be obtained
without unreasonable efforts or expense.
2.5 CONFIDENTIALITY. Between the date of this Agreement and the Closing,
the parties to this Agreement will maintain in confidence, and will cause their
directors, officers, employees, agents, and advisors to maintain in confidence,
and not use to the detriment of the other parties to this Agreement, any
written, oral, or other information obtained in confidence from the other
parties in connection with this Agreement or the transactions contemplated
hereby, unless: (i) such information is already known to such other party or to
others not bound by a duty of confidentiality, or such information becomes
publicly available through no fault of such party, (ii) the use of such
information is necessary or appropriate in making any filing or obtaining any
consent or approval required for the consummation of the transactions
contemplated by this Agreement, or (iii) the furnishing or use of such
information is required by or necessary or appropriate in connection with legal
proceedings.
If the Mergers are not consummated, then each party hereto will return or
destroy as much of such written information as the other parties hereto may
reasonable request.
2.6 INTERIM EVENTS. Each Merging Company agrees that it will take no
action prior to the Closing, other than in the ordinary course of its business,
which would or might have a material adverse effect upon its financial
condition, and no benefits will be paid or incurred to shareholders, officers,
or directors between the date hereof and the Closing other than as is consistent
with past activities and practices or is disclosed on the Merging Company's
Disclosure Schedule (see EXHIBIT 3). Each Merging Company will use its best
efforts to preserve for New Futech the present relationships of the Merging
Company with its employees, customers and others having business relations with
it. Each Merging Company will not allow its trade payables to go unpaid, except
in the ordinary course of its business.
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Prior to the Closing, and except as otherwise consented to or approved by
all of the Merging Companies in writing, which consent will not be unreasonably
withheld, no Merging Company will:
(i) change its Articles or Certificate of Incorporation or Bylaws;
(ii) change the number of shares of stock issued and outstanding
(other than to cause its equity securities, including options and
equity participation interests, to conform to the capitalization
described in the Merging Company's Disclosure Schedule (see
Section 3.2 below);
(iii) merge or consolidate with or into any other corporation or other
entity;
(iv) declare or pay any dividend or repurchase or otherwise acquire
any shares of stock; or
(v) except in the ordinary course of business and consistent with
past practice, increase the compensation payable to or to become
payable to any shareholder, director, officer, employee or agent,
or to pay any bonus, severance payment or other compensation to
any shareholder, director, officer, employee or agent, or enter
into any agreement of any type which is not terminable by the
Merging Company on no more than 30 days notice.
2.7 401(K) PLAN. New Futech will take all actions necessary immediately
after the Closing of the Merger either: (i) to roll over each Merging Company's
401(k) Plan or similar employee benefit plans, if any, into its 401(k) Plan; or
(ii) to continue the Merging Company's 401(k) Plan as a separate and distinct
plan with no amendments or alterations adverse to the interests of the employees
covered by such Plan.
2.8 EMPLOYMENT AGREEMENTS. At the Closing, and subject to the
consummation of the Mergers, New Futech (and New Sub, as the case may be) will
execute and deliver Employment Agreements with the persons and on the terms
described on EXHIBIT 2.8.1. The Employment Agreements will be in the form of
EXHIBIT 2.8.2, except as modified as called for on EXHIBIT 2.8.1.
2.9 INDEMNIFICATION. New Futech will indemnify and hold harmless each
Merging Company, and its directors, officers and employees from and against any
liability, obligation, loss, cost and expense, including attorneys' fees,
reasonably incurred by any of them in connection with any claim, arbitration,
mediation or litigation made or commenced against any of them by a shareholder
of that Merging Company in respect of the Mergers, except for claims of breach
of this Agreement by the indemnified party.
2.10 REVISION OF LOANS. The amount and terms of certain loans between New
Futech as successor to the Merging Companies and certain Shareholders will be
revised as stated in EXHIBIT 2.10. The revised loans will be evidenced by
promissory notes and related loan agreements reflecting the revised terms.
New Futech will obtain releases of the personal guaranties of certain
Shareholders, and assume debts owing by certain of the Merging Companies to
certain of the Shareholders, as specified in EXHIBIT 2.10.
2.11 EXPENSES AND COSTS OF MERGERS. Futech and New Futech will pay and be
responsible for all costs and expenses (including, without limitation, legal,
accounting, auditing, stock transfer agent, cash and securities disbursing
agent, SEC fees and due diligence) of all of the Merging Companies regarding the
Mergers. Such obligation will be limited to costs and expenses approved in
writing by Futech or New Futech.
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2.12 RESTRICTIVE COVENANTS.
2.12.1 The Shareholders shall not, except as representatives of and
as directed by New Futech, without the prior written consent of New Futech,
which consent may be withheld for any or no reason, for a period of two (2)
years following the Closing, directly or indirectly, own, manage, operate,
control, be employed by, participate in, render services to, make loans to,
or be connected in any manner with the ownership, management, operation, or
control of any business located anywhere in the world, in any business
competitive with the business of New Futech (which shall be deemed to
include all business operations designing, developing, manufacturing,
publishing, marketing and/or distributing books, greeting cards, games
and/or toys, or parts or components thereof); provided, however, that these
restrictions when applied to Carl E. Voigt, IV and Carl E. Voigt, III shall
be limited to games and/or toys business operations; and provided further
however that these restrictions when applied to Fred or Gail DaMert shall
be limited to the games and toys business being conducted by DaMert as of
the date of this Agreement.
In the event of any actual or threatened breach of the provisions of
this Section, New Futech and/or New Sub shall be entitled to seek an
injunction restraining the actual or threatened breach, and/or any other
available remedies for such breach or threatened breach, including pursuing
a recovery for damages.
2.12.2 The Shareholders shall not at any time, without the prior
written consent of New Futech, which consent may be withheld for any or no
reason, disclose, in any fashion other than as required in the day to day
affairs of New Futech and/or New Sub, to any person or entity: (i) the
names of customers of New Futech and/or New Sub or the business, or the
names of other persons or entities having business dealings with New Futech
and/or New Sub or the Business, or (ii) any of the business methods or
confidential information of New Futech and/or New Sub or the business,
including but not limited to their customer lists, prospective customers,
customers purchasing habits, customer contact personnel, marketing and
servicing techniques, financial matters, sales and marketing systems and
methods, marketing development and business expansion plans and
projections, personnel training and development programs, customer and
supplier relationships, and trade secrets. The obligation of
confidentiality shall not apply to any information which: (i) is in
possession of the individual Shareholder prior to the receipt thereof from
the other Merging Companies and/or New Futech; (ii) is available or becomes
available to the public through no fault of the Shareholder; or (iii) is
received by the Shareholder from a third party having the right to disclose
it.
2.12.3 The Shareholders shall not, at any time within two (2) years
after the Closing, without the prior written consent of New Futech, which
consent may be withheld for any reason or no reason, directly or indirectly
induce, encourage or solicit or assist any person who was or is employed
(whether as an employee or as an independent contractor) by a Merging
Company during the two years preceding the Closing, to leave the employ of
New Futech.
2.12.4 The parties acknowledge and agree that the restrictions
contained herein, including but not limited to the time period and
geographical area restrictions, are fair and reasonable and necessary for
the successful operation of New Futech's business, that violation of any of
them would cause irreparable injury, and that the restrictions contained
herein are not unreasonably restrictive of any party's ability to earn a
living. If the scope of any restriction in this Section is too broad to
permit enforcement of
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such restriction to its fullest extent, then such restriction shall be
enforced to the maximum extent permitted by law, and all parties hereto
consent and agree that such scope shall be modified judicially or by
arbitration in any proceeding brought to enforce such restriction. The
parties hereto acknowledge and agree that remedies at law for any breach or
violation of the provisions of this Section would alone be inadequate, and
agree and consent that temporary and permanent injunctive relief may be
granted in connection with such violations, without the necessity of proof
of actual damage, and such remedies shall be in addition to other remedies
and rights the parties may have at law or in equity. The parties agree that
no party shall be required to give notice or post any bond in connection
with applying for or obtaining any such injunctive relief.
2.12.5 The parties acknowledge and agree that the covenants in this
Section shall be construed as an agreement independent of any other
provision of this Agreement, so that the existence of any claim or cause of
action by a Shareholder against Futech, New Futech, or New Sub, whether
predicated on this Section or otherwise, shall not constitute a defense to
the enforcement of this Section.
2.12.6 If New Futech defaults under its obligations to pay the Fundex
shareholders as provided for on EXHIBIT 1.6, and the Fundex shareholders as
a result thereof repossess the stock of New Sub, then the restrictive
covenant provisions appearing in Sections 2.12.1 and 2.12.3 shall terminate
as to the Fundex Shareholders as of the date of repossession.
2.13 OTHER AGREEMENTS FOR PARTICULAR PARTIES. Certain additional
agreements with particular parties are described on EXHIBIT 2.13.
2.14 OTHER DISCUSSIONS. In consideration of the substantial expenditures
of time, effort and expense to be undertaken by the Merging Companies in
connection with their due diligence reviews, the Shareholders and the Merging
Companies agree that they shall not, between the date this Agreement is signed
and the earlier to occur of the Closing and August 30, 1999: (i) actively seek
or otherwise initiate discussions with any other prospective acquirer of the
stock, assets or business of the Merging Company; or (ii) assist or participate
in any due diligence in connection with any such transaction. Additionally,
during such period of time, the Merging Company shall not actively seek or
otherwise initiate discussions with any other company governing the purchase by
the Merging Company of the capital stock or assets of such other company or
concerning a merger, share exchange, consolidation or similar transaction
involving the Merging Company and such other company.
2.15 BEST EFFORTS TO REGISTER STOCK. After the Closing, New Futech will
use its best efforts to register the New Futech common stock with the SEC on
Form 8-A and list the common stock on a national securities exchange.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION
OF EACH MERGING COMPANY AND ITS SHAREHOLDERS
The following representations, warranties and indemnities are being made,
as of the date hereof and as of the date of the Closing, by each Merging
Company, and the Merging Company's Shareholders (only those shareholders
included in the defined term "Shareholders"), to the other Merging Companies and
their shareholders (not including just those shareholders included in the
defined term "Shareholders"); provided, however, that,
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notwithstanding whether any representation or warranty is made only to the
knowledge of a Merging Company, all representations and warranties of any
Shareholder, unless otherwise specifically identified below, are made only to
the best knowledge of the Shareholder (the representation and warranty of the
Shareholder is to the knowledge of the Shareholder as to the facts presented in
the representation and warranty, and is not as to just the knowledge of the
Merging Company as to those facts). These representations, warranties and
indemnities are subject to any limitations and qualifications or other
disclosures contained in the corresponding sections of the Disclosure Schedule
of the particular Merging Company and its Shareholders, attached hereto as
EXHIBITS 3. A breach of a representation or warranty of a Shareholder of a
Merging Company will be deemed also to be a breach of that representation or
warranty by the Merging Company.
3.1 DUE INCORPORATION. Each Merging Company is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation. Each Merging Company is duly licensed or qualified to do
business and is in good standing in each state where the property owned or held
under lease is such as to require it to be so licensed or qualified, except
those states where the failure to be so licensed or qualified would not have a
material adverse effect on its financial condition or operations or its
business. To the knowledge of the Merging Company and its Shareholders, the
Merging Company has the corporate power and authority to own and operate its
properties and carry on its business as now conducted.
True, correct and complete copies of the corporate formation documents for
the Merging Company, and all minutes, resolutions and consents, have been or
will be delivered to the Surviving Corporation. To the knowledge of the Merging
Company and its Shareholders, the minute book(s) of the Merging Company
correctly record all resolutions of the directors and shareholders of the
Merging Company, and its stock records correctly reflect the ownership of its
stock.
3.2 CAPITALIZATION. Each of the Merging Companies has authorized, issued
and outstanding equity securities only as shown on Section 3.2 of its Disclosure
Schedule. Other than as set forth in Section 3.2 of the Disclosure Schedule for
a specific Merging Company, there are no other rights, subscriptions, options,
warrants, conversion rights or agreements of any kind outstanding to purchase or
otherwise acquire from the Merging Company any shares of its capital stock, or
securities or obligations of any kind convertible into or exchangeable for any
shares of its capital stock. To the knowledge of each Merging Company and its
Shareholders, all issued shares of the Merging Company have been duly
authorized, and the issued and outstanding shares of stock are fully paid,
non-assessable (except with respect to any Merging Company that does business in
Wisconsin, as provided in Wisconsin Statutes sec.180.0622(2), as judicially
interpreted), and were not issued in violation of the terms of any agreement or
other understanding, and were issued in compliance with all applicable federal
and state securities or "blue sky" laws and regulations.
3.3 SUBSIDIARIES. Except as set forth in Section 3.3 of its Disclosure
Schedule, no Merging Company owns or has any agreement, whether written or oral,
regarding rights or contracts to acquire any equity securities or other
securities of any company, or any direct or indirect equity or ownership
interest in any other entity.
3.4 FINANCIAL INFORMATION. Each Merging Company has furnished the other
parties to this Agreement with true, correct and complete copies of the Merging
Company's financial statements and other books and records. To the knowledge of
the Merging Company and its Shareholders, the Merging Company's year-end
financial statements were
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prepared in accordance with its books and records and in accordance with
generally accepted accounting principles consistently applied, and present
fairly the financial condition of the Merging Company as of their respective
dates and the results of operations and changes in financial positions for the
periods then ended. The financial statements do not contain any material items
of special or non-recurring income or other income not earned in the ordinary
course of business, except as expressly specified therein.
To the knowledge of the Merging Company and its Shareholders, at the
Closing, all of the books and records of the Merging Company will be in its
possession, other than the capital stock books and stock transfer records which
may be in the possession of the Merging Company's transfer agent and registrar.
3.5 TAXES. To the knowledge of the Merging Company and its Shareholders,
except as may be disclosed in Section 3.5 of the Merging Company's Disclosure
Schedule, all federal and state income, excise, franchise, payroll, property,
sales, and other tax returns required to be filed by or with respect to the
Merging Company (except returns not yet due) including returns of the
Shareholders in the case of any Merging Company that is or was qualified as an S
corporation (for the period of such qualification) have been filed, are complete
and accurately reflect in all material respects all matters therein required to
be reflected, and all taxes shown on such returns to be due, and any assessments
received by either the Merging Company or its Shareholders with respect thereto,
have been paid in full.
3.6 MATERIAL CHANGES. To the knowledge of the Merging Company and its
Shareholders, except as may be disclosed in Section 3.6 of the Merging Company's
Disclosure Schedule, from the date of the most recent financial statements
provided to the other parties to this Agreement, and through the date hereof,
the business of the Merging Company has been conducted only in the ordinary
course, there have not been any material adverse changes in the financial
condition and operations of said business, and there has been no damage,
destruction or other occurrence (whether or not insured against) to tangible
property which materially adversely affects the financial condition or
operations of said business.
3.7 TITLE TO ASSETS; LIENS. To the knowledge of the Merging Company and
its Shareholders, the Merging Company owns all assets it purports to own,
including all assets reflected in its financial statements. Except as may be set
forth in Section 3.7 of its Disclosure Schedule, all assets of the Merging
Company are free and clear of all restrictions, claims, liens, encumbrances or
rights of others, other than those imposed under its Articles or Certificate of
Incorporation or Bylaws, and other than as set forth in the Merging Company's
financial statements, and other than for debts incurred or amended in the
ordinary course of business, including debts to fund Futech acquisitions, since
the date of the most recent financial statements provided by the Merging
Company. The stock of the Merging Companies owned by the Shareholders is free
and clear of any and all liens, claims or encumbrances, except for pledges of
stock securing only the debts of the Merging Companies.
3.8 LITIGATION. To the knowledge of the Merging Company and its
Shareholders, and except as disclosed in Section 3.8 of the Merging Company's
Disclosure Schedule, there is no litigation, proceeding, or investigation
pending against the Merging Company and no reasonable grounds to believe there
is any basis for the commencement of any litigation, proceeding or investigation
against it.
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3.9 COMPLIANCE WITH LAWS. To the knowledge of the Merging Company and its
Shareholders, the Merging Company is in substantial compliance with all laws
applicable to it or its business including, without limitation, laws prohibiting
discrimination or harassment, regulating working conditions or governing
employment relations and employee benefits. The Merging Company and its
Shareholders are not aware of any investigation or allegations of any person
with respect to any alleged violation of any provision of any federal, state or
local law, regulation, ordinance, order or administrative ruling, relating to
the Merging Company or its business, except as may be set forth in Section 3.9
of its Disclosure Schedule.
3.10 INSURANCE. Each Merging Company carries commercially reasonable
insurance against personal injury and property damage to third persons and in
respect of its products and services, and other insurance, including any and all
workman's compensation insurance required by law. Neither the Merging Company
nor its Shareholders have received any notice that the Merging Company is in
default with respect to any provision contained in any insurance policy, and
they are not aware of any such default. The Merging Company has made copies of
all of its insurance policies available to New Futech.
3.11 LICENSES. To the knowledge of the Merging Company and its
Shareholders, the Merging Company has any and all material licenses and permits
necessary and/or appropriate to operate its business in the manner in which the
business is currently operated.
3.12 HAZARDOUS MATERIALS. To the knowledge of the Merging Company and its
Shareholders, the business of the Merging Company has never dealt in any manner
with any hazardous or toxic materials or waste.
3.13 JUDGMENTS AGAINST THE MERGING COMPANY AND/OR ITS BUSINESS. Neither
the Merging Company nor its business is under any governmental investigation, no
such investigation has been threatened, and there are no outstanding judgments
against the Merging Company, its business or its assets.
3.14 COMPLETE SALE. All material assets used by the Merging Company in
the operation of its business are reflected in the financial statements of the
Merging Company that have been provided to the other parties to this Agreement.
3.15 ASSETS IN GOOD CONDITION. Except as may be stated in Section 3.15 of
the Disclosure Schedule for the Merging Company, each material asset of the
Merging Company which is a tangible asset is in good working order and
condition, reasonable wear and tear excepted.
3.16 DISCLOSURE MATERIALS. To the knowledge of the Merging Company and
its Shareholders, all of the information disclosed by the Merging Company to any
of the other parties to this Agreement, as a whole, does not contain any
statement that, as of the date hereof, is false or misleading, and does not omit
to state any material fact (i) necessary to make the statements made, in light
of the circumstances under which they were made, not false or misleading, or
(ii) necessary to provide the other parties to this Agreement with complete and
accurate information as to the assets and financial condition of the business of
the Merging Company.
3.17 DEFAULTS. To the knowledge of the Merging Company and its
Shareholders, except as may be described in Section 3.17 of the Merging
Company's Disclosure Schedule, there are no defaults or events that, with the
giving of notice or the passage of
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time, would constitute defaults under any material document under which the
Merging Company is obligated.
3.18 MATERIAL CONTRACTS. Except as disclosed in Section 3.18 of its
Disclosure Schedule, the Merging Company is not a party to or bound by any
agreement not made in the ordinary course of its business which is material to
its financial condition or operations.
3.19 OUTSTANDING LIABILITIES. To the knowledge of the Merging Company and
its Shareholders, there are no liabilities of the Merging Company other than as
are shown on its most recent balance sheet provided to the other Merging
Companies, and other than (i) matters disclosed in Section 3.19 of its
Disclosure Schedule, and (ii) liabilities arising after the balance sheet date
in the normal course of business out of purchases and sale of goods. There are
no liabilities relating to the Merging Company's business which are more than
ninety (90) days past due, except as otherwise stated in Section 3.19 of its
Disclosure Schedule.
3.20 INVENTORY. Except as disclosed in Section 3.20 of its Disclosure
Schedule, the inventory held by the Merging Company is useable and in good
condition, with not more than 3% thereof (plus any inventory reserve set up on
the financial statements of the Merging Company) being obsolete, and all of the
inventory is owned by the Merging Company, none of it being held on consignment.
3.21 RECEIVABLES. All accounts receivable of the Merging Company arose in
the regular course of business, and, to the best knowledge of the Merging
Company and its Shareholders, represent valid obligations arising from sales
actually made or services actually performed in the ordinary course of business
and are collectable, subject to the Merging Company's customary bad debt
reserves, and subject to no defenses or counterclaims.
3.22 EMPLOYEES. All employee benefits for the Merging Company's employees
are described in Section 3.22 of its Disclosure Schedule. To the knowledge of
the Merging Company and its Shareholders, and except as may be described in
Section 3.22 of the Merging Company's Disclosure Schedule, the Merging Company
is in compliance with all terms of all of its employee benefit plans.
Prior to the Closing, each Merging Company will provide to the other
Merging Companies a complete and accurate list of the following information for
each employee, including each employee on leave of absence or layoff status:
name, job title, current compensation, vacation and sick pay accrued, and
services credited for purposes of vesting and eligibility to participate in any
of the Merging Company's employee benefit plans.
Except as may be disclosed in Section 3.22 of the Disclosure Schedule for a
Merging Company, and except as described in Section 2.8 above, all employment
agreements, consulting agreements and related types of agreements between the
Merging Company and its Shareholders shall automatically terminate as of the
Closing, without compensation being due for services rendered thereunder after
the Closing.
3.23 NO CONFLICTS. To the knowledge of the Merging Company and its
Shareholders, the execution, delivery and performance of this Agreement and the
other documents and instruments to be executed and delivered pursuant hereto,
and the consummation of the transactions contemplated herein or therein:
(i) Will not violate or conflict with any applicable material, federal,
state, foreign, local or other law, ordinance, rule, regulation, or
governmental requirement or restriction of any kind, including any
rules, regulations, and orders promulgated
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thereunder, and any final orders, decrees, consents, or judgments of
any regulatory agency or court;
(ii) Will not require any authorization, consent, approval, exemption or
other action by or notice to any government entity (including, without
limitation, under any "plant closing" or similar law); the Merging
Company is not required to give any notice or to obtain any consent
from any person or entity which is party to a material contract or
agreement with the Merging Company or from any governmental agency in
connection with the execution and delivery of this Agreement or the
consummation of the Mergers, other than the approval of the Board of
Directors and stockholders of the Merging Company pursuant to the
applicable law, as required by applicable federal and state securities
laws and as set forth in Section 3.23 of its Disclosure Schedule;
(iii) Will not violate or conflict with, or constitute a default (or event
which, with notice or lapse of time, or both, would constitute a
default) under, and will not result in the termination of, or
accelerate the performance required by, or result in the creation of
any lien, claim or encumbrance upon any of the Merging Company's
assets under its Articles or Certificate of Incorporation or Bylaws,
or any material contract, commitment, understanding, arrangement,
agreement or restriction of any kind or character to which the
Merging Company is a party or by which the Merging Company or any of
the Merging Company's assets may be bound or affected, other than
those material contracts and agreements which require the consent of
the other party thereto as set forth in Section 3.23 of its
Disclosure Schedule; and
(iv) Will not give any governmental body the right to revoke, withdraw,
suspend, cancel, terminate or modify any governmental authorization
held by the Merging Company or that otherwise relates to its business,
except with respect to immaterial circumstances.
3.24 VIOLATIONS OF LAW.
(a) To the knowledge of the Merging Company and its Shareholders, none of
the present or past operations of the Merging Company's business, the
products of the business, or the Merging Company's assets violate or
conflict, in any material respect, with any permits, any law (including
environmental laws, other than as set forth in Section 3.24 of its
Disclosure Schedule), governmental specification, authorization, or
requirement, or any decree, judgment, order or similar restriction. To
the knowledge of the Merging Company and its Shareholders, the Merging
Company is not the subject of an inspection or inquiry regarding
violations or alleged violations of any law by any state, federal or
local agency.
(b) To the knowledge of the Merging Company and its Shareholders, there are
no pending administrative or judicial proceedings, threatened
proceedings, orders, notice of violations, inspection reports, and
similar occurrences, if any, relating to the conduct of its business or
the Merging Company's assets.
(c) The Merging Company has not been the subject of an Occupational and
Safety Health Administration inspection or found by any agency to be in
violation of any state or federal occupational safety or health law in
the conduct of its business.
3.25 CONDITION AND SUFFICIENCY OF ASSETS. To the knowledge of the Merging
Company and its Shareholders, and except as may be stated in Section 3.25 of the
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Merging Company's Disclosure Schedule, all material assets of the Merging
Company are in good operating condition and repair, and are adequate for the
uses to which they are being put, and none of such items is in need of
maintenance or repairs, except for ordinary, routine maintenance and repairs
that are not material in nature. To the knowledge of the Merging Company and its
Shareholders, the assets are sufficient for the continued conduct of the Merging
Company's business after the Closing in substantially the same manner as
conducted prior to the Closing.
3.26 BANK ACCOUNTS. The Merging Company has disclosed, or will disclose
prior to the Closing, to the other Merging Companies the names and locations of
all banks, trust companies, savings and loan associations and other financial
institutions at which the Merging Company maintains a safe deposit box, lock box
or checking, savings, custodial or other account of any nature, the type and
number of each such account and the signatories therefor, a description of any
compensating balance arrangements, and the names of all individuals authorized
to draw thereon, make withdrawals therefrom or otherwise have access thereto.
3.27 ENVIRONMENTAL MATTERS. For purposes of this Section:
(i) "Environmental Law" means all federal, state, local, foreign, and
other applicable jurisdiction laws relating to the environment or the
use, disposal, existence, or release of any Hazardous Materials,
including but not limited to any and all laws concerning, affecting,
controlling, or in any way relating to, whether in whole or in part,
noise levels, ground vibrations, air pollutants, water pollutants,
process waste water, or Hazardous Materials;
(ii) "Environmental Release" means any release, spill, emission, leaking,
injection, deposit, disposal, discharge, dispersal, leaching or
migration into the atmosphere, soil, surface water, groundwater or
property;
(iii) "Hazardous Materials" means: (A) any waste, hazardous waste,
pollutant, contaminant, or hazardous or toxic substance regulated by
law; (B) asbestos; (C) formaldehyde; (D) polychlorinated biphenyls;
(E) radioactive materials; (F) waste oil and other petroleum
products; and (G) any other substance which constitutes a nuisance
or hazard to the environment or the public health, safety, or
welfare.
3.27.1 Other than as set forth in Section 3.27 of its Disclosure
Schedule, to the knowledge of the Merging Company and its Shareholders, the
Merging Company is, and at all times has been, in full compliance with, and
has not been and is not in violation of or liable under, any Environmental
Law. The Merging Company has no basis to expect, nor has the Merging
Company or (to the knowledge of the Merging Company or its Shareholders)
any other person for whose conduct the Merging Company is or may be held to
be responsible received, any actual or threatened order, notice, or other
communication from (i) any governmental body or private citizen acting in
the public interest, or (ii) the current or prior owner or operator of any
of the Merging Company's properties or assets, of any actual or potential
violation or failure to comply with any Environmental Law, or of any actual
or threatened obligation to undertake or bear the cost of any
environmental, health and safety liabilities with respect to any of the
Merging Company's properties or assets (whether real, personal, or mixed)
in which the Merging Company has had an interest, or with respect to any of
the Merging Company' properties at or to which Hazardous Materials were
generated, manufactured, refined, transferred, imported, used or
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processed by the Merging Company, or (to the knowledge of the Merging
Company or its Shareholders) any other person for whose conduct the Merging
Company is or may be held responsible, or from which Hazardous materials
have been transported, treated, stored, handled, transferred, disposed,
recycled, or received.
3.27.2 The Merging Company has delivered to the other Merging
Companies complete copies and results of any reports, studies, analyses,
tests, or monitoring possessed or initiated by the Merging Company or its
Shareholders pertaining to Hazardous Materials or hazardous activities in,
on, or under the Merging Company's properties or concerning compliance by
the Merging Company or any other person for whose conduct it is or may be
held responsible, with Environmental Laws.
3.28 INTELLECTUAL PROPERTY.
(a) The Merging Company has provided the other Merging Companies with a
true correct and complete list of (i) all patents held by the Merging
Company and all re-examinations, re-issues, divisions, continuations,
continuations in part and extensions thereof and all pending patent
applications by the Merging Company, including for each such patent the
serial or patent number, country, filing and expiration date and title,
(ii) all registered trademarks of the Merging Company and pending
trademark registrations by the Merging Company, including for each such
trademark, the registration number, country, filing and expiration
date, mark and class, (iii) all registered copyrights of the Merging
Company and copyright applications by the Merging Company, including
the service marks, trade names and brand names of the Merging Company,
used in its business (whether or not registered) (all of the foregoing
collectively referred to as the "Intellectual Property"). To the
knowledge of the Merging Company and its Shareholders, all such
patents, trademarks and copyrights are properly registered, any
applications therefor have been properly made, and all annuity,
maintenance, renewal and other fees in connection with any of the
foregoing are current.
(b) The Merging Company has provided the other Merging Companies with a
list of all material licenses, contracts, commitments (including
without limitation, confidentiality agreements) to which the Merging
Company is a party or otherwise subject relating to the Intellectual
Property, including, without limitation, computer software (except for
standard licensing agreements or provisions from the seller or licensor
of such software). During the preceding three (3) fiscal years and the
current fiscal year to date, no claim or allegation of infringement has
been made by or against the Merging Company, whether relating to any
item of Intellectual Property or otherwise, no claim or allegation of
misappropriation or misuse of any item of Intellectual Property has
been made by or against the Merging Company, and no claim or allegation
has been asserted against the Merging Company with respect to the
ownership or use of any of the Intellectual Property by the Merging
Company or challenging or questioning the validity or effectiveness of
any such license, contract or commitment, and there does not exist to
the knowledge of any Shareholder or of the Merging Company any valid
basis for any such claim or allegation.
(c) To the knowledge of the Merging Company and its Shareholders, the
Merging Company has good and valid title to, or otherwise possesses
rights to use, the Intellectual Property.
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3.29 CUSTOMERS AND SUPPLIERS. The Merging Company has provided the other
Merging Companies with a list of its five (5) largest customers in terms of
dollar volume of sales for the three (3) preceding fiscal years and for the
current fiscal year, showing the approximate total dollar amount of sales to
each such customer during each such fiscal year. The Merging Company has
provided the other Merging Companies with a list of the five (5) largest
suppliers in terms of dollar volume of purchases for the last fiscal year and
for the current fiscal year showing the approximate total dollar amount of
purchases from each supplier during each such fiscal year. Except as may be
disclosed in Section 3.29 of its Disclosure Schedule, since January 1, 1997, the
Merging Company has not received any notice from and has not otherwise been
informed or made aware that any such five (5) largest customers or five (5)
largest suppliers will be terminating or curtailing its business with the
Merging Company in a manner that would have a material adverse effect on the
Merging Company.
3.30 CHANGES TO THE MERGING COMPANY'S DOCUMENTS. Except as may be
described in Section 3.30 of its Disclosure Schedule, or disclosed in EXHIBIT
1.6, none of the following has occurred within the last twelve months prior to
the date of this Agreement with respect to the Merging Company: (i) any change
in the Articles or Certificate of Incorporation or Bylaws; (ii) any change in
the number of shares of stock issued and outstanding, other than upon exercise
of stock options; (iii) the merger or consolidation of the Merging Company with
or into any other corporation or other entity: (iv) declaration or payment by
the Merging Company of any dividend or any repurchase by the Merging Company of
any shares of its stock; or (v) except in the ordinary course of business and
consistent with the Merging Company's past practice, any increase in the
compensation payable by the Merging Company to any shareholder, director,
officer, employee or agent, or payment of any bonus, severance payment or other
compensation to any shareholder, director, officer, employee or agent, or the
entering into of any agreement of any type which is not terminable by the
Merging Company on no more than 30 days notice.
3.31 STOCKHOLDERS AGREEMENTS AND OTHER AGREEMENTS. To the knowledge of
the Merging Company and its Shareholders, there are no stockholder agreements or
similar arrangements restricting voting rights or the transferability of any
interest in the Merging Company relating to the capital stock of the Merging
Company, or otherwise relating to the Merging Company. This representation and
warranty does not include any pledge by a Shareholder or other stockholder of
capital stock of the Merging Company, the terms of which may restrict
transferability of such capital stock. Furthermore, there are no employment
agreements, consulting agreements or similar type agreements relating to the
Merging Company which are not terminable by the Merging Company on not more than
90 days notice.
3.32 CERTAIN PAYMENTS. To the knowledge of the Merging Company and its
Shareholders, neither the Merging Company nor any shareholder, director,
officer, agent or employee of the Merging Company, or any other person
associated with or acting for or on behalf of the Merging Company, has directly
or indirectly: (a) made any contribution, gift, bribe, rebate, payoff, influence
payment, kickback, or other payment to any person, private or public, regardless
of form, whether in money, property, or services (i) to obtain favorable
treatment in securing business, (ii) to pay for favorable treatment for business
secured, or (iii) to obtain special concessions or for special concessions
already obtained, for or in respect of the Merging Company, or (iv) in violation
of any law; or (b) established or maintained any fund or asset that has not been
recorded in the books and records of the Merging Company.
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3.33 FILINGS COMPLETE. Each Merging Company will cooperate with the other
Merging Companies with respect to all filings that any of the Merging Companies
make in connection with the Mergers and all matters connected therewith.
3.34 PRODUCTS. To the knowledge of the Merging Company and its
Shareholders, except as disclosed Schedule 3.34 for the Merging Company, the
products offered currently or in the past by the Merging Company for sale meet
all material product and/or process specifications which they purport or are
required to meet, and satisfy in all material respects all applicable laws where
the products are currently being sold or have been sold within the last five
years, except where the Merging Company has chosen not to sell products because
the products would violate a law of that place.
3.35 PATENTS. All patents and patent applications or licenses of the
Merging Company are described in Section 3.35 of the Disclosure Schedule.
3.36 INDEMNIFICATION; SURVIVAL. Each Merging Company and its
Shareholders, jointly and severally, hereby agree to indemnify New Futech and
its officers, directors and controlling persons and defend and hold them free
and harmless from and against any liability, obligation, loss, cost and expense,
including attorney's fees, incurred by them in connection with any material
breach by the Merging Company of any of its representations, warranties or
covenants, contained in this Agreement. For this purpose, any breach or
combination of breaches will be considered material only if they exceed in the
aggregate the amount set forth in EXHIBIT 3.36 as to any Merging Company.
The representations and warranties in this Section, and elsewhere in this
Agreement, and all indemnification provisions in this Agreement, will survive
the Closing for a period of 18 months thereafter, after which they will expire
except as to any claims asserted on or before that date. The rights of New
Futech and the other parties to this Agreement based upon the representations
and warranties of the Merging Company will not be affected by any investigation
conducted with respect thereto, or any knowledge acquired, or capable of being
acquired, at any time, whether before or after the execution of this Agreement,
with respect to the accuracy or inaccuracy of or compliance with, any such
representation or warranty.
Disclosures made anywhere in this Agreement or its Exhibits shall be deemed
to be disclosures for all purposes of this Agreement.
ARTICLE IV
CONDITIONS OF MERGER
4.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to effect the Mergers will be subject to
the satisfaction at or prior to the Effective Time of the following conditions,
provided that the failure of Conditions 4.1.4 through 4.1.10 hereof with respect
to any particular Merging Company and its Shareholders will not act as a
condition to the obligations of that Merging Company, or its Shareholders.
4.1.1 Stockholder Approval. This Agreement and the Merger to which
the Merging Company is a party will have been approved and adopted by the
requisite vote of the stockholders of each Merging Company.
4.1.2 No Order. No federal or state governmental or regulatory
authority or other agency or commission, or federal or state court of
competent jurisdiction, will have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation,
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executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which in effect restricts, prevents or prohibits
the consummation of the transactions contemplated by this Agreement.
4.1.3 No Challenge. There will not be pending any action, proceeding
or investigation before any court or administrative agency or by any
government agency or any other person: (i) challenging or seeking material
damages in connection with the Mergers or the conversion of any Merging
Company's equity securities into New Futech's stock, promissory notes and
cash pursuant to the Mergers, or (ii) seeking to restrain, prohibit or
limit the exercise of full rights of ownership or operation by New Futech
or its subsidiaries of all or any portion of the business or assets of any
Merging Company, which in either case is reasonably likely to have a
material adverse effect on any party to this Agreement.
4.1.4 Representations, Warranties and Covenants. The representations
and warranties of each Merging Company and its Shareholders contained in
this Agreement will be true and correct in all material respects on and as
of the Effective Time, with the same force and effect as though made on and
as of the Effective Time. Each Merging Company and its Shareholders will
have performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it
or them on or prior to the Effective Time. Each Merging Company and its
Shareholders will have delivered to New Futech and to the other parties to
this Agreement at the Closing a certificate, dated the Effective Time, to
the foregoing effect.
4.1.5 Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required
to be made by any Merging Company or its Shareholders for the
authorization, execution and delivery of this Agreement and the
consummation by them of the transactions contemplated hereby will have been
obtained and made.
4.1.6 No Material Adverse Change. The operations, assets and
financial condition of each Merging Company have not suffered a material
adverse change between the date of this Agreement and the date of Closing.
4.1.7 Opinions of Counsel. Each Merging Company will have received
an opinion of outside counsel for each of the other Merging Companies,
dated the Closing, substantially to the effect set forth in EXHIBIT 4.1.7.
Each Merging Company agrees to provide such an opinion letter.
4.1.8 Assignments. The assignment of all material permits, licenses
and contracts, required to be assigned and necessary to continue the
operations of its business will have been made by each Merging Company.
4.1.9 Maintenance of Assets. Each Merging Company will have
maintained its assets in the same condition as of the date of this
Agreement (subject only to ordinary wear and tear).
4.1.10 Ordinary Course of Business. Each Merging Company will have
conducted its business diligently and substantially in the same manner as
prior to the execution of this Agreement and will not have entered into any
material contract, commitment or transaction not in the usual and ordinary
course or business.
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4.2 SPECIAL CONDITIONS FOR PARTICULAR PARTIES. The obligations of each
Merging Company will be subject to the satisfaction at or prior to the Effective
Time of the conditions set out with respect to that Merging Company on EXHIBIT
4.2.
ARTICLE V
TERMINATION, AMENDMENT AND WAIVER
5.1 TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the stockholders of any Merging Company, by mutual
consent of each Merging Company and its Shareholders.
5.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement pursuant to Section 5.1, this Agreement will forthwith become void and
all rights and obligations of any party hereto will cease.
5.3 AMENDMENT. This Agreement may be amended by the Merging Companies and
the Shareholders by action taken by or on behalf of their respective Boards of
Directors, and by such shareholders, at any time prior to the Effective Time;
provided, however, that, after approval of the Merger by the stockholders of any
Merging Company, no amendment may be made which would reduce the amount or
change the type of consideration into which each share of that Merging Company
will be converted pursuant to this Agreement upon consummation of the Mergers.
This Agreement may not be amended except by an instrument in writing signed by
the parties hereto.
5.4 WAIVER. At any time prior to the Effective Time, any party hereto
may: (i) extend the time for the performance of any of the obligations or other
duties of the other parties hereto, and (ii) waive compliance with any of the
agreements or conditions contained herein. Any such extension or waiver will be
valid if set forth in an instrument in writing signed by the party or parties to
be bound thereby.
ARTICLE VI
GENERAL PROVISIONS
6.1 TAX TREATMENT. The transactions contemplated hereby are intended to
qualify as tax-free reorganizations under the provisions of Section 368 of the
Code. Each Merging Company and its Shareholders acknowledges, however, that they
have each been represented by their own tax advisors in connection with this
transaction, that no Merging Company has made any representation or warranty to
any other with respect to the treatment of such transaction or the effect
thereof under applicable tax laws, regulations or interpretations. Each party
agrees to use commercially reasonable efforts to obtain tax-free treatment of
the Mergers to the extent such treatment is available under applicable tax laws.
6.2 FURTHER ASSURANCES. From time to time, at any other party's request
and without further consideration, each party will execute and deliver to the
other such documents and take such action as the other party may reasonably
request in order to consummate more effectively the transactions contemplated
hereby.
6.3 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, then all other conditions and provisions of this Agreement will
nevertheless remain in full force and effect so long as
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the economic or legal substance of the transactions contemplated hereby is not
affected in any manner adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto will negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that transactions contemplated hereby are fulfilled
to the extent possible.
6.4 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties and supersedes all prior agreements and undertakings, both written
and oral, between the parties, or any of them with respect to the subject matter
hereof and, except as otherwise expressly provided herein, is not intended to
confer upon any other person any rights or remedies hereunder. Notwithstanding
the foregoing, the terms of certain letters of intent survive the execution of
this Agreement to and only to the extent described on EXHIBIT 6.5.
6.5 ASSIGNMENT. This Agreement may not be assigned by operation of law or
otherwise.
6.6 PARTIES IN INTEREST. This Agreement will be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or will confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
6.7 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns.
6.8 GOVERNING LAW. This Agreement will be governed by, construed and
enforced in accordance with the laws of the State of Arizona, without giving
effect to the conflicts of laws rules thereof. The courts of the State of
Arizona will have the sole and exclusive jurisdiction and venue in any case or
controversy arising under this Agreement or by reason of this Agreement. The
parties agree that any litigation or arbitration arising from the interpretation
or enforcement of this Agreement will be only in either Maricopa County Superior
Court or in the United States Federal District Court for the District of
Arizona, and shall be only in the United States Federal District Court for the
District of Arizona if such venue is available. Solely for this purpose each
party to this Agreement (and each person who will become a party) hereby
expressly and irrevocably consents to the jurisdiction and venue of such courts.
6.9 MODIFICATION. Any modification or waiver of any term of this
Agreement, including a modification or waiver of this term, must be in writing
and signed by the parties to be bound by the modification or waiver.
6.10 ATTORNEY'S FEES. Should any party to this Agreement or the
stockholders of any Merging Company institute any action or proceeding to
enforce this Agreement or any provision hereof, or for damages by reason of any
alleged breach of this Agreement, or of any provision hereof, or for a
declaration of rights hereunder, then the prevailing party(s) of such action or
proceeding will be entitled to receive from the other involved party or parties
all costs and expenses, including reasonable attorneys' fees and expert witness
fees incurred by the prevailing party(s) in connection with such action or
proceeding.
6.11 COUNTERPARTS. This Agreement may be executed by the parties in one
or more counterparts, and any number of counterparts signed in the aggregate by
the parties will constitute a single instrument. The parties authorize and agree
to accept facsimile
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signatures in counterparts to this Agreement, and that said facsimile signatures
will for all purposes be binding upon the parties as if the same were original
signatures.
6.12 NOTICES. Any notice or communication given under the terms of this
Agreement ("Notice") will be in writing and will be delivered in person or
mailed by certified mail, return receipt requested, in the United States Mail,
postage pre-paid, addressed as specified in EXHIBIT 6.13 hereto or at such other
address as a person may from time to time designate by Notice hereunder. Notice
will be effective upon delivery in person, or if mailed, at midnight on the
third business day after the date of mailing.
6.13 PARAGRAPH TITLES AND HEADINGS. The titles and headings of sections
of this Agreement are for the convenience of reference only, and are not
intended to define, limit, or describe the scope or intent of any provision of
this Agreement, and will not affect the construction of any provision of this
Agreement.
6.14 BROKERAGE, FINDER'S OR FINANCIAL ADVISOR'S COMMISSIONS. The parties
each represent and warrant that all negotiations relevant to this Agreement have
been carried out by them directly, without the intervention of any person, other
than as specified on EXHIBIT 6.14. Any other brokerage, finder's or financial
advisor's fee that should arise from this transaction will be paid by the party
who contracted with such person. That party will indemnify and hold harmless the
other party against and in respect to any claim for such fee relative to this
Agreement, or to the transaction contemplated hereby.
6.15 MISCELLANEOUS. The parties agree that each party and its counsel
have reviewed and revised this Agreement, or had an opportunity to review and
revise this Agreement, and that any rule of construction to the effect that
ambiguities are to be resolved against the drafting party will not apply to the
interpretation of this Agreement or any amendments or exhibits hereto. No waiver
of any provision of this Agreement will be effective unless made in writing. The
parties do not intend to confer any benefit upon any person, firm, or
corporation other than the parties hereto. No representation or warranty herein
may be relied upon by any person not a party to this Agreement.
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IN WITNESS WHEREOF, each of the Merging Companies have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized, and each of the Shareholders have executed
this Agreement on their own behalf.
<TABLE>
<S> <C>
FUTECH: Futech Interactive Products, Inc., an Arizona
corporation
By
--------------------------------------------------
Vincent W. Goett, CEO
FUTECH Futech Interactive Products (Delaware), Inc., a
DELAWARE: Delaware corporation
By
--------------------------------------------------
Vincent W. Goett, CEO
NEW SUB: Futech Toys & Games, Inc., a Nevada corporation
By
--------------------------------------------------
Carl E. Voigt, IV, President
FUNDEX: Fundex Games, Ltd., a Nevada corporation
By
--------------------------------------------------
Carl E. Voigt, IV, President and CEO
JANEX: Janex International, Inc., a Colorado corporation
By
--------------------------------------------------
Vincent W. Goett, President
</TABLE>
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<TABLE>
<S> <C>
TRUDY: Trudy Corporation, a Delaware corporation
By
-----------------------------------------------
William W. Burnham, Chairman and CEO
DaMERT: DaMert Company, a California corporation
By
--------------------------------------------------
Frederick A. DaMert, Chairman
SHAREHOLDERS:
</TABLE>
<TABLE>
<S> <C>
DaMert:
---------------------------------------------------
Frederick A. DaMert, Trustee of the DaMert Trust,
UTD September 28, 1998
---------------------------------------------------
Gail Patton DaMert, Trustee of the DaMert Trust,
UTD September 28, 1998
Fundex:
---------------------------------------------------
Carl E. Voigt, IV
---------------------------------------------------
Carl E. Voigt, III
Futech:
---------------------------------------------------
Vincent W. Goett
Trudy:
---------------------------------------------------
William W. Burnham
</TABLE>
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<PAGE> 236
AGREEMENT OF CERTAIN SHAREHOLDERS
TO VOTE FOR THE MERGER
The undersigned shareholders of the Merging Companies hereby agree to vote
their shares of the Merging Companies in favor of the Mergers. The signatures
appearing below bind the undersigned shareholders only to the obligation
appearing in the preceding sentence, and not to the entire Agreement appearing
above or any provision contained therein.
<TABLE>
<S> <C>
Trudy:
---------------------------------------------------
Alice B. Burnham
---------------------------------------------------
Elisabeth T. Prial
</TABLE>
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<PAGE> 237
MERGER AGREEMENT
EXHIBITS
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<PAGE> 238
EXHIBIT 1.5
TO
MERGER AGREEMENT
(LIST OF DIRECTORS AND OFFICERS OF NEW FUTECH AND NEW SUB)
<TABLE>
<S> <C> <C> <C>
I. New Futech:
A. Directors: Vincent W. Goett
Roderick L. Turner
Carl E. Voigt, IV
William W. Burnham
Robert J. Rosepink
Gary A. Oman
F. Keith Withycombe
B. Officers:
CEO: Vincent W. Goett
President: Vincent W. Goett
Vice-President of the Toys/ Carl E. Voigt, IV
Games Division:
Secretary: Frederick B. Gretsch, Sr.
Treasurer: Frederick B. Gretsch, Sr.
II. New Sub:
A. Directors: Vincent W. Goett
Frederick B. Gretsch, Sr.
Carl E. Voigt, IV
B. Officers:
President: Carl E. Voigt, IV
Vice President: Carl E. Voigt, III
Secretary: Frederick B. Gretsch, Sr.
Treasurer: Frederick B. Gretsch, Sr.
</TABLE>
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EXHIBIT 1.6
TO
MERGER AGREEMENT
(MERGER CONSIDERATION AND CONVERSION OF STOCK OPTIONS)
The references appearing below on this Exhibit in the form "[1]" correlate
to the similar references appearing in the form of the Promissory Note attached
as EXHIBIT 1.6A.
A. DAMERT.
1. $312,000 cash (plus $200,000 cash paid to CorDev Corporation (Bob
Oliver) under Section A of EXHIBIT 6.14). $12,000 of the $312,000 is to be paid
to Greg McVey.
2. $2,600,000 Promissory Note (referred to in this Section as the "NOTE")
in the form of EXHIBIT 1.6-A.
[1]$2,600,000.00 (with $100,000.00 thereof being payable to Greg McVey).
[2]The date of the Closing.
[3]Frederick A. DaMert and Gail Patton DaMert, as trustees, and their
successors in trust, under the DaMert Trust, UTD September 28, 1998.
[4]Two Million Six Hundred Thousand Dollars ($2,600,000)
[5]Zero percent (0%)
[6]1609 Fourth Street, Berkeley, California 94710 [or addresses provided
by individual shareholders]
[7] The text after the words "as follows," is as follows:
(a) $520,000 (with $20,000.00 thereof being payable to Greg McVey)
within thirty (30) days after the Closing (the "Closing") of
the merger of DaMert Company into Maker; and
(b) $2,080,000 (with $80,000.00 thereof being payable to Greg
McVey) within seven (7) months after the "Closing."
[8]Shall read as follows:
7. SECURITY. As security for Maker's performance under this Note,
Maker hereby grants Payee a security interest in the assets of Maker
which were acquired by Maker from DaMert Company in the merger of
DaMert Company into Maker, which assets are identified on Exhibit
"A" attached hereto and hereby made a part hereof. In the event of
default by Maker hereunder, Payee shall have all rights with
respect to such collateral as are available to a secured party
under the Uniform Commercial Code in the State of Arizona, as the
same may from time to time be changed.
Until the Note is fully paid, Maker agrees not to encumber the
assets identified on Exhibit "A" (other than refinancing of
existing debt (including any available but unused credit and
including any ability to borrow against a borrowing base), which
will be allowed, but only on terms not less favorable to Maker than
the terms of the refinanced debt (except that the interest rate may
increase to then-existing market rates)). The holder of this Note
shall subordinate this debt to the debts described in this
paragraph.
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A list of the assets of DaMert as of the Closing will be attached
to the Note as Exhibit "A" thereto.
The following is added at the end of Section 4 of the Note:
If the principal, or any other amount due under this Note, or under
any other agreement between Maker and Payee pertaining to the
indebtedness evidenced hereby, shall not be paid within ten (10)
days after due, then: (i) the whole sum of principal shall become
due and shall thereafter bear interest at the annual rate of 10%,
and (ii) New Futech shall issue to the Payee 10,000 shares of New
Futech's common stock for each six-month period, or portion
thereof, for which said payment amount and all interest accrued
thereon shall remain unpaid in full.
3. 671,147 shares of New Futech common stock of which 25,813 shares goes to
Greg McVey.
B. FUNDEX.
1. Fundex shareholders will be granted the option to accept cash at the
Closing in lieu of the consideration described in Section 2 below (the
"CASH OPTION"). The Fundex shareholders electing the Cash Option will be
entitled to receive $2.84 per Fundex share surrendered pursuant to this
Agreement. Carl E. Voigt, IV and Carl E. Voigt, III by their signatures
to this Agreement, irrevocably agree not to elect the Cash Option. Any
Fundex shareholder electing the Cash Option shall forfeit any other
rights to which such shareholder would otherwise be entitled pursuant to
the Merger Agreement.
2. The consideration to be paid to the shareholders of Fundex not electing
the Cash Option is a promissory note (referred to in this Section as the
"NOTE") in the form of EXHIBIT 1.6-A, with the terms summarized below,
and the New Futech common stock as described in Section 3 below.
[1]$4,500,000.00 minus the total consideration paid in connection with
the Cash Option pursuant to Section 1 above.
[2]The date of the Closing.
[3]Carl E. Voigt, IV, in trust for the Fundex shareholders [or at New
Futech's election, New Futech may have as many Notes as there are
Fundex shareholders, with each of said Notes being payable directly
to a Fundex shareholder, in the amount of the share of the debt
payable to said shareholder]. The shareholders of Fundex will
authorize such a trust arrangement, or individual notes will be
issued to each shareholder.
[4]Four Million Five Hundred Thousand Dollars ($4,500,000.00) minus the
total consideration paid in connection with the Cash Option pursuant
to Section 1 above.
[5]Ten percent (10%)
[6]2237 Directors Row, Indianapolis, Indiana 46241 [or addresses
provided by individual shareholders]
[7]in full on or before the date which is one year after the date of
this Note, but with interest only payable on a calendar quarter basis
by the tenth day
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<PAGE> 241
after the end of each calendar quarter, commencing with the first
calendar quarter after the date of this Note.
[8]Shall read as follows:
7. SECURITY. As security for Maker's performance under this Note,
Maker hereby grants Payee a security interest in all capital stock
of [New Sub], a Nevada corporation, now owned or hereafter
acquired, which corporation is a 100% owned subsidiary of Maker. In
the event of default by Maker hereunder, Payee shall have all
rights with respect to such collateral as are available to a
secured party under the Uniform Commercial Code in the State of
Arizona, as the same may from time to time be changed. The stock
shall be held in escrow by Mitchell Roth, legal counsel for Payee,
endorsed in blank, until this Note is paid in full.
Until the Note is fully paid, the undersigned guarantor agrees not
to encumber its stock of New Sub.
Payment under the Note, and New Sub's obligations regarding liens
against Phase 10 as set out on Exhibit 2.13 below, will be secured
by the guarantee and pledge of assets of New Sub, with language
added at the end of the Note as follows:
The faithful and timely performance by Maker under the Note
appearing above is hereby guaranteed by the undersigned. The
undersigned further agrees that any action may be bought and
prosecuted by Payee against the undersigned guarantor whether
or not any action is brought against Maker, and whether or not
Maker or any other parties are joined in such action. The
undersigned guarantor specifically agrees to be liable to
Payee for the obligations of Maker as set out above, even if
Payee or any successor-in-interest releases any or all rights
of any sort against the Maker. The undersigned guarantor
hereby consents to any such release, which release shall be
without effect on the undersigned guarantor's liability for
said obligations. The undersigned guarantor waives any right
to require Payee to proceed against Maker or pursue any other
remedy in Payee's power. The undersigned guarantor waives any
defense arising by reason of any disability or other defense
of Maker by reason of the cessation from any cause whatsoever
(other than performance in full) of the liability of Maker
under the Note appearing above. The prevailing party in any
litigation, arbitration or other proceeding arising out of
this guarantee shall be entitled to reimbursement from the
other party for all reasonable costs and expenses incurred in
such proceeding, including reasonable attorney's fees.
The undersigned hereby grants Payee a security interest in all
of the undersigned's assets, now owned or hereafter acquired,
as security for: (i) the guarantee appearing immediately
above; and (ii) the undersigned's obligations set out in
Exhibit 2.13, Section B of that certain Merger Agreement,
dated [the date of this Merger Agreement]. The security
interest created in (i) above shall continue until the Note is
fully paid. The security interest in (ii) above shall continue
until, and only until: (i) Phase 10 is collaterally assigned,
free and clear of all
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liabilities, to the Fundex shareholders as security for the
obligations of New Sub and/or New Futech under Exhibit 2.13 of
the Merger Agreement described above; or (ii) the Phase 10
Option terminates as called for in the Merger Agreement. In
the event of default by the undersigned under the obligations
secured as described above, Payee shall have all rights with
respect to such collateral as are available to a secured party
under the Uniform Commercial Code in the State of Arizona, as
the same may from time to time be changed. Financing
statements will be filed evidencing the liens described above
in such jurisdictions as reasonably determined by the Fundex
shareholders.
Until the obligations secured as described above are fully
performed, the undersigned guarantor agrees: (i) not to
encumber its assets after the date of this guaranty (other
than refinancing of existing debt (including any available but
unused credit and including any ability to borrow against a
borrowing base), which will be allowed, but only on terms not
less favorable to the undersigned guarantor than the terms of
the refinanced debt (except that the interest rate may
increase to then-existing market rates)); and (ii) not to pay
any dividends to its shareholder (Futech Interactive Products,
Inc.).
DATED the date first hereinabove written:
[New Sub], Inc., a Nevada corporation
By
-------------------------------------------------------------------------
Carl E. Voigt, IV, President
New Futech agrees to retain New Sub as a separate subsidiary of New
Futech at least as long as the security interest created above
survives.
The following replaces Section 4 of the Note:
4. DEFAULT. The occurrence of any one of the following events
shall constitute a default ("EVENT OF DEFAULT") under this Note:
(a) If Maker, after 10 days written notice, fails to pay the
principal or interest due under this Note, or under any other
agreement between Maker and Payee pertaining to the
indebtedness evidenced hereby.
(b) If Maker fails to perform, keep or observe any term, provision,
condition, warranty or representation contained in this Note,
which is required to be performed, kept or observed by Maker,
if such failure continues for 20 days after written notice
thereof is received by Maker.
(c) The occurrence of a default or an Event of Default under any
agreement, instrument or document heretofore, now or any time
hereafter delivered by or on behalf of Maker to Payee;
(d) The occurrence of a default or an Event of Default under any
instrument or document heretofore, now or at any time delivered
to Payee by any guarantor of Maker's liabilities hereunder;
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(e) If any of Maker's or New Futech's assets are attached, seized,
subjected to a writ of distress, warrant, or levied upon or
become subject to any lien or come within the possession of any
receiver, trustee, custodian or assignee for benefit of
creditors;
(f) If Maker or New Futech becomes insolvent or generally fails to
pay or admits in writing its inability to pay debts as they
become due, if a petition under any section or chapter of the
Bankruptcy reform Act of 1978 or any similar law or regulation
is filed by or against Maker or New Futech, if Maker or New
Futech shall make as assignment for benefit of creditors, if
any case or proceeding is filed by or against Maker or New
Futech for its dissolution or liquidation, or upon the death or
incapacity of Vincent Goett.
If a liability pursuant to this Note is not paid at the due date,
then the unpaid amount of liabilities shall bear interest after the
due date until paid at a rate equal to 18%.
Upon the occurrence of an Event of Default, without notice by Payee
to or demand by Payee of Maker: (i) all the principle and interest
under this Note shall be due and payable forthwith; and (ii) Payee
may exercise any one or more of the rights and remedies accruing to
a secured party under the Uniform Commercial Code in the State of
Arizona.
All Payee's rights and remedies under this Note are cumulative and
non-exclusive. The acceptance by Payee of any partial payment made
hereunder after the time when any liabilities become due and
payable will not establish a custom, or waive any rights of Payee
to enforce prompt payment thereof. Any waiver of an Event of
Default hereunder shall not suspend, waive, or effect any other
Event of Default hereunder, Maker and every endorser waive
presentment, demand and protest and notice of presentment, protest,
default, non-payment, maturity, release, compromise, settlement,
extension or renewal of this Note, and ratify and confirm whatever
Payee may do in this regard. Other than set forth in this Note,
Maker further waives any and all notice or demand to which Payee
might be entitled with respect to this Note by virtue of any
applicable statute or law.
3. Those Fundex shareholders not electing the Cash Option will receive
their prorata share of New Futech shares of common stock equal to
600,000 shares minus .184635 for each share of Fundex common stock
exchanged for cash pursuant to the Cash Option in Section 1 above.
4. Fundex has issued stock options to certain employees and directors of
Fundex pursuant to Fundex's 1996 Stock Option Plan. The total options
issued under the Plan as of the Closing will be as identified on EXHIBIT
1.6-B. As soon as practicable after the Closing, all such options will
be converted to options to acquire New Futech common stock as described
on EXHIBIT 1.6-B.
C. FUTECH.
1. 4,121,920 (including 607,728 in respect of the Janex stock owned by
Futech) shares of New Futech common stock for Futech common stock, plus
the number of shares otherwise issuable pursuant to options or warrants
as described in Section 2 appearing immediately below that are exercised
prior to the Closing.
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2. Futech has issued stock options and warrants to certain employees and
directors of Futech, and certain others. As soon as practicable after
the Closing, all such options and warrants will be converted to rights
to acquire 6,933,066 shares of New Futech common stock, at prices
ranging from $1.50 to $4.50, minus the amount issued in respect of
options or warrants exercised prior to the Closing. Options and warrants
outstanding at the time of the Closing shall be appropriately adjusted
for a 30 to 1 ratio of Futech shares to New Futech shares.
D. JANEX.
1. 162,230 shares of New Futech common stock will be issued for the Janex
common stock, which reflects the cancellation of shares of Janex owned
by Futech, plus the number of shares otherwise issuable pursuant to
options or warrants as described in Section 2 appearing immediately
below that are exercised prior to the Closing.
2. Janex has issued stock options and warrants to certain employees of
Janex and another party. As soon as practicable after the Closing, all
such options and warrants will be converted to rights to acquire 4,833
shares of New Futech common stock, minus the amount issued in respect of
options or warrants exercised prior to the Closing. Options and warrants
outstanding at the time of the Closing shall be appropriately adjusted
for a 30 to 1 ratio of Janex shares to New Futech shares.
E. TRUDY.
1. $456,330.00 cash (plus $43,670.00 cash paid to James P. McGough under
Section E of EXHIBIT 6.14).
2. 400,000 shares (modifiable under EXHIBIT 2.13) of New Futech common
stock.
3. At the Effective Time, each outstanding and unexercised Trudy stock
option shall cease to represent a right to acquire shares of Trudy stock
and shall be converted automatically into an option to purchase, for
each share of Trudy common stock covered by such option, that number of
shares of New Futech common stock and cash into which each share of
Trudy common stock is converted pursuant to subparagraphs 1 and 2
appearing immediately above. Said number of shares and said cash are
part of the shares and cash to be received described in Section 1.6
above, and do not increase the number of shares or cash involved in the
Merger. The shares allocated to the option rights shall be held by New
Futech and issued to the party exercising the option only after the
option is exercised. The cash allocated to the option rights shall be
payable to the party exercising the option only after the option is
exercised. Appropriate adjustments shall be made by New Futech, if
required, to the terms of any such option to accomplish the foregoing.
The duration and other terms of the new option shall be the same as the
original option except that all references to Trudy shall be deemed to
be references to New Futech.
4. Trudy has advised the Merging Companies and the Merging Companies agree
that Trudy will provide options, stock grants or other equity
participation to certain directors, officers, agents and employees of
Trudy at or prior to the Closing of the Merger, covering an aggregate of
31,350,000 shares of Trudy common stock and options for 14,680,000
shares (see EXHIBIT 3-E, SECTION 3.2).
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EXHIBIT 1.6-A
TO
MERGER AGREEMENT
(FORM OF PROMISSORY NOTES CONSTITUTING MERGER CONSIDERATION)
PROMISSORY NOTE
$[1] As of [2]
Phoenix, Arizona
THIS NOTE is made as of the date stated above by Futech Interactive
Products, Inc., a Delaware corporation ("Maker") to the order of [3]
(collectively "Payee").
1. PAYMENT. For value received, Maker promises to pay to Payee or Payee's
order, without offset, the principal sum of [4], together with interest
calculated at [5] per annum, as hereinafter set forth. Principal and interest
are payable in lawful money of the United States of America at [6], or at such
other address as the holder hereof may from time to time designate in writing,
as follows:
[7]
All payments made hereunder shall be applied to interest and principal in that
order.
2. PREPAYMENT. Maker has the privilege, at any time, to prepay the whole
or any part of the unpaid balance hereof without penalty or forfeiture.
3. INTEREST. All interest payable pursuant to this Note shall be computed
on the basis of a 365-day year. In no event shall the aggregate of the interest
herein provided to be paid over the contractual term of the loan exceed the
highest rate to which a borrower and lender may agree in writing under the laws
of the State of Arizona.
4. DEFAULT. If the principal or interest due under this Note, or under
any mortgage, deed of trust, security agreement, or other agreement between
Maker and Payee pertaining to the indebtedness evidenced hereby shall not be
paid within 10 days after the date upon which such payment is due, or if Maker
fails to comply with all of the other terms and conditions of this Note or any
instrument securing this Note, and such failure (other than a payment
obligation) shall continue for 20 days after written notice thereof is received
by Maker, then the entire principal and interest sum due hereunder shall, at the
option of Payee, become immediately due and payable without further notice.
5. COLLECTION COSTS. Maker agrees to reimburse Payee for all costs and
expenses, including without limitation, all reasonable attorneys' fees incurred
in the enforcement or collection of this Note or any judgment obtained hereon.
6. WAIVER, CONSENT, ETC. Maker and each endorser hereof severally waive
diligence, demand, presentment for payment and protest, and consent to the
extension of time of payment of this Note without notice.
7. SECURITY. [8].
8. MISCELLANEOUS. The provisions of this Note shall be binding upon Maker
and Maker's personal representatives, successors and assigns, and shall inure to
the benefit of Payee and Payee's successors and assigns. This Note shall be
governed by and construed and enforced in accordance with the laws of the State
of Arizona. The courts of the State of Arizona shall have the sole and exclusive
jurisdiction and venue in any case or
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controversy arising under this Note or by reason of this Note. The parties agree
that any litigation or arbitration arising from the interpretation or
enforcement of this Note shall be only in either Maricopa County Superior Court
or in the United States Federal District Court for the District of Arizona, and
for this purpose each party to this Note (and each person who shall become a
party) hereby expressly and irrevocably consents to the jurisdiction and venue
of such courts. This Note shall be construed according to its fair meaning and
neither for nor against the drafting party. Time is of the essence of this Note
and each and every term and provision hereof.
DATED the date first hereinabove written.
Futech Interactive Products, Inc., a
Delaware corporation
By
------------------------------------
Vincent W. Goett, CEO
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EXHIBIT 1.6-B
TO
MERGER AGREEMENT
(FUNDEX STOCK OPTIONS AND CONVERSION TO SHARES OF NEW FUTECH )
See Exhibit 3B-3.2
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<PAGE> 248
EXHIBIT 1.11
TO
MERGER AGREEMENT
(VOTES REQUIRED FOR MERGER APPROVAL)
A. DAMERT.
Majority.
B. FUNDEX.
Majority.
C. FUTECH.
Majority.
D. JANEX.
Majority.
E. TRUDY.
Majority.
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EXHIBIT 2.8.1
TO
MERGER AGREEMENT
(TERMS OF EMPLOYMENT AGREEMENTS)
I. The references appearing below on this Exhibit to Sections correlate to
the Sections in the form of the Employment Agreement attached as EXHIBIT 2.8.2.
A. DAMERT.
1. Frederick A. DaMert
[1] The date of the Closing.
[2] New Futech
[3] Frederick A. DaMert
[4] Vice-President of Research and Development
[5] three (3) years
[6] $120,000.00
[7] Subparagraph 4(d) is to be deleted.
[8] Subparagraph 4(d) is to be deleted.
[9] $0.
[10] 20 days.
[11] the lesser of the remaining term of this Agreement or one year.
[12] Futech Interactive Products, Inc., a Delaware corporation, 2999
North 44th Street, Suite 225, Phoenix, Arizona 85018-7247.
[13] Frederick A. DaMert, 1609 Fourth Street, Berkeley, California
94710.
[14] Insure that all current proprietary technology is fully developed
and to seek out or create new proprietary technology that can be
shared by the divisions of Futech. To coordinate corporate
technology information by making sure that all current and new
innovations are clearly communicated to the appropriate product
development and marketing teams of Futech. To create product
concepts and opportunities for all divisions of Futech including
innovations for E-commerce.
The scope of the activities restricted in the non-compete
provisions in subparagraph 8(b) of the form shall be limited to the
toys and games business being conducted by DaMert as of the date of
the Agreement.
The employee shall be based at Employer's operating unit in
Berkeley, California, or at such other location as Employer and
Employee mutually agree to relocate in order to fulfill Employee's
obligations under the Employment Agreement.
No less than 120 days notice of termination without cause will be
given to the employee.
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2. Gail Patton DaMert
[1] The date of the Closing.
[2] New Futech
[3] Gail Patton DaMert
[4] Vice-President of Integration and Business Analysis
[5] three (3) years
[6] $120,000.00
[7] Subparagraph 4(d) is to be deleted.
[8] Subparagraph 4(d) is to be deleted.
[9] $0.
[10] 20 days.
[11] the lesser of the remaining term of this Agreement or one year.
[12] Futech Interactive Products, Inc., a Delaware corporation, 2999
North 44th Street, Suite 225, Phoenix, Arizona 85018-7247.
[13] Gail Patton DaMert, 1609 Fourth Street, Berkeley, California 94710.
[14]Intentionally Omitted.
The scope of the activities restricted in the non-compete provisions in
subparagraph 8(b) of the form shall be limited to the toys and games
business being conducted by DaMert as of the date of the Agreement.
The employee shall be based at Employer's operating unit in Berkeley,
California, or at such other location as Employer and Employee mutually
agree to relocate in order to fulfill Employee's obligations under the
Employment Agreement.
No less than 120 days notice of termination without cause will be given
to the employee.
B. FUNDEX.
See II below.
C. FUTECH.
All employment agreements of Futech pass through and survive as obligations
of New Futech, notwithstanding Section 3.22 of the Merger Agreement.
D. JANEX.
No new Employment Agreements as a result of the merger. All employment
agreements of Futech pass through and survive as obligations of New Futech,
notwithstanding Section 3.22 of the Merger Agreement.
E. TRUDY.
1. William W. Burnham
[1] The date of the Closing.
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[2] New Futech
[3] William W. Burnham
[4] Vice-President -- Specialty.
[5] three (3) years
[6] $100,000.00
[7] 6,667
[8] $7.50
[9] $10,000
[10] 20 days.
[11]the greater of the remaining term of this Agreement or one year.
[12]Futech Interactive Products, Inc., a Delaware corporation, 2999
North 44th Street, Suite 225, Phoenix, Arizona 85018-7247.
[13] William W. Burnham, 353 Main Avenue, Norwalk, Connecticut
06851-1552
[14] See EXHIBIT 2.8.1-1.
II. The references appearing below on this Exhibit to Sections correlate
to the Sections in the form of the Employment Agreement attached as EXHIBIT
2.8.3.
B. FUNDEX.
1. Carl E. Voigt, IV
[1] The date of the Closing.
[2] Carl E. Voigt, IV
[3]President of [New Sub]. [and also Vice President of the Toys/Games
Division of New Futech]
[4]Participation in any benefit programs adopted from time to time by
Employer or Futech Interactive Products, Inc., for the benefit of
its senior executive employees (which benefits shall be similar to
those offered by Futech Interactive Products., Inc.). Employee shall
receive such other fringe benefits as may be granted to Employee
from time to time by Employer or Futech Interactive Products to its
senior executives.
Vincent W. Goett shall during the term of this Employment Agreement vote
his shares in New Futech for Carl E. Voigt, IV being a member of the
Board of Directors of New Futech.
2. Carl E. Voigt, III
[1] The date of the Closing.
[2] Carl E. Voigt, III
[3] Vice President of [New Sub]
[4]Participation in any benefit programs adopted from time to time by
Employer or Futech for the benefit of its employees (which benefits
shall be similar to those offered by Futech).
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EXHIBIT 2.8.2
TO
MERGER AGREEMENT
(FORM FOR EMPLOYMENT AGREEMENTS)
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") effective as of [1] is by and between [2]
("Employer"), and [3] ("Employee").
A. Employer is engaged in the business of designing, manufacturing,
distributing and marketing books, greeting cards, electronic devices, games and
toys.
B. Employer desires to hire the services of Employee, and Employee is
willing to provide those services to Employer, on the terms and conditions
hereinafter set forth.
In consideration of the recitals and mutual agreements hereinafter set
forth, the parties agree as follows:
1. Employment. Employer hires Employee on a full-time basis, in
accordance with the terms and conditions set forth herein, and Employee
agrees to accept such full-time employment in accordance with said terms
and conditions. Employee's title shall be "[4]." Employee's title and
duties may be changed from time to time in the discretion of Employer's
Board of Directors (the "Board"), President or Chief Executive Officer.
Employee agrees to devote Employee's full time, skill, knowledge and
attention to the business of Employer and the performance of Employee's
duties under this Agreement.
2. Term. The term of employment under this Agreement shall commence
on [1] (the "Effective Date") and shall continue thereafter for a period of
[5], unless earlier terminated as set forth in Section 7 below.
3. Duties. Employee shall be responsible for all of the duties
associated with Employee's position with Employer, including without
limitation those identified on Exhibit "A" attached hereto and hereby made
a part hereof, and such other duties as may be determined by Employer.
4. Compensation.
(a) Base Salary. Employer agrees to pay Employee a base salary,
before deducting all applicable withholdings, at the rate of not less
than $[6]per year, which shall be payable in accordance with Employer's
standard payroll policies, which policies may be revised from time to
time.
(b) Deductions. Employer shall deduct from the payments made to
Employee hereunder any federal, state or local withholding or other
taxes or charges which Employer is required to deduct under applicable
law, and all amounts payable to Employee under this Agreement are stated
before any such deductions. Employer shall have the right to rely upon
written opinion of counsel if any questions arise as to any deductions.
(c) Bonus. From time to time, Employee may be eligible for a bonus
at Employer's sole discretion.
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(d) Stock Options. If Employee has been continuously employed by
Employer between the date of this Agreement and the date which is twelve
months thereafter, and has not been in default under the terms of this
Agreement, then Employee shall as of the date which is twelve months
after the date of this Agreement have the right to purchase up to [7]
shares of Employer's common stock.
If Employee has been continuously employed by Employer between the
date of this Agreement and the date which is twenty-four months
thereafter, and has not been in default under the terms of this
Agreement, then Employee shall as of the date which is twenty-four
months after the date of this Agreement have the right to purchase up to
[7] shares of Employer's common stock.
If Employee has been continuously employed by Employer between the
date of this Agreement and the date which is thirty-six months
thereafter, and has not been in default under the terms of this
Agreement, then Employee shall as of the date which is thirty-six months
after the date of this Agreement have the right to purchase up to [7]
shares of Employer's common stock.
The purchase price of common stock purchased under the three
preceding paragraphs shall be $ [8] per share, payable in full in cash
at the time the option is exercised. The options may be exercised only
by written notice given to Employer, or Employer's successors and
assigns. The options shall expire on the date which is ten (10) years
after the date of this Agreement, if not exercised by that date.
Employer's common stock shall be subject to all of the terms and
restrictions of said stock, and Employer shall no obligation under this
Agreement to register Employer's stock or to make registered stock
available to Employee under this Agreement. No representation, warranty
or guaranty is made by Employer as to the value of the stock to be
issued pursuant to this subparagraph, and Employee takes full risk and
responsibility as to said value.
Employee hereby makes the representations and warranties set out in
Exhibit "B" attached hereto and hereby made part hereof. On said Exhibit
"B" Employee is referred to as the "Subscriber," Employer is referred as
the Corporation, and the shares of stock to be acquired by Employee
under this Section are referred to as the "Shares." Employee
acknowledges and understands the meaning and legal consequences of the
representations and warranties contained herein and agrees to indemnify
and defend and hold harmless the other parties hereto, and Employer's
directors, officers, agents, employees, and attorneys, from and against
any and all claims, loss, damage, liability, cost or expense, including
attorneys' fees and court costs, due to or arising out of or connected
directly or indirectly with or to any breach of any such representation
or warranty made by Employee. Employee's representations and warranties
appearing herein are made as of the date hereof and as of the date of
issuance of stock pursuant to this subparagraph (d). Employee's
acceptance of stock under this Section 4 shall constitute Employee's
confirmation of the representations and warranties appearing herein as
of the date of the acceptance.
Employee shall be entitled to have Employer issue Employee stock
under this Section 4 not more than twice in any calendar year.
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Notwithstanding the foregoing provisions which require Employee to
be employed by Employer for the stock options to vest, if Employer
terminates Employee's employment in violation of this Agreement, or if
there is a material change in Employee's duties to be performed by
Employee for Employer under this Agreement and those changes are
unacceptable to Employee and Employee as a result thereof terminates
employment with Employer, then so long as Employee has not been in
default under the terms of this Agreement, the stock options described
above which have not yet vested shall immediately vest.
(e) Signing Bonus. Employer shall pay Employee a one-time bonus in
the amount of $ [9] within sixty days after completion of the merger of
Trudy Corporation into Employer.
5. Benefits.
(a) Insurance. In addition to the compensation described above,
while Employee is employed hereunder, Employer shall pay for and provide
Employee with life, health and disability insurance consistent with what
is provided from time to time to Employer's other executive employees
during the term of this Agreement.
(b) Expense Reimbursement. In addition to the compensation and
benefits provided above, Employer shall, upon receipt of appropriate
documentation, reimburse Employee each month for Employee's reasonable
travel, lodging and other ordinary and necessary business expenses
consistent with Employer's policies as in effect from time to time.
(c) Retirement. Employee shall be entitled to participate in any
retirement savings or benefits plan offered by Employer to its
employees, as revised by Employer from time to time.
6. Vacation. Employee shall be entitled to up to [10] days of
vacation with full pay per full calendar year, in addition to such holidays
as Employer may approve for its employees.
7. Termination. Employer may terminate Employee's employment prior
to the expiration of the initial term of employment or any extension
thereof, in the manner provided in Section 7(a). Additionally, if
Employee's employment is terminated by Employer without Cause (as defined
below), Employee shall be entitled to compensation as provided in Section
7(d).
(a) For Cause. Employer may terminate this Agreement for Cause,
with a written notice to Employee stating the facts constituting such
Cause, provided that Employee shall have 10 days following such notice
to cure any conduct or act, if curable, alleged to provide grounds for
termination for Cause hereunder. In the event of termination for Cause,
Employer shall be obligated to pay the Employee only the salary due
Employee through the date of termination pursuant to Section 4(a).
"Cause" shall include material neglect of duties; willful failure to
abide by material instructions or policies from, or set by, Employer in
good faith; conviction of a felony, or conviction of another offense or
pleading guilty or nolo contendere to a crime involving moral turpitude
which may have an adverse impact on Employer's reputation or standing in
the community; Employee's material breach of this Agreement; Employee's
breach of any other material
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obligation to Employer; or upon the bankruptcy, receivership,
dissolution or cessation of business of Employer.
(b) Disability. If during the term of this Agreement, Employee
fails to perform Employee's duties hereunder because of physical or
mental illness or other incapacity for 30 consecutive days, or for 45
days during any 120-day period, then Employer shall have the right to
terminate this Agreement without further obligation hereunder, except
for any amounts payable pursuant to disability or workers' compensation
insurance plans generally applicable to Employer's employees. Employer
shall provide Employee with notice of commencement of the disability
period, which period cannot commence more than 14 days prior to the date
of the notice. If there is any dispute as to whether Employee is or was
physically or mentally disabled under this Agreement, whether Employee's
disability has ceased or whether Employee is able to resume Employee's
duties, such question shall be submitted to a licensed physician agreed
upon by Employer and Employee. Employee shall submit to such
examinations and provide information as such physician may request, and
the determination of such physician as to Employee's physical or mental
condition shall be binding and conclusive on the parties. Employer
agrees to pay the cost of any such physician's services, tests and
examinations.
(c) Death. If the Employee dies during the term of this Agreement,
this Agreement shall terminate immediately, and Employee's legal
representatives or estate shall be entitled to receive the base salary
due to Employee through the last day of the calendar month in which
Employee's death occurs and any other death benefits generally
applicable to Employer's employees.
(d) Termination Without Cause; Severance Pay. Employer may
terminate this Agreement without Cause with a written notice to
Employee. If Employer terminates this Agreement before the end of the
term of the Agreement for any reason other than those described in
Sections 7(a), 7(b) or 7(c) above, then Employer shall pay to Employee,
as the same shall become due, Employee's base salary, less applicable
withholdings (the "Severance Pay"), for [11].
(e) Termination by Employee; Severance Pay. If Employee terminates
this Agreement prior to the end of the term hereof, Employee shall give
written notice to Employer at least 30 days prior to termination.
Employee shall not be entitled to the Severance Pay: (i) if Employee
terminates this Agreement for any reason other than for Employer's
material breach of this Agreement; or (ii) if Employee's employment is
terminated for the reasons described in Sections 7(a), 7(b) or 7(c).
8. Confidential Information; Exclusivity of Employee's Services.
(a) Confidential Information. Employee acknowledges that Employee
may receive, or contribute to the production of, Confidential
Information. For purposes of this Agreement, Employee agrees that
"Confidential Information" shall mean information or material
proprietary to Employer or designated as Confidential Information by
Employer or its clients or customers and not generally known by
non-Employer personnel, which Employee develops or of, or to, which
Employee may obtain knowledge or access through, or as a result of,
Employee's relationship with Employer (including information conceived,
originated, discovered or developed in whole or in part by Employee).
Confidential Information
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includes, but is not limited to, the following types of information and
other information of a similar nature (whether or not reduced to
writing) related to Employer's business: discoveries, inventions, ideas,
concepts, research, development, processes, procedures, "know-how",
formulae, marketing techniques and materials, marketing and development
plans, business plans, customer names, employee names and other
information related to customers, price lists, pricing policies,
financial information, employee compensation, and computer programs and
systems. Confidential Information also includes any information
described above which Employer obtains from another party and which
Employer treats as proprietary or designates as Confidential
Information, whether or not owned by or developed by Employer. Employee
acknowledges that the Confidential Information derives independent
economic value, actual or potential, from not being generally known to,
and not being readily ascertainable by proper means by, other persons
who can obtain economic value from its disclosure or use. Information
publicly known without breach of this Agreement that is generally
employed by the trade at or after the time Employee first learns of such
information, or generic information or knowledge which Employee would
have learned in the course of similar employment or work elsewhere in
the trade, shall not be deemed part of the Confidential Information.
Employee further agrees:
(i) To furnish Employer on demand, at any time during or after
employment, a complete list of the names and addresses of all
present, former and potential customers and other contacts
gained while an Employee of Employer in Employee's possession,
whether or not in the possession or within the knowledge of
Employer.
(ii) That all notes, memoranda, documentation and records in any
way incorporating or reflecting any Confidential Information
shall belong exclusively to Employer, and Employee agrees to
turn over all copies of such materials in Employee's control
to Employer upon request or upon termination of Employee's
employment with Employer.
(iii) That while employed by Employer and thereafter Employee will
hold in confidence and not directly or indirectly reveal,
report, publish, disclose or transfer any of the Confidential
Information to any person or entity, or utilize any of the
Confidential Information for any purpose, except in the
course of Employee's work for Employer.
(iv) That any idea in whole or in part conceived of or made by
Employee during the term of his employment, consulting, or
similar relationship with Employer which relates directly or
indirectly to Employer's current or planned lines of business
and is made through the use of any of the Confidential
Information of Employer or any of Employer's equipment,
facilities, trade secrets or time, or which results from any
work performed by Employee for Employer, shall belong
exclusively to Employer and shall be deemed a part of the
Confidential Information for purposes of this Agreement.
Employee hereby assigns and agrees to assign to Employer all
rights in and to such Confidential Information whether for
purposes of obtaining patent or copyright protection or
otherwise. Employee shall acknowledge and deliver to
Employer, without charge to Employer (but at its expense)
such written instruments and do such other acts, including
giving testimony in
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support of Employee's authorship or inventorship, as the case
may be, necessary (in the opinion of Employer) to obtain
patents or copyrights or to otherwise protect or vest in
Employer the entire right and title in and to the
Confidential Information.
(b) Exclusivity of Employee's Services. During Employee's
employment by Employer and for a period of two years thereafter [but
with regard to the two years thereafter, this Section 8(b) shall apply
only if this Agreement is terminated for Cause pursuant to Section 7(a)
or due to Employee resigning or otherwise terminating Employee's
employment before the end of the term of this Agreement], Employee
agrees that Employee shall not, except as an owner of less than two
percent of a publicly-traded corporation's stock, enter into or engage,
directly or indirectly, whether on Employee's own account or as a
shareholder, partner, joint venturer, employee, consultant, advisor,
and/or agent, of any person, firm, corporation, or other entity other
than Employer, in any or all of the following activities:
(i) Engaging in the business of designing, manufacturing,
distributing and marketing books, greeting cards, electronic
devices, games and/or toys in the United States of America or
anywhere else in the entire world.
(ii) Soliciting the past or existing joint venturers, partners,
customers, clients, suppliers, or business patronage of
Employer or any of its predecessors, affiliates or
subsidiaries.
(iii) Soliciting the employment of any employees of Employer or any
of its affiliates or subsidiaries.
(iv) Promoting or assisting, financially or otherwise, any person,
firm, association, corporation, or other entity engaged in
the business of designing, manufacturing, distributing and
marketing books, greeting cards, electronic devices, games
and/or toys in the United States of America or anywhere else
in the entire world.
(v) Using any Confidential Information [as defined in Section
8(a)] for the purpose of, or which results in, direct
competition with Employer or any of its affiliates or
subsidiaries.
(c) Injunctions. Employer and Employee agree that the restrictions
contained in this Section 8 are reasonable, but it is recognized that
damages in the event of the breach of any of the restrictions may be
difficult or impossible to ascertain; and, therefore, Employee agrees
that, in addition to and without limiting any other right or remedy
Employer may have, Employer shall have the right to an injunction
against Employee issued by a court of competent jurisdiction enjoining
any such breach without showing or proving any actual damage to
Employer.
(d) Employee Acknowledgements. Employee also agrees, acknowledges,
covenants, represents and warrants as follows:
(i) That Employee has read and fully understands the foregoing
restrictions and that he has been advised to consult with a
competent attorney regarding the uses and enforceability of
restrictive covenants;
(ii) That Employee is aware that there may be defenses to the
enforceability of the foregoing restrictive covenants based
on time or territory
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considerations, and that Employee knowingly, consciously,
intentionally and entirely voluntarily, irrevocably waives
any and all such defenses and will not assert the same in any
action or other proceeding brought by Employer for the
purpose of enforcing the restrictive covenants or in any
other action or proceeding involving Employee and Employer;
(iii) That Employee is fully and completely aware that, and further
understands that, the foregoing restrictive covenants are an
essential part of the consideration for Employer entering
into this Agreement and has entered into this Agreement in
full reliance on these acknowledgments, covenants,
representations and warranties; and
(iv) That the existence of any claim or cause of action by
Employee against Employer, if any, whether predicated upon
this Agreement or otherwise, shall not constitute a defense
to the enforcement by Employer of the foregoing restrictive
covenants which shall be litigated separately, except when
Employee's employment is terminated pursuant to Section 7(a)
herein and a court of competent jurisdiction determines
subsequently that Employee was not terminated for Cause.
(e) Reformation. If any of the provisions of this Section 8 should
ever be deemed by a court of competent jurisdiction to exceed the
temporal, geographic or occupational limitations permitted by applicable
laws, those provisions shall be and are hereby reformed to the maximum
temporal, geographic, and/or occupational limitations permitted by law.
(f) Survival. The obligations described in Sections 8(a), (c), (d)
and (e), above, shall survive any termination of this Agreement or any
termination of the employment relationship created hereunder.
9. Inventions and Creations.
(a) Employee agrees that all inventions, discoveries, developments,
improvements, ideas, distinctive marks, symbols or phrases,
copyrightable creations, works of authorship, mask works and
other contributions including but not limited to software,
advertising, design, art work, manuals and writings
(collectively referred to as "Creations"), whether or not
protected by statute, which have been, or are in the future
conceived, created, made, developed or acquired by Employee,
either individually or jointly, while Employee is retained by
Employer and relate in any manner to Employee's work for
Employer, the research or business of Employer or fields into
which the business of Employer may extend, belong to and are
the property of Employer.
(b) Employee agrees and warrants that the Creations will be
Employee's original work and will not improperly or illegally
incorporate any material created by or belonging to others.
(c) Employee hereby sells, assigns and transfers to Employer
exclusively and irrevocably, without further compensation, all
ownership, title and rights in and to all of the Creations.
Employee further agrees to promptly and fully disclose the
Creations to Employer in writing, if requested by Employer, and
to deliver promptly to Employer whenever reasonably requested
and also upon completion of this Agreement, any
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and all originals and copies of manuscripts, programs,
writings, pictorial materials, drafts and notes of the
Creations, regardless of the media in which they might exist.
Employee agrees to execute and deliver any and all lawful
applications, assignments and other documents which Employer
requests for protecting the Creations in the United States or
any other country. Employer shall have the full and sole power
to prosecute such applications and to take all other actions
concerning the Creations, and Employee agrees to cooperate
fully, at the expense of Employer, in the preparation and
prosecution of all such applications and any legal actions and
proceedings concerning the Creations.
(d) Without diminishing in any way the rights granted to Employer
above, if a Creation is described in a patent, copyright or
trademark application, or is disclosed to a third party by
Employee within two years after Employee's employment with
Employer is terminated, Employee agrees that it is to be
presumed that the Creation was conceived, created, made,
developed or acquired by Employee during the period of his
employment with Employer, unless Employee can prove otherwise
by clear and convincing evidence.
10. Governing Law and Venue. Arizona law shall govern the
construction and enforcement of this Agreement and the parties agree that
any claim or cause of action pertaining to this Agreement shall lie only in
courts of competent jurisdiction located in Maricopa County, Arizona.
11. Construction. The language in all parts of this Agreement shall
in all cases be construed as a whole according to its fair meaning and not
strictly for nor against any party. The parties agree that each party has
reviewed this Agreement and that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not
apply in the interpretation of this Agreement or any amendment or any
exhibits thereof.
12. Nondelegability of Employee's Rights; Employer Assignment
Rights. The obligations, rights and benefits of Employee hereunder are
personal and may not be delegated, assigned or transferred in any manner
whatsoever, nor are such obligations, rights or benefits subject to
involuntary alienation, assignment or transfer. Upon reasonable notice to
Employee, Employer may transfer Employee to an affiliate of Employer, which
affiliate shall assume the obligations of Employer under this Agreement.
This Agreement shall be assigned automatically to any entity merging with
or acquiring Employer or its business.
13. Severability. If any term or provision of this Agreement is
declared by a court of competent jurisdiction to be invalid or
unenforceable for any reason, this Agreement shall remain in full force and
effect, and either (a) the invalid or unenforceable provision shall be
modified to the minimum extent necessary to make it valid and enforceable
or (b) if such a modification is not possible, this Agreement shall be
interpreted as if such invalid or unenforceable provision were not a part
hereof.
14. Attorneys' Fees. Except as otherwise provided herein, if any
party hereto institutes an action or other proceeding to enforce any rights
arising out of this Agreement, the party prevailing in such action or other
proceeding shall be paid all reasonable costs and attorneys' fees by the
non-prevailing party, such fees to be set by
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the court and not by a jury and to be included in any judgment entered in
such proceeding.
15. Consideration. It is expressly understood and agreed that this
document sets forth the entire consideration for this Agreement, and that
said consideration for this Agreement is contractual and not a mere
recital.
16. Gender and Number. All terms used in one number or gender shall
be construed to include any other number or gender as the context may
require.
17. Counterparts. This Agreement may be executed in any number of
counterparts, all such counterparts shall be deemed to constitute one and
the same instrument, and each of said counterparts shall be deemed an
original hereof.
18. Section Headings. The section headings used in this Agreement
are inserted for convenience only and shall not affect the meaning or
construction of this Agreement.
19. Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed duly given upon receipt if either personally
delivered, sent by certified mail, return receipt requested, sent by
telefacsimile with a copy by first-class U.S. mail, or sent by a
nationally-recognized overnight courier service, addressed to the parties
as follows:
<TABLE>
<C> <S>
If to Employer: [12]
If to Employee: [13]
</TABLE>
or to such other address and/or telefacsimile number as any party may
provide to the other in accordance with this Section.
20. Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof
(i.e., Employee's employment by Employer) and supersedes all prior or
contemporaneous offers, understandings or agreements in regard thereto.
21. Modification of Agreement. No modification or addition to this
Agreement shall be valid unless in writing, specifically referring to this
Agreement and signed by all parties hereto.
22. Waiver. No waiver of any rights under this Agreement shall be
valid unless in writing and signed by the party to be charged with such
waiver. No waiver of any term or condition contained in this Agreement
shall be deemed or construed as a further or continuing waiver of such term
or condition, unless the waiver specifically provides otherwise.
23. Contracts. Notwithstanding any provisions to the contrary in
this Agreement, Employee shall not enter into any contracts or agreements,
written or oral, for or on behalf of Employer without Employer's prior
written consent.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first hereinabove written.
<TABLE>
<C> <S>
EMPLOYER: [2]
By: /s/
--------------------------------------------------
Its
--------------------------------------------------
EMPLOYEE [3]
</TABLE>
List of Exhibits:
<TABLE>
<S> <C> <C>
Job Description.................... "A"
Subscriber Representations and
Warranties....................... "B"
</TABLE>
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EXHIBIT "A"
JOB DESCRIPTION
[14]
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EXHIBIT "B"
SUBSCRIBER REPRESENTATIONS AND WARRANTIES
Subscriber hereby represents, warrants and acknowledges to the Corporation
as follows:
1. The Shares will be acquired by Subscriber for Subscriber's own account
and not with the view to, or for resale in connection with, any distribution,
public offering or transfer thereof within the meaning of the Securities Act of
1933, as amended (the "1933 Act"), and Subscriber is not, directly or
indirectly, participating in an underwriting of any such distribution, offering,
or transfer.
2. Subscriber understands that the Shares have not been registered under
the 1933 Act by reason of issuance in transactions exempt from the registration
and prospectus delivery requirements of the 1933 Act pursuant to Section 4(2)
thereof.
3. Subscriber understands that the Shares have not been registered under
the 1933 Act or any state securities laws, that they are "restricted securities"
in the hands of Subscriber with the meaning of the Act, and that any future sale
of the Shares will be regulated by the Act and applicable state securities laws.
Subscriber understands that the Shares may not be sold, transferred or otherwise
disposed of without registration under the 1933 Act or an exemption therefrom,
and that in the absence of an effective registration statement covering the
Shares, or an available exemption from registration under the 1933 Act, the
Shares must be held indefinitely.
4. Subscriber will not sell or otherwise transfer or dispose of any of the
Shares: (A) except in strict compliance with (1) the provisions of the Agreement
to which this Exhibit is attached, and (2) the restrictions on transfer
described herein, and (B) unless such securities are (X) registered under the
1933 Act, and any applicable state securities laws, or (Y) Subscriber represents
that such securities may be sold in reliance on an exemption from such
registration requirements.
5. No federal or state agency, including the Securities and Exchange
Commission or the securities regulatory agency of any state, has approved or
disapproved the Shares, passed upon or endorsed the merits of the Shares, or
made any finding or determination as to the fairness of the Shares for private
investment.
6. The investment in the Shares is being made in reliance on specific
exemptions from the registration requirements of federal and state securities
laws, and the Corporation is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgements and understandings set
forth herein in order to establish such exemptions.
7. Subscriber agrees to deliver to the Corporation, if requested by the
Corporation, an investment letter in customary form.
8. Based on personal knowledge and experience in financial and business
matters in general, Subscriber understands the nature of this investment, is
fully aware of and familiar with the business operations of the Corporation, and
is able to evaluate the merits and risks of an investments in the Shares.
9. Subscriber has been given the opportunity to ask questions about the
Corporation and has been granted access to all information, financial and
otherwise, with respect to the Corporation which has been requested, has
examined such information, and is satisfied with respect to the same.
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10. Subscriber has been encouraged to rely upon the advice of Subscriber's
legal counsel and accountants or other financial advisors with respect to the
tax and other considerations relating to the acquisition of the Shares.
11. Subscriber, in determining to acquire the Shares, has relied solely
upon: (A) the advice of Subscriber's legal counsel and accountants or other
financial advisers with respect to the tax, economic and other consequences
involved in acquiring the Shares, and (B) Subscriber's own independent
evaluation of the business, operations and prospects of the Corporation and the
merits and risks of the acquisition of the Shares.
12. Subscriber has been advised and understands that this investment is,
by its nature, very speculative.
13. Subscriber has sufficient income and net worth such that Subscriber
does not contemplate being required to dispose of any portion of the investment
in the Shares to satisfy any existing or expected undertaking or indebtedness.
Subscriber is able to bear the economic risks of an investment in the Shares,
including, without limiting the generality of the foregoing, the risk of losing
all or any part of the investment and probable inability to sell or transfer the
Shares for an indefinite period of time.
14. Subscriber is an "accredited investor" within the meaning of Rule 501
of Regulation D promulgated by the Securities and Exchange Commission, as
presently in effect.
15. The investment in the Shares has been privately proposed to Subscriber
without the use of general solicitation or advertising.
16. Subscriber understands that the certificates representing the Shares
may bear restrictive legends as to the restricted nature of such securities and
may bear a legend substantially in the following form, and agrees to will hold
the Shares subject thereto:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES
LAWS. NEITHER THIS SECURITY NOR ANY PORTION HEREOF OR INTEREST HEREIN MAY
BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS
THE SAME IS REGISTERED UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND THE
COMPANY SHALL HAVE RECEIVED, AT THE EXPENSE OF THE HOLDER HEREOF,
EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO THE COMPANY (WHICH
MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY).
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EXHIBIT 2.8.3
TO
MERGER AGREEMENT
(FORM FOR EMPLOYMENT AGREEMENTS)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("AGREEMENT") is entered into effective
[1] , by and between [2] ("EMPLOYEE") and [New Sub], a Nevada
corporation ("EMPLOYER") and Futech Interactive Products, Inc., a Delaware
corporation (with its successors, "FUTECH")
R E C I T A L S:
A. Employee has been employed by Fundex Games, Ltd., a Nevada corporation
("FUNDEX"), which manufactures and distributes children's games and toys (the
"BUSINESS").
B. On even date herewith, Employer, a wholly owned subsidiary of Futech,
has acquired all the stock of Fundex pursuant to the terms of that certain
Merger Agreement by and between Fundex and Futech (and others) (the "MERGER
AGREEMENT").
C. Employer desires to employ Employee, and Employee desires to accept
employment, upon the terms and conditions set forth in this Agreement.
D. Futech desires to guarantee Employer's performance of this Agreement as
an enducement to Employee to execute this Agreement on the terms and conditions
set forth herein.
T E R M S:
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1. EMPLOYMENT. Employer hereby hires and employs Employee for the
position of " [3] " of Employer, or such other additional title with
Futech as the Chairman of Futech shall reasonably determine. Employee shall be
vested with such powers and responsibilities, and shall perform such functions
and duties, as Employer shall from time to time prescribe.
Employee will devote on an exclusive basis Employee's full time, energy and
skill to the performance of Employee's duties for Employer and for the benefit
of Employer and/or Futech. Employee shall at all times faithfully,
industriously, and to the best of Employee's ability, experience and talent,
perform Employee's duties under this Agreement. Employee will exercise due
diligence and care in the performance of Employee's duties to Employer under
this Agreement.
Employee will be based at Employer's operating unit in Indianapolis,
Indiana, or such other location as Employer and Employee reasonably agree to so
relocate in order to fulfill Employee's obligations hereunder.
2. EMPLOYMENT PERIOD. The period of employment shall commence on the date
of this Agreement, and end on the date which is three (3) years thereafter
("EXPIRATION DATE"), unless sooner terminated in accordance with the provisions
of this Agreement. The
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period of time commencing on Employee's first day of employment with Employer,
and ending on the effective date of the termination of employment of Employee
under this Agreement, is sometimes referred to herein as the "Employment
Period."
3. COMPENSATION. As compensation for services rendered by Employee under
this Agreement, Employer shall pay Employee as follows, and Employee agrees that
said payments shall be in full payment for Employee's services and promises to
Employer (specifically including the covenant not to compete as set out in
Section 8 below and the proprietary information provisions in Section 9 below):
(a) Base Salary. Employee shall receive compensation installments
based on an annual salary of One Hundred Fifty Thousand Dollars
($150,000.00) ("BASE SALARY"). Employee's Base Salary shall be payable in a
manner and on the timetable which Employer's payroll is customarily
handled, but no less often than semi-monthly installments.
(b) Common Stock Option. If Employee has been continuously employed
by Employer between the date of this Agreement and the date which is one
year thereafter, or is terminated by Employer during that period without
Cause (as hereinafter defined) and has not been in material default under
the terms of this Agreement, then Employee shall as of the date which is
one year after the date of this Agreement have the right to purchase up to
11,111 shares of Futech's common stock.
If Employee has been continuously employed by Employer between the
date of this Agreement and the date which is two years thereafter, or is
terminated by Employer during that period without Cause, and has not been
in material default under the terms of this Agreement, then Employee shall
as of the date which is two years after the date of this Agreement have the
right to purchase up to an additional 11,111 shares of Futech's common
stock.
If Employee has been continuously employed by Employer between the
date of this Agreement and the date which is three years thereafter, or is
terminated by Employer during that period without Cause, and has not been
in material default under the terms of this Agreement, then Employee shall
as of the date which is three years after the date of this Agreement have
the right to purchase up to 11,111 shares of Futech's common stock.
The purchase price of common stock purchased under the three preceding
paragraphs shall be $4.50 per share, payable in full in cash at the time
the option is exercised. The options may be exercised only by written
notice given to Employer, or Employer's successors and assigns. The options
shall expire on the date which is ten (10) years after the date of this
Agreement, if not exercised by that date.
The common stock purchased pursuant to this Section shall be subject
to all of the terms and restrictions of said stock, which shall be
commensurate with the restrictions restricting other Futech common stock.
No representation, warranty or guaranty is made by Employer as to the value
of the stock to be issued pursuant to this subparagraph, and Employee takes
full risk and responsibility as to said value.
Employee hereby makes the representations and warranties set out in
Exhibit "A" attached hereto and hereby made part hereof. On said Exhibit
"A" Employee is referred to as the "Subscriber," Futech is referred as the
Corporation, and the shares of stock to be acquired by Employee under this
Section are referred to as the
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"Shares." Employee acknowledges and understands the meaning and legal
consequences of the representations and warranties contained herein and
agrees to indemnify and defend and hold harmless the other parties hereto,
and Employer's directors, officers, agents, employees, and attorneys, from
and against any and all claims, loss, damage, liability, cost or expense,
including attorneys' fees and court costs, due to or arising out of or
connected directly or indirectly with or to any breach of any such
representation or warranty made by Employee. Employee's representations and
warranties appearing herein are made as of the date hereof and as of the
date of issuance of stock pursuant to this subparagraph (b). Employee's
acceptance of stock under this Section 3 shall constitute Employee's
confirmation of the representations and warranties appearing herein as of
the date of the acceptance.
Employee shall be entitled to have Futech issue Employee stock under
this Section 3 not more than twice in any calendar year.
Notwithstanding the foregoing provisions which require Employee to be
employed by Employer for the stock options to vest, if Employer terminates
Employee's employment in violation of this Agreement, or if there is a
material change in Employee's duties to be performed by Employee for
Employer under this Agreement and those changes are unacceptable to
Employee and Employee as a result thereof terminates employment with
Employer, then so long as Employee has not been in default under the terms
of this Agreement, the stock options described above which have not yet
vested shall immediately vest.
(c) Vacation and Fringe Benefit Programs. During the term of this
Agreement, Employee shall be entitled to the following:
(i) Twenty days of vacation per full year worked, to be taken in
accordance with the policies and directives of Employer.
(ii) [4]Employee shall receive such other fringe benefits as may be
granted to Employee from time to time by Employer or Futech.
Employee's participation in such employee benefits of Employer
or Futech shall be based upon Employee's tenure classification
under rules established by Employer from time to time, and
Employee shall be credited towards his tenure for the time
employed by Fundex.
(iii) Employee shall be entitled to be reimbursed by Employer for
all reasonable and necessary expenses incurred by Employee in
carrying out his duties under this Agreement in accordance
with Employer's standard policy regarding such
reimbursements, including, without limitation, car phone,
airfare, hotel, meals and other reasonable travel expenses.
(d) Payroll Taxes. Employee's compensation and other benefits shall
be subject to all payroll and withholding deductions as may be required by
law.
(e) Permitted Activities. Notwithstanding anything to the contrary
herein contained, Employee (i) may make passive investments and hold
positions as director, trustee, or similar capacity in other entities
insofar as such positions and investments do not conflict with this
Agreement, Employee's full-time duties and loyalties to Employer and its
affiliates or any of Employer's written policies; and (ii) may hold
positions in charitable and other organizations so long as they are not
inappropriate in light of or conflict with his duties hereunder
(collectively, the "PERMITTED ACTIVITIES").
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4. DEATH OR DISABILITY. If during the Employment Period Employee
shall become "disabled", and as a result thereof become unable to continue
the proper performance of Employee's duties hereunder on a full-time basis,
then Employee's employment hereunder shall thereupon at the option of
Employer automatically terminate. This Agreement shall automatically
terminate upon the death of Employee. For purposes of this Agreement,
disability shall mean the failure by Employee on account of a medical
disability to substantially perform employee's duties of employment and
achieve expected customary results for a period of 90 consecutive days and
the finding by Employer in the exercise of its reasonable discretion,
confirmed by written opinion of a medical doctor after a detailed exam,
that Employee will not be able to substantially perform Employee's duties
for at least a period of an additional 90 days during the term of this
Agreement.
5. TERMINATION BY EMPLOYER.
(a) Termination for Cause. Employer may terminate this Agreement at
any time for "Cause". The existence of Cause shall be reasonably determined
by Employer. Any termination for Cause shall be, at Employer's election,
immediate. The term "Cause" as used herein shall include, but not be
limited to, the following meanings:
(i) The failure of Employee to timely discharge or perform
Employee's material duties and obligations under this
Agreement with due diligence and care for a period of thirty
(30) days after written notice of such failure is given to
Employee by Employer; provided, however, that said thirty
(30) day period shall not apply to violations of Sections 8
or 9 below;
(ii) The refusal of Employee to implement or adhere to material
policies or directives of Employer, which are known to
Employee, for a period of thirty (30) days after written
notice of such is given to Employee by Employer;
(iii) Conviction of a felony under state or federal law, or the
conviction of a lesser offense involving moral terpitude
which may have an adverse impact on Employer's reputation or
standing in the community;
(iv) Conduct which is a material violation of Employee's common
law duty of loyalty to Employer and/or Futech;
(v) Fraudulent conduct in connection with the business affairs of
Employer regardless of whether said conduct is designed to
defraud Employer or others. Fraudulent conduct shall not
include negligence, recklessness, bad judgment or any
unintentional acts of Employee;
(vi) Conduct which is a material violation of any provision of
this Agreement for a period of thirty (30) days after which
notice to Employee of such violation is given Employee by
Employer;
(vii) The taking by the Employee of actions (excluding Permitted
Activities) in conflict with any interest of the Employer,
Futech or their subsidiaries or affiliates, provided that
Employee shall have ten (10) days after written notice
thereof to cure such breach;
(viii) A material breach by Employee of any representation,
warranty, covenant or agreement contained in this Agreement;
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(ix) Employee's knowing breach or default of any of the
representations contained in that certain "Merger Agreement"
of even date herewith (the "MERGER AGREEMENT"), by and among
Carl E. Voigt, III, Carl E. Voigt, IV, Futech, Fundex Games,
Ltd., and others, relating to, among other things, certain of
the capital stock of Fundex Games, Ltd., which breach or
default has a material adverse effect on the business of
Fundex;
(x) If Employee intentionally materially misrepresents any
statement to Employer or Futech; or
(xi) If Employee terminates this Agreement.
6. TERMINATION BY EMPLOYEE. Employee shall have the right to terminate
this Agreement at any time after at least ninety (90) days prior written notice
given to Employer. Employee agrees to provide Employer with ninety (90) days
prior written notice of any such termination.
7. EFFECT OF TERMINATION.
(a) Proper Termination. Upon proper termination of this Agreement by
Employer or Employee, any amounts payable between the parties for periods
prior to termination shall remain payable, and the covenant not to compete
set forth in Section 8 below, and the proprietary information provisions of
Section 9 below, shall survive any said termination and shall continue to
bind Employee for the period of time stated therein.
(b) Termination Without Cause. Upon the occurrence of a termination
by Employer without Cause or "Constructive Termination" by Employer, this
Agreement shall terminate upon the date of such termination without Cause
and the Employee shall (i) be paid, within 10 days thereafter, any unpaid
portion of the Base Salary as then in effect, through the Expiration Date;
(ii) receive (within 120 days after the end of the relevant fiscal year of
Futech) any bonus payments, prorated to such date of termination, Employee
would be entitled to but for such termination without Cause, and (iii) be
entitled to vesting of all options to purchase common stock of Futech
granted to Employee, and such options shall become immediately exercisable
as set forth in Section 3 herein. Upon such termination without Cause or
Constructive Termination, the restrictions in Section 8 and Section 9 (with
respect only to Fundex) below shall automatically terminate and shall be of
no further force or effect (this provision shall not effect any
restrictions appearing in the Merger Agreement). For purposes of this
Agreement, Constructive Termination shall mean:
(i) a material change in Employee's title, authorities or duties
as set forth in Section 1 of this Agreement;
(ii) Employer's continuing breach of the terms of this Agreement
for a period of 30 days after its receipt of written notice of
such breach from Employee specifying the alleged breach;
(iii) Goett shall no longer be Chairman and/or Chief Executive
Officer of Futech at any time prior to the earlier to occur
of one year after the date of this Agreement or the date of
any secondary public offering by Futech or its successor;
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(iv) a default by Futech in the payment of any installment of the
Promissory Note executed in accordance with Section B of
EXHIBIT 1.6 of the Merger Agreement; or
(v) a material default by Futech in any representation, warranty
or covenant made by Futech in the Merger Agreement, after
written notice of such default from Employee to Futech
specifying the alleged breach and 30 days to cure such breach.
8. RESTRICTIVE COVENANTS. Employee acknowledges that Employee will have
access to confidential information about Employer and Futech, and that Employee
will have access to other "proprietary information" (as defined in Section 9
below) acquired by Employer or Futech at the expense of Employer or Futech for
use in the business of Employer and/or Futech. Accordingly, by execution of this
Agreement:
(a) Employee agrees that commencing the date of this Agreement, and
continuing for one (1) year following Employee's termination of
employment with Employer pursuant to Section 6 or for Cause,
Employee shall not violate the provisions of subparagraph 8(b)
below. Employee agrees that the one-year period referred to in the
preceding sentence shall be extended by the number of days included
in any period of time during which Employee is or was engaged in
activities constituting a breach of subparagraph 8(b).
(b) During the time period specified in subparagraph (a) above,
Employee shall not:
(i) Directly or indirectly induce, encourage or assist any other
individual who was employed by Employer or Futech during
Employee's employment with Employer, or during the one (1)
year period referred to in subparagraph (a) above, to leave
the employ of Employer or Futech. If Employee has any control
over, or responsibility with respect to, the hiring of
employees, agents or consultants at any other facility or with
any other employer, Employee shall use reasonable efforts to
preclude the hiring or retention by such other employer or
facility of any individual who was employed by Employer or
Futech during Employee's employment period with Employer or
Futech or during the one (1) year period referred to in
subparagraph (a) above.
(ii) Directly or indirectly solicit (or take other actions which
could reasonably have the same effect as such solicitation)
any individual or entity who is or was a customer of Employer
or Futech during Employee's employment with Employer or Futech
to obtain services from Employee or any other individual or
entity, if such services are similar to, or the same as, the
services provided to such individual or entity by Employer or
Futech during Employee's employment with Employer or Futech,
and the services and/or goods solicited are in the toys and/or
games business.
(iii) Directly or indirectly own, manage, operate, control, be
employer by, participate in, or be connected in any manner
with the ownership, management, operation, or control of any
business offering services in competition with those of
Employer or Futech and located anywhere in the world.
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(c) Employee agrees, prior to employment, to provide a copy of this
Section 8 to each and every other employer or facility at which
Employee is retained or employed during the period specified in
subparagraph 8(a) above.
(d) Employee expressly agrees and acknowledges that these restrictive
covenants are necessary for Employer's and Futech's protection
because of the nature and scope of Employer's and Futech's
business, the highly technological-intensive nature of Employer's
business, and Employee's position with and services rendered for
Employer and/or Futech, Employee expressly agrees and acknowledges
that this covenant not to compete is reasonable as to time, scope
of activities restricted, and geographical area, does not place any
unreasonable burden upon Employee, and does not prevent Employee
from earning a living. Employee and Employer agree that the general
public will not be harmed as a result of enforcement of this
covenant not to compete.
(e) If the scope of any restriction in this Section is too broad to
permit enforcement of such restriction to its fullest extent, then
such restriction shall be enforced to the maximum extent permitted
by law, and the parties hereto consent and agree that such scope
may be modified judicially or by arbitration in any proceeding
brought to enforce such restriction. Further, Employee acknowledges
that any breach of this covenant not to compete would result in
irreparable damage to Employer and/or Futech. Employee acknowledges
and agrees that remedies at law for any breach or violation of the
provisions of this Section would alone be inadequate, and agrees
and consents that temporary and permanent injunctive relief may be
granted in connection with such violations, without the necessity
of proof of actual damage, and such remedies shall be in addition
to other remedies and right Employer may have at law or in equity.
Employee agrees that neither Employer nor Futech shall not be
required to give notice or post any bond in connection with
applying for or obtaining any such injunctive relief.
(f) Subject to Section 7 herein, Employee agrees that the covenants in
this Section 8 shall be construed as an agreement independent of
any other provision of this Agreement so that the existence of any
claim or cause of action by Employee against Employer or Futech,
whether predicated on this Section or otherwise, shall not
constitute a defense to the enforcement of this Section.
(h) Employee acknowledges that Employee has had the opportunity to have
Employee's personal legal counsel review these restrictive
covenants, and all of the other provisions in this Agreement.
(i) Employee acknowledges that Employee understands and hereby agrees
to each and every term and condition of these restrictive
covenants.
9. PROPRIETARY INFORMATION. It is understood and agreed that, in the
course of Employee's employment hereunder and through Employee's activities for
and on behalf of Employer or Futech, Employee will receive, deal with and have
access to Employer's and/or Futech's "proprietary information," defined below,
and that Employee holds and is to hold said proprietary information in trust and
confidence for Employer and Futech. Employee agrees that Employee shall not,
during the term of this Agreement or thereafter, in any fashion, form or manner,
directly or indirectly, retain, make copies of, divulge, disclose or communicate
to any person, in any manner whatsoever, or authorize anyone
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else to take such actions, except when necessary or required in the normal
course of Employee's employment hereunder and for the benefit of Employer or
Futech, or with the express written consent of Employer and Futech, any of
Employer's or Futech's proprietary information or any information of any kind,
nature or description whatsoever concerning any matters affecting or relating to
Employer's or Futech's business.
For purposes of this Agreement, "proprietary information" means and
includes the following: the identity of customers or potential customers of
Employer or Futech; any written, typed or printed lists or other materials
identifying the customers of Employer or Futech; any information supplied by
customers of Employer or Futech; any and all data or information involving the
techniques, programs, methods or contacts employed by Employer or Futech in the
conduct of its business; any lists, documents, manuals, records, forms, or other
materials used by Employer or Futech in the conduct of its/their business; any
descriptive materials describing the methods and procedures employed by Employer
or Futech in the conduct of its business; any other secret or confidential
information concerning Employer's or Futech's business or affairs. The terms
"list," "document," or their equivalent, as used in this paragraph, are not
limited to a physical writing or compilation but also include any and all
information whatsoever regarding the subject matter of the "list" or "document"
whether or not such compilation has been reduced to writing. For purposes of
this Agreement, proprietary information shall not include information that (i)
becomes generally available to the public, other than as a result of disclosure
by Employee or his agents, representatives; (ii) becomes available on a non-
confidential basis from a source other than a member of Employer, Futech or
their affiliates or agents, provided such source lawfully obtains such
information and is not bound by a confidentiality agreement with any member of
Employer or Futech; or (iii) is required to be disclosed by law.
The parties hereby stipulate as between themselves that this requirement of
confidentiality is vital to the effective and successful operation of Employer's
and Futech's business, and that any breach of the terms of this Section 9 shall
be a material breach of this Agreement. In the event of Employee's actual or
threatened breach of this Section 9, Employer and/or Futech shall be entitled,
in addition to any and all available remedies for such breach or threatened
breach, to the recovery of damages from Employee and to injunctive relief.
If during the term of Employee's employment with Employer Employee develops
or discovers any innovative technique, method, or process relating to the
Business, or receives any patents relating to the Business, then such
techniques, methods, processes and patents shall be the property of Employer.
Upon termination of this Agreement for any reason, Employee shall
immediately turn over to Employer any proprietary information. Employee shall
have no right to retain any copies of any material qualifying as proprietary
information for any reason whatsoever after termination of Employee's employment
hereunder without the express prior written consent of Employer.
Subject to Section 7 herein, Employee agrees that the covenants in this
Section 9 shall be construed as an agreement independent of any other provision
of this Agreement so that the existence of any claim or cause of action by
Employee against Employer or Futech, whether predicated on this Section or
otherwise, shall not constitute a defense to the enforcement of this Section.
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10. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and
supersedes any and all prior agreements and understandings between the parties
with respect to employment or with respect to the compensation of Employee by
Employer, other than as called for in the Agreement described in subparagraph
5(b)(ix) above.
11. SUCCESSORS; BENEFIT. This Agreement is personal in its nature and
Employee shall not, without the consent of Employer, assign, transfer or
delegate this Agreement or any rights or obligations hereunder. The rights and
obligations of Employer hereunder shall inure to the benefit of and shall be
binding upon the successors and assigns of Employer.
12. GOVERNING LAW. This Agreement and the legal relations thus created
between the parties hereto shall be governed by and construed and enforced under
and in accordance with the laws of the State of Arizona.
13. JURISDICTION. The courts of the State of Arizona shall have the sole
and exclusive jurisdiction in any case or controversy arising under this
Agreement or by reason of this Agreement. The parties agree that any litigation
or arbitration arising from the interpretation or enforcement of this Agreement
shall be in the United States Federal Court for the District of Arizona, if
available, and if not available, then in the Maricopa County Superior Court, and
for this purpose each party to this Agreement (and each person who shall become
a party) hereby expressly and irrevocably consents to the jurisdiction of such
courts.
14. ENTIRE AGREEMENT; MODIFICATION. This Agreement embodies the entire
agreement of the parties respecting the matters within its scope. Except as
otherwise expressly set forth in this Agreement, or in the Agreement described
in subparagraph 5(b)(ix) above, this Agreement contains all the terms and
conditions agreed to by the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, if any, with respect
thereto. This Agreement may not be amended or modified except by an agreement in
writing duly executed by Employee, Employer and Futech. The parties do not
intend to confer any benefit hereunder on any person or firm other than the
parties hereto. No representation or warranty herein may be relied upon by any
person not a party to this Agreement.
15. WAIVER. Failure to insist upon strict compliance with any of the
terms, covenants or conditions hereof shall not be deemed a waiver of such term,
covenant or condition, nor shall any waiver or relinquishment of, or failure to
insist upon strict compliance with, any right or power hereunder at any one or
more times be deemed a waiver or relinquishment of such right or power at any
other time or times.
16. ATTORNEY'S FEES. Employee and Employer agree that in any arbitration
or legal proceeding arising out of this Agreement the prevailing party shall be
entitled to its reasonable attorney's fees and costs of litigation, determined
by the judge and not the jury in which the action is brought, in addition to any
other relief granted.
17. SEVERABILITY. In the event that any court of competent jurisdiction
determines that any portion of this Agreement is in violation of any statute or
public policy, then only the portions of this Agreement which violate such
statute or public policy shall be stricken. All portions of this Agreement which
do not violate any statute or public policy shall continue in full force and
effect. Further, any court order striking any portion of this Agreement shall
modify the stricken terms as narrowly as possible to give as much effect as
possible to the intentions of the parties under this Agreement.
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18. NOTICES. Any notice or other communication given under the terms of
this Agreement ("Notice") shall be in writing and shall be delivered in person
or mailed by certified mail, return receipt requested, in the United States
mail, postage pre-paid, addressed as follows:
If to Employer: [New Sub]
Attention: Frederick B. Gretsch, Sr.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
and
Futech Interactive Products, Inc.
Attention: Vincent W. Goett
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
If to Employee: [2]
2237 Directors Row
Indianapolis, Indiana 46241
Copy to: Much Shelist Freed Denenberg Ament &
Rubenstein, P.C.
200 North LaSalle Street, Suite 2100
Chicago, Illinois 60601
Attention: Mitchell S. Roth
Phone: (312)346-3100
Fax: (312)621-1750
or at such other address as a party may from time to time designate by Notice
hereunder. Notice shall be effective upon delivery in person, or if mailed, at
midnight on the third business day after the date of mailing.
19. MISCELLANEOUS. The parties agree to do such further acts and things
and execute and deliver such additional agreements and instruments as either
party may reasonably require to consummate, evidence, or confirm any agreement
contained herein in the manner contemplated hereby. This Agreement shall be
construed according to its fair meaning, and neither for nor against the
drafting party. The titles and headings of sections of this Agreement are for
the convenience of reference only, are not intended to define, limit, or
describe the scope or intent of any provision of this Agreement, and shall not
affect the construction of any provision of this Agreement.
20. INDEMNIFICATION. Employer and Futech agree to indemnify the Employee
(and his successors, assigns, estate, administrators, executors, and legal
representatives) and to advance monies to such persons to pay expenses relating
to indemnifiable events, in each case to the fullest extent permitted by the
laws of the State of Arizona and Employee shall be entitled to the protection of
any insurance policies Employer or Futech may elect to maintain generally for
the benefit of their directors and officers, against all costs, charges and
expenses whatsoever incurred or sustained by Employee or his successors,
assigns, estate, administrators, executors and legal representatives in
connection with any action, suit or proceeding to which any such persons may be
made a party by reason of the Employee being or having been a director or
officer of the Employer, Futech or any of their subsidiaries and affiliates;
provided, however, that the provisions of this Section 20 shall not apply to
liabilities indemnified against by Employee in that certain Merger
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Agreement, by and among Futech, Trudy Corporation, Futech Interactive Products,
Inc., an Arizona corporation, DaMert Company, Janex International, Inc., Fundex
Games, Ltd., Employer, and certain individuals (subject to the limitations on
liability set out in Exhibit 3.36 of the Merger Agreement).
DATED the date first hereinabove written.
EMPLOYER: [New Sub],
a Nevada corporation
By:
----------------------------------
Vincent W. Goett, CEO
EMPLOYEE:
-------------------------------------------------
[2]
ACCEPTED AND AGREED TO
as of the date first hereinabove written,
by:
Futech Interactive Products, Inc., a Delaware corporation
By
- -----------------------------------------------
Vincent W. Goett, C.E.O.
List of Exhibits:
Representations and Warranties
Regarding Stock................."A"
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EXHIBIT "A"
SUBSCRIBER REPRESENTATIONS AND WARRANTIES
Subscriber hereby represents, warrants and acknowledges to the Corporation
as follows:
1. The Shares will be acquired by Subscriber for Subscriber's own account and
not with the view to, or for resale in connection with, any distribution,
public offering or transfer thereof within the meaning of the Securities Act
of 1933, as amended (the "1933 Act"), and Subscriber is not, directly or
indirectly, participating in an underwriting of any such distribution,
offering, or transfer.
2. Subscriber understands that the Shares have not been registered under the
1933 Act by reason of issuance in transactions exempt from the registration
and prospectus delivery requirements of the 1933 Act pursuant to Section
4(2) thereof.
3. Subscriber understands that the Shares have not been registered under the
1933 Act or any state securities laws, that they are "restricted securities"
in the hands of Subscriber with the meaning of the Act, and that any future
sale of the Shares will be regulated by the Act and applicable state
securities laws. Subscriber understands that the Shares may not be sold,
transferred or otherwise disposed of without registration under the 1933 Act
or an exemption therefrom, and that in the absence of an effective
registration statement covering the Shares, or an available exemption from
registration under the 1933 Act, the Shares must be held indefinitely.
4. Subscriber will not sell or otherwise transfer or dispose of any of the
Shares: (A) except in strict compliance with (1) the provisions of the
Agreement to which this Exhibit is attached, and (2) the restrictions on
transfer described herein, and (B) unless such securities are (X) registered
under the 1933 Act, and any applicable state securities laws, or (Y)
Subscriber represents that such securities may be sold in reliance on an
exemption from such registration requirements.
5. No federal or state agency, including the Securities and Exchange Commission
or the securities regulatory agency of any state, has approved or
disapproved the Shares, passed upon or endorsed the merits of the Shares, or
made any finding or determination as to the fairness of the Shares for
private investment.
6. The investment in the Shares is being made in reliance on specific
exemptions from the registration requirements of federal and state
securities laws, and the Corporation is relying upon the truth and accuracy
of the representations, warranties, agreements, acknowledgments and
understandings set forth herein in order to establish such exemptions.
7. Subscriber agrees to deliver to the Corporation, if requested by the
Corporation, an investment letter in customary form.
8. Based on personal knowledge and experience in financial and business matters
in general, Subscriber understands the nature of this investment, is fully
aware of and familiar with the business operations of the Corporation, and
is able to evaluate the merits and risks of an investments in the Shares.
9. Subscriber has been given the opportunity to ask questions about the
Corporation and has been granted access to all information, financial and
otherwise, with respect to the Corporation which has been requested, has
examined such information, and is satisfied with respect to the same.
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10. Subscriber has been encouraged to rely upon the advice of Subscriber's
legal counsel and accountants or other financial advisors with respect to
the tax and other considerations relating to the acquisition of the Shares.
11. Subscriber, in determining to acquire the Shares, has relied solely upon:
(A) the advice of Subscriber's legal counsel and accountants or other
financial advisers with respect to the tax, economic and other consequences
involved in acquiring the Shares, and (B) Subscriber's own independent
evaluation of the business, operations and prospects of the Corporation and
the merits and risks of the acquisition of the Shares.
12. Subscriber has been advised and understands that this investment is, by its
nature, very speculative.
13. Subscriber has sufficient income and net worth such that Subscriber does
not contemplate being required to dispose of any portion of the investment
in the Shares to satisfy any existing or expected undertaking or
indebtedness. Subscriber is able to bear the economic risks of an
investment in the Shares, including, without limiting the generality of the
foregoing, the risk of losing all or any part of the investment and
probable inability to sell or transfer the Shares for an indefinite period
of time.
14. Subscriber is an "accredited investor" within the meaning of Rule 501 of
Regulation D promulgated by the Securities and Exchange Commission, as
presently in effect.
15. The investment in the Shares has been privately proposed to Subscriber
without the use of general solicitation or advertising.
16. Subscriber understands that the certificates representing the Shares may
bear restrictive legends as to the restricted nature of such securities and
may bear a legend substantially in the following form, and agrees to will
hold the Shares subject thereto:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY PORTION HEREOF OR
INTEREST HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF UNLESS THE SAME IS REGISTERED UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE AND THE COMPANY SHALL HAVE RECEIVED, AT THE EXPENSE OF THE
HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO THE
COMPANY (WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY).
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EXHIBIT 2.10
TO
MERGER AGREEMENT
(PROVISIONS REGARDING SHAREHOLDER LOANS AND GUARANTEES)
A. DAMERT.
New Futech will, by the Closing, do the following:
(i) Obtain releases of Frederick A. DaMert and Gail Patton DaMert of their
personal guarantees of their following DaMert Company's obligations:
(1) loans from Wells Fargo Bank with aggregate current balances of
approximately $2,824,000; and (2) all obligations under that certain
real property lease dated July 27, 1995 for the premises located at
1609 fourth street, Berkeley, California.
(ii) Arrange for the pay-off of all the debt obligations of DaMert Company
to Wells Fargo Bank, consisting of a credit facility of $2,500,000,
an additional loan of $300,000, and a term equipment loan with an
approximate current balance of $24,000; and
(iii) Assume repayment of the loans owing by DaMert to Frederick A. DaMert
in the aggregate principal amount of $128,849.
B. FUNDEX.
New Futech will, by the Closing, obtain releases of Carl E. Voigt, IV and
Carl E. Voigt, III, and their spouses, of their personal guarantees of the
following Fundex debts: (i) $2,500,000.00 revolving credit line of Fundex with
Norwest Business Credit, Inc.; and (ii) $1,000,000.00 term loan of Fundex with
Liberty Bidco Investment Corporation ("Bidco"). New Futech will, by the Closing,
also obtain releases of the shares of stock of Fundex which are pledged to Bidco
as collateral for the $1,000,000.00 term loan.
C. FUTECH.
Not Applicable.
D. JANEX.
Within 30 days after the Closing, New Futech is to obtain releases of Les
Friedland, Dan Lesnick, and Howard W. Moore from their personal obligations or
guarantees of the Janex line of credit with Tinton Falls State Bank, up to a
maximum amount of $300,000.00.
E. TRUDY.
At the Closing, New Futech will assume repayment of the loans owing by
Trudy to William W. Burnham and two of his family members. The aggregate
principal and interest owing as of January 31, 1999 on all of said debts is
agreed by the parties to be the sum of $800,000.00. Interest will accrue only on
the debt owing to the family members ($172,253.00 balance at April 30, 1999)
between April 30, 1999 through the Closing. No interest will accrue on the debts
owing to William W. Burnham between February 1, 1999 through the Closing. After
the Closing, interest will accrue on all of said debts at and only at four
percent (4%) per annum. At the Closing, twenty five percent (25%) of the
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principal balance due as of the Closing, plus interest accrued to the date of
Closing (on the debt to the family members only), shall be repayable on said
debts, and twenty five percent (25%), plus interest accrued to the date of each
payment (at four percent (4%) per annum) from the date of Closing (regardless of
what interest rate was agreed upon by Trudy and the lender), shall be payable on
each of three consecutive six (6) month anniversaries after the Closing. Trudy
will cause William W. Burnham to forever forgive and discharge the debts owing
to him to the extent necessary to obtain the balances due as described above,
and William W. Burnham hereby agrees to so forgive and discharge said debts to
said extent.
Within thirty (30) days after the Closing, New Futech will obtain releases
of William W. Burnham of his personal guaranty of the following Trudy debts: (i)
Trudy's revolving credit agreement with First Union, with an outstanding balance
as of April 30, 1999 of $795,000.00; and (ii) Trudy's four year Term Note with
First Union, with an outstanding balance as of April 30, 1999 of $195,650.00.
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EXHIBIT 2.13
TO
MERGER AGREEMENT
(OTHER AGREEMENTS FOR PARTICULAR PARTIES)
A. DAMERT.
New Futech will assume the obligations of DaMert to deliver cash,
promissory notes and stock to Greg McVey, president of DaMert, in accordance
with DaMert's Special Executive Incentive Compensation Plan, in the amount of 4%
of the DaMert net consideration after paying broker for the Merger under Section
1.6.
B. FUNDEX.
1. Phase 10 Option.
Fundex owns all rights to a product identified as "Phase 10." For a short
time period after three years have elapsed after the Closing, if certain stock
price performance criterion have not been satisfied, all as set out below, then
the Fundex shareholders, acting jointly but not severally, will have an option
(the "Phase 10 Option"), on the terms set out herein, to exchange all of the
stock in New Futech that they acquired pursuant to the Mergers for all ownership
rights to Phase 10. This provision does not prevent Fundex shareholders from
selling their stock, but requires them to own and exchange the same amount of
stock they would have had if the stock had not been sold.
New Futech and New Sub will maintain Phase 10 free and clear of any liens,
claims or encumbrances not existing as of the Closing, so long as the Phase 10
Option is exercisable. New Futech and New Sub will obtain releases of any liens
against Phase 10 (even those existing as of the Closing), upon the earlier of
the following, unless prior to that time the Phase 10 Option is terminated as
provided for in the paragraph appearing immediately below: (i) twenty-four
months after the Closing, or (ii) a refinancing by New Futech of the Fundex
credit facility. If the Phase 10 Option is exercised, New Futech and New Sub
will deliver Phase 10 as called for in this provision free and clear of all
liens.
See Exhibit 1.6 for provisions creating security for the obligations of New
Futech and New Sub regarding Phase 10.
The Phase 10 Option must be exercised, if at all, within and during the 60
day period after the expiration of three (3) years after the Closing. The Phase
10 Option shall terminate if either or both of the following occur and the
Promissory Note payable to the Fundex shareholders (described in Section B of
EXHIBIT 1.6 above) is paid in full:
(a) After the expiration of any lockup period specified in the
underwriting agreement for any public stock offering prohibiting the
Fundex shareholders from selling the New Futech stock acquired in
the Mergers, for any 15 consecutive trading day period the average
daily closing price, on a principle national public market on which
such stock is traded, of the stock of New Futech acquired by the
Fundex shareholders in the Mergers is such that said stock is valued
at not less than $7.50 per share, and the average number of shares
traded daily during said 15 days was at least 40,000; or
(b) New Futech offers to buy, or presents a party who offers to buy, the
stock acquired by the Fundex shareholders pursuant to the Mergers,
at a purchase
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price of at least $7.50 per share, and with a closing date of not
more than 60 days after the offer is made (if the offer is accepted,
the closing must actually occur within said time, or fail to occur
through the fault of the sellers), whether or not said offer is
accepted; provided, however, that said offer may not be made until
at least twelve months after the Closing.
If the Phase 10 Option is exercised, then the Employment Agreements for
Carl E. Voigt, IV and Carl E. Voigt, III shall thereupon automatically
terminate, which terminations will be terminations for "Cause" and will
be governed by the terms of the Employment Agreements; provided,
however, that the non-compete provisions of the Employment Agreements
shall thereafter not restrict Carl E. Voigt, IV and/or Carl E. Voigt,
III from using the Phase 10 product, even if that use competes with New
Futech.
Futech will use its best efforts to obtain a valuation of the Phase 10
Option prior the Closing, at Futech's cost. If the result of the
valuation is such that the value of the New Futech shares to be issued
in the Merger to the Fundex shareholders is less than the value which
would be necessary to qualify the Merger as a tax-free transaction, then
the parties agree to negotiate in good faith to adjust the consideration
payable to the Fundex shareholders in the Merger so that the Merger
qualifies as a tax free transaction.
2. Fundex Key Employees. Jim Money, George Propsom, Eric Voigt and
Barrett Powers will be considered for stock options of New Futech as part of New
Futech's employee stock option plan, if any.
3. Election to Board of Directors. At the Closing, subject to the
applicable fiduciary duties, New Futech's Chairman and Chief Executive Officer
shall recommend the election of Carl E. Voigt, IV to the Board of Directors of
New Futech and use his best efforts to assure New Futech's management will
recommend the reelection of Carl E. Voigt, IV to the Board, at the appropriate
times, so long as Carl E. Voigt, IV is party to an employment agreement with New
Sub.
4. Termination of Representations and Warranties. If New Futech defaults
under its obligations to pay the Fundex shareholders the Promissory Note as
called for on EXHIBIT 1.6 above, and the Fundex shareholders as a result thereof
repossess the stock of New Sub as allowed on EXHIBIT 1.6 above, then the
representations and warranties of Fundex and the Fundex Shareholders in this
Agreement shall, effective at the time of the repossession, terminate; provided,
however, that New Futech's failure to make payments due under said Note as a
result of a violation of representations and/or warranties by Fundex or the
Fundex Shareholders shall not cause a termination of the representations and
warranties of Fundex or its Shareholders.
5. Shareholder Voting. Notwithstanding anything in this Agreement to the
contrary, if Futech is in default under that certain License Agreement, dated of
even date with this Agreement, between Futech and Fundex, then each of the
Fundex Shareholders may vote such Shareholder's shares of stock in Fundex not in
favor of the Mergers as set out in this Agreement.
Notwithstanding anything in this Agreement to the contrary, the Fundex
Shareholders will not vote on the Merger until: (i) an appraisal of the Phase 10
Option has been completed; and (ii) the parties have taken such action as is
necessary to assure that the Merger qualifies as a tax free reorganization for
Fundex and the Fundex shareholders under Section 368(a) of the Internal Revenue
Code.
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C. FUTECH.
None.
D. JANEX.
None.
E. TRUDY.
1. Guarantee of Value of Futech Stock.
(a) If as of the Effective Time New Futech common stock has become
"Public" (meaning for purposes of this Agreement that said stock is
then publicly traded and listed on a U.S. registered securities
exchange, such as the NASDAQ National Market System), then effective
at the Closing the Trudy shareholders will instead of receiving in
the Merger 400,000 shares of New Futech common stock (as described
on EXHIBIT 1.6) they will receive shares of New Futech common stock
in the aggregate amount of the greater of 400,000 shares or that
number of shares necessary to equal a $3,000,000 value, determined
using the average of the closing trading prices of the New Futech
common stock as of the fifteen days immediately prior to the
Closing.
(b) If as of the Effective Time New Futech common stock has not become
Public, but does become Public within five years after the Effective
Time, then the closing trading price of the New Futech common stock
shall be determined for the day after New Futech becomes Public and
for each of the fourteen days thereafter, and the average of those
fifteen numbers (hereinafter the "Opening Public Value") shall be
calculated. If and only if the Opening Public Value is less than
$7.50 per share, then additional New Futech common stock will be
issued to the Trudy shareholders in the number of shares necessary
so that New Futech common stock worth $3,000,000 (valued at the
Opening Public Value) has been issued to the Trudy shareholders
pursuant to this Agreement.
The provisions of this subparagraph (b) assume that: (i) there will
be no stock splits or reverse splits of New Futech stock between the
Closing date and the date New Futech becomes Public; and (ii) the
issuance of the additional stock is exempt from federal and state
securities registration requirements or can be registered by New
Futech. If a stock split or reverse stock split occurs between the
Closing date and the date New Futech becomes Public, then the $7.50
value used in this subparagraph shall be changed as necessary so
that each share of New Futech common stock originally acquired in
the Merger at the Closing, if held until New Futech goes Public, is
guarantied a value of at least $7.50 when New Futech becomes Public.
New Futech agrees to use its best efforts to register the shares
covered by this subparagraph under applicable securities laws, if
necessary.
(c) If the New Futech common stock has not become Public within five
years after the Effective Time, then the Trudy shareholders will
have the right at any time after said five year period but prior to
the date which is six months thereafter, to exchange New Futech
common shares, acquired pursuant to
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Section 1.6 of this Agreement and still held, for a New Futech
debenture with a principal amount equal to the aggregate principal
amount of New Futech common shares surrendered at a value of $7.50
per New Futech common share. The debenture would be payable in full
within five (5) years after the origination date of the debenture,
with interest at the publicly announced prime rate of interest of
Bank One, Arizona, N.A., as such rate may from time to time change.
At Futech's election, Futech may instead of issuing any said
debenture pay any person entitled to such a debenture cash in the
amount at which the debenture would be issued to such person.
The provisions of this subparagraph (c) assume that: (i) there will
be no stock splits or reverse splits of New Futech stock between the
Closing date and the date a debenture is issued under this
provision; and (ii) the issuance of such debentures is exempt from
federal and state securities registration requirements or can be
registered by New Futech. If a stock split or reverse stock split
occurs between the Closing date and the date a debenture is issued,
then the $7.50 value used in this subparagraph shall be changed as
necessary so that each share of New Futech common stock originally
acquired in this Merger at the Closing, if replaced with a debenture
under this subparagraph, is guarantied a value of at least $7.50
when the debenture is issued. New Futech agrees to use its best
efforts to register the debentures covered by this subparagraph
under applicable securities laws, if necessary.
2. Enforcement. The Merging Companies acknowledge and agree that the
provisions of Section 1 immediately above are for the benefit of the Trudy
shareholders and the holders as they may exist from time to time of the New
Futech stock acquired by said shareholders pursuant to the Merger, and that such
Trudy shareholders and such holders have legally enforceable rights against New
Futech in respect thereof. It shall be the burden of the shareholder to trace
his/her stock as being stock acquired by a Trudy shareholder pursuant to the
Merger.
3. Board Position. At the Effective Time, subject to the applicable
fiduciary duties, New Futech's Chairman and Chief Executive Officer shall
recommend the election of William W. Burnham to the Board of Directors of New
Futech and use his best efforts to assure New Futech's management will recommend
the reelection of William W. Burnham to the Board, at the appropriate times, so
long as Willaim W. Burnham is party to an employment agreement with New Futech.
4. Trudy Key Employees. Bill Carney will be considered for stock options
of New Futech as part of New Futech's employee stock option plan, if any.
5. Environmental Indemnification. Effective automatically at the Closing,
without the necessity of any additional documents, William W. Burnham
("Burnham") agrees as follows:
Burnham is, directly or indirectly, an owner of real property located
at 353 Main Avenue, Norwalk, Connecticut (the "PROPERTY"), which property
is currently leased by Trudy. There are, have been, or may have been
potential hazardous liability problems with the Property. The Merging
Companies are not willing to assume any potential hazardous waste liability
that currently exists.
Burnham is owed money by Trudy, which debts are compromised as called
for in EXHIBIT 2.10.
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Burnham hereby agrees to indemnify, defend and hold harmless New
Futech, and New Futech's officers, directors, attorneys, and agents, from
and against any and all claims of any type, including attorneys' fees and
costs, arising out or relating to any claim relating to hazardous waste
associated with the Property relating to all periods of time prior to the
Closing of the Merger.
Burnham releases and forever discharges New Futech from the debts
owing to Burnham by Trudy, to and only to the extent called for in EXHIBIT
2.10.
New Futech may offset any amount owing to it under this provision or
any other provision of this Agreement against any amount owing by New
Futech to Burnham; provided, however, that if the liability to be offset
relates to items other than the environmental indemnification, then prior
to such offset: (i) New Futech and Burnham shall mutually agree as to the
amount of the liability; and (ii) New Futech will give Burnham thirty days
after written notice to eliminate the liability.
6. Deterioration of Financial Condition. The Merging Companies agree: (i)
that any continued deterioration in the operations, assets and financial
condition of Trudy between the date of the Merger Agreement and the Closing
shall not constitute a failure by Trudy to fulfill the condition to Closing set
forth in Section 4.1.6 of the Merger Agreement; and (ii) the entering by Trudy
into any loan or financing arrangement, contract, commitment or transaction
between the date of the Merger Agreement and the Closing shall not constitute a
failure by Trudy to fulfill the condition to Closing set forth in Section 4.1.10
of the Merger Agreement, so long as Futech is given advance notice where
practical and prompt notice otherwise.
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EXHIBIT 3-A
TO
MERGER AGREEMENT
(DISCLOSURE SCHEDULE OF DAMERT COMPANY)
The paragraph numbering below corresponds to the paragraph numbering in
Article III of the Merger Agreement.
3.1 DUE INCORPORATION.
No exceptions.
3.2 CAPITALIZATION.
Common Shares Authorized: 5,000 shares, no par value.
Common Shares Issued and Outstanding: 1,000
Series A Preferred Authorized: Not Applicable.
Series A Preferred Issued and Outstanding: Not Applicable.
The following summarizes stock options, warrants, subscriptions, conversion
rights and similar rights:
One stock option for the purchase of 52.63 shares of common stock,
exercisable for a total price of $1.00, is issued to Lynne McDonald. Fred
and/or Gail DaMert will cause the option to be exercised simultaneously
with the Closing of the Merger, and the stock issued in connection with
such exercise shall receive its share of the consideration to be paid to
the DaMert shareholders in the Merger.
Stock appreciation rights entitling holders to payment equivalent to the
increase in value of units designed to be equal to 7% of the aggregate of
DaMert's outstanding stock and those units. Fred and/or Gail DaMert have
bought out three percentage points of these rights prior to the Closing,
leaving 4% to be assumed by New Futech as described in Section A of EXHIBIT
2.13.
3.3 SUBSIDIARIES.
None
3.4 FINANCIAL INFORMATION.
No exceptions.
3.5 TAXES.
The 1998 federal and state income tax returns of the shareholder of the
corporation are currently on extension.
3.6 MATERIAL CHANGES.
See 3.30 below.
3.7 TITLE TO ASSETS; LIENS.
The liens of Wells Fargo Bank.
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3.8 LITIGATION.
(1) DaMert has received a written claim of infringement with regard to a
product name and the use of a slogan including the word "rainbow" in
connection with the packaging and advertising of certain of its toy
products. DaMert disputes that it is infringing upon the property
rights of the claimant.
(2) The Defendant in an action by DaMert for collection of an unpaid
invoice ($4,672) has filed a cross-complaint against DaMert, alleging
$3,000 in damages on account of the action of DaMert in shipping goods
prematurely to the Cross-Complainant. DaMert disputes the validity of
the cross-complaint.
3.9 COMPLIANCE WITH LAWS.
No exceptions.
3.10 INSURANCE.
No exceptions.
3.11 LICENSES.
No exceptions.
3.12 HAZARDOUS MATERIALS.
DaMert used hazardous materials, specifically polyester resins and
solvents, from 1973 until April 1989 to produce optical prisms and tabletop
sculptures. In April of 1989 it ceased manufacturing and moved from that
location. The company has not used hazardous materials since.
3.13 JUDGMENTS AGAINST THE MERGING COMPANY AND/OR ITS BUSINESS.
None.
3.14 COMPLETE SALE.
No exceptions.
3.15 ASSETS IN GOOD CONDITION.
DaMert's local area network of PC's will require software upgrades and some
hardware replacement in order to be Year 2000 compliant. Outdated workstations
need to be replaced to conform to Y2K compliance (estimated $30,000 to $40,000
expense).
3.16 DISCLOSURE MATERIALS.
No exceptions.
3.17 DEFAULTS.
DaMert is not in compliance with certain covenants in the credit agreement
with Wells Fargo Bank related to promissory notes in the original principal
amounts of $2,500,000 and $400,000.
3.18 MATERIAL CONTRACTS.
(i) July 27, 1995 office lease for the property located at 1609 Fourth
St., Berkeley, CA.
(ii) June 1, 1997 License Agreement with L.J. Liff & Associates Limited.
(iii) January 28, 1999 distribution agreement with Equity Toys.
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(iv) November 1, 1994 Master License Agreement with Dan Gilbert, Inc., and
related product license agreements
(v) April 21, 1998 Licensing Agreement with Brian W. Walker and Rodney A.
Dahl
(vi) 1995 License Agreement with John A.L. Osborn.
(vii) April 14, 1997 and April 11, 1997 License Agreements with Relinda
Recio dba X Libris.
(viii) October 4, 1995 License Agreement with Nico Smith.
(ix) November 17, 1998 Licensing and Distribution Agreement with Crystal
Lines (International) Pty, Ld.
3.19 OUTSTANDING LIABILITIES.
See 3.30 and 3.22.
3.20 INVENTORY.
$15,649 of obsolete inventory on books. $12,183 of inventory of fantasy
characters whose license has expired. $16,465 of inventory in good condition not
presented in 1998 catalog. $15,299 of inventory in good condition but old
packaging. Total inventory value of $1,262,556.
3.21 RECEIVABLES.
DaMert estimates it will have approximately $63,000 in uncollectible
accounts receivable, thereby exceeding its $50,000 reserve.
3.22 EMPLOYEES.
See Exhibit 3A-3.22.
DaMert has entered into an employment agreement with Julie Nunn, Director
of Product Development, which will survive the Closing.
3.23 NO CONFLICTS.
The following material agreements of DaMert require consent or notice in
connection with the Mergers:
(i) July 27, 1995 office lease for 1609 Fourth Street, Berkeley,
California between the Merging Company and Cedar/Fourth Street
Partners (notice to Lessor required);
(ii) June 1, 1997 License Agreement between DaMert and L.J. Liff &
Associates Limited (consent for merger required, which consent
shall not be unreasonably withheld by the Licensor).
(iii) December 15, 1998 loan agreement with Wells Fargo Bank (consent
required).
(iv) November 1, 1994 Master License Agreement with Dan Gilbert, Inc.,
and related product license agreements.
(v) November 17, 1998 Licensing and Distribution Agreement with Crystal
Lines (International) Pty, Ltd (notice required).
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3.24 VIOLATIONS OF LAW.
None.
3.25 CONDITION AND SUFFICIENCY OF ASSETS.
See 3.15 above.
3.26 BANK ACCOUNTS.
See Exhibit 3A-3.26.
3.27 ENVIRONMENTAL MATTERS.
None.
3.28 INTELLECTUAL PROPERTY.
See Exhibit 3A-3.28.
3.29 CUSTOMERS AND SUPPLIERS.
No exceptions. See Exhibit 3A-3.29
3.30 CHANGES TO THE MERGING COMPANY'S DOCUMENTS.
DaMert has entered into compensation agreements not in the ordinary course
of business with Julie Nunn, Director of Product Development; Tom Santilena,
Controller; William Hanlon, Senior Product Developer; and Lawrence Waide, former
Director of Operations. In each case, compensation is payable following or as a
result of a change in control of DaMert. Any amounts payable to said persons
under said arrangements as a result of the Merger shall be paid from the
compensation otherwise payable to Fred and/or Gail DaMert under Section 1.6 of
the Merger Agreement.
3.31 STOCKHOLDERS AGREEMENTS AND OTHER AGREEMENTS.
The employment agreement of Julie Nunn can be terminated within one year of
a change in control only with payment of 4 months severance.
3.32 CERTAIN PAYMENTS.
No exceptions.
3.33 FILINGS COMPLETE.
No exceptions.
3.34 PRODUCTS.
No exceptions.
3.35 PATENTS.
See 3.28
3.36 INDEMNIFICATION; SURVIVAL.
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EXHIBIT 3-B
TO
MERGER AGREEMENT
(DISCLOSURE SCHEDULE OF FUNDEX GAMES, LTD.)
The paragraph numbering below corresponds to the paragraph numbering in
Article III of the Merger Agreement.
3.1 DUE INCORPORATION.
No exceptions.
3.2 CAPITALIZATION.
Common Shares Authorized: 8,000,000 shares, $.0001 par value.
Common Shares Issued and Outstanding: 1,624,824
Series A Preferred Authorized: Not Applicable.
Series A Preferred Issued and Outstanding: Not Applicable.
The following summarizes stock options, warrants, subscriptions, conversion
rights and similar rights:
See Exhibit 3B-3.2
3.3 SUBSIDIARIES.
None
3.4 FINANCIAL INFORMATION.
No exceptions.
3.5 TAXES.
(i) Form 5500 not filed for tax years 1994-1998
(ii) Company currently under audit for income tax year ending 12/31/96
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3.6 MATERIAL CHANGES.
No exceptions.
3.7 TITLE TO ASSETS; LIENS.
No exceptions.
3.8 LITIGATION.
None
3.9 COMPLIANCE WITH LAWS.
No exceptions.
3.10 INSURANCE.
No exceptions.
3.11 LICENSES.
No exceptions.
3.12 HAZARDOUS MATERIALS.
No exceptions.
3.13 JUDGMENTS AGAINST THE MERGING COMPANY AND/OR ITS BUSINESS.
None.
3.14 COMPLETE SALE.
No exceptions.
3.15 ASSETS IN GOOD CONDITION.
No exceptions.
3.16 DISCLOSURE MATERIALS.
No exceptions.
3.17 DEFAULTS.
None.
3.18 MATERIAL CONTRACTS.
None.
3.19 OUTSTANDING LIABILITIES.
See Exhibit 3B-3.19.
3.20 INVENTORY.
No exceptions.
3.21 RECEIVABLES.
No exceptions.
3.22 EMPLOYEES.
See Exhibit 3B-3.22.
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3.23 NO CONFLICTS.
See Exhibit 3B-3.23.
3.24 VIOLATIONS OF LAW.
None.
3.25 CONDITION AND SUFFICIENCY OF ASSETS.
No exceptions.
3.26 BANK ACCOUNTS.
No exceptions.
3.27 ENVIRONMENTAL MATTERS.
None.
3.28 INTELLECTUAL PROPERTY.
No exceptions.
3.29 CUSTOMERS AND SUPPLIERS.
No exceptions.
3.30 CHANGES TO THE MERGING COMPANY'S DOCUMENTS.
No changes.
3.31 STOCKHOLDERS AGREEMENTS AND OTHER AGREEMENTS.
None.
3.32 CERTAIN PAYMENTS.
No exceptions.
3.33 FILINGS COMPLETE.
No exceptions.
3.34 PRODUCTS.
No exceptions.
3.35 PATENTS.
See Exhibit 3B-3.35.
3.36 INDEMNIFICATION; SURVIVAL.
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LICENSE AGREEMENT
THIS AGREEMENT is made and entered into as of the 7th day of June, 1999, by
and between Futech Interactive Products, Inc., an Arizona corporation ("Futech")
and Fundex Games, Ltd., a Nevada corporation ("Fundex").
R E C I T A L S:
A. Futech is willing to loan funds to Fundex, on and subject to the terms
of this Agreement.
B. Futech is willing to grant Fundex the right to use certain technology,
on and subject to the terms of this Agreement.
C. Futech and Fundex, and others, have entered into or may in the future
enter into a Merger Agreement (the "Merger Agreement") for, among other things,
the merger of Futech into a Delaware corporation ("New Futech") and the merger
of Fundex into a wholly owned subsidiary ("New Sub") of New Futech (said mergers
are collectively referred to hereinafter as the "Merger"). This Agreement is
intended to apply to New Futech and New Sub after the Merger.
NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, the parties agree as follows:
T E R M S:
1. LOAN BY FUTECH TO FUNDEX. Futech will loan funds to Fundex, or provide
letters of credit, to be used by Fundex for product development and working
capital, in the total amount of $1,500,00.00, as follows: (i) $250,000.00 upon
execution of this Agreement and execution of the Merger Agreement by all parties
thereto; (ii) $500,000.00 prior to the Fundex shareholder meeting to be called
to approve the SEC-approved S-4 for the Merger; and (iii) the remainder as
needed by Fundex as determined by the parties from time to time. The debt (loan
or use of letter(s) of credit) will accrue interest at ten percent (10%) per
annum from the date(s) advances are made until repaid in full.
The debt will be repaid in full, without offset of any type, with interest
two years after the date of this Agreement. If the Merger closes, New Futech
defaults under its obligations to pay the Fundex shareholders amounts due under
the Promissory Note (the "Note") as called for in Section 1.6 of the Merger
Agreement, and the Fundex shareholders as a result thereof repossess the stock
of New Sub, then $750,000.00 of the balance due under the debt will be forfeited
by New Futech as a penalty.
2. LICENSES OF RIGHTS TO FUNDEX.
(a) Futech hereby grants to Fundex the non-exclusive, non-assignable right
to apply Futech's game board technology in connection with the development,
marketing, distribution and sale of: (i) the Fundex products identified as
incorporating Futech technology in the Fundex Games 1999 Product Catalog; and
(ii) other future products as may be agreed by Futech in a written document(s)
signed after the date of this Agreement by the CEO of Futech.
Futech retains all ownership rights in connection with its technology. All
intellectual property rights, including all patent, trademark, and tradename
rights, including but not limited to the names and related trademarks "Track
Sounds" and "Sound Zone," created
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in the development of products (including but not limited to sound games, sound
puzzles, and other sound products) incorporating the Futech technology, shall be
and remain the property of Futech, and Fundex agrees to, at the request of
Futech, execute (without consideration being paid) such documents as are
necessary and/or appropriate to confirm ownership of said rights in Futech
and/or to transfer ownership rights to Futech.
(b) The term of this license will commence when Fundex commenced applying
Futech technology to products, and will continue thereafter until December 31,
2000.
(c) Fundex shall pay Futech a royalty (referred to in this Agreement as the
"Royalty" or "Royalties") equal to one-half of the Net Operating Profits of
Fundex from the sale of products incorporating Futech technology. The term "Net
Operating Profits" shall mean net sales (gross sales less discounts actually
given and return actually made); less cost of goods sold (landed to
Indianapolis); less commissions paid to third parties of not more than 7%; less
royalties paid to third parties; less 3.5% of net sales for a freight allowance;
less 17% of net sales for an overhead allowance.
Royalties will be payable on a calendar quarter basis, by the thirtieth day
following the calendar quarter to which the Royalties relate. Any unpaid
Royalties shall bear interest at eighteen percent (18%) per annum from the due
date until paid in full.
3. REPORTS, BOOKS AND RECORDS, SAMPLES.
(a) At least quarterly on a calendar quarter basis, Fundex shall make
written reports to Futech in form and with detail as shall reasonably be
requested by Futech, certified to be accurate by an authorized agent of Fundex,
setting forth the sales and other detail relating to the gross sales for the
period to which the Royalties relate. Said reports shall be furnished even if
there are no sales during the calendar quarter. The failure or refusal of Fundex
to timely furnish any such report, or the payment due as shown in the report,
shall be deemed a substantial and material breach of this Agreement. The receipt
and acceptance by Futech of any of the reports furnished pursuant to this
Agreement, or of any payments made herein (or the cashing of any checks paid
hereunder) shall not preclude Futech from questioning the accuracy of any such
report at any time (within the two year period described below), and in the
event that any inconsistencies or mistakes are discovered in any such report or
payment, they shall immediately be rectified and the appropriate payment made by
Fundex, together with interest on the overdue payments at the per annum rate of
one (1) percentage point above the prime rate of interest published by the Wall
Street Journal, as such rate may from time to time change. Royalty statements
and reports shall become incontestable if not contested within two (2) years
after receipt thereof by Futech.
(b) Fundex shall keep at its principal place of business, such books and
records and other documents relating to its sales during the term of this
Agreement as may be necessary or proper to enable the amounts payable to Futech
hereunder to be conveniently ascertained.
(c) Futech shall have the right, from time to time during the term of this
Agreement, and for a period of two years thereafter (with respect to any
then-contestable statement), but not more than once annually, upon thirty (30)
days prior written notice, during regular office hours, to cause a certified
public accountant(s) on behalf of Futech to audit or otherwise review the books
and records of Fundex. Fundex shall cooperate with such audit or review, and
provide requested information relating to Fundex sales and expenses. The auditor
shall be entitled to inspect all accounts and records of Fundex and to take
extracts therefrom or copies thereof to the extent necessary to verify the
Royalty
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reports and payments required under the terms of this Agreement. The duration of
any audit under this provision shall not exceed thirty (30) days.
(d) Fundex will provide Futech with one hundred (100) free samples of each
product incorporating Futech technology sold by or for Fundex, within thirty
(30) days after the product first becomes available for sale.
4. PRODUCT LIABILITY; INSURANCE.
(a) Fundex agrees to indemnify and defend and save harmless Futech from
every claim, demand, expense, and cost, including reasonable attorneys' fees,
which may arise by reason of the use by Fundex of the Futech technology, and any
injury or damage of any kind or nature to any person or property caused by or
resulting from or arising out of a defect in design, workmanship, or material of
any product manufactured, marketed and/or sold by Fundex using Futech technology
(hereinafter the "Licensed Products"); provided, however, that the foregoing
shall not apply to any such claim, etc. arising out of, relating to or caused by
the Futech technology, to and only to the extent so related or caused (this
provision shall not limit Fundex's indemnification for liability for products
defectively manufactured by or for Fundex, unless the liability results from
defects inherent in the Futech technology and the defective product was
manufactured substantially in accordance with Futech instructions).
(b) Fundex shall obtain at its own expense and maintain during the term of
this Agreement, and for a period of seven (7) years thereafter, general
liability insurance and product liability insurance with at least coverage of
$1,000,000 per occurrence and $3,000,000 in the aggregate.
All insurance must be provided by a recognized insurance company having a
Best's Rating of no less than AA. As proof of such insurance, a fully paid
certificate of insurance naming Futech as an additional insured shall be
submitted to Futech's office as and when requested by Futech, within thirty (30)
days after written request is made therefor. Futech shall be entitled throughout
the term of this Agreement, to a copy of the prevailing policies of insurance.
The policies of insurance must be non-cancelable except after thirty (30) days
prior written notice to Futech.
5. STANDARDS, QUALITY CONTROL. Fundex shall maintain high standards of
quality, style, appearance and service with respect to all Licensed Products
made and/or sold, and all related advertising and promotional material
including, without limitation, the quality of physical material utilized. All
Licensed Products will be manufactured, sold, and distributed in accordance with
all applicable federal, state, local and foreign laws and regulations.
6. TRADEMARK USAGE; MARKING. Any Licensed Product incorporating,
embodying, or comprising Futech technology shall display in a plainly visible
manner Futech's trademark, in a manner agreed upon beforehand by the parties.
Fundex shall mark all Licensed Products with such appropriate patent and
trademark marking and other proprietary legends as reasonably requested by
Futech.
Unless otherwise agreed in writing by Futech, all Licensed Products shall
be clearly marked with type in readable size with the words "Technology Provided
by Futech Interactive Products, Inc.," and immediately thereafter shall appear
the then-current address and phone number of Futech provided by Futech to
Fundex. No portion of the statement appearing within the quotation marks in the
preceding sentence shall be in larger type in or any way any more prominent than
any other part thereof.
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7. CONFIDENTIALITY.
(a) Fundex acknowledges that Futech's confidential information is unique
and valuable and was developed or otherwise acquired by Futech at great expense,
and that any unauthorized disclosure or use of Futech's confidential information
may cause Futech irreparable injury loss for which damages would be an
inadequate remedy. Fundex agrees to hold such confidential information in
strictest confidence, to use all efforts reasonable under the circumstances to
maintain the secrecy thereof, and not to make use thereof other than in
accordance with this Agreement, and not to make use of or to release or disclose
confidential information to any third party without Futech's prior written
consent.
(b) Futech acknowledges that various information regarding the business
plans and product concepts of Fundex may comprise confidential information.
Futech agrees to hold Fundex's confidential information in strictest confidence,
not to make use thereof other than in accordance with this Agreement, to use all
efforts reasonable under the circumstances to maintain the secrecy thereof, and
not to make use of or to release or disclose Fundex's confidential information
to any third party without Fundex's prior written consent.
(c) The parties acknowledge that any violation of this Section shall
constitute a material breach of this Agreement resulting in irreparable injury
to the non-breaching party, and agree that, in addition to any and all other
rights available to the non-breaching party by law or by this Agreement, the
non-breaching party shall have the right to seek to have an injunction entered
against the breaching party to enjoin any further violations of this Agreement.
8. WARRANTIES OF FUTECH. Futech hereby represents and warrants as
follows:
(a) Futech is the owner of all right, title and interest in and to the
Futech technology licensed hereby, and has the right to so license said
technology.
(b) these are no outstanding licenses or other agreements that relate to or
restrict the use of the Futech technology which are inconsistent with the
licenses granted in this Agreement.
(c) Futech has no knowledge of and has received no notice of any adversely
held patent, patent right, trademark, service mark, trade name, trade secret,
copyright, franchise or other proprietary right of any other person or notice of
any claim of any other person, nor has Futech made a claim against any person,
relating to any of the Futech technology licensed hereby, and Futech has no
knowledge of any basis for any such charge or claim.
9. WARRANTIES OF FUNDEX. Fundex hereby represents and warrants as
follows:
(a) Fundex shall use the Futech technology only in a manner designed to
enhance the public image of the Futech technology; and
(b) Fundex shall not use the Futech technology in connection with any
products or services without the prior written authorization of Futech. Failure
by Futech to act with respect to any use of its technology shall not constitute
a waiver of Futech's right to prevent further use of the technology, or
constitute a waiver of Futech's right to require written approval of Futech for
future uses of the technology.
(c) Fundex agrees to submit to Futech for its prior written approval,
samples of promotional materials and advertising to be used by Fundex in
connection with the Licensed Products.
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10. INDEMNITIES.
(a) The parties hereto shall each indemnify and hold the other harmless
from and against any and all claims, liabilities, loss, expense (including
reasonable attorneys' fees) or damages arising out of any breach of this
Agreement, including without limitation any representation, warranty, covenant
or agreement of such party set forth in this Agreement, provided that the
indemnified party shall, with reasonable promptness, notify the indemnifying
party of any such claim, demand, or suit and shall fully cooperate in the
defense thereof.
(b) Fundex shall defend, indemnify and hold Futech, and its subsidiaries,
and associated and affiliated companies, harmless from and against any
liabilities (including reasonable attorneys' fees and costs) of any kind or
nature whatsoever which may be sustained or suffered by Futech: (i) in
connection with the Licensed Products or the packaging, distribution, promotion,
sale or exploitation of the Licensed Products, including but not limited to any
actual or alleged defect in the License Products, or their packaging, whether
latent or patent, including failure of said Licensed Products or their
packaging, distribution, promotion, sale or exploitation to meet any federal,
state or local laws or standards; (ii) based upon or arising out of any actual
or alleged unauthorized use by Fundex or its subsidiaries of any patent, trade
secret, process, idea, method or device, or any copyright or trademark; or (iii)
any other actual or alleged unauthorized action of Fundex. The foregoing
indemnification shall not however apply to any such liability arising out of,
relating to or caused by the Futech technology, to and only to the extent so
related or caused (this provision shall not limit Fundex's indemnification for
liability for products defectively manufactured by or for Fundex, unless the
liability results from defects inherent in the Futech technology and the
defective product was manufactured substantially in accordance with Futech
instructions).
(c) Futech shall defend, indemnify and hold Fundex, and its subsidiaries
harmless from and against any liabilities (including reasonable attorneys' fees
and costs) of any kind or nature whatsoever (including but not limited to
liabilities from infringement) which may be sustained or suffered by Fundex
arising out of, relating to or caused by the Futech technology, to and only to
the extent so related or caused (this indemnification shall not apply to
liability for products defectively manufactured by or for Fundex, unless the
liability results from defects inherent in the Futech technology and the
defective product was manufactured substantially in accordance with Futech
instructions).
(d) The indemnifying party shall have the right to designate counsel to
defend against such claims and suits; however, at the indemnified party's
option, the indemnified party shall have the right to participate in the defense
with its own counsel at its own expense. In no event shall any such claims or
suits affecting the rights of a party be settled without the prior written
consent of that party.
11. ASSIGNMENT/SUB-LICENSING; SUCCESSORS. This Agreement and the rights
and obligations created hereunder may not be sublicensed, assigned, encumbered
or pledged as security for any obligation of Fundex, without the prior written
consent of Futech, which consent may be withheld for any reason or no reason.
This Agreement shall be binding upon New Futech and New Sub after the Merger.
12. TERMINATION.
(a) If a party commits a material breach of any provision of this
Agreement, and said breach continues for a period of ten (10) days for monetary
breaches, and thirty (30) days for non-monetary breaches, after written notice
to the defaulting party specifying the
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nature of the breach, then, by written notice to the defaulting party, the
non-defaulting party may terminate this Agreement. Such termination shall be
without prejudice to any other legal remedy available to the non-defaulting
party.
(b) Futech shall have the right, by written notice to Fundex, to terminate
this Agreement upon thirty (30) days prior written notice to Fundex, upon or
after an adjudication that Fundex is bankrupt or insolvent, or the filing by
Fundex of a petition in bankruptcy, or a petition or answer seeking
reorganization, readjustment, or rearrangement of its business or affairs, under
any law or governmental regulations relating to bankruptcy or insolvency.
(c) Upon termination of this Agreement, all rights granted Fundex hereunder
shall cease; provided, however, that the right of Fundex to continue the use of
the technology in connection with Licensed Products and sell the products on
hand or in the process of manufacture shall continue until all such products are
sold, but in no event beyond six months after termination, provided Royalties
due thereon will be paid to Futech as provided for in this Agreement. No
termination hereunder shall effect the obligations of the parties (including
without limitation the obligation to pay Royalties) arising prior to the date of
termination.
(d) Upon termination of this Agreement, Fundex shall return to Futech all
technical information, materials, samples, formulas, drawings, and know-how in
tangible form furnished by Futech, and all other such information, materials,
etc. in possession or control of Fundex relating to the Futech technology, and
shall (subject to subparagraph (c) above) forthwith discontinue the use of the
Futech technology. Upon such termination, Futech shall have the right of first
refusal to purchase any or all of the tooling and related equipment of Fundex
used in connection with the Futech technology.
13. NOTICES. Any notice or communication given under the terms of this
Agreement ("Notice") shall be in writing and shall be delivered in person or
mailed by certified mail, return receipt requested, in the United States Mail,
postage pre-paid, addressed as follows:
<TABLE>
<S> <C>
If to Futech: Futech Interactive Products, Inc.
2999 North 44(th) Street, Suite
225
Phoenix, Arizona 85018-7247
If to Fundex: Fundex Games, Ltd.
2237 Directors Row
Indianapolis, Indiana 46241
</TABLE>
or at such other address as a party may from time to time designate by Notice
hereunder. Notice shall be effective upon delivery in person, or if mailed, at
midnight on the third business day after the date of mailing.
14. FURTHER ASSURANCES. The parties agree to do such further acts and
things and to execute and deliver such additional agreements and instruments as
any party may reasonably require to consummate, evidence, or confirm the
Agreement contained herein in the manner contemplated hereby.
15. CONSTRUCTION. This Agreement shall be construed according to its fair
meaning, and neither for nor against the drafting party, and shall be construed
in accordance with the laws of the State of Arizona. Title and headings of
sections of this Agreement are for the convenience of reference only, are not
intended to define, limit, or describe the scope or intent of any provision of
this Agreement, and shall not affect the construction of any provision of this
Agreement.
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16. MODIFICATION. Any modification or waiver of any term of this
Agreement, including a modification or waiver of this term, must be in writing
and signed by the parties to be bound by the modification or waiver.
17. SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity of the
remainder of this Agreement.
18. ATTORNEY'S FEES. In the event of any litigation or other proceeding
concerning this Agreement, the prevailing party shall be entitled to recover its
costs, reasonable attorney's fees, and other reasonable expenses.
19. TIME. Time is of the essence of each and every provision of this
Agreement.
20. CONTINGENCY. This Agreement and all obligations in this Agreement are
contingent on execution and delivery by all parties thereto of the Merger
Agreement.
DATED the date first hereinabove written.
FUNDEX: Fundex Games, Ltd., a Nevada
corporation
By
------------------------------------
Carl E. Voigt, IV, President and
CEO
FUTECH: Futech Interactive Products, Inc., an
Arizona corporation
By
------------------------------------
Vincent W. Goett, Chairman and CEO
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EXHIBIT 3-C
TO
MERGER AGREEMENT
(DISCLOSURE SCHEDULE OF FUTECH INTERACTIVE PRODUCTS, INC.)
The paragraph numbering below corresponds to the paragraph numbering in
Article III of the Merger Agreement.
3.1 DUE INCORPORATION.
No exceptions.
3.2 CAPITALIZATION.
Common Shares Authorized: 235,000,000 shares, no par value.
Common Shares Issued and Outstanding: 87,339,078
Series A Preferred Authorized: 100,000,000 shares, no par value
Series A Preferred Issued and Outstanding: 3,750,000
The following summarizes stock options, warrants, subscriptions, conversion
rights and similar rights:
See EXHIBIT 3C-3.2.
3.3 SUBSIDIARIES.
Janex International, Inc.
Gold Star Publishing, LLC.
3.4 FINANCIAL INFORMATION.
No exceptions.
3.5 TAXES.
No exceptions.
3.6 MATERIAL CHANGES.
Futech has a dispute with Toys R Us over a $70,000 chargeback made by Toys
R Us on product ordered with an unreasonable ship date.
3.7 TITLE TO ASSETS; LIENS.
No exceptions.
3.8 LITIGATION.
On May 1, 1998, Futech acquired substantially all of the assets of XYZ
Group Inc. ("XYZ"), a wholesaler and distributor of books and various book
products including children's electronic toys and book and toy combination
products for consideration of $10,200,000, including a $4,000,000 note payable
to the former owner and $2,867,334 payable either in cash or with 14,336,670
shares of Futech's common stock. The $2,867,334 has not been paid and the
certificates for common stock has not been issued. The note payable accrues
interest at 10% per annum, and was due May 1, 1999. According to the agreement,
an additional $1,000,000 is due as of May 1, 1999, and $100,000 interest is
added to the total due. Additional consideration of $2,332,666 was contingent on
XYZ's sales performance. Futech's position is that the contingencies were not
met.
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See EXHIBIT 3C-3.8.
3.9 COMPLIANCE WITH LAWS.
No exceptions.
3.10 INSURANCE.
No exceptions.
3.11 LICENSES.
No exceptions.
3.12 HAZARDOUS MATERIALS.
No exceptions.
3.13 JUDGMENTS AGAINST THE MERGING COMPANY AND/OR ITS BUSINESS.
None.
3.14 COMPLETE SALE.
No exceptions.
3.15 ASSETS IN GOOD CONDITION.
No exceptions.
3.16 DISCLOSURE MATERIALS.
No exceptions.
3.17 DEFAULTS.
None.
3.18 MATERIAL CONTRACTS.
None.
3.19 OUTSTANDING LIABILITIES.
See EXHIBIT 3C-3.19.
3.20 INVENTORY.
No exceptions.
3.21 RECEIVABLES.
No exceptions.
3.22 EMPLOYEES.
See EXHIBIT 3C-3.22.
3.23 NO CONFLICTS.
None.
3.24 VIOLATIONS OF LAW.
None.
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3.25 CONDITION AND SUFFICIENCY OF ASSETS.
No exceptions.
3.26 BANK ACCOUNTS.
No exceptions.
3.27 ENVIRONMENTAL MATTERS.
None.
3.28 INTELLECTUAL PROPERTY.
No exceptions.
3.29 CUSTOMERS AND SUPPLIERS.
No exceptions.
3.30 CHANGES TO THE MERGING COMPANY'S DOCUMENTS.
See EXHIBIT 3C-3.30.
3.31 STOCKHOLDERS AGREEMENTS AND OTHER AGREEMENTS.
None.
3.32 CERTAIN PAYMENTS.
No exceptions.
3.33 FILINGS COMPLETE.
No exceptions.
3.34 PRODUCTS.
No exceptions.
3.35 PATENTS.
See EXHIBIT 3C-3.35.
3.36 INDEMNIFICATION; SURVIVAL.
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EXHIBIT 3-D
TO
MERGER AGREEMENT
(DISCLOSURE SCHEDULE OF JANEX INTERNATIONAL, INC.)
The paragraph numbering below corresponds to the paragraph numbering in
Article III of the Merger Agreement.
3.1 DUE INCORPORATION.
No exceptions.
3.2 CAPITALIZATION.
Common Shares Authorized: 20,000,000 shares, no par value.
Common Shares Issued and Outstanding: 18,098,750
Series A Preferred Authorized: 5,000,000 shares, no par value
Series A Preferred Issued and Outstanding: 5,000,000
The following summarizes stock options, warrants, subscriptions, conversion
rights and similar rights: See EXHIBIT 3D-3.2.
45,000 stock options outstanding, one share per option
100,000 warrants outstanding -- $.64 exercise price
3.3 SUBSIDIARIES.
Janex Corporation, With Design In Mind, Malibu Fun Stuffed, Pro Gains
Company Limited, Malibu Fun Stuffed International Limited.
3.4 FINANCIAL INFORMATION.
No exceptions.
3.5 TAXES.
No exceptions.
3.6 MATERIAL CHANGES.
No exceptions.
3.7 TITLE TO ASSETS; LIENS.
UCC-1 favoring Howard Moore, UCC-1 favoring Tinton Falls Bank, and UCC-1
favoring the State of California.
3.8 LITIGATION.
None
3.9 COMPLIANCE WITH LAWS.
No exceptions.
3.10 INSURANCE.
No exceptions.
3.11 LICENSES.
No exceptions.
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3.12 HAZARDOUS MATERIALS.
No exceptions.
3.13 JUDGMENTS AGAINST THE MERGING COMPANY AND/OR ITS BUSINESS.
None.
3.14 COMPLETE SALE.
No exceptions.
3.15 ASSETS IN GOOD CONDITION.
No exceptions.
3.16 DISCLOSURE MATERIALS.
No exceptions.
3.17 DEFAULTS.
None.
3.18 MATERIAL CONTRACTS.
None.
3.19 OUTSTANDING LIABILITIES.
See attached Exhibit 3D-3.19.
3.20 INVENTORY.
No exceptions.
3.21 RECEIVABLES.
No exceptions.
3.22 EMPLOYEES.
See attached Exhibit 3D-3.22.
<TABLE>
<CAPTION>
EMPLOYEE JOB TITLE COMPENSATION/YEAR
- -------- ---------- -----------------
<S> <C> <C>
Daniel Lesnick................. Former COO $104,000.00
Michael Handelman.............. Former CFO $103,500.00
</TABLE>
3.23 NO CONFLICTS.
None.
3.24 VIOLATIONS OF LAW.
None.
3.25 CONDITION AND SUFFICIENCY OF ASSETS.
No exceptions.
3.26 BANK ACCOUNTS.
No exceptions.
3.27 ENVIRONMENTAL MATTERS.
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<PAGE> 304
None.
3.28 INTELLECTUAL PROPERTY.
No exceptions.
3.29 CUSTOMERS AND SUPPLIERS.
No exceptions.
3.30 CHANGES TO THE MERGING COMPANY'S DOCUMENTS.
No changes.
3.31 STOCKHOLDERS AGREEMENTS AND OTHER AGREEMENTS.
None.
3.32 CERTAIN PAYMENTS.
No exceptions.
3.33 FILINGS COMPLETE.
No exceptions.
3.34 PRODUCTS.
No exceptions.
3.35 PATENTS.
<TABLE>
<S> <C> <C>
Patent #5,434,761 To Daniel Lesnick
Squeeze Flashlight Assigned to With Design In Mind
Reassigned to Janex International,
Inc.
</TABLE>
3.36 INDEMNIFICATION; SURVIVAL.
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EXHIBIT 3-E
TO
MERGER AGREEMENT
(DISCLOSURE SCHEDULE OF TRUDY CORPORATION)
The paragraph numbering below corresponds to the paragraph numbering in
Article III of the Merger Agreement.
3.1 DUE INCORPORATION.
No exceptions.
3.2 CAPITALIZATION.
Common Shares Authorized: 850,000,000 shares, $.0001 par value.
Common Shares Issued and Outstanding: 331,222,249
Series A Preferred Authorized: Not Applicable.
Series A Preferred Issued and Outstanding: Not Applicable.
The following summarizes stock options, warrants, subscriptions, conversion
rights and similar rights:
- Stock Options, stock grants or other equity participation rights granted
to certain directors, officers, agents and employees of Trudy
Corporation, covering an aggregate of 31,350,000 shares of common stock.
- Other stock options for 14,680,000 shares of common stock.
- There is an agreement with one director of Trudy Corporation to provide
compensation in the form of stock options or grants with a value of
$10,000.00 per year.
3.3 SUBSIDIARIES.
None
3.4 FINANCIAL INFORMATION.
No exceptions.
3.5 TAXES.
No exceptions.
3.6 MATERIAL CHANGES.
Trudy has experienced a continuing deterioration in its financial
condition. On May 13, 1999, Trudy was notified by First Union Bank of defaults
in Trudy's obligations under Trudy's debt instruments with said bank.
3.7 TITLE TO ASSETS; LIENS.
No exceptions.
3.8 LITIGATION.
No exceptions.
3.9 COMPLIANCE WITH LAWS.
No exceptions.
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3.10 INSURANCE.
No exceptions.
3.11 LICENSES.
No exceptions.
3.12 HAZARDOUS MATERIALS.
No exceptions.
3.13 JUDGMENTS AGAINST THE MERGING COMPANY AND/OR ITS BUSINESS.
None.
3.14 COMPLETE SALE.
No exceptions.
3.15 ASSETS IN GOOD CONDITION.
No exceptions.
3.16 DISCLOSURE MATERIALS.
No exceptions.
3.17 DEFAULTS.
On May 13, 1999, Trudy was notified by First Union Bank of defaults in
Trudy's obligations under Trudy's debt instruments with said bank.
3.18 MATERIAL CONTRACTS.
Lease between Trudy and Noreast Management LLC, covering 353 Main Avenue,
Norwalk, CT 06851.
3.19 OUTSTANDING LIABILITIES.
As to Trudy, Section 3.19 is replaced with the following:
To the knowledge of Trudy, there are no liabilities of Trudy other than
as are shown on the Trudy balance sheet as of April 30, 1999, and other
than: (i) a possible contingent liability for $30,000.00 for sub-right
royalties to the Smithsonian Institute; (ii) liabilities arising after
the balance sheet date in the normal course of business out of purchases
and sale of goods; and (iii) expected borrowings after April 30, 1999
and until the time of the Merger in the amount of approximately
$375,000. There are no liabilities relating to the Business which are
more than ninety (90) days past due, other than approximately $12,657
owed to WWB for unreimbursed business expenses, $1,876 owing to Emerald
Accounting, $43,863 owing to Smithsonian for royalties, $6,000 owing to
The Nature Conservancy, and miscellaneous liabilities not material to
Trudy in the aggregate. Depending on Trudy's ability to borrow or
otherwise obtain capital until the Merger closes, other liabilities may
become past due.
3.20 INVENTORY.
No exceptions. Trudy's obsolete inventory percentage shall be 10% instead
of 3% as called for in Section 3.20 of the Agreement.
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3.21 RECEIVABLES.
No exceptions.
3.22 EMPLOYEES.
Hourly Paid Employees
1. Medical/Dental Benefits.
Company shares 50/50 in cost for individual and family effective the
first month following 30 days of employment.
2. Vacation.
Two weeks paid per annum, available after 6 months of employment.
Accrued months are June through March. No days accrued in April or May.
Vacation is to be taken during the calendar year in which it is accrued.
a. Two weeks (10 days)
(Accrue 1 day/month from date of hire.)
(Must work 6 months before vacation can be taken or prearranged
differently at time of hire.)
b. Three weeks (15) days after five year anniversary
(Accrue 1 1/2 days/month)
c. Four weeks (20 days) after 10 years
(Accrue 2 days/month)
3. Nine Holidays with pay after one month of service.
Holiday pay is not granted if there is an unexcused absence the day
preceding or following the holiday. These holidays are generally
included though they may change by Letter Memo at the beginning of each
calendar year.
New Years Day
Good Friday
Memorial Day
Fourth of July
Labor Day
Thanksgiving
Thanksgiving Friday
Christmas
One Additional Holiday (to be determined each year)
4. Sick Days.
None
5. Bonus.
Eligibility: Over one year tenure as of December 31 for full benefit.
For employment less than one year, bonus will be prorated on length of
employment over 90 days.
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6. Stock Options.
Eligibility: Must be employed for 2 years. Consideration for
Options: Performance, salary level, attendance and tenure.
7. 401 K Plan.
Company contribution at the rate of 50% of employee paid in amount up to
3% of one's salary. Vesting and other restrictions apply.
8. Hours.
Office: 8:30 AM to 5:00 PM with 45 minute lunch hour-Monday through
Friday.
Plant: 7:30 AM to 3:30 PM with 30 minute lunch hour at 12:30 PM Monday-
Thursday; 7:30 AM to 12:30 PM Friday
Shipping: 7:30 AM to 4:45 PM with 30 minute lunch at 12:30 PM Monday-
Thursday; 7:30 AM to 12:30 PM Friday
9. Overtime.
None unless preapproved by W.W.B.
10.Absences.
Non-emergency doctor or dentist appointments to be scheduled after
business hours or on Saturday, if possible. Otherwise, all absences must
be excused by your supervisor. There are no other authorized paid
absences.
Effective: December 2, 1998
Salaried Employees
1. Medical/Dental Benefits
Company shares 50/50 in cost for individual and family effective the
first month following 30 days of employment.
2. Vacation
Two weeks paid per annum, available after 6 months of employment.
Accrued months are June through March. No days are accrued in April or
May. Vacation is to be taken during the calendar year in which it is
accrued.
a. Two weeks (10 days)
(Accrue 1 day/month from date of hire)
Must work 6 months before vacation can be taken or prearranged
differently at time of hire.)
b. Three weeks (15 days) after five year anniversary
(Accrue 1 1/2 days/month)
c. Four weeks (20 days) after 10 years
(Accrue 2 days/month)
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3. Nine Holidays with pay after one month of service
Holiday pay is not granted if there is an unexcused following the
holiday. These holidays are generally included though they may change by
Letter Memo at the beginning of each calendar year.
New Year's Day
Good Friday
Memorial Day
Fourth of July
Labor Day
Thanksgiving
Thanksgiving Friday
Christmas
One Additional Holiday (to be determined each year)
4. Bonus
Eligibility: Employed for one year as of December 31 for full benefit.
For employment less than one year, bonus will be prorated on length of
employment over 90 days. Bonus is predicated on anticipated Company
profits for the current year.
5. Stock Options
Eligibility: Must be employed for 2 years. Considerations for Options:
Performance, salary level, attendance and tenure.
6. 401 K Plan
Company contribution at the rate of 50% of employee paid in amount up to
3% of one's salary. Vesting and other restrictions apply.
7. Hours
Office: 8:30 AM to 5:00 PM with 45 minute lunch hour-Monday through
Friday (Hours other than above must be prearranged with supervisor)
8. Absences
Non-emergency doctor or dentist appointments to be scheduled after
business hours or on Saturday, if possible. Otherwise, all absences must
be excused by your supervisor.
Consulting Agreements with Suzanne Glazer and Judy Gittenstein, copies
of which have been supplied to Futech.
3.23 NO CONFLICTS.
1. License Agreement, dated June 17, 1997, between the Smithsonian
Institution and Soundprints, a division of Trudy Corporation.
2. Letter Agreement, dated December 5, 1994, between The Nature Conservancy
and Soundprints, a division of Trudy Corporation. Note, however, that
this Letter Agreement does not expressly require the consent or any
other action of The Nature Conservancy in respect of the Merger and is
included in this Exhibit E to advise Futech that it may be advisable for
Trudy to give notice of the proposed
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Merger and to obtain such consent simply because the Letter Agreement is
a material agreement of Trudy.
3. Revolving Credit Agreement, dated March 30, 1998, with First Union for a
maximum amount of $1.2 million.
4. Term Note, dated March 30, 1998, with First Union in the amount of
$250,000.
5. Loan from First Union to Noreast Management LLC, covering 353 Main
Avenue and guaranteed by Trudy.
3.24 VIOLATIONS OF LAW.
At the time of the purchase by Noreast Management LLC of the building and
land at 353 Main Avenue, Norwalk, CT (the "Property"), currently leased by Trudy
from Noreast for Trudy's principal offices, the Connecticut Department of
Environmental Protection ("DEP") approved all remediation of the Property with
the exception of the northern portion of the Property. As to the northern
portion, HRP, a Connecticut state EPA license contractor, was authorized to
perform final remediation. A Plan of Remediation was to have been submitted to
the DEP by August 1998. Noreast applied to the DEP for a one year extension of
such date to August 1999.
The HRP remediation plan which will cost $27,000 is as follows:
1. Drilling a monitoring well to check for the presence of lead in water;
and
2. Remediating an abandoned oil tank by removing it from an underground
site.
The remediation under this plan is expected to be completed by August 1,
1999.
Trudy is of the view that it bears no monetary or other responsibility for
the remediation in its role as a lessee or otherwise.
3.25 CONDITION AND SUFFICIENCY OF ASSETS.
No exceptions.
3.26 BANK ACCOUNTS.
No exceptions.
3.27 ENVIRONMENTAL MATTERS.
See disclosure for Section 3.24 above.
3.28 INTELLECTUAL PROPERTY.
No exceptions.
3.29 CUSTOMERS AND SUPPLIERS.
Sales to Advance Marketing Services have decreased from $1,700,000 in 1997
to $850,000 in 1998 to $0 in 1999.
3.30 CHANGES TO THE MERGING COMPANY'S DOCUMENTS.
No changes.
3.31 STOCKHOLDERS AGREEMENTS AND OTHER AGREEMENTS.
None.
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3.32 CERTAIN PAYMENTS.
No exceptions.
3.33 FILINGS COMPLETE.
No exceptions.
3.34 PRODUCTS.
No exceptions.
3.35 PATENTS.
None.
3.36 INDEMNIFICATION; SURVIVAL.
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EXHIBIT 3.17
TO
MERGER AGREEMENT
(DEFAULTS)
A. DAMERT.
See Section 3.17 of Exhibit 3-A.
B. FUNDEX.
No Exceptions.
C. FUTECH.
No Exceptions.
D. JANEX.
No Exceptions.
E. TRUDY.
Trudy has a dispute involving royalties under sub-licensing rights, as to
which Trudy does not admit that there is or may be a default, but is disclosing
this matter in the spirit of full disclosure to the other Merging Companies. The
other party involved in this matter has been given written notice of the issue
and the issue has been, and is being, discussed with the other party with the
expectation of a successful resolution thereof.
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<PAGE> 313
EXHIBIT 3A-3.22
3.20 INVENTORY
As of 4/30/98
A. There is $10,949 of obsolete parts on the books with no further use or
market value.
B. There is $12,183 of inventory in good condition of fantasy characters
whose license has expired. We are seeking permission from the licensor
to sell these off.
C. There is $16,465 of inventory in good condition not presented in the
1998 catalog.
D. There is $15,299 of inventory in good condition presented in the 1999
catalog but in old packaging.
E. Total Inventory Value $1,262,556
Under GAAP, item A is obsolete and B if permission to sell off is not
granted. We feel there is a market for items C and D.
3.22 EMPLOYEES
VACATIONS
All full-time employees are eligible for vacation. Temporary employees and
part-time employees working less than 1000 hours per year are not eligible for
vacation.
Vacation days and portions of days thereof, are accrued from the first day
of employment and are "banked" monthly. Employees may only take as many vacation
days as are in their "Bank". Annual vacations are determined by length of
service and are accrued as follows:
<TABLE>
<CAPTION>
DAYS OF
VACATION
ACCRUED
LENGTH OF SERVICE ANNUALLY
----------------- --------
<S> <C>
1 to 5 years................................ 10 days
6 years to 10 years......................... 15 days
11 years to 15 years........................ 20 days
over 15 years and up........................ 25 days
</TABLE>
Vacation days will be accrued at a rate equal to the employees average
number of hours/day over the previous 12 months of service as defined by payroll
records. Example: employee that averages 8 hours/day will be paid 8 hours on
Vacation; employee that averages 6 hours/day will be paid 6 hours on Vacation.
Vacations may be taken at any time during the year, except that they MUST be
scheduled to avoid conflicts with other employees' vacations. DaMert Company
discourages employees from taking Vacation time during the company's busy period
of the year (September-November). Check with your supervisor for the best times
to take Vacation. Specific vacation dates must be approved by the employee's
supervisor at least 30 days prior to the anticipated vacation. Requests should
be in writing. Employees with the most seniority will have first priority as to
the dates of their vacation request. New employees cannot take Vacation during
their first 30 days of employment although their Vacation benefits accrue from
date of hire. Any requested Vacation period in excess of two consecutive weeks
requires special management
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approval. Single days off should be approved at least one week in advance of the
requested date.
A maximum of 10 additional vacation days may be carried over at the
employee's anniversary date of hire. Financial compensation in lieu of vacation
is not allowed. In the interest of maintaining their physical and mental health,
employees are encouraged to use all their vacation time annually. All vacation
earned will be paid out at the time of termination. Vacation is not earned while
an employee is on a leave of absence.
HOLIDAYS
Full-time and part-time employees working at least 1000 hours per year are
eligible for holiday pay. Employees will be paid for the amount of hours they
would be normally scheduled to work that day.
The following paid holidays will be observed in 1999:
<TABLE>
<S> <C>
Memorial Day 5/31/99
Independence Day 7/5/99
Labor Day 9/6/99
Thanksgiving 11/25-11/26
Christmas Day 12/23-12/24
New Years 12/30-12/31
New Year's Day Labor Day
Memorial Day Thanksgiving Day
Independence Day Christmas Day
</TABLE>
Employees may not elect financial compensation in lieu of taking time off
for a holiday. If an exempt employee is requested to work on a holiday, an
alternate day off will be allowed in lieu of taking the holiday. If a non-exempt
employee is requested to work on a holiday, he/she will be paid at the
applicable overtime rate.
Employees who do not report to work on the day prior to, or the day
immediately following the holiday, without prior approval, will not be paid for
the holiday. Employees on a Leave of Absence are not eligible for holiday pay.
Temporary employees, independent consultants, and similar classifications are
not eligible for holiday pay.
If a holiday falls on a weekend, the holiday will be observed on the
closest Friday or Monday, or on the customary day.
DaMert will make a reasonable accommodation to employees who wish time off
to observe religious holidays. Those employees needing such time should make
their request in writing to their department head.
Ownership, solely at its discretion, may choose to provide additional paid
Company holidays. A company "shop calendar" identifying all holidays and dates
will be published annually.
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SICK/DISABILITY LEAVE
All permanent full-time and part-time employees are eligible to accrue Sick
Leave bank hours as follows:
On January 1 of each year, each employee is given a Sick Leave bank of
time corresponding to 8 days worth of hours each employee is regularly
scheduled to work. Full-time employees, i.e., those scheduled to work 8
hours a day, will receive a bank of 64 hours. A part-time employee, who is
scheduled to work six hours a day will receive 48 hours. Sick Leave hours
must be taken in half-day (4 Hour) increments.
The purpose of the Sick Leave hours is to allow employees a reasonable
accumulation of time to be used for bonafide reasons to be away from the
job. An example would be the use of Sick Leave in the middle of the day for
a doctor appointment. Examples of such reasons are occasional illness,
medical and dental appointments, or personal business that cannot be
conducted outside working hours.
Sick Leave hours may not be used to supplement employee scheduled
vacation time or in conjunction (day before or day after) a company
scheduled Holiday.
The exception to this rule is if the employee comes to work and must
leave "sick". "Telephoned" sick leave calls the day before or after
Vacation or Holiday leave are not acceptable to receive sick leave pay.
New employees are not awarded sick time until after 30 days of
employment. At that date, the amount of hours of Sick Leave banked will be
prorated for the period of time remaining in the current 12 month cycle.
Once an employee has used up all of their Sick Leave in a given 12
month period, all Sick time off will be unpaid, unless prior arrangements
are made with their supervisor to use earned Vacation days. There is no
"borrowing" of Sick Leave days from the next 12 month cycle. There is no
payout of unused Sick Leave hours at termination.
All Sick Leave hours not used by December 31 will be rolled forward
into a Disability Bank for the employee. The Disability Bank will be
allowed to accumulate from year to year to a maximum bank of 6 calendar
weeks (30 work days). The purpose of the "Disability" time is to allow
employees wage compensation in the event of an illness or accident that
would keep them away from the job for more than 5 work days. Use of this
Disability time bank always requires a written explanation from a
physician. "Disability" days may not be used for occasional illness even if
the employee has used up their entire sick leave pool. There is no payout
of Disability hours at termination.
A maximum of 2 sick days may be taken for family illnesses. Employees
may not take Disability days for this purpose. In the event 3 or more days
are necessary for a family illness, Vacation time may be used.
Employees who are unable to report to work because of illness must
contact their department head within one hour of their scheduled start
time. Any absence of 3 days or more will require a physician's note.
Temporary employees are not granted paid sick or paid personal leave.
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FAMILY LEAVE
After the first year of continuous employment, DaMert Company will provide
unpaid leaves of absence for family care up to a total of four months in a 24
month period. Leave may be granted for the birth or adoption of an employee's
child, or to care for a parent or spouse who has a serious health condition.
Any employee taking a family care leave will receive the same benefits as
provided under the Disability Leave Policy. You must give your supervisor
written notice of your request for family leave as soon as you learn that leave
is necessary. DaMert Company may deny a request for family leave if it is
necessary to prevent undue hardship to the Company. In addition, no family leave
will be granted to care for a child when the child's other parent is taking
leave or is otherwise unemployed.
A request for family leave must be accompanied by a medical certificate
from the attending physician, which includes the date on which the medical
condition commenced, the probable duration of the condition, the estimated time
the patient will require the employee's care, and a statement that the
employee's participation in the treatment care of the patient is warranted by
the medical condition. Upon expiration of the time estimated by the doctor, the
employee must obtain another medical certificate if additional leave is
required.
DaMert Company will make reasonable efforts to return you to your prior
position, if available, or similar job for which you are qualified, at the same
salary rate held prior to the leave of absence.
Failure to notify the Company of your availability for work when it occurs,
failure to return to work when called by the Company, or your continued absence
from work because your leave must extend beyond the maximum time allowed, may be
deemed a voluntary termination of your employment with DaMert Company.
LEAVES OF ABSENCE
A leave of absence is an extended period of time absent from work without
loss of employment. Leave of absence is without pay. During the first 30 days of
a leave of absence the company continues to pay company-paid benefits; the
employee must pay premiums for dependent coverage in advance to the company.
A written request for a leave of absence, providing full explanation of the
circumstances, must be presented to the employee's immediate supervisor at least
two weeks before the start date of the leave of absence. Failure to report to
work on the first day after the expiration of the leave of absence, without
approval, will be considered a voluntary termination of employment.
PERSONAL LEAVE OF ABSENCE
DaMert Company has a policy of granting personal leaves of absence in a few
well-defined cases. A personal leave of absence may be granted by DaMert up to a
maximum of 30 days. An extension beyond 30 days may be considered in the event
of serious or extenuating circumstances. If possible, at least 6 weeks notice
must be given for such leave.
For time off in a non-pay status, an employee must submit a request for a
leave of absence in writing to their manager. Managers will forward the request
to ownership with the Manager's recommendation. The final approving authority is
an Owner. Managers at
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any level are not authorized to approve or promise an employee, in any way, that
the request has been or will be approved until concurrence has been received.
JURY DUTY
If you receive a jury summons, you must inform your supervisor immediately.
DaMert Company will pay the difference between your regular earnings and the fee
you receive for jury service.
You must report to work on days or parts of days when you are not required
to serve. If you do not return to work immediately after an approved leave for
jury duty, the Company may assume you have voluntarily quit your job.
WITNESS DUTY
You may be required by law to appear in court as a witness. If you give
reasonable advance notice to your supervisor, you will be allowed to take time
off. Regular full-time employees may be paid for up to two (2) days. All leave
thereafter will be unpaid.
MEDICAL LEAVE OF ABSENCE FOR NONOCCUPATIONAL MEDICAL DISABILITY, INCLUDING
PREGNANCY OR CHILDBIRTH OR RELATED MEDICAL CONDITION
Medical leaves up to four (4) months may be granted for any nonoccupational
medical disability, including disability because of pregnancy or childbirth or
related medical condition.
The Company reserves the right to require written proof from a licensed
doctor that your disability has started or ended before it allows you to take a
leave or return from leave. It is your responsibility to provide your supervisor
with the following information as soon as you know you need to take a leave of
absence: 1) how long you expect to be on disability leave; 2) a doctor's
certificate or other medical proof acceptable to the Company showing the
expected dates of your disability; and 3) regular updates at least every week
regarding your medical status and the date you expect to return to work.
Applications for leaves of absence for disability because of pregnancy of birth
should be submitted at least two weeks before the start date of such leave, if
possible.
MEDICAL LEAVE OF ABSENCE FOR OCCUPATIONAL DISABILITY
If you are injured at work, you may be allowed to take an unpaid leave of
absence until 1) a recognized medical professional certifies that you are
allowed to resume all of the duties of your former position; 2) you are unable
to come back to work in your position (i.e. your condition is permanent and
stationary); or 3) you resign, quit, or otherwise indicate that you are not
going to return to your job.
MILITARY LEAVE OF ABSENCE
An employee who is drafted for service in the armed forces is eligible for
military leave of absence. Upon return from service, the employee will be
eligible for re-employment and will be reinstated in the same of substantially
similar position.
An employee who is a member of the Armed Forces Reserve or the National
Guard and who is required to attend annual active duty for training or other
short-term reserve or Guard duty (i.e. forest fire fighting, police duty for
natural disaster, etc.) is eligible for a military leave of absence. Such time
off will not be considered vacation time. If the employee's military pay for the
training is less than his/her average company earnings for
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a like period DaMert Company will pay the difference to the employee for a
period not exceeding two (2) weeks.
BEREAVEMENT LEAVE OF ABSENCE
In the event of a death in your immediate family, you may have time needed
up to three working days, with pay, to handle family affairs and attend the
funeral. "Immediate family" is defined as: father, mother, sister, brother,
spouse, child, mother-in-law, father-in-law, grandparents, grandchildren,
nieces, nephews, sisters-and-brothers-in-law, and domestic partners.
If the funeral is beyond 250 miles of your home, up to 2 additional days
may be approved. These additional days will be taken from the employees
Disability Leave bank. Employees should notify their department heads as soon as
possible of their need for such leave.
VOTING
DaMert Company policy is to encourage its employees to participate in the
election of government leaders. Therefore, adequate time off is allowed from the
beginning or end of the workday to exercise this right. If the employee
otherwise will be unable to vote, he/she may wish to inquire of their Registrar
of Voters about the possibility of voting by absentee ballot.
Please be sure to schedule this time off with your supervisor to ensure
proper coverage of your work station. Registered voters may take up to a maximum
of 2 hours to vote.
LIFE THREATENING DISEASES
DaMert Company is committed to keeping your work environment healthy and
safe for all employees, and has established these rules which you should follow
if you or one of your co-workers has or contracts a life-threatening illness:
1) DaMert Company will treat all life-threatening illnesses the same as
other illnesses in terms of all our employee policies and benefits.
2) If you have or contract a life-threatening illness, you will be
allowed to keep working, as long as a) you can meet the Company's
performance standards; b) your illness does not actually endanger the
health or safety of other employees or customers; and c) you will not
make your illness worse by continuing to work.
3) You may not refuse to work because you are afraid of contracting a
non contagious life-threatening illness from a co-worker. You may not
harass or otherwise discriminate against a co-worker who has a
life-threatening illness. Employees who refuse to work with or who
harass or discriminate against any employee with a life-threatening
illness will be disciplined, up to and including discharge.
4) In this handbook, "life-threatening illness" includes cancer, Lou
Gehrig's Disease, AIDS, and other illnesses of a severely
degenerative nature.
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GROUP INSURANCE
Medical Insurance
All employees working 30 hours per week are eligible for medical insurance.
Temporary and part-time employees are not eligible on the DaMert Company plan.
Benefits begin on the first regular work day following a 30-day waiting period.
The cost for medical insurance is paid as follows:
Employees -- a minimum of 80% of the premium cost to be paid by the
Company, the balance to be paid by employees through payroll deduction.
Dependents -- 100% of the premium cost to be paid by the employee
through payroll deduction. DaMert Company does not contribute to the cost
for dependents.
This Medical Plan was selected to ensure the employees are not burdened
with extreme medical costs. This policy was developed for the benefit of all
full-time employees. You are encouraged to take sick leave for medical
appointments.
The specific coverage of DaMert Company Medical Plan are located in your
medical handbook published by the insurance carrier.
Dental Insurance
All employees working 30 hours per week are eligible for dental insurance.
Temporary and part-time employees are not eligible on DaMert Company plan.
Benefits begin on the first regular work day following a 30-day waiting period.
The cost for dental insurance is paid as follows:
<TABLE>
<CAPTION>
EMPLOYEE DEPENDENTS
-------- ----------
<S> <C> <C>
Company pays....................... 60% 0%
Employee pays...................... 40% 100%
</TABLE>
This Dental Plan was selected to ensure that employees are not burdened
with extreme dental costs. The intention of this benefit is to encourage
employees to take preventive dental care. You are encouraged to take sick leave
for dental appointments.
The specific coverage of the this dental plan are located in the dental
handbook provided by the insurance carrier.
Life Insurance
A group Life Insurance Plan has been provided to give basic protection to
all full-time employees working 30 hours per week. Temporary and part-time
employees are not eligible on the DaMert Company Group Life Insurance plan. This
Group Policy is in force on the first regular work day following a 30-day
employment period.
The total cost of this Group Insurance Plan is paid by DaMert Company.
The specific term insurance coverage of the plan is in the amount of
$10,000 for all employees. Details are in the handbook as provided by the
insurance carrier.
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401(k) Plan
The company has a 401(k) plan. The employee may make elective contributions
to the plan as prescribed by law. The company will make a 10% matching
contribution which the employee vests 100% at the time on the match.
The company has a profit sharing plan attached to the 401(k) plan. Profit
sharing is discretionary and based on the company's performance and achievement
of goals. The profit sharing contribution vest over six years as follows: 20%
after 2 years, 40% after 3 years, 60% after 4 years, 80% after 5 years and 100%
after 6 years. In the event of a major change in ownership employee profit
sharing contribution vest 100%.
OVERTIME
All overtime must have prior approval.
Hours
Office hours are from 8:00 AM to 4:30 PM. Variations from this must have
approval of a supervisor.
Compensation
The compensation package is comprised of four basic areas.
1. Base salary
2. Benefits Package
3. Individual Merit Award
4. Year End Bonus
Each area is defined as follows:
Base Salary: The base salary is determined by the salary range within
a given grade. The amount of wages given within the grade is determined the
job skill brought to that grade. It is DaMert Company's intent to
compensate each person fairly based on the employee's contribution within
there particular pay grade. Increases to base salary are changed when there
is a change in contribution or responsibility within the grade or a change
to a higher grade. Increases are not automatic and are not tied to a
particular time frame. Increases in base salary can occur at any time.
Effective January 1, the entire payroll will be increased for a Cost of
Living Allowance (C.O.L.A.). The amount of the C.O.L.A. will be at the
discretion of the owners.
Benefits Package: It is the intent of DaMert Company to provide a
comprehensive benefits package. The Benefits package will be reviewed
annually. A summary of the benefits package will be provided as soon as
possible after year end. The summary will report both governmental mandated
contributions as well as company discretionary benefits.
Individual Merit Award (I.M.A.): The I.M.A. compensation is tied to
the annual performance appraisal. During the performance appraisal process
certain goals will be established between the supervisor and employee. A
pool of dollars will be determined during the annual budget process. The
amount of I.M.A. received depends on the level of goals achieved. For
example, if the management team establishes a 3% I.M.A. pool, an employee
can earn up to 3% of their annual salary if all the goals are achieved that
were agreed upon at the performance appraisal. The first year is a
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transition year and the amount of I.M.A. received will be based on prior
years performance and time in service. The I.M.A. will be distributed as a
separate check on the first pay period in May. Remember, base salary is not
increased.
Year End Bonus: The Year End Bonus will be determined as a part of
the annual budget process. The management team establishes company goals
for the coming year. If the goals of the company are achieved the
pre-determined bonus amounts will be distributed to all employees on
payroll as of the last payroll in December. This program replaces the
annual "Christmas Bonus", which was originally a discretionary award to
employees and has evolved into a perceived entitlement. In short, if the
company achieves its goals it will share them with the employees. This is a
win win participation. The Company goals and Year End Bonus amount will be
published at the completion of the budget process.
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EXHIBIT 3A-3.26
3.26 BANK ACCOUNTS
Account #4121089916 Operating Account Wells Fargo Bank
Signatories Fred DaMert
Gail DaMert
Greg McVey
Tom Santilena
Lynne McDonald
Account #4121091425 Payroll Account Wells Fargo Bank
Signatories Fred DaMert
Gail DaMert
Tom Santilena
Wells Fargo Payroll Service
Account #4121093959 Petty Checking Wells Fargo Bank
Signatories Fred DaMert
Gail DaMert
Greg McVey
Tom Santilena
Lynne McDonald
Bill Hanlon
Don Bee
Account #114026734 401(k) Clearing Account The Mechanics Bank
Signatories Fred DaMert
Gail DaMert
Tom Santilena
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EXHIBIT 3A-3.29
3.29 CUSTOMERS AND SUPPLIERS
<TABLE>
<S> <C>
TOP FIVE CUSTOMERS AS OF 14 MAY 1999
Natural Wonders............................ $111,705
HCM Kinzel GmbH............................ 78,057
Ames....................................... 49,832
Pierre Belvedere Inc. ..................... 47,336
Discovery Channel Stores................... 37,125
1998
HCM Kinzel GmbH............................ 405,459
Natural Wonders............................ 319,338
Zany Brainy................................ 237,850
World of Science........................... 181,380
Store of Knowledge......................... 176,911
1997
Natural Wonders............................ 416,678
Store of Knowledge......................... 323,734
HCM Kinzel GmbH............................ 260,350
Sharper Image.............................. 254,994
Pierre Belvedere........................... 244,099
1996
Natural Wonders............................ 943,786
Zany Brainy................................ 341,721
Nature Company............................. 322,616
Pierre Belvedere........................... 319,396
Books-A-Million............................ 259,424
TOP FIVE SUPPLIERS AS OF 30 APRIL 1999
Lorelei Commodity.......................... 246,012
Hopstech Industries Ltd. .................. 116,473
Equity Marketing........................... 71,441
Inter. Procurement Systems................. 70,734
Cantel Manufacturing Ltd. ................. 38,186
1998
Lorelei Commodity.......................... 1,351,844
Hopstech Industries........................ 880,194
Edaron, Inc. .............................. 140,681
Valiant Printing........................... 89,491
Kling Magnetics Inc. ...................... 82,484
</TABLE>
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<TABLE>
<S> <C>
1997
Lorelei Commodity.......................... 1,211,775
Hopstech Industries........................ 728,713
Edaron, Inc. .............................. 351,498
Valiant Printing........................... 291,052
Elpete Trading Co. ........................ 119,958
1996
Hopstech Industries........................ 1,031,911
Edaron, Inc. .............................. 840,486
Valiant Printing........................... 304,232
White Eagle................................ 227,934
Elpete Trading Co. ........................ 202,208
</TABLE>
All products previously produced at Valiant Printing are now produced at
General Glory Company.
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EXHIBIT 3A-3.35
UNITED STATES PATENT [19] [11] PATENT NUMBER: DES. 316,882
HANLON, III [45] DATE OF PATENT: MAY 14, 1991
-
<TABLE>
<C> <C> <C> <S> <C>
[54] RETURN TOP
[75] Inventor: William M. Hanlon, III,
Castro Valley, Calif.
[73] Assignee: DaMert Company, San Leandro,
Calif.
[**] Term: 14 Years
[21] Appl. No.: 391,859
[22] Filed: Aug. 10, 1989
[52] U.S. Cl. ......................... D31/99
[58] Field of Search... D21/99, 100, 98, 95;
446/245, 242, 248, 249, 261, 262
[56] References Cited
U.S. PATENT DOCUMENTS
D. 61,134 7/1922 Fletcher...... D21/98
D. 139,743 12/1994 Davidson...... D21/99
D. 156,582 12/1949 Tomarun....... D21/99
D. 200,586 3/1965 Parente....... D21/98
288,265 11/1883 Shourda....... D21/98
1,419,690 6/1922 Samour........ 446/248
FOREIGN PATENT DOCUMENTS
30913 6/1917 Fed. Rep. of
Germany....... 446/248
20426 of 1898 United
Kingdom....... 446/247
Primary Examinee--Charles A. Rademaker
Attorney Agent, or Firm--Harris Zimmerman
[37] CLAIM
The ornamental design for a return top, as shown
and described.
DESCRIPTION
FIG. 1 is a top plan view of a return top
showing any new design;
FIG. 2 is a side elevational view thereof, the
side opposite being identical; and
FIG. 3 is an end elevational view thereof, the
end opposite being identical.
</TABLE>
[ILLUSTRATION OF RETURN TOP]
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INT. CL.: 28
PRIOR U.S. CLS.: 22, 23, 38, AND 50
REG. NO. 2,233,014
UNITED STATES PATENT AND TRADEMARK OFFICE REGISTERED MAR. 16, 1999
- --------------------------------------------------------------------------------
TRADEMARK
PRINCIPAL REGISTER
METROPOLIS
<TABLE>
<S> <C>
DAMERT COMPANY (CALIFORNIA CORPORATION) FIRST USE 4-10-1998; IN COMMERCE 4-10-1998.
1609 FOURTH STREET
BERKELEY, CA 94710
SN 75-366,918, FILED 10-2-1997.
FOR: THREE DIMENSIONAL ASSEMBLY PUZZLE IN THE
SHAPE OF A CITY, IN CLASS 28 (U.S. CLS. 22, 23, 38
AND 50). LAURA KOVAISKY, EXAMINING ATTORNEY
</TABLE>
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INT. CL.: 28
PRIOR U.S. CLS.: 22, 23, 38, AND 50
REG. NO. 2,234,702
UNITED STATES PATENT AND TRADEMARK OFFICE REGISTERED MAR. 23, 1999
- --------------------------------------------------------------------------------
TRADEMARK
PRINCIPAL REGISTER
KLIK-KLAK-BLOX
<TABLE>
<S> <C>
DAMERT COMPANY (CALIFORNIA CORPORATION) FIRST USE 3-3-1997; IN COMMERCE 3-3-1997.
1609 FOURTH STREET
BERKELEY, CA 94710
SN 75-136,411, FILED 7-22-1996.
FOR: MANIPULATIVE PUZZLE, IN CLASS 28 (U.S.
CLS. 22, 23, 38 AND 50). KARLA PERKINS, EXAMINING ATTORNEY
</TABLE>
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INT. CL.: 28
PRIOR U.S. CLS.: 22
REG. NO. 1,589,123
UNITED STATES PATENT AND TRADEMARK OFFICE REGISTERED MAR. 27, 1990
- --------------------------------------------------------------------------------
TRADEMARK
PRINCIPAL REGISTER
TURBO SPARKLER
<TABLE>
<S> <C>
DAMERT COMPANY (CALIFORNIA CORPORATION) FIRST USE 7-22-1989; IN COMMERCE 7-22-1989.
900 75TH AVENUE
OAKLAND, CA 94621
SER. NO. 73-818,912, FILED 8-14-1989.
FOR: TOY YO YOS, IN CLASS 28 (U.S. CL. 22). CORA ANN MOORHEAD, EXAMINING ATTORNEY
</TABLE>
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EXHIBIT 3B-3.19
SCHEDULE 3.19
FUNDEX GAMES, LTD.
O/S ACCOUNTS PAYABLE > 90 DAYS
<TABLE>
<CAPTION>
VENDOR TOTAL +90 DISPOSITION
------ ----- --- -----------
<S> <C> <C> <C>
Carl E. Voigt III............. 12,947.25 12,947.25 Due by December 31, 1999
Carl E. Voigt IV.............. 5,343.43 5,195.39 Due by December 31, 1999
KCET PBS Television........... 22,200.00 22,200.00 $2,220.00 due on first of month until
paid in full (03/01/00)
Kyce Enterprise............... 31,097.04 31,097.04 $6,000.00 due first and third week of
month until paid in full (July 1999)
Max-Key Enterprises........... 89,672.60 65,139.80 $10,000.00 due last week of month until
paid in full (November 1999)
Jack of All Games............. 43,600.20 43,600.20 $14,677.25 due 15th of month until paid
in full (July 15, 1999)
WKOP PBS Television........... 11,916.67 11,916.67 $1,083.33 due on first of month until
paid in full (04/01/00)
Meyer Fredericks.............. 13,300.65 13,300.65 $3,500.00 due 15th of month until paid
in full (July 15, 1999)
Much Shelist Rubenstein....... 64,100.04 11,579.42 $11,579.42 due on May 31, 1999
Playtoy Industries............ 1,300.20 1,300.20 Commissions due on bankrupt customer
Paine Webber.................. 49,000.00 49,000.00 Money Purchase Plan settlement -- due
June 30, 1999
344,478.08 267,276.62
</TABLE>
A-120
<PAGE> 330
EXHIBIT 3B-3.2
FUNDEX GAMES, LTD
OPTIONS AND WARRANTS
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
------ --------------
<S> <C> <C>
DIRECTORS OPTIONS PURSUANT TO 1996 OPTION PLAN
Sheldon Drobny
96........................................................ 2,000 $ 4.0
97........................................................ 2,000 4.0
98........................................................ 2,000 3.0
William Prophater
96........................................................ 2,000 $ 4.0
97........................................................ 2,000 4.0
98........................................................ 2,000 3.0
Dennis Weidannor
96........................................................ 2,000 $ 4.0
97........................................................
2,000 3.0
-------
16,000
-------
PRIVATE PLACEMENT BRIDGE CONVERSION
Jay Gale.................................................... 2,380 $4.20
Howard Simons............................................... 270 4.20
Aric & Corey Simons......................................... 7,150 4.20
Sharon Gonsky Pension Fund.................................. 7,440 4.20
Jerry Schacter.............................................. 7,440 4.20
Harbour Court LP I.......................................... 14,880 4.20
P.C. Goldslick Revocable Trust.............................. 14,880 4.20
Steve Levy.................................................. 14,880 4.20
Richard Goulding............................................ 8,928 4.20
Dennis Goby................................................. 7,440 4.20
Stacy Rosenberg............................................. 3,720 4.20
Sarah Schwartz.............................................. 3,720 4.20
Paradigm Venture............................................
29,762 4.20
-------
122,890(1)
</TABLE>
A-121
<PAGE> 331
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
------ --------------
<S> <C> <C>
MERRIL WEBBER AS PLACEMENT AGENT -- 5 YR. WARRANTS
(ISSUED 3/97 IN PRIVATE PLACEMENT)
2,458(1) 4.20
4,142 4.20
1,346 5.50
0 6.30
-------
7,946
-------
</TABLE>
- -------------------------
(1) Upon any exercise of the 4.20 warrants, Merril Webber is entitled to receive
additional warrants exercisable at $4.20 per share in an amount equal to 2%
of the gross amount received upon exercise divided by $4.20 up to a maximum
of 2,458 Fundex warrants.
TOY PARADISE DEAL
75,000 Warrants not convertible to Futech Warrants. Need 20 days notice
prior to merger to exercise (see sec. 11.2 of Warrant)
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
------ --------------
<S> <C> <C>
Aaron Fisher........................................ 14,550 9.60
Sheldon Drobney..................................... 14,550 9.60
Randall Goulding.................................... 750 9.60
Reevy Rosenberg..................................... 7,275 9.60
Stewart Shiman...................................... 14,550 9.60
Gordon Ballin....................................... 13,050 9.60
Bob Noto............................................ 3,000 9.60
Buzz Simons.........................................
7,275
-------
75,000
-------
</TABLE>
A-122
<PAGE> 332
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
------ --------------
<S> <C> <C>
EMPLOYEE STOCK OPTIONS VIA 1996 NONSTATUTORY OPTION PLAN
1997 OPTIONS
Carl E. Voigt, IV................................... 10,000 $4.40
Carl E. Voigt, III.................................. 10,000 4.40
Richard Bowden...................................... [10,000expired](2)
Eric J. Voigt....................................... 10,000 4.00
George Propsom...................................... 7,000 4.00
Karen Patterson..................................... 2,000 4.00
Cristen Rabriach.................................... [2,000expired](2)
Tom Fultz...........................................
2,000 4.00
-------
41,000
-------
</TABLE>
- -------------------------
(2) Left employ prior to vesting.
<TABLE>
<S> <C> <C>
1998 OPTIONS
Carl E. Voigt, IV................................... 20,000 3.30
Carl E. Voigt, III.................................. 20,000 3.30
Jim Money........................................... 10,000 3.00
Eric Voigt.......................................... 10,000 3.00
George Propsom...................................... 10,000 3.00
Karen Patterson..................................... 3,000 3.00
Tom Fultz...........................................
3,000 3.00
-------
76,000
-------
EXERCISABLE OPTIONS AND WARRANTS TO BE CONVERTED TO
FUTECH OPTIONS....................................
338,836
=======
</TABLE>
A-123
<PAGE> 333
EXHIBIT 3B-3.22
SCHEDULE 3.22
HOURLY PAID EMPLOYEES
1. Medical Benefits -- Company covers 88% of cost for individual and
family upon election by employee. Employees are eligible after 30 days
of employment.
2. Cafeteria Plan -- Employees are eligible to participate in the
cafeteria plan, which includes universal life, short-term disability,
dental and a variety of flex plans, upon 90 days of employment. The
employees cover 100% of the cost.
3. Long-term Disability -- Company covers 100% of cost after 30 days of
employment.
4. Life Insurance -- Company covers 100% of cost of $10,000 term policy
after 30 days of service.
5. Vacation -- Two weeks paid per annum, three weeks after five years of
service.
6. Holidays -- seven paid holidays upon employment. Holiday pay is not
granted if there is an unexcused absence the day preceding or following
the holiday. These holidays are generally included though they may
change by letter memo at the beginning of each calendar year: New Years
Day, Memorial Day, Fourth of July, Labor Day, Thanksgiving,
Thanksgiving Friday, Christmas.
7. Sick Days -- Five days are earned each year and are granted on the
first day of the calendar year.
8. Bonus -- Discretionary by management.
9. Stock Options -- ?
10. Simple IRA Plan -- Employees may contribute up to 15% percent of their
salary, with a cap of $6,000 per annum, after 90 days of service.
Company will match up to 3%.
11. Hours -- Warehouse: 7:00 AM to 4:00 PM with two 15 minute breaks and 30
minutes for lunch; Office: Flexible, but must work nine hours between
7:00 AM to 5:30 PM with a 1 hour lunch.
12. Overtime -- None unless approved by supervisor.
13. Absences -- All absences must be excused by your supervisor. Personal
days are used to cover excused absences.
SALARIED EMPLOYEES
same
A-124
<PAGE> 334
EXHIBIT 3B -- 3.23
<TABLE>
<CAPTION>
NAME RELATIONSHIP ADDRESS
- ---- ------------ -------
<S> <C> <C>
Wells Fargo Business
Credit............... Line of Credit 111 East Wayne Street, Fort Wayne, IN 46801
Facility
Liberty BIDCO
Investment Corp. .... Mezzanine Note 3000 Town Center, Suite 830, Southfield, MI
48075-1177
Duke Reality
Investment, Inc. .... Warehouse Lease 281 Fortune Circle East, Suite M,
Indianapolis, IN 46241
200 Fifth Avenue
Associates........... Showroom Lease 60 East 42nd Street, 53rd Floor, New York, NY
10010
Performance
Unlimited............ License Agreement 1710 General George Patton Drive, Suite 110,
Brentwood, TN 37027
NBD Bank, N.A. ........ Equipment Lease 151 N. Delaware Street, #850, Indianapolis,
IN 46158
IKON Capital........... Copier/Fax Lease P.O. Box 9115, Macon, GA 31208-9115
Pitney Bowes Credit
Corp. ............... Postage Machine Lease P.O. Box 5151, Shelton, CT 06484-7151
Active International... Media Barter 1 Blue Hill Plaza, Pearl River, NY 10965
Management Computer
Systems.............. Computer Service 7301 N. Shadeland Ave, Suite B, Indianapolis,
IN 46250
Software Solutions..... Accounting Software c/o Management Computer Systems, 7301 N.
Shadeland Ave, Suite B, Indianapolis, IN
46250
Commercial Union
Insurance............ Property Casualty c/o Agency Associates, 4545 Northwestern Hwy,
Ins. Zionsville, IN 46067
</TABLE>
A-125
<PAGE> 335
EXHIBIT 3B-3.35
SCHEDULE 3.35
LICENSE AGREEMENTS:
- - Anjar Company -- "Kreskin's Amazing Oracle Game" license dated October 5,
1998
- - Baron Design & Development -- "Water Bopper" license dated September 9, 1997
- - George Castanis & Delaney Product Development -- "Peanut Butter and Jelly
Game" license dated November 1, 1996
- - Gordon Barlow Design -- "A-Z" license dated March 20, 1996
- - Gordon Barlow Design -- "Clowning Around" license dated August 19, 1996
- - Gordon Barlow Design -- "Comfy Couch" license dated August 19, 1996
- - Gordon Barlow Design -- "Disc Shooter Target Set" license dated March 20,
1996
- - Gordon Barlow Design -- "Giggling Ghosts" license dated August 19, 1996
- - Gordon Barlow Design -- "Limbo Splash" license dated August 19, 1996
- - Gordon Barlow Design -- "Spaghetti Train" license dated August 19, 1996
- - Gordon Barlow Design -- "5 in 1 Game" license dated September 10, 1997
- - Gordon Barlow Design -- "Telephone Game" license dated August 19, 1996
- - Gordon Barlow Design -- "Tug-of-War Game" license dated March 20, 1996
- - Gordon Barlow Design -- "Fishin' Fun" license dated May 19, 1997
- - Hollywood Ventures Corporation -- "Big Comfy Couch" license dated November 1,
1995
- - Hollywood Ventures Corporation -- "Inflatable Big Comfy Couch" license dated
June 1, 1996
- - Ken Johnson -- "Phase 10" license dated December 1, 1986, as amended
- - Lydia Freilich & Randy Lister -- "Triangle with Ball Skill Game" license
dated November 28, 1997
- - M Design -- "Piranha Game" license dated
- - Meyer/Glass Design -- "Big Shots" license dated November 1, 1996
- - Performance Unlimited -- "Beginner's Bible/Dovetales" dated November 8, 1993
- - Performance Unlimited -- "The Beginners Bible" license dated November 15,
1997
- - Random Games -- "Big Comfy Couch Hidden Treasures" license dated February 27,
1996
- - Random Games -- "Heroes of the Bible" game license dated December 13, 1993
- - Random Games -- "King of the Jungle" game license dated January 6, 1994
- - Random Games -- "Phase 10 Dice" license dated May 21, 1993
- - Random Games -- "Pocahontas Harvest" license dated December 12, 1994
- - Random Games -- "The Jungle Animals Game" dated December 13, 1993
- - Random Games -- "Tortoise and the Hare" game license dated December 13, 1993
A-126
<PAGE> 336
- - Royal Tee Inc. and Brainchild Games, Inc. license dated January 1, 1996
- - Seven Towns Ltd. -- "Penguin Panic" license dated July 1, 1998
- - Theora Design -- "Search 4" licensing agreement dated January 11, 1999
- - Yurkovic Design -- "Chairs Game" license dated November 4, 1998
PATENTS/TRADEMARKS:
- - Patent #5,873,727 Apparatus for Moving Pieces During a Game Playing Period
and an Associated Method of Playing a Game -- application filed September 9,
1997
- - Patent Pending -- Multipurpose Game Assembly -- application filed September
3, 1998
- - Trademark "Upsets" -- registration date August 19, 1997
- - Trademark "Toot 'R Ville Express" -- registration date June 30, 1998
- - Trademark "Telephone Tag" -- registration date June 30, 1998
- - Trademark "Big Shot" -- registration date November 11, 1996
- - Trademark "Limbo Splash" -- registration date January 19, 1999
- - Trademark "Piranha" -- registration date February 2, 1999
- - Trademark "Penguin Pileup" -- registration date pending
- - Trademark "Down And Out" -- registration date pending
- - Trademark "Search 4" -- registration date pending
- - Trademark "Squeezed Out" -- registration date pending
- - Trademark "Chairs" -- registration date pending
- - Trademark "Pegs & Jokers" -- registration date pending
- - Trademark "Sound Zone" -- registration date pending
- - Trademark "Child's First" -- registration date pending
A-127
<PAGE> 337
EXHIBIT 3C-3.8
14. COMMITMENTS AND CONTINGENCIES
In 1998, the former owner of XYZ filed a lawsuit in Wisconsin against the
Company, alleging the breach of an employment agreement. The parties have agreed
to arbitration in Arizona, and the lawsuit was dismissed. Although the outcome
of this matter cannot be determined at this time, management does not believe it
will be material to the operations, financial position, or cash flows of the
Company.
On December 22, 1998, Premier Publishing, Inc. filed a complaint in
Wisconsin against the Company alleging, among other things, conversion and
breach of contract. Discovery is currently ongoing. The outcome of this matter
cannot be determined at this time.
The Company is a party to other litigation in the ordinary course of
business. Management, after taking into account the opinion of counsel, believes
the ultimate outcome of such matters will not have a material adverse effect on
the Company's financial position.
In December 1997, Goett personally settled a lawsuit against the Company
and certain of its shareholders regarding certain patent rights. The Company
originally agreed to pay Goett $10,000 per month from July 1, 1998 through June
30, 1999 and an additional payment of $1,500,000 on June 30, 1999 to acquire the
rights to the patents and to reimburse Goett for the cost of the settlement. On
December 9, 1998, the agreement was revised to omit the $10,000 per month
payment in exchange for an advance payment on the $1,500,000, and to change the
due date to June 1, 1999. The balance owing at December 31, 1998 is $850,000.
A-128
<PAGE> 338
EXHIBIT 3C-3.19
3.19
The following is a listing of the liabilities relating to the companies
business which are more than ninety (90) days past due:
<TABLE>
<S> <C>
Airtouch Cellular........................................... 127.90
William Charles Bundren & Associates, P.C. ................. 38,517.51
Chase Manhatten Bank........................................ 98,850.69
Digital Industries.......................................... 1,334.00
Ernst & Young............................................... 11,237.00
James W. Gick............................................... 13,379.61
Hebert, Schenk & Johnsen.................................... 4,807.56
Knobbe, Martens, Olsen & Bear, LLP.......................... 3,544.12
Leonard, Dicker, & Schreiber................................ 2,244.87
Marvel Entertainment Group, Inc. ........................... 30,000.00
Stephen McTaggert........................................... 17,909.50
MetroTel Business Systems................................... 112.50
Quarles & Brady............................................. 157,857.48
Squire, Sanders & Dempsey................................... 43,636.75
Taylor Design............................................... 3,000.00
Virchow, Krause & Company, LLP.............................. 3,500.00
H. C. Wainwright & Company.................................. 20,000.00
----------
Total liabilities more than 90 days past due................ 450,059.49
==========
</TABLE>
(ii) LIABILITIES ARISING AFTER THE BALANCE SHEET DATE THAT ARE OUTSIDE THE
NORMAL COURSE OF BUSINESS.
The Company has an additional liability in the amount of $1,400,000.00 as
of April 29, 1999 for the following contingency in the purchase agreement
between the Company and XYZ Group Inc. for the purchase of XYZ Group Inc.:
"That if the entire $4,000,000.00 is not paid by one year after the
Closing, then: (1) interest shall be added to the amount due, calculated on
the outstanding balance at the rate of ten percent (10%) per annum from the
date of the Closing under paid in full; and (ii) $1,000,000.00 shall be
added to the amount payable, as a penalty and said $1,000,000.00 shall
accrue interest at the rate of ten percent (10%) per annum for the date
which is one year after the Closing until paid in full.
A-129
<PAGE> 339
EXHIBIT 3C--3.22
3.22 Employees
1. Medical/Dental Benefits
Company pays 100% of cost for individual and family effective the first
month following 30 days of employment. Dental insurance is also
available to employees in Wisconsin at a cost to the employee.
2. Vacation
Two weeks paid per annum, 5 days every six months available after 6
months of employment.
a. Two weeks (10 days)
(Accrue 5 days every 6 months from date of hire)
b. Three weeks (15 days) after five year anniversary
(Accrue 7 1/2 days every 6 months from date of hire)
c. Four weeks (20 days) after ten year anniversary
(Accrue 10 days every 6 months from date of hire)
3. Eight Holidays with Pay
These holidays are generally included though they may change at the
discretion of management.
New Year's Day
Good Friday
Memorial Day
Fourth of July
Labor Day
Thanksgiving
Thanksgiving Friday
Christmas
4. Stock Options
Eligibility: At the discretion of management. Consideration for
Options: Performance, salary level, and tenure.
5. 401 K Plan
Company contribution at the rate of 25% of employee paid in amount up
to 4% of one's salary. Vesting and other restriction apply.
6. Personal Days/Sick Days
Each employee has 5 fully paid personal days per year, either in time
off or payroll. All employees are entitled to 5 fully paid days per
year for major illness requiring hospitalization of 3 days or more.
A-130
<PAGE> 340
EXHIBIT 3C-3.30
(i) any changes in Articles of Certificate of incorporation or bylaws.
NONE
(ii) any change in the numbers of shares of stock issued and outstanding.
Please refer to the following schedule:
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED
---------------------------------- -------------------------------
SHARES DOLLARS ISSUABLE SHARES DOLLARS ISSUABLE
---------- -------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Common Stock issuable in
connection with XYZ Company
acquisition................... 14,336,670 $2,867,334
Preferred stock issued in
connection with acquisition of
Janex shares.................. 3,750,000 $750,000
Roderick L. Turner Debt
conversion, $350,000 loan plus
accrued interest, 3/1/99...... 2,780,555 $417,083
Roderick L. Turner Debt
conversion, $300,000 loan plus
accrued interest, 3/1/99...... 2,097,342 314,601
Elizabeth D. Pickard Debt
conversion, $100,000.00 loan
plus accrued interest,
3/1/99........................ 808,416 121,262
Dyer Holdings, LLC Debt
conversion, $300,000 loan plus
accrued interest, 3/1/99...... 565,892 84,884
Nehring Family Trust Debt
conversion, $100,000.00 loan
plus accrued interest,
3/1/99........................ 808,416 121,262
</TABLE>
(iii) the merger or consolidation of the Merging Company with any or into
any other corporation or other entity.
On March 31, 1998 the Company acquired substantially all of the assets of
Gick Publishing, Inc. ("Gick"), for cash consideration of $2,020,000 plus the
assumption of certain liabilities totaling $940,452. Gick manufactures and sells
foam-based greeting cards and products.
On May 1, 1998 the Company acquired substantially all of the assets of XYZ
Group Inc. ("XYZ"), a wholesaler and distributor of books and various book
products including children's electronic toys and book and toy combination
products, for consideration of $10,200,000, including a $4,000,000 note payable
to the former owner and $2,867,334 payable either in cash or with 14,336,670
shares of the Company's common stock. The note payable is due April 29, 1999 and
bears interest at 10 percent. Consideration of 2,332,666 was contingent based on
XYZ's future performance. However, these contingencies were not met. On April
29, 1999, an additional $1,400,000.00 is due from this transaction (please see
Section 3.19(ii) for more on this liability).
On December 11, 1998 the Company acquired approximately 73 percent of the
outstanding common stock and 100 percent of the outstanding preferred stock of
Janex International, Inc., ("Janex"), a developer, marketer and seller of toys
and children's products, for consideration of $1,500,000, consisting of a
$750,000 note payable and $750,000 payable with 3,750,000 shares of the
Company's preferred stock. The note bears interest at 10 percent and is payable
30 days after the
A-131
<PAGE> 341
merger of Futech into Janex. Janex is a publicly traded New Jersey based Nasdaq
"pink sheet" company which trades under the symbol "JANX".
(iv) NONE
(v) The employment agreement between the Company and Chairman of the
Board, Vincent W. Goett has a salary for the calendar year 1999 of
$350,000. The Company has recorded and paid this obligation of only an
annualized salary of $250,000. The error has been corrected and a
payment retroactive to January 1, 1999 will be paid on the payroll of
May 28, 1999.
A-132
<PAGE> 342
EXHIBIT 3C-3.35
FUTECH MASTER PATENT STATUS CHART
U.S. PATENT APPLICATIONS
<TABLE>
<CAPTION>
Q&B FILING RELATIONAL
REF. NO. TITLE SERIAL NO. DATE DATA STATUS
-------- ----- ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C>
370100.90156.............. Scroll Toy Not Yet Assigned Not Yet Filed -- No application prepared
or filed per client
request.
370100.90172.............. Baby Baton Not Yet Assigned Not Yet Filed -- Ask client for
instructions as to filing
01/99.
370100.90181.............. Decorative Novelty 09/025,351 02/18/98 Divisional(1) Should receive 1st Office
Articles Application of Serial Communication by 08/99.
No. 08/577,609 Status check 08/99.
370100.90245.............. Decorative Novelty Not Yet Assigned Not Yet Filed Continuation In Under client review
Articles Part(2) (1/13/99).
w/Audiovisual (CIP) of Serial No.
Enhancements and 09/025,351
Method Therefor
(musical postcard)
370100.90377.............. An Accordion-Type 09/216,612 12/18/98 CIP of Serial No. Filing Receipt (FR)
Electronic Book 08/898,056 received with PTO error;
and a Method of expected corrected FR by
Manufacture 06/99.
Therefor
370100.90393.............. Apparatus for 08/898,056 07/22/97 Continuation(3) of Amendment submitted
Presenting Visual 08/474,707 1/14/99. Check status
Material with 07/99.
Identified Sensory
Material
</TABLE>
A-133
<PAGE> 343
FUTECH MASTER PATENT STATUS CHART -- (CONTINUED)
REGISTERED U.S. PATENTS
<TABLE>
<CAPTION>
Q&B ISSUE RELATIONAL
REF. NO. TITLE PATENT NO. DATE DATA STATUS
-------- ----- ---------- ----- ---------- ------
<S> <C> <C> <C> <C> <C>
370100.90032....................... Electronic Book 5,417,575 05/23/95 CIP of Patent No. 2nd Maintenance Fee due
5,167,508 11/23/02.
370100.90041....................... Apparatus for 5,484,292 01/16/96 CIP of Serial No. 1st Maintenance Fee due
Combining Audio 07/685,278 07/16/99.
and Visual Indicia
370100.90059....................... Electronic Book 5,167,508 12/01/92 CIP of Serial No. 2nd Maintenance Fee due
396,129 06/01/00.
370100.90067....................... Method of 5,609,488 03/11/97 Divisional of Serial 1st Maintenance Fee due
Combining Audio No. 07/980,649 09/11/00.
and Visual Indicia
370100.90091....................... Game Board 5,772,208 06/30/98 -- 1st Maintenance Fee due
Incorporating 12/30/01.
Apparatus for
Selectively . . .
370100.90105....................... Model Motor 5,782,186 07/21/98 -- 1st Maintenance Fee due
Vehicle Track 01/21/02.
System. . . .
370100.90181....................... Decorative Novelty 5,735,453 04/07/98 -- 1st Maintenance Fee due
Articles 10/07/01.
370100.90385....................... Squeeze Flashlight 5,434,761 07/18/98 -- 2nd Maintenance Fee due
01/18/03.
370100.90407....................... Activated Work and 4,656,469 04/07/87 -- 3rd Maintenance Fee due
Method of Forming 04/07/99.
Same
370100.90415....................... Visual and Audible 4,703,573 11/03/87 -- 3rd Maintenance Fee due
Activated Work and 05/03/99.
Method of Forming
Same
</TABLE>
FOREIGN PATENT APPLICATIONS
<TABLE>
<CAPTION>
Q&B REFERENCE TITLE COUNTRY APPLICATION NO. FILING DATE RELATIONAL DATA
- ------------- ----- ------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
370100.90041... Apparatus for Combining Audio PCT PCT/US93/10705 11/04/93 Corresponds to U.S. Patent
and Visual Indicia No.: 5,484,292
370100.90041... Apparatus for Combining Audio Europe 94901300.7 06/24/95 PCT/US93/10705
and Visual Indicia
370100.90041... Apparatus for Combining Audio Canada 2,150,013 05/23/95 PCT/US93/10705
and Visual Indicia
370100.90041... Apparatus for Combining Audio India 1253/Del/93 11/09/93 PCT/US93/10705
and Visual Indicia
370100.90041... Apparatus for Combining Audio Japan 513158/94 06/24/95 PCT/US93/10705
and Visual Indicia
370100.90059... Electronic Book PCT PCT/US92/03056 04/14/92 US Serial No. 07/685,278
370100.90059... Electronic Book Europe 92911059.1 04/14/92 PCT/US92/03056
370100.90059... Electronic Book Canada 2,108,554 10/15/93 PCT/US92/03056
<CAPTION>
Q&B REFERENCE STATUS
- ------------- ------
<S> <C>
370100.90041.. Completed.
370100.90041.. Response to Office Action
filed 12/06/98; check status
06/99.
370100.90041.. Office Action Response Due
05/12/99.
370100.90041.. Check status 06/99.
370100.90041.. Request for Examination due
11/04/00.
370100.90059.. Completed.
370100.90059.. Response filed with EPO
12/98; check status 06/99.
370100.90059.. Annuity and Request for
Examination due 04/14/99.
Need client instructions by
02/14/99.
</TABLE>
A-134
<PAGE> 344
FUTECH MASTER PATENT STATUS CHART -- (CONTINUED)
<TABLE>
<CAPTION>
Q&B REFERENCE TITLE COUNTRY APPLICATION NO. FILING DATE RELATIONAL DATA
- ------------- ----- ------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
370100.90059... Electronic Book S. Korea 18,887/92 10/14/92 PCT/US92/03056
370100.90059... Electronic Book Japan 510057/92 04/14/92 PCT/US92/03056
370100.90059... Electronic Book India 886/Del/92 09/30/92 PCT/US92/03056
370100.90059... Electronic Book Kazakhstan Not Yet 11/15/93 PCT/US92/03056
Assigned
370100.90083... Laminated Sheet Product PCT PCT/US97/21276 11/18/97 U.S. Serial No.:
Containing 60/031,184
370100.90091... Game Board Incorporating PCT PCT/US96/17589 11/05/96 U.S. Serial No: 08/554,734
Apparatus for Selectivity
370100.90091... Game Board Incorporating Canada 2,236,891 11/05/96 PCT/US96/17589
Apparatus for Selectively
370100.90091... Game Board Incorporating Europe 96938731.5 11/05/96 PCT/US96/17589
Apparatus for Selectively
370100.90091... Game Board Incorporating India 2436/Del/96 11/06/96 U.S. Serial No.:
Apparatus for Selectively 08/554,734
370100.90105... Model Motor Vehicle Track PCT PCT/US97/23943 12/24/97 U.S. Serial No.:
System 08/775,956
370100.90181... Decorative Novelty Articles PCT PCT/US96/18098 11/08/96 U.S. Serial No.:
08/557,609
370100.90181... Decorative Novelty Articles Europe 96939659.7 11/08/96 PCT/US96/18098
<CAPTION>
Q&B REFERENCE STATUS
- ------------- ------
<S> <C>
370100.90059.. Request for Examination
filed; check status 03/99.
370100.90059.. Request for Examination due
04/14/99. Per client
instructions, will permit
ABANDONMENT on 04/14/99.
370100.90059.. Check status 01/99.
370100.90059.. Check status 01/99.
370100.90083.. National Phase filing due
5/19/99.
370100.90091.. Completed.
370100.90091.. Maintenance Fee due 11/05/99.
Request for Examination due
11/05/99.
370100.90091.. Follow up by 03/99 on request
for status sent 02/99.
370100.90091.. Check status due 03/99.
370100.90105.. National Phase filing due
07/03/99.
370100.90181.. Completed.
370100.90181.. Renewal due 11/30/99. Need
client instruction by 09/99.
</TABLE>
REGISTERED FOREIGN PATENTS
<TABLE>
<CAPTION>
Q&B REFERENCE TITLE COUNTRY PATENT NO. ISSUE DATE RELATIONAL DATA
- ------------- ----- ------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
370100.90059... Electronic Book Australia 664,701 03/19/96 PCT/US92/03056
<CAPTION>
Q&B REFERENCE STATUS
- ------------- ------
<S> <C>
370100.90059.. Annuity due 04/14/99.
</TABLE>
ABANDONED APPLICATION
<TABLE>
<CAPTION>
SERIAL FILING RELATIONAL
REFERENCE TITLE NO. DATE COUNTRY DATA
--------- ----- ------ ------ ------- ----------
<S> <C> <C> <C> <C> <C>
FUT04-0370....... Apparatus for Combining Audio 08/474,707 06/07/95 U.S. Parent application to
and Visual Material pending continuation
application 08/898,056
370100.90041..... Apparatus for Combining Audio 702092/1995 05/24/95 South Korea PCT/US93/10705
and Visual Indicia
370100.90041..... Apparatus for Combining Audio None. None. Brazil PCT/US93/10705
and Visual Indicia
370100.90059..... Electronic Book 9211105.0 10/14/92 China PCT/US92/03056
370100.90059..... Electronic Book 93058476/09 10/15/93 Russia PCT/US92/03056
370100.90059..... Electronic Book 9400697.2 08/09/94 Uzbekistan PCT/US92/03056
370100.90083..... Laminated Sheet Product 97/10411 11/19/97 South Africa U.S. Serial No.:
Containing 60/031,184
<CAPTION>
REFERENCE STATUS
--------- ------
<S> <C>
FUT04-0370....... File kept with Serial
No. 08/898,056.
370100.90041..... ABANDONED per client
instructions.
370100.90041..... Filing deadline missed
by prior firm.
370100.90059..... ABANDONED per client
instructions.
370100.90059..... ABANDONED per client
instructions.
370100.90059..... ABANDONED per client
instructions.
370100.90083..... ABANDONED per client
instruction.
</TABLE>
A-135
<PAGE> 345
FUTECH MASTER PATENT STATUS CHART -- (CONTINUED)
<TABLE>
<CAPTION>
SERIAL FILING RELATIONAL
REFERENCE TITLE NO. DATE COUNTRY DATA
--------- ----- ------ ------ ------- ----------
<S> <C> <C> <C> <C> <C>
370100.90083..... Printed Speaker for 60/031,184 11/19/96 U.S. PCT/US97/21276
Incorporation into a (Provisional)
Laminated Sheet Product
370100.90083..... Printed Battery for 60/031,185 11/19/96 U.S. PCT/US97/21276
Incorporation into a (Provisional)
Laminated Sheet Product
370100.90105..... Model Motor Vehicle Track 98/0027 01/05/98 South Africa U.S. Serial No.:
System 08/775,956
<CAPTION>
REFERENCE STATUS
--------- ------
<S> <C>
370100.90083..... ABANDONED after filing
PCT application.
370100.90083..... ABANDONED after filing
PCT application.
370100.90105..... ABANDONED per client
instructions.
</TABLE>
ABANDONED PATENTS
<TABLE>
<CAPTION>
PATENT ISSUE RELATIONAL
REFERENCE TITLE NO. DATE COUNTRY DATA
--------- ----- ------ ----- ------- ----------
<S> <C> <C> <C> <C> <C>
370100.90041..... Apparatus Combining Audio and 10815 02/23/96 Sri Lanka PCT/US93/10705
Visual Indicia
370100.90041..... Apparatus Combining Audio and 673,219 02/18/97 Australia PCT/US93/10705
Visual Indicia
370100.90059..... Electronic Book 178,299 06/07/95 Mexico PCT/US92/03056
370100.90059..... Electronic Book 57,656 09/01/90 Taiwan U.S. Serial No.
07/396,129
<CAPTION>
REFERENCE STATUS
--------- ------
<S> <C>
370100.90041..... ABANDONED per client
instructions.
370100.90041..... ABANDONED per client
instructions.
370100.90059..... ABANDONED per client
instructions.
370100.90059..... ABANDONED per client
instructions.
</TABLE>
A-136
<PAGE> 346
FUTECH MASTER PATENT STATUS CHART -- (CONTINUED)
[PATENT MARKING GUIDELINES TO COME]
A-137
<PAGE> 347
FUTECH MASTER PATENT STATUS CHART -- (CONTINUED)
PATENT MARKING GUIDELINES (CONTINUED)
f. In summary, assume a product is covered by U.S. Patent 1,234,567 and
several patent applications pending in the U.S. and abroad. Here, the
product should be marked as: "U.S. Patent 1,234,567. U.S. and Foreign
Patents Pending."
A-138
<PAGE> 348
FUTECH MASTER PATENT STATUS CHART -- (CONTINUED)
1. Divisional Application: As a beginning proposition, under U.S. Patent
Law, you can protect only one invention per patent. Occasionally, a Patent
Examiner will allege that an applicant is attempting to protect more than one
invention in a single patent application. In response, the applicant must select
which one of the inventions to prosecute in the patent application. Then, the
applicant can file what is known as a "divisional application" to prosecute
claims directed to the other invention.
2. Continuation In Part Application: Assuming you have a patent
application A that discloses the details of an invention, you can file a CIP
application that adds "new matter" (details of the invention not in application
A). Claims in the CIP application that depend on only the disclosure from
application A for support are granted application A's filing date; however,
claims in the CIP application that rely on material first disclosed in the CIP
application will get the later filing date of the CIP application.
3. Continuation Application: Assume you have an application A that a
Patent Examiner is not ready to allow as a patent. We have three options,
namely, abandon the application, appeal the Examiner's determination, or file a
continuation application. The continuation application permits us to continue
arguing the merits of the invention by narrowing the claims to get around the
prior art in hopes of obtaining a patent. A continuation application is like a
CIP application without any new matter. In other words, application A and its
continuation application have the same disclosure and effective filing date,
though they may have claims of different scope.
A-139
<PAGE> 349
EXHIBIT 3D-3.19
SECTION 3.19 OUTSTANDING LIABILITIES
Janex International, Inc.
Accounts Payable 90 days or over
as of 5-19-99
<TABLE>
<CAPTION>
VENDOR AMOUNT
- ------ ------
<S> <C>
Character Connections....................................... $ 2,064.00
Federal Express............................................. $ 64.70
International Business Directories.......................... $ 186.50
Lion Pride Industries, Inc. ................................ $ 1,000.00
Walt Disney Company......................................... $ 62,359.02
Warner Brothers............................................. $ 25,329.00
The Lyons Group............................................. $ 27,500.00
Leisure Concepts............................................ $ 25,000.00
Les Friedland & Assoc. ..................................... $ 87,169.81
Penn Design, Inc. .......................................... $ 1,900.00
Pitney Bowes................................................ $ 141.99
RIA Group................................................... $ 552.20
Xerox Corporation........................................... $ 29.68
-----------
TOTAL............................................. $233,296.90
</TABLE>
A-140
<PAGE> 350
EXHIBIT 3D-3.22
3.22 EMPLOYEES.
Salaried Employees:
1. Medical/Dental Benefits
Company pays 100% of cost for individual and family coverage effective
the first month following 30 days of employment.
2. Vacation
Vacation accrual begins with the first month of hire. Monthly accrual
rates are determined by the employee's anniversary date. Vacation
accrues at a rate of 6.25 hours each month of full-time service (10
days for every 12 months) up through the first year of continuous
employment. Accrual rates thereafter are as follows:
<TABLE>
<CAPTION>
HOURS ACCRUED
DURING YEAR PER MONTH YEARLY TOTAL
----------- ------------- ------------
<S> <C> <C>
2 to 5............................. 6.25 10 days
6 to 10............................ 9.38 15 days
11 to 15............................ 12.50 20 days
16 plus............................. 15.63 25 days
</TABLE>
If the employee's 5th, 10th, or 15th anniversary date falls on or
before the last working day of the month, the employee will accrue the
higher rate for that month. Vacation is not earned while an employee is
on a leave of absence. Employees may take total "available" vacation at
any time throughout the year, subject to supervisor approval. All
vacations must be scheduled in advance with the employee's supervisor.
An employee's vacation time vests when it is accrued, excepting that
vacation time accrued during the first six month period, and can be
carried over to future calendar years if not taken. This means that the
earned vacation is permanently credited to the employee.
An employee cannot take more than 15 consecutive days of vacation
(excluding Saturdays, Sundays, and Holidays) in any one calendar year
without the approval of the President. Upon termination, the employee's
accrued, but not taken vacation hours, will be added to the final
paycheck using the employee's then current, straight-time hourly rate
for conversion.
The Company reserves the right to cash out, i.e., payoff, any accrued
vacation benefits at any time on the basis of an employee's
compensation rate at the time of the cash out.
3. Holidays
Janex International, Inc. provides ten paid holidays each year. The
Company is officially closed on New Years Day, Martin Luther King Day,
President's Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, the day after Thanksgiving, Christmas Eve, and
Christmas Day.
4. Hours
Office: 8:00am to 5:00pm with 1 hour lunch, Monday through Friday.
A-141
<PAGE> 351
5. Absences
Non-emergency doctor or dentist appointments to be scheduled after
business hours or on Saturday, if possible, otherwise all absences must
be excused by your supervisor.
All insurance must be provided by a recognized insurance company having a
Best's Rating of no less than AA. As proof of such insurance, a fully paid
certificate of insurance naming Futech as an additional insured shall be
submitted to Futech's office as and when requested by Futech, within thirty (30)
days after written request is made therefor. Futech shall be entitled throughout
the term of this Agreement, to a copy of the prevailing policies of insurance.
The policies of insurance must be non-cancelable except after thirty (30) days
prior written notice to Futech.
A-142
<PAGE> 352
EXHIBIT 3.36
TO
MERGER AGREEMENT
(ALLOWED EXCESS LIABILITIES)
A. DAMERT.
$100,000.00; provided, however, that there shall also be a limit on the
liability of DaMert and its Shareholders under the representations and
warranties in this Agreement in the amount of $2,000,000.00 for items for which
DaMert and its Shareholders were not aware as of the time of the Closing.
B. FUNDEX.
$100,000.00; provided, however, that there shall also be a limit on the
liability of Fundex and its Shareholders under the representations and
warranties in this Agreement in the amount of $2,000,000.00 for items for which
Fundex and its Shareholders were not aware as of the time of the Closing.
C. FUTECH.
$100,000.00; provided, however, that there shall also be a limit on the
liability of Futech and its Shareholders under the representations and
warranties in this Agreement in the amount of $2,000,000.00 for items for which
Futech and its Shareholders were not aware as of the time of the Closing.
D. JANEX.
$100,000.00; provided, however, that there shall also be a limit on the
liability of Janex and its Shareholders under the representations and warranties
in this Agreement in the amount of $2,000,000.00 for items for which Janex and
its Shareholders were not aware as of the time of the Closing.
E. TRUDY.
$100,000.00; provided, however, that there shall also be a limit on the
liability of Trudy and its Shareholders under the representations and warranties
in this Agreement in the amount of $2,000,000.00 for items for which Trudy and
its Shareholders were not aware as of the time of the Closing.
A-143
<PAGE> 353
EXHIBIT 4.1.7
TO MERGER AGREEMENT
(FORM OF LEGAL OPINION)
[LETTER HEAD]
[DATE]
Futech Interactive Products, Inc.
Attention: Vincent W. Goett, CEO
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
Re: Merger Transaction (the "TRANSACTION") Among Futech Interactive
Products, Inc., an Arizona corporation ("FUTECH"), Trudy Corporation,
a Delaware corporation ("TRUDY"), Fundex Games, Ltd., a Nevada
corporation ("FUNDEX"), DaMert Company, a California corporation
("DAMERT"), Janex International, Inc., a Colorado corporation
("JANEX"), Futech Interactive Products (Delaware) Inc., a newly formed
Delaware corporation ("FUTECH DELAWARE"), [New Sub], a newly formed
Nevada corporation ("NEW SUB") (collectively, the "MERGING
COMPANIES"), and those shareholders (the "SHAREHOLDERS") of Futech,
Trudy, Fundex, DaMert and Janex identified on the signature pages of
the Merger Agreement, dated May
------------, 1999 (the "MERGER AGREEMENT").
Gentlemen:
We have acted as special counsel to
------------------ (hereinafter the "CORPORATION") in connection with the
Transaction. You have requested an opinion regarding certain matters relating to
the Merger Agreement and related documents, and the Transaction. Capitalized
terms used in this letter, and not otherwise defined in this letter, shall have
the meaning given to them in the Documents (defined below). This opinion is
limited to the merger of the Corporation into Futech Interactive Products, Inc.,
a Delaware corporation [New Sub -- for Fundex], and that portion of the
Transaction relating to such merger and does not address, cover or relate to any
other merger of any company or any other portion of the Transaction
For purposes of this opinion, we have examined such questions of law and
fact as we have deemed necessary or appropriate, and have relied upon such
agreements, documents, instruments, records, certificates, opinions and other
statements of government officials and representatives of the Corporation as we
deemed applicable to the Transaction and necessary as a basis for our opinion
(collectively, the "DOCUMENTS").
As to any question of fact material to our opinion, we have relied solely
upon copies of the Corporation's Certificate or Articles of Incorporation, filed
with
- ------------- (the "Commission") on
- -------------, 19
- --, and
- -------------
- --, filed with the Commission on
- -------------, 19
- --, the Bylaws of the Corporation certified by an officer of the Corporation as
in effect on the Closing of the Transaction, a certificate of good standing of
the Corporation from the Commission, dated immediately prior to the Closing, and
representations and warranties of the Corporation contained in the Merger
Agreement and the Documents.
A-144
<PAGE> 354
Based on the foregoing, and subject to the qualifications set forth below,
we are of the opinion that:
1. The Corporation is duly organized, validly existing, and in good
standing under the laws of the State of
----------------------.
2. To the best of our knowledge, the Corporation's authorized capital is
as is disclosed in the Merger Agreement.
3. To the best of our knowledge, the Corporation has the requisite
corporate power and corporate authority: (i) to own and operate its
properties and assets; (ii) to carry out its business as such business
is currently being conducted; and (iii) to carry out the terms and
conditions applicable to it under the Merger Agreement. The execution,
delivery and performance of the Merger Agreement by the Corporation
have been duly authorized by all requisite corporate action on the
part of the Corporation and the Merger Agreement has been duly
executed and delivered by the Corporation.
4. We have no knowledge of any pending or threatened litigation or other
legal proceeding against the Corporation, other than as may be
disclosed in the Merger Agreement.
5. To our knowledge, the execution and delivery of the Merger Agreement,
and consummation of the Transaction by the Corporation, will not
conflict with or result in a violation of any applicable law or rule
affecting the Corporation.
6. To our knowledge, no consent, approval, authorization, or other action
by, or filing with, any federal, state, or local governmental
authority is required in connection with the execution and delivery by
the Corporation of the Merger Agreement and the consummation of the
Transaction by the Corporation, other than filings required by federal
and state securities laws, or, if any of the foregoing is required, it
has been obtained.
7. The execution and delivery of the Merger Agreement and consummation of
the Transaction by the Corporation will not conflict with or result in
a violation of the Corporation's Articles of Incorporation or Bylaws.
8. To the best of our knowledge, the execution and delivery of the Merger
Agreement and consummation of the Transaction by the Corporation will
not conflict with or result in a violation of any judgment, order, or
decree of any court or governmental agency to which the Corporation is
a party or by which the Corporation is bound.
9. We are not aware of any judgment, order or decree of any court or
governmental agency to which the Corporation is a party or by which
the Corporation is bound.
10. To our knowledge, the execution and delivery of the Merger Agreement,
and consummation of the Transaction by the Corporation, will not
conflict with or result in a violation of any contract, indenture,
instrument, or other agreement to which the Corporation is a party or
by which the Corporation is bound.
11. We are not aware of any reason why the Merger Agreement would not
constitute the legal, valid, and binding obligations of the
Corporation, enforceable in accordance with its terms.
A-145
<PAGE> 355
In rendering the foregoing opinions, we have assumed: (i) the genuineness
of the signatures not witnessed, the authenticity of documents submitted as
originals, and the conformity to originals of documents submitted as copies;
(ii) the legal capacity of the natural person executing the documents; (iii)
that the documents accurately describe and contain the mutual understanding of
the parties, and that there are no oral or written statements or agreements that
modify, amend, or vary, or purport to modify, amend, or vary, any of the terms
of the Documents; (iv) that the Corporation owns all of the property, assets and
rights purported to be owned by it; and (v) the Merger Agreement, related
documents and all of the Documents to which any person other than the
Corporation is a party are the legal, valid and binding obligations of such
party, enforceable against such party in accordance with their respective terms.
The opinions set forth above are subject to the following qualifications
and limitations:
(i) The enforceability of the Documents may be subject to or limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, arrangement, or other similar laws relating to or
affecting the rights of creditors generally; and
(ii) The enforceability of the Documents is subject to general principles
of equity, including principles of fair dealing, good faith and
commercial reasonableness.
(iii) Whenever this opinion with respect to the existence or absence of
facts is indicated to be based on our "knowledge" or awareness or
lack thereof, it is intended to signify that during the course of our
representation of the Corporation, this constitutes only the
information which has come to the attention of any lawyer of our firm
who has active involvement in the Transaction or who is primarily
responsible for providing a response to a particular opinion issue or
confirmation regarding a particular factual finding which would give
the firm actual knowledge or notice of the existence or absence of
such facts. Insofar as this opinion relates to factual matters, we
relied upon inquiries made of the corporation and its officers.
Although nothing has come to our attention leading us to question the
accuracy of the responses to our inquiries, we have not, except as
specifically noted in this opinion, made any independent inquiry or
investigation.
We are members of the Bar of the State of
------------------, and, except as expressly set forth herein, our opinion
is limited to matters governed by
- ------------- law including the portion of such law dealing with corporations.
The opinions expressed in this letter are based upon the law of such
jurisdiction in effect on the date hereof, and we assume no obligation to revise
or supplement this opinion should such law be changed by legislative action,
judicial decision, or otherwise.
We authorize and agree to accept facsimile signatures to this letter as if
the same were originals.
Yours Truly,
[LAW FIRM]
[LAWYER]
A-146
<PAGE> 356
EXHIBIT 4.2
TO
MERGER AGREEMENT
(CONDITIONS FOR PARTICULAR MERGING COMPANIES)
A. DAMERT.
New Futech shall have executed and delivered to Fred DaMert and Gail Patton
DaMert at the Closing Employment Agreements as described in EXHIBIT 2.8.1.
New Futech shall have obtained the releases as called for in Section A. of
EXHIBIT 2.10.
B. FUNDEX.
New Futech shall have executed and delivered to Carl E. Voigt, IV and Carl
E. Voigt, III at the Closing Employment Agreements as described in EXHIBIT
2.8.1.
New Futech shall have obtained the releases of guaranties as called for in
Section B. of EXHIBIT 2.10.
New Sub shall have executed and delivered to Carl E. Voigt, IV UCC-1
Financing Statements as called for in EXHIBIT 1.6.
C. FUTECH.
Fred DaMert, Gail Patton DaMert, Carl E. Voigt, IV, Carl E. Voigt, III, and
William W. Burnham shall have executed and delivered to New Futech at the
Closing Employment Agreements as described in EXHIBIT 2.8.1.
D. JANEX.
Not Applicable.
E. TRUDY.
New Futech shall have executed and delivered to William W. Burnham at the
Closing an Employment Agreement as described in EXHIBIT 2.8.1.
A-147
<PAGE> 357
EXHIBIT 6.5
TO
MERGER AGREEMENT
(SURVIVING PROVISIONS OF LETTERS OF INTENT)
A. DAMERT.
Those provisions of the Letter of Intent between DaMert and Futech, dated
March 24, 1999, which are specifically designated as legally binding upon the
parties shall continue to be binding upon the parties thereto.
B. FUNDEX.
Those provisions of the Letter of Intent between Fundex and Futech, dated
March 4, 1999, which are specifically designated as legally binding upon the
parties shall continue to be binding upon the parties thereto.
C. FUTECH.
Not Applicable.
D. JANEX.
Not Applicable.
E. TRUDY.
Those provisions of the Letter of Intent between Trudy and Futech, dated
December 16, 1998, which are specifically designated as legally binding upon the
parties shall continue to be binding upon the parties thereto.
A-148
<PAGE> 358
EXHIBIT 6.13
TO
MERGER AGREEMENT
(MAILING LIST FOR NOTICES)
A. DAMERT.
<TABLE>
<S> <C>
If to DaMert: DaMert Company
1609 Fourth Street
Berkeley, California 94710
Attn: Fred and Gail DaMert
with copy to: Peter Whitman
1717 Embarcadero Road
Palo Alto, California 94303
If to Fred DaMert: Fred DaMert
1609 Fourth Street
Berkeley, California 94710
If to Gail Patton DaMert: Gail Patton DaMert
1609 Fourth Street
Berkeley, California 94710
</TABLE>
B. FUNDEX.
<TABLE>
<S> <C>
If to Fundex: Fundex Games, Ltd.
2237 Directors Row
Indianapolis, Indiana 46241
Attn: Carl E. Voigt, IV
with copy to: Mitchell Roth
200 North LaSalle, #2100
Chicago, Illinois 60601
If to Carl E. Voigt, IV: Carl E. Voigt, IV
2237 Directors Row
Indianapolis, Indiana 46241
If to Carl E. Voigt, III: Carl E. Voigt, III
2237 Directors Row
Indianapolis, Indiana 46241
</TABLE>
C. FUTECH.
<TABLE>
<S> <C>
If to Futech: Futech Interactive Products, Inc.
2999 North 44th Street, Suite
Phoenix, Arizona 85018-7247
Attn: Vincent W. Goett
</TABLE>
A-149
<PAGE> 359
<TABLE>
<S> <C>
with copy to: Thomas R. Lofy
9445 North 37th Street
Phoenix, Arizona 85028
</TABLE>
D. JANEX.
<TABLE>
<S> <C>
If to Janex: Janex International, Inc.
c/o Futech Interactive Products, Inc.
2999 North 44th Street, Suite
Phoenix, Arizona 85018-7247
Attn: Vincent W. Goett
with copy to: Quarles & Brady, LLP.
Attn: Mark Briggs
One East Camelback Road, Suite 400
Phoenix, Arizona 85012
</TABLE>
E. TRUDY.
<TABLE>
<S> <C>
If to Trudy: Trudy Corporation
353 Main Avenue
Norwalk, Connecticut 06851-1552
Attn: William W. Burnham
with copy to: Charles E. Barnett
McGovern & Associates
One Lafayette Place
Greenwich, Connecticut 06830
If to Elisabeth T. Prial: Elisabeth T. Prial
353 Main Avenue
Norwalk, Connecticut 06851-1552
If to William W. Burnham: William W. Burnham
353 Main Avenue
Norwalk, Connecticut 06851-1552
If to Alice B. Burnham: Alice B. Burnham
353 Main Avenue
Norwalk, Connecticut 06851-1552
</TABLE>
A-150
<PAGE> 360
EXHIBIT 6.14
TO
MERGER AGREEMENT
(BROKERAGE FEES PAYABLE)
A. DAMERT.
DaMert has entered into an agreement with CorDev Corporation (Bob Oliver)
relating to the sale of DaMert. The amount paid will be $200,000 cash and 21,333
shares of New Futech common stock which will be paid by New Futech.
B. FUNDEX.
Not Applicable.
C. FUTECH.
Not Applicable.
D. JANEX.
Not Applicable.
E. TRUDY.
Trudy's financial advisor, James P. McGough, represents Trudy in connection
with the Mergers, and shall be compensated by Trudy paying him cash in the
amount of $43,670, and by Trudy issuing him Trudy stock, which will participate
in the Merger consideration ($16,330 of the cash and 14,314 shares of the New
Futech common stock), for services rendered with respect to the negotiation and
closing of the Mergers.
A-151
<PAGE> 361
(APPENDIX B)
CERTIFICATE OF INCORPORATION
OF
FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.
1. Name. The name of the Corporation is Futech Interactive Products
(Delaware) Inc.
2. Registered Office and Agent. The address of its registered office in
the State of Delaware is 1209 Orange Street, Wilmington, New Castle County,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
3. Purpose. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "DGCL").
4. Authorized Stock. The total number of shares of stock which the
Corporation shall have authority to issue is Fifty Million (50,000,000) shares,
having a par value of one-tenth of one cent ($.001) per share. The authorized
shares shall be comprised of Forty-Five Million (45,000,000) shares designated
as "Common Stock" and Five Million (5,000,000) shares designated as "Preferred
Stock".
The Preferred Stock may be divided into and issued in series, and authority
is hereby expressly granted to the Board of Directors, by resolution or
resolutions adopted by the Board of Directors, to divide, from time to time, any
and all of such Preferred shares into series and to fix and determine the
relative rights and preferences of the shares of any series so established,
including (a) the rate of dividend payable thereon and whether such dividends
shall be cumulative, noncumulative or partially cumulative; (b) the extent to
which such dividends are payable on a parity with or in preference to the
dividends payable on the shares of any other class or series of stock; (c) the
amount which shall be paid to the holders thereof in the event of voluntary or
involuntary liquidation; (d) the terms and conditions on which the holders
thereof may convert the same into any other class or series of stock, if the
shares of any series are issued with the privilege of conversion; (e) the price
at and the terms and conditions on which the shares may be redeemed and the
terms or amount of any sinking fund provided for the purchase or redemption
thereof; (f) the voting rights, if any, of the holders thereof; and (g) such
other provisions as may be permitted to be fixed by the Board of Directors of
the corporation pursuant to the laws of the State of Delaware, as in effect at
the time of the creation of any such series.
5. Incorporator. The name and mailing address of the incorporator is as
follows:
<TABLE>
<CAPTION>
NAME MAILING ADDRESS
- ---- ---------------
<S> <C>
Leezie Kim One East Camelback Road
Suite 400
Phoenix, Arizona 85012-1649
</TABLE>
6. Number of Directors. The number of directors of the Corporation, and
the division of directors into classes (if any), shall be fixed by, or in the
manner provided in, the Bylaws.
7. Elimination of Certain Liability of Directors. No director of the
Corporation shall be held personally liable to the Corporation or its
stockholders for monetary damages
B-1
<PAGE> 362
of any kind for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL, or (iv) for any transaction from which the director derived an
improper personal benefit. If the DGCL is amended to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the DGCL as so amended. No amendment to or repeal of
this Section 7 shall adversely affect any right or protection of any director of
the Corporation existing at the time of such amendment or repeal for or with
respect to acts or omissions of such director prior to such amendment or repeal.
8. Amendments to Bylaws. In furtherance and not in limitation of the
powers conferred by the DGCL, the Board of Directors is expressly authorized to
make, alter or repeal the Bylaws of the Corporation.
9. Amendments to Certificate. The Corporation reserves the right to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by the DGCL, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
I, THE UNDERSIGNED, being the Incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the DGCL, do make this Certificate,
hereby declaring and certifying that this is my act and deed and the facts
herein stated are true, and accordingly have hereunto set my hand this 7th day
of June, 1999.
/s/ LEEZIE KIM
--------------------------------------
Leezie Kim, Sole Incorporator
B-2
<PAGE> 363
BYLAWS
OF
FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.
ADOPTED
JUNE 7, 1999
<PAGE> 364
ARTICLE I
OFFICES
1.01. Registered Office. The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware.
1.02. Principal Business Office. The corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
STOCKHOLDERS
2.01. Place of Meeting. All meetings of the stockholders for the election
of directors shall be held at such place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in duly executed
waiver of notice thereof.
2.02. Annual Meeting. Annual meetings of stockholders shall be held on
the last Tuesday of April if not a legal holiday, and if a legal holiday, then
on the next secular day following, at 10:00 a.m., or at such other date and time
as shall be designated from time to time by the Board of Directors. At such
annual meeting, the stockholders shall elect by a plurality vote, by written
ballot, a Board of Directors and shall transact such other business as may
properly be brought before the meeting.
2.03 Notice of Meeting. Written notice of the annual meeting stating the
place, date and hour of the meeting shall be given to each stockholder entitled
to vote at such meeting not less than ten nor more than sixty days before the
date of the meeting.
2.04 Closing of Transfer Books or Fixing Record Date. The officer who has
charge of the stock ledger of the corporation shall prepare and make, at least
ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than sixty nor less than ten days before the date of such meeting, nor more
than sixty days prior to any other action. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the
<PAGE> 365
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
2.05. Special Meeting. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Chairman of the Board and CEO
or President and shall be called by the President or Secretary at the request in
writing of a majority of the Board of Directors, or at the request in writing of
stockholders owning a majority in amount of the entire capital stock of the
corporation issued and outstanding and entitled to vote. Such request shall
state the purpose or purposes of the proposed meeting.
2.06. Notice of Meeting. Written notice of a special meeting stating the
place, date and hour of the meeting and the purpose or purposes for which the
meeting is called, shall be given not less than ten nor more than sixty days
before the date of the meeting, to each stockholder entitled to vote at such
meeting. The business transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice.
2.07. Quorum. Except as otherwise provided by statute or by the
Certificate of Incorporation, the holders of a majority of the shares of stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall not
be present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
2.08. Voting of Shares. When a quorum is present at any meeting, the vote
of the holders of a majority of the shares of stock having voting power present
in person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of the
statutes or of the Certificate of Incorporation, a different vote is required in
which case such express provision shall govern and control the decision of such
question.
Unless otherwise provided in the Certificate of Incorporation, each
stockholder shall at every meeting of stockholders be entitled to one vote in
person or by proxy for each share of the capital stock having voting power held
by such stockholder, but no proxy shall be voted on after three years from its
date, unless the proxy provides for a longer period.
At all elections of directors of the corporation each stockholder having
voting power shall be entitled to exercise the right of cumulative voting as
provided in the Certificate of Incorporation.
2.09. Action by Written Consent. Unless otherwise provided in the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders of the corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding shares of stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all
<PAGE> 366
shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
3.01. General Powers and Number. The business of the corporation shall be
managed by or under the direction of its Board of Directors which may exercise
all such powers of the corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these bylaws
directed or required to be exercised or done by the stockholders or by others.
The number of directors which shall constitute the whole Board shall be
nine (9), and directors shall be classified with respect to the time for which
they shall hold office by dividing them into three (3) classes, each class to
consist of three (3) directors. The directors of the first class shall hold
office for an initial term expiring at the annual meeting of stockholders in
2000, the directors of the second class for an initial term expiring at the
annual meeting of stockholders in 2001, and the directors of the third class for
an initial term expiring at the annual meeting of stockholders in 2002. At the
close of each annual meeting of this corporation, the successors to the class of
directors whose terms expire that year shall be elected by the stockholders and
shall commence to hold office for a term of three (3) years, or until their
successors have been elected and qualified, or until their prior death,
resignation or removal.
The number of directors may be increased or decreased from time to time by
amendment to this Section, adopted by the stockholders, but no decrease shall
have the effect of shortening the term of an incumbent director. In the event of
an increase in the number of directors, the stockholders or the remaining
directors shall assign the newly created directorship(s) to the appropriate
class or classes so that the three (3) classes shall continue to consist of, as
nearly as possible, an equal number of directors.
3.02. Vacancies. Vacancies and newly created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
annual election and until their successors are duly elected and shall qualify,
unless sooner displaced. If there are no directors in office, then an election
of directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole Board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
3.03. Annual Meeting. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time
<PAGE> 367
and place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
3.04. Regular Meetings. Regular meetings of the Board of Directors may be
held within or without the State of Delaware without notice, at such time and at
such place as shall from time to time be determined by the Board.
3.05. Special Meetings. Special meetings of the Board may be held within
or without the State of Delaware and may be called by the Chairman of the Board
and CEO or President on forty-eight hours notice to each director, either
personally or by mail or by telegram; special meetings shall be called by the
President or Secretary in like manner and on like notice on the written request
of two directors.
3.06. Quorum. At all meetings a majority of the number of directors as
provided in Section 3.01 shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation. If a quorum shall not be present
at any meeting of the Board of Directors the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
3.07. Action By Unanimous Written Consent. Unless otherwise restricted by
the Certificate of Incorporation or these bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writings are
filed with the minutes of proceedings of the Board or committee.
3.08. Participation By Conference Telephone. Unless otherwise restricted
by the Certificate of Incorporation or these bylaws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or any committee, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.
3.09. Committees of Directors. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to
<PAGE> 368
the extent authorized in the resolutions providing for the issuance of shares of
stock adopted by the board of directors as provided in Section 151(a) fix any of
the preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation), adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
bylaws of the corporation; and, unless the resolution or the Certificate of
Incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock or to
adopt a certificate of ownership and merger. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the Board of Directors. Each committee shall keep regular minutes of
its meetings and report the same to the Board of directors when required.
3.10. Compensation. Unless otherwise restricted by the Certificate of
Incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
3.11. Removal of Directors. Unless otherwise restricted by the
Certificate of Incorporation or by law, any director or the entire Board of
Directors may be removed from office by the stockholders, but only for cause and
only by the holders of a majority of shares entitled to vote at an election of
directors.
ARTICLE IV
NOTICES
4.01. Notice. Whenever, under the provisions of the statutes or of the
Certificate of Incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
4.02. Waiver of Notice. Whenever any notice is required to be given under
the provisions of the statutes or of the Certificate of Incorporation or of
these bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
ARTICLE V
OFFICERS
5.01. Number. The officers of the corporation shall be chosen by the
Board of Directors and shall be a Chairman of the Board and CEO, a President, a
Vice President, a
<PAGE> 369
Secretary and a Treasurer. The Board of Directors may also choose additional
Vice Presidents, and one or more assistant secretaries and assistant treasurers.
Any number of offices may be held by the same person, unless the Certificate of
Incorporation or these bylaws otherwise provide.
5.02. Election and Term of Office. The Board of Directors at its first
meeting after each annual meeting of stockholders shall choose a Chairman of the
Board and CEO, a President, one or more Vice Presidents, a Secretary and a
Treasurer. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the corporation
shall be filled by the Board of Directors.
5.03. The Chairman of the Board and CEO. The Chairman of the Board and
CEO shall be the chief executive officer of the corporation. He or she shall
preside at all meetings of the stockholders and the Board of Directors and shall
have executive management of the business of the corporation and see that all
orders and resolutions of the Board of Directors are carried into effect. The
Chairman of the Board and CEO shall direct the affairs and policies of the
corporation, subject to any direction which may be given by the Board of
Directors. The Chairman of the Board and CEO shall have authority to designate
the duties and powers of the officers and delegate specialpowers and duties to
specified officers, so long as such designations shall not be inconsistent with
applicable laws, these bylaws, or action of the Board of Directors. The Chairman
of the Board and CEO shall have such other powers and duties as may, from time
to time, be prescribed by these bylaws or by resolution of the Board of
Directors.
5.04 The President. The President shall be the chief operating officer of
the corporation and, subject to the control of the Board of Directors and
Chairman of the Board and CEO, shall in general supervise and control all of the
day-to-day business and affairs of the corporation. In the absence of the
Chairman of the Board and CEO, the President shall preside at all meetings of
the stockholders and the Board of Directors. The President shall execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation. The President shall have such other powers and duties as may,
from time to time, be prescribed by these bylaws or by the Board of Directors or
Chairman of the Board and CEO.
5.05 The Vice Presidents. In the absence of the President or in the event
of his inability or refusal to act, the Vice President (or in the event there be
more than one Vice President, the Vice Presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
5.06 The Secretary. The Secretary shall attend all meetings of the Board
of Directors and all meetings of the stockholders and shall record all the
proceedings of the meetings of the corporation and of the Board of Directors in
a book to be kept for that purpose. The Secretary shall perform like duties for
the standing committees when required. The Secretary shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall perform such other
<PAGE> 370
duties as may be prescribed by the Board of Directors or President, under whose
supervision he or she shall be. The Secretary shall have custody of the
corporate seal of the corporation (if one is adopted by the Board of Directors)
and the Secretary, or an assistant secretary, shall have authority to affix the
same to any instrument requiring it. When so affixed, the corporate seal may be
attested by the Secretary's signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
or her signature.
5.07 The Treasurer. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors. The Treasurer
shall disburse the funds of the corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the President and the Board of Directors, at its regular meetings, or when the
Board of Directors so requires, an account of all his or her transactions as
Treasurer and of the financial condition of the corporation. If required by the
Board of Directors, the Treasurer shall give the corporation a bond (which shall
be renewed every six years) in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of the office and for the restoration to the corporation, in case of
the Treasurer's death, resignation, retirement or removal from office, of all
books, papers, vouchers, money and other property of whatever kind in the
Treasurer's possession or under his or her control belonging to the corporation.
5.08 Assistant Secretaries and Assistant Treasurers. There shall be such
number of assistant secretaries and assistant treasurers as the Board of
Directors may appoint as it shall deem necessary. The assistant secretary, or if
there be more than one, the assistant secretaries in the order determined by the
Board of Directors (or if there be no such determination, then in the order of
their election) may sign with the President or a Vice President certificates for
shares of the corporation the issuance of which shall have been authorized by a
resolution of the Board of Directors, and shall, in the absence of the Secretary
or in the event of the Secretary's inability or refusal to act, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe. The assistant secretary or assistant treasurer, in general,
shall, in the absence of the Secretary or Treasurer, as appropriate, or in the
event of their inability or refusal to act, perform the duties and exercise the
powers of the Secretary or Treasurer, as appropriate, and shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe.
5.09. Other Assistants and Acting Officers. The Board of Directors may,
from time to time appoint such other officers and agents as it shall deem
necessary who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board.
5.10. Salaries. The salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors.
<PAGE> 371
ARTICLE VI
CERTIFICATE FOR SHARES OF STOCK
AND THEIR TRANSFER
6.01. Certificate for Shares. The shares of the corporation may be
represented by a certificate or may be uncertificated. Certificates shall be
signed by, or in the name of the corporation by, the chairman or vice chairman
of the Board of Directors, if any, or the President or a Vice President and the
Treasurer or an assistant treasurer, or the Secretary or an assistant secretary
of the corporation, certifying the number of shares owned by such holder in the
corporation.
Upon the face or back of each stock certificate issued to represent any
partly paid shares, or upon the books and records of the corporation in the case
of uncertificated partly paid shares, shall be set forth the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Within a reasonable time after the issuance or transfer of uncertificated
stock, the corporation shall send to the registered owner thereof a written
notice containing the information required to be set forth or stated on
certificates pursuant to Sections 151, 156, 202(a) or (218)(a) or a statement
that the corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
6.02. Facsimile Signatures. Any of or all the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if that person were such officer, transfer agent or registrar at the date of
issue.
6.03. Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his or her legal representative, to advertise the same in such
manner as it shall require and/or to give the
<PAGE> 372
corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
6.04. Transfers of Shares. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
6.05. Registered Stockholders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as owner of
shares to receive dividends, and to vote as such owner, and to hold liable for
calls and assessments a person registered on its books as the owner of shares.
The corporation shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of the State of Delaware.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
7.01. Indemnification of Directors and Officers. The corporation shall,
to the maximum extent and in the manner permitted by the General Corporation Law
of Delaware as the same now exists or may hereafter be amended, indemnify any
person against expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred in connection with
any threatened, pending or completed action, suit, or proceeding in which such
person was or is a party or is threatened to be made a party by reason of the
fact that such person is or was a director or officer of the corporation. For
purposes of this Section 7.01, a "director" or "officer" of the corporation
shall mean any person (i) who is or was a director or officer of the
corporation, (ii) who is or was serving at the request of the corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise, or (iii) who was a director or officer of a corporation which
was a predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
board of Directors of the corporation.
The corporation shall pay the expenses (including attorneys' fees) incurred
by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding refereed to in this
Section 7.01 in advance of its final disposition; provided, however, that
payment of expenses incurred by a director or officer of the corporation in
advance of the final disposition of such action, suit or proceeding shall be
made only upon receipt of an undertaking by the director or officer to repay all
amounts advanced if it should ultimately be determined that the director or
officer is not entitled to be indemnified under this Section 7.01 or otherwise.
The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
bylaws, agreement, vote of the stockholders
<PAGE> 373
or disinterested directors or otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
7.02. Indemnification of Others. The corporation shall have the power, to
the maximum extent and in the manner permitted by the General Corporation Law of
Delaware as the same now exists or may hereafter be amended, to indemnify any
person (other than directors and officers) against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incorrect in connection with any threatened, pending or completed
action, suit, or proceeding in which such person was or is a party or is
threatened to be made a party by reason of the fact that such person is or was
an employee or agent of the corporation. For purposes of this Section 7.02, an
"employee" or "agent" of the corporation (other than a director or officer)
shall mean any person (i) who is or was an employee or agent of the corporation,
(ii) who is or was serving at the request of the corporation as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was an employee or agent of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
7.03. Insurance. The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of the General
Corporation Law of Delaware.
ARTICLE VIII
GENERAL PROVISIONS
8.01. Dividends. Dividends upon the capital stock of the corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the Certificate of Incorporation. Before
payment of any dividend, there may be set aside out of any funds of the
corporation available for dividends such sum or sums as the directors from time
to time, in their absolute discretion, think proper as a reserve or reserves to
meet contingencies, or for equalizing dividends, or for repairing or maintaining
any property of the corporation, or for such other purpose as the directors
shall think conducive to the interest of the corporation, and the directors may
modify or abolish any such reserve in the manner in which it was created.
8.02. Annual Statement. The Board of Directors shall present at each
annual meeting, and at any special meeting of the stockholders when called for
by vote of the stockholders, a full and clear statement of the business and
condition of the corporation.
8.03. Checks. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
<PAGE> 374
8.04. Fiscal Year. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
8.05. Seal. The corporation may have a seal which shall have inscribed
thereon the name of the corporation and the words "Corporate Seal, Delaware."
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
ARTICLE IX
AMENDMENTS
These bylaws may be altered, amended or repealed or new bylaws may be
adopted by the stockholders or by the Board of Directors, when such power is
conferred upon the Board of Directors by the Certificate of Incorporation, at
any regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new bylaws be contained in the
notice of such special meeting. Notwithstanding the foregoing, Sections 3.01 and
3.11 and Article VII of these bylaws may not be altered, amended or repealed by
the Board of Directors. If the power to adopt, amend or repeal bylaws is
conferred upon the Board of Directors by the Certificate of Incorporation, it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal bylaws.
<PAGE> 375
APPENDIX 1
ARIZONA BUSINESS CORPORATION ACT
DISSENTERS' RIGHTS
10-1301. DEFINITIONS
In this article, unless the context otherwise requires:
1. "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
2. "Corporation" means the issuer of the shares held by a dissenter
before the corporate action or the surviving or acquiring corporation by
merger or share exchange of that issuer.
3. "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 10-1302 and who exercises that right when
and in the manner required by article 2 of this chapter.
4. "Fair value" with respect to a dissenter's shares means the value
of the shares immediately before the effectuation of the corporate action
to which the dissenter objects, excluding any appreciation or depreciation
in anticipation of the corporate action unless exclusion is inequitable.
5. "Interest" means interest from the effective date of the corporate
action until the date of payment at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under the circumstances.
6. "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation.
7. "Shareholder" means the record shareholder or the beneficial
shareholder.
10-1302. RIGHT TO DISSENT
A. A shareholder is entitled to dissent from and obtain payment of the
fair value of the shareholder's shares in the event of any of the following
corporate actions:
1. Consummation of a plan of merger to which the corporation is a
party if either:
(a) Shareholder approval is required for the merger by section
10-1103 or the articles of incorporation and if the shareholder is
entitled to vote on the merger.
(b) The corporation is a subsidiary that is merged with its parent
under section 10-1104.
2. Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan.
3. Consummation of a sale or exchange of all or substantially all of
the property of the corporation other than in the usual and regular course
of business, if the
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shareholder is entitled to vote on the sale or exchange, including a sale
in dissolution, but not including a sale pursuant to a court order or a
sale for cash pursuant to a plan by which all or substantially all of the
net proceeds of the sale will be distributed to the shareholders within one
year after the date of sale.
4. An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it
either:
(a) Alters or abolishes a preferential right of the shares.
(b) Creates, alters or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares.
(c) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities.
(d) Excludes or limits the right of the shares to vote on any
matter or to cumulate votes other than a limitation by dilution through
issuance of shares or other securities with similar voting rights.
(e) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired
for cash under section 10-604.
5. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, the bylaws or a resolution of the
board of directors provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares
under this chapter may not challenge the corporate action creating the
shareholder's entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
C. This section does not apply to the holders of shares of any class or
series if the shares of the class or series are redeemable securities issued by
a registered investment company as defined pursuant to the investment company
act of 1940 (15 United States Code section 80a-1 through 80a-64).
D. Unless the articles of incorporation of the corporation provide
otherwise, this section does not apply to the holders of shares of a class or
series if the shares of the class or series were registered on a national
securities exchange, were listed on the national market systems of the national
association of securities dealers automated quotation system or were held of
record by at least two thousand shareholders on the date fixed to determine the
shareholders entitled to vote on the proposed corporate action.
10-1303. DISSENT BY NOMINEES AND BENEFICIAL OWNERS
A. A record shareholder may assert dissenters' rights as to fewer than all
of the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
person and notifies the corporation in writing of the name and address of each
person on whose behalf the record shareholder asserts dissenters' rights. The
rights of a partial dissenter under this subsection are determined as if the
shares as to which the record shareholder dissents and the record shareholder's
other shares were registered in the names of different shareholders.
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B. A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if both:
1. The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights.
2. The beneficial shareholder does so with respect to all shares of
which the beneficial shareholder is the beneficial shareholder or over
which the beneficial shareholder has power to direct the vote.
10-1320. NOTICE OF DISSENTERS' RIGHTS
A. If proposed corporate action creating dissenters' rights under section
10-1302 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under this article and shall be accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under section 10-1302
is taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights.
10-1321. NOTICE OF INTENT TO DEMAND PAYMENT
A. If proposed corporate action creating dissenters' rights under section
10-1302 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights shall both:
1. Deliver to the corporation before the vote is taken written notice
of the shareholder's intent to demand payment for the shareholder's shares
if the proposed action is effectuated.
2. Not vote the shares in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A of
this section is not entitled to payment for the shares under this article.
10-1322. DISSENTERS' NOTICE
A. If proposed corporate action creating dissenters' rights under section
10-1302 is authorized at a shareholders' meeting, the corporation shall deliver
a written dissenters' notice to all shareholders who satisfied the requirements
of section 10-1321.
B. The dissenters' notice shall be sent no later than ten days after the
corporate action is taken and shall:
1. State where the payment demand must be sent and where and when
certificates for certificated shares shall be deposited.
2. Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received.
3. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and that requires that the person asserting
dissenters' rights certify whether or not the person acquired beneficial
ownership of the shares before that date.
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4. Set a date by which the corporation must receive the payment
demand, which date shall be at least thirty but not more than sixty days
after the date the notice provided by subsection A of this section is
delivered.
5. Be accompanied by a copy of this article.
10-1323. DUTY TO DEMAND PAYMENT
A. A shareholder sent a dissenters' notice described in section 10-1322
shall demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to section 10-1322, subsection B, paragraph 3 and
deposit the shareholder's certificates in accordance with the terms of the
notice.
B. A shareholder who demands payment and deposits the shareholder's
certificates under subsection A of this section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of the
proposed corporate action.
C. A shareholder who does not demand payment or does not deposit the
shareholder's certificates if required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
article.
10-1324. SHARE RESTRICTIONS
A. The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions are released under section 10-1326.
B. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
10-1325. PAYMENT
A. Except as provided in section 10-1327, as soon as the proposed
corporate action is taken, or if such action is taken without a shareholder
vote, on receipt of a payment demand, the corporation shall pay each dissenter
who complied with section 10-1323 the amount the corporation estimates to be the
fair value of the dissenter's shares plus accrued interest.
B. The payment shall be accompanied by all of the following:
1. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year and the latest available interim financial statements, if any.
2. A statement of the corporation's estimate of the fair value of the
shares.
3. An explanation of how the interest was calculated.
4. A statement of the dissenter's right to demand payment under
section 10-1328.
5. A copy of this article.
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10-1326. FAILURE TO TAKE ACTION
A. If the corporation does not take the proposed action within sixty days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
B. If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under section 10-1322 and shall repeat the payment demand
procedure.
10-1327. AFTER-ACQUIRED SHARES
A. A corporation may elect to withhold payment required by section 10-1325
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares plus accrued interest and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction of
his demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated and a statement of the dissenters' right to demand payment under
section 10-1328.
10-1328. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
A. A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due and either demand payment of the dissenter's estimate, less any payment
under section 10-1325, or reject the corporation's offer under section 10-1327
and demand payment of the fair value of the dissenter's shares and interest due,
if either:
1. The dissenter believes that the amount paid under section 10-1325
or offered under section 10-1327 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated.
2. The corporation fails to make payment under section 10-1325 within
sixty days after the date set for demanding payment.
3. The corporation, having failed to take the proposed action, does
not return the deposited certificates or does not release the transfer
restrictions imposed on uncertificated shares within sixty days after the
date set for demanding payment.
B. A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection A of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.
10-1330. COURT ACTION
A. If a demand for payment under section 10-1328 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and shall petition the court to determine the fair value of the
shares and accrued
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interest. If the corporation does not commence the proceeding within the sixty
day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
B. The corporation shall commence the proceeding in the court in the
county where a corporation's principal office or, if none in this state, its
known place of business is located. If the corporation is a foreign corporation
without a known place of business in this state, it shall commence the
proceeding in the county in this state where the known place of business of the
domestic corporation was located.
C. The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares, and all parties shall be served with a copy of the
petition. Nonresidents may be served by certified mail or by publication as
provided by law or by the Arizona rules of civil procedure.
D. The jurisdiction of the court in which the proceeding is commenced
under subsection B of this section is plenary and exclusive. There is no right
to trial by jury in any proceeding brought under this section. The court may
appoint a master to have the powers and authorities as are conferred on masters
by law, by the Arizona rules of civil procedure or by the order of appointment.
The master's report is subject to exceptions to be heard before the court, both
on the law and the facts. The dissenters are entitled to the same discovery
rights as parties in other civil proceedings.
E. Each dissenter made a party to the proceeding is entitled to judgment
either:
1. For the amount, if any, by which the court finds the fair value of
his shares plus interest exceeds the amount paid by the corporation.
2. For the fair value plus accrued interest of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under section 10-1327.
10-1331. COURT COSTS AND ATTORNEY FEES
A. The court in an appraisal proceeding commenced under section 10-1330
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of any master appointed by the court. The court shall
assess the costs against the corporation, except that the court shall assess
costs against all or some of the dissenters to the extent the court finds that
the fair value does not materially exceed the amount offered by the corporation
pursuant to sections 10-1325 and 10-1327 or that the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment under section
10-1328.
B. The court may also assess the fees and expenses of attorneys and
experts for the respective parties in amounts the court finds equitable either:
1. Against the corporation and in favor of any or all dissenters if
the court finds that the corporation did not substantially comply with the
requirements of article 2 of this chapter.
2. Against the dissenter and in favor of the corporation if the court
finds that the fair value does not materially exceed the amount offered by
the corporation pursuant to sections 10-1325 and 10-1327.
3. Against either the corporation or a dissenter in favor of any
other party if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith
with respect to the rights provided by this chapter.
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C. If the court finds that the services of an attorney for any dissenter
were of substantial benefit to other dissenters similarly situated and that the
fees for those services should not be assessed against the corporation, the
court may award to these attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who were benefitted.
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FUTECH INTERACTIVE PRODUCTS, INC.
2999 NORTH 44TH STREET
SUITE 225
PHOENIX, ARIZONA 85018-7247
-------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 1999
-------------------------
You are invited to attend a Special Meeting of Stockholders of Futech
Interactive Products, Inc., that will be held at a.m. local time on
, 1999 at . The Futech
Interactive Products, Inc. Board of Directors has called this special meeting
for the following purposes:
- To consider and vote upon a proposal to approve and adopt the Merger
Agreement dated as of June 7, 1999, by and among Futech Interactive
Products, Inc., Janex International, Inc., Trudy Corporation, Fundex
Games, Ltd., DaMert Company, and two newly formed companies that we are
referring to as "New Futech" and "New Sub." Under the Merger Agreement,
first Futech and then Janex, Trudy, and DaMert will merge with and into
New Futech, which will survive the merger, and Fundex will merge into New
Sub, which will survive as a wholly-owned subsidiary of New Futech.
Assuming that none of the currently outstanding options or warrants for
Futech common stock are exercised prior to the mergers, each share of
Futech common stock outstanding immediately prior to the mergers (other
than dissenting shares) will be converted into the right to receive
approximately .0391 shares of New Futech common stock.
- To consider and vote upon a proposal to approve the 1999 Stock Option
Plan.
- To transact such other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
These matters are more fully described in the prospectus/proxy statement
and related prospectus/proxy statement supplement that are attached to this
Notice.
We, the board of directors of Futech, recommend that you vote FOR the
mergers and FOR approval of the 1999 Stock Option Plan.
You will be entitled to vote at the special meeting or any adjournment or
postponement of the special meeting only if you are a holder of record of Futech
common stock at the close of business on , 1999.
BY ORDER OF THE BOARD OF DIRECTORS
Vincent W. Goett
Chairman
Phoenix, Arizona
, 1999
IMPORTANT
We cordially invite all stockholders to attend the special meeting in
person.
Whether or not you plan to attend the special meeting in person, in order
to assure your representation at the meeting, we urge you to complete, sign and
date the enclosed proxy card, which is being solicited by the board of
directors, and promptly return it in the self-addressed return envelope enclosed
for that purpose. You may revoke your proxy at any time prior to the vote at the
meeting by telling us that you want to do so.
<PAGE> 383
SUBJECT TO COMPLETION, DATED AUGUST 6, 1999
FUTECH INTERACTIVE PRODUCTS, INC.
FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.
FUTECH TOYS & GAMES, INC.
PROSPECTUS/PROXY STATEMENT SUPPLEMENT
This prospectus/proxy statement supplement, and the related
prospectus/proxy statement, are being furnished to you and the other
stockholders of Futech Interactive Products, Inc. in connection with the
solicitation of proxies by the Futech board of directors for use at the Special
Meeting of Stockholders to be held at a.m. local time on ,
1999, at and at any adjournments or postponements of the special
meeting. At the special meeting, we will ask you to consider and vote upon a
proposal to approve and adopt the Merger Agreement dated as of June 7, 1999, by
and among Futech, Janex International, Inc., Trudy Corporation, Fundex Games,
Ltd., DaMert Company, and two newly formed companies (Futech Interactive
Products (Delaware), Inc. and Futech Toys & Games, Inc.) that we are referring
to as "New Futech" and "New Sub," respectively. We will also ask you to consider
and vote upon a proposal to approve the 1999 Stock Option Plan, which is
intended to continue in effect after the mergers. Under the Merger Agreement,
first Futech and then Janex, Trudy, and DaMert will merge with and into New
Futech, which will survive the mergers and Fundex will merge into New Sub, which
will survive as a wholly-owned subsidiary of New Futech. Assuming none of the
outstanding options or warrants for shares of Futech or Janex common stock are
exercised prior to the mergers, each share of Futech common stock or preferred
stock outstanding immediately prior to the mergers (other than dissenting
shares) will be converted into the right to receive approximately .0391 shares
of New Futech common stock. Outstanding shares of Janex, Trudy, Fundex and
DaMert will be converted into a combination of cash, promissory notes and common
stock of New Futech. In addition, outstanding options of each of the merging
companies will be converted into options to purchase common stock of New Futech.
This prospectus/proxy statement supplement and the related prospectus/proxy
statement, together with similar supplements that are being provided to
stockholders of Janex, Trudy, Fundex and DaMert with copies of the
prospectus/proxy statement, also constitute the prospectus of New Futech and New
Sub in connection with the offer and issuance of their securities pursuant to
the mergers. Assuming none of the outstanding Futech, Janex or Fundex options or
warrants for shares of Futech or Janex common stock are exercised prior to the
mergers, a minimum aggregate of 5,867,628 and a maximum aggregate of 5,955,297
shares of New Futech common stock, a minimum of $768,330 and a maximum of
$2,116,830 in cash and a minimum aggregate of $5,751,500 and a maximum aggregate
of $7,100,000 in promissory notes of New Sub or New Futech will be issued to the
stockholders of Janex, Futech, Trudy, Fundex and DaMert in the mergers. In
addition, certain outstanding indebtedness in the amount of $10,000,000 is
expected to be exchanged for 2,222,222 shares of New Futech preferred stock
shortly after the mergers. Former stockholders of Fundex may exchange their New
Futech Stock for the license rights in the "Phase 10" family of games and former
stockholders of Trudy may become entitled to receive additional New Futech
shares or to exchange their New Futech shares for debentures in the future,
under certain circumstances. Certain loan agreements and employment agreements,
including employee options to acquire New Futech common stock, are also part of
the deal. See "DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT -- Basic
Terms of the Merger Agreement" in the prospectus/proxy statement.
We expect the New Futech common stock to trade on the OTC Bulletin Board
after the mergers, but we cannot be sure it will do so and we cannot predict
what the price might be. We do not expect a trading market to develop for any of
the other securities of New Futech.
The mergers cannot be consummated unless: (a) stockholders of Futech,
Janex, Trudy, Fundex and DaMert, voting separately at their respective meetings
of stockholders, each approve the mergers, and (b) other conditions included in
the Merger Agreement are either satisfied or waived. See "DESCRIPTION OF THE
MERGERS AND THE MERGER AGREEMENT -- Conditions to Closing" in the
prospectus/proxy statement.
The record date for the special meeting is , 1999. On the
record date Futech had outstanding 87,339,078 shares of common stock and
3,750,000 shares of preferred stock. This prospectus/proxy statement supplement
and the related prospectus/proxy statement and the accompanying form of proxy
are first being mailed to stockholders of Futech on or about ,
1999.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY
STATEMENT SUPPLEMENT AND THE RELATED PROSPECTUS/PROXY STATEMENT. THE PROPOSED
MERGER IS A COMPLEX TRANSACTION. WE STRONGLY URGE YOU TO READ AND CONSIDER
CAREFULLY THE PROSPECTUS/PROXY STATEMENT AND THE RELATED PROSPECTUS/PROXY
STATEMENT SUPPLEMENT IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER
"RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT
AND PAGE 8 OF THE PROSPECTUS/PROXY STATEMENT.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus/proxy statement supplement or the accompanying prospectus/proxy
statement is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus/proxy statement supplement is , 1999.
<PAGE> 384
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS/PROXY STATEMENT. WE HAVE NOT, AND NEW FUTECH AND NEW SUB HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEW FUTECH AND NEW SUB ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF THE DATE ON THE
FRONT OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ONLY. OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.
WHERE YOU CAN FIND MORE INFORMATION
We will send to you, without charge, any material information that we have
or can obtain without unreasonable effort or expense concerning Futech or any
other merging company, concerning the Merger Agreement and related contracts or
concerning the proposed management and operations of New Futech. You may direct
requests for additional information regarding DaMert, Futech, Trudy, Fundex, or
Janex to Frederick B. Gretsch, Sr. at 2999 N. 44th Street, suite 225, Phoenix,
Arizona 85018-7247, (602) 808-8765.
TO OBTAIN TIMELY DELIVERY OF THESE DOCUMENTS, YOU MUST MAKE YOUR REQUEST NO
LATER THAN , 1999, FIVE BUSINESS DAYS BEFORE THE DATE OF THE FUTECH
STOCKHOLDERS MEETING.
You should rely only on the information provided in or incorporated by
reference (and not later changed) in the prospectus/proxy statement or any
prospectus/proxy statement supplement. We have not, and New Futech and New Sub
have not, authorized anyone else to provide you with additional or different
information. New Futech and New Sub are not making an offer of any securities in
any state where the offer is not permitted. You should not assume that the
information in this prospectus/proxy statement supplement or the
prospectus/proxy statement is accurate as of any date other than the date on the
front of these documents.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY INFORMATION -- Q&A.................................. 1
Why are the five companies proposing to merge?............ 1
What will I receive in the mergers?....................... 1
What risks should I consider?............................. 1
What stockholder vote is required to approve the
mergers?............................................... 1
What circumstances might prevent the mergers?............. 2
How will the mergers be treated for accounting
purposes?.............................................. 2
When do you expect the mergers to be completed?........... 2
What are the tax consequences of the mergers to me?....... 2
Will I have dissenters' rights?........................... 2
What do I need to do now?................................. 2
Should I send in my stock certificates now?............... 3
OTHER INFORMATION ABOUT THE MERGERS......................... 3
The Companies............................................. 3
The Special Meeting....................................... 5
The Merger Agreement...................................... 5
SPECIAL RISK FACTORS AFFECTING FUTECH....................... 6
Stockholder Matters......................................... 9
THE MERGERS AND RELATED TRANSACTIONS........................ 10
General................................................... 10
Effects of the Mergers.................................... 10
Futech's Board Recommendation............................. 11
Related Agreements; Interests of Certain Futech Affiliates
in the Mergers......................................... 11
Regulatory Matters........................................ 11
Certain Federal Tax Matters............................... 12
Accounting Treatment...................................... 13
RIGHTS OF DISSENTING SHAREHOLDERS........................... 13
NEW FUTECH AND FUTECH SHARES................................ 14
New Futech Common Stock................................... 14
Futech Capital Stock...................................... 14
Common Stock.............................................. 15
Preferred Stock........................................... 15
COMPARISON OF THE RIGHTS OF HOLDERS OF FUTECH COMMON STOCK
AND NEW FUTECH COMMON STOCK............................... 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION... 24
Overview.................................................. 24
Results of Operations of the Company...................... 24
</TABLE>
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<TABLE>
<S> <C>
Seasonality and Quarterly Fluctuations.................... 27
Liquidity and Capital Resources........................... 28
Inflation................................................. 31
Year 2000................................................. 31
Safe Harbor Disclosure: Forward-Looking Statements and
Associated Risks....................................... 32
DESCRIPTION OF FUTECH'S BUSINESS............................ 33
General; Recent Developments.............................. 33
Business.................................................. 33
Marketing, Distribution and Customers..................... 36
Manufacturing............................................. 37
Product Design and Selection.............................. 37
Competition............................................... 37
Trade Publishing.......................................... 38
Specialty Products........................................ 38
Distribution.............................................. 38
Patents and Trademarks.................................... 39
Governmental Regulations.................................. 40
Employees................................................. 40
Properties................................................ 40
Legal Proceedings......................................... 40
FUTECH MANAGEMENT........................................... 41
Directors and Executive Officers.......................... 41
Employment Arrangements................................... 42
1999 Stock Option Plan and Executive Compensation
Matters................................................ 43
Limitation of Liability and Indemnification............... 46
FUTECH STOCKHOLDERS......................................... 48
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 50
APPENDICES
Appendix A -- Arizona Business Corporation Act Dissenters'
Rights.................................................... A-1
</TABLE>
iii
<PAGE> 387
SUMMARY INFORMATION -- Q&A
This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the mergers contemplated thereby, you should carefully read
this entire document and the additional documents we mention. You should pay
special attention to the "RISK FACTORS" section beginning on page 8 of the
prospectus/proxy statement and "SPECIAL RISK FACTORS AFFECTING FUTECH" in this
prospectus/proxy statement supplement beginning on page 6.
WHY ARE THE FIVE COMPANIES PROPOSING TO MERGE?
The five companies are proposing to merge because the directors of each
company believe the combination will provide significant benefits to
stockholders. We believe the mergers will enable us to take advantage of the
complementary strategic fit of our respective businesses by marketing through
additional channels of distribution. We also hope and believe the mergers will
improve the likelihood that stockholders will have a more liquid market should
they wish to sell their stock and that the combined companies will be able to
more efficiently access the markets for debt and equity when appropriate. To
review the background and reasons for the mergers in greater detail, see
"BACKGROUND OF THE MERGERS" in the prospectus/proxy statement.
WHAT WILL I RECEIVE IN THE MERGERS?
You and all Futech stockholders will receive common stock of New Futech in
exchange for your Futech stock. Stockholders of the other merging companies will
receive cash, promissory notes and/or common stock of New Futech. Certain
employment contracts and other agreements with affiliates of the merging
companies are also part of the deal. See "DESCRIPTION OF THE MERGERS AND THE
MERGER AGREEMENT" in the prospectus/proxy statement.
WHAT RISKS SHOULD I CONSIDER?
You should review "RISK FACTORS" on pages 8 through 13 of the prospectus/
proxy statement as well as the special risk factors affecting primarily Futech
that are discussed on pages 6 through 9 of this prospectus/proxy statement
supplement.
WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGERS?
The following table shows the proportions of the outstanding shares whose
affirmative vote is required to approve of the mergers, together with the
proportion of the outstanding shares that are held by directors, executive
officers and their affiliates, all whom have indicated that they intend to vote
in favor of the mergers.
<TABLE>
<CAPTION>
SHARES OWNED BY DIRECTORS,
COMPANY VOTE REQUIRED EXECUTIVE OFFICERS AND AFFILIATES
- ------- ------------- ---------------------------------
<S> <C> <C>
DaMert Majority 100.0%
Fundex Majority 70.8%
Futech Majority 72.7%
Janex Majority 78.9%
Trudy Majority 55.7%
</TABLE>
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WHAT CIRCUMSTANCES MIGHT PREVENT THE MERGERS?
New Futech has the right to terminate the Merger Agreement if stockholders
from all of the merging companies combined exercise dissenters' rights with
respect to more than 5% of the aggregate merger consideration to be issued in
the mergers. See "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT -- Conditions to Closing" in the prospectus/proxy statement for a
description of the other conditions to the mergers.
HOW WILL THE MERGERS BE TREATED FOR ACCOUNTING PURPOSES?
We expect the mergers to be treated as purchases by Futech, which means
that the amount by which the total merger consideration received by stockholders
of the other merging companies plus the amount of their liabilities exceeds the
fair market value of their identifiable assets will initially be treated as
goodwill by New Futech for accounting purposes.
WHEN DO YOU EXPECT THE MERGERS TO BE COMPLETED?
We are working to complete the mergers during the third quarter of 1999.
However, the Merger Agreement does not include any express deadline for the
mergers to proceed.
WHAT ARE THE TAX CONSEQUENCES OF THE MERGERS TO ME?
We and the other merging companies have structured the Merger Agreement
with the intent and expectation that the exchange of common shares by Futech
shareholders will be tax-free for federal income tax purposes. You should review
the more detailed description of federal tax consequences that appear in
"CERTAIN FEDERAL TAX MATTERS" in this prospectus/proxy statement supplement.
State and local taxes may also become due as a result of the mergers.
The precise tax consequences of the mergers will depend on your own
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the mergers to you.
WILL I HAVE DISSENTERS' RIGHTS?
Yes, provided you do not vote in favor of the mergers and meet all other
requirements of the dissenter's rights statute. See "RIGHTS OF DISSENTING
SHAREHOLDERS" in this prospectus/proxy statement supplement and the dissenters'
rights statute that is attached as Appendix 1 to this prospectus/proxy statement
supplement.
WHAT DO I NEED TO DO NOW?
Just indicate on your proxy card how you want to vote on the mergers, and
sign and mail it in the enclosed return envelope as soon as possible, so that
your shares will be represented at the stockholders meeting.
If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be counted as a vote in favor of the mergers. If you do
not vote or you abstain, it will have the same effect as a vote against the
mergers.
The stockholders meeting will take place on , at local time,
at . You may attend the stockholders meeting and vote your shares in
person, rather than signing and mailing your proxy card. In addition, you may
withdraw your proxy up to
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<PAGE> 389
and including the day of the meeting and either change your vote or attend the
meeting and vote in person.
SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
No. After the mergers are completed we will send you written instructions
for exchanging your stock certificates for the New Futech stock to which you are
entitled.
OTHER INFORMATION ABOUT THE MERGERS
THE COMPANIES
NEW FUTECH
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
New Futech is a newly-organized Delaware corporation that has been formed
to be the surviving parent corporation under the Merger Agreement. New Futech
has had no operations prior to the date of this prospectus/proxy statement
supplement. Under the Merger Agreement, first Futech and then Janex, Trudy and
DaMert will merge with and into New Futech, which will survive the mergers. As a
part of the mergers, New Futech will change its name to "Futech Interactive
Products, Inc."
NEW SUB
Futech Toys & Games, Inc.
2237 Directors Row
Indianapolis, Indiana 46241
(317) 248-1080
New Sub is a newly-organized Nevada corporation that has been formed to be
the surviving subsidiary corporation of New Futech under the Merger Agreement.
New Sub has had no operations prior to the date of this prospectus/proxy
statement supplement. Under the Merger Agreement, Fundex will merge with and
into New Sub, which will survive that merger as a wholly-owed subsidiary of New
Futech. All of the stock and assets of New Sub will be pledged to the former
stockholders of Fundex to secure the promissory notes of New Sub issued to them
in connection with the merger of Fundex into New Sub. In addition, the former
stockholders of Fundex who do not elect the All Cash Alternative will receive a
conditional option to purchase New Sub's license to market the "Phase 10" family
of games in 2002 in exchange for the New Futech stock they receive in the
mergers (but not the cash or promissory notes), exercisable only if the stock
has not achieved targeted liquidity and a valuation of at least $7.50 per share
($4,500,000 in the aggregate, if no stockholders elect the All Cash Alternative)
within three years after the completion of the mergers.
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<PAGE> 390
JANEX
Janex International, Inc.
c/o Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
Janex hires subcontractors to manufacture and markets children's toys,
gumball banks, flashlights and battery operated toothbrushes marketed under the
brand name Janex. Janex incorporates licensed characters into most of its
products, and sells its products to United States mass merchant retailers, toy
specialty stores and department stores.
FUTECH
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
Futech designs, publishes, hires subcontractors to manufacture and markets
interactive, educational, promotional and entertainment products (i.e., books,
game boards with sound capabilities and specialty post cards) targeted primarily
towards children. Futech's patented technology utilizes specialized conductive
ink to print interactive touch points. These touch points trigger speech, music
and sound effects. Futech licensed this technology to a major entertainment and
publishing company. Futech also distributes proprietary products, as well as
those of third party publishers, to warehouse clubs, national book chains,
specialty and independent retailers and major toy chains.
TRUDY
Trudy Corporation
353 Main Avenue
Norwalk, CT 06851-1552
(203) 846-2274
Trudy Corporation was initially organized as a Connecticut corporation
under the name "Norwest Manufacturing Corporation" in 1979. Trudy, which does
business under the name Soundprints, publishes juvenile story books and
audio-cassettes which are sold in conjunction with contract manufactured
educational plush toys to the retail and mail order markets.
FUNDEX
Fundex Games, Ltd.
2237 Directors Row
Indianapolis, Indiana 46241
(317) 248-1080
Fundex Games, Ltd. was originally incorporated in the State of Indiana as
"Third Quarter, Inc." in 1991. Fundex develops, markets, and distributes a
variety of games and toys for both children and adults, including:
- card games, puzzles and board games, including the Phase 10 card game and
its sister products;
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- skill and action games for children;
- games, puzzles and toys featuring characters licensed from third parties;
and
- spring and summer toys for children, including jump ropes, water toys and
water games.
DAMERT
DaMert Company
1609 Fourth Street
Berkeley, California 94710
(510) 524-7400
DaMert Company was founded in 1973 and incorporated in 1979. DaMert Company
hires subcontractors to manufacture and markets toys, gifts and puzzles targeted
primarily to children ages 6-12 with science and nature themes. Presently, the
product base includes over 200 toys, gifts and puzzles selling through catalogs,
museums, department stores, specialty gift stores and toy stores nationwide.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Futech special meeting will be held on , at at
.
PURPOSE OF THE SPECIAL MEETING
We have called the special meeting so the Futech stockholders can vote on
whether to approve the mergers pursuant to the Merger Agreement and to vote on
whether to approve the 1999 Stock Option Plan. The directors of Futech, Janex,
Trudy, Fundex and DaMert have called for special meetings of the stockholders of
their companies so that they also can vote whether to approve the mergers.
REQUIRED VOTE
The mergers will have been approved by Futech only if the merger proposal
receives the affirmative vote of a majority of the outstanding shares of common
stock and a majority of the outstanding shares of preferred stock, voting as a
single class. Similarly, the 1999 Stock Option Plan will have been approved only
if it receives the affirmative vote of a majority of the outstanding common
stock and preferred stock, voting as a single class. On the record date, Futech
had outstanding 87,339,078 shares of common stock and 3,750,000 shares of
preferred stock. Executive officers, directors and their affiliates owning
63,470,506 shares of common stock and all of the preferred stock have indicated
that they intend to vote in favor of the mergers and the 1999 Stock Option Plan.
RECOMMENDATION OF THE FUTECH BOARD OF DIRECTORS
We have approved the Merger Agreement and recommend that the stockholders
of Futech vote "FOR" approval of the Merger Agreement and "FOR" approval of the
1999 Stock Option Plan.
THE MERGER AGREEMENT
Under the Merger Agreement, first Futech and then Janex, Trudy, and DaMert
will merge with and into New Futech, which will survive the mergers, and Fundex
will merge
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<PAGE> 392
into New Sub, which will survive as a wholly-owned subsidiary of New Futech.
Under the Merger Agreement, Futech stockholders who do not exercise dissenters'
rights will receive common stock of New Futech as described in the
prospectus/proxy statement under the heading "DESCRIPTION OF THE MERGERS AND THE
MERGER AGREEMENT -- Basic Terms of the Merger Agreement." Stockholders of Fundex
and Trudy will also have certain conditional rights to receive additional stock
or to exchange their New Futech stock for promissory notes or certain other
assets under specified circumstances. See "DESCRIPTION OF THE MERGERS AND THE
MERGER AGREEMENT -- Basic Terms of the Merger Agreement."
THE 1999 STOCK OPTION PLAN
The 1999 Stock Option Plan provides for the issuance of stock options for
up to 1,000,000 shares of New Futech common stock to employees and others from
time to time under the terms of the plan.
SPECIAL RISK FACTORS AFFECTING FUTECH
In addition to the other information included in this prospectus/proxy
statement supplement (including the matters addressed in "INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS") and the risk factors described in the
prospectus/proxy statement under the heading "Risk Factors," the factors
described below should be considered carefully by shareholders of Futech in
determining whether to approve the Merger Agreement and the other transactions
being considered.
FUTECH HAS EXPERIENCED SUBSTANTIAL OPERATING LOSSES AND HIGH DEBT.
Futech generated substantially no revenues during 1996 and 1997 and has
also sustained operating losses for the past few years. Recent losses occurred
primarily because the Company incurred large expenditures for product design,
experienced write-offs of various large assets, and sustained costs associated
with a joint venture that was discontinued. In the past three years, the Company
closed down a printing plant, started and subsequently discontinued a joint
venture, purchased three companies, restarted the use of subcontractors to
manufacture the Company's products, and hired many new employees. The Company
has acquired debt and has issued stock to provide funds to continue operations.
If the Company is unable to generate operating profits and sustainable operating
cash flow in the near future, that could jeopardize its continued operations.
FUTECH'S INTERACTIVE TALKING PAGES TECHNOLOGY USES A SPECIALIZED MANUFACTURING
PROCESS.
The manufacturing process of Futech's interactive Talking Pages technology
utilizes a specialized process and specialized equipment to print and cure
conductive ink and dielectric material to the structure of the pages in the book
or gameboard. A major printing company in Hong Kong and China is currently the
Company's sole manufacturer to perform the printing and binding process for
books that incorporate this technology. If Futech is forced to use another
printer, we could experience serious delays and/or possible cost over-runs
during the transition.
FUTECH DEPENDS UPON KEY RELATIONSHIPS.
For the twelve month period ended December 31, 1998, approximately 38% of
Futech's revenues and 51% of its accounts receivable were attributable to
Futech's two
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<PAGE> 393
largest customers. Similarly, 63% of Futech's 1998 revenues were from trade
publishing and distribution of books, of which 13% occurred pursuant to its
agreement with Magi Publications. Futech distributes products to warehouse clubs
such as Sam's Club, Costco and BJ's Wholesale Club, major retail outlets such as
Toys 'R' Us, Target, Kmart and Wal-Mart, regional discounters such as Kohl's,
Meijers and Shopko, and national book chains such as Waldenbooks, Borders, B.
Dalton Bookseller, Barnes & Noble, Inc., and Books-a-Million. The loss of a
particular customer or relationship, or a substantial decrease in business from
a customer, may have a material adverse affect on Futech's business, financial
condition, and operating results.
FUTECH COULD LOSE KEY PERSONNEL.
Futech's future success will depend to a significant extent on several key
individuals, including Vincent W. Goett, Joseph K. Petter and Frederick B.
Gretsch, Sr. The loss of the services of any of these individuals could have a
material adverse effect on the ability of Futech to implement its goals and a
material adverse effect on Futech in general. Futech does not maintain key man
life insurance on the lives of any of its executive officers or employees. The
success of Futech will depend, among other factors, on the successful
recruitment and retention of quality management and other personnel. See
"FUTECH'S MANAGEMENT."
FUTECH RELIES UPON ITS PATENTS AND PROPRIETARY RIGHTS.
Futech's success will depend in part on its United States and foreign
patent protection for its technology, to preserve its trade secrets and to
operate without infringing the proprietary rights of third parties. Because of
the substantial length of time and expense associated with developing new
technologies, Futech places considerable importance on patent and trade secret
protection. Futech holds ten patents in the United States, two patents in a
foreign country and 17 patents pending relating to certain technologies at
various stages of development. There can be no assurance that the patent
applications relating to Futech's technologies will result in patents being
issued or that current or additional patents will afford protection against
competitors with similar technology. Futech may be required to obtain licenses
from others to develop, manufacture or market its products. There can be no
assurance that Futech will be able to obtain such licenses on commercially
reasonable terms, if at all, or that the patents underlying the licenses will be
valid and enforceable. Futech may also rely upon unpatented technology, and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information or techniques, or otherwise gain access to
Futech's proprietary technology or disclose such technology, or that Futech can
meaningfully protect its rights in such proprietary technology. While Futech has
taken and continues to take steps to become aware of related technical
developments, there can be no assurance that Futech will not encounter an
unfavorable patent situation. Litigation may be necessary to enforce Futech's
patents to determine the validity and scope of Futech's patents or to defend or
assert claims of infringement. Any such litigation could have a material adverse
effect upon Futech's business, financial condition and results of operations.
Futech is investigating the possibility of infringement by a variety of
competitors of one of its United States patents.
COSTS COULD INCREASE AND REVENUES COULD DECLINE.
Paper supplies, conductive ink, computer chip and other material costs
constitute a significant portion of Futech's product costs and are susceptible
to numerous factors
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<PAGE> 394
beyond the control of Futech. Significant increases in these costs could have a
material adverse effect on Futech's operating results.
The success of Futech's operations depends to an extent upon a number of
factors relating to discretionary consumer spending. These factors include
economic conditions, such as employment, business conditions, interest rates,
and tax rates, as well as the continued growth of the electronic publishing,
trade publishing, promotional products and specialty product industries. There
can be no assurance that consumer spending will not be adversely affected by
general social trends and economic conditions, thereby impacting Futech's
growth, net sales, and profitability. If the demand for electronic books, trade
books, promotional publishing and specialty products were to decline, Futech's
business, financial condition and operating results could be adversely affected.
FUTECH'S RIGHTS AGAINST AFFILIATES MAY BE LIMITED.
As permitted by the Arizona Business Corporation Act, Futech has included
in its Articles of Incorporation, a provision to eliminate, to the fullest
extent permitted by the Arizona Business Corporation Act, the personal liability
of its directors or officers to Futech and its stockholders for monetary damages
for breach of their fiduciary duty as director. Arizona law does not permit the
elimination of liability (i) for the amount of a financial benefit received by a
director of officer to which the benefit received by a director or officer is
not entitled, (ii) for an intentional infliction of harm to Futech or its
shareholders, (iii) for an intentional violation of criminal law, or (iv) for a
violation of sec. 10-833 of the Arizona Business Corporation Act regarding
unlawful distributions. The effect of this provision in the Articles of
Incorporation is to eliminate the rights of Futech and its stockholders (through
stockholders' derivative suits on behalf of Futech) to recover monetary damages
against a director or officer for breach of fiduciary duty as a director thereof
(including breaches resulting from negligent or grossly negligent behavior)
except in the situations described in clauses (i)-(iv), inclusive, above. In
addition, the Articles of Incorporation, provide that Futech shall indemnify its
officers and directors to the fullest extent permitted by the Arizona Business
Corporation Act for expenses, liabilities or other matters referred to in or
covered by such section.
CHANGE IN CONTROL PROVISIONS MAY DISCOURAGE TAKE-OVER OFFERS.
Futech's Articles of Incorporation and Bylaws and the Arizona Business
Corporation Act contain provisions that may have the effect of making it more
difficult or delaying attempts by others to obtain control of Futech, even when
those attempts may be in the best interests of the stockholders. Certain of
Futech's employment agreements with key executives could have similar effects.
FUTECH MUST CONTEND WITH THE YEAR 2000 ISSUE.
The Year 2000 presents potential concerns for business and consumer
computing. The consequences of this issue may include systems failures and
business process interruption. The Year 2000 issue affects Futech's internal
systems, including information technology (IT) and non-IT systems. Futech is
assessing the readiness of its systems for handling the Year 2000. Although the
assessment is still underway, management believes that all material systems will
be compliant by the Year 2000 and that the cost to address the issues is not
material. Nevertheless, Futech is creating contingency plans for certain
internal systems.
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<PAGE> 395
The Company has not instituted any procedures to obtain certification from
its major vendors or customers that their systems are Year 2000 compliant. Such
a survey would include vendors who provide systems related services, e.g.,
communications, banking, credit card processing, shipping, security, HVAC, etc.
along with third-party factories providing book and toy products. The cost of
such a survey, in both time and money, would be substantial. However, the
Company does not believe that the failure of any vendor or customer to be Year
2000 compliant will have a material impact on the Company.
STOCKHOLDER MATTERS
Futech does not trade on any established market. Similarly, there is no
public market for the New Futech common stock. We expect the New Futech common
stock to trade on the OTC Bulletin Board/Nasdaq Stock Market soon after the
mergers, but we cannot be sure it will do so and we cannot predict what the
price might be. We do not expect a trading market to develop for the other
securities of New Futech.
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<PAGE> 396
THE MERGERS AND RELATED TRANSACTIONS
GENERAL
The Merger Agreement provides for the merger of Futech into New Futech,
promptly followed by the substantially simultaneous merger of Janex, Trudy and
DaMert with and into New Futech and the substantially simultaneous merger of
Fundex with and into New Sub. The discussion in this prospectus/proxy statement
supplement and the related prospectus/proxy statement of the mergers and the
description of the principal terms of the Merger Agreement contained in the
prospectus/proxy statement are subject to and qualified in their entirety by
reference to the Merger Agreement, a copy of which is attached to the
prospectus/proxy statement as Appendix A, and incorporated herein by reference.
EFFECTS OF THE MERGERS
GENERAL
We intend for the mergers to occur promptly following approval of the
mergers by the requisite vote of the stockholders of each of Janex, Futech,
Trudy, DaMert and Fundex and the satisfaction or waiver of all other conditions
to consummation of the mergers. The mergers will become effective at or about
the time of filing of articles of merger or other appropriate documents with the
applicable government offices or agencies. At that time (a) first Futech and
then Janex, Trudy and DaMert will merge with and into New Futech with the result
that New Futech will be the surviving corporation and (b) Fundex will merge with
and into New Sub with the result that New Sub will be the surviving corporation.
As part of the mergers New Futech will change its name to "Futech Interactive
Products, Inc." The stockholders of Futech will become stockholders of New
Futech, and their rights will be governed by the New Futech certificate of
incorporation and bylaws. See "COMPARISON OF RIGHTS OF STOCKHOLDERS OF FUTECH
AND NEW FUTECH." See "DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT" in
the prospectus/proxy statement.
For information regarding the operation of New Futech and New Sub following
the mergers, see " NEW FUTECH BUSINESS" in the prospectus/proxy statement. For
information regarding the officers and directors of New Futech following the
mergers, see "NEW FUTECH'S MANAGEMENT" in the prospectus/proxy statement.
EXCHANGE RATIOS
Options and warrants to purchase Futech common stock that are outstanding
at the time of the mergers will be converted into options to acquire New Futech
stock in the ratio of one New Futech share for every 30 Futech shares. Assuming
none of the outstanding options or warrants are exercised prior to the mergers,
each share of Futech common and preferred stock outstanding immediately prior to
the mergers (other than dissenting shares) will be converted into the right to
receive approximately .0391 shares of New Futech common stock.
Outstanding shares of Janex, DaMert, Fundex and Trudy will also be
converted into a combination of cash, common stock of New Futech and promissory
notes of New Futech or New Sub. Under certain circumstances the former
stockholders of Fundex will have the right to exchange their New Futech stock
for the license rights in the "Phase 10" family of games now owned by Fundex.
Under certain other circumstances the former stockholders of Trudy will have the
right to receive additional New Futech stock or to
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<PAGE> 397
exchange their New Futech stock for unsecured five year debentures. In addition,
outstanding options for shares of Trudy, Futech, Janex and Fundex will be
converted into options for shares of common stock of New Futech. See
"DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT -- Basic Terms of the
Merger Agreement" in the prospectus/proxy statement.
FRACTIONAL SHARES
Fractional shares of New Futech common stock will not be issued in the
mergers. Instead, stockholders in any of the merging companies who would
otherwise have received an amount of New Futech stock that includes a fraction
of a share will instead receive an amount of cash equal to that fraction
multiplied by $7.50. For example, a Futech stockholder who is otherwise entitled
to receive 15.5 shares of New Futech common stock will actually receive only 15
shares, plus $3.75 in cash (i.e., 0.5 times $7.50).
FUTECH'S BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF FUTECH HAS DETERMINED THAT THE MERGERS ARE
ADVISABLE AND IN THE BEST INTERESTS OF FUTECH AND ITS STOCKHOLDERS AND HAS
RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
RELATED AGREEMENTS; INTERESTS OF CERTAIN FUTECH AFFILIATES IN THE MERGERS
On June 1, 1998, Futech entered into a Patent Licensing and Purchase
Agreement with Grand Slam Investments, L.L.C., which is controlled by Vincent W.
Goett. Under the Agreement, Grand Slam grants Futech exclusive, world-wide
rights to use two patents owned by Grand Slam. Under the Agreement, Futech would
make twelve monthly royalty payments of $10,000 beginning June 1, 1998. On June
30, 1999, Futech would purchase the patents for $1,500,000. Alternatively,
Futech had the right to purchase the patents at an earlier date of December 30,
1998 for a reduced cost of $1,000,000. This Agreement was amended on December 9,
1998 whereby Futech agreed to pay $650,000 on December 9, 1998 and $850,000 on
or before June 1, 1999. Additionally, the monthly royalty payments of $10,000
were suspended as of December 31, 1998. The $850,000 payment has not been made.
Vincent W. Goett, Joseph K. Petter, and Frederick B. Gretsch will enter
into employment agreements with New Futech in connection with the merger. See
"DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT -- Employment Agreement
with Affiliates' and "NEW FUTECH'S MANAGEMENT -- Employment Agreements" in the
prospectus/proxy statement.
SEE "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" IN THIS
PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE CORRESPONDING HEADING IN THE
PROSPECTUS/ PROXY STATEMENT.
REGULATORY MATTERS
Except as disclosed in this prospectus/proxy statement supplement and the
prospectus/proxy statement, Futech and New Futech are not aware of any
governmental or regulatory approvals required for consummation of the mergers,
other than compliance with the federal securities laws and applicable securities
and "blue sky" laws of the various states.
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<PAGE> 398
CERTAIN FEDERAL TAX MATTERS
In the opinion of Quarles & Brady LLP, special tax counsel to Futech and
New Futech, the Merger of Futech into New Futech, which will precede the mergers
involving Janex, Trudy, DaMert and Fundex, will be treated for federal income
tax purposes as a reorganization within the meaning of sec. 368(a) of the Code,
and Futech and New Futech will each be a party to that reorganization within the
meaning of sec. 368(b) of the Code.
In rendering its opinion, counsel has relied upon and assumed as accurate
and correct on the date hereof, and will rely on and assume as accurate and
correct as of the Effective Time of merger, the information contained in this
prospectus/proxy statement supplement and the related prospectus/proxy statement
and certain representations as to factual matters made by Futech and New Futech.
The representations relied upon include the following: (i) Futech will be merged
into New Futech whether or not the mergers involving Janex, Trudy, DaMert and
Fundex occur; and (ii) immediately after the merger of Futech into New Futech
and before the Janex, Trudy, DaMert and Fundex mergers, the Futech stockholders
will own all of the outstanding New Futech common stock and will own such stock
solely by reason of their ownership of Futech stock immediately prior to the
merger of Futech into New Futech. Any inaccuracy or change with respect to such
information or representations or actions of Futech or New Futech contrary to
such representations could adversely affect the conclusions reached in the
opinion and the tax summary set forth below.
Counsel's opinion represents its best legal judgement as to the tax
treatment of the merger, but the opinion is not binding on the Internal Revenue
Service. The parties have not and will not request a ruling from the Service in
connection with the federal income tax consequences of the merger. The following
summary of material United States federal income tax consequences of the merger
is based upon the conclusions reached in such opinion.
Based on the provisions of the Code, the applicable regulations thereunder,
judicial authority and current administrative rulings and practices as of the
date hereof, all of which are subject to change, possibly with retroactive
effect: (i) no gain or loss will be recognized by Futech or New Futech as a
result of the merger; (ii) no gain or loss will be recognized by the holders of
Futech common stock upon conversion of their shares of Futech common stock into
shares of New Futech common stock pursuant to the merger; (iii) the tax basis of
the shares of New Futech common stock into which shares of Futech common stock
are converted will be the same as the basis of the shares of Futech common stock
converted into such New Futech common stock; and (iv) the holding period for
shares of New Futech common stock into which shares of Futech common stock are
converted will include the period that such shares of Futech common stock were
held by the holder, provided such shares were held as capital assets of the
holder at the Effective Time of merger.
A holder of Futech common stock who receives New Futech common stock
pursuant to the merger will be required to retain records and file with such
holder's federal income tax return for the taxable year in which the merger
takes place a statement setting forth all relevant facts in respect of the
nonrecognition of gain or loss upon such exchange. The statement is required to
include (i) such holder's basis in the shares of Futech common stock surrendered
in the merger; and (ii) the value of New Futech common stock received (using
fair market value as of the Effective Time of Merger) and the amount of any cash
received in the merger.
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<PAGE> 399
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A DESCRIPTION OF THE MATERIAL
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL TAX EFFECTS OF THE MERGER. In
addition, the discussion does not address all of the tax consequences that may
be relevant to particular taxpayers in light of their personal circumstances or
to taxpayers subject to special treatment under the Code (for example, insurance
companies, financial institutions, dealers in securities, tax exempt
organizations, foreign corporations, foreign partnerships, or other foreign
entities and individuals who are not citizens or residents of the United States
and persons who acquired their New Futech common stock pursuant to the exercise
or termination of employee stock options, warrants or otherwise as
compensation).
No information is provided herein with respect to the tax consequences, if
any, of the merger under applicable foreign, state, local and other tax laws.
THE GENERAL SUMMARY SET FORTH ABOVE IS NOT INTENDED TO BE, NOR SHOULD IT BE
CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF FUTECH COMMON
STOCK. EACH HOLDER OF FUTECH COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER,
INCLUDING THE APPLICATION OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
The mergers are intended to qualify as a purchase for accounting purposes.
Under this accounting method, the merged companies will record the combined net
assets at their fair value as of the date of the merger. The value of net assets
will be allocated between the identifiable assets acquired (including
intangibles) and liabilities assumed. Any excess of total purchase price over
the sum of the amounts assigned to identifiable assets and liabilities is
recorded as goodwill and will be amortized over its estimated economic life, but
not more that 40 years.
RIGHTS OF DISSENTING SHAREHOLDERS
Pursuant to sec.sec. 10-1301 through 10-1303, 10-1320 and 10-1321 of the
Arizona Business Corporation Act ("AZBCA"), copies of which are attached to this
prospectus/proxy statement supplement as Appendix I, stockholders of Futech may
dissent from, and obtain payment of the fair value of their Futech shares in the
event of the consummation of the mergers. A Futech stockholder who wishes to
assert dissenters' rights in connection with the mergers must (i) deliver to
Futech, before a vote of the stockholders of Futech is taken with respect to the
mergers, written notice of the stockholder's intent to demand payment for the
stockholder's Futech shares if the mergers are effectuated; and (ii) not vote in
favor of the merger proposal.
If the merger proposal is approved at the Futech special meeting and if the
other conditions of the mergers are satisfied or waived, Futech will deliver a
written dissenters' notice to all Futech stockholders who have satisfied the
requirements described above to assert those rights. Futech will send the
dissenters' notice no later than ten days after the mergers are effectuated.
The dissenters' notice delivered by Futech will: (i) state that the mergers
were authorized and the effective date or proposed effective date of the
mergers; (ii) state an address at which Futech will receive payment demands and
an address at which certificates for Futech shares must be deposited; (iii)
include a form for demanding
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<PAGE> 400
payment; and (iv) set a date by which Futech must receive the payment demand and
by which certificates for Futech shares must be deposited at the address for
such deposits in the dissenters' notice, which date may not be less than 30 days
after the date the dissenters' notice is given. Additionally, Futech may require
that when a record holder of Futech shares dissents with respect to the shares
held by any one or more beneficial owners of Futech shares, each such beneficial
owner of Futech shares must certify to Futech that both such beneficial owner
and the record holder of Futech shares beneficially owned by such beneficial
owner have asserted dissenters' rights as to all such Futech shares. If Futech
so requires, the dissenters' notice will state this requirement. The dissenters'
notice will include a copy of the AZBCA sec.sec. 10-1301 through 10-1303,
10-1320 and 10-1321.
A Futech stockholder to whom a dissenters' notice is sent and who wishes to
exercise dissenters' rights must: (i) demand payment on the form provided and
within the time period set forth in the dissenters' notice; and (ii) deposit
certificates for Futech shares in accordance with the terms of the dissenters'
notice. A stockholder of Futech who demands payment as described above retains
all rights of a stockholder of Futech, except the right to transfer the shares,
until the effective time of the mergers and thereafter has only the right to
receive payment for the fair value of his or her Futech Shares.
A stockholder of Futech who does not demand payment and deposit
certificates as required is not entitled to payment under AZBCA sec.sec. 10-1301
through 10-1303, 10-1320 and 10-1321.
NEW FUTECH AND FUTECH SHARES
NEW FUTECH COMMON STOCK
For a description of New Futech common stock and its Series A preferred
stock, see "DESCRIPTION OF NEW FUTECH CAPITAL STOCK" in the prospectus/proxy
statement.
FUTECH CAPITAL STOCK
The following description of Futech's capital stock is a summary only and
is subject to, and qualified in its entirety by, reference to Futech's Articles
of Incorporation and Bylaws, copies of which are included as exhibits to the
prospectus/proxy statement which accompanies this prospectus/proxy statement
supplement, and by reference to Arizona Law under which Futech is incorporated.
COMMON STOCK
As of May 31, 1999 there were 87,339,078 shares of Futech common stock
outstanding which were held of record by approximately 129 stockholders. Futech
has not paid any dividends on its common stock. The Merger Agreement provides
that Futech will not declare or pay any dividend without the prior written
approval of New Futech.
PREFERRED STOCK
As of May 31, 1999 there were 3,750,000 shares of Futech preferred stock
outstanding which were held of record by three stockholders. Futech has not paid
any dividends on its preferred stock. The Merger Agreement provides that Futech
will not declare or pay any dividend without the prior written approval of New
Futech. These shares will be converted into New Futech common stock at the time
of the mergers.
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<PAGE> 401
COMPARISON OF THE RIGHTS OF HOLDERS OF FUTECH COMMON STOCK AND
NEW FUTECH COMMON STOCK
Futech is an Arizona corporation and the rights of its stockholders are
governed by the Arizona Business Corporation Act ("AZBCA") and the Articles of
Incorporation and Bylaws of Futech. New Futech is a Delaware corporation and the
rights of its stockholders are governed by the Delaware General Corporation Law
("DGCL") and the Certificate of Incorporation and Bylaws of New Futech. By the
Merger Agreement, the Futech stockholders will become New Futech stockholders
and as such, their rights will be governed by the DGCL and the New Futech
Certificate of Incorporation and Bylaws.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF ARIZONA AND DELAWARE
The corporation laws of Arizona and Delaware differ in many respects.
Although all the differences are not set forth in this prospectus/proxy
statement supplement, provisions which could materially affect the rights of
shareholders are discussed below.
REMOVAL OF DIRECTORS
<TABLE>
<CAPTION>
Arizona Delaware
<S> <C>
A director of a corporation that does not A director of a corporation that does not have a
have a staggered board of directors or classified board or cumulative voting may be
cumulative voting may be removed with or without removed without or without cause with approval
cause with the approval of a majority of the of the majority of the outstanding shares
voting shares held by the voting group of entitled to vote at an election of directors. In
stockholders that elected the director. In the the case of a Delaware corporation having
case of an Arizona corporation having cumulative cumulative voting, if less than the entire board
voting, if less than the entire board is to be is to be removed, a director may not be removed
removed, a director may not be removed if the without cause if the number of shares voted
number of shares voted against such removal against such removal would be sufficient to
would be sufficient to elect the director under elect the director under cumulative voting. A
cumulative voting. Pursuant to the Articles of director of a corporation with a classified
Incorporation, Futech has a staggered board and board of directors may be removed only for
allows the removal of a director only for cause cause, unless the certificate of incorporation
and only by an affirmative vote of the holders otherwise provides. The certificate of
of a majority of the outstanding shares of the incorporation and bylaws of New Futech provide
Corporation then entitled to vote generally in for a classified board of directors, but not for
the election of directors to remove a director. cumulative voting.
Futech does not have cumulative voting.
</TABLE>
CLASSIFIED BOARD OF DIRECTORS
A classified (the term in Delaware) or staggered board is one on which a
certain number, but not all, of the directors are elected on a rotating basis
each year. This method of electing directors makes changes in the composition of
the board of directors more difficult, and thus, a change in control of a
corporation potentially a lengthier and more difficult process.
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<PAGE> 402
<TABLE>
<CAPTION>
Arizona Delaware
<S> <C>
Arizona law permits, but does not require, Delaware law permits, but does not require, a
a staggered board of directors, by which the classified board of directors, by which the
directors can be divided into as many as three directors can be divided into as many as three
classes with staggered terms of office, with classes with staggered terms of office, with
only one class of directors standing for only one class of directors standing for
election each year. The Futech articles of election each year. The New Futech certificate
incorporation provide for a staggered board. of incorporation and bylaws provide for a
classified board, consisting of three classes
with three directors in each class.
</TABLE>
INDEMNIFICATION AND LIMITATION OF LIABILITY
Arizona and Delaware have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with certain exceptions, a corporation to adopt a
provision in its articles of incorporation or certificate of incorporation, as
the case may be, eliminating the liability of a director to the corporation or
its stockholders for monetary damages for breach of the director's fiduciary
duty. There are nonetheless certain differences between the laws of the two
states respecting indemnification and limitation of liability.
<TABLE>
<CAPTION>
Arizona Delaware
<S> <C>
The Articles of Incorporation of Futech The Certificate of Incorporation of New Futech
eliminate the liability of officers, directors, also eliminates the liability of directors to
employees and other agents to the corporation to the corporation or its stockholders for monetary
the fullest extent permissible under Arizona damages for breach of fiduciary duty as a
law. Arizona law does not permit the elimination director to the fullest extent permissible under
of monetary liability where such liability is Delaware law. Under Delaware law, such provision
based on: may not eliminate or limit director monetary
liability for:
- - financial benefit received by a director to
which the director is not entitled, - breaches of the director's duty of loyalty to
the corporation or its stockholders,
- - intentional infliction of harm on the
corporation or the stockholders, - acts or omissions not in good faith or
involving intentional misconduct or knowing
- - conduct not in good faith and the individual violations of law,
did not reasonably believe, in the case of
conduct in an official capacity with the - the payment of unlawful dividends or unlawful
corporation, acts or omissions not in the best stock repurchases or redemptions, or
interest of the corporation, and in all other
cases acts or omissions contrary to the best - transactions in which the director received an
interests of the corporation, improper personal benefit.
- - intentional violation of criminal law,
- - liability for improper distributions, loans or
guarantees.
</TABLE>
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<PAGE> 403
<TABLE>
<CAPTION>
Arizona Delaware
<S> <C>
Arizona law generally permits Such limitation of liability provisions also may
indemnification of director expenses, not limit a director's liability for violation
including attorney's fees, reasonably related of or otherwise relieve directors from the
to the defense or settlement of a derivative necessity of complying with federal or state
or third-party action, provided there is a securities laws, or affect the availability of
determination by a majority vote of a non-monetary remedies such as injunctive relief
disinterested quorum of the directors, by or rescission.
independent legal counsel or by a majority
vote of the stockholders that the person Delaware law generally permits indemnification
seeking indemnification acted in good faith of expenses, including attorney's fees, actually
and in a manner reasonably believed to be in and reasonably incurred in the defense or
the best interests of the corporation. Arizona settlement of a derivative or third-party
law requires indemnification of director action, provided there is a determination by a
expenses when the individual being indemnified majority vote of disinterested directors, by
has successfully defended any action, claim, independent legal counsel or by a majority vote
issue or on the merits or otherwise. of the stockholders that the person seeking
indemnification acted in good faith and in a
manner reasonably believed to be in or not
opposed to the best interest of the corporation.
Delaware law requires indemnification, of
expenses when the individual being indemnified
has successfully, defended any action, claim,
issue, or matter therein, on the merits or
otherwise.
Delaware law also permits a Delaware corporation
to provide indemnification in excess of that
provided by statute.
A provision of Delaware law states that the
indemnification provided by statute shall not be
deemed exclusive of any other rights under any
bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
</TABLE>
Both Arizona and Delaware law requires indemnification when the individual
has defended successfully the action on the merits or otherwise.
Expenses incurred by an officer or director in defending an action may be
paid in advance, under Arizona law and Delaware law, if such director or officer
undertakes to repay such amounts and if it is ultimately determined that he or
she is not entitled to indemnification. In addition, the laws of both states
authorize a corporation's purchase of indemnity insurance for the benefit of its
officers, directors, employees and agents whether or not the corporation would
have the power to indemnify against the liability covered by the policy.
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<PAGE> 404
INSPECTION OF SHAREHOLDER LIST
Arizona law allows any stockholder (1) who has been a holder of record of
shares or of a voting trust beneficial interest for at least six months, or (2)
will be the holder of record of shares or the holder of record of voting trust
beneficial interest for at least 5% of all of the outstanding shares of a
corporation to inspect the stockholder list, if the stockholder makes a demand
in good faith and for a proper purpose and the records requested are directly
connected with the stockholder's purpose. Delaware law allows any stockholder to
inspect the stockholder list for a purpose reasonably related to such person's
interests as a stockholder. Both Arizona and Delaware law require the
stockholder to give the corporation written notice of its demand prior to
inspection of the stockholder list.
DIVIDENDS AND REPURCHASES OF SHARES
<TABLE>
<CAPTION>
Arizona Delaware
<S> <C>
Arizona law provides that dividends may be Delaware law permits a corporation to declare
declared and paid in cash or property only out and pay dividends out of surplus or if there is
of the unreserved and unrestricted earned no surplus, out of net profits for the fiscal
surplus of the corporation or out of the year as long as the amount of capital of the
unreserved and unrestricted net earnings of the corporation following the declaration and
current fiscal year and the next preceding payment of the dividend is not less than the
fiscal year taken as a single period. Arizona aggregate amount of the capital represented by
law permits a corporation to declare and pay the issued and outstanding stock of all classes
dividends unless it would be contrary to the having preference upon the distribution of
articles of incorporation or after giving it assets. In addition, Delaware law generally
effect: provides that a corporation may redeem or
repurchase its shares only if the capital of the
- - the corporation would not be able to pay its corporation is not impaired and such redemption
debts as they become due in the usual course or repurchase would not impair the capital of
of business, or the corporation.
- - the corporation's total assets would be less
than the sum of its total liabilities plus
(unless the articles of incorporation permit
otherwise) the amount that would be needed, if
the corporation were to be dissolved at the
time of the distribution, to satisfy the
preferential rights upon dissolution of
stockholders whose preferential rights are
superior to those receiving the distribution.
</TABLE>
STOCKHOLDER VOTING
<TABLE>
<CAPTION>
Arizona Delaware
<S> <C>
Arizona generally requires that a majority Delaware law generally requires that a majority
of the stockholders of both acquiring and target of the stockholders of both acquiring and target
corporations approve statutory mergers. corporations approve statutory mergers.
Does not require a stockholder vote of Does not require a stockholder vote of
</TABLE>
18
<PAGE> 405
<TABLE>
<CAPTION>
Arizona Delaware
<S> <C>
the surviving corporation in a merger if: the surviving corporation in a merger (unless
the corporation provides otherwise in its
- - the merger agreement does not amend the certificate of incorporation) if:
existing articles of incorporation,
- the merger agreement does not amend the
- - each stockholder of the surviving corpo- existing certificate of incorporation,
ration whose shares were outstanding
immediately before the merger will hold the - each share of the stock of the surviving
same number of shares, with identical corporation outstanding immediately before the
designations, preferences, limitations and effective date of the merger is to be
relative rights immediately after the merger, identical outstanding or treasury share of the
surviving corporation after the merger, and
- - the number of voting shares outstanding
immediately after the merger, plus the number - either no shares of common stock of the
of voting shares issuable as a result of the surviving corporation and no shares,
merger or by the exercise of rights and securities or obligations convertible into
warrants issued pursuant to the merger, will such stock are to be issued or delivered under
not exceed by more than 20% the total number the plan of merger, or the authorized unissued
of shares of the surviving corporation shares or the treasury shares of common stock
outstanding immediately before the merger, and of the surviving corporation to be issued or
delivered under the plan of merger plus those
- - the number of participating shares (shares initially issuable upon conversion of any
that entitle their holders to participate other shares, securities or obligations to be
without limitation on distributions) issued or delivered under such plan do not
outstanding immediately after the merger, plus exceed 20% of the shares of common stock of
the number of participating shares issuable as the surviving corporation outstanding
a result of the merger either by the immediately prior to the effective date of the
conversion of securities issued pursuant to merger.
the merger or by the exercise of rights and
warrants issued pursuant to the merger, will
not exceed by more than 20% the total number
of participating shares outstanding
immediately before the merger.
</TABLE>
Both Arizona and Delaware law require that a sale of all or substantially
all of the assets of a corporation be approved by a majority of the outstanding
voting shares of the corporation transferring such assets.
Both Arizona and Delaware law generally do not require class voting, except
in certain transactions involving an amendment to the Certificate of
Incorporation that adversely affects a specific class of shares or where the
class of securities designates such a right.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS UNDER DELAWARE LAW
In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a corporation, and one or more of its significant stockholders, more
difficult. Under sec. 203 of the Delaware General Corporation Law, certain
"business combinations" with "interested
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<PAGE> 406
stockholders" of Delaware corporations are subject to a three-year moratorium
unless specified conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or entity who or which owns,
individually or with or through certain other persons or entities, 15% or more
of the corporation's outstanding voting stock (including any rights to acquire
stock pursuant to an option, warrant, agreement, arrangement or understanding,
or upon the exercise of conversion or exchange rights, and stock with respect to
which the person has voting rights only), or is an affiliate or associate of the
corporation and was the owner, individually or with or through certain other
persons or entities, of 15% or more of such voting stock at any time within the
pervious three years, or is an affiliate or associate of any of the foregoing.
For purposes of sec. 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or a direct
or indirect majority-owned subsidiary equal in aggregate market value of 10% or
more of the aggregate market value of either the corporation's consolidated
assets or all of its outstanding stock; the issuance of transfer by the
corporation or a direct or indirect majority-owned subsidiary of stock of the
corporation or such subsidiary to the interested stockholder (except for certain
transfers in a conversion or exchange or a pro rata distribution or certain
other transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock or of the corporation's voting stock); or receipt by the
interested stockholder (except proportionately as a stockholder), directly or
indirectly, of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by sec. 203 does
not apply if:
- prior to the date on which such stockholder becomes an interested
stockholder the board of directors approves either the business
combination or the transaction that resulted in the person or entity
becoming an interested stockholder,
- upon consummation of the transaction that made him or her an interested
stockholder, the interested stockholder owns at least 85% of the
corporation's voting stock outstanding at the time the transaction
commenced (excluding from the eighty-five percent calculation shares
owned by directors who are also officers of the target corporation and
shares held by employee stock plans that do not give employee
participants the right to decide confidentiality whether to accept a
tender or exchange offer), or
- on or after the date such person or entity becomes an interested
stockholder, the board approves the business combination and it is also
approved at a stockholder meeting by sixty-six and two-thirds percent of
the outstanding voting stock not owned by the interested stockholder.
20
<PAGE> 407
Section 203 only applies to certain publicly held corporations that have a
class of voting stock that is:
- listed on a national securities exchange,
- quoted on an interdealer quotation system of a registered national
securities association, or
- held of record by more than 2,000 stockholders.
Under certain circumstances, sec. 203 of the DGCL may made it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three-year period.
There is no provision in the AZBCA equivalent to sec. 203 of the DGCL.
INTERESTED DIRECTOR TRANSACTIONS
Under both Arizona and Delaware law, certain contracts or transactions in
which one or more of a corporation's directors has an interest are not void or
voidable because of such interest provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the conditions are
similar under Arizona and Delaware law. Under Arizona and Delaware law, (a)
either the stockholders or the board of directors must approve any such contract
or transaction after full disclosure of the material facts, and, in the case of
board approval, the contract or transaction must also be "fair" to the
corporation, or (b) the contract or transaction must have been fair as to the
corporation at the time it was approved. If board approval is sought, the
contract or transaction must be approved by a majority vote of a quorum of the
directors, without counting the vote of any interested directors. Delaware law
allows interested directors to be counted for purposes of establishing a quorum,
but Arizona law does not.
APPRAISAL/DISSENTERS' RIGHTS
Under both Arizona and Delaware law, a stockholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal/dissenters' rights by which such
stockholder may receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she would otherwise receive in the
transactions. Under both Arizona and Delaware law, such fair market value is
determined exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation.
<TABLE>
<CAPTION>
Arizona Delaware
<S> <C>
Dissenters' rights are not available (a) Appraisal rights are not available (a) with
with respect to the sale of all or substantially respect to the sale of all or substantially all
all of the assets of the corporation or a merger of the assets of a corporation, (b) with respect
if no vote of the stockholders is required to to a merger or consolidation by a corporation
approve the transaction under Arizona law, (b) the shares of which are either listed on a
to stockholders of shares of any class or series national securities exchange, designated as a
if the shares of the class or series are national market system security on an
redeemable securities issued by a registered interdealer quotation system by the National
investment company as defined pursuant to the Association of Securities Dealers, Inc. or are
Investment Company Act held of record by more than
</TABLE>
21
<PAGE> 408
<TABLE>
<CAPTION>
Arizona Delaware
<S> <C>
of 1940 (15 United States Code sec. 80a-1 2,000 holders if such stockholders receive only
through 80a-64), or (c) to stockholders of shares of the surviving corporation or shares of
shares which either were listed on a national any other corporation that are either listed on
securities exchange or on the national market a national securities exchange, designated as a
system of the National Association of Securities national market system security on an
Dealers Automated System or were held of record interdealer quotation system by the National
by more than 2,000 holders on the date fixed to Association of Securities Dealers, Inc. or held
determine the stockholders entitled to vote on of record by more than 2,000 holders, plus cash
the proposed corporate action. in lieu of fractional shares of such corpora-
tions, or (c) to stockholders of a corporation
surviving a merger if no vote of the
stockholders of the surviving corporation is
required to approve the merger under Delaware
law.
</TABLE>
22
<PAGE> 409
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with Futech's
audited consolidated financial statements for the two years ended December 31,
1998 and December 31, 1997, and the unaudited financial statements for the
quarters ended March 31, 1999 and March 31, 1998 and notes thereto appearing
elsewhere in the prospectus/proxy statement supplement.
OVERVIEW
Incorporated in 1990, Futech Interactive Products, Inc. ("Futech" or the
"Company") designs, publishes, hires subcontractors to manufacture and markets
interactive, educational, promotional and entertainment products (i.e. books,
game boards, and specialty post cards) targeted primarily towards children.
Additionally, the Company licensed its technology to other companies,
manufacturers (through third parties) foam-based post cards, and distributes
third party books from major book publishers. These products are sold through
all channels of retail sales, including warehouse clubs, national book chains,
specialty and independent retailers, major toy chains, direct marketing
catalogs, and the internet.
The Company owns patented technology which utilizes specialized conductive
ink to print interactive touch points in books, games, and other print media.
These touch point trigger speech, music and sound effects. The Company uses
subcontractors to produce its own propriety products using this technology
Additionally, the Company distributes other proprietary products, as well as
books of third party publishers.
In March 1998, Futech purchased substantially all of the assets of Gick, a
manufacturer of foam-based post cards, stationary, specialty crafts and hobby
items. Shortly after the purchase, the Company disposed of the specialty crafts
and hobby portions of the business.
In May 1998, Futech purchased substantially all of the assets of XYZ Group,
Inc. ("XYZ"), a distributor of children's books and related products.
In December 1998, Futech purchased a majority interest in the stock of
Janex, a designer, developer and manufacturer (through subcontractors) of
practical toy products.
RESULTS OF OPERATIONS OF THE COMPANY
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
Total revenue for three months ended March 31, 1999, was $2,518,276, as
compared to $2,000,000 for the three months ended March 31,1998. Historically,
Futech has been a research and development company, working to refine and
improve patented technology. For 1998 there were no sales of products utilizing
this technology. Sales of proprietary product in the first three months ended
March 31, 1999 amounted to $56,872. This was our first run of the Talking Pages
series that was delivered in March. The increase in total revenue is due
primarily to the Company's acquisitions. The acquisition of XYZ resulted in
sales of $1,961,393. The acquisition of Gick resulted in sales of foam-based
post cards of $277,665. The acquisition of Janex resulted in sales of toy
products of $222,346. The revenue for the 1st quarter of 1998 was from a
technology fee of $2,000,000 that was earned as a result of the termination of a
joint venture agreement. This was a one-time fee and there were no similar
revenues in 1999.
23
<PAGE> 410
Gross profit for the three months ended March 31, 1999, was $447,300 or
17.8% of revenue, as compared to $2,000,000 or 100% of revenue for the three
months ended March 31, 1998. The decrease is entirely due to a technology fee
that had no cost of goods attached to it while the current year's sales are
related to product sales. The cost of goods percentage should improve as the
percentage of proprietary product to total sales increases.
Selling, general and administrative expenses (SG&A) for the three months
ended March 31, 1999, were $1,911,630 or 75.9% of revenue, as compared to
$566,226 or 28.3% for the three months ended March 31, 1998. The increase in
SG&A is due primarily to the acquisitions made. Salaries and wages increased by
$567,466 as the result of an increase in the number of employees. Shipping and
freight increased by $204,188 due to the increased costs of the distribution
center and sales from an initial production run from Hong Kong. Rent and related
overhead expense increased $141,894 due to the facilities acquired in the
acquisitions.
Depreciation and amortization of intangibles for the three months ended
March 31, 1999, were $520,767 or 20.8% of revenue, as compared to $107,551 or
5.4% for the three months ended March 31,1998. The increase in depreciation and
amortization of intangibles is due primarily to the acquisitions made. All of
the acquisitions were accounted for using the purchase method. As a result,
there was a significant increase of property and equipment as well as intangible
assets, such as goodwill that resulted in a corresponding increase in
depreciation and amortization.
Loan origination fees and related amortization expenses for the three
months ended March 31, 1999, were $154,787 or 6.1% of revenue, as compared to $0
(zero) for the three months ended March 31, 1998. The increase in loan fees is
primarily due to the amortization of loans fees from notes originating in the
fourth quarter of 1998.
Interest expense for the three months ended March 31, 1999, were $676,732
or 26.9% of revenue, as compared to $109,385 or 5.5% for the three months ended
March 31, 1998. The increase in interest expense is due to the increase in debt
incurred by the Company to fund the acquisitions made and to finance operations.
The following two tables set forth, for the periods indicated, the actual
dollars and relative percentage that certain income and expense items bear to
net sales.
24
<PAGE> 411
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue................ $ -- $ 8,032,910 $2,000,000 $2,518,276
Cost of sales................ -- 4,295,578 2,070,976
------------ ----------- ---------- ----------
Gross profit................. -- 3,737,332 2,000,000 447,300
Selling, general and
administrative expenses.... 3,563,905 5,869,146 566,226 1,911,630
Research and development..... 6,732,875 229,480 76,831
Depreciation and
amortization............... 55,491 1,343,197 107,551 520,767
Loss on Joint Venture........ 1,393,778 --
------------ ----------- ---------- ----------
Operating Income (loss)...... (11,746,049) (3,704,491) 1,249,392 1,985,097
Other expense (net).......... (2,681,134) (2,089,768) 102,937 731,124
------------ ----------- ---------- ----------
Net Income (loss)............ $(14,427,183) $(5,794,259) $1,146,455 $2,716,221
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997* 1998 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue................. N/A 100.0% 100.0% 100.0%
Cost of sales................. N/A 53.5 0.0 82.2
--- ----- ----- ------
Gross profit.................. N/A 46.5 100.0 17.8
Selling, general and
administrative expenses..... N/A 73.1 28.3 75.9
Research and development...... N/A 2.8 3.8 0.0
Depreciation and
amortization................ N/A 16.7 5.4 20.8
Loss on Joint Venture......... N/A 0.0 0.0 0.0
--- ----- ----- ------
Operating Income (loss)....... N/A (46.1) 62.5 (78.9)
Other expense (net)........... N/A (26.0) (5.1) (29.0)
--- ----- ----- ------
Net Income (loss)............. N/A (72.1) 57.3 (107.9)
</TABLE>
- -------------------------
* Percentages are not applicable because there were $-0- (zero) sales in 1997.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
Total revenue for the year ended December 31, 1998 was $8,032,910, as
compared to $0 (zero) for the year ended December 31, 1997. Historically, Futech
has been a research and development company, working to refine and improve
patented technology. For 1997 and 1998 there were no sales of products utilizing
this technology. The increase in total revenue is due primarily to the Company's
acquisitions during 1998. The acquisition of XYZ resulted in sales of
third-party books of $5,095,386. The acquisition of Gick resulted in sales of
foam-based post cards of $875,874. The acquisition of Janex, which occurred in
25
<PAGE> 412
December, resulted in sales of toy products of $61,650. In addition, a
technology fee of $2,000,000 was earned as a result of the termination of a
joint venture agreement.
Gross profit for the year ended December 31, 1998, was $3,737,332 or 46.5%
of revenue, as compared to $0 (zero) for the year ended December 31, 1997. The
increase is entirely due to the gross profit generated from the product lines
that have been acquired due to the acquisitions.
Selling, general and administrative ("SG&A") expenses for the year ended
December 31, 1998, were $5,869,146, or 73.1% of revenue, as compared to
$3,563,905 for the year ended December 31, 1997. The increase in SG&A is due
primarily to an increase of salaries and wages of $953,250, resulting from an
increase in the number of employees due to the acquisitions made. Rent and
related overhead expenses increased $329,975 due to the facilities acquired in
these acquisitions. Sales commissions increased $171,241 due to the additions of
product lines as a result of the acquisitions being made. Professional fees
increased $272,023 due to the need for legal and accounting services as a result
of the acquisitions made.
Research and development ("R&D") costs for the year ended December 31,
1998, were $229,480 or 2.8% of revenue, as compared to $6,732,875 for the year
ended December 31, 1997. The reduction of R&D costs was a result of having the
major portion of the R&D work completed in the year ended December 31, 1997 and
prior.
Depreciation and amortization of intangibles expenses for the year ended
December 31, 1998, was $1,343,197 or 16.7% of revenue, as compared to $55,491
for the year ended December 31, 1997. The increase in depreciation and
amortization of intangibles is due primarily to the acquisitions made. All of
the acquisitions were accounted for using the purchase method of accounting. As
a result, there was a significant increase of property and equipment as well as
intangible assets, such as goodwill, which resulted in a corresponding increase
in depreciation and amortization.
Loss on joint venture was $0 (zero) for the year ended December 31, 1998,
as compared to $1,393,778 for the year ended December 31, 1997. During 1997, the
Company expended $1,393,778 in support of a joint venture with Golden Books
Family Entertainment, Inc. The joint venture agreement was terminated in the
fourth quarter of 1997, so there were no related expenditures in 1998.
Loan origination fees and related amortization expense for the year ended
December 31, 1998 was $241,250 or 3.0% of revenue, as compared to $2,460,000 for
the year ended December 31, 1997. In 1998, the Company renegotiated its
agreements with individuals who provided financing, whereby the Company pays
loan origination fees with stock options in lieu of cash.
Interest expense for the year ended December 31, 1998, was $1,704,444 or
21.2% of revenue, as compared to $221,134 for the year ended December 31, 1997.
The increase in interest expense is due to the increase in debt incurred by the
Company to fund the acquisitions made and to finance operations.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Futech's business historically tends to generate greater revenues during
August through November when large retailers and wholesale clubs place orders
and make purchases for the Christmas selling season. Management anticipates the
average sales revenue for each of the months of August through November will be
twice as much as average sales revenue for other months of the year. The Company
plans for this occurrence
26
<PAGE> 413
each year by ordering greater volumes of inventory and hiring additional
temporary staff during the 3rd and 4th quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its existing lines of credit and projected cash
flows from operations will not be sufficient to fund projected order flow,
overhead, debt repayment and pending acquisitions for the fiscal year ended
December 31, 1999. The Company has experienced recurring losses from operations,
negative cash flows and decreases in working capital.
The Company's ultimate ability to continue as a going concern depends on:
(i) the market acceptance of its products, (ii) the Company generating operating
profits, (iii) its creation of sustainable positive cash flow, and (iv)
obtaining additional financial resources to provide near-term operating cash.
Management believes that there are several items that will allow the Company to
provide cash for continuing operations.
Cost cutting: After the acquisitions that were completed in 1998, Futech
closed the Gick facility and the Janex facility and laid off several employees.
These type of cost-cutting activities reduced expenses as well as reduced future
cash needs. The Company anticipates it will take other cost-cutting actions in
the future.
Expanded Markets: Management believes the combination of the companies in
this merger will allow the Company to sell its products into additional markets
of the acquired companies. Management expects this will have a positive affect
on sales of the Company.
Different Distribution Channels: The varied companies in this combination
utilize different distribution and selling methods. Futech's Management believes
this will increase the sales and subsequent cash flows from its proprietary
products.
New Products: The Company has begun to create new prototype products with
Management of the acquired companies. The new products, game boards and other
interactive products, utilize interactive technology. Management believes these
new products will produce a high level of excitement in the consumer market that
will increase the Company's sales and subsequent cash flow.
Secondary Public Offering: Management is considering a follow-on public
offering after the merger. Funds provided from this offering would be used to
pay down debt, and if excess funds are available, they would be used to expand
the Company's product lines or to acquire other companies that would help to
improve the Company's sales and cash flows.
Additional Loans: On May 21, 1999 we increased a line of credit with one
bank by $2,000,000. This increase was guaranteed personally by F. Keith
Withycombe, a director. The Company is also working with its other existing
lenders and selected shareholders to provide funds, as needed, to supplement
current cash-flow needs. On May 24, 1999 Futech retained Schroder & Co., Inc. to
act as its exclusive financial advisor to perform general investment banking
services. The agreement expires May 24, 2000, but may be terminated sooner, with
some provisions of the agreement surviving early termination.
Management believes these activities, if successful, will be sufficient to
support the Company's liquidity and capital needs for the next 12 months.
The Company's cash balance decreased by $2,699 to $184,044 at March 31,
1999, as compared to $186,743 at December 31, 1998. The Company's net working
capital increased by $2,803,835 from working capital deficit of $30,645,533 at
December 31, 1998
27
<PAGE> 414
to a working capital deficit of $27,841,698 at March 31, 1999 and the Company's
current ratio decreased to 0.21:1 at March 31, 1999 as compared to 0.19:1 at
December 31, 1998.
The Company had negative cash flow from operating activities of $3,250,201
for the three months ended March 31, 1999, as compared to a negative operating
cash flow in 1998 of $853,915. The negative cash flows are the results of
increased production and operations that have been acquired since last year.
During the three months ended March 31, 1999, the company purchased
property and equipment totaling $149,982. The company also incurred additions to
product development costs of $7,004. The company also invested $49,323 in the
joint venture, Gold Star Publishing, LLC. This compares to additions to property
and equipment $28,586 and an advance of $100,000 for an acquisition for the
three months ended March 31, 1998. The Company also purchased substantially all
of the net assets of Gick Publishing, Inc. during the first quarter of 1998 for
$2,056,910. Of this amount, $125,000 was expended in 1997.
The Company generated $3,453,811 from financing activities during the three
months ended March 31, 1999 compared to $3,150,150 during the same period in
1998. The company also increased the amount on two existing lines of credit for
a total of $3,609,344. There were also increased borrowings from the Company CEO
of $155,533.
For the year ended December 31, 1998, the Company had negative cash flow
from operating activities of $4,484,878, as compared to negative cash flow of
$4,672,682 for the year ended December 31, 1997. The decrease in negative cash
flow from operating activities is due primarily to a decrease in net operating
loss in 1998 and an increase in sales in 1998, resulting in collection of
accounts receivable. The increase in cash used in financing activities is
primarily due to cash used for acquisitions of companies.
The Company used $3,077,694 in investing activities for the year ended
December 31, 1998, compared to $377,921 in 1997. The cash generated from
financing activities came primarily from an increase in borrowings of
$9,388,601, offset by net disbursements of $1,644,987 to the CEO of the Company.
During 1997, the cash generated from financing activities came from an increase
in borrowings of $5,826,502, proceeds of $215,800 from the issuance of stock,
offset by net disbursements of $1,056,590 to the CEO of the Company.
The Company's capital commitments for 1999 include debt repayments, lease
commitments, development of new and existing product lines, upgrade or
replacement of the Company's computer system, the purchase of an internet web
server and continuing development of the Company's internet web site.
28
<PAGE> 415
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
<S> <C> <C>
Notes payable to shareholders, due December 15,
1999, interest from prime + 0.5 percent (8.25
percent at March 31, 1999) to 10 percent payable
at maturity....................................... $10,650,000 $10,000,000
$4.0 million line of credit with a bank, interest at
prime rate + 2.5 percent (10.25 percent at March
31, 1999) due monthly. $3.6 million is personally
guaranteed by the
Company's CEO..................................... 4,000,000 4,000,000
$7.0 million line of credit with a bank, interest at
prime + 2.5 percent (10.25 percent at March 31,
1999) due monthly, secured by inventory and
accounts receivable of XYZ, and guaranteed by the
former owner of XYZ............................... 3,456,446 2,945,532
$7.0 million line of credit with a bank, due
December 1, 2000, interest at prime + 1.0 percent
(8.75 percent at March 31, 1999) due monthly,
personally guaranteed by the Company's CEO and a
director/warrant holder........................... 2,450,000 6,545,000
Note payable to Newtech, past due(1)................ 1,000,000 1,000,000
Note payable to Golden Books, due June 1, 1999,
interest at prime plus 1 percent (8.75 percent at
March 31, 1999) payable at maturity(2)............ 1,000,000 1,000,000
Note payable for purchase of patent due June 1,
1999(3)........................................... 850,000 857,510
Note payable to former owner of XYZ, payable in cash
or stock.......................................... 6,867,334 6,867,334
Notes payable, due April 1999 to June 1999, interest
at 10 percent payable at maturity, convertible
into common stock at $0.50 per share(4)........... 363,148 41,091
Notes payable to shareholders in connection with the
acquisition of Janex.............................. 750,000 750,000
$400,000 line of credit with a bank, due July 1,
1999, interest at prime rate plus .25 percent
(8.00 percent at March 31, 1999) payable monthly,
collateralized by all assets of Janex and
personally guaranteed by two shareholders......... 257,000 257,000
Other............................................... 112,592 43,551
----------- -----------
31,756,520 34,307,018
Less current portion................................ 29,306,520 27,762,018
----------- -----------
Notes payable, noncurrent........................... $ 2,450,000 $ 6,545,000
=========== ===========
</TABLE>
Future maturities of notes payable are as follows at March 31, 1999:
<TABLE>
<S> <C>
1999.................................................. $29,306,520
2000.................................................. 2,450,000
-----------
$31,756,520
===========
</TABLE>
29
<PAGE> 416
- ---------------
(1) On May 31, 1999 this note including accrued interest was converted into
$50,000 cash, $200,000 note and 3,634,520.56 shares of Futech common stock.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
(2) This note was not paid on its due date. Futech is presently negotiating with
the note holder regarding payment under this note.
(3) This note was not paid on its due date. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
(4) The remaining $41,091 was due in June 1999. This payment was not made and
Futech is in discussions with the note holder to clear the matter.
The Company leases operating facilities and certain equipment under
noncancelable leases. Future minimum lease payments under these leases are
$612,078 for 1999, $485,106 for 2000, $247,418 for 2001 and $126,431 for 2002.
Over the next 12 months, the Company plans to spend approximately
$3,300,000 for the development of new products, as well as for the improvement
of existing products. Some of the products to be included in this program are
interactive books and games, interactive books with proprietary themes, and to
redesign and repackage existing product lines.
The Company is dedicated to having a strong internet presence for selling
its products as well as providing other services for customers who enjoy playing
interactive games via the internet or other media. The Company plans to spend
approximately $400,000 to purchase hardware and software that will allow it to
host its own internet web site at its facilities, as well as to hire three
additional employees to design and maintain the internet web site.
INFLATION
Management believes that inflation has not had a significant impact on
Futech's costs and profits during the past two years.
YEAR 2000
The Year 2000 presents potential concerns for business and consumer
computing. The consequences of this issue may include systems failures and
business process interruption. The Year 2000 issue affects Futech's internal
systems, including information technology (IT) and non-IT systems. Futech is
assessing the readiness of its systems for handling the Year 2000. Although the
assessment is still underway, management believes that all material systems will
be compliant by the Year 2000 and that the cost to address the issues is not
material. Nevertheless, Futech is creating contingency plans for certain
internal systems.
The Company has not instituted any procedures to obtain certification from
its major vendors or customers that their systems are Year 2000 compliant. Such
a survey would include vendors who provide systems related services, e.g.,
communications, banking, credit card processing, shipping, security, HVAC, etc.
along with third-party factories providing book and toy products. The cost of
such a survey, in both time and money, would be substantial. However, the
Company does not believe that the failure of any vendor or customer to be Year
2000 compliant will have a material impact on the Company.
30
<PAGE> 417
SAFE HARBOR DISCLOSURE: FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus/proxy statement supplement and the prospectus/proxy
statement contains or incorporates by reference forward-looking statements. The
factors identified under "SPECIAL RISK FACTORS AFFECTING FUTECH" in this
prospectus/proxy statement supplement and "RISK FACTORS" in the prospectus/proxy
statement are important factors (but not necessarily all important factors) that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, Futech.
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, Futech cautions
that, while such assumptions or bases are believed to be reasonable and are made
in good faith, assumed facts or bases almost always vary from actual results,
and the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, Futech, or its respective management, express an expectation or
belief as to future results, such expectation or belief is expressed in good
faith and believed to have a reasonable basis, but there can be no assurance
that the statement of expectation or belief will result or be achieved or
accomplished. The words "believe," "expect," and "anticipate" and similar
expressions identify forward-looking statements. The portions of this
prospectus/proxy statement supplement which contain forward-looking statements
often include cross-references to "Risk Factors." See also the information
contained under the sections entitled "Futech's Management's Discussion and
Analysis or Plan of Operation" included elsewhere herein.
31
<PAGE> 418
DESCRIPTION OF FUTECH'S BUSINESS
GENERAL: RECENT DEVELOPMENTS
Futech Interactive Products, Inc., formerly known as Futech Educational
Products, Inc., was incorporated in Arizona in 1990. The Company's principal
place of business is located at 2999 N. 44th Street, Suite 225, Phoenix, Arizona
85018-7247. The Company's telephone number is (602) 808-8765.
Futech, founded in 1988 by Stephen McTaggart, develops electronic "talking"
books that utilize specialized conductive ink on printed pages to convey sounds,
voices, and music. In late November 1992, Futech opened a manufacturing facility
and began manufacturing its own published books under the "TOUCH ME SOUND PAGES"
name. Futech closed this facility in 1996 and currently subcontracts with third
parties to manufacture its products.
Futech co-publishes and distributes traditional paperback books pursuant to
a co-publishing/distribution agreement with Magi Publications (see "LICENSING").
Futech licenses various book clubs, including Scholastic and Troll, to
distribute some of these paperback books.
Futech distributes both Magi books and its own electronic books on an
exclusive basis. On a non-exclusive basis, Futech also distributes paperback
books published and manufactured by various third parties.
In 1998, Futech entered into agreements to purchase the following three
companies or their assets to broaden product mix and improve distribution: Gick
Publishing, Inc., XYZ Distribution, and Janex International, Inc. Gick, a
California corporation, manufactures and distributes foam-based post cards, gift
tags, picture frames, specialty crafts and hobby items. XYZ, a Wisconsin
corporation, distributes children's books, adult books, audio books, activity
games and related educational products. Janex, a Colorado corporation, designs,
develops, and manufactures functional toy products for children, including tooth
brushes, coin banks, and Wet Pets.
Futech acquired the XYZ distribution facility in Wisconsin along with
Gick's distribution center on the West Coast. Futech closed the West Coast
distribution facility and consolidated the shipping, receiving and billing of
Gick's foam-based products into its Wisconsin distribution facility.
On February 1, 1999, Futech entered into a joint venture with renowned
author Joy Berry and her company, Responsible Kids, LLC, by purchasing 49% of
Gold Star Publishing, LLC, to develop and publish children's self-improvement
products. The purchase required Futech to contribute $500,000 in working capital
to Gold Star and guarantee payment of a $200,000 line of credit from Responsible
Kids, LLC.
Futech currently operates three facilities: corporate offices in Phoenix,
Arizona; sales office in Chicago, Illinois; and general sales, distribution and
operations facilities in Waukesha, Wisconsin (near Milwaukee). Little Tiger
Press and Gold Star Publishing titles are sold and distributed through the
Wisconsin facility.
BUSINESS
BOOKS, TOYS, AND INTERACTIVE PRODUCTS
Toys, games and interactive games encompass many product categories
including: conventional board games, electronic game boards, book and toy
packages. Futech has
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chosen to concentrate on certain formats such as interactive game boards,
interactive puzzles, interactive books, interactive learning devices, practical
toys and combination toy/game/book packages. This area of products has grown in
recent years due to parents' interest in combining entertainment with educating
their children. Futech expects to compete by designing products which provide
high quality play processes, interactive capabilities, educational experiences
and superior value to the consumer at competitive prices. As an example of
retail prices, the interactive game board products will be sold at retail for
$15 to $30. The Company believes this price point compares favorably with
similar electronic game and toy products which typically retail between $30 and
$100. All of the products will be sold to major mass market retailers, toy
stores and independent retailers in the United States and internationally.
TRADE PUBLISHING AND INTERACTIVE PUBLISHING
Trade Publishing
The trade publishing industry features hundreds of publishers releasing a
wide variety of consumer books into the market, including hard cover best
sellers, paperback best sellers, trade paperbacks, audio books, children's
books, computer books, religious books, gardening books, travel books, gift
books, novelty books, electronic books and others.
Interactive Publishing
The interactive product industry consists of books containing sound,
promotional publishing and specialty products. Books containing sound first
appeared on the market in the early 1980's in the form of a piano keyboard
attached to a hard cover book featuring easy-to-play, familiar children's songs.
These books were generally low-tech products featuring a one-sound chip and a
low-quality speaker. With the production of low cost microchips and
microprocessors from companies such as Winbond, Electronic Speech Systems and
Texas Instruments Inc., the cost for incorporating speech technology, sound
effects and music into products dropped dramatically in the mid-1980's. Sight &
Sound helped define the interactive product industry by introducing licensed and
unlicensed products, reducing the costs of production and developing new
technologies allowing more sounds per product. Sight & Sound was acquired by
Western Publishing Company in 1990 and Western rapidly expanded Sight & Sound's
existing interactive product lines from $20 million to $125 million in three
years. These new products utilize either an ESS chip or a Texas Instrument chip
and improved technology allows the story to be enhanced by an electronic sound
pad. In 1996, Western Publishing was acquired by Golden Books.
The SMART PAGES and EXTRA SMART PAGES formats produced by Golden Books use
the same technology as Futech's TALKING PAGES and TALKING PAGES PLUS. Each of
Futech's books contains up to 42 touch points or switches that are embedded in
the covers or pages of the books. When a touch point is pushed it triggers a
switch and the microchip delivers an audible message. This allows children to
touch a picture, object or word and have the book respond to or instruct them.
Depending on the format, the audible messages consist of speech, music or sound
effects. Golden's books will contain anywhere from 100 to 150 musical sounds,
voices, or sound effects, as well as hundreds of interactive play options.
Licensing
Futech has a co-publishing/distribution agreement with Magi Publications, a
United Kingdom publisher, and will license Magi to produce co-editions for the
European market. The Little Tiger Press co-publishing/distribution agreement
grants Futech the exclusive
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publishing and distribution rights in the United States, Mexico and Canadian
markets for Magi's titles. Magi currently has over 50 back list titles and 14
new front list titles for 1999. Magi will create new titles using United
States-based authors and illustrators and Futech will continue to import
co-editions from Magi's European operations.
Futech licenses certain United States paperback rights to various book
clubs such as Scholastic, Troll and Book-of-the-Month Club for United States
specialty distribution. When these companies purchase the paperback rights,
Futech provides them with films which allow them to produce their own low cost
paperback editions. These companies distribute the editions to schools
throughout the United States. They distribute flyers/order blanks directly to
children so the product can be ordered via mail order. They also participate in
school book fairs in which they set up book displays at schools for a one-week
period and sell directly to the students. A substantial advance in guarantee is
paid by these companies to Futech for the rights to produce these paperback
editions. These advances and guarantees are earned by Futech through a per-book
royalty agreement with these companies. Sales of these editions often average
100,000 copies or more.
On August 14, 1996, Futech entered into a joint venture with Golden Books,
the world's largest publisher of children's books. In January 1998, Futech
transformed its agreement with Golden into a five year, non-exclusive licensing
agreement and received a $2 million up front, non-refundable guarantee for the
non-exclusive use of the technology. Golden Books recently filed bankruptcy for
reorganization purposes.
In late 1997, due to the disappointing results from the Golden Books
relationship, Futech management re-evaluated their long-term licensing strategy
and decided to compliment the licensing of its technology with developing,
manufacturing and distributing its own proprietary products. To pursue this new
complimentary strategy, the Company entered into several acquisition and joint
venture agreements beginning in 1998 (see "DESCRIPTION OF NEW FUTECH'S
BUSINESS -- Recent Acquisitions" in the prospectus/proxy statement).
Toy Products
Toys, games and interactive games encompass many product categories
including: conventional board games, electronic game boards, book and toy
packages. Futech currently produces electronic books and has chosen to
concentrate on certain product development formats such as game boards,
interactive learning devices, and functional toys. A majority of the products
are sold at retail for $5 to $15, thereby creating impulse sales to consumers.
Companies producing educational toy products at similar price points include
Random House, Children's Books, Golden Books, Tiger Electronics and V-Tech.
Futech develops and manufactures through subcontractors a series of toy and
functional products for children through its Janex operating unit which are
distributed both in the United States and internationally. These products are
designed to be practical while offering high quality and superior value to the
consumer. Current Hercules and Looney Tunes licensed products include tooth
brushes and banks. Janex proprietary products include Wet Pets, which is a line
of pool and bathtub related play products. Sales of this product line in the
first four months of 1999 were less than 4% of revenues.
Specialty Products
Futech markets a three-dimensional, mailable foam card which can be
designed in any shape, including hearts and flowers, and can feature promotional
messages with up to one minute of speech music and sound effects. These foam
cards are sold in the form of
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stationery, greeting cards, gift tags, and picture frames. These products range
in price from $1 to $7. These products constituted approximately 9% of revenues
in the 1st quarter of 1999.
MARKETING, DISTRIBUTION AND CUSTOMERS
The distribution of the paperback books published by third parties on a
non-exclusive basis is a highly competitive business. The largest demand for
distribution services is from the warehouse club segment. This includes Sam's
Club, Costco and BJ's. The warehouse clubs have become a very popular channel
from which consumers purchase books. Of the $1 billion in books sales by
warehouse clubs, $600 million are purchased directly from publishers. The
distribution market to warehouse clubs is currently controlled by two
distributors and is highly competitive. See "COMPETITION."
Futech sells its interactive products by marketing them through different
distribution channels including mass market retailers, warehouse clubs, regional
discounters, major book chains, drug chains, supermarkets and other retail
outlets throughout the United States. Futech distributes its proprietary product
lines to warehouse clubs, major retail outlets, regional discounters, national
book chains, drug store chains and supermarket chains.
Futech distributes over 150 foam-based post cards to approximately 3,900
stores, including 2,500 independent, specialty retailers and to chains. The post
cards are currently being tested and an expanded test is expected soon. The post
cards are marketed under the Better Than A Letter and Kinda Like A Card brand
names.
Currently, Futech has an assortment of wholesale catalogs to describe and
market existing products. Two options are available to consumers to facilitate
direct retail purchases. The first, a retail mail-order sales catalog, is
distributed by direct mail. Futech also has an Internet-based website,
www.futechinteractive.com, which was activated in April of 1999. Consumers can
order from a selection of hundreds of products, order replacement batteries,
play interactive online games and learn general information about the Company.
The website also provides email links to key personnel, current press releases,
a map of Futech locations, catalog order forms, listings of current Futech job
opportunities, and an interactive environment that makes visiting fun. Previous
online customers can conveniently return and track their orders directly from
the web site. Customer contact forms are also available to provide easy
communication with Futech representatives. Futech received its first order on
this site on May 20, 1999.
With the acquisition of XYZ on May 1, 1998, Futech now has a fully
operational distribution center centrally located in the Midwest to service its
U.S. and Canadian accounts. Futech currently distributes third-party publishers'
books on a non-exclusive basis domestically and proprietary and exclusive
product lines, including the electronic books, foam-core specialty products, and
the Little Tiger Press and Gold Star Publishing paperback books, domestically
and internationally.
Futech's distribution facility is well equipped and utilizes EDI
(electronic data interface or "EDI") to receive orders from its major customers.
EDI allows for instantaneous downloading and tracking of orders and paperless
invoicing. This means that orders are received the same day they are placed and
can be processed rapidly. In addition, Futech has designed and implemented a
custom bar code-based inventory management and shipping system in its warehouse.
High speed packaging machines, labeling machines, conveyors and a computerized
rate shopper to allow for quick processing of customer
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orders. Most customers require customized services such as pre-ticketing of
merchandise, collating and shrink wrapping custom packages, direct store
shipment, prepaid freight and the ability to receive returns from thousands of
individual locations.
The same distribution facility utilizes a computerized rate shopper to
determine the most economical and fastest way to ship products to its customers.
This allows Futech to control its freight expense while providing exceptional
service.
For independent and specialty accounts, a special pick and pack system has
been developed that allows for one day processing of smaller orders. This system
utilizes thousands of individual bar-coded locations to track, pull and process
individual orders. This pick and pack area is conducive to packing small orders
for individual customers and can be expanded to service customers on a direct
basis from Futech's Internet based website catalog.
MANUFACTURING
Futech subcontracts with third parties to manufacture its electronic books,
including TALKING PAGES and TALKING PAGES PLUS, by sub-contracting with
manufacturing companies throughout Asia. Futech's specialty products, including
promotions and specialty post cards, are currently manufactured domestically.
The sound modules for the electronic specialty products are manufactured in
China.
PRODUCT DESIGN AND SELECTION
Futech continually refines and enhances existing technology as required to
utilize the technology in new products. The Company's corporate facility houses
a Macintosh supported Product Development Department, which is utilized in the
design and development of its interactive products. The Product Development
Department makes samples of Futech's books for marketing. A team of design
coordinating professionals takes products from inception to manufacturing by
troubleshooting with prototypes of the products and coordinating required
materials such as illustration, script writing, story writing, plastic mold
design, extensive technology development and sound development. The team also
acts as a support service to both overseas and U.S. manufacturers in the process
of manufacturing the Company's products.
The department also features an in-house web development team. This team is
responsible for bringing the Company's presence into the next millennium with a
fully interactive E-Commerce website. The site offers customers the capability
of sampling and purchasing products online as well as playing interactive games,
ordering accessories, and troubleshooting issues. This can all be done by
touring a virtual "fun house style" world at www.futechinteractive.com which
features creative animation, music and sound effects.
Futech also maintains a liaison with individual inventors and companies
involved in the development of related technologies that are sometimes utilized
to enhance and expand Futech's products.
COMPETITION
Futech operates in highly competitive markets. Some of Futech's competitors
are significantly larger than Futech and have substantially greater resources
available for developing and marketing their products. Futech believes that its
unique patented technology, which it licenses, distribution service capability
and manufacturing its own
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products will allow Futech to successfully compete against many of these larger
competitors.
TRADE PUBLISHING
Futech's competition in the trade publishing industry includes Bantam
Doubleday Dell, Simon & Schuster, McGraw-Hill Companies, Inc., Harcourt Brace &
Company, Harlequin Enterprises Ltd., Golden Books, Dove Entertainment, Inc.,
Random House, The Putnam Publishing Group, Penguin USA, Scholastic, Andrews &
McMeel, HarperCollins, Avon, Houghton Mifflin Company, William Morrow,
North-South Books and others.
Futech's co-publishing/distribution agreement with Little Tiger Press
allows Futech to compete in the Trade Publishing market with the importation of
quality books from the United Kingdom through Magi. Futech also intends to
distribute Little Tiger Press products in Canada and Little Tiger Press has
chosen a distinctive market segment by offering high quality children's books at
a value price.
Futech has also entered a joint venture (Gold Star Publishing, LLC) with
renowned author Joy Berry to develop, produce and distribute children's
self-improvement products (i.e. Earning an Allowance, Self Esteem, Discipline,
Handling Emergencies, etc.). During 1999, Gold Star is publishing more than 75
new books, kits, videos and board books which will be available during the 2nd
and 3rd quarters. Previously, Joy Berry has sold more than 80 million books
through various direct mail and book club catalogs. Through the joint venture,
Futech has exclusive distribution rights to all new Gold Star products plus
approximately 250 of Joy Berry's previously published titles.
SPECIALTY PRODUCTS
The specialty products market is very competitive, in particular, in the
greeting cards segment. However, Futech believes its foam-core post cards are
unique due to its patented technology that combines printed circuitry, speakers
and batteries within one compact package. Futech has begun to leverage its
proprietary technology within the greeting card segment via its "Musical Mail"
line introduced in late 1998. The Company plans to launch additional products in
1999 that continue to exploit its patent and address key consumer needs. There
are no significant competitors for this specialty product given Futech holds the
patent on the manufacturing process for these cards.
Futech is also actively participating in the re-emergence of scrap booking,
an industry devoted to producing arts and crafts for home assembled projects.
The Company's line of "Little Bits" and "Make a Memory" are positioned to take
advantage of this segment, defining pre-assembled kits for mass retail as a
strategic opportunity. The Specialty Products division uses a series of
independent representative sales companies to penetrate the large number of
small card and crafts shops, as well as individual retail chain stores.
DISTRIBUTION
Futech distributes paperback books on a non-exclusive basis to warehouse
clubs. The distribution market to warehouse clubs on a non-exclusive basis is
currently controlled by two distributors, Advanced Marketing Services and
Futech. AMS is the market leader in warehouse club distribution with 97.5% of
total sales, compared with 2.5% for Futech. In 1990, there were 10 warehouse
club chains in the country and eight distributors servicing those chains. Due to
a consolidation in the club marketplace through acquisitions and bankruptcies,
there are currently only three major discount warehouse chains, including
Costco, Sam's Club, and B.J.'s, and two major distributors of children's books
to those
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chains. Warehouse club chains require shipment to individual stores, the
pre-ticketing of merchandise and the ability of the distributor to manage their
inventories and promotions. Since purchasing XYZ, Futech has been competing by
diversifying into areas other than distributing third-party children's books.
Futech competes with AMS in a number of different product categories including
hard cover best sellers, soft cover best sellers, paperbacks, trade paperbacks,
computer books, cookbooks, gardening books, self-help books, inspirational
books, religious books and audio books.
PATENTS AND TRADEMARKS
The Company's proprietary technology relates to printed audible signals,
visual circuitry and associated electrical components such as switches,
batteries, speakers and liquid crystal displays (LCD). This technology is
applied to produce books and play boards that emit speech, music and sound
effects or other visual signals activated by pressing switches embedded in the
surface of the product. Upon pressing a designated point on the page or surface
of the produce a microchip is activated and a speech, music, or sound effect
response is emitted. In certain products light emitting diodes (LEDs) or LCDs
provide visual enhancement.
The Company relies heavily upon patent and trademark protection to maintain
its competitive position. The Company recognizes that patents are not totally
effective in prohibiting competitors from producing similar products that could
compete with those of the Company. For those products that it makes sense to
patent, the Company takes the steps necessary to do so. Prior to its
incorporation, Futech applied for its first patent in 1989. Since that time,
Futech has obtained 10 U.S. patents, two foreign patents, four pending U.S.
patent applications, and 13 pending foreign patent applications.
Futech owns six U.S. patents, two foreign patents (Australia and New
Zealand), and a number of pending U.S. and foreign patent applications covering
various embodiments of an interactive electronic book. Additionally, Futech owns
a U.S. patent for an interactive electronic game board, and several
corresponding pending foreign patent applications. Additionally, Futech owns a
U.S. patent covering a model race car track system, and several corresponding
pending foreign patent applications.
The electronic book, game board, and race car track patents and patent
applications cover a variety of notable features, such as a technique for
printing conductive ink to create electronic circuits for use in the products.
Such printing techniques may also be used to make electronic components such as
switches, batteries, speakers, and light emitting devices for use in the
circuits. Such components are used to produce interactive sounds and/or visual
images in response to user activation of switches embodied in the products.
Futech also owns a U.S. patent and several pending U.S. and foreign patent
applications covering foam-core based novelty articles that may include sound
producing and/or light emitting devices. The corresponding product line includes
foam-core based stationery, postcards, gift tags, and picture frames.
Additionally, Futech owns a U.S. patent covering a novelty flashlight having a
decorative deformable body that, when squeezed, activates the light.
In order to prevent the use of Futech's products and their names, Futech
has registered the following Trademarks/Trade Names for its electronic books and
foam-core based stationery, postcards, gift tags, and picture frames: ABC
Talking Book; ABC Talking Book Adventures; Adventures Through ABC Land; Bookee;
Bookie; Bookie Mark; Look, Listen & Learn Series; The ABC Talking Book, The
Talking Book Adventures; Better Than a Letter; and Talking Pages. Futech also
has 15 Trademark/Trade Name
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applications pending for its foam-core based stationery, postcards, gift tags,
picture frames, electronic books, and interactive electronic games.
GOVERNMENT REGULATIONS
The Company is subject to the provision of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Products Safety Act. Those
laws empower the Consumer Products Safety Commission to protect children from
hazardous products. The CPSC has the authority to exclude from the market,
articles which are found to be hazardous, and can require a manufacturer to
repurchase such products under certain circumstances. Any such determination by
the CPSC is subject to court review. Similar laws exist in some states and
cities in the United States and in many jurisdictions throughout the world. The
Company endeavors to comply with all applicable regulations through a program
for quality inspections and product testing. The Company maintains product
liability insurance in the amount of $2,000,000.
EMPLOYEES
As of March 31, 1999, Futech had 60 employees. None of the employees of
Futech is a member of a union. Futech closed its West Coast distribution center
on June 30, 1998 and consolidated its shipping, receiving and billing functions
to its Midwest distribution center and 30 Gick employees were terminated. The
remaining seven West Coast employees were terminated effective December 31,
1998, with their duties transferred to the Phoenix and Wisconsin operations.
PROPERTIES
Futech leases one facility in Phoenix, Arizona with 9,628 square feet of
office space. The lease expires February 1, 2003. Through its XYZ acquisition,
Futech has assumed the lease on a facility in Pewaukee, Wisconsin with
approximately 50,000 square feet of warehouse space and 8,000 square feet of
office space. The lease expires June 30, 2002. Through its Gick acquisition,
Futech leases a facility in Laguna Hills, California with 4,643 square feet of
office space. This space has been subleased to a third party. This lease expires
June 30, 2000. Futech believes the existing facilities are adequate for its
current requirements and that suitable additional or substitute space is readily
available if needed.
LEGAL PROCEEDINGS
Futech is currently involved in one material and three immaterial legal
proceedings as a defendant. Futech is the defendant in Premier Publishing, Inc.
v. Futech Interactive Products, Inc., which was initiated on December 22, 1998
in the Waukesha County Circuit Court of Wisconsin. Premier alleges Futech failed
to pay $94,227.94 for inventory, plus costs and attorneys' fees. Joe Billings, a
Director of Futech, owns a 33% interest in Premier. Futech was the defendant in
Gary Roy, a/k/a Joe, Billings v. Futech Interactive Products, Inc., which was
initiated on November 20, 1998 in Waukesha County Circuit court of Wisconsin.
Mr. Billings, a Director of Futech, alleges Futech wrongfully terminated his
employment and failed to perform according to the terms of the Agreement for
Purchase and Sale of Assets of XYZ. Mr. Billings claims damages resulting from
the wrongful termination equal approximately $1,150,000 plus costs and
attorneys' fees. This suit was dismissed pending arbitration. New Futech admits
it owes Mr. Billings certain other amounts in connection with the acquisition.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." Futech is also pursuing a
proceeding against Creative Beginnings relating to nonpayment of obligations.
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FUTECH MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Futech and their positions at May
1, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Vincent W. Goett..................... 35 Chairman of the Board, Chief Executive
Officer, President and Director
Joseph K. Petter..................... 56 Chief Operating Officer
Frederick B. Gretsch, Sr............. 53 Chief Financial Officer, Treasurer and
Secretary
Roderick L. Turner................... 66 Director
Gary A. Oman......................... 50 Director
Robert J. Rosepink................... 48 Director
Gary R. "Joe" Billings............... 42 Director
F. Keith Withycombe.................. 54 Director
</TABLE>
VINCENT W. GOETT Mr. Goett has served as Chairman and Chief Executive
Officer and Director of Futech since March 1995. He has served as Chairman of
the Board, Chief Executive Officer, President and Director of Janex since
December 11, 1998. Mr. Goett joined Futech as its Chief Operating Officer on
January 5, 1995. From August 1991 to January 1995, he owned and operated
Paradise International, an investment business engaged in acquisition and joint
venture activities. From September 1985 to August 1991, Mr. Goett was President
of Westplex, Inc. which effected major investments in commercial real estate. He
attended Arizona State University. Mr. Goett is the son-in-law of Roderick L.
Turner, a director of Futech, and brother-in-law of R. Bradford Turner, Vice
President, stationary/novelties of Futech.
JOSEPH K. PETTER Mr. Petter has served as Chief Operating Officer of the
Company since February 1997. He has served as Chief Operating Officer of Janex
since December 11, 1998. Mr. Petter joined Futech as Vice President of
Operations in March 1996. Prior to joining Futech, from July 1989 to December
1995, he was a Division Vice President of ADVO, Inc., a direct mail marketing
company. From 1970 to 1989, he was a Group or Senior Manager with several
different operating companies of the Dun & Bradstreet Corporation. Mr. Petter
completed the Executive Management Program from the University of Chicago and
received his B.S. in Industrial Engineering from the Illinois Institute of
Technology.
FREDERICK B. GRETSCH, SR. Mr. Gretsch has served as Chief Financial
Officer, Secretary and Treasurer of Futech since September 1997. He has been
Chief Financial Officer, Treasurer, Secretary and Director of Janex since
December 11, 1998. He has served in various financial and marketing positions
throughout his career. Prior to joining Futech, from May 1996 to December 1996,
he was Treasurer of Vail Resorts, Inc., a ski resort company, and from November
1995 to May 1996, Mr. Gretsch was Treasurer of Cable Systems International, a
copper wire and cable manufacturing company. From February 1992 to February
1995, he was Director of Treasury Operations at General Dynamics Corporation, a
defense contractor. From June 1975 to December 1991, he was Vice President at
Citicorp/Citibank, a major bank holding company. From October 1968 to June 1975,
Mr. Gretsch was Manager of Sales Accounting and Administrator of Financial
Analysis at RCA, a diversified corporation. Mr. Gretsch received his Masters
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degree in Business Administration from Columbia University and his B.A. in
Economics from Georgetown University.
RODERICK L. TURNER Mr. Turner has served as Director of Futech since July
1995. He retired as Senior Executive Vice President of Colgate Palmolive, Inc.
in 1992 with 30 years of service in various executive management positions
within Colgate. Since 1992, Mr. Turner has been engaged in entrepreneurial
interests along with the management of his personal investments. He is the
father-in-law of Mr. Goett, an officer and director of Futech, and father of R.
Bradford Turner. Mr. Turner received his BA in Business from Cornell University.
GARY A. OMAN Mr. Oman has served as a Director of Futech since January
1996. He has been a Vice President of Coldwell Banker Success Realty since 1991.
From 1973 to 1991, Mr. Oman was a real estate investment consultant and
entrepreneur. Prior to his business interests in real estate investments, Mr.
Oman was in the education profession. He attended Mankato State College where he
studied Educational Administration.
ROBERT J. ROSEPINK Mr. Rosepink has served as a Director of Futech since
January 1998. He has been a partner of Rosepink & Estes, a law firm specializing
in estate planning, probate and trust law since 1988. He was a partner at the
law firm of Snell & Wilmer in Phoenix, Arizona from 1985 to 1988 and an
associate and shareholder at the law firm of Fennemore, Craig, von Ammon, Udall
& Powers in Phoenix, Arizona from 1975 to 1985. Mr. Rosepink received his J.D.
degree, with honors, from George Washington University.
GARY R. "JOE" BILLINGS Mr. Billings has served as a Director of Futech
since January 1998. He also served as a consultant to Futech from August 1997 to
April 1998 and President of the Company from May to September 1998. Prior to
working with Futech, Mr. Billings founded and served as President of Premier
Publishing, Inc. beginning in October 1995 and founded and served as president
of XYZ Group, Inc. since August 1990. From June 1980 through July 1990, he was a
part owner, and Vice President of Sales and Marketing, for Sight & Sound, Inc.,
a music publisher and electronic book publisher. Mr. Billings received his
Bachelor of Arts degree in Accounting from the University of Wisconsin.
F. KEITH WITHYCOMBE Mr. Withycombe has served as a Director of Futech
since November, 1998. He was President and Chief Operating Officer of Evans
Withycombe Residential, Inc. from 1994 to 1996, and President of Evans
Withycombe, Inc. from 1981 to 1994. Mr. Withycombe received a B.S. in
Engineering from the United States Air Force Academy and a M.S. in Engineering
from Arizona State University.
EMPLOYMENT ARRANGEMENTS
Vincent W. Goett, the Chairman of the Board, President and Chief Executive
Officer of Futech, entered into an employment agreement with Futech dated
December 31, 1997. Under the agreement, Mr. Goett is entitled to an annual base
salary of not less than $200,000 in the first year of the agreement and $350,000
in subsequent years of the agreement, plus a bonus at Futech's discretion. In
addition, Futech agreed to grant Mr. Goett options to purchase 7 million shares
of Futech's Common Stock at an exercise price of $0.10 per share, which options
are exercisable as follows: 2 million on December 31, 1998; 2 million on
December 31, 1999; 1 million on December 31, 2000; 1 million on December 31,
2001; and the remaining 1 million on December 31, 2002. The agreement terminates
on December 31, 2002, unless earlier terminated, and is renewable
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for additional one-year periods. During 1999 Futech granted Mr. Goett 17 million
options to purchase common stock at an exercise price of $.05 per share,
expiring in 2009.
Joseph K. Petter, Chief Operating Officer of Futech, entered into an
employment agreement with Futech dated February 1, 1997. Under the agreement,
Mr. Petter will receive $125,000 per year for the first year and $175,000 for
the second through fifth years of employment. By verbal agreement Mr. Petter and
the company have changed Mr. Petters annual salary to $125,000 for 1999. The
agreement terminates in January 2002. Mr. Petter also entered into a
confidentiality agreement with Futech dated March 4, 1996.
Frederick B. Gretsch, Sr., Chief Financial Officer, Secretary and Treasurer
of Futech, entered into an employment agreement with Futech dated September 2,
1997. Under the agreement, he is entitled to an annual base salary of not less
than $125,000. The agreement terminates on December 31, 2000. Mr. Gretsch also
entered into a confidentiality agreement with Futech in connection with his
employment.
William E. Hermes, Executive Vice President -- Sales, entered into an
employment agreement with Futech dated April 1, 1999. Under the agreement, Mr.
Hermes is entitled to an annual salary of not less than $125,000. Additionally,
he received 2,500,000 preferred stock options exercisable at $.05 per share from
April 1, 1999 to March 1, 2009. Mr. Hermes also received 1,999,999 options for
common stock exercisable at $0.25 per share with one-third of the shares vesting
over three years on March 1, beginning in the year 2000. The agreement
terminates on April 1, 2002. Mr. Hermes also entered into a confidentiality
agreement with Futech in connection with his employment.
STOCK OPTION PLAN AND EXECUTIVE COMPENSATION MATTERS
1999 STOCK OPTION PLAN
The 1999 Stock Option Plan (the "1999 Plan") will be adopted by the Board
of Directors of Futech conditioned upon and subject to approval by Futech's
stockholders. A total of 1,000,000 shares of Common Stock will be reserved for
issuance under the 1999 Plan. The 1999 Plan will survive the merger.
Purposes
The purpose of the 1999 Plan is to attract and retain the best available
directors and employees of the Company or any parent or subsidiary or affiliate
of the Company which now exists or hereafter is organized or acquired by or
acquires the Company, as well as appropriate third parties who can provide
valuable services to the Company, to provide additional incentive to such
persons and to promote the success of the business of the Company.
Administration
The 1999 Plan is administered by the Board of Directors or a Committee of
the Board of Directors appointed by the Board and constituted so as to permit
the 1999 Plan to comply with Rule 16b-3. The administering body is referred to
herein as the "Committee." The Committee determines the persons to whom stock
options will be granted, the terms of such grants and the number of shares
subject to options. The 1999 Plan provides for the grant of options which
qualify as "Incentive Stock Options" (sometimes referred to herein as "ISOs")
under Section 422 of the Code and non-
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<PAGE> 429
statutory stock options which do not specifically qualify for favorable income
tax treatment under the Code (sometimes referred to herein as "NSOs").
Eligibility and Participation
Any employee of the Company or any of its subsidiaries is eligible to
receive options under the 1999 Plan. Non-employee directors are eligible to
receive only NSOs under the 1999 Plan while employee directors are eligible for
both ISOs and NSOs. In addition, any other individual whose participation the
Committee determines is in the best interests of the Company is eligible to
receive only NSOs under the 1999 Plan. The Committee has complete discretion to
determine which eligible individuals are to receive option grants. In general,
the only consideration received by the Company for the grant of an award will be
past services or the expectation of future services, or both. The 1999 Plan does
not confer on any participant in the 1999 Plan (a "Participant") any right with
respect to continued employment or other services to the Company and will not
interfere in any manner with the right of the Company to terminate a
Participant's employment or other services.
Stock Subject to the 1999 Plan
The aggregate number of shares which may be issued pursuant to the exercise
of options granted under the 1999 Plan is 1,000,000 shares of the Company's
Common Stock, subject to adjustments in certain circumstances, including
reorganizations, recapitalizations, stock splits, reverse stock splits, stock
dividends and the like. If any outstanding option grant under the 1999 Plan for
any reason expires or is terminated, the shares of Common Stock allocable to the
unexercised portion of the option grant shall again be available for options
under the 1999 Plan as if no options had been granted with respect to those
shares.
Limitations on Awards
No grants are required to be made during any calendar year. No ISO may be
exercised more than ten years from the date of grant (five years in the case of
a grant to a Participant owning more than 10% or more of the total combined
voting power of all classes of stock of the Company or any ISO Group member),
immediately after the date the Participant ceases to perform services for the
Company or any ISO Group member (for reasons other than death or disability),
one year after the date the Participant ceases to perform services for the
Company or any ISO Group member if cessation is due to death or disability, or
the date the Participant ceases to perform services for the Company or any ISO
Group member if cessation is for cause. No NSO may be exercised more than ten
years from the date of grant, one year after the date the Participant ceases to
perform services for the Company or any Affiliated Group member (for reasons
other than death, disability, retirement or cause), two years after the date the
Participant cease to perform services for the Company or any Affiliated Group
member if cessation is due to death, disability or retirement, or the date the
Participant ceases to perform services for the Company or any Affiliated Group
member if cessation is for cause.
Pricing and Payment of Options
The per share exercise price of each stock option granted under the 1999
Plan will be established by the Committee at the time of grant. Subject to the
provisions of the Internal Revenue Code of 1986, as amended, grants to
Participants may be either ISOs or NSOs. In the case of an ISO, the per share
exercise price may be no less than 100% of the fair market value of a share of
Common Stock on the date of grant (110% in the case of a Participant who owns,
directly or indirectly, 10% or more of the outstanding voting
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<PAGE> 430
power of all classes of stock of the Company). The per share exercise price of a
Non-qualified Stock Option may be any amount determined in good faith by the
Committee. With respect to ISOs, the aggregate fair market value of the Common
Stock for which one or more options granted to a Participant may become
exercisable during any one calendar year may not exceed $1,000,000. The fair
market value of the Common Stock equals the closing price on the date in
question on the principal exchange or other market on which the stock is then
traded.
Under the 1999 Plan, the purchase price of an option is payable upon
exercise: (i) in cash; (ii) by check; (iii) to the extent permitted by the
particular option grant, by transferring to the Company shares of Common Stock
of the Company at their fair market value as of the option exercise date
(provided that the Participant held the shares of stock for at least six
months); or (iv) through a sale and remittance procedure by which a Participant
delivers concurrent written instructions to a Company-designated brokerage firm
to sell immediately the purchased Common Stock and remit to the Company
sufficient funds to pay for the options exercised and by which the certificates
for the purchased Common Stock are delivered directly to the brokerage firm. The
Company may also extend and maintain, or arrange for the extension and
maintenance of, credit to a Participant to finance the purchase of shares
pursuant to the exercise of options, on such terms as may be approved by the
Board of Directors or the Committee, subject to applicable regulations of the
Federal Reserve Board and any other applicable laws or regulations in effect at
the time such credit is extended.
The Committee may require, as a condition to exercise of an option, that
the Participant pay to the Company, in cash or in shares of the Common Stock of
the Company, the entire amount of taxes which the Company is required to
withhold by reason of such exercise, in such amount as the Committee or the
Board of Directors may determine. Alternatively, the Participant may elect,
subject to rules adopted by the Committee or the Board of Directors, or the
Company may require that the Company withhold from the shares to be issued that
number of shares having a fair market value equal to the amount which the
Company is required to withhold.
Exercise
As described above, the Committee has the authority to determine the
vesting and exercise provisions of all grants under the 1999 Plan. In general
under the 1999 Plan, no option shall be exercisable during the lifetime of a
Participant by any person other than the Participant, his or her guardian or
legal representative.
Accelerating Events
The options granted under the 1999 Plan become fully exercisable if the
Company is dissolved or liquidated, subject to certain reorganizations, mergers,
or consolidations, is acquired or subject to a hostile takeover attempt,
undergoes a change in control or if there is an announcement or proxy
solicitation relating to such events.
Termination or Amendment of the 1999 Plan
The Board of Directors may amend or modify the 1999 Plan at any time;
provided, that shareholder approval shall be obtained for any action for which
shareholders approval is required in order to comply with Rule 16b-3, the Code,
or other applicable laws or regulatory requirements within such time periods
prescribed. The 1999 Plan will terminate on January 29, 2008, unless sooner
terminated by the Board of Directors.
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<PAGE> 431
Option Grants
No options have been granted under the 1999 Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Arizona Revised Statutes sec. 10-851 contains an extensive indemnification
provision which permits an Arizona corporation to indemnify any person who was,
or is threatened to be named defendant or respondent ("party") in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative ("proceeding") (other than (i) a
proceeding by or in the right of the corporation in which the director was held
liable to the corporation or (ii) in connection with a proceeding charging
improper personal benefit in which the director was held liable on the basis
that personal benefit was improperly received by the director) by reason of the
fact that such person is or was a director, or while serving as a director, is
or was serving at the corporation's request as a director, officer, partner,
trustee, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise ("director") against the
obligation to pay a judgment, settlement, penalty or fine, or reasonable
expenses with respect to a proceeding (including obligations and expenses that
have not yet been paid by such person but that have been or may be incurred)
("liability") if such person's conduct was in good faith and such person
reasonably believed that such conduct in an official capacity with the
corporation was in the corporation's best interest or, in all other cases, that
such conduct was at least not opposed to the corporation's best interest, and,
in the case of criminal proceedings, such person had no reasonable cause to
believe that the conduct was unlawful.
Arizona Revised Statutes sec. 10-852 requires an Arizona corporation
(unless limited by its articles of incorporation) to (i) indemnify a director
who was the prevailing party in the defense of a proceeding to which the
director was a party because the director is or was a director of the
corporation against reasonable expenses incurred by the director in connection
with the proceeding and (ii) indemnify a director who is not an officer,
employee or holder of more than 5% of the outstanding shares of any class of the
corporation's stock (an "outside director") against liability and to pay an
outside director's expenses in advance of a final disposition of a proceeding,
if the director furnishes the corporation with a written affirmation of the
director's good faith belief that the director met the standard of conduct
described in sec. 10-851 and an undertaking executed personally, or on the
director's behalf, to repay the advance if it is determined that the director
did not meet the standard of conduct. Arizona Revised Statutes sec. 10-853
permits an Arizona corporation to pay expenses incurred by any other director
who is a party to a proceeding in advance of final disposition of a proceeding
if the director furnishes the corporation the written affirmation and
undertaking described above and a determination is made by Futech's board who
are not parties to the proceeding, special legal counsel or shareholders that
the facts then known would not preclude indemnification.
Arizona Revised Statutes sec. 10-854 permits a court to order
indemnification of a director who is a party to a proceeding upon the director's
application for indemnification to the court even if the director has not met
the statutory requirements if the director is fairly and reasonably entitled to
indemnification in view of all of the relevant circumstances.
Arizona Revised Statutes sec. 10-856 entitles an officer who is not a
director to the mandatory and court-ordered indemnification provided by Arizona
law to directors. In addition, an officer who is not a director and employees
and agents of an Arizona
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<PAGE> 432
corporation may be indemnified to the same extent as directors and may be
further indemnified to the extent consistent with public policy.
Arizona Revised Statutes sec. 10-202 provides that a corporation in its
articles of incorporation may eliminate or limit personal liability of members
of its board of directors to the corporation or its shareholders for money
damages for any action taken or any failure to take any action as a director.
However, no such provision may eliminate or limit the liability of a director
for the amount of a financial benefit received by a director to which the
director is not entitled, an intentional infliction of harm on the corporation
or its shareholders, authorizing the unlawful distribution to shareholders, or
an intentional violation of criminal law. A provision of this type has no effect
on the availability of equitable remedies, such as injunction or rescission, for
an action or failure to take any action as a director. Futech's Articles of
Incorporation contain such a provision.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of Futech pursuant to
the foregoing provisions, or otherwise, Futech has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by Futech of expenses incurred or paid by a director, officer
or controlling person of Futech in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Futech will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
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<PAGE> 433
FUTECH STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of Futech's Common Stock as of the date of this prospectus/proxy
statement supplement with respect to (i) each person known by Futech to
beneficially own more than five percent of the outstanding shares of Futech's
common stock or preferred stock, (ii) each director of Futech, (iii) each of the
executive officers listed in the Summary Compensation Table in the
prospectus/proxy statement, and (iv) all directors and executive officers of
Futech as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO
MERGER(1)(2)
----------------------
IDENTITY OF STOCKHOLDER OR GROUP NUMBER PERCENT
- -------------------------------- ----------- -------
<S> <C> <C>
Vincent W. and Melissa Turner Goett(3)................... 77,862,263 52.2
Debra McTaggart(4)....................................... 12,622,375 13.9
R. Bradford Turner(5).................................... 6,282,695 6.9
Garry and Darilyne Goett(6).............................. 7,406,765 8.1
Roderick L. Turner(7).................................... 17,117,409 18.2
Gary A. Oman(8).......................................... 2,379,000 2.6
Robert J. Rosepink(9).................................... 6,500,000 6.7
Joseph K. Petter(10)..................................... 1,333,334 1.5
Gary R. "Joe" Billings(11)............................... 0 0.0
Frederick B. Gretsch, Sr.(12)............................ 1,166,668 1.3
F. Keith Withycombe(13).................................. 30,000,000 24.8
All Directors and Executive Officers as a Group (8
persons)............................................... 136,358,674 71.8
</TABLE>
- -------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") and generally includes voting
or investment power with respect to securities. In accordance with SEC
rules, shares which may be acquired upon exercise of stock options which
are currently exercisable or which become exercisable within 60 days of
the date of the table are deemed beneficially owned by the optionee.
Except as indicated by footnote, and subject to community property laws
where applicable, the persons or entities named in the table above have
sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.
(2) Includes shares issuable upon the exercise of options which are currently
exercisable or become exercisable within 60 days of May 1, 1999 as
applicable for each of the following individuals:
Vincent W. & Melissa Turner Goett
Roderick L. Turner
Robert J. Rosepink
Joseph K. Petter
Frederick B. Gretsch, Sr.
F. Keith Withycombe & Patricia A. Withycombe (H&W)
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<PAGE> 434
(3) 21,000,000 share options are currently exercisable by Vincent W. Goett,
9,950,000 options are currently exercisable jointly by Vincent and Melissa
Goett and 1,000,000 options as well as 26 million warrants are currently
exercisable by Palmilla Management Trust (Goett Family Trust). 2,148,011
shares are owned of record by Vincent Goett; 1,850,000 shares are owned of
record by Mr. Goett's spouse, Melissa Goett; 15,614,252 shares are owned
of record jointly by Vincent and Melissa Goett; and 300,000 are owned of
record by three minor children of the Goetts.
(4) 4,000,000 shares are owned of record by Newtech Consulting, Inc., which is
controlled by Stephen McTaggart; 5,502,375 shares are owned of record by
Mr. McTaggart's spouse, Debra McTaggart; 3,000,000 shares owned of record
by Pacific Ranch, LP, which is controlled by Debra McTaggart; and 120,000
shares are owned of record by the six minor children of the McTaggarts.
(5) R. Bradford Turner is the brother-in-law of Vincent W. Goett. He owns of
record 6,282,695 Futech shares.
(6) 5,788,227 shares are owned of record jointly by Garry Goett and his
spouse, Darilyne Goett, the parents of Vincent Goett; 36,000 shares are
owned by Garry Goett. 922,731.705 shares are owned of record by Metroplex
Properties, Inc. and 180,000 are owned by Metroplex Property, Inc.
Restated Money Purchase Pension Plan, which is controlled by Mr. Garry
Goett; 81,410.625 shares are owned of record by Olympic Management, Inc.,
which is controlled by Mr. Garry Goett; 398,395.295 shares are owned of
record by Olympic Properties, Inc., which is controlled by Mr. Garry
Goett.
(7) Roderick L. Turner is the father-in-law of Vincent W. Goett. 3,750,000
options are currently exercisable by Mr. Turner. Mr. Turner has also
converted two separate loans with Futech to shares yet-to-be received for
a total of 4,877,898.003 additional shares. 900,000 shares are in a family
trust controlled by Mr. Turner, 7,225,721 shares are owned individually,
and 1,363,790 shares are owned by Terry C. Turner, Mr. Turner's wife.
(8) Indicated shares are owned of record by The Oman Family Trust, of which
Gary Oman and his wife, Sherri Oman, are trustees.
(9) 500,000 shares are owned of record by Robert J. Rosepink. Mr. Rosepink
currently has 6,000,000 warrants that are exercisable.
(10) 300,000 shares are held in Joseph K. Petter's Individual Retirement
Account, and 200,000 shares are held by Mr. Petter individually. Mr.
Petter currently has 833,334 options that are exercisable.
(11) Mr. Gary R. "Joe" Billings is due 14,336,670 shares or cash of $2,867,334
for the sale of XYZ upon the merger being completed.
(12) Mr. Frederick B. Gretsch, Sr. currently has 1,166,668 options that are
exercisable.
(13) Mr. F. Keith Withycombe & Patricia A. Withycombe (H&W) currently have
30,000,000 warrants that are exercisable.
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<PAGE> 435
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 17, 1997, Futech entered into an Agreement for Purchase and Sale
of Assets with XYZ, pursuant to which Futech has purchased substantially all of
the assets of XYZ at the closing on May 1, 1998. Mr. Billings, a Director of
Futech, was the sole shareholder of XYZ. The agreement requires Futech to pay
the following consideration: (i) $1 million in cash; (ii) $4 million in a
12-month, no interest note; (iii) $2,867,334 in cash or in shares of common
stock at $.20 a share; and (iv) an additional $1,000,000 to be added to the
total amount, if the $4,000,000 is not paid by April 30, 1999. This additional
$1,000,000 is now due and both the $4,000,000 and the additional $1,000,000 bear
interest at 10%. Futech has paid the $1 million in cash. There is a dispute
about whether Futech had cause to terminate Mr. Billings under the related
employment agreement. As the sole shareholder of XYZ, a subchapter S
corporation, Mr. Billings received the cash and shares of common stock
constituting the purchase price for XYZ.
Pursuant to the Agreement for Purchase and Sale of Assets with XYZ, Futech
assumed a $7 million line of credit from Republic Acceptance Corporation made by
XYZ. The line of credit generally bears interest at prime plus 2.5%. Mr.
Billings personally guaranteed the loan. Additionally, the loan is secured with
the inventory and accounts receivable of XYZ.
On January 1, 1997, Futech entered an agreement which allows the chief
executive officer to borrow funds from time to time. The outstanding balance
bears interest at prime plus 1% and is due on December 31, 2001 on the amounts
outstanding. There is an option to renew the agreement for an additional 3
years. As of December 31, 1998 the balance due to the Company was $1,440,270.
In April 1997, Roderick L. Turner, a director and shareholder loaned Futech
$350,000, with interest at 10%, due July 2, 1999. In lieu of payment, Mr. Turner
could receive 840,000 common shares at $0.50 per share. On March 1, 1999, the
lender and Futech agreed to amend the loan agreement, whereby the loan plus
interest (totaling $417,083.33) was converted to 2,780,555.533 shares of common
stock at $0.15 per share. In connection with the original loan, Futech paid Mr.
Goett $35,000 and issued 1,000,000 shares of common stock as a loan origination
fee.
On October 29, 1997, Roderick L. Turner and Vincent W. Goett loaned Futech
$245,000, with interest at 10%, due December 31, 1997. This loan was repaid
January 14, 1998. In connection with this loan, Futech issued Mr. Goett 500,000
shares common stock as a loan origination fee.
On April 24 and September 2, 1997, Roderick L. Turner and Vincent W. Goett
loaned Futech $3,000,000, with interest at 10%, due in 1998 and 1999. In
connection with the loans, Futech paid Mr. Goett $300,000 and issued 7,000,000
shares of common stock as a loan origination fee.
On January 2, 1998, Roderick L. Turner and Vincent W. Goett loaned Futech
$2,500,000, with interest at 10% due April 30, 1998. In connection with this
loan, Futech paid Mr. Goett $250,000 and issued 2,500,000 shares of common stock
as a loan origination fee. Later in the year the loan fee and stock were
re-characterized as a loan and stock options.
On March 31, 1998, Vincent W. Goett personally guaranteed $3.6 million of a
$4 million line of credit newly established with Republic Bank. This loan
generally bears interest at a rate of prime plus 2.5% and is due and payable on
demand. In connection
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<PAGE> 436
with this guarantee, Futech paid Mr. Goett $360,000 and issued 7,200,000 shares
of common stock as a loan origination fee. Later in the year, the loan fee and
stock were re-characterized as a loan and stock options.
On May 5, 1998, Roderick L. Turner and Vincent W. Goett loaned Futech
$1,500,000 with interest at 10% due May 5, 2000. At the same time, Mr. Turner
and Mr. Goett signed a subordination agreement with Republic Bank to subordinate
all of their debt to Republic. In connection with the loan and the subordination
fee, Futech paid Mr. Goett $500,000 and issued 3,000,000 shares of common stock
as a loan origination fee. Later in the year, the loan fee and stock were
re-characterized as a loan and stock options.
On June 1, 1998, Futech entered a Patent Licensing and Purchase Agreement
with Grand Slam Investments, L.L.C., which is controlled by Vincent W. Goett.
Under the agreement, Grand Slam grants Futech exclusive, world-wide rights to
use two patents owned by Grand Slam. Under the agreement, Futech will make 12
monthly royalty payments of $10,000 beginning June 1, 1998. On June 30, 1999,
Futech will purchase the patents for $1,500,000. Alternatively, Futech had the
right to purchase the patents at an earlier date of December 30, 1998 for a
reduced cost of $1,000,000. This agreement was amended on December 9, 1998
whereby Futech agreed to pay $650,000 on December 9, 1998 and $850,000 on or
before June 1, 1999. Additionally, the monthly royalty payments of $10,000 were
suspended as of December 31, 1998. The $850,000 payment has not been made.
On June 24, 1998, Roderick L. Turner and Vincent W. Goett loaned Futech
$1,000,000, with interest at 10%, due December 24, 1998. In connection with the
loan, Futech paid Mr. Goett $100,000 and issued 2,000,000 shares of common stock
as a loan origination fee. Later in the year, the loan fee and stock were
re-characterized as a loan and stock options.
On August 3, 1998, Roderick L. Turner loaned Futech $300,000, with no
interest, due upon receipt of the $2,000,000 listed below. No repayment was made
and on March 1, 1999, the lender and Futech agreed to amend the loan agreement,
whereby interest was added to the loan at 10% per annum. Additionally, on March
1, 1999, the loan plus interest (totaling $314,604.37) was converted to
2,097,342.47 shares of common stock as $0.15 per share.
On August 10, 1998, Vincent W. and Melissa T. Goett loaned Futech
$2,000,000, with interest at 10%, due on September 1, 1999. In connection with
the loan, Futech paid Mr. Goett $200,000 and issued 8,000,000 shares of common
stock as a loan origination fee. Later in the year, the loan fee and stock were
re-characterized as a loan and stock options.
On December 3, 1998, F. Keith Withycombe, a director, Patricia A.
Withycombe, Vincent W. Goett and Melissa T. Goett personally guaranteed a $7
million line of credit newly established with Bank of America. This loan
generally bears interest at prime plus 1% and is due on December 1, 2000. In
return for their personal guarantees, Mr. Withycombe and Mr. Goett each received
warrants for 21,000,000 common stock shares exercisable at $0.05 per share. In
addition, Mr. Withycombe became a Director. As a finder's fee, Robert J.
Rosepink, a director, received warrants for 4,000,000 shares of common stock
exercisable at $0.05 per share. Additionally, as part of this agreement, Mr.
Goett may take a loan advance of $300,000.
On December 15, 1998, Roderick L. Turner and Vincent W. Goett agreed to
extend the due date of their combined $8,000,000 loans, and Vince and Melissa
Goett agreed to extend the due date of the $2,000,000 loan to December 15, 1999.
In connection with this
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<PAGE> 437
extension, Mr. Turner and the Goetts received options for a combined 8,000,000
shares of common stock exercisable at $0.05 per share.
On May 21, 1999, F. Keith Withycombe, a director, agreed to provide a
secured $2,000,000 line of credit to Futech. The line of credit is due on
December 1, 1999 and interest accrues at prime plus 1% per annum. Mr. Withycombe
agreed to subordinate this secured loan to the $7,000,000 loan to Futech from
Bank of America National Trust and Savings Association. As consideration for
this loan Futech agreed to issue warrants for 9,000,000 shares of Futech common
stock (300,000 in New Futech shares) exercisable at $0.05 per share ($1.50 per
share in New Futech shares). As consideration for facilitating this loan Futech
agreed to issue Robert J. Rosepink, a director, warrants for 2,000,000 shares of
Futech common stock (66,667 shares of New Futech common stock) exercisable at
$0.05 per share ($1.50 per share in New Futech Shares). Additionally, Vincent W.
Goett received warrants for 5,000,000 shares of Futech common stock (166,667
shares of New Futech common stock) exercisable at $0.05 per share in New Futech
shares).
On May 31, 1999 Futech Interactive Products and Newtech Consulting
(controlled by a 4.4% shareholder) agreed to convert outstanding debt, including
interest, totaling $1,158,630.14 into $50,000 cash, $200,000 note bearing
interest at 8% due by June 30, 1999, and 3,634,520.56 shares of Futech common
stock. Futech paid $50,000 on May 31. No other payments or stock issuances have
been made under this agreement.
Futech signed an agreement on March 31, 1999 with Trudy that, in the event
that merger did not occur by June 1, 1999, Futech would assist in providing the
working capital needs of Trudy, if needed, to maintain sales momentum until the
closing. The agreement also states that Futech will assure that Trudy is not in
default under any of the loan agreements, including its borrowings from First
Union.
WHERE CAN YOU FIND MORE INFORMATION
You may request a copy of these documents at no cost by writing to us at
the following address:
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
Attn: Frederick B. Gretsch, Sr.
Telephone: (602) 808-8765
You should rely only on the information provided in or incorporated by
reference (and not later changed) in the prospectus/proxy statement or any
prospectus/proxy statement supplement. We have not, and New Futech and New Sub
have not, authorized anyone else to provide you with additional or different
information. New Futech and New Sub are not making an offer of any securities in
any state where the offer is not permitted. You should not assume that the
information in the prospectus/proxy statement or any prospectus/proxy statement
supplement is accurate as of any date other than the date on the front of these
documents.
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JANEX INTERNATIONAL, INC.
C/O FUTECH INTERACTIVE PRODUCTS, INC.
2999 NORTH 44TH STREET
SUITE 225
PHOENIX, ARIZONA 85018-7247
-------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 1999
-------------------------
You are invited to attend a Special Meeting of Stockholders of Janex
International, Inc. that will be held at a.m. local time on
1999 at . The Janex board of directors has called this special meeting
for the following purposes:
- To consider and vote upon a proposal to approve and adopt the Merger
Agreement dated as of June 7, 1999, by and among Janex, Futech
Interactive Products, Inc., Trudy Corporation, Fundex Games, Ltd., DaMert
Company, and two newly formed companies that we are referring to as "New
Futech" and "New Sub." Under the Merger Agreement, first Futech and then
Janex, Trudy, and DaMert will merge with and into New Futech, which will
survive the merger, and Fundex will merge into New Sub, which will
survive as a wholly-owned subsidiary of New Futech. Each share of Janex
common stock outstanding immediately prior to the mergers (other than
dissenting shares) will be converted into the right to receive
approximately 0.0333 shares of New Futech common stock. The outstanding
preferred stock of Janex, all of which is owned by Futech, will be
cancelled in the mergers but has been valued on the same basis as the
Janex common stock.
- To transact such other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
These matters are more fully described in the prospectus/proxy statement
supplement and related prospectus/proxy statement that are attached to this
Notice.
We, the board of directors of Janex, unanimously recommend that you vote
FOR the mergers.
You will be entitled to vote at the special meeting or any adjournment or
postponement of the special meeting only if you are a holder of record of Janex
common stock at the close of business on , 1999.
BY ORDER OF THE BOARD OF DIRECTORS
Vincent W. Goett
Chairman
Phoenix, Arizona
, 1999
IMPORTANT
We cordially invite all stockholders to attend the special meeting in
person.
Whether or not you plan to attend the special meeting in person, in order
to assure your representation at the meeting, we urge you to complete, sign and
date the enclosed proxy card, which is being solicited by the board of
directors, and promptly return it in the self-addressed return envelope enclosed
for that purpose. You may revoke your proxy at any time prior to the vote at the
meeting by telling us that you want to do so.
<PAGE> 439
SUBJECT TO COMPLETION, DATED AUGUST 6, 1999
FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.
FUTECH TOYS & GAMES, INC.
JANEX INTERNATIONAL, INC.
PROSPECTUS/PROXY STATEMENT SUPPLEMENT
This prospectus/proxy statement supplement, and the related
prospectus/proxy statement, are being furnished to you and the other
stockholders of Janex International, Inc., in connection with the solicitation
of proxies by the Janex board of directors for use at the Special Meeting of
Stockholders to be held at a.m. local time on , 1999, at
and at any adjournments or postponements of the special meeting.
At the special meeting, we will ask you to consider and vote upon a proposal to
approve and adopt the Merger Agreement dated as of June 7, 1999, by and among
Janex, Futech Interactive Products, Inc., Trudy Corporation, Fundex Games, Ltd.,
DaMert Company, and two newly formed companies (Futech Interactive Products
(Delaware), Inc. and Futech Toys & Games, Inc.) that we are referring to as "New
Futech" and "New Sub," respectively. Under the Merger Agreement, first Futech
and then Janex, Trudy, and DaMert will merge with and into New Futech, which
will survive the merger and Fundex will merge into New Sub, which will survive
as a wholly-owned subsidiary of New Futech. Each share of Janex common stock
outstanding immediately prior to the mergers (other than dissenting shares) will
be converted into the right to receive approximately 0.0333 shares of New Futech
common stock. The outstanding preferred stock of Janex, all of which is owned by
Futech, will be cancelled in the mergers but has been valued on the same basis
as the Janex common stock. Outstanding shares of Futech, Trudy, Fundex and
DaMert will be converted into a combination of cash, promissory notes and common
stock of New Futech. In addition, outstanding options of each of the merging
companies will be converted into options to purchase common stock of New Futech.
This prospectus/proxy statement supplement and the related prospectus/proxy
statement, together with similar supplements that are being provided to
stockholders of Futech, Trudy, Fundex and DaMert with copies of the
prospectus/proxy statement, also constitute the prospectus of New Futech and New
Sub in connection with the offer and issuance of their securities pursuant to
the mergers. Assuming no outstanding Futech, Janex or Fundex options or warrants
are exercised prior to the mergers, a minimum aggregate of 5,867,628 and a
maximum aggregate of 5,955,297 shares of New Futech common stock, a minimum
aggregate of $768,330 and a maximum aggregate of $2,116,830 in cash and a
minimum aggregate of $5,751,500 and a maximum aggregate of $7,100,000 in
promissory notes of New Sub or New Futech will be issued to the stockholders of
Janex, Futech, Trudy, Fundex and DaMert in the mergers. In addition, certain
outstanding indebtedness in the amount of $10,000,000 is expected to be
exchanged for 2,222,222 shares of New Futech preferred stock shortly after the
mergers. Former stockholders of Fundex may exchange their New Futech stock for
the license rights in the "Phase 10" family of games and former stockholders of
Trudy may become entitled to receive additional New Futech shares or to exchange
their New Futech shares for debentures in the future, under certain
circumstances. Certain loan agreements and employment agreements, including
employee options to acquire New Futech common stock, are also part of the deal.
See "DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT -- Basic Terms of the
Merger Agreement" in the prospectus/ proxy statement.
We expect the New Futech common stock to trade on the OTC Bulletin Board
after the mergers, but we cannot be sure it will do so and we cannot predict
what the price might be. We do not expect a trading market to develop for any of
the other securities of New Futech. On June 4, 1999, the closing sales price of
a share of Janex common stock, as reported on the over-the-counter bulletin
board (the "OTC Bulletin Board"), was $0.23.
The mergers cannot be consummated unless: (a) stockholders of Janex,
Futech, Trudy, Fundex and DaMert, voting separately at their respective meetings
of stockholders, each approve the mergers, and (b) other conditions included in
the Merger Agreement are either satisfied or waived. See "DESCRIPTION OF THE
MERGERS AND THE MERGER AGREEMENT -- Conditions to Closing" in the
prospectus/proxy statement.
The record date for the special meeting is , 1999. This
prospectus/proxy statement supplement and the related prospectus/proxy statement
and the accompanying form of proxy are first being mailed to stockholders of
Janex on or about , 1999.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY
STATEMENT SUPPLEMENT AND THE RELATED PROSPECTUS/PROXY STATEMENT. THE PROPOSED
MERGER IS A COMPLEX TRANSACTION. WE STRONGLY URGE YOU TO READ AND CONSIDER
CAREFULLY THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE RELATED
PROSPECTUS/PROXY STATEMENT IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO
UNDER "RISK FACTORS" BEGINNING ON PAGE 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus/proxy statement supplement or the accompanying prospectus/proxy
statement is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus/proxy statement supplement is , 1999.
<PAGE> 440
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS/PROXY STATEMENT. WE HAVE NOT, AND NEW FUTECH AND NEW SUB HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEW FUTECH AND NEW SUB ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS PROXY/ STATEMENT SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF THE DATE ON
THE FRONT OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ONLY. OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.
WHERE YOU CAN FIND MORE INFORMATION
We will send to you, without charge, any material information that we have
or can obtain without unreasonable effort or expense concerning Janex or any
other merging company, concerning the Merger Agreement and related contracts or
concerning the proposed management and operations of New Futech. You may direct
requests for such additional information to Janex in the manner described below.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http.//www.sec.gov. You may also read and copy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, and Chicago. You can call the SEC at 1-800-732-0330 for further
information about the public reference rooms. Similar information is available
concerning Trudy.
The SEC allows us to "incorporate by reference" some of the information we
file with them, which means we are assumed to have disclosed important
information to you when we refer you to documents that are on file with the SEC.
The information we have incorporated by reference is an important part of this
prospectus/proxy statement supplement and the related prospectus/proxy
statement, and information that we file later with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below and any future documents we file with the SEC under Sections 13(a),
13(c), l4 or 15(d) of the Securities Exchange Act of 1934 until the mergers
occur.
- Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998.
- Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999.
- Current Reports on Form 8-K dated February 25, 1999.
You may request a copy of these documents at no cost by writing to us at
the following address:
Janex International, Inc.
c/o Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
Attn: Brian Young
Telephone: 602-808-8765
TO OBTAIN TIMELY DELIVERY OF THESE DOCUMENTS, YOU MUST MAKE YOUR REQUEST NO
LATER THAN , 1999, FIVE BUSINESS DAYS BEFORE THE DATE OF THE JANEX
STOCKHOLDERS MEETING.
i
<PAGE> 441
You should rely only on the information provided in or incorporated by
reference (and not later changed) in the prospectus/proxy statement or any
prospectus/proxy statement supplement. Neither we nor New Futech have authorized
anyone else to provide you with additional or different information. New Futech
is not making an offer of any securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus/proxy
statement supplement or the prospectus/proxy statement is accurate as of any
date other than the date on the front of these documents.
ii
<PAGE> 442
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY INFORMATION - Q&A................................... 1
OTHER INFORMATION ABOUT THE MERGERS......................... 3
The Companies............................................. 3
The Special Meeting....................................... 5
The Merger Agreement...................................... 5
SPECIAL RISK FACTORS AFFECTING JANEX........................ 5
STOCKHOLDER MATTERS......................................... 6
THE MERGERS AND RELATED TRANSACTIONS........................ 8
General................................................... 8
Effects of the Mergers.................................... 8
Background of the Mergers................................. 9
Reasons for the Mergers................................... 9
Janex's Board Recommendation.............................. 10
Related Agreements; Interests of Certain Janex Affiliates
in the Mergers......................................... 10
Regulatory Matters........................................ 10
Certain Federal Tax Matters............................... 11
Accounting Treatment...................................... 12
RIGHTS OF DISSENTING STOCKHOLDERS........................... 12
NEW FUTECH AND JANEX SHARES................................. 13
New Futech Common Stock................................... 13
Janex Capital Stock....................................... 13
COMPARISON OF THE RIGHTS OF HOLDERS OF JANEX COMMON STOCK
AND NEW FUTECH COMMON STOCK............................... 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION... 21
Overview.................................................. 21
Results of Operations..................................... 21
Seasonality and Quarterly Fluctuations.................... 24
Liquidity and Capital Resources........................... 25
Inflation................................................. 27
Year 2000................................................. 27
Safe Harbor Disclosure.................................... 27
DESCRIPTION OF JANEX'S BUSINESS............................. 28
Business.................................................. 28
Marketing, Distribution and Customers..................... 29
Manufacturing............................................. 31
Product Design and Selection.............................. 31
Competition............................................... 32
Patents, Trademarks and Licenses.......................... 33
Backlog................................................... 34
Governmental Regulations.................................. 34
Properties................................................ 34
Legal Proceedings......................................... 35
Employees................................................. 35
</TABLE>
iii
<PAGE> 443
<TABLE>
<S> <C>
JANEX MANAGEMENT............................................ 36
Employment Arrangements..................................... 37
JANEX STOCKHOLDERS.......................................... 38
Security Ownership of Certain Beneficial Owners and
Management............................................. 38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 39
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 40
APPENDICES
Appendix 1 - Section 7-113-102 Dissenters' Rights of
Colorado Business Corporation Act......................... A-1
</TABLE>
iv
<PAGE> 444
SUMMARY INFORMATION -- Q&A
This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the mergers contemplated thereby, you should carefully read
this entire document and the additional documents we mention. You should pay
special attention to the "RISK FACTORS" section beginning on page of the
prospectus/proxy statement and "SPECIAL RISK FACTORS AFFECTING JANEX" on page
of this prospectus/ proxy statement supplement.
WHY ARE THE FIVE COMPANIES PROPOSING TO MERGE?
The five companies are proposing to merge because the directors of each
company believe the combination will provide significant benefits to
stockholders. We believe the mergers will enable us to take advantage of the
complementary strategic fit of our respective businesses by marketing through
additional channels of distribution. We also hope and believe the mergers will
improve the likelihood that stockholders will have a more liquid market should
they wish to sell their stock and that the combined companies will be able to
more efficiently access the markets for debt and equity when appropriate. To
review the background and reasons for the mergers in greater detail, see
"BACKGROUND OF THE MERGERS" in the prospectus/proxy statement.
WHAT WILL I RECEIVE IN THE MERGERS?
You and all Janex stockholders will receive common stock of New Futech in
exchange for your Janex stock. Stockholders of the other merging companies will
receive cash, promissory notes and common stock of New Futech. Certain
employment contracts and other agreements with affiliates of the merging
companies are also part of the deal. See "DESCRIPTION OF THE MERGERS AND THE
MERGER AGREEMENT" in the prospectus/proxy statement.
WHAT RISKS SHOULD I CONSIDER?
You should review "RISK FACTORS" on page 8 of the prospectus/proxy
statement as well as the special risk factors affecting primarily Janex that are
discussed on pages 5 through 6 of this prospectus/proxy statement supplement.
WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGERS?
The following table shows the proportions of the outstanding shares that
must vote in favor of the mergers, together with the proportion of the
outstanding shares that are held by directors, executive officers and their
affiliates, the majority of whom have indicated that they intend to vote in
favor of the mergers.
<TABLE>
<CAPTION>
SHARES OWNED BY DIRECTORS,
COMPANY VOTE REQUIRED EX. OFFICERS & AFFILIATES
- ------- ------------- --------------------------
<S> <C> <C>
DaMert Majority 100.0%
Fundex Majority 70.8%
Futech Majority 72.7%
Janex Majority 78.9%
Trudy Majority 55.7%
</TABLE>
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<PAGE> 445
WHAT CIRCUMSTANCES MIGHT PREVENT THE MERGERS?
New Futech has the right to terminate the Merger Agreement if stockholders
from all of the merging companies combined exercise dissenters' rights with
respect to more than 5% of the aggregate merger consideration to be issued in
the mergers. See "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT -- Conditions to Closing" in the prospectus/proxy statement for a
description of the other conditions to the mergers.
HOW WILL THE MERGERS BE TREATED FOR ACCOUNTING PURPOSES?
We expect the mergers to be treated as purchases by Futech, which means
that the amount by which the total merger consideration received by stockholders
of the other merging companies plus the amount of their liabilities exceeds the
fair market value of their identifiable assets will initially be treated as
goodwill by New Futech for accounting purposes.
WHEN DO YOU EXPECT THE MERGERS TO BE COMPLETED?
We are working to complete the mergers during the third quarter of 1999.
However, the Merger Agreement does not include any express deadline for the
mergers to proceed.
WHAT ARE THE TAX CONSEQUENCES OF THE MERGERS TO ME?
We and the other merging companies have structured the Merger Agreement
with the intent and expectation that a gain or loss will be recognized by Janex
shareholders upon the exchange of shares. Gain or loss will also be recognized
by the other stockholders with respect to the portion of the merger
consideration to them that consists of cash (including cash in lieu of
fractional shares), or promissory notes, or certain other property of New Futech
or New Sub. You should review the more detailed description of federal tax
consequences that appear on pages 11 through 12 of this prospectus/proxy
statement supplement. State and local taxes may also become due as a result of
the mergers.
The precise tax consequences of the mergers will depend on your own
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the mergers to you.
WILL I HAVE DISSENTERS' RIGHTS?
Yes, provided you do not vote in favor of the mergers and meet all other
requirements of the dissenter's rights statute. See pages 12 through 13 and the
Colorado dissenters' rights statute which is attached as Appendix 1 to this
supplement.
WHAT DO I NEED TO DO NOW?
Just indicate on your proxy card how you want to vote on the mergers, and
sign and mail it in the enclosed return envelope as soon as possible, so that
your shares will be represented at the stockholders meeting.
If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be counted as a vote in favor of the mergers. If you do
not vote or you abstain, it will have the same effect as a vote against the
mergers.
The stockholders meeting will take place on , at local
time, at . You may attend the stockholders meeting and vote your
shares in person,
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<PAGE> 446
rather than signing and mailing your proxy card. In addition, you may withdraw
your proxy up to and including the day of the meeting and either change your
vote or attend the meeting and vote in person.
IF MY SHARES OF JANEX STOCK ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY
BROKER VOTE MY SHARES FOR ME?
Your broker will vote your shares of Janex stock only if you provide
instructions on how to vote. Without instructions, your shares will not be
voted. Shares that are not voted will have the same effect as votes against the
mergers.
SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
No. After the mergers are completed we will send you written instructions
for exchanging your stock certificates for the New Futech stock to which you are
entitled.
OTHER INFORMATION ABOUT THE MERGERS
THE COMPANIES
NEW FUTECH
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
New Futech is a newly-organized Delaware corporation that has been formed
to be the surviving parent corporation under the Merger Agreement. New Futech
has had no operations prior to the date of this prospectus/proxy statement
supplement. Under the Merger Agreement, first Futech and then Janex, Trudy and
DaMert will merge with and into New Futech, which will survive the mergers. As a
part of the mergers, New Futech will change its name to "Futech Interactive
Products, Inc."
NEW SUB
Futech Toys & Games, Inc.
2237 Directors Row
Indianapolis, Indiana 46241
(317) 248-1080
New Sub is a newly-organized Nevada corporation that has been formed to be
the surviving subsidiary corporation of New Futech under the Merger Agreement.
New Sub has had no operations prior to the date of this prospectus/proxy
statement supplement. Under the Merger Agreement, Fundex will merge with and
into New Sub, which will survive that merger as a wholly-owed subsidiary of New
Futech. All of the stock and assets of New Sub will be pledged to the former
stockholders of Fundex to secure the promissory notes of New Sub issued to them
in connection with the merger of Fundex into New Sub. In addition, the former
stockholders of Fundex who do not elect the All Cash Alternative will receive a
conditional option to purchase New Sub's license to market the "Phase 10" family
of games in 2002 in exchange for the New Futech stock they receive in the
mergers (but not the cash or promissory notes), exercisable only if the stock
has not achieved targeted liquidity and a valuation of at least $7.50 per share
($4,500,000 in the aggregate, if no stockholders elect the All Cash Alternative)
within three years after the completion of the mergers.
3
<PAGE> 447
JANEX
Janex International, Inc.
c/o Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
Janex manufactures and markets children's toys, banks, flashlights and
battery operated toothbrushes marketed under the brand name Janex. Janex
incorporates licensed characters into most of its products, and sells its
products to United States mass merchant retailers, toy specialty stores and
department stores.
FUTECH
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
Futech designs, publishes, manufactures and markets interactive,
educational, promotional and entertainment products (i.e., books, game boards
with sound capabilities and specialty post cards) targeted primarily towards
children. Futech's patented technology utilizes specialized conductive ink to
print interactive touch points. These touch points trigger speech, music and
sound effects. Futech licenses this technology to major entertainment and
publishing companies. Futech also distributes proprietary products, as well as
those of third party publishers, to warehouse clubs, national book chains,
specialty and independent retailers and major toy chains.
TRUDY
Trudy Corporation
353 Main Avenue
Norwalk, CT 06851-1552
(203) 846-2274
Trudy Corporation was initially organized as a Connecticut corporation
under the name "Norwest Manufacturing Corporation" in 1979. Trudy, which does
business under the name Soundprints, publishes juvenile story books and
audio-cassettes which are sold in conjunction with contract manufactured
educational toys to the retail and mail order markets.
FUNDEX
Fundex Games, Ltd.
2237 Directors Row
Indianapolis, Indiana 46241
(317) 248-1080
Fundex Games, Ltd. was originally incorporated in the State of Indiana as
"Third Quarter, Inc." in 1991. Fundex develops, markets, and distributes a
variety of games and toys for both children and adults, including:
- card games, puzzles and board games, including the Phase 10 card game and
its sister products;
- skill and action games for children;
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<PAGE> 448
- games, puzzles and toys featuring characters licensed from third parties;
and
- spring and summer toys for children, including jump ropes, water toys and
water games.
DAMERT
DaMert Company
1609 Fourth Street
Berkeley, California 94710
(510) 524-7400
DaMert Company was founded in 1973 and incorporated in 1979. DaMert creates
and produces toy and gift products targeted primarily to children ages 6-12 with
nature and science themes. Presently, the product line includes over 200 toys,
gifts and puzzles selling through catalogs, museums, department stores,
specialty gift stores and toy stores nationwide.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Janex special meeting will be held on , at at
.
PURPOSE OF THE SPECIAL MEETING
We have called the special meeting so the Janex stockholders can vote on
whether to approve the mergers pursuant to the Merger Agreement. The directors
of Futech, Trudy, Fundex and DaMert have called for special meetings of the
stockholders of their companies so that they also can vote whether to approve
the mergers.
RECOMMENDATION OF THE JANEX BOARD OF DIRECTORS
We have unanimously approved the Merger Agreement and unanimously recommend
that the stockholders of Janex vote "FOR" approval of the Merger Agreement.
THE MERGER AGREEMENT
Under the Merger Agreement, first Futech and then Janex, Trudy, and DaMert
will merge with and into New Futech, which will survive the mergers, and Fundex
will merge into New Sub, which will survive as a wholly-owned subsidiary of New
Futech. Under the Merger Agreement, Janex stockholders who do not exercise
dissenters' rights will receive common stock of New Futech as described in the
prospectus/proxy statement under the heading "DESCRIPTION OF THE MERGERS AND THE
MERGER AGREEMENT -- Basic Terms of the Merger Agreement." Stockholders of Fundex
and Trudy will also have certain conditional rights to receive additional stock
or to exchange their New Futech stock for promissory notes or certain other
assets under specified circumstances. See "DESCRIPTION OF THE MERGERS AND THE
MERGER AGREEMENT -- Basic Terms of the Merger Agreement."
SPECIAL RISK FACTORS AFFECTING JANEX
In addition to the risk factors set forth elsewhere in the prospectus/proxy
statement, you should carefully consider the special risks of Janex described
below in evaluating the proposals which you will vote on at the special meeting
and the effects on the securities
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<PAGE> 449
you will acquire in the mergers. Although we believe that the special risks and
uncertainties described below are the major ones facing Janex, they are not the
only ones that we will face. Any of the following could have a material adverse
effect on our business, financial condition or results of operations and the
business, and the business, financial condition or results of operations of the
combined companies.
THE NEW FUTECH STOCK MAY HAVE A LOWER MARKET VALUE THAN EXPECTED.
None of the companies participating in the merger engaged an independent
financial advisor to provide an estimate of value of any of the merging
companies or of the New Futech or an opinion concerning the fairness of the
merger consideration to be received by shareholders. Even if an active market
develops for the New Futech common stock, we have no independent basis for any
prediction about the price levels at which it might be expected to trade.
STOCKHOLDERS MAY BE UNABLE TO TRADE THEIR JANEX OR NEW FUTECH STOCK.
For several years, Janex has been a de-listed company and there is a
limited market for trading its shares. Without a merger it is not expected that
this situation will change, so Janex's stockholders may not be able to realize
any value for their ownership in Janex. On the other hand, we cannot be certain
that an active market will develop for the New Futech shares to be received in
the mergers.
REVENUES AND PROFITABILITY HAVE RECENTLY DECLINED.
For the fiscal year ended December 31, 1998, Janex's sales declined to
$3,117,599, from $5,596,979 for the year ended December 31, 1997. For the three
months ended March 31, 1999 Janex's sales declined to $222,346 from $1,608,557
for the three months ended March 31, 1998.
Net loss for the three months ended March 31, 1999 was $208,218 as compared
to net income of $223,307 for the three months ended March 31, 1998.
The decline in revenue and profitability has resulted in the Company
experiencing negative cash flow and a decrease in working capital.
Without additional cash availability, the Company will be unable to develop
new products, acquire new licenses or fund overhead and debt repayment.
STOCKHOLDER MATTERS
Janex common stock began trading on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") on October 16, 1989 and was quoted
on NASDAQ until July 17, 1997, when it was deleted from NASDAQ, as a consequence
of Janex's failure to meet the minimum capital and surplus requirements for
continued listing. Janex common stock is now traded on the OTC Bulletin Board
under the symbol "JANX." Janex preferred stock is not traded. The following
table sets forth the high and low bid prices per share for the Janex common
stock for each fiscal quarter from January 1, 1997, through June 30, 1999, as
reported by the National Association of Securities Dealers and the OTC Bulletin
Board and as adjusted to reflect the conversion of the shares of Janex stock not
held by Futech into shares of common stock of New Futech in the mergers. The
historical quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and do not necessarily represent actual transactions. On
June 4,
6
<PAGE> 450
1999 (the day before the Merger Agreement was signed), the closing price of the
Janex common stock was $0.23 per share.
<TABLE>
<CAPTION>
PRICE PER NEW
FUTECH
HISTORICAL SHARE RECEIVED IN
PRICES MERGER
------------- ------------------
JANEX COMMON STOCK HIGH LOW HIGH LOW
- ------------------ ----- ---- ------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
1st Quarter................................ $1.44 $.56 $43.20 $16.80
2nd Quarter................................ .75 .31 22.50 9.30
3rd Quarter................................ .69 .05 20.10 1.50
4th Quarter................................ .55 .13 16.50 3.90
Year Ended December 31, 1998
1st Quarter................................ $ .63 $.14 $15.00 $ 5.70
2nd Quarter................................ .53 .17 14.40 5.70
3rd Quarter................................ .23 .06 7.20 2.10
4th Quarter................................ .38 .12 11.70 3.60
Year Ending December 31, 1999
1st Quarter................................ $ .35 $.17 $10.50 $ 5.10
2nd Quarter................................ .27 .16 8.10 5.00
</TABLE>
As of July 31, 1999, there were approximately 781 and one stockholders of
record of Janex common stock and preferred stock, respectively, as shown on the
records of its transfer agent.
Janex has not paid dividends on its common stock and does not anticipate
paying dividends in the foreseeable future. If the mergers do not occur for any
reason, we anticipate that all earnings, in the foreseeable future, will be
retained for development of Janex's business.
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THE MERGERS AND RELATED TRANSACTIONS
GENERAL
The Merger Agreement provides for the merger of Futech into New Futech,
promptly followed by the substantially simultaneous merger of Janex, Trudy and
DaMert with and into New Futech and the substantially simultaneous merger of
Fundex with and into New Sub. The discussion in this prospectus/proxy statement
supplement and the related prospectus/proxy statement of the mergers and the
description of the principal terms of the Merger Agreement contained in the
prospectus/proxy statement are subject to and qualified in their entirety by
reference to the Merger Agreement, a copy of which is attached to the
prospectus/proxy statement as Appendix A, and incorporated herein by reference.
EFFECTS OF THE MERGER
GENERAL
We intend for the mergers to occur promptly following approval of the
mergers by the requisite vote of the stockholders of each of Janex, Futech,
Trudy, DaMert and Fundex and the satisfaction or waiver of all other conditions
to consummation of the mergers. The mergers will become effective at or about
the time of filing of articles of merger or other appropriate documents with the
applicable government offices or agencies. At that time (a) first Futech and
then Janex, Trudy and DaMert will merge with and into New Futech with the result
that New Futech will be the surviving corporation and (b) Fundex will merge with
and into New Sub with the result that New Sub will be the surviving corporation.
As part of the mergers New Futech will change its name to "Futech Interactive
Products, Inc." The stockholders of Janex will become stockholders of New
Futech, and their rights will be governed by the New Futech certificate of
incorporation and bylaws. See "COMPARISON OF RIGHTS OF STOCKHOLDERS OF JANEX AND
NEW FUTECH." See "DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT" in the
prospectus/proxy statement.
For information regarding the operation of New Futech and New Sub following
the mergers, see "DESCRIPTION OF NEW FUTECH'S BUSINESS" in the prospectus/ proxy
statement. For information regarding the officers and directors of New Futech
following the mergers, see "NEW FUTECH'S MANAGEMENT" in the prospectus/ proxy
statement.
EXCHANGE RATIOS.
Each share of Janex common stock outstanding immediately prior to the
mergers (other than dissenting shares) will be converted into the right to
receive approximately 0.0333 shares of New Futech common stock.
Outstanding shares of Futech, DaMert, Fundex and Trudy will also be
converted into a combination of cash, common stock of New Futech and promissory
notes of New Futech or New Sub. Under certain circumstances the former
stockholders of Fundex will have the right to exchange their New Futech stock
for the license rights in the "Phase 10" family of games now owned by Fundex.
Under certain other circumstances the former stockholders of Trudy will have the
right to receive additional New Futech stock or to exchange their New Futech
stock for unsecured five year debentures. In addition, outstanding options for
shares of Trudy, Futech, Janex and Fundex will be converted into options for
shares of common stock of New Futech. See "DESCRIPTION OF THE
8
<PAGE> 452
MERGERS AND THE MERGER AGREEMENT -- Basic Terms of the Merger Agreement" in the
prospectus/proxy statement.
FRACTIONAL SHARES.
Fractional shares of New Futech common stock will not be issued in the
mergers. Instead, stockholders in any of the merging companies who would
otherwise have received an amount of New Futech stock that includes a fraction
of a share will instead receive an amount of cash equal to that fraction
multiplied by $7.50. For example, a Janex stockholder who is otherwise entitled
to receive 15.5 shares of New Futech common stock will actually receive only 15
shares, plus $3.75 in cash (i.e., 0.5 times $7.50).
BACKGROUND OF THE MERGER
In April of 1998, Mr. Vince Goett, Chairman of Futech, telephoned Les
Friedland, President of Janex, to express an interest in a possible merger of
the two companies, and business synergies.
In early August 1998, Mr. Goett arranged for Les Friedland, Daniel Lesnick,
Michael Handelman and Janex counsel to visit the Futech offices in Phoenix.
During the meeting the possibilities of a merger between the two companies were
discussed, as well as a review of the financial condition of Janex. At the end
of the meeting a deal was struck with a term sheet drafted by outside counsel
for Futech.
From the visit to the Futech office in Phoenix negotiations continued
regarding the acquisition of shares and debt. The negotiations culminated in a
Letter of Intent dated August 24, 1998.
From August 30 to September 2, 1998 members of Futech including Fred
Gretsch, Mel Sauder, Joe Petter and outside counsel visited the office of Janex
to perform due diligence procedures.
The actual Stock Purchase and Sale Agreement with Futech was signed on
September 30, 1998.
On May 27, 1999, the Futech Board of Directors approved the Merger
Agreement.
REASONS FOR THE MERGER
For the year ended December 31, 1998, net sales declined to $3,117,599, as
compared to $5,596,979 for the year ended December 31, 1997, a decrease of
$2,479,380 or 44.3%. For the three months ended March 31, 1999, net sales
declined to $222,346, as compared to $1,608,557 for the three months ended March
31, 1998, a decrease of $1,386,211 or 86.2%. The decline in revenues has
resulted in the Company experiencing recurring losses from operations, negative
cash flows and decreases in working capital. Without additional cash
availability, the Company will be unable to develop new products, acquire new
licenses or fund overhead and debt repayment. As a small, de-listed company,
Janex has found it difficult to raise capital. The Company has been unable to
provide its stockholders liquidity for its stock.
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<PAGE> 453
After pursuing several alternatives, the Company agreed to the merger with
Futech. Management believes that the merger will provide many advantages that
the Company would not otherwise experience:
- Necessary financial resources through the ability to raise public
capital;
- Mass and diverse product presentation to mass retailers;
- Current Futech patented technology to be incorporated into existing and
future product lines;
- New technology provided through on-going research and development not
available to small, individual companies;
- Access to popular key licensed characters to be incorporated into
existing and future product lines;
- Access to more experienced and deeper management; and
- Broader company strength to withstand potential competitor aggression
designed to eliminate smaller competition.
Management also hopes that the merger will enable Janex shareholders to be
provided liquidity for their New Futech stock resulting from New Futech becoming
a public corporation with actively traded securities. It is expected that the
New Futech common stock will trade on the OTC Bulletin Board following the
merger. Management further hopes that within a period of time, that New Futech
will be listed on the NASDAQ market upon achieving the minimum requirements of
NASDAQ, and that upon listing, will further improve shareholder liquidity.
For additional information regarding the background of and reasons for the
merger, see "SPECIFIC REASONS FOR PREVIOUS ACQUISITIONS and PROPOSED MERGER
PARTNERS" in the prospectus/proxy statement.
JANEX'S BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF JANEX HAS DETERMINED THAT THE MERGERS ARE
ADVISABLE AND IN THE BEST INTERESTS OF JANEX AND ITS STOCKHOLDERS AND HAS
RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
RELATED AGREEMENTS; INTERESTS OF CERTAIN JANEX AFFILIATES IN THE MERGER
In connection with the mergers, New Futech will repay certain promissory
notes of Futech to the former stockholders of Janex in the principal amount of
$750,000, and will also repay certain bank debt. SEE "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE
CORRESPONDING SECTION IN THE PROSPECTUS/PROXY STATEMENT.
REGULATORY MATTERS
Except as disclosed in this prospectus/proxy statement supplement and the
prospectus/proxy statement, Janex and New Futech are not aware of any
governmental or regulatory approvals required for consummation of the mergers,
other than compliance with the federal securities laws and applicable securities
and "blue sky" laws of the various states.
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<PAGE> 454
CERTAIN FEDERAL TAX MATTERS
In the opinion of Quarles & Brady LLP, special tax counsel to New Futech,
the merger of Janex into New Futech will be treated for federal income tax
purposes as reorganization as to New Futech within the meaning of Section 368(a)
of the Code and New Futech and Janex will each be a party to that reorganization
within the meaning of Section 368(b) of the Code.
In rendering its opinion, counsel has relied upon and assumed as accurate
and correct on the date hereof, and will rely on and assume as accurate and
correct as of the Effective Time of the merger, the information contained in
this prospectus/proxy statement supplement and the related prospectus/proxy
statement and certain representations as to factual matters made by Futech, New
Futech and Janex. The representations relied upon include that Futech, prior to
the Effective Time of the mergers and within a 12 month period, has acquired by
purchase within the meaning of Section 338(h)(3) of the Code stock of Janex
representing at least 80% of the voting power of the stock of Janex and having a
value equal to at least 80% of the total value of the stock of Janex. Any
inaccuracy or change with respect to such information or representations or
actions by Futech, New Futech or Janex contrary to such representations could
adversely affect the conclusions reached in the opinion and the tax summary set
forth below.
Counsel's opinion represents its best legal judgement as to the tax
treatment of the merger, but the opinion is not binding on the Internal Revenue
Service. The parties have not and will not request a ruling from the Service in
connection with the federal income tax consequences of the merger. The following
summary of material United States federal income tax consequences of the merger
is based upon the conclusions reached in such opinion.
Based on the provisions of the Code, the applicable regulations thereunder,
judicial authority and current administrative rulings and practices as of the
date hereof, all of which are subject to change, possibly with retroactive
effect: (i) no gain or loss will be recognized by Futech, New Futech or Janex as
a result of the merger; and (ii) with respect to holders of Janex common stock
other than Futech or New Futech: (A) gain or loss will be recognized by such
holders of Janex common stock upon conversion of their shares of Janex common
stock into shares of New Futech common stock pursuant to the merger measured by
the difference between the fair market value of the New Futech common stock
received and the adjusted tax basis of the Janex common stock exchanged for it;
(B) the tax basis of the shares of New Futech common stock into which shares of
Janex common stock are converted will be equal to the fair market value of such
New Futech common stock at the Effective Time of the merger; (C) the holding
period for shares of New Futech common stock into which shares of Janex common
stock are converted will begin at the Effective Time of the merger; and (D) such
gain or loss recognized will be long term capital gain or loss provided the
Janex common stock was held as a capital asset for more than 12 months.
Notwithstanding the description above of the treatment of holders of Janex
common stock other than Futech and New Futech, it is possible that such Janex
stockholders could take the position that the merger is a reorganization within
the meaning of Section 368(a) of the Code as to all of the Janex stockholders,
in which event no gain or loss would be recognized by any of the Janex
stockholders on their receipt of the New Futech common stock.
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<PAGE> 455
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A DESCRIPTION OF THE MATERIAL
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL TAX EFFECTS OF THE MERGER. In
addition, the discussion does not address all of the tax consequences that may
be relevant to particular taxpayers in light of their personal circumstances or
to taxpayers subject to special treatment under the Code (for example, insurance
companies, financial institutions, dealers in securities, tax exempt
organizations, foreign corporations, foreign partnerships, or other foreign
entities and individuals who are not citizens or residents of the United States
and persons who acquired their New Futech common stock pursuant to the exercise
or termination of employee stock options, warrants or otherwise as compensation.
No information is provided herein with respect to the tax consequences, if
any, of the merger under applicable foreign, state, local and other tax laws.
THE GENERAL SUMMARY SET FORTH ABOVE IS NOT INTENDED TO BE, NOR SHOULD IT BE
CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF JANEX COMMON
STOCK. EACH HOLDER OF JANEX COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER,
INCLUDING THE APPLICATION OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
The mergers are intended to qualify as a purchase for accounting purposes.
Under this accounting treatment, the amount by which the total merger
consideration received by stockholders of the other merging companies plus the
amount of their liabilities exceeds the fair market value of their identifiable
assets will initially be treated as goodwill by New Futech for accounting
purposes.
RIGHTS OF DISSENTING STOCKHOLDERS
Pursuant to Sections 7-113-101 through 7-113-302 of the Colorado Business
Corporation Act ("CBCA"), copies of which are attached to this prospectus/proxy
statement supplement as Appendix 1, stockholders of Janex may dissent from, and
obtain payment of the fair value of their Janex shares in the event of the
consummation of the mergers. A Janex stockholder who wishes to assert
dissenters' rights in connection with the mergers must (i) deliver to Janex,
before a vote of the stockholders of Janex is taken with respect to the mergers,
written notice of the stockholder's intent to demand payment for the
stockholder's Janex shares if the mergers are effectuated; and (ii) not vote in
favor of the merger proposal.
If the merger proposal is approved at the Janex special meeting and if the
other conditions of the mergers are satisfied or waived, Janex will deliver a
written dissenters' notice to all Janex stockholders who have satisfied the
requirements described above to assert those rights. Janex will send the
dissenters' notice no later than ten days after the mergers are effectuated.
The dissenters' notice delivered by Janex will: (i) state that the mergers
were authorized and the effective date or proposed effective date of the
mergers; (ii) state an address at which Janex will receive payment demands and
an address at which certificates for Janex shares must be deposited; (iii)
include a form for demanding payment; and (iv) set a date by which Janex must
receive the payment demand and by which certificates for Janex shares must be
deposited at the address for such deposits in the
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dissenters' notice, which date may not be less than 30 days after the date the
dissenters' notice is given. Additionally, Janex may require that when a record
holder of Janex shares dissents with respect to the shares held by any one or
more beneficial owners of Janex shares, each beneficial owner of Janex shares
must certify to Janex that both such beneficial owner and the record holder of
Janex shares beneficially owned by such beneficial owner have asserted
dissenters' rights as to all such Janex shares. If Janex so requires, the
dissenters' notice will state this requirement. The dissenters' notice will
include a copy of the CBCA Sections 7-113-101 through 7-113-302.
A Janex stockholder to whom a dissenters' notice is sent and who wishes to
exercise dissenters' rights must: (i) demand payment on the form provided and
within the time period set forth in the dissenters' notice; and (ii) deposit
certificates for Janex shares in accordance with the terms of the dissenters'
notice. A stockholder of Janex who demands payment as described above retains
all rights of a stockholder of Janex, except the right to transfer the shares,
until the effective time of the mergers and thereafter has only the right to
receive the fair value of his or her Janex shares.
A stockholder of Janex who does not demand payment and deposit certificates
as required is not entitled to payment under CBCA Sections 7-113-101 through
7-113-302.
NEW FUTECH AND JANEX SHARES
NEW FUTECH COMMON STOCK
For a description of New Futech common stock and its authorized but
unissued preferred stock, see "DESCRIPTION OF NEW FUTECH CAPITAL STOCK" in the
prospectus/proxy statement.
JANEX CAPITAL STOCK
The following description of Janex's capital stock is a summary only and is
subject to, and qualified in its entirety by, reference to Janex's Articles of
Incorporation and Bylaws, copies of which are included as exhibits to the
registration statement of which this prospectus/proxy statement supplement is a
part, and by reference to Colorado Law under which Janex is incorporated.
COMMON STOCK
As of July 31, 1999 there were 18,098,750 shares of Janex common stock
outstanding which were held of record by approximately 781 stockholders. Janex's
common stock is traded on the OTC Bulletin Board (under the symbol "JANX"). To
Janex's knowledge, no dealer makes a market in Janex's shares. Quotes for Janex
shares on the OTC Bulletin Board are infrequent and do not constitute an
established market for Janex shares. Janex has not paid any dividends on its
common stock. The Merger Agreement provides that Janex will not declare or pay
any dividend without the prior written approval of New Futech.
PREFERRED STOCK
As of May 31, 1999 there were 5,000,000 shares of Janex preferred stock
outstanding which were held of record by one stockholder.
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<PAGE> 457
COMPARISON OF THE RIGHTS OF HOLDERS OF JANEX COMMON STOCK AND
NEW FUTECH COMMON STOCK
Janex is a Colorado corporation and the rights of its stockholders are
governed by the Colorado Business Corporation Act ("CBCA") and the Articles of
Incorporation and Bylaws of Janex. New Futech is a Delaware corporation and the
rights of it stockholders are governed by the Delaware General Corporation Law
("DGCL") and the Certificate of Incorporation and Bylaws of New Futech. By the
Merger Agreement, the Janex stockholders will become New Futech stockholders and
as such their rights will be governed by the DGCL and the New Futech Certificate
of Incorporation and Bylaws.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF COLORADO AND DELAWARE
The corporation laws of Colorado and Delaware differ in many respects.
Although all the differences are not set forth in this prospectus/proxy
statement supplement, provisions which could materially affect the rights of
stockholders are discussed below.
REMOVAL OF DIRECTORS
<TABLE>
<S> <C>
Colorado Delaware
A director of a corporation that does not have a A director of a corporation that does not have a
staggered board of directors or cumulative classified board or cumulative voting may be
voting may be removed with or without cause with removed without or without cause with approval
the approval of a majority of the outstanding of the majority of the outstanding shares
shares entitled to vote at an election of entitled to vote at an election of directors. In
directors. In the case of a Colorado corporation the case of a Delaware corporation having
having cumulative voting, if less than the cumulative voting, if less than the entire board
entire board is to be removed, a director may is to be removed, a director may not be removed
not be removed if the number of shares voted without cause if the number of shares voted
against such removal would be sufficient to against such removal would be sufficient to
elect the director under cumulative voting. elect the director under cumulative voting. A
Janex does not have a staggered board or director of a corporation with a classified
cumulative voting. board of directors may be removed only for
cause, unless the certificate of incorporation
otherwise provides. The Certificate of
Incorporation and Bylaws of New Futech provide
for a classified board of directors, but not for
cumulative voting.
</TABLE>
CLASSIFIED BOARD OF DIRECTORS
A classified (the term in Delaware) or staggered board is one on which a
certain number, but not all, of the directors are elected on a rotating basis
each year. This method of electing directors makes changes in the composition of
the board of directors more difficult, and thus a change in control of a
corporation potentially a lengthier and more difficult process.
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<PAGE> 458
<TABLE>
<S> <C>
Colorado Delaware
Colorado law permits, but does not require, a Delaware law permits, but does not require, a
staggered board of directors, by which the classified board of directors, by which the
directors can be divided into as many as three directors can be divided into as many as three
classes with staggered terms of office, with classes with staggered terms of office, with
only one class of directors standing for only one class of directors standing for
election each year. The Janex Articles of election each year. The New Futech Certificate
Incorporation and Bylaws do not provide for a of Incorporation and Bylaws provide for a
staggered board. classified board, consisting of three classes
with three directors in each class.
</TABLE>
INDEMNIFICATION AND LIMITATION OF LIABILITY
Delaware and Colorado have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with certain exceptions, a corporation to adopt a
provision in its articles of incorporation or certificate of incorporation, as
the case may be, eliminating the liability of a director to the corporation or
its stockholders for monetary damages for breach of the director's fiduciary
duty. There are nonetheless certain differences between the laws of the two
states respecting indemnification and limitation of liability.
<TABLE>
<S> <C>
Colorado Delaware
The Articles of Incorporation of Janex eliminate The Certificate of Incorporation of New Futech
the liability of directors to the corporation to also eliminates the liability of directors to
the fullest extent permissible under Colorado the corporation or its stockholders for monetary
law. Colorado law does not permit the damages for breach of fiduciary duty as a
elimination of monetary liability where such director to the fullest extent permissible under
liability is based on: Delaware law. Under Delaware law, such provision
may not eliminate or limit director monetary
- - breaches of the director's duty of loyalty to liability for:
the corporation or its stockholders,
- breaches of the director's duty of loyalty to
- - acts or omissions not in good faith or the corporation or its stockholders,
involving intentional misconduct or knowing
violations of law, - acts or omissions not in good faith or
involving intentional misconduct or knowing
- - in the case of conduct in an official capacity violations of law,
with the corporation, acts or omissions not in
the best interest of the corporation, and in - the payment of unlawful dividends or unlawful
all other cases acts or omissions contrary to stock repurchases or redemptions, or
the best interests of the corporation,
- transactions in which the director received an
- - receipt of an improper personal benefit, improper personal benefit.
- - liability for improper distributions, loans or Such limitation of liability provisions also may
guarantees. not limit a director's liability for violation
of or otherwise relieve directors from the
necessity of complying with federal or state
securities laws, or affect
</TABLE>
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<TABLE>
<S> <C>
Colorado law generally permits indemnification the availability of non-monetary remedies such
of director expenses, including attorney's fees, as injunctive relief or rescission.
actually and reasonably incurred in the defense
or settlement of a derivative or third-party Delaware law generally permits indemnification
action, provided there is a determination by a of expenses, including attorney's fees, actually
majority vote of a disinterested quorum of the and reasonably incurred in the defense or
directors, by independent legal counsel or by a settlement of a derivative or third-party
majority vote of the stockholders that the action, provided there is a determination by a
person seeking indemnification acted in good majority vote of disinterested directors, by
faith and in a manner reasonably believed to be independent legal counsel or by a majority vote
in the best interests of the corporation. of the stockholders that the person seeking
Colorado law requires indemnification of indemnification acted in good faith and in a
director expenses when the individual being manner reasonably believed to be in or not
indemnified has successfully defended any opposed to the best interest of the corporation.
action, claim, issue or on the merits or Delaware law requires indemnification, of
otherwise. expenses when the individual being indemnified
has successfully, defended any action, claim,
issue, or matter therein, on the merits or
otherwise.
Delaware law also permits a Delaware corporation
to provide indemnification in excess of that
provided by statute.
A provision of Delaware law states that the
indemnification provided by statute shall not be
deemed exclusive of any other rights under any
bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
</TABLE>
Both Colorado and Delaware law requires indemnification when the individual
has defended successfully the action on the merits or otherwise.
Expenses incurred by an officer or director in defending an action may be
paid in advance, under Colorado law and Delaware law, if such director or
officer undertakes to repay such amounts if it is ultimately determined that he
or she is not entitled to indemnification. In addition, the laws of both states
authorize a corporation's purchase of indemnity insurance for the benefit of its
officers, directors, employees and agents whether or not the corporation would
have the power to indemnify against the liability covered by the policy.
INSPECTION OF STOCKHOLDER LIST
Both Delaware and Colorado law allow any stockholder to inspect the
stockholder list for a purpose reasonably related to such person's interests as
a stockholder.
DIVIDENDS AND REPURCHASES OF SHARES
<TABLE>
<S> <C>
Colorado Delaware
Colorado law dispenses with the concepts of par Delaware law permits a corporation to declare
value of shares as well as statutory definitions and pay dividends out of surplus or if there is
of capital, surplus and the like. no surplus, out of net profits for
</TABLE>
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<TABLE>
<S> <C>
The concepts of par value, capital and surplus the fiscal year as long as the amount of capital
are retained under Delaware law. Colorado law of the corporation following the declaration and
permits a corporation to declare and pay payment of the dividend is not less than the
dividends unless, after giving it effect: aggregate amount of the capital represented by
the issued and outstanding stock of all classes
- - the corporation would not be able to pay its having preference upon the distribution of
debts as they become due in the usual course assets. In addition, Delaware law generally
of business, or provides that a corporation may redeem or
repurchase its shares only if the capital of the
- - the corporation's total assets would be less corporation is not impaired and such redemption
than the sum of its total liabilities plus or repurchase would not impair the capital of
(unless the articles of incorporation permit the corporation.
otherwise) the amount that would be needed, if
the corporation were to be dissolved at the
time of the distribution, to satisfy the
preferential rights upon dissolution of
stockholders whose preferential rights are
superior to those receiving the distribution.
</TABLE>
STOCKHOLDER VOTING
<TABLE>
<S> <C>
Colorado Delaware
Generally requires that a majority of the Generally requires that a majority of the
shareholders of both acquiring and target shareholders of both acquiring and target
corporations approve statutory mergers. corporations approve statutory mergers.
Does not require a stockholder vote of the Does not require a stockholder vote of the
surviving corporation in a merger if surviving corporation in a merger (unless the
corporation provides otherwise in its
- - the merger agreement does not amend the Certificate of Incorporation) if
existing articles of incorporation,
- the merger agreement does not amend the
- - each stockholder of the surviving corpo- existing Certificate of Incorporation,
ration whose shares were outstanding
immediately before the merger will hold the - each share of the stock of the surviving
same number of shares, with identical corporation outstanding immediately before the
designations, preferences, limitations and effective date of the merger is to be
relative rights immediately after the merger, identical outstanding or treasury share of the
surviving corporation after the merger, and
- - the number of voting shares outstanding
immediately after the merger, plus the number - either no shares of common stock of the
of voting shares issuable as a result of the surviving corporation and no shares,
merger or by the exercise of rights and securities or obligations convertible into
warrants issued pursuant to the merger, will such stock are to be issued or delivered under
not exceed by more than twenty percent (20%) the plan of merger, or the authorized unissued
the total number of shares of the surviving shares or the treasury shares of common stock
corporation outstanding immediately before the of the surviving corporation to be issued or
merger, and delivered under the plan of merger plus those
- - the number of participating shares initially issuable upon conversion of any
</TABLE>
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<TABLE>
<S> <C>
(shares that entitle their holders to other shares, securities or obligations to be
participate without limitation on distri- issued or delivered under such plan do not
butions) outstanding immediately after the exceed twenty percent (20%) of the shares of
merger, plus the number of participating common stock of the surviving corporation
shares issuable as a result of the merger outstanding immediately prior to the effective
either by the conversion of securities issued date of the merger.
pursuant to the merger or by the exercise of
rights and warrants issued pursuant to the
merger, will not exceed by more than twenty
percent (20%) the total number of
participating shares outstanding immediately
before the merger.
</TABLE>
Both Delaware and Colorado law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the outstanding voting shares of the corporation transferring such assets.
Both Colorado and Delaware law generally do not require class voting,
except in certain transactions involving an amendment to the certificate of
incorporation that adversely affects a specific class of shares or where the
class of securities designates such a right.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS UNDER DELAWARE LAW
In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a corporation and one or more of its significant stockholders, more
difficult. Under Section 203 of the Delaware General Corporation Law, certain
"business combinations" with "interested stockholders" of Delaware corporations
are subject to a three-year moratorium unless specified conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or entity who or which owns,
individually or with or through certain other persons or entities, fifteen
percent (15%) or more of the corporation's outstanding voting stock (including
any rights to acquire stock pursuant to an option, warrant, agreement,
arrangement or understanding, or upon the exercise of conversion or exchange
rights, and stock with respect to which the person has voting rights only), or
is an affiliate or associate of the corporation and was the owner, individually
or with or through certain other persons or entities, of fifteen percent (15%)
or more of such voting stock at any time within the pervious three years, or is
an affiliate or associate of any of the foregoing.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or a direct
or indirect majority-owned subsidiary equal in aggregate market value of ten
percent (10%) or more of the aggregate market value of either the corporation's
consolidated assets or all of its outstanding stock; the issuance of transfer by
the corporation or a direct or indirect majority-owned subsidiary of stock of
the corporation or such subsidiary to the interested stockholder (except for
certain transfers in
18
<PAGE> 462
a conversion or exchange or a pro rata distribution or certain other
transactions, none of which increase the interested stockholder's proportionate
ownership of any class or series of the corporation's or such subsidiary's stock
or of the corporation's voting stock); or receipt by the interested stockholder
(except proportionately as a stockholder), directly or indirectly, of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if:
- prior to the date on which such stockholder becomes an interested
stockholder the board of directors approves either the business
combination or the transaction that resulted in the person or entity
becoming an interested stockholder,
- upon consummation of the transaction that made him or her an interested
stockholder, the interested stockholder owns at least eighty-five percent
of the corporation's voting stock outstanding at the time the transaction
commenced (excluding from the eighty-five percent calculation shares
owned by directors who are also officers of the target corporation and
shares held by employee stock plans that do not give employee
participants the right to decide confidentiality whether to accept a
tender or exchange offer), or
- on or after the date such person or entity becomes an interested
stockholder, the board approves the business combination and it is also
approved at a stockholder meeting by sixty-six and two-thirds percent of
the outstanding voting stock not owned by the interested stockholder.
Section 203 only applies to certain publicly held corporations that have a
class of voting stock that is:
- listed on a national securities exchange,
- quoted on an interdealer quotation system of a registered national
securities association, or
- held of record by more than 2,000 stockholders.
Under certain circumstances, Section 203 of the DGCL may made it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three year period.
There is no provision in the CBCA equivalent to Section 203 of the DGCL.
INTERESTED DIRECTOR TRANSACTIONS
Under both Delaware and Colorado law, certain contracts or transactions in
which one or more of a corporation's directors has an interest are not void or
voidable because of such interest provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the conditions are
similar under Delaware and Colorado law. Under Delaware and Colorado law, (a)
either the stockholders or the board of directors must approve any such contract
or transaction after full disclosure of the material facts, and, in the case of
board approval, the contract or transaction must also be "fair" to the
corporation, or (b) the contract or transaction must have been fair as to the
corporation at the time it was approved. If board approval is sought, the
contract or transaction must be approved by a majority vote of a quorum of the
directors, without counting the vote of any interested
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<PAGE> 463
directors (except that interested directors may be counted for purposes of
establishing a quorum).
APPRAISAL/DISSENTERS' RIGHTS
Under both Delaware and Colorado law, a stockholders of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal/dissenters' rights by which such
shareholder may receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she would otherwise receive in the
transactions. Under both Delaware and Colorado law, such fair market value is
determined exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation.
<TABLE>
<S> <C>
Colorado Delaware
Dissenters' rights are not available (a) with Appraisal rights are not available (a) with
respect to the sale of all or substantially all respect to the sale of all or substantially all
of the assets of the corporation or a merger if of the assets of a corporation, (b) with respect
no vote of the stockholders is required to to a merger or consolidation by a corporation
approve the transaction under Colorado law or the shares of which are either listed on a
(b) to stockholders of shares which either were national securities exchange, designated as a
listed on a national securities exchange national market system security on an
registered under the federal Securities and interdealer quotation system by the National
Exchange Act of 1934 or on the national market Association of securities Dealers, Inc. or are
system of the National Association of Securities held of record by more than 2,000 holders if
Dealers Automated System or were held of record such stockholders receive only shares of the
by more than 2,000 holders if such stockholders surviving corporation or shares of any other
receive only shares of the surviving corporation corporation that are either listed on a national
or shares of any other corporation that are securities exchange, designated as a national
either listed on a national securities exchange market system security on an interdealer
registered under the federal Securities Act of quotation system by the National Association of
1934 or on the national market system of the securities Dealers, Inc. or held of record by
National Association of Securities Dealers more than 2,000 holders, plus cash in lieu of
Automated Quotation System or held of record by fractional shares of such corporations, or (c)
more than 2,000 holders, plus cash in lieu to stockholders of a corporation surviving a
record by more than 2,000 holders, plus cash in merger if no vote of the stockholders of the
lieu of fractional shares. surviving corporation is required to approve the
merger under Delaware law.
</TABLE>
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<PAGE> 464
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Janex's
audited consolidated financial statements and notes thereto appearing elsewhere
in the prospectus.
OVERVIEW
Incorporated in 1986, Janex currently develops, manufactures and markets a
combination of functional children's products, toys and novelty gift items,
through its Janex and Malibu lines.
The Janex line incorporates licensed fantasy characters into most of its
functional products such as flashlights, battery powered toothbrushes and alarm
clocks, and sells them under the "Janex" brand name to mass merchant retailers,
toy specialty stores and department stores in the United States. The Janex
products are sold at retail prices ranging from $3.00 to $30.00. Royalties are
paid to the licensors of the fantasy characters.
The Malibu line focuses primarily on children's toys and novelty gift items
for which a demand exists, and seeks to make them more attractive or fun through
a unique design or innovative packaging. The Malibu line products are sold to
mass merchant retailers, chain stores and speciality stores and are offered at
retail prices ranging from $3.00 to $40.00. The Malibu line products do not
incorporate licensed characters.
Historically, the Company's sales were almost evenly divided between the
Janex line and the Malibu line. However, Janex's current business strategy is to
focus on sales of products by the Malibu line. The Malibu line does not
incorporate licensed fantasy characters into its products and therefore does not
pay royalties to licensors which are significant and often require guaranteed
minimum payments. Sales of products incorporating licensed characters can be
volatile, especially given the short-lived popularity of such characters and
increasing competition in the children's entertainment and animation industries.
RESULTS OF OPERATIONS OF THE COMPANY
The following table sets forth, for the periods indicated, the relative
percentage that certain income and expense items bear to net sales.
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<PAGE> 465
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
--------------------------------------------- ------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1998 MARCH 31, 1998 MARCH 31, 1999
--------------------- --------------------- -------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- ------- ---------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales............................ $ 5,596,979 100.0% $ 3,117,599 100.0% $1,608,557 100.0% $ 222,346 100.0%
Cost of Sales........................ 3,354,114 59.9 1,663,627 52.4 769,735 47.9 187,037 84.1
Royalties............................ 651,422 11.6 380,969 12.2 54,859 3.4 5,355 2.4
----------- ----- ----------- ----- ---------- ----- --------- -----
Gross Profit......................... 1,591,443 28.5 1,103,003 35.4 783,963 48.7 29,954 13.5
Selling, general and administrative
expenses........................... 2,208,106 39.5 1,755,882 56.3 424,536 26.3 154,928 69.7
Depreciation and amortization........ 551,951 9.9 376,283 12.1 75,244 4.7 73,408 33.0
Write-off of goodwill and intangible
assets............................. 1,643,386 29.3 -- -- -- -- -- --
----------- ----- ----------- ----- ---------- ----- --------- -----
Operating income (loss).............. (2,812,000) (50.2) (1,029,162) (33.0) 284,183 17.7 (198,382) (89.2)
Other expense........................ 359,303 (6.4) 248,432 (8.0) 55,793 (3.5) 5,111 (2.3)
----------- ----- ----------- ----- ---------- ----- --------- -----
Loss before taxes.................... (3,171,303) (56.6) (1,277,594) (41.0) 228,390 14.2 (203,493) 91.5
Income tax expense................... 3,548 (0.1) 5,746 (0.1) 5,083 (.3) 4,725 (2.1)
----------- ----- ----------- ----- ---------- ----- --------- -----
Net income (loss).................... $(3,174,851) (56.7) $(1,283,340) (41.1) $ 223,307 13.9 $(208,218) (93.6)
=========== ===== =========== ===== ========== ===== ========= =====
</TABLE>
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<PAGE> 466
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
For three months ended March 31, 1999, net sales decreased significantly by
$1,386,211 or 86.2%, to $222,346, as compared to net sales of $1,608,557 for the
three months ended March 31, 1998. The significant decrease in net sales is a
direct result of the changeover in new management. The resulting relocation of
the Company's headquarters and a major change in sales representative groups had
a direct negative impact on net sales for the three months ended March 31, 1999.
At March 31, 1999, the Company had a backlog of unfilled orders of
approximately $400,000 comparable with its order backlog of approximately
$1,200,000 at March 31, 1998. Although the Company has noted a general decrease
in order flow in 1999, as compared to prior years, the present backlog is not
necessarily indicative of net sales to be expected for the full fiscal year
ending December 31, 1999.
For the three months ended March 31, 1999, gross profit was $29,954 or
13.5% of net sales, as compared to $783,963 or 48.7% of net sales for the three
months ended March 31, 1998. The Company typically establishes prices to obtain
a target gross margin ranging from 45% to 50%, but overall gross margin can vary
depending on the sales mix in each quarter. The decrease in gross margin in
1999, as compared to 1998, was the result of the Company deciding to close out
certain slow-moving inventory at little or no profit and price adjustments due
to competition.
For the three months ended March 31, 1999, royalty expense was $5,355 or
2.4% of net sales, as compared to $54,859 or 3.4% of net sales for the three
months ended March 31, 1998. The decrease in royalty expense in 1999, as
compared to 1998 was a result of a shift in the sales mix to a higher proportion
of non-royalty sales, which include the Wet Pet line.
For the three months ended March 31, 1999, selling, general and
administrative expenses decreased by $269,608 or 63.5%, to $154,928 or 69.7% of
net sales, as compared to $424,536 or 26.3% of net sales, for the three months
ended March 31, 1998. Selling, general and administrative expenses are comprised
of fixed overhead costs and variable selling expenses. The decrease in selling,
general and administrative expenses is a direct result of management's
continuing effort to reduce fixed overhead costs.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
Sales for the year ended December 31, 1998, were $3,117,599, as compared to
$5,596,979 for the year ended December 31, 1997, a decrease of $2,479,380 or
44.3%. Management believes the sales decrease resulted from a number of factors.
Many of the Company's customers had inventory carry-overs from 1997 and were
reluctant to place large orders for shipment for 1998. In addition, approvals on
product designs from certain licensors were provided on an untimely basis,
delaying manufacturing. And finally, there was a significantly reduced demand
for products incorporating a licensed character.
The net loss for the year ended December 31, 1998, was $1,283,340 or $0.13
per share, compared to a net loss of $3,174,851 or $0.55 per share for the year
ended December 31, 1997. However, the significant net loss for 1997 was due in
part to the Company's write-off of certain intangible assets, consisting of
trademarks, licensing arrangements and goodwill, amounting to $1,643,386.
Without these write-offs, the company's net losses for 1997 would have been
$1,531,465, or $0.27 per share.
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<PAGE> 467
Sales during the year ended December 31, 1998, were primarily from shipment
of products from the Malibu product line. The Wet Pets product line generated
sales of $1,798,866 or 57.7% of total sales in 1998. This compares to sales for
the year ended December 31, 1997 of $2,817,410 or 50.3% of total sales. Shipment
of products incorporating characters licensed from the Walt Disney Company
generated sales of $62,243 or 2.0% of total sales, and the shipment of products
incorporating characters licensed from Warner Bros. generated sales of $95,366
or 3.1% of total sales. This compares to sales during the year ended December
31, 1997, when licenses from the Walt Disney Company generated sales of $628,184
or 11.2% of total sales, and licenses from Warner Bros. generated $1,361,780 or
24.3% of total sales.
Royalty expense was $380,969 for the year ended December 31, 1998, or 12.2%
of sales, as compared to royalties of $651,422 or 11.6% of sales for the year
ended December 31, 1997. The increase in royalties as a percentage of sales is a
result of a significant shift in the sales mix to a higher proportion of
non-royalty sales (including the Wet Pet products) which resulted in a reduction
of royalty expense, which was offset by a charge to operations of $197,880 to
meet royalty guarantees made on contracts under which insufficient product sales
were generated to meet the minimum guarantees through December 31, 1998.
Gross profit of $1,103,003 was 35.4% of total sales for the year ended
December 31, 1998, as compared to $1,591,443 or 28.5% of sales for the year
ended December 31, 1997. Gross profits fell in 1998 because of significantly
lower sales but margins improved because sales of lower margin products were
more substantially affected. The gross profit for both 1998 and 1997 was
negatively affected by the write down of inventories of approximately $299,000
and $50,000 during those years, respectively.
Selling, general and administrative ("SG&A") expenses were $1,755,882 or
56.3% of sales for the year ended December 31, 1998, as compared to $2,208,106
or 39.5% of sales for the year ended December 31, 1997. SG&A expenses are
comprised of fixed overhead costs and variable selling costs. SG&A increased as
a percentage of sales due to the significant decrease in sales volume in 1998
over that of 1997, partially offset by a decrease in fixed overhead costs.
Interest expense for the year ended December 31, 1998, was $260,533 or 8.4%
of sales as compared to $389,401 or 7.0% of the sales for the year ended
December 31, 1997. The decrease was primarily attributable to the decrease of
imputed interest charges on notes payable to related parties. For 1998, the
charge was $116,863, as compared to $214,292 for 1997. The decrease was slightly
offset by an increase in the use of the Company's credit facilities to finance
operations during peak business periods as a result of the overall decrease in
sales during the year.
Depreciation expense for the year ended December 31, 1998, was $376,283 or
12.1% of sales, as compared to $551,951 or 9.9% of sales for the year ended
December 31, 1997. Due to historical operating losses and limited working
capital, the Company's ability to acquire new fixed assets has decreased. As a
result, depreciation expense has declined.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business historically tended to generate the greater part of
both sales and profits during the Christmas selling season. However, with the
significant shift of sales relating to the Wet Pet line, approximately 50% of
shipping has taken place between January and March.
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<PAGE> 468
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its existing cash balance together with its
existing lines of credit and projected cash flow from operations will not be
sufficient to fund projected order flow, overhead and debt repayment for the
fiscal year ending December 31, 1999. The Company has experienced recurring
losses from operations, negative cash flows and decreases in working capital.
The Company's ultimate ability to continue as a going concern depends on:
(i) the market acceptance of its products; (ii) its generation of operating
profits; (iii) its creation of a sustainable positive cash flow; and (iv)
obtaining additional financial resources to provide near term operating cash.
Management believes that the financial resources from its majority shareholder,
Futech, in addition to sales generated from new product lines that it is
developing, will allow the Company to continue in operation for fiscal year
1999.
The Company had negative cash flow from operating activities of $626,229
for the three months ended March 31, 1999, as compared to a negative operating
cash flow for the three months ended March 31, 1998 of $100,514, as declining
sales have led to lower accounts receivable collections in 1999.
During the three months ended March 31, 1999, the Company incurred
additions to product development costs of $24,168. This compares to additions to
tooling and molds related to new licenses of $6,483 and additions to product
development costs of $19,998 for the three months ended March 31, 1998.
The Company generated $605,718 from financing activities during the three
months ended March 31, 1999 compared to $142,581 during the same period in 1998.
The cash generated in financing activities came from proceeds of advances from
parent of $605,718.
The Company had negative cash flow from operating activities of $666,007
for the year ended December 31, 1998, compared to a positive cash flow in 1997
of $323,180, as declining sales have led to lower accounts receivable
collections in 1998.
The Company used $96,031 in investing activities for the year ended
December 31, 1998, compared to providing $103,018 in 1997. The increase in cash
used in investing activities relates primarily to a slight decrease in
expenditures to build tools and molds and to develop new products. During 1998,
the Company invested $81,567 in additions to property, plant and equipment, of
which all of it was for tooling for new products, and the Company invested
$114,464 in product development costs. Additionally, in 1998 the Company
redeemed $100,000 of its certificate of deposit. During 1997, the Company made
comparable investments of $190,898 in property, plant and equipment, of which
approximately $174,499 was for tooling for new products, and the Company
invested $106,084 in product development costs. Additionally, the Company
redeemed $400,000 of its certificate of deposit.
The Company generated $659,778 from financing activities during the year
ended December 31, 1998, compared to using $448,142 during 1997. The cash
generated in financing activities came primarily from an increase in bank debt
of $257,000, a decrease in note payable of $219,189, a decrease in loan
payable-agent of $249,113 and offset by proceeds of advances from parent of
$621,080 and proceeds of issuance of common stock of $250,000.
The Company's capital commitments for 1999 include commitments for minimum
guaranteed royalties under licensing agreements. The commitments for 1999 and
2000 amount to $268,959 and $35,000, respectively. The Company also maintains a
non-
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<PAGE> 469
cancelable operating lease on its former facility, although it subleases that
space for an amount approximating the Company's rent to the landlord. Future
minimum payments under this lease are $102,000 per year for each of 1999 and
2000.
On December 11, 1998, Futech purchased 5,219,046 shares of common stock and
$1,480,783 of stockholder loans (including interest of $250,784) to the Company
from certain of the Company's majority stockholders. Subsequently, the
shareholder loans were converted into 8,011,645 shares of common stock and
5,000,000 shares of preferred stock. After such conversion, Futech owns
approximately 79 percent of the Company's outstanding stock.
Until December 1998, the Company had the ability to borrow up to $900,000
under a Revolving Credit Agreement with a significant stockholder of the Company
that expires on October 19, 1999. The Revolving Credit Agreement bears interest
at 9.5 percent payable quarterly. The Revolving Credit Agreement is secured by
all of the assets of Janex Corporation, and the guarantee of the Company. As
additional consideration, on April 19, 1996, the Company granted the lender
warrants to purchase up to 900,000 shares of the Company's common stock,
exercisable at a price of $1.45 per share through April 19, 2000. The Company
has used $150,000 under the Revolving Credit Agreement as security to issue a
stand-by letter of credit in connection with the loan payable to the Company's
Hong Kong agent. This agreement ended and all warrants were canceled on December
11, 1998 in connection with Futech's acquisition of all this significant
stockholder's Common Stock.
In connection with the acquisition of Janex Corporation in 1993, the
Company issued promissory notes to two stockholders totaling $1,000,000, payable
in semi-annual installments over a three-year period. On June 28, 1996, the note
holders agreed to extend the payment date for all remaining payments to February
1, 1998, subject to payment of interest at the rate of 9.5 percent per annum,
retroactive to January 1, 1996. On August 4, 1997, the note holders agreed to
further extend the payment date to February 1, 1999. Quarterly interest payments
commenced on September 1, 1996. In connection with the extension of the notes,
the Company entered into a warrant agreement with each of the note holders,
providing for the issuance of up to 282,994 warrants to one of them and up to
167,994 warrants to the other, to acquire a total of 450,998 shares of the
Company's common stock, exercisable at a price of $1.45 per share through June
28, 2000. The warrants vest in six-month increments over the term of the loan,
and if the loan is paid off early, certain of the warrants will be void. The
agreement ended and all warrants were canceled on December 11, 1998 in
connection with Futech's acquisition of all these two stockholder's common
stock.
The Company charged to operations $116,863 and $214,292 of imputed interest
expense from the issuance of stock purchase warrants noted above for the years
ended December 31, 1998 and 1997, respectively.
The Company may borrow up to $400,000 under a line of credit agreement with
a bank. Borrowings under the line bear interest at the bank's prime rate plus
0.25 percent (8.0 percent at December 31, 1998). The line is secured by all of
the Company's assets and is personally guaranteed by two shareholders.
Borrowings under the line are due July 1, 1999. Borrowing capacity of $143,000
is available at December 31, 1998.
Through 1998, the Company had the ability to borrow up to $450,000 from its
Hong Kong agent for the payment of product development and tooling costs. Any
loans are to be repaid from collections of certain customer invoices at the rate
of 5 percent of the invoice
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<PAGE> 470
amount, with interest at two percent above the Hong Kong prime rate. All
borrowings under this arrangement were repaid in 1998. Any borrowings are
secured by certain tooling, as well as an irrevocable stand-by letter of credit
for $150,000.
Pursuant to a supplementary agency agreement, the Company had the ability
to borrow an additional $200,000 from its Agent provided that the Company issues
to the Agent an irrevocable stand-by letter of credit for $100,000. Any advance
under this facility was to be repaid within 60 days from the date of advance
with interest at 2 percent above the Hong Kong prime rate. As of December 31,
1997 and 1998, the Company had no borrowings under this credit facility.
The Company previously borrowed $340,000 under a private unsecured loan. At
December 31, 1997, the balance outstanding against this facility was $219,189,
which bore interest at prime plus 2 percent. This loan was repaid in 1998.
INFLATION
Management believes that inflation has not had a significant impact on the
Company's costs and profits during the past two years.
YEAR 2000
The Year 2000 presents potential concerns for business and consumer
computing. The consequences of this issue may include systems failures and
business process interruption. The Year 2000 issue affects Janex's internal
systems, including information technology (IT) and non-IT systems. Janex is
assessing the readiness of its systems for handling the Year 2000. Although the
assessment is still underway, management believes that all material systems will
be compliant by the Year 2000 and that the cost to address the issues will not
be material. Nevertheless, Janex is creating contingency plans for certain
internal systems.
The Company has not instituted any procedures to obtain certification from
its major vendors or customers that their systems are Year 2000 compliant. Such
a survey would include vendors who provide systems related services, e.g.,
banking, letter of credit processing, shipping, security, HVAC, etc. along with
third-party factories providing toy products. The cost of such a survey, in both
time and money, would be substantial. However, the Company does not believe that
the failure of any vendor or customer to be Year 2000 compliant will have a
material impact on the Company.
SAFE HARBOR DISCLOSURE: FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus/proxy statement and each related prospectus/proxy statement
supplement contains or incorporates by reference forward-looking statements. The
factors identified above in this section are important factors (but not
necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, New Futech or any of the merging companies.
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, New Futech
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. We cannot promise that
statements of expectation or belief will be achieved or accomplished. The words
"believe," "expect," and "anticipate" and similar expressions identify forward-
looking statements throughout these materials.
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DESCRIPTION OF JANEX'S BUSINESS
Janex International, Inc., formerly known as With Design in Mind
International, Inc., was incorporated in Colorado in 1986. Its direct or
indirect wholly-owned subsidiaries include: With Design in Mind, a California
corporation ("WDIM"); Janex Corporation, a New Jersey corporation ("Janex"); and
Malibu Fun Stuffed, Inc., a California corporation ("Malibu"); Pro Gains Company
Limited, a Hong Kong corporation ("Pro Gains"); and Malibu Fun Stuffed
International Limited, a Hong Kong corporation ("MFSI"). As used herein, the
term "the Company" refers to Janex International, Inc. and its wholly owned
subsidiaries, unless the context indicates otherwise. The Company's principal
place of business is located at 2999 N. 44th Street, Suite 225, Phoenix, Arizona
85018-7247. The Company's telephone number is (602) 808-8765.
The business of Janex and ProGains (collectively referred to as the "Janex
Division") focuses on the manufacturing and marketing of children's toys, coin,
flashlights and battery operated toothbrushes marketed under the brand name
Janex. Janex incorporates licensed characters into most of its products, and
sells its products to United States mass merchant retailers, toy specialty
stores and department stores. Sales and manufacturing were historically
facilitated through Janex's sister company in Hong Kong, Pro Gains.
Malibu and MFSI (collectively referred to as the "Malibu Division") operate
in tandem similar to Janex and Pro Gains. Together they develop, manufacture and
market toys and novelty gift items, selling to mass merchant retailers, chains
stores, and specialty stores primarily in the United States.
The product line of the Malibu Division differs from that of the Janex
Division in that most of the Malibu Division products ("Malibu Products") do not
incorporate licensed characters. While the Malibu Products fall more clearly
into the toy category, the Company considers the Janex Division products ("Janex
Products") to be of a functional nature and not necessarily toys. Therefore, the
Company operates Malibu and MFSI, and Janex and Pro Gains, as two distinct
divisions. Nevertheless, their methods of operation and procedures are almost
identical, and therefore will not be separately discussed herein, unless there
are significant differences.
BUSINESS
PRODUCTS
The Company's products are either created by the Company or licensed from
independent inventors. Royalties are payable by the Company with respect to
products manufactured from designs or technologies licensed by the Company from
inventors or other third parties.
Janex Products. Most of the Janex products incorporate licensed fantasy
characters. Presently, Janex has licenses to utilize one or more trademarks
and/or copyrights owned or controlled by The Walt Disney Company, Saban
Merchandising, New Line Productions, Inc., MCA/Universal Merchandising, Inc.,
Children's Television Workshop, World Championship Wrestling, The Lyons Group,
Lionel LLC, Warner Bros. Corporation and Turner Home Entertainment, Inc.
Although the basic underlying product may stay the same, generally the product
is tailored to match the licensed character which is incorporated into it.
Janex products are targeted for sale by mass merchant retailers at prices
ranging from $3 to $30. Generally, the commercial life expectancy of any given
Janex product is virtually unlimited in its generic state (i.e., without a
licensed character). However, the
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commercial life span of any particular version of one of the Janex products is
directly tied to the length of the license agreement for the fantasy character
incorporated into that product, and the popularity of that fantasy character
with consumers. Since most of the Janex license agreements are written for a
term of two years, and given that the popularity of most fantasy characters is
short lived, the Company estimates that the useful life of any given version of
a Janex product will be no more than two years. Although the Company intends to
continue to market some version of every one of the Janex Products it now sells
for at least the next two years, the Company nevertheless is actively developing
new products which could incorporate fantasy characters.
The Janex product line currently includes the following: battery operated
Power Toothbrush and Stand, battery operated Power Toothbrush (without stand),
battery operated Power Flashlight, Action/Talking Alarm Clock, Role Play Gear,
Deluxe Doll Carrier, Deluxe Doll Diaper Bag, Budget Doll Bedding Assortment,
Doll Comforter and Pillow Set and Lil' Miss Executive Play Set.
Malibu Products. The Malibu products do not normally incorporate licensed
fantasy characters. As a result, this product line is not limited by licensor
approval of the products it develops and sells. Malibu products are targeted for
sale by mass merchant retailers, specialty retailers and gift stores at prices
ranging from $3 to $40. The commercial life span of the Malibu products could be
long-lived, as is the case with many toys that are not tied into a fashion or
fad, but the Company expects the life span of a Malibu product to be five years
or less. Consequently, the Company is constantly seeking new product concepts
for the Malibu product line, and further, is continually redesigning and
repackaging existing products to improve consumer appeal.
Malibu products include the following pool and bathtub toys: Wee Wet Pets,
Wet Pet Babies, Water Wings, Water Rings, Bath Tub Basketball, Tub-A-Ducks, Wee
Boats, Train Adventure Video Set and Mr. Baby Proofer.
The Company intends to add several new products in 1999, subject to the
availability of working capital. The concentration of new product introductions
will be on products of similar characteristics to those already in the Company's
product lines, i.e., similar retail price levels, similar capability of
incorporating a fanciful licensed character (for Janex products), similar target
age groups, suitable for manufacture through existing or similar factories, and
suitable for distribution through existing distribution channels.
MARKETING, DISTRIBUTION AND CUSTOMERS
The Company sells its products nationwide to retailers primarily through a
network of independent sales representative firms. One of those independent
sales representative firms is owned by the Company's former President and
current director. That firm represents the Company's products to one of its
largest customers. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." The
Company's products are displayed at two major consumer product shows in January
and February of each year, and at a number of smaller specialty market shows
throughout the year. Marketing activities for the Company's product lines
primarily target mass merchant retailers in the United States and Canada, as
well as smaller regional merchants, drug chains, department stores and gift
stores. In 1998, two mass merchant retailers represented more than half of the
Company's revenues.
Janex Products. The product marketing strategy for the Janex Product line
is to market the line as a selection of products for children that are primarily
functional in
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nature and will provide a benefit to both the parent and child, and may in
certain circumstances be used as toys. Janex products incorporate licensed
characters where possible, are marketed under one brand name, Janex, and are
sold at retail prices ranging from $3 and $30. The brand name provides an
umbrella for all products which helps both the sell-in of the product line to
retailers, and the sell-through to customers.
The primary target audience for the product line is mothers of boys and
girls between the ages of three and ten. Janex products are designed to be
functional fun products which would help a parent "manage" their children and at
the same time make routine activities and chores fun and/or easier for the child
to do.
Malibu Products. The product marketing strategy for the Malibu Product
line is to market a line of reasonably priced toys and novelty gift items for
which a demand exists, and that are different from other products on the market,
either through unique product design or innovative packaging. Because the
Company does not have the financial strength to support Malibu products with
television advertising, the product design and unique packaging need to capture
the attention of consumers at the shelf level. Further, Malibu products will be
customized, either in design or in packaging, to meet the needs of specific
customers.
The Company historically offered to customers two primary methods of
purchasing product: on customary industry credit terms, FOB the Company's
primary warehouse facility in Baltimore, Maryland; or on a letter of credit
basis, through the Hong Kong subsidiaries Pro Gains and MFSI, FOB Hong Kong.
Under these terms, title to the goods passes to the buyer at the point of
origin, and in most cases the buyer is responsible for the costs of
transportation.
Prior to 1998, domestic inventories were kept in a third party contract
warehouse facility located in Baltimore, Maryland owned by the father of the
Company's former President and current director. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS." Orders from domestic customers were processed by the
Company. Shipping documents were forwarded to the Baltimore warehouse, which
filled the orders and ensured shipment of product to customers in accordance
with customer specified shipping instructions. The warehouse confirmed shipment
to the customer, and the Company then invoiced the customer.
Letter of credit orders are processed through the Company's Hong Kong
subsidiaries. The Company has no employees in Hong Kong, but instead has entered
into a service agreement with a Hong Kong based services company (also referred
to in the industry as an agent) that provides the personnel and facilities to
accomplish accepting orders primarily from United States and Canadian based
retailers, arranging for the manufacture of products to fill those orders,
delivering the products to the customers or the customers' representatives in
Hong Kong, and then processing the necessary documentation to negotiate payment
for the goods by way of letters of credit or, in some instances, by direct wire
transfer from the customer.
Although Janex maintained a domestic warehouse in Baltimore, Maryland, and
shipped to customers FOB Baltimore, this business activity ceased in 1997
because it required continued investment in inventory and accounts receivable.
Management believes that shipping to customers on normal credit terms from
domestic inventories provides access to a base of customers that do not purchase
on a letter of credit basis. This group of customers may include smaller
retailers that do not purchase enough product to make
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letter of credit purchasing advantageous, and certain larger multi-location
retailers that rely on their suppliers to provide inventory and logistics
services along with product.
In order to facilitate shipping to these customers, the Company entered
into an agreement with Advantage Merchandise, a warehouse in San Diego,
California. Advantage Merchandise purchased directly from the Company, on a
letter of credit basis, enough inventory to fulfill orders sold by the Company,
through its network of sales representative firms. Advantage Merchandise then
processed these orders, delivering the product to the customer and then
processing the collection of the accounts receivable.
As of December 31, 1998, the agreement with Advantage Merchandise expired
and the Company entered into a non-exclusive verbal distribution agreement with
Fundex Games, Ltd. on terms and service similar to the Advantage Merchandise
agreement, without commission mark up.
MANUFACTURING
All of the Company's products are manufactured to the Company's
specifications by manufacturers based in Macau and China. The Company believes
that teaming contract manufacturers with Company representatives yields cost
savings, maximizes the design resources of the Company and shortens the new
product introduction cycle. During the design stage, Company representatives
work closely with employees of the manufacturers and travel to the
manufacturers' facilities, in order to accomplish the Company's design goals.
Company employees also travel to the manufacturing facilities for the purpose of
inspecting the manufacturing process and verifying the effectiveness of quality
control and assurance programs.
Pro Gains or MFSI, through its agent, initiates all orders for product with
the manufacturer and pays the manufacturer, subsequent to the delivery of the
product in accordance with payment terms agreed to between the Company and the
manufacturer. All products manufactured in Asia are manufactured specifically
for a customer order.
PRODUCT DESIGN AND SELECTION
New products are initially selected based upon what management believes
will be successful. However, in order to reduce the expense of producing a
product that may not sell, the Company may utilize the services of professional
market research companies to perform product testings and to determine product
viability. In the product selection and design process input is also solicited
from buyers at certain retailers and from sales representatives. Feedback from
these market research resources is also used in the development of product
packaging and in the establishment of product price levels. In addition, for the
Janex products, since most incorporate licensed characters, the licensor's input
into product and packaging design is always solicited, and in some cases may
even be required by the terms and conditions of the license agreement.
While the Company has been the sole originator of several of its products,
it actively seeks innovative and unusual product concepts from third parties. If
and when the Company determines that it is willing to license a product, it
seeks to obtain the exclusive marketing and manufacturing rights.
Historically, the Company has not incurred any significant costs in
connection with research and development and does not expect to do so in the
foreseeable future. The Company keeps the direct investment in research and
development on new products to a
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<PAGE> 475
minimum by entering into agreements with product researchers/inventors providing
for ongoing royalty participation should a given product be brought to market.
For the Janex product line, the Company continually searches for new
characters to license. A new fantasy character can be used on new products as
well as extend the life of an existing product. When new licenses are acquired,
the licensors generally specify exactly what products the licensed characters
can be incorporated into, the territory in which products incorporating those
licenses can be sold, the royalty rate payable on sales of products, the royalty
advance (if any), and the royalty guarantee (if any). The amount of the royalty
rate, advance and guarantee required under any given license agreement is
generally a function of the credibility of the owner of the licensed property,
and the popularity of the licensed character with the target market.
For the Janex products, the Company seeks licenses which may open up
additional target market groups. As an example, the Little Mermaid character on
a battery operated toothbrush is a suitable product for a four year old girl.
That same battery operated toothbrush with a Batman character on it would be a
suitable product for a seven year old boy. As a result, the Company endeavors as
part of its product development program to ensure that it has spread its
available license acquisition funds across a range of licenses, rather than
investing heavily in only one or two licenses.
COMPETITION
The market for both toys and functional children's products is served by
manufacturers, both foreign and domestic, many of whom have greater financial
resources and greater name and product recognition than the Company. Because
each of the Company's products are available over a broad price range, the
market is competitive, including numerous small manufacturers and two industry
giants that dominate the industry. The Company classifies the competition for
its product lines as follows: (1) toy and novelty gift manufacturers, (2)
functional product manufacturers, and (3) direct functional children's product
competitors.
Toy and novelty gift manufacturers are companies which are primarily in the
business of manufacturing and marketing toys. Functional product manufacturers
are companies which are primarily in the business of manufacturing and marketing
a specific type, or group, of functional products, such as furniture, lighting,
or clocks, but which may include in their product line certain functional
children's products. Direct functional children's product competitors are
companies which manufacture and market functional children's products as their
company's primary business. All companies that fall into these three categories
compete with the Company's product lines.
There is considerable competition for the consumer's dollar in the
Company's target markets. However, the Company believes that Janex products are
differentiated from those of the competition by relying heavily on the use of
licensed characters. Malibu products are differentiated from those of the
competition by relying on unique product designs and unique packaging. Although
the Company attempts to protect its products with patents and/or trademarks when
available, successful products in any product classification are always
susceptible to imitation or "knock-off." The Company seeks to maintain a
competitive advantage by continuing to introduce new products and/or product
enhancements over time, by producing high quality products, and by pursuing
licenses for a broad range of children's characters.
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For the Janex products, competition between companies for licenses is
intense. Most license agreements are non-exclusive and limited in duration.
Within the industry, two years is the standard term for most license agreements.
When licenses become available, or when they are up for renewal, the licensor
may give the license to the company which is willing to offer the highest
royalty rate, advance royalty amount, or royalty guarantee. The Company ranks as
a very small player in the industry, and is extremely vulnerable in the
competition for licenses should financial strength become a primary decision
making criterion of the licensor.
The Company believes its relationship with its major licensors to be good,
and believes that it will continue to be able to obtain from its existing
licensors, and new licensors, the necessary licenses to maintain a competitive
advantage in the marketplace. However, there is no guarantee that the Company
will be able to obtain the licenses necessary to maintain a competitive
advantage, and failure to obtain those licenses would adversely effect the sales
of Janex products.
Since the Janex Division relies upon licensed characters as the primary
method of differentiating its products from those of other companies, revenues
tend to be a function of the general popularity of the characters licensed by
the Company. Thus, the strength or weakness of the licenses held by the Company
can be expected to a have a major influence on revenues and profitability, and
over time the Company expects to experience both significant upward and downward
fluctuations in sales. These upward and downward swings in revenue associated
with "fad" or "hit" licenses that generate tremendous sales volumes for short
periods make the business of selling products that incorporate licensed fantasy
characters extremely volatile, in comparison to businesses that do not sell
products that incorporate licensed fantasy characters, and that do not sell
products that are considered fads.
The volatility of revenues and profits created as a result of the
significant reliance on licensed characters by Janex products has, over time,
been reduced as Malibu products increasingly contribute to the operations of the
Company.
PATENTS, TRADEMARKS AND LICENSES
For those products that can be patented, the Company normally takes the
steps necessary to do so. However, the Company recognizes that patents are not
totally effective in prohibiting competitors from producing similar products
that could compete with those of the Company. Therefore, the Company does not
rely heavily upon patent protection to maintain its competitive position. The
Company believes that its growth, competitive position and success are dependent
upon its right to use specific licensed characters and trademarks, its ability
to develop and design unique products and packaging, its relationships with
customers, and its relationship with contract manufacturers.
The Company has entered into a number of license agreements for the use of
licensed fantasy characters on its products. These licenses typically run for
two years and all have guaranteed royalties. The following is a partial list of
the current licensors to the Company and the characters licensed:
- The Walt Disney Company for Hercules
- Warner Bros. Corporation for Looney Tunes
- Children's Television Workshop for Sesame Street
- Lionel LLC for Lionel Trains
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<PAGE> 477
- New Line Cinema Productions, Inc. for Lost in Space
- Turner Home Entertainment, Inc. for Jonny Quest
- MCA/Universal Merchandising, Inc. for Lost World
- Leisure Concepts for World Championship Wrestling, Inc. for WCW
characters
- The Lyons Group for Barney
- Saban Merchandising, Inc. for Power Rangers in Space
In addition, the Company has entered into a number of license agreements
for the use of product designs and for the rights to use certain trademarks.
These license agreements typically run two to five years. The respective
licensors in each instance have registered, own and/or control the trademark,
registered trademarks and/or copyright rights to the characters licensed and the
characters, likenesses thereof, names, pictures, drawings and any other
associations with those characters that are used by the Company strictly under
license from the respective licensor.
BACKLOG
Shipment of the Company's products is anticipated to peak during the summer
months and, consequently, it is expected that the Company's backlog will be at a
maximum during June, July and August. If items are not in stock, delivery
typically takes between one and three months. When items are in stock, items are
normally shipped on the date upon which the customer has requested shipment.
At December 31, 1998, the backlog of orders was approximately $.25 million
and at December 31, 1997, the backlog of orders was approximately $1.0 million.
GOVERNMENT REGULATIONS
The Company is subject to the provision of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Products Safety Act. Those
laws empower the Consumer Products Safety Commission (the "CPSC") to protect
children from hazardous products. The CPSC has the authority to exclude from the
market articles which are found to be hazardous and can require a manufacturer
to repurchase such products under certain circumstances. Any such determination
by the CPSC is subject to court review. Similar laws exist in some states and
cities in the United States and in many jurisdictions throughout the world. The
Company endeavors to comply with all applicable regulations through a program of
quality inspections and product testing. The Company maintains product liability
insurance in the amount of $1,000,000.
PROPERTIES
As of December 11, 1998, the Company moved its headquarters to Phoenix,
Arizona, and is presently operating in the offices of Futech Interactive
Products, Inc. (Futech) its parent corporation.
The Company entered into a lease, effective April 1, 1994, for 2,202 square
feet of office space in a multi-tenant high rise building located at 21700
Oxnard Street, Woodland Hills, California (the "Office"). The Company and the
Landlord amended the lease, effective January 1, 1996, providing the Company
with an additional 2,460 square feet of space adjacent to its current offices,
and extended the expiration date of the lease to December 31, 2000. The lease
allows for its early termination at any time after
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<PAGE> 478
March 1997, provided that the Company enters into another lease with the
landlord in the same complex. Effective April 1, 1997, the Company entered into
an agreement to sublease a portion of the facility to a third party for the
balance of the lease. Effective May 1, 1998, the Company entered into an
agreement to sublease the remaining portion of the facility to a third party for
the remaining term of the lease.
LEGAL PROCEEDINGS
There are no pending legal proceedings involving the Company.
EMPLOYEES
As of April 1, 1999, the Company had two full-time employees. The full-time
employees were engaged as follows: one in accounting and one in marketing and
product development. The Company has never experienced a work stoppage and the
Company believes that relations with its employees are good. None of the
Company's employees are covered by collective bargaining agreements.
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JANEX MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the Company's
executive officers and directors as of December 31, 1998:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Vincent W. Goett..................... 35 Chairman of the Board, Chief Executive
Office, President and Director
Joseph K. Petter..................... 56 Chief Operating Officer
Frederick B. Gretsch, Sr............. 53 Chief Financial Officer, Treasurer,
Secretary and Director
Charles M. Foley..................... 41 Director
Leslie Friedland..................... 45 Director
Daniel Lesnick....................... 46 Director
</TABLE>
VINCENT W. GOETT Mr. Goett has served as Chairman of the Board, Chief
Executive Officer and Director of Janex since December 11, 1998. Mr. Goett has
served as Chairman and Chief Executive Officer and Director of Futech since
March 1995. Mr. Goett joined Futech as its Chief Operating Officer on January 5,
1995. From August 1991 to January 1994, Mr. Goett owned and operated Paradise
International, an investment business engaged in acquisition and joint venture
activities. From September 1985 to August 1991, Mr. Goett was President of
Westplex, Inc. which effected major investments in commercial real estate. Mr.
Goett attended Arizona State University, where he studied Business Management.
JOSEPH K. PETTER Mr. Petter has served as Chief Operating Officer of Janex
since December 11, 1998, and of Futech since February 1997. Mr. Petter joined
Futech as Vice President of Operations in March 1996. From July 1989 to December
1995, Mr. Petter was a Division Vice President of ADVO, Inc., a direct mail
marketing company. From 1970 to 1989, Mr. Petter was a Group or Senior Manager
with several different operating companies of the Dun & Bradstreet Corporation.
Mr. Petter completed the Executive Management Program at the University of
Chicago and received a B.S. in Industrial Engineering from the Illinois
Institute of Technology.
FREDERICK B. GRETSCH, SR. Mr. Gretsch has been Chief Financial Officer,
Treasurer, Secretary and Director of Janex since December 11, 1998. Mr. Gretsch
has served as Chief Financial Officer, Secretary and Treasurer of Futech since
September 1997. He has served in various financial and marketing positions
throughout his career. Prior to joining Futech, from November 1995 to May 1996,
Mr. Gretsch was Treasurer of Cable Systems International, Inc., a copper wire
and cable manufacturing company, and from May 1996 to December 1996, he was
Treasurer of Vail Resorts, Inc., a ski resort company. From February 1992 to
February 1995, Mr. Gretsch was Director of Treasury Operations at General
Dynamics Corporation, a defense contractor. From June 1975 to December 1991, he
was Vice President at Citicorp/Citibank, a major bank holding company. From
October 1968 to June 1975, Mr. Gretsch was manager of Sales Accounting and an
Administrator of Finance at RCA, a diversified corporation. Mr. Gretsch received
his Masters degree in Business Administration from Columbia University and his
B.A. in Economics from Georgetown University.
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<PAGE> 480
CHARLES M. FOLEY Mr. Foley has been a Director of Janex since December 11,
1998. Mr. Foley currently serves a the President of Home, Office & Personal
Organizers, Inc., a consulting business that specializes in accounting,
financial, administrative and Y2K issues. He started his company in 1996 after
having served as Futech's Chief Operating and Financial Officer from January
1995 through February 1997, and on Futech's Board of Directors from 1997 through
the Spring of 1998. Prior to his tenure at Futech, Mr. Foley was Corporate
Controller for Paradise International Distribution Corporation, an international
and specialty markets distributor for Futech's Talking Pages from January 1995.
From 1993 to 1994, he was Corporate Controller for Hypercom, Inc., an
international manufacturer of networks and EFT terminals and systems. From 1990
to 1993, Mr. Foley served as the Financial Revenue Manager for Syntellect Inc.,
a global manufacturer of interactive voice response systems. From 1987 to 1990,
he was an Audit Supervisor for Greyhound Corporation, and from 1983 to 1987, he
was an Internal Auditor with Monsanto Company in St. Louis, Missouri. Mr. Foley
received his Masters in International Management from the American Graduate
School of International Management in 1982 and his B.S. in Management Science
from Moorhead State University in 1979. Mr. Foley served in the Peace Corps in
Honduras, Central America, from 1980 to 1982.
LESLIE FRIEDLAND Mr. Friedland has been a Director of Janex since August
4, 1997. Mr. Friedland was President and Chief Executive Officer of Janex from
August 4, 1997 to December 11, 1998. Mr. Friedland is the owner of LFA
Associates, a manufacture representative firm, which represents 18 different
lines in the mid-Atlantic region. He has been President of LFA since 1993.
DANIEL LESNICK Mr. Lesnick has been a Director of Janex since August 29,
1997. Mr. Lesnick was Executive Vice President and Chief Operating officer of
Janex from August 4, 1997 to December 11, 1998. Prior to that time, Mr. Lesnick
had been Executive Vice President of Janex Corporation, a wholly owned
subsidiary of Janex International, Inc., from October 6, 1993 to January 31,
1997, at which time he left Janex. From August 1988 to October 5, 1993, Mr.
Lesnick was Vice President and co-owner of MJL Marketing, Inc. (now Janex). He
was Director of Sales and Marketing for Sunk Yong Company, a Korean corporation
operating in a number of different industries, from February 1986 to July 1988.
Previously, Mr. Lesnick held positions as Merchandising Manager with Spencer
Gifts and as a Senior Buyer with Lionel Leisure, both specialty retailers. Mr.
Lesnick holds an associate degree in marketing.
EMPLOYMENT ARRANGEMENTS
The Company has not entered into employment agreements with any of its
executive officers.
In August 1995, the Company established a 401K Profit Sharing Plan ("401K")
for the benefit of the employees of the Company. Under the provisions of the
401K, employees may make contributions on a tax deferred basis to their 401K
account, up to the legal limits provided for by United States income tax
regulations. The Company, at its discretion, may contribute a portion of the
Company's profits to the 401K. Such contributions are allocated between members
of the 401K based on a pre-stated formula. Employer contributions vest with 401K
participants at the rate of 20% per year, beginning in year two and ending in
year six of employment. For the year ended December 31, 1998, the Company did
not make a contribution to the 401K.
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<PAGE> 481
The Company has a health insurance plan, which covers all employees in a
non-discriminatory manner. With the exception of the health insurance plan and
the 401K, the Company has no insurance or medical reimbursement plans covering
its officers or directors, nor do they contemplate implementing any such plans
at this time.
JANEX STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 1999, with
respect to the beneficial ownership of the Company's common stock by each person
known by the Company to be the beneficial owner of more than five percent of the
outstanding common stock, by each of the Company's directors, and by the
officers and directors of the Company as a group:
<TABLE>
<CAPTION>
SHARES OWNED PERCENT
BENEFICIAL OWNERS BENEFICIALLY OF CLASS(1)
- ----------------- ------------ -----------
<S> <C> <C>
Security ownership of certain beneficial owners:
Futech Interactive Products, Inc................... 13,230,691(2) 73.0%
2999 N. 44th Street, Suite 225
Phoenix, AZ 85018-7247
Security ownership of management:
Vincent W. Goett................................... 10,000 0.1%
All executive officers and directors as a group (6
persons)........................................... 10,000 0.1%
</TABLE>
- -------------------------
(1) Based upon 18,098,750 shares of common stock issued and outstanding on
December 31, 1998.
(2) Does not include ownership of 5,000,000 shares of the Company's preferred
stock which is convertible at any time into 5,000,000 shares of common
stock, provided that a sufficient number of shares of common stock are
authorized and unissued which is not currently the case. If such ownership
is included, Futech would own 79% of the Company's common stock on a
fully-diluted basis.
The Company is not aware of any contract or other arrangement, including a
pledge of the Company's securities, that could result in a change in the control
of the Company. The Company is not aware of any voting trusts.
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<PAGE> 482
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has engaged the services of a manufacturers representative
firm, Les Friedland Associates ("LFA"), to represent the Company to customers
located in the states of New York, New Jersey, Connecticut and Pennsylvania. LFA
represents the Company to its largest customer, Toys R Us. The principal owner
and operator of LFA, Mr. Leslie Friedland, is one of the former shareholders and
former Chief Executive Officer of Janex, and currently a director of the
Company. Under the terms of the representative agreement ("LFA Agreement"), LFA
was to be paid a commission of 4.25% on all sales that it generates within its
territory. Effective April 1, 1995, LFA and the Company agreed to reduce the
commission rate under the LFA Agreement to 4%. The terms and conditions of the
representative agreement are standard in the industry, and the agreement is
cancelable at any time with 30 days notice. Pursuant to the LFA Agreement, LFA
was paid, or will be paid, $65,154 for the year ended December 31, 1998 and was
paid, or will be paid, $98,166 for the year ended December 31, 1997. Further,
the Company rented showroom space from LFA during a major industry trade show in
1997, for which the Company paid $26,000. The rate charged by LFA for the
showroom rental is competitive with other showroom space rental rates during the
show period. No such expense was incurred in 1998.
On June 28, 1996, the Company and Leslie Friedland entered into an
agreement whereby the due date on the Company's note held by Mr. Friedland was
extended to February 1, 1998. Additionally the Company owed Mr. Friedland
$115,000 for commissions as of December 31, 1995, which Mr. Friedland also
extended to December 31, 1997. In connection with such extension agreement, the
Company granted warrants to Mr. Friedland to acquire up to 282,994 shares of the
Company's common stock (restricted), with certain "piggy-back" registration
rights. These warrants have an exercise price of $1.45 and expire on June 28,
2000. The warrants vest in six-month increments over the term of the loan,
commencing on June 28, 1996. The warrants were canceled on December 11, 1998.
On June 28, 1996, the Company and Daniel Lesnick, Executive Vice President
of Janex, entered into an agreement whereby the due date on the Company's note
held by Mr. Lesnick was extended to February 1, 1998. In connection with such
extension agreement, the Company granted warrants to Mr. Lesnick to acquire up
to 167,994 shares of the Company's common stock (restricted), with certain
"piggy-back" registration rights. These warrants have an exercise price of $1.45
and expire on June 28, 2000. The warrants vest in 6-month increments over the
term of the loan, commencing on June 28, 1996. The warrants were canceled on
December 11, 1998.
The Company utilized the services of a public warehouse facility, Hollins
Distributors, in Baltimore, Maryland. The warehouse facility charges the Company
a fee based on the amount of goods received, and the amount of goods shipped.
The rates charged by Hollins Distributors are competitive with those of other
public warehouses, and the relationship can be terminated annually upon 60 days
written notification. Hollins Distributors is owned by Mr. Howard Friedland, the
father of Mr. Leslie Friedland. Hollins Distributors was paid $20,911 during
1997. No payments were owed during 1998.
In December 1998, Futech Interactive Products, Inc. acquired 5,219,046
shares of the Company's common stock and shareholder loans of $1,480,783
(including interest of $250,784) from certain of the Company's majority
shareholders, including Leslie Friedland and Daniel Lesnick. Subsequently, the
Company converted those shareholder loans into 8,011,645 shares of common stock
and 5,000,000 shares of preferred stock. As a result,
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<PAGE> 483
Futech owns 73% of the Company's outstanding common stock and 100% of its
outstanding preferred stock.
On December 11, 1998, three of the Company's major stockholders, including
Leslie Friedland and Daniel Lesnick, completed the sale of their stock under a
stock purchase and sale agreement with Futech Interactive Products, Inc., a
Phoenix, Arizona-based company. Pursuant to the agreement, the shareholders sold
all 5,219,046 shares of the common stock of Janex stock owned by them,
constituting approximately 52% of the issued and outstanding common stock of
Janex, to Futech for a combination of 3,750,000 shares of Futech's Series A
Preferred Stock and $750,000 in promissory notes, and the assumption by Futech
of certain liabilities. As part of the transaction, Futech also purchased
certain receivables owed by Janex to these shareholders. In connection with the
closing of the transaction, Futech exchanged these receivables for 8,011,645
shares of common stock and 5,000,000 shares of preferred stock of the Company.
As a result, Futech is the owner of an aggregate of approximately 73% of the
issued and outstanding common stock and all of the preferred stock of the
Company, together aggregating 79% of the issued and outstanding capital stock of
the Company.
Also in connection with the closing of the transaction, Alex Hughes, Jr.
resigned from the Board of Directors of the Company, and Futech nominees Vincent
W. Goett, Frederick B. Gretsch, Sr. and Charles M. Foley were appointed to the
Board of Directors. In addition, Vincent W. Goett became the President, Chief
Executive Officer and Chairman of the Board of the Company, Joseph K. Petter
became the Chief Operating Officer, Frederick B. Gretsch became the Chief
Financial Officer, Treasurer and Secretary.
Since its acquisition of the Janex's stock, Futech has provided
administrative services to Janex, and has made certain loan advances to the
Company for its operations and is likely to make further advances as needed.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
As previously reported in the Company's Current Report on Form 8-K dated
February 25, 1999, the Company engaged Ernst & Young, LLP as its independent
auditor for the fiscal year ending December 31, 1998, to replace the firm of BDO
Seidman, LLP. Ernst & Young, LLP is the independent auditor used by the
Company's majority shareholder. The decision to change auditors was made in the
ordinary course of business.
The reports of BDO Seidman, LLP on the Company's financial statements for
1996 and 1997 did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or accounting
principles, except as discussed in the following paragraph.
As indicated in the reports of BDO Seidman, LLP on the Company's financial
statements for the past two fiscal years, there are factors that raise
substantial doubt about the Company's ability to continue as a going concern.
The independent auditor's report indicates there is no assurance the Company
will be able to realize its recorded assets and liquidate its liabilities in the
normal course of business. Although Management discusses, in a footnote, its
plans in regard to these matters, the financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In connection with the audits of the Company's financial statements for
each of the two fiscal years ended December 31, 1996 and 1997, and in the
subsequent interim period,
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there were no disagreements with BDO Seidman, LLP on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to the satisfaction of BDO Seidman, LLP would
have caused BDO Seidman, LLP to make reference to the matter in their report.
The Company has agreed to indemnify and hold harmless BDO Seidman, LLP for
any and all liabilities, costs or expenses of any nature whatsoever incurred by
BDO Seidman, LLP in defending itself in a lawsuit brought because of the
re-issuance of BDO Seidman, LLP's report on its audit of the Company's 1997
financial statements. In accordance with the agreement, the indemnification will
be void if a court, after adjudication, finds BDO Seidman, LLP to be liable for
malpractice.
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APPENDIX 1
COLORADO BUSINESS CORPORATION ACT
DISSENTERS' RIGHTS
7-113-101 -- DEFINITIONS.
For purposes of this article:
(1) "Beneficial shareholder" means the beneficial owner of shares held
in a voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring domestic or
foreign corporation, by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 7-113-102 and who exercises that right at
the time and in the manner required by part 2 of this article.
(4) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the effective date of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action except to the extent
that exclusion would be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at the legal rate as
specified in section 5-12-101, C.R.S.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares that are registered in the name of a nominee to the extent such
owner is recognized by the corporation as the shareholder as provided in
section 7-107-204.
(7) "Shareholder" means either a record shareholder or a beneficial
shareholder.
7-113-102 -- RIGHT TO DISSENT.
(1) A shareholder, whether or not entitled to vote, is entitled to dissent
and obtain payment of the fair value of the shareholder's shares in the event of
any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party if:
(I) Approval by the shareholders of that corporation is required
for the merger by section 7-111-103 or 7-111-104 or by the articles of
incorporation; or
(II) The corporation is a subsidiary that is merged with its parent
corporation under section 7-111-104;
(b) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired;
(c) Consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of the property of the corporation for which a
shareholder vote is required under section 7-112-102 (1); and
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(d) Consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of the property of an entity controlled by the
corporation if the shareholders of the corporation were entitled to vote
upon the consent of the corporation to the disposition pursuant to section
7-112-102 (2).
(1.3) A shareholder is not entitled to dissent and obtain payment, under
subsection (1) of this section, of the fair value of the shares of any class or
series of shares which either were listed on a national securities exchange
registered under the federal "Securities Exchange Act of 1934", as amended, or
on the national market system of the national association of securities dealers
automated quotation system, or were held of record by more than two thousand
shareholders, at the time of:
(a) The record date fixed under section 7-107-107 to determine the
shareholders entitled to receive notice of the shareholders' meeting at
which the corporate action is submitted to a vote;
(b) The record date fixed under section 7-107-104 to determine
shareholders entitled to sign writings consenting to the corporate action;
or
(c) The effective date of the corporate action if the corporate action
is authorized other than by a vote of shareholders.
(1.8) The limitation set forth in subsection (1.3) of this section shall
not apply if the shareholder will receive for the shareholder's shares, pursuant
to the corporate action, anything except:
(a) Shares of the corporation surviving the consummation of the plan
of merger or share exchange;
(b) Shares of any other corporation which at the effective date of the
plan of merger or share exchange either will be listed on a national
securities exchange registered under the federal "Securities Exchange Act
of 1934", as amended, or on the national market system of the national
association of securities dealers automated quotation system, or will be
held of record by more than two thousand shareholders;
(c) Cash in lieu of fractional shares; or
(d) Any combination of the foregoing described shares or cash in lieu
of fractional shares.
(2) (Deleted by amendment, L. 96, p. 1321, sec. 30, effective June 1,
1996.)
(2.5) A shareholder, whether or not entitled to vote, is entitled to
dissent and obtain payment of the fair value of the shareholder's shares in the
event of a reverse split that reduces the number of shares owned by the
shareholder to a fraction of a share or to scrip if the fractional share or
scrip so created is to be acquired for cash or the scrip is to be voided under
section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair
value of the shareholder's shares in the event of any corporate action to the
extent provided by the bylaws or a resolution of the board of directors.
(4) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this article may not challenge the corporate action
creating such entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
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7-113-103 -- DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
person and causes the corporation to receive written notice which states such
dissent and the name, address, and federal taxpayer identification number, if
any, of each person on whose behalf the record shareholder asserts dissenters'
rights. The rights of a record shareholder under this subsection (1) are
determined as if the shares as to which the record shareholder dissents and the
other shares of the record shareholder were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to the shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder causes the corporation to receive the
record shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder dissents with respect to all shares
beneficially owned by the beneficial shareholder.
(3) The corporation may require that, when a record shareholder dissents
with respect to the shares held by any one or more beneficial shareholders, each
such beneficial shareholder must certify to the corporation that the beneficial
shareholder and the record shareholder or record shareholders of all shares
owned beneficially by the beneficial shareholder have asserted, or will timely
assert, dissenters' rights as to all such shares as to which there is no
limitation on the ability to exercise dissenters' rights. Any such requirement
shall be stated in the dissenters' notice given pursuant to section 7-113-203.
7-113-201 -- NOTICE OF DISSENTERS' RIGHTS.
(1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is submitted to a vote at a shareholders' meeting, the notice
of the meeting shall be given to all shareholders, whether or not entitled to
vote. The notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and shall be accompanied by a copy of this
article and the materials, if any, that, under articles 101 to 117 of this
title, are required to be given to shareholders entitled to vote on the proposed
action at the meeting. Failure to give notice as provided by this subsection (1)
shall not affect any action taken at the shareholders' meeting for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's shares under this article by reason of the shareholder's
failure to comply with the provisions of section 7-113-202 (1).
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104, any written or oral solicitation of a shareholder to execute
a writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this article, by a copy of this
article, and by the materials, if any, that, under articles 101 to 117 of this
title, would have been required to be given to shareholders entitled to vote on
the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting. Failure to give notice as provided by this subsection (2)
shall not affect any
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action taken pursuant to section 7-107-104 for which the notice was to have been
given, but any shareholder who was entitled to dissent but who was not given
such notice shall not be precluded from demanding payment for the shareholder's
shares under this article by reason of the shareholder's failure to comply with
the provisions of section 7-113-202 (2).
7-113-202 -- NOTICE OF INTENT TO DEMAND PAYMENT.
(1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is submitted to a vote at a shareholders' meeting and if
notice of dissenters' rights has been given to such shareholder in connection
with the action pursuant to section 7-113-201 (1), a shareholder who wishes to
assert dissenters' rights shall:
(a) Cause the corporation to receive, before the vote is taken,
written notice of the shareholder's intention to demand payment for the
shareholder's shares if the proposed corporate action is effectuated; and
(b) Not vote the shares in favor of the proposed corporate action.
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104 and if notice of dissenters' rights has been given to such
shareholder in connection with the action pursuant to section 7-113-201 (2), a
shareholder who wishes to assert dissenters' rights shall not execute a writing
consenting to the proposed corporate action.
(3) A shareholder who does not satisfy the requirements of subsection (1)
or (2) of this section is not entitled to demand payment for the shareholder's
shares under this article.
7-113-203 -- DISSENTERS' NOTICE.
(1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized, the corporation shall give a written
dissenters' notice to all shareholders who are entitled to demand payment for
their shares under this article.
(2) The dissenters' notice required by subsection (1) of this section shall
be given no later than ten days after the effective date of the corporate action
creating dissenters' rights under section 7-113-102 and shall:
(a) State that the corporate action was authorized and state the
effective date or proposed effective date of the corporate action;
(b) State an address at which the corporation will receive payment
demands and the address of a place where certificates for certificated
shares must be deposited;
(c) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(d) Supply a form for demanding payment, which form shall request a
dissenter to state an address to which payment is to be made;
(e) Set the date by which the corporation must receive the payment
demand and certificates for certificated shares, which date shall not be
less than thirty days after the date the notice required by subsection (1)
of this section is given;
(f) State the requirement contemplated in section 7-113-103 (3), if
such requirement is imposed; and
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(g) Be accompanied by a copy of this article.
7-113-204 -- PROCEDURE TO DEMAND PAYMENT.
(1) A shareholder who is given a dissenters' notice pursuant to section
7-113-203 and who wishes to assert dissenters' rights shall, in accordance with
the terms of the dissenters' notice:
(a) Cause the corporation to receive a payment demand, which may be
the payment demand form contemplated in section 7-113-203 (2) (d), duly
completed, or may be stated in another writing; and
(b) Deposit the shareholder's certificates for certificated shares.
(2) A shareholder who demands payment in accordance with subsection (1) of
this section retains all rights of a shareholder, except the right to transfer
the shares, until the effective date of the proposed corporate action giving
rise to the shareholder's exercise of dissenters' rights and has only the right
to receive payment for the shares after the effective date of such corporate
action.
(3) Except as provided in section 7-113-207 or 7-113-209 (1) (b), the
demand for payment and deposit of certificates are irrevocable.
(4) A shareholder who does not demand payment and deposit the shareholder's
share certificates as required by the date or dates set in the dissenters'
notice is not entitled to payment for the shares under this article.
7-113-205 -- UNCERTIFICATED SHARES.
(1) Upon receipt of a demand for payment under section 7-113-204 from a
shareholder holding uncertificated shares, and in lieu of the deposit of
certificates representing the shares, the corporation may restrict the transfer
thereof.
(2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.
7-113-206 -- PAYMENT.
(1) Except as provided in section 7-113-208, upon the effective date of the
corporate action creating dissenters' rights under section 7-113-102 or upon
receipt of a payment demand pursuant to section 7-113-204, whichever is later,
the corporation shall pay each dissenter who complied with section 7-113-204, at
the address stated in the payment demand, or if no such address is stated in the
payment demand, at the address shown on the corporation's current record of
shareholders for the record shareholder holding the dissenter's shares, the
amount the corporation estimates to be the fair value of the dissenter's shares,
plus accrued interest.
(2) The payment made pursuant to subsection (1) of this section shall be
accompanied by:
(a) The corporation's balance sheet as of the end of its most recent
fiscal year or, if that is not available, the corporation's balance sheet
as of the end of a fiscal year ending not more than sixteen months before
the date of payment, an income statement for that year, and, if the
corporation customarily provides such statements to shareholders, a
statement of changes in shareholders' equity for that year and a statement
of cash flow for that year, which balance sheet and statements shall have
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been audited if the corporation customarily provides audited financial
statements to shareholders, as well as the latest available financial
statements, if any, for the interim or full-year period, which financial
statements need not be audited;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under
section 7-113-209; and
(e) A copy of this article.
7-113-207 -- FAILURE TO TAKE ACTION.
(1) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 does not occur within sixty days after the date
set by the corporation by which the corporation must receive the payment demand
as provided in section 7-113-203, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(2) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 occurs more than sixty days after the date set by
the corporation by which the corporation must receive the payment demand as
provided in section 7-113-203, then the corporation shall send a new dissenters'
notice, as provided in section 7-113-203, and the provisions of sections
7-113-204 to 7-113-209 shall again be applicable.
7-113-208 -- SPECIAL PROVISIONS RELATING TO SHARES ACQUIRED AFTER ANNOUNCEMENT
OF PROPOSED CORPORATE ACTION.
(1) The corporation may, in or with the dissenters' notice given pursuant
to section 7-113-203, state the date of the first announcement to news media or
to shareholders of the terms of the proposed corporate action creating
dissenters' rights under section 7-113-102 and state that the dissenter shall
certify in writing, in or with the dissenter's payment demand under section
7-113-204, whether or not the dissenter (or the person on whose behalf
dissenters' rights are asserted) acquired beneficial ownership of the shares
before that date. With respect to any dissenter who does not so certify in
writing, in or with the payment demand, that the dissenter or the person on
whose behalf the dissenter asserts dissenters' rights acquired beneficial
ownership of the shares before such date, the corporation may, in lieu of making
the payment provided in section 7-113-206, offer to make such payment if the
dissenter agrees to accept it in full satisfaction of the demand.
(2) An offer to make payment under subsection (1) of this section shall
include or be accompanied by the information required by section 7-113-206 (2).
7-113-209 -- PROCEDURE IF DISSENTER IS DISSATISFIED WITH PAYMENT OR OFFER.
(1) A dissenter may give notice to the corporation in writing of the
dissenter's estimate of the fair value of the dissenter's shares and of the
amount of interest due and may demand payment of such estimate, less any payment
made under section 7-113-206,
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or reject the corporation's offer under section 7-113-208 and demand payment of
the fair value of the shares and interest due, if:
(a) The dissenter believes that the amount paid under section
7-113-206 or offered under section 7-113-208 is less than the fair value of
the shares or that the interest due was incorrectly calculated;
(b) The corporation fails to make payment under section 7-113-206
within sixty days after the date set by the corporation by which the
corporation must receive the payment demand; or
(c) The corporation does not return the deposited certificates or
release the transfer restrictions imposed on uncertificated shares as
required by section 7-113-207 (1).
(2) A dissenter waives the right to demand payment under this section
unless the dissenter causes the corporation to receive the notice required by
subsection (1) of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
7-113-301 -- COURT ACTION.
(1) If a demand for payment under section 7-113-209 remains unresolved, the
corporation may, within sixty days after receiving the payment demand, commence
a proceeding and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay to each dissenter whose demand remains
unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in subsection
(1) of this section in the district court of the county in this state where the
corporation's principal office is located or, if the corporation has no
principal office in this state, in the district court of the county in which its
registered office is located. If the corporation is a foreign corporation
without a registered office, it shall commence the proceeding in the county
where the registered office of the domestic corporation merged into, or whose
shares were acquired by, the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unresolved parties to the proceeding commenced
under subsection (2) of this section as in an action against their shares, and
all parties shall be served with a copy of the petition. Service on each
dissenter shall be by registered or certified mail, to the address stated in
such dissenter's payment demand, or if no such address is stated in the payment
demand, at the address shown on the corporation's current record of shareholders
for the record shareholder holding the dissenter's shares, or as provided by
law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to such order. The parties to
the proceeding are entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding commenced under
subsection (2) of this section is entitled to judgment for the amount, if any,
by which the court finds the fair value of the dissenter's shares, plus
interest, exceeds the amount paid by the
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corporation, or for the fair value, plus interest, of the dissenter's shares for
which the corporation elected to withhold payment under section 7-113-208.
7-113-302 -- COURT COSTS AND COUNSEL FEES.
(1) The court in an appraisal proceeding commenced under section 7-113-301
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation; except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under section 7-113-209.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any dissenters if the
court finds the corporation did not substantially comply with the
requirements of part 2 of this article; or
(b) Against either the corporation or one or more dissenters, in favor
of any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this article.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to said counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefitted.
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TRUDY CORPORATION
353 MAIN AVENUE
NORWALK, CONNECTICUT 06851-1552
-------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 1999
-------------------------
You are invited to attend a Special Meeting of Stockholders of Trudy
Corporation that will be held at a.m. local time on , 1999, at
. The Trudy Board of Directors has called this special
meeting for the following purposes:
- To consider and vote upon a proposal to approve and adopt the Merger
Agreement dated as of June 7, 1999, by and among Trudy, Futech
Interactive Products, Inc., Janex International, Inc., Fundex Games,
Ltd., DaMert Company, and two newly formed companies that we are
referring to as "New Futech" and "New Sub." Under the Merger Agreement,
first Futech and then Trudy, Janex, and DaMert will merge with and into
New Futech, which will survive the mergers, and Fundex will merge into
New Sub, which will survive as a wholly-owned subsidiary of New Futech.
Each share of Trudy common stock outstanding immediately prior to the
mergers (other than dissenting shares) will be converted into the right
to receive approximately .0011 shares of New Futech common stock and
$.0012 in cash. In addition, if at the time the New Futech stock is first
traded on a listed and recognized securities exchange, its average
closing price over a specified 15 day period is less than $7.50 per
share, the former Trudy stockholders will receive additional shares of
New Futech common stock in an amount sufficient to cause the value of all
such stock issued to them to equal $3,000,000. If by the fifth
anniversary of the closing the New Futech common stock is still not
publicly traded as described above, each former Trudy stockholder will
have the right to exchange New Futech stock for unsecured five year
debentures of New Futech bearing interest at prime and with a principal
amount equal to $7.50 per share exchanged.
- To transact such other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
These matters are more fully described in the prospectus/proxy statement
supplement and related prospectus/proxy statement that are attached to this
Notice.
We, the board of directors of Trudy, unanimously recommend that you vote
FOR the mergers.
You will be entitled to vote at the special meeting or any adjournment or
postponement of the special meeting only if you are a holder of record of Trudy
common stock at the close of business on , 1999.
BY ORDER OF THE BOARD OF DIRECTORS
William W. Burnham
Chairman
Norwalk, Connecticut
, 1999
IMPORTANT
We cordially invite all stockholders to attend the special meeting in
person.
Whether or not you plan to attend the special meeting in person, in order
to assure your representation at the meeting, we urge you to complete, sign and
date the enclosed proxy card, which is being solicited by the board of
directors, and promptly return it in the self-addressed return envelope enclosed
for that purpose. You may revoke your proxy at any time prior to the vote at the
meeting by telling us that you want to do so.
<PAGE> 494
SUBJECT TO COMPLETION, DATED AUGUST 6, 1999
FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.
FUTECH TOYS & GAMES, INC.
TRUDY CORPORATION
PROSPECTUS/PROXY STATEMENT SUPPLEMENT
This prospectus/proxy statement supplement, and the related prospectus/proxy
statement, are being furnished to you and the other stockholders of Trudy
Corporation, in connection with the solicitation of proxies by the Trudy board
of directors for use at the Special Meeting of Stockholders to be held at a.m.
local time on , 1999, at and at any adjournments or
postponements of the special meeting. At the special meeting, we will ask you to
consider and vote upon a proposal to approve and adopt the Merger Agreement
dated as of , 1999, by and among Trudy, Futech Interactive Products,
Inc., Janex International, Inc., Fundex Games, Ltd., DaMert Company, and two
newly formed companies (Futech Interactive Products (Delaware), Inc. and Futech
Toys & Games, Inc.) that we are referring to as "New Futech" and "New Sub,"
respectively. Under the Merger Agreement, first Futech and then Trudy, Janex,
and DaMert will merge with and into New Futech, which will survive the mergers
and Fundex will merge into New Sub, which will survive as a wholly-owned
subsidiary of New Futech. Each share of Trudy common stock outstanding
immediately prior to the mergers (other than dissenting shares) will be
converted into the right to receive approximately .0011 shares of New Futech
common stock and $.0012 in cash. In addition, if at the time the New Futech
stock is first traded on a listed and recognized securities exchange, its
average closing price over a specified 15 day period is less than $7.50 per
share, the former Trudy stockholders will receive additional shares of New
Futech common stock in an amount sufficient to cause the value of all such stock
issued to them to equal $3,000,000. If by the fifth anniversary of the closing
the New Futech common stock is still not publicly traded as described above,
each former Trudy stockholder will have the right to exchange New Futech stock
for unsecured five year debentures of New Futech bearing interest at prime and
with principal amount equal to $7.50 per share exchanged. Outstanding shares of
Futech, Janex, Fundex and DaMert will also be converted into a combination of
cash, shares of New Futech stock and promissory notes of New Futech or New Sub.
In addition, outstanding options for shares of Trudy, Futech, Janex and Fundex
will be converted into options to purchase common stock of New Futech. See
"DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT -- Basic Terms of the
Merger Agreement" in the prospectus/proxy statement.
This prospectus/proxy statement supplement and the related prospectus/proxy
statement, together with similar supplements that are being provided to
stockholders of Futech, Janex, Fundex and DaMert with copies of the prospectus/
proxy statement, also constitute the prospectus of New Futech and New Sub in
connection with the offer and issuance of their securities pursuant to the
mergers. Assuming no outstanding Futech, Janex or Fundex options or warrants are
exercised prior to the mergers, a minimum aggregate of 5,867,628 shares and a
maximum aggregate of 5,955,297 shares of New Futech common stock, a minimum of
$768,330 and a maximum of $2,116,830 in cash and a minimum aggregate of
$5,751,000 and a maximum aggregate of $7,100,000 in promissory notes of New
Futech or New Sub will be issued to the stockholders of Trudy, Futech, Janex,
Fundex and DaMert in the mergers. In addition, certain outstanding indebtedness
in the amount of $10,000,000 is expected to be exchanged for 2,222,222 shares of
New Futech preferred stock shortly after the mergers. Former stockholders of
Fundex may exchange their New Futech stock for the license rights in the "Phase
10" family of games and former stockholders of Trudy may become entitled to
receive additional New Futech shares or to exchange their New Futech shares for
debentures in the future, under certain circumstances. Certain loan agreements
and employment agreements, including employee options to acquire New Futech
common stock, are also part of the deal. See "DESCRIPTION OF THE MERGERS AND THE
MERGER AGREEMENT -- Basic Terms of the Merger Agreement" in the prospectus/proxy
statement.
There is no established public trading market for Trudy common stock,
although it is traded sporadically on the OTC Bulletin Board under the symbol
"TRDY." We expect the New Futech common stock to trade on the OTC Bulletin Board
after the mergers, but we cannot be sure it will do so and we cannot predict
what the price might be. We do not expect a trading market to develop for any of
the other securities of New Futech or New Sub.
The mergers cannot be consummated unless: (a) stockholders of Trudy, Futech,
Janex, Fundex and DaMert, voting separately at their respective meetings of
stockholders, each approve the mergers, and (b) other conditions included in the
Merger Agreement are either satisfied or waived. See "DESCRIPTION OF THE MERGERS
AND THE MERGER AGREEMENT -- Conditions to Closing" in the prospectus/proxy
statement.
The record date for the special meeting is , 1999. This
prospectus/proxy statement supplement and the related prospectus/proxy statement
and the accompanying form of proxy are first being mailed to stockholders of
Trudy on or about , 1999.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY STATEMENT
SUPPLEMENT AND THE RELATED PROSPECTUS/ PROXY STATEMENT. THE PROPOSED MERGER IS A
COMPLEX TRANSACTION. WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS
PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE RELATED PROSPECTUS/PROXY STATEMENT
IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS"
BEGINNING ON PAGE 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus/proxy statement supplement or the accompanying prospectus/proxy
statement is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus/proxy statement supplement is , 1999.
<PAGE> 495
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS/PROXY STATEMENT. WE HAVE NOT, AND NEW FUTECH AND NEW SUB HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEW FUTECH AND NEW SUB ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF THE DATE ON THE
FRONT OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ONLY. OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.
WHERE YOU CAN FIND MORE INFORMATION
We will send to you, without charge, any material information that we have
or can obtain without unreasonable effort or expense concerning Trudy or any
other merging company, concerning the Merger Agreement and related contracts or
concerning the proposed management and operations of New Futech. You may direct
requests for such additional information to Trudy in the manner described below.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http.//www.sec.gov. You may also read and copy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, and Chicago. You can call the SEC at 1-800-732-0330 for further
information about the public reference rooms. Similar information is available
concerning Janex.
The SEC allows us to "incorporate by reference" some of the information we
file with them, which means we are assumed to have disclosed important
information to you when we refer you to documents that are on file with the SEC.
The information we have incorporated by reference is an important part of this
prospectus/proxy statement supplement and the related prospectus/proxy
statement, and information that we file later with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below and any future documents we file with the SEC under Sections 13(a),
13(c), l4 or 15(d) of the Securities Exchange Act of 1934 until the mergers
occur.
- Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999.
- Quarterly Reports on Form 10-QSB for the periods ended June 30, 1998,
September 30, 1998 and December 31, 1998.
- Current Reports on Form 8-K dated December 18, 1998 and April 12, 1999.
You may request a copy of these documents at no cost by writing to us at
the following address:
Trudy Corporation
353 Main Avenue
Norwalk, Connecticut 06851-1552
Attn: William T. Carney
Telephone: 203-846-2274
TO OBTAIN TIMELY DELIVERY OF THESE DOCUMENTS, YOU MUST MAKE YOUR REQUEST NO
LATER THAN , FIVE BUSINESS DAYS BEFORE THE DATE OF THE TRUDY
STOCKHOLDERS MEETING.
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<PAGE> 496
You should rely only on the information provided in or incorporated by
reference (and not later changed) in the prospectus/proxy statement or any
prospectus/proxy statement supplement. Neither we nor New Futech have authorized
anyone else to provide you with additional or different information. New Futech
is not making an offer of any securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus/proxy
statement or any prospectus/proxy statement supplement is accurate as of any
date other than the date on the front of these documents.
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<PAGE> 497
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY INFORMATION -- Q&A.................................. 1
OTHER INFORMATION ABOUT THE MERGERS......................... 3
The Companies............................................. 3
The Special Meeting....................................... 5
The Merger Agreement...................................... 5
SPECIAL RISK FACTORS AFFECTING TRUDY........................ 6
STOCKHOLDER MATTERS......................................... 6
THE MERGERS AND RELATED TRANSACTIONS........................ 7
General................................................... 7
Effects of the Mergers.................................... 7
Background of the Mergers................................. 8
Reasons for the Mergers................................... 10
Trudy's Board Recommendation.............................. 10
Related Agreements; Interests of Certain Trudy Affiliates
in the Mergers......................................... 10
Regulatory Matters........................................ 11
Certain Federal Tax Matters............................... 11
Accounting Treatment...................................... 14
APPRAISAL RIGHTS OF TRUDY STOCKHOLDERS...................... 14
NEW FUTECH AND TRUDY SHARES................................. 16
New Futech Common Stock................................... 16
Trudy Capital Stock....................................... 16
COMPARISON OF THE RIGHTS OF HOLDERS OF TRUDY COMMON STOCK
AND NEW FUTECH COMMON STOCK............................... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION... 20
Overview.................................................. 20
Results of Operations..................................... 20
Seasonality and Quarterly Fluctuations.................... 21
Liquidity and Capital Resources........................... 21
Inflation................................................. 22
Year 2000................................................. 22
Safe Harbor Disclosure: Forward-Looking Statements and
Associated Risks....................................... 23
DESCRIPTION OF TRUDY'S BUSINESS............................. 24
General................................................... 24
Products and Licensing.................................... 24
Marketing and Sales....................................... 24
Customers................................................. 25
Manufacturing and Product Design.......................... 25
Employees and Product Design.............................. 26
</TABLE>
iii
<PAGE> 498
<TABLE>
<S> <C>
Property.................................................. 26
Legal Proceedings......................................... 26
TRUDY MANAGEMENT............................................ 27
Directors and Executive Officers.......................... 27
TRUDY STOCKHOLDERS.......................................... 29
Security Ownership of Certain Beneficial Owners and
Management............................................. 29
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 30
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 31
APPENDICES
Appendix I -- Section 262 Appraisal Rights Delaware General
Corporation Law........................................... A-1
</TABLE>
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<PAGE> 499
SUMMARY INFORMATION -- Q&A
This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the mergers contemplated thereby, you should carefully read
this entire document and the additional documents we mention. You should pay
special attention to the "RISK FACTORS" section beginning on page 8 of the
prospectus/proxy statement and "SPECIAL RISK FACTORS FOR TRUDY" on page 6 of
this prospectus/proxy statement supplement.
WHY ARE THE FIVE COMPANIES PROPOSING TO MERGE?
The five companies are proposing to merge because the directors of each
company believe the combination will provide significant benefits to
stockholders. We believe the mergers will enable us to take advantage of the
complementary strategic fit of our respective businesses by marketing through
additional channels of distribution. We also hope and believe that the mergers
will improve the likelihood that stockholders will have a more liquid market
should they wish to sell their stock and that the combined companies will be
able to more efficiently access the markets for debt and equity when
appropriate. To review the background and reasons for the mergers in greater
detail, see "BACKGROUND OF THE MERGERS" in the prospectus/proxy statement.
WHAT WILL I RECEIVE IN THE MERGERS?
You and all Trudy stockholders will receive a combination of cash and
common stock of New Futech in exchange for your Trudy stock. Stockholders of the
other merging companies will receive cash, common stock of New Futech and
promissory notes of New Futech or New Sub. Certain employment contracts and
other agreements with affiliates of the merging companies are also part of the
deal. See "DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT" in the
prospectus/proxy statement.
WHAT RISKS SHOULD I CONSIDER?
You should review "RISK FACTORS" on pages 8 through 13 of the prospectus/
proxy statement as well as the "SPECIAL RISK FACTORS AFFECTING TRUDY" on pages 6
through 7 of this prospectus/proxy statement supplement.
WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGERS?
The following table shows the proportions of the outstanding shares that
must vote in favor of the mergers, together with the proportion of the
outstanding shares that are held by directors, executive officers and their
affiliates, the majority of whom have indicated that they intend to vote in
favor of the mergers.
<TABLE>
<CAPTION>
SHARES OWNED BY DIRECTORS,
COMPANY VOTE REQUIRED EXECUTIVE OFFICERS AND AFFILIATES
- ------- ------------- ---------------------------------
<S> <C> <C>
Trudy.. Majority 55.7%
Fundex... Majority 70.8%
Futech... Majority 72.7%
Janex.. Majority 78.9%
DaMert... Majority 100.0%
</TABLE>
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<PAGE> 500
WHAT CIRCUMSTANCES MIGHT PREVENT THE MERGERS?
New Futech has the right to terminate the Merger Agreement if stockholders
from all of the merging companies combined exercise dissenters' rights with
respect to more than 5% of the aggregate merger consideration to be issued in
the mergers. See "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT -- Conditions to Closing" in the prospectus/proxy statement for a
description of the other conditions to the mergers.
HOW WILL THE MERGERS BE TREATED FOR ACCOUNTING PURPOSES?
We expect the mergers to be treated as purchases by Futech, which means
that the amount by which the total merger consideration received by stockholders
of the other merging companies plus the amount of their liabilities exceeds the
fair market value of their identifiable assets will initially be treated as
goodwill by New Futech for accounting purposes.
WHEN DO YOU EXPECT THE MERGERS TO BE COMPLETED?
We are working to complete the mergers during the third quarter of 1999.
However, the Merger Agreement does not contain any express deadline for the
mergers to proceed.
WHAT ARE THE TAX CONSEQUENCES OF THE MERGERS TO ME?
We and the other merging companies have structured the Merger Agreement
with the intent and expectation that the exchange of shares by Trudy
shareholders will be tax-free for federal income tax purposes. THERE WILL BE
FEDERAL INCOME TAXES DUE ON THE CASH AND OTHER RIGHTS THAT YOU RECEIVE. You
should review the more detailed description of federal tax consequences in
"CERTAIN FEDERAL TAX MATTERS" in this prospectus/proxy statement supplement.
State and local taxes may also become due as a result of the mergers.
The precise tax consequences of the mergers will depend on your own
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the mergers to you.
WILL I HAVE DISSENTERS' RIGHTS?
Yes, provided you do not vote in favor of the mergers and meet all other
requirements of the dissenters' rights statute. See "APPRAISAL RIGHTS OF TRUDY
STOCKHOLDERS" in this prospectus/proxy statement supplement.
WHAT DO I NEED TO DO NOW?
Just indicate on your proxy card how you want to vote on the mergers, and
sign and mail it in the enclosed return envelope as soon as possible, so that
your shares will be represented at the stockholders meeting.
If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be counted as a vote in favor of the mergers. If you do
not vote or you abstain, it will have the same effect as a vote against the
mergers.
The stockholders meeting will take place on , at
local time, at . You may attend the stockholders
meeting and vote your shares in person, rather than signing and mailing your
proxy card. In addition, you may withdraw your proxy up to and including the day
of the meeting and either change your vote or attend the meeting and vote in
person.
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<PAGE> 501
IF MY SHARES OF TRUDY STOCK ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY
BROKER VOTE MY SHARES FOR ME?
Your broker will vote your shares of Trudy stock only if you provide
instructions on how to vote. Without instructions, your shares will not be
voted. Shares that are not voted will have the same effect as votes against the
mergers.
SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
No. After the mergers are completed we will send you written instructions
for exchanging your stock certificates for the New Futech stock and cash to
which you are entitled.
OTHER INFORMATION ABOUT THE MERGERS
THE COMPANIES
NEW FUTECH
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
New Futech is a newly-organized Delaware corporation that has been formed
to be the surviving parent corporation under the Merger Agreement. New Futech
has had no operations prior to the date of this prospectus/proxy statement
supplement. Under the Merger Agreement, first Futech and then Trudy, Janex and
DaMert will merge with and into New Futech, which will survive the mergers. As a
part of the mergers, New Futech will change its name to "Futech Interactive
Products, Inc."
NEW SUB
Futech Toys & Games, Inc.
2237 Directors Row
Indianapolis, Indiana 46241
(317) 248-1080
New Sub is a newly-organized Nevada corporation that has been formed to be
the surviving subsidiary corporation of New Futech under the Merger Agreement.
New Sub has had no operations prior to the date of this prospectus/proxy
statement supplement. Under the Merger Agreement, Fundex will merge with and
into New Sub, which will survive that merger as a wholly-owed subsidiary of New
Futech. All of the stock and assets of New Sub will be pledged to the former
stockholders of Fundex to secure the promissory notes of New Sub issued to them
in connection with the merger of Fundex into New Sub. In addition, the former
stockholders of Fundex who do not elect the All Cash Alternative will receive a
conditional option to purchase New Sub's license to market the "Phase 10" family
of games in 2002 in exchange for the New Futech stock they receive in the
mergers (but not the cash or promissory notes), exercisable only if the stock
has not achieved targeted liquidity and a valuation of at least $7.50 per share
($4,500,000 in the aggregate, if no stockholders elect the All Cash Alternative)
within three years after the completion of the mergers. See "DESCRIPTION OF THE
MERGERS AND THE MERGER AGREEMENT -- Basic Terms of the Merger Agreement" in the
prospectus/ proxy statement.
3
<PAGE> 502
TRUDY
Trudy Corporation
353 Main Avenue
Norwalk, Connecticut 06851-1552
(203) 846-2274
Trudy Corporation was initially organized as a Connecticut corporation
under the name "Norwest Manufacturing Corporation" in 1979. Trudy, which does
business under the name Soundprints, publishes juvenile storybooks and audio
cassettes under license agreements with the Smithsonian Institution and the
Nature Conservancy which are sold in conjunction with contract-manufactured
educational toys to the retail, education and mail order markets.
FUTECH
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
Futech designs, publishes, manufactures and markets interactive,
educational, promotional and entertainment products (i.e., books, game boards
with sound capabilities and specialty post cards) targeted primarily towards
children. Futech's patented technology utilizes specialized conductive ink to
print interactive touch points. These touch points trigger speech, music and
sound effects. Futech licenses this technology to a major entertainment and
publishing company. Futech also distributes proprietary products, as well as
those of third party publishers, to warehouse clubs, national book chains,
specialty and independent retailers, and major toy chains.
JANEX
Janex International, Inc.
c/o Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
Janex manufactures and markets children's toys, gumball banks, flashlights
and battery operated toothbrushes marketed under the brand name Janex. Janex
incorporates licensed characters into most of its products, and sells its
products to United States mass merchant retailers, toy specialty stores and
department stores.
FUNDEX
Fundex Games, Ltd.
2237 Directors Row
Indianapolis, Indiana 46241
(317) 248-1080
Fundex Games, Ltd. was originally incorporated in the State of Indiana as
"Third Quarter, Inc." in 1991. Fundex develops, markets, and distributes a
variety of games and toys for both children and adults, including:
- card games, puzzles and board games, including the Phase 10 card game and
its sister products;
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<PAGE> 503
- skill and action games for children;
- games, puzzles and toys featuring characters licensed from third parties;
and
- spring and summer toys for children, including jump ropes, water toys and
water games.
DAMERT
DaMert Company
1609 Fourth Street
Berkeley, California 94710
(510) 524-7400
DaMert Company was founded in 1973 and incorporated in 1979. DaMert creates
and produces toy and gift products targeted primarily to children ages 6-12 with
nature and science themes. Presently, the product base includes over 200 toys,
gifts and puzzles selling through catalogs, museums, department stores,
specialty gift stores and toy stores nationwide.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Trudy special meeting will be held on , at at
.
PURPOSE OF THE SPECIAL MEETING
We have called the special meeting so the Trudy stockholders can vote on
whether to approve the mergers pursuant to the Merger Agreement. The directors
of Futech, Janex, Fundex and DaMert have called for special meetings of the
stockholders of their companies so that they also can vote whether to approve
the mergers.
RECOMMENDATION OF THE TRUDY BOARD OF DIRECTORS
We have unanimously approved the Merger Agreement and unanimously recommend
that the stockholders of Trudy vote "FOR" approval of the Merger Agreement.
THE MERGER AGREEMENT
Under the Merger Agreement, first Futech and then Trudy, Janex and DaMert
will merge with and into New Futech, which will survive the mergers, and Fundex
will merge into New Sub, which will survive as a wholly-owned subsidiary of New
Futech. Under the Merger Agreement, each share of Trudy common stock outstanding
immediately prior to the mergers (other than dissenting shares) will be
converted into the right to receive approximately .0011 shares of New Futech
common stock and $.0012 in cash. In addition, if at the time the New Futech
stock is first traded on a listed and recognized securities exchange, its
average closing price over a specified 15 day period is less than $7.50 per
share, the former Trudy stockholders will receive additional shares of New
Futech common stock in an amount sufficient to cause the value of all such stock
issued to them to equal $3,000,000. If by the fifth anniversary of the closing
the New Futech common stock is still not publicly traded as described above,
each former Trudy stockholder will have the right to exchange New Futech stock
for unsecured five year debentures of New Futech bearing interest at prime and
with principal amount equal to $7.50 per share exchanged. See "DESCRIPTION OF
THE MERGERS AND THE MERGER AGREEMENT -- Basic Terms of the Merger Agreement" in
the prospectus/proxy statement.
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<PAGE> 504
SPECIAL RISK FACTORS AFFECTING TRUDY
In addition to the risk factors set forth elsewhere in the prospectus/proxy
statement, you should carefully consider the special risks of Trudy described
below in evaluating the proposals which you will vote on at the special meeting
and the effects on the securities you will acquire in the mergers. Although we
believe that the special risks and uncertainties described below are the major
ones facing Trudy, they are not the only ones that we will face. Any of the
following could have a material adverse effect on our business, financial
condition or results of operations and the business, financial condition or
results of operations of the combined companies.
TRUDY'S REVENUES AND PROFITABILITY HAVE RECENTLY DECLINED.
For the fiscal year ended March 31, 1999 Trudy's sales declined to $3.4
million from $5.0 million in the previous year. This decline was primarily the
result of reduced sales to warehouse clubs, but a general decline was
experienced across most trade and mail order segments. For the same period, net
income declined to a loss of $1.6 million from a profit of $0.2 million in the
previous year. The decline in profitability has resulted in the need for Trudy
to exhaust its bank credit line and seek additional financing from a
modification in the borrowing formula on this credit line. This credit line
expired on June 15, 1999. Trudy has been advised that it is in default on its
credit line and its term loan because it is in violation of loan covenants to
maintain a total liabilities to net tangible worth ratio of 2.50 to 1.00 and a
minimum level of net tangible worth of $750,000. Both the credit line and the
term loan became due on June 15, 1999 and remain unpaid. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION." Additionally, William W. Burnham,
the President of Trudy, loaned Trudy $338,900 in 1998 and the company has been
unable to repay these loans. Without additional cash availability, Trudy will be
unable to develop new products, acquire additional inventory, execute a new mail
order catalog for 1999 and expand its sales in the educational markets.
STOCKHOLDERS MAY BE UNABLE TO TRADE THEIR TRUDY STOCK.
For several years, Trudy has been a de-listed company and there has been an
extremely limited market for trading shares of the company. Without a merger, it
is not expected that this situation will change, so Trudy's stockholders may not
be able to realize any value for their ownership in Trudy.
TRUDY HAS FAILED OR BEEN DELINQUENT IN FILING ITS PERIODIC AND OTHER REPORTS
WITH THE SECURITIES AND EXCHANGE COMMISSION.
Trudy's common stock is registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934. Accordingly, Trudy is required to file periodic
and other reports with the Securities and Exchange Commission. Trudy has failed
to file, and more recently has been late on several occasions in filing, with
the Securities and Exchange Commission certain of Trudy's reports on Forms
10-QSB, 10-KSB and 8-K. In addition, Trudy's directors, officers and beneficial
owners of more than 10% of Trudy's common stock are required to file reports
with the Commission pursuant to Section 16 of the Exchange Act. Some of these
required reports have not been filed timely or at all.
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<PAGE> 505
STOCKHOLDER MATTERS
There is no established public trading market for Trudy common stock,
although it is traded sporadically on the OTC Bulletin Board under the symbol
"TRDY." There is no public trading market for the New Futech common stock. We
expect the New Futech common stock to trade on the OTC Bulletin Board/Nasdaq
Stock Market soon after the mergers, but we cannot be sure it will do so and we
cannot predict what the price might be. We do not expect a trading market to
develop for any of the other securities of New Futech or New Sub.
As of May 31, 1999, the record date, there were approximately 1,479
stockholders of record of Trudy common stock, as shown on the records of our
transfer agent.
Since its organization, Trudy has not paid any dividends on its common
stock and does not anticipate paying dividends in the foreseeable future. If the
mergers do not occur for any reason, we anticipate that all earnings, in the
foreseeable future, will be retained for development of Trudy's business.
THE MERGERS AND RELATED TRANSACTIONS
GENERAL
The Merger Agreement provides for the merger of Futech with and into New
Futech, promptly followed by the substantially simultaneous merger of Trudy,
Janex, and DaMert with and into New Futech and the substantially simultaneous
merger of Fundex with and into New Sub. The discussion in this prospectus/proxy
statement supplement and the related prospectus/proxy statement of the mergers
and the description of the principal terms of the Merger Agreement contained in
the prospectus/proxy statement are subject to and qualified in their entirety by
reference to the Merger Agreement, a copy of which is attached to the
prospectus/proxy statement as Appendix A, and incorporated herein by reference.
EFFECTS OF THE MERGERS
GENERAL
We intend for the mergers to occur promptly following approval of the
mergers by the requisite vote of the stockholders of each of Trudy, Futech,
Janex, DaMert and Fundex and the satisfaction or waiver of all other conditions
to consummation of the mergers. The mergers will become effective at or about
the time of filing of articles of merger or other appropriate documents with the
applicable government offices or agencies. At that time (a) first Futech and
then Trudy, Janex, and DaMert will merge with and into New Futech with the
result that New Futech will be the surviving corporation and (b) then Fundex
will merge with and into New Sub with the result that New Sub will be the
surviving corporation. As part of the mergers, New Futech will change its name
to "Futech Interactive Products, Inc." The stockholders of Trudy will become
stockholders of New Futech, and their rights will be governed by the New Futech
certificate of incorporation and bylaws. See "COMPARISON OF RIGHTS OF
STOCKHOLDERS OF TRUDY AND NEW FUTECH." See "DESCRIPTION OF THE MERGERS AND THE
MERGER AGREEMENT" in the prospectus/proxy statement.
For information regarding the operation of New Futech and New Sub following
the mergers, see " NEW FUTECH BUSINESS" in the prospectus/proxy statement. For
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<PAGE> 506
information regarding the officers and directors of New Futech following the
mergers, see "NEW FUTECH'S MANAGEMENT" in the prospectus/proxy statement.
EXCHANGE RATIOS
Each share of Trudy common stock outstanding immediately prior to the
mergers (other than dissenting shares) will be converted into the right to
receive approximately .0011 shares of new Futech common stock and $.0012 in
cash. In addition, if at the time the New Futech stock is first traded on a
listed and recognized securities exchange, its average closing price over a
specified 15 day period is less than $7.50 per share, the former Trudy
stockholders will receive additional shares of New Futech common stock in an
amount sufficient to cause the value of all such stock issued to them to equal
$3,000,000. If by the fifth anniversary of the closing the New Futech common
stock is still not publicly traded as described above, each former Trudy
stockholder will have the right to exchange New Futech stock for unsecured five
year debentures of New Futech bearing interest at prime and with principal
amount equal to $7.50 per share exchanged.
Outstanding shares of Futech, Fundex, Janex and DaMert will also be
converted into a combination of cash, common stock of New Futech and promissory
notes of New Futech or New Sub. Under certain circumstances the former
stockholders of Fundex will have the right to exchange their New Futech stock
for the license rights in the "Phase 10" family of games now owned by Fundex. In
addition, outstanding options for shares of Trudy, Futech, Janex and Fundex will
be converted into options for shares of common stock of New Futech. See
"DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT -- Basic Terms of the
Merger Agreement" in the prospectus/proxy statement.
FRACTIONAL SHARES
Fractional shares of New Futech common stock will not be issued in the
mergers. Instead, stockholders in any of the merging companies who would
otherwise have received an amount of New Futech stock that includes a fraction
of a share will instead receive an amount of cash equal to that fraction
multiplied by $7.50. For example, a Trudy stockholder who is otherwise entitled
to receive 15.5 shares of New Futech common stock will actually receive only 15
shares, plus $3.75 in cash (i.e., 0.5 times $7.50).
BACKGROUND OF THE MERGERS
During 1998, Trudy had been actively seeking an acquisition which would
provide ready distribution for Soundprints storybooks and audio tapes in the
supplemental education market either to libraries and/or the classroom. After
several years of growth in sales and profitability due to the successful
penetration of the Soundprints products in the book seller and specialty retail
trade, warehouse clubs, and direct mail segments, the Company decided, after
reviewing market data, that the best opportunity for continued sales momentum
was to sell directly to educators where the Soundprints products could be used
in libraries and classrooms. Trudy management also believed that it had
sufficient direct marketing, back-office and order fulfillment expertise and
capacity to nearly double its sales without adding substantially to overhead
costs.
During the summer of 1998, Trudy entered preliminary discussions with three
companies with a presence in the education market. During this time, sales in
Trudy's main market segments, particularly sales to the warehouse clubs, began
to decline. It was determined that, at this reduced level of sales, the Company
would not have the financial
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resources to acquire another company. In the meantime the Company had hired a
mergers and acquisitions consulting firm, JPMC Associates, which was actively
seeking acquisition candidates for Trudy. This firm introduced Trudy to a
manufacturer and marketer of science educational products which was seeking to
acquire other companies. Discussions between Trudy's management, JPMC, and the
management of the other company took place during the fall of 1998. Historical
financial results and projections were exchanged. However, a merger agreement
acceptable to Trudy's management could not be reached.
In early November 1998, Vincent Goett, Futech's CEO, having become aware of
Trudy's interest in acquisition candidates, placed a telephone call to William
Burnham, Trudy's chief executive officer. William Carney, Trudy's chief
financial officer, returned the call to Mr. Goett. Mr. Goett reviewed Futech's
recent history of acquiring several toy, game, greeting card and publishing
distribution companies and outlined his strategy to continue making acquisitions
of companies that could utilize Futech's proprietary conductive ink sound
technology. A confidentiality agreement between the two companies was signed by
Mr. Goett and Mr. Carney on November 11.
On November 16 and 17, 1998 at an annual strategic planning retreat of
management and board members in Vermont, the Company's financial condition was
reviewed and discussed in detail as to a near strategy to address the recent
sales softness. Various alternatives were considered including remaining
independent, merging with Futech, continuing to seek other merger partners
including the science educational products company or rekindle the earlier
strategy of acquiring a literature based educational publisher. For the latter
option, one such publisher had been identified and preliminary acquisition
negotiations initiated. The consensus of those at the retreat was Soundprints
did not have a source of cash to fund an acquisition. Alternatively, a purchase
with Trudy stock would not be sufficient incentive to the acquiring party since
Trudy's stock had been de-listed and there were no market makers. In addition,
the sales level of the company was such that sufficient cash could not be
generated in the next six months to allow the Company to stay within its bank
lending covenants. Accordingly, it was decided that management should continue
with preliminary merger negotiations with Futech. On November 23 and 24, a
meeting was held at Futech's offices in Phoenix, AZ between Mr. Goett and Mr.
Burnham, Elisabeth Prial, Trudy's publisher, and Mr. James McGough, principal of
JPMC Associates. Terms of an agreement for Futech to acquire Trudy were agreed
to at these meetings. On December 11th, at a special board meeting, details of
the acquisition terms were discussed and the agreement was unanimously approved.
On December 18, 1998 a Letter of Intent was signed by both companies.
Throughout January and February, both companies performed due diligence
while the definitive merger agreement was drafted. On March 1, 1999, Trudy's
Board held a special meeting to review the proposed merger and, after discussion
and consideration, approved and authorized the execution of the merger
agreement. Following further negotiation, each of Trudy and Futech executed and
delivered the merger agreement on March 3. Since March, Trudy management has
been working closely with the management of the other merging companies to
integrate the various operations. Additional due diligence work has been
performed by all parties. Since the execution of the merger agreement on March
3, 1999 between Trudy and Futech, it was determined that it would be preferable
to have a global merger agreement which would be signed by all of the merging
companies and would supersede the prior merger agreement between Trudy and
Futech. The Global Merger Agreement (which is referred to herein as the "Merger
Agreement") contains substantially similar terms as the prior merger agreement
and was unanimously approved by Trudy's board of directors on May 25, 1999.
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REASONS FOR THE MERGERS
THE TRUDY BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF THE MERGERS
ARE IN THE BEST INTERESTS OF TRUDY AND ITS SHAREHOLDERS. ACCORDINGLY, THE TRUDY
BOARD HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER AGREEMENT AND RECOMMENDS
THAT THE STOCKHOLDERS OF TRUDY VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
As a small, de-listed public company, Trudy has found it difficult to raise
capital for investment opportunities which it considered attractive. It has also
been unable to provide its shareholders liquidity for its stock. A decline in
sales and profitability in 1998 has made it increasingly difficult for Trudy to
fund needed investments.
After pursuing several alternatives throughout 1998, including acquiring or
merging with other small publishing companies, Trudy agreed to be acquired by
Futech. Management and the board believe that the mergers will give Trudy access
to the capital needed to increase the number of titles published each year and
also expand into the supplemental education market. The mergers will also allow
Trudy to improve profitability by realizing economies of scale needed to improve
the effectiveness of its sales efforts in multiple distribution channels and
reduce overhead costs in administrative, logistical, and back-office functions.
The mergers may provide liquidity to the former Trudy stockholders for
their New Futech common stock. Trudy's board of directors expects the New Futech
common stock to trade on the OTC Bulletin Board after the mergers, but there is
no assurance that it will do so or at what price or prices it would trade.
For additional information regarding the background of and the reasons for
the merger, see "SPECIFIC REASONS FOR PREVIOUS ACQUISITIONS AND PROPOSED MERGER
PARTNERS" beginning in the prospectus/proxy statement.
TRUDY'S BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF TRUDY HAS DETERMINED THAT THE MERGERS ARE
ADVISABLE AND IN THE BEST INTERESTS OF TRUDY AND ITS STOCKHOLDERS AND HAS
UNANIMOUSLY RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
RELATED AGREEMENTS; INTERESTS OF CERTAIN TRUDY AFFILIATES IN THE MERGERS
In connection with the mergers, William W. Burnham will be employed as the
Vice President of Specialty Markets of New Futech. Mr. Burnham will also be a
director of New Futech and will receive a three year employment agreement
providing for a base salary of $100,000 per year and stock options for a total
of 20,000 shares of New Futech common stock, vesting in equal, annual
installments over the three year period and with an exercise price of $7.50 per
share. Some of the officers and directors of the other merging companies will
also receive employment agreements and stock options in connection with the
mergers.
New Futech has also agreed, as part of the Merger Agreement, to repay
certain loans owing by Trudy to William W. Burnham and two of his family members
in the aggregate amount (including accrued interest through January 31, 1999) of
$800,000. Interest will continue to accrue only on the debt owing to the family
members until the mergers occur. As of June 30, 1999, the balance, including
accrued interest owed to the family members was $173,941. No interest will
accrue on the debts owing to Mr. Burnham from February 1, 1999 through the
effective time of the mergers. Beginning on the closing date
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of the mergers, interest will accrue on the outstanding balance of all of these
loans at four percent (4%) per annum. At the closing, New Futech will repay 25%
of the outstanding balance, and thereafter will repay three equal amounts of
principal plus all accrued interest at six month intervals.
Within thirty days after the effective date of the mergers, New Futech will
obtain releases of William W. Burnham of his personal guaranty of the following
Trudy debts: (i) Trudy's revolving credit agreement with First Union, with an
outstanding balance as of June 30, 1999 of $697,234 and (ii) Trudy's four year
term note with First Union with an outstanding balance as of April 30, 1999 of
$186,099. New Futech may be required to refinance these loans to obtain the
releases.
Trudy has agreed to pay James P. McGough of JPMC Associates, Trudy's
mergers and acquisitions consulting firm, total compensation of approximately
$167,000 for his services in connection with the Trudy merger. Mr. McGough will
be paid $43,670 and granted 13,500,000 shares of Trudy common stock prior to the
closing of the mergers. The 13,500,000 shares of Trudy common stock will be
converted in the mergers into cash in the amount of $16,330 and 14,314 shares of
New Futech common stock.
REGULATORY MATTERS
Except as disclosed in this prospectus/proxy statement supplement and the
prospectus/proxy statement, Trudy and New Futech are not aware of any
governmental or regulatory approvals required for consummation of the mergers,
other than compliance with the federal securities laws and applicable securities
and "blue sky" laws of the various states.
CERTAIN FEDERAL TAX MATTERS
In the opinion of Quarles & Brady LLP, special tax counsel to New Futech,
the Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and New Futech and Trudy will
each be a party to that reorganization within the meaning of Section 368(b) of
the Code.
In rendering its opinion, counsel has relied upon and assumed as accurate
and correct on the date hereof, and will rely on and assume as accurate and
correct as of the Effective Time of merger, the information contained in this
prospectus/proxy statement supplement and the related prospectus/proxy statement
and certain representations as to factual matters made by New Futech and Trudy.
The representations relied upon include the following: (i) the Trudy
stockholders will receive in the merger New Futech common stock having a fair
market value of at least 40% of the fair market value of all outstanding Trudy
common stock immediately before the merger; and (ii) there is no plan or
intention on the part of New Futech or a corporation related to New Futech to
purchase any of the new Futech common stock transferred to the Trudy
shareholders in the merger. Any inaccuracy or change with respect to such
information or representations or actions of New Futech or Trudy contrary to
such representations could adversely affect the conclusions reached in the
opinion and the tax summary set forth below.
Counsel's opinion represents its best legal judgement as to the tax
treatment of the Merger, but the opinion is not binding on the Internal Revenue
Service (the "Service"). The parties have not and will not request a ruling from
the Service in connection with the federal income tax consequences of the
merger.
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The following discussion addresses certain federal tax consequences of the
merger to a Trudy stockholder assuming the merger will qualify as a
reorganization and is based on the provisions of the Code, the applicable
regulations thereunder, judicial authority and current administrative rulings
and practices as of the date hereof, all of which are subject to change,
possibly with retroactive effect. The discussion assumes that the shares of
Trudy common stock are held as capital assets.
The receipt by the Trudy stockholders of the conditional rights to
additional New Futech common stock will not be taxable to the Trudy
stockholders. However, the receipt by the Trudy stockholders of the conditional
rights to exchange their New Futech common stock for New Futech debentures after
5 years from the merger will be taxable to the Trudy stockholders. Imputed
interest may be imposed on the receipt of additional New Futech common stock or
New Futech debentures pursuant to the exercise of such conditional rights.
A Trudy stockholder will not recognize loss on the receipt of New Futech
common stock, the conditional right to exchange New Futech common stock for a
New Futech debenture and cash in exchange for Trudy common stock. However, under
Section 356(a)(1) of the Code, the stockholder will recognize gain, if any, with
respect to each share of Trudy common stock exchanged (measured by the sum of
the fair market value of the portion of a share of New Futech common stock
received for such share of Trudy common stock plus the fair market value of the
portion of the conditional right to exchange New Futech common stock for a New
Futech debenture received for such share of Trudy common stock plus the amount
of any cash received for such share of Trudy common stock, minus the tax basis
of such share of Trudy common stock) but only to the extent of the amount of the
conditional right to exchange New Futech common stock for a New Futech debenture
and cash received in exchange for such share of Trudy common stock.
Under applicable Supreme Court precedent, any such gain recognized will be
taxed as either gain from the sale or exchange or stock (i.e., capital gain) or
as a dividend (to the extent of the stockholder's ratable share of the earnings
and profits of Trudy), based upon whether, in the transaction described in the
next sentence, such stockholder's interest in Trudy was reduced sufficiently so
as to meet one of the tests set forth in Section 302(b) of the Code, as
described below. For purposes of this determination, a Trudy stockholder will be
treated as if such stockholder had engaged in a hypothetical transaction in
which such stockholder and all other Trudy stockholders (i) received solely
shares of New Futech common stock in exchange for all of their shares of Trudy
common stock; and (ii) thereafter had a portion of such shares of New Futech
common stock redeemed for the cash and the conditional right to exchange New
Futech common stock for a New Futech debenture portion of the merger
consideration. A Trudy stockholder's hypothetical interest in New Futech after
step (i) is compared to such stockholder's interest in New Futech subsequent to
the deemed redemption in step (ii). In each case, subject to limited exceptions,
shares of New Futech common stock actually or constructively owned by such
stockholder will be considered owned for purposes of applying the test, even if
such shares of New Futech common stock were not received or deemed received in
the Merger.
Under Section 302(b) of the Code a stockholder's interest in New Futech
will be deemed to have been reduced sufficiently so as to result in sale or
exchange treatment of the gain if, insofar as is here relevant, (i) such
stockholder's interest in New Futech is completely terminated as a result of the
transaction; (ii) as a result of the hypothetical redemption described above and
taking into account all other hypothetical redemptions in the Merger, the Fundex
Merger and the DaMert Merger, a stockholder's interest in New
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Futech is less than 80% of the stockholder's interest in New Futech before the
redemption; or (iii) such stockholder's interest was "meaningfully reduced" by
virtue of such redemption (the "Section 302 Tests"). While the latter of the
Section 302 Tests requires a determination based on a stockholder's particular
facts and circumstances, the Service has indicated in published rulings that a
distribution that results in any actual reduction in interest of an extremely
small minority stockholder in a publicly held corporation will meaningfully
reduce the stockholder's interest in the corporation if the stockholder
exercises no control with respect to corporate affairs.
Under the applicable constructive ownership rules of Section 318 of the
Code for purposes of the Section 302 Tests, a stockholder will, in general, be
treated as owning shares owned by certain family members and other related
entities, or that are subject to options owned or deemed owned by such person.
The actual or constructive ownership of shares of Trudy common stock may, in
some circumstances, have the effect of causing a Trudy stockholder that would
otherwise qualify for capital gain treatment under the Section 302 Tests to fail
to so qualify and subject such stockholder to dividend treatment.
To the extent that cash and the conditional right to exchange New Futech
common stock for a New Futech debenture received in exchange for shares of Trudy
common stock is treated as a dividend to a corporate stockholder (other than an
S corporation), such stockholder will be (i) eligible for a dividends received
deduction (subject to applicable limitations); and (ii) subject to the
"extraordinary dividend" provisions of the Code. Under recently enacted
legislation, any cash which is treated as a dividend to a corporate stockholder
will constitute an extraordinary dividend, except as otherwise provided in
Treasury Regulations which have yet to be promulgated. Consequently, in the
absence of such regulations, the nontaxed portion of any such dividend would
reduce a corporate stockholder's adjusted tax basis in the shares of New Futech
common stock received in the Merger but not below zero and would thereafter be
taxable as capital gain.
The tax basis of each share of New Futech common stock received in the
merger will be the same as the tax basis of the shares of Trudy common stock
exchanged therefor, increased by the amount of gain recognized on the exchange
with respect to such shares of Trudy common stock (including any such gain that
is treated as a dividend), decreased by the amount of cash and conditional right
to exchange New Futech common stock for a New Futech debenture received with
respect to such shares of Trudy common stock (other than cash received in lieu
of a fractional share interest). The holding period of the shares of New Futech
common stock received will include the holding period of the shares of Trudy
common stock exchanged therefor.
A holder of Trudy common stock who receives New Futech common stock and
cash pursuant to the merger will be required to retain records and file with
such holder's federal income tax return for the taxable year in which the merger
takes place a statement setting forth all relevant facts in respect of the
nonrecognition of gain or loss upon such exchange. The statement is required to
include (i) such holder's basis in the shares of Trudy common stock surrendered
in the merger; and (ii) the value of New Futech common stock received and the
conditional right to exchange New Futech common stock for a New Futech debenture
(using fair market value as of the Effective Time of merger) and the amount of
any cash received in the Merger.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A DESCRIPTION OF THE MATERIAL
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL TAX EFFECTS OF THE MERGER. In
addition, the discussion does not address all of the tax consequences that may
be relevant to particular taxpayers in light of
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their personal circumstances or to taxpayers subject to special treatment under
the Code (for example, insurance companies, financial institutions, dealers in
securities, tax exempt organizations, foreign corporations, foreign
partnerships, or other foreign entities and individuals who are not citizens or
residents of the United States and persons who acquired their New Futech common
stock pursuant to the exercise or termination of employee stock options,
warrants or otherwise as compensation.
No information is provided herein with respect to the tax consequences, if
any, of the merger under applicable foreign, state, local and other tax laws.
THE GENERAL SUMMARY SET FORTH ABOVE IS NOT INTENDED TO BE, NOR SHOULD IT BE
CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF TRUDY COMMON
STOCK. EACH HOLDER OF TRUDY COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER,
INCLUDING THE APPLICATION OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
The mergers are intended to qualify as a purchases by Futech, which means
that the amount by which the total merger consideration received by stockholders
of the other merging companies plus the amount of their liabilities exceeds the
fair market value of their identifiable assets will initially be treated as
goodwill by New Futech for accounting purposes.
APPRAISAL RIGHTS OF TRUDY STOCKHOLDERS
Delaware law entitles the holders of record of shares of Trudy common stock
who follow the procedures specified in Section 262 of the Delaware General
Corporation Law (the "DGCL") to have their shares appraised by the Delaware
Court of Chancery and to receive the "fair value" of such shares as of the
effective date of the mergers as determined by the court in place of the merger
consideration. In order to exercise appraisal rights, a stockholder must demand
and perfect the rights in accordance with Section 262 of the DGCL. The following
is a summary of Section 262 of the DGCL and is qualified in its entirety by
reference to Section 262 of the DGCL, a copy of which is attached to this
prospectus/proxy statement supplement as Appendix I. Stockholders should
carefully review Section 262 of the DGCL as well as information discussed below
to determine their rights to appraisal.
If a stockholder of Trudy elects to exercise the right to an appraisal
under Section 262 of the DGCL, such stockholder must do ALL of the following:
(1) file with Trudy at its main office in Norwalk, Connecticut, a
written demand for appraisal of the shares of Trudy common stock held
(which demand must identify the stockholder and expressly request an
appraisal) before the vote is taken on the Merger Agreement at the special
meeting (this written demand for appraisal must be in addition to and
separate from any proxy or vote against the Merger Agreement; neither
voting against, abstaining from voting nor failing to vote on the Merger
Agreement will constitute a demand for appraisal within the meaning of
Section 262 of the DGCL);
(2) not vote in favor of the Merger Agreement (a failure to vote or
abstaining from voting will satisfy this requirement, but a vote in favor
of the Merger
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Agreement, by proxy or in person, or the return of a signed proxy which
does not specify a vote against approval and adoption of the Merger
Agreement, will constitute a waiver of such stockholder's right of
appraisal and will nullify any previously filed written demand for
appraisal); and
(3) continuously hold such shares through the effective date of the
mergers.
All written demands for appraisal should be addressed to: William W.
Burnham, President, Trudy Corporation, 353 Main Avenue, Norwalk, Connecticut
06851-1552, before the vote is taken on the Merger Agreement at the special
meeting, and should be executed by, or on behalf of, the holder of record. Such
demand must reasonably inform Trudy of the identity of the stockholder and that
such stockholder is thereby demanding appraisal of such stockholder's shares.
Within 10 days after the effective date of the mergers, New Futech will
give written notice of the effective date of the mergers to each stockholder of
Trudy who has satisfied the requirements of Section 262 of the DGCL and has not
voted for the proposal to approve and adopt the Merger Agreement and the
transactions contemplated thereby (a "Dissenting Stockholder"). Within 120 days
after the effective date of the mergers, New Futech or any Dissenting
Stockholder may file a petition in the court demanding a determination of the
fair value of the shares of Trudy common stock of all Dissenting Stockholders.
Any Dissenting Stockholder desiring the filing of such petition is advised to
file such petition on a timely basis, unless such Dissenting Stockholder
receives notice that such a petition has been filed by New Futech or another
Dissenting Stockholder.
If a petition for appraisal is timely filed, the court will determine which
stockholders are entitled to appraisal rights and thereafter will determine the
fair value of the shares of Trudy common stock held by Dissenting Stockholders,
exclusive of any element of value arising from the accomplishment or expectation
of the merger, but together with a fair rate of interest, if any, to be paid on
the amount determined to be fair value. In determining such fair value, the
court shall take into account all relevant factors. The court may determine such
fair value to be more than, less than or equal to the consideration that such
Dissenting Stockholder would otherwise be entitled to receive pursuant to the
Merger Agreement. If a petition for appraisal is not timely filed, then the
right to an appraisal shall cease. The costs of the appraisal proceeding shall
be determined by the court and taxed against the parties as the court determines
to be equitable under the circumstances. Upon the application of any
stockholder, the court may determine the amount of interest, if any, to be paid
upon the value of stock of stockholders entitled thereto. Upon application of a
stockholder, the court may order all or a portion of the expenses incurred by
any stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts, to
be charged pro rata against the value of all shares entitled to appraisal.
From and after the effective date of the mergers, no Dissenting Stockholder
shall have any rights of a Trudy stockholder with respect to such holder's
shares for any purpose, except to receive payment of its fair value and to
receive payment of dividends or other distributions on such holder's shares, if
any, payable to Trudy stockholders of record as of a date prior to the effective
date of the mergers. If a Dissenting Stockholder delivers to New Futech a
written withdrawal of the demand for an appraisal within 60 days after the
effective date of the mergers or thereafter with the written approval of New
Futech, or if no petition for appraisal is filed within 120 days after the
effective date of the mergers, then the right of such Dissenting Stockholder to
an appraisal will cease and such Dissenting Stockholder will be entitled to
receive only the merger consideration.
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NEW FUTECH AND TRUDY SHARES
NEW FUTECH COMMON STOCK
For a description of New Futech common stock and its authorized but
unissued preferred stock, see "DESCRIPTION OF NEW FUTECH CAPITAL STOCK" in the
prospectus/proxy statement.
TRUDY CAPITAL STOCK
The following description of Trudy's capital stock is a summary only and is
subject to, and qualified in its entirety by, reference to Trudy's certificate
of incorporation and bylaws, copies of which are included as exhibits to the
registration statement of which this prospectus/proxy statement supplement is a
part, and by reference to Delaware law under which Trudy is incorporated.
COMMON STOCK
The current authorized capital of Trudy consists of 850,000,000 shares of
common stock, par value $.0001 per share. As of June 30, 1999, there were
331,222,249 shares of Trudy common stock issued and outstanding. In addition,
prior to the closing of the mergers, Trudy is obligated to issue 13,500,000
shares of its common stock to James P. McGough of JPMC Associates, Trudy's
mergers and acquisitions consulting firm and an aggregate of 17,850,000 shares
to certain Directors, officers and employees of Trudy. The per share
consideration payable to Trudy stockholders in the mergers described in this
prospectus/proxy statement takes into account the issuance of these shares.
There were also 22,500,000 shares of Trudy common stock reserved for issuance
pursuant to Trudy's 1987 Stock Option Plan, 6,765,000 shares of which of have
been issued pursuant to the exercise of options granted under the plan and
14,680,000 shares of which are subject to outstanding options granted under the
plan. To Trudy's knowledge, no dealer makes a market in Trudy's shares. Quotes
for Trudy shares on the over-the-counter market (NASDAQ symbol: TRDY) are
infrequent and do not constitute an established market for Trudy shares. Trudy
has not paid any dividends on its common stock. The Merger Agreement provides
that Trudy will not declare or pay any dividend without the prior written
approval of New Futech.
Each share of Trudy common stock is entitled to one vote. The directors of
Trudy are elected to serve one-year terms. The DGCL provides that the
affirmative vote of a majority of all shares entitled to vote is required in
order to constitute stockholder approval of a merger, consolidation or
liquidation of Trudy, sale or other disposition of substantially all of its
assets or amendment of its certificate of incorporation. Pursuant to its
certificate of incorporation, Trudy's board of directors may amend the bylaws.
Trudy's bylaws provide for removal of a director, with or without cause by the
affirmative vote of a majority of all shares entitled to vote at an election of
directors.
Holders of capital stock of Trudy do not have preemptive or other
subscription rights to purchase or subscribe for unissued stock or other
securities of Trudy.
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COMPARISON OF THE RIGHTS OF HOLDERS OF TRUDY COMMON STOCK
AND NEW FUTECH COMMON STOCK
Trudy and New Futech are both Delaware corporations and as such the rights
of their stockholders are governed by the DGCL and their respective certificates
of incorporation and bylaws. By the Merger Agreement, the Trudy stockholders
will become New Futech stockholders and as such their rights will be governed
by, in addition to the DGCL, New Futech's Certificate of Incorporation and
Bylaws.
The certificate of incorporation and bylaws of Trudy and New Futech differ
in certain respects. In addition, certain provisions of the DGCL may apply
differently to Trudy and New Futech. Although all of the provisions of the DGCL
that may apply differently to Trudy and New Futech and all of the differences
between Trudy's and New Futech's Certificates of Incorporation and Bylaws are
not set forth in this prospectus/proxy statement supplement, differences which
could materially affect the rights of stockholders are discussed below.
CAPITAL STOCK
The Trudy Certificate of Incorporation authorizes the issuance of
850,000,000 shares of common stock, par value $.0001 per share. Trudy currently
has outstanding 331,222,249 shares of common stock. Accordingly, all
shareholders of Trudy common stock have equal rights and preferences with
respect to dividends and distributions upon liquidation.
The New Futech Certificate of Incorporation authorizes the issuance of
45,000,000 shares of common stock, par value $.001 and 5,000,000 shares of
preferred stock, par value $.001 per share. Following the mergers a minimum
aggregate of 5,867,628 shares and a maximum aggregate of 5,955,297 shares of New
Futech common stock will be outstanding. In addition, certain outstanding
indebtedness in the amount of 10,000,000 is expected to be exchanged for
2,222,222 shares of New Futech preferred stock shortly after the mergers.
Holders of New Futech preferred stock will have certain rights and
preferences with respect to dividends and upon liquidation that are superior to
those of holders of New Futech common stock. The relative rights and preferences
of any New Futech preferred stock issued in the future may be established by the
New Futech board of directors without shareholder action, and such shares, when
and if issued, could have dividend, liquidation, voting and other rights
superior to those of New Futech common stock.
STOCKHOLDER VOTING
Delaware law generally does not require class voting, except in certain
transactions involving an amendment to the Certificate of Incorporation that
adversely affects a specific class of shares or where the designation of a class
of securities grants such a right. Accordingly, holders of New Futech preferred
stock will have class voting rights in transactions involving an amendment to
New Futech's Certificate of Incorporation if such amendment will adversely
affect the rights of such holders.
CLASSIFIED BOARD OF DIRECTORS
A classified board is one on which a certain number, but not all, of the
directors are elected on a rotating basis each year. This method of electing
directors makes changes in the composition of the board of directors more
difficult, and thus a potential change in control of a corporation a lengthier
and more difficult process. Delaware law permits, but
17
<PAGE> 516
does not require, a classified board of directors, by which the directors can be
divided into as many as three classes with staggered terms of office, with only
one class of directors standing for election each year.
Trudy's Certificate of Incorporation and Bylaws do not provide for a
classified board of directors. New Futech's Certificate of Incorporation and
Bylaws provide for a classified board, consisting of three classes with three
directors in each class.
REMOVAL OF DIRECTORS
A director of Trudy may be removed with or without cause with the approval
of a majority of the outstanding shares entitled to vote at an election of
directors. A director of a corporation with a classified board of directors may
be removed only for cause, unless the corporation's certificate of incorporation
provides otherwise. New Futech's Certificate of Incorporation does not so
provide.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS UNDER DELAWARE LAW
In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a corporation and one or more of its significant shareholders, more
difficult. Under Section 203 of the Delaware General Corporation Law, certain
"business combinations" with "interested stockholders" of Delaware corporations
are subject to a three-year moratorium unless specified conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or entity who or which owns,
individually or with or through certain other persons or entities, fifteen
percent (15%) or more of the corporation's outstanding voting stock (including
any rights to acquire stock pursuant to an option, warrant, agreement,
arrangement or understanding, or upon the exercise of conversion or exchange
rights, and stock with respect to which the person has voting rights only), or
is an affiliate or associate of the corporation and was the owner, individually
or with or through certain other persons or entities, of fifteen percent (15%)
or more of such voting stock at any time within the pervious three years, or is
an affiliate or associate of any of the foregoing.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or a direct
or indirect majority-owned subsidiary equal in aggregate market value of ten
percent (10%) or more of the aggregate market value of either the corporation's
consolidated assets or all of its outstanding stock; the issuance of transfer by
the corporation or a direct or indirect majority-owned subsidiary of stock of
the corporation or such subsidiary to the interested stockholder (except for
certain transfers in a conversion or exchange or a pro rata distribution or
certain other transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock or of the corporation's voting stock); or receipt by the
interested stockholder (except proportionately as a stockholder), directly or
indirectly, of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation or a subsidiary.
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<PAGE> 517
The three-year moratorium imposed on business combinations by Section 203
does not apply if:
- prior to the date on which such stockholder becomes an interested
stockholder the board of directors approves either the business
combination or the transaction that resulted in the person or entity
becoming an interested stockholder,
- upon consummation of the transaction that made him or her an interested
stockholder, the interested stockholder owns at least eighty-five percent
of the corporation's voting stock outstanding at the time the transaction
commenced (excluding from the eighty-five percent calculation shares
owned by directors who are also officers of the target corporation and
shares held by employee stock plans that do not give employee
participants the right to decide confidentiality whether to accept a
tender or exchange offer), or
- on or after the date such person or entity becomes an interested
stockholder, the board approves the business combination and it is also
approved at a stockholder meeting by sixty-six and two-thirds percent of
the outstanding voting stock not owned by the interested stockholder.
Section 203 only applies to certain publicly held corporations that have a
class of voting stock that is:
- listed on a national securities exchange,
- quoted on an interdealer quotation system of a registered national
securities association, or
- held of record by more than 2,000 stockholders.
In addition, Section 203 of the DGCL does not apply if a corporation's
original certificate of incorporation contains a provision expressly electing
not to be governed by Section 203. Neither Trudy's nor New Futech's Certificate
of Incorporation contains such an election.
Section 203 of the DGCL does not currently apply to Trudy. Based upon the
expectation that there will be more than 2,000 record holders of New Futech
common stock following the mergers, Section 203 will apply to New Futech.
Under certain circumstances, Section 203 of the DGCL may make it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three year period.
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<PAGE> 518
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with Trudy's audited
financial statements and notes thereto for the two years ended March 31, 1998
and 1997 and its unaudited financial statements for the year ended March 31,
1999, appearing as an attachment to the prospectus/proxy statement.
OVERVIEW
Trudy Corporation, a Delaware corporation, was initially organized as a
Connecticut corporation under the name Norwest Manufacturing Corporation in
1979. Trudy, which does business under the name Soundprints, currently publishes
juvenile storybooks and audio cassettes which are sold in conjunction with
contract-manufactured educational toys to the retail, education and mail order
markets.
Soundprints holds an exclusive license from the Smithsonian Institution to
utilize the Smithsonian name in connection with the sale of realistic wildlife
plush toys and educational kits, storybooks and audio cassettes. Soundprints
also has a license from The Nature Conservancy to develop a series of habitat
books, toys and audio cassettes.
Soundprints' products are sold to book, toy and specialty retailers;
warehouse clubs and book, gift and educational distributors by an in-house sales
staff and independent commissioned sales representatives and are offered at
retail prices ranging from $4.95 to $32.95.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentage that certain income and expense items bear to net sales.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31,
1999 1998
---------- ----------
<S> <C> <C>
Net sales.............................................. 100.0% 100.0%
Cost of sales.......................................... 64.0 54.9
----- -----
Gross profit........................................... 36.0 45.1
Selling, general and administrative expenses........... 70.1 43.9
----- -----
Income from operations................................. (34.1) 1.2
Other income (expense)................................. (2.3) (1.3)
----- -----
(Loss) income before benefit for income taxes.......... (36.4) (0.1)
Income tax benefit (provision)......................... (11.1) 3.1
----- -----
Income before extraordinary item....................... (47.5) 3.0
Extraordinary item (net of income taxes)............... -- 1.1
----- -----
Net income............................................. (47.5) 4.1
</TABLE>
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
Net Sales. Net sales for the year ended March 31, 1999 were $3,390,884 as
compared with net sales of $4,977,599 for the year ended March 31, 1998. Sales
to
20
<PAGE> 519
warehouse clubs, the largest market segment, were down $775,443 or 44% to
$977,961 due to the clubs' decision to purchase more conservatively and minimize
inventory carryover. Direct response sales of $961,624 were $269,554 or 22%
lower than last year. Catalog marketers, in general, experienced reduced buying
early in the pre-holiday season (September) due to financial market uncertainty.
Sales of $671,946 to bookstores and specialty retailers were $492,101, 42%,
below last year as the number of independent bookstores continues to decline and
specialty stores have become more selective in their purchases. Sales to schools
and education wholesalers continue to increase as a result of the Company's
decision to target its direct marketing toward this growing market segment.
Cost of Sales. Cost of sales of $2,168,685 decreased from $2,730,401 in
the prior year primarily because of the lower level of sales volume. In
percentage terms, cost of sales increased 64.0% from 54.9%. The higher
percentage is the result of the acceleration of amortization of product
development costs and increased reserves for inventory obsolescence in 1999.
Selling, General and Administrative Expense. Selling, general, and
administrative expenses increased to $2,355,787 from $2,168,322. The increase is
the result of the accelerated write-off of royalty advances, the recording of
sub-right royalty expenses, and the write-off of a computer operating system
purchased in December 1997 because it was determined that the new system did not
meet the Company's requirements. Lower royalty and sales commission expenses
resulting from lower revenue were offset by the higher cost of a larger consumer
catalog mailing.
Income/(Loss) from Operations. Income from operations was a loss of
$1,155,763 compared with a profit of $61,427 in the prior year. The decline is
primarily the result of lower sales and the accelerated write-offs cited above.
Interest Expense. Interest expense increased to $111,604 from $102,099
last year as a result of higher borrowing needed to fund working capital
requirements and operating losses.
Depreciation Expense. Depreciation expense increased to $22,175 from
$17,449 in the prior year. The increase is due to purchases of equipment
amounting to $59,671.
Other Income. Other income of $34,134 decreased from $35,904 in the prior
year.
Net Income/(Loss). A net loss of $1,611,233 for the year ended March 31,
1999 compares to a profit of $203,552 in the prior year. In addition to the
changes discussed above, the decline is also the result of the write-off of
$378,000 of deferred tax assets in 1999 and two non-recurring gains recorded
last year: an income tax benefit of $152,000 and an after tax gain of $56,320
from the forgiving of accrued interest on loans made to the Company by its
President.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The demand for Trudy's retail products is seasonal, with a majority of
sales to retailers occurring during the late summer and early fall in
anticipation of the Christmas season. Direct mail sales are concentrated in the
October-December quarter.
LIQUIDITY AND CAPITAL RESOURCES
The seasonality of sales has made credit availability an important issue
for Trudy. It is necessary for Trudy to build inventory during the summer in
anticipation of the large number of direct mail shipments, which are primarily
paid by credit card, in the fall.
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<PAGE> 520
Shipments to the warehouse clubs are also heavy in the late summer and early
fall, but payment terms for these customers are sixty days.
In March 1998, Trudy renewed a bank revolving line of credit of $1,200,000
and obtained a four-year term loan of $250,000 to finance seasonal working
capital needs, catalog expenses, and system improvements. The line of credit
bears interest at the rate of prime plus .25% and the term loan bears interest
at the rate of 8.75%. In March 1999, Trudy negotiated an extension of the line
of credit through June 15, 1999. An integral part of the March 3, 1999 merger
agreement with Futech, which remains in effect as part of the New Futech merger
agreement, is an agreement, also dated March 3, 1999, by Futech to assist in
providing the working capital needs of Trudy, if needed, to maintain sales
momentum and assure that Trudy is not in default of its loan agreements,
including its borrowings from First Union National Bank. On May 13, 1999 First
Union notified Trudy that it was in default of covenants requiring the
maintenance of a ratio of total liabilities to tangible net worth of not more
than 2.50 to 1.00 and a minimum level of net tangible worth of $750,000 and both
loans became due on June 15, 1999. As of June 30, 1999, these loans remain
unpaid. Management has no assurances that Futech currently has the financial
resources to honor its agreement with Trudy. The balances as of June 30, 1999
are $679,234 on the line of credit and $186,099 on the term loan. Management of
Trudy has met with lenders in an attempt to restructure the credit facility, or
otherwise satisfactorily resolve the defaults. It is not possible, however, to
predict at this time the success of management's efforts. No assurance can be
given that the outcome of Trudy's negotiating efforts with the lenders will not
adversely affect Trudy's business, financial condition, results of operations
and cash flows. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
In July 1998, William W. Burnham loaned Trudy $28,900 to fund conversion
costs for a second computer system. The note bears an interest rate of 8% and is
payable in one year. In August 1998, Mr. Burnham loaned the company $310,000 to
finance short term working capital needs. This note bears an interest rate of 8%
and was due in sixty days. Lower than expected direct mail sales in the fall
prevented repayment of this loan. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
On May 28, 1999, Alice B. Burnham, a director of Trudy and wife of the
Trudy's president loaned the Company $140,000 to meet immediate cash needs. The
note bears interest at 8 percent and was due (but not paid) on July 2, 1999. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Loans from the President of the Company and his family totaled $797,730 on
March 31, 1999 compared with $448,888 on March 31, 1998.
Accounts receivable were $246,049 on March 31, 1999 compared with $321,898
on March 31,1998. The decrease is due to lower sales volume in the last quarter
of the fiscal year compared with last year. Inventory levels were $1,501,204 on
March 31, 1999 compared with $1,574,901 on March 31, 1998. Actual unit inventory
increased because of slower turnover resulting from the downturn in sales along
with the need to stock new titles and toys. The reserve for inventory
obsolescence was increased by $205,000.
INFLATION
Trudy does not believe that inflation has a significant impact on its
operations.
22
<PAGE> 521
YEAR 2000
During 1998, Trudy upgraded its computer system and MAS90 software used for
accounting, order processing, and inventory management. The Company believes
that this equipment and software is Year 2000 compliant. The Company is now in
the process of receiving certification from its major vendors that their systems
are Year 2000 compliant. This survey includes vendors who provide
systems-related services, e.g., banking, credit card processing, shipping,
security, HVAC, etc. along with those providing the Company with its book and
toy products. The Company does not believe that the failure of any vendor to be
Year 2000 compliant would have a material impact on the Company.
SAFE HARBOR DISCLOSURE: FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus/proxy statement and each related prospectus/proxy statement
supplement contains or incorporates by reference forward-looking statements. The
factors identified above in this section are important factors (but not
necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, New Futech or any of the merging companies.
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, New Futech
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. We cannot promise that
statements of expectation or belief will be achieved or accomplished. The words
"believe," "expect," and "anticipate" and similar expressions identify forward-
looking statements throughout these materials.
23
<PAGE> 522
DESCRIPTION OF TRUDY'S BUSINESS
GENERAL
Trudy Corporation, which does business under the name Soundprints,
publishes juvenile storybooks and audio cassettes which are sold in conjunction
with contract-manufactured educational toys to the retail, education and mail
order markets.
Trudy Corporation was initially organized as a Connecticut corporation
under the name Norwest Manufacturing Corporation on September 14, 1979, changed
its name to Trudy Toys Company, Inc. on December 5, 1979, changed its name to
Trudy Corporation on March 27, 1984, and was re-incorporated as a Delaware
corporation on February 25, 1987. As used herein, the terms "Trudy" or
"Soundprints" include Trudy Corporation and its Connecticut predecessor, except
as the context may otherwise require.
PRODUCTS AND LICENSING
Soundprints holds an exclusive license from the Smithsonian Institution to
utilize the Smithsonian name through the period ending September 30, 2002, in
connection with the sale of realistic wildlife plush toys and educational kits,
storybooks, and audio cassettes. Since 1991, Soundprints has published a total
of 60 titles in four different series under the Smithsonian license. Royalties
are paid to the Smithsonian at the rate of 5.0% of net sales on all licensed
products.
Soundprints also has a license from The Nature Conservancy to develop a
series of habitat books, toys and audio cassettes. The first four titles in the
habitat series were introduced in the spring of 1997. The orientation of the
habitat series has been toward both the education and trade markets. Through
1998, twelve Nature Conservancy titles have been published. The license from the
Nature Conservancy runs to January 2000.
Market reception of the Smithsonian and Nature Conservancy series has been
extremely positive as a result of the highly perceived value of the book and
plush animal sets. Each season Soundprints introduces five to seven new titles.
In addition to new titles in the Smithsonian and Nature Conservancy series, an
international series, combining books and dolls, was launched this spring. In
the fall of 1999, a new series of photographic board books accompanied by soft
cotton velour toys for toddlers will be launched in cooperation with the
Smithsonian Institution National Zoological Park.
MARKETING AND SALES
Soundprints' products are sold to book, toy, and specialty store retailers;
warehouse clubs; and book, gift and educational distributors by an in-house
sales staff and independent commissioned sale representatives. In addition,
Soundprints mails a catalog directly to consumers, schools, and libraries and an
in-house telemarketing staff receives and processes phone, Internet and mail
orders.
A promising growth area is the educational market. Schools and libraries
have discovered how to use Soundprints' products as supplemental classroom
reading material. School book clubs and book fairs have experienced impressive
sales growth to both students and teachers. In addition to actual book sales,
subsidiary rights are sold to book club operators who also purchase significant
quantities of plush toys to accompany the books.
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<PAGE> 523
During 1998, sales to retailers, principally book, toy, and specialty
stores, were flat or off somewhat from the prior year. Sales to aquarium,
museum, and zoo stores continued to increase because of the nature theme of the
products. Sales to independent booksellers have been the most volatile as these
retailers continue to be adversely affected by the market penetration of the
superstore chains and Internet booksellers.
CUSTOMERS
One customer accounted for 28.8% of sales in 1999 with this same customer
representing 35.2% in 1998.
MANUFACTURING AND PRODUCT DESIGN
Plush and toy product design is done in "design rooms" managed by
Soundprints' overseas contractors. Storybooks are created by free-lance authors
and illustrators working under the direction of Soundprints' editorial and
graphic design staff. Audio is produced by an award-winning sound designer
overseen by Soundprints' editorial department.
Soundprints produces the majority of its products by sub-contracting with
independent toy factories and printing plants located in Asia. Approximately 95%
of the toys are purchased from one vendor in China, but Trudy has other
qualified sources of supply from which it has purchased in the past. Trudy owns
the design of each existing toy product (except for Smithsonian plush toys which
are co-trademarked with Smithsonian Institution) and actively manages the design
of new products. Trudy believes that production could quickly be transferred to
other companies in Bangladesh and Sri Lanka if production were not available
from the company in China, or if more favorable pricing became available. Books
are purchased from a U.S. company which subcontracts production to various
printers in the Far East. These manufacturers can also perform certain other
functions such as the labeling and packaging of product for volume shipments
directly to specific customers. Audio cassettes are duplicated locally. Delivery
has been satisfactory from all suppliers.
Originally a plush toy manufacturer, Soundprints discontinued its plush toy
sewing operations in 1990 and now concentrates its operational expertise on
package assembly of the toy, book and tape components for fulfillment to retail
and mail order customers.
BACKLOG
As of March 31, 1999, Trudy's order backlog was approximately $40,000.
Orders are generally shipped promptly unless items are on back order or the
customer requests a later delivery date. As of March 31, 1998, Trudy's order
backlog was approximately $472,365. The increase in order backlog in March 1998
was primarily the result of several large orders placed by the Company's largest
customers. Although orders are subject to cancellation, this happens only
rarely.
GOVERNMENTAL REGULATIONS
Trudy is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Products Safety Act. Those
laws empower the Consumer Products Safety Commission (the "CPSC") to protect
children from hazardous products. The CPSC has the authority to exclude from the
market articles which are found to be hazardous and can require a manufacturer
to repurchase such products under certain circumstances. Any such determination
by the CPSC is subject to court review.
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<PAGE> 524
Similar laws exist in some states and cities in the United States and in many
jurisdictions throughout the world. Trudy endeavors to comply with all
applicable regulations.
COMPETITION
Management believes Soundprints is the leading supplier of licensed,
realistic plush toys packaged with an educational book and audio cassette. Trudy
is not aware of any direct competitors in this market, although there are a few
publishers who compete by combining plush toys with single titles of children's
classic books. Soundprints believes that its competitive advantages are its
unique editorial genre, its superior design and the perceived high quality of
its products relative to the retail price, in addition to the licenses with the
Smithsonian Institution and The Nature Conservancy.
EMPLOYEES AND PRODUCT DESIGN
As of March 31, 1999, Trudy had 21 full-time employees, all in its Norwalk
facility, consisting of 11 persons in sales and administration, seven in
shipping and handling, and three in editing and graphic design. Seasonal
personnel are hired in the fall to assist with greater volumes in the assembly
area and to handle in-bound telemarketing for the direct response business.
Soundprints' ability to design, manufacture, market, and sell products
depends largely upon its ability to attract and retain highly skilled personnel,
particularly in the product design, publishing, and sales areas. Over the last
year, Soundprints has upgraded positions in editorial and sales management in
terms of professionalism and experience to further improve the quality and
distribution of its products and their value to the customer.
PROPERTY
Trudy leases warehouse and administrative facilities in a 27,000 square
foot building at 353 Main Avenue in Norwalk, Connecticut. The building is
located approximately 50 miles east of New York City. This facility, first
occupied by the Company in July 1996, is owned by a partnership comprised of
Trudy's President, a former Vice President, and a Board Member.
The lease, which runs to 2004, provides for annual rent which is
representative of the local market today and holds the Company responsible for
payment of taxes and utilities as well as rent.
The Main Avenue property was purchased and financed independently of Trudy.
Renovations to the site however required the use of a $300,000 installment loan
payable over eight years. This bank loan is collateralized with the Trudy lease
contract, as well as a Trudy Corporation guarantee. See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS."
Trudy believes that its facilities are adequate for all of its foreseeable
requirements.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party, or of which, any of its property is subject.
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<PAGE> 525
TRUDY MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Trudy, at March 31, 1999, are as
follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Alice B. Burnham..................... 51 Director
William W. Burnham................... 56 Chairman of the Board of Directors,
President and Treasurer
Peter D. Nalle....................... 52 Director
Fred M. Filoon....................... 57 Director
Elisabeth T. Prial................... 41 Director
William T. Carney.................... 45 Vice President and Chief Financial Officer
</TABLE>
Each director is elected to hold office until the next annual meeting of
shareholders and until his successor is elected and qualified. Executive
officers are elected by the Board of Directors and hold office until their
successors are chosen and qualified, subject to earlier removal by the Board of
Directors.
The principal occupations for the past five years of each director and
officer of Trudy are as follows:
Alice B. Burnham was elected a director of Trudy in October 1994. As a
major shareholder and wife of the President, she had long been familiar with the
workings of Trudy. Mrs. Burnham manages her own interior design business in New
Canaan, Connecticut and is active in civic and professional affairs. Mrs.
Burnham received her degree from Briarcliff College.
William W. Burnham has been President and a director of Trudy since 1979.
Mr. Burnham served as Group Director of Marketing at Pepsico, Inc. from 1976 to
1979. From 1972 to 1976, Mr. Burnham served as the Director of Advertising and
Sales Promotion at Vlasic Foods. Mr. Burnham received a B.S. from Trinity
College and an M.B.A. from Columbia University.
Peter D. Nalle was named a director of Trudy in September 1996. Mr. Nalle
has years of experience in the publishing industry having worked for McGraw-Hill
and later for Lippincott and for Simon & Schuster. More recently, Mr. Nalle was
Chief Operating Officer of Grolier, Inc. He received his degree from Brown
University.
Fred M. Filoon was named a director of Trudy in January 1993. Mr. Filoon
has 30 years of experience in the investment and financial community having
worked for Donaldson, Lufkin & Jenrette as well as Morgan Stanley in New York.
Currently, he is a partner with Cramer, Rosenthal & McGlynn. Mr. Filoon received
his B.A. from Bowdoin College.
Elisabeth T. Prial was named Vice President and Publisher of Futech on May
24, 1999. Prior to joining Futech, Ms. Prial served as the Vice President of
Sales of Trudy since October 1994 and Publisher of Trudy since 1996. For the
three years prior to October 1994, Ms. Prial served as Director of Sales of
Trudy. Prior to joining Trudy
27
<PAGE> 526
Corporation she worked in juvenile publishing with Warner Books, Putnam, and
others. Mrs. Prial attended the New York Fashion Institute of Design.
William T. Carney was named Vice President and Chief Financial Officer on
March 23, 1998. Mr. Carney has held various financial management positions with
Pechiney/American National Can and Ford Motor Company. Mr. Carney received an
B.A. from Dartmouth College and an M.B.A. from the Wharton School.
28
<PAGE> 527
TRUDY STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of Trudy's common stock at May 28, 1999, with respect to (i) each
person known to Trudy to own beneficially more than 5% of the outstanding shares
of Trudy's common stock, (ii) each director of Trudy, (iii) each of the
executive officers of Trudy and, (iv) all directors and executive officers of
Trudy as a group.
<TABLE>
<CAPTION>
TRUDY COMMON STOCK
NAME BENEFICIALLY OWNED(1) PERCENT OF CLASS
- ---- --------------------- ----------------
<S> <C> <C>
William W. Burnham(2)(3)(4)................. 115,090,000 32.8%
Alice B. Burnham(2)(3)(5)................... 63,250,000 18.1%
Peter B. Burnham............................ 35,410,000 10.1%
216 Hardwick Road
Petersham, MA
Peter D. Nalle(3)........................... 2,750,000 0.8%
Fred M. Filoon(3)(6)........................ 5,250,000 1.5%
Elisabeth T. Prial(3)(7).................... 12,000,000 3.4%
William T. Carney(3)........................ 3,000,000 0.9%
All executive officers and directors as a
group (6 persons)(4)(5)(6)(7)............. 201,340,000 55.7%
</TABLE>
- -------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") and generally includes voting or
investment power with respect to securities. In accordance with SEC rules,
shares which may be acquired upon exercise of stock options which are
currently exercisable or which become exercisable within 60 days of the date
of the table are deemed beneficially owned by the optionee. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons or entities named in the table above have sole
voting and investment power with respect to all shares of Trudy common stock
shown as beneficially owned by them.
(2) Husband and wife.
(3) The address of each of these individuals is: c/o Trudy Corporation, 353 Main
Avenue, Norwalk, Connecticut 06851-1552.
(4) Includes 2,000,000 shares of Trudy common stock issuable upon exercise of
immediately exercisable options.
(5) Includes 1,000,000 shares of Trudy common stock issuable upon exercise of
immediately exercisable options.
(6) Includes 3,000,000 shares of Trudy common stock issuable upon exercise of
immediately exercisable options.
(7) Includes 6,500,000 shares of Trudy common stock issuable upon exercise of
immediately exercisable options.
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<PAGE> 528
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the mergers, William W. Burnham will be employed as the
Vice President of Specialty Markets of New Futech. Mr. Burnham will also be a
director of New Futech and will receive a three year employment agreement
providing for a base salary of $100,000 per year and stock options for a total
of 20,000 shares of New Futech common stock, vesting in equal, annual
installments over the three year period and with an exercise price of $7.50 per
share. Some of the officers and directors of the other merging companies will
also receive employment agreements and stock options in connection with the
mergers.
The Main Avenue property leased by Trudy is owned by a Connecticut limited
liability corporation, Noreast Management LLC, which is owned jointly by William
W. Burnham, the Chairman of the Board of Directors and President of Trudy, P.
Ogilvie, a former officer of Trudy, and Fred M. Filoon, a director of Trudy. To
effect refurbishment on this building, Noreast Management borrowed $300,000 as
an eight year loan from a local bank. This loan was secured by personal
guarantees from both Mr. Burnham and Mr. Ogilvie, an assignment of the lease,
and a guarantee by Trudy Corporation. Pursuant to the Merger Agreement, Mr.
Burnham has agreed to indemnify New Futech for any all claims relating to
hazardous waste associated with this property for all periods of time prior to
the closing of the mergers.
In previous years, Trudy had borrowed an aggregate of $454,729 from William
W. Burnham, Peter B. Burnham and members of their families. The loans bear
interest at the rate of 10% per annum. On March 31, 1987, the note holders
contributed to the Company's capital an aggregate of $374,205 of these notes
payable. The balance of $80,525 in demand loans was converted to five-year term
loans with interest payments quarterly in arrears at the greater of 10% per
annum or the applicable Federal rate. Interest accruals aggregating $91,728 have
further increased the indebtedness to $173,941 as of June 30, 1999.
As of March 31, 1998, Trudy has borrowed an aggregate of $383,742 in cash
advances (including accrued interest) from William W. Burnham to finance
inventory purchases and catalog printing. This total is comprised of promissory
notes which bear interest at the rate of 12% per annum. The notes are secured
with a pledge of all of the Company's inventory, accounts receivable, and
equipment. On March 31, 1998, Mr. Burnham forgave the unpaid accrued interest,
totaling $96,320 on these notes. No further interest expense has been accrued on
these loans. The aggregate balance of these loans, as of June 30, 1999, was
$287,422.
In July and August 1998, William W. Burnham made additional loans to the
Company totaling $338,900 to fund an investment in a new computer system and
seasonal working capital requirements. The note for the computer system is for
$28,900 and bears an interest rate of 8%. It is due in July 1999. The note for
the working capital totals $310,000 and bears an interest rate of 8%. It was due
in October 1998, but remains unpaid.
New Futech has also agreed, as part of the Merger Agreement, to repay
certain loans owing by Trudy to William W. Burnham and two of his family members
in the aggregate amount (including accrued interest through January 31, 1999) of
$800,000. Interest will continue to accrue only on the debt owing to the family
members until the mergers occur. As of April 30, 1999, the balance, including
accrued interest owed to the family members was $172,253. No interest will
accrue on the debts owing to Mr. Burnham from
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<PAGE> 529
February 1, 1999 through the effective time of the mergers. Beginning on the
closing date of the mergers, interest will accrue on the outstanding balance of
all of these loans at four percent (4%) per annum. At the closing, New Futech
will repay 25% of the outstanding balance, and thereafter will repay three equal
amounts of principal plus all accrued interest at six month intervals.
Within thirty days after the effective date of the mergers, New Futech will
obtain releases of William W. Burnham of his personal guaranty of the following
Trudy debts: (i) Trudy's revolving credit agreement with First Union, with an
outstanding balance as of June 30, 1999 of $697,234 and (ii) Trudy's four year
term note with First Union with an outstanding balance as of June 30, 1999 of
$186,099. New Futech may be required to refinance these loans to obtain the
releases.
Trudy has agreed to pay James P. McGough of JPMC Associates, Trudy's
mergers and acquisitions consulting firm, total compensation of approximately
$167,000 for his services in connection with the Trudy merger. Mr. McGough will
be paid $43,670 and granted 13,500,000 shares of Trudy common stock prior to the
closing of the mergers. The 13,500,000 shares of Trudy common stock will be
converted in the mergers into cash in the amount of $16,330 and 14,314 shares of
New Futech common stock.
On May 28, 1999, Alice B. Burnham a director of Trudy and wife of the
Trudy's president loaned Trudy $140,000 to meet immediate cash needs. The note
bears interest at 8 percent and was due (but not paid) on July 2, 1999.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
As previously reported in Trudy's Current Report on Form 8-K dated April
12, 1999, Trudy's board of directors approved the engagement of Ernst & Young,
LLP and is in the process of retaining this firm as its independent auditor for
the fiscal year ending March 31, 1999 to replace the firm of Abrams and Company,
P.C., who was dismissed as auditor of the Trudy effective April 9, 1999. Ernst &
Young, LLP is the independent auditor used by Futech Interactive Products, Inc.,
one of the other merging companies.
The reports of Abrams and Company, P.C. on Trudy's financial statements for
the past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles. In connection with the audits of Trudy's financial
statements for each of the two fiscal years ended March 31, 1997 and 1998, there
were no disagreements with Abrams and Company, P.C. on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope
procedures which, if not resolved to the satisfaction of Abrams and Company,
P.C. would have caused Abrams and Company, P.C. to make reference to these
matters in their report. Trudy has requested Abrams and Company, P.C. to furnish
Trudy with a letter addressed to the Securities Exchange Commission stating
whether it agrees with the above statements and such letter has been furnished.
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APPENDIX 1
DELAWARE GENERAL CORPORATION LAW
SECTION 262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market
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system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of
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any class or series of stock of a constituent corporation that are entitled
to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date
of mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such demand
will be sufficient if it reasonably informs the corporation of the identity
of the stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their
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shares have not been reached by the surviving or resulting corporation. If the
petition shall be filed by the surviving or resulting corporation, the petition
shall be accompanied by such a duly verified list. The Register in Chancery, if
so ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
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<PAGE> 534
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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<PAGE> 535
FUNDEX GAMES, LTD.
2237 DIRECTORS ROW
INDIANAPOLIS, INDIANA 46241
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 1999
------------------------
You are invited to attend a Special Meeting of Stockholders of Fundex
Games, Ltd., that will be held at a.m. local time on , 1999,
at .
The Fundex board of directors has called this special meeting for the
following purposes:
- To consider and vote upon a proposal to approve and adopt the Merger
Agreement dated as of June 7, 1999, by and among Fundex, Futech
Interactive Products, Inc., Trudy Corporation, Janex International, Inc.,
DaMert Company, and two newly formed companies that we are referring to
as "New Futech" and "New Sub." Under the Merger Agreement, first Futech
and then Janex, Trudy, and DaMert will merge with and into New Futech,
which will survive the mergers, and Fundex will merge into New Sub, which
will survive as a wholly-owned subsidiary of New Futech. Under the Merger
Agreement, Fundex stockholders who do not exercise dissenters' rights
will generally receive a combination of cash, promissory notes of New Sub
and common stock of New Futech as described in the prospectus/proxy
statement under the heading "DESCRIPTION OF THE MERGERS AND THE Merger
Agreement -- Basic Terms of the Merger Agreement." However, holders of up
to approximately 29% of the outstanding stock of Fundex may elect to
receive cash at the rate of $2.84 per Fundex share (the "All Cash
Alternative"). Those Fundex stockholders not electing the All Cash
Alternative will receive promissory notes in the aggregate amount of
$4,500,000 minus the total consideration paid to stockholders electing
the All Cash Alternative. Fundex stockholders not electing the All Cash
Alternative will also receive approximately .3693 shares of New Futech
common stock per Fundex share plus their pro rata proportion (shared
among all Fundex stockholders who do not elect the All Cash Alternative)
of .184635 shares of New Futech for each of the Fundex shares as to which
the All Cash Alternative is selected. The promissory note of New Sub will
be secured by a subordinated pledge of its assets and secured by a pledge
of the New Sub stock.
- To transact such other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
These matters are more fully described in the prospectus/proxy statement
supplement and related prospectus/proxy statement that are attached to this
Notice.
We, the board of directors of Fundex, unanimously recommend that you vote
FOR the mergers.
You will be entitled to vote at the special meeting or any adjournment or
postponement of the special meeting only if you are a holder of record of Fundex
common stock at the close of business on , 1999.
BY ORDER OF THE BOARD OF DIRECTORS
Chip Voigt
President
Indianapolis, Indiana
, 1999
IMPORTANT
We cordially invite all stockholders to attend the special meeting in
person.
Whether or not you plan to attend the special meeting in person, in order
to assure your representation at the meeting, we urge you to complete, sign
and date the enclosed proxy card, which is being solicited by the board of
directors, and promptly return it in the self-addressed return envelope
enclosed for that purpose. You may revoke your proxy at any time prior to the
vote at the meeting by telling us that you want to do so.
<PAGE> 536
SUBJECT TO COMPLETION, DATED AUGUST 6, 1999
FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.
FUTECH TOYS & GAMES, INC.
FUNDEX GAMES, LTD.
PROSPECTUS/PROXY STATEMENT SUPPLEMENT
This prospectus/proxy statement supplement, and the related prospectus/proxy
statement, are being furnished to you and the other stockholders of Fundex
Games, Ltd., in connection with the solicitation of proxies by the Fundex board
of directors for use at the Special Meeting of Stockholders to be held at
a.m. local time on , 1999, at and at any
adjournments or postponements of the special meeting. At the special meeting, we
will ask you to consider and vote upon a proposal to approve and adopt the
Merger Agreement dated as of June 7, 1999, by and among Fundex, Futech
Interactive Products, Inc., Trudy Corporation, Janex International, Inc., DaMert
Company, and two newly formed companies (Futech Interactive Products (Delaware),
Inc. and Futech Toys & Games, Inc.) that we are referring to as "New Futech" and
"New Sub," respectively. Under the Merger Agreement, first Futech and then
Janex, Trudy, and DaMert will merge with and into New Futech, which will survive
the mergers, and Fundex will merge into New Sub, which will survive as a
wholly-owned subsidiary of New Futech. Under the Merger Agreement, Fundex
stockholders who do not exercise dissenters' rights will generally receive a
combination of cash, promissory notes of New Sub and common stock of New Futech
as described in the prospectus/proxy statement under the heading "DESCRIPTION OF
THE MERGERS AND THE MERGER AGREEMENT -- Basic Terms of the Merger Agreement."
However, holders of up to approximately 29% of the outstanding stock of Fundex
(i.e. all Fundex stockholders except Carl E. Voigt, III and Carl E. Voigt, IV,
who have agreed not to receive this right) may elect to receive cash at the rate
of $2.84 per Fundex share (the "All Cash Alternative"). Those Fundex
stockholders not electing the All Cash Alternative will receive promissory notes
in the aggregate amount of $4,500,000 minus the total consideration paid to
stockholders electing the All Cash Alternative. Fundex stockholders not electing
the All Cash Alternative will also receive approximately .3693 shares of New
Futech common stock per Fundex share plus their pro rata proportion (shared
among all Fundex stockholders who do not elect the All Cash Alternative) of
approximately .184635 shares of New Futech for each of the Fundex shares as to
which the All Cash Alternative is selected. The promissory note of New Sub will
bear interest at the rate of 10% per annum, will be due one year after the
mergers occur, and will be secured by New Futech's pledge of all of the stock of
New Sub and by a subordinated lien on New Sub's assets. Outstanding shares of
Futech, Trudy, Janex and DaMert will also be converted into a combination of
cash, promissory notes and common stock of New Futech. In addition, outstanding
options of Fundex, Futech, Janex and Trudy will be converted into options to
purchase common stock of New Futech.
This prospectus/proxy statement supplement and the related prospectus/proxy
statement, together with similar supplements that are being provided to
stockholders of Futech, Trudy, Janex and DaMert with copies of the
prospectus/proxy statement, also constitute the prospectus of New Futech and New
Sub in connection with the offer and issuance of their securities pursuant to
the mergers. Assuming no outstanding Futech, Janex or Fundex options or warrants
are exercised prior to the mergers, a minimum aggregate of 5,867,628 shares and
a maximum aggregate of 5,955,297 shares of New Futech common stock, a minimum of
$768,330 and a maximum of $2,116,830 in cash and a minimum aggregate of
$5,751,500 and a maximum aggregate of $7,100,000 in promissory notes of New
Futech or New Sub will be issued to the stockholders of Janex, Futech, Trudy,
Fundex and DaMert in the mergers. In addition, certain outstanding indebtedness
in the amount of $10,000,000 is expected to be exchanged for 2,222,222 shares of
New Futech preferred stock shortly after the mergers. Former stockholders of
Fundex may exchange their New Futech stock for the license rights in the "Phase
10" family of games and former stockholders of Trudy may become entitled to
receive additional New Futech shares or to exchange their New Futech shares for
debentures in the future under certain circumstances. Certain loan agreements
and employment agreements, including employee options to acquire New Futech
common stock, are also part of the deal. See "DESCRIPTION OF THE MERGERS AND THE
Merger Agreement -- Basic Terms of the Merger Agreement" in the prospectus/proxy
statement.
We expect the New Futech common stock to trade on the OTC Bulletin Board
after the mergers, but we cannot be sure it will do so and we cannot predict
what the price might be. We do not expect a trading market to develop for any of
the other securities of New Futech.
The mergers cannot be consummated unless: (a) stockholders of Janex,
Futech, Trudy, Fundex and DaMert, voting separately at their respective meetings
of stockholders, each approve the mergers, and (b) other conditions included in
the Merger Agreement are either satisfied or waived. See "DESCRIPTION OF THE
MERGERS AND THE MERGER AGREEMENT -- Conditions to Closing" in the
prospectus/proxy statement.
The record date for the special meeting is , 1999. This
prospectus/proxy statement supplement and the related prospectus/proxy statement
and the accompanying form of proxy are first being mailed to stockholders of
Fundex on or about , 1999.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY STATEMENT
SUPPLEMENT AND THE RELATED PROSPECTUS/PROXY STATEMENT. THE PROPOSED MERGER IS A
COMPLEX TRANSACTION. WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS
PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE RELATED PROSPECTUS/PROXY STATEMENT
IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS"
BEGINNING ON PAGE 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus/proxy statement supplement or the accompanying prospectus/proxy
statement is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus/proxy statement supplement is , 1999.
<PAGE> 537
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS/PROXY STATEMENT. WE HAVE NOT, AND NEW FUTECH AND NEW SUB HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEW FUTECH AND NEW SUB ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS PROXY/ STATEMENT SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF THE DATE ON
THE FRONT OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ONLY. OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.
WHERE YOU CAN FIND MORE INFORMATION
We will send to you, without charge, any material information that we have
or can obtain without unreasonable effort or expense concerning Fundex or any
other merging company, concerning the Merger Agreement and related contracts or
concerning the proposed management and operations of New Futech. You may direct
requests for additional information regarding DaMert, Futech, Trudy, Fundex, or
Janex to Frederick B. Gretsch, Sr. at 2999 North 44th Street, Suite 225,
Phoenix, Arizona 85018-7247, (602) 808-8765.
TO OBTAIN TIMELY DELIVERY OF THESES DOCUMENTS, YOU MUST MAKE YOUR REQUEST
NO LATER THAN , FIVE BUSINESS DAYS BEFORE THE DATE OF THE FUNDEX
STOCKHOLDERS MEETING.
You should rely only on the information provided in or incorporated by
reference (and not later changed) in the prospectus/proxy statement or any
prospectus/proxy statement supplement. Neither we nor New Futech have authorized
anyone else to provide you with additional or different information. New Futech
is not making an offer of any securities in any state where the offer is
permitted. You should not assume that the information in this prospectus/proxy
statement or any prospectus/proxy statement supplement is accurate as of any
date other than the date on the front of these documents.
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<PAGE> 538
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY INFORMATION -- Q&A.................................. 1
Why are the five companies proposing to merge?............ 1
What will I receive in the mergers?....................... 1
What risks should I consider?............................. 1
What stockholder vote is required to approve the
mergers?............................................... 1
What circumstances might prevent the mergers?............. 2
How will the mergers be treated for accounting
purposes?.............................................. 2
When do you expect the mergers to be completed?........... 2
What are the tax consequences of the mergers to me?....... 2
Will I have dissenters' rights?........................... 2
What do I need to do now?................................. 2
Should I send in my stock certificate now?................ 3
OTHER INFORMATION ABOUT THE MERGERS......................... 3
The Companies............................................. 3
The Special Meeting....................................... 5
The Merger Agreement...................................... 5
SPECIAL RISK FACTORS AFFECTING FUNDEX....................... 6
STOCKHOLDER MATTERS......................................... 7
THE MERGERS AND RELATED TRANSACTIONS........................ 9
General................................................... 9
Effects of the Mergers.................................... 9
Background of the Mergers................................. 10
Reasons for the Mergers................................... 11
Fundex's Board Recommendation............................. 12
Related Agreements; Interests of Certain Fundex Affiliates
in the Merger.......................................... 12
Regulatory Matters........................................ 12
Certain Federal Tax Matters............................... 12
Accounting Treatment...................................... 16
NEW FUTECH AND FUNDEX SHARES................................ 16
New Futech Common Stock................................... 16
General Description of Fundex Common Stock................ 16
Common Stock.............................................. 16
COMPARISON OF THE RIGHTS OF HOLDERS OF FUNDEX COMMON STOCK
AND NEW FUTECH COMMON STOCK............................... 17
FUNDEX MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATION......................... 23
Overview.................................................. 23
Results of Operations of the Company...................... 23
</TABLE>
ii
<PAGE> 539
<TABLE>
<S> <C>
Seasonality and Quarterly Fluctuations.................... 25
Liquidity and Capital Resources........................... 25
Inflation................................................. 26
Year 2000................................................. 26
Safe Harbor Disclosure; Forward-Looking Statements and
Associated Risks....................................... 26
DESCRIPTION OF FUNDEX'S BUSINESS............................ 27
Business.................................................. 27
Marketing, Distribution and Customers..................... 29
Manufacturing............................................. 30
Product Design and Selection.............................. 30
Competition............................................... 31
Patents, Trademarks and Licensing......................... 31
Backlog................................................... 31
Government Regulations.................................... 32
Employees................................................. 32
Properties................................................ 32
Legal Proceedings......................................... 32
FUNDEX MANAGEMENT........................................... 33
Directors and Executive Officers.......................... 33
FUNDEX STOCKHOLDERS......................................... 35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 35
APPENDICES
Appendix I -- Section 92A.380 of Nevada Revised Statutes.... A-1
</TABLE>
iii
<PAGE> 540
SUMMARY INFORMATION -- Q&A
This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the mergers contemplated thereby, you should carefully read
this entire document and the additional documents we mention. You should pay
special attention to the "RISK FACTORS" section beginning on page 8 of the
prospectus/proxy statement and "SPECIAL RISK FACTORS AFFECTING FUNDEX" on page 6
of this prospectus/proxy statement supplement.
WHY ARE THE FIVE COMPANIES PROPOSING TO MERGE?
The five companies are proposing to merge because the directors of each
company believe the combination will provide significant benefits to
stockholders. We believe the mergers will enable us to take advantage of the
complementary strategic fit of our respective businesses by marketing through
additional channels of distribution. We also hope and believe that the mergers
will improve the likelihood that stockholders will have a more liquid market
should they wish to sell their stock and that the combined companies will be
able to more efficiently access the markets for debt and equity when
appropriate. To review the background and reasons for the mergers in greater
detail, see "BACKGROUND OF THE MERGERS" in the prospectus/proxy statement.
WHAT WILL I RECEIVE IN THE MERGERS?
Unless you or other Fundex stockholders elect the All Cash Alternative
described below, you and all Fundex stockholders will receive a combination of
cash, promissory notes and common stock in exchange for your Fundex stock.
Stockholders of the other merging companies will receive cash, promissory notes
and common or preferred stock of New Futech. Certain employment contracts and
other agreements with affiliates of the merging companies are also part of the
deal. See "DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT" in the
prospectus/proxy statement.
WHAT RISKS SHOULD I CONSIDER?
You should review "RISK FACTORS" on pages 8 through 13 of the prospectus/
proxy statement, as well as the special risk factors affecting primarily Fundex
that are discussed on pages 6 through 7 of this prospectus/proxy statement
supplement.
WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGERS?
The following table shows the proportions of the outstanding shares that
must vote in favor of the mergers, together with the proportion of the
outstanding shares that are held by directors, executive officers and their
affiliates, the majority of whom have indicated that they intend to vote in
favor of the mergers.
<TABLE>
<CAPTION>
SHARES OWNED BY DIRECTORS,
COMPANY VOTE REQUIRED EXECUTIVE OFFICERS AND AFFILIATES
------- ------------- ---------------------------------
<S> <C> <C>
DaMert Majority 100.0%
Fundex Majority 70.8%
Futech Majority 72.7%
Janex Majority 78.9%
Trudy Majority 55.7%
</TABLE>
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<PAGE> 541
WHAT CIRCUMSTANCES MIGHT PREVENT THE MERGERS?
New Futech has the right to terminate the Merger Agreement if stockholders
from all of the merging companies combined exercise dissenters' rights with
respect to more than 5% of the aggregate merger consideration to be issued in
the mergers. See "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT -- Conditions to Closing" in the prospectus/proxy statement for a
description of the other conditions to the mergers.
HOW WILL THE MERGERS BE TREATED FOR ACCOUNTING PURPOSES?
We expect the mergers to be treated as purchases by Futech, which means
that the amount by which the total merger consideration received by stockholders
of the other merging companies plus the amount of their liabilities exceeds the
fair market value of their identifiable assets will initially be treated as
goodwill by New Futech for accounting purposes.
WHEN DO YOU EXPECT THE MERGERS TO BE COMPLETED?
We are working to complete the mergers during the third quarter of 1999.
However, the Merger Agreement does not contain any express deadline for the
mergers to proceed.
WHAT ARE THE TAX CONSEQUENCES OF THE MERGERS TO ME?
We and the other merging companies have structured the Merger Agreement
with the intent and expectation that the exchange of shares by Fundex
shareholders will be tax-free for federal income tax purposes. THERE WILL BE
FEDERAL INCOME TAXES DUE ON THE CASH, PROMISSORY NOTES AND CONDITIONAL RIGHTS
THAT YOU RECEIVE. You should review the more detailed description of federal tax
consequences that appear on pages through of this prospectus/proxy statement
supplement. State and local taxes may also become due as a result of the
mergers.
The precise tax consequences of the mergers will depend on your own
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the mergers to you.
WILL I HAVE DISSENTERS' RIGHTS?
Yes, provided you do not vote in favor of the mergers and meet all other
requirements of the dissenter's rights statute. See pages 22 and Appendix I to
this prospectus/proxy statement supplement.
WHAT DO I NEED TO DO NOW?
Just indicate on your proxy card how you want to vote on the mergers, and
sign and mail it in the enclosed return envelope as soon as possible, so that
your shares will be represented at the stockholders meeting.
If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be counted as a vote in favor of the mergers. If you do
not vote or you abstain, it will have the same effect as a vote against the
mergers.
The stockholders meeting will take place on , at
local time, at . You may attend the stockholders
meeting and vote your shares in person, rather than signing and mailing your
proxy card. In addition, you may withdraw
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<PAGE> 542
your proxy up to and including the day of the meeting and either change your
vote or attend the meeting and vote in person.
SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
No. After the mergers are completed we will send you written instructions
for exchanging your stock certificates for the New Futech stock, cash and
promissory notes to which you are entitled.
OTHER INFORMATION ABOUT THE MERGERS
THE COMPANIES
NEW FUTECH
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
New Futech is a newly-organized Delaware corporation that has been formed
to be the surviving parent corporation under the Merger Agreement. New Futech
has had no operations prior to the date of this prospectus/proxy statement
supplement. Under the Merger Agreement, first Futech and then Janex, Trudy and
DaMert will merge with and into New Futech, which will survive the mergers. As a
part of the mergers, New Futech will change its name to "Futech Interactive
Products, Inc."
NEW SUB
Futech Toys & Games, Inc.
2237 Directors Row
Indianapolis, Indiana 46241
(317) 248-1080
New Sub is a newly-organized Nevada corporation that has been formed to be
the surviving subsidiary corporation of New Futech under the Merger Agreement.
New Sub has had no operations prior to the date of this prospectus/proxy
statement supplement. Under the Merger Agreement, Fundex will merge with and
into New Sub, which will survive that merger as a wholly-owed subsidiary of New
Futech. All of the stock and assets of New Sub will be pledged to the former
stockholders of Fundex to secure the promissory notes of New Sub issued to them
in connection with the merger of Fundex into New Sub. In addition, the former
stockholders of Fundex who do not elect the All Cash Alternative will receive a
conditional option to purchase New Sub's license to market the "Phase 10" family
of games in 2002 in exchange for the New Futech stock they receive in the
mergers (but not the cash or promissory notes), exercisable only if the stock
has not achieved targeted liquidity and a valuation of at least $7.50 per share
($4,500,000 in the aggregate, if no stockholders elect the All Cash Alternative)
within three years after the completion of the mergers.
JANEX
Janex International
c/o Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
3
<PAGE> 543
Janex manufactures and markets children's toys, gumball banks, flashlights
and battery operated toothbrushes marketed under the brand name Janex. Janex
incorporates licensed characters into most of its products, and sells its
products to United States mass merchant retailers, toy specialty stores and
department stores.
FUTECH
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018
(602) 808-8765
Futech designs, publishes, manufactures and markets interactive,
educational, promotional and entertainment products (i.e., books, game boards
with sound capabilities and specialty post cards) targeted primarily towards
children. Futech's patented technology utilizes specialized conductive ink to
print interactive touch points. These touch points trigger speech, music and
sound effects. Futech licenses this technology to major entertainment and
publishing companies. Futech also distributes proprietary products, as well as
those of third party publishers, to warehouse clubs, national book chains,
specialty and independent retailers and major toy chains.
TRUDY
Trudy Corporation
353 Main Avenue
Norwalk, CT 06851-1552
(203) 846-2274
Trudy Corporation was initially organized as a Connecticut corporation
under the name "Norwest Manufacturing Corporation" in 1979. Trudy, which does
business under the name Soundprints, publishes juvenile story books and
audio-cassettes which are sold in conjunction with contract manufactured
educational toys to the retail and mail order markets.
FUNDEX
Fundex Games, Ltd.
2237 Directors Row
Indianapolis, Indiana 46241
(317)248-1080
Fundex Games, Ltd. was originally incorporated in the State of Indiana as
"Third Quarter, Inc." in 1991. Fundex develops, markets, and distributes a
variety of games and toys for both children and adults, including:
- card games, puzzles and board games, including the Phase 10 card game and
its sister products;
- skill and action games for children;
- games, puzzles and toys featuring characters licensed from third parties;
and
- spring and summer toys for children, including jump ropes, water toys and
water games.
4
<PAGE> 544
DAMERT
DaMert Company
1609 Fourth Street
Berkeley, California 94710
(510) 524-7400
DaMert Company was founded in 1973 and incorporated in 1979. DaMert creates
and produces toy and gift products targeted primarily to children ages 6-12 with
nature and science themes. Presently, the product line includes over 200 toys,
gifts and puzzles selling through catalogs, museums, department stores,
specialty gift stores and toy stores nationwide.
THE SPECIAL MEETING
DATE, TIME AND PLACE (PAGE )
The Fundex special meeting will be held on , at
at .
PURPOSE OF THE SPECIAL MEETING (PAGE )
We have called the special meeting so the Fundex stockholders can vote on
whether to approve the mergers pursuant to the Merger Agreement. The directors
of Futech, Trudy, Janex and DaMert have called for special meetings of the
stockholders of their companies so that they also can vote whether to approve
the mergers.
RECOMMENDATION OF THE FUNDEX BOARD OF DIRECTORS (PAGE )
We have unanimously approved the Merger Agreement and unanimously recommend
that the stockholders of Fundex vote "FOR" approval of the Merger Agreement.
THE MERGER AGREEMENT
Under the Merger Agreement, first Futech and then Janex, Trudy, and DaMert
will merge with and into New Futech, which will survive the mergers, and Fundex
will merge into New Sub, which will survive as a wholly-owned subsidiary of New
Futech. Under the Merger Agreement, Fundex stockholders who do not exercise
dissenters' rights will generally receive a combination of cash, promissory
notes of New Sub and common stock of New Futech as described in the
prospectus/proxy statement under the heading "DESCRIPTION OF THE MERGERS AND THE
MERGER AGREEMENT -- Basic Terms of the Merger Agreement." However, holders of up
to approximately 29% of the outstanding stock of Fundex (i.e., all Fundex
stockholders except Carl E. Voigt, IV and Carl E. Voigt, III, who have agreed
not to receive this right) may elect to receive cash at the rate of $2.84 per
Fundex share (the "All Cash Alternative"). Those Fundex stockholders not
electing the All Cash Alternative will receive promissory notes in the aggregate
amount of $4,500,000 minus the total consideration paid to stockholders electing
the All Cash Alternative. Fundex stockholders not electing the All Cash
Alternative will also receive .3693 shares of New Futech common stock per Fundex
share plus their pro rata proportion (shared among all Fundex stockholders who
do not elect the All Cash Alternative) of approximately .184635 shares of New
Futech for each of the Fundex shares as to which the All Cash Alternative is
selected. The promissory note of New Sub will be secured by a subordinated
pledge of its assets and secured by a pledge of the New Sub stock and will also
be fully and unconditionally guaranteed. See "DESCRIPTION OF THE MERGERS AND THE
MERGER AGREEMENT -- Basic Terms of the Merger Agreement."
5
<PAGE> 545
SPECIAL RISK FACTORS AFFECTING FUNDEX
In addition to the risk factors set forth elsewhere in the prospectus/proxy
statement, you should carefully consider the special risks of Fundex described
below in evaluating the proposals which you will vote on at the special meeting
and the effects on the securities you will acquire in the merger. Although we
believe that the special risks and uncertainties described below are the major
ones facing Fundex, they are not the only ones that we will face. Any of the
following could have a material adverse effect on our business, financial
condition or results of operations and the business, financial condition or
results of operations of the combined companies.
A FEW CUSTOMERS ACCOUNT FOR MOST OF OUR SALES.
Our five largest customers accounted for approximately 57.8% and 41.2% of
our net sales in 1997 and 1998, respectively. We do not have any contracts with
any of our customers, and we do not expect to enter into any. If we lose any of
our major customers or if they substantially reduce their orders to us, this
could have a material adverse effect on the future results of operations and
financial condition of the combined company.
OUR PRODUCTS CAN BECOME OBSOLETE VERY QUICKLY.
Consumer preferences can change rapidly in our markets. Our success
generally depends on our ability to successfully introduce new products which
consumers like. Because we have to make new product commitments well in advance
of sales, we must anticipate future market demand when making new product
decisions. The success of our new products depends on a number of things:
- making the right product selections,
- completing product design in a timely fashion,
- implementing manufacturing and assembly processes in a timely and
efficient manner, and
- designing and implementing effective sales and marketing strategies and
programs.
Because of the factors outlined above, we cannot assure you that we will
succeed in introducing new products which consumers like and that we will
introduce these new products in a timely and efficient manner. If we fail to do
these things or to do them well, our failure could have a material adverse
effect on the future results of operations and financial condition of the
combined companies.
MANY OF OUR COMPETITORS ARE BIGGER, HAVE GREATER FINANCIAL RESOURCES AND DO MORE
CONSUMER ADVERTISING.
We compete with many other companies in the design and development of new
toys and games, in getting licenses for our current products and new products,
and in marketing and distributing our products. Many of our competitors have
greater financial resources, more sophisticated sales forces, larger facilities
for product development and greater name recognition than we do. Many of our
competitors do more consumer advertising than we do. Many of our competitors may
also have greater influence with retailers than we do because of their size and
may have the ability to price their products more aggressively.
We cannot assure you that we will be able to compete successfully or that
we will have the ability to expand our operations to help the combined companies
grow.
6
<PAGE> 546
WE RELY ON THE SUCCESS OF ONE PRINCIPAL PRODUCT LINE.
We rely heavily on the success or failure of one principal product line and
on the introduction of promotional products. We derived approximately 32.8% and
35.9% of our net sales in 1997 and 1998, respectively, from our Phase 10(TM)
product line.
Our failure to maintain the marketability of our Phase 10(TM) line could
have a material adverse effect on the future results of operations and financial
condition of the combined company. We cannot assure you that we will be able to
maintain the marketability of our Phase 10(TM) line.
OUR RAW MATERIALS COSTS FLUCTUATE AND WE CANNOT ALWAYS INCREASE THE PRICE OF OUR
PRODUCTS TO MATCH INCREASES IN THE COST OF OUR RAW MATERIALS.
To make our products we primarily use the raw materials paper and plastic.
We believe that adequate supplies of these raw materials are readily available
to us and our contract manufacturers. However, as the price of these raw
materials fluctuates, our manufacturing costs fluctuate accordingly. When raw
materials costs rise during the year, we usually cannot increase the sales
prices of our products to make up for increased costs of raw materials until the
beginning of a calendar year, if at all.
WE DEPEND ON LICENSES FROM INVENTORS.
We obtain many of our products through licenses from inventors. We compete
with many other companies for such licenses. In addition, we depend upon
proprietary character licenses for one of our newer product lines. We intend to
seek other character licenses to expand our business.
Many of our competitors have substantially greater financial and other
resources than we do and therefore may have the resources to out-bid us for
licenses. Many of our licensing agreements are non-exclusive and limited in
duration, and competition for licenses is intense. We cannot assure you that we
will succeed in renewing our present licenses or in obtaining new licenses.
WE HAVE SEASONAL VARIATIONS IN THE AMOUNT OF OUR SALES AND OUR FINANCIAL RESULTS
USUALLY VARY FROM QUARTER TO QUARTER.
To a greater extent than some other parts of the toy and game industry, the
majority of retail sales of games and puzzles occur during the period from
September to December. The great majority of shipments of games and puzzles
occur during the third and fourth quarters, and we have our highest inventory
levels then.
We generate a substantial portion of our revenues during the third and
fourth quarters, and our operating results usually fluctuate significantly among
quarters because of this. Operating results may also fluctuate as a result of a
number of other factors, including the timing of shipments of new products,
activities of our competitors, advertising by competitors, and the emergence of
new companies and products in the market.
STOCKHOLDER MATTERS
Fundex stock does not trade on any established market. Similarly, there is
no public trading market for the New Futech common stock. We expect the New
Futech common stock to trade on the OTC Bulletin Board/Nasdaq Stock Market soon
after the mergers,
7
<PAGE> 547
but we cannot be sure it will do so and we cannot predict what the price might
be. We do not expect a trading market to develop for any of the other securities
of New Futech.
As of May 31, 1999, the record date, there were approximately 60
stockholders of record of Fundex common stock, as shown on our records.
Fundex has not paid dividends on its common stock and does not anticipate
paying dividends in the foreseeable future. If the mergers do not occur for any
reason, we anticipate that all earnings, in the foreseeable future, will be
retained for development of Fundex's business.
8
<PAGE> 548
THE MERGERS AND RELATED TRANSACTIONS
GENERAL
The Merger Agreement provides for the merger of Futech with and into New
Futech, promptly followed by the substantially simultaneous merger of Janex,
Trudy and DaMert with and into New Futech and the substantially simultaneous
merger of Fundex with and into New Sub. The discussion in this prospectus/proxy
statement supplement and the related prospectus/proxy statement of the mergers
and the description of the principal terms of the Merger Agreement contained in
the prospectus/proxy statement are subject to and qualified in their entirety by
reference to the Merger Agreement, a copy of which is attached to the
prospectus/proxy statement as Appendix A, and incorporated herein by reference.
EFFECTS OF THE MERGERS
GENERAL
We intend for the mergers to occur promptly following approval of the
mergers by the requisite vote of the stockholders of each of Janex, Futech,
Trudy, DaMert and Fundex and the satisfaction or waiver of all other conditions
to consummation of the mergers. The mergers will become effective at or about
the time of filing of articles of merger or other appropriate documents with the
applicable government offices or agencies. At that time (a) first Futech and
then Janex, Trudy and DaMert will merge with and into New Futech with the result
that New Futech will be the surviving corporation and (b) then Fundex will merge
with and into New Sub with the result that New Sub will be the surviving
corporation. As part of the mergers, New Futech will change its name to "Futech
Interactive Products, Inc." The stockholders of Fundex will become stockholders
of New Futech, and their rights will be governed by the New Futech certificate
of incorporation and bylaws. See "Comparison of Rights of Stockholders of Fundex
and New Futech." See "DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT" in
the prospectus/proxy statement.
For information regarding the operation of New Futech and New Sub following
the mergers, see "DESCRIPTION OF NEW FUTECH'S BUSINESS" in the prospectus/proxy
statement. For information regarding the officers and directors of New Futech
following the mergers, see "NEW FUTECH'S MANAGEMENT" in the prospectus/proxy
statement.
EXCHANGE RATIOS
If none of the Fundex stockholders elects the All Cash Alternative, each
share of Fundex common stock outstanding immediately prior to the mergers (other
than dissenting shares) will be converted into the right to receive
approximately 0.3693 shares of New Futech common stock and a promissory note of
New Futech in the amount of approximately $2.7695 that bears interest at the
rate of 10% per annum, is due one year after the mergers occur, and is secured
by New Futech's pledge of all of the stock of New Sub, by a subordinated lien on
New Sub's assets and by the full and unconditional guarantee of New Futech.
Stockholders will also receive the conditional right to exchange their New
Futech stock for the license rights to the "Phase 10" family of products as
described below.
9
<PAGE> 549
Any Fundex stockholders who elect the All Cash Alternative will instead
receive cash at the rate of $2.84 per Fundex share. In that case the remaining
Fundex stockholders will receive:
- one year promissory notes in an aggregate amount of $4,500,000 minus the
aggregate amount paid to stockholders who elect the All Cash Alternative;
plus
- approximately .3693 shares of New Futech common stock per Fundex share;
plus
- their pro rata proportion (shared among all Fundex stockholders who do
not elect the All Cash Alternative) of approximately .184635 shares of
New Futech for each of the Fundex shares as to which the All Cash
Alternative is selected.
Outstanding shares of Futech, Trudy, Janex and DaMert will also be
converted into a combination of cash, promissory notes and common stock of New
Futech. Under certain circumstances the former stockholders of Trudy will have
the right to receive additional New Futech stock or to exchange their New Futech
stock for unsecured five year debentures. In addition, outstanding options of
each of the merging companies will be converted into options to purchase common
stock of New Futech. See "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT -- Basic Terms of the Merger Agreement."
FRACTIONAL SHARES
Fractional shares of New Futech common stock will not be issued in the
mergers. Instead, stockholders in any of the merging companies who would
otherwise have received an amount of New Futech stock that includes a fraction
of a share will instead receive an amount of cash equal to that fraction
multiplied by $7.50. For example, a Fundex stockholder who is otherwise entitled
to receive 15.5 shares of New Futech common stock will actually receive only 15
shares, plus $3.75 in cash (i.e., 0.5 times $7.50).
BACKGROUND OF THE MERGER
On September 3, 1998, Mr. Vince Goett, Chairman of Futech, telephoned Mr.
Chip Voigt, President of Fundex, to express interest in working together on the
development, marketing and production of certain game products utilizing
Futech's proprietary product. Mr. Goett also wanted to further explore business
synergies.
On September 11, 1998, Mr. Goett arranged for Mr. Chip Voigt and Mr. Pete
Voigt, Executive Vice President, to visit the Futech offices in Phoenix. During
the meeting the Voigts and Mr. Goett toured the facilities and discussed the
Futech proprietary product and the possibilities for a merger between the two
companies.
On January 7, 1999, Mr. Chip Voigt and Fundex counsel met with Mr. Goett to
continue discussions and structure of a possible merger.
From the visit to the Futech offices in Phoenix in 1998 through March 5,
1999, Mr. Chip Voigt and Mr. Goett engaged in negotiations regarding the merger.
The negotiations culminated in a Letter of Intent of Merger dated March 5, 1999.
From shortly after the date of the discussions with Futech in 1998 through
the signing of the Merger Agreement, Mr. Chip Voigt and Mr. George Propsom,
Fundex's Director of Product Development, had lengthy discussions on the
development of games and puzzles utilizing the Futech patents and processes with
Mr. Joe Petter, Futech's Chief Operating Officer, and Mr. Scott Leuthold,
Futech's Director of Product Development.
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From March 5, 1999, through the date of the signing of the agreement, the
parties have engaged in extensive discussions to negotiate the complete and
final terms of the Merger Agreement and have conducted extensive due diligence
with regard to each other's business.
On April 29, 1999, the Fundex Board of Directors met to discuss the
progress of the discussions of the Merger Agreement.
On May 27, 1999, the Futech Board of Directors approved the mergers and the
Merger Agreement. On June 7, 1999, the Fundex Board of Directors approved the
merger of Fundex into New Sub and the Merger Agreement, and as of June 7, 1999,
the Merger Agreement was executed.
REASONS FOR THE MERGERS
Fundex is a privately held company which has historically found it
difficult to obtain access to sufficient capital to expand its business and make
all of the investments in its products and operations which it felt were
desirable. It has also relied very heavily on a single product line, making
introductions of new products and promotional items more risky, because of the
heavier financial burden these placed on Fundex financial resources than on
larger companies with more diverse and varied product lines and greater
financial resources. Cash flow shortfalls have occurred more frequently than the
company desired.
Fundex believes the mergers will offer a number of benefits to Fundex,
including the following:
- Fundex expects to benefit from Futech's patented technology as well as
Futech's established distribution channels in children's publishing.
- Fundex expects to benefit from the greater financial resources and access
to capital of the combined entities, especially for product development
and distribution.
- Fundex expects to benefit from the combined entities' greater access to
character licensed products which are essential to continued growth of
the Fundex product line.
- Fundex expects to benefit from the greater depth of management which the
resulting entity will provide.
- Fundex expects to benefit from the more diverse product line of the
combined companies and the diminished seasonal impact on its business.
- Fundex expects that stockholders who do not sell their shares for cash
will benefit because the Futech stock which they will receive is likely
to be publicly traded and therefore much more liquid than current Fundex
stock.
Although Fundex believes the mergers will offer it a number of benefits, as
outlined above, it has no assurances that the post-merger company will provide
it with adequate capital to fund future growth or that additional acquisitions
can be completed to create the economies of scale which it believes that the
merger can provide.
In addition to the factors outlined above, Fundex's Board of Directors
considered the following additional factors in arriving at its decision.
Fundex's Board of Directors viewed the mergers as the best means to obtain
liquidity for the stockholders investment in Fundex. In the past few years,
Fundex's Board of Directors have considered a number of alternatives to provide
liquidity and greater capital resources for Fundex, including an initial public
offering in 1996. Because it has a niche product line and is a relatively small
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company, Fundex's Board of directors determined that the prospects for an
advantageous initial public offering were not favorable.
Fundex's Board of Directors believes that the mergers are fair and in the
best interests of Fundex and its stockholders and therefore recommends that the
stockholders vote in favor of the merger of Fundex into New Sub.
Fundex's Board of Directors believes that the merger of Fundex into New Sub
is the best alternative for Fundex stockholders because Fundex stockholders are
likely to have a public market available for sale of their Futech shares should
they wish to sell them. Moreover, the Fundex Board of Directors believes that
the two alternatives offered to shareholders for disposition of their Fundex
stock under the Merger Agreement provide investors with an attractive set of
alternatives for disposition of their interest in Fundex. Fundex's Board of
Directors has considered the fact that the value of Futech stock may fluctuate
significantly after the mergers.
For additional information regarding the background of and reasons for the
mergers, see "DESCRIPTION OF NEW FUTECH'S BUSINESS -- Reasons for the Mergers"
in the prospectus/proxy statement.
FUNDEX'S BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF FUNDEX HAS DETERMINED THAT THE MERGERS ARE
ADVISABLE AND IN THE BEST INTERESTS OF FUNDEX AND ITS STOCKHOLDERS AND HAS
UNANIMOUSLY RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
RELATED AGREEMENTS; INTERESTS OF CERTAIN FUNDEX AFFILIATES IN THE MERGER
ON JUNE 7, 1999, FUNDEX AND FUTECH ENTERED INTO A LOAN AND LICENSING
AGREEMENT PURSUANT TO WHICH (a) FUTECH AGREED TO LOAN FUNDEX (OR PROVIDE LETTERS
OF CREDIT FOR) AN AGGREGATE OF $1,500,000 AND (b) A NONEXCLUSIVE LICENSE
PERMITTING CERTAIN FUNDEX PRODUCTS TO USE FUTECH'S GAME BOARD TECHNOLOGY PENDING
THE MERGERS IN EXCHANGE FOR A ROYALTY EQUAL TO 50% OF NET PROFITS ON THE
ASSOCIATED PRODUCTS. THE DEBT MUST BE REPAID OVER A PERIOD OF 24 MONTHS. IF THE
MERGERS OCCUR AND THEREAFTER THE FORMER FUNDEX STOCKHOLDERS FORECLOSE ON THE NEW
SUB STOCK AS A RESULT OF A DEFAULT ON THE PROMISSORY NOTES ISSUED IN THE
MERGERS, UP TO $750,000 OF THIS DEBT WILL BE CANCELLED AS A PENALTY. TO DATE,
FUTECH HAS LOANED $100,000 UNDER THIS AGREEMENT.
REGULATORY MATTERS
Except as disclosed in this prospectus/proxy statement supplement and the
prospectus/proxy statement supplement, Fundex and New Futech are not aware of
any governmental or regulatory approvals required for consummation of the
mergers, other than compliance with the federal securities laws and applicable
securities and "blue sky" laws of the various states.
CERTAIN FEDERAL TAX MATTERS
In the opinion of Quarles & Brady LLP, special tax counsel to New Futech,
the merger of Fundex into New Sub will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
and New Futech, New Sub and Fundex will each be a party to that reorganization
within the meaning of Section 368(b) of the Code.
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In rendering its opinion, counsel has relied upon and assumed as accurate
and correct on the date hereof, and will rely on and assume as accurate and
correct as of the Effective Time of merger, the information contained in this
prospectus/proxy statement supplement and the related prospectus/proxy statement
and certain representations as to factual matters made by New Futech, New Sub
and Fundex. The representations relied upon include the following: (i) the
Fundex stockholders will receive in the merger New Futech common stock having a
fair market value of at least 40% of the fair market value of all outstanding
Fundex common stock immediately before the merger; (ii) in the merger Fundex
will transfer to New Sub assets representing at least 90% of the fair market
value of its net assets and at least 70% of the fair market value of its gross
assets taking into account any redemptions or distributions by Fundex occurring
prior to the merger and certain other items; (iii) there is no plan or intention
on the part of New Futech or a corporation related to New Futech to purchase any
of the New Futech common stock transferred to the Fundex stockholders in the
merger; and (iv) the source of payment of all cash to any Fundex stockholder in
the merger will be New Futech. Any inaccuracy or change with respect to such
information or representations or actions of New Futech, New Sub or Fundex
contrary to the representations could adversely affect the conclusions reached
in the opinion and the tax summary set forth below.
Counsel's opinion represents its best legal judgement as to the tax
treatment of the merger, but its opinion is not binding on the Internal Revenue
Service (the "Service"). The parties have not and will not request a ruling from
the Service in connection with the federal income tax consequences of the
merger.
The following discussion addresses certain federal tax consequences of the
merger to a Fundex stockholder assuming the Merger will qualify as a
reorganization and is based on the provisions of the Code, the applicable
regulations thereunder, judicial authority and current administrative rulings
and practices as of the date hereof, all of which are subject to change,
possibly with retroactive effect. The discussion assumes that the shares of
Fundex common stock are held as capital assets.
If any Fundex stockholders elect the All Cash Alternative, then such Fundex
stockholders will receive only cash for their Fundex common stock in the merger
and the nonelecting Fundex stockholders will receive shares of New Futech common
stock, New Sub Notes and the conditional rights and no cash for their Fundex
common stock in the merger. If no Fundex stockholders elect the All Cash
Alternative, then all Fundex stockholders will receive new Futech common stock,
New Futech Notes, the conditional rights and cash for their Fundex common stock
in the merger.
A Fundex stockholder that receives solely cash in the merger in exchange
for such stockholder's shares of Fundex common stock generally will recognize
capital gain or loss measured by the difference between the amount of cash
received with respect to each share of Fundex common stock and the tax basis of
each such share of Fundex common stock exchanged therefor. However, if any such
stockholder actually or constructively owns shares of New Futech common stock
after the merger (as the result of constructive ownership of shares of Fundex
common stock that are exchanged for shares of New Futech common stock in the
merger), the cash received by such stockholder may, in certain circumstances, be
taxed as a dividend. The circumstances under which dividend treatment may apply
and the tax consequences thereof are similar to those discussed below with
respect to the receipt of New Futech common stock, New Sub Notes, the
conditional rights and cash, except that the amount treated as a dividend would
not be limited to the amount of such stockholder's gain realized in the
transaction.
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A Fundex stockholder that receives New Futech common stock, New Sub Notes
and the conditional rights in the merger in exchange for such stockholder's
shares of Fundex common stock will have the same treatment as discussed below
with respect to the receipt of New Futech common stock, New Sub Notes, the
conditional rights and cash.
A Fundex stockholder will not recognize loss on the receipt of New Futech
common stock, New Sub Notes and cash in exchange for Fundex common stock.
However, under Section 356(a)(1) of the Code, the stockholder will recognize
gain, if any, with respect to each share of Fundex common stock exchanged
(measured by the sum of the fair market value of the portion of a share of New
Futech common stock received for such share of Fundex common stock, plus the
fair market value of the portion of the New Sub Notes received for such share of
Fundex common stock, plus the fair market value of the portion of the
conditional rights received for such share of Fundex common stock, plus the
amount of any cash received for such share of Fundex common stock, minus the tax
basis of such share of Fundex common stock) but only to the extent of the amount
of the New Sub Notes plus the amount of conditional rights plus the amount of
cash received in exchange for such share of Fundex common stock.
Under applicable Supreme Court precedent, any such gain recognized will be
taxed as either gain from the sale or exchange or stock (i.e., capital gain) or
as a dividend (to the extent of the stockholder's ratable share of the earnings
and profits of Fundex), based upon whether, in the transaction described in the
next sentence, such stockholder's interest in Fundex was reduced sufficiently so
as to meet one of the tests set forth in Section 302(b) of the Code, as
described below. For purposes of this determination, a Fundex stockholder will
be treated as if such stockholder had engaged in a hypothetical transaction in
which such stockholder and all other Fundex stockholders (i) received solely
shares of New Futech common stock in exchange for all of their shares of Fundex
common stock; and (ii) thereafter had a portion of such shares of New Futech
common stock redeemed for the New Sub Notes, conditional rights and cash portion
of the merger consideration. A Fundex stockholder's hypothetical interest in New
Futech after step (i) is compared to such stockholder's interest in New Futech
subsequent to the deemed redemption in step (ii). In each case, subject to
limited exceptions, shares of New Futech common stock actually or constructively
owned by such stockholder will be considered owned for purposes of applying the
test, even if such shares of New Futech common stock were not received or deemed
received in the merger.
Under Section 302(b) of the Code a stockholder's interest in New Futech
will be deemed to have been reduced sufficiently so as to result in sale or
exchange treatment of the gain if, insofar as is here relevant, (i) such
stockholder's interest in New Futech is completely terminated as a result of the
transaction; (ii) as a result of the hypothetical redemption described above and
taking into account all other hypothetical redemptions in the merger, the Trudy
merger and the DaMert merger, a stockholder's interest in New Futech is less
than 80% of the stockholder's interest in New Futech before the redemption; or
(iii) such stockholder's interest was "meaningfully reduced" by virtue of such
redemption (the "Section 302 Tests"). While the latter of the Section 302 Tests
requires a determination based on a stockholder's particular facts and
circumstances, the Service has indicated in published rulings that a
distribution that results in any actual reduction in interest of an extremely
small minority stockholder in a publicly held corporation will meaningfully
reduce the stockholder's interest in the corporation if the stockholder
exercises no control with respect to corporate affairs.
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Under the applicable constructive ownership rules of Section 318 of the
Code for purposes of the Section 302 Tests, a stockholder will, in general, be
treated as owning shares owned by certain family members and other related
entities, or that are subject to options owned or deemed owned by such person.
The actual or constructive ownership of shares of Fundex common stock may, in
some circumstances, have the effect of causing a Fundex stockholder that would
otherwise qualify for capital gain treatment under the Section 302 Tests to fail
to so qualify and subject such stockholder to dividend treatment.
To the extent that cash, the conditional rights and New Sub Notes received
in exchange for shares of Fundex common stock are treated as a dividend to a
corporate stockholder (other than an S corporation), such stockholder will be
(i) eligible for a dividends received deduction (subject to applicable
limitations); and (ii) subject to the "extraordinary dividend" provisions of the
Code. Under recently enacted legislation, any cash which is treated as a
dividend to a corporate stockholder will constitute an extraordinary dividend,
except as otherwise provided in Treasury Regulations which have yet to be
promulgated. Consequently, in the absence of such regulations, the nontaxed
portion of any such dividend would reduce the stockholder's adjusted tax basis
in the shares of New Futech common stock received in the merger but not below
zero and would thereafter be taxable as capital gain.
The tax basis of each share of New Futech common stock received in the
merger will be the same as the tax basis of the shares of Fundex common stock
exchanged therefor, increased by the amount of gain recognized on the exchange
with respect to such shares of Fundex common stock (including any such gain that
is treated as a dividend), decreased by the amount of New Sub Notes, the amount
of the conditional rights and cash received with respect to such shares of
Fundex common stock. The holding period of the shares of New Futech common stock
received will include the holding period of the shares of Fundex common stock
exchanged therefor.
Provided that a Fundex stockholder's recognized gain in the merger is
treated under the Section 302 Tests as a gain from the sale or exchange of stock
and not as a dividend, a Fundex stockholder may report the portion of the gain
attributable to the New Sub Notes received for the Fundex common stock under the
installment method (i.e., gain is reportable in the taxable year in which cash
is received under the New Sub Notes).
A holder of Fundex common stock who receives New Futech common stock, New
Sub Notes, the conditional rights and/or cash pursuant to the merger will be
required to retain records and file with such holder's federal income tax return
for the taxable year in which the merger takes place a statement setting forth
all relevant facts in respect of the nonrecognition of gain or loss upon such
exchange. The statement is required to include (i) such holder's basis in the
shares of Fundex common stock surrendered in the merger; and (ii) the value of
New Futech common stock, New Sub Notes and the conditional rights received
(using fair market value as of the Effective Time of merger) and the amount of
any cash received in the merger.
The foregoing discussion is intended only as a description of the material
federal income tax consequences of the merger and does not purport to be a
complete analysis or description of all potential tax effects of the merger. In
addition, the discussion does not address all of the tax consequences that may
be relevant to particular taxpayers in light of their personal circumstances or
to taxpayers subject to special treatment under the Code (for example, insurance
companies, financial institutions, dealers in securities, tax exempt
organizations, foreign corporations, foreign partnerships, or other foreign
entities and individuals who are not citizens or residents of the United States
and persons who acquired
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their New Futech common stock pursuant to the exercise or termination of
employee stock options, warrants or otherwise as compensation).
No information is provided herein with respect to the tax consequences, if
any, of the merger under applicable foreign, state, local and other tax laws.
The general summary set forth above is not intended to be, nor should it be
construed to be, legal or tax advice to any particular holder of Fundex common
stock. EACH HOLDER OF FUNDEX COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER,
INCLUDING THE APPLICATION OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
The mergers are intended to qualify as purchases by Futech, which means
that the amount by which the total merger consideration received by stockholders
of the other merging companies plus the amount of their liabilities exceeds the
fair market value of their identifiable assets will initially be treated as
goodwill by New Futech for accounting purposes.
NEW FUTECH AND FUNDEX SHARES
NEW FUTECH COMMON STOCK
For a description of New Futech common stock and its authorized but
unissued preferred stock, see "DESCRIPTION OF NEW FUTECH CAPITAL STOCK" in the
prospectus/proxy statement.
GENERAL DESCRIPTION OF FUNDEX COMMON STOCK
Fundex is authorized to issue up to 8,000,000 shares of common stock, $.001
par value. There are 1,624,824 shares of common stock outstanding at the date of
this prospectus/proxy statement supplement. At the date of this prospectus/proxy
statement supplement, there were approximately 60 holders of record of the
Company's Common Stock.
COMMON STOCK
Holders of Fundex common stock are entitled to share ratably in dividends
as are declared by the Board of Directors of the company out of funds legally
available for the payment of dividends. In the event of any liquidation,
dissolution or winding-up of the Fundex, the holders of common stock will be
entitled to receive a pro rata share of the net assets of the company remaining
after payment or provision for payment of the debts and other liabilities of the
company.
Holders of common stock are entitled to one vote per share in all matters
to be voted upon by stockholders. Cumulative voting for the election of
directors, and all other matters brought before stockholders meetings, whether
annual or special, is not permitted. Holders of Fundex common stock have no
preemptive or subscription rights, and the common stock is not subject to
redemption or assessment.
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COMPARISON OF THE RIGHTS OF HOLDERS OF FUNDEX COMMON STOCK AND NEW FUTECH COMMON
STOCK
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF NEVADA AND DELAWARE
The corporation laws of Nevada and Delaware differ in many respects.
Although all the differences are not set forth in this prospectus/proxy
statement supplement, provisions which could materially affect the rights of
stockholders are discussed below.
REMOVAL OF DIRECTORS
Nevada
Applicable Nevada law provides that one or more directors of a corporation may
be removed with or without cause, by the vote of stockholders representing not
less than two-thirds of the voting power of the issued and outstanding stock
entitled to vote, subject to certain conditions. These conditions include
certain voting requirements applicable to corporations having cumulative voting
rights and to the removal of a member of a board who is elected by a single
class. The Fundex Board of Directors is not classified. Fundex stockholders may
not cumulate votes for directors.
Delaware
Under applicable Delaware law any director or the entire board of directors may
be removed, with or without cause, by the holders of a majority of the shares
entitled to vote at an election of directors. Applicable Delaware law also
provides additional requirements for the removal of a member of a board which is
classified as to term or elected by a single class or elected by classes
possessing cumulative voting rights. In the case of a Delaware corporation
having cumulative voting, if less than the entire board is to be removed, a
director may not be removed without cause if the number of shares voted against
such removal would be sufficient to elect the director under cumulative voting.
A director of a corporation with a classified board of directors may be removed
only for cause, unless the certificate of incorporation otherwise provides. The
certificate of incorporation and bylaws of New Futech provide for a classified
board of directors, but not for cumulative voting.
CLASSIFIED BOARD OF DIRECTORS
A classified (the term in Delaware) or staggered board is one on which a
certain number, but not all, of the directors are elected on a rotating basis
each year. This method of electing directors makes changes in the composition of
the board of directors more difficult, and thus, a change in control of a
corporation potentially a lengthier and more difficult process.
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Nevada
Nevada law permits, but does not require, a staggered board of directors, by
which the directors can be divided into as many as three classes with staggered
terms of office, with only one class of directors standing for election each
year. The Fundex articles of incorporation do not provide for a staggered board.
Delaware
Delaware law permits, but does not require, a classified board of directors, by
which the directors can be divided into as many as three classes with staggered
terms of office, with only one class of directors standing for election each
year. The New Futech certificate of incorporation and bylaws provide for a
classified board, consisting of three classes with three directors in each
class.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Both the Nevada and applicable Delaware laws provide that a director,
employee, officer or agent of a corporation may be indemnified against liability
(other than in an action by or in the right of the corporation) and other costs
incurred by such person in connection with such proceeding, provided such person
acted in good faith and in a manner such person reasonably believed to be in,
and not opposed to, the best interests of the corporation, and, with respect to
any criminal proceeding, had no reason to believe the conduct was unlawful. For
actions or suits brought by or in the name of the corporation, both the Nevada
and applicable Delaware laws provide that a director, employee, officer or agent
of a corporation may be indemnified against expenses incurred by such person in
connection with such proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in, or at least not opposed to, the
best interests of the corporation, except that if such person is adjudged to be
liable to the corporation, such person can be indemnified if and only to the
extent that a court determines that despite the adjudication of liability, in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court shall deem proper. On the
other hand, if he/she prevails, indemnification is mandatory. See the following
paragraph for a discussion of the differences in the standards of liability for
Fundex directors compared to New Futech directors.
The Nevada and Delaware Statutes both allow a corporation to include, in
its articles or certificate of incorporation, a provision that limits or
eliminates the personal liability of an officer (Nevada only) or a director to
the corporation and its stockholders for monetary damages for such person's
breach of fiduciary duty, provided that such provision may not so limit a
director's liability (i) for a breach of his or her duty of loyalty to the
corporation (Delaware only); (ii) for acts or omissions not in good faith or
involving fraud (Nevada only); intentional misconduct or a knowing violation of
law; (iii) for unlawful payments of dividends, certain stock repurchases or
redemptions; or (iv) for any transaction from which the director derived an
improper personal benefit (Delaware only).
INSPECTION OF STOCKHOLDER LIST
Nevada law allows any stockholder who has been a holder of record of shares
for at least six months, or any person holding, or thereunto authorized in
writing by the holder of, at least 5% of all of the outstanding shares of a
corporation to inspect the stockholder list, if the stockholder makes a demand
in good faith and for a proper purpose and the records requested are directly
connected with the stockholder's purpose. Delaware law allows any stockholder to
inspect the stockholder list for a purpose reasonably related to
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such person's interests as a stockholder. Both Nevada and Delaware law require
the stockholder to give the corporation written notice of its demand prior to
inspection of the stockholder list.
DIVIDENDS AND REPURCHASES OF SHARES
Nevada
Holders of Fundex common stock are entitled to share ratably in such cash
dividends as may be declared from time to time by Fundex's Board of Directors
out of funds legally available therefor. Nevada law permits a corporation to
declare and pay dividends unless it would render the corporation insolvent.
Delaware
Delaware law permits a corporation to declare and pay dividends out of surplus
or if there is no surplus, out of net profits for the fiscal year as long as the
amount of capital of the corporation following the declaration and payment of
the dividend is not less than the aggregate amount of the capital represented by
the issued and outstanding stock of all classes having preference upon the
distribution of assets. In addition, Delaware law generally provides that a
corporation may redeem or repurchase its shares only if the capital of the
corporation is not impaired and such redemption or repurchase would not impair
the capital of the corporation.
STOCKHOLDER VOTING
Nevada
Applicable Nevada law requires that any proposed exchange, merger or
consolidation of a corporation must be approved by the holders of a majority of
the outstanding shares entitled to vote.
Delaware
Applicable Delaware law provides that a merger, consolidation, sale, lease or
exchange of all or substantially all of its assets may be effected upon a vote
of the holders of a majority of a corporation's outstanding shares. Delaware law
does not require a stockholder vote of the surviving corporation in a merger if
(a) the merger does not amend the existing certificate of incorporation, (b)
each outstanding share of the surviving corporation before the merger is
unchanged or becomes a treasury share of the surviving corporation, and (c) the
number of shares to be issued by the surviving corporation in the merger does
not exceed 20% of the shares outstanding immediately prior to such issuance.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS UNDER DELAWARE AND NEVADA
LAW
In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a
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corporation, and one or more of its significant stockholders, more difficult.
Under sec. 203 of the Delaware General Corporation Law, certain "business
combinations" with "interested stockholders" of Delaware corporations are
subject to a three-year moratorium unless specified conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or entity who or which owns,
individually or with or through certain other persons or entities, 15% or more
of the corporation's outstanding voting stock (including any rights to acquire
stock pursuant to an option, warrant, agreement, arrangement or understanding,
or upon the exercise of conversion or exchange rights, and stock with respect to
which the person has voting rights only), or is an affiliate or associate of the
corporation and was the owner, individually or with or through certain other
persons or entities, of 15% or more of such voting stock at any time within the
pervious three years, or is an affiliate or associate of any of the foregoing.
For purposes of sec. 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or a direct
or indirect majority-owned subsidiary equal in aggregate market value of 10% or
more of the aggregate market value of either the corporation's consolidated
assets or all of its outstanding stock; the issuance of transfer by the
corporation or a direct or indirect majority-owned subsidiary of stock of the
corporation or such subsidiary to the interested stockholder (except for certain
transfers in a conversion or exchange or a pro rata distribution or certain
other transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock or of the corporation's voting stock); or receipt by the
interested stockholder (except proportionately as a stockholder), directly or
indirectly, of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by sec. 203 does
not apply if:
- prior to the date on which such stockholder becomes an interested
stockholder the board of directors approves either the business
combination or the transaction that resulted in the person or entity
becoming an interested stockholder,
- upon consummation of the transaction that made him or her an interested
stockholder, the interested stockholder owns at least 85% of the
corporation's voting stock outstanding at the time the transaction
commenced (excluding from the eighty-five percent calculation shares
owned by directors who are also officers of the target corporation and
shares held by employee stock plans that do not give employee
participants the right to decide confidentiality whether to accept a
tender or exchange offer), or
- on or after the date such person or entity becomes an interested
stockholder, the board approves the business combination and it is also
approved at a stockholder meeting by sixty-six and two-thirds percent of
the outstanding voting stock not owned by the interested stockholder.
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<PAGE> 560
Section 203 only applies to certain publicly held corporations that have a
class of voting stock that is:
- listed on a national securities exchange,
- quoted on an interdealer quotation system of a registered national
securities association, or
- held of record by more than 2,000 stockholders.
Under certain circumstances, sec. 203 of the DGCL may made it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three-year period.
Applicable Nevada law similarly prohibits such business combinations
between Nevada corporations and interested stockholders for a period of 3 years
after the interested stockholder's date of acquiring shares unless the
combination or the purchase of the shares, made by the interested stockholder is
approved by the board of directors. Applicable Nevada law also prohibits such
business combinations after the expiration of 3 years after the interested
stockholder's date of acquiring shares unless the combination meets the
requirements specified in Section 78,439 for director and stockholder approvals
or Sections 78,441 to 78,444 inclusive with respect to the consideration to be
received in the combination by all stockholders other than the interested
stockholder. Applicable Nevada law defines interested stockholders to include
persons who, alone or together with affiliates, beneficially own 10% of the
outstanding stock of the corporation. A Nevada corporation may opt-out of the
application of these provisions under certain circumstances.
Applicable Nevada law also denies voting rights to a stockholder who
acquires a controlling interest in a Nevada corporation, unless such voting
rights are approved by a majority of the voting powers of the corporation. A
Nevada corporation may opt-out of the application of these provisions under
certain circumstances. Fundex has not opted out of the application of this
statute.
Nevada law does not require a stockholder vote of the surviving corporation
in a merger if (a) the merger does not amend the existing articles of
incorporation, (b) each outstanding share of the surviving corporation before
the merger is unchanged, and (c) the number of shares to be issued by the
surviving corporation in the merger does not exceed 20% of the shares
outstanding immediately prior to such issuance.
INTERESTED DIRECTOR TRANSACTIONS
NEVADA
Applicable Nevada law contains a provision similar to Delaware law, except
that the board of directors may approve the transaction only if the vote is
sufficient without counting the vote of the interested directors.
DELAWARE
Applicable Delaware law states that a transaction involving an interested
director of a Delaware corporation is not void or voidable if (a) the director's
interest in the transaction is disclosed to the board and a majority of the
disinterested directors approve it, (b) the interest is disclosed to the
stockholders and the transaction is approved by a majority of the stockholders,
or (c) the transaction is fair to the corporation.
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<PAGE> 561
APPRAISAL/DISSENTERS' RIGHTS
According to Nevada Revised Statutes Section 92A.420.1, stockholders of
Fundex who wish to assert dissenters' rights:
- must deliver to Fundex BEFORE the vote is taken at the Special
Meeting written notice of their intent to demand payment for their
Fundex common stock if the merger is completed; and
- must not vote their shares in favor of the Merger Agreement.
Stockholders failing to satisfy these requirements will not be entitled to
dissenters' rights under Chapter 92A of the Nevada Revised Statutes.
According to Delaware law, appraisal rights are not available (a) with
respect to the sale of all or substantially all of the assets of a corporation,
(b) with respect to a merger or consolidation by a corporation the shares of
which are either listed on a national securities exchange, designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or are held of record by more
than 2,000 holders if such stockholders receive only shares of the surviving
corporation or shares of any other corporation that are either listed on a
national securities exchange, designated as a national market system security on
an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders, plus cash in lieu of
fractional shares of such corporations, or (c) to stockholders of a corporation
surviving a merger if no vote of the stockholders of the surviving corporation
is required to approve the merger under Delaware law.
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<PAGE> 562
FUNDEX MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Fundex's
audited financial statements and notes thereto for the two years ended December
31, 1997 and 1998 and its unaudited financial statements for the three months
ended March 31, 1999 and 1998, appearing as an attachment to the
prospectus/proxy statement.
OVERVIEW
Fundex was originally incorporated and founded by Carl E. ("Chip") Voigt,
IV and Carl E. ("Pete") Voigt, III in the State of Indiana in 1991 as Third
Quarter, Inc. In August 1996, Fundex was reincorporated in the State of Nevada
by establishing a new Nevada corporation and merging the Indiana corporation
into the Nevada corporation. In connection with the merger, the name of the
Company was changed to Fundex Games, Ltd.
Fundex Games, Ltd. ("Fundex" or the "Company") develops, markets, and
distributes a variety of games and toys for both children and adults. The
Company's principal products include: (i) card games, puzzles, and board games;
(ii) skill and action games for children; (iii) games, puzzles, and toys
featuring highly-recognized entertainment properties and characters licensed by
Fundex from third parties; and (iv) spring and summer toys for children.
The Fundex products are sold to mass merchant retailers, chain stores and
specialty stores and are offered at retail prices ranging from $1.00 to $60.00.
RESULTS OF OPERATIONS OF THE COMPANY
The following table sets forth, for the periods indicated, the relative
percentage that certain income and expense items bear to net sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED YEAR ENDED ---------------------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1998 1998 1999
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
Net Sales.......................... 100.0% 100.0% 100.0% 100.0%
Cost of Sales...................... 65.4 66.4 73.2 66.3
Gross Profit....................... 34.6 33.6 26.8 33.7
Selling, general and administrative
expenses......................... 48.8 31.4 37.0 38.2
Operating Income (loss)............ (14.2) 2.2 (10.2) (4.5)
Other expense...................... (0.7) (2.2) (2.6) (7.1)
----- ----- ----- -----
Net (loss)......................... (14.9) (0.0) (12.8) (11.6)
</TABLE>
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<PAGE> 563
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Sales. Net sales for the three months ended March 31, 1999 were
$935,019 as compared with net sales of $1,117,470 for the three months ended
March 31, 1998, or a decrease of 16.3%. The decrease is related to fewer
inventory close-out sales for the three months ended March 31, 1999 as compared
to March 31, 1998.
Cost of Sales. Cost of sales of $619,685 decreased from $818,697 in the
prior year. In percentage terms to net sales, cost of sales decreased from 73.2%
to 66.3% principally as a result of the 1998 close-outs of inventory.
Selling General and Administrative Expense. Selling, general and
administrative ("SG&A") expenses decreased from $413,088 to $357,565. The
decrease was a result from the company terminating its retirement plan on
January 1, 1999 resulting in a recapture of expenses approximating $104,000.
Depreciation and amortization expense was $77,141 as of March 31, 1999 as
compared to $46,616 on March 31, 1998. The $30,525 increase is primarily a
result of amortization of loan costs. In the third and fourth quarter of 1998,
the Company secured a mezzanine facility with Liberty BIDCO Investment Company
and replaced lenders on the line of credit facility. The new line of credit is
with Wells Fargo Business Credit (formerly Norwest Business Credit) and the old
line of credit was with NBD Bank, N.A.
Income from Operations. Consequently, loss from operations of $(42,231)
was improved from $(114,315) in 1998.
Other Income (Expense). Other expense was $66,701 as of March 31, 1999 as
compared to $28,921 on March 31, 1998. Interest expense increased to $76,701
from $40,386 in the prior year. Fundex secured a $1,000,000 subordinated term
loan from Liberty BIDCO Investment Corporation in August 1998. Interest is based
on prime plus 3 percentage points and a revenue participation fee of 1.25% of
net sales is also assessed. The interest cost attributable to the term loan was
$46,126. The balance of the interest expenses at March 31, 1999 relates to the
company's line of credit. Royalty income increased to $10,000 from $9,276 in the
prior year. Phase 10(TM) international sales accounted for the increase in
royalty income. Interest income decreased to $0 from $2,189 in the prior year.
Fundex changed financial lenders in October 1998 and as a result, changed cash
management processes.
Taxes. No tax provision as company has approximately $1,000,000 of net
operating carryforwards (expiring in 2012) which can be utilized to offset
future taxable income. The deferred tax asset of $340,000 has been fully offset
by a valuation allowance because realization is not likely at this time.
Net Income (Loss). As a result of the above factors, net loss decreased
from $(143,236) as of March 31, 1998 to $(108,832) as of March 31, 1999.
FISCAL YEAR ENDED DECEMBER 31, 1998, COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
Net Sales. Net sales for the year ended December 31, 1998 were $8,576,702
as compared with net sales of $7,797,681 for the year ended December 31, 1997,
or an increase of 10.0%. Sales of the new Super Sports Arena game and the
continued growth of the Phase 10(TM) card game accounted for the majority of the
increased net sales.
Cost of Sales. Cost of sales of $5,693,644 increased in 1998 from
$5,098,750 in the prior year. As a percentage of net sales, cost of sales
increased from 65.4% to 66.4%, principally as a result of a 1997 product
close-out.
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<PAGE> 564
Selling General and Administrative Expense. Selling, general and
administrative ("SG&A") expenses decreased from $3,810,056 in 1997 to $2,695,853
in 1998. Higher advertising costs in 1997 accounted for the significant
decrease, partially offset by increased personnel costs. Advertising costs
decreased from $1,672,368 in 1997 to $269,117 in 1998, or a decrease of
$1,402,251. Depreciation and amortization expense was $230,512 on December 31,
1998 as compared to $179,894 on December 31, 1997. The increase in depreciation
relates to new product tooling introduced in the later part of 1997 and in early
1998.
Income from Operations. Income from operations of $187,205 in 1998 was up
from a loss of $1,111,125 in 1997, largely due to decreased advertising
expenses.
Other Income (Expense). Other income (expense) was ($190,132) as of
December 31, 1998 as compared to ($53,067) on December 31, 1997. Interest
expense increased to $245,895 in 1998 from $86,419 in the prior year. Fundex
secured a $1,000,000 subordinated term loan from Liberty BIDCO Investment
Corporation in August 1998. Interest is based on prime plus 3 percentage points,
and a revenue participation fee of 1.25% of net sales is also assessed. The
interest cost attributable to the term loan was $83,152. The Company's other
principal debt, its line of credit was put in place in March 1997 and resulted
in only nine (9) months of interest expense in 1997 as compared to twelve (12)
months in 1998. Royalty income increased to $51,816 from $28,009 in 1997
compared to twelve months in 1998. Phase 10(TM) international sales were up
significantly resulting in the increase in royalty income. Interest income
decreased to $3,947 in 1998 from $5,343 in the prior year. Fundex changed
financial lenders in October 1998 and as a result, changed cash management
processes.
Taxes. No tax provision as company has approximately $1,000,000 of net
operating carryforwards (expiring in 2012) which can be utilized to offset
future taxable income. The deferred tax asset of $340,000 has been fully offset
by a valuation allowance because realization is not likely at this time.
Net Income (Loss). As a result of lower advertising costs and slightly
higher royalty income, partially offset by higher costs of sales and interest
expense, the Company had a net loss of ($2,927) in 1998, improved from a net
loss of ($1,164,192) in 1997.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The demand for Fundex Games' retail products is seasonal, with a majority
of sales to retailers occurring July through November in anticipation of the
Christmas season.
LIQUIDITY AND CAPITAL RESOURCES
Demand for Fundex Games' products continues to be strong and the company is
continuously developing additional products. Fundex Games' benchmark product,
Phase 10(TM) continues to sell strongly and serves as a product introduction
item with new and existing customers.
The seasonality of sales has made credit availability an important issue
for Fundex Games. In October 1998, the Company replaced the existing bank lender
with an asset based lender, resulting in a $2,500,000 line of credit and
obtained a five-year term loan of $1,000,000 to finance seasonal working capital
and the 1997 net loss. As of June 30, 1999 Fundex is in default on these two
credit facilities. Fundex is currently negotiating with its lenders to resolve
these deficiencies.
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<PAGE> 565
Accounts receivable decreased to $842,392 at March 31, 1999, compared with
$924,318 a year earlier due in part to decreased sales in the first quarter
compared to the previous year. The Company had two customers file bankruptcy,
with the appropriate reserve set up; Playtoy Industries ($36,632) in November
1998 and Caldor (67,414) in January 1999. Inventory levels were $2,018,710 on
March 31, 1999, compared with $1,874,423 on March 31, 1998. The increase of
$144,287 was attributable to new product buildup. The Company anticipates
selling the additional inventory in the third quarter of 1999. Loans outstanding
at March 31, 1999, were $1,000,000 on the term loan from Liberty BIDCO
Investment Corporation and $1,217,198 on the line of credit due from Wells Fargo
(formerly known as "Norwest Business Credit") as compared to $1,600,000
outstanding at March 31, 1998 from NBD Bank, N.A.
INFLATION
Management believes that inflation has not had a significant impact on the
Company's costs and profits during the past two years.
YEAR 2000
Fundex Games' FACTS software, used for accounting, order processing and
inventory management, is Year 2000 compliant. The Company is now in the process
of receiving certification from its major vendors that their systems are Year
2000 compliant. This survey includes vendors who provide systems related
services including banking, credit card processing, shipping as well as those
providing the company with its game products. The Company does not believe that
the failure of any vendor to be Year 2000 compliant would have a material impact
on the Company.
SAFE HARBOR DISCLOSURE: FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus/proxy statement supplement and the related prospectus/proxy
statement contains or incorporates by reference forward-looking statements. The
factors identified above in this section are important factors (but not
necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, New Futech or any of the merging companies.
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, New Futech
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. We cannot promise that
statements of expectation or belief will be achieved or accomplished. The words
"believe," "expect," and "anticipate" and similar expressions identify forward-
looking statements throughout these materials.
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<PAGE> 566
DESCRIPTION OF FUNDEX'S BUSINESS.
Fundex was originally incorporated and founded by Carl E. ("Chip") Voigt,
IV and Carl E. ("Pete") Voigt, III in the State of Indiana in 1991 as Third
Quarter, Inc. In August 1996, Fundex was reincorporated in the State of Nevada
by establishing a new Nevada corporation and merging the Indiana corporation
into the Nevada corporation. The Company's principal place of business is
located at 2237 Directors Row, Indianapolis, IN 46241. The Company's telephone
number is (317) 248-1080.
Fundex develops, markets, and distributes a variety of games and toys for
both children and adults. The Company's principal products include: (i) card
games, puzzles, and board games; (ii) skill and action games for children; (iii)
games, puzzles, and toys featuring highly-recognized entertainment properties
and characters licensed by Fundex from third parties; and (iv) spring and summer
toys for children..
The Fundex products are sold to mass merchant retailers, chain stores and
specialty stores and are offered at retail prices ranging from $1.00 to $60.00.
BUSINESS
PRODUCTS
Fundex has a broad and well established line of games and toys, and is
continually developing additional games and toys for children, families, and
adults.
The Company's products are generally acquired from others or developed for
Fundex by unaffiliated third parties. Fundex employs an individual to review and
refine new toy, game, and puzzle concepts submitted from these third parties. If
Fundex accepts and develops a third party's concept for a new toy, game or
puzzle, it generally pays a royalty to the inventor on items sold which were
developed from such concept. Generally, Fundex will commit to manufacture and
sell a minimum number of such items. Royalties paid to the inventors range from
1% to 10% of the wholesale sales price for each unit sold by Fundex. Fundex
occasionally pays advance royalties on products where a significant amount of
development has been done by an inventor. Fundex believes that utilizing third
party inventors give it a wide range of available new products and eliminates
operating costs associated with maintaining full time inventors.
The following is a description of Fundex's major product lines:
Phase 10(TM)
The Phase 10(TM) card game is an established card game for ages eight (8)
to adult. Phase 10(TM) is currently the second best-selling card came in the
United States and the world, with over 6,000,000 units sold. The Phase
10(TM)card game and its sister products, Phase 10 Dice, Phase 10 UPSETS, and
Take Five, comprise Fundex's principal product line. Phase 10(TM) is sold by a
very broad base of retailers and is available at over 20,000 retail locations.
Card games such as Phase 10(TM) and Uno(TM) from Mattel, Inc. typically have
very long product cycles often lasting for decades and a very broad demographic
base of players. As a result, these games are not normally sensitive to economic
volatility. The retail price range for these products is $3.99 to $19.99.
Family Games
Fundex markets a broad range of family games designed to appeal to ages 8
to adult. These products' retail prices range from $7.99 to $19.99. The family
range of games
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<PAGE> 567
include "Penguin Pileup", "A to Z", and the "52 Game Chest". This is the fastest
growing of the Fundex product lines due in part to broad age appeal and games
that are classics and critically acclaimed. "A to Z" was selected as the Best
Word Game of 1997 by Games Magazine. This line carries high gross margins
because of the exclusivity of the products. The games are carried by a broad
cross section of the retail base, from mass market retailers to independent game
and toy retailers.
Action Games
Fundex markets several action games, those games that require a degree of
manual dexterity to play. These products range in price from $9.99 to $59.99
retail. The action game category has been one that has been diminished due to
the popularity of electronic games such as Nintendo 64 and Sony Playstation in
the past several years. Fundex positions its products to provide high perceived
value with low retail price points to the retailer so as to make the product
appealing to the consumer. Products such as the "Super Sports Arena" game
comprise this category. These products are highly promotional and lend
themselves to advertising in customer newspaper ads.
Preschool Games and Toys
Fundex markets a range of products designed for the preschool age child.
These games do not require reading, so the child may play amongst other children
or with parents. These products range in price from $6.99 to $19.99 retail. The
products are sold to a broad range of retailers from mail order catalogs to mass
market retailers and toy specialty chains. Products in this range include the
"Wigglin Wally" fishing game, "Peanut Butter & Jelly", the "Beginners Bible
Noah's Ark Playset", and "Noah's Ark Board Game". Each of these products is
proprietary to Fundex.
Wooden Games
A growing category for the Company has been its line of wooden games. These
are competitively priced and well made wood versions of several classic games
such as labyrinths, chess, checkers, Chinese checkers and Mancala. The Company
has gained market share with its market leading package design and innovative
gift sets. The products range in price from $6.99 to $24.99. Each year Fundex
introduces several new items in this category. Senat, an ancient Egyptian game,
and Kalahari were introduced this year. This product line is sold primarily
through upscale retailers.
Basic Board Games and Mini Games
Fundex markets a comprehensive line of traditional board games such as
chess and checkers. These products retail in the $2.99 to $9.99 range. Although
this is a large business dominated by two major competitors, Fundex has shown a
profit for these basic board games in its first full year of production. Fundex
expects that margins will improve in this category as volume increases.
Spring & Summer Toys and Games
Fundex markets a line of spring and summer toys and games to complement its
line. The spring and summer line sells primarily in the first six months of the
year providing some balance to the heavily seasonal second half of the year. The
company produces jump ropes, water toys, and water games. The products range in
price from $0.99 to $14.99.
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New Products
In 1998 and 1999, Fundex introduced several new games which management
believes will strengthen and broaden its product mix. Set forth below is an
overview of these products.
"Electronic Interactive Games" are the first games to utilize the
patented 'in the gameboard' circuitry developed by Futech Interactive
Products. The games in this series include "Blastoid," a space game,
"Chat," the race around the Internet game, and a series of collectible
NASCAR racing circuit games. The games features drivers Jeff Gordon, Dale
Earnhardt, Dale Jarrett, Rusty Wallace and Dale Earnhardt Jr. Die-cast
collectible cars that move around the race track gameboard with the play
dictated by random commands and sound effects from the circuitry. The games
are expected to retail from $15 to $25. This product is expected to begin
shipment in July 1999.
"Electronic Interactive Puzzles" are the first puzzles to utilize the
Futech circuitry. The puzzle asks the child to find certain pieces and when
the puzzle piece is correctly placed in the puzzle an appropriate sound is
made by the puzzle to confirm the piece was placed correctly. The puzzle is
expected to retail for $10. This product is expected to begin shipment in
July 1999.
"The Amazing Kreskins Celtic Oracle Game" uses the power of Kreskin,
the world famous mentalist, to create an intriguing and revealing game.
Players respond to questions using the Oracle, which reveals their true
answer. The game is expected to retail for $20. This product is expected to
begin shipment in July 1999.
"Super Sports Arena 5 in I Game Table" is a versatile game allows
realistic play of Pool, Bowling, Basketball, Hockey, and Ping Pong in a
portable system. The Super Sports Arena is expected to retail for
approximately $60 and is priced about 30 - 40% under its competition from
Fisher Price, Amav, and Toy Biz. This item is an exceptional value for the
consumer. Retailer response has been tremendous and management believes
this will be a staple item in the industry for years to come. This product
began shipments in 1998.
"Penguin Pileup" is a family skill game that comes from a renowned
design firm in London. The game consists of a floating iceberg, and 24
penguins. The object is to place all of ones penguins on the iceberg
without them falling off. This product was successfully marketed to the
educational and specialty toy markets in 1997 and has been successfully
introduced to the mass market in 1998. Management believes Penguin Pileup
will be a staple item. The product retails from $15 to $20. This product
began shipments in 1998.
MARKETING, DISTRIBUTION AND CUSTOMERS
The Company sells its products nationwide to retailers primarily through a
network of independent sales representative firms. The Company's products are
displayed at two major consumer product shows in January and February of each
year, and at a number of smaller specialty market shows throughout the year.
Marketing activities for the Company's product lines primarily target mass
merchant retailers in the United States and Canada, as well as smaller regional
merchants, drug chains, department stores and gift stores. In 1998, the
Company's 10 largest customers represented more than half of the Company's
revenues.
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<PAGE> 569
The Company distributes its products primarily out of its facility in
Indianapolis, Indiana. Some orders are sold on an FOB Hong Kong basis are
shipped directly from Fundex's manufacturers.
Fundex's products are sold primarily in retail mass market, wholesalers,
toy and chain stores.
MANUFACTURING
Fundex's products are currently manufactured by unaffiliated third parties
located in the United States, China, Taiwan, and the Philippines. Approximately
50% of Fundex's products are manufactured within the United States. The
manufacturers are chosen based on their ability to manufacture the products to
meet delivery requirements, quality, reliability, and price. The use of third
party manufacturers not only enables Fundex to avoid fixed operating costs
associated with manufacturing, but also affords Fundex greater flexibility in
the manufacturing process and in the materials used in its products since Fundex
is not restricted by the capabilities of expensive purchased equipment.
Manufacturing costs are paid for by open account with the manufacturer. Fundex
believes that alternative sources of supply are available for each of its
products.
At its Indianapolis facility, Fundex assembles, packages, and shrink wraps
many of its products. Approximately 40% of Fundex's products, including the
Phase 10(TM) product line, are produced in Indianapolis. Although Fundex does
not manufacture its products, it does participate in the decision of prototype
products, production tooling and molds, printing plates and dies, and seeks to
insure quality control by actively reviewing the production processes and in
testing goods produced by its manufacturers.
The principal raw materials used in Fundex's products are printed paper and
paperboard, plastics, and wood. Fundex believes there are adequate sources of
supply for such raw materials, and although Fundex does not manufacture all of
its own products, the molds, films, printing plates, and dies used in the
manufacturing process are transferable if Fundex employs different
manufacturers.
PRODUCT DESIGN AND SELECTION
The Company's products are generally acquired from others or developed for
Fundex by unaffiliated third parties. Fundex employs an individual to review and
refine new toy, game, and puzzle concepts submitted from these third parties. If
Fundex accepts and develops a third party's concept for a new toy, game or
puzzle, it generally pays a royalty to the inventor on items sold which were
developed from such concept. Generally, Fundex will commit to manufacture and
sell a minimum number of such items. Royalties paid to the inventors range from
1% to 10% of the wholesale sales price for each unit sold by Fundex. Fundex
occasionally pays advance royalties on products where a significant amount of
development has been done by an inventor. Fundex believes that utilizing third
party inventors gives it a wide range of available new products and eliminates
operating costs associated with maintaining full time inventors.
Safety testing of Fundex's products are conducted by independent third
party contractors to meet safety regulations imposed by federal and state
governmental agencies. Fundex, in conjunction with these contractors, determines
the appropriate warning labels (such as choking hazard and age restrictions) to
be placed on its products.
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<PAGE> 570
COMPETITION
The market for games and toys is served by manufacturers, both foreign and
domestic, many of whom have greater financial resources and have greater name
and product recognition than the Company. Many products are available over a
broad price range. The market is competitive, includes numerous small
manufacturers, and is dominated by two industry giants. The toy industry is
highly competitive and sensitive to changing consumer preferences and demands.
Competition is based primarily on price, quality, and play value. In recent
years the toy industry has experienced rapid consolidation driven, in part, by
the desire of industry competitors to offer a range of products across a broader
variety of categories.
Generally speaking, Fundex competes with Mattel, Inc., Hasbro, Inc.
(including, its Milton Bradley and Parker Bros. Divisions), and Pressman, Inc.
Mattel and Hasbro, the two largest toy companies in the United States, control
approximately 50% of the game and toy market.
PATENTS, TRADEMARKS AND LICENSES
Carl E. (Chip) Voigt, III and Carl E. (Pete) Voigt, IV (collectively, the
"Voigts") obtained the exclusive rights to manufacture, market and distribute
the Phase 10(TM) card game (and all enhancements) pursuant to an agreement dated
December 18, 1986. The agreement is for a term of ten (10) years, and
automatically renews for successive five year periods unless terminated by the
Voigts. The Voigts assigned such rights to Fundex in respect of the sales of
Phase 10(TM) in the United States effective in 1991, and transferred all foreign
rights to Fundex in 1996. In connection with the assignment of the foreign
rights to Fundex, the Voigts assigned to Fundex all of their rights under
various sub-license agreements. Pursuant to the sub-license agreements, certain
rights to market and sell Phase 10(TM) products were assigned to entities with
respect to individual territories, including Spain, Italy, Canada, Sweden,
Germany, Australia, and New Zealand.
Because Fundex obtains many of its products through licenses, it relies on
trademark and other protection obtained by its licensors. The license agreements
for such products, including the license relating to Phase 10(TM), permit Fundex
to utilize the trademarks and other proprietary rights owned by the licensor.
Company trademarks granted include Fundex Games, Roundabout, Tyrannorace, Take
Five, Toot R Ville Express, Piranha, and Telephone Tag. Trademarks pending, and
applied for, include Upsets(TM), Penguin Pileup, Wigglin Wally, Search 4, Pegs
and Jokers and Limbo Splash. Fundex has received a patent on a certain game
playing apparatus to be used in connection with its "10 in I" games. Fundex
recognizes that patents are not totally effective in prohibiting competitors
from producing similar products that could compete with those of Fundex.
Therefore, Fundex does not rely heavily upon patent protection to maintain its
competitive provision, but instead relies to a greater extent on trademark and
copyright protection.
BACKLOG
Shipment of the Company's products is anticipated to peak during the summer
months and, consequently it is expected that the Company's backlog will be at a
maximum during June, July and August. Orders are normally shipped on the date
upon which the customer has requested shipment.
Many of the Company's customers order on an as needed basis and for
immediate shipment. Fundex normally ships these orders within 48 hours.
31
<PAGE> 571
At December 31, 1998, the backlog of orders was approximately $216,000 and
at December 31, 1997, the backlog of orders was approximately $206,000.
GOVERNMENT REGULATIONS
The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Products Safety Act. Those
laws empower the Consumer Products Safety Commission (the "CPSC") to protect
children from hazardous products. The CPSC has the authority to exclude from the
market articles which are found to be hazardous and can require a manufacturer
to repurchase such products under certain circumstances. Any such determination
by the CPSC is subject to court review. Similar laws exist in some states and
cities in the United States and in many jurisdictions throughout the world. The
Company endeavors to comply with all applicable regulations through a program of
quality inspections and product testing. The Company maintains product liability
insurance in the amount of $2,000,000.
EMPLOYEES
As of December 31, 1998, Fundex employed twenty-one (21) full-time
employees, including its three executive officers. All of Fundex's employees are
located in the United States. Fundex believes that its relations with its
employees are good. None of Fundex's employees are represented by a union.
PROPERTIES
Fundex presently leases approximately 32,000 square feet of space at 2237
Directors Row, Indianapolis, Indiana 46241. The term of the lease is for a
period of five (5) years and contains a renewal option for an additional three
(3) years. The monthly rental is $13,985. Fundex also leases approximately 1,000
square feet of showroom and office space at the Toy Center South, 200 Fifth
Avenue, Room 516, New York, NY, at a current rental of approximately $2,200 per
month. The showroom is used to exhibit Fundex's products for the International
Toy Fair in February each year, and is used as an office for the balance of the
year. The showroom lease expires April 30, 2006. Fundex believes it will need a
larger New York showroom as the number of its products and product lines grow.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Company is a party,
or of which, any of its property is subject.
32
<PAGE> 572
FUNDEX MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding Fundex's executive
officers and directors as of December 31, 1998:
<TABLE>
<CAPTION>
YRS. WITH YRS. IN
NAME AGE POSITION CO. INDUSTRY
- ---- --- -------- --------- --------
<S> <C> <C> <C> <C>
Carl E. (Chip) Voigt, IV........... 38 President, CEO & Director 8 15
Carl E. (Pete) Voigt, III.......... 61 Executive Vice President 9 40
& Director
James E. Money, D.................. 36 Chief Financial Officer 1 1
and Treasurer & Director
George Propsom..................... 51 Product Development 3 25
Manager
Eric J. Voigt...................... 34 Plant & Purchasing 8 8
Manager
William H. Prophater............... 53 Director 2 --
Sheldon Drobny..................... 52 Director 2 --
</TABLE>
MR. CARL E. (CHIP) VOIGT, IV Fundex's President, Chief Executive Officer
and Chairman of the Board has been engaged in the toy and game industry for over
15 years. He is one of the founders of Fundex and has been President and Chief
Executive Officer since the inception of Fundex in 1991. Prior to joining
Fundex, Mr. Voigt spent four years as a manufacturer representative in the toy
and game industry. He received a Bachelor of Science degree in Industrial
Management from Purdue University. Mr. Voigt is the son of Carl E. (Pete) Voigt,
III and the brother of Eric J Voigt.
MR. CARL E. (PETE) VOIGT, III Fundex's Executive Vice President, Secretary
and Director has been engaged in the game and toy business for over 37 years. He
is one of the founders of Fundex and has been Executive Vice President since its
inception in 1991. Mr. Voigt was a manufacturer's representative in the toy and
game industry from 1974 until 1988, and participated in the development and
implementation of the sales and marketing plan for the card came "Uno", the
best-selling card game in the world. Prior to that time, Mr. Voigt was a
salesman or buyer in the toy and game business. Mr. Voigt is the father of Carl
E. (Chip) Voigt, IV and of Eric J Voigt.
MR. JAMES E. MONEY, II Fundex's Chief Financial Officer and Vice President
joined the Company in April 1998. Mr. Money is a Certified Public Account and
has been involved in the services industry for the past ten years. Mr. Money
spent the last two years as Director of Billing & Collections for a
transportation company. Prior to working in the transportation industry, Mr.
Money spent two plus years as controller of a financial service company. Mr.
Money also spent three years in public accounting working for an Indianapolis
area local firm. Mr. Money Graduated from Indiana University with a B. S. in
Accounting,
MR. GEORGE PROPSOM Fundex's Director of Development joined the Company in
July of 1996. Mr. Propsom has been in the toy industry since 1971. Mr. Propsom
started with Western Publishing Company as an Associate Designer. Mr. Propsom
spent five years at Parker Brothers as a designer for games and Nerf products.
While at Western Publishing
33
<PAGE> 573
Mr. Propsom spent 17 years as Manager of product development for SkilCraft and
Westerns Game and Activity Department. Mr. Propsom was also employed at Cadaco
in Chicago as Operation Manager.
MR. ERIC J. VOIGT Fundex's Plant and Purchasing Manager has been engaged
in the toy and came industry for over 9 years. Prior to joining Fundex, Mr.
Voigt was in the hotel and restaurant business. He attended Purdue University
and Northern Michigan College. Mr. Voigt is the son of Mr. Carl E. Voigt, III
and brother of Mr. Carl E. Voigt IV.
MR. WILLIAM H. PROPHATER Mr. Prophater has been a director of Fundex since
July 1996. Mr. Prophater has been executive vice president of Style-Line, Inc.,
a manufacturer of window treatments since 1992. From 1990 to 1991, Mr. Prophater
was vice president and general merchandise manager of Ames Department Stores.
Prior to that time, Mr. Prophater was senior vice president and general
merchandise manager of Gold Circle Stores. Mr. Prophater received a Bachelor of
Science/Bachelor of Arts degree in management from Creighton University.
MR. SHELDON DROBNY Mr. Drobny has been a director of Fundex since
September 1996. He is a registered representative with Merrill Weber & Co., Inc.
Mr. Drobny is a principal in the accounting firm of Adler, Drobny & Fischer, LLC
and is the managing director of Paradigm Venture Investors, LLC, a private
investment firm. Prior to joining Adler, Drobny & Fischer, LLC, Mr. Drobny was
with the Internal Revenue Service. Mr. Drobny received a Bachelor of Science
degree in accounting from Roosevelt University, and Mr. Drobny is a Certified
Public Accountant.
34
<PAGE> 574
FUNDEX STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of Fundex common stock at June 30, 1999 with respect to (i) each
person known to Fundex to own beneficially more than 5% of the outstanding
shares of Fundex's common stock, (ii) each director of Fundex, (iii) each of the
executive officers of Fundex, and (iv) all directors and executive officers of
Fundex as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
PRIOR TO MERGER
-------------------------
NAME NUMBER PERCENT(1)
- ---- ---------- -----------
<S> <C> <C>
Identity of Stockholder or Group
Carl (Chip) E. Voigt, IV, Officer/Director.............. 575,000 35.4
Carl (Pete) E. Voigt, III, Officer/Director............. 575,000 35.4
Sheldon Drobny, Director................................ 44,062 2.7
All Executive Officers and Directors as Group........... 1,194,062 73.5
</TABLE>
(1) Based upon 1,624,824 shares of Common Stock issued and outstanding on June
30, 1999.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the mergers, Chip Voigt will become a director and Vice
President of the Toys/Games Division of New Futech and a director and President
of New Sub. Pete Voigt will become the Vice President of New Sub. Chip Voigt and
Pete Voigt will each receive an employment agreement providing for a base salary
of $150,000 per year for a three year term and providing each with options for
33,333 shares of New Futech common stock that vest over the three year period
and have an exercise price of $4.50 per share. The amount of options and the
exercise price for the option were arrived at by negotiation between Futech each
of Chip Voigt and Pete Voigt. Some of the officers and directors of other
merging companies will also receive employment agreements and stock options in
connection with the mergers. Certain officers and directors of the merging
companies have given personal guarantees of the indebtedness of those companies,
and New Futech is required to obtain releases of those personal guarantees. See
"DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT -- Employment Agreements
with Affiliates" and "NEW FUTECH'S MANAGEMENT -- Employment Agreements" in the
prospectus/proxy statement.
35
<PAGE> 575
APPENDIX 1
NEV. REV. STAT. ANN. @ 92A.380 (1998) Right of stockholder to dissent from
certain corporate actions and to obtain payment for shares
1. Except as otherwise provided in NRS 92A.370 to 92A.390, a stockholder
is entitled to dissent from, and obtain payment of the fair value of his shares
in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic corporation
is a party:
(1) If approval by the stockholders is required for the merger by
NRS 92A.120 to 92A.160, inclusive, or the articles of incorporation and
he is entitled to vote on the merger; or
(2) If the domestic corporation is a subsidiary and is merged with
its parent under NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic
corporation is a party as the corporation whose subject owner's interests
will be acquired, if he is entitled to vote on the plan.
(c) Any corporate action taken pursuant to a vote of the stockholders
to the event that the articles of incorporation, bylaws or a resolution of
the board of directors provides that voting or nonvoting stockholders are
entitled to dissent and obtain payment for their shares.
2. A stockholder who is entitled to dissent and obtain payment under NRS
92A.300 to 92A.500, inclusive, may not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to him
or the domestic corporation.
NEV. REV. STAT. ANN. @ 92A.400 (1998) LIMITATIONS ON RIGHT OF
DISSENT: Assertion as to portions only to shares registered to stockholder;
assertion by beneficial stockholder
1. A stockholder of record may assert dissenter's rights as to fewer than
all of the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the subject corporation
in writing of the name and address of each person on whose behalf he asserts
dissenter's rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different stockholders.
2. A beneficial stockholder may assert dissenter's rights as to shares
held on his behalf only if:
(a) He submits to the subject corporation the written consent of the
stockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the
beneficial stockholder or over which he has power to direct the vote.
A-1
<PAGE> 576
NEV. REV. STAT. ANN. @ 92A.410 (1998) Notification of stockholders
regarding right of dissent
1. If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, the notice of the meeting must state that
stockholders are or may be entitled to assert dissenters' rights under NRS
92A.300 to 92A.500, inclusive, and be accompanied by a copy of those sections.
2. If the corporate action creating dissenters' rights is taken by written
consent of the stockholders or without a vote of the stockholders, the domestic
corporation shall notify in writing all stockholders entitled to assert
dissenters' rights that the action was taken and send them the dissenter's
notice described in NRS 92A.430.
NEV. REV. STAT. ANN. @ 92A.420. Prerequisites to demand for payment for
shares
1. If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, a stockholder who wishes to assert
dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is taken,
written notice of his intent to demand payment for his shares if the
proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1 is
not entitled to payment for his shares under this chapter.
NEV. REV. STAT. ANN. @ 92A.430 (1998) DISSENTER'S NOTICE: Delivery to
stockholders entitled to assert rights
1. If a proposed corporate action creating dissenters' rights is
authorized at a stockholders' meeting, the subject corporation shall deliver a
written dissenter's notice to all stockholders who satisfied the requirements to
assert those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to
what extent the transfer of the shares will be restricted after the demand
for payment is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to the news media or to the stockholders of the terms of
the proposed action and requires that the person asserting dissenter's
rights certify whether or not he acquired beneficial ownership of the
shares before that date;
(d) Set a date by which the subject corporation must receive the
demand for payment, which may not be less than 30 nor more than 60 days
after the date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
A-2
<PAGE> 577
NEV. REV. STAT. ANN. @ 92A.460 (1998) Payment for shares: General
requirements:
1. Except as otherwise provided in NRS 92A.470, within 30 days after
receipt of a demand for payment, the subject corporation shall pay each
dissenter who complied with NRS 92A.440 the amount the subject corporation
estimates to be the fair value of his shares, plus accrued interest. The
obligation of the subject corporation under this subsection may be enforced by
the district court:
(a) Of the county where the corporation's registered office is
located; or
(b) At the election of any dissenter residing or having its registered
office in this state, of the county where the dissenter resides or has its
registered office. The court shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, a statement
of income for that year, a statement of changes in the stockholders' equity
for that year and the latest available interim financial statements, if
any;
(b) A statement of the subject corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under NRS
92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive.
NEV. REV. STAT. ANN. @ 92A.480 (1998) DISSENTER'S ESTIMATE OF FAIR VALUE:
Notification of subject corporation; demand for payment of estimate
1. A dissenter may notify the subject corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment pursuant to NRS 92A.460, or
reject the offer pursuant to NRS 92A.470 and demand payment of the fair value of
his shares and interest due, if he believes that the amount paid pursuant to NRS
92A.460 or offered pursuant to NRS 92A.470 is less than the fair value of his
shares or that the interest due is incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this section
unless he notifies the subject corporation of his demand in writing within 30
days after the subject corporation made or offered payment for his shares.
NEV. REV. STAT. ANN. @ 92A.490 (1998) Legal proceeding to determine fair
value: Duties of subject corporation; powers of court; rights of dissenter
1. If a demand for payment remains unsettled, the subject corporation
shall commence a proceeding within 60 days after receiving the demand and
petition the court to determine the fair value of the shares and accrued
interest. If the subject corporation does not commence the proceeding within the
60-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
A-3
<PAGE> 578
2. A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it shall
commence the proceeding in the county where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or any amendment thereto. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to a
judgment:
(a) For the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the subject
corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the subject corporation elected to withhold payment
pursuant to NRS 92A.470.
A-4
<PAGE> 579
DAMERT COMPANY
1609 FOURTH STREET
BERKELEY, CALIFORNIA 94710
-------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 1999
-------------------------
You are invited to attend a Special Meeting of Stockholders of DaMert
Company that will be held at a.m. local time on , 1999 at
. The DaMert board of directors has called this special
meeting for the following purposes:
- To consider and vote upon a proposal to approve and adopt the Merger
Agreement dated as of June 7, 1999, by and among DaMert, Futech
Interactive Products, Inc., Trudy Corporation, Fundex Games, Ltd., Janex
International, Inc., and two newly formed companies that we are referring
to as "New Futech" and "New Sub." Under the Merger Agreement, first
Futech and then Janex, Trudy, and DaMert will merge with and into New
Futech, which will survive the merger, and Fundex will merge into New
Sub, which will survive as a wholly-owned subsidiary of New Futech. Each
share of DaMert common stock outstanding immediately prior to the mergers
(other than dissenting shares) will be converted into the right to
receive approximately 613.07 shares of New Futech common stock, $285.00
in cash, and a promissory note of New Futech in the amount of $2,375.00.
- To transact such other business as may properly come before the special
meeting or any adjournment or postponement of the special meeting.
These matters are more fully described in the prospectus/proxy statement
supplement and related prospectus/proxy statement that are attached to this
Notice.
We, the board of directors of DaMert, unanimously recommend that you vote
FOR the mergers.
You will be entitled to vote at the special meeting or any adjournment or
postponement of the special meeting only if you are a holder of record of DaMert
common stock at the close of business on , 1999.
BY ORDER OF THE BOARD OF DIRECTORS
Frederick A. DaMert
Chairman
Berkeley, California
, 1999
IMPORTANT
We cordially invite all stockholders to attend the special meeting in person.
<PAGE> 580
SUBJECT TO COMPLETION, DATED AUGUST 6, 1999
FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.
FUTECH TOYS & GAMES, INC.
DAMERT COMPANY
PROSPECTUS/PROXY STATEMENT SUPPLEMENT
This prospectus/proxy statement supplement, and the related
prospectus/proxy statement, are being furnished to you and the other
stockholders of DaMert Company, in connection with the solicitation of proxies
by the DaMert board of directors for use at the Special Meeting of Stockholders
to be held at a.m. local time on , 1999, at and at any adjournments
or postponements of the special meeting. At the special meeting, we will ask you
to consider and vote upon a proposal to approve and adopt the Merger Agreement
dated as of June 7, 1999, by and among DaMert, Futech Interactive Products,
Inc., Trudy Corporation, Fundex Games, Ltd., Janex International, Inc., and two
newly formed companies (Futech Interactive Products (Delaware), Inc. and Futech
Toys & Games, Inc.) that we are referring to as "New Futech" and "New Sub,"
respectively. Under the Merger Agreement, first Futech and then Janex, Trudy,
and DaMert will merge with and into New Futech, which will survive the mergers
and Fundex will merge into New Sub, which will survive as a wholly-owned
subsidiary of New Futech. Each share of DaMert common stock outstanding
immediately prior to the mergers (other than dissenting shares) will be
converted into the right to receive approximately 613.07 shares of New Futech
common stock, $285.00 in cash, and a promissory note of New Futech in the amount
of approximately $2,375.00. Outstanding shares of Futech, Trudy, Fundex and
Janex will be converted into a combination of cash, promissory notes and common
stock of New Futech. In addition, outstanding options of each of the merging
companies will be converted into options to purchase common stock of New Futech.
This prospectus/proxy statement supplement and the related prospectus/proxy
statement, together with similar supplements that are being provided to
stockholders of Futech, Trudy, Fundex and Janex with copies of the
prospectus/proxy statement, also constitute the prospectus of New Futech and New
Sub in connection with the offer and issuance of shares of their securities
pursuant to the mergers. Assuming no outstanding Futech, Janex or Fundex options
or warrants are exercised prior to the mergers, a minimum aggregate of 5,867,628
and a maximum aggregate of 5,955,297 shares of New Futech common stock, a
minimum aggregate of $768,330 and a maximum aggregate of $2,116,830 in cash and
a minimum aggregate of $5,751,500 and a maximum aggregate of $7,100,000 in
promissory notes of New Sub or New Futech will be issued to the stockholders of
Janex, Futech, Trudy, Fundex and DaMert in the mergers. In addition, certain
outstanding indebtedness in the amount of $10,000,000 is expected to be
exchanged for 2,222,222 shares of New Futech preferred stock shortly after the
mergers. Former stockholders of Fundex may exchange their New Futech stock for
the license rights in the "Phase 10" family of games and former stockholders of
Trudy may become entitled to receive additional New Futech shares or to exchange
their New Futech shares for debentures in the future under certain
circumstances. Certain loan agreements and employment agreements, including
employee options to acquire New Futech common stock, are also part of the deal.
See "DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT -- Basic Terms of the
Merger Agreement" in the prospectus/proxy statement.
We expect the New Futech common stock to trade on the OTC Bulletin Board
after the mergers, but we cannot be sure it will do so and we cannot predict
what the price might be. We do not expect a trading market to develop for any of
the other securities of New Futech.
The mergers cannot be consummated unless: (a) stockholders of Janex,
Futech, Trudy, Fundex and DaMert, voting separately at their respective meetings
of stockholders, each approve the mergers, and (b) other conditions included in
the Merger Agreement are either satisfied or waived. See "DESCRIPTION OF THE
MERGERS AND THE MERGER AGREEMENT -- Conditions to Closing" in the
prospectus/proxy statement.
The record date for the special meeting is , 1999. This
prospectus/proxy statement supplement and the related prospectus/proxy statement
are first being mailed to stockholders of DaMert on or about , 1999.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY
STATEMENT SUPPLEMENT AND THE RELATED ATTACHED PROSPECTUS/PROXY STATEMENT. THE
PROPOSED MERGER IS A COMPLEX TRANSACTION. WE STRONGLY URGE YOU TO READ AND
CONSIDER CAREFULLY THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE RELATED
ATTACHED PROSPECTUS/PROXY STATEMENT IN ITS ENTIRETY, PARTICULARLY THE MATTERS
REFERRED TO UNDER "RISK FACTORS" BEGINNING ON PAGE 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus/proxy statement supplement or the accompanying prospectus/proxy
statement is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus/proxy statement supplement is , 1999.
<PAGE> 581
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS/PROXY STATEMENT. WE HAVE NOT, AND NEW FUTECH AND NEW SUB HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEW FUTECH AND NEW SUB ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF THE DATE ON THE
FRONT OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ONLY. OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.
WHERE YOU CAN FIND MORE INFORMATION
We will send to you, without charge, any material information that we have
or can obtain without unreasonable effort or expense concerning DaMert or any
other merging company, concerning the Merger Agreement and related contracts or
concerning the proposed management and operations of New Futech. You may direct
requests for additional information regarding DaMert, Futech, Trudy, Fundex, or
Janex to Frederick B. Gretsch, Sr. at 2999 N. 44th Street, suite 225, Phoenix,
Arizona 85018-7247, (602) 808-8765.
TO OBTAIN TIMELY DELIVERY OF THESE DOCUMENTS, YOU MUST MAKE YOUR REQUEST NO
LATER THAN , 1999, FIVE BUSINESS DAYS BEFORE THE DATE OF THE DAMERT
STOCKHOLDERS MEETING.
You should rely only on the information provided in or incorporated by
reference (and not later changed) in the prospectus/proxy statement or any
prospectus/proxy statement supplement. Neither we nor New Futech have authorized
anyone else to provide you with additional or different information. New Futech
is not making an offer of any securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus/proxy
statement supplement or the prospectus/proxy statement is accurate as of any
date other than the date on the front of these documents.
i
<PAGE> 582
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY INFORMATION -- Q&A.................................. 1
OTHER INFORMATION ABOUT THE MERGERS......................... 3
The Companies............................................. 3
The Special Meeting....................................... 5
The Merger Agreement...................................... 5
SPECIAL RISK FACTORS AFFECTING DAMERT....................... 5
STOCKHOLDER MATTERS......................................... 6
THE MERGERS AND RELATED TRANSACTIONS........................ 6
General................................................... 6
Effects of the Mergers.................................... 6
Background of the Mergers................................. 7
Reasons for the Mergers................................... 8
DaMert's Board Recommendation............................. 8
Related Agreements; Interests of Certain DaMert Affiliates
in the Mergers......................................... 8
Regulatory Matters........................................ 9
Certain Federal Tax Matters............................... 9
Accounting Treatment...................................... 10
RIGHTS OF DISSENTING STOCKHOLDERS........................... 10
NEW FUTECH AND DAMERT SHARES................................ 13
New Futech Common Stock................................... 13
DaMert Capital Stock...................................... 13
COMPARISON OF THE RIGHTS OF HOLDERS OF DAMERT COMMON STOCK
AND NEW FUTECH COMMON STOCK............................... 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION... 23
Overview.................................................. 23
Results of Operations..................................... 23
Seasonality and Quarterly Fluctuations.................... 24
Liquidity and Capital Resources........................... 25
Inflation................................................. 25
Year 2000................................................. 26
Safe Harbor Disclosure.................................... 26
DESCRIPTION OF DAMERT'S BUSINESS............................ 27
General................................................... 27
Products.................................................. 27
Sales, Marketing and Distribution......................... 27
Customers................................................. 29
</TABLE>
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<PAGE> 583
<TABLE>
<S> <C>
Manufacturing............................................. 29
Seasonality............................................... 29
Backlog................................................... 29
Product Design and Selection.............................. 29
Competition............................................... 30
Patents, Trademarks and Licenses.......................... 30
Government Regulations.................................... 30
Employees................................................. 30
Properties................................................ 31
Legal Proceedings......................................... 31
DAMERT MANAGEMENT........................................... 32
Employment Arrangements................................... 33
DAMERT STOCKHOLDERS......................................... 35
Security Ownership of Certain Beneficial Owners and
Management............................................. 35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 35
APPENDICES
Appendix 1 -- California General Corporation Law Dissenters'
Rights.................................................... A-1
</TABLE>
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<PAGE> 584
SUMMARY INFORMATION -- Q&A
This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the mergers contemplated thereby, you should carefully read
this entire document and the additional documents we mention. You should pay
special attention to the "RISK FACTORS" section beginning on page 8 of the
prospectus/proxy statement and "SPECIAL RISK FACTORS AFFECTING DAMERT" on page 5
of this prospectus/ proxy statement supplement.
WHY ARE THE FIVE COMPANIES PROPOSING TO MERGE?
The five companies are proposing to merge because the directors of each
company believe the combination will provide significant benefits to
stockholders. We believe the mergers will enable us to take advantage of the
complementary strategic fit of our respective businesses by marketing through
additional channels of distribution. We also hope and believe the mergers will
improve the likelihood that stockholders will have a more liquid market should
they wish to sell their stock and that the combined companies will be able to
more efficiently access the markets for debt and equity when appropriate. To
review the background and reasons for the mergers in greater detail, see
"BACKGROUND OF THE MERGERS" in the prospectus/proxy statement.
WHAT WILL I RECEIVE IN THE MERGERS?
You and all DaMert stockholders will receive a combination of cash,
promissory notes and common stock of New Futech in exchange for your DaMert
stock. Stockholders of the other merging companies will receive cash, promissory
notes and common stock of New Futech. Certain employment contracts and other
agreements with affiliates of the merging companies are also part of the deal.
See "DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT" in the
prospectus/proxy statement.
WHAT RISKS SHOULD I CONSIDER?
You should review "RISK FACTORS" beginning on page 8 of the
prospectus/proxy statement as well as the special risk factors affecting
primarily DaMert that are discussed on pages 5 through 6 of this
prospectus/proxy statement supplement.
WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGERS?
The following table shows the proportions of the outstanding shares that
must vote in favor of the mergers, together with the proportion of the
outstanding shares that are held by directors, executive officers and their
affiliates, the majority of whom have indicated that they intend to vote in
favor of the mergers.
<TABLE>
<CAPTION>
SHARES OWNED BY DIRECTORS,
COMPANY VOTE REQUIRED EXECUTIVE OFFICERS AND AFFILIATES
- ------- ------------- ---------------------------------
<S> <C> <C>
DaMert Majority 100.0%
Fundex Majority 70.8%
Futech Majority 72.7%
Janex Majority 78.9%
Trudy Majority 55.7%
</TABLE>
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<PAGE> 585
WHAT CIRCUMSTANCES MIGHT PREVENT THE MERGERS?
New Futech has the right to terminate the Merger Agreement if stockholders
from all of the merging companies combined exercise dissenters' rights with
respect to more than 5% of the aggregate merger consideration to be issued in
the mergers. See "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT -- Conditions to Closing" in the prospectus/proxy statement for a
description of the other conditions to the mergers.
HOW WILL THE MERGERS BE TREATED FOR ACCOUNTING PURPOSES?
We expect the mergers to be treated as purchases by Futech, which means
that the amount by which the total merger consideration received by stockholders
of the other merging companies plus the amount of their liabilities exceeds the
fair market value of their identifiable assets will initially be treated as
goodwill by New Futech for accounting purposes.
WHEN DO YOU EXPECT THE MERGERS TO BE COMPLETED?
We are working to complete the mergers during the third quarter of 1999.
However, the Merger Agreement does not include any express deadline for the
mergers to proceed.
WHAT ARE THE TAX CONSEQUENCES OF THE MERGERS TO ME?
We and the other merging companies have structured the Merger Agreement
with the intent and expectation that the exchange of shares by DaMert
shareholders will be tax-free for federal income tax purposes. THERE WILL BE
FEDERAL INCOME TAXES DUE ON THE CASH AND PROMISSORY NOTES THAT YOU RECEIVE. You
should review the more detailed description of federal tax consequences that
appear on pages 9 through 10 of this prospectus/proxy statement supplement.
State and local taxes may also become due as a result of the mergers.
The precise tax consequences of the mergers will depend on your own
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the mergers to you.
WILL I HAVE DISSENTERS' RIGHTS?
Yes, provided you do not vote in favor of the mergers and meet all other
requirements of the dissenter's rights statute. See pages 10 through 12.
WHAT DO I NEED TO DO NOW?
You need merely to participate in the stockholders meeting that has been
called to consider the mergers. The stockholders meeting will take place on
, at local time, at .
SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
No. After the mergers are completed we will send you written instructions
for exchanging your stock certificates for the New Futech stock, cash and
promissory notes to which you are entitled.
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<PAGE> 586
OTHER INFORMATION ABOUT THE MERGERS
THE COMPANIES
NEW FUTECH
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
New Futech is a newly-organized Delaware corporation that has been formed
to be the surviving parent corporation under the Merger Agreement. New Futech
has had no operations prior to the date of this prospectus/proxy statement.
Under the Merger Agreement, first Futech and then Janex, Trudy and DaMert will
merge with and into New Futech, which will survive the mergers. As a part of the
mergers, New Futech will change its name to "Futech Interactive Products, Inc."
NEW SUB
Futech Toys & Games, Inc.
c/o Fundex Games, Ltd.
2237 Directors Row
Indianapolis, IN 46241
(317) 248-1080
New Sub is a newly-organized Nevada corporation that has been formed to be
the surviving subsidiary corporation of New Futech under the Merger Agreement.
New Sub has had no operations prior to the date of this prospectus/proxy
statement supplement. Under the Merger Agreement, Fundex will merge with and
into New Sub, which will survive that merger as a wholly-owed subsidiary of New
Futech. All of the stock and assets of New Sub will be pledged to the former
stockholders of Fundex to secure the promissory notes of New Sub issued to them
in connection with the merger of Fundex into New Sub. In addition, the former
stockholders of Fundex who do not elect the All Cash Alternative will receive a
conditional option to purchase New Sub's license to market the "Phase 10" family
of games in 2002 in exchange for the New Futech stock they receive in the
mergers (but not the cash or promissory notes), exercisable only if the stock
has not achieved targeted liquidity and a valuation of at least $7.50 per share
($4,500,000 in the aggregate, if no stockholders elect the All Cash Alternative)
within three years after the completion of the mergers.
JANEX
Janex International, Inc.
c/o Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
Janex manufactures and markets children's toys, gumball banks, flashlights
and battery operated toothbrushes marketed under the brand name Janex. Janex
incorporates licensed characters into most of its products, and sells its
products to United States mass merchant retailers, toy specialty stores and
department stores.
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<PAGE> 587
FUTECH
Futech Interactive Products, Inc.
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247
(602) 808-8765
Futech designs, publishes, manufactures and markets interactive,
educational, promotional and entertainment products (i.e., books, game boards
with sound capabilities and specialty post cards) targeted primarily towards
children. Futech's patented technology utilizes specialized conductive ink to
print interactive touch points. These touch points trigger speech, music and
sound effects. Futech licenses this technology to major entertainment and
publishing companies. Futech also distributes proprietary products, as well as
those of third party publishers, to warehouse clubs, national book chains,
specialty and independent retailers and major toy chains.
TRUDY
Trudy Corporation
353 Main Avenue
Norwalk, CT 06851-1552
(203) 846-2274
Trudy Corporation was initially organized as a Connecticut corporation
under the name "Norwest Manufacturing Corporation" in 1979. Trudy, which does
business under the name Soundprints, publishes juvenile story books and
audio-cassettes which are sold in conjunction with contract manufactured
educational toys to the retail and mail order markets.
FUNDEX
Fundex Games, Ltd.
2237 Directors Row
Indianapolis, Indiana 46241
(317) 248-1080
Fundex Games, Ltd. was originally incorporated in the State of Indiana as
"Third Quarter, Inc." in 1991. Fundex develops, markets, and distributes a
variety of games and toys for both children and adults, including:
- card games, puzzles and board games, including the Phase 10 card game and
its sister products;
- skill and action games for children;
- games, puzzles and toys featuring characters licensed from third parties;
and
- spring and summer toys for children, including jump ropes, water toys and
water games.
DAMERT
DaMert Company
1609 Fourth Street
Berkeley, California 94710
(510) 524-7400
4
<PAGE> 588
DaMert Company was founded in 1973 and incorporated in 1979. DaMert Company
manufactures and markets toys, gifts and puzzles targeted primarily to children
ages 6-12 with science and nature themes. Presently, the product base includes
over 200 toys, gifts and puzzles selling through catalogs, museums, department
stores, specialty gift stores and toy stores nationwide.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The DaMert special meeting will be held on , at at
.
PURPOSE OF THE SPECIAL MEETING
We have called the special meeting so the DaMert stockholders can vote on
whether to approve the mergers pursuant to the Merger Agreement. The directors
of Futech, Trudy, Fundex and Janex have called for special meetings of the
stockholders of their companies so that they also can vote whether to approve
the mergers.
RECOMMENDATION OF THE DAMERT BOARD OF DIRECTORS
We have unanimously approved the Merger Agreement and unanimously recommend
that the stockholders of DaMert vote "FOR" approval of the Merger Agreement.
THE MERGER AGREEMENT
Under the Merger Agreement, first Futech and then Janex, Trudy, and DaMert
will merge with and into New Futech, which will survive the mergers, and Fundex
will merge into New Sub, which will survive as a wholly-owned subsidiary of New
Futech. Under the Merger Agreement, DaMert stockholders who do not exercise
dissenters' rights will receive a combination of cash, promissory notes of New
Futech and common stock of New Futech as described in the prospectus/proxy
statement under the heading "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT -- Basic Terms of the Merger Agreement." Stockholders of Fundex and
Trudy will also have certain conditional rights to receive additional stock or
to exchange their New Futech stock for promissory notes or certain other assets
under specified circumstances. See "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT -- Basic Terms of the Merger Agreement."
SPECIAL RISK FACTORS AFFECTING DAMERT
In addition to the risk factors beginning on page 8 of the prospectus/proxy
statement, you should carefully consider the special risks of DaMert described
below in evaluating the proposals which you will vote on at the special meeting
and the effects on the securities you will acquire in the mergers. Although we
believe that the special risks and uncertainties described below are the major
ones facing DaMert, they are not the only ones that we will face. Any of the
following could have a material adverse effect on our business, financial
conditions or results of operations and the business, financial condition or
results of operations of the combined companies.
WE ARE IN DEFAULT UNDER OUR CREDIT ARRANGEMENTS.
DaMert is in violation of certain of its credit arrangements with its bank.
DaMert has the ability to borrow up to $2,800,000 under a Revolving Line of
Credit Note with its bank
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<PAGE> 589
that expired on May 15, 1999. The bank has approved an extension to July 31,
1999. This may not be sufficient extension to allow the merger to close. DaMert
will have to renegotiate the extension and they cannot be certain it will be
approved. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION -- Liquidity and Capital Resources."
STOCKHOLDER MATTERS
DaMert stock does not trade on any established market. Similarly, there is
no public trading market for the New Futech common stock. We expect the New
Futech common stock to trade on the OTC Bulletin Board/Nasdaq Stock Market soon
after the mergers, but we cannot be sure it will do so and we cannot predict
what the price might be. We do not expect a trading market to develop for the
other securities of New Futech.
As of May 31, 1999, the record date, there was one stockholder of record of
DaMert common stock. Another person is expected to exercise employee options,
and a third person will exchange SAR's in exchange for DaMert common stock
immediately before the mergers.
DaMert has not paid dividends on its common stock and does not anticipate
paying dividends in the foreseeable future. If the mergers do not occur for any
reason, we anticipate that all earnings, in the foreseeable future, will be
retained for development of DaMert's business.
THE MERGERS AND RELATED TRANSACTIONS
GENERAL
The Merger Agreement provides for the merger of Futech into New Futech,
promptly followed by the substantially simultaneous merger of Janex, Trudy and
DaMert with and into New Futech and the substantially simultaneous merger of
Fundex with and into New Sub. The discussion in this prospectus/proxy statement
supplement and the related prospectus/proxy statement of the mergers and the
description of the principal terms of the Merger Agreement contained in the
prospectus/proxy statement are subject to and qualified in their entirety by
reference to the Merger Agreement, a copy of which is attached to the
prospectus/proxy statement as Appendix A, and incorporated herein by reference.
EFFECTS OF THE MERGERS
GENERAL
We intend for the mergers to occur promptly following approval of the
mergers by the requisite vote of the stockholders of each of Janex, Futech,
Trudy, DaMert and Fundex and the satisfaction or waiver of all other conditions
to consummation of the mergers. The mergers will become effective at or about
the time of filing of articles of merger or other appropriate documents with the
applicable government offices or agencies. At that time (a) first Futech and
then Janex, Trudy and DaMert will merge with and into New Futech with the result
that New Futech will be the surviving corporation and (b) Fundex will merge with
and into New Sub with the result that New Sub will be the surviving corporation.
As part of the mergers New Futech will change its name to "Futech Interactive
Products, Inc." The stockholders of DaMert will become stockholders of New
Futech, and their rights will be governed by the New Futech certificate of
incorporation
6
<PAGE> 590
and bylaws. See "COMPARISON OF RIGHTS OF STOCKHOLDERS OF DaMERT AND NEW FUTECH."
See "DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT" in the
prospectus/proxy statement.
For information regarding the operation of New Futech and New Sub following
the mergers, see " DESCRIPTION OF NEW FUTECH'S BUSINESS" in the prospectus/
proxy statement. For information regarding the officers and directors of New
Futech following the mergers, see "NEW FUTECH'S MANAGEMENT" in the prospectus/
proxy statement.
EXCHANGE RATIOS
Each outstanding share of DaMert common stock at the effective date of the
mergers will be converted into the right to receive approximately:
- $285.00 in cash,
- a non-interest bearing promissory note (secured by a lien that is
subordinated to New Futech's bank debt) in the amount of approximately
$2,375.00, payable $475.00 one month after the mergers and $1,900.00
seven months after the mergers, and
- 613.07 shares of New Futech common stock.
The promissory notes do not bear interest, but substantial penalties will
apply should New Futech default on its payment obligations.
Outstanding shares of Futech, Janex, Fundex and Trudy will also be
converted into a combination of cash, common stock of New Futech and promissory
notes of New Futech or New Sub. Under certain circumstances the former
stockholders of Fundex will have the right to exchange their New Futech stock
for the license rights in the "Phase 10" family of games now owned by Fundex.
Under certain other circumstances the former stockholders of Trudy will have the
right to receive additional New Futech stock or to exchange their New Futech
stock for unsecured five year debentures. In addition, outstanding options for
shares of Trudy, Futech, Janex and Fundex will be converted into options for
shares of common stock of New Futech. See "DESCRIPTION OF THE MERGERS AND THE
MERGER AGREEMENT -- Basic Terms of the Merger Agreement" in the prospectus/proxy
statement.
FRACTIONAL SHARES
Fractional shares of New Futech common stock will not be issued in the
mergers. Instead, stockholders in any of the merging companies who would
otherwise have received an amount of New Futech stock that includes a fraction
of a share will instead receive an amount of cash equal to that fraction
multiplied by $7.50. For example, a DaMert stockholder who is otherwise entitled
to receive 15.5 shares of New Futech common stock will actually receive only 15
shares, plus $3.75 in cash (i.e., 0.5 times $7.50).
BACKGROUND OF THE MERGER
In January 1999 the DaMert Company's merger consultant, Robert P. Oliver,
President, CorDev Corporation, was in merger discussions with several
manufacturers of toys, games and puzzles. On January 16, 1999, Mr. Jeffrey Gold,
President Goldmark Advisors, Inc., a merger and acquisition firm, informed Mr.
Oliver that Futech Interactive
7
<PAGE> 591
Products, Inc. ("Futech"), could be a strategic buyer prospect for the DaMert
Company ("DaMert"). Mr. Oliver agreed that Mr. Gold could introduce DaMert to
Futech.
On January 25, 1999, Mr. Gold met with Futech, described DaMert and
provided Mr. Goett with a copy of DaMert's detailed information book. A
representative of Futech visited the DaMert Booth at the New York Toy Fair in
early February. On February 18, 1999, Mr. Goett and Mr. Oliver discussed
Futech's serious interest and DaMert product samples and more financial
information were sent. Subsequently, Fred DaMert and Mr. Oliver spent March 4,
1999 at Futech, in Phoenix, for detailed discussions with Mr. Goett and other
Futech executives. At this time, terms of an acquisition of DaMert by Futech or
its affiliate were agreed upon.
An additional visit to Futech was made by Gail and Fred DaMert the
following week. A letter of intent was presented to DaMert at its facility by a
representative of Futech on March 24, 1999. Thereafter ensued a period of due
diligence, strategic planning, structural decisions, personnel assignments and
merger documentation. On May 27, 1999 Futech Board of Directors approved the
mergers and the Merger Agreement. On June 7, 1999, the Global Merger Agreement
was signed by all parties.
On May 27, 1999 the Futech Board of Directors approved the Merger
Agreement.
REASONS FOR THE MERGER
Over the past 26 years, DaMert Company has established a well-regarded
leadership reputation for product innovation in the fields of nature, science
and learning toys. Over these years there has been a growing retail environment
supported by "baby boomer" consumers who wish to provide their children and
family members with products that educate as well as entertain. Most recently,
however, there has been increasing consumer interest in electronic and
interactive products coupled with increasing competition in the more traditional
puzzle, game and science toy categories. Frustrated by the limitations of its
internally generated capital base, DaMert decided in September 1998 to actively
seek a strategic partnership with an external company or investors. The
interactive technology base and cross-marketing opportunities presented by the
merger allow DaMert's product innovation strengths to carry forward into the
twenty-first century.
For additional information regarding the reasons for the merger, see
"SPECIFIC REASONS FOR PREVIOUS ACQUISITIONS AND PROPOSED MERGER PARTNERS" in the
prospectus/proxy statement.
DAMERT'S BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF DaMERT HAS DETERMINED THAT THE MERGERS ARE
ADVISABLE AND IN THE BEST INTERESTS OF DaMERT AND ITS STOCKHOLDERS AND HAS
UNANIMOUSLY RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
RELATED AGREEMENTS; INTERESTS OF CERTAIN DAMERT AFFILIATES IN THE MERGER
Fred and Gail DaMert will enter into employment agreements with New Futech
in connection with the merger. See "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT -- Employment Agreements with Affiliates" and "NEW FUTECH'S
MANAGEMENT -- Employment Agreements" in the prospectus/proxy statement.
8
<PAGE> 592
SEE "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" IN THIS
PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE CORRESPONDING HEADING IN THE
PROSPECTUS/ PROXY STATEMENT.
REGULATORY MATTERS
Except as disclosed in this prospectus/proxy statement supplement and the
prospectus/proxy statement, DaMert and New Futech are not aware of any
governmental or regulatory approvals required for consummation of the mergers,
other than compliance with the federal securities laws and applicable securities
and "blue sky" laws of the various states.
CERTAIN FEDERAL TAX MATTERS
In the opinion of Quarles & Brady LLP, special tax counsel to Futech and
New Futech, the merger of DaMert into New Futech will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code, and DaMert and New Futech will each be a party to that reorganization
within the meaning of Section 368(b) of the Code.
In rendering its opinion, counsel has relied upon and assumed as accurate
and correct on the date hereof, and will rely on and assume as accurate and
correct as of the Effective Time of merger, the information contained in this
prospectus/proxy statement supplement and the related prospectus/proxy statement
and certain representations as to factual matters made by DaMert and New Futech.
Counsel's opinion represents its best legal judgement as to the tax treatment of
the merger, but the opinion is not binding on the Internal Revenue Service. The
parties have not and will not request a ruling from the Service in connection
with the federal income tax consequences of the merger. The following summary of
material United States federal income tax consequences of the merger is based
upon the conclusions reached in such opinion.
Based on the provisions of the Code, the applicable regulations thereunder,
judicial authority and current administrative rulings and practices as of the
date hereof, all of which are subject to change, possibly with retroactive
effect: (i) no gain or loss will be recognized by DaMert or New Futech as a
result of the merger; (ii) no gain or loss will be recognized by the holders of
DaMert Common Stock upon conversion of their shares of DaMert Common Stock into
shares of New Futech Common Stock pursuant to the merger, except with respect to
the portion of the merger consideration that does not consist of New Futech
common stock; (iii) the tax basis of the shares of New Futech common stock into
which shares of DaMert common stock are converted will be the same as the basis
of the shares of Futech common stock converted into such New Futech common
stock, reduced by any amount allocable to the portion of the merger
consideration that does not consist of New Futech common stock; (iv) the holding
period for shares of New Futech common stock into which shares of DaMert common
stock are converted will include the period that such shares of DaMert common
stock were held by the holder, provided such shares were held as capital assets
of the holder at the Effective Time of Merger; and (v) the payment of
consideration that does not consist of shares of New Futech common stock to a
holder of DaMert common stock will result in the recognition of gain or loss for
federal income tax purposes, measured by the difference between the amount of
cash or other nonstock consideration received and the portion of the adjusted
tax basis of DaMert common stock allocable to it (such gain or loss will be
capital gain or
9
<PAGE> 593
loss, provided that such stock was held as a capital asset as of the Effective
Time of merger).
A holder of DaMert common stock who receives New Futech common stock
pursuant to the merger will be required to retain records and file with such
holder's federal income tax return for the taxable year in which the merger
takes place a statement setting forth all relevant facts in respect of the
nonrecognition of gain or loss upon such exchange. The statement is required to
include (i) such holder's basis in the shares of DaMert common stock surrendered
in the merger; and (ii) the value of New Futech common stock received (using
fair market value as of the Effective Time of merger) and the amount of any cash
or other nonstock consideration received in the merger.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A DESCRIPTION OF THE MATERIAL
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR DESCRIPTION OF ALL POTENTIAL TAX EFFECTS OF THE MERGER. In
addition, the discussion does not address all of the tax consequences that may
be relevant to particular taxpayers in light of their personal circumstances or
to taxpayers subject to special treatment under the Code (for example, insurance
companies, financial institutions, dealers in securities, tax exempt
organizations, foreign corporations, foreign partnerships, or other foreign
entities and individuals who are not citizens or residents of the United States
and persons who acquired their New Futech common stock pursuant to the exercise
or termination of employee stock options, warrants or otherwise as compensation.
No information is provided herein with respect to the tax consequences, if
any, of the merger under applicable foreign, state, local and other tax laws.
THE GENERAL SUMMARY SET FORTH ABOVE IS NOT INTENDED TO BE, NOR SHOULD IT BE
CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF DAMERT COMMON
STOCK. EACH HOLDER OF DAMERT COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER,
INCLUDING THE APPLICATION OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
The mergers are intended to qualify as a purchase for accounting purposes.
Under this accounting treatment, the amount by which the total merger
consideration received by stockholders of the other merging companies plus the
amount of their liabilities exceeds the fair market value of their identifiable
assets will initially be treated as goodwill by New Futech for accounting
purposes.
RIGHTS OF DISSENTING STOCKHOLDERS
The rights of DaMert stockholders who dissent in connection with the
mergers are governed by specific legal provisions contained in Chapter 13
("Chapter 13") of the California General Corporation Law ("CGCL"). The following
summary of the provisions of Chapter 13 is not intended to be a complete
statement of such provisions and is qualified in its entirety by reference to
the full text of Chapter 13, a copy of which is attached to this
prospectus/proxy statement as Appendix 1 and is incorporated herein by
reference. Failure to follow the steps required by Chapter 13 for perfecting
dissenters' rights may result in the loss of such rights.
Under Chapter 13, if the mergers are completed, any shares of DaMert common
stock as to which dissenters' rights are properly exercised ("Dissenting
Shares") will not be
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<PAGE> 594
converted by virtue of the mergers into the right to receive the merger
consideration pursuant to the Merger Agreement, but instead will be converted
into the right to receive in cash the "fair market value" of such shares,
determined as of the day before the first announcement of the terms of the
mergers, and excluding any appreciation or depreciation in consequence of the
mergers. For shares of DaMert common stock to qualify as Dissenting Shares, (i)
the holders of such shares must not have voted in favor of approval of the
Merger Agreement and (ii) the holder of such shares must submit stock
certificates for endorsement (as described below).
If the mergers are approved at the DaMert special meeting, DaMert will,
within ten days after such approval, mail to any stockholder who may have a
right to require DaMert to purchase his, her or its shares for cash as a result
of making a demand (as described below), a notice that the required stockholder
approval of the Merger Agreement was obtained (the "Notice of Approval"),
accompanied by a copy of Chapter 13. The Notice of Approval will set forth the
price determined by DaMert to represent the "fair market value" of any
Dissenting Shares (which will constitute an offer by DaMert to purchase the
Dissenting Shares at the stated price) and will set forth a brief description of
the procedures to be followed by the stockholders who wish to exercise their
dissenters' rights.
Within 30 days after the date on which the Notice of Approval was mailed,
DaMert must receive the demand of the dissenting stockholders. The demand is
required by law to contain a statement concerning the number and class of shares
of DaMert stock held of record by such dissenting stockholder and what the
stockholder claims to be the fair market value of the Dissenting Shares as of
the close of business on the day immediately prior to the announcement of the
merger. The statement of fair market value in the demand by the dissenting
stockholder constitutes an offer by the dissenting stockholder to sell the
Dissenting Shares at that price. The dissenting stockholder must submit DaMert
stock certificate(s) representing the Dissenting Shares to DaMert at DaMert's
principal office within that 30 day period. The DaMert stock certificate(s) will
be stamped or endorsed with a statement that the shares are Dissenting Shares.
If the price contained in the Notice of Approval is acceptable to the dissenting
stockholder, the dissenting stockholder may demand the same price. This would
constitute an acceptance of the offer by DaMert to purchase the dissenting
stockholder's stock at the price stated in the Notice of Approval.
If DaMert and a dissenting stockholder agree upon the price to be paid for
the Dissenting Shares, the agreed price (together with interest thereon at the
legal rate on judgments from the date of the agreement between DaMert and the
dissenting stockholder) is required by law to be paid to the dissenting
stockholder within 30 days after that agreement or within 30 days after any
statutory or contractual conditions to the mergers are satisfied, whichever is
later, subject to the surrender of the DaMert stock certificates.
If DaMert and a dissenting stockholder disagree as to the price for the
Dissenting Shares or disagree as to whether the Dissenting Shares are entitled
to be classified as Dissenting Shares, the stockholder may, within six months
after the Notice of Approval is mailed, file a complaint in the Superior Court
of the proper county requesting the court to make the determinations or,
alternatively, may intervene in any pending action brought by another dissenting
stockholder. Costs of the action (including compensation of appraisers) are
required to be assessed as the court considers equitable, but must be assessed
against DaMert if the appraised value determined by the court exceeds the price
offered by DaMert.
11
<PAGE> 595
The court action to determine the fair market value of the shares will be
suspended if litigation is instituted to test the sufficiency or regularity of
the votes of the stockholders in authorizing the mergers. Furthermore, no
stockholder who is entitled to assert dissenters' rights under Chapter 13 shall
have any right to attack the validity of the mergers or to have the mergers set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the mergers has been legally voted in favor of
the mergers.
Dissenting Shares may lose their status as such and the right to demand
payment will terminate, among other reasons, if (i) the mergers are abandoned,
(ii) the shares are transferred before being submitted for endorsement or are
surrendered for conversion into shares of another class, (iii) the dissenting
stockholder and DaMert do not agree upon the status of the shares as Dissenting
Shares or upon the price of such shares and the dissenting stockholders fails to
file suit against DaMert or intervene in a pending action within six months
following the date on which the Notice of Approval was mailed to the
stockholder, or (iv) the dissenting stockholder withdraws his or her demand for
the purchase of the Dissenting Shares with the consent of DaMert.
12
<PAGE> 596
NEW FUTECH AND DAMERT SHARES
NEW FUTECH COMMON STOCK
For a description of New Futech common stock and its authorized but
unissued preferred stock, see "DESCRIPTION OF NEW FUTECH CAPITAL STOCK" in the
prospectus/proxy statement.
DAMERT CAPITAL STOCK
The following description of DaMert's capital stock is a summary only and
is subject to, and qualified in its entirety by, reference to DaMert's Articles
of Incorporation and Bylaws, copies of which are included as exhibits to the
registration statement of which this prospectus/proxy statement supplement is a
part, and by reference to California law under which DaMert is incorporated.
COMMON STOCK
As of May 31, 1999 there were 1,000 shares of DaMert common stock
outstanding which were held of record by one stockholder. There is no public
market for DaMert common stock. DaMert has not paid any dividends on its common
stock. The Merger Agreement provides that DaMert will not declare or pay any
dividend without the prior written approval of New Futech.
COMPARISON OF THE RIGHTS OF HOLDERS OF DAMERT COMMON STOCK AND
NEW FUTECH COMMON STOCK
DaMert is a California corporation and the rights of its shareholders are
governed by the California General Corporation Law ("CGCL") and the Articles of
Incorporation and Bylaws of DaMert. New Futech is a Delaware corporation and the
rights of it stockholders are governed by the Delaware General Corporation Law
("DGCL") and the Certificate of Incorporation and Bylaws of New Futech. By the
Merger Agreement, the DaMert shareholders will become New Futech stockholders
and as such their rights will be governed by the DGCL and the New Futech
articles of incorporation and bylaws.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF CALIFORNIA AND DELAWARE
The corporation laws of California and Delaware differ in many respects.
Although all the differences are not set forth in this prospectus/proxy
statement supplement, provisions which could materially affect the rights of
shareholders are discussed below.
13
<PAGE> 597
REMOVAL OF DIRECTORS
<TABLE>
<CAPTION>
California Delaware
<S> <C>
A director of a corporation that does not have a A director of a corporation that does not have a
classified board of directors may not be removed classified board or cumulative voting may be
if the number of shares voted against such removed without or without cause with approval
removal would be sufficient to elect the of the majority of the outstanding shares
director if voted cumulatively at an election at entitled to vote at an election of directors. In
which the same total number of votes were cast the case of a Delaware corporation having
and either the number of directors elected at cumulative voting, if less than the entire board
the most recent annual meeting of stockholders, is to be removed, a director may not be removed
or if greater, the number of directors for whom without cause if the number of shares voted
removal is being sought, were then being against such removal would be sufficient to
elected. In the case of a California corporation elect the director under cumulative voting. A
having cumulative voting, if less than the director of a corporation with a classified
entire board is to be removed, a director may board of directors may be removed only for
not be removed if the number of shares voted cause, unless the certificate of incorporation
against such removal would be sufficient to otherwise provides. The certificate of
elect the director if voted cumulatively at an incorporation and bylaws of New Futech provide
election at which the same total number of votes for a classified board of directors, but not for
were cast and the entire number of the directors cumulative voting.
authorized at the time of the director's most
recent election were then being elected. In
addition, the holders of at least 10% of the
number of outstanding shares of any class of
stock may initiate a court action to remove any
director for cause. DaMert does not have a
classified board.
</TABLE>
14
<PAGE> 598
CLASSIFIED BOARD OF DIRECTORS
A classified (the term in Delaware) or staggered board is one on which a
certain number, but not all, of the directors are elected on a rotating basis
each year. This method of electing directors makes changes in the composition of
the board of directors more difficult, and thus a change in control of a
corporation potentially a lengthier and more difficult process.
<TABLE>
<CAPTION>
California Delaware
<S> <C>
California law permits, but does not require, Delaware law permits, but does not require, a
"listed corporations" to have a classified board classified board of directors, by which the
of directors, by which the directors can be directors can be divided into as many as three
divided into as many as three classes with classes with staggered terms of office, with
staggered terms of office, with only one class only one class of directors standing for
of directors standing for election each year. A election each year. The New Futech certificate
"listed company" is a company that meets certain of incorporation and bylaws provide for a
requirements such as having its shares listed classified board, consisting of three classes
for trading on the New York Stock Exchange, with three directors in each class.
American Stock Exchange or the NASDAQ. The
DaMert articles of incorporation and bylaws do
not provide for a classified board, nor is
DaMert a "listed company."
</TABLE>
15
<PAGE> 599
INDEMNIFICATION AND LIMITATION OF LIABILITY
Delaware and California have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with certain exceptions, a corporation to adopt a
provision in its articles of incorporation or certificate of incorporation, as
the case may be, eliminating the liability of a director to the corporation or
its stockholders for monetary damages for breach of the director's fiduciary
duty. There are nonetheless certain differences between the laws of the two
states respecting indemnification and limitation of liability.
<TABLE>
<CAPTION>
California Delaware
<S> <C>
The articles of incorporation of DaMert do not The certificate of incorporation of New Futech
eliminate the liability of directors to the eliminates the liability of directors to the
corporation to the fullest extent permissible corporation or its stockholders for monetary
under California law. California law does not damages for breach of fiduciary duty as a
permit the elimination of monetary liability director to the fullest extent permissible under
where such liability is based on: Delaware law. Under Delaware law, such provision
may not eliminate or limit director monetary
- - intentional misconduct or knowing and culpable liability for:
violation of law,
- breaches of the director's duty of loyalty to
- - acts or omissions that a director believes to the corporation or its stockholders,
be contrary to the best interests of the
corporation or its stockholders, or that - acts or omissions not in good faith or
involve the absence of good faith on the part involving intentional misconduct or knowing
of the director, violations of law,
- - receipt of any improper personal benefit, - the payment of unlawful dividends or unlawful
stock repurchases or redemptions, or
- - acts or omissions that show reckless disregard
for the director's duty to the corporation or - transactions in which the director received an
its stockholders, where the director in the improper personal benefit.
ordinary course of performing a director's
duties should have been aware of a risk of Such limitation of liability provisions also may
serious injury to the corporation or its not limit a director's liability for violation
shareholders, of or otherwise relieve directors from the
necessity of complying with federal or state
- - acts or omissions that constitute and securities laws, or affect the availability of
unexcused pattern of inattention that amounts non-monetary remedies such as injunctive relief
to an abdication of the director's duty to the or rescission.
corporation and its stockholders,
Delaware law generally permits indemnification
- - interest transactions between the corporation of expenses, including attorney's fees, actually
and the director, in which a director has a and reasonably incurred in the defense or
material financial interest, or settlement of a derivative or third-party
action, provided there is a determination by a
- - liability for improper distributions, loans or majority vote of disinterested directors, by
guarantees. independent legal counsel or by a majority vote
of the stockholders that the person seeking
California law permits indemnification of indemnification acted in good faith and in a
expenses in a derivative or third party manner reasonably believed to be in or
</TABLE>
16
<PAGE> 600
<TABLE>
<CAPTION>
California Delaware
<S> <C>
action, except that with respect to derivative not opposed to the best interest of the
actions (i) no indemnification may be made when corporation. Delaware law requires
a person is adjudged liable to the corporation indemnification, of expenses when the individual
in the performance of that person's duty to the being indemnified has successfully, defended any
corporation and its stockholders, unless and action, claim, issue, or matter therein, on the
only to the extent that a court determines that merits or otherwise.
the person is fairly and reasonably entitled to
indemnity for expenses, (and (ii) no Delaware law also permits a Delaware corporation
indemnification may be made in respect of to provide indemnification in excess of that
amounts paid or expenses incurred in settling or provided by statute.
otherwise disposing of a threatened pending
action without court approval or expenses A provision of Delaware law states that the
incurred in an action settled or disposed of indemnification provided by statute shall not be
without court approval. Indemnification is deemed exclusive of any other rights under any
permitted by California law only for acts taken bylaw, agreement, vote of stockholders or
in good faith and reasonably believed to be in disinterested directors or otherwise.
the best interests of the corporation and its
stockholders, as determined by a majority vote
of a disinterested quorum of the directors,
independent legal counsel (if a quorum of
independent directors is not obtainable), a
majority vote of a quorum of the stockholders
(excluding shares owned by the indemnified
party), or the court handling the action and, in
the case of a criminal proceeding,
indemnification is permitted if the indemnified
party had no reasonable cause to believe his or
her conduct was unlawful.
</TABLE>
Both California and Delaware law requires indemnification when the
individual has defended successfully the action on the merits.
Expenses incurred by an officer or director in defending an action may be
paid in advance, under California law and Delaware law, if such director or
officer undertakes to repay such amounts if it is ultimately determined that he
or she is not entitled to indemnification. In addition, the laws of both states
authorize a corporation's purchase of indemnity insurance for the benefit of its
officers, directors, employees and agents whether or not the corporation would
have the power to indemnify against the liability covered by the policy.
INSPECTION OF STOCKHOLDER LIST
The CGCL provides for an absolute right of inspection of the stockholder
list for persons holding five percent or more of a corporation's voting shares
or persons holding one percent or more of such shares who have filed a Schedule
14A with the SEC relating to the election of directors. Both the CGCL and the
DGCL allow any stockholder or
17
<PAGE> 601
stockholder to inspect the stockholder list for a purpose reasonably related to
such person's interest as a stockholder or shareholder. However, the DGCL
contains no provision comparable to the absolute right of inspection provided by
the CGCL to certain shareholders.
DIVIDENDS AND REPURCHASES OF SHARES
<TABLE>
<CAPTION>
California Delaware
<S> <C>
Generally, under the CGCL a California Delaware law permits a corporation to declare
corporation may pay dividends out of retained and pay dividends out of surplus or if there is
earnings or if, after giving effect thereto, (i) no surplus, out of net profits for the fiscal
the assets (excluding goodwill and certain other year as long as the amount of capital of the
assets) of the corporation are at least equal to corporation following the declaration and
1.25 times its liabilities (excluding certain payment of the dividend is not less than the
deferred credits), and (ii) the current assets aggregate amount of the capital represented by
of such corporation are at least equal to (x) the issued and outstanding stock of all classes
its current liabilities or (y) if the average of having preference upon the distribution of
the earnings of such corporation before taxes assets. In addition, Delaware law generally
and interest expense for the two preceding provides that a corporation may redeem or
fiscal years was less than the average of the repurchase its shares only if the capital of the
interest expense of such corporation for such corporation is not impaired and such redemption
fiscal years, 1.25 times its current or repurchase would not impair the capital of
liabilities. In addition, the ability of a the corporation.
California corporation to pay dividends is
restricted by certain limitations for the
benefit of certain preference shares.
</TABLE>
18
<PAGE> 602
STOCKHOLDER VOTING
<TABLE>
<CAPTION>
California Delaware
<S> <C>
Generally requires that a majority of the Generally requires that a majority of the
stockholders of both acquiring and target shareholders of both acquiring and target
corporations approve statutory mergers. corporations approve statutory mergers.
Does not require a stockholder vote of the Does not require a stockholder vote of the
surviving corporation in a merger if surviving corporation in a merger (unless the
corporation provides otherwise in its
- - such stockholders shall own, immediately after certificate of incorporation) if
the merger, equity securities (not including
any warrants or similar rights to purchase - the merger agreement does not amend the
such equity securities) of the surviving or existing certificate of incorporation,
acquiring corporation or a parent party
possessing more than five-sixths of the voting - each share of the stock of the surviving
power of the surviving or acquiring corporation outstanding immediately before the
corporation or parent party. effective date of the merger is to be
identical outstanding or treasury share of the
However, California law does require that the surviving corporation after the merger, and
principal terms of a merger be approved by the
outstanding shares of the surviving corporation - either no shares of common stock of the
if any amendment is made to its articles which surviving corporation and no shares,
would otherwise require approval. securities or obligations convertible into
such stock are to be issued or delivered under
the plan of merger, or the authorized unissued
shares or the treasury shares of common stock
of the surviving corporation to be issued or
delivered under the plan of merger plus those
initially issuable upon conversion of any
other shares, securities or obligations to be
issued or delivered under such plan do not
exceed twenty percent (20%) of the shares of
common stock of the surviving corporation
outstanding immediately prior to the effective
date of the merger.
</TABLE>
With certain exceptions, the CGCL requires that a merger, sale of assets or
similar transaction be approved by a majority vote, and in some cases a
two-thirds vote, of each class of shares outstanding. The DGCL does not
generally require such class voting, except in certain transactions involving an
amendment to the certificate of incorporation that adversely affects a specific
class of shares or where the class of securities designates such a right,
although Delaware law does require that a sale of all or substantially all of
the assets of a corporation be approved by a majority of the outstanding voting
shares of the corporation transferring such assets.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS UNDER DELAWARE LAW
In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a
19
<PAGE> 603
corporation and one or more of its significant shareholders, more difficult.
Under Section 203 of the Delaware General Corporation Law, certain "business
combinations" with "interested stockholders" of Delaware corporations are
subject to a three-year moratorium unless specified conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or entity who or which owns,
individually or with or through certain other persons or entities, fifteen
percent (15%) or more of the corporation's outstanding voting stock (including
any rights to acquire stock pursuant to an option, warrant, agreement,
arrangement or understanding, or upon the exercise of conversion or exchange
rights, and stock with respect to which the person has voting rights only), or
is an affiliate or associate of the corporation and was the owner, individually
or with or through certain other persons or entities, of fifteen percent (15%)
or more of such voting stock at any time within the pervious three years, or is
an affiliate or associate of any of the foregoing.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or a direct
or indirect majority-owned subsidiary equal in aggregate market value of ten
percent (10%) or more of the aggregate market value of either the corporation's
consolidated assets or all of its outstanding stock; the issuance of transfer by
the corporation or a direct or indirect majority-owned subsidiary of stock of
the corporation or such subsidiary to the interested stockholder (except for
certain transfers in a conversion or exchange or a pro rata distribution or
certain other transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock or of the corporation's voting stock); or receipt by the
interested stockholder (except proportionately as a stockholder), directly or
indirectly, of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if:
- prior to the date on which such stockholder becomes an interested
stockholder the board of directors approves either the business
combination or the transaction that resulted in the person or entity
becoming an interested stockholder,
- upon consummation of the transaction that made him or her an interested
stockholder, the interested stockholder owns at least eighty-five percent
of the corporation's voting stock outstanding at the time the transaction
commenced (excluding from the eighty-five percent calculation shares
owned by directors who are also officers of the target corporation and
shares held by employee stock plans that do not give employee
participants the right to decide confidentiality whether to accept a
tender or exchange offer), or
- on or after the date such person or entity becomes an interested
stockholder, the board approves the business combination and it is also
approved at a stockholder meeting by sixty-six and two-thirds percent of
the outstanding voting stock not owned by the interested stockholder.
20
<PAGE> 604
Section 203 only applies to certain publicly held corporations that have a
class of voting stock that is:
- listed on a national securities exchange,
- quoted on an interdealer quotation system of a registered national
securities association, or
- held of record by more than 2,000 stockholders.
Under certain circumstances, Section 203 of the DGCL may made it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three year period.
There is no provision in the CGCL equivalent to Section 203 of the DGCL.
However, under the CGCL, if a party that makes a tender offer or proposes to
acquire a corporation by a reorganization or certain sales of assets is
controlled by such corporation or is controlled by an officer or director of
such corporation, or if a director or executive officer of such corporation has
a material financial interest in such party (each an "Interested Party
Proposal"), (i) an affirmative opinion in writing as to the fairness of the
consideration to the stockholders of such corporation must be delivered to
stockholders of such corporation, and (ii) such stockholders must be (x)
informed of certain later tender offers or written proposals for a
reorganization or sale of assets made by other persons, and (y) afforded a
reasonable opportunity to withdraw any vote, consent or proxy previously given
or shares previously tendered in connection with the Interested Party Proposal.
INTERESTED DIRECTOR TRANSACTIONS
Under the laws of both California and Delaware, contracts or transactions
between a corporation and one or more of its directors, or between a corporation
and any other entity in which one or more of its directors are directors or have
a financial interest, are not void or voidable because of such interest or
because such director is present at a meeting of the board which authorizes or
approves the contract or transaction, provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the conditions are
similar under the CGCL and the DGCL. Under the CGCL and the DGCL, either (i) the
stockholders or shareholders or the board of directors must approve any such
contract or transaction in good faith after full disclosure of the material
facts (and, in the case of board approval other than for a common directorship,
the CGCL requires that the contract or transaction must also be "just and
reasonable" to the corporation), or (ii) the contract or transaction must have
been "fair" (in Delaware) or, in the case of a common directorship (in
California), "just and reasonable" as to the corporation at the time it was
approved. The CGCL explicitly places the burden of proof of the just and
reasonable nature of the contract or transaction on the interested director.
Under the DGCL, if board approval is sought, the contract or transaction
must be approved by a majority of the disinterested directors (even though less
than a majority of a quorum). Under the CGCL, if stockholder approval is sought,
the interested director is not entitled to vote his or her shares at a
stockholder meeting with respect to any action regarding such contract or
transaction. If board approval is sought, the contract or transaction must be
approved by a majority vote of a quorum of the directors, without counting the
vote of any interested directors (except that interested directors may be
counted for purposes of establishing a quorum.)
21
<PAGE> 605
APPRAISAL/DISSENTERS' RIGHTS
Under both Delaware and California law, a stockholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal/dissenters' rights by which such
stockholder may receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she would otherwise receive in the
transactions. Under both Delaware and California law, such fair market value is
determined exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation.
<TABLE>
<CAPTION>
California Delaware
<S> <C>
Under California law, in connection with the Appraisal rights are not available (a) with
merger of a corporation for which the approval respect to the sale of all or substantially all
of outstanding shares is required, dissenting of the assets of a corporation, (b) with respect
stockholders of such corporation who follow to a merger or consolidation by a corporation
prescribed statutory procedures are entitled to the shares of which are either listed on a
receive payment of the fair market value of national securities exchange, designated as a
their shares. No such rights are available, national market system security on an
however, if the shares are listed on a national interdealer quotation system by the National
securities exchange certified by the California Association of securities Dealers, Inc. or are
Commissioner of Corporations or appear on the held of record by more than 2,000 holders if
Federal Reserve Board list of over-the-counter such stockholders receive only shares of the
margin stocks unless (i) such shares are subject surviving corporation or shares of any other
to certain restrictions on transfer, or (ii) the corporation that are either listed on a national
holders of at least five percent of such shares securities exchange, designated as a national
elect dissenter's rights. In connection with the market system security on an interdealer
Merger, holders of DaMert Common Stock may, by quotation system by the National Association of
complying with required procedures, be entitled securities Dealers, Inc. or held of record by
to dissenters' rights under the CGCL. See more than 2,000 holders, plus cash in lieu of
"RIGHTS OF DISSENTING STOCKHOLDERS." fractional shares of such corporations, or (c)
to stockholders of a corporation surviving a
merger if no vote of the stockholders of the
surviving corporation is required to approve the
merger under Delaware law.
</TABLE>
22
<PAGE> 606
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with the DaMert's
audited consolidated financial statements and notes thereto appearing elsewhere
in the prospectus/ proxy statement.
OVERVIEW
Founded in 1973 and incorporated in 1979, DaMert currently develops,
manufactures and markets high quality toys, gifts and puzzles. DaMert enters
into agreements with inventors to create a steady stream of high quality
products. Presently, DaMert's products include over 200 toys, gifts and puzzles
selling to catalogs, museums, department stores, specialty gift and toy stores
nationwide. The DaMert products are sold at retail prices generally ranging from
$5.00 to $25.00.
RESULTS OF OPERATIONS OF THE COMPANY
The following table sets forth, for the periods indicated, the relative
percentage that certain income and expense items bear to net sales.
<TABLE>
<CAPTION>
YEARS ENDED: THREE MONTHS ENDED:
------------------------------------------- -------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997 MARCH 31, 1999 MARCH 31, 1998
-------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................. $6,837,280 100.00% $8,876,462 100.00% $1,256,848 100.00% $1,163,084 100.00%
Cost of Sales......... 4,291,854 62.8% 5,328,453 60.0% 736,611 58.6% 696,072 59.8%
---------- ------ ---------- ------ ---------- ------ ---------- ------
Gross Profit.......... 2,545,426 37.2% 3,548,009 40.0% 520,237 41.4% 467,012 40.2%
---------- ------ ---------- ------ ---------- ------ ---------- ------
Operating Expenses
Product
Development....... 546,706 8.0% 488,638 5.5% 86,822 6.9% 138,261 11.9
Marketing and
Sales............. 998,802 14.6% 1,320,380 14.9% 230,800 18.4% 283,889 24.4%
General and Admin... 1,878,005 27.5% 1,647,803 18.6% 426,271 33.9% 464,787 40.0%
---------- ------ ---------- ------ ---------- ------ ---------- ------
Total Op. Exp..... $3,423,513 50.1% $3,456,821 39.0% $ 743,893 59.2% $ 886,937 76.3%
---------- ------ ---------- ------ ---------- ------ ---------- ------
Income (loss) before
taxes............... (878,087) (12.8)% 91,188 1.0% (223,656) (17.8)% (419,925) (36.1)%
Provision for income
taxes............... 800 0.1% 1,431 0.0% 800 0.1% 800 0.1%
---------- ------ ---------- ------ ---------- ------ ---------- ------
Net income (loss)..... $ (878,887) (12.9)% $ 89,757 1.0% $ (224,456) (17.9)% $ (420,725) (36.2)%
---------- ------ ---------- ------ ---------- ------ ---------- ------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Sales. For the three months ended March 31, 1999, net sales were
$1,256,848, an increase of $93,764 or 8.1% compared to $1,163,084 for the period
ending March 31, 1998. This increase was related to a restructure of the
domestic sales management instituted in November 1998. Three regional directors
functionally replaced a national manager, sales assistant and key account
manager, the structure in place January 1998. The National Sales Manager had
been terminated in March 1998, and a suitable replacement was not found until
November 1998.
Gross Profit. For the three months ended March 31, 1999, gross profit was
$520,237, 41.4% of Sales, an increase of $53,255 or 11.4% compared to gross
profit of $467,012.
23
<PAGE> 607
40.2% of Sales for the same period in 1998. International sales were 11.9% of
sales as of March 31, 1999, compared to 16.2% as of March 31, 1998. Since these
sales are highly discounted, less relative contribution leads to higher gross
profit. Additionally, cost control in the shipping and inventory control
departments contributed to higher gross profit.
Operating Expenses (includes interest expense). For the three months ended
March 31, 1999, operating expenses (which include product development,
marketing, general and administrative, and interest expense) were $743,893, a
decrease of $143,044 or 16.1%, compared to operating expenses of $886,937 in
1998. Cost control in each department's fixed overhead lowered expenses in 1999
relative to 1998. Interest expenses for the period ending March 31, 1999, were
$46,666, an increase of $8,994 or 23.9% compared to interest expenses of $37,672
for the same period in 1998. Higher borrowing was necessitated by lower
receivables at year end 1998 compared to year end 1997.
Net Income. For the three months ended March 31, 1999, net loss was
($223,656), an improvement of $196,314 or 46.7% over the net loss of ($419,925)
for the same period in 1998. Because of the seasonality of the business, profit
is not expected until the Third Quarter.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
Net Sales. Net sales for 1998 were $6,837,280, a decrease of $2,039,182,
or 23% from $8,876,462 in 1997. This decline was due primarily to lost sales
orders that resulted from terminating the National Sales Manager in first
quarter 1998 and not finding suitable replacement personnel until November 1998
when the holiday buying season was essentially over.
Gross Profit. Gross profit for 1998 was $2,545,426, a decrease of
$1,002,583, or 28.3% from $3.5 million in 1997. Margins decreased from 40.0% to
37.2%. This was due to a higher percentage of international sales (which are
highly discounted) relative to total sales, 17.7% in 1998 compared to 15.9% in
1997. The international sales volume was not affected by the termination of the
National Sales Manager since it was not under his jurisdiction.
Operating Expenses (includes interest expense). Operating expenses which
include product development, marketing and sales, general and administrative,
and interest expenses for 1998 were $3,423,513 a decrease of $33,308, or 1% from
$3,456,821 in 1997. Higher product development expenses in 1998 were due to the
expansion of the game product category and the hiring of additional personnel
during part of the year. Marketing and sales expenses decreased in 1998 due to a
decrease in sales commissions resulting from lower revenue, reclassifying the
salary of the Marketing Director to G & A with his promotion to President, and
termination of the National Sales Manager early in the year. General and
administrative expenses increased in 1998 due to the salary reclassification
mentioned above and an increase of interest expense of $31,594, or 17.5% to
$211,746 over $180,152 in 1997. Lower receivables necessitated higher borrowing
to meet working capital requirements.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The demand for DaMert's retail product has a large seasonal component, with
a majority of sales to retailers during the 3rd and 4th fiscal quarters.
Quarterly revenue breakdowns are as follows (stated in % of total sales): 1st
quarter, 16-20%; 2nd quarter, 16-20%; 3rd quarter, 30-34%, 4th quarter, 30-34%.
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<PAGE> 608
LIQUIDITY AND CAPITAL RESOURCES
The seasonality of sales has made credit availability an important issue.
It is necessary to build inventory during the summer in anticipation of the
heavy fall buying by retailers. However, receivables are at their lowest in the
first two quarters of the year when the buying decisions for product and
materials must be made. On May 15, 1998, DaMert renewed an annual bank revolving
line of credit of $2,500,000 to finance working capital needs. On August 15,
1998, a short term loan of $500,000 was added to DaMert's credit facilities.
This loan was due December 15, 1998. It was rewritten into a $400,000 loan due
January 30, 1999. There is currently $300,000 remaining on this note.
Accounts Receivables were $925,590 on December 31, 1998, compared with
$1,765,871 on December 31, 1997, a decrease of $840,281. This decrease was due
primarily to lower sales in 4th quarter 1998 than in 4th quarter 1997,
$2,157,600 in 1998 compared to $3,041,200 in 1997.
DaMert has the ability to borrow up to $2,800,000 under a Revolving Line of
Credit Note with its bank that expires on May 15, 1999. The bank has approved an
extension to July 31, 1999. The Revolving Line of Credit Note bears interest at
the bank's prime rate plus 0.75%. The Revolving Line of Credit Note is secured
by a first priority security interest in all of DaMert's accounts receivable and
other rights of payment, general intangibles and inventory. As part of the
Revolving Line of Credit Note, DaMert has the ability to obtain letters of
credit in the aggregate amount of $250,000 outstanding at any one time. This
feature has been eliminated in the credit line extension dated May 15, 1999. The
indebtedness of DaMert under the Revolving Line of Credit Note is guaranteed
pursuant to a personal guarantee of Frederick A. DaMert. As stated above, an
additional loan of $400,000 was written December 15, 1998. This Loan was due
January 30, 1999. The bank has approved an extension until June 30, 1999. This
loan bears interest at the bank's prime rate plus 3.75% and is secured by a
first priority security interest in all of DaMert's accounts receivable and
other rights of payment, general intangibles and inventory. The indebtedness of
DaMert under the Loan was personally guaranteed by Frederick A. DaMert. There is
an outstanding balance of $300,000 on this Loan.
As of December 31, 1997, DaMert was not in compliance with certain
covenants required by the credit agreement with its bank. The bank subsequently
waived compliance with these covenants for the year ended December 31, 1997. As
of December 31, 1998, DaMert was not in compliance with certain covenants
required by its credit agreement with its bank. All interest payments are
current.
DaMert had previously borrowed $80,260 in a Term Loan to finance office
equipment for the Berkeley facility. This Term Loan was financed with a first
priority security interest in the equipment and bears interest at the bank's
prime rate plus 0.75%. This loan is current and as of December 15, 1998 had an
outstanding principal balance of $26,753.44.
The agreement with the bank does not allow DaMert to merge or consolidate
with any other entity unless the bank otherwise consents in writing. The bank
will agree to the Merger contingent on refinancing of the current credit
facilities by New Futech.
DaMert has also borrowed funds from Frederick A. DaMert, the founder. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS", in this prospectus/proxy
statement supplement.
INFLATION
The Company does not believe inflation has a significant impact on its
operations.
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<PAGE> 609
YEAR 2000
DaMert utilizes a Local Area Network (LAN) system of PC's and a
commercially produced software packages (MACOLA). Software Y2K upgrades provided
by MACOLA will be installed in May 1999. Some PC's in use are not Y2K compliant
and will have to be replaced. Cost estimates for replacement of dated PC
hardware are currently in process. Management thinks that replacement costs will
be $30,000 to $40,000. DaMert does not believe that failure of any vendor to be
Year 2000 compliant would have a material impact on the company.
SAFE HARBOR DISCLOSURE: FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This prospectus/proxy statement and each related prospectus/proxy statement
supplement contains or incorporates by reference forward-looking statements. The
factors identified above in this section are important factors (but not
necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, New Futech or any of the merging companies.
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, New Futech
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. We cannot promise that
statements of expectation or belief will be achieved or accomplished. The words
"believe," "expect," and "anticipate" and similar expressions identify forward-
looking statements throughout these materials.
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DESCRIPTION OF DAMERT'S BUSINESS
GENERAL
DaMert's principal place of business is located at 1609 Fourth Street,
Berkeley, California 94710. The Company's telephone number is (510) 524-7400.
DaMert Company creates and produces affordable, high quality gifts and toys that
entertain, educate and endure, incorporating themes that capture the magic of
imagination, the wonders of nature and science, the beauties of art and the
mysteries of space. Approximately 200 products are marketed to a nationwide
customer base of 8000 accounts and internationally distributed to over 48
countries.
DaMert was founded by Fred DaMert on February 5, 1973 in San Rafael,
California. It was incorporated in the State of California on January 1, 1979,
and elected subchapter-S status on January 1, 1989. Up until its acquisition by
New Futech, DaMert has been self capitalized and wholly owned by Fred DaMert and
his wife Gail Patton DaMert.
In September of 1998, frustrated by the limitations of its internally
generated capital base, DaMert began to actively seek a strategic partnership
with an external company or investors. DaMert engaged an outside consultant to
assist and advise in this scenario.
PRODUCTS
DaMert Company focuses on six categories of about 200 affordable toy and
gift products designed for the specialty toy, museum and gift markets:
Puzzles/Brainteasers, Glow-In-The-Dark, Activity Kits, Great Gizmos, Games and
Rainbows. These products are targeted primarily to children ages 6-12, however,
many of these items are designed to be enjoyed by adults and children together.
Approximately 35% of current sales are derived from Puzzles/Brainteasers,
including the cardboard Triazzle Puzzle Collection and the plastic 3D Slide
Puzzle Collection. Triazzle(R) Puzzles, a significant volume contributor since
1991, are manufactured under a long-term exclusive license from inventor Dan
Gilbert, through December 2002.
Glow represents 26% of sales, followed by Great Gizmos and Activity Kits,
covering a broad variety of science and discovery topics, together totaling 17%.
Games, a relatively new category, has grown to approximately 12% of total sales
with new product expansion underway. Prisms, diffraction and other Rainbow
themed items comprise approximately 9% of sales.
DaMert has a significant R&D staff but also works in conjunction with
outside inventors and product designers throughout the country. DaMert products
have been the recipient of numerous excellence awards including the National
Parenting Center Seal of Approval, Parent's Choice, Gold Seal of Excellence from
The Oppenheim Toy Portfolio, and Great American TV Toy Test. In 1998 alone,
DaMert was included in Dr. Toy's 100 Best Children's Products, Dr. Toy's Best
Vacation Products, Child Magazine Best Toys of the Year, and was the recipient
of the prestigious Family Fun's T.O.Y. (Toy of the Year) for its proprietary
game Impact Zone.
SALES, MARKETING AND DISTRIBUTION
DaMert Company's marketing and overall business strategy is based on
creating excellence in its niche. In the product area, this means that the
company is placing more
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<PAGE> 611
emphasis and support on creating a DaMert "brand" that crosses all six product
categories. To accomplish this goal, new packaging was introduced in 1998 and
has helped build recognition of DaMert as a key player in the toy, museum and
gift retail market. Its reputation for products that blend fun with education
has also created significant demand for custom orders from retailers such as The
Nature Company/Discovery Channel Stores, Natural Wonders, Warner Bros.' retail
stores, the Smithsonian catalog, and most recently, Restoration Hardware.
However, DaMert Company's formula for success goes beyond its products. Its
prices are kept within an affordable range of $5 to $25 for retail stores and
catalogs. This price-value ratio has enabled the company to prosper through
recessions because its products offer more value -- more hours of fun and
learning -- for the same price as competing products.
DaMert Company's products are sold to a balanced and broad range of
accounts including museums, zoos, aquariums, specialty toy and gift retailers,
traditional and electronic catalogs, prominent national chains, plus an
international distribution network which reaches over 48 countries. The company
currently distributes products to over 4,000 retailers nationwide, handling many
larger accounts directly. Other retailers are covered by a nationwide sales
network of approximately 100 representatives. The domestic sales effort is
managed by three internal regional directors. The internal team is supported by
a small customer service staff responsible for order processing and
telemarketing. DaMert Company also attends major gift and toy trade shows, and
uses public relations and trade advertising to increase awareness and sales.
The domestic market enjoys a continued popularity for science and learning
toys as retail opportunities evolve and expand. A growing number of specialty
retail chains are thriving with this merchandising platform, including Discovery
Channel Stores, Learning Express, LeamingSmith, Natural Wanders, Noodle
Kidoodle, Zany Brainy and World Of Science. These segments comprise over 600
total locations nationwide.
Electronic commerce (i.e. retailers selling products on the Internet) has
emerged in the toy segment over the last 12 months, and DaMert has opened
several electronic commerce accounts including EToy.com, Amazon.com,
Toysmart.com and Red Rocket.com, a division of Nickelodeon. At this time, the
company also promotes its products through its own website but is not currently
offering them for direct consumer purchasing.
In 1998, for the first time in DaMert's 26 year history, the company
allowed selective testing of a few specialty toy products at Target Stores. The
success of this venture has led to product expansion in Target in 1999.
DaMert Company began international distribution of its product line in
1992. Over the last several years, popularity of the product line has grown
throughout the international community. DaMert Company currently has
distribution in over 48 countries around the world.
International sales comprised 18% of total sales in 1998, predominantly
through key distribution agreements in the major industrial countries. Volume
purchases, significant discounts and factory-direct shipping are common to major
distributors in this business segment, with a common strategy to replicate
American retail price points in all foreign markets.
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<PAGE> 612
CUSTOMERS
DaMert had over 4200 active customers in 1998. The single largest customer
represented 5.93% of sales in 1998 as compared to 2.91% of sales in 1997. The
next largest customer represented 4.67% of sales in 1998 and 4.69% of sales in
1997. Approximately 80% of sales were represented by 622 customers in 1998 as
compared to 677 customers in 1997.
MANUFACTURING
DaMert produces the majority of its products by subcontracting with a
number of independent factories located in China and Taiwan. Less than 5% of the
products are produced domestically. One independent agent is responsible for
approximately 40% of the foreign manufacturing which is spread out over many
different factories. A direct relationship between DaMert and another
manufacturer accounts for approximately another 25% of its overseas
manufacturing. Some customers require direct shipments from these factories.
However, approximately 95% of manufactured products are shipped to DaMert.
Certain minimum order requirements necessitate holding inventory in the Berkeley
warehouse in advance of expected retail sales. Most payments to factories are
made by wire transfer upon confirmation of shipment, however, DaMert's loan
facility allows a line of credit to be used for certain transactions.
SEASONALITY
The demand for DaMert's retail product has a large seasonal component, with
a majority of sales to retailers during the 3rd and 4th fiscal quarters. The
Company experiences 32-40% of its sales in the first half of the year and 60-68%
in the second half of the year.
BACKLOG
Due to the high seasonal demand of DaMert's business, all December orders
in the system were shipped by December 18, 1998. As a matter of accounting
policy, all back orders of value less than $40 were canceled. There were no
significant cancellations due to product unavailability (out of stock
merchandise). Future orders (due January 1, 1999 and beyond) in the system as of
December 31, 1998 were $176,731, an increase of $79,956 or 82.6%, from $96,775
of future orders on December 31, 1997.
PRODUCT DESIGN AND SELECTION
DaMert has established a reputation for product innovation in the area of
nature, science and learning toys and gifts. Internally, the company has created
a team of extremely capable and inventive concept and product developers.
However, over the years DaMert has built a reputation among independent
innovators as a company who can maximize their ideas in fair mutually,
beneficial relationships. This reputation, coupled with DaMert's location in the
creatively acclaimed San Francisco Bay Area, results in a continuous flow of
ideas from external sources. DaMert works with these "creative partners" in a
variety of ways including licensing, purchase of the concept, or exclusive
purchase of the manufactured product.
DaMert is fundamentally "market-oriented and product driven." Fred and Gail
DaMert, as well as the four operating executives, participate fully in the
product development process. This process starts with the creative idea and
carries all the way into product introduction and sales, and inventory
management and quality control.
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<PAGE> 613
COMPETITION
DaMert strives to be a leading innovator in each of its six major product
categories introducing 40 to 50 new additions annually. Because of the diversity
of its six product categories, DaMert has competitors in each of these areas.
Competition in DaMert's market is defined primarily as competing for the
business of the same retailers. DaMert identifies its key competitors in each
product category as follows: Puzzles/Brainteasers -- Binary Arts and Bedazzled;
Glow-in-the-Dark -- Great Explorations and Illuminations; Activity
Kits -- Creativity for Kids and Curiosity Kits; Great Gizmos (science toys) --
Wild Planet, Rainbows -- Lightrix and White Eagle, and Games -- University Games
and Briarpatch.
DaMert believes that its unique mix of product categories provides
competitive strength in two key ways. First, DaMert offers cross-merchandising
opportunities among the categories, as well as strong thematic presentations
(e.g. space, ocean, insects), allowing retailers to offer a broad range of
merchandise. These merchandising opportunities were further enhanced in 1998
when DaMert began rolling out a comprehensive look for all packaging and
presentation material, which tied together the product categories in an attempt
to build stronger overall brand recognition and preference. The second
competitive advantage offered by DaMert is the retailer's opportunity to
"consolidate vendors" and order a wide variety of merchandise from one place.
This is further supported by DaMert's low minimum order requirement and low to
no minimum case quantity requirement on many items.
PATENTS, TRADEMARKS AND LICENSES
In the normal course of business DaMert Company makes every effort to
patent or trademark internally developed concepts as well as the licensing of
patents and trademarks from submissions provided by outside developers. DaMert
currently has no "fantasy character" license. Although the procurement of
patents, trademarks and licenses does not eliminate the possibility of
infringement it has proven to be an effective deterrent to competitors.
Licenses for rights to use patents and trademarks from outside product
designers typically run for two to five years, are world wide in scope, have
automatic renewals and are transferable in the event of a change in ownership of
DaMert Company.
GOVERNMENT REGULATIONS
The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Products Safety Acts. Those
laws empower the Consumer Products Safety Commission (the "CPSC") to protect
children from hazardous products. The CPSC has the authority to exclude from the
market articles which are found to be hazardous and can require a manufacturer
to repurchase such products under certain circumstances. Any such determination
by the CPSC is subject to court review. Similar laws exist in some states and
cities in the United States and in many jurisdictions throughout the world. The
Company endeavors to comply with all applicable regulations through a program of
quality inspections and product testing. The Company maintains product liability
insurance in the amount of $4,000,000.
EMPLOYEES
As of December 31, 1998 DaMert had 31 full-time employees, all in its
Berkeley facility, consisting of 18 in marketing, sales and administration, 8 in
shipping, and 5 in
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product design and development. Seasonal warehouse personnel are hired in the
summer and fall to assist with the greater volume of orders being shipped.
PROPERTIES
On July 27, 1995, DaMert entered into a six-year lease commencing December
1, 1995, for 32,000 square feet of office and warehouse space in a building
located at 1609 Fourth Street, Berkeley, California (the "Facility"). The
Facility is located in a mixed industrial, retail and residential area 15 miles
east of San Francisco. It is divided into a 24,000 square feet of warehouse and
8,000 square feet of office. DaMert Company feels that the facility will meet
its foreseeable requirements.
The lease provides for one six-year extension option. The base monthly rent
for the initial six-year term is fixed at $23,295. Rent for the option period
shall be set at the then fair market rental rate for a similar industrial gross
lease. In addition to the base rent, DaMert is liable for its share of any
increase in operating cost over the base year operating expenses. Future minimum
rental payments per year for the lease of the Facility are $279,540 for 1999
through 2000 and $256,245 for 2001. The lease grants DaMert a right of first
refusal to lease additional portions of the building which become available.
Pursuant to the lease, Fred DaMert entered into a Lease Guaranty with the
landlord. Under the terms of the Lease Guaranty, Fred DaMert has guaranteed the
obligations of DaMert under the lease for the initial six-year term of the
lease. If there is a change in control of DaMert, the new shareholders would
have to execute a similar lease guaranty in order for Fred DaMert to be released
from the current Lease Guaranty.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Company is a party,
or of which, any of its property is subject.
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DAMERT MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding DaMert's executive
officers and directors as of April 1, 1999:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Frederick A. DaMert................ 52 Chairman of the Board and Director
Chief Executive Officer and
Gail Patton DaMert................. 48 Director
Joyce DaMert....................... 80 Director
Lynne McDonald..................... 47 Secretary of Board and Director
Greg McVey......................... 45 President
Larry Waide*....................... 45 Director of Operations
Tom Santilena...................... 50 Controller and Director of Finance
</TABLE>
- -------------------------
* Mr. Waide submitted a letter of resignation to DaMert Company effective April
29, 1999.
FREDERICK A. DAMERT. Fred DaMert is Chairman and Founder of DaMert
Company. He has owned and operated the company for 26 years, and is responsible
for creating and sourcing toy and gift products. He was a Humanities major at
San Francisco State University.
GAIL PATTON DAMERT. Gail DaMert became a member of the Board of Directors
of DaMert shortly after her marriage to Fred DaMert in 1983. In 1989, she joined
DaMert Company as the Director of Finance. In 1994, she became Chief Executive
Officer. Prior to 1989, Gail was a systems engineering manager at Lockheed
Missiles and Space Company. Gail holds a B.A. Degree in Mathematics and
Astronomy from Smith College, and a Ph.D. in Astronomy from State University of
New York at Stony Brook.
JOYCE DAMERT. Joyce DaMert is the mother of Fred DaMert and is retired and
living in Piedmont, California. She has served as the President of the Oakland
Museum Board and the Vice President of the Albert Baker Foundation. She has a
B.A. in Art from Pomona College.
LYNNE MCDONALD. Lynne McDonald was elected to the Board in 1982 and has
served as its Secretary since 1986. She has been an employee of DaMert Company
since 1981 and has held various positions in almost all functional areas of
DaMert Company including administration, accounting, sales and marketing. She is
currently the Managing Supervisor for Customer Service. Lynne holds a degree in
Early Childhood Development from St. Cloud State University.
GREG MCVEY. Greg McVey joined DaMert Company in early 1992 as Director of
Marketing and Sales, with responsibility for all product development, marketing,
promotional and sales functions. He was promoted to President in 1997. Prior to
his employment with DaMert, McVey owned his own marketing consulting business
and has held senior marketing positions at Laurel Burch, Inc. and Lucky Stores,
Inc. He holds a Liberal Arts Degree in Retail Business Administration and
Marketing from Saddleback College.
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<PAGE> 616
LARRY WAIDE. Larry Waide joined DaMert Company in 1991 to manage the
company's worldwide sourcing, manufacturing, engineering and distribution
functions. His industry experience includes R. Dakin & Company, Discovery Toys,
Child's Play USA and YES! Entertainment. He holds a B.A. degree in Mathematics
from California State University at Fresno.
TOM SANTILENA. Tom Santilena joined DaMert Company in 1994. He is
responsible for all policies and procedures concerning records, finance, and
accounting as well as human resource management. Prior to DaMert, Tom was the
company controller at Laurel Burch, Inc. and Leaseway Transportation
Corporation. He majored in Accounting at Armstrong Business College.
EMPLOYMENT ARRANGEMENTS
On April 28, 1999, DaMert entered into an employment agreement with Julie
Nunn, Director of Product Development. The agreement provides that in the event
of a change in control occurring within two years from the date of the
agreement, Nunn will continue in her present capacity with DaMert or its
successor, but her annual base salary will increase to $82,000 at the time of
the change in control. According to the employment agreement, a change of
control occurs if at least 51% of the assets of DaMert are transferred or sold
to another entity, or if DaMert is merged or consolidated with or into another
entity. Subsequent to a change in control, if Nunn's employment with DaMert or
its successor is involuntarily terminated for other than cause before the
one-year anniversary of the change in control, then DaMert or its successor will
pay Nunn four months severance pay at the rate of her then current base salary.
In 1995, DaMert established a 401K Profit Sharing Plan ("401K") for the
benefit of the employees of DaMert. Under the provisions of the 401K, employees
may make contributions on a tax deferred basis to their 401K account, up to the
legal limits provided for by United States income tax regulations. DaMert makes
a non-elective matching contribution of 10% of the employee's salary deferral.
Participants are immediately vested in the balance of their matching account.
DaMert may also make discretionary contributions at the discretion of the Board
of Directors. Such contributions are allocated between participants of the 401K
based on a pre-stated formula. Participants become vested in such discretionary
contributions as follows: 20% after two years of service and an additional 20%
each year thereafter until a participant reaches 100% at six years or more of
service. For the years ended December 31, 1997 and December 31, 1998, DaMert
made discretionary contributions of $0 and $0, respectively.
DaMert has a health insurance plan, which covers all employees in a non-
discriminatory manner. With the exception of the health insurance plan and the
401K, DaMert has no insurance or medical reimbursement plans covering its
officers or directors, nor do they contemplate implementing any such plans at
this time.
DaMert has granted stock appreciation rights ("SARs") to certain employees
pursuant to a Special Executive Incentive Compensation Plan which was
established in 1995. A participating executive is awarded by the Board of
Directors a certain number of "units" each of which is hypothetically assumed to
represent one share of stock in the company. The SARs are adjusted for dilutive
events to maintain a targeted percentage interest in DaMert until the aggregated
interests of all employees equals 20%. A participant of the plan at no time owns
any capital stock of DaMert, nor any rights of a stockholder. The SARs earn a
proportionate share of the increase in book value of
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<PAGE> 617
DaMert, payable upon a sale of at least 50%, or a public offering, of DaMert's
stock, or the termination of employment. The employees' interest in the SARs
vest 20% annually over 5 years. At the present time, the employees participating
in this plan and their percentage interests are as follows: Greg McVey, 4%;
Larry Waide, 3%. DaMert is in the process of repurchasing Mr. Waide's SARs. Mr.
McVey's SAR's are to be exchanged for 42.10 shares of DaMert common stock prior
to and in connection with the mergers.
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<PAGE> 618
DAMERT STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of May 31, 1999, with
respect to the beneficial ownership of DaMert's common stock by each person
known by DaMert to
be the beneficial owner of more than five percent of the outstanding common
stock, by each of DaMert's directors, and by the officers and directors of
DaMert as a group:
<TABLE>
<CAPTION>
SHARES OWNED PERCENT
BENEFICIAL OWNERS BENEFICIALLY OF CLASS(1)
----------------- ------------ -----------
<S> <C> <C>
Security ownership of certain beneficial owners:
Frederick A. DaMert and Gail Patton DaMert......... 1,000 100%
as Trustees of the DaMert Trust UDT
September 28, 1998
Security ownership of management:
No direct ownership, but 100% beneficial
ownership as trustees of the DaMert Trust.......... 1,000 100%
All officers and directors as a group (5 persons):... 1,000 100%
</TABLE>
- -------------------------
(1) Based upon 1,000 shares of common stock issued and outstanding on May 31,
1999.
There are no contracts or other arrangements, including any pledge of
DaMert's securities, that could result in a change in the control of the
company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1998, DaMert Company has borrowed an aggregate of
$128,849 from Fred DaMert. These are in the form of two promissory notes, the
first dated July 1, 1987 for $58,849 and the second dated November 1, 1996 for
$70,000. These notes are paying interest at the rate of 10% per annum. They were
used to supplement working capital requirements at the time they were issued.
On February 29, 1996, DaMert entered into an option agreement with Lynne
McDonald, a director, which restated a previous option agreement of March 9,
1989 and granted McDonald rights to acquire 52.63 shares of the common stock of
DaMert at an exercise price of $1.00. The option is exercisable in the event of
(a) disposition of 50% or more of DaMert's voting stock via transaction to any
person or persons or merger with any other entity in which the stockholders of
DaMert hold less than 50% of the surviving corporate entity or (b) prior to any
registered public offering. The rights granted pursuant to the option agreement
expire on March 3, 2024. The option agreement also contains an anti-dilution
clause to adjust the number of shares covered by the option for certain types of
transactions in DaMert's common stock. The rights to this option are personal to
Lynne McDonald and are not assignable.
Fred and Gail DaMert will enter into employment agreements with New Futech
in connection with the merger. See "DESCRIPTION OF THE MERGERS AND THE MERGER
AGREEMENT -- Employment Agreements with Affiliates" and "NEW FUTECH'S
MANAGEMENT -- Employment Agreements" in the prospectus/proxy statement.
35
<PAGE> 619
APPENDIX 1
CALIFORNIA GENERAL CORPORATION LAW
DISSENTERS' RIGHTS
1300. (a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301. (a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such
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<PAGE> 620
corporation shall mail to each such shareholder a notice of the approval of the
reorganization by its outstanding shares (Section 152) within 10 days after the
date of such approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304
and this section, a statement of the price determined by the corporation to
represent the fair market value of the dissenting shares, and a brief
description of the procedure to be followed if the shareholder desires to
exercise the shareholder's right under such sections. The statement of price
constitutes an offer by the corporation to purchase at the price stated any
dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
1303. (a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or
A-2
<PAGE> 621
within 30 days after any statutory or contractual conditions to the
reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. (a) If the corporation denies that the shares are dissenting shares,
or the corporation and the shareholder fail to agree upon the fair market value
of the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152) or
notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. (a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share.
Within the time fixed by the court, the appraisers, or a majority of them,
shall make and file a report in the office of the clerk of the court. Thereupon,
on the motion of any party, the report shall be submitted to the court and
considered on such evidence as the court considers relevant. If the court finds
the report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306. To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the
A-3
<PAGE> 622
corporation for the amount thereof together with interest at the legal rate on
judgments until the date of payment, but subordinate to all other creditors in
any liquidation proceeding, such debt to be payable when permissible under the
provisions of Chapter 5.
1307. Cash dividends declared and paid by the corporation upon the
dissenting shares after the date of approval of the reorganization by the
outstanding shares (Section 152) and prior to payment for the shares by the
corporation shall be credited against the total amount to be paid by the
corporation therefor.
1308. Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
1309. Dissenting shares lose their status as dissenting shares and the
holders thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310. If litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
1311. This chapter, except Section 1312, does not apply to classes of
shares whose terms and provisions specifically set forth the amount to be paid
in respect to such shares in the event of a reorganization or merger.
1312. (a) No shareholder of a corporation who has a right under this
chapter to demand payment of cash for the shares held by the shareholder shall
have any right at law or in equity to attack the validity of the reorganization
or short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
A-4
<PAGE> 623
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
A-5
<PAGE> 624
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law (the "General
Corporation Law") provides that a Delaware corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (0ther than an employee by or in the right of
the corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no cause to believe his conduct was
unlawful.
Section 145(b) provides that a Delaware corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect to any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the court in which such action or suit was brought shall
determine that despite the adjudication of liability, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) or in the defense or any claim, issue or
matter therein, he shall be indemnified against expenses actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and that the corporation may purchase and
maintain insurance on behalf of a director or officer of the corporation against
any liability asserted against him or incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liabilities under such Section 145. Section
102(b)(7) of the General Corporation Law provides that a corporation in its
original certificate of incorporation or an amendment thereto validly approved
by stockholders may eliminate or limit personal liability of members of its
board of directors or governing body for violations of a director's duty of
care. However, no such provision may eliminate or limit the liability of a
director for breaching his duty of loyalty, acting or failing to act in good
faith, engaging in intentional misconduct or knowingly violating a law, paying
an unlawful dividend or approving an unlawful stock repurchase, or obtaining an
improper personal benefit. A provision of this type has no effect on the
availability of equitable remedies, such as injunction or rescission, for breach
of fiduciary duty. The Company's Certificate of Incorporation contains such a
provision.
II-1
<PAGE> 625
The Company's Bylaws provide that the Company shall indemnify officers and
directors to the full extent permitted by and in the manner permissible under
the laws of the State of Delaware.
The holders of the Company's capital stock or warrants to purchase capital
stock who have contractual registration rights are required to be indemnified by
the Company against losses, claims, damages or liabilities arising out of any
untrue statement of a material fact or omission thereof in a Registration
Statement under the Securities Act of 1933. The Company's obligation to
indemnify such holders includes the officers, directors and partners of such
holders, some of whom are currently directors of the Company. The Company shall
not be liable for any such indemnity to the extent that any such loss, claim,
damage or liability arises out of or is based upon any untrue statement or
material omission in reliance upon and in conformity with written information
furnished by such person to the Company, specifically for use therein.
The indemnification provided as set forth above is not exclusive of any
rights to which a director or officer of the Company may be entitled. The
general effect of the foregoing provisions may be to reduce the circumstances in
which a director or officer may be required to bear the economic burdens of the
foregoing liabilities and expenses.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
See Exhibit Index following the Signatures page which is incorporated
herein by reference.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because they are not applicable or are not
required or the information required to be set forth herein is included in the
Financial Statements or Notes thereto.
ITEM 22. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes as follows: that prior to
any public offering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
Registrant undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 (the "Act")
and is used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Registration Statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus/Joint Proxy
Statement
II-2
<PAGE> 626
pursuant to Items 4, (10(b), 11 or 13 of Form S-4, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of respecting to the request.
(4) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Act, as
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in a
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy, as expressed in the Act, and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 627
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrants, Futech Interactive Products (Delaware) Inc. and Futech Toys &
Games, Inc. certify that they have duly caused this amendment to the
registration statement to be signed on their behalf by the undersigned,
thereunto duly authorized in the City of Phoenix, State of Arizona, on the 6th
day of August, 1999.
FUTECH INTERACTIVE PRODUCTS (DELAWARE)
INC.
By: /s/ VINCENT W. GOETT
------------------------------------
Vincent W. Goett
President
FUTECH TOYS & GAMES, INC.
By: /s/ VINCENT W. GOETT
------------------------------------
Vincent W. Goett
President
S-1
<PAGE> 628
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.
<TABLE>
<CAPTION>
PERSON TITLE DATE
------ ----- ----
<C> <S> <C>
/s/ VINCENT W. GOETT* Chairman of the Board, August 6, 1999
- ----------------------------------------------------- President, Chief Executive
Vincent W. Goett Officer and Director
(Principal Executive
Officer)
/s/ JOSEPH K. PETTER* Chief Operating Officer August 6, 1999
- -----------------------------------------------------
Joseph K. Petter
/s/ FREDERICK B. GRETSCH, SR. Chief Financial Officer, August 6, 1999
- ----------------------------------------------------- Treasurer and Secretary
Frederick B. Gretsch, Sr. (Principal Financial and
Accounting Officer)
/s/ CARL E. VOIGT, IV* Vice President of Games/Toys August 6, 1999
- ----------------------------------------------------- and Director
Carl E. Voigt, IV
/s/ WILLIAM W. BURNHAM* Vice President of Speciality August 6, 1999
- ----------------------------------------------------- Items and Director
William W. Burnham
/s/ RODERICK L. TURNER* Director August 6, 1999
- -----------------------------------------------------
Roderick L. Turner
/s/ GARY A. OMAN* Director August 6, 1999
- -----------------------------------------------------
Gary A. Oman
/s/ ROBERT J. ROSEPINK* Director August 6, 1999
- -----------------------------------------------------
Robert J. Rosepink
/s/ F. KEITH WITHYCOMBE* Director August 6, 1999
- -----------------------------------------------------
F. Keith Withycombe
</TABLE>
S-2
<PAGE> 629
FUTECH TOYS & GAMES, INC.
<TABLE>
<CAPTION>
PERSON TITLE DATE
------ ----- ----
<C> <S> <C>
/s/ CARL E. VOIGT, IV* President and Director August 6, 1999
- ----------------------------------------------------- (Principal Executive
Carl E. Voigt, IV Officer)
/s/ CARL E. VOIGT, III* Vice President August 6, 1999
- -----------------------------------------------------
Carl E. Voigt, III
/s/ FREDERICK B. GRETSCH, SR. Secretary, Treasurer and August 6, 1999
- ----------------------------------------------------- Director (Principal
Frederick B. Gretsch, Sr. Financial and Accounting
Officer)
/s/ VINCENT W. GOETT* Director August 6, 1999
- -----------------------------------------------------
Vincent W. Goett
</TABLE>
* /s/ FREDERICK B. GRETSCH, SR.
------------------------------------
Pursuant to a Power of Attorney
dated June 7, 1999, included on
the signature page to the
Registrant's
Registration Statement on Form S-4
(Registration No. 333-80131)
S-3
<PAGE> 630
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
2.1FT Agreement for Purchase and (1)
Sale of Assets dated
September 30, 1997 by and
between Gick Publishing, a
California Corporation,
James W. and Terri L. Gick,
and Futech Educational
Products, Inc. ("Futech")
2.2FT Agreement for Purchase and (1)
Sale of Assets dated as of
October 17, 1997 by and
between XYZ Group Inc. and
Futech
2.3FT Amendment to Agreement for X
Purchase and Sale of Assets
dated December 31, 1997 by
and between XYZ Group Inc.
and Futech
2.4FT Second Amendment to X
Agreement for Purchase and
Sale of Assets dated April
29, 1998 by and between XYZ
Group Inc. and Futech
2.5FT Stock Purchase and Sale (1)
Agreement dated as of
September 30, 1998 by and
between Les Friedland, Dan
Lesnick, Howard W. Moore and
Helen Z. Moore Revocable
Trust, dated November 1,
1996, Howard Moore
Associates, Inc., Defined
Benefit Plan & Trust, Howard
Moore Associates, Inc. and
Howard W. Moore and Futech
3.1FT Amended and Restated (1)
Articles of Incorporation of
Futech
3.1J Articles of Incorporation of Filed as Exhibit 3.1 to
Pacific Acquisitions, Inc. Janex's Registration
as filed July 28, 1986 Statement on Form 8-A (file
00017929) and incorporated
herein by reference
3.1T Certificate of Incorporation Filed as Exhibit 3a. to
of Trudy Corporation Trudy's Registration
("Trudy"), Statement on
</TABLE>
<PAGE> 631
<TABLE>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
as adopted February 24, 1987 Form S-18 (file 33-4379B)
dated May 22, 1987 and
<CAPTION>
<C> <S> <C> <C>
3.1FD Articles of Incorporation of (1)
Fundex Games, Ltd.
("Fundex") dated July 16,
1996
3.1D Articles of Incorporation of (1)
DaMert Company ("DaMert"),
dated January 31, 1979
3.2FT Amended and Restated Bylaws (1)
of Futech
3.2J Articles of Amendment to the Filed as Exhibit 3.2 to
Articles of Incorporation of Janex's Registration
Pacific Acquisitions, Inc. Statement on Form S-1 (file
as adopted July 18, 1988 00017929) dated August 8,
1990 and incorporated herein
by reference
3.2T Agreement of Merger, dated (1)
as of March 23, 1987 between
Trudy Corporation, a
Connecticut Corporation, and
Trudy, a Delaware
corporation
3.2FD Certificate of Amendment to (1)
Fundex dated August 24, 1997
3.2D By-Laws of DaMert, as (1)
adopted March 25, 1979
3.3J Statement of Resolution Filed as Exhibit 3.3 to
Establishing Series for Janex's Registration
Shares as adopted October 4, Statement on Form S-1 (file
1988 00017929) dated August 8,
1990 and incorporated herein
by reference
3.3T Certificate of Amendment of Filed as Exhibit 3b. to
Certificate of Incorporation Trudy's Registration
of Trudy, as adopted May 13, Statement on Form S-18 (file
1987 33-4379B) dated May 22, 1987
and incorporated herein by
reference
3.3FD Bylaws of Fundex (1)
</TABLE>
<PAGE> 632
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
3.4J Articles of Amendment to the Filed as Exhibit 3.4 to
Articles of Incorporation of Janex's Registration
With Design In Mind Statement on Form S-1 (file
International, Inc. as 00017929) dated August 8,
adopted July 11, 1990 1990 and incorporated herein
by reference
3.4T Bylaws of Trudy Filed as Exhibit 3c. to
Trudy's Registration
Statement on Form S-18 (file
33-4379B) dated May 22, 1987
and incorporated herein by
reference
3.5J Articles of Amendment to the Filed as Exhibit 3.6 to
Articles of Incorporation of Janex's Registration
With Design In Mind Statement on Form S-A (file
International, Inc. as 00017929) dated December 20,
adopted August 11, 1994 1994 and incorporated herein
by reference
3.6J Articles of Amendment to the (1)
Articles of Incorporation of
Janex International, Inc. as
adopted December 11, 1998
3.7J Certificate of Correction (1)
for Articles of Amendment to
the Articles of
Incorporation of Janex
3.8J Bylaws of Janex Filed as Exhibit 3.6 to
Janex's Registration
Statement on Form 8-A (file
00017929) dated August 15,
1989 and incorporated herein
by reference
3.9J Amendment to Article IV of (1)
the Bylaws of With Design In
Mind International, Inc.
dated September 3, 1991
4.1FT Section 4.1 of the Amended (1)
and Restated Articles of
Incorporation of Futech. See
Exhibit 3.1FT
</TABLE>
<PAGE> 633
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
4.1J Articles IV, V, VI, X, XI,
XII, XIII, XIV, and XV of
the Articles of
Incorporation of Janex, as
amended. See Exhibits 3.1J
(Incorporated by Reference)
to 3.7J
4.1T Articles 4, 9, 10, 11 and 12 Filed as Exhibit 3 a. to
of the Certificate of Trudy's Registration
Incorporation of Trudy Statement on Form S-18 (file
Corporation. See Exhibit 33-4379B) dated May 22, 1987
3.1T and Exhibit 3.3T and incorporated herein by
reference
4.1FD Sections 3.2 and 3.3 of the (1)
Articles of Incorporation of
Fundex Games, Ltd. See
Exhibit 3.2
4.1D Articles IV, V, VI and VIII (1)
of the By-Laws of DaMert.
See Exhibit 3.2D
4.2FT Articles II, III, VI and VII (1)
of the Amended and Restated
Bylaws of Futech. See
Exhibit 3.2FT
4.2J Articles II, VI, and VIII of
the Bylaws of Janex, as
amended. See Exhibits 3.8J
(Incorporated by Reference)
to 3.9J
4.2T Articles 5 and 6 of the (1)
Agreement of Merger, dated
as of March 23, 1987 between
Trudy Corporation, a
Connecticut corporation, and
Trudy Corporation, a
Delaware corporation. See
Exhibit 3.2T
4.2FD Articles 11, VIII, and IX of (1)
the Bylaws of Fundex Games,
Ltd. See Exhibit 3.3
4.2D Specimen Common Stock *
Certificate of DaMert
4.3FT Specimen Common Stock
Certificate of Futech
</TABLE>
<PAGE> 634
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
4.3J Specimen Common Stock Filed as Exhibit 4.1 to
Certificate Janex's Registration
Statement on Form S-1 (file
00017929) dated August 8,
1990 and incorporated herein
by reference
4.3T Articles 11, 111, V, IX and Filed as Exhibit 3 b. to
X of the Bylaws Trudy Trudy's Registration
Statement on Form S-18 (file
33-4379B) dated May 22, 1987
and incorporated herein by
reference
4.3FD Specimen Stock Certificate *
4.4FT Stock Restrictions and Sale (1)
Agreement dated January 27,
1994 by and between Vincent
W.Goett and Melissa Turner
Goett and Futech
4.4T Specimen Common Stock *
Certificate of Trudy
4.5FT Stock Purchase Agreement (1)
dated January 27, 1994 by
and between Vincent W. Goett
and Melissa Turner Goett and
Futech
4.6FT First Amendment to Stock (1)
Purchase Agreement dated
February 7, 1994 by and
among Vincent W. Goett and
Melissa Turner Goett, Gary
and Darilyne Goett, and
Futech
4.7FT First Amendment to Stock (1)
Restrictions and Sale
Agreement dated February 7,
1994, by and between Vincent
W. Goett and Melissa Turner
Goett and Futech
4.8FT Registration Rights (1)
Agreement dated January 5,
1998 by and between Manmohan
Singh Bhatia and Futech
</TABLE>
<PAGE> 635
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
4.9J Settlement Warrant Agreement Filed as Exhibit 4.9 to
dated March 26, 1996 by and Janex's Registration
between Janex and Deco Disc Statement on Form 10-KSB
Industries, Inc. (file 00017929) for the
fiscal year ended December
31, 1995 and incorporated
herein by reference
8.1FT Form of Tax Opinion of *
Quarles & Brady LLP
8.1J Form of Tax Opinion of *
Quarles & Brady LLP
8.1T Form of Tax Opinion of *
Quarles & Brady LLP
8.1FD Form of Tax Opinion of *
Quarles & Brady LLP
8.1D Form of Tax Opinion of *
Quarles & Brady LLP
9.1FT Voting Agreement dated (1)
December 3, 1998 by the
shareholders of Futech or
the benefit of F. Keith
Withycombe and Patricia A.
Withycombe
10.1FT Lease Agreement dated August (1)
5, 1996 by and between
Concord Equities, L.L.C. and
Futech
10.1T Security Interest Agreement (1)
dated May 16, 1991 between
Trudy and William W. Burnham
regarding Mr. Burnham
hypothecating and assigning
his personal Investment
Savings Account at Union
Trust as collateral for
Trudy to effect the opening
of the Letters of Credit for
$8,160 and $28,300
10.1FD Warrant Agreement dated as (1)
of August 31, 1996 by and
among Fundex and Toy
Paradise Partnership
</TABLE>
<PAGE> 636
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.1D Option to Purchase Corporate (1)
Common Stock dated February
29, 1996 by and between
DaMert and Lynne McDonald
10.2FT 1998 Stock Option Plan for (1)
Futech
10.2T Security Interest Agreement (1)
(#2) dated July 31, 1991
between Trudy and William W.
Burnham regarding a $16,000
loan
10.2FD Purchase Agreement dated (1)
March , 1997 between
Fundex and Harbor Court LP1
10.2D Employment Agreement dated (1)
April 28, 1999 between
DaMert and Julie Nunn
10.3FT Employment Agreement dated (1)
December 31, 1997 by and
between Vincent Goett and
Futech
10.3T Security Interest Agreement (1)
(#3) dated August 5, 1991
between Trudy and William W.
Burnham regarding Mr.
Burnham hypothecating and
assigning his personal
Investment Savings Account
and Union Trust as
collateral for Trudy to
effect the opening of the
Letters of Credit for
$12,960 for T.E. Squirrels
and $11,180 for Wolves
10.3FD Fundex 1996 Stock Option (1)
Plan for Non-Employee
Directors Terms and
Conditions
10.3D Credit Agreement dated (1)
December 15, 1998 by and
between DaMert and Wells
Fargo Bank, N.A.
10.4FT Confidentiality Agreement (1)
dated September 2, 1997 by
and between Fred B. Gretsch
and Futech
</TABLE>
<PAGE> 637
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.4T Security Interest Agreement (1)
(#4) dated August 20, 1991
between Trudy and William S.
Burnham regarding a $30,000
loan
10.4(A)FD Fundex 1996 Stock Option (1)
Plan for Non-Employee
Directors
10.4(B)FD Fundex Gamer, LTD. 1996 (1)
Stock Option Plan for Non-
Employee Directors
nonstatutory Stock Option
Agreement
10.4D Corporation Promissory Note (1)
dated July 1, 1987 of DaMert
and payable to Frederick A.
DaMert
10.5FT Futech Employment Contract (1)
dated September 2, 1997 by
and between Fred B. Gretsch
and Futech
10.5T Security Interest Agreement (1)
(#5) dated September 5, 1991
between Trudy and William W.
Burnham regarding a $30,000
loan
10.5FD Fundex 1996 Employee Stock (1)
Option Plan
10.5D Office Lease dated July 27, (1)
1995 by and between Cedar/
Fourth Street Partners and
DaMert
10.6FT Agreement Regarding (1)
Confidentiality Information
and Technology dated March
4, 1996 by and between
Joseph K. Petter and Futech
</TABLE>
<PAGE> 638
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.6T Security Interest Agreement (1)
(#6) dated October 18, 1991
between Trudy and William W.
Burnham regarding a $10,000
loan
10.6FD Fundex 1996 Stock Option (1)
Plan Nonstatutory Stock
Option Agreement
10.6D Finder Agreement dated June (1)
15, 1998 by and between
CorDev Corporation and
DaMert
10.7FT Futech Employment Contract (1)
dated February 1, 1997 by
and between Joseph K. Petter
and Futech
10.7T Security Interest Agreement (1)
(#7) dated January 24, 1992
between Trudy and William W.
Burnham regarding a $12,500
loan
10.7FD Fundex Nonstatutory Employee (1)
Stock Option Agreement
10.7D Special Executive Incentive (1)
Compensation Plan Agreement
dated July 13, 1995 by and
between DaMert and Gregory
McVey
10.8FT Agreement Regarding (1)
Inventions dated October 17,
1997 by and between Zeb
Billings and Futech
10.8T Security Interest Agreement (1)
(#9) dated April 30, 1992
between Trudy and William W.
Burnham regarding a $15,000
loan
10.8FD Fundex Stock Purchase (1)
Agreement
10.8D Special Executive Incentive (1)
Compensation Plan Agreement
dated November 30, 1995 by
and between DaMert and Larry
A. Waide
</TABLE>
<PAGE> 639
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.9FT Agreement dated August 14, (1)
1996 by and between Golden
Books Family Entertainment,
Inc. and Futech
10.9T Security Interest Agreement (1)
(#12) dated August 25, 1992
between Trudy and William N.
Burnham regarding a $16,000
loan
10.9FD Fundex Incentive Stock (1)
Option Agreement
10.9D Master License Agreement
dated November 1, 1994 by
and between Dan Gilbert,
Inc., d.b.a. Dan Gilbert Art
Group and DaMert
10.10FT Operating Agreement of (1)
Little Tiger Press U.S.A.,
L.L.C.
10.10T Security Interest Agreement (1)
(#13) dated September 25,
1992 between Trudy and
William W. Burnham regarding
a $50,000 loan
10.10FD Credit and Security (1)
Agreement dated October 30,
1998 between Fundex and
Norwest Business Credit,
Inc.
10.11FT Distribution Agreement dated (1)
January 5, 1998 by and
between Little Tiger Press
USA, L.L.C. and Futech
10.11T Security Interest Agreement (1)
(#14) dated October 5, 1992
between Trudy and William W.
Burnham regarding a $13,000
loan
10.11FD Business Loan Note with (1)
Covenants in an amount up to
$1,000,000 dated August 27,
1998 payable to Liberty
Bidco Investment Corporation
("Liberty")
</TABLE>
<PAGE> 640
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.12FT Consulting Agreement dated (1)
January 5, 1998 by and
between Manmohan Singh
Bhatia and Little Tiger
Press USA, L.L.C.
10.12J Settlement Agreement dated Filed as Exhibit 10.13 to
October 17, 1994, by and Janex's Registration
between Janex and Dentsu Statement on Form 8-K (File
Prox Inc. 00017929) dated October 14,
1994 and incorporated herein
by reference
10.12T Security Interest Agreement (1)
(#15) dated March 12, 1993
between Trudy and William W.
Burnham regarding a $45,000
loan
10.12FD Continuing Security (1)
Agreement dated August 27,
1998 between Liberty and
Fundex
10.13FT Co-Publishing Agreement (1)
(U.S. Materials) dated
January 5, 1998 by and
between Magi Publications
and Little Tiger Press USA,
L.L.C.
10.13T Security Interest Agreement (1)
(#16) dated May 19, 1993
between Trudy and William W.
Burnham regarding a $15,000
loan
10.13FD Revenue and Participation (1)
Agreement dated August 27,
1998 between Liberty and
Fundex
10.14FT Co-Publishing Agreement (1)
(U.K. Materials) dated
January 5, 1998 by and
between Magi Publications
and Little Tiger Press USA,
L.L.C.
10.14T Security Interest Agreement (1)
(#17) dated March 29, 1995
between Trudy and William W.
Burnham regarding a $4,800
loan
</TABLE>
<PAGE> 641
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.14FD Articles of Merger dated (1)
August 27, 1996 of Third
Quarter, Inc. with and into
Fundex
10.15FT Multiple Advance Promissory (1)
Note dated January 5, 1998
by Little Tiger Press USA,
L.L.C. to the order of
Futech
10.15T Security Interest Agreement (1)
(#18) dated July 10, 1998
between Trudy and William W.
Burnham regarding a $28,900
loan
10.15FD Lease Agreement dated (1)
January 8, 1997 by and
between Dugan Realty, L.L.C.
and Fundex
10.16FT Registration Rights (1)
Agreement dated January 5,
1998 by and between Manmohan
Singh Bhatia and Futech
10.16T Security Interest Agreement (1)
(#19) dated August 5, 1998
between Trudy and William W.
Burnham regarding a $310,000
loan
10.16FD Agreement dated May 21, 1993 (1)
by and between Random Games,
Inc.dba Random Games & Toys
and Third Quarter
Corporation
10.17T Loan Agreement dated March (1)
30, 1998 between First Union
National Bank and Trudy
10.17FD Assignment of Intellectual (1)
Property Rights dated August
1, 1996 among Carl E. Voigt,
III, Carl E. Voigt, IV, and
Third Quarter Corporation.
</TABLE>
<PAGE> 642
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.18J Settlement Agreement and Filed as Exhibit 10.19 to
Specific Release by and Janex's Registration
between Janex, Deco Disc Statement on Form 10-KSB
Industries, Inc., and its (filed 00017929) for the
shareholders, Donald fiscal year ended December
Spector, Michael Deutch, 31, 1995 and incorporated
Barbara Carver and James herein by reference
McGraw dated March 26, 1996
10.18T Security Agreement dated (1)
March 30, 1998 between First
Union National Bank and
Trudy
10.18FD Addendum to Agreement dated (1)
December 18, 1986 by and
between K & K International,
Kenneth Johnson, and Carl E.
Voigt, III and Carl E.
Voigt.
10.19T First Union Bank (1)
Modification Number Two to
Loan Agreement dated March
1, 1999.
10.19FD License Agreement dated (1)
November 1, 1995 by and
between Hollywood Ventures
Corporation and Third
Quarter Corporation dba
Fundex
10.20T Landlord Subordination and (1)
Waiver dated March 30, 1998
between First Union National
Bank and Noreast Management
LLC
10.20FD License Agreement dated June (1)
1, 1996 by and between
Hollywood Ventures
corporation and Third
quarter Corporation dba
Fundex
10.21FT Agreement dated August 7, (1)
1996 by and between Stephen
I. McTaggart and Futech
10.21T Promissory Note dated March (1)
30, 1998 in the amount of
$1,200,000 by Trudy d/b/a
TMC Soundprints in favor of
First Union National Bank
</TABLE>
<PAGE> 643
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.22FT Agreement to amend payment (1)
terms of patent-related and
royalty promissory notes
dated March 27, 1997 by and
between Vincent W. Goett,
Stephen I. McTaggart, and
Debra McTaggart
10.22T Promissory Note dated March (1)
30, 1998 in the amount of
$250,000 by Trudy d/b/a TMC
Soundprints in favor of
First Union National Bank
10.23FT Agreement for Purchase and (1)
Sale of Assets dated October
29, 1997 by and between
Newtech Consulting, Inc. and
Futech
10.23T Lease Agreement between (1)
Noreast Management LLC and
TMC/Soundprints, Inc.
(Trudy) dated December 5,
1994
10.24FT Promissory Note in the (1)
principal amount of
$2,000,000 dated October 29,
1997 by Futech to the order
of Newtech Consulting, Inc.
10.24T The Nature Conservancy (1)
letter of understanding with
Soundprints (Trudy) dated
December 5, 1994
10.25FT Agreement for Purchase and (1)
Sale of Assets dated
December 31, 1997 by and
between Newtech Consulting,
Inc. and Futech
10.25J Form of Indemnification (1)
Agreement wherein Janex
Company is indemnifying its
former accountants BDO
Seidman, LLP for claims
arising out of the
reissuance of the Company's
1997 financial statements.
</TABLE>
<PAGE> 644
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.25T Smithsonian/Soundprints (1)
Agreement dated June 17,1997
between Smithsonian
Institution and Soundprints,
a division of Trudy
10.26FT Agreement for Reassignment (1)
of Promissory Note dated
January 21, 1998 by and
between Newtech Consulting,
Inc., Vincent W. Goett and
Futech
10.26T Consent to Assignment of the (1)
June 17, 1997 Smithsonian/
Soundprints; Agreement from
Soundprints; to Futech
Interactive Products, dated
March 3, 1999
10.27FT Consulting Agreement dated (1)
January 28, 1998 by and
between Stephen McTaggart
and Futech
10.27T Trudy 1987 Stock Option Plan (1)
10.28FT Promissory Note in the (1)
amount of $1,130,000 dated
June 1, 1995 by and between
Vincent W. Goett and Futech
10.29FT Financing Agreement dated (1)
August 1, 1995 for
$7,000,000 by and between
Republic Acceptance
Corporation and XYZ Group,
Inc.
10.30FT Amendment to Financing (1)
Agreement dated July 25,
1996 by and between XYZ
Group, Inc. and Republic
Acceptance Corporation
10.31FT Guaranty of Payment for (1)
Existing and/or Future
Indebtedness dated August 4,
1995
10.32FT Assignment of Life Insurance (1)
Policy As Collateral dated
August 1, 1995
</TABLE>
<PAGE> 645
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.33FT Subordination Agreement (1)
dated August 1, 1995 by and
between Republic Acceptance
Corporation, Gary R.
Billings and XYZ Group, Inc.
10.34FT Subordination Agreement (1)
dated August 1, 1995 by and
between Republic Acceptance
Corporation, Gary Billings,
as legal guardian for
Allison Billings, a minor,
and XYZ Group, Inc.
10.35FT Loan Agreement dated (1)
December 12, 1995 for
$1,000,000 by and between
Roderick L. Turner, Garry
Goett and Vincent W. Goett
and Futech
10.36FT Master Promissory Note in (1)
the principal amount of
$1,000,000 dated December
12, 1995 payable to Roderick
L. Turner, Garry Goett and
Vincent W. Goett
10.37FT Shareholder Loan and Master (1)
Promissory Note for Credit
Line Agreement dated January
1, 1997 between Vincent W.
Goett and Futech
10.38FT Final Resolution on Loan Due (1)
dated February 26, 1997
executed by Vincent W. Goett
10.39FT Promissory Note in the (1)
principal amount of $350,000
dated April 2, 1997 payable
to Vincent W. Goett
10.40FT Stock Option and Loan (1)
Agreement dated April 4,
1997 by and between Roderick
L. Turner and Futech
10.41FT Promissory Note in the (1)
principal amount of
$1,000,000 dated April 25,
1997 payable to Roderick
Turner and Vincent W. Goett
</TABLE>
<PAGE> 646
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.42FT Addendum 1 to Promissory (1)
Note for $1 Million loaned
to Futech by Roderick Turner
and Vincent W. Goett dated
April 25, 1997
10.43FT Addendum 2 to Promissory (1)
Note for $1 Million loaned
to Futech by Roderick Turner
and Vincent W. Goett dated
September 2, 1997
10.44FT Promissory Note in the (1)
principal amount of $250,000
dated October 29, 1997
payable to Roderick Turner
and Vincent W. Goett
10.45FT Financing Agreement dated (1)
March 31, 1998 by and
between U.S. Bancorp
Republic Commercial Finance,
Inc. and Futech
10.46FT Collateral Assignment of (1)
Patents dated March 31, 1998
by and between U.S. Bancorp
Republic Commercial Finance,
Inc. and Futech
10.47FT Collateral Assignment of (1)
Trademarks dated March 31,
1998 by and between U.S.
Bancorp Republic Commercial
Finance, Inc. and Futech
10.48FT Personal Guarantee Agreement (1)
and Promissory Note made and
entered into March 31, 1998
by and between Vincent W.
Goett and Futech
10.49FT Promissory Note for $1.5 (1)
Million loan to Futech from
Roderick L. Turner and
Vincent W. Goett
10.50FT Promissory Note for $1 (1)
Million credit line to
Futech from Roderick L.
Turner and Vincent W. Goett
</TABLE>
<PAGE> 647
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.51FT First Amendment to Financing (1)
Agreement dated July 2, 1998
by and between U.S. Bancorp
Republic Commercial Finance,
Inc. and Futech
10.52FT Promissory Note in the (1)
principal amount of
$2,000,000 dated August 10,
1998 payable to The Chase
Manhattan Bank by Futech
10.53FT Promissory Note Agreement (1)
for $2.0 Million Loan to
Futech from Melissa Turner
Goett and Vincent W. Goett
made and entered into August
10, 1998
10.54FT Business Loan Agreement (1)
dated December 1, 1998
between Bank of America
National Trust and Savings
Association and Futech
10.55FT Guarantor Agreement relating (1)
to $7 million line of credit
dated December 3, 1998 by
and between Vincent W. Goett
and Futech
10.56FT Futech Stock Purchase (1)
Warrant for Robert J.
Rosepink to purchase
4,000,000 shares of common
stock dated December 3, 1998
10.57FT Futech Stock Purchase (1)
Warrant for Palmilla
Management Trust to purchase
21,000,000 shares of common
stock dated December 3, 1998
10.58FT Futech Stock Purchase (1)
Warrant for F. Keith
Withycombe and Patricia A.
Withycombe to purchase
21,000,000 shares of common
stock dated December 3, 1998
</TABLE>
<PAGE> 648
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
10.59FT Master Promissory Note for (1)
Loan and/or Credit Line
Agreements for a principal
amount totaling $8,000,000,
dated December 15, 1998 by
and between Vincent W.
Goett, Roderick L. Turner
and Futech
10.60FT Collateral Agreements (1)
regarding transfer of the
secured interests of.
Roderick L. Turner, Terry C.
Turner and T. Valdetaire
Turner to The Chase
Manhattan Bank
10.61FT Subordination, Priority and (1)
Security Agreement dated
December 3, 1998 by and
among Vincent W. Goett, F.
Keith Withycombe and
Patricia A. Withycombe and
Futech
10.62FT Cash Advance Conversion (1)
Agreement dated March 1,
1999 by and between Roderick
L. Turner and Futech
10.63FT F. Keith Withycombe Business X
Loan Agreement dated May 21,
1999
21.J Subsidiaries of Janex:
1) With Design in Mind, a
California corporation, a
wholly-owned subsidiary
2) Janex Corporation, a New
Jersey corporation, a
wholly-owned subsidiary
3) Pro Gain Company Limited,
a Hong Kong corporation,
a wholly-owned subsidiary
4) Malibu Fun Stuffed, Inc.,
a California corporation, a
wholly-owned subsidiary
5) Malibu Fun Stuffed
International Limited, a
Hong Kong corporation, a
wholly-owned subsidiary
23.1FT Consent of Ernst & Young X
LLP, Independent Auditors
</TABLE>
<PAGE> 649
<TABLE>
<CAPTION>
EXHIBIT FILED
NO. DESCRIPTION INCORPORATED BY REFERENCE TO: HEREWITH
- ------- ----------- ----------------------------- --------
<C> <S> <C> <C>
23.1J Consent of BDO Seidman, LLP X
23.1T Consent of Abrams and X
Company, P.C.
23.1FD Consent of BDO Seidman LLP X
23.1D Consent of Armanino McKenna X
LLP
23.1G Consent of Sparks, Nelson & X
Jacobson, CPAs
23.1X Consent of Virchow, Krause & X
Company, LLP
23.2FT Consent of Quarles & Brady *
LLP
23.2J Consent of Quarles & Brady *
LLP
23.2T Consent of Quarles & Brady *
LLP
23.2FD Consent of Quarles & Brady *
LLP
23.2D Consent of Quarles & Brady *
LLP
23.3J Consent of Ernst & Young X
LLP, Independent Auditors
23.3T Consent of Ernst & Young X
LLP, Independent Auditors
23.3X Consent of Virchow, Krause & X
Company, LLP
24.FT [Power of Attorney]
24.J [Power of Attorney]
24.T [Power of Attorney]
24.FD [Power of Attorney]
24.D [Power of Attorney]
27.FT Financial Data Schedule (1)
27.J Financial Data Schedule (1)
27.T Financial Data Schedule (1)
27.FD Financial Data Schedule (1)
27.D Financial Data Schedule (1)
</TABLE>
- -------------------------
* To be filed by Amendment
(1) Previously filed, with Registration Statement on Form S-4 (Filed 333-80131)
Dated June 7, 1999.
<PAGE> 1
Exhibit 2.3FT
AMENDMENT TO AGREEMENT
FOR
PURCHASE AND SALE OF ASSETS
THIS AMENDMENT is made as of the 31st day of December, 1997, by and between
XYZ Group Inc., a Wisconsin corporation ("Seller") and Futech Educational
Products, Inc., an Arizona corporation ("Buyer").
RECITALS:
A. Seller and Buyer entered into an Agreement for Purchase and Sale of
Assets, dated October 17, 1997 (the "Sale Agreement").
B. The parties desire to amend the Sale Agreement on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound,
the parties hereto agree as follows:
TERMS:
1. Sections 2.1.2 through 2.1.5, and the first paragraph of Section 2.1.6,
are hereby deleted in their entirety and replaced with the following:
2.1.2 $1,667,334.00 of Futech Stock (defined below), valued at the
Closing Value, payable at the Closing or as soon as is practicable
thereafter. The term "Closing Value" is used herein shall be determined by
dividing (i) the total investment made in Futech at the time of the Private
Placement Offering by new shareholders acquiring Futech Stock as part of
the Private Placement Offering, by (ii) the number of shares those
investors receive for their investment;
2.1.3 This Section is intentionally omitted.
2.1.4 $1,332,666.00 of Futech Stock (defined below), valued as of
December 31, 1998 if Futech has by that date had an Initial Public
Offering, and valued at the Closing Value if Futech has not by that date
had an Initial Public Offering, payable within thirty days after said date
if and only if: (i) the "Net Sales" (defined below) of the Business for the
calendar year 1998 are at least 115% of the calendar year 1997 Net Sales,
and (ii) a "Billings Termination" (defined below) has not occurred prior to
said date;
2.1.5 $500,000.00 of Futech Stock (defined below), valued as of
January 1, 1999 if Futech has by that date had an Initial Public
Offering, and valued at the Closing Value if Futech has not by that date
had an Initial Public Offering, payable within thirty days after said date
if and only if: (i) the "Net Sales of All Futech Entities" (defined below)
for the calendar year 1998 are at least 120% of the calendar year 1997 Net
Sales of All Futech Entities, and (ii) a "Billings Termination" (defined
below) has not occurred prior to said date:
2.1.6 $500,000.00 of Futech Stock (defined below), valued as of
January 1,
<PAGE> 2
2000 if Futech has by that date had an Initial Public Offering, and
valued at the Closing Value if Futech has not by that date had an
Initial Public Offering, payable within thirty days after said date if
and only if: (i) the "Net Sales of All Futech Entities" (defined
below) for the calendar year 1999 are at least 120% of the calendar
year 1998 Net Sales of All Futech Entities, and (ii) a "Billings
Termination" (defined below) has not occurred prior to said date;
2. Sections 2.3 and 2.4 are hereby deleted in their entirety.
3. Section 7.15 is hereby deleted in its entirety.
4. The words "and the funds described in Section 2.1.2 above" are hereby
deleted from the first sentence in the second paragraph of Section 8.2.
5. Section 7.7 is hereby deleted in its entirety and replaced with the
following:
7.7 Buyer closing its Private Placement Offering, or other
financing acceptable to Buyer, on terms acceptable to Buyer;
6. The first sentence of Section 8.1 is hereby deleted in its entirety
and replaced with the following:
The closing of the Transaction (the "Closing") shall occur
simultaneously with the closing of Buyer's Private Placement Offering,
or other financing acceptable to Buyer, on a date prior to May 1, 1998
selected by Buyer.
7. Except as expressly called for in this Amendment, the Sale Agreement
continues unmodified and in full force and effect.
8. This Amendment may be executed by the parties in one or more
counterparts, and any number of counterparts signed in the aggregate by the
parties shall constitute a single instrument. The parties authorize and agree
to accept facsimile signatures in counterparts to this Agreement, and that said
facsimile signatures shall for all purposes be binding upon the parties as if
the same were originals.
SELLER: XYZ Group Inc., a Wisconsin corporation
By: /s/ Gary Roy Billings
-----------------------------------
Gary Roy ("Joe") Billings, President
BUYER: Futech Educational Products, Inc.,
an Arizona corporation
By: /s/ Vincent W. Goett
-----------------------------------
Vincent W. Goett, President
2
<PAGE> 1
Exhibit 2.4FT
SECOND AMENDMENT TO AGREEMENT
FOR
PURCHASE AND SALE OF ASSETS
THIS AMENDMENT is made as of the 29th day of April, 1998, by and between
XYZ Group Inc., a Wisconsin corporation ("Seller") and Futech Interactive
Products, Inc., an Arizona corporation, formerly Futech Educational Products,
Inc., an Arizona corporation ("Buyer").
R E C I T A L S:
A. Seller and Buyer entered into an Agreement for Purchase and Sale of
Assets, dated October 17, 1997, and amended the same pursuant to an Amendment
to Agreement for Purchase and Sale of Assets, dated December 31, 1997
(collectively the "Sale Agreement").
B. The parties desire to amend the Sale Agreement on the terms and
conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants and conditions
contained herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally
bound, the parties hereto agree as follows:
T E R M S:
1. Section 2.1 is hereby deleted in its entirety and replaced with the
following:
2.1 The purchase price for the Assets shall, subject to
adjustment as described below, be as follows, and shall be payable
as follows:
2.1.1 $1,000,000.00 payable in full in cash equivalent
at the Closing;
2.1.2 6,000,000 shares of Futech Stock (defined below),
the agreed value of which is 20 cents per share, for a total
$1,200,000.00, to be issued at the time of final payment of the
amount due under Section 2.1.3 below;
2.1.3 $4,000,000.00 payable in full in cash equivalent
on or before the date which is one year after the Closing;
provided, however, that if prior to one year after the Closing
Buyer receives funds through a Private Placement or a Public
Offering, then, to the extent said funds are not used to pay
Buyer's bank debt, said funds will be paid to Seller in reduction
of the debt owing under this section 2.1.3; and provided further
that if the entire $4,000,000.00 is not paid by one year after
the Closing, then: (i) interest shall be added to the amount due,
calculated on the outstanding balance at the rate of ten percent
(10%) per annum from the date of the Closing under paid in full;
and (ii) $1,000,000.00 shall be added to the amount payable, as a
penalty, and said $1,000,000.00 shall accrue interest at the rate
of ten percent (10%) per annum from the date which is one year
after the Closing until paid in full. Buyer shall be entitled to
offset amounts due from Seller to Buyer against the amount due to
Seller under this Section, and the interest and $1,000,000.00
penalty appearing in the preceding sentence shall not apply to
the extent of offsets claimed in good faith by Buyer, or to
amounts deposited in escrow pending settlement of any disputes
between Buyer and Seller over the amount owing under this
Section;
<PAGE> 2
2.1.4 8,336,670 shares of Futech Stock (defined below), the agreed
value of which is 20(cent) per share, for a total $1,667,334.00, to be issued at
the time of final payment of the amount due under Section 2.1.3 above;
2.1.5 $1,332,666.00 of Futech Stock (defined below), valued as of
December 31, 1998 if Futech has by that date had an Initial Public Offering, or
a Private Placement Offering through an investment banker, and valued at the
Closing Value if Futech has not by that date had an Initial Public Offering, or
a Private Placement Offering through an investment banker, payable within thirty
days after said date if and only if: (i) the "Net Sales" (defined below) of the
Business for the calendar year 1998 are at least 115% of the calendar year 1997
Net Sales, and (ii) a "Billings Termination" (defined below) has not occurred
prior to said date;
2.1.6 $500,000.00 of Futech Stock (defined below), valued as of January
1, 1999 if Futech has by that date had an Initial Public Offering, or a Private
Placement Offering through an investment banker, and valued at the Closing Value
if Futech has not by that date had an Initial Public Offering, or a Private
Placement Offering through an investment banker, payable within thirty days
after said date if and only if: (i) the "Net Sales of All Futech Entities"
(defined below) for the calendar year 1998 are at least 120% of the calendar
year 1997 Net Sales of All Futech Entities, and (ii) a "Billings Termination"
(defined below) has not occurred prior to said date;
2.1.7 $500,000.00 of Futech Stock (defined below), valued as of January
1, 2000 if Futech has by that date had an Initial Public Offering, or a Private
Placement Offering through an investment banker, and valued at the Closing Value
if Futech has not by that date had an Initial Public Offering, or a Private
Placement Offering through an investment banker, payable within thirty days
after said date if and only if: (i) the "Net Sales of All Futech Entities"
(defined below) for the calendar year 1999 are at least 120% of the calendar
year 1998 Net Sales of All Futech Entities, and (ii) a "Billings Termination"
(defined below) has not occurred prior to said date.
The term "Futech Stock" as used herein means the common stock of Buyer (or
Buyer's successor), subject to all of the terms and restrictions generally
applying to said stock. Said stock shall be unregistered stock subject to all
restrictions required by law, and subject to such reasonable restrictions as are
required by Buyer's underwriter, and will be stock subject to a Registration
Rights Agreement in the form of Exhibit "F" attached hereto and hereby made a
part hereof. At Buyer's election, Buyer may substitute cash or cash equivalent
for Futech Stock under Sections 2.1.2, and 2.1.4 through 2.1.7 above.
The term "Net Sales" as used herein shall mean gross sales of the Business,
minus only returns and allowances.
The term "Net Sales of All Futech Entities" as used herein shall mean gross
sales, minus only returns and allowances, of Buyer and any successor of Buyer,
including all subsidiaries thereof.
2
<PAGE> 3
The term "Billings Termination" shall mean voluntary
termination by Gary Roy ("Joe") Billings (hereinafter "Billings")
of his employment with Buyer, or if Billings is or becomes no
longer able to render employment services to Buyer as a result of
his death, disability or other cause, or if Billings breaches his
obligations to Buyer under the Employment Agreement in the form
of Exhibit "A" attached hereto or the Confidentiality Agreement
in the form of Exhibit "B" attached hereto.
2. Seller shall no longer have an obligation to reimburse Buyer for
auditor and accountant fees and costs saved (as called for in Section 6.4).
3. Notwithstanding the language appearing in the last paragraph of
Section 8.3, $100,000.00 will not be held out of the sales price at the
Closing, but Buyer will have a right of offset against deferred balance of the
purchase price for differences between Pre-Closing figures and actual Closing
figures.
4. The first sentence of Section 8.1 is hereby deleted in its entirety
and replaced with the following:
The closing of the Transaction (the "Closing") shall occur
simultaneously with the closing of Buyer's financing acceptable to
Buyer, on a date prior to May 15, 1998 selected by Buyer.
5. Any funds deposited by Buyer under Section 8.2, and any interest
earned thereon, shall be applied against the purchase price payable by Buyer
hereunder.
6. Except as expressly called for in this Amendment, the Sale Agreement
continues unmodified and in full force and effect.
7. This Amendment may be executed by the parties in one or more
counterparts, and any number of counterparts signed in the aggregate by the
parties shall constitute a single instrument. The parties authorize and agree
to accept facsimile signatures in counterparts to this Agreement, and that said
facsimile signatures shall for all purposes be binding upon the parties as if
the same were originals.
SELLER: XYZ Group Inc., a Wisconsin corporation
By /s/ Gary Roy Billings
------------------------------------------
Gary Roy ("Joe") Billings, President
BUYER: Futech Interactive Products, Inc.,
an Arizona corporation, formerly
Futech Educational Products, Inc.,
an Arizona corporation
By /s/ Vincent W. Goett
------------------------------------------
Vincent W. Goett, CEO
3
<PAGE> 1
Exhibit 10.63FT
F. KEITH WITHYCOMBE BUSINESS LOAN AGREEMENT
- --------------------------------------------------------------------------------
This Agreement dated as of May 21, 1999 is between F. Keith Withycombe, a
married man, (the "Lender") and Futech Interactive Products, Inc. (the
"BORROWER").
1. AMOUNT AND TERMS.
1.1 LINE OF CREDIT AMOUNT. During the availability period described below, the
Lender will provide a line of credit to the Borrower. The amount of the line of
credit (the "COMMITMENT") is Two Million and No/100 Dollars ($2,000,000.00).
This is a revolving line of credit. During the availability period, the Borrower
may repay principal amounts and reborrow them.
The Borrower agrees not to permit the outstanding principal balance of the line
of credit to exceed the Commitment.
1.2 AVAILABILITY. The line of credit is available between the date of this
Agreement and December 1, 1999 (the "EXPIRATION DATE") unless the Borrower is in
default.
1.3 INTEREST RATE.
The interest rate is the Reference Rate plus 1.00 percentage point(s).
The Reference Rate is the rate of interest publicly announced from time to time
by the Bank of America National Trust and Savings Association ("BANK") in San
Francisco, California, as its Reference Rate. The Reference Rate is set by the
Bank based on various factors, including the Bank's costs and desired return,
general economic conditions and other factors, and is used as a reference point
for pricing some loans. The Bank may price loans to its customers at, above or
below the Reference Rate. Any change in the Reference Rate will take effect at
the opening of business on the day specified in the public announcement of a
change in the Bank's Reference Rate.
1.4 REPAYMENT.
(a) The Borrower will pay interest on July 1, 1999 and on the first day of each
month thereafter until payment in full of any principal outstanding under this
line of credit; and (b) The Borrower will repay in full all principal and any
unpaid interest or other charges outstanding under this line of credit no later
than the Expiration Date.
1.5 LETTERS OF CREDIT. This line of credit may not be used for financing standby
letters or commercial letters of credit.
1.6 SECURED LINE OF CREDIT. This line of credit is intended to be a secured and
perfected line of credit, subordinate only to the $7,000,000 loan to Borrower
from Bank of America National Trust and Savings Association. The security for
this line of credit will be comprised of a security interest in all of
Borrower's assets. Borrower agrees to take all actions necessary to document and
perfect this subordinate security interest of Lender.
2. FEES AND EXPENSES.
2.1 LOAN FEE. The Borrower does not have to pay a fee upon execution of this
Agreement.
2.2 REIMBURSEMENT COST. The Borrower agrees to reimburse the Lender for any
expenses it incurs in the preparation of this Agreement and any agreement or
instrument required by this Agreement. Expenses include, but are not limited to,
reasonable attorneys' fees.
3. DISBURSEMENTS, PAYMENTS AND COSTS
3.1 TELEPHONE AND TELEFAX AUTHORIZATION. (a) The Lender may honor telephone or
telefax instructions for advances or repayments given by any one of the
individual signer(s) of this Agreement or a person or persons authorized in
writing by any one of the signer(s) of this Agreement; (b) Advances will be
deposited in and repayments will be withdrawn from the Borrowers account number
with Bank of America National Trust and Savings Association, or other accounts
as designated in writing by the Borrower; and (c) The Borrower indemnifies and
excuses the Lender (including its officers, employees, and agents) from all
liability, loss, and costs in connection with any act resulting
<PAGE> 2
from telephone instructions it reasonably believes are made by any individual
authorized by the Borrower to give such instructions. This indemnity and excuse
will survive this Agreement's termination.
3.2. INTEREST CALCULATION. All interest and fees, if any, will be computed on
the basis of a 360-day year and the actual number of days elapsed. This results
in more interest or a higher fee than if a 365-day year is used.
3.3. INTEREST ON LATE PAYMENTS. At the Lender's sole option in each instance,
any amount not paid when due under this Agreement (including interest) will bear
interest from the due date at the Reference Rate plus 5.00 percentage points.
This may result in compounding of interest.
3.4 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Lender bear interest at a rate per annum which is 5.00 percentage points
higher than the rate of interest otherwise provided under this Agreement. This
will not constitute a waiver of any default.
4. CONDITIONS The Lender must receive the following items, in form and
content acceptable to the Lender, before it is required to extend any credit to
the Borrower under this Agreement.
4.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance by
the Borrower (and any guarantors) of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
5. REPRESENTATIONS AND WARRANTIES When the Borrower signs this Agreement, and
until the Lender is repaid in full, the Borrower makes the following
representations and warranties. Each request for an extension of credit
constitutes a renewed representation: (a) The Borrower is a corporation duly
formed and existing under the laws of the state where organized; (b) This
Agreement, and any instrument or agreement required hereunder, are within the
Borrower's powers, have been duly authorized, and do not conflict with any of
its organizational papers; (c) This Agreement, and each other agreement or
document executed and delivered to the Lender in connection with this Agreement,
is a legal, valid and binding agreement of the Borrower, enforceable against the
Borrower in accordance with its terms, and any instrument or agreement required
hereunder, when executed and delivered, will be similarly legal, valid, binding
and enforceable; (d) In each state in which the Borrower does business, it is
properly licensed, in good standing, and where required, in compliance with
fictitious name statutes; (e) This Agreement does not conflict with any law,
agreement, or obligation by which the Borrower is bound; (f) All financial and
other information that has been or will be supplied to the Lender is: (i)
sufficiently complete to give the Lender accurate knowledge of the Borrower's
(and any guarantor's) financial condition; (ii) in form and content required by
the Lender; (iii) in compliance with all government regulations that apply; (g)
There is no lawsuit, tax claim or other dispute pending or threatened against
the Borrower, which, if lost, would impair the Borrower's financial condition or
ability to repay the loan, except as have been disclosed in writing to the
Lender prior to the date of this Agreement; (h) The Borrower possesses all
permits, memberships, franchises, contracts and licenses required and all
trademark rights, trade name rights, patent rights and fictitious name rights
necessary to enable it to conduct the business in which it is now engaged; (i)
There is no event which is, or with notice or lapse of time or both would be, a
default under this Agreement; (j) The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement;
and (k) On the basis of a comprehensive review and assessment of Borrowers
systems and equipment and inquiry made of Borrower's material suppliers, vendors
and customers Borrower management is of the view that the "YEAR 2000 PROBLEM"
(that is, the inability of computers, as well as embedded microchips in
non-computing devices, to perform properly date-sensitive functions with respect
to certain dates prior to and after December 31, 1999), including costs of
remediation, will not result in a material adverse change in the operations,
business properties, condition (financial or otherwise) of Borrower. Borrower
has developed feasible contingency plans to adequately ensure uninterrupted and
unimpaired business operation in the event of failure of its own or a third
party's systems or equipment due to the Year 2000 problem, including those of
vendors, customers, and suppliers, as well as a general failure of or
interruption in its communications and delivery infrastructure.
6. COVENANTS The Borrower agrees, so long as credit is available under this
Agreement and until the Lender is repaid in full:
6.1 USE OF PROCEEDS. To use the proceeds of the credit only for working
capital financing and the issuance of standby letters of credit.
6.2 FINANCIAL INFORMATION. To provide the following financial information and
statements and additional information as requested by the Lender from time to
time:
2
<PAGE> 3
(a) Within 90 days of the Borrowers fiscal year end, the Borrowers annual
financial statements. These financial statements must be audited by a
Certified Public Accountant ("CPA") acceptable to the Lender.
(b) Each guarantors annual budgeted statement of sources and uses of cash flows
within 90 days of each calendar year end. These financial statements may be
guarantor prepared.
(c) Each guarantor's annual financial statements in form satisfactory to the
Lender within 90 days of each calendar year end. These financial statements
may be guarantor prepared.
(d) Copies of each guarantor's federal income tax return (with all forms K-1
attached) within 30 days of filing, together with a statement of any
contributions made by the guarantor to any subchapter S corporation or
trust, and copies of any extensions of the filing date.
(e) Within 60 days of each quarter end, the Borrower will provide to the Lender
copies of statements from depository institutions or brokerage firms, or
other evidence acceptable to the Lender of the Borrowers liquid assets.
6.3 LIQUIDITY. Borrower and Vincent W. Goett and Melissa Turner Goett will each
maintain liquid assets equal to at least Four Million and No/100 Dollars
($4,000,000.00). "LIQUID ASSETS" means the following assets of the Guarantor's:
(a) cash and certificates of deposit; (b) U.S. treasury bills and other
obligations of the federal government; (c) readily marketable securities
(including commercial paper, but excluding restricted stock and stock subject
to the provisions of Rule 144 of the Securities and Exchange Commission); and
(d) for Vincent W. Goett and Melissa Turner Goett, Futech stock, options and
notes.
6.4 OTHER DEBTS. Not to have outstanding or incur any direct or contingent
debts or lease obligations (other than those to Bank of America National Trust
and Savings Association), or become liable for the debts of others without the
Lender's written consent. This does not prohibit: (a) Acquiring goods,
supplies, or merchandise on normal trade credit; (b) Endorsing negotiable
instruments received in the usual course of business; (c) Obtaining surety
bonds in the usual course of business; (d) Debts and lines of credit in
existence on the date of this Agreement disclosed in writing to the Lender; or
(e) Vincent W. Goett creating, incurring, assuming, or otherwise becoming
liable in any manner for any indebtedness (as surety or guarantor for the debt
for another, or otherwise) other than to Lender, in excess of: Five Million and
No/100 Dollars ($5,000,000.00) in aggregate, excluding permanent secured real
estate property.
6.5 OTHER LIENS. Not to create, assume, or allow any security interest or lien
(including judicial liens) on property the Borrower now or later owns, except:
(a) Deeds of trust and security agreements in favor of the Lender; (b) Liens
for taxes not yet due; (c) Liens outstanding on the date of this Agreement
disclosed in writing to the Lender; (d) Secure obligations in a total principal
amount not exceeding Ten Million and No/100 Dollars ($10,000,000.00); and (e)
Additional liens for Vincent W. Goett, which together with the debts permitted
under the preceding paragraph 6.4 (e), secure obligations in a total principal
amount not exceeding Five Million and No/100 Dollars ($5,000,000.00).
6.6 NOTICES TO LENDER. To promptly notify the Lender in writing of: (a) any
lawsuit over Fifty Thousand and No/100 Dollars ($50,000.00) against the
Borrower (or any guarantor); (b) any substantial dispute between the Borrower
(or any guarantor) and any government authority; (c) any failure to comply with
this Agreement; (d) any material adverse change in the Borrower's (or any
guarantor's) financial condition or operations; and (e) any change in the
Borrower's name, legal structure, place of business, or chief executive office
if the Borrower has more than one place of business.
6.7 CHANGE OF OWNERSHIP. Borrower not to cause, permit, or suffer any change,
direct or indirect, in the Borrower's capital ownership or in the management
and control of Borrower.
6.8 BOOKS AND RECORDS. To maintain adequate books and records.
6.9 AUDITS. To allow the Lender and its agents to inspect the Borrower's
properties and examine, audit, and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Lender or its agents to have access to perform inspections or audits
and to respond to the Lender's requests for information concerning properties,
books and records.
6.10 COMPLIANCE WITH LAWS. To comply with the laws, (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
6.11 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.
<PAGE> 4
6.12 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or
replacements to keep the Borrower's properties in good working condition.
6.13 COOPERATION. To take any action requested by the Lender to carry out
the intent of this Agreement.
6.14 INSURANCE. To maintain insurance as is usual for the business it is in.
6.15 ADDITIONAL NEGATIVE COVENANTS (BORROWER AND GUARANTORS). Not to,
without the Lender's written consent: (a) engage in any business activities
substantially different from the Borrower's present business; (b) liquidate or
dissolve the Borrowers business; (c) enter into any consolidation, merger,
pool, joint venture, syndicate, or other combination; (d) acquire or purchase a
business or its assets; (e) sell or otherwise dispose of any assets for less
than fair market value or enter into any sale and leaseback agreement covering
any of its fixed or capital assets; (f) transfer any assets to any other
company owned in whole or part by Borrower; (g) change management or control of
Borrower; or (h) obtain, guarantee, or make any intercompany debt.
6.16 SUBORDINATION OF DEBT. All loans made to Borrower by anyone (including
loans made by shareholders or warrant or stock option holders or loans made by
affiliated or controlled companies) other than Bank of America National Trust
and Savings Association are expressly made subordinate to the Commitment and
line of credit described above.
7. DEFAULT If any of the following events occur, the Lender may do one or
more of the following: declare the Borrower in default, stop making any
additional credit available to the Borrower, and require the Borrower to repay
its entire debt immediately and without prior notice. If an event of default
occurs under the paragraph entitled "BANKRUPTCY" below with respect to the
Borrower, the entire debt outstanding under this Agreement will automatically
be due immediately.
7.1 FAILURE TO PAY. The Borrower fails to make a payment under this
Agreement when due.
7.2 FALSE INFORMATION. The Borrower (or any guarantor) has given the
Lender false or misleading information or representations.
7.3 DEATH. The Borrower (or any guarantor) dies; if the Borrower is a
corporation, any principal officer or majority stockholder dies.
7.4 BANKRUPTCY. The Borrower (or any guarantor or general partner of the
Borrower) files a bankruptcy petition, a bankruptcy petition is filed against
the Borrower (or any guarantor or general partner of the Borrower), or the
Borrower (or any guarantor or general partner of the Borrower) makes a general
assignment for the benefit of creditors.
7.5 RECEIVERS. A receiver or similar official is appointed for the
Borrowers (or any guarantor's) business, or the business is terminated.
7.6 GOVERNMENT ACTION. Any government authority takes action that the
Lender believes materially adversely affects the Borrower's (or any guarantors)
financial condition or ability to repay.
7.7 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the
Borrower's (or any guarantor's) financial condition, properties or prospects,
or ability to repay the extensions of credit under this Agreement.
7.8 CROSS-DEFAULT. Any default occurs under any agreement in connection
with any credit the Borrower (or any guarantor) has obtained from anyone else
or which the Borrower (or any guarantor) has guaranteed.
7.9 DEFAULT UNDER RELATED DOCUMENTS. Any guaranty, subordination
agreement, security agreement, deed of trust, or other document required by
this Agreement is violated or no longer in effect.
7.10 OTHER LENDER AGREEMENTS. The Borrower (or any guarantor) fails to meet
the conditions of, or fails to perform any obligation under any other agreement
the Borrower (or guarantor) has with the Lender or any affiliate of the Lender.
7.11 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the
conditions of, or fails to perform any obligation under, any term of this
Agreement not specifically referred to in this Article.
4
<PAGE> 5
8. ENFORCING THIS AGREEMENT; MISCELLANEOUS
8.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Lender and all financial covenants will be made
under generally accepted accounting principles, consistently applied.
8.2 ARIZONA LAW. This Agreement is governed by Arizona law.
8.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and
the Lender's successors and assignees. The Borrower agrees that it may not
assign this Agreement without the Lender's prior consent.
8.4 ARBITRATION. (a) Unless expressly prohibited by law, any controversy or
claim between or among the parties, including but not limited to those arising
out of or relating to this Agreement or any agreements or instruments relating
hereto or delivered in connection herewith and any claim based on or arising
from an alleged tort, will at the request of any party be determined by
arbitration. The arbitration will be conducted in accordance with the United
States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law
provision in this Agreement, and under the Commercial Rules of the American
Arbitration Association ("AAA"). The arbitrator(s) will give effect to statutes
of limitation in determining any claim. Any controversy concerning whether an
issue is arbitrator(s) will be determined by the arbitrator(s). Judgment upon
the arbitration award may be entered in any court having jurisdiction. The
institution and maintenance of an action for judicial relief or pursuit of a
provisional or ancillary remedy will not constitute a waiver of the right of any
party, including the plaintiff, to submit the controversy or claim to
arbitration if any other party contests such action for judicial relief; and
(b) No provision of this paragraph will limit the right of any party to this
Agreement to exercise self-help remedies such as setoff, to foreclose against
or sell any real or personal property collateral or security, or to obtain
provisional or ancillary remedies from a court of competent jurisdiction before,
after, or during the pendency of any arbitration or other proceeding. The
exercise of a remedy does not waive the right of either party to resort to
arbitration. At the Lender's option, sale of assets under the Uniform
Commercial Code may be accomplished without arbitration as permitted under the
relevant statutes. Notwithstanding anything to the contrary in this Agreement,
no claim or controversy between Borrower and Lender will be subject to
arbitration if any party to the action is not subject to arbitration or if the
maintaining the arbitration action would or could lead to inconsistent results
under similar situations (such as, for example, the case of default by
Borrower).
8.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Lender retains all rights, even
if it makes a loan after default. If the Lender waives a default, it may
enforce a later default. Any consent or waiver under this Agreement must be in
writing.
8.6 ADMINISTRATION COSTS. The Borrower will pay the Lender for all reasonable
costs incurred by the Lender in connection with administering this Agreement.
8.7 ATTORNEYS' FEES. The Borrower will reimburse the Lender for any reasonable
costs and attorneys' fees incurred by the Lender in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration proceeding, the prevailing party is entitled
to recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. As
used in this paragraph, "attorneys' fees" includes the allocated costs of
in-house counsel.
8.8 ONE AGREEMENT. This Agreement and any related security or other agreements
required by this Agreement, collectively: (a) represent the sum of the
understandings and agreements between the Lender and the Borrower concerning
this credit; (b) replace any prior oral or written agreements between the
Lender and the Borrower concerning this credit; and (c) are intended by the
Lender and the Borrower as the final, complete and exclusive statement of the
terms agreed to by them. In the event of any conflict between this Agreement
and any other agreements required by this Agreement, this Agreement will
prevail.
8.9 USURY LAWS. This paragraph covers the transactions described in this
Agreement and any other agreements with the Lender or its affiliates executed
in connection with this Agreement, to the extent they are subject to the
Arizona usury laws (the "Transactions"). The Borrower understands and believes
that the Transactions comply with the Arizona usury laws. However, if any
interest or other charges paid or payable in connection with the Transactions
are ever determined to exceed the maximum amount permitted by law, the Borrower
agrees that:
(a) the amount of interest or other charges payable by the Borrower pursuant
to the Transactions will be reduced to the maximum amount permitted by
law; and
5
<PAGE> 6
(b) any excess amount previously collected from the Borrower in connection with
the Transactions which exceeded the maximum amount permitted by law will be
credited against the then outstanding principal balance. If the outstanding
principal balance has been repaid in full, the excess amount paid will be
refunded to the Borrower.
All fees, charges, goods, things in action or any other sums or things of value,
other than interest at the interest rate described in this Agreement, paid or
payable by the Borrower (collectively the "Additional Sums"), that may be deemed
to be interest with respect to the Transactions, will, for the purpose of any
laws of the State of Arizona that may limit the maximum amount of interest to be
charged with respect to the Transactions, be payable by Borrower as, and will be
deemed to be, additional interest. For such purposes only, the agreed upon and
"contracted for rate of interest" of the Transactions will be deemed to be
increased by the rate of interest resulting from the Additional Sums.
This Agreement is executed as of the date stated at the top of the first page.
<TABLE>
<CAPTION>
"Lender" "Borrower"
<S> <C>
Futech Interactive Products, Inc.
/s/ F. Keith Withycombe /s/
__________________________________ ________________________________
By: F. Keith Withycombe By: Vincent W. Goett, President
Address where notices to Lender Address where notices to Borrower
are to be sent: are to be sent:
6237 North 59th Place 2999 North 44th Street, Suite #225
Paradise Valley, AZ 85253 Phoenix, Arizona 85018
</TABLE>
6
<PAGE> 7
(b) any excess amount previously collected from the Borrower in connection
with the Transactions which exceeded the maximum amount permitted by
law will be credited against the then outstanding principal balance. If
the outstanding principal balance has been repaid in full, the excess
amount paid will be refunded to the Borrower.
All fees, charges, goods, things in action or any other sums of things of
value, other than interest at the interest rate described in this Agreement,
paid or payable by the Borrower (collectively the "Additional Sums"), that
may be deemed to be interest with respect to the Transactions, will, for the
purpose of any laws of the State of Arizona that may limit the maximum amount
of interest to be charged with respect to the Transactions, be payable by
Borrower as, and will be deemed to be, additional interest. For such purposes
only, the agreed upon and "contracted for rate of interest" of the Transactions
will be deemed to be increased by the rate of interest resulting from the
Additional Sums.
This Agreement is executed as of the date stated at the top of the first page.
"Lender" "Borrower"
Futech Interactive Products, Inc.
/s/ Vincent W. Goett
- ----------------------------- --------------------------------
By: F. Keith Withycombe By: Vincent W. Goett, President
Address where notices to Lender Address where notices to Borrower
are to be sent: are to be sent:
6237 North 59th Place 2888 North 44th Street, Suite #225
Paradise Valley, AZ 85253 Phoenix, Arizona 85018
6
<PAGE> 8
FIRST AMENDMENT
TO
SUBORDINATION, PRIORITY AND SECURITY AGREEMENT
THIS AMENDMENT is made as of May 21, 1999 ("Amendment Date"), by and
between Futech Interactive Products, Inc., an Arizona corporation ("Futech"),
Vincent W. Goett ("Goett") and F. Keith Withycombe ("Withycombe").
RECITALS:
A. Futech, Goett and Withycombe entered into that certain Subordination,
Priority and Security Agreement, dated December 3, 1998 (the "Agreement").
Capitalized terms used in this Amendment shall have the same meanings given
those terms in the Agreement.
B. Withycombe has loaned (the "Loan") to Futech the sum of
$2,000,000.00, as evidenced by that certain Promissory Note of even date
herewith (the "Note") and Business Loan Agreement of even date herewith ("Loan
Agreement").
C. In consideration for the Loan, Futech has agreed to issue additional
warrants to Withycombe.
D. Rosepink facilitated the additional loan, and Futech has agreed to
issue additional warrants to Rosepink in consideration for his services.
E. The parties desire to amend the Agreement on the terms and conditions
hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants and conditions
contained herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally
bound, the parties hereto agree as follows:
TERMS:
Section 2 of the Agreement is deleted in its entirety and replaced with
the following:
1. Priority. Notwithstanding any other provision of this Agreement, or
any other document to which the parties hereto are bound, the parties agree
that the following priority shall apply to the security interest described
below encumbering Futech's assets, as of the date of this Agreement and at all
times thereafter;
(a) The first priority shall be the lien of Bank of America National
Trust and Savings Association.
(b) The second priority shall be the lien of Withycombe evidenced by
the Note.
<PAGE> 9
(c) The third priority shall be the liens of Guarantors described in
the Agreement.
Proceeds to the Guarantors shall be paid to and shared between the
Guarantors in proportion to the amounts paid by the Guarantors on the
guaranteed debt. For example, if Goett pays $200,000.00 on the Guaranty and
Withycombe pays $100,000.00 on the Guaranty, then amounts collected by
Guarantors in reimbursement of obligations paid under the Guaranty shall be
for the benefit of Goett and Withycombe 2/3 and 1/3, respectively, until
the full $300,000.00 is repaid to Guarantors.
(d) The fourth priority shall be for other security interests of
Goett against Futech's assets existing as of the date of this Agreement.
Each party to this Agreement hereby unconditionally subordinates said
party's lien to the other liens identified above as being prior to said
lien, to the extent necessary to accomplish the priority of liens as
described above. This being the case, Futech and Goett agree to take all
actions necessary to perfect the security interest of Withycombe in all
jurisdictions where the assets may be used or located or where perfection
is necessary, subordinate only to the security interest of Bank of America
National Trust and Savings Association.
2. Effective immediately and automatically upon funding by Withycombe of
the Loan, Futech shall be obligated to issue to Withycombe, as soon as is
practicable, warrants in substantially the same form as Exhibit "A" attached to
the Agreement, for Withycombe to acquire 9,000,000 shares of non-assessable
common stock of Futech at a price of $.05 per share. The common stock acquired
by Withycombe under this provision shall contain all of the rights and
restrictions applicable to the common stock of Futech. Futech makes and has made
no representation or warranty as to the value of Futech's stock, such value
being Withycombe's risk.
3. By December 1, 1999, Goett agrees to obtain a release of Withycombe of
all of Withycombe's obligations under the Guaranty. Withycombe must, at or
prior to the obtaining of such release, exercise all of Withycombe's warrants to
acquire Futech stock issued pursuant to the Agreement (21,000,000 shares) and
this Amendment (9,000,000 shares) (30,000,000 shares in total). At the time such
release is obtained, Withycombe shall transfer to Goett all of Withycombe's
collateral interests securing the Guaranty.
4. As consideration for Rosepink facilitating the Loan, effective
immediately and automatically at the funding of the Loan, Futech shall be
obligated to issue to Rosepink, as soon as is practicable, warrants in the form
of Exhibit "A" attached to the Agreement, for Rosepink to acquire 2,000,000
shares of common stock of Futech at a price of $.05 per share. The common stock
acquired by Rosepink under this provision shall contain all of the rights and
restrictions applicable to the common stock of Futech. Futech makes and has made
no representation or warranty as to the value of Futech's stock, such value
being Rosepink's risk.
5. Effective immediately and automatically at the funding of the Loan,
Futech shall be obligated to issue to Goett, as soon as is practicable, warrants
in the form of Exhibit "A" attached to the Agreement, for Goett to acquire
5,000,000 shares of common stock of Futech at a
2
<PAGE> 10
price of $.05 per share. The common stock acquired by Goett under this
provision shall contain all of the rights and restrictions applicable to the
common stock of Futech. Futech makes and has made no representation or warranty
as to the value of Futech's stock, such value being Goett's risk.
6. Withycombe and Goett hereby confirm the representations and warranties
set out in Exhibit "B" to the Agreement, with said representations and
warranties to be applied to the warrants described herein and the Futech stock
to be acquired in connection with said warrants.
7. Futech represents and warrants to Withycombe that a true and complete
list of the number of outstanding shares of stock in Futech and all warrants
and stock options (including their respective strike or exercise price) in
Futech is attached as APPENDIX ONE to this Amendment. Futech agrees that it
will not issue any additional common stock, preferred stock, warrants, or stock
options in Futech without the written consent of Withycombe. Any request made
by Futech for approval of additional common stock, preferred stock, warrants,
or stock options must be accompanied by written disclosure of the name and
address of the common stock, preferred stock, warrant, or stock option holder
together with an identification of the amount of shares to be issued or subject
to the common stock, preferred stock, warrant, or stock options.
8. Futech agrees not to issue any preferred stock or any class of stock
with priority over the common stock that is subject to the warrants of
Withycombe described in Paragraph 2 above without the prior approval of
Withycombe.
9. Futech directly or indirectly owns all or portions of various other
companies that may be engaged in business similar or different from that of
Futech. These companies will be referred to as the "AFFILIATE COMPANIES".
Futech and Goett agree that they will take no action with respect to Futech or
the Affiliated Companies that in any manner may impact Futech's ability to
repay the Loan from Withycombe.
10. Except as expressly called for in this Amendment, the Agreement
continues unmodified and in full force and effect.
11. If there is conflict between the Note and Loan Agreement, on the one
hand, and the Agreement and this Amendment, on the other hand, the provisions
of the Note and Loan Agreement will control.
12. This Amendment may be executed by the parties in one or more
counterparts, and any number of counterparts signed in the aggregate by the
parties shall constitute a single instrument. The parties authorize and agree
to accept facsimile signatures in counterparts to this Amendment, and that said
facsimile signatures shall for all purposes be binding upon the parties as if
the same were originals.
3
<PAGE> 11
DATED the date first written above.
FUTECH: Futech Interactive Products, Inc.,
an Arizona corporation
By
----------------------------------
Vincent W. Goett, CEO
GOETT:
----------------------------------
Vincent W. Goett
WITHYCOMBE: /s/ F. Keith Withycombe
----------------------------------
F. Keith Withycombe
ROSEPINK REPRESENTATIONS AND WARRANTIES:
Rosepink made certain representations, warranties and agreements in
writing at the end of the Agreement. Said representations, warranties and
agreements are hereby confirmed and ratified, including as to the warrants
described above and the Futech stock to be acquired by Rosepink in connection
with those warrants.
- ----------------------------------
Robert J. Rosepink
4
<PAGE> 12
DATED the date first written above.
FUTECH: Futech Interactive Products, Inc.,
an Arizona corporation
By /s/ Vincent W. Goett
-------------------------------
Vincent W. Goett, CEO
GOETT: /s/ Vincent W. Goett
---------------------------------
Vincent W. Goett
WITHYCOMBE:
---------------------------------
F. Keith Withycombe
ROSEPINK REPRESENTATIONS AND WARRANTIES:
Rosepink made certain representations, warranties and agreements in writing
at the end of the Agreement. Said representations, warranties and agreements are
hereby confirmed and ratified, including as to the warrants described above and
the Futech stock to be acquired by Rosepink in connection with those warrants.
- --------------------------
Robert J. Rosepink
4
<PAGE> 13
APPENDIX ONE
TO
FIRST AMENDMENT TO
SUBORDINATION, PRIORITY AND SECURITY AGREEMENT
(list of warrant and stock option holders)
<PAGE> 14
FUTECH STOCK STATUS
AS OF DECEMBER 31, 1998 PRE-PP
<TABLE>
<S> <C> <C> <C>
Acuna, Carlos 5,000.0000 0.0062%
Alperin, Steven 60,000.0000 0.0747%
Anderson, Roger & Shirley 15,000.0000 0.0187%
Auer & Co 60,000.0000 0.0747%
Barrett, Stephen 200,000.0000 0.2491%
Bartolon, Gene & Carol 2,000.0000 0.0025%
Bean, Mike & Karen 3,000.0000 0.0037%
Bird, Cleta 500,000.0000 0.6228%
Blair Partners-Missouri 748,800.0000 0.9328%
Bonnell Family Trust 100,000.0000 0.1246%
Borinstein, Bill 200,000.0000 0.2491%
Borinstein, Joe 200,000.0000 0.2491%
Brookson, Robert & Helen 850,000.0000 1.0588%
Clement, Kim 100,000.0000 0.1246%
Cohan, Jonathan 60,000.0000 0.0747%
Cox, Glen 25,000.0000 0.0311%
Cuevas, Alex 37,500.0000 0.0467%
Cummings, Herbert K. Marital Trust 1,241,995.0000 1.5471%
Curtin, Meryl 3,200.0000 0.0040%
Dow, Mindy 5,000.0000 0.0062%
Fitzgerald, Ron 1,218,949.0000 1.5184%
Foley, Chuck 350,000.0000 0.4360%
Ford, Silas 200,000.0000 0.2491%
Fountain of Hope-Susan Stacey 150,000.0000 0.1868%
Frank, Michael 375,504.0000 0.4678%
FT TR (Rod Turner Trust) 450,000.0000 0.5605%
FT TR (Rod Turner Trust) 450,000.0000 0.5605%
Furman, Rod 850,000.0000 1.0588%
Galameau, Penny Sue 1,489,017.3750 1.8548%
Goett, Garry & Darllyne 5,766,227.0000 7.2102% 7,406,764.625
Goett, Garry 38,000.0000 0.0448% 9.2263%
Goett, Melissa Turner 1,850,000.0000 2.3045% 19,912,263.00
Goett, Vincent W. 2,148,011.0000 2.6757% 24.8040%
Goett, Vincent W. & Melissa Turner 15,614,252.0000 19.4501%
Goett, Brooke-Ashton Turner 100,000.0000 0.1246%
Goett, Kendall Turner 100,000.0000 0.1246%
Goett, Samanatha Terriann 100,000.0000 0.1246%
Golub, Alan 4,000.0000 0.0050%
Hare, Hazel 800,000.0000 0.9965%
Harlan, Brian 10,000.0000 0.0125%
Ishcomer, Barbara 327,510.0000 0.4080%
Ishcomer, Chuck 327,510.0000 0.4080% 2,344.703
Ishcomer, Chuck & Barbara 1,689,663.0000 2.1048% 2.9207%
Jeffries, James & Karen 5,000.0000 0.0062%
Jensen, Kristen 10,000.0000 0.0125%
Jensen, Mart 10,000.0000 0.0125%
Kichon, Jon & Dana 12,000.0000 0.0149%
Kimberly Scott, Ltd. 360,845.0000 0.4495%
</TABLE>
<PAGE> 15
<TABLE>
<S> <C> <C> <C>
Kinghorn, R. Scott 26,667.0000 0.0332%
Krim Assoc. Plan 60,000.0000 0.0747% 996.00
Krim, Joan 20,000.0000 0.0249% 1.2432%
Krim, Richard 140,000.0000 0.1744%
Krim, Scott 190,000.0000 0.2367%
Kubiak, David & Juanita 5,000.0000 0.0062%
L.A. Ventures II 315,830.0000 0.3934%
LaFay, Catherine 315,830.0000 0.3934%
Lambros, Connie 15,000.0000 0.0187%
Landis, Dean 3,000.0000 0.0037%
Landis, Kay 1,000.0000 0.0012%
Landrum, Sharon 8,000.0000 0.0100%
Lardoux, Jean-Pierre 30,000.0000 0.0374%
Lechter, Sharon 1,200,000.0000 1.4948%
Leggat, Andrew 2,000.0000 0.0025%
Madden, Ken & Helene 120,000.0000 0.1495%
Magyar, Steve 24,000.0000 0.0299%
Mark, Reuben 400,000.0000 0.4963%
Marks, Michael & Natalie 10,000.0000 0.0125%
Massey, Terrill 500.0000 0.0006%
Matthews, Kenda 80,001.0000 0.0997%
McTaggart, Amelia 20,000.0000 0.0249% 12,622.375
McTaggart, Amy 20,000.0000 0.0249% 15.7232%
McTaggart, Deb 5,502,375.0000 6.8541%
McTaggart, Matthew 20,000.0000 0.0249%
McTaggart, Melissa 20,000.0000 0.0249%
McTaggart, Sarah 20,000.0000 0.0249%
McTaggart, Scott 20,000.0000 0.0249%
Mehojah, William & Fredericka 120,000.0000 0.1495%
Metroplex Properties, Inc. 922,731.7050 1.1494%
Metroplex Property Inc., Reinstated 180,000.0000 0.2242%
Money Purchase Pension Plan
Meyers, Barry 20,000.0000 0.0249%
Micalizio, Dean 10,000.0000 0.0125%
Mitchell, Judy 15,000.0000 0.0187%
Newtech Consulting, Inc. 4,000,000.0000 4.9827%
Olympic Management, Inc. 81,410.6250 0.1014%
Olympic Properties, Inc. 398,395.2950 0.4963%
Oman Family Trust 2,379,000.0000 2.9634%
Oman, Jessica 10,000.0000 0.0125%
Oman, Michael 10,000.0000 0.0125%
Pacific Ranch, LP 3,000,000.0000 3.7370%
PaineWeb.Krim 588,000.0000 0.7325%
PaineWeb.Taub 18,000.0000 0.0224%
Pasquill, Diane 25,000.0000 0.0311%
Persson, Randolph 2,500.0000 0.0031%
Persson, Teresa C. 2,500.0000 0.0031%
Petter, Joseph 500,000.0000 0.6226%
Phillips, Christina 2,000.0000 0.0025%
Ragone, Garry & Marian 1,242,184.0000 1.5473%
Rodgers, Ronald 10,000.0000 0.0125%
</TABLE>
<PAGE> 16
<TABLE>
<S> <C> <C> <C>
Rosen, Charles .......................... 20,000.0000 0.0249%
Rosebud Investments., L.L.C. ............ 125,000.0000 0.1557% 825,000
Rosepink, Robert ........................ 500,000.0000 0.6228% 0.7785%
Ruhl, Barry ............................. 600,000.0000 0.7474%
Samarasekera, Ronda ..................... 500.0000 0.0006%
Scottsdale Memorial Health Foundation ... 200,000.0000 0.2491%
AKA Scottsdale Healthcare Foundation ....
Scottsdale Worship Center ............... 250,000.0000 0.3114%
Sears, Donald E. ........................ 13,500.0000 0.0168%
Sears, Rafaela .......................... 25,000.0000 0.0311%
Seaver, Douglas ......................... 740,052.0000 0.9219%
Serrano, Darlynn ........................ 12,250.0000 0.0153%
Sotebeer, Mike & Elsje .................. 10,000.0000 0.0125%
Taub, Joyce Lynn ........................ 60,000.0000 0.0747% 78,000
Taylor, Rona ............................ 40,000.0000 0.0498% 0.0972%
Trattler, Anne .......................... 60,000.0000 0.0997%
Turner Fam. Trust ....................... 1,000.0000 0.0012%
Turner, R. Bradford ..................... 6,282,695.0000 7.8261%
Turner, Roderick L. ..................... 7,225,721.0000 9.0008% 9,489,511
Turner, Terry C. ........................ 1,363,790.0000 1.6988% 11.8207%
Ulloa, Javier ........................... 5,000.0000 0.0062%
Victoria Financial, Inc. ................ 360,844.0000 0.4495%
Walbridge, Don .......................... 20,000.0000 0.0249%
Walbridge, Ken .......................... 35,000.0000 0.0436%
Waldon, Jim ............................. 120,000.0000 0.1495%
Weber, Barbara .......................... 40,000.0000 0.0498%
Westarz Homes, Inc. ..................... 444,177.0000 0.5533% 1,165,866
Wright, Debbra .......................... 10,000.0000 0.0125% 1,4523%
Wunsch, Robert .......................... 150,000.0000 0.1868%
Zimmerman, Edward ....................... 50,000.0000 0.0823%
Zimmerman, Harilyn ...................... 50,000.0000 0.0623%
Zovne, Jerry & Karen .................... 75,000.0000 0.0934%
----------------
80,278,457.0000 100.0000%
Total Issued ..................... 80,278,457.0000 100.0000%
Total Authorized ................. 235,000,000.0000
shares reserved for Preferred ......... 100,000,000.0000
Available to Issue ............... 54,721,543.0000
</TABLE>
<PAGE> 17
Stock Options/Employee Options/Warrants (Revised)
<TABLE>
<CAPTION>
Initially
Entity Date Awarded Reason Price Total Shares Effective Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vincent W. Goett 9/26/97 Grant $ 0.05 10,000,000 9/26/97 10M
12/31/97 Grant $ 0.10 7,000,000 12/31/98 2M
1/29/99 Grant $ 0.05 8,000,000 1/29/00
5/12/99 Bonus $ 0.05 9,000,000
Joseph K. Petter 1/29/98 Grant $ 0.25 2,500,000 1/29/99 833,334
1/29/99 Grant $ 0.05 2,750,000 1/29/00
Fred B. Gretsch 1/29/98 Grant $ 0.25 2,500,000 1/29/99 833,334
6/30/98 Grant $ 0.20 1,000,000 6/30/99
1/29/99 Grant $ 0.05 2,250,000 1/29/00
Scott Leuthold 1/29/98 LOEmploy 50,000 $ 0.25 3/1/97
50,000 $ 0.25 2/3/98
50,000 $ 0.25 2/3/99 150,000 vested 150,000
Charles Foley 1/29/98 LOEmploy 300,000 $ 0.25 12/31/97
300,000 $ 0.25 12/31/98 600,000 vested 600,000
David Wine 11/1/98 LOEmploy $ 0.25 200,000 11/1/99
1/29/99 Grant $ 0.05 400,000 1/29/00
Kip Dean 11/1/98 LOEmploy $ 0.25 100,000 11/1/99
1/29/99 Grant $ 0.05 200,000 1/29/00
Jim Houston 6/1/99 LOEmploy $ 0.25 300,000 6/1/00
Brian Young 6/1/99 LOEmploy $ 0.25 300,000 6/1/00
Scott Leuthold 1/29/98 LOEmploy $ 0.25 150,000 1/29/99 50,000
Connie Lambros 1/29/98 Grant $ 0.25 600,000 1/29/99 200,000
1/29/99 Grant $ 0.05 500,000 1/29/00
Melvin J. Sauder 7/1/98 LOEmploy $ 0.20 500,000 7/1/99
11/1/98 Grant $ 0.20 1,500,000 11/1/99
1/29/99 Grant $ 0.05 1,250,000 1/29/00
Alex Cuevas 1/29/98 Grant $ 0.25 300,000 1/29/99 100,000
1/29/99 Grant $ 0.05 500,000 1/29/00
Javier Ulloa 1/29/98 Grant $ 0.25 100,000 1/29/99 33,334
Goett/Turner Loans
1/2/98 $2,500,000 Loan $ 0.05 1.25 V&M 2,500,000 1/2/99 2.5M
1.25 RT
3/31/98 $3,500,000 Guarantee $ 0.05 V&M 7,200,000 3/31/99 7.2M
</TABLE>
Page 1
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5/5/98 $ 1,500,000 Loan $0.05 1.5 V&M 3,000,000 5/5/99 3M
1.5 Rod
6/24/98 $ 1,000,000 Loan $0.05 1 PMT 2,000,000 6/24/99
1 RT
8/10/98 $ 2,000,000 Loan $0.05 6 PMT 8,000,000 8/10/99
2 RT
12/3/98 $ 7,000,000 Guarantee $0.05 PMT 21,000,000 12/3/98 21M
12/15/98 $ 8,000,000 Loan $0.05 4 PMT 8,000,000 12/15/99
4 RT
F. Keith Withycombe 12/3/98 Guarantee $0.05 21,000,000 12/3/98 21M
& Patricia A. Withycombe (H&W) 9,000,000
Robert J. Rosepink 12/3/98 Facilitator $0.05 4,000,000 12/3/98 4M
1,000,000
2,000,000
Roderick L. Turner Loans
4/2/97 $ 350,000 Loan $417,083.33 $0.15 2,780,555.53 3/1/99 stock
8/4/98 $ 300,000 Loan $314,601.37 $0.15 2,097,342.47 3/1/99 stock
Notes Payable/Option Conversions
Pickard $121,262.40 $0.15 808,416.00 3/1/99 stock
Dyer Holdings $ 84,883.40 $0.15 565,891.20 3/1/99 stock
Nehring Trust $121,262.40 $0.15 808,416.00 3/1/99 stock
Taylor $ 40,836.20 $0.15
1998 Stock Option Plan Inactive 7,200,000 N/A
22,800,000 TBD
H.C. Wainwright & Co., Inc. Contract $0.50 300,000 TBD
William Hermes-Employment Agreement 4/1/99
4/1/99 Preferred $0.05 2,500,000 4/1/99 2.5M
4/1/99 Common $0.25 2,000,000 3/1/00
Loan Option Agreement
John Dawson $5M Loan $0.25 ? 20,000,000 TBD
R. Bradford Turner Grant $0.25 ? 1,500,000 TBD
FBG 5/16/99 204,710,621.20
==============
</TABLE>
Page 2
<PAGE> 19
PROMISSORY NOTE
$2,000,000.00 As of May 21, 1999
Phoenix, Arizona
THIS NOTE is made as of the date stated above by Futech Interactive
Products, Inc., an Arizona corporation ("Maker") to the order of and F. Keith
Withycombe ("Payee").
1. PAYMENT. For value received, Maker promises to pay to Payee or
Payee's order, as hereinafter set forth, without offset, the principal sum of
Two Million Dollars ($2,000,000.00),together with interest calculated at one
percentage point over the publicly announced Reference Rate of interest of Bank
of America National Trust and Savings Association in San Francisco, California,
as such rate may from time to time change. Principal and interest are payable
in lawful money of the United States of America at 6237 North 59th Place,
Paradise Valley, Arizona 85253, or at such other address as the holder hereof
may from time to time designate in writing, in full on or before December 1,
1999. All payments made hereunder shall be applied to interest and principal in
that order.
2. PREPAYMENT. Maker has the privilege, at any time, to prepay the whole
or any part of the unpaid balance hereof without penalty or forfeiture.
3. INTEREST. All interest payable pursuant to this Note shall be
computed on the basis of a 360-day year. In no event shall the aggregate of the
interest herein provided to be paid over the contractual term of the loan
exceed the highest rate to which a borrower and lender may agree in writing
under the laws of the State of Arizona.
4. DEFAULT. If the principal due under this Note, or under any mortgage,
deed of trust, security agreement, or other agreement between Maker and Payee
pertaining to the indebtedness evidenced hereby shall not be paid when due, or
if Maker fails to comply with all of the other terms and conditions of this
Note or any instrument securing this Note, and such failure shall continue for
ten days after notice thereof is given to Maker, then the entire principal sum,
accrued interest, and all other amounts due hereunder shall, at the option of
Payee, become immediately due and payable.
5. COLLECTION COSTS. Maker agrees to reimburse Payee for all costs and
expenses, including without limitation, all reasonable attorneys' fees incurred
in the enforcement or collection of this Note or any judgement obtained hereon.
6. WAIVER, CONSENT, ETC. Maker, sureties, guarantors, and endorsers
hereof agree to be jointly and severally bound, severally waive any homestead or
exemption rights against said debt, severally waive diligence, demand,
presentment for payment, protest, protest and demand, notice of protest, notice
of nonpayment, notice of default, notice of acceleration, and all other notices
and demands of any kind. Maker, sureties, guarantors and endorsers hereof hereby
severally
1
<PAGE> 20
consent to the extension of time for payment of this Note or any installment
hereof, any modification hereof, release from liability of any maker, endorser,
or any other person or entity at any time liable for the payment hereof, and the
modification or release of any collateral at any time held as security for this
Note, without notice and without affecting the liability of any maker,
guarantor, surety or endorser. Maker further waives, to the extent permitted by
law, the right to plead any and all statutes of limitations as a defense to any
demand on this Note.
Delay or failure in exercising any of Payee's rights or options hereunder
shall not constitute a waiver thereof, and any waiver of any rights or options
hereunder shall not constitute a waiver of the right to exercise the same in the
event of any subsequent default. By accepting payment of any sum hereunder after
its due date, the holder hereof shall not waive its rights either to require
prompt payment when due of all other sums hereunder or to declare a default for
failure to make prompt payment. No waiver by the holder of this Note shall be
effective unless it is in writing and signed by such holder.
7. SEVERABILITY. If any provision of this Note or any application of such
provision shall be declared by a court of competent jurisdiction to be invalid
or unenforceable, such invalidity or unenforceability shall not affect any other
application of such provision nor the balance of the provisions hereof which
shall, to the fullest extent possible, remain in full force and effect, and such
court shall reform such unenforceable provision so as to give maximum
permissible effect to the intentions of the parties as expressed therein.
8. SECURITY. As security for Maker's performance under this Note, Maker
hereby grants Payee a security interest in any and all assets now owned or
hereafter acquired by Maker, including but not limited to the assets identified
on Exhibit "A" attached hereto and hereby made a part hereof. In the event of
default by Maker hereunder, Payee shall have all rights with respect to such
collateral as are available to a secured party under the Uniform Commercial Code
in the State of Arizona, as the same may from time to time be changed. Maker
agrees to execute and deliver to Payee and pay the costs of recording financing
statements evidencing this security agreement and other documents necessary or
appropriate to perfect this security interest. Maker shall reimburse Payee for
all reasonable costs associated with such filings.
9. MISCELLANEOUS. The provisions of this Note shall be binding upon Maker
and Maker's personal representatives, successors and assigns, and shall inure to
the benefit of Payee and Payee's successors and assigns. This Note shall be
governed by and construed and enforced in accordance with the laws of the State
of Arizona. The courts of the State of Arizona shall have the sole and exclusive
jurisdiction and venue in any case or controversy arising under this Note or by
reason of this Note. The parties agree that any litigation or arbitration
arising from the interpretation or enforcement of this Note shall be only in
either Maricopa County Superior Court or in the United States Federal District
Court for the District of Arizona, and for this purpose each party to this Note
(and each person who shall become a party) hereby expressly and irrevocably
consents to the jurisdiction and venue of such courts. This Note shall be
construed according to its fair meaning and neither for nor against the drafting
party. Time is of the essence of this Note and each and every term and provision
hereof.
2
<PAGE> 21
DATED the date first hereinabove written.
Futech Interactive Products, Inc.,
an Arizona corporation
/s/ Vincent W. Goett
---------------------------
Vincent W. Goett, CEO
Lists of Exhibits:
Description of Collateral "A"
3
<PAGE> 22
Exhibit "A"
DESCRIPTION OF COLLATERAL
The collateral consists of the following described property, together with
all other personal property and equipment, of whatever nature or kind, now owned
or subsequently acquired by Debtor, including all additions, substitutions,
accessions, repairs, replacements and additions thereto (including the proceeds
of sales thereof) whether or not installed, affixed, or attached to, kept or
situated on or at, any real property owned by the Debtor (the "Real Property"):
1. All items of Debtor's machinery, furniture, furnishings, equipment,
fixtures, materials, handling equipment, appliances, tools, fabrication devices,
jigs, materials, and other personal property, including all processing,
manufacturing, fabricating, sales, and service equipment.
2. Any franchise rights, licenses, contracts, plans, surveys, permits, and
agreements required or used in connection with the ownership, operation, or
maintenance of the Real Property or any trade or business conducted by Debtor,
including without limitation any licenses for the sale of alcoholic beverages,
contracts with builders, material suppliers, and professional services
providers.
3. All rights of Debtor to the use of any trade name, trademark, or
service mark, all phone numbers and all advertising rights and contracts.
4. Any and all awards, including interest, previously and hereafter made
to Debtor for taking by eminent domain of the whole or any part of the Real
Property or any easements therein.
5. All of Debtor's interest in any inventory, trade stock, or other
personal property available for sale in the ordinary course of Debtor's
business, all raw materials, work-in-process, finished goods, salvaged
materials, and supplies, and all plans and blueprints of any type. Included are
all goods or products of every type or description customarily held for resale
by Debtor, along with all raw materials to be processed or those being
processes, and all materials used or consumed in Debtor's business, including
but not limited to packaging, containers, wrappers and labels, and all office
and warehouse supplies of every type and description.
6. All cash on hand, checking accounts, savings accounts, and other
deposit and other accounts of any type, with financial institutions or
otherwise, and all rights of every type to receive consideration from third
parties.
7. All instruments, documents, chattel paper, accounts receivable,
contract rights and general intangibles of every type and description.
8. All construction materials, supplies, lumber and all other materials or
equipment delivered to the Real Property for incorporation therein or use in
construction at any time being conducted thereon.
9. All of Debtor's interest in:
(a) All existing and future leases (of real property and/or personal
property, whether as lessor or lessee), and all rents, franchises, issues and
profits, and all security deposits from tenants, lessees or other occupiers or
any real property;
(b) All policies of insurance and all proceeds, loss payable clauses and
premium refunds, and all claims relating thereto;
(c) All operating or management or supervision agreements;
<PAGE> 23
(d) All reciprocal easement agreements;
(e) All contracts with builders and/or material suppliers;
(f) All building and use permits issued by any governmental agency;
(g) All deposits made with or other security given to utility
companies or other companies by Debtor, and all advance payments of insurance
premiums made by Debtor;
(h) In so far as permitted by applicable law, all licenses, including
but not limited to any operating licenses, contracts, management contracts or
agreements, franchise agreements, permits, authorizations or certificates
required or used by Debtor;
(i) All damages, royalties and revenue of every kind, nature and
description whatsoever that Debtor may be entitled to receive from any person
or entity, with the right in the Secured Party to receive and receipt therefor
and apply the same to the indebtedness secured hereby either before or after
any default hereunder, and Secured Party may demand, sue for and recover any
such payments but shall not be required to do so.
10. All of Debtor's rights, title and interest in and to any leasehold
improvements.
11. Any and all of Debtor's assets not identified above are included
within the collateral secured hereby.
The foregoing shall specifically include, but shall not be limited to the
assets, if any, identified in Exhibit "A-1" attached hereto and hereby made a
part hereof.
2
<PAGE> 24
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
This instrument was recorded at request of:
F. Keith Withycombe
6237 North 59th Place
Paradise Valley, Arizona 85253
The recording official is directed to return this instrument,
or a copy of this instrument, to the person named above. Space Reserved For Recording Information
- -----------------------------------------------------------------------------------------------------------------------------------
UNIFORM
COMMERCIAL CODE
Loan No. FINANCING STATEMENT FOR FILING
------------------- Form UCC-1
- -----------------------------------------------------------------------------------------------------------------------------------
Effective Date County and State of Transaction
May 21, 1999 Maricopa County, Arizona
- -----------------------------------------------------------------------------------------------------------------------------------
DEBTOR (Name, Address and ZIP Code) SECURED PARTY (Name, Address and ZIP Code)
Futech Interactive Products, Inc. F. Keith Withycombe
Attention: Vincent W. Goett, CEO 6237 North 59th Place
2999 N. 44th Street, Suite 225 Paradise Valley, Arizona
Phoenix, Arizona 85018-7247
- -----------------------------------------------------------------------------------------------------------------------------------
Assignee of Secured Party Record Owner of Real Property, If Not Debtor
(Name, Address and Zip Code) (Name, Address and ZIP Code)
- -----------------------------------------------------------------------------------------------------------------------------------
Counties Where Collateral is Located [ ] Products of Collateral are also covered
Maricopa County, Arizona [ ] Proceeds of Collateral are also covered
- -----------------------------------------------------------------------------------------------------------------------------------
If collateral is timber to be cut, crops growing or to be grown, minerals or the like, accounts to be financed at the wellhead or
minehead of the well or mine, or goods which are or are to become fixtures, the real property to which these are affixed or
concerned is legal described:
[ ] This financing statement is to be filed in the office where a mortgage on the real property would be recorded.
- -----------------------------------------------------------------------------------------------------------------------------------
Financing Statement covers the following types or items of property:
All assets of Debtor, now owned and/or hereafter acquired, including but not limited to the assets identified on Exhibit "A"
attached hereto and hereby made a part hereof.
- -----------------------------------------------------------------------------------------------------------------------------------
This Financing Statement is filed or recorded without Debtor's signature to perfect a security interest in collateral in which:
[ ] is already subject to a security interest in another jurisdiction when it was brought into the state or which Debtor changed
location to this State;
[ ] Are proceeds of the original collateral described above in which a security interest was perfected;
[ ] Was acquired four months or less after Debtor has changed its name, identity or corporate structure;
[ ] Is no longer effective due to lapse of the original filing.
- -----------------------------------------------------------------------------------------------------------------------------------
Futech Interactive Products, Inc., an Arizona corporation
---------------------------
By /s/ Vincent W. Goett F. Keith Withycombe
- -----------------------------------------------------------------------------------------------------------------------------------
Vincent W. Goett, CEO
- -----------------------------------------------------------------------------------------------------------------------------------
Signatures of Debtor or Assignor Signatures of Secured Party or Assignee
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit 23.1 FT
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report on the consolidated financial statements of Futech
Interactive Products, Inc. as of December 31, 1997 and 1998 and for each of the
two years in the period ended December 31, 1998 dated March 5, 1999 except for
Note 17, as to which the date is June 7, 1999, in Amendment No. 2 to the
Registration Statement (Form S-4 No. 333-80131) and related Prospectus of Futech
Interactive Products, Inc.
/s/ Ernst & Young LLP
Phoenix, Arizona
August 4, 1999
<PAGE> 1
Exhibit 23.1J
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus/Proxy Statement constituting a
part of Futech Interactive Products, Inc. and Futech Toys and Games, Inc's
Registration Statement on Form S-4 of our report dated March 30, 1998, relating
to the financial statements of Janex International, Inc., which are contained
in the Prospectus/Proxy Statement. Our report contains an explanatory paragraph
regarding uncertainty as to the ability of the Company to continue as a going
concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus/Proxy Statement.
Woodbridge, New Jersey /s/ BDO Seidman, LLP
August 5, 1999
<PAGE> 1
Exhibit 23.1T
Abrams and Company, P.C.
- --------------------------------------------------------------------------------
Certified Public Accountants One Huntington Quadrangle
Suite 4 South 1
Melville, N.Y. 11747-4406
(516) 454-9393 TEL.
(516) 454-6228 FAX
[email protected]
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of Futech Interactive
Products (Delaware), Inc. on Form S4 of our report dated June 26, 1998 (except
as to Note 18a, the dates of which are July 10, 1998 and August 5, 1998),
appearing in the Prospectus/Proxy Statement which is a part of this
Registration Statement.
/s/ Abrams and Company, P.C.
- ----------------------------
August 5, 1999
<PAGE> 1
Exhibit 23.1FD
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus/Proxy Statement constituting a
part of Futech Interactive Products, Inc. and Futech Toys and Games, Inc's
Registration Statement on Form S-4 of our report dated March 17, 1999, relating
to the financial statements of Fundex Games, Ltd., which are contained in the
Prospectus/Proxy Statement.
We also consent to the reference to us under the caption "Experts" in the
Prospectus/Proxy Statement.
/s/ BDO Seidman, LLP
Chicago, Illinois
August 5, 1999
<PAGE> 1
EXHIBIT 23.1 D
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4
(File No. 333-80131) of our report dated February 19, 1999 (except for Note 9,
as to which the date is April 21, 1999), on our audits of the financial
statements of DaMert Company as of and for the years ended December 31, 1998
and 1997. We also consent to the reference to our firm under the caption
"experts."
/s/ARMANINO McKENNA LLP
San Leandro, California
August 5, 1999
<PAGE> 1
Exhibit 23.1G
CONSENT OF SPARKS, NELSON & JACOBSON, CPAs.
INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our audited financial statements of Gick Publishing, Inc. as of September
30, 1997 and for the eleven months then ended dated November 5, 1997, in the
Registration Statement (Form S-4) and related Prospectus of Futech Interactive
Products for the registration of 6,500,000 shares of its common stock.
/s/ Sparks, Nelson & Jacobson
-------------------------
Sparks, Nelson & Jacobson, CPAs
Santa Ana, California
July 27, 1999
<PAGE> 1
Exhibit 23.1X
CONSENT OF VIRCHOW, KRAUSE & COMPANY, LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report on the financial statements of XYZ Group, Inc. as of December
31, 1997 and for the year then ended dated February 12, 1998, in the
Registration Statement (Form S-4 No. 333-80131) and related prospectus of
Futech Interactive Products for the registration of 6,500,000 shares of its
common stock.
Brookfield, Wisconsin /s/ Virchow, Krause & Company, LLP
August 6, 1999
<PAGE> 1
Exhibit 23.3J
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report on the consolidated financial statements of Janex
International, Inc. as of December 31, 1998 and for the year then ended dated
April 7, 1999, in Amendment No. 2 to the Registration Statement (Form S-4 No.
333-80131) and related Prospectus of Futech Interactive Products, Inc.
/s/ Ernst & Young LLP
Phoenix, Arizona
August 4, 1999
<PAGE> 1
Exhibit 23.3T
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report on the financial statements of Trudy Corporation as of March
31, 1999 and for the year then ended dated June 11, 1999, in Amendment No. 2 to
the Registration Statement (Form S-4 No. 333-80131) and related Prospectus of
Futech Interactive Products, Inc.
/s/ Ernst & Young LLP
Phoenix, Arizona
August 4, 1999
<PAGE> 1
Exhibit 23.3x
CONSENT OF VIRCHOW, KRAUSE & COMPANY, LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report on the financial statements of XYZ Group, Inc. as of April 30,
1998 and for the four months then ended dated March 23, 1999, in the
Registration Statement (Form S-4 No. 333-80131) and related prospectus of Futech
Interactive Products for the registration of 6,500,000 shares of its common
stock.
Virchow, Krause & Company, LLP
/s/ Virchow, Krause & Company, LLP
Brookfield, Wisconsin
August 6, 1999
