<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
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Commission File Number 0-20612
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JUST TOYS, INC.
(Exact Name of Registrant as specified in its Charter)
-----------------------
Delaware 13-3677074
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
20 Livingstone Avenue, Dobbs Ferry, New York 10522
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(914) 674-8697
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ------- -------
The aggregate number of the Registrant's shares outstanding on November 13, 1998
was 2,203,673 shares of Common Stock, par value $.01 per share
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JUST TOYS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements:
<S> <C>
Consolidated Balance Sheets - September 30, 1998
and 1997 (unaudited) and December 31, 1997.................................... 1
Consolidated Statements of Operations (unaudited)
for the Three Months and Nine Months Ended September 30, 1998 and 1997........ 2
Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 30, 1998 and 1997......................... 3
Notes to Consolidated Financial Statements (unaudited)........................ 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................. 7
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..................................... 13
Item 4. Submission of Matters to a Vote of Security-Holders........................... 13
Item 6. Exhibits and Reports on Form 8-K.............................................. 14
SIGNATURES ..................................................................................... 16
</TABLE>
<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
---------------------------- ------------
1998 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash .................................................... $ 414,545 $ 133,172 $ 213,789
Accounts receivable, net of allowances of $192,000,
$439,000 and $688,000 (Note 2) .................... 949,804 714,631 97,778
Inventories (Note 3) .................................... 4,065,117 4,443,030 3,713,981
Prepaid and refundable income taxes ..................... 39,269 46,768 39,269
Prepaid expenses and other current assets ............... 1,676,466 1,358,422 1,710,888
------------ ------------ ------------
Total current assets .............................. 7,145,201 6,696,023 5,775,705
Property and equipment, at cost, net of accumulated
depreciation and amortization ........................... 2,992,308 3,198,916 3,223,172
Goodwill, net of accumulated amortization .................. 580,681 626,221 614,836
Other assets ............................................... 127,175 168,767 114,535
------------ ------------ ------------
TOTAL ............................................. $ 10,845,365 $ 10,689,927 $ 9,728,248
============ ============ ============
LIABILITIES
Current liabilities:
Due to factor ........................................... $ 1,827,783 $ 1,287,475
Accounts payable ........................................ 2,469,855 1,826,979 $ 1,853,246
Accrued liabilities ..................................... 887,138 1,133,506 897,153
------------ ------------ ------------
Total current liabilities ......................... 5,184,776 4,247,960 2,750,399
Series B Convertible Redeemable Preferred
Stock, 650,000 shares authorized, 292,675, 527,397
and 521,854 shares issued and outstanding
(liquidation value $1,060,947, $1,911,814 and $1,891,721) 605,613 1,010,095 1,018,990
------------ ------------ ------------
Total liabilities and Series B Stock (Note 5) .... 5,790,389 5,258,055 3,769,389
------------ ------------ ------------
STOCKHOLDERS' EQUITY
Stockholders' equity (Note 4):
Preferred stock, $1.00 par value, 2,000,000 shares
authorized:
Series A Convertible Redeemable Preferred
Stock, 150,000 shares authorized, 120,000
shares issued and outstanding (liquidation
value $120,000) ............................. 120,000 120,000 120,000
Common stock, par value $.01 per share, 15,000,000
shares authorized, 2,203,673, 2,086,312 and
2,089,084 issued and outstanding .................. 22,037 20,863 20,891
Additional paid-in capital .............................. 30,087,437 29,859,301 29,869,934
Accumulated deficit ..................................... (25,174,498) (24,568,292) (24,051,966)
------------ ------------ ------------
Total stockholders' equity ........................ 5,054,976 5,431,872 5,958,859
------------ ------------ ------------
TOTAL ....................................... $ 10,845,365 $ 10,689,927 $ 9,728,248
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
JUST TOYS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales ......................... $ 5,119,646 $ 6,695,500 $ 12,611,904 $ 15,656,159
Cost of goods sold ................ 3,096,283 4,349,188 7,566,570 9,870,139
------------ ------------ ------------ ------------
Gross profit ...................... 2,023,363 2,346,312 5,045,334 5,786,020
------------ ------------ ------------ ------------
Expenses:
Merchandising, selling, warehousing
and distribution ............. 989,127 942,888 2,711,761 2,759,807
Royalties ......................... 208,053 249,706 517,830 577,504
General and administrative ........ 858,850 854,046 2,537,607 2,523,255
------------ ------------ ------------ ------------
Total ................... 2,056,030 2,046,640 5,767,198 5,860,566
------------ ------------ ------------ ------------
Operating income (loss) ........... (32,667) 299,672 (721,864) (74,546)
------------ ------------ ------------ ------------
Other expenses:
Interest expense ............. (146,925) (162,730) (402,091) (426,243)
Other expense ................ -- (4,425) -- (1,986)
------------ ------------ ------------ ------------
Net income (loss) ................. (179,592) 132,517 (1,123,955) (502,775)
Preferred stock dividends and
accretion (Note 4) ........... (31,846) (52,987) (122,493) (162,068)
Gain on conversion of Series B
Stock (Note 5) ............... 3,976 -- 123,916 --
------------ ------------ ------------ ------------
Net income (loss) attributable to
common stockholders .......... $ (207,462) $ 79,530 $ (1,122,532) $ (664,843)
============ ============ ============ ============
Weighted average common shares
outstanding .................. 2,202,848 2,077,491 2,140,680 2,075,891
============ ============ ============ ============
Per share data:
Basic income (loss) attributable to
common stockholders .......... $ (0.09) $ 0.04 $ (0.52) $ (0.32)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
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JUST TOYS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1998 1997
----------- -----------
(Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net loss ................................................... $(1,123,955) $ (502,775)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................ 624,332 724,799
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable ..................... (852,026) (427,053)
Inventories ............................. (351,136) 187,572
Prepaid and refundable income taxes -- (17,854)
Prepaid expenses and other current assets 34,422 (240,294)
Other assets ............................ (12,640) (49,117)
Increase (decrease) in:
Accounts payable ........................ 616,609 (328,272)
Accrued liabilities ..................... (10,015) (188,070)
----------- -----------
Net cash used in operating activities ........ (1,074,409) (841,064)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment .................. (359,313) (385,091)
----------- -----------
Net cash used in investing activities (359,313) (385,091)
----------- -----------
Cash flows from financing activities:
Borrowings from factor ................................. 1,827,783 1,287,475
Proceeds from sale of common stock -- 22,348
Cash paid in connection with conversion (117,778) --
of Series B Stock (Note 5)
Dividends paid ......................................... (75,527) (104,203)
----------- -----------
Net cash provided by financing activities ......... 1,634,478 1,205,620
----------- -----------
Net increase (decrease) in cash 200,756 (20,535)
----------- -----------
Cash - beginning of period 213,789 153,707
----------- -----------
Cash - end of period ....................................... $ 414,545 $ 133,172
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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JUST TOYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
In the opinion of management, the accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. The results of operations
for the interim periods are not necessarily indicative of the results for a full
year. These consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
(1) Basic loss per share attributable to common stockholders:
Basic loss per share was calculated by dividing net loss attributable
to common stockholders by the weighted average number of shares of Common Stock
outstanding. All options, warrants and preferred stock issued by the Company
were antidilutive.
(2) Comprehensive Income:
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's financial statements.
(3) Reclassifications:
Certain previously reported amounts have been reclassified to conform
to the 1998 presentation and that of the Form 10-K for the year ended December
31, 1997.
4
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Note 2 - Accounts Receivable
Accounts receivable and amounts due from factor consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 1997
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Accounts receivable - factor ....... $ 2,651,234 $ 3,568,414 $ 5,047,225
Borrowings from factor ............. (2,651,234) (3,568,414) (5,023,147)
----------- ----------- -----------
Net due from factor ................ -- -- 24,078
Accounts receivable - trade ........ 1,141,804 1,153,631 761,700
----------- ----------- -----------
Total accounts receivable ........ 1,141,804 1,153,631 785,778
Less: Accounts receivable allowances (192,000) (439,000) (688,000)
----------- ----------- -----------
Total accounts receivable, net of
allowances ................... $ 949,804 $ 714,631 $ 97,778
=========== =========== ===========
</TABLE>
Note 3 - Inventories
The inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 1997
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Finished goods............................. $ 2,593,016 $ 2,976,830 $ 2,643,941
Material components and supplies........... 1,472,101 1,466,200 1,070,040
----------- ----------- ------------
Total.................................... $ 4,065,117 $ 4,443,030 $ 3,713,981
=========== =========== ============
</TABLE>
Note 4 - Stockholders' Equity
Stockholders' equity consists of the following:
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Accumulated
Stock Stock Capital Deficit Total
---------- --------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1997............ $ 120,000 $ 20,891 $ 29,869,934 $(24,051,966) $ 5,958,859
Conversion of Series B Stock to
Common Stock (Note 5).............. 1,146 217,503 218,649
Net loss (unaudited)................. (1,123,955) (1,123,955)
Preferred Stock dividends and
accretion.......................... (122,493) (122,493)
Gain on conversion of Series B
Stock (Note 5)..................... 123,916 123,916
---------- --------- ------------ ------------- -----------
Balance September 30, 1998
(unaudited)........................ $ 120,000 $ 22,037 $ 30,087,437 $ (25,174,498) $ 5,054,976
========== ========= ============ ============= ===========
</TABLE>
5
<PAGE>
Effective September 4, 1998, the Company implemented a one-for-two
reverse stock split of the Company's common stock. The number of shares of
common stock outstanding and the earnings per share have been retroactively
adjusted to reflect the reverse stock split.
The number of shares and exercise price of the Company's outstanding
warrants and options for future issuance of common stock were proportionately
adjusted in accordance with their terms to reflect the reverse stock split. The
reverse stock split also resulted in the conversion price of the Series A Stock
and the conversion price and the number of shares of common stock issuable upon
conversion of the Series B Stock being proportionately adjusted as provided in
each such security's Certificate of Designations, Preferences and Rights.
Note 5 - Conversion of Series B Stock
On April 9, 1998, the Company offered to pay and exchange $0.5075 in
cash and one half of one share of the Company's Common Stock (as adjusted for
the one-for-two reverse stock split) for each share of Series B Stock (the
"Exchange Offer"). The holders of 232,075 shares of Series B Stock accepted the
Exchange Offer and the Company paid $117,778 in cash and issued 116,038 shares
of Common Stock in exchange for the 232,075 shares of Series B Stock. The market
value of the Common Stock and carrying value of the Series B Stock on the date
of exchange amounted to $218,649 and $460,343, respectively. The total
consideration paid by the Company was less than the carrying value of the Series
B Stock by $123,916, and has been accounted for as a gain on conversion of the
Series B Stock.
6
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward looking information
and describes the expectations of the Company concerning future business
conditions and the outlook for the Company based on currently available
information. Wherever possible, the Company has identified these forward looking
statements by words such as "anticipates," "believes," "estimates," "expects"
and similar expressions. These forward looking statements are subject to risks
and uncertainties which could cause the Company's actual results or performance
to differ materially from those expressed in these statements. These risks and
uncertainties include the following: reliance on manufacturers based in China,
seasonality and quarterly fluctuations, government regulation, changes in
consumer preferences, reliance on new product introduction, dependence of a
limited number of customers, customer inventory management, the impact of
competition on revenues, margins and pricing and other risks and uncertainties
as may be disclosed from time to time in the Company's public announcements and
filings with the Securities and Exchange Commission. The Company assumes no
obligation to update publicly any forward looking statements, whether as a
result of new information, future events or otherwise.
Results of Operations
Three Months Ended September 30, 1998 and 1997
Net sales for the three months ended September 30, 1998 decreased 23.5%
to $5,120,000 from $6,696,000 in the comparable period in 1997. The decrease in
sales is due primarily to (a) the significant reduction in inventories and
increased seasonality of purchasing patterns at a number of the Company's larger
customers during the three months ended September 30, 1998 and (b) a change in
the Company's product mix to product lines which are more seasonal in nature
than product lines sold in 1997. Net sales of the Company's Sports toys
decreased 34.5% to $1,431,000 during the third quarter of 1998 from $2,186,000
in the comparable period in 1997. Net sales of the Company's Toys category
decreased 18.2% to $3,689,000 in the third quarter of 1998 from $4,510,000 in
the same period of 1997. The change in sales in these categories was primarily
attributable to (a) changes in product mix which have resulted from the Company
selectively discontinuing products it believes will not achieve an acceptable
return on investment in the future and (b) the Company's investments in new
products, primarily in the Toys category.
Gross profit as a percentage of net sales increased to 39.5% for the
three months ended September 30, 1998 compared to 35.0% for the three months
ended September 30, 1997. This increase resulted primarily from (a) a change in
product mix which is a result of the Company selectively discontinuing products
it believes will not achieve an acceptable return on investment in the future
and (b) the Company's efforts to market products with a higher gross profit.
Gross profit decreased 13.8% to $2,023,000 in the third quarter of 1998 from
$2,346,000 in the comparable period in 1997 as a result of the decrease in
sales.
The Company's net sales and gross margin, as a percentage of sales, is
dependent on its mix of business during a given time period. Variables include
such factors as whether merchandise is shipped from a domestic warehouse or
directly from the Orient, whether the merchandise is purchased from overseas
sources or is produced domestically and the specific blend of products shipped
to the Company's customers.
7
<PAGE>
Royalty expense increased as a percentage of net sales to 4.1% in the
period ended September 30, 1998 from 3.7% for the period ended September 30,
1997 primarily due to an increase in net sales of products subject to royalties,
which are a result of the Company's investment in new products.
Operating loss was $33,000 in the three months ended September 30, 1998
compared to an operating income of $300,000 in the comparable period in 1997.
This difference is primarily attributable to the decrease in sales and gross
profit.
Net loss was $180,000 in the third quarter of 1998 as compared to a net
income of $133,000 in the comparable period in 1997. During the third quarter of
1998 and 1997, the Company recorded the dividends paid on its preferred stock
outstanding and the accretion of the Series B Stock issued in 1996 to its
redemption value as a change in stockholder's equity and deducted these expenses
in computing net loss attributable to common stockholders. Net loss attributable
to common stockholders during the third quarter of 1998 was reduced by a gain on
the conversion of Series B Stock of $3,976. Basic loss per share attributable to
common stockholders was $0.09 per share from an income of $0.04 per share on
2,203,000 and 2,077,000 weighted average shares outstanding in the three months
ended September 30, 1998 and 1997, respectively.
Nine Months Ended September 30, 1998 and 1997
Net sales for the nine months ended September 30, 1998 decreased 19.4%
to $12,612,000 from $15,656,000 in the comparable period in 1997. The decrease
in sales is due primarily to (a) the significant reduction in inventories and
increased seasonality of purchasing patterns at a number of the Company's larger
customers during the nine months ended September 30, 1998 and (b) a change in
the Company's product mix to product lines which are more seasonal in nature
than product lines sold in 1997. Net sales of the Company's Sports toys
decreased 41.2% to $4,162,000 during the first nine months of 1998 from
$7,073,000 in the comparable period in 1997. Net sales of the Company's Toys
category decreased 1.6% to $8,450,000 in the first nine months of 1998 from
$8,583,000 in the same period of 1997. The change in sales in these categories
was primarily attributable to (a) changes in product mix which have resulted
from the Company selectively discontinuing products it believes will not achieve
an acceptable return on investment in the future and (b) the Company's
investments in new products, primarily in the Toys category.
Gross profit as a percentage of net sales increased to 40.0% for the
nine months ended September 30, 1998 compared to 37.0% for the nine months ended
September 30, 1997. This increase resulted primarily from (a) a change in
product mix which is a result of the Company selectively discontinuing products
it believes will not achieve an acceptable return on investment in the future
and (b) the Company's efforts to market products with a higher gross profit.
Gross profit decreased 12.8% to $5,045,000 in the first nine months of 1998 from
$5,786,000 in the comparable period in 1997 as a result of the decrease in
sales.
The Company's net sales and gross margin, as a percentage of sales, is
dependent on its mix of business during a given time period. Variables include
such factors as whether merchandise is shipped from a domestic warehouse or
directly from the Orient, whether the merchandise is purchased from overseas
sources or is produced domestically and the specific blend of products shipped
to the Company's customers.
Royalty expense increased as a percentage of net sales to 4.1% in the
period ended September 30, 1998 from 3.7% for the period ended September 30,
1997 primarily due to an increase in net sales of products subject to royalties,
which are a result of the Company's investment in new products.
8
<PAGE>
Operating loss was $722,000 in the nine months ended September 30, 1998
compared to an operating loss of $75,000 in the comparable period in 1997. This
difference is primarily attributable to the decrease in sales and gross profit.
Net loss was $1,124,000 in the first nine months of 1998 as compared to
$503,000 in the comparable period in 1997. During the first nine months of 1998
and 1997, the Company recorded the dividends paid on its preferred stock
outstanding and the accretion of the Series B Stock issued in 1996 to its
redemption value as a change in stockholder's equity and deducted these expenses
in computing net loss attributable to common stockholders. Net loss attributable
to common stockholders during the nine months ended September 30, 1998 was
reduced by a gain on the conversion of Series B Stock of $123,916. Basic loss
per share attributable to common stockholders increased to $0.52 per share from
$0.32 per share on 2,141,000 and 2,076,000 weighted average shares outstanding
in the nine months ended September 30, 1998 and 1997, respectively.
Backlog
Total order backlog at September 30, 1998 and 1997 was approximately
$1,509,000 and $1,929,000, respectively. The Company expects substantially all
of such orders to be filled during 1998. Cancellations may materially reduce the
amount of sales realized from the Company's backlog. The business of the Company
is characterized by customer order patterns which vary from one year to the next
largely because of the different levels of consumer acceptance of a product
line, product availability, marketing strategies, inventory levels of retailers
and differences in overall economic conditions. The use of just-in-time/quick
response inventory techniques and replenishment programs by larger retailers has
resulted in fewer orders being placed in advance of shipment and more orders for
immediate delivery. This distorts the comparisons of unshipped orders at any
given date. The Company expects these trends to continue. Additionally, it is a
general industry practice that orders are subject to amendment or cancellation
by customers prior to shipment. Therefore, comparisons of unshipped orders in
any specific period in any given year with those same periods in preceding years
are not necessarily indicative of sales for an entire year. Order backlog is
also impacted by a shift in the Company's revenues to the second half of the
year with fourth quarter revenues becoming increasingly significant. The Company
does not consider total order backlog to be a meaningful indicator of future
sales.
Liquidity and Capital Resources
The Company's working capital at September 30, 1998 was $1,960,000 as
compared to $3,025,000 at December 31, 1997.
Inventory levels were $378,000 lower at September 30, 1998 compared
with September 30, 1997 as a result of the implementation of new inventory
control systems and the Company selectively discontinuing products it believes
will not achieve an acceptable return on investment in the future.
Cash used in operating activities for the nine months ended September
30, 1998 was $1,074,000 as compared with $841,000 in the comparable period in
1997. The increase in cash needs was caused by the increased seasonality of the
Company's product lines and the decreased sales for the first nine months of the
year.
9
<PAGE>
Cash used in investing activities was $359,000 and $385,000 in the nine
month periods ended September 30, 1998 and 1997, respectively, which was
primarily attributable to capital expenditures for fixed assets, including molds
and tooling for new products.
Cash provided by financing activities was $1,634,000 and $1,206,000 in
the first nine months of 1998 and 1997, respectively, primarily from borrowings
from the Company's factor.
The Company's factoring agreement with Milberg Factors, Inc.
("Milberg") provides for advances equal to the lesser of 85% of total accounts
receivable or $5,000,000. The factoring charge is 0.65% of receivables. Advances
bear interest at the rate of prime plus one percent. Milberg has also agreed to
advance to the Company, at the Company's request, the lesser of $2,000,000 or
50% of the Company's inventory located in the United States. Milberg has also
agreed to advance to the Company additional funds during 1998 based upon cash
flow projections approved by Milberg. Such advances will also bear interest at
the rate of prime plus one percent. Additionally, the factoring arrangement with
Milberg is secured by a mortgage on the real property owned by the Company's
manufacturing subsidiary.
During the nine months ended September 30, 1998, 229,179 shares of
Series B Stock were converted into 114,590 shares of Common Stock.
The Company believes that its cash flow from operations and available
borrowings will be adequate to meet its obligations for the ensuing year.
Seasonality
The toy industry is typically seasonal in nature due to the heavy
demand for toy products during the Christmas season. During the past several
years, the Company has experienced a shift in its revenues to the second half of
the year with fourth quarter revenues becoming increasingly significant. The
Company expects that this trend will continue due to industry changes and due to
changes to its product mix related to the doll carriage and stroller product
lines and the Play Table product lines which were acquired in 1996. This
concentration increases the risk of (a) underproduction of popular items, (b)
overproduction of less popular items and (c) failure to achieve tight and
compressed shipping schedules.
Year 2000
Many existing computer systems and programs process transactions using
two digits rather than four digits for the year of a transaction. Unless the
hardware and/or the software has been modified, a significant number of those
computer systems and programs may process a transaction with a date of the year
2000 as the year "1900", which could cause the system or the program to fail or
create erroneous results before, on or after January 1, 2000 (the "Y2K Issue").
The Company's Y2K project is intended to reduce the effects on the
Company's business of the Y2K Issue. The Y2K project involves: (i) an inventory
of Y2K items and an assessment of the Y2K compliance of items determined to be
material to the Company; (ii) upgrading or replacing material items that are
determined not to be Y2K compliant; (iii) testing material items and evaluating
Y2K compliance of the Company's customers, suppliers and contractors; and (iv)
designing and implementing contingency plans. All phases of the project are
being performed by the Company. Testing of the Company's computer systems and
programs as upgraded or replaced under conditions simulating actual use is
scheduled to be completed by June 1999.
10
<PAGE>
The Company's principal computer systems consist of: (i) management
information software ("MIS") for accounts receivable, general ledger, payables,
order entry, sales reporting, inventory tracking and product distribution; (ii)
electronic data interchange ("EDI") for order-taking, invoicing and the like
between the Company and its major customers; (iii) systems involved in the
Company's manufacturing operations such as materials purchasing and
manufacturing scheduling; and (iv) local area network and personal computer
operating systems.
The Company installed a Y2K compliant MIS system at its headquarters in
early 1997. Initial testing has confirmed the system's Y2K compliance and the
Company plans further testing throughout the Y2K project. The MIS systems at the
Company's United States manufacturing and Hong Kong subsidiaries are not
currently Y2K compliant. The Company is in the process of upgrading, replacing
and testing such systems. The Company estimates that the upgrading, replacing
and testing will cost approximately $100,000 which will be funded from cash flow
from operations. There is no assurance at this time that software upgrades or
replacements will resolve all of the Company's MIS Y2K issues.
The Company has installed and successfully tested Y2K compliant EDI
software. The Company is communicating with its customers, contractors and
suppliers to evaluate their EDI Y2K compliance. The Company believes that over
the upcoming months its major customers plan to test their EDI systems for
internal, intermediary and supplier Y2K compliance. The Company would be unable
to receive and invoice orders from a customer though EDI if the customer or its
EDI intermediaries are not Y2K compliant. Although the Company does not transmit
electronic orders to its contractors and suppliers, delays or non- delivery of
goods to the Company could arise from Y2K Issues affecting their businesses.
The Company's initial tests have confirmed that the Company's local
area network operating system is Y2K compliant. The Company intends to upgrade
or replace any manufacturing operations software or other personal computer
based software found not to be Y2K compliant. The Company also intends to
replace personal computers found not to be Y2K compliant. The Company expects
the software upgrades and replacements and personal computer replacements to be
completed by June 1999 at an estimated cost of less than $25,000.
The failure to correct a material Y2K Issue could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Particularly because
of the uncertainty of the Y2K readiness of customers, suppliers and contractors,
the Company is unable to assess at this time whether the consequences of the Y2K
Issue will have a material impact on the Company's results of operations,
liquidity or financial condition.
To date, the Company has not established a contingency plan for
possible Y2K Issues. Where needed, the Company intends to establish contingency
plans based on its testing and evaluation experience.
The cost of Y2K compliance and the referenced completion dates are
based on management's best estimates and may be updated as additional
information becomes available. Reference is made to the first paragraph of Part
I Item 2 of this report, which addresses forward-looking statements made by the
Company.
11
<PAGE>
Other Information
Effective February 23, 1998, new continued listing standards were
adopted for securities trading on the Nasdaq National Market. The Company's
Common Stock is not in compliance with two of the new requirements, specifically
maintenance of (i) a one dollar per share closing bid price and (ii) a
$5,000,000 market value of public float. The Company presented a plan to a
Nasdaq Listing Qualifications Panel which provides for the taking of action
designed to achieve compliance with the $1.00 per share minimum bid price
requirement allowing the Company's common stock to be included on The Nasdaq
SmallCap Market under its continued listing criteria. The plan includes the one
for two reverse stock split of the Company's common stock which was approved by
the Company's stockholders on September 1, 1998 and implemented on September 4,
1998. After the close of business on October 29, 1998, the Company was notified
of the Panel's determination that the plan did not enable the common stock to
comply and sustain the requirements for continued listing on the Nasdaq National
Market. The Panel also determined that the common stock's bid price did not
satisfy the requirements for listing on The Nasdaq SmallCap Market. The Panel
further determined to delist the common stock from the Nasdaq Stock Market
effective October 29, 1998. The Company has requested that the Nasdaq Review
Counsel review the Panel's decision. There can be no assurance that the Review
Counsel will change the Panel's determinations. The Company's common stock is
currently being quoted on the OTC Bulletin Board under the symbol "JUST".
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On September 4, 1998 (the "Effective Date"), the Company amended its certificate
of incorporation to effect a one-for-two reverse stock split of its common
stock, par value $.01 per share which was approved by the Company's stockholders
on September 1, 1998. On the Effective date, the number of shares of common
stock held by each stockholder were deemed to represent one-half of the number
of shares of common stock owned immediately prior to the reverse stock split
with fractional shares rounded to the next highest whole share.
Item 4. Submission of Matters to a Vote of Security-Holders
The Company held its annual meeting of stockholders on September 1, 1998 in
Dobbs Ferry, New York. The matters submitted to a vote of the Company's
stockholders were (i) the election of seven directors, (ii) the approval of a
proposal to amend the Company's Certificate of Incorporation to implement a
one-for- two reverse stock split, and (iii) ratification of the appointment of
Ernst & Young LLP as independent auditors for the 1998 fiscal year. Votes of
shares reported below reflect pre-reverse stock split shares.
12
<PAGE>
The Company's shareholders elected for one year terms all persons nominated for
directors as set forth in the Company's proxy statement dated August 3, 1998.
Below is the result of the vote:
Name For Withheld Authority
- ---- --- ------------------
Roger Gimbel 3,711,529 45,814
Charmaine Jefferson 3,660,529 96,814
Howard Kaufman 3,711,529 45,814
Morton J. Levy 3,711,529 45,814
Irwin Naitove 3,660,529 96,814
Donald D. Shack 3,663,029 94,314
Barry Shapiro 3,711,529 45,814
The Company's stockholders approved a proposal to amend the Company's
Certificate of Incorporation to implement a one-for-two reverse stock split by a
vote of 3,701,094 for, 50,614 against and 5,635 abstaining.
The Company's stockholders ratified the Board of Director's appointment
of Ernst & Young LLP as the Company's independent auditors for the 1998 fiscal
year by a vote of 3,694,944 for, 7,864 against and 54,535 abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Certificate of Incorporation, incorporated by reference to Exhibit
3.1 to the Registration Statement on Form S-1 (File No. 33-50878).
3.2 Certificate of Amendment of Certificate of Incorporation
incorporated by reference to Exhibit 3.5 of the Quarterly Report
on Form 10-Q filed with the Securities and Exchange Commission on
November 8, 1996 (the "1996 3rd Quarter 10-Q").
3.3 Certificate of Designations, Preferences and Rights of the Series
A Convertible Redeemable Preferred Stock (included in Exhibit 4.1
hereof).
3.4 Certificate of Designations, Preferences and Rights of the Series
B Convertible Redeemable Preferred Stock (included in Exhibit 4.2
hereof).
3.5 Amended and Restated By-laws incorporated by reference to Exhibit
3.4 to the 1996 3rd Quarter 10-Q.
*3.6 Certificate of Amendment of Certificate of Incorporation, dated
September 3, 1998.
4.1 Certificate of Designations, Preferences and Rights of the Series
A Convertible Redeemable Preferred Stock, incorporated by
reference to Exhibit 4 of the Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on November 7, 1995.
4.2 Certificate of Designations, Preferences and Rights of the Series
B Convertible Redeemable Preferred Stock, incorporated by
reference to Exhibit 3.2 of the Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 10, 1996 (the
"July 1996 Form 8- K").
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4.3 Form of Warrant, dated June 26, 1995, issued to various parties in
respect of the aggregate of 60,000 shares of the Company's Common
Stock, incorporated by reference to Exhibit 4.2 of the July 1996
Form 8-K.
*4.4 Warrant agreement, dated as of August 31, 1998, between the
Company and Gerard Klauer Mattison & Co., Inc.
*10.1 Engagement letter, dated August 31, 1998, between the Company and
Gerard Klauer Mattison & Co., Inc. (Certain information has been
omitted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended).
+27 Financial Data Schedule.
- --------------------------
* Filed herewith
+ Filed with the Securities and Exchange Commission only pursuant to
Article 5 of Regulation S-X.
(b) Reports on Form 8-K:
During the third quarter of 1998, the Company filed one report on Form
8-K with respect to Item 5--Other Events with the Securities and Exchange
Commission on September 4, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1998
JUST TOYS, INC.,
a Delaware corporation
By: /s/ Barry Shapiro
----------------------------
Barry Shapiro
Chief Executive Officer
By: /s/ David Schwartz
----------------------------
David Schwartz
Chief Financial Officer and
Principal Accounting Officer
15
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION OF
JUST TOYS, INC.
--------
Under Section 242 of the General Corporation Law of the State of Delaware
1. The name of the corporation is JUST TOYS, INC. (the "Corporation").
2. The certificate of incorporation of the Corporation was filed with
the Secretary of State of Delaware on August 3, 1992.
3. The certificate of incorporation of the Corporation is hereby
amended, as authorized by Section 242 of the General Corporation Law, to effect
a 1 for 2 reverse stock split of the Corporation's common stock, par value $.01
per share.
4. To accomplish the foregoing amendment, Article FOURTH of the
certificate of incorporation of the Corporation is hereby amended by adding the
following to the end of such Article FOURTH:
Effective as of 5:00 p.m., New York time, on the date the
Certificate of Amendment to this Certificate of Incorporation amending
this Article FOURTH is filed with the Secretary of State of the State
of Delaware (the "Effective Date"), each two issued and outstanding
shares of common stock, par value $.01 per share, of this Corporation
("Pre-Split Common Stock") shall be automatically, without further
action by the holders of the Pre-Split Common Stock, converted into one
share of common stock, par value $.01 per share, of this Corporation
("Post-Split Common Stock") to give effect to a one-for-two reverse
stock split (the "Reverse Split"). From and after the Effective Date,
each certificate representing shares of Pre-Split Common Stock shall be
deemed to represent for all purposes the number of shares of Post-Split
Common Stock into which the shares of Pre-Split Common Stock were
converted pursuant to the Reverse Split, with fractional shares rounded
to the next highest whole share.
5. The amendment to the Certificate of Incorporation of the Corporation
provided for herein was approved by a majority of the members of the Board of
Directors of the Corporation and later followed by the affirmative vote of the
holders of a majority of the outstanding shares entitled to vote thereon at the
annual meeting of the shareholders of the Corporation duly called and held on
the 1st day of September, 1998, a quorum being present.
<PAGE>
IN WITNESS WHEREOF, I have signed this document on the date set forth
below and do hereby affirm, under penalties of perjury, that the statements
contained therein have been examined by me and are true and correct.
Dated: September 1, 1998
/s/ Barry Shapiro
-------------------------------
Barry Shapiro, President
Attest:
/s/ Seymour Rosenthal
- ----------------------------------
Seymour Rosenthal, Secretary
<PAGE>
JUST TOYS, INC.
AND
GERARD KLAUER MATTISON & CO., INC.
--------
WARRANT AGREEMENT
<PAGE>
WARRANT AGREEMENT dated as of August 31, 1998 between JUST
TOYS, INC. (the "Company"), and GERARD KLAUER MATTISON & CO., INC.("Gerard
Klauer").
W I T N E S S E T H:
WHEREAS, pursuant to a letter agreement dated concurrently
herewith (the "Retention Agreement"), the Company has retained Gerard Klauer, on
an exclusive basis, as its investment advisor for the purpose of identifying and
assisting it with the structure, evaluation, negotiation and financing of
Acquisition Transactions, as that term is defined in the Retention Agreement,
("Acquisition Transactions"); and
WHEREAS, as full consideration for Gerard Klauer's services to
the Company, the Company has agreed to issue to Gerard Klauer and Gerard Klauer
has agreed to accept warrants to purchase 500,000 shares of the Company's common
stock, par value $.01 per share ("Common Stock").
NOW, THEREFORE, in consideration of the premises, the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant. Gerard Klauer is hereby granted the right to purchase, from
August 31, 1998 until 5:00 P.M., New York time, on August 31, 2003 (the
"Exercise Period"), up to an aggregate of 500,000 shares of Common Stock (the
"Shares") at an initial exercise price (subject to adjustment as provided in
Section 9 hereof) of $1.00 per share of Common Stock subject to the terms and
conditions of this Agreement (the "Warrants").
2. Exercisability.
2.1 The Warrants will be exercisable with respect to 100,000
Shares upon execution of this Agreement.
2.2 The Warrants will become exercisable with respect to the
remaining 400,000 Shares upon consummation of Acquisition Transactions according
to the following schedule:
2.2.1 when aggregate Achieved Net Sales (as defined
below) from Acquisition Transactions ("Achieved Net Sales") equal any amount up
to $10,000,000, the Warrants shall become exercisable with respect to such
number of Shares as equals 200,000 multiplied by a fraction, the numerator of
which is Achieved Net Sales and the denominator of which is $10,000,000; and
2.2.2 when aggregate Achieved Net Sales exceed
$10,000,000 and equal any amount up to $25,000,000, the Warrants shall become
exercisable with respect to such number of additional Shares as equals 100,000
multiplied by a fraction, the numerator of which is Achieved Net Sales minus
$10,000,000 and the denominator of which is $15,000,000; and
<PAGE>
2.2.3 when aggregate Achieved Net Sales exceed
$25,000,000, the Warrants shall become exercisable with respect to such number
of additional Shares (not exceeding 100,000 Shares), as equals 100,000
multiplied by a fraction, the numerator of which is Achieved Net Sales minus
$25,000,000 and the denominator of which is $10,000,000.
As used herein, "Achieved Net Sales" means the gross sales (less customary trade
and cash discounts) of the product line, company, division or subsidiary which
is the subject of an Acquisition Transactions for the 12 month period
immediately preceding the closing date of such Acquisition Transactions as
reflected on the books and records of the selling entity of the product line or
of the Company, division or subsidiary being acquired computed in accordance
with generally acceptable accounting principles.
2.3 The Warrants shall become fully exercisable upon the
occurrence of either of following events:
2.3.1 if, during the Exercise Period, gross sales
(less customary trade and cash discounts) of toy lines acquired in Acquisition
Transactions shall exceed $50,000,000; or
2.3.2 if prior to termination of the Retention
Agreement, a Change in Control, as that term is defined in the Retention
Agreement ("Change in Control"), shall have occurred.
2.4 If the Retention Agreement is terminated pursuant to
Section 2 of the Retention Agreement, all Warrants which have not theretofore
become exercisable shall forthwith terminate and be of no further force or
effect, except that the Warrants shall remain exercisable after termination of
the Retention Agreement in accordance with the provisions of Section 2.3.1 above
and during the 18 month period following termination of the Retention Agreement
for Acquisition Transactions effected during that period in accordance with
Section 1 of the Retention Agreement.
3. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
4. Exercise of Warrants. The Warrants are exercisable at an initial
exercise price (subject to adjustment as provided in Section 9 hereof) per share
of Common Stock set forth in Section 7 hereof payable to the Company by
certified or official bank check in New York Clearing House funds, subject to
adjustment as provided in Section 9 hereof. Upon surrender of a Warrant
Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Exercise Price (as hereinafter defined) for the
shares of Common Stock purchased at the Company's principal offices in New York
(presently located at 20 Livingston Avenue, Dobbs Ferry, New York 10522) the
registered holder of a Warrant Certificate ("Holder" or "Holders") shall be
entitled to receive a certificate or certificates for the shares of Common Stock
so purchased. The
2
<PAGE>
purchase rights represented by each Warrant Certificate are exercisable at the
option of the Holder thereof, in whole or in part (but not as to fractional
shares of the Common Stock underlying the Warrants). In the case of the purchase
of less than all the shares of Common Stock purchasable under any Warrant
Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the shares of Common stock purchasable thereunder.
5. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock underlying the Warrants,
shall be made forthwith (and in any event within ten business days thereafter)
without charge to the Holder thereof including, without limitation, any tax
which may be payable in respect of the issuance thereof, and such certificates
shall (subject to the provisions of Section 6 and Section 8 hereof) be issued in
the name of, or in such names as may be directed by, the Holder thereof;
provided, however, that the Company shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and delivery
of any such certificates in a name other than that of the Holder and the Company
shall not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
The Warrant Certificates and the certificates representing the
Shares issuable upon the exercise of the Warrants shall be executed on behalf of
the Company by the manual or facsimile signature of the then present Chairman or
Vice Chairman of the Board of Directors or President or Vice President of the
Company under its corporate seal reproduced thereon, attested to by the manual
or facsimile signature of the then present Secretary or Assistant Secretary of
the Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
6. Restriction On Transfer of Warrants. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrant is
being acquired as an investment and not with a view to the distribution thereof;
that the Warrants may not be sold, transferred, assigned, hypothecated or
otherwise disposed of, in whole or in part, except to officers, directors or
employees of Gerard Klauer.
7. Exercise Price.
7.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 9 hereof, the initial exercise price of the Warrants shall
be $1.00 per share of Common Stock. The adjusted exercise price shall be the
price which shall result from time to time from any and all adjustments of the
initial exercise price in accordance with the provisions of Section 9 hereof;
provided, however, that the adjusted exercise price shall never be reduced below
the par value of the Common Stock.
3
<PAGE>
7.2 Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or other adjusted exercise price, depending upon
the context.
8. Registration Rights.
8.1 Registration Under the Securities Act of 1933. The
Warrants and the Shares issuable upon exercise of the Warrants have not been
registered under the Securities Act of 1933, as amended (the "Act"). Upon
exercise, in part or in whole, of the Warrants, certificates representing the
Shares underlying the Warrants (the "Warrant Shares") shall bear the following
legend:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("Act"), and may not be
offered or sold except pursuant to (i) an effective registration
statement under the Act, (ii) to the extent applicable, Rule 144 under
the Act (or any similar rule under such Act relating to the disposition
of securities), or (iii) an opinion of counsel, if such opinion shall
be reasonably satisfactory to counsel to the issuer, that an exemption
from registration under such Act is available.
8.2 Piggyback Registration. If, at any time commencing after
the date hereof and expiring seven years thereafter, the Company proposes to
register any of its securities under the Act (other than in connection with a
merger or pursuant to Form S-8 or a successor form) it will give written notice
by registered mail, at least 30 days prior to the filing of each such
registration statement, to all of the Holders of the Warrants and/or the Warrant
Shares (the "Registrable Securities") of its intention to do so. If the Holders
of the Warrants and/or Warrant Shares notify the Company within 20 days after
receipt of any such notice of its or their desire to include any such securities
in such proposed registration statement, the Company shall afford each of the
Holders of the Warrants and/or Warrant Shares the opportunity to have any such
Warrant Shares registered under such registration statement.
Notwithstanding the foregoing, if, in the case of an
underwritten offering by the Company, the managing underwriter of such offering
shall advise the Company in writing that, in its opinion, the distribution of
the Warrant Shares requested to be included in the registration concurrently
with the securities being registered by the Company would adversely affect the
distribution of such securities by the Company, then the offering and sale of
such Warrant Shares shall be delayed for such period, not to exceed 90 days, as
the managing underwriter shall request. In the event of a delay as provided in
the preceding sentence, the Company shall file such supplements and post
effective amendments, and take any such other steps as may be necessary, to
permit the proposed offering and sale of such Shares for a period of 90 days
immediately following the end of such period of delay.
Notwithstanding the provisions of this Section 8.2, the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 8.2 (irrespective of whether a written request
for inclusion of any such securities shall have been made) to elect not to
4
<PAGE>
file any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof.
8.3 Demand Registration.
(a) At any time commencing after the date hereof and
expiring five years thereafter, the Holders of the Warrants and/or Warrant
Shares representing a "Majority" (as hereinafter defined) of such securities
(assuming the exercise of all of the Warrants) shall have the right (which right
is in addition to the registration rights under Section 8.2 hereof), exercisable
by written notice to the Company, to have the Company prepare and file with the
Commission on two occasions, a registration statement and such other documents,
including a prospectus, as may be necessary in the opinion of both counsel for
the Company and counsel for the Underwriters and Holders, in order to comply
with the provisions of the Act, so as to permit a public offering and sale of
their respective Warrant Shares for nine consecutive months by such Holders and
any other Holders of the Warrants and/or Warrant Shares who notify the Company
within ten days after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written
notice of any registration request under this Section 8.3 by any Holder or
Holders to all other registered Holders of the Warrants and the Warrant Shares
within ten days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under
Section 8.2 and subsection (a) of this Section 8.3, at any time commencing after
the date hereof and expiring five years thereafter, any Holder of the Warrants
and/or Warrant Shares shall have the right, exercisable by written request to
the Company, to have the Company prepare and file, on one occasion, with the
Commission a registration statement so as to permit a public offering and sale
for nine consecutive months by any such Holder of its Warrant Shares provided,
however, that all costs incident thereto shall be at the expense of the Holder
or Holders making such request.
8.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Section 8.2 or Section 8.3 hereof, the
Company covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within 30 days of receipt of any demand therefor, shall
use its best efforts to have any registration statements declared effective at
the earliest possible time, and shall furnish each Holder desiring to sell
Warrant Shares such number of prospectuses as shall reasonably be requested.
Notwithstanding the foregoing, the Company shall be entitled
to postpone, for a period of not more than 120 days after receipt of a request
to effect a registration, the filing of any registration statement otherwise
required to be prepared and filed by it pursuant to Section 8.3 hereof if, at
the time it receives a request for registration, the Board of Directors of the
Company determines
5
<PAGE>
in its reasonable business judgment that such registration and offering would
interfere with any material financing, acquisition, corporate reorganization or
other material transaction or development involving the Company and promptly
gives the Holders demanding registration written notice of such determination;
provided that (i) upon such postponement by the Company, the Company shall be
required to file such registration statement as soon as practicable after the
Board of Directors of the Company shall determine, in its reasonable business
judgment, that such registration and offering will not interfere with the
aforesaid material financing, acquisition, corporate reorganization or other
material transaction or development involving the Company, (ii) the Company may
not utilize this right more than once, (iii) the Holders who made such written
request to effect such registration, may, at any time in writing, withdraw such
request for such registration and therefore preserve the rights provided in
Section 8.3 hereof for such Holders to again request such registration, and (iv)
the Exercise Period shall automatically be extended by an additional 180 days.
(b) The Company shall pay all costs (excluding fees
and expenses of Holder(s)' counsel and any underwriting or selling commissions),
fees and expenses in connection with all registration statements filed pursuant
to Sections 8.2 and 8.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) will pay all costs, fees and expenses in connection with any
registration statement filed pursuant to Section 8.3(c). If the Company shall
fail to comply with the provisions of Section 8.4(a), the Company shall, in
addition to any other equitable or other relief available to the Holder(s),
extend the Exercise Period by such number of days as shall equal the delay
caused by the Company's failure, and be liable for any or all damages as the
Holder(s) may be entitled to as a matter of law.
(c) The Company will take all necessary action which
may be required in qualifying or registering the Warrant Shares included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Holder(s), provided that
the Company shall not be obligated to execute or file any general consent to
service of process or to qualify as a foreign corporation to do business under
the laws of any such jurisdiction.
(d) The Company agrees to indemnify and hold harmless
each Holder of the Warrant Shares to be sold pursuant to any registration
statement ("Registration Statement") and each person, if any, who controls any
such Holder within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and each of
them, from and against any and all loss, liability, claim, damage, expense or
action, joint or several (including, but not limited to, any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever and any amount
paid in settlement of any litigation, commenced or threatened, or of any claim
whatsoever, if such settlement is effected with the written consent of the
Company, which consent shall not be unreasonably withheld), to which they or any
of them may become subject under the Act, the Exchange Act or other Federal or
state statutory law or regulation, at common law or otherwise, insofar as such
loss, liability, claim, damage, expense or action arises out of (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (or
6
<PAGE>
any amendment thereto), or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, (ii) any untrue statement or alleged untrue statement of a
material fact contained in a preliminary prospectus or prospectus (or any
amendment or supplement thereto), or any omission or alleged omission therefrom
of a material fact required to be stated therein or necessary in order to make
the statement therein, in light of the circumstances under which they were made,
not misleading, or (iii) any untrue statement or alleged untrue statement of a
material fact contained in any application or other document executed by the
Company or based upon written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify all or any of the Warrant
Shares under the securities laws thereof or filed with the Securities and
Exchange Commission ("SEC"), the National Association of Securities Dealers,
Inc. ("NASD") or any securities exchange, or any omission or alleged omission
therefrom of a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the Company shall not be
liable in any such case to the extent that such untrue statement or omission or
such alleged untrue statement or omission was made in reliance upon and in
conformity with information furnished in writing by or on behalf of any Holder
to the Company expressly for use in the Registration Statement (or any amendment
thereto), any such preliminary prospectus or the prospectus (or any amendment or
supplement thereto) or any such application or document. The indemnity contained
in this Section 8.4(d) is in addition to any liability which the Company may
otherwise have to any Holder or any controlling person of a Holder.
(e) Each Holder severally agrees that it will
indemnify and hold harmless the Company, each of its officers who signs the
Registration Statement, each of its directors, and each person who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any and all loss, liability, claim, damage, expense or
action, joint or several to the same extent as the foregoing indemnity from the
Company to the Holders, but only with respect to statements or omissions made in
the Registration Statement (or any amendment thereto) or a preliminary
prospectus or the prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with information furnished in writing by such
Holder to the Company expressly for use in the Registration Statement (or any
amendment thereto). The indemnity contained in this Section 8.4(e) is in
addition to any liability which any Holder may otherwise have to the Company or
any of its directors, officers or controlling persons.
(f) Promptly after receipt by an indemnified party
under this Section 8.4 of notice of any claim, threatened claim or the
commencement of any action, the indemnified party shall, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8.4,
notify the indemnifying party in writing of the claim, threatened claim or the
commencement of that action; provided, however, that the failure to notify an
indemnifying party shall not relieve such indemnifying party from any liability
which it may have to an indemnified party otherwise than under this Section 8.4.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein, and to the extent that it wishes, jointly with
any other similarly notified indemnified party,
7
<PAGE>
to assume the defense thereof with its counsel, who shall be reasonably
satisfactory to the indemnified party. After notice from the indemnifying party
to the indemnified party of its election to assume the defense of such claim,
threatened claim or action, the indemnifying party shall not be liable to the
indemnified party under this Section 8.4 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation provided, however, that any
indemnified party shall have the right to employ counsel to represent it and its
controlling persons who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by such indemnified party against the
Company under this Section 8.4 if, in the reasonable judgment of such
indemnified party, it is necessary for it to be represented by separate counsel
in order to avoid an actual or potential conflict of interest or if it shall
have reasonably concluded that there may be defenses available to it, and its
controlling persons different from or in addition to those available to the
Company, and in either such event the reasonable fees and expenses of such
separate counsel shall be paid by the Company. An indemnifying party shall not
be liable for any settlement of any action or claims effected without its
written consent (which consent shall not unreasonably be withheld).
(g) Nothing contained in this Agreement shall be
construed as requiring the Holder(s) to exercise their Warrants prior to the
initial filing of any registration statement or the effectiveness thereof.
(h) The Company shall not permit the inclusion of any
securities other than the Warrant Shares to be included in any registration
statement filed pursuant to Section 8.3 hereof, or file any other registration
statement subsequent to the receipt of any notice pursuant to Section 8.3 hereof
and until 90 days after the effectiveness of a registration statement filed
pursuant to Section 8.3 hereof, without the prior written consent of the Holders
of the Warrants and Warrant Shares representing a Majority of such securities.
(i) In connection with any registration statement
filed pursuant to Section 8.2 hereof, the Company shall furnish to each Holder
participating in any offering a signed counterpart, addressed to such Holder an
opinion of counsel to the Company, dated the effective date of such registration
statement (and, if such registration includes an underwritten public offering,
an opinion dated the date of the closing under the underwriting agreement), and
a "cold comfort" letter dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, a letter
dated the date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, and are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to underwriters in underwritten
public offerings of securities.
(j) The Company shall as soon as practicable after
the effective date of the registration statement, and in any event within 15
months thereafter, make "generally available
8
<PAGE>
to its security holders" (within the meaning of Rule 158 under the Act) an
earnings statement (which need not be audited) complying with Section 11(a) of
the Act and covering a period of at least 12 consecutive months beginning after
the effective date of the registration statement.
(k) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below, copies of all correspondence between the Commission and the
Company, its counsel or auditors and all memoranda relating to discussions with
the Commission or its staff with respect to the registration statement and
permit each Holder and underwriters to do such investigation upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the NASD. Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such Holder
shall reasonably request.
(l) The Company shall enter into an underwriting
agreement with the managing underwriters selected for such underwriting by
Holders holding a Majority of the Warrant Shares requested to be included in
such underwriting. Such agreement shall be satisfactory in form and substance to
the Company, each Holder and such managing underwriters, and shall contain such
representations, warranties and covenants by the Company and such other terms as
are customarily contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any underwriting agreement relating
to an underwritten sale of their Warrant Shares and may, at their option,
require that any or all the representations, warranties and covenants of the
Company to or for the benefit of such underwriters shall also be made to and for
the benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
(m) For purposes of this Agreement, the term
"Majority" in reference to the Holders of the Warrants or Warrant Shares, shall
mean in excess of fifty percent (50%) of the then outstanding Warrants or
Warrant Shares that are not held by the Company, an affiliate, officer,
creditor, employee or agent thereof or any of their respective affiliates,
members of their family, persons acting as nominees or in conjunction therewith
or have not been resold to the public pursuant to a registration statement filed
with the SEC under the Act.
9. Adjustments to Exercise Price and Number of Shares.
9.1 Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
9.2 Adjustment in Number of Shares. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Section 9, the number of
Shares issuable upon the exercise of each
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<PAGE>
Warrant shall be adjusted to the nearest full amount by multiplying a number
equal to the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares issuable upon exercise of the Warrants immediately
prior to such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
9.3 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean the class of stock designated as
Common Stock in the Certificate of Incorporation of the Company as may be
amended as of the date hereof, or any other class of stock resulting from
successive change or reclassifications of such Common Stock consisting solely of
changes in par value, or from par value to no par value, or from no par value to
par value. In the event that the Company shall after the date hereof issue
securities with greater or superior voting rights than the shares of Common
Stock outstanding as of the date hereof, the Holder, at its option, may receive
upon exercise of the Warrants either shares of Common Stock or a like number of
such securities with greater or superior voting rights.
9.4 Merger or Consolidation. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the holder of the
Warrants then outstanding or to be outstanding shall have the right thereafter
(until the expiration of the Warrants) to receive, upon exercise of such
warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in this Section 9. The above provision of
this subsection shall similarly apply to successive consolidations or mergers.
9.5 Notice of Adjustment in Exercise Price. Upon any
adjustment of the Exercise Price pursuant to this Section 9, the Company shall
promptly thereafter cause to be given to each holder by first-class mail,
postage prepaid, written notice setting forth the Exercise Price after such
adjustment and setting forth in reasonable detail the method of calculation and
the facts upon which such calculations are based and setting forth the number of
Warrant Shares of the Warrants and payment of the adjusted Exercise Price.
10. Exchange and Replacement of Warrant Certificates. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it or the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction,
10
<PAGE>
of indemnity or security reasonably satisfactory to it, and reimbursement to the
Company of all reasonable expenses incidental thereto, and upon surrender and
cancellation of the Warrants, if mutilated, the Company will make and deliver a
new Warrant Certificate of like tenor, in lieu thereof.
11. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
12. Reservation and Listing of Securities. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Common Stock and other securities issuable upon such exercise
shall be duly and validly issued, fully paid, non-assessable and not subject to
the preemptive rights of any stockholder. As long as the Warrants shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon the exercise of the Warrants to be listed (subject to
official notice of issuance) on all securities exchanges on which the Common
Stock issued to the public in connection herewith may then be listed and/or
quoted on the Nasdaq Stock Market.
13. Notice to Warrant Holders. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them
to receive a dividend or distribution payable; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property,
assets and business as a entirety shall be proposed;
11
<PAGE>
then, in any one or more of said events, the Company shall give written notice
of such event at least 15 days prior to the date fixed as a record date or the
date of closing the transfer books for the determination of the stockholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such record date or
the date of closing the transfer books, as the case may be. Failure to give such
notice or any defect therein shall not affect the validity of any action taken
in connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription rights,
option or warrants, or any proposed dissolution, liquidation, winding up or
sale.
14. Notices.
All notices, request, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to the registered Holder of the Warrants, to
the address of such Holder as shown on the books of the
Company; or
(b) If to the Company, to the address set forth in
Section 4 hereof or to such other address as the Company may
designate by notice to the Holders.
15. Successors. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of
business on July __, 2003.
17. Governing Law; Submission to Jurisdiction. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
The parties will arbitrate any dispute, claim or controversy
relating to or arising out of this agreement in New York City in accordance with
the rules of the American Arbitration Association in effect at the time
arbitration is commenced. The arbitrator's decision and award will be final and
binding on the parties and may be entered and confirmed in any court of
competent jurisdiction and enforced to the full extent permitted by law. The
arbitrator may grant any legal and/or equitable relief to which a party may be
entitled under the law or legal theory under which the party seeks relief. Each
party to such arbitration shall bear its own costs of the proceeding. The
12
<PAGE>
compensation of the arbitrator and any other costs of the proceeding shall be
shared equally by the parties.
18. Entire Agreement; Modification. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof and may not be modified or amended except by a writing duly signed by the
party against whom enforcement of the modification or amendment is sought.
19. Severability. If any provisions of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
20. Captions. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
registered Holder(s) of the Warrant Certificates or Warrant Shares any legal or
equitable right, remedy or claim under this Agreement.
22. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
JUST TOYS, INC.
By: /s/ Barry Shapiro
----------------------------------------------
Barry Shapiro, Chief Executive Officer
Attest:
/s/ Seymour Rosenthal
- ----------------------
Secretary
GERARD KLAUER MATTISON & CO.
By: /s/ Dominic A. Petito
----------------------------------------------
Name: Dominic A. Petito
Title: Sr. Managing Director
14
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES, OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, AUGUST 31, 2003
No. WG-1 500,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that Gerard Klauer Mattison
& Co., Inc., or registered assigns, is the registered holder of Warrants to
purchase, from August 31, 1998 until 5:00 p.m. New York time on August 31, 2003
("Expiration Date"), up to an aggregate of 500,000 fully-paid and non-assessable
shares of common stock, $.01 par value ("Common Stock") of JUST TOYS, INC., a
Delaware corporation (the "Company"), at the initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $1.00 per share of
Common Stock upon surrender of this Warrant Certificate and payment of the
Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the warrant agreement dated as of August 31,
1998 among the Company and Gerard Klauer Mattison & Co., Inc. (the "Warrant
Agreement"). Payment of the Exercise price shall be made by certified or
official bank check in New York Clearing House funds payable to the order of the
Company.
The Warrants will be exercisable in accordance with Section 2
of the Warrant Agreement.
A-1
<PAGE>
No Warrant may be exercised after 5:00 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such numbered unexercised Warrants.
The company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
A-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of August 31, 1998
JUST TOYS, INC.
[SEAL] By: ______________________________________
Barry Shapiro, Chief Executive Officer
Attest:
______________________________
Secretary
A-3
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase __________ shares of
Common Stock and herewith tenders in payment for such securities a certified or
official bank check payable in New York Clearing House Funds to the order of
Just Toys, Inc. in the amount of $__________, all in accordance with the terms
hereof. The undersigned requests that a certificate for such securities be
registered in the name of __________ whose address is __________ and that such
Certificate be delivered to __________ whose address is __________.
Dated: _________________
Signature______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
A-4
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _____________________ hereby sells, assigns and
transfers unto _______________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint __________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: _________________
Signature______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
A-5
<PAGE>
CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
[Just Toys, Inc. Letterhead]
August 31, 1998
Gerard Klauer Mattison & Co., Inc.
529 Fifth Avenue
New York, NY 10017
Gentlemen:
This letter constitutes the agreement between Gerard Klauer Mattison &
Co., Inc. ("Gerard Klauer") and Just Toys, Inc. (the "Company") regarding the
retention of Gerard Klauer as the Company's financial advisor.
1. Scope of Services. The Company hereby engages Gerard Klauer as its
exclusive financial advisor for the purpose, among other things, of identifying
and assisting the Company with the structure, evaluation, negotiation and
financing of Acquisition Transactions (as hereinafter defined). As used in this
agreement, the term "Acquisition Transaction" means, whether effected in one
transaction or a series of transactions: (a) any acquisition, purchase,
transfer, merger, consolidation, reorganization, or other business combination
pursuant to which any entity or company (an "Acquisition Candidate") or the
business or one or more product lines of the Acquisition Candidate is acquired
or combined with the Company or a subsidiary of the Company, whether or not the
Company is the surviving entity as a result of such transaction, (b) the
acquisition, directly or indirectly, by the Company of more than 50% of the
capital stock outstanding or a substantial portion of the assets, of the
Acquisition Candidate or a subsidiary of the Acquisition Candidate by way of
tender or exchange offer, negotiated purchase or otherwise, or (c) the
acquisition, directly or indirectly, by the Company of control of the
Acquisition Candidate or the ability to effect such control, through a proxy
contest or otherwise. Gerard Klauer shall use its best efforts to perform the
foregoing functions and acknowledges that the Company's primary goal is a
transaction or series of transactions in which the Company is the surviving
entity.
Acquisition Transactions shall include any such transactions
effected by the Company during the term of Gerard Klauer's retention hereunder
or within 18 months following the termination of Gerard Klauer's retention
hereunder, with parties introduced to the Company by Gerard Klauer or with whom
Gerard Klauer has had substantial discussions regarding the Company respecting
such a transaction. [*]
- ------------------
[*] Certain information has been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended.
<PAGE>
The consummation of any Acquisition Transaction and the terms
thereof shall be wholly within the Company's sole and absolute discretion. The
Company may terminate negotiations with respect to any Acquisition Transaction
at any time whether or not a contract calling for the transaction has been
entered into.
2. Term and Termination. The term of this agreement shall commence on
the date hereof and shall continue unless and until terminated by either party
hereto upon the giving of 60 days prior written notice of termination (the
"Term").
3. Compensation. As full and complete compensation for all services
rendered by Gerard Klauer pursuant to this agreement, the Company shall issue to
Gerard Klauer a five year warrant to purchase up to 500,000 shares of the
Company's common stock, par value $.01 per share ("Common Stock"), at an
exercise price per share of $1.00 (the "Warrants") on the terms set forth in
that certain Warrant Agreement dated and being executed and delivered
concurrently herewith. As a retainer for Gerard Klauer's services hereunder, the
Warrant Agreement provides that the Warrants are immediately exercisable with
respect to 100,000 shares of Common Stock. Upon termination of this agreement,
except as provided in the Warrant Agreement, all Warrants which have not
therefore become exercisable in accordance with Section 2 of the Warrant
Agreement shall forthwith terminate and be of no further force or effect. The
Warrant Agreement also provides that if, prior to termination of this agreement,
a Change of Control shall occur, all unexercised Warrants shall become fully
exercisable. A "Change in Control" shall be deemed to have occurred at such time
as (i) a person, or any persons acting together in a manner which would
constitute a "group" (a "Group") for purposes of Section 13(d) of the Securities
Exchange Act of 1934, as amended, or any successor provision thereto, together
with any affiliates thereof, (a) become the beneficial owners, directly or
indirectly, of capital stock of the Company, entitling such person or persons
and its or their affiliates to exercise more than 50% of the total voting power
of all classes of the Company's capital stock entitled to vote generally in the
election of the Company's directors or (b) shall succeed in having sufficient of
its or their nominees (who are not supported by a majority of the then current
Board of Directors of the Company) elected to the Board of Directors of the
Company such that nominees, when added to any existing directors remaining on
the Board of Directors of the Company after such election who are affiliates of
or acting in concert with such persons, shall constitute a majority of the Board
of Directors of the Company, (ii) the Company shall consolidate with or merge
with or into any other person or sell, convey, transfer or lease its properties
and assets substantially as an entirety to any person (other than a subsidiary
of the Company), or any other person shall consolidate with or merge into the
Company (other than, in the case of this clause (ii) pursuant to any
consolidation or merger where persons who are stockholders of the Company
immediately prior thereto become the beneficial owners of shares of capital
stock of the surviving company entitling such persons to exercise more than 50%
2
<PAGE>
of the total voting power of all classes of such surviving company's capital
stock entitled to vote generally in the election of directors).
Gerard Klauer shall be entitled to additional compensation, on terms to
be agreed upon between Gerard Klauer and the Company, in the event that Gerard
Klauer shall arrange financing for an Acquisition Transaction.
4. Cooperation. During the Term, the Company shall (i) notify Gerard
Klauer of any discussions with a potential Acquisition Candidate, whether
identified by Gerard Klauer or a third party and (ii) offer Gerard Klauer the
opportunity to fully participate in a transaction with such potential
Acquisition Candidate.
5. Right of First Refusal. If during the Term, and (i) for a period of
six months after expiration of the Term if this Agreement shall have been
terminated by the Company and during the Term there shall have been no
Acquisition Transaction or (ii) for a period of 18 months after expiration of
the Term if this Agreement shall have been terminated by the Company and during
the Term there shall have been an Acquisition Transaction, the Company shall
receive a bona fide offer ("Bona Fide Offer") in writing in respect of an
underwritten public offering or private placement of the Company's securities
from a source other than Gerard Klauer, the Company shall first offer to Gerard
Klauer the opportunity to act as lead underwriter or exclusive placement agent
under the terms and conditions contained in the Bona Fide Offer. The Company's
offer shall be in writing and shall be accompanied by a true copy of the Bona
Fide Offer. Gerard Klauer shall have the right but not the obligation to accept
such offer by written notice of acceptance to the Company within 10 days after
receipt of such offer. In the event that Gerard Klauer fails to accept the
offer, the Company shall be free to engage in the underwritten public offering
or private placement, as the case may be, on substantially the terms contained
in the Bona Fide Offer or on terms more favorable to the Company.
6. Voting Agreement. During the period that Gerard Klauer is engaged by
the Company pursuant to this Agreement and for a period of one year thereafter,
Gerard Klauer will vote all shares of Common Stock acquired by exercise of the
Warrants in accordance with the majority of the Company's other outstanding
Common Stock with respect to any matter that is submitted to a vote of the
Company's stockholders.
7. Public Announcements. No public announcement regarding this
engagement shall be made by the Company or Gerard Klauer without the prior
written consent of the other. No public announcement regarding an Acquisition
Transaction shall be made by Gerard Klauer without the prior written consent of
the Company.
8. Confidentiality. Gerard Klauer shall treat as confidential and shall
not, without the Company's prior written consent, divulge to any third party,
except to the extent necessary for the performance of its services hereunder or
as may be required by applicable law, information, knowledge or data relating to
or concerned with the operations, sales, business and affairs of the Company.
3
<PAGE>
9. Disclosure of Information. Gerard Klauer will not furnish any
information regarding the Company to any potential acquisition target or
financing source unless such potential acquisition target or financing source
has been approved by the Company and a confidentiality agreement is signed by
the Company and such potential acquisition target or financing source. Gerard
Klauer shall maintain a list of the name of each person to whom any such
information is distributed and, at the request of the Company, request any such
person to return information to Gerard Klauer.
10. Representation of Other Toy Companies. The Company acknowledges
that Gerard Klauer is active in the toy industry and may, from time to time,
represent other companies in the toy industry, including companies which may be
deemed to be competitors of the Company. The Company also acknowledges that
there may be transactions which Gerard Klauer has been retained by other
companies to handle which Gerard Klauer is unable to bring to the Company and
Gerard Klauer shall have no obligation to disclose the existence of such
transactions or companies to the Company.
11. Legal Matters. This agreement and the Warrant Agreement constitutes
the entire agreement between the parties hereto and supersedes any prior
agreement or understanding between the parties. This agreement shall be governed
and construed in accordance with the laws of the State of New York. The parties
will arbitrate any dispute, claim or controversy relating to or arising out of
this agreement in New York City in accordance with the rules of the American
Arbitration Association in effect at the time arbitration is commenced. The
arbitrator's decision and award will be final and binding on the parties and may
be entered and confirmed in any court of competent jurisdiction and enforced to
the full extent permitted by law. The arbitrator may grant any legal and/or
equitable relief to which a party may be entitled under the law or legal theory
under which the party seeks relief. Each party to such arbitration shall bear
its own costs of the proceeding. The compensation of the arbitrator and any
other costs of the proceeding shall be shared equally by the parties.
12. Notices. All notices required under this agreement shall be in
writing and shall become effective five business days after being deposited in
the United States mails, certified or registered, with appropriate postage
prepaid for first class mail or, if delivered by hand or courier service or in
the form of a telex, telecopy or telegram, when received (if received during
normal business hours on a business day, or if not, then on the next business
day thereafter), and shall be directed to the following address or telex or
telecopy number: if to the Company, Just Toys, Inc., 20 Livingstone Ave., Dobbs
Ferry, New York 10522, Attention: President, telecopy no. (914) 674-9712; if to
Gerard Klauer, Gerard Klauer Mattison & Co., 529 Fifth Ave., New York, New York
10017, Attention: Dominic Petito, telecopy no. (212) 338-8991.
4
<PAGE>
If the foregoing is in accordance with your understanding and
agreement, kindly sign this letter below under the words "Agreed To and
Accepted".
Sincerely,
JUST TOYS, INC.
By: /s/ Barry Shapiro
-------------------------------------
Name: Barry Shapiro
Title: President and
Chief Executive Officer
Agreed To and Accepted:
GERARD KLAUER MATTISON & CO., INC.
By: /s/ Dominic A. Petito
- ----------------------------------------
Name: Dominic A. Petito
Title: Sr. Managing Director
5
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