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Page 1
There are several global toy fairs each year that attract buyers from toy retailers across the world.
One of the largest toy fairs is held in Hong Kong in January each year, where new toys are launched
for the following Christmas market. Other global toy fairs are held in Europe, Russia and the USA,
also early
in the calendar year. At these toy fairs, buyers will assess and choose which of the new toys may
achieve high sales. The toy fairs attract a wide range of exhibitors that are launching new toys,
both large listed companies and small companies.
The level of sales achieved by many toy companies will often depend on orders generated from
buyers attending these international toy fairs. Therefore, it is important that prototype toys and
marketing literature is ready in order to meet the requirements of these global buyers at the start
of each calendar year.
Jot
The Jot brand was established in 1998 by husband and wife team Jon and Tani Grun. The company
initially designed a small range of toys that were manufactured in their home European country.
These toys proved to be very popular in their home country and Jon Grun then expanded the range of
products.
By 2003, within five years of starting Jot, the founders were encouraged to see Jots products
ordered by many large toy retailers across Europe. By this stage the company had grown
considerably, and had annual sales of almost 2 million. Commencing in 2004, Jot started
outsourcing all of its manufacturing to a range of manufacturing companies in China in order to
reduce its cost base and to enable the company to price its products more competitively.
By the end of 2010 sales revenue exceeded 8 million and the company had achieved substantial
sales revenue growth each year. Jot has seen its sales revenue grow by 16% in the year ended
31
December 2010 and by almost 18% in the year to 31 December 2011.
A summary of Jots key personnel is shown in Appendix 1 on page 11.
In summary, most of Jots toys have simple electronics that make a sound or enable movement.
Some of the more advanced toys have simple programming to enable educational aspects of the
toy to be more interactive.
Jots products are sold to toy retailers for between 7 and 38. These are Jots selling prices to
toy retailers. Most of the retailers will then sell these toys at a large mark-up, which can be as
much as
50% to 100%, i.e. a toy procured from Jot at 10 could be retailed to the end customer at as much as
20. Margins vary from product to product and whereas toys aimed at the 9 -11 age group carry
more sophistication (and hence risk) they also carry higher margins.
In the year ended 31 December 2011 Jots actual sales volumes were over 706,000 units across Jots
entire range of products. The total sales revenue for the year ended 31 December 2011 was
9,866,000, which resulted in an average selling price of just under 14 per unit. Over 80% of
Jots product sales are sold to retailers for 20 or less.
Bank loan of 500,000 due in January 2014. (about 14 months from the current date
Bank loan of 500,000 due in January 2015.
Bank loan of 600,000 due in January 2020.
Jots bank has been very responsive to the companys needs for cash in order to fund its growth but
has indicated that at the present time it would not be able to provide any additional long-term
finance.
Jot has an overdraft facility of 1,500,000, which the bank has stated is the maximum limit.
The current cost of its overdraft is at an interest rate of 12% per year. At 31 December 2011,
Jots overdraft was 960,000.
Jots business is highly seasonal with a significant proportion of sales occurring in quarters 3 and 4.
As Jot builds up its inventory in preparation for higher levels of sales in quarters 3 and 4, cash flow is
negative during the second half of the year. This is because outsourced manufacturing for the majority
of all products occurs mainly from the end of quarter 2, during all of quarter 3 and the beginning of
quarter 4.
Page 3
Jot is a private limited company and not listed on any stock exchange. It has 40,000 shares in
issue, each of 1 par value. The company has an authorised share capital of 200,000 shares.
To date, the Board of Jot has not declared any dividends. The shares are held as follows:
Number of shares
held at
31 December 2011
Percentage
shareholding
Jon Grun
Tani Grun
Alana Lotz
Boris Hepp
Michael Werner
12,000
12,000
8,000
4,000
4,000
%
30
30
20
10
10
Total
40,000
100
Production of toys
Jot has its own in-house team of designers who are involved in designing toys that are unique,
innovative and fun to play with. The production of new toys is split into two stages. Firstly, the design
stage involves the design team developing a new toy and after it has been approved, the second
stage is where the operations team is responsible for contracting an outsourced manufacturer for
the mass production of each product.
The head of Jots design team is Alana Lotz, Product Development Director. She is responsible for
researching the market trends in toys globally and establishing the availability of new innovative
technology that could be incorporated into new toy designs. This is what helps to make Jots
product range innovative and at the cutting edge of new technology, as the products incorporate
new technology electronic chip components.
Research and development work on new product development usually occurs between May and
December each year so that the new products have been fully tested ready for the annual launch of
Jots new range of toys each January. Jot currently launches 5/6 totally new products each year
and the development costs are generally between 0.1 and 0.25 million for each new product. The
total design and development costs are around 1.2 million each year. This is included in
administrative expenses in Jots statement of comprehensive income.
Jot has just finalised its range of new products for 2013, so as to allow time to produce marketing
literature and prepare prototypes ready for the global toy fairs being held in January to March 2013
in various locations around the world.
The design team which is based in the UK develops all new products through the following stages:
The design team is kept fresh by the introduction of new designers each year. Good designers are
kept on but those that are seen as burnt out are let go. Early in 2012 a new designer was employed
named Indy Kaplia who had some radical new designs to offer. One of these toys (a flying
spaceship) had been rushed into production in time for the 2012 Christmas season and had been
greeted well by the retailers.
Page 4
Jot uses a specialised company, based in Europe for the manufacture and testing of all prototype
products and there are often two or three stages involved before the prototype product is produced to
the satisfaction of the designers. Only when each product is signed off by the design and
management team can Jots legal team apply for the IPRs for the product design. Then the approved
new product designs go into production by outsourced manufacturers.
The designs are then electronically transferred to Jots operations team headed up by Michael
Werner, Operations Director, for the selection and appointment of outsourced manufacturers.
The stages in the production process are as follows:
Michael Werner is responsible for the selection, appointment and monitoring of Jots outsourced
manufacturers and all aspects of the management of the outsourced manufacturing process for Jots
products. Jots products are all manufactured by a small number of specialised outsourced
manufacturing companies which are all based in China. Jot is responsible for shipments of all
products from its outsourced manufacturers to its warehouses or sometimes directly to customers.
Outsourced manufacturers
Currently Jot uses 20 off-shore outsourced manufacturing companies. Off-shore outsourced
manufacturing is defined as shifting work to foreign, distant companies in order to reduce production
costs. Some of the outsourced manufacturers are small companies each of which manufactures just
one of Jots products. Some of the larger outsourced manufacturing companies make several of
Jots products. All of these outsourced manufacturing companies do not work exclusively for Jot but
manufacture toys, as well as other products, for a number of international companies. All of Jots
outsourced manufacturers are based in China.
When a product design has been approved and the IPR applied for, Michael Werner will send the
product design with an indication of the number of products to be manufactured and the timescale
for shipment, to a small range of outsourced manufacturers for them to tender for the manufacture of
the product. Jot often asks the same outsourced manufacturing companies, which it has used
previously, to tender for the manufacture of its new product designs each year. Therefore, there is a
high level of
repeat business and a good level of understanding and commitment established between Jot,
based in Europe, and its outsourced manufacturers based in China.
When the tenders have been received, Michael Werner and his team review the outsourced
manufacturing companies submissions and then select the outsourced manufacturer to be
appointed. Jots designers and sales team will have already decided on an indicative selling price, so
the unit price to be charged to Jot by the outsourced manufacturing company is often the determining
factor when making the decision of which outsourced manufacturing company to use. Whilst other
factors are considered, such as quality and ability to deliver the required volume of products to the
required timescale, it is the unit price that is important in order to achieve the planned level of gross
margin. Gross profit is defined as sales revenue less the outsourced manufacturing cost of units sold
and excludes all other costs.
Jots design team already knows the component cost of each product, based on the list of
components required, so it is the cost of manufacturing that will vary between the different tenders.
Generally, in most tenders, the unit prices quoted by different outsourced manufacturers are quite
close to each other.
Page 5
Most of Jots products are manufactured using basic raw materials, such as plastic and electronic
components for the toys and plastic and paper products for their packaging. The majority of Jots
products require a range of electronic components. These components are readily available from a
variety of sources but are subject to price fluctuations. Each product design will specify which, and
how many, of each component type is required. Some of the electronic components are specialised
and contain application-specific integrated circuits (ASIC components) which are procured from
specialist suppliers. Jot does not have any agreements with these specialised suppliers as all
components, including ASIC components, are procured directly by the outsourced manufacturer
appointed to manufacture each of Jots products. Some of Jots outsourced manufacturers, which
manufacture a range of electronic products for Jot and other companies, have on-going supply
contracts in place for several key components, which helps them to price their products
competitively.
The timescales each year for the production of Jots products is for tenders to be submitted and
manufacturers appointed by the end of May. The major proportion of manufacturing occurs between
June and early November each year. The last of the manufacturing occurs in early November to
enable time for the products to be shipped to Jots warehouses in Europe and the USA, or
sometimes
directly to Jots customers, in time to meet the Christmas sales peak. All three of Jots warehouses
are leased.
Over the last 10 to 15 years many companies have outsourced their manufacturing to companies in
China. However, with wage rates in China increasing, some companies have started to consider
near- shoring. Near-shoring is defined as the transfer of business processes to companies in a
nearby country. Therefore, if Jot were to consider near-shoring, this would result in having some
outsourced manufacturers based in Europe.
Page 6
Sales
Jots sales revenue for the year ended 31 December 2011 was 9,866,000. The geographical analysis
of these sales is shown as follows:
Retailers these include large toy retailers as well as supermarket chains and other retailers
Distributors these distributors purchase Jots products and sell them on to a wide range of
smaller retailers.
Jot currently has three warehouses, two in Europe and one in the USA. Usually all products are
shipped from each of Jots outsourced manufacturers directly to one of Jots three warehouses.
In some instances, products are shipped directly to customers.
Jots terms of sale are for payment within 30 days of invoice. Invoices are produced automatically,
on a daily basis, based on information transferred to the sales ledger from the inventory control IT
system. However, Jot is very dependent on sales to large retailers, which often do not pay until at
least 60 days after the invoice date. Jot has little influence over these retailers and does not want to
jeopardise future sales by chasing them too aggressively.
Sales of Jots toys are highly seasonal, as shown in the quarterly analysis of sales in Appendix 4
on page 14.
Page 7
In the year ended 31 December 2011, sales in quarter 3 (July to September) were 25% of annual
sales and sales in quarter 4 (October to December) were 51% of annual sales.
Jots sales are highly dependent on seven large retailers. These seven large companies comprise
toy retailers, large international supermarket retailers, department stores and one on-line retailer.
Over
68% of Jots sales in the financial year ended 31 December 2011 were to these 7 customers based in
Europe and the USA. These key customers place their main orders in May or June each year and
sometimes earlier. If individual products are selling well or the retailers consider sales may be higher
than they originally thought, then the retailers would place additional orders with Jot. This could
happen at any time between June through to late October.
The remaining 32% of sales are to distributors as well as small and medium sized retailers around
the world. Jot currently has around 350 customers in total, including the 7 large customers.
With the placement of orders from its large customers and the many smaller customers early in
the year, Jot is able to place firm orders with its outsourced manufacturers with a reasonable
degree of certainty of sales levels. However, there is always a balancing act between placing a
large order to meet committed and expected sales and not holding enough inventory.
Licensed toys
Jot currently has 12 product lines which are licensed products from popular film and TV programs for
the manufacture and sale of toys. Licensed products are defined as toys which use a logo, design or
character from a film or TV programme and the owner of the IPR will license each product under a
strict licensing agreement, whereby a royalty is paid to the owner of the IPR for each unit
manufactured. A licensed product is where the TV or film company owns the intellectual property
rights (IPRs) for the characters and licenses the manufacture and sale of the products to another
company in exchange for a license fee for each item produced (whether sold or not).
A fixed license fee is paid to the licensor in accordance with the licensing contract, and the fee is
usually paid at the time Jot places an order with its outsourced manufacturer. The fee is between
5% and 10% of Jots selling price to retailers.
Anna Veld, Licensing Director, joined Jot in 2009 and has negotiated all of the licensed products
that Jot currently sells. She is very experienced in this field and in liaison with both Sonja Rosik and
Boris Hepp, she has identified products for Jot to develop and sell. Licensed products now account
for almost 10% of Jots sales, in terms of the number of units sold.
Inventory control
Michael Werner is responsible for logistics and inventory control. There is always a difficult decision to
be made when placing orders with outsourced manufacturers, between ordering too much inventory
and not selling it and the opposite of losing sales because of lack of inventory. This is further
exacerbated due to the seasonal nature of sales, which are predominantly made in quarters 3 and 4
of each calendar year.
At the start of each calendar year, any unsold inventory for products that Boris Hepp, Sales Director,
considers to be out of date, are offered to Jots customers at substantially reduced prices to clear
them and the inventory value is written down. There are a few products which are sold on a regular
basis throughout each year and their inventory value is not written down.
Inventory counts at the end of the financial year are reconciled with Jots IT inventory control system
and any discrepancies are written off. Jots inventory is valued at the lower of cost or realisable
market value, based on a first-in, first-out basis. Inventory value is based only on out-sourced
manufacturing contracted charges, using the unit price from manufacturers invoices, unless the
realisable value is lower.
Page 8
Inventory also includes a reserve for the write-down in value in respect of slow-moving and obsolete
products. This valuation is based upon Jots management teams review of inventories taking into
account for each product the estimated future sales demand, anticipated product selling prices,
expected product lifecycle and products planned for discontinuation. The valuation for inventory
write down is reviewed quarterly. At 31 December 2011 the write-down reserve was 0.124 million.
This is netted off against the value of the current inventory of products held in Jots warehouses.
IT systems
Tani Grun appointed an external IT consultancy company some years ago to provide the IT
systems required for Jots growing business. However, some of the systems are not ideal and do
not provide Jots management team with all of the data that it requires. There is also some
replication of data between different IT systems.
The Finance Department operates a multi-currency nominal ledger and integrated sales and
purchase ledgers. However, these IT systems do not accept data directly from any of Jots other IT
systems.
The Finance Department also operates a fixed assets register.
Jot outsources the logistics of its products, both the movement of manufactured products and the
sales to customers, to a global logistics company. This company operates a fast efficient service and
with the increase in sales volumes over the last few years, a reduction on the unit costs has recently
been negotiated. The outsourced logistics company provides Jot with access to all tracking and
logistics data for products moving into Jots three warehouses and prepares reports on products
which have been shipped directly to customers.
The data concerning goods delivered to Jots three warehouses is transferred electronically to Jots
inventory control system. This database system generates despatch notes for all orders that are
fulfilled from each warehouse. The majority of customer deliveries are fulfilled from Jots
warehouses and not directly from the manufacturer. The despatch note data is transferred
electronically to the Finance Department in order to raise invoices to customers for goods
despatched. Information on customer orders which are delivered directly from the manufacturer is
transferred by the outsourced logistics company to the Finance Department, in order to raise
invoices.
Page 9
All product designs and product drawings, which include a detailed listing of all parts and
components, are prepared using a standard CAD / CAM IT system. This allows direct interface with
Jots
outsourced manufacturers. This ensures that each new product design can be transferred to the
appointed outsourced manufacturers IT systems when the product is ready for manufacture,
thereby eliminating any delays and confusion over the exact product specification and design.
Page 10
Appendix 1
Jots key personnel
Jon Grun Managing Director
Jon Grun, aged 48, is an engineer and has worked in a variety of large companies designing
electrical products. He always wanted to establish his own company and was inspired to start the Jot
toy company in 1998 when his children were young, as he felt there was a gap in the market for
innovative, educational toys. Jon Grun owns 30% of the shares in issue.
Tani Grun Finance and IT Director
Tani Grun, aged 44, is married to Jon Grun. She is a CIMA accountant and worked for some
large companies in senior roles before taking on the Finance Director role for Jot when it was
formed in
1998. Initially she worked part-time, but as the company has grown, she is finding the role more
challenging. She is considering recruiting a new person to take responsibility for IT for Jot as she
considers that outside experience is necessary to move the company forward. Currently, many of
Jots IT solutions are out-sourced. Tani Grun owns 30% of the shares in issue.
Alana Lotz Product Development Director
Alana Lotz, aged 44, has been Tani Gruns friend for many years and trained as a design engineer
and then worked for a global toy manufacturer for 12 years. Tani Grun recruited her when Jot was
established in 1998 and she has been a leading force in the expansion of the range of new toys and
in the recruitment and retention of Jots design team. She holds 20% of the shares in issue.
Sonja Rosik, Marketing Director
Sonja Rosik, aged 35, was recruited in 2009 when the role of Marketing Director was separated
from the previous role of Sales and Marketing Director. She has brought a wealth of new ideas and
dynamism to Jots marketing and has helped to expand Jots products to new geographical markets.
She does not own any shares.
Boris Hepp Sales Director
Boris Hepp, aged 42, joined Jot in 2003 when sales in Europe were starting to grow rapidly. He held
the joint role of Sales and Marketing Director until 2009, when the Board decided that he would be
best employed in concentrating on capturing sales in new markets. Boris Hepp had known Jon Grun
for many years before he joined Jot and was very impressed at how quickly the company had
grown. Boris Hepp holds 10% of the shares in issue which he purchased when he joined Jot in
2003.
Michael Werner Operations Director
Michael Werner, aged 50, is responsible for all operations, including management of outsourced
manufacturing, logistics and inventory control. All stages from the handover of each product design
through to delivery to Jots customers are under Michael Werners control. He joined Jot in 2008
from a large European based electrical company. He enjoys meeting the challenges faced by Jots
growth and also the freedom to manage operations without the large corporate culture that he found
frustrating. He holds 10% of the shares in issue which he purchased when he joined Jot in 2008.
Anna Veld - Licensing Director
Anna Veld, aged 37, has extensive knowledge of licensing agreements from her previous roles
working for a global film company which licensed its merchandising products and she has also
worked for a large toy manufacturer. She has been instrumental in increasing the number of licensed
products that Jot sells. She does not own any shares.
Viktor Mayer - HR manager
Viktor Mayer, aged 55, joined Jot in 2011 on a part-time basis to help with HR matters, which Jon
Grun used to manage with the help of an outsourced HR agency.
Page 11
Appendix 2
Extract from Jots Statement of Comprehensive Income,
Statement of Financial Position and Statement of Changes in Equity
Statement of Comprehensive Income
Year ended
31 December 2011
Year ended
31 December 2010
000
000
Revenue Cost of
sales Gross profit
Distribution costs
Administrative expenses
Operating profit
Finance income
Finance expense
Profit before tax
Tax expense (effective tax rate is 30%)
Profit for the period
551
13
213
453
12
201
351
105
264
79
246
185
000
As at
31 December 2010
000
750
542
4,065
21
000
721
470
3,173
29
4,628
5,378
40
90
802
Non-current liabilities
Long term loans
Current liabilities
Bank overdraft
Trade payables
Tax payables
Total current liabilities
Total equity and liabilities
8,371
5,615
2,756
478
1,825
As at
31 December 2011
000
Current assets
Inventory
Trade receivables
Cash and cash equivalents
Total current assets
Total assets
9,866
6,719
3,147
552
2,044
3,672
4,393
40
90
556
932
686
1,600
1,600
960
1,781
105
790
1,238
79
2,846
5,378
2,107
4,393
Note: Paid in share capital represents 40,000 shares of 1.00 each at 31 December 2011
Statement of Changes in Equity
For the year ended 31 December 2011
Balance at 31 December 2010
Profit
Dividends paid
Balance at 31 December 2011
Share
capital
000
40
40
Share
premium
000
90
90
Retained
earnings
000
556
246
802
Total
000
686
246
932
Appendix 3
Statement of Cash Flows
Year ended
31 December 2011
000
000
351
240
200
440
(72)
(892)
543
(421)
(200)
(79)
(279)
91
(269)
(269)
170
0
170
(8)
29
21
Appendix 4
Quarterly analysis of sales for 2009 to 2011
Qtr 1
Qtr 2
Qtr 3
Qtr 4
Jan Mar
Apr June
Jul
Sept
Oct Dec
Total
2011 Actual
Sales 000
%
988
10%
1,380
14%
2,490
25%
5,008
51%
9,866
100%
2010 Actual
Sales 000
%
730
9%
1,250
15%
2,360
28%
4,031
48%
8,371
100%
2009 Actual
Sales 000
%
548
8%
1,010
14%
2,025
28%
3,622
50%
7,205
100%
Appendix 5
Extracts from Jots 5 year plan
Actual
Forecast
Plan
Plan
Plan
Plan
2011
2012
2013
2014
2015
2016
9,866
11,568
13,124
14,791
16,840
19,260
31.9%
32.3%
32.6%
32.9%
33.2%
33.6%
551
694
820
961
1,137
1,348
Operating profit
5.6%
6.0%
6.2%
6.5%
6.8%
7.0%
706.3
868.5
977.5
1,102.0
1,240.0
1,405.0
Number of countries
products to be sold in
22
23
25
28
32
36
10
Revenue
000
Gross profit
000
'000
19,260
16,840
13,124
9,866
2011
14,791
11,568
2012
2013
2014
2015
2016
5 ye ar plan pe riod
1500
'000
Operating profit
1,348
1000
500
0
2011
2012
2013
2014
2015
2016
1,137
961
551
694
820