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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ...... to ......
Commission file number 0-15586
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EOS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE NO. 52-1373960
- ------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
888 SEVENTH AVENUE, 13TH FLOOR
NEW YORK, NEW YORK 10106
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 887-6869
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
common stock, $0.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required 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 [ ] No [x]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting common stock
held by non-affiliates of the registrant, based upon the closing sale price of
the common stock on March 25, 2002 as reported on the OTC Bulletin Board, was
approximately $35,788,025. Shares of common stock held by each officer and
director and by each person who beneficially owns 5% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 25, 2002, the registrant had outstanding 56,132,098 shares
of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
See Exhibit Index.
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EOS INTERNATIONAL, INC.
FORM 10-K
TABLE OF CONTENTS
PART I PAGE NO.
Item 1. Business.................................................. 1
Item 2. Properties................................................ 11
Item 3. Legal Proceedings......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders....... 11
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 12
Item 6 Selected Financial Data................................... 15
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 16
Item 7A Quantitative and Qualitative Disclosure about
Market Risk............................................... 28
Item 8 Financial Statements and Supplementary Data............... 29
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 29
PART III
Item 10 Directors and Executive Officers of the Registrant........ 31
Item 11 Executive Compensation.................................... 33
Item 12 Security Ownership of Certain Beneficial Owners
and Management............................................ 40
Item 13 Certain Relationships and Related Transactions............ 42
PART IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................... 46
Signatures................................................ 55
Index to Consolidated Financial Statements................ F-1
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PART I
ITEM 1. BUSINESS
Certain statements in this Annual Report on Form 10-K, including
certain statements contained in "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
words or phrases "can be", "expects", "may affect", "may depend", "believes",
"estimate", "project", and similar words and phrases are intended to identify
such forward-looking statements. Such forward-looking statements are subject
to various known and unknown risks and uncertainties and Eos International,
Inc. ("Eos") cautions you that any forward-looking information provided by or
on behalf of Eos is not a guarantee of future performance. Eos' actual
results could differ materially from those anticipated by such
forward-looking statements due to a number of factors, some of which are
beyond Eos' control, including (i) the volatile and competitive nature of the
consumer products and direct selling industries, (ii) changes in domestic and
foreign economic and market conditions, (iii) the effect of federal, state
and foreign regulation on Eos' business, (iv) the ability of Eos to attract
and maintain relationships with its independent sales forces, (v)
intellectual property and other claims, (v) Eos' ability to successfully
implement and execute its acquisition strategies, (vi) Eos' ability to
maintain its relationships with its customers and (vii) Eos' ability to raise
additional sources of financing or capital to satisfy its operating expenses
and working capital needs in addition to the risks described below in this
Item 1 and in Item 7-- Management's Discussion and Analysis of Financial
Condition and Results of Operations, as well as those discussed in Eos' other
public filings. All such forward-looking statements are current only as of
the date on which such statements were made. Eos does not undertake any
obligation to publicly update any forward-looking statement to reflect events
or circumstances after the date on which any such statement is made or to
reflect the occurrence of unanticipated events.
OVERVIEW
Eos International, Inc., a Delaware corporation, changed its name from
dreamlife, inc. in December 2001. Unless otherwise noted, all references now to
Eos include its former business (dreamlife, inc.) and its current subsidiaries,
including Discovery Toys, Inc. and Regal Greetings and Gifts, Inc.
In 1999, we announced an internet initiative including plans for an
online network, to focus on personal and professional improvement. We launched a
website, WWW.DREAMLIFE.COM, on February 12, 2000 with an objective to build an
interactive network for personal and professional improvement. This business
model failed to generate sufficient revenues to support the business. On July
18, 2001, Eos acquired all of the outstanding capital stock of Discovery Toys,
Inc. pursuant to a Stock Purchase Agreement dated as of July 18, 2001, by and
among Eos, Discovery Toys, Inc. and the holders of all of the issued and
outstanding capital stock of Discovery Toys, Inc. (the "Discovery Toys
Stockholders"). Discovery Toys, Inc. operates as a wholly owned subsidiary of
Eos. Pursuant to the Stock Purchase Agreement, Eos issued an aggregate of
33,772,143 shares of common stock to the Discovery Toys Stockholders in exchange
for all of the issued and outstanding shares of capital stock of Discovery Toys,
Inc. The consideration paid by Eos for the acquisition of Discovery Toys, Inc.
was determined through arms-length negotiation by the management of Eos and the
majority stockholders of Discovery Toys, Inc. Subsequent to the acquisition, the
Discovery Toys Stockholders hold a majority of the voting interests in Eos. As
Eos was a public shell with no viable business operations of its own prior to
the reverse merger, the transaction has been accounted for as a recapitalization
of Discovery Toys, Inc., with Discovery Toys, Inc. as the accounting
acquirer. The historical financial results for periods prior to July 18, 2001
reflect the financial position and operations of Discovery Toys, Inc. only.
Discovery Toys, Inc. was founded in 1978 by Lane Nemeth as a
multi-level marketing company providing high quality educational toys to
children. Discovery Toys, Inc. was purchased by Avon Products, Inc. in
January 1997. In January 1999, Discovery Toys was sold by Avon to a
private investment group that retained control after the reverse merger in
July 2001.
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CHANGE IN BUSINESS
STRATEGY. As a result of the transaction with Discovery Toys, Eos has
changed its strategic focus to serve as a company with a mission to acquire and
grow consumer product companies with a direct selling emphasis.
MARKET GROWTH FACTORS. Myriad social and economic trends point towards
growth for the direct selling industry. Greater numbers of people are working
from home, searching for financial stability, planning for early retirement and
examining ways to increase their leisure time. Direct selling allows people to
set flexible hours, work from home and earn compensation in proportion to their
efforts.
In addition, consumer trends point to an increasing preference for the
convenience of buying via direct sellers. Direct sellers assist consumers by
bringing welcomed product variety directly to their doorstep in an efficient
manner. This service is also beneficial for the growing elderly population, who
often experience decreased mobility which restricts them from shopping
extensively and frequently.
REGAL ACQUISITION. To pursue this strategy, on December 14, 2001,
Eos purchased 85% of the assets of the Regal Greetings and Gifts division of
MDC Corporation, Inc. ("MDC"), an Ontario Corporation and Primes DeLuxe, Inc.
(a subsidiary of MDC Corporation). The Regal business consists of all the
tangible assets of an ongoing business, including cash, accounts receivable,
property and equipment, inventory and prepaid expenses as well as the
intangible assets, including the customer list and goodwill. This acquisition
was accounted for as a purchase.
EMPLOYEES. At December 31, 2001 we had approximately 955 employees
consisting of 3 full-time employees of Eos, 82 full-time employees of Discovery
Toys, and 307 full-time employees, along with 563 part-time employees, of Regal
Greetings and Gifts, Inc. There are no employees covered by collective
bargaining agreements. We believe our employee relations to be good overall.
RESEARCH AND DEVELOPMENT. Expenditures for research and development
were insignificant for Eos and its operating subsidiaries during the past three
years.
SIGNIFICANT CUSTOMERS. Eos and its operating subsidiaries enjoy a broad
customer base and have no customers that represent more than 10% of its
revenues.
ENVIRONMENTAL COMPLIANCE. We have no future commitments for
expenditures relating to environmental compliance and have not made any
significant expenditures relating to such issues in the past two years.
SEASONALITY. Eos is a highly seasonal business as both operating
subsidiaries follow a pattern of increased sales concentration in the fourth
quarter of the year common to many consumer product companies. Revenues during
the fourth quarter constitute approximately 40% to 50% of annual revenues.
FOREIGN OPERATIONS. With the acquisition of Regal Greetings and
Gifts, Inc., a Canadian corporation, we expect the majority of our revenues
will be recognized from operations in Canada. Prior to the acquisition of
Regal, Eos' subsidiary, Discovery Toys, had sales in Canada of approximately
$2.7 million in 2001, $2.4 million in 2000 and $2.6 million in 1999. On a
full year unaudited pro forma basis giving effort to the Regal acquisition as
of January 1, 2001, foreign sales would have exceeded $57.0 million in 2001.
For the year ended December 31, 2001, Eos reported sales in Canada of $5.2
million on a consolidated basis.
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OPERATING SEGMENTS
DISCOVERY TOYS
Discovery Toys is a multi-level marketer of approximately 200 products
including toys, games, books, and software through a network of approximately
30,000 independent educational consultants ("ECs") in the United States and
Canada. Lane Nemeth, a former daycare director, who recognized the need for high
quality educational toys in the market place, founded Discovery Toys in 1978.
Discovery Toys' principal offices are located in Livermore, California, and its
geographic market primarily encompass the United States and Canada. Sales of
educational toys accounted for over 80% of Discovery Toys revenue during each of
the last three fiscal years. Shipping and handling accounted for approximately
15% of revenues during each of the last three fiscal years.
SALES FORCE. Discovery Toys uses a force of independent sales
representatives to sell and distribute its products to consumers. This technique
uses catalogs developed by Discovery Toys and live product demonstrations given
at hostess parties to promote product sales. Discovery Toys uses a multi-level
marketing plan to provide career opportunities to parents and others who are
recruited as educational consultants while providing them the flexibility of
being an independent sales representative.
CATALOGUES. Discovery Toys creates two major catalogues annually and
distributes over 3 million copies annually, along with additional seasonal sales
supplements.
PRODUCTS. Products consisting of high quality educational toys, books
and software are developed and designed in-house or sourced from an independent
designer or vendor. Toys represent over 80% of the sales revenues from products
sold by Discovery Toys with the balance of sales revenues from products sold
attributed to books and software. Products are sourced domestically as well as
from Asia and Europe. Discovery Toys uses approximately 80 vendors for product
sourcing. Products are tested to ensure educational quality, play value,
durability and safety. Products are also categorized by age level with a focus
to grow a child's natural interests, developmental level, and evolving learning
style. Discovery Toys introduces approximately 80 new products each year. ABS
plastics is the most used raw material in our product line and although pricing
of this commodity fluctuates, we do not feel there are any significant current
resource limitations regarding this material.
INVENTORY. Inventory is maintained at Discovery Toys' central warehouse
and inventories are adjusted seasonally to meet sales demands.
DELIVERY. Products are distributed from Discovery Toys' automated
warehouse facility in Livermore, California. Orders from educational consultants
are received via phone, fax, mail and internet, fulfilled from inventory by its
automated line and shipped to the educational consultants or party hostess for
final distribution to the consumer.
BACKLOG. As of December 31, 2001, the backlog of sales consisted of
$206,000 of product orders received but not shipped compared to $329,000 at
December 31, 2000. All orders were shipped during the first quarter of fiscal
2002.
REGAL GREETINGS AND GIFTS, INC.
Regal Greetings and Gifts is one of Canada's largest direct selling and
mail order distributors of general merchandise to consumers. Regal sells its
products through a network of independent sales representatives who in turn sell
the merchandise to friends, family neighbors and co-workers. Regal also sells
merchandise via its website, and its 43 representative service centers ("RSCs")
located throughout
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Canada. Regal's products include a flagship line of greeting cards and
gift-wrap, the majority of which are printed in Canada, as well as innovative
household and giftware items. Regal produces five major catalogues per year for
use by its sales representatives. Regal markets up to 3,300 items in a given
sales period, the majority of which are from independent trading agents selling
products on behalf of Asian-based manufacturers. In total, Regal's inventory
includes more than 7,400 stock keeping units ("SKUs"), with prices ranging from
$1.25 to $53.12 per item (approximately $2 to $85 CDN (Canadian dollars)).
Approximately 10% of the product line may be selected for customer
personalization. Regal's success has been fueled by a number of key factors
including high brand name recognition, a loyal and geographically dispersed
direct-selling force, a broad range of merchandise offered at affordable prices,
colorful and descriptive catalogues, conveniently located retail sales centers,
efficient ordering processes and high customer satisfaction.
Founded in 1928 as the Regal Stationery Company, Regal initially
operated as a commercial printer of greeting cards, gift-wrap and stationery.
Regal introduced its consumer mail-order operations in the 1940s. Regal was
purchased by the Canadian Corporate Management Company Limited, in 1973. Regal
acquired Montreal based Primes de Luxe ("PDL") in 1980 to allow Regal to expand
its market share in Quebec. Following this acquisition, Regal increased its
focus on the core business with the sale of its envelope manufacturing
facilities.
The majority of Regal's sales are made through Regal's network of
independent sales representatives, who collect orders from friends, family,
neighbors and co-workers and then purchase the products directly from Regal at a
discount. The rate of discount depends upon a representative's individual sales
volume, with the highest performing representatives receiving a 50% discount on
merchandise. Representatives keep the difference between Regal's published sale
price and the discounted price. Although many representatives are
self-purchasers (meaning that they only buy for themselves), others devote
themselves full-time to selling Regal's products.
Regal's active registered representatives, that is, the number who have
purchased in the last two months, were in excess of 400,000 as of December 31,
2001. Representatives sell Regal products to supplement family income or to
support fund-raising activities for non-profit organizations. Representatives
are not required to satisfy any minimum sales targets, nor are they encouraged
to actively recruit new representatives. Typically, 25% to 30% of active
representatives have sold Regal's products for less than one year. The Company
believes that it has attracted a loyal representative following at Regal due to
Regal's low-pressure sales system, which is flexible, supportive, and
family-oriented.
MERCHANDISING. Regal varies its merchandise to consistently offer a
unique mix of affordable products. A typical Regal or PDL catalogue offers
merchandise ranging in price from $1.25 to $53.12 per item (approximately $2
to $85 CDN), with an average price point of $6.09 (approximately $9.75 CDN).
Approximately 45% of merchandise offered each catalogue season is new,
including new greeting card and gift wrap designs.
Regal offers seven primary product categories:
o Home Decorative - Regal sells products including candles,
garlands, serving pieces, table linen, seasonal themes such as
BBQ and patio accessories, Christmas and other holiday items.
o Stationery - Regal offers a wide selection of cards and
quality gift wrap for all ages and occasions, as well as a
stationery and sticker line.
o Kitchen Items - Regal sells dozens of quality, value-priced
ideas for the kitchen, including linen, canisters, serving
sets, space savers and cooking and baking accessories.
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o Home Functional - Regal sells decorative and practical items
for the home and garden, including bird feeders, lawn
ornaments, innovative space savers, laundry and closet
organizers as well as seasonal items.
o Special Use Accessories - Regal sells accessories for a
variety of functions, including garden, patio, beach, golf,
pet, automobile and home entertaining.
o Children's Products - Regal sells variety of children's
products with an emphasis on the practical and education. The
range includes desk and design sets, stamps, stickers,
educational puzzles, inflatable and plush toys, and
organizers.
o Bathroom Items - Regal offers decorative and space-saving
racks and organizers, shower curtains, novelty bath and decor
accessories, and specialized cleaning or repair items.
PRODUCT SOURCING. Regal purchases approximately 70% of its merchandise
from independent trading agents selling products on behalf of Asian-based
manufacturers. Approximately 20% of the items (mainly greeting cards and gift
wrap products) are manufactured in-house and approximately 10% of all items are
sourced in Canada. Regal sources product from more than forty vendors. Raw
materials vary by product with paper being a significant resource for the
business.
INVENTORY. Regal maintains inventory at all of its 43 representative
service centers and its main warehouse in Mississuaga, Ontario. Inventories are
adjusted to meet seasonal sales demand.
CATALOGUE DESIGN, PRODUCTION AND CIRCULATION. Regal produces 5 major
catalogues per year via its in-house creative department and distributes over 8
million copies annually. Regal also produces special promotional flyers, usually
in connection with the sale of excess inventory or leftover merchandise from the
RSCs. The fall/Christmas catalogues are mailed twice annually, at the end of
June and the end of August. Catalogues are mailed only to Regal's proprietary
active registered representative list or in response to requests generated by
Regal's customer recruitment initiatives.
Representatives initiate the sales process by purchasing catalogues
from Regal for distribution. Catalogues are sold to representatives on a sliding
scale based on volume ordered and year-to-date earning level. Representatives
use a variety of methods to distribute catalogues, including door-to-door
catalogue drops and distribution at, craft sales, flea market booths,
recreational gatherings and in the workplace. Representatives collect orders via
customer order forms, and either collect money at the time of order or upon
delivery. After collecting orders, representatives send their orders to Regal
via phone, fax, mail, the Internet, or alternately visit one of Regal's 43 RSCs
to purchase the merchandise.
INTERNET STRATEGY. Regal launched its Regal and PDL websites
(WWW.REGALGREETINGS.COM and WWW.PRIMESDELUXE.COM respectively) in May 1999.
Initially, the websites were information intensive and provided no order
mechanism. Database ordering was implemented in September 1999. Regal's primary
objectives in its internet strategy include generating revenue growth by
providing a convenient direct order channel for representatives, as well as
establishing a feedback mechanism to monitor customer satisfaction. Currently,
information on the Regal site is mirrored on the PDL site and includes the
history of Regal, a comprehensive online catalogue, shopping capabilities for
registered representatives, RSC locations, a list of representatives,
information on becoming a representative and one-step registration for new
representatives, as well as information on using Regal as a source of
fundraising. Representatives can place online orders from any current catalogue
and pay via Visa or Mastercard. This system also allows Representatives to
process orders using their customer's credit cards. Representatives have a
password-protected area on the site which allows them to print business tools
and forms, update their account profile, participate in community message boards
and obtain information on current contests and winners.
BACKLOG. Backlog consisting of orders received but not shipped were
approximately $11,000 at December 31, 2001 and $16,000 as of December 31, 2000.
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INDUSTRY AND COMPETITION
COMPETITION. The markets for consumer products and the direct selling
industry are both highly competitive. Direct selling companies compete for
products, customers, and sales representatives.
We compete for product revenues with traditional forms of retail,
direct selling companies, internet retailers and discount merchandisers.
We expect that we will face strong competition in the execution of
our strategy of acquiring consumer product and direct selling companies for
growth as many of our competitors have:
o longer operating histories;
o more experience in consumer products;
o significantly greater financial, product development and
marketing resources;
o more liquid stock which can be used as a currency to acquire
other companies;
o greater access to debt or equity capital;
o greater name recognition; and
o larger existing customer and independent sales force bases.
Accordingly, there can be no assurance that:
o we will be able to identify and negotiate additional favorable
acquisitions;
o we will be able to effectively compete against other companies
for future growth or future acquisitions; or
o we will be able to successfully integrate and grow these
acquisitions.
There can be no assurance that we will be able to compete successfully
against our current or future competitors or that competitive pressures faced by
us will not have a material adverse effect on our business, results of
operations and financial condition.
DIRECT SALES INDUSTRY OVERVIEW. Direct selling is the sale of a
consumer product or service in a face-to-face manner that is not performed in
a fixed retail location. Direct sellers act as independent contractors; sales
agents work on their own schedules, and their earnings are in direct
proportion to their efforts. The strength of direct selling lies in its
tradition of independence, service to consumers and the spirit of
entrepreneurs. Direct selling provides accessible business opportunities to
persons looking for alternative sources of income, and whose entry is
generally restricted by gender, age, education or previous experience. Around
the world a substantial majority of direct sellers are women, and most work
in their direct selling businesses on a part-time basis. A very small
percentage of direct sellers are employees of the companies whose products
they sell. In many cases, direct selling opportunities develop into a
fulfilling career for those who achieve success and choose to pursue their
independent direct selling business on a full-time basis.
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COMPETITION. Discovery Toys competes in the direct selling industry and
the $24 billion North American toy market in general. Discovery Toys competes on
price and quality. Discovery Toys differentiates itself by offering a unique
line of high quality educational toys. Generally, Regal competes with companies
in three marketing channels: direct selling, traditional discount stores and
fundraising programs where competition is based on merchandising mix, price and
the recruitment of talented sales representatives.
DIRECT SELLERS. Discovery Toys and Regal compete with other direct
selling companies for representatives on various levels, including but not
limited to, earnings opportunity, product selection, program flexibility and
convenience. Avon Products, Inc., Tupperware Corp and Amway Corporation are
amongst the largest direct selling companies with which the Company competes.
o Avon Products, Inc. (NYSE: AVP) is the world's leading direct
seller of beauty and related products, with total sales in
excess of $5.0 billion worldwide. Avon has recently modified
its product line and now competes directly with Regal on
certain items, such as home entertaining, home decor and
children's products. Avon also markets an extensive line of
fashion jewelry, apparel, gifts and collectibles.
o Tupperware Corp. (NYSE: TUP) is a leading international direct
selling company with total sales of over $1.0 billion
worldwide. There are 1.0 million independent sales people
worldwide demonstrating and selling Tupperware's premium food
storage and serving containers, microwave cookware and
children's toys in over 100 countries.
o Amway Corporation is a leading worldwide direct selling
company of consumer products with total estimated sales of
over $2.0 billion in the United States.
DISCOUNT STORES. Stores catering to consumer shoppers, such as
Wal-Mart, Toys "R" Us, Zellers Inc., Hallmark and Carlton Cards sell similar
product lines and compete with Regal and Discovery Toys on a price and value
basis.
o Wal-Mart Stores, Inc. (NYSE: WMT), the world's largest
retailer, operates discount stores across the US and Canada.
Each store carries stationery, housewares, electronics, tools,
sporting goods, toys, jewelry, as well as multiple other
supplies for the home. Wal-Mart is believed to be the largest
retailer of toys in the United States.
o Toys "R" Us, a nationwide chain of retailers, is believed to
be the second largest retailer of toys in the U.S.
o Zellers Inc., is a leading Canadian chain of 350 discount
department stores which generated sales of $4.6 billion in
1999. Zellers targets budget-conscious consumers and is
further distinguished in the marketplace by its exclusive
brands and customer loyalty rewards program.
o Specialty card stores such as Hallmark and Carlton Cards
operate retail outlets across Canada which provide a wide
selection of cards, ribbons and gift wrap.
o Educational toy groups such as Leap Frog, Zany Brainy, and
Imaginarium are also competitors of the Company.
FUNDRAISING. Non profit groups, such as schools and churches, often use
fund raising programs to generate incremental funds for school initiatives.
Regal catalogues and products are sold for these purposes in Canada. Many
fundraising competitors offer similar product lines, although their product
selection is typically limited.
o QSP, Inc., a subsidiary of the Reader's Digest Association,
Inc., had estimated worldwide sales of $300 million in 2000.
QSP helps schools and youth groups raise funds for the
projects through the sale of magazine subscriptions, gift
wrap, cards and small gifts.
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o Third Wave Fundraising serves school, scout, sport and church
groups. The company generally requires a minimum order of $500
per group. Fundraising groups sell Third Wave's products such
as candles, cookie dough and chocolates at full price and then
order items at a discount from the company.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND DOMAIN NAMES
We regard our copyrights, service marks, trademarks, trade names, trade
dress, trade secrets, proprietary technology and similar intellectual property
as critical to our success, and rely on trademark and copyright law, trade
secret protection and confidentiality and/or license agreements with our
employees, customers, independent contractors, partners and others to protect
our proprietary rights. We pursue the registration of our trademarks and service
marks in the United States and Canada, and have applied for and obtained
registration in the United States for certain of our trademarks and service
marks, including "Discovery Toys," and the Discovery Toys logo. "Regal Greetings
and Gifts" is a registered trademark in Canada. Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our products and services are made available.
We have been and may be subject to legal proceedings and claims from
time to time in the ordinary course of our business, including claims of alleged
infringement of patents, trademarks and other intellectual property rights of
third parties by us and our licensees. These claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources. Further, if these claims are successful, we may be required to change
our product offerings and pay financial damages. There can be no assurance that
these changes of trademarks, alteration of content or format or payment of
financial damages will not adversely affect our business, results of operations
and financial condition.
We may be required to obtain licenses from others to refine, develop,
market and deliver new products. There can be no assurance that we will be able
to obtain any license on commercially reasonable terms or at all or that rights
granted pursuant to any licenses will be valid and enforceable.
OUR RECENT COMPANY HISTORY
RECAPITALIZATION. On July 18, 2001, Eos acquired all of the
outstanding capital stock of Discovery Toys, Inc., a California corporation,
pursuant to a Stock Purchase Agreement dated as of July 18, 2001, by and among
Eos, Discovery Toys and the holders of all of the issued and outstanding capital
stock of Discovery Toys (the "Discovery Toys Stockholders"). Discovery Toys
operates as a wholly owned subsidiary of Eos. Pursuant to the Stock Purchase
Agreement, Eos issued an aggregate of 33,772,143 shares of common stock to the
stockholders of Discovery Toys in exchange for all of the issued and outstanding
shares of capital stock of Discovery Toys. The consideration paid by Eos for the
acquisition of Discovery Toys was determined through arms-length negotiation by
the management of Eos and the majority stockholders of Discovery Toys.
Subsequent to the acquisition, the Discovery Toys Stockholders hold a majority
of the voting interests in Eos. This reverse merger has been treated as a
recapitalization of Discovery Toys.
As part of the transactions contemplated by the Stock Purchase
Agreement, the Board of Directors of Eos amended and restated its By-Laws. The
Amended and Restated By-Laws provide that the Board of Directors shall consist
of nine members. The initial members of the Board of Directors following the
Company's acquisition of Discovery Toys consists of two groups, the Eos
directors and the Discovery Toys directors. The Eos directors are Jonathan C.
Klein, Peter A. Lund, Anthony J. Robbins and Charles D. Peebler, Jr. The
Discovery Toys directors are Julius Koppelman, William S. Walsh, Anthony R.
Calandra and James M. Cascino. There is one vacancy on the Board of Directors to
be filled by the vote of a majority of the directors (the "Outside Director").
The person so selected shall serve until the next annual meeting of
stockholders. The Outside Director has not been appointed as of the date
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hereof. If any Eos director or Discovery Toys director is unable to serve or,
once having commenced to serve, is removed or withdraws from the Board of
Directors, the replacement of that director will be nominated by the majority of
the remaining directors of the group to which such director shall have been a
member, or the sole remaining director of such group, if applicable. If the
Outside Director is unable to serve or, once having commenced to serve, is
removed or withdraws from the Board of Directors, the replacement of such
director will be filled by the vote of a majority of the remaining directors.
The Amended and Restated By-laws also provide that the Eos directors and the
Discovery Toys directors shall each have the right to nominate four persons as
directors of Eos.
The composition of the Board of Directors of Discovery Toys has not
been affected as a result of the acquisition. Pursuant to the Stock Purchase
Agreement, for so long as Eos owns one hundred percent of the issued and
outstanding capital stock of Discovery Toys, it shall vote the Discovery Toys
stock it holds, at any time, in favor of those individuals properly nominated by
Discovery Toys' then existing Board of Directors for membership on the Discovery
Toys Board of Directors.
In connection with the transactions contemplated by the Stock Purchase
Agreement, Eos entered into a Registration Rights Agreement with the former
stockholders of Discovery Toys. This agreement provides that Eos shall use
reasonable commercial efforts to file a registration statement with the
Securities and Exchange Commission for the public sale of the shares of Eos
common stock issued pursuant to the Stock Purchase Agreement within ninety days
of the date of the Stock Purchase Agreement. As of the date hereof, Eos has not
filed such registration statement. Additionally, Eos, Anthony J. Robbins,
Robbins Research International Inc. and CYL Development Holdings, LLC agreed to
terminate the Stockholder Agreement by and among them dated May 27, 1999
pursuant to a Termination Agreement dated July 18, 2001.
After giving effect to the issuance of the common stock pursuant to
the Stock Purchase Agreement and the issuance of the common stock pursuant to
the Note Exchange Agreement described below, Eos has outstanding 56,132,098
shares of common stock. As a result of such issuances by the Company,
immediately after the acquisition, the former stockholders of Discovery Toys
owned approximately 60% of the voting power of Eos and the stockholders of
Eos immediately prior to the consummation of the acquisition of Discovery
Toys owned approximately 40% of the voting power of Eos. As a condition to
the closing of the acquisition, Eos issued 2,400,000 shares of common stock
to CYL Development Holdings, LLC in exchange for cancellation of a $2,400,000
promissory note, payable by Eos. The promissory note, which was initially
issued by Eos payable to The Chase Manhattan Bank, was assigned by The Chase
Manhattan Bank to CYL Development Holdings, LLC. CYL Development Holdings,
LLC is a principal stockholder in Eos.
As a condition to the closing of the acquisition described above,
Eos and Peter A. Lund agreed to amend the offer letter dated July 24, 2000
which sets forth the terms of Mr. Lund's employment arrangement with Eos. The
amendment accelerated the vesting of the unvested portion of the three
million dollar bonus provided for in the offer letter and modified the
payment dates of such bonus.
In connection with the restructuring of Eos' business and operations,
Eos entered into an amendment to the Content Provider Agreement and License
dated as of April 23, 1999 by and among Eos, Anthony J. Robbins and Robbins
Research International Inc. Pursuant to this amendment, Eos assigned and
transferred to the Robbins Group all of its right, title and interest in all
property rights pursuant to the Content Provider Agreement and License and any
property or rights derived therefrom. In consideration of the aforementioned
assignment and transfer, the Robbins Group agreed to extinguish certain
obligations of Eos under the Content Provider Agreement and License. Eos
retained the exclusive right and license to use any content relating to
certain intellectual property rights granted pursuant to the Content Provider
Agreement now existing or developed in the
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future, royalty-free, for the limited purpose of training over the Internet
employees or consultants of any entity engaged principally in the direct selling
of products or services with respect to which Eos directly or indirectly owns an
equity interest of more than fifty percent, subject to certain limited retained
rights of the Robbins Group to use such content in Internet training. The
amendment further provides that Anthony J. Robbins shall make up to two
appearances at sales meetings or conventions for employees and/or consultants of
Eos or any of its affiliates in any twelve-month period.
As a result of the transaction with Discovery Toys, Eos has changed its
strategic focus to serve as a company with a mission to acquire and grow
consumer product companies with a direct selling emphasis.
REGAL ACQUISITION. To pursue this strategy, Eos purchased the Regal
Greetings and Gifts division of MDC Corporation, Inc. ("MDC"), an Ontario
Corporation, and Primes DeLuxe, Inc. and MDC Regal, Inc. (each a subsidiary
of MDC Corporation) on December 14, 2001. The Regal business consists of all
the assets of an ongoing business, including cash, accounts receivable,
property and equipment, inventory and prepaid expenses. This acquisition was
accounted for as a purchase.
The Regal business was purchased by Regal Greetings and Gifts
Corporation, a Canadian Corporation ("Regal Corporation") which was formed by
RGG Acquisition Inc., ("RGG"), a wholly owned subsidiary of Eos, to effect
the purchase. The purchase price for an 85% interest in the assets of the
Regal business was approximately $22.0 million, including $0.7 million in
cash acquisition costs, plus the assumption of existing liabilities of
approximately $4.2 million. The $22.0 million, together with cash debt issue
costs of $0.7 million relating to the transaction, was satisfied with the
issuance of a $3.8 million note ($2.9 million net of discount) by Regal
Corporation to MDC, put rights with an estimated fair value of $0.5 million
granted to MDC related to its 15% equity ownership interest of Regal
Corporation, $6.5 million short term bridge notes issued by Eos, a primary
loan of $8.3 million from The Bank of Nova Scotia to the Regal Corporation
and a mezzanine loan in the amount of $4.5 million from RoyNat Capital Inc.
("RoyNat") to the Regal Corporation. RGG and PDL provided a guarantee to MDC
of the performance of the note issued by Regal Corporation to MDC. In
connection with the mezzanine loan, the Regal Corporation issued warrants to
RoyNat to purchase 11,000 shares of the common stock of the Regal Corporation
for $0.01 per share. Upon exercise of such warrants, RGG's and MDC's
percentage of ownership of the Regal Corporation will be reduced
proportionally. In connection with this transaction, MDC, RGG, RoyNat, the
Bank of Montreal Capital Corporation and Regal entered into an Amended and
Restated Unanimous Shareholders Agreement, as amended thereafter, providing
for, among other things, certain transfer restrictions, rights of first
refusal, co-sale rights, put and call rights and preemptive rights. RoyNat
assigned a portion of the mezzanine loan and the rights related thereto to
the Bank of Montreal Capital Corporation. McGuggan, LLC provided to MDC a
guarantee of the performance by RGG of its obligations under the acquisition
agreement. The purchase price and nature of the consideration paid in the
acquisition were determined through arms-length negotiations. See "Item
7-Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity" and the notes to the financial statements included
herein.
The bridge notes issued by Eos in the amount of $3.0 million to
Weichert Enterprises, LLC and in the amount of $3.5 million to DL Holdings I,
LLC are payable on April 13, 2002. CYL Development Holdings, LLC, a principal
stockholder of Eos, is also a non-voting member of DL Holdings I, LLC. In
connection with the short term notes, Eos issued warrants to acquire 2,600,000
shares of its stock for $2.95 per share subject to certain terms and conditions.
See "Item 5-Market for Registrant's Common Stock and Related Stockholders
Matters" for a description of the short term bridges notes, the warrants and
certain registration rights, put rights and call rights relating to this bridge
financing.
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ITEM 2. PROPERTIES
We are headquartered in New York, New York, where we lease
approximately 2,400 square feet of space at 888 Seventh Avenue, 13th Floor. The
lease is for one year beginning November, 2001 and is cancelable at any point
during the lease with 30 days notice by the lessee or lessor.
Discovery Toys operates a 180,000 square foot leased facility at 6400
Brisa Street, Livermore, California. The facility contains both warehouse space
of approximately 150,000 square feet for storage and distribution and 30,000
square feet of office facilities. The lease expires in February, 2004.
Regal occupies 45 locations across Canada in 8 provinces. Regal's
headquarters is located at 7035 Ordan Drive, Mississuaga, Ontario in a
237,065 square foot leased facility. The lease expires in 2009. The company
also maintains a secondary headquarters in Quebec City, Quebec, consisting of
a 2,987 square foot leased facility that includes a French speaking call
center. There are 43 representative service centers in light industrial areas
that average 6,600 square feet to supply representatives locally. The
facilities total approximately 286,205 square feet and are all leased
facilities. We believe that our facilities are adequate for our needs.
ITEM 3. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. We have
from time to time become a party to various legal proceedings arising in the
ordinary course of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 31, 2001, a special meeting of stockholders was held to
vote upon a proposal to approve a change of the Company's name from dreamlife,
inc. to Eos International, Inc. The proposal was approved at the special
meeting. The record date for the special meeting was the close of business on
October 24, 2001. On that date, the Company had 56,132,098 shares of Common
Stock outstanding.
There were 40,356,496 shares present in person or represented by proxy
at the special meeting, of which 40,356,496, shares voted in favor of the
proposal. No shares voted against the proposal and no shares abstained. There
were no broker non-votes at the special meeting.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
PRICE OF COMMON STOCK
Our common stock is quoted on the OTC Bulletin Board under the symbol
"EOSI". The following table sets forth, for the periods indicated, the high and
low bid prices per share of the common stock as reported on the OTC Bulletin
Board. Over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
<Table>
<Caption>
2001 HIGH LOW
- ---- ---- ---
First Quarter $2.75 $0.94
Second Quarter $1.06 $0.80
Third Quarter $2.00 $0.90
Fourth Quarter $3.20 $1.70
2000
First Quarter $18.13 $9.88
Second Quarter $9.88 $3.50
Third Quarter $4.03 $3.50
Fourth Quarter $3.66 $0.94
</Table>
HOLDERS
On March 25, 2002, the closing sale price of our common stock on the
OTC Bulletin Board was $2.95 per share. There were 129 holders of record as of
March 25, 2002. We estimated total beneficial owners to be 1,009 as of March 25,
2002. We have no outstanding shares of preferred stock as of March 25, 2002.
DIVIDENDS
Eos has not declared or paid any cash dividends on its common stock.
Eos intends to retain its future earnings, if any, to fund the development and
growth of its business. Eos does not anticipate paying any cash dividends in the
foreseeable future.
Prior to the recapitalization, Discovery Toys paid cash dividends to
its stockholders of $.00 per share and $.03 per share in the years ended
December 31, 2001 and 2000.
Both operating subsidiaries, Discovery Toys and Regal, have
restrictions against making loans, advances, dividends and corporate overhead
payments to Eos without lender approvals. Management is currently in
negotiations with the primary lender of Discovery Toys, PNC Bank, to allow
additional
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overhead charges to support the Eos parent. On March 18, 2002, the bank approved
$50,000 in corporate overhead fees to be charged to Discovery Toys and paid to
Eos. Final agreements are being negotiated to permit up to $250,000 to be
charged to Discovery Toys, and paid to Eos, before the period ending June 30,
2002, and an additional $150,000 to be charged from July 1, 2002, until December
31, 2002. Discussions also have been entered into with the primary lenders of
Regal, The Bank of Nova Scotia and RoyNat, to attempt to negotiate additional
corporate overhead charges to be billed to Regal and paid to Eos similar to
those being negotiated for Discovery Toys. There can be no assurance that final
agreements will be reached on these amendments to the current loan arrangements.
RECENT SALES OF UNREGISTERED SECURITIES
During the fourth quarter of the year ended December 31, 2001, Eos sold
short term bridge notes and warrants to purchase its common stock to two
investors, in each case in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act relating to sales by an issuer not
involving a public offering, as set forth below. Based on discussions with and
representations made by such investors, Eos reasonably believes that each such
investor was an accredited and/or sophisticated investor. Eos granted to each
investor access to information on the Company necessary to make an informed
investment decision.
The short term bridge notes were sold by Eos to DL Holdings I, LLC and
Weichert Enterprises, LLC in the principal amounts of $3,500,000 and $3,000,000
respectively. These notes bear interest at the rate of 13% per annum and mature
April 13, 2002, at which time all principal and interest is due. CYL Development
Holdings, LLC, a principal stockholder of Eos, is also a non-voting member of DL
Holdings I, LLC. Eos agreed to use its best efforts to grant, or cause to be
granted, to DL Holdings I, LLC and Weichert Enterprises, LLC, a perfected
security interest in all of its assets and other property and any of its
subsidiaries that have been or are available to be granted as collateral. Eos
has not granted such security interests to DL Holdings I, LLC or Weichert
Enterprises, LLC because it is currently prohibited from granting security
interests by the loan arrangements between its subsidiaries and their respective
lenders.
DL Holdings I, LLC and Weichert Enterprises, LLC were granted
warrants to purchase 1,400,000 and 1,200,000 shares of common stock of Eos,
respectively, in connection with the issuance of the short term bridge notes.
The warrants may be exercised at the price of $2.95 per share for a five year
period commencing on April 14, 2002. Both DL Holdings I, LLC and Weichert
Enterprises, LLC were granted demand and "piggyback" registration rights on
the shares of common stock of Eos underlying the warrants.
The holders of the warrants have a put right with respect to the shares
of common stock of Eos underlying the warrants, commencing on the date upon
which all of the amounts owing under the short term notes have been paid in
full. This right allows the holders of the warrants to sell to Eos all or a
portion of the warrants at $0.15 per share, if the put right is exercised before
April 14, 2002, $0.45 per share, if the put right is exercised after April 14,
2002 but before August 14, 2002, and $0.90 per share if the put right is
exercised after August 14, 2002. Eos has a call right with respect to the shares
of common stock underlying the warrants at any time during the 90 day period
commencing on the date upon which all amounts owing under the short term notes
have been paid in full. The call right allows Eos to purchase from the holders
of the warrants, at a price of $0.15 per share, if the call right is exercised
before April 14, 2002, $0.45 per share, if the call right is exercised after
April 14, 2002 but before August 14, 2002, and $0.90 per share if the call right
is exercised after August 14, 2002, a number of shares of common stock of Eos
equal to 75% of the total number of shares of common stock into which such
warrant holder's warrants were exercisable on the date of their issuance, less
the number of shares of common stock underlying the warrants of such holder that
have been repurchased pursuant to the put right discussed above.
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If all amounts owing under the short term notes have not been paid in
full on or prior to December 9, 2002, Eos has agreed to issue to DL Holdings I,
LLC and Weichert Enterprises, LLC on such date and on each 30th day following
such date that such payment has not occurred, warrants to purchase an aggregate
of 16,667 shares of common stock of Eos (53.8461% to DL Holdings I, LLC and the
balance to Weichert Enterprises, LLC) for each day after December 9, 2002 that
all amounts owing under the short term notes remain unpaid. The exercise price
for these warrants shall be $.50 per share.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with
"Management's Discussion of Financial Condition and Results of Operations" and
our financial statements and notes to those statements and other financial
information included elsewhere in this Annual Report.
(in thousands, except per share amounts)
<Table>
<Caption>
Period from Unaudited Unaudited 11
Year Ended Year Ended Jan. 15, 1999 Year Ended Mos. Ended
Dec. 31, Dec. 31, to Dec. 31, Dec. 31, Dec. 31,
2001 2000 1999 1998(1) 1997(1)
---- ----- ---- ------- -------
STATEMENT OF OPERATIONS DATA:
Revenues $44,280 $ 40,131 $ 39,673 $ 35,284 $ 36,120
Cost of revenues 25,920 24,190 23,407 12,617 13,625
-------- -------- -------- -------- --------
Gross profit 18,360 15,941 16,266 22,667 22,495
OPERATING EXPENSES:
Selling, general & administrative 18,150 16,546 15,831 25,017 27,129
Amortization of intangible assets (525) (525) (525) -- --
-------- -------- -------- -------- --------
Total operating expenses 17,625 16,021 15,306 25,017 27,129
-------- -------- -------- -------- --------
Income (loss) from operations 735 (80) 960 (2,350) (4,634)
Interest income (expense), net (957) (44) (218) (201) (150)
Other income (expense) 2,030 457 (10) (1,506) 1,669
-------- -------- -------- -------- --------
Income (loss) before income taxes 1,808 333 732 (4,057) (3,115)
Provision for income taxes 59 6 -- (636) (1,090)
-------- -------- -------- -------- --------
Net income (loss) before minority interest 1,749 327 732 (3,421) (2,025)
Minority interest (9) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) attributable to common
stockholders $ 1,740 $ 327 $ 732 $ (3,421) $ (2,025)
======== ======== ======== ======== ========
Basic and diluted net loss per share $ .04 $ .01 $ .02 $ (.09) $ (.05)
Weighted average shares of common stock (2)
outstanding used in computing basic
net income per share 45,900 38,300 39,000 39,000 39,000
Weighted average shares of common stock
outstanding used in computing diluted net
income per share 46,007 38,300 39,000 39,000 39,000
Dividends per share $ -- $ .03 $ -- $ -- $ --
-------- -------- -------- -------- --------
</Table>
(1) Presentation of data prior to 1999 does not reflect adjustments made for
adoption of classification rules that require shipping and handling charges
to be reflected in revenue and cost of sales, respectively, and the costs
of the company's sales compensation plan as a reduction of revenues. Prior
to 1999 Discovery was a division of Avon Products, Inc.
(2) Shares have been converted to reflect equivalent shares outstanding
subsequent to the July 18, 2001 recapitalization.
<Table>
<Caption>
As of December 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
unaudited unaudited
BALANCE SHEET DATA:
Cash & cash equivalents 10,782 10,927 10,500 455 250
Working capital 8,369 8,162 8,201 (5,997) (1,202)
Total assets 43,008 16,824 16,895 9,142 10,271
Long-term liabilities 18,891 4,631 3,379 0 0
Redeemable Warrants 977 -- -- -- --
Stockholders' equity (deficit) (5,746) 352 1,537 (3,625) (158)
</Table>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS AND THE OTHER FINANCIAL
INFORMATION APPEARING ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO HISTORICAL
INFORMATION, THE FOLLOWING DISCUSSION AND OTHER PARTS OF THIS ANNUAL REPORT
CONTAIN FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES.
OVERVIEW
Eos (formerly known as dreamlife) launched a website,
WWW.DREAMLIFE.COM, on February 12, 2000 with an objective to build an
interactive network for personal and professional improvement. This business
model failed to generate sufficient revenues to support the business. On July
18, 2001, Eos acquired all of the outstanding capital stock of Discovery Toys,
Inc. pursuant to a Stock Purchase Agreement dated as of July 18, 2001, by and
among Eos, Discovery Toys, Inc. and the holders of all of the issued and
outstanding capital stock of Discovery Toys, Inc. (the "Discovery Toys
Stockholders"). Pursuant to the Stock Purchase Agreement, Eos issued an
aggregate of 33,772,143 shares of common stock to the Discovery Toys
Stockholders in exchange for all of the issued and outstanding shares of capital
stock of Discovery Toys, Inc. The consideration paid by Eos for the acquisition
of Discovery Toys, Inc. was determined through arms-length negotiation by the
management of Eos and the majority stockholders of Discovery Toys, Inc.
Subsequent to the acquisition, the Discovery Toys Stockholders hold a majority
of the voting interests in Eos. Discovery Toys, Inc. operates as a wholly owned
subsidiary of Eos. As Eos, immediately prior to the merger, was a public shell
with no viable business operations of is own, the transaction has been accounted
for as a recapitalization of Discovery Toys, Inc.
As a result of the transaction with Discovery Toys, Eos has changed its
strategic focus to serve as a company with a mission to acquire and grow
consumer product companies with a direct selling emphasis.
To pursue this strategy, Eos purchased 85% of the assets of the
Regal Greetings and Gifts division of MDC Corporation, Inc. ("MDC"), an
Ontario Corporation, and Primes DeLuxe, Inc. and MDC Regal Inc. (each a
subsidiary of MDC Corporation) on December 14, 2001. The Regal business
consists of all the assets of an ongoing business, including cash, accounts
receivable, property and equipment, inventory and prepaid expenses. This
acquisition was accounted for as a purchase. Primes Deluxe, Inc. conducts
Regal's operations in Quebec.
The results of Regal's operations have been included in the
consolidated financial statements since December 14, 2001.
As a result of the following, the discussion and analysis of our
financial condition and results of operations for the periods reported reflect
the operations of Discovery Toys.
(i) Discovery Toys was the acquirer of Eos for accounting purposes
in the reverse acquisition on July 18, 2001 and, thus, the
financial statements presented prior to that date are those of
Discovery Toys; and
(ii) On December 14, 2001, we acquired the Regal Greetings and
Gifts division of MDC Corp. and certain subsidiaries of MDC
and the consolidated results of the operations include the
activity of this subsidiary from December 14 through
December 31, 2001.
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CRITICAL ACCOUNTING POLICIES
In the ordinary course of business, we have made a number of estimates
and assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ significantly from those estimates under different
assumptions and conditions. We believe that the following discussion addresses
our most critical accounting policies, which are those that are most important
to the portrayal of our financial condition and results and require management's
most difficult, subjective and complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
REVENUE RECOGNITION AND SALES RETURNS Revenue is recognized when the
product is delivered, which is generally at the time of shipment, when legal
title and risk of loss are transferred to our independent sales representatives.
Independent sales consultants have limited rights to return product
orders, and we record provisions for estimated returns and warranty costs at the
time revenue is recognized based on historical experience. Actual returns were
not significant during 2001, 2000 or 1999.
We maintain an incentive bonus plan in which all independent
consultants participate. Under the plan, consultants earn awards based on
individual and team sales performance and other benchmarks. Awards are
determined and accrued for on a monthly basis at Discovery Toys and on a
periodic basis at Regal. These awards are reflected as a reduction of revenues
in the period the awards are earned.
We provide coupons to buyers of our products and hostess volunteers
that can be used towards the purchase of future Company products. When coupons
are provided in conjunction with the sale of products, we allocate the sales
proceeds between the fair values of the products and the value of the coupon
based on estimated redemption rates. Amounts attributable to the value of the
coupon are deferred until the earlier of redemption of the coupon or expiration
occurs. When coupons are provided as incentives to hostess volunteers, we accrue
the value of the coupon based on estimated redemption rates as a sales and
marketing expense. When coupons are provided as incentives to sales
representatives, we accrue the value of the coupon based on estimated redemption
rates as a reduction of revenues.
INVENTORIES Inventories are stated at the lower of cost or market
value. We record adjustments to the value of inventory based upon our forecasted
plans to sell our inventories. The physical condition (e.g., age and quality) of
the inventories is also considered in establishing its valuation. These
adjustments are estimates, which could vary significantly, either favorably or
unfavorably, from actual requirements if future economic conditions, customer
inventory levels or competitive conditions differ from our expectations.
GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS We have made
acquisitions in the past that included a significant amount of goodwill and
other intangible assets. Under generally accepted accounting principles in
effect through December 31, 2001, these assets, as well as negative goodwill,
were amortized over their estimated useful lives, and were tested
periodically to determine if they were recoverable from operating earnings on
an undiscounted basis over their useful lives.
Effective in 2002, goodwill will no longer be amortized but will be
subject to an annual (or under certain circumstances more frequent) impairment
test based on its estimated fair value. Other intangible assets that meet
certain criteria will continue to be amortized over their useful lives and will
also be subject to an impairment test based on estimated fair value. Estimated
fair value is typically less than values based on undiscounted operating
earnings because fair value estimates include a discount factor in
17
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valuing future cash flows. There are many assumptions and estimates underlying
the determination of an impairment loss. Another estimate using different, but
still reasonable, assumptions could produce a significantly different result. We
currently do not expect to record an impairment charge upon completion of the
initial impairment review. However, there can be no assurance that at the time
the review is completed a material impairment charge will not be recorded.
Further, in 2002, negative goodwill must be written-off as the cumulative
effect of a change in accounting principle. As a result, the Company expects
to record a benefit of approximately $3.7 million on Janaury 1, 2002
resulting from the write-off of goodwill.
ESTIMATES ARISING FROM THE ACQUISITION OF REGAL We granted warrants to
certain lenders from whom we obtained financing to acquire an 85% interest in
the assets of Regal. These warrants give the holders the option to purchase
shares of stock from us at a fixed price or sell the warrants back to us at
prices defined in the agreement. In some cases, these prices are based on a
multiple of the historical earnings of Regal. The minority stockholder also has
the right to sell (put) its interest to us at a price based a multiple of the
historical earnings of Regal. The warrants granted to our lenders and the put
rights granted to the seller have been recorded at fair value. The underlying
valuations, which were determined through use of the Black Scholes Model,
represent significant accounting estimates. The price at which the warrant
holders and minority stockholder can sell their instruments back to us is a key
variable in determining fair value with the Black Scholes Model. As the price in
some instances is based, in part, on a multiple of the historical earnings of
Regal, this variable, and therefore, our calculation of the fair value of these
instruments is subject to change. Changes in the value of the warrants will be
reflected as interest expense. Changes in the value of the seller's put rights
will be reflected as changes in the carrying value of the minority interest.
2001 COMPARED TO 2000
REVENUES We record revenues from sales made to our independent sales
representatives, net of the cash incentives earned by these representatives
under our incentive bonus plans. Revenues for the current year ended December
31, 2001 increased 10.3% from $40,131,000 to $44,280,000. The revenues from the
acquisition of Regal Greetings and Gifts contributed $2,455,000 or 6.1% of the
increase as a result of inclusion of its sales from the acquisition date,
December 14, 2001, through the end of 2001. The remaining $1,694,000 or 4.2% of
the increase represents an increase in the sales of Discovery Toys. Discovery
Toys' increase in product sales (toys, books and software) contributed 5.0% of
the increase in revenues. New product sales increased 50% compared to the prior
year, which generated increases in product orders and average order. Shipping
and handling revenues on these products contributed 0.9% of the 10.3% increase
to the overall revenues. These gains were offset by increased compensation plan
costs of 1.3% of sales and lower volume of new education consultant kit revenue
of approximately 0.4% of sales. Sales of New Educational Consultant ("EC") kits
are a primary measure of sales representative recruiting for the Company. We had
a decrease of 10.8% in recruiting of new representatives for the year ended
December 31, 2001 using this measure. Discovery Toys engaged in more promotional
discounting of these new EC kits in fiscal year 2000 as compared to fiscal year
2001 which we believe led to increased purchases of the kit in fiscal 2000 as a
result of the excellent product value included as part of the kit, without
generating new ECs that became active in selling for the Company. We believe
this to be a factor in the lower recruiting numbers reflected in the year ended
December 31, 2001.
To offset the effect of the lower number of recruits, the Company
changed its maintenance policy for inactive recruits during 2001 and pursued
programs to reactivate representatives who had ceased to actively promote our
products. This campaign is believed to have been a contributor to our growth in
pre-Christmas sales realized during the fourth quarter.
Although the total number of sales representatives from which we
received orders dropped 2.2% from last year, order count grew 5.1% showing a
more active sales force that was also reflected in net growth of our group
manager sales consultant rank.
During the year, Discovery Toys implemented its internet "e-clic"
online ordering system to allow its educational consultants the convenience of
ordering online and to simplify its ordering process
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by automating much of the mathematical process sales representatives previously
had to perform in submitting orders.
Discovery Toys hopes to continue its sales growth trend by continuing
to focus on introduction of new recruiting programs and tools, continuing to
make it easier for its educational consultants and customers to do business with
the company and continuing to develop and introduce new products into its
product line.
COST OF SALES Cost of sales increased from $24,190,000 for the year
ended December 31, 2000 to $25,920,000 for the year ended December 31, 2001 but
decreased from 60.3% of sales in 2000 to 58.5% of sales for the year ended
December 31, 2001. Discovery Toys showed slight improvement in its cost of sales
which dropped from 60.3% of sales for the year ended December 31, 2000 to
59.1% of sales for the year ended December 31, 2001, a 2.0% improvement. Overall
cost of sales were aided by lower new EC kit sales in the 2001 product mix,
which tend to generate lower margins than regular product sales and improved
margins on those new EC kits sold. This contributed a decrease of 1.3% to the
cost of sales as a percentage of sales. The balance of the improvement came
from improved cost recovery of shipping and handling and catalogue printing
costs.
Regal attempts to identify products that will allow for adequate markup
to support its earning opportunity for its sales representatives, provide
excellent perceived value to its end customers, and support its margin
requirements needed for its operation of its representative service centers
(distribution centers) for the convenience of its sales force. Regal also sells
products at its distribution centers that are not in its current catalogues as a
method to reduce excess inventories and generate more sales activity at its
distribution centers.
As Regal Greetings and Gifts has a lower cost of sales as a
percentage of sales than Discovery Toys, the inclusion of Regal's results for
the short period from December 14, 2001 to December 31, 2001 had the effect
of decreasing overall cost of sales as a percent to sales by 0.6%. Regal
experienced a 48.7% cost of sales as a percent of sales during the period
from the acquisition date, December 14, 2001, until the end of the 2001
fiscal year.
SALES AND MARKETING EXPENSES Sales and marketing expenses increased
from $6,940,000 for the year-ended December 31, 2000 to $7,601,000 for the year
ended December 31, 2001. Inclusion of the results of operations for Regal
Greetings and Gifts added $660,000 of expense from the date of acquisition,
December 14, 2001, until December 31, 2001. Discovery Toys sales and marketing
expenses were flat for the year ended December 31, 2001 as compared to the year
ended December 31, 2000 as Discovery Toys continued to focus on cost control.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative
expenses increased from $9,606,000 for the year ended December 31, 2000 to
$10,549,000 for the year ended December 31, 2001. Overhead attributable to
the operation of the Eos parent represented $885,000 of the overall increase
as a result of the assumption of salaries, rent, insurance, and regulatory
compliance costs related to its structure as a public company. Eos corporate
expenses increased in the fourth quarter as activity around evaluation of
potential acquisitions, and work done by accountants and attorneys to meet
regulatory reporting requirements increased. The acquisition of Regal
Greetings and Gifts added $413,000 to consolidated general and administrative
expenses during the year ended December 31, 2001 representing Regal's general
and administrative expenses from December 14, 2001 to December 31, 2001.
Discovery Toys general and administrative expenses declined from
$9,606,000 for the year ended December 31, 2000 to $9,250,000 for the year ended
December 31, 2001, a $356,000 or 3.7% decline. Savings in the Information
Technology ("IT") area was the primary reason as we benefited from a new
contract with our IT contractor, EDS, that dropped our fixed base level of
support.
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AMORTIZATION OF GOODWILL Amortization of negative goodwill in the
amount of $525,000 represents the excess of the fair value of the net assets
over the purchase price resulting from the recapitalization of Discovery Toys
in January 1999. Eos is amortizing negative goodwill over a ten-year period
using the straight-line method. Amortization will cease on December 31, 2001
and the Company will recognize the unamortized balance of $3.7 million in
income in its first quarter of 2002, as the cumulative effect of a change in
accounting principle.
NET INTEREST EXPENSE Net interest expense was $957,000 for the year
ended December 31, 2001 compared to $44,000 for the year-end December 31, 2000.
The increase is primarily due to increased line of credit use and lower cash
balances due to the stock repurchase and stockholder distribution totaling
$5,985,000 prior to the recapitalization.
OTHER INCOME Other income primarily consisted of recognition of
unearned revenue from a merchandising agreement with a former internet
retailer. We recognized $2,074,000 of income associated with this agreement
in the year ended December 31, 2001 due to a default on the agreement whereby
we recognized the full remaining unamortized amount of unearned revenue
associated with the agreement. We recognized other income of $394,000 related
to this agreement in the year ended December 31, 2000. We believe we have no
continuing obligations under the agreement.
INCOME TAX EXPENSE Income tax provisions of $59,000 were recognized
for the year ended December 31, 2001 compared to $6,000 for the year-ended
December 31, 2000. The provisions for year ended December 31, 2001 reflected
$52,000 of taxes from the Regal Greetings and Gifts division based on their
status as a new corporation in Canada and recognition of a small pretax
profit from the short period from the date of its acquisition to the end of
the year. Discovery Toys and Eos tax provisions consist mostly of state
minimum tax amounts for both the years ended 2001 and 2000 as we had prior
tax loss carry forwards that offset any significant taxable amounts.
A 100% valuation allowance has been recorded against $4.6 million of
deferred tax assets associated with Eos, including its U.S. subsidiary,
Discovery Toys, as of December 31, 2001. Historical earnings leads management to
believe that realization of these assets is uncertain. Regal, a Canadian
corporation, has gross deferred tax assets of $2.7 million. Management has
established a $ 2.1 million valuation allowance against these assets. Management
has estimated its valuation allowance after considering the nature of the future
tax deductions, the timing of those deductions, and historical earnings.
NET INCOME AND OTHER MEASURES Net income increased $1,413,000 to
$1,740,000 for the year ended December 31, 2001 compared to $327,000 for the
year ended December 31, 2000.
The additional contribution from Discovery Toys sales and operating
improvements assisted in covering the additional corporate overhead generated
as a result of the reverse merger with Eos, which along with the recognition
of the unearned revenue related to the termination of the internet retailer
merchandising agreement, were the primary reasons for the increase.
Eos earnings per share for the year ended December 31, 2001 is $0.04
compared to $0.01 per share for the year ended December 31, 2000.
2000 COMPARED TO 1999
The audit period for fiscal year 1999 in the financial statements
included in this annual report is from January 15, 1999 to December 31, 1999.
The following discussion of fiscal year 2000 compared to fiscal year 1999 is
based upon fiscal year 1999 on a proforma basis to include the period from
January 1, 1999 to December 31, 1999, as management believes such unaudited
proforma comparison to be more meaningful than a comparison to the audit
period for fiscal 1999.
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Following performance gains in fiscal 1999 as compared to fiscal 1998,
assisted by sales to eToys, a former internet toy e-tailer, the Company's
revenue performance in fiscal 2000 as compared to fiscal 1999 was relatively
flat. Soft sales due to the economic slowdown in the fourth quarter of fiscal
2000 and a drop in eToys revenues throughout fiscal 2000 were the primary
contributors to a small overall sales decline in 2000 as compared to 1999.
Revenues for 2000 were $40,131,000 or 0.7% below the prior year's sales
of $40,420,000 on a full year proforma basis. Entering the fourth quarter, sales
were up 3% or $641,000 versus the prior year, however, a weak economy and retail
market contributed to a sales decline in the fourth quarter of fiscal 2000, when
approximately 45% of the company's business is conducted. The drop in eToys
sales accounted for $978,000 of a $930,000 sales decline in the fourth quarter
of 2000. Gross margin was slightly lower in the year ended December 31, 2000 at
39.7% of sales compared to the 41.3% of sales realized for the full year ended
December 31, 1999. Discounting of new EC kits and the loss of the higher margin
eToys sales were factors in the 3.7% decline.
Sales and marketing expenses were $6,940,000 for the year ended
December 31, 2000 compared to 6,880,000 for the full year 1999. Expenses
changed less than 1% for the year.
General and administrative expenses were $9,606,000 in 2000 compared
to $9,785,000 in 1999, a decrease of $179,000 due to cost control efforts and
minor staff reductions.
Negative goodwill amortization was $525,000 for both 2000 and
1999 on a full year basis attributable to amortization of the excess value of
the net assets over the purchase price from the acquisition of Discovery Toys
from Avon.
Discovery Toys realized an operating loss of $80,000 in 2000 versus
proforma full year operating income of $521,000 in 1999. The loss of sales
volume combined with a $242,000 eToys bad debt "write-off" contributed to the
operating decline. The $242,000 write-off was due to outstanding invoices not
paid by eToys at the time they filed for bankruptcy.
The loss of new EC kit revenues was a factor contributing to the
Company's decline in operating income for the year ended December 31, 2000. To
spark recruiting the Company engaged in promotional discounting of the new EC
kit. The number of new recruits increased 29.1%; however, profit generated by EC
kit sales declined approximately $200,000 compared to the prior year. Despite
the significant increase in new recruits, active selling sales representatives
increased marginally, while the number of product orders and average order size
declined. This indicates the Company recruited unproductive sales
representatives or "Kit Buyers." Kit Buyers are new recruits who join Discovery
Toys to get the new EC kit, because of its value, but never actively sell.
Net Interest Expense declined to $44,000 for the year ended December
31, 2000 mainly as a result of having more cash on hand due to payments
received from a sales and merchandising agreement with an internet retailer.
Income Tax Provisions were neglible for both 2000 and 1999 as they
represented only minimum state income tax expenses as we had prior tax loss
carryforwards that offset any significant taxable amounts.
Net income dropped from $562,000 on a full year proforma basis in the
year ended 1999 to $327,000 for the year ended December 31, 2000. The decrease
in net income which resulted from the drop in operating income was partially
offset by the inclusion of amounts recognized as other income from the
merchandising agreement with eToys of $394,000 in the year ended December 31,
2000 compared to $32,000 in year end December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the twelve month period ended December 31, 2001, we generated
approximately $2.4 million of cash in operating activities, primarily due to
$1.3 million of cash generated by Discovery Toys from improved operating income,
$0.8 million of cash from operations consumed by the addition of the Eos parent
additional overhead added during 2001, and $1.9 million of cash generated from
operations from Regal Greetings and Gifts, largely due to a temporary increase
in accounts payable relating to acquisition costs not paid as of December 13,
2001.
During the year ended December 31, 2001, the Company used $13.8
million for investing activities. This amount consisted of $18.5 million paid
to acquire Regal and $200,000 of capital expenditures, offset by $5.0 million
of cash acquired in connection with the acquisition of Regal and the reverse
merger with Eos. The Company had $11.3 million of net cash provided by
financing acitivities, which was mostly related to proceeds net of debt issue
costs of $18.5 million received from financing obtained to acquire Regal,
offset primarily by distribuitons and stock repurchases of $6.0 million made
by Discovery Toys prior to the reverse merger with Eos. Discovery Toys
consumed $4.7 million primarily resulting from $4.5 million used to pay
distributions to the stockholders of Discovery Toys prior to the
recapitalization, $1.5 million used to repurchase common stock of Discovery
Toys prior to the recapitalization, less $1.3 million of cash acquired in the
recapitalization.
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The Regal Business was purchased by Regal Corporation which was
formed by RGG, a wholly owned subsidiary of Eos, to effect the purchase. The
purchase price for an 85% interest in the assets of the Regal business was
approximately $22.0 million, including $0.7 million in cash acquisition
costs, plus the assumption of existing liabilities of approximately $4.2
million. The $22.0 million, together with cash debt issue costs of $0.7
million relating to the transaction, was satisfied with the issuance of a
$3.8 million note ($2.9 million net of discount) by Regal Corporation to MDC,
the seller, put rights with an estimated fair value of $0.5 million granted
to MDC related to its 15% ownership interest in Regal Corporation, $6.5
million of short term bridge notes issued by Eos, a primary loan of $8.3
million from The Bank of Nova Scotia to the Regal Corporation and a mezzanine
loan in the amount of $4.5 million from RoyNat to the Regal Corporation. The
primary loan and the mezzanine loan are each secured by all of the assets of
Regal and its subsidiaries, the primary loan being senior to the mezzanine
loan. RGG and PDL provided a guarantee to MDC of the performance of the note
issued by Regal Corporation to MDC. In connection with the mezzanine loan,
Regal Corporation issued warrants to RoyNat to purchase 11,000 shares of the
common stock of the Regal Corporation for $0.01 per share. Upon exercise of
such warrants, RGG's and MDC's percentage of ownership of the Regal
Corporation will be reduced proportionally. In connection with this
transaction, MDC, RGG, RoyNat, the Bank of Montreal Capital Corporation and
Regal entered into an Amended and Restated Unanimous Shareholders Agreement,
as amended thereafter, providing for, among other things, certain transfer
restrictions, rights of first refusal, co-sale rights, put and call rights
and preemptive rights. RoyNat assigned a portion of the mezzanine loan and
the rights related thereto to the Bank of Montreal Capital Corporation.
McGuggan, LLC provided to MDC a guarantee of the performance by RGG of its
obligations under the acquisition agreement. The purchase price and nature of
the consideration paid in the acquisition were determined through arm's
length negotiations.
The short term bridge notes are payable on April 13, 2002 in the
amount of $3.0 million to Weichert Enterprises, LLC and in the amount of $3.5
million to DL Holdings I, LLC. CYL Development Holdings, LLC, a principal
stockholder of Eos, is also a non-voting member of DL Holdings I, LLC. In
connection with the short term notes, Eos issued warrants to acquire an
aggregate of 2,600,000 shares of its stock for $2.95 per share. The warrants
also contain put rights that allow the warrant holders to sell their warrants
back to Eos in exchange for cash. The value attributable to put has been
classified as a liability as it is settled in cash. The price at which the
holders may put the warrants back to Eos increases from $0.15 per warrant to
$0.45 per warrant on April 15, 2002 and to $0.90 per warrant on August 15,
2002. Changes in the fair value may result in additional interest expense.
See "Item 5 - Market for Registrant's Common Stock and Related Stockholder
Matters" for a discussion of the short term notes and the warrants issued to
the note holders.
Based on the exchange rate as of the date of the Regal acquisition,
the aggregate purchase price was US$22.0 million, including put rights
granted to MDC, the seller, valued at $510,000. The value of the put rights,
which allow MDC to sell back its minority interest to the Company in exchange
for cash, was estimated using the Black Scholes model. Assumptions underlying
the valuation included a risk free rate of 4.46%, a volatility of 55% and an
expected life of 5 years. The put right may be exercised upon the earlier of
(i) certain liquidity events, as defined in the agreement, (ii) the
bankruptcy or insolvency of Regal, (iii) March 31, 2005 but prior to March
31, 2006, in the event RoyNat is not then a shareholder of Regal, (iv) the
date on which (a) James Liati, Frank Adubato, Anthony Calandra, Frank
Calabrese and William Walsh collectively are not the registered or beneficial
owners of more shares in the capital of Eos, than any other shareholder or
shareholder group of Eos acting in concert, or (b) any of James Liati, Frank
Adubato and Frank Calabrese is the registered or beneficial owner of less
than 2,000,000 shares in the capital of Eos or (c) William Walsh is the
registered or beneficial owner of less than 3,000,000 shares in the capital
of Eos, and (v) February 2007. The price at which the warrants or underlying
shares may be sold back to the Company is equal to the greater of (i) the
price paid per share in any of the triggering liquidity events, (ii) the fair
market value, as defined in the agreement, per share of Regal stock, or (iii)
5.5 times average Regal earnings before interest, taxes, depreciation and
amortization plus cash on hand less payments needed to retire the senior
debt, mezzanine debt and note to seller.
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Eos working capital was $8.4 million as of December 31, 2001. The
Eos parent company as a separate entity had $6.2 million of negative working
capital as of December 31, 2001. Of that negative working capital, $5.9
million represents $5.5 million in short term notes, $6.5 million face value
net of a $1.0 million discount on the note, and $0.4 million of value
attributed to the redeemable warrants issued with the notes. The total amount
due on the notes, including interest on the notes and the minimum amount
payable to the holders upon their exercise of the put rights contained in the
redeemable warrants due on April 13, 2002 is $7.2 million.
The remaining $200,000 of negative working capital of the Eos parent
entity as of December 31, 2001, represents current liabilities other than the
short term notes in excess of cash and prepaid expenses. The Eos parent entity
has no separate source of revenues.
Both operating subsidiaries, Discovery Toys and Regal, have
restrictions against making loans, advances, dividends and corporate overhead
payments to the Eos parent corporation without lender approvals. Current
arrangements with the lenders do not support sufficient corporate overhead
billings to the subsidiaries to provide adequate working capital for the Eos
parent to meet its current operating expenses beyond May 2002. Eos must be able
to negotiate agreements with its subsidiaries' lenders for additional corporate
overhead billings from the parent to the subsidiaries, acquire additional
sources of financing, or additional sources of capital to meet these
obligations.
On June 28, 2001, Discovery Toys, Avon Products, Inc. and other
parties thereto entered into an agreement for sale by Avon to Discovery Toys
of 3,911,831 shares of capital stock of Discovery Toys for $1,456,000. As
part of such transaction, among other things, Discovery Toys agreed to change
the maturity date of the promissory note issued by Discovery Toys to Avon
from January 15, 2006 to the earlier to occur of (i) June 30, 2003, (ii) sale
or transfer of all or substantially all assets of Discovery Toys, (iii) sale
of 50% or more of the fully diluted outstanding capital stock of Discovery
Toys (other than a sale or transfer to Eos), or (iv) sale of 50% or more of
the membership interests of Discovery Toys, L.L.C. The amended promissory
note is subordinate to the revolving line of credit extended by PNC Bank. The
amended promissory note is in the amount of $3,500,000 and bears interest at
the rate of 4.64% per annum compounded annually. The interest is due and
payable at maturity.
Eos does not have sufficient working capital to meet its obligations on
the $6.5 million of notes due April 13, 2002. Eos must negotiate extensions or
amendments to the $6.5 million notes or acquire additional financing or sources
of capital to meet this obligation.
There can be no assurances of the Company's ability to negotiate
satisfactory agreements with its lenders sufficient to meet the Eos parent's
operating cost requirements or the ability to secure additional financing or
sources of capital to meet its corporate overhead expenses and the payment of
its short term notes due April 13, 2002.
Both Discovery Toys and Regal are highly seasonal operating
subsidiaries and have revolving lines of credit established with lenders to
provide seasonal financing for its operations. The Company recognized
approximately 40-50% of its annual sales revenues, in the fourth quarter. The
Company requires significant working capital through the first three quarters
for operating expenses and to build inventory for the fourth quarter.
In 1999, Discovery Toys entered into a line of credit arrangement
with a bank providing for advances up to $5.0 million. Outstanding advances
may not exceed specified percentages of eligible accounts receivable and
inventory of Discovery Toys as defined in the agreement. At December 31, 2001
Discovery Toys had $2.6 million available when factoring in its borrowing
base restrictions. Outstanding borrowings bear interest at a variable rate,
which is generally related to the bank's borrowing rate plus 2%. The line of
credit expires in May 2003 and requires that certain covenants be met. The
Company was in compliance with all covenants at December 31, 2001. Borrowings
under the line of credit are secured by substantially all of the assets of
Discovery Toys. At December 31, 2001 and 2000,
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outstanding borrowings were $0 and $1,250,000, respectively and the effective
interest rates were 0% and 11%, respectively.
In December 2001 in conjunction with the acquisition of Regal
Greetings and Gifts, Regal entered into a revolving credit agreement with The
Bank of Nova Scotia for up to $10.0 million CDN (approximately $6.2 million
U.S.) to assist in meeting its operating requirements. Outstanding advances
may not exceed specified percentages of eligible accounts receivable and
inventory of Regal and its subsidiaries as defined in the agreement. At
December 31, 2001 Regal had $3.5 million available when factoring in its
borrowing base restrictions. The credit line bears interest at the bank's
U.S. Dollar Base Rate in Canada plus 3.00% per annum with interest payable
monthly on the 22nd of each month. There were no borrowings outstanding on
this line of credit at December 31, 2001.
In December 2001, Regal also entered into a forward exchange credit
agreement with The Bank of Nova Scotia. The credit agreement allows Regal to
enter into foreign currency forward exchange contracts with The Bank of Nova
Scotia with a maximum term of one year. The aggregate national value of forward
exchange contracts may not exceed $15.0 million. Under the terms of this
agreement, Regal is subject to certain financial covenants based on liquidity
ratios. During 2001, Regal did not enter into any forward contracts.
Discovery Toys current projections indicate it will need a relaxation
of the borrowing requirements from its primary lender in excess of $1.0 million
from July through October of 2002.
Regal has significant interest bearing obligations incurred in
connection with its purchase and current operating projections indicate that it
will fully utilize its operating line of credit during the 2002 year. There can
be no assurances that Regal will not be required to request relaxation of its
borrowing requirements from its primary lender on its line of credit during the
next 12 months or that, if requested, its lender will agree to a relaxation of
the borrowing requirements.
There can be no assurance that additional financing or capital will
be available to Eos to meet its cash requirements for its current debt and
operating requirements. For these reasons there is uncertainty as to whether
Eos can continue as a going concern beyond April 13, 2002. The report of the
Company's auditors on the financial statements of the Company as of December
31, 2001 and for the year ended December 31, 2001 contains a separate
paragraph stating that the accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, "certain lenders restrict
the amount of funds the Company's subsidiaries may advance to the Company's
parent, which has negative working capital conditions and the Company has
certain debt payments due in April 2002. These conditions raise substantial
doubt about the Company's ability to continue as a going concern."
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Failure to negotiate satisfactory agreements with its lenders to meet
Eos operating cost requirements and seasonal financing requirements of Discovery
Toys and Regal or the failure to secure additional financing or sources of
capital to meet its corporate overhead expenses and the repayment of the short
term notes could result in the cessation of operations or an involuntary
bankruptcy of Eos or an involuntary bankruptcy of one or more of its
subsidiaries.
In addition, if Eos is unable to exercise its call option and
repurchase the warrants issued to the note holders, Eos will recognize $780,000
of expense associated with an increase in the redemption value of the warrants
after April 14, 2002 until August 13, 2002, and an additional $1,170,000 after
August 14, 2002. Current agreements call for significantly increased costs
associated with these notes should they not be paid by April 13, 2002.
Failure of the Company to have adequate liquidity to meet its corporate
overhead expenses could result in failure to pay the salary of its chairman,
Peter Lund. Such a failure could constitute a
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constructive termination which would require payment of Mr. Lund's deferred
compensation in the amount of $3.0 million. The Company would currently be
unable to satisfy this obligation. This could cause Eos to cease operations or
result in an involuntary bankruptcy.
Management is currently in negotiations with the primary lender of
Discovery Toys to allow additional overhead charges to support the Eos
parent. On March 18, 2002, the bank approved $50,000 in corporate overhead
fees to be charged to Discovery Toys and paid to Eos. Final agreements are
being negotiated to permit up to $250,000 to be charged to Discovery Toys
before the period ending June 30, 2002, and an additional $150,000 to be
charged from July 1, 2002 to December 31, 2002. The agreement being
negotiated will also anticipate the amount of additional credit required for
Discovery Toys to meet its seasonal operating credit line requirements. There
can be no assurance that a final agreement will be reached on these
amendments to the current loan arrangements.
Discussions have been entered into with the primary lenders of Regal to
attempt to negotiate additional corporate overhead charges to be billed to Regal
similar to those being negotiated for Discovery Toys. There can be no assurance
that a final agreement will be reached on these amendments to the current loan
arrangements.
Management is also actively pursuing new sources of financing which may
include additional sales of the Company's securities to provide sufficient cash
to meet its short term debt requirements, provide additional working capital and
fund future potential acquisitions. There can be no assurance that any new
sources of financing will be available on terms acceptable to the Company, if at
all.
RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued
Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and
Other Intangible Assets." Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
as well as all purchase method business combinations completed after June 30,
2001. Statement 141 also specifies criteria that intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. Statement 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment.
Eos has adopted the provisions of Statement 141 as of July 1, 2001 and
will adopt Statement 142 effective January 1, 2002. When Statement 142 is
adopted, remaining unamortized negative goodwill must be written off as the
cumulative effect of a change in accounting principle. As a result, Eos expects
to record a benefit of approximately $3.7 million on January 1, 2002 resulting
from the write-off of negative goodwill. Eos does not believe there will be any
additional impact from the implementation of these statements on Eos financial
statements.
In August 2001, the FASB also issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." This statement, which is
effective for fiscal years beginning after December 15, 2001, addresses
financial accounting and reporting for the impairment of long-lived assets,
excluding goodwill and intangible assets, to be held and used or disposed of.
Eos does not expect the implementation of this standard to have a significant
effect on its results of operations or financial condition.
In April 2001, the Emerging Issues Task Force issued No. 00-25 ("EITF
00-25"), "Accounting for Consideration from a Vendor to a Retailer in Connection
with the Purchase or Promotion of the Vendor's Products," which states that
consideration from a vendor to a reseller of the vendor's products is
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presumed to be a reduction of the selling prices of the vendor's products and,
therefore, should be characterized as a reduction of revenue when recognized in
the vendor's income statement. That presumption is overcome and the
consideration can be categorized as a cost incurred if, and to the extent that,
a benefit is or will be received from the recipient of the consideration. That
benefit must meet certain conditions described in EITF 00-25. The consensus
should be applied no later than in annual or interim financial statements for
periods beginning after December 15, 2001. The financial statements currently
comply with EITF 00-25. The consensus reached in EITF 00-25 has been codified in
EITF 01-19 "Accounting For Consideration Given by a Vendor to a Customer
(Includes a Reseller of the Vendor's Products)."
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATION AND FINANCIAL
CONDITION.
THE INDEPENDENT ACCOUNTANT'S REPORT ON OUR FINANCIAL STATEMENTS
CONTAINS A "GOING CONCERN" QUALIFICATION. We may not have sufficient liquidity
to continue to meet our obligations. We have short term notes due April 13, 2002
which could be in default if we can not raise sufficient additional capital or
arrange new financing on acceptable terms or negotiate an extension on such
short term notes. There are also agreements that exist with our lenders that
prohibit cash being advanced to the Eos parent to meet our corporate overhead
cash requirements.
WE ARE HIGHLY LEVERAGED AND MAY NOT BE ABLE TO MEET OUR LOAN
COMMITMENTS AND COVENANTS. We have to operate at certain performance levels to
maintain our financing arrangements to provide adequate liquidity for our
operations to continue. There are no guarantees that we will be able to operate
at these performance levels.
WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING OUR BUSINESS STRATEGY. Our
current strategy is to acquire and grow consumer product companies with an
emphasis on direct selling. There can be no assurance that we will be
successful in executing this strategy. These risks include our ability to:
o Identify and complete appropriate future acquisitions;
o Successfully integrate completed acquisitions;
o Manage the cost of pursing and completing acquisitions;
o Raise financing to meet the cash needs for the acquired
companies;
o Achieve profitability and revenue growth in the acquired
companies; and
o Attract, retain and motivate qualified management and other
personnel
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS. We will
require additional financing before April 13, 2002. We may not be able to obtain
the financing or obtain it on terms acceptable to us. Without additional
financing, we may be forced to cease operations. In addition, the success of the
Company's new business strategy is dependent on our ability to complete
acquisitions. These acquisitions may require additional financing. There is no
assurance that we will be able to obtain additional financing.
WE MAY NOT BE ABLE TO CONTINUE TO RECRUIT AND MAINTAIN OUR INDEPENDENT
SALES FORCE. We rely on growth and maintenance of an independent sales force to
provide revenue generation. We cannot give assurances of the Company's ability
to maintain these sales force at its existing level or grow these sales forces
beyond their current level.
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WE MAY NOT BE ABLE TO CONTINUE TO IDENTIFY, DEVELOP, AND PROVIDE
ACCEPTABLE PRODUCTS FOR OUR CUSTOMER MARKETS. We must continue to provide
consumer products that are desirable to purchase and introduce new products to
support revenue generation. There are no assurances of acceptance of our
products in the marketplace.
MANY OF OUR PRODUCTS ARE SOURCED FROM FOREIGN MARKETS. We can provide
no assurance that situations will not arise that could interrupt our ability to
source our products.
WE COULD FACE PRODUCT LIABILITY CLAIMS. Our products are designed for
use by consumers including children. There can be no assurance that use of the
products will not give rise to liability claims that could materially effect the
ability of the Company to continue.
OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL. Our success is
substantially dependent on the ability and experience of our senior
management and other key personnel, particularly Peter Lund, our Chairman,
and James M. Cascino, our Chief Executive Officer. If one or more members of
our management team become unable or unwilling to continue in their present
positions, our business could be materially harmed.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS. Eos' success will depend upon our ability to identify and attract
high quality acquisition candidates. Many of our competitors have longer
operating histories, more extensive industry experience, greater brand
recognition and significantly greater financial, marketing and other resources
than we have. If we are unable to successfully compete, our business, operating
results and financial condition would be materially harmed.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. We
regard our trademarks, trade secrets and similar intellectual property as
important to our success. We have applied for the registration of some of our
trademarks and service marks in the United States and in selected foreign
jurisdictions. We have also entered into licensing agreements. However, our
efforts to establish and protect our intellectual property rights may be
inadequate to prevent misappropriation or infringement of our intellectual
property rights. If we are unable to safeguard our intellectual property rights,
it could materially harm our business, operating results and financial
condition.
WE ARE SUBJECT TO GOVERNMENT REGULATION AND LEGAL LIABILITIES THAT MAY
BE COSTLY AND MAY INTERFERE WITH OUR ABILITY TO CONDUCT BUSINESS. Laws and
regulations directly applicable to the status of independent sales
representative could change the economics of our business model. These laws and
regulations could expose us to compliance costs and substantial liability, which
could materially harm our business, operating results and financial condition.
YOU MAY EXPERIENCE DILUTION OF YOUR SHARES. Initially, the Company
plans to complete acquisitions using primarily equity as an acquisition
currency. If the Company is successful in completing acquisitions in this
manner, it will require the issuance of additional shares which could result in
substantial dilution of your holdings in Eos.
OUR STOCK PRICE MAY FLUCTUATE, WHICH MAY MAKE IT DIFFICULT TO RESELL
YOUR SHARES AT ATTRACTIVE PRICES. The market price of our common stock may be
highly volatile. Factors that could cause volatility in our stock price include:
o fluctuations in our quarterly operating results;
o deviations in our results of operations from estimates;
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o changes in the market valuations of other direct marketing
companies and stock market price and volume fluctuations
generally;
o economic conditions specific to direct marketing and consumer
product markets;
o announcements by us or our competitors relating to new
products, significant acquisitions, strategic relationships,
joint ventures or capital commitments;
o regulatory developments; and
o additions or departures of our key personnel.
SALES OF SHARES ELIGIBLE FOR FUTURE SALE COULD IMPAIR OUR STOCK
PRICE. In June 2001, we issued 2,000,000 shares of our common stock in a
private placement which were restricted securities as defined by Rule 144
under the Securities Act of 1933. Additionally, on July 18, 2001, in two
separate transactions, we issued an aggregate of 36,172,143 shares of our
common stock which were restricted securities as defined by Rule 144 under
the Securities Act of 1933. As a result of such transactions, if the Company
is in compliance with the reporting requirements of Rule 144, subject to
certain volume limitations with respect to sales by affiliates, 38,172,143
shares of our common stock may be sold pursuant to Rule 144 after July 18,
2002. The market price of our common stock could drop due to the sale of a
large number of shares of our common stock, including shares sold under Rule
144, or the perception that these sales could occur. These factors could also
make it more difficult to raise funds through future offerings of common
stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RISK We use the U.S. dollar as our
functional currency, except for our Canadian subsidiary, Regal, which uses the
Canadian dollar as its functional currency. Foreign currency assets and
liabilities, including U.S. dollar denominated assets and liabilities held by
Regal, are re-measured into the applicable functional currency using
end-of-period exchange rates for monetary assets and liabilities and historical
exchange rates for non-monetary assets and liabilities. Foreign currency
revenues and expenses are remeasured at average exchange rates in effect during
each period. For consolidation purposes, Regal's financial statements are
translated to the U.S. dollar reporting currency using period-end rates of
exchange for assets and liabilities and using monthly rates for revenues and
expenses. Translation gains and losses are deferred and included in the
cumulative translation adjustment component of other comprehensive income (loss)
in stockholders' equity.
Foreign currency exchange risk primarily arises from U.S. dollar
denominated payables held by Regal, arising from Regal's purchases of inventory
from U.S. suppliers. Currently, approximately 70% of Regal's inventory purchases
are denominated in U.S. dollars. Since Regal's sales are denominated in Canadian
dollars, changes in the rate of exchange between the Canadian dollar and the
U.S. dollar can affect Regal's reported results of operations. As the
consolidated statements of operations include the results of Regal from December
14, 2001 (the date of its acquisition) through December 31, 2001, we estimate
that a hypothetical 10% decrease in the value of the Canadian dollar as compared
to the U.S. dollar would not have materially affected its net income.
We plan to take actions in the future to reduce our exposure to
fluctuations in the rate of exchange between the Canadian dollar and the U.S.
dollar, including the purchase of forward contracts for the purchase of U.S.
dollars in amounts sufficient to pay for forecasted U.S. dollar denominated
inventory purchases. We plan to account for forward contracts in accordance with
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
SFAS 133 and SFAS 138 require derivatives to be measured at fair value and to be
recorded as assets or liabilities on the balance sheet. The accounting for gains
or losses resulting from changes in
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the fair values of those derivatives is dependent upon the type of the
derivative and whether it qualifies for hedge accounting. Gains and losses from
forward purchase contracts not designated as hedge instruments would be
recognized in results of operations in the period they arise, and could result
in additional volatility of our reported earnings. If the forward purchase
contracts are designated as hedge instruments, and provided they qualify for
hedge accounting under SFAS 133, the resulting gains and losses would initially
be reported as a component of other comprehensive income (loss) and subsequently
reclassified into results of operations when the hedged exposure affects results
of operations.
In December 2001, Regal also entered into a credit agreement with
The Bank of Nova Scotia. The credit agreement allows Regal to enter into
foreign currency forward exchange contracts with The Bank of Nova Scotia with
a maximum term of one year. The aggregate notional value of forward exchange
contracts may not exceed $15 million (CDN). Under the terms of this
agreement, Regal is subject to certain financial covenants based on liquidity
ratios. During 2001, Regal did not enter into any forward exchange contracts.
INTEREST RATE RISK Our long-term debt has a fair value, based on
current interest rates, of approximately $17,237,000 at December 31, 2001. Fair
value will vary as interest rates change. The following table presents the
aggregate maturities and historical cost amounts of the debt outstanding and
related weighted-average-interest, stated rates by maturity dates at December
31, 2001:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------------
U.S. DOLLAR CANADIAN CANADIAN
FIXED-RATE AVERAGE DOLLAR FIXED AVERAGE DOLLAR VARIABLE AVERAGE
MATURITY DATE DEBT INTEREST RATE RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- --------------------------------------------------------------------------------------------------------------------
2002 $ -- -- $ -- -- $1,253,000 7.75%
2003 4,003,000 4.64% -- -- 1,253,000 7.75%
2004 -- -- 282,000 12.00% 1,880,000 7.75%
2005 -- -- 1,629,000 8.15% 1,880,000 7.75%
2006 -- -- 2,893,000 7.65% 1,881,000 7.75%
Thereafter -- -- 3,353,000 12.00% -- --
- --------------------------------------------------------------------------------------------------------------------
Total $4,003,000 4.64% $8,157,000 9.68% $8,147,000 7.75%
====================================================================================================================
</Table>
CONTRACTUAL OBLIGATIONS
The Company has contractual obligations to make future payments under its
short-term bridge notes, long-term notes payable, and non-cancelable lease
agreements. The following table sets forth these contractual obligations:
2002 2003 2004 2005 2006 THEREAFTER TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
Short-term bridge notes $ 6,500,000 -- -- -- -- -- $ 6,500,000
Long-term notes payable 7,753,000 5,256,000 2,162,000 3,509,000 4,774,000 3,353,000 26,807,000
Minimum rental commitments 2,561,000 2,114,000 1,281,000 990,000 800,000 1,790,000 9,536,000
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 are included in this Annual
Report beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
KPMG LLP was previously the principal accountants for Eos. On November
6, 2001, KPMG LLP declined to stand for reelection. BDO Seidman LLP was engaged
as principal accountants on November 12, 2001. The decision to hire BDO Seidman
was approved by the Executive Committee of the Board of Directors of Eos.
In connection with the audits of the two fiscal years ended December
31, 2000 of Eos and the subsequent interim period through November 6, 2001,
there were no disagreements with KPMG LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or
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procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement. During the two most recent fiscal years and through
November 6, 2001, there have been no reportable events (as defined in Regulation
S-K 304(a)(1)).
The audit reports of KPMG LLP on the financial statements of Eos, as of
December 31, 2000 and 1999 and for the year ended December 31, 2000 and the
period from April 21, 1999 (date of inception) to December 31, 1999, did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles except as
follows:
KPMG LLP's report on the financial statements of Eos as of December 31,
2000 and 1999 and for the year ended December 31, 2000 and the period from April
21, 1999 (date of inception) to December 31, 1999, contained a separate
paragraph stating that "the Company has incurred losses from development stage
activities and has a working capital and stockholders' deficiency at December
31, 2000 that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty."
Comyns, Smith, McCleary LLP served as the principal independent
accountants for Discovery Toys, Inc. As described in the report on Form 8-K
dated August 1, 2001, Eos acquired all of the outstanding stock of Discovery
Toys, Inc. in a reverse acquisition on July 18, 2001. Discovery Toys has
operated as a wholly-owned subsidiary of Eos since the date of such
acquisition. On December 28, 2001, Comyns, Smith, McCleary LLP declined to
stand for reelection as the principal independent auditors of Discovery Toys,
Inc.
In connection with the audits of the two fiscal years ended December
31, 2000 and the subsequent interim period through December 28, 2001, there were
no disagreements with Comyns, Smith, McCleary LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement. During the two most recent fiscal years and through
December 28, 2001, there have been no reportable events (defined in Regulation
S-K 304(a)(1)).
The audit reports of Comyns, Smith, McCleary LLP on the financial
statements of Discovery Toys, Inc. as of the two fiscal years ended December 31,
2000, did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope, or accounting
principles.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the director and executive officers of
Eos, their ages and the positions held by them with Eos on March 25, 2001. See
"Item 13-Certain Relationships and Related Transactions" for a discussion of an
amendment and restatement of Eos' By-Laws with respect to the composition of
Eos' Board of Directors.
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
Peter A. Lund.......................... 61 Chairman
James M. Cascino....................... 50 President & Chief Executive Officer and Director
Jack B. Hood........................... 46 Treasurer & Chief Financial Officer
James J. Liati......................... 59 Secretary
Julius Koppelman....................... 85 Vice Chairman of the Board
Anthony J. Robbins .................... 42 Vice Chairman of the Board
Anthony R. Calandra.................... 60 Director
Jonathan C. Klein...................... 43 Director
Charles D. Peebler, Jr. ............... 65 Director
William S. Walsh....................... 40 Director
</Table>
- ------------
PETER A. LUND is a private investor and media consultant and currently serves as
Chairman of the Board of EOS. He has served as a member of the Board of
Directors of Eos since November 1999. Mr. Lund served as the Chief Executive
Officer of Eos from May, 2000 until August 2001. Prior to November 1999, Mr.
Lund was President and Chief Executive Officer of CBS Inc. where he spent 18
years in a variety of positions including President, CBS TV and Cable,
President, CBS Television Network, President, CBS Television Stations, and
President, CBS Sports. He was also the President of Multimedia Entertainment Co.
and General Manager of television stations in Chicago and New York. Mr. Lund
currently serves as a member of the Board of Directors of Hughes Electronics
Corp., Razorfish, Inc., and Crown Media Holdings, Inc., all publicly traded
companies. He is also a member of the Board of Trustees of the University of St.
Thomas. He additionally serves as a member of the Boards of Directors of
Regal and Discovery Toys.
JAMES M. CASCINO has served as President and Chief Executive Officer of Eos
since August 2001. Mr. Cascino has served as Chief Executive Officer of
Discovery Toys, Inc. since January 1999 and has also served as President and
Chief Executive Officer of Institutional Financing Services of New Jersey, Inc.
("IFS") since 1997. Before being named Chief Executive Officer at IFS, he was
Senior Vice President of Sales and Marketing at IFS for 10 years. Prior to
joining IFS, Mr. Cascino served in a number of sales and management positions at
Avon Products Inc., HBO & Company, the Cystic Fibrosis Foundation and Mercer
University. He received an A.B. degree from Mercer University. Mr. Cascino is a
member of the Board of Directors of Discovery Toys and IFS. He additionally
serves as Chairman of the Board of Directors of Regal.
JACK B. HOOD has served as the Chief Financial Officer and Treasurer of Eos
since October 1, 2001. Mr. Hood has served as the Chief Financial Officer and
Vice President of Finance of IFS since October 1996. Mr. Hood has also served as
the Chief Financial Officer of Discovery Toys since August, 2001. Prior to
joining IFS, Mr. Hood served at Tyler Pipe Industries, a $200+ million dollar
manufacturer of cast iron
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pipe and fittings, formerly owned by Tyler Corporation, in a variety of
managerial positions and responsibilities, serving as its Controller from 1992
to 1996. Mr. Hood is currently Chief Financial Officer of Discovery Toys, Inc.
and IFS. Mr. Hood received his MBA from the University of Texas at Tyler and a
BBA from Sam Houston State University. He has been a licensed CPA since 1983.
Mr. Hood is a member of the Board of Directors of Discovery Toys and IFS.
JAMES LIATI has served as the Secretary of Eos International since August
2001. Mr. Liati has served as the Chief Operating Officer and Executive Vice
President of McGuggan, LLC since 1995. Mr. Liati spent the first fifteen
years of his career in a series of technical, marketing and management
positions with IBM, AT&T and ITT. In 1983, he joined the Fidelco Capital
Group and spent twelve years in acquiring, managing, and selling a number of
companies. He has had chief executive experience in managing both domestic
and multinational companies. Mr. Liati is a member of the Board of Directors
of Discovery Toys, IFS, Corporate Aircraft Management Partners, McGuggan and
Artegraft, Inc.
JULIUS KOPPELMAN has served as Vice Chairman of the Board for Eos since July
2001 and serves as the Chairman of the Board of Discovery Toys, Inc. and IFS.
Mr. Koppelman served as Executive Vice President and a member of the Board of
Directors at RCA Corporation before retiring following a 38 year career. Mr.
Koppelman then joined Wesray Capital Corp. as Chairman of their Harding
Service L.L.C. consulting arm, where he served on the Board of Directors of
some 30 companies including such well known names as Avis Rent A Car, Wilson
Sporting Goods, Carter Children's Wear, Simmons Mattress Co., and Atlas Van
Lines. Mr. Koppelman is also a member of the Board of Directors of Princess
House Inc., Artegraft Inc., Medcon Financial Services and Corporate Aircraft
Management Partners.
ANTHONY J. ROBBINS is Vice Chairman of Eos. He had served as Chairman since
founding the company in November 1999 until August 2001. He has also served as
Chairman of the Board of Robbins Research International, Inc., also known as the
Anthony Robbins Companies, since 1983. Internationally recognized as the leader
in peak performance and results coaching, Mr. Robbins is a best-selling author
of five books. His audio program, "Personal Power," is the best-selling personal
improvement program of all time with more than 35 million tapes distributed
worldwide.
ANTHONY R. CALANDRA has served as a Director of Eos since July 2001. Mr.
Calandra has been President of McGuggan, LLC, since 1995. Prior to that, Mr.
Calandra had served as President of Artegraft, Inc. and President of Redi
Mail Direct Marketing, Inc. He received an accounting degree from Rutgers
University. Mr. Calandra is currently the Chairman of the Board of Artegraft,
Inc. and is a member of the Board of Directors of Medcon Financial Services,
IFS, Discovery Toys and Gettoner.com. He additionally serves as a member of
the Board of Directors of Regal.
JONATHAN C. KLEIN is the President and Chief Executive Officer of The FeedRoom,
a company he founded in 1998. Mr. Klein served as Executive Vice President, CBS
News from January 1996 until October 1998. Prior to that, Mr. Klein was a news
and documentary producer for CBS News, where he pioneered new forms of
storytelling as the creator of the innovative cinema verite series, "Before Your
Eyes." During his tenure at CBS News he won multiple Emmy and Peabody Awards and
the Columbia-Dupont Silver Baton.
CHARLES D. PEEBLER, JR. has served as a member of the Board of Directors of
Eos since November 1999. Mr. Peebler has served as Managing Director of Plum
Capital, LLC since 2000. Mr. Peebler was Chief Executive Officer of Bozell,
Jacobs, Kenyon and Eckhardt from January 1986 to December 1997 before merging
his company with True North. He then served as President of True North and
Chairman and Chief Executive Officer of their Diversified Services Group from
1997 until 1999. Mr. Peebler retired as Chairman Emeritus of True North in
December 2000. Mr. Peebler is a member of the Board of
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Directors of American Tool Companies, Inc., AvalonBay Communities, Inc., Hot
Link Inc., and mPulse, of which he is Chairman of the Board.
WILLIAM S. WALSH has served as a Director of Eos since July 2001. Mr. Walsh
has served as Managing Partner of McGuggan, LLC, since 1997. Prior to that,
Mr. Walsh had served as Managing Partner of both Emptor Capital and South
Street Capital. Mr. Walsh has also managed a food manufacturing business that
he co-founded. He is a graduate of the University of Richmond. Mr. Walsh is a
member of the Board of Directors of Princess House, Discovery Toys, IFS,
Medcon Financial Services, ATS, CMEInfo, Select Nutrition and Regal.
SECTION 16 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers and persons who own more
than ten percent of a registered class of the Company's equity securities file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Directors, officers and greater than ten percent stockholders are
required by Commission regulation to furnish the Company with copies of all
section 16(a) forms they file.
Based upon a review of filed forms received by the Company and
representations by persons that would be required to file such forms, the
Company believes that all required filings by current executive officers and
directors during the calendar year 2001 have been timely filed except that mr.
Anthony Robbins a director of the Company failed to file a form 5 to report his
contribution of 17,031,297 shares of common stock to Eos. Mr. Robbins intends to
file such report promptly.
ITEM 11. EXECUTIVE COMPENSATION
EMPLOYMENT AGREEMENTS
In July 2000, Eos International, Inc. entered into an offer letter with
Peter A. Lund, as Eos' Chief Executive Officer, that provides for annual base
salary to Mr. Lund of $300,000, subject to change at the discretion of the
Board. The agreement also provided for a discretionary bonus that may be granted
as determined by the Board and a deferred bonus of up to $3.0 million, subject
to vesting requirements, payable in a lump sum on May 22, 2003, the third
anniversary of the start of Mr. Lund's service as Chief Executive Officer. The
deferred bonus vested with respect to 33 1/3% of the full bonus amount on May
22, 2001, the first anniversary of the start of Mr. Lund's service, and an
additional 5.55% of the full bonus amount at the end of each following month
until fully vested. The vesting of the deferred bonus accelerated (a) with
respect to up to 25% of the full bonus amount if a change in control occurred
with respect to Eos and (b) with respect to the remaining unvested portion if
Mr. Lund was terminated other than for cause prior to May 22, 2002. The
agreement also contains confidentiality and non-competition provisions
prohibiting Mr. Lund from competing against Eos and disclosing trade secrets and
other proprietary information. In July 2000, Eos also granted to Mr. Lund a
ten-year non-statutory stock option under Eos' 1999 Employee Stock Option Plan
to purchase up to 2,400,000 shares of Common Stock at $5.20 per share.
As a condition to the closing of the acquisition of Discovery Toys, Eos
and Peter A. Lund agreed to amend the compensation arrangement. The amendment
accelerated the vesting of the unvested portion of the $3.0 million bonus
provided for in the offer letter and extended the payment dates of such bonus.
Under the amendment, the bonus is payable in three equal annual payments of $1.0
million beginning in July 2003 provided Eos is successful at meeting certain
fundraising targets. Otherwise, the bonus is payable in five equal payments of
$600,000 beginning in July 2003. Payment of the bonus is
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automatically accelerated upon Mr. Lund's employment termination, if other than
for cause. The entire $3.0 million liability was accrued by Eos on July 18, 2001
as part of the reverse acquisition with Discovery Toys on that date.
As an inducement to Mr. Lund, CYL Development Holdings, LLC, a
principal stockholder of Eos, has granted to Mr. Lund an option to purchase up
to 1,600,000 shares of Eos common stock held by CYL Development Holdings, LLC.
Such option is exercisable for a period of five years commencing on July 18,
2001 at an exercise price of $1.00 per share, subject to vesting requirements.
On December 12, 2001, Regal Greetings and Gifts Corporation entered
into an employment agreement with Janice Wadge in relation to her performance of
duties as President and Chief Executive Officer. The terms of the contract cover
a three-year period at a base salary of $235,000 CDN (approximately $147,000
U.S.) with pay increases to be set and approved by the Board of Directors of
Regal. Regal's Board also will establish an annual bonus plan payable to members
of senior management. The agreement also contemplates participation in a Stock
Bonus Plan the terms of which have not been agreed upon as of this date. The
agreement also provides for severance of 18 months salary should the employee be
terminated without cause.
On December 12, 2001, Regal Greetings and Gifts Corporation entered
into an employment agreement with Kevin Watkinson in relation to his performance
of duties as Senior Vice President and Chief Financial Officer. The terms of the
contract cover a three-year period at a base salary of $167,000 CDN
(approximately $104,000 U.S.) with pay increases to be set and approved by the
Board of Directors of Regal. Regal's Board also will establish an annual bonus
plan payable to members of senior management. The agreement also contemplates
participation in a Stock Bonus Plan the terms of which have not been agreed upon
as of this date. The agreement also provides for severance of 12 months salary
should the employee be terminated without cause.
On January 15, 1999, Discovery Toys entered into an employment
agreement with Lane Nemeth appointing Ms. Nemeth as Chairperson of Discovery
Toys. The term of the agreement expires in January 2003. Under the agreement Ms.
Nemeth is entitled to a base compensation of $300,000 per year and to a bonus of
between 50% and 100% of the annual base salary based on Ms. Nemeth and Discovery
Toys meeting certain financial and non-financial milestones. In addition, Ms.
Nemeth is entitled to certain additional benefits such as allowance for an
automobile and reimbursement of certain expenses. In the event the agreement is
terminated by Discovery Toys without cause, Ms. Nemeth is entitled to her base
compensation for the balance of the stated term of the agreement and to a bonus
which shall be pro rated for the year.
On January 15, 1999, Discovery Toys entered into an employment
agreement with Thomas C. Zimmer appointing Mr. Zimmer as President and Chief
Operating Officer of Discovery Toys. The term of the agreement expired on
January 16, 2002. However, this agreement was renewed for a period of one year
pursuant to its terms. Under the agreement Mr. Zimmer is entitled to a base
compensation of $165,000 per year and to a bonus of up to $50,000 based on Mr.
Zimmer and Discovery Toys meeting certain financial and non-financial
milestones. In addition, Mr. Zimmer is entitled to certain additional benefits
such as a lease allowance for an automobile and reimbursement of certain
expenses. In the event the agreement is terminated by Discovery Toys without
cause after June 30, 1999, Discovery Toys will be required to pay Mr. Zimmer his
base compensation for 15 months plus $103,125.
In May 1999, Eos entered into a three-year employment agreement with
William Zanker pursuant to which Mr. Zanker was responsible for such executive
responsibilities as were assigned to him by Eos' Chief Operating Officer.
Pursuant to the agreement, Mr. Zanker received an annual base salary of
$200,000, subject to increase at the discretion of Eos' Board. If Mr. Zanker's
employment was terminated without cause, he was entitled to severance
compensation in an amount equal to the employee's base
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salary for the remainder of the employment term. The agreement also contained
confidentiality and non-competition provisions prohibiting the employee from
competing against Eos and disclosing trade secrets and other proprietary
information. Obligations under this agreement were satisfied with a $200,000
payment under a settlement agreement reached in December 2001.
In May 2000, Eos entered into a Retention and Severance Agreement with
Beth Polish, Eos' then President and Chief Operating Officer (the "Polish
Severance Agreement"), pursuant to which Ms. Polish (a) agreed to continue in
her positions as President and Chief Operating Officer until May 31, 2000; (b)
was deemed to have earned her bonus of $50,000, payable on or before May 26,
2000; (c) benefited from the accelerated vesting of options to purchase 225,000
shares of Common Stock at $9.00 per share (such options and options to purchase
an additional 225,000 shares were part of a grant of options to Ms. Polish to
purchase 1,000,000 shares, of which options to purchase 550,000 will not vest
due to Ms. Polish's resignation); and (d) received a severance payment of
$300,000 to be paid in semi-monthly installments over 12 months. The Polish
Severance Agreement also provides for mutual releases and restrictions on Ms.
Polish's ability to solicit Eos employees, customers and suppliers as well as
restrictions on Ms. Polish's ability to use certain confidential information
gained during her employment with Eos. Obligations under this agreement were
satisfied in May 2001.
BOARD COMMITTEES
See "Item 13-Certain Relationships and Related Transactions" for a
discussion of an amendment and restatement of Eos' By-Laws with respect to the
composition of Eos' Board of Directors.
The compensation committee of the Board reviews and recommends to the
Board the compensation and benefits of all executive officers of Eos,
administers Eos' stock option plans and establishes and reviews general policies
relating to compensation and benefits of employees of Eos. The compensation
committee consists of Julius Koppelman (Chair), Anthony Calandra, Charles
Peebler, and William Walsh.
The executive committee of the Board consists of Julius Koppelman
(Chair), Anthony Calandra, James Cascino, Peter Lund, and William Walsh.
The audit committee of the Board consists of Anthony Calandra (Chair),
Anthony J. Robbins, and Jonathan Klein. The Audit Committee is authorized to
engage Eos' independent auditors and review with such auditors (i) the scope and
timing of their audit services and any other services they are asked to perform,
(ii) their report on Eos' financial statements following completion of their
audit and (ii) Eos' policies and procedures with respect to internal accounting
and financial controls.
The Board has also elected an acquisition committee of the Board that
consists of William Walsh (Chair), Charles Peebler and Peter Lund to review and
identify potential acquisitions.
DIRECTOR COMPENSATION
All directors are entitled to receive reimbursement for traveling costs
and other out-of-pocket expenses incurred in attending Board meetings.
In September 2001, CYL Development Holdings, LLC, a principal
stockholder of Eos, granted options to Board member, Charles D. Peebler, Jr.
to purchase 100,000 shares of Eos common stock held by CYL Development
Holdings, LLC. Such options are exercisable for a period of five years
commencing on September 25, 2001 at an exercise price of $1.00 per share.
35
<Page>
COMPENSATION COMMITTEE INTERLOCKS
Mr. James Cascino is a Director and the President and Chief Executive
Officer of Eos. Mr. Cascino is also the Chief Executive Officer and a member of
the compensation committee of Discovery Toys. Mr. Peter Lund, Eos' Chairman,
is a director of the Feed Room. Mr. Jonathan Klein, a director of Eos, is the
President and Chief Executive Officer of the Feed Room.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued
for the years specified below for (i) Eos' Chief Executive Officer, (ii) the
four most highly compensated executive officers of Eos and its subsidiaries,
other than Eos' Chief Executive Officer, whose salary and bonus for the year
ended December 31, 2001 were in excess of $100,000 and (iii) a former executive
officer of Eos whose salary and bonus for the year ended December 31, 2001 was
in excess of $100,000.
<Table>
<Caption>
Summary Compensation Table
All Other
Name and Principal Position Fiscal Year Annual Salary Compensation
- --------------------------- ----------- ------------- ------------
Peter A. Lund (1)
Chairman of the Board 2001 $300,000 (1)
2000 $184,231
James M. Cascino (2)
President and Chief Executive Officer, Eos 2001 (2)
Lane Nemeth (3)
Founder and Executive-Product Development
Discovery Toys 2001 $300,000 $5,640 (4)
2000 $300,000 $5,570
1999 $300,000 $4,800
Thomas C. Zimmer (3)
President and Chief Operating Officer,
Discovery Toys 2001 $226,250 $43,920
2000 $184,166 $41,760
1999 $151,250
Richard Newton
Vice President Operations, Discovery Toys 2001 $144,762 $8,080
2000 $138,833 $10,080
1999 $135,000 $6,080
Philicia G. Levinson (5)
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer 2001 $131,250 $25,000
2000 $175,000 $25,000
1999 $69,271
</Table>
- ----------------
(1) Mr. Lund became our Chairman of the Board in August, 2001. Prior to
that he served as Chief Executive Officer from May, 2000 until August
2001. See "Item 11-Executive Compensation - Employment Agreements" for
a discussion of Mr. Lund's employment arrangements including a $3.0
million bonus payable in installments commencing in July 2003 or upon
his earlier termination other than for cause.
36
<Page>
(2) Mr. Cascino was elected Chief Executive Officer of Eos in August 2001.
Mr. Cascino is not an employee of Eos or its subsidiaries. Mr. Cascino
is an employee of IFS which is paid pursuant to a reimbursement
agreement for time spent by certain executives of IFS with Discovery
Toys. Aggregate payments for all executives of IFS who provided
services to Discovery Toys or Eos were $192,000, $192,000 and $96,000
to IFS for the years ended December 31, 2001, 2000 and 1999,
respectively.
(3) Ms. Nemeth and Mr. Zimmer are executive officers of Discovery Toys.
Neither is an executive officer or employees of Eos International.
(4) Ms. Nemeth is eligible for a bonus for the year ended December 31,
2001, the amount of which has yet to be determined.
(5) Ms. Levinson joined Eos in August 1999. She resigned effective
September 30, 2001.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of stock options to our Chairman
of the Board and our former Chief Financial Officer. The potential realizable
value is calculated based on the term of the option at its time of grant. It is
calculated assuming that the fair market value of our common stock on the date
of grant appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the last
day of its term for the appreciated stock price. These numbers are calculated
based on the requirements of the Securities and Exchange Commission and do not
reflect our estimate of future stock price growth. No options were granted by
Eos to any of the executive officers or the former executive officer named in
the summary compensation table above. The option grants set forth in the table
below were made by a principal stockholder of Eos to the Chairman of Eos and to
a former executive officer.
<Table>
<Caption>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
---------------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS VALUE AT ASSUMED ANNUAL
SECURITIES GRANTED TO RATES OF STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR OPTION
OPTIONS IN FISCAL PRICE PER EXPIRATION TERM
NAME GRANTED (#) YEAR (%) SHARE ($/SH) DATE 5%($) 10%($)
- ---- ----------- -------- ------------ ---- ----- ------
Peter A. Lund (1) 1,600,000 80% $1.00 07/18/2006 $442,080 $976,816
Philicia G. Levinson (2) 400,000 20% $1.00 07/18/2006 $110,520 $224,204
</Table>
- ---------
(1) Mr. Lund received options from CYL Development Holdings, LLC, a principal
stockholder of Eos, to purchase 1,600,000 shares of Eos stock held by CYL
Development Holdings, LLC. Such option was exercisable for a period of
five years commencing on July 18, 2001, subject to vesting requirements.
(2) Ms. Levinson received options from CYL Development Holdings, LLC, a
principal stockholder of Eos, to purchase 400,000 shares of common stock
held by CYL Development Holdings, LLC. Such option was exercisable for a
period of five years commencing on July 18, 2001, subject to vesting
requirements. Ms. Levinson resigned from Eos in September 2001 prior to
vesting in such options.
37
<Page>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table provides certain summary information concerning
stock options exercised and held as of December 31, 2001 by our Chairman of the
Board and former Chief Executive Officer. No options were exercised during
fiscal 2001 by any executive officer. The value of unexercised in-the-money
options at fiscal year-end is based on $2.95 per share, the assumed fair market
value of the common stock at December 31, 2001, less the exercise price per
share.
<Table>
<Caption>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES EXERCISED NUMBER OF SECURITIES IN-THE-MONEY OPTIONS
UNDERLYING UNEXERCISED AT FISCAL YEAR-END
---------------------------------- OPTIONS ----------------------------
NAME SHARES ACQUIRED VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------------- ----------- ------------- ----------- -------------
ON EXERCISE (#) ($)
--------------- ---
Peter A. Lund --- --- 2,487,400 1,667,600 --- 3,120,000
</Table>
STOCK OPTION PLANS
1997 STOCK OPTION PLAN
Officers, directors, consultants and other key personnel of Eos are
eligible for option grants under our 1997 Stock Option Plan which is
administered by the Board. The administration of the 1997 Plan may be delegated
to a committee of the Board in the Board's discretion.
The 1997 Plan authorizes the granting of incentive stock options
("ISOs") and non-qualified stock options ("NSOs") to purchase up to 750,000
shares of common stock at a price not less than 100% (110% in the case of
ISO's granted a person who owns stock possessing more than 10% of the voting
power of Eos) of the fair market value of the common stock on the date of
grant and provides that no portion of an option may be exercised beyond ten
years from that date (five years in the case of ISO's granted to a 10%
stockholder). To the extent not otherwise provided by the Board, options
granted under the 1997 Plan to employees and consultants become exercisable
in three installments, each equal to one-third of the entire option granted
and exercisable on the first, second and third anniversaries of the grant
date, respectively. In the event an employee's service to Eos ceases, vested
options may be exercised within one year in the case of death or following a
determination of disability. Vested options may be exercised within three
months following termination for any other reason; except, if such
termination is for cause. If termination is for cause, the options will not
be exercisable following such termination. In no event may an option be
exercised later than the date of expiration of the term of the option as set
forth in the agreement evidencing such option. Options will not be
transferable except upon death (in which case they may be exercised by the
decedent's executor or other legal representative). The 1997 Plan will
terminate by its terms in 2007. As of December 31, 2001, options to purchase
an aggregate of 175,000 shares were outstanding under the 1997 Plan and
291,000 shares were available for future grant.
1999 EMPLOYEE STOCK OPTION PLAN
Officers and other full time employees of Eos and any of its
subsidiaries are eligible to participate in the 1999 Employee Stock Option Plan,
which may be administered by the Board or a committee of the Board. An aggregate
of 6,500,000 shares of common stock are reserved for issuance under the 1999
Employee Stock Option Plan. As of December 31, 2001, options to purchase an
aggregate of 2,487,753 shares had been granted, net of forfeitures, and
4,012,247 shares were available for future grant.
The 1999 Employee Stock Option Plan permits grants of ISOs and NSOs. An
employee who owns more than ten percent (10%) of the total combined voting power
of all classes of outstanding stock of Eos or its subsidiaries will not be
eligible for the grant of an ISO, unless the requirements set forth in
38
<Page>
Section 422(c)(5) of the Internal Revenue Code (the "Code") are satisfied. The
exercise price per share of an option is established by the administrator of the
1999 Employee Stock Option Plan in its discretion, but, in the case of an ISO,
may not be less than the fair market value (or not less than 110% of the fair
market value under the requirements of Section 422(c)(5) of the Code) of a share
of common stock as of the date of grant. NSOs granted under the 1999 Employee
Stock Option Plan may have a specified exercise price that is fixed or varies in
accordance with a predetermined formula while the NSO is outstanding. No
individual is permitted to receive options to purchase common stock during any
fiscal year in excess of 500,000 shares of common stock; provided, however, a
newly hired individual may receive options to purchase up to 2,400,000 shares of
common stock during the portion of the fiscal year remaining after his or her
date of hire.
Options granted under the 1999 Employee Stock Option Plan may be
exercisable (subject to such restrictions and vesting provisions as the plan
administrator may determine on the date of grant in its discretion), in part
from time to time or in whole at any time after a portion becomes fully vested,
for a period not to exceed ten years from the date of grant, in the case of an
ISO (or five years under the requirements of Section 422(c)(5) of the Code). The
exercise of an option may be accelerated in the event of the optionee's death,
disability, retirement or other events and may provide for expiration prior to
the end of its term in the event of the termination of the optionee's service
with or without cause. Such period will be established by the plan administrator
at its discretion on the date of grant. Options are not transferable except upon
death (in which case they may be exercised by the decedent's executor or other
legal representative).
The 1999 Employee Stock Option Plan provides for partial acceleration
of options granted under the plan under certain circumstances involving certain
changes in control of Eos. The 1999 Employee Stock Option Plan will terminate by
its terms in 2009.
1999 OUTSIDE DIRECTORS STOCK OPTION PLAN
Non-Employee directors of Eos and any of its subsidiaries are eligible
for option grants under the 1999 Outside Directors Stock Option Plan, which is
administered by the Board. An aggregate of 385,000 shares of common stock are
reserved for issuance under the 1999 Outside Directors Stock Option Plan. As of
December 31, 2001, options to purchase an aggregate of 250,000 shares had been
granted, net of forfeitures and 135,000 shares were available for future grant.
The options granted under the 1999 Outside Directors Stock Option Plan
are NSOs. The exercise price per share of an option is established by the Board
at its discretion. The exercise price per share of an option may be fixed or
vary in accordance with a predetermined formula while the option is outstanding.
Options granted under the 1999 Outside Directors Stock Option Plan are
exercisable (subject to such restrictions and vesting provisions as the Board
may determine on the date of grant at its discretion), in part from time to time
or in whole at any time after a portion becomes fully vested, for a period not
to exceed ten years from the date of grant. The exercise of an option may be
accelerated in the event of the optionee's death, disability or retirement or
other events and may provide for expiration prior to the end of its term in the
event of the termination of the optionee's service with or without cause. Such
period will be established by the Board at its discretion on the date of grant.
Options are not transferable except upon death (in which case they may be
exercised by the decedent's executor or other legal representative). The 1999
Outside Directors Stock Option Plan will terminate by its terms in 2009.
39
<Page>
1999 CONSULTANTS STOCK OPTION PLAN
Consultants and other bona fide service providers to Eos and any
subsidiaries are eligible for option grants under the 1999 Consultants Stock
Option Plan, which may be administered by the Board or a committee of the Board.
An aggregate of 327,500 shares of common stock are reserved for issuance under
the 1999 Consultants Stock Option Plan. As of December 31, 2001, options to
purchase an aggregate of 327,500 shares had been granted under the 1999
Consultants Stock Option Plan and no shares were available for future grant.
The options granted under the 1999 Consultants Stock Option Plan are
NSOs. The exercise price per share of an option is established by the
administrator of the 1999 Consultants Stock Option Plan at its discretion. The
exercise price may be fixed or may vary in accordance with a predetermined
formula while the option is outstanding.
Options granted under the 1999 Consultants Stock Option Plan may be
exercisable (subject to such restrictions and vesting provisions as the plan
administrator may determine on the date of grant in its discretion), in part
from time to time or in whole at any time after a portion becomes fully vested,
for a period not to exceed ten years from the date of grant. The exercise of an
option may be accelerated in the event of the optionee's death, disability or
retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the optionee's service with or
without cause. Such period will be established by the plan administrator at its
discretion on the date of grant. Options will not be transferable except upon
death (in which case they may be exercised by the decedent's executor or other
legal representative). The 1999 Consultants Stock Option Plan will terminate by
its terms in 2009.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 15, 2002, certain
information regarding beneficial ownership of Eos' voting securities by (i) each
of Eos' directors, (ii) each of the executive officers named in the summary
compensation table, (iii) all directors and executive officers named in the
summary compensation table as a group and (iv) each person known by Eos to own
beneficially more than 5% of Eos' outstanding voting securities.
<Table>
<Caption>
Amount & Nature of Percentage
Beneficial Ownership of class of
Name & Address of Beneficial Owner(1) of Common Stock(2) Common Stock(3)
- ------------------------------------- ------------------ ---------------
Peter A. Lund (4) 2,555,000 4.4%
Chairman of the Board of Directors
Julius Koppelman 860,603 1.5%
Vice-Chairman of the Board of Directors
Anthony J. Robbins (5) 6,000,000 10.7%
Vice-Chairman of the Board of Directors
Anthony R. Calandra 3,256,291 5.8%
Director
James M. Cascino 1,955,916 3.5%
Director, President and Chief Executive Officer
Jonathan Klein 0 *
Director
Charles D. Peebler (6) 255,000 *
Director
William S. Walsh 4,273,012 7.6%
Director
Jack B. Hood 1,173,549 2.1%
40
<Page>
Chief Financial Officer
James J. Liati 3,256,291 5.8%
Secretary
Lane Nemeth (7) 5,867,747 10.4%
Founder and Executive-Product Development, Discovery Toys
3527 Mt. Diablo Blvd., PMB 412 Lafayette, California 94549
Thomas C. Zimmer 1,955,916 3.5%
President and Chief Operating Officer, Discovery Toys
Richard Newton 782,366 1.4%
Vice President Operations, Discovery Toys
Philicia G. Levinson 0 *
Senior Vice President, Chief Financial Officer, Secretary
and Treasurer (through September 30, 2001)
CYL Development Holdings, LLC (8) 4,850,000 8.6%
330 South Street Morristown, N.J. 07962
Frank M. Adubato (9) 3,256,291 5.8%
365 South Street Morristown, N.J. 07962
Frank M. Calabrese (10) 3,256,291 5.8%
365 South Street Morristown, N.J. 07962
William H. Taylor (11) 3,256,291 5.8%
45 Park Place South, PMB 156 Morristown, N.J. 07960
All directors and executive officers named in the summary
compensation table as a group (14 persons) (12) 32,191,691 54.6%
</Table>
- --------------------------------------------------------------------------------
* Represents less than 1%
(1) Unless otherwise noted, the address of each of the listed persons is c/o
Eos, 888 Seventh Avenue, New York, NY 10106. All shares are beneficially
owned and sole voting and investment power is held by the person named
above, unless otherwise indicated.
(2) Generally, a person is deemed to be the beneficial owner of common stock
that is currently held or that can be acquired within 60 days from the
date set forth above through the exercise of any option, warrant or right.
(3) Based on a total of 56,132,098 shares of Common Stock outstanding as of
March 15, 2002. Shares of Common Stock subject to options, warrants or
rights that are currently exercisable or exercisable within 60 days are
deemed outstanding for purposes of computing the percentage ownership of
the person holding such options, warrants or rights, but are not deemed
outstanding for purposes of computing the percentage ownership of any
other person.
(4) Represents 2,555,000 shares of Common Stock issuable upon exercise of
presently exercisable options held by such individual.
(5) Based in part on a Schedule 13D filed by Mr. Robbins and Robbins Research
International ("RRI"). Of the number of shares reported in the table, RRI
owns 1,799,999. In his capacity as Chairman and sole equity owner of RRI,
Robbins shares voting and dispositive power with respect to the securities
beneficially owned by RRI and may be deemed to be the beneficial owner of
such securities.
(6) Represents 255,000 shares of Common Stock issuable upon exercise of
presently exercisable options held by such individual.
(7) Based on a Schedule 13D filed by such person.
(8) Based in part on a Schedule 13D filed by CYL Development Holdings, LLC
("CYL"), Kurt T. Borowsky and David J. Roy. In their capacity as managers
of CYL, Messrs. Borowsky and Roy together irrevocably possess the sole
power to vote and dispose of the Common Stock owned by CYL, and may each,
therefore, be deemed the beneficial owners of such securities.
(9) Based on a Schedule 13D filed by such person.
(10) Based on a Schedule 13D filed by such person.
41
<Page>
(11) Based on a Schedule 13D filed by such person.
(12) Includes 2,810,000 shares of Common Stock issuable upon exercise of
presently exercisable options held by members of such group.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As an inducement to Mr. Lund, CYL Development Holdings, LLC, a
principal stockholder of Eos, granted to Mr. Lund an option to purchase up to
1,600,000 shares of Eos common stock held by CYL Development Holdings, LLC. Such
option is exercisable for a period of five years commencing on July 18, 2001 at
an exercise price of $1.00 per share, subject to vesting requirements.
The Board of Directors in December 2001 approved payment of investment
banking fees to McGuggan LLC in connection with the acquisition of Regal
Greetings and Gifts. This fee amounted to $160,000 plus reimbursement of certain
acquisition related costs incurred by McGuggan on behalf of Eos. Certain members
of McGuggan LLC are Directors and significant stockholders of Eos including Mr.
William Walsh and Mr. Anthony Calandra. This fee was accrued and unpaid as of
March 31, 2002.
In connection with the acquisition of Regal Greetings and Gifts, Eos
and Regal entered into an agreement for management consulting services
between the companies in December of 2001 for a term of 10 years. The
agreement assigns Eos responsibility for performance of the services to
William Walsh and Anthony Calandra. The agreement calls for payment by Regal
of $500,000 CDN (approximately $300,000 U.S.) annually for such services. The
Board of Directors approved payment of the $500,000 CDN in annual management
fees to Mr. Walsh and Mr. Calandra in December 2001 for an initial term of
one year. In connection with the Regal acquisition, McGuggan LLC provided MDC
a guarantee of the performance by RGG Acquisition of its obligations under
the Regal acquisition agreement.
In January 1999, Discovery Toys entered into an agreement for
management consulting services with William S. Walsh and McGuggan LLC.
Pursuant to this agreement, Discovery Toys paid $225,000 to McGuggan and
$75,000 to Mr. Walsh, respectively, in each of fiscal 2000 and 1999.
Commencing with the year ended December 31, 2001, the aggregate fees under
the agreement shall be the greater of 0.6% of the gross revenues of Discovery
Toys or $300,000. On February 15, 2001, McGuggan assigned all its
obligations, right, title and interest in, to and under the consulting
agreement to Discovery Toys, L.L.C., a former principal stockholder of Eos,
effective as of January 1, 2001. DT Investors, L.L.C. and Mr. Julius
Koppelman own 95% and 5% of the membership interests of Discovery Toys, L.L.C.
Messrs. James Liati, Eos' Secretary, and Anthony Calandra, a Director of Eos,
and Messrs. Frank Calabrese, Frank M. Adubata and William Taylor, each a
principal stockholder of Eos, own DT Investors, L.L.C.
Discovery Toys entered into an expense reimbursement agreement with IFS
in 1999 to reimburse IFS for time and expenses relating to services performed
for Discovery Toys by certain IFS executives including James M. Cascino and Jack
B. Hood. IFS was paid $192,000 for the year ended December 31, 2001 as a result
of this agreement. Discovery Toys is obligated to pay Eos $16,000 per month
during 2002.
On September 25, 2001, CYL Development Holdings, LLC, a principal
stockholder, issued options for 100,000 shares of Eos common stock to Charles D.
Peebler a director of Eos with an exercise price of $1.00 per share. Such option
is exercisable for a period of five years commencing on September 25, 2001.
CYL Development Holdings, LLC is a non-voting member of DL Holdings I,
LLC. DL Holdings I, LLC has provided short term financing in the amount of
$3,500,000 associated with the acquisition of Regal Greetings and Gifts. DL
Holding I, LLC was issued 1,400,000 warrants for Eos common stock. See "Item
5-Market for Registrant's Common Stock and Related Stockholder Matters" for a
description of certain registration rights, put rights and call rights relating
to the shares of common stock underlying such warrants.
42
<Page>
In connection with the acquisition of Discovery Toys, the Board of
Directors of Eos amended and restated its By-Laws. The Amended and Restated
By-Laws provide that the Board of Directors shall consist of nine members. The
initial members of the Board of Directors following Eos' acquisition of
Discovery Toys consists of two groups, the Eos directors and the Discovery Toys
directors. The Eos directors are Jonathan C. Klein, Peter A. Lund, Anthony J.
Robbins and Charles D. Peebler, Jr. The Discovery Toys directors are Julius
Koppelman, William S. Walsh, Anthony R. Calandra and James M. Cascino. There is
one vacancy on the Board of Directors to be filled by the vote of a majority of
the directors (the "Outside Director"). The person so selected shall serve until
the next annual meeting of stockholders. The Outside Director has not been
appointed as of the date hereof. If any Eos director or Discovery Toys director
is unable to serve or, once having commenced to serve, is removed or withdraws
from the Board of Directors, the replacement of that director will be nominated
by the majority of the remaining directors of the group to which such director
shall have been a member, or the sole remaining director of such group, if
applicable. If the Outside Director is unable to serve or, once having commenced
to serve, is removed or withdraws from the Board of Directors, the replacement
of such director will be filled by the vote of a majority of the remaining
directors. The Amended and Restated By-laws also provide that the Eos directors
and the Discovery Toys directors shall each have the right to nominate four
persons as directors of Eos. Initially, Peter A. Lund shall serve as the
Chairman of the Board of Directors and Julius Koppelman and Anthony J. Robbins
shall serve as Vice-Chairmen of the Board of Directors.
The composition of the Board of Directors of Discovery Toys was not
affected as a result of the recapitalization of Discovery Toys. Pursuant to the
Stock Purchase Agreement executed in connection with the recapitalization, for
so long as Eos owns one hundred percent of the issued and outstanding capital
stock of Discovery Toys, it shall vote the Discovery Toys stock it holds, at any
time, in favor of those individuals properly nominated by Discovery Toys' then
existing Board of Directors for membership on the Discovery Toys Board of
Directors. Messrs. Anthony Calandra, James Cascino, Jack Hood, Julius Koppelman,
James Liati, William Walsh, Thomas Zimmer and Ms. Lane Nemeth are directors of
Discovery Toys.
In connection with the acquisition of Discovery Toys, Eos entered into
a Registration Rights Agreement with the former stockholders of Discovery Toys.
This agreement provides that Eos shall use reasonable commercial efforts to file
a registration statement with the Securities and Exchange Commission for the
public sale of the shares of Eos common stock issued pursuant to the Stock
Purchase Agreement executed in connection with the acquisition within ninety
days of the date of such Stock Purchase Agreement. As of the date hereof, Eos
has not filed such registration statement.
Additionally, Eos, Anthony J. Robbins, Robbins Research International
Inc. and CYL Development Holdings, LLC agreed to terminate the Stockholder
Agreement by and among them dated May 27, 1999 pursuant to a Termination
Agreement dated July 18, 2001.
After giving effect to the issuance of the common stock pursuant to
the Stock Purchase Agreement executed in connection with the Discovery Toys
acquisition and the issuance of the common stock pursuant to the Note
Exchange Agreement described below, Eos has outstanding 56,132,098 shares of
common stock. As a result of such issuances by Eos, immediately after the
acquisition, the former stockholders of Discovery Toys owned approximately
60% of the voting power of Eos and the stockholders of Eos immediately prior
to the consummation of the acquisition of Discovery Toys owned approximately
40% of the voting power of Eos. As a result of the acquisition of Discovery
Toys, Jack Hood, Chief Financial Officer of Eos, James Cascino, Director,
President and Chief Executive Officer of Eos, William Walsh, Director of Eos,
Lane Nemeth, Executive-Product Development of Discovery Toys, Thomas Zimmer,
President and Chief Operating Officer of Discovery Toys and Richard Newton,
Vice President Operations of Discovery Toys, were issued 1,173,549,
1,955,916, 4,303,014, 5,867,747, 1,955,916 and 782,366 shares of common stock
of Eos, respectively. As a result of the acquisition of
43
<Page>
Discovery Toys, Discovery Toys, L.L.C., a former principal stockholder of
Eos, was issued 17,212,058 shares of common stock of Eos. On August 20, 2001,
Discovery Toys, L.L.C. distributed 860,603 shares of common stock of Eos to
Julius Koppelman, a member, and 16,351,455 shares of common stock of Eos to
DT Investors, L.L.C., a member. DT Investors, L.L.C. then distributed
3,256,291 shares of common stock of Eos to each of its members, Anthony
Calandra, a Director of Eos, James Liati, Secretary of Eos, Frank Calabrese,
Frank Adubato and William Taylor, each a principal stockholder of Eos.
Under the terms of a Grid Time Promissory Note signed on October 24,
2000 to the order of The Chase Manhattan Bank, Eos obtained a line of credit
for $1,500,000, which bore interest at the prime rate and was due on November
30, 2000. On November 28, 2000, the maturity date of the note was extended to
January 31, 2001. On January 15, 2001, the principal amount of the note was
increased to $2,000,000 and the maturity date was extended to April 30, 2001.
On March 13, 2001, the principal amount of the note was further increased to
$2,250,000. On April 12, 2001, Eos obtained a $50,000 short-term loan from an
affiliate of CYL Development Holdings, LLC, a principal stockholder of Eos,
which expired on April 30, 2001. On April 26, 2001, the line of credit with
The Chase Manhattan Bank was further increased to $2,400,000 and the maturity
date was extended to August 31, 2001. A portion of the proceeds of the
increase in the line of credit was used to repay the $50,000 short-term loan.
As a condition to the closing of the Discovery Toys acquisition, on July 18,
2001, Eos issued 2,400,000 shares of common stock to CYL Development
Holdings, LLC in exchange for cancellation of a $2,400,000 promissory note,
payable by Eos pursuant to a Note Exchange Agreement. The promissory note,
which was initially issued by Eos payable to The Chase Manhattan Bank, was
assigned by The Chase Manhattan Bank to CYL Development Holdings, LLC. An
affiliate of CYL Development Holdings, LLC had provided credit support for
the $2,400,000 promissory note payable by Eos.
As a condition to the closing of the Discovery Toys acquisition, Eos
and Peter A. Lund agreed to amend the offer letter between them dated July
24, 2000 which sets forth the terms of Mr. Lund's employment arrangement with
Eos. The amendment accelerated the vesting of the unvested portion of the
three million dollar bonus provided for in the offer letter and modified the
payment dates of such bonus. See "Item - 11 Executive Compensation -
Employment Agreements."
In July 2001, in connection with the restructuring of Eos' business and
operations, Eos entered into an amendment to the Content Provider Agreement and
License dated as of April 23, 1999 by and among Eos, Anthony J. Robbins and
Robbins Research International Inc. Pursuant to this amendment, Eos assigned and
transferred to the Robbins Group all of its right, title and interest in all
property rights pursuant to the Content Provider Agreement and License and any
property or rights derived therefrom. In consideration of the aforementioned
assignment and transfer, the Robbins Group agreed to extinguish certain
obligations of Eos under the Content Provider Agreement and License. Eos
retained the exclusive right and license to use any content relating to the
Robbins Property now existing or developed in the future, royalty-free, for the
limited purpose of training over the Internet employees or consultants of any
entity engaged principally in the direct selling of products or services with
respect to which Eos directly or indirectly owns an equity interest of more than
fifty percent, subject to certain limited retained rights of the Robbins Group
to use such content in Internet training. The amendment further provides that
Anthony J. Robbins shall make up to two appearances at sales meetings or
conventions for employees and/or consultants of Eos or any of its affiliates in
any twelve-month period.
On February 1, 2001, two of Eos' principal stockholders, Anthony
Robbins and CYL Development Holdings, LLC, agreed to contribute shares of common
stock of Eos back to Eos. The share contributions were effected on April 12,
2001 Anthony Robbins and his affiliates contributed 17,031,297 shares of common
stock to Eos and CYL Development Holdings, LLC contributed 5,377,099 shares of
common stock to Eos.
44
<Page>
On January 15, 1999, in connection with the acquisition of Discovery
Toys from Avon, Discovery Toys issued to Avon an unsecured promissory note in
the amount of $3,500,000 due on January 15, 2006. On June 28, 2001, Discovery
Toys, Avon and other parties thereto entered into an agreement for sale by Avon
to Discovery Toys of 3,911,831 shares of capital stock of Discovery Toys for
$1,456,000. As part of such transaction, among other things, Discovery Toys
agreed to change the maturity date of the promissory note from January 15, 2006
to the earlier to occur of (i) June 30, 2003, (ii) sale or transfer of all or
substantially all assets of Discovery Toys, (iii) sale of 50% or more of the
fully diluted outstanding capital stock of Discovery Toys (other than a sale or
transfer to Eos), or (iv) sale of 50% or more of the membership interests of
Discovery Toys, L.L.C. The amended promissory note is subordinate to the
revolving line of credit extended by PNC Bank. The amended promissory note is in
the amount of $3,500,000 and bears interest at the rate of 4.64% per annum
compounded annually.
45
<Page>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
NUMBER DESCRIPTION AND METHOD OF FILING
------ --------------------------------
2.1 Contribution and Exchange Agreement dated as of May 20, 1999
among the registrant, Change Your Life.com, LLC, Anthony J.
Robbins, Robbins Research International Inc. and CYL
Development Holdings, LLC (1)
2.2 Agreement and Plan of Reorganization dated as of May 27, 1999
among the registrant, Concept Acquisition Corporation, Concept
Development, Inc., William Zanker and Debbie Dworkin (2)
2.3 Agreement of Merger dated as of May 27, 1999 between Concept
Acquisition Corporation and Concept Development, Inc. (2)
2.4 Stock Purchase Agreement dated as of July 18, 2001, among the
registrant, Discovery Toys, Inc. and the Discovery Toys, Inc.
shareholders named therein (21)
2.5 Note Exchange Agreement dated as of July 18, 2001, between the
registrant and CYL Development Holdings, LLC (21)
3(i).1 Restated Certificate of Incorporation (3)
3(i).2 Certificate of Amendment to Certificate of Incorporation dated
June 18, 1987 (4)
3(i).3 Certificate of Amendment to Certificate of Incorporation dated
November 17, 1989 (5)
3(i).4 Certificate of Amendment to Certificate of Incorporation filed
November 3, 1999 (6)
3(i).5 Certificate of Amendment to Certificate of Incorporation filed
December 13, 1999 (7)
3(i).6 Certificate of Amendment to Certificate of Incorporation filed
December 31, 2001 (8)
3(ii) Amended and Restated By-Laws (21)
4.1 Registration Rights Agreement dated as of July 18, 2001, among
the registrant and the Discovery Toys, Inc. shareholders named
therein (21)
46
<Page>
4.2 Termination Agreement dated July 18, 2001, among the
registrant, Anthony J. Robbins, Robbins Research International
Inc. and CYL Development Holdings, LLC (21)
4.3 Registration Rights Agreement among the registrant, DL
Holdings, LLC and Weichert Enterprises, LLC (8)
10.1 Content Provider Agreement and License effective as of April
23, 1999 between Change Your Life.com, LLC, Anthony J. Robbins
and Research International Inc. (2) (12)
10.2 Escrow Agreement dated as of May 27, 1999 among the
registrant, Debbie Dworkin and State Street Bank and Trust
Company (2) (12)
10.3 Repurchase Agreement dated as of May 27, 1999 between the
registrant and Debbie Dworkin (2)
10.4 Employment Agreement dated as of May 27, 1999 between the
registrant and William Zanker (1)
10.5 Exclusive License and Marketing Agreement dated as of May 27,
1999 among the registrant, Seligman Greer Communication
Resources, Inc., SGS Communications Resources, Inc., Seligman
Greer Sandberg Enterprises, Inc., SGC Communication Resources
LLC and Learning Annex Interactive LLC (2) (12)
10.6 Option Agreement dated as of May 27, 1999 among the
registrant, Seligman Greer Communication Resources, Inc., SGS
Communication Resources, Inc., Seligman Greer Sandberg
Enterprises, Inc., SGC Communication Resources LLC and
Learning Annex Interactive LLC and certain shareholders and
members, as applicable, of such entities other than the
registrant listed therein (2) (12)
10.7 Registration Rights Agreement dated as of May 27, 1999 among
the registrant, Anthony J. Robbins, Robbins Research
International Inc. and CYL Development Holdings, LLC (1)
10.8 Stockholders Agreement dated as of May 27, 1999 among the
registrant, Anthony J. Robbins, Robbins Research International
Inc. and CYL Development Holdings, LLC (1)
10.9 Lease for 425 West 15th Street, Floor 3R, New York, New York
dated May 21, 1999 between the registrant and CFG/AGSB Chelsea
Ninth, LLC (9)
10.10 Distribution Agreement dated May 27, 1999 between the
registrant and U.S. NeuroSurgical, Inc. (10)
10.11 Tax Matters Agreement dated May 27, 1999 between the
registrant and U.S. NeuroSurgical, Inc. (10)
47
<Page>
10.12 Assignment and Assumption Agreement dated May 27, 1999 between
the registrant and U.S. NeuroSurgical, Inc. (10)
10.13 1997 Stock Option Plan (11)
10.14 1999 Employee Stock Option Plan (6)
10.15 1999 Outside Directors Stock Option Plan (6)
10.16 1999 Consultants Stock Option Plan (6)
10.17 Content License Agreement dated December 6, 1999 between
Yahoo! Inc. and the registrant, as amended (7) (12)
10.18 Retention and Severance Agreement made as of May 23, 2000 by
and between Beth Polish and the registrant (13)
10.19 Offer Letter by and between Peter A. Lund and the registrant
dated July 24, 2000 (14)
10.20 Letter agreement regarding registration rights by and between
Peter A. Lund and the registrant dated July 24, 2000 (15)
10.21 Grid Time Promissory Note to The Chase Manhattan Bank for
$1,500,000 dated October 24, 2000 (16)
10.22 Interactive Services Agreement by and between America Online,
Inc. and the registrant dated July 17, 2000 (12) (17)
10.23 Grid Time Promissory Note to The Chase Manhattan Bank for
$1,500,000 dated November 27, 2000 (18)
10.24 Grid Time Promissory Note to The Chase Manhattan Bank for
$2,000,000 dated January 11, 2001 (18)
10.25 Grid Time Promissory Note to The Chase Manhattan Bank for
$2,250,000 dated March 9, 2001 (18)
10.26 Surrender Agreement by and between CFG/AGSCB 75 Ninth Avenue,
LLC and the registrant dated January 23, 2001 (18)
10.27 Grid Time Promissory Note to Van Beuren Management, Inc. for
$50,000 dated April 12, 2001 (18)
10.28 Grid Time Promissory Note to the Chase Manhattan Bank for
$2,400,000 dated April 26, 2001 (20)
10.29 Modification to Peter A. Lund Offer Letter dated July 18,
2001, between the registrant and Peter A. Lund (21)
48
<Page>
10.30 Amendment to Content Provider and License Agreement dated as
of July 10, 2001 among Anthony J. Robbins, Robbins Research
International Inc. and the registrant (21)
10.31 Revolving Credit and Security Agreement dated as of June 1,
1999 between Discovery Toys, Inc. and PNC Bank, National
Association (23)
10.32 Amendment No.1 to Revolving Credit and Security Agreement
dated as of June 1, 1999 between Discovery Toys, Inc. and PNC
Bank, National Association (23)
10.33 Amended Promissory Note from Discovery Toys, Inc. to Avon
Products, Inc. for $3,500,000 dated June 28, 2001 (23).
10.34 Reimbursement Agreement dated as of July 1, 1999 between IFS
of New Jersey, Inc. and Discovery Toys, Inc. (23)
10.35 Employment Agreement dated as of January 15, 1999 between
Discovery Toys, Inc. and Lane Nemeth (23)
10.36 Agreement for Management Consulting Services dated as of
January 15, 1999 among Discovery Toys, Inc., William S. Walsh
and McGuggan LLC (23)
10.37 Assignment of Agreement for Management Consulting Services
dated as of February 15, 2001 among Discovery Toys, Inc.,
William S. Walsh, McGuggan LLC and Discovery Toys LLC (23)
10.38 Employment Agreement dated as of January 1999 between
Discovery Toys, Inc. and Thomas C. Zimmer (23)
10.39 Agreement dated as of June 28, 2001 by and among Discovery
Toys, L.L.C., Avon Products, Inc., Discovery Toys, Inc. and
William S. Walsh (23)
10.40 Restated Asset and Share Purchase Agreement dated as of
December 4, 2001 among MDC Corporation Inc., Regal Greetings &
Gifts Corporation and McGuggan, LLC (23)
10.41 Amending Agreement dated as of December 14, 2001 among MDC
Corporation Inc., Regal Greetings & Gifts Corporation and
McGuggan LLC (23)
10.42 Agreement for Management Consulting Services dated as of
December 14, 2001 by and between Regal Greetings & Gifts
Corporation and the registrant (23)
10.43 Employment Agreement dated as of December 12, 2001 by and
between Regal Greetings & Gifts Corporation and Janice Wadge
(23)
10.44 Employment Agreement dated as of December 12, 2001 by and
between Regal Greetings & Gifts Corporation and Kevin
Watkinson (23)
49
<Page>
10.45 Promissory Note dated as of December 14, 2001 made by Regal
Greetings & Gifts Corporation and issued to MDC Corporation
Inc. (23)
10.46 Secured $3,500,000 Bridge Loan Promissory Note dated as of
December 14, 2001 made by the registrant and issued to DL
Holdings I, LLC (23)
10.47 Secured $3,000,000 Bridge Loan Promissory Note dated as of
December 14, 2001 made by the registrant and issued to
Weichert Enterprises, LLC (23)
10.48 Common Stock Purchase Warrant of the registrant dated as of
December 14, 2001 issued to Weichert Enterprises, LLC (23)
10.49 Common Stock Purchase Warrant of the registrant dated as of
December 14, 2001 issued to DL Holdings I, LLC (23)
10.50 Letter of Commitment dated December 5, 2001 issued by The Bank
of Nova Scotia to Regal Greetings & Gifts Corporation (23)
10.51 Acknowledgement to The Bank of Nova Scotia Re: Survival of
Letter of Commitment dated December 14, 2001 by and among
Regal Greetings & Gifts Corporation, MDC Regal Inc. and Primes
De Luxe Inc. (23)
10.52 Debenture dated as of December 14, 2001 issued to RoyNat
Capital Inc. by Regal Greetings & Gifts Corporation (23)
10.53 Warrants To Acquire Common Shares in Regal Greetings & Gifts
Corporation dated as of December 14, 2001 issued to RoyNat
Capital Inc. (23)
10.54 Amended and Restated Unanimous Shareholders Agreement among
MDC Corporation Inc., RGG Acquisition Inc, RoyNat Capital
Inc., Bank of Montreal Capital and Regal Greetings & Gifts
Corporation, as amended thereafter (8)
10.55 Demand Note to The Bank of Nova Scotia for $13,000,000 (CAD)
dated December 12, 2001 (8)
10.56 Agreement re: Operating Credit Line between Regal Greetings &
Gifts Corporation and The Bank of Nova Scotia (8)
10.57 Agreement for Commercial Letter of Credit between Regal
Greetings & Gifts Corporation and The Bank of Nova Scotia (8)
10.58 Priorities Agreement among The Bank of Nova Scotia, RoyNat
Capital Inc. and Regal Greetings & Gifts Corporation (8)
10.59 General Security Agreement between Regal Greetings & Gifts
Corporation and The Bank of Nova Scotia (8)
50
<Page>
10.60 Multi Party Share Pledge Acknowledgement Agreement among
RoyNat Capital, The Bank of Nova Scotia, Regal Greetings &
Gifts Corporation and RGG Acquisition Inc. (8)
10.61 Assignment of Shares between Regal Greetings & Gifts
Corporation and The Bank of Nova Scotia (8)
10.62 Assignment between Regal Greetings & Gifts Corporation and The
Bank of Nova Scotia (8)
10.63 Assignment of Agreement between Regal Greetings & Gifts
Corporation and The Bank of Nova Scotia (8)
10.64 Subordination and Postponement Agreement from MDC Corporation
Inc. (8)
10.65 Postponement Agreement to The Bank of Nova Scotia from Primes
De Luxe Inc. (8)
10.66 Guarantee to The Bank of Nova Scotia from Primes De Luxe Inc.
(8)
10.67 General Security Agreement between Primes De Luxe Inc. and The
Bank of Nova Scotia (8)
10.68 Hypothec on Movable Property between The Bank of Nova Scotia
and Primes De Luxe Inc (8)
10.69 Assignment between Primes De Luxe Inc. and The Bank of Nova
Scotia (8)
10.70 Guarantee to The Bank of Nova Scotia from MDC Regal Inc. (8)
10.71 General Security Agreement between MDC Regal Inc. and The Bank
of Nova Scotia (8)
10.72 Hypothec on Movable Property between The Bank of Nova Scotia
and MDC Regal Inc. (8)
10.73 Assignment between MDC Regal Inc. and The Bank of Nova Scotia
(8)
10.74 Assignment of Shares between RGG Acquisition Inc. and The Bank
of Nova Scotia (8)
10.75 Letter Agreement between the registrant and Hearst-Argyle
Television, Inc. (8)
16.1 Letter, dated December 13, 1999, of Richard A. Eisner &
Company, LLP (19)
16.2 Letter, dated November 12, 2001, of KPMG LLP (22)
16.3 Letter, dated January 3, 2002, of Comyns, Smith, McCleary LLP
(24)
51
<Page>
21 Subsidiaries of the Registrant (8)
- ----------
(1) Incorporated by reference to the registrant's Form 8-K/A dated May 27, 1999
and filed with the Securities and Exchange Commission as of June 11, 1999.
(2) Incorporated by reference to the registrant's Form 8-K/A dated May 27, 1999
and filed with the Securities and Exchange Commission on February 17, 2000.
(3) Incorporated by reference from Exhibit 3.1 to the registrant's Registration
Statement No. 33-4532-W on Form S-18.
(4) Incorporated by reference from Exhibit 3(b) to the registrant's 1987 Annual
Report on Form 10-K.
(5) Incorporated by reference to Exhibit 3(c) to the registrant's 1988 Annual
Report on Form 10-K.
(6) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999.
(7) Incorporated by reference to the registrant's 1999 Annual Report on Form
10-K.
(8) Filed herewith
(9) Incorporated by reference to Exhibit 10(i) to the registrant's Quarterly
Report on Form 10-Q for the period from April 21, 1999 through June 30, 1999.
(10) Incorporated by reference to exhibits to U.S. Neurosurgical, Inc.'s (a
former subsidiary of the registrant) Form 10 as filed with the Securities and
Exchange Commission on July 1, 1999.
(11) Incorporated by reference to Exhibit 10(k) to the registrant's 1997 Annual
Report on Form 10-K.
(12) Confidential treatment has been granted for certain portions of this
exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.
(13) Incorporated by reference to Exhibit 10.1 to the registrant's Form 8-K
dated May 23, 2000 and filed with the Securities and Exchange Commission on May
26, 2000.
(14) Incorporated by reference to Exhibit 10.2 to the registrant's Form 8-K
dated July 24, 2000 and filed with the Securities and Exchange Commission on
July 25, 2000.
(15) Incorporated by reference to Exhibit 10.2 to the registrant's Form 8-K
dated July 24, 2000 and filed with the Securities and Exchange Commission on
July 25, 2000.
52
<Page>
(16) Incorporated by reference to Exhibit 10.1 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000.
(17) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000.
(18) Incorporated by reference to the registrant's Annual Report on Form 10-K
for the year ended December 31, 2000.
(19) Incorporated by reference to Exhibit 16 to the registrant's Form 8-K/A
dated December 3, 1999 and filed with the Securities Exchange Commission on
December 15, 1999.
(20) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001.
(21) Incorporated by reference to the registrant's Form 8-K dated July 18, 2001
and filed with the Securities Exchange Commission on August 1, 2001.
(22) Incorporated by reference to the registrant's Form 8-K dated November 6,
2001 and filed with the Securities Exchange Commission on November 13, 2001.
(23) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001.
(24) Incorporated by reference to the registrant's Form 8-K/A dated July 18,
2001 and filed with the Securities Exchange Commission on January 3, 2002.
(b) Reports on Form 8-K
On August 1, 2001, Eos International, Inc. (formerly known as
dreamlife, inc.) filed a report on Form 8-K dated July 18, 2001 under Item 1
(Change of Control of Registrant), Item 2 (Acquisition or Disposition of
Assets), Item 5 (Other Events) and Item 7 (Financial Statements of Business
Acquired) to report the Discovery Toys acquisition and certain transactions
consummated in connection therewith, which was amended through the filing by Eos
of a report on Form 8-K/A filed on December 17, 2001 under Item 7 (Financial
Statements of Business Acquired), which was further amended through the filing
by Eos of a report on Form 8-K/A filed on January 3, 2002 under Item 4 (Change
in Registrant's Certifying Accountant).
On November 13, 2001, Eos International filed a report on Form 8-K
dated November 6, 2001 under Item 4 (Change in Registrant's Certifying
Accountant) to report a change in Eos's certifying accountant.
On December 27, 2001, Eos filed a report on Form 8-K dated December 14,
2001 under Item 2 (Acquisition or Disposition of Assets) and Item 7 (Financial
Statements of Business Acquired) to report the acquisition of the Regal
Greetings & Gifts division of MDC Corporation,
53
<Page>
Inc., which was amended through the filing by Eos of a report on Form 8-K/A
filed on February 27, 2002 under Item 7 (Financial Statements of Business
Acquired).
On January 3, 2002, Eos International filed a report on Form 8-K dated
December 31, 2001 under Item 5 (Other Events) to report that the registrant had
changed (i) its name from dreamlife, inc. to Eos International, Inc. and (ii)
its trading symbol from "DLIF" to "EOSI".
(c) Exhibits
Exhibits required by Section 601 of Regulation S-K (see (a) above)
(d) Financial Statement Schedules
See the notes to the Financial Statements included in this Annual
Report.
54
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, hereunto duly authorized as of the
9 day of April, 2002.
EOS INTERNATIONAL, INC.
By: /s/ James M. Cascino
--------------------------------------
James M. Cascino
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
Signatures Title of Capacities Date
---------- ------------------- ----
/s/ Peter A. Lund Chairman April 8, 2002
- ---------------------------------
Peter A. Lund
/s/ James M. Cascino President, Chief Executive Officer and April 9, 2002
- --------------------------------- Director (Principal Executive Officer)
James M. Cascino
/s/ Jack B. Hood Chief Financial Officer and Treasurer April 8, 2002
- --------------------------------- (Principal Financial and Accounting Officer)
Jack B. Hood
/s/ Anthony J. Robbins Vice Chairman of the Board April 8, 2002
- ---------------------------------
Anthony J. Robbins
/s/ Julius Koppelman Vice Chairman of the Board April 6, 2002
- ---------------------------------
Julius Koppelman
Director April __, 2002
- ---------------------------------
Charles D. Peebler, Jr.
/s/ Anthony R. Calandra Director April 5, 2002
- ---------------------------------
Anthony R. Calandra
/s/ Jonathan C. Klein Director April 8, 2002
- ---------------------------------
Jonathan C. Klein
/s/ William S. Walsh Director April 5, 2002
- ---------------------------------
William S. Walsh
</Table>
55
<Page>
EOS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Independent Auditors' Report F-3
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-4
Consolidated Statements of Operations for the years ended December 31,
2001 and 2000 and the period from January 15, 1999 to
December 31, 1999 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 2001 and 2000 and the period
from January 15, 1999 to December 31, 1999 F-6
Consolidated Statements of Cash Flows for the years ended December 31,
2001 and 2000 and the period from January 15, 1999 to
December 31, 1999 F-7
Notes to Consolidated Financial Statements F-9
F-1
<Page>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Eos International, Inc
San Francisco, California
We have audited the accompanying consolidated balance sheet of Eos
International, Inc. as of December 31, 2001 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eos International,
Inc. at December 31, 2001, and the results of their operations and their cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed under the liquidity
caption in Note 1 to the financial statements, certain lenders restrict the
amount of funds that the Company's subsidiaries may advance to the Company's
parent, which has negative working capital conditions and the Company has
certain debt payments due in April 2002. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
San Francisco, California
March 22, 2002
F-2
<Page>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Discovery Toys, Inc.
We have audited the accompanying consolidated balance sheet of Discovery Toys,
Inc. (a California corporation) (the "Company") as of December 31, 2000 and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the year ended December 31, 2000 and the period from January
15, 1999 to December 31, 1999. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the first
paragraph present fairly, in all material respects, the financial position of
Discovery Toys, Inc. as of December 31, 2000 and the results of its operations
and its cash flows for the year ended December 31, 2000 and the period from
January 15, 1999 to December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.
As indicated in Note 2a, the Company retroactively adjusted the common stock and
per share information in its 2000 and 1999 financial statements as a result of
the reverse acquisition that occurred on July 18, 2001.
/s/ Comyns, Smith, McCleary LLP
Lafayette, California
March 16, 2001, except for Note 2a which is as of April 2, 2002
F-3
<Page>
EOS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<Table>
<Caption>
December 31
---------------------------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $10,782,000 $10,927,000
Accounts receivable, net 1,336,000 435,000
Inventory 14,213,000 4,079,000
Prepaid expenses and other current assets 2,793,000 363,000
Deferred tax assets 177,000 -
- -----------------------------------------------------------------------------------------------------------------
Total current assets 29,301,000 15,804,000
Property and equipment, net 4,616,000 968,000
Goodwill 5,488,000 -
Deferred tax assets 452,000 -
Customer list 3,100,000 -
Other non-current assets 51,000 52,000
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $43,008,000 $16,824,000
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $4,820,000 $1,795,000
Accrued liabilities 8,927,000 4,597,000
Lines of credit - 1,250,000
Short-term bridge notes, net of discount 5,542,000 -
Redeemable warrants 390,000 -
Current maturities of notes payable 1,253,000 -
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 20,932,000 7,642,000
Accrued compensation 3,000,000 -
Deferred revenues - 1,681,000
Notes payable, less current maturities 15,891,000 2,950,000
Negative goodwill 3,674,000 4,199,000
Redeemable warrants 977,000 -
Minority interest 4,280,000 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 100,000,000
shares authorized and 78,540,494 and 37,814,369 shares
issued at December 31, 2001 and 2000 (of which
22,408,396 and 0 are held in treasury) 561,000 378,000
Preferred stock, $0.01 par, 1,000,000 shares authorized,
0 shares issued at December 31, 2001 and 2000 - -
Paid-in capital - 413,000
Distributions in excess of capital (7,395,000) -
Retained earnings (accumulated deficit) 1,202,000 (439,000)
Cumulative translation adjustment (114,000) -
- -----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (5,746,000) 352,000
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $43,008,000 $16,824,000
=================================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<Page>
EOS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
<Table>
<Caption>
Year Ended Year Ended Period from
December 31, December 31, Jan.15, 1999 to
2001 2000 Dec. 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Sales $44,280,000 $40,131,000 $39,673,000
Cost of sales 25,920,000 24,190,000 23,407,000
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 18,360,000 15,941,000 16,266,000
OPERATING EXPENSES:
Sales and marketing 7,601,000 6,940,000 6,497,000
General and administrative 10,549,000 9,606,000 9,334,000
Amortization of negative goodwill (525,000) (525,000) (525,000)
- ---------------------------------------------------------------------------------------------------------------------------
Operating profit (loss) 735,000 (80,000) 960,000
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 195,000 436,000 206,000
Interest expense (1,152,000) (480,000) (424,000)
Other income (expense), net 2,030,000 457,000 (10,000)
- ---------------------------------------------------------------------------------------------------------------------------
Total other income (expense) 1,073,000 413,000 (228,000)
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,808,000 333,000 732,000
Income Taxes 59,000 6,000 -
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 1,749,000 327,000 732,000
Minority Interest (9,000) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $1,740,000 $327,000 $ 732,000
- ---------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $0.04 $0.01 $0.02
DILUTED EARNINGS PER COMMON SHARE $0.04 $0.01 $0.02
WEIGHTED AVERAGE SHARES USED IN
COMPUTING NET INCOME PER SHARE
Basic 45,900,000 38,300,000 39,000,000
Diluted 46,007,000 38,300,000 39,000,000
===========================================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<Page>
EOS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<Table>
<Caption>
Distributions Cumulative
Common Paid-in In Excess Retained Translation
Shares Stock Capital Of Capital Earnings Adjustment Total
- ------------------------------------------------------------------------------------------------------------------------------------
Carry-over equity of
minority shareholder at
January 15, 1999 3,911,831 $ 39,000 $767,000 - $ - $ - $ 806,000
Transfer of common
stock to acquirer on
January 15, 1999 35,206,481 352,000 (352,000) - - - -
Repurchase and retirement
of common stock (391,183) (4,000) 3,000 - - - (1,000)
Net Income - - - - 732,000 - 732,000
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, at
December 31, 1999 38,727,129 387,000 418,000 - 732,000 - 1,537,000
Issuance of common stock 260,789 3,000 - - - - 3,000
Repurchase and retirement
of common stock (1,173,549) (12,000) (5,000) - - - (17,000)
Dividends - - - - (1,498,000) - (1,498,000)
Net income - - - - 327,000 - 327,000
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, at
December 31, 2000 37,814,369 378,000 413,000 - (439,000) - 352,000
Repurchase of common
stock-Avon (3,911,831) (39,000) (413,000) (1,004,000) - - (1,456,000)
Dividends and distributions - - - (4,401,000) (99,000) - (4,500,000)
Repurchase of common
stock (130,395) (1,000) - (28,000) - - (29,000)
Shares issued by accounting
acquirer 22,359,955 223,000 - (2,739,000) - - (2,516,000)
Warrants issued to bridge
lenders in connection with
the acquisition of Regal - - - 726,000 - - 726,000
Options issued to director - - - 51,000 - - 51,000
Comprehensive income:
Net income - - - - 1,740,000 - 1,740,000
Translation loss - - - - - (114,000) (114,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - - 1,740,000 (114,000) 1,626,000
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, at
December 31, 2001 56,132,098 $561,000 $ - $(7,395,000) $ 1,202,000 $ (114,000) $ (5,746,000)
====================================================================================================================================
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<Page>
EOS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<Table>
<Caption>
Year Ended Year Ended Period from
December 31, December 31, Jan.15, 1999 to
2001 2000 Dec. 31, 1999
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,740,000 $ 327,000 $ 732,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 580,000 443,000 106,000
Provision for doubtful accounts 229,000 360,000 278,000
Non cash expense for compensation 51,000 3,000 -
Provision for inventory 49,000 - -
Amortization of discount on notes payable 452,000 176,000 176,000
Amortization of negative goodwill (525,000) (525,000) (525,000)
Other 9,000 - -
Changes in assets and liabilities excluding
acquired businesses:
Accounts receivable (338,000) (328,000) (158,000)
Inventory (258,000) (234,000) 980,000
Prepaid expenses and other current assets (444,000) 281,000 9,000
Deposits and other assets 89,000 5,000 -
Accounts payable and accrued liabilities 2,400,000 556,000 2,732,000
Deferred revenues (1,681,000) 907,000 774,000
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,353,000 1,971,000 5,104,000
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (199,000) (29,000) (1,247,000)
Acquisition costs (691,000) - -
Acquisition of Regal, net of seller financing (17,857,000) - -
Cash acquired in acquisitions 4,994,000 - -
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (13,753,000) (29,000) (1,247,000)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment for repurchase of common stock (1,485,000) (17,000) (1,000)
Proceeds from issuance of notes payable 19,255,000 - -
Cash debt issue costs (707,000) - -
Payment of common stock dividends and distributions (4,500,000) (1,498,000) -
Payments on line of credit (1,250,000) - 1,250,000
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 11,313,000 (1,515,000) 1,249,000
- ------------------------------------------------------------------------------------------------------------------------
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<Page>
EOS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
<Table>
<Caption>
Year Ended Year Ended Period from
December 31, December 31, Jan.15, 1999 to
2001 2000 Dec. 31, 1999
- ---------------------------------------------------------------------------------------------------------------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS (58,000) - -
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (145,000) 427,000 5,106,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,927,000 10,500,000 5,394,000
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $10,782,000 $10,927,000 $10,500,000
=====================================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ 429,000 $ 285,000 $ 79,000
Income taxes $ 5,000 $ 4,000 $ 5,000
=====================================================================================================================
</Table>
F-8
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY - Eos International, Inc. is a Delaware corporation that owns
two operating subsidiaries, Discovery Toys, Inc. (Discovery Toys), a
California Corporation, and Regal Greetings and Gifts, Inc. (Regal), a
Canadian Corporation. Discovery Toys is a wholly-owned subsidiary of Eos.
Eos owns an 85% interest in Regal.
Eos International, Inc., changed its name from dreamlife, inc. in December
2001. All references now to "Eos" or the "Company" include its former
business (dreamlife, inc.) and its current subsidiaries Discovery Toys,
Inc. and Regal Greetings and Gifts, Inc.
On July 18, 2001, Discovery Toys entered into a transaction with Eos that
was accounted for as a reverse merger, with Discovery Toys as the
accounting acquirer. The historical financial results for the periods prior
to July 18, 2001 reflect the financial position and results of operations
of Discovery Toys only.
Discovery Toys is a multi-level marketer of approximately 200 products
including toys, games, books, and software through a network of
approximately 30,000 independent educational consultants ("ECs") in the
United States and Canada. Lane Nemeth, a former daycare director, who
recognized the need for high quality educational toys in the market place,
founded Discovery Toys in 1978. Discovery Toys' principal offices are
located in Livermore, California, and its geographic markets primarily
encompass the United States and Canada.
Regal Greetings and Gifts is one of Canada's largest direct selling and
mail order distributors of general merchandise to consumers. The Company
sells its products through a network of independent representatives who in
turn sell the merchandise to friends, family neighbors and coworkers. Regal
also sells merchandise via its Website, and its 43 "RSCs" (representative
service centers) located throughout Canada. Regal's products include a
flagship line of greeting cards and gift wrap, the majority of which are
printed in Canada, as well as innovative household and giftware items. The
Company produces five major catalogues per year for use by its independent
representatives. The Company markets up to 3,300 items in a given sales
period, the majority of which are sourced abroad. In total, the Company's
inventory includes more than 7,400 stock keeping units ("SKUs"), with
prices ranging from $1 to $53 per item. Approximately 10% of the product
line may be selected for customer personalization. Management believes that
Regal's success has been fueled by a number of key factors including high
brand name recognition, a loyal and geographically dispersed direct-selling
force, a broad range of merchandise offered at affordable prices, colorful
and descriptive catalogues, conveniently located RSCs, efficient ordering
processes and high customer satisfaction.
RECENT ACCOUNTING PRONOUNCEMENTS - In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations," and Statement No. 142, "Goodwill
and Other Intangible Assets." SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001 as well as all purchase method business combinations completed after
June 30, 2001. SFAS 141 also specifies criteria that intangible assets
acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for separately.
SFAS 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but
F-9
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
instead tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 will also require that intangible assets
with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for
impairment.
The Company has adopted the provisions of SFAS 141 as of July 1, 2001 and
will adopt SFAS 142 effective January 1, 2002. When SFAS 142 is adopted,
remaining unamortized negative goodwill must be written off as the
cumulative effect of a change in accounting principle. As a result, the
Company expects to record a benefit of approximately $3.7 million on
January 1, 2002 resulting from the write-off of negative goodwill. The
Company does not believe there will be any additional impact from the
implementation of these statements on its financial statements.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. This statement supersedes SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. The statement retains the previously existing
accounting requirements related to the recognition and measurement of the
impairment of long lived assets to be disposed of by sale to include
discontinued operations. It also expands the previously existing reporting
requirements for discontinued operations to include a component of an
entity that either has been disposed of or is classified as held for sale.
Management does not expect this statement to have a material impact on the
Company's financial position or results of operations upon adoption on
January 1, 2002.
In April 2001, the Emerging Issues Task Force issued No. 00-25 ("EITF
00-25"), ACCOUNTING FOR CONSIDERATION FROM A VENDOR TO A RETAILER IN
CONNECTION WITH THE PURCHASE OR PROMOTION OF THE VENDOR'S PRODUCTS, which
states that consideration from a vendor to a reseller of the vendor's
products is presumed to be a reduction of the selling prices of the
vendor's products and, therefore, should be characterized as a reduction of
revenue when recognized in the vendor's income statement. That presumption
is overcome and the consideration can be categorized as a cost incurred if,
and to the extent that, a benefit is or will be received from the recipient
of the consideration. That benefit must meet certain conditions described
in EITF 00-25. The consensus should be applied no later than in annual or
interim financial statements for periods beginning after December 15, 2001.
The financial statements currently comply with EITF 00-25. The consensus
reached in EITF 00-25 has been codified in EITF 01-19, "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)".
MANAGEMENT'S USE OF ESTIMATES AND ASSUMPTIONS - The preparation of
financial statements in accordance with generally accepted accounting
principles in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates, and such differences could be material and affect the
results of operations reported in future periods.
F-10
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION- The accompanying
consolidated financial statements include the accounts of the Company and
its legally owned subsidiaries, Discovery Toys, Inc., Regal Greetings and
Gifts, Inc., and Prime DeLuxe, Inc., a subsidiary of Regal, which conducts
Regal's operations in Quebec, Canada. All material inter-company accounts
and transactions have been eliminated in consolidation.
The Company uses a calendar year-end for financial reporting periods.
CURRENCY TRANSLATION - The Company uses the U.S. dollar as its functional
currency, except for its Canadian subsidiary, Regal, which uses the
Canadian dollar as its functional currency. Foreign currency assets and
liabilities, including U.S. Dollar denominated assets and liabilities held
by Regal, are re-measured into the applicable functional currency using
end-of-period exchange rates for monetary assets and liabilities and
historical exchange rates for non-monetary assets and liabilities. Foreign
currency revenues and expenses are remeasured at average exchange rates in
effect during each period. The effects of these items as they relate to
Regal are reflected in earnings. For consolidated purposes, Regal's
financial statements are translated to the U.S. dollar reporting currency
using period-end rates of exchange for assets and liabilities and using
monthly rates for revenues and expenses. Translation gains and losses are
deferred and included in the cumulative translation adjustment component of
other comprehensive income (loss) in stockholders' equity (deficit).
REVENUE RECOGNITION -- Revenue is recognized when the product is delivered,
which is generally at the time of shipment, when legal title and risk of
loss are transferred to the Company's independent sales representatives.
Independent sales consultants have limited rights to return product orders,
and the Company records provisions for estimated returns and warranty costs
at the time revenue is recognized based on historical experience. Actual
returns were not significant during 2001, 2000 or 1999.
The Company maintains an incentive bonus plan in which all independent
consultants participate. Under the plan, consultants earn awards based on
individual and team sales performance and other benchmarks. Awards are
determined and accrued for on a monthly basis at Discovery Toys and on a
periodic basis at Regal. These awards are reflected as a reduction of
revenues in the period the awards are earned. Awards under the incentive
bonus plan were $8,964,000, $7,545,000, and $7,577,000 for 2001, 2000 and
1999, respectively.
The Company provides coupons to buyers of its products and to hostess
volunteers that can be used towards the purchase of future Company
products. When coupons are provided in conjunction with the sale of
products, the Company allocates the sales proceeds between the fair values
of the products and the value of the coupon based on estimated redemption
rates. Amounts attributable to the value of the coupon are deferred until
the earlier of redemption of the coupon or expiration occurs. When coupons
are provided as incentives to hostess volunteers, the Company accrues the
value of the coupon based on estimated redemption rates as a sales and
marketing expense. When coupons are provided as incentives to sales
representatives, the Company accrues the value of the coupon based on
estimated redemption rates as reduction of revenue.
F-11
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
SHIPPING AND HANDLING COSTS - In October 2000, the Emerging Issues Task
Force issued EITF 00-10, "Accounting for Shipping and Handling Revenues and
Costs", which requires fees billed to customers associated with shipping
and handling to be classified as revenue, and costs associated with
shipping and handling to be either classified as cost of sales or disclosed
in the notes to the financial statements. The Company records shipping and
handling fees billed to customers as revenue included in net sales. Costs
associated with shipping and handling activities are comprised of outbound
freight and associated direct labor costs, and are recorded in cost of
sales.
ADVERTISING COSTS - Direct response advertising costs, consisting
principally of catalog preparation, printing and postage costs incurred by
Regal are capitalized and amortized over the period of benefit, generally
three to six months. $1,378,000 of such costs were capitalized at December
31, 2001 and $161,000 was expensed for the period from December 14, 2001
through December 31, 2001.
SEASONALITY - The Company operates within a highly seasonal industry
whereby approximately 40-50% of its sales are earned during the months of
October through December.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. At December 31, 2001 and 2000, $6,174,000 and $11,809,000,
respectively, of money market securities, the fair value of which
approximates cost, are included in cash and cash equivalents. The Company
deposits cash and cash equivalents with high credit quality financial
institutions.
INVENTORY- For Discovery Toys, inventory primarily includes finished
products purchased from contract manufacturers and is stated at the lower
of weighted average cost or market.
Regal inventory includes finished goods, work in process and raw materials
and is stated at the lower of cost or market. Cost is generally determined
on a first in, first out basis.
PROPERTY AND EQUIPMENT - Property and equipment are stated at historical
cost. Depreciation is calculated using the straight-line or accelerated
method over the estimated useful lives of the assets ranging from three to
ten years as follows:
Computer equipment and software 3 to 10 years
Furniture, fixtures and office equipment 10 years
Leasehold improvements Shorter of estimated economic
life or term of the lease
Machinery and equipment 5 to 10 years
GOODWILL - Goodwill related to acquisitions occurring prior to July 1, 2001
are being amortized using the straight-line method over a 10-year life.
F-12
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company measures its financial
assets and liabilities in accordance with accounting principles generally
accepted in the United States of America. The carrying values of the
redeemable warrants and put rights granted to the minority stockholder is
recorded at their fair value. The fair values of the notes payable at
December 31, 2001 are as follows:
---------------------------------------------------------------------------
Short-term bridge notes $ 5,542,000
Notes payable $17,237,000
---------------------------------------------------------------------------
IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and circumstances
indicate that the cost of assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down is
required. If required, the write-down would be determined based on the
excess of the cost over the fair value of the asset.
INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, ACCOUNTING FOR INCOME TAXES, which requires recognition of
deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. The
provision for income tax expense is the tax payable for the period plus the
change during the period in deferred tax assets and liabilities.
EARNINGS PER SHARE - Basic net income (loss) per share is computed using
the weighted average number of common shares outstanding for the applicable
period. Diluted net income (loss) per share reflects the potential dilutive
effect of securities (which consist of stock options) that could share in
earnings of the Company, unless the inclusion of these potential dilutive
effects results in antidilution.
STOCK-BASED COMPENSATION - The Company follows the disclosure provisions of
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123), which
requires pro forma disclosure of net income and earnings per share as if
the SFAS No. 123 fair value method had been applied. The Company continues
to apply the provisions of Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, for the preparation of its basic
financial statements.
MINORITY INTEREST - Minority interest represents MDC Corporation, Inc.'s
(MDC) proportionate share of the equity of Regal plus the fair value of the
put rights granted to MDC in connection with the Company's acquisition of
85% interest in Regal. The carrying value of minority interest will be
adjusted for changes in the fair value of the put rights, together with
MDC's proportionate share of Regal's earnings.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the current year's presentation.
F-13
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
LIQUIDITY - Eos had working capital of $8.4 million as of December 31,
2001. The Eos parent company, as a separate entity, had $6.2 million of
negative working capital as of December 31, 2001. Of that negative working
capital, $5.9 million represents the $5.5 million carrying value of the
short term bridge notes, ($6.5 million face value net of a $1.0 million
discount on the note), and $0.4 million represents the fair value of the
redeemable warrants granted in connection with the bridge financing. On
April 13, 2002 the bridge notes will become due. The total amount of
principal and interest on the bridge notes and the amount due upon
redemption of the warrants held by the bridge lenders will be $7.2 million.
If the warrants are not exercised or redeemed by April 14, 2002, the
aggregate redemption price of the warrants increases to $1,170,000 on April
15, 2002, and to $2,340,000 on August 15, 2002, if the warrants are not
exercised or redeemed by August 14, 2002. The remaining $200,000 of
negative working capital on the Eos parent entity books as of December 31,
2001, represents current liabilities other than the short-term notes in
excess of cash and prepaid expenses. The Eos parent entity has no separate
source of revenues.
Both operating subsidiaries, Discovery Toys and Regal, have restrictions
against making loans, advances, dividends and corporate overhead payments
to the Eos parent company without lender approvals. At December 31, 2001,
restricted net assets were $4.2 million. Current arrangements with these
lenders do not support sufficient corporate overhead billings to the
parent company to provide adequate working capital for the parent to
meet its current operating expenses beyond May 2002. Eos must be able to
negotiate agreements with its lenders for additional corporate overhead
billings from the parent to the subsidiaries, obtain additional sources
of financing, or additional sources of capital to fund these operating
needs. Further, Eos does not have sufficient liquidity to repay the
bridge notes upon their maturity on April 13, 2002. Eos must negotiate
extensions or amendments to these notes or acquire additional financing
or sources of capital to repay the notes.
Failure of the company to have adequate liquidity to meet its corporate
overhead expenses could result in failure to pay the salary of its
chairman, Peter Lund. Such a failure could constitute a constructive
termination, which would require payment of his deferred compensation in
the amount of $3.0 million.
Both Discovery Toys and Regal are highly seasonal operating subsidiaries
and have revolving lines of credit established with lenders to provide
seasonal financing for its operations. The Company recognized approximately
40-50% of its annual sales revenues in the fourth quarter. Historically,
significant amounts of working capital are used to fund operating expenses
for the first three quarters of each year and to acquire inventory to meet
sales demand in the fourth quarter of each year. Discovery Toys' current
projections indicate that it will need a relaxation of its borrowing base
restrictions from its primary lender of approximately $1.0 million from
July through October of 2002. Historically, Discovery Toys has successfully
obtained such concessions to meet its operating cash flows needs. However,
no assurances can be provided as to its ability to continue to obtain such
concessions.
Regal has incurred significant interest bearing obligations in connection
with its purchase, and current operating projections indicate that it will
fully utilize its operating line of credit during 2002. As a result, Regal
may also be required to request relaxation of borrowing base restrictions
imposed by its line of credit provider.
F-14
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Management is currently in negotiations with the primary lender of
Discovery Toys to allow additional advances to support the Eos parent. On
March 18, 2002, the bank permitted Discovery Toys to advance $50,000 to Eos
to pay corporate overhead expenses. Final agreements are being negotiated
to permit up to $250,000 to be advanced by Discovery Toys to the parent
company before the period ending June 30, 2002, and an additional $150,000
to be advanced from July 1, 2002, until December 31, 2002. The agreement
being negotiated will also anticipate the amount of additional working
capital required for Discovery Toys to meet its seasonal operating credit
line requirements. Discussions are also underway with Regal's primary
lenders for them to permit Regal to make advances to the parent company
that will be used to meet the parent company's corporate overhead costs.
Management is also actively pursuing new sources of financing which may
include additional sales of the company's securities to provide sufficient
cash to meet its short term debt requirements, provide additional working
capital and fund future potential acquisitions. However, no assurances can
be provided as to the likelihood of success. Therefore, substantial doubt
exists as to the Company's ability to continue to operate as a going
concern. The financial statements do not include any adjustment that might
result from the outcome of this uncertainty.
2A. RECAPITALIZATION
Eos (formerly known as dreamlife) launched a website, WWW.DREAMLIFE.COM, on
February 12, 2000 with an objective to build an interactive network for
personal and professional improvement. This business model failed to
generate sufficient revenues to support the business. On July 18, 2001, Eos
acquired all of the outstanding capital stock of Discovery Toys, Inc.
pursuant to a Stock Purchase Agreement dated as of July 18, 2001, by and
among Eos, Discovery Toys, Inc. and the holders of all of the issued and
outstanding capital stock of Discovery Toys, Inc. (the "Discovery Toys
Stockholders"). Pursuant to the Stock Purchase Agreement, Eos issued an
aggregate of 33,772,143 shares of common stock to the Discovery Toys
Stockholders in exchange for all of the issued and outstanding shares of
capital stock of Discovery Toys, Inc. The corresponding recapitalization of
Discovery Toys resulted in the issance to Eos, for accounting purposes, of
22,359,955 shares. The terms of the reverse merger was determined through
arms-length negotiation by the management of Eos and the majority
stockholders of Discovery Toys, Inc. Subsequent to the acquisition, the
Discovery Toys Stockholders hold a majority of the voting interests in Eos.
Discovery Toys, Inc. operates as a wholly owned subsidiary of Eos. As Eos,
immediately prior to the merger, was a public shell with no viable business
operations of is own, the transaction has been accounted for as a reverse
merger with Discovery Toys as the accounting acquirer. The historical
financial results for periods prior to July 18, 2001 reflect the financial
position and operations of Discovery Toys only as restated. Outstanding
common shares of Discovery have been retroactively adjusted for all periods
to give effect to the recapitalization. Accordingly, $330,000 has been
reclassified from paid-in-capital to common stock at December 31, 2000.
2B. ACQUISITION
As a result of the transaction with Discovery Toys, Eos has changed its
strategic focus to serve as a company with a mission to acquire and grow
consumer product companies with a direct selling emphasis.
F-15
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
To pursue this strategy, Eos purchased the Regal Greetings and Gifts
division of MDC, an Ontario Corporation and Prime DeLuxe, Inc. (a
subsidiary of MDC). The Regal business consists of all the assets of an
ongoing business, including cash, accounts receivable, property and
equipment, inventory and prepaid expenses. This acquisition was accounted
for as a purchase.
The Regal Business was purchased by Regal Greetings and Gifts Corporation,
a Canadian Corporation (the "Regal Corporation") which was formed by RGG
Acquisition Inc., ("RGG"), a wholly owned subsidiary of Eos, to effect the
purchase. The purchase price for an 85% interest in the assets of the Regal
Business was approximately $22.0 million, including $0.7 million in cash
acquisition costs, plus the assumption of existing liabilities. The $22.0
million, together with cash debt issue costs of $0.7 million relating to
the transaction, was satisfied with the issuance of a $3.8 million note
($2.9 million net of discount) by Regal Corporation to MDC, put rights with
an estimated fair value of $0.5 million granted to MDC related to its 15%
ownership interest in Regal, $6.5 million of short-term bridge notes issued
by Eos, a primary loan of $8.3 million from The Bank of Nova Scotia to the
Regal Corporation and a mezzanine loan in the amount of $4.5 million from
RoyNat Capital Inc. ("RoyNat") to the Regal Corporation. In connection with
the mezzanine loan, Regal Corporation issued warrants to RoyNat to purchase
11,000 shares of the common stock of the Regal Corporation for $0.01 per
share. Upon exercise of such warrants, RGG's and MDC's percentage of
ownership of the Regal Corporation will be reduced proportionally. The
purchase price and nature of the consideration paid in the acquisition were
determined through negotiations.
The bridge notes are payable in April 2002 in the amount of $3.0 million to
Weichert Enterprises, LLC and in the amount of $3.5 million to DL Holdings
I, L.L.C. A significant Eos stockholder is also a stockholder of DL
Holdings I, L.L.C. In connection with the short-term notes, Eos issued
warrants to acquire 2,600,000 shares of its stock for $2.95 per share
subject to certain terms and conditions. The results of Regal's operations
have been included in the consolidated financial statements since December
14, 2001.
Based on the exchange rate as of the date of the acquisition, the
aggregate purchase price was US$22.0 million, including put rights
granted to MDC valued at $510,000. The value of the put rights, which
allow MDC to sell back its minority interest to the Company in exchange
for cash, was estimated using the Black Scholes model. Assumptions
underlying the valuation included a risk free rate of 4.46%, a
volatility of 55%, a dividend yield of zero and an expected life of 5
years. The put may be exercised upon the earlier of certain liquidity
events, as defined in the agreement, or February 2007. The price at
which (i) the warrants or underlying shares may be sold back to the
Company is equal to the greater of the price paid per share in any of
the triggering liquidity events, (ii) fair market value, as defined in
the agreement, per share of Regal stock, or (iii) 5.5 times average
Regal earnings per share before interest, taxes, depreciation and
amortization plus cash on hand less payments needed to retire the senior
debt, mezzanine debt and note to seller. Purchase price is comprised of
the following:
---------------------------------------------------------------------------
Cash to seller (a) $17,857,000
Seller financing, net of discount of $925,000 2,902,000
Put rights granted to the selling stockholder 510,000
Acquisition costs 691,000
---------------------------------------------------------------------------
$21,960,000
===========================================================================
(A) SOURCES OF CASH ARE COMPRISED OF THE FOLLOWING:
F-16
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<Table>
<Caption>
Net Carrying
Value Discount Face
--------------------------------------------------------------------------
Senior debt $7,584,000 $ 707,000 $ 8,291,000
Mezzanine debt 3,470,000 994,000 4,464,000
Bridge financing 5,384,000 1,116,000 6,500,000
--------------------------------------------------------------------------
19,255,000
Less: Cash debt issue costs (707,000)
Acquisition costs (691,000)
--------------------------------------------------------------------------
$17,857,000
==========================================================================
</Table>
The following table summarizes the estimated fair values of assets
acquired and liabilities assumed at the date of acquisition. Eos is in the
process of obtaining third-party valuations of certain intangible assets;
thus, the allocation of purchase price is subject to refinement.
<Table>
<Caption>
DECEMBER 14, 2001
--------------------------------------------------------------------------
Current assets $16,599,000
Property, plant and equipment 3,888,000
Other assets 757,000
Customer list 3,155,000
Goodwill 5,584,000
--------------------------------------------------------------------------
Total assets acquired 29,983,000
Current liabilities (4,196,000)
Minority interest (3,827,000)
--------------------------------------------------------------------------
Purchase consideration $21,960,000
--------------------------------------------------------------------------
</Table>
The customer list represents an acquired intangible asset with a useful
life of five years. All goodwill is allocated to the Regal segment, and
approximately 75% of the balance is expected to be deductible for tax
purposes.
The following summarized unaudited pro forma consolidated results of
operations are presented as if the acquisition of Regal and the reverse
merger between Eos and Discovery Toys had occurred on January 1, 2000 and
2001, respectively. The unaudited pro forma results are not necessarily
indicative of future earnings or earnings that would have been reported
had the acquisition been completed as presented:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------
2001 2000
--------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Revenue $96,258,000 $95,845,000
Net loss (12,479,000) (1,923,000)
Basic and diluted net loss per share (0.22) (0.03)
--------------------------------------------------------------------------
</Table>
F-17
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The 2001 proforma net loss includes a $17.5 million goodwill impairment
charge that was recorded by Regal prior to its acquisition by Eos.
Prior to January 15, 1999, Discovery Toys was a wholly owned subsidiary of
Avon Products, Inc. ("Avon"). On January 15, 1999, in accordance with the
terms of a Stock Transfer Agreement, Avon transferred 90% of the
outstanding stock of the Company to a new shareholder group. No
consideration was paid in connection with the transfer. Immediately prior
to the transfer, Avon contributed $3.8 million in additional working
capital to the Company, forgave $6.9 million in inter-company debt, and
provided financing to the Company in the amount of $3.5 million. As a
result of the significant change of ownership that occurred on January 15,
1999, a new basis of accounting was established. Accordingly, the estimated
fair values of assets acquired and liabilities assumed were recorded as
follows:
---------------------------------------------------------------------------
Estimated fair value of net tangible assets acquired $ 7,400,000
Less: consideration paid -
---------------------------------------------------------------------------
Excess of estimated fair value of assets acquired over
purchase consideration $ 7,400,000
===========================================================================
Reduction in recorded value of long-lived assets (fixed assets) $ 2,100,000
Negative goodwill 5,300,000
---------------------------------------------------------------------------
$ 7,400,000
===========================================================================
Negative goodwill is being amortized using the straight-line method over a
10-year life.
3. BALANCE SHEET COMPONENTS:
<Table>
<Caption>
December 31,
-----------------------------------
2001 2000
-----------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE, NET:
Accounts receivable $ 1,639,000 $ 846,000
Allowance for doubtful accounts 303,000 411,000
----------------------------------------------------------------------------------------
Net accounts receivable $ 1,336,000 $ 435,000
========================================================================================
INVENTORY:
Finished goods $13,752,000 $3,855,000
Work in process 78,000 -
Raw material and supplies 383,000 224,000
----------------------------------------------------------------------------------------
Net inventory $14,213,000 $4,079,000
========================================================================================
PROPERTY AND EQUIPMENT, NET:
Furniture, fixtures & office equipment $ 550,000 $ -
Machinery and equipment 949,000 403,000
F-18
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<Caption>
DECEMBER 31,
----------------------------------
2001 2000
----------------------------------------------------------------------------------------
Computer equipment and software 3,636,000 1,455,000
Leasehold improvements 976,000 34,000
----------------------------------------------------------------------------------------
Total property and equipment 6,111,000 1,892,000
Less accumulated depreciation (1,495,000) (924,000)
----------------------------------------------------------------------------------------
Net property and equipment $ 4,616,000 $ 968,000
========================================================================================
ACCRUED LIABILITIES:
Accrued compensation - sales consultants $ 1,376,000 $ 1,842,000
Accrued compensation and related expenses 1,835,000 629,000
Sales and use taxes payable 1,384,000 414,000
Deferred revenues, current portion - 393,000
Inventory in transit 1,374,000 -
Income taxes payable 50,000 -
Other 2,908,000 1,319,000
----------------------------------------------------------------------------------------
Total accrued liabilities 8,927,000 4,597,000
----------------------------------------------------------------------------------------
NEGATIVE GOODWILL:
Negative goodwill 5,249,000 5,249,000
Less accumulated amortization (1,575,000) (1,050,000)
----------------------------------------------------------------------------------------
Net negative goodwill $ 3,674,000 $ 4,199,000
========================================================================================
</Table>
4. BANK LINES OF CREDIT
In 1999, Discovery Toys entered into a line of credit arrangement with a
bank providing for advances up to $5,000,000. Outstanding advances may not
exceed specified percentages of eligible accounts receivable and inventory
as defined in the agreement. At December 31, 2001, Discovery Toys had
$2,600,000 available when factoring in its borrowing base restrictions.
Outstanding borrowings bear interest at a variable rate, which is generally
related to the bank's borrowing rate plus 2%. The line of credit expires in
May 2003 and requires that certain covenants be met. The Company was in
compliance with all covenants at December 31, 2001. Borrowings under the
line of credit are secured by substantially all of the assets of Discovery
Toys. At December 31, 2001 and 2000, outstanding borrowings were $0 and
$1,250,000, respectively and the effective interest rates were 0% and 11%,
respectively.
In December 2001, in conjunction with the acquisition of Regal Greetings
and Gifts, Regal entered into a revolving credit agreement with The Bank of
Nova Scotia for up to $10 million CDN (approximately $6.2 million U.S.) to
assist in meeting its operating requirements. Outstanding advances may not
exceed specified percentages of eligible accounts receivable and inventory
as
F-19
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
defined in the agreement. At December 31, 2001, Regal had $3.5 million
available when factoring in its borrowing base restrictions. The credit
line bears interest at the bank's U.S. Dollar Base Rate in Canada plus
3.00% per annum with interest payable monthly on the 22nd of each month.
There were no borrowings outstanding on this line of credit at December 31,
2001.
In December 2001, Regal also entered into a credit agreement with The Bank
of Nova Scotia. The credit agreement allows Regal to enter into foreign
currency forward exchange contracts with The Bank of Nova Scotia with a
maximum term of one year. The aggregate notional value of forward exchange
contracts may not exceed $15 million. Under the terms of this agreement,
Regal is subject to certain financial covenants based on liquidity ratios.
During 2001, Regal did not enter into any forward contracts.
5. NOTES PAYABLE
On January 15, 1999, in accordance with the Avon Stock Transfer Agreement,
Discovery Toys received $3,500,000 in exchange for an unsecured note
payable to Avon due on January 15, 2006. The note bears interest at 4.64%
per annum payable at maturity. The Company determined that the market rate
of interest at which it could borrow similar funds was approximately 10.75%
per annum at January 15, 1999. As a result, the note payable was recorded
net of a discount of $1,227,000 that will be amortized into interest
expense over the life of the note. At December 31, 2000, the note payable
balance of $2,950,000 includes a remaining unamortized discount on the note
of $875,000 and accrued interest payable of $325,000. On June 28, 2001 the
loan agreement was amended and a new maturity date was established. The new
maturity date of the loan is June 30, 2003, and at December 31, 2001 the
note payable balance of $3,412,000 includes a remaining unamortized
discount on the note of $591,000 and accrued interest payable of $503,000.
The Company's acquisition of Regal was financed through borrowings
undertaken by both Eos and Regal Greetings and Gifts Corporation, an entity
formed by Eos to effect the purchase of the Regal division from MDC. The
borrowings and relevant accounting are summarized below.
The senior debt of approximately $8.1 million ($13,000,000 CDN) provided by
The Bank of Nova Scotia bears interest at the bank's prime rate plus 3%
(7.75% at December 31, 2001) and matures in December 2006. Principal
payments of $313,000 per quarter are to be made through December 2003,
increasing to principal payments of $478,000 per quarter through September
2006, and a final payment of the remaining principal and interest are due
in December 2006. In addition to the scheduled payments, accelerated
payments may be required if certain operating cash flow requirements are
met. This note is secured by all of the assets of Regal.
The mezzanine debt of approximately $4.4 million ($7,000,000 CDN) provided
by RoyNat Capital bears interest at 12% and matures in January 2007.
Interest is payable monthly. Principal payments of $94,000 per quarter are
due from January 2004 through October 2006. The remaining unpaid balance is
due upon maturity in January 2007. Regal issued 11,000 detachable warrants
to purchase shares of Regal stock at $0.01 per share to the lender in
connection with this debt. These warrants also entitle the holder to put
rights that allow the holder of either the warrants or the shares to be
received upon exercise to sell these warrants or shares back to Regal in
exchange for cash. The
F-20
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
relative fair value of both the put and call features of these warrants
was determined using the Black Scholes model and is reflected as a
discount on the related debt with a corresponding credit reflected as a
liability as the put is to be settled in cash and the call is to be
settled in the shares of the subsidiary. The put may be exercised upon
the earlier of certain liquidity events, as defined in the agreement, or
January 2007. The price at which the warrants or underlying shares may
be sold back to the Company is equal to the greater of (i) the price
paid per share in any of the triggering liquidity events, (ii) fair
market value, as defined in the agreement per share of Regal stock, or
(iii) five times average Regal earnings per share before interest,
taxes, depreciation and amortization plus cash on hand less payments
needed to retire the senior debt, mezzanine debt and note to seller. The
Company also has the right to buy back up to 50% of the warrants or
shares received subsequent to exercise of the warrants. Changes in the
fair value of the warrants will be recorded as additional interest
expense. To value the warrants at December 31, 2001 using the Black
Scholes model, a risk-free rate of 4.46%, volatility of 55%, a dividend
yield of zero and an expected life of five years were used. This note is
secured by all of the assets of Regal. The mezzanine debt is subordinate
to the senior debt.
The note due to the seller, MDC, for approximately $3.8 million ($6,000,000
CDN) is unsecured, bears interest at 7% and matures in December 2006. Two
principal payments of equal to the lesser of approximately $1.25 million or
a percentage of operating cash flow are to be made by February 2005 and
February 2006. The remaining unpaid balance of principal and interest is
due upon maturity in December 2006. Because the stated interest rate on the
note is less than the market rate of interest that Regal could obtain on a
note with similar terms (which the Company believes to be 13%), a discount
has been recorded on the note to approximate the difference between the
fair value and face value of the note. The note is subordinate to both the
senior and mezzanine debt.
The bridge financing provided by DL Holdings I, LLC and Weichert
Enterprises to Eos for $6.5 million bears interest at 13% and matures in
April 2002, at which time all principal and interest is due. The bridge
lenders were also granted 2.6 million warrants to purchase shares of Eos
stock at $2.95 per share. The warrants also contain put rights that allow
the warrant holders to sell their warrants back to Eos in exchange for
cash. The relative fair value of both the call and put features for these
warrants has been determined using the Black Scholes model and is reflected
as a discount on the note. Underlying assumptions in the valuation include
a risk-free rate of 4.46%, volatility of 55%, a dividend yield of zero and
an expected life of 5.33 years. The value attributable to put has been
classified as a liability as it is settled in cash. The value attributable
to the call has been classified as equity as it is settled in the shares of
Eos, which is the parent company. The price at which the holders may put
the warrants back to Eos increases from $0.15 per warrant to $0.45 per
warrant on April 15, 2002 and $0.90 per warrant August 15, 2002. Changes in
the fair value may result in additional interest expense. A significant
stockholder of Eos is also a non-voting member of DL Holdings I, LLC. Eos
also has the right to buy back up to 75% of the warrants from the warrant
holders.
The above debt instruments do not contain conversion features.
F-21
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Outstanding notes payable as of December 31, 2001 are comprised of the
following:
<Table>
<Caption>
Principal and Net Carrying
Accrued Interest Discount Value
------------------------------------------------------------------------------------
Senior debt $8,147,000 $686,000 $ 7,461,000
Mezzanine debt 4,387,000 977,000 3,410,000
MDC 3,770,000 909,000 2,861,000
Avon 4,003,000 591,000 3,412,000
-------------------------------------------------------------------------------------
17,144,000
Less: Current maturities (1,253,000)
-------------------------------------------------------------------------------------
$15,891,000
=====================================================================================
Short-term bridge notes $6,500,000 $958,000 $ 5,542,000
=====================================================================================
<Caption>
Minimum annual payments are due as follows:
YEAR ENDING DECEMBER 31,
-------------------------------------------------------------------------------------
2002 $ 7,753,000
2003 5,256,000
2004 2,162,000
2005 3,509,000
2006 4,774,000
Thereafter 3,353,000
-------------------------------------------------------------------------------------
$ 26,807,000
=====================================================================================
</Table>
6. STOCKHOLDERS' EQUITY (DEFICIT)
All share data has been retroactively restated based on the share exchange
rate implicit in the Discovery Toys transaction of approximately 80 shares
of Eos common stock for each share of Discovery Toys common stock
outstanding. The weighted-average number of shares outstanding for years
ended December 31, 2001, 2000 and 1999 represent the weighted-average
number of shares outstanding based on the restated historical shares
outstanding.
In January 1999, the purchasers of Discovery Toys resold 17,994,441 shares
of newly acquired Common Stock to certain key employees for nominal
consideration. Of these shares, 1,955,917 shares sold to one employee were
subject to vesting restrictions that lapsed on June 30, 1999, and the
remaining 16,038,524 shares were fully vested. The Company's stock was
deemed by the Company to have no value at the time of the transfer, and the
Company did not record compensation expense as a result of the transfer.
F-22
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
In October 1999, the Company repurchased 391,183 shares of Common Stock
from a former employee at the stock's deemed fair value of approximately
$1,000.
In January 2000, the Company issued a total of 260,789 fully vested shares
of Common Stock to two employees for consideration of $1 per employee. The
Company recorded $3,000 in compensation expense as a result of these
transactions.
In June 2000, the Company repurchased 1,173,549 shares of Common Stock from
a former employee at the stock's deemed fair value of $17,000.
In February, July and November 2000, the Company paid dividends totaling
$1,498,000 to holders of its Common Stock.
On June 28, 2001, the Company redeemed 3,911,831 shares of its common stock
held by Avon Products, Inc. in exchange for $1,456,000.
On June 29, 2001, the Company made a cash distribution to holders of the
Company's common stock in the aggregate amount of $4,500,000, of which
$99,000 was recorded as a dividend and $4,401,000 was recorded as a
distribution in excess of capital.
On July 6, 2001, the Company redeemed 130,395 shares of its common stock
held by an employee in exchange for $29,000.
On July 18, 2001, in connection with the reverse merger with Discovery
Toys, Eos issued an aggregate of 33,772,143 shares of common stock to the
Discovery Toys stockholders. The corresponding recapitalization of
Discovery Toys resulted in the issuance to Eos, for accounting purposes, of
22,359,955 shares.
On September 25, 2001 Eos recorded a charge of $51,000 to general and
administrative expenses related to the intrinsic value of an option granted
by a principal stockholder to a director to purchase 100,000 shares of
common stock at an exercise price of $1.00 from this principal shareholder.
STOCK OPTIONS AND WARRANTS
1997 STOCK OPTION PLAN
Officers, directors, consultants and other key personnel of Eos are
eligible for option grants under the 1997 Stock Option Plan which is
administered by the Board. The administration of the 1997 Plan may be
delegated to a committee of the Board at the Board's discretion. The 1997
Plan authorizes the granting of incentive stock options ("ISOs") and
non-qualified stock options ("NSOs") to purchase up to 750,000 shares of
common stock at a price not less than 100% (110% in the case of ISO's
granted a person who owns stock possessing more than 10% of the voting
power of Eos) of the fair market value of the common stock on the date of
grant and provides that no portion of an option may be exercised beyond ten
years from that date (five years in the case of ISO's granted to a 10%
stockholder). To the extent not otherwise provided by the Board, options
granted under the 1997 Plan to employees and consultants become exercisable
in three installments, each equal to one-third of the entire option granted
and exercisable on the first, second and third anniversaries of the grant
date, respectively. In the event an employee's service to Eos ceases,
F-23
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
vested options may be exercised within one year in the case of death or
following a determination of disability. Vested options may be exercised
within three months following termination for any other reason; except
that, if such termination is for cause. If termination is for cause, the
options may not be exercisable following such termination. In no event may
an option be exercised later than the date of expiration of the term of the
option as set forth in the agreement evidencing such option. Options will
not be transferable except upon death (in which case they may be exercised
by the decedent's executor or other legal representative). The 1997 Plan
will terminate by its terms in 2007. As of December 31, 2001, options to
purchase an aggregate of 175,000 shares were outstanding under the 1997
Plan and 291,000 shares were available for future grant.
1999 EMPLOYEE STOCK OPTION PLAN
Officers and other full time employees of Eos and any of its subsidiaries
are eligible to participate in the 1999 Employee Stock Option Plan, which
may be administered by the Board or a committee of the Board. An aggregate
of 6,500,000 shares of common stock are reserved for issuance under the
1999 Employee Stock Option Plan. As of December 31, 2001, options to
purchase an aggregate of 2,487,500 shares had been granted, net of
forfeitures, and 4,012,500 shares were available for future grant.
The 1999 Employee Stock Option Plan permits grants of ISOs and NSOs. An
employee who owns more than ten percent (10%) of the total combined voting
power of all classes of outstanding stock of Eos or its subsidiaries will
not be eligible for the grant of an ISO, unless the requirements set forth
in Section 422(c)(5) of the Internal Revenue Code (the "Code") are
satisfied. The exercise price per share of an option is established by the
administrator of the 1999 Employee Stock Option Plan in its discretion,
but, in the case of an ISO, may not be less than the fair market value (or
not less than 110% of the fair market value under the requirements of
Section 422(c)(5) of the Code) of a share of common stock as of the date of
grant. NSOs granted under the 1999 Employee Stock Option Plan may have a
specified exercise price that is fixed or varies in accordance with a
predetermined formula while the NSO is outstanding. No individual is
permitted to receive options to purchase common stock during any fiscal
year in excess of 500,000 shares of common stock; provided, however, a
newly hired individual may receive options to purchase up to 2,400,000
shares of common stock during the portion of the fiscal year remaining
after his or her date of hire.
Options granted under the 1999 Employee Stock Option Plan may be
exercisable (subject to such restrictions and vesting provisions as the
plan administrator may determine on the date of grant in its discretion),
in part from time to time or in whole at any time after a portion becomes
fully vested, for a period not to exceed ten years from the date of grant,
in the case of an ISO (or five years under the requirements of Section
422(c)(5) of the Code). The exercise of an option may be accelerated in the
event of the optionee's death, disability, retirement or other events and
may provide for expiration prior to the end of its term in the event of the
termination of the optionee's service with or without cause. Such period
will be established by the plan administrator at its discretion on the date
of grant. Options are not transferable except upon death (in which case
they may be exercised by the decedent's executor or other legal
representative).
The 1999 Employee Stock Option Plan provides for partial acceleration of
options granted under the plan under certain circumstances involving
certain changes in control of Eos. The 1999 Employee Stock Option Plan will
terminate by its terms in 2009.
F-24
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1999 OUTSIDE DIRECTORS STOCK OPTION PLAN
Non-Employee directors of Eos and any of its subsidiaries are eligible for
option grants under the 1999 Outside Directors Stock Option Plan, which is
administered by the Board. An aggregate of 385,000 shares of common stock
are reserved for issuance under the 1999 Outside Directors Stock Option
Plan. As of December 31, 2001, options to purchase an aggregate of 250,000
shares had been granted, net of forfeitures, and 135,000 shares were
available for future grant.
The options granted under the 1999 Outside Directors Stock Option Plan are
NSOs. The exercise price per share of an option is established by the Board
at its discretion. The exercise price per share of an option may be fixed
or vary in accordance with a predetermined formula while the option is
outstanding.
Options granted under the 1999 Outside Directors Stock Option Plan are
exercisable (subject to such restrictions and vesting provisions as the
Board may determine on the date of grant at its discretion), in part from
time to time or in whole at any time after a portion becomes fully vested,
for a period not to exceed ten years from the date of grant. The exercise
of an option may be accelerated in the event of the optionee's death,
disability or retirement or other events and may provide for expiration
prior to the end of its term in the event of the termination of the
optionee's service with or without cause. Such period will be established
by the Board at its discretion on the date of grant. Options are not
transferable except upon death (in which case they may be exercised by the
decedent's executor or other legal representative). The 1999 Outside
Directors Stock Option Plan will terminate by its terms in 2009.
1999 CONSULTANTS STOCK OPTION PLAN
Consultants and other bona fide service providers to Eos and any
subsidiaries are eligible for option grants under the 1999 Consultants
Stock Option Plan, which may be administered by the Board or a committee of
the Board. An aggregate of 327,500 shares of common stock are reserved for
issuance under the 1999 Consultants Stock Option Plan. As of December 31,
2001, options to purchase an aggregate of 327,500 shares had been granted
under the 1999 Consultants Stock Option Plan and no shares were available
for future grant.
The options granted under the 1999 Consultants Stock Option Plan are NSOs.
The exercise price per share of an option is established by the
administrator of the 1999 Consultants Stock Option Plan at its discretion.
The exercise price may be fixed or may vary in accordance with a
predetermined formula while the option is outstanding.
F-25
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Options granted under the 1999 Consultants Stock Option Plan may be
exercisable (subject to such restrictions and vesting provisions as the
plan administrator may determine on the date of grant in its discretion),
in part from time to time or in whole at any time after a portion becomes
fully vested, for a period not to exceed ten years from the date of grant.
The exercise of an option may be accelerated in the event of the optionee's
death, disability or retirement or other events, and may provide for
expiration prior to the end of its term in the event of the termination of
the optionee's service with or without cause. Such period will be
established by the plan administrator at its discretion on the date of
grant. Options will not be transferable except upon death (in which case
they may be exercised by the decedent's executor or other legal
representative). The 1999 Consultants Stock Option Plan will terminate by
its terms in 2009.
Certain stock options granted to Eos employees and directors prior to July
18, 2001 remain outstanding subsequent to Discovery Toys' acquisition of
Eos. No value was assigned to outstanding stock options in the accounting
for the acquisition since their exercise prices were significantly higher
than the market value of Eos common stock at the time of the acquisition. A
summary of option activity is as follows:
<Table>
<Caption>
Options Weighted Average
Outstanding Exercise Price
------------------------------------------------------------------------------
Options assumed at July 18, 2001 4,672,000 $6.78
Cancellations (682,000) 9.86
------------------------------------------------------------------------------
December 31, 2001 3,990,000 $6.26
==============================================================================
</Table>
At December 31, 2001, 750,000 of the options outstanding were granted
outside of the stock option plans prior to July 18, 2001. All were
exercisable and had a weighted average exercise price of $7.20.
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2001:
<Table>
<Caption>
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------------------------
Weighted Weighted
Range of Exercise Shares Weighted Average Number Weighted Average
Prices Outstanding Average Price Remaining Life Exercisable Average Price Remaining Life
---------------------------------------------------------------------------------------------------------------
$0.75 - $3.53 183,000 $0.87 6.11 177,000 $0.78 6.03
4.50 - 5.20 2,700,000 5.12 8.28 2,632,000 5.12 8.28
9.00 - 10.00 1,020,000 9.56 6.03 1,020,000 9.56 6.03
11.19 - 16.34 87,000 14.13 7.21 74,000 14.68 7.17
---------------------------------------------------------------------------------------------------------------
$0.75 - $16.34 3,990,000 $6.26 7.59 3,903,000 $6.26 7.57
===============================================================================================================
</Table>
F-26
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The Company is required under Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" to disclose pro forma
information regarding option grants made to employees based in specified
valuation techniques that produce estimated compensation charges. These
amounts have not been reflected in the Company's Consolidated Statement of
Operations because no compensation charge arises when the price of
employees' stock options is greater than or equal to the market value of
the underlying stock at the grant date, as in the case of options granted
to the Company's employees. No options have been granted by the Company
subsequent to the reverse merger between Eos and Discovery Toys and as a
result, pro-forma net income and earnings per share equals those reported
in the Company's Consolidated Statement of Operations.
During 2001, CYL Development Holding, LLC (CYL), a principal owner of Eos
common stock, granted certain employees and directors 2.1 million options
to purchase Eos shares owned by CYL. The Company recorded a charge of
$51,000 to general and administrative expense based on the intrinsic value
of the awards.
WARRANTS
Warrants to acquire 400,000 shares of common stock at $7.00, expiring in
April 2005, and warrants to acquire 200,000 shares of common stock at $0.75
per share, expiring in December 2003, were assumed subsequent to the
reverse merger between Eos and Discovery Toys. Furthermore, in connection
with the bridge financing, Eos issued an aggregate of 2.6 million warrants
to acquire common stock at $2.95 per share to DL Holdings I, LLC and
Weichert Enterprises, LLC. The warrants may be exercised at any time
between April 14, 2002 and April 17, 2007. Activity is summarized as
follows:
<Table>
<Caption>
Warrants Weighted Average
Outstanding Exercise Price
--------------------------------------------------------------------------------
Warrants assumed at July 18, 2001 600,000 $4.92
Warrants granted to bridge lenders 2,600,000 2.95
--------------------------------------------------------------------------------
December 31, 2001 3,200,000 $3.32
================================================================================
</Table>
7. OPERATING LEASES
The Company leases its distribution and office facilities under the terms
of various operating lease agreements, which call for monthly lease
payments. Monthly lease payments will be adjusted to market rates as
determined in accordance with the lease terms and according to any lease
term extensions. The leases generally provide that the Company pays taxes,
insurance, maintenance and certain other operating expenses. Discovery Toys
distribution and office facility is operating under a non-cancelable lease
that expires in 2004. Discovery Toys can renew this lease at its existing
rate for two subsequent five-year periods. Regal has entered into operating
leases for its distribution and office facility as well as its RSCs. These
leases expire at varying times through 2009. Building rental expense
totaled $901,000, $756,000, and $762,000 in 2001, 2000 and 1999
respectively.
F-27
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The Company leases certain other vehicles and equipment used in its
operations under non-cancelable operating lease agreements expiring from
2001 through 2004. Vehicle and equipment rental expenses totaled $86,000,
$94,000 and $96,000 in 2001, 2000 and 1999 respectively.
Future minimum lease payments for non-cancelable operating leases at
December 31, 2001 are as follows:
<Table>
<Caption>
---------------------------------------------------------------------------
2002 $ 2,561,000
2003 2,114,000
2004 1,281,000
2005 990,000
2006 800,000
Thereafter 1,790,000
---------------------------------------------------------------------------
$ 9,536,000
===========================================================================
</Table>
Future sublease payments to be received under noncancelable leases are as
follows: 2002 - $30,000; 2003 - $30,000; and 2004 - $5,000.
8. CONCENTRATION OF CREDIT RISK
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of amounts receivable from independent sales
consultants. The Company extends credit in the normal course of business to
its independent sales consultants and performs credit evaluations of
financial condition as deemed necessary. Generally, no collateral is
required from its independent sales consultants. Credit losses, if any,
have been within management's expectations and are provided for in the
financial statements.
The Company maintains demand deposits with financial institutions with
credit risk, in the normal course of business, to meet their operating
needs. The Company's credit risk lies with the exposure to loss of
uninsured demand deposits in the event of nonperformance by these financial
institutions. At December 31, 2001, balances on deposit with financial
institutions exceeded federally insured limits by approximately
$11,440,000.
9. MERCHANDISING AND PROMOTION AGREEMENT
The Company entered into a merchandising and promotion agreement effective
November 1, 1999 with a prominent internet retailer. The original term of
the agreement was 62 months. The Company received payments of $1,000,000 in
1999 and $1,500,000 in 2000 per the terms of the agreement. Due to
financial difficulties faced by the internet retailer, the Company did not
receive a payment of $500,000 due in November 2001 under this agreement.
Subject to the terms of the agreement, the contract is in default. The
Company was recognizing revenue under the agreement
F-28
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
on a pro rata basis over the remaining life of the agreement from the dates
the individual payments were received. Due to the default of the agreement,
the Company recognized the remaining $2,074,000 of unearned revenue during
the year ended December 31, 2001, as it had no further performance
obligations. Other income of $2,074,000, $394,000 and $32,000 was
recognized in 2001, 2000 and 1999 respectively. At December 31, 2001, and
2000, the Company had recorded deferred revenue of $0 and $2,074,000,
respectively under the agreement.
10. INCOME TAXES
Income before income taxes consisted of the following:
<Table>
<Caption>
2001 2000 1999
------------------------------------------------------------------------------------------------------------
United States $2,223,000 $161,000 $548,000
Foreign (415,000) 172,000 184,000
------------------------------------------------------------------------------------------------------------
Total $1,808,000 $333,000 $732,000
============================================================================================================
<Caption>
The income tax provision consists of the following:
2001 2000 1999
------------------------------------------------------------------------------------------------------------
Current:
State $ 7,000 $ 6,000 $ -
Canadian 52,000 - -
------------------------------------------------------------------------------------------------------------
Total current $ 59,000 $ 6,000 $ -
============================================================================================================
<Caption>
The following table reconciles the federal statutory tax rate to the
effective tax rate of the provision for income taxes:
2001 2000 1999
---------------------------------------------------------------------------------------------------------------
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income taxes 0.3 1.8 -
Amortization of goodwill (8.0) (53.6) (24.4)
Change in valuation allowance (28.2) 5.9 (17.8)
Amortization of discount and other 2.3 13.7 8.2
Foreign taxes 2.9 - -
---------------------------------------------------------------------------------------------------------------
Effective tax rate 3.3% 1.8% -%
===============================================================================================================
</Table>
F-29
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Deferred tax assets and liabilities are summarized as follows:
<Table>
<Caption>
December 31, 2001 December 31, 2000
------------------------------------------------------------------------------------------------
Net operating loss carryforwards $ 2,104,000 $ 761,000
Accrued compensation and accrued vacation 1,301,000 173,000
Deferred revenue - 429,000
Accumulated depreciation and amortization 3,316,000 162,000
Reserves 285,000 322,000
Capitalized overhead-inventory 158,000 124,000
Incentive commitments & other 80,000 343,000
Valuation allowance (6,615,000) (2,314,000)
------------------------------------------------------------------------------------------------
Total, net of deferred tax asset $ 629,000 $ -
================================================================================================
Current $ 177,000 -
Non-Current 452,000 -
------------------------------------------------------------------------------------------------
Total $ 629,000 $ -
================================================================================================
</Table>
The Company's net operating loss carryforwards included as a deferred tax
asset above are approximately $5.6 million and $1.9 million for 2001 and
2000, respectively. These operating loss carryforwards will expire between
2003 and 2020 if not utilized. For federal and state tax purposes, a
portion of the Company's net operating loss carryforwards may be subject to
certain limitations on utilization in case of change in ownership as
defined by federal and state tax law. The net deferred tax asset balance of
$629,000 at December 31, 2001 is the amount acquired by Eos in its purchase
of Regal.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their bases
for financial reporting purposes. In addition, future tax benefits, such as
net operating loss carryforwards, are recognized to the extent that
realization of such benefits is more likely than not. The Company has
assessed its ability to realize future tax benefits, and concluded that as
a result of its history of losses, it is more likely than not, that such
benefits will not be realized. Accordingly, the Company has recorded a
valuation allowance against its deferred tax assets. A portion of the
valuation allowance relates to approximately $2.1 million of future tax
benefits related to goodwill purchased in connection with the Regal
acquisition. Any tax benefits that are actually realized will be allocated
to reduce goodwill.
F-30
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
The Company has a management consulting services agreements with two
separate companies, each of which has common ownership with Discovery Toys.
Pursuant to the terms of the first agreement, the Company pays annual
management fees equal to the greater of $225,000 or a percentage of
revenue, as defined in the agreement, for Discovery Toys. The Company had
unpaid fees under this agreement of $225,000 on both December 31, 2001 and
2000. The Company also receives management services from a member of its
Board of Directors, who is also a shareholder, and pays annual fees equal
to the greater of $75,000 or a percentage of revenues, as defined in the
agreement, for Discovery Toys for these services. Pursuant to the terms of
these agreements, the Company incurred management fee expenses of $492,000,
$492,000, and $396,000 in 2001, 2000, and 1999, respectively. These
agreements may be extended or terminated at will.
In December 2001, the Board of Directors approved payment of investment
banking fees to McGuggan, LLC in conjunction with the acquisition of Regal
Greetings and Gifts. This fee amounted to $160,000 and reimbursement of
certain acquisition related costs incurred by McGuggan on behalf of Eos.
Certain members of McGuggan LLC are Directors and significant shareholders
of Eos.
In conjunction with the acquisition of Regal Greetings and Gifts, Eos and
Regal entered into an agreement for management consulting services between
the companies in December 2001. The agreement assigns responsibility for
performance of the services to William Walsh and Anthony Calandra. Mr.
Walsh and Mr. Calandra are directors and stockholders of Eos. The agreement
calls for payment of $500,000 CDN annually for such services (approximately
$300,000 U.S.). The Board of Directors approved payment of $500,000 CDN in
annual management fees to Mr. Walsh and Mr. Calandra for services to be
rendered in 2002.
As disclosed in Note 6 to the financial statements, CYL Development
Holdings, LLC (CYL), a significant stockholder, granted options to purchase
shares of Eos common stock from CYL to an employee and a non-employee
director.
12. SEGMENT INFORMATION
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, established standards for reporting information about
operating segments in the financial statements. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. In reporting to management the
entities operating results are categorized into three segments. Discovery
Toys markets and sells educational toys. Regal markets and sells consumer
gift products. Overhead costs associated with the Company's Eos shell are
characterized as "Corporate". Prior to 2001, the Company only operated
through its Discovery Toys segment.
F-31
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<Table>
<Caption>
Discovery Toys, Regal Greetings &
2001 (DOLLARS IN THOUSANDS) Inc Gifts Corporate Total
--------------------------------------------------------------------------------------------------------------
Revenues $ 41,825 $ 2,455 $ - $ 44,280
Income before taxes $ 2,801 $ 110 $(1,103) $ 1,808
Net income (loss) $ 2,794 $ 49 $(1,103) $ 1,740
Depreciation and amortization $ 471 $ 44 $ 65 $ 580
Interest Expense $ 887 $ 67 $ 198 $ 1,152
Total assets, excluding intercompany $ 11,644 $ 30,312 $ 1,052 $ 43,008
==============================================================================================================
</Table>
Information concerning principal geographic areas was as follows (dollars
in thousands):
<Table>
<Caption>
2001 2000 1999
----------------------------- -------------------------- ---------------------------
Revenues as a Revenues as a Revenues as a
Percentage Net Percentage Net Percentage Net
Of Total: Property of Total: Property of Total: Property
--------------------------------------------------------------------------------------------------------------
United States 88% 813 94% 959 94% 1,370
Canada 12% 3,803 6% 9 6% 12
--------------------------------------------------------------------------------------------------------------
100% 4,616 100% 968 100% 1,382
==============================================================================================================
<Caption>
A summary of the Company's revenues by product is as follows:
2001 2000 1999
--------------------------------------------------------------------------------------------------
Revenues:
Educational toys $ 35,854,000 $ 34,982,000 $33,008,000
Books 4,884,000 3,630,000 5,117,000
Educational software 1,148,000 1,400,000 1,775,000
Shipping revenues 6,703,000 6,338,000 6,196,000
Independent sales consultant commissions (8,964,000) (7,545,000) (7,577,000)
Consumer gift products 3,277,000 - -
Other 1,378,000 1,326,000 1,154,000
--------------------------------------------------------------------------------------------------
Total $ 44,280,000 $ 40,131,000 $39,673,000
==================================================================================================
</Table>
No one customer accounted for more than 10% of the Company's consolidated
annual revenues in fiscal 2001, 2000 or 1999.
F-32
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
13. RETIREMENT PLANS
Discovery Toys sponsors a 401(k) salary deferral plan ("401(k) Plan")
covering substantially all employees of the Company. Contributions to the
401(k) Plan are in the form of employee salary deferral contributions,
which may be matched by the Company up to a specific limit. The 401(k) Plan
also provides for discretionary profit sharing contributions as determined
on an annual basis at the discretion of the Company's Board of Directors.
The Company's expense incurred during 2001, 2000 and 1999 in connection
with the 401(k) Plan was $13,000, $14,000 and $28,000. The Company made
$38,000, $27,000 and $33,000 in matching contributions to the 401(k) Plan
in 2001, 2000 and 1999. During these years no profit sharing contributions
were made.
EMPLOYEE BENEFIT PLAN
Regal provides a contributory defined benefit plan for its employees. The
following schedule reconciles the plan's funded status (the difference
between the fair value of the plan assets and the benefit obligation) to
the accrued benefit cost recorded on the consolidated balance sheet:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1 $ 3,079,000
Service cost for benefits earned 53,000
Interest cost 217,000
Member contributions 46,000
Actuarial gain $ 78,000
Benefits paid (144,000)
------------------------------------------------------------------------
Benefit obligation at December 31 3,329,000
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1 2,718,000
Actual return on plan assets 224,000
Employer contributions 257,000
Plan participants' contribution 46,000
Benefits paid (144,000)
Actuarial loss (58,000)
------------------------------------------------------------------------
Fair value of plan assets at December 31 3,043,000
------------------------------------------------------------------------
BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS (286,000)
Unrecognized actuarial loss 213,000
------------------------------------------------------------------------
Accrued benefit cost $ (73,000)
========================================================================
</Table>
F-33
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Unrecognized actuarial losses are amortized on a straight-line basis over
the average remaining service period of active plan participants.
Net pension cost for the year ended December 31, 2001 was as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------------------
Service cost for benefits earned $ 53,000
Interest cost 217,000
Expected return on assets (224,000)
---------------------------------------------------------------------------
Benefit cost $ 46,000
----------------------------------------------------------------------------
</Table>
As the consolidated financial statements include the results of Regal from
the date of its acquisition, December 14, 2001, through December 31, 2001,
there was no pension expense included in the 2001 consolidated financial
statements.
The following actuarial assumptions were used in determining the plans'
funded status and net pension cost. Year-end assumptions are used to
compute funded status, while prior year-end assumptions are used to
computed net pension cost.
<Table>
<Caption>
DECEMBER 31, 2001 2000
- ------------------------------------------------------------------------------
Discount rate 6.75% 7.00%
Rate of future compensation increases 4.00% 4.00%
Expected long term rate of return on plan assets 8.00% 8.50%
- ------------------------------------------------------------------------------
</Table>
14. VALUATION AND QUALIFYING ACCOUNTS
Valuation and Qualifying Accounts
<Table>
<Caption>
Balance at Amount Deductions Balance at
Beginning Assumed in Charged to and End of
of Period Acquisition Expense Write-Offs Period
--------------------------------------------------------------------------------------------------------------
YEAR-ENDED DECEMBER 31, 2001
Allowance for doubtful accounts $ 411,000 $ 121,000 $229,000 $458,000 $ 303,000
Deferred tax asset valuation
allowance $2,314,000 $ 4,795,000 $ - $494,000 $6,615,000
Inventory allowance $ 152,000 $ 1,055,000 $ 49,000 - $1,256,000
--------------------------------------------------------------------------------------------------------------
YEAR-ENDED DECEMBER 31, 2000
Allowance for doubtful accounts $ 274,000 $ - $360,000 $223,000 $ 411,000
Deferred tax asset valuation
allowance $2,372,000 $ - $ - $ 58,000 $2,314,000
Inventory allowance $ 407,000 $ - $ - $255,000 $ 152,000
--------------------------------------------------------------------------------------------------------------
YEAR-ENDED DECEMBER 31, 1999
Allowance for doubtful accounts $ 362,000 $ - $278,000 $366,000 $ 274,000
Deferred tax asset valuation
allowance $1,989,000 $ - $383,000 $ - $2,372,000
Inventory allowance $ 417,000 $ - $ - $ 10,000 $ 407,000
==============================================================================================================
</Table>
F-34
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
15. QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results for the years ended
December 31, 2001 and December 31, 2000.
<Table>
<Caption>
2001 Quarter Ended
------------------------------------------------------------------
March June September December
----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues $7,029 $7,648 $ 8,123 $21,480
Gross profit 2,797 3,064 3,183 9,316
Net income (loss) 1,215 (677) (1,287) 2,489
Basic and diluted income (loss) per
common share $0.03 $(0.02) $ (0.02) $ 0.03
==========================================================================================================
<Caption>
2000 Quarter Ended
------------------------------------------------------------------
March June September December
----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues $6,489 $7,117 $9,042 $17,483
Gross profit 2,189 2,707 3,311 7,734
Net income (loss) (1,154) (468) (524) 2,473
Basic and diluted income (loss) per
common share $(0.03) $(0.01) $(0.01) $ 0.01
==========================================================================================================
</Table>
Loss per share data for the quarters ended September 30, 2001 and 2000
has been restated from the amounts reported in the third quarter 10-Q
filing to properly reflect the shares outstanding as a result of the
reverse merger with Discovery Toys.
16. EMPLOYMENT AGREEMENTS
In July 2000, Eos entered into a compensation arrangement with Peter A.
Lund, its former Chief Executive Officer. The agreement also provided for
a discretionary bonus of up to $3.0 million. As a condition to the
closing of the acquisition of Discovery Toys, Inc., Eos and Peter A. Lund
agreed to amend the compensation arrangement. The amendment accelerated
the vesting of the unvested portion of the $3.0 million bonus provided
for in the Offer Letter and extended the payment dates of such bonus.
Under the amendment, the bonus is payable in three equal annual payments
of $1.0 million beginning in July 2003 provided Eos is successful at
meeting certain fundraising targets. Otherwise, the bonus is payable in
five equal payments of $600,000 beginning in July 2003. Payment of the
bonus is automatically accelerated upon Mr. Lund's employment
termination, if other than for cause. The entire $3.0 million liability
was accrued by Eos on July 18, 2001 as part of the reverse merger with
Discovery Toys on that date.
F-35
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
On December 12, 2001, Regal Greetings and Gifts Corporation entered into an
employment agreement with Janice Wadge in relation to her performance of
duties as President and Chief Executive Officer. The terms of the contract
cover a three-year period at a base salary of approximately $147,000
($235,000 CDN) per year with pay increases to be set and approved by the
Board of Directors of Regal. The Board also will establish an annual bonus
plan payable to members of senior management of Regal. The agreement also
contemplates participation in a Stock Bonus Plan the terms of which have
not been agreed upon as of this date. The agreement also provides for
severance of 18 months salary should the employee be terminated without
cause, as defined in the agreement.
On December 12, 2001, Regal Greetings and Gifts Corporation entered into an
employment agreement with Kevin Watkinson in relation to his performance of
duties as Senior Vice President and Chief Financial Officer. The terms of
the contract cover a three-year period at a base salary of approximately
$104,000 ($167,000 CDN) per year with pay increases to be set and approved
by the Board of Directors of Regal. The Board also will establish an annual
bonus plan payable to members of senior management of Regal. The agreement
also contemplates participation in a Stock Bonus Plan the terms of which
have not been agreed upon as of this date. The agreement also provides for
severance of 12 months salary should the employee be terminated without
cause, as defined in the agreement.
Discovery Toys has entered into an employment agreement with Thomas C.
Zimmer appointing Mr. Zimmer as President and Chief Operating Officer of
Discovery Toys. The term of the agreement expires in January 2003. Under
the agreement Mr. Zimmer is entitled to a base compensation of $165,000 per
year and to a bonus of up to $50,000 based on Mr. Zimmer and Discovery Toys
meeting certain financial and non-financial milestones. In addition, Mr.
Zimmer is entitled to certain additional benefits such as a lease allowance
for an automobile and reimbursement of certain expenses. In the event, the
agreement is terminated by Discovery Toys without cause, Discovery Toys
will be required to pay Mr. Zimmer his base compensation for 15 months plus
$103,125.
On January 15, 1999, Discovery Toys entered into an employment agreement
with Lane Nemeth appointing Ms. Nemeth as Chairperson of Discovery Toys.
The term of the agreement expires in January 2003. Under the agreement
Ms. Nemeth is entitled to a base compensation of $300,000 per year and
to a bonus of between 50% and 100% of the annual base salary based on
Ms. Nemeth and Discovery Toys meeting certain financial and
non-financial milestones. In addition, Ms. Nemeth is entitled to certain
additional benefits such as allowance for an automobile and
reimbursement of certain expenses. In the event the agreement is
terminated by Discovery Toys without cause, Ms. Nemeth is entitled to
her base compensation for the balance of the stated term of the
agreement and to a bonus which shall be pro rated for the year.
17. EARNINGS PER SHARE
The following is a reconciliation of the weighted average number of shares
used to compute basic and dilutive earnings per share:
<Table>
<Caption>
DECEMBER 31, 2001 2000 1999
---------------------------------------------------------------------------------------
Basic weighted average common
Shares outstanding 45,900,000 38,300,000 39,016,000
Options and warrants 107,000 - -
---------------------------------------------------------------------------------------
Dilutive weighted average common
Shares outstanding 46,007,000 38,300,000 39,016,000
=======================================================================================
</Table>
For the year ended December 31, 2001, 3,865,253 options and 3,000,000
warrants were not included in the computation of diluted earnings per share
because their effect would have been anti-dilutive.
F-36
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
18. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Presented below are the condensed financial statements of Eos
International, Inc. on a stand-alone basis as of December 31, 2001.
Eos International, Inc.
Condensed Financial Information of Registrant
Condensed Balance Sheet
<Table>
<Caption>
December 31, 2001
---------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 902,000
Prepaid expenses and other current assets 9,000
---------------------------------------------------------------------------
Total current assets 911,000
Property and equipment, net 82,000
Investment in subsidiaries 3,443,000
---------------------------------------------------------------------------
TOTAL ASSETS $4,436,000
===========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 286,000
Accrued liabilities 194,000
Short-term bridge notes, net of discount 5,542,000
Redeemable warrants 390,000
Intercompany payables 656,000
---------------------------------------------------------------------------
Total current liabilities 7,068,000
Accrued compensation 3,000,000
---------------------------------------------------------------------------
10,068,000
---------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 100,000,000
shares authorized and 78,540,494 and 37,814,369
shares issued at December 31, 2001 and 2000
(of which 22,408,396 and 0 are held in treasury) 561,000
Paid-in capital -
Distributions in excess of capital (7,395,000)
Retained earnings 1,202,000
-----------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (5,632,000)
-----------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $4,436,000
=============================================================================
</Table>
F-37
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Eos International, Inc.
Condensed Financial Information of Registrant
Condensed Statement of Operations
<Table>
<Caption>
Year Ended
December 31, 2001 (1)
- --------------------------------------------------------------------------------
OPERATING EXPENSES:
General and administrative $ 886,000
OTHER INCOME (EXPENSE):
Interest income 12,000
Interest expense (198,000)
Other income (expense), net (31,000)
- --------------------------------------------------------------------------------
Total other income (expense) (217,000)
- --------------------------------------------------------------------------------
Net loss before equity in income of subsidiaries (1,103,000)
Equity in income of subsidiaries, net of tax 2,843,000
- --------------------------------------------------------------------------------
NET INCOME $ 1,740,000
================================================================================
</Table>
(1) Included in the amounts are the results of operations of Eos
International, Inc. from July 18, 2001 through December 31, 2001, and
equity in income of subsidiaries, net of tax, for the year ended
December 31, 2001.
F-38
<Page>
EOS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Eos International, Inc.
Condensed Financial Information of Registrant
Condensed Statement of Cash Flows
<Table>
<Caption>
Year Ended
Dec. 31, 2001 (1)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,740,000
Adjustments to reconcile net loss to net cash provided by operating
activities:
Equity in income of subsidiaries, net of tax (2,843,000)
Depreciation and amortization 65,000
Non cash expense for compensation 51,000
Amortization of discount on notes payable 158,000
Changes in:
Prepaid expenses and other current assets 96,000
Intercompany payables 656,000
Accounts payable and accrued liabilities (394,000)
Other 64,000
- ---------------------------------------------------------------------------------------------------
Net cash used in operating activities (407,000)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary (6,500,000)
Cash acquired through reverse merger 1,309,000
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,191,000)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 6,500,000
- ---------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 902,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR -
- ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 902,000
===================================================================================================
</Table>
(1) Included in these amounts are the results of operations of Eos
International, Inc. from July 18, 2001 through December 31, 2001, and
equity in income of subsidiaries, net of tax, for the year ended
December 31, 2001.
F-39
<Page>
Exhibit Index
-------------
Exhibit
Number Description and Method of Filing
- ------ --------------------------------
2.1 Contribution and Exchange Agreement dated as of May 20, 1999 among the
registrant, Change Your Life.com, LLC, Anthony J. Robbins, Robbins
Research International Inc. and CYL Development Holdings, LLC (1)
2.2 Agreement and Plan of Reorganization dated as of May 27, 1999 among the
registrant, Concept Acquisition Corporation, Concept Development, Inc.,
William Zanker and Debbie Dworkin (2)
2.3 Agreement of Merger dated as of May 27, 1999 between Concept
Acquisition Corporation and Concept Development, Inc. (2)
2.4 Stock Purchase Agreement dated as of July 18, 2001, among the
registrant, Discovery Toys, Inc. and the Discovery Toys, Inc.
shareholders named therein (21)
2.5 Note Exchange Agreement dated as of July 18, 2001, between the
registrant and CYL Development Holdings, LLC (21)
3(i).1 Restated Certificate of Incorporation (3)
3(i).2 Certificate of Amendment to Certificate of Incorporation dated June 18,
1987 (4)
3(i).3 Certificate of Amendment to Certificate of Incorporation dated November
17, 1989 (5)
3(i).4 Certificate of Amendment to Certificate of Incorporation filed November
3, 1999 (6)
3(i).5 Certificate of Amendment to Certificate of Incorporation filed December
13, 1999 (7)
3(i).6 Certificate of Amendment to Certificate of Incorporation filed December
31, 2001 (8)
3(ii) Amended and Restated By-Laws (21)
4.1 Registration Rights Agreement dated as of July 18, 2001, among the
registrant and the Discovery Toys, Inc. shareholders named therein (21)
4.2 Termination Agreement dated July 18, 2001, among the registrant,
Anthony J. Robbins, Robbins Research International Inc. and CYL
Development Holdings, LLC (21)
4.3 Registration Rights Agreement among the registrant, DL Holdings, LLC
and Weichert Enterprises, LLC (8)
<Page>
10.1 Content Provider Agreement and License effective as of April 23, 1999
between Change Your Life.com, LLC, Anthony J. Robbins and Research
International Inc. (2) (12)
10.2 Escrow Agreement dated as of May 27, 1999 among the registrant, Debbie
Dworkin and State Street Bank and Trust Company (2) (12)
10.3 Repurchase Agreement dated as of May 27, 1999 between the registrant
and Debbie Dworkin (2)
10.4 Employment Agreement dated as of May 27, 1999 between the registrant
and William Zanker (1)
10.5 Exclusive License and Marketing Agreement dated as of May 27, 1999
among the registrant, Seligman Greer Communication Resources, Inc., SGS
Communications Resources, Inc., Seligman Greer Sandberg Enterprises,
Inc., SGC Communication Resources LLC and Learning Annex Interactive
LLC (2) (12)
10.6 Option Agreement dated as of May 27, 1999 among the registrant,
Seligman Greer Communication Resources, Inc., SGS Communication
Resources, Inc., Seligman Greer Sandberg Enterprises, Inc., SGC
Communication Resources LLC and Learning Annex Interactive LLC and
certain shareholders and members, as applicable, of such entities other
than the registrant listed therein (2) (12)
10.7 Registration Rights Agreement dated as of May 27, 1999 among the
registrant, Anthony J. Robbins, Robbins Research International Inc. and
CYL Development Holdings, LLC (1)
10.8 Stockholders Agreement dated as of May 27, 1999 among the registrant,
Anthony J. Robbins, Robbins Research International Inc. and CYL
Development Holdings, LLC (1)
10.9 Lease for 425 West 15th Street, Floor 3R, New York, New York dated May
21, 1999 between the registrant and CFG/AGSB Chelsea Ninth, LLC (9)
10.10 Distribution Agreement dated May 27, 1999 between the registrant and
U.S. NeuroSurgical, Inc. (10)
10.11 Tax Matters Agreement dated May 27, 1999 between the registrant and
U.S. NeuroSurgical, Inc. (10)
10.12 Assignment and Assumption Agreement dated May 27, 1999 between the
registrant and U.S. NeuroSurgical, Inc. (10)
10.13 1997 Stock Option Plan (11)
<Page>
10.14 1999 Employee Stock Option Plan (6)
10.15 1999 Outside Directors Stock Option Plan (6)
10.16 1999 Consultants Stock Option Plan (6)
10.17 Content License Agreement dated December 6, 1999 between Yahoo! Inc.
and the registrant, as amended (7) (12)
10.18 Retention and Severance Agreement made as of May 23, 2000 by and
between Beth Polish and the registrant (13)
10.19 Offer Letter by and between Peter A. Lund and the registrant dated July
24, 2000 (14)
10.20 Letter agreement regarding registration rights by and between Peter A.
Lund and the registrant dated July 24, 2000 (15)
10.21 Grid Time Promissory Note to The Chase Manhattan Bank for $1,500,000
dated October 24, 2000 (16)
10.22 Interactive Services Agreement by and between America Online, Inc. and
the registrant dated July 17, 2000 (12) (17)
10.23 Grid Time Promissory Note to The Chase Manhattan Bank for $1,500,000
dated November 27, 2000 (18)
10.24 Grid Time Promissory Note to The Chase Manhattan Bank for $2,000,000
dated January 11, 2001 (18)
10.25 Grid Time Promissory Note to The Chase Manhattan Bank for $2,250,000
dated March 9, 2001 (18)
10.26 Surrender Agreement by and between CFG/AGSCB 75 Ninth Avenue, LLC and
the registrant dated January 23, 2001 (18)
10.27 Grid Time Promissory Note to Van Beuren Management, Inc. for $50,000
dated April 12, 2001 (18)
10.28 Grid Time Promissory Note to the Chase Manhattan Bank for $2,400,000
dated April 26, 2001 (20)
10.29 Modification to Peter A. Lund Offer Letter dated July 18, 2001, between
the registrant and Peter A. Lund (21)
10.30 Amendment to Content Provider and License Agreement dated as of July
10, 2001 among Anthony J. Robbins, Robbins Research International Inc.
and the registrant (21)
<Page>
10.31 Revolving Credit and Security Agreement dated as of June 1, 1999
between Discovery Toys, Inc. and PNC Bank, National Association (23)
10.32 Amendment No.1 to Revolving Credit and Security Agreement dated as of
June 1, 1999 between Discovery Toys, Inc. and PNC Bank, National
Association (23)
10.33 Amended Promissory Note from Discovery Toys, Inc. to Avon Products,
Inc. for $3,500,000 dated June 28, 2001 (23).
10.34 Reimbursement Agreement dated as of July 1, 1999 between IFS of New
Jersey, Inc. and Discovery Toys, Inc. (23)
10.35 Employment Agreement dated as of January 15, 1999 between Discovery
Toys, Inc. and Lane Nemeth (23)
10.36 Agreement for Management Consulting Services dated as of January 15,
1999 among Discovery Toys, Inc., William S. Walsh and McGuggan LLC (23)
10.37 Assignment of Agreement for Management Consulting Services dated as of
February 15, 2001 among Discovery Toys, Inc., William S. Walsh,
McGuggan LLC and Discovery Toys LLC (23)
10.38 Employment Agreement dated as of January 1999 between Discovery Toys,
Inc. and Thomas C. Zimmer (23)
10.39 Agreement dated as of June 28, 2001 by and among Discovery Toys,
L.L.C., Avon Products, Inc., Discovery Toys, Inc. and William S. Walsh
(23)
10.40 Restated Asset and Share Purchase Agreement dated as of December 4,
2001 among MDC Corporation Inc., Regal Greetings & Gifts Corporation
and McGuggan, LLC (23)
10.41 Amending Agreement dated as of December 14, 2001 among MDC Corporation
Inc., Regal Greetings & Gifts Corporation and McGuggan LLC (23)
10.42 Agreement for Management Consulting Services dated as of December 14,
2001 by and between Regal Greetings & Gifts Corporation and the
registrant (23)
10.43 Employment Agreement dated as of December 12, 2001 by and between Regal
Greetings & Gifts Corporation and Janice Wadge (23)
10.44 Employment Agreement dated as of December 12, 2001 by and between Regal
Greetings & Gifts Corporation and Kevin Watkinson (23)
10.45 Promissory Note dated as of December 14, 2001 made by Regal Greetings &
Gifts Corporation and issued to MDC Corporation Inc. (23)
<Page>
10.46 Secured $3,500,000 Bridge Loan Promissory Note dated as of December 14,
2001 made by the registrant and issued to DL Holdings I, LLC (23)
10.47 Secured $3,000,000 Bridge Loan Promissory Note dated as of December 14,
2001 made by the registrant and issued to Weichert Enterprises, LLC
(23)
10.48 Common Stock Purchase Warrant of the registrant dated as of December
14, 2001 issued to Weichert Enterprises, LLC (23)
10.49 Common Stock Purchase Warrant of the registrant dated as of December
14, 2001 issued to DL Holdings I, LLC (23)
10.50 Letter of Commitment dated December 5, 2001 issued by The Bank of Nova
Scotia to Regal Greetings & Gifts Corporation (23)
10.51 Acknowledgement to The Bank of Nova Scotia Re: Survival of Letter of
Commitment dated December 14, 2001 by and among Regal Greetings & Gifts
Corporation, MDC Regal Inc. and Primes De Luxe Inc. (23)
10.52 Debenture dated as of December 14, 2001 issued to RoyNat Capital Inc.
by Regal Greetings & Gifts Corporation (23)
10.53 Warrants To Acquire Common Shares in Regal Greetings & Gifts
Corporation dated as of December 14, 2001 issued to RoyNat Capital Inc.
(23)
10.54 Amended and Restated Unanimous Shareholders Agreement among MDC
Corporation Inc., RGG Acquisition Inc, RoyNat Capital Inc., Bank of
Montreal Capital Corporation and Regal Greetings & Gifts
Corporation, as amended thereafter (8)
10.55 Demand Note to The Bank of Nova Scotia for $13,000,000 (CAD) dated
December 12, 2001 (8)
10.56 Agreement re: Operating Credit Line between Regal Greetings & Gifts
Corporation and The Bank of Nova Scotia (8)
10.57 Agreement for Commercial Letter of Credit between Regal Greetings &
Gifts Corporation and The Bank of Nova Scotia (8)
10.58 Priorities Agreement among The Bank of Nova Scotia, RoyNat Capital Inc.
and Regal Greetings & Gifts Corporation (8)
10.59 General Security Agreement between Regal Greetings & Gifts Corporation
and The Bank of Nova Scotia (8)
10.60 Multi Party Share Pledge Acknowledgement Agreement among RoyNat
Capital, The Bank of Nova Scotia, Regal Greetings & Gifts Corporation
and RGG Acquisition Inc. (8)
10.61 Assignment of Shares between Regal Greetings & Gifts Corporation and
The Bank of Nova Scotia (8)
<Page>
10.62 Assignment between Regal Greetings & Gifts Corporation and The Bank of
Nova Scotia (8)
10.63 Assignment of Agreement between Regal Greetings & Gifts Corporation and
The Bank of Nova Scotia (8)
10.64 Subordination and Postponement Agreement from MDC Corporation Inc. (8)
10.65 Postponement Agreement to The Bank of Nova Scotia from Primes De Luxe
Inc. (8)
10.66 Guarantee to The Bank of Nova Scotia from Primes De Luxe Inc. (8)
10.67 General Security Agreement between Primes De Luxe Inc. and The Bank of
Nova Scotia (8)
10.68 Hypothec on Movable Property between The Bank of Nova Scotia and Primes
De Luxe Inc (8)
10.69 Assignment between Primes De Luxe Inc. and The Bank of Nova Scotia (8)
10.70 Guarantee to The Bank of Nova Scotia from MDC Regal Inc. (8)
10.71 General Security Agreement between MDC Regal Inc. and The Bank of Nova
Scotia (8)
10.72 Hypothec on Movable Property between The Bank of Nova Scotia and MDC
Regal Inc. (8)
10.73 Assignment between MDC Regal Inc. and The Bank of Nova Scotia (8)
10.74 Assignment of Shares between RGG Acquisition Inc. and The Bank of Nova
Scotia (8)
10.75 Letter Agreement between the registrant and Hearst-Argyle Television,
Inc. (8)
16.1 Letter, dated December 13, 1999, of Richard A. Eisner & Company, LLP
(19)
16.2 Letter, dated November 12, 2001, of KPMG LLP (22)
16.3 Letter, dated January 3, 2002, of Comyns, Smith, McCleary LLP (24)
21 Subsidiaries of the Registrant (8)
<Page>
- ----------
(1) Incorporated by reference to the registrant's Form 8-K/A dated May 27, 1999
and filed with the Securities and Exchange Commission as of June 11, 1999.
(2) Incorporated by reference to the registrant's Form 8-K/A dated May 27, 1999
and filed with the Securities and Exchange Commission on February 17, 2000.
(3) Incorporated by reference from Exhibit 3.1 to the registrant's Registration
Statement No. 33-4532-W on Form S-18.
(4) Incorporated by reference from Exhibit 3(b) to the registrant's 1987 Annual
Report on Form 10-K.
(5) Incorporated by reference to Exhibit 3(c) to the registrant's 1988 Annual
Report on Form 10-K.
(6) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999.
(7) Incorporated by reference to the registrant's 1999 Annual Report on Form
10-K.
(8) Filed herewith
(9) Incorporated by reference to Exhibit 10(i) to the registrant's Quarterly
Report on Form 10-Q for the period from April 21, 1999 through June 30, 1999.
(10) Incorporated by reference to exhibits to U.S. Neurosurgical, Inc.'s (a
former subsidiary of the registrant) Form 10 as filed with the Securities and
Exchange Commission on July 1, 1999.
(11) Incorporated by reference to Exhibit 10(k) to the registrant's 1997 Annual
Report on Form 10-K.
(12) Confidential treatment has been granted for certain portions of this
exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.
(13) Incorporated by reference to Exhibit 10.1 to the registrant's Form 8-K
dated May 23, 2000 and filed with the Securities and Exchange Commission on May
26, 2000.
(14) Incorporated by reference to Exhibit 10.2 to the registrant's Form 8-K
dated July 24, 2000 and filed with the Securities and Exchange Commission on
July 25, 2000.
(15) Incorporated by reference to Exhibit 10.2 to the registrant's Form 8-K
dated July 24, 2000 and filed with the Securities and Exchange Commission on
July 25, 2000.
(16) Incorporated by reference to Exhibit 10.1 to the registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000.
<Page>
(17) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000.
(18) Incorporated by reference to the registrant's Annual Report on Form 10-K
for the year ended December 31, 2000.
(19) Incorporated by reference to Exhibit 16 to the registrant's Form 8-K/A
dated December 3, 1999 and filed with the Securities Exchange Commission on
December 15, 1999.
(20) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001.
(21) Incorporated by reference to the registrant's Form 8-K dated July 18, 2001
and filed with the Securities Exchange Commission on August 1, 2001.
(22) Incorporated by reference to the registrant's Form 8-K dated November 6,
2001 and filed with the Securities Exchange Commission on November 13, 2001.
(23) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001.
(24) Incorporated by reference to the registrant's Form 8-K/A dated July 18,
2001 and filed with the Securities Exchange Commission on January 3, 2002.