1uptoys_global toy industry

This case was written by Armand Smits and Wynand Bodewes from Maastricht University, with the support of Charlotte Butler, Research Consultant. It was made possible through the generous cooperation of 1uptoys. The case is intended for class discussion rather than to illustrate either effective or ineffective handling of management situations. The development of the case was enabled by a grant from the European Community (ENT/EFORCE). Sole responsibility of the case resides with the authors.

Copyright 2011 Maastricht University, Maastricht, the Netherlands.

1uptoys

Breaking into the global toy industry

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811-006-1

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One morning, late in December 2006, Ronald Mannak, founder of 1uptoys, a start-up

focused on developing next generation toys, sat at his desk in the firms headquarters in

Rotterdam, the Netherlands and began to open his mail.

A letter franked by SenterNovem1, a government agency that assessed whether or not

new ventures were eligible for a bank loan, caught his attention. Quickly he opened the

letter and started reading. The message was clear, and certainly not the one he had

expected.

He had first applied for a bank loan of 225,000, partly guaranteed by the Dutch state, at

the end of that summer after discussions with potential investors had run into a dead end.

The application had not run smoothly mainly, Mannak believed, due to communication

problems and bad luck. Eventually, in November 2006, SenterNovem had approved the

application but then Rabobank, the bank expected to grant the loan, had refused to

continue. In December, 1uptoys had managed to change banks to ABN-AMRO which,

provided that SenterNovem approved the switch, was willing to lend him the money.

Mannak had expected SenterNovem to quickly confirm the new arrangement. However,

as todays letter informed him, the change of banks meant that 1uptoys application must

be re-assessed, a process that would take at least a month.

The delay would not have been too disastrous if 1uptoys hadnt been sinking into an

increasingly precarious financial state since September that year. In effect, the advance

1uptoys had received from its licensee Silverlit, a Chinese toy manufacturer, to develop

mass-producible prototypes, was fast running out, and the second advance would only be

paid once the prototypes were ready, scheduled for April 2007. However, if there was no

money to pay the two developers their wages, the prototypes would not be completed. In

1 At the moment of writing, the activities of SenterNovem have been combined with activities of other

governmental agencies. The organization is now called Agentschap NL.

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November, when Mannak had only been able to pay them part of their salaries, the

teams productivity and morale had plummeted.

A company meeting was scheduled for the next day. Mannak had wanted to use this

meeting to announce that their money problems were over and discuss how they could

still make the April 2007 deadline. However, the letter from SenterNovem made him

reconsider. A serious decision about the future of 1uptoys would have to be made and

communicated in tomorrows meeting. His heart told him to ask his team for their

continued commitment so that they still met the April 2007 deadline. But his mind told

him this would be very unwelcome news. What should he do?

Starting 1uptoys

The idea On December 7th 2005, Mannak, then a doctoral student, had dinner with his friend

Patrick Grasso and family. Already fascinated by the concept of innovative toys Mannak,

together with several colleagues from Delft University of Technology (Delft UT) in the

Netherlands had been spending his evenings and weekends working on ideas such as a

golf-swing simulator and a Ninja Master; wearable sensors that mimicked ninja sounds.

As Mannak recalled: When I started a doctorate in September 2002, my research project

was a joint initiative between the departments of industrial design and electrical

engineering. Although I learned a lot and met many smart people it was quite boringso

I started developing products and ideas for start-ups in the field of toys and gadgets, such

as 1uptoys. Thats what I really liked doing.

The Grasso dinner took place during the Christmas holiday season, and Grassos kids had

been given some fairly simple air-drums as a present. The toy was based on sensors

inside the drumsticks that produced a sound when moved, so when the children hit the air

with the two drumsticks it produced a drumming noise. Remarkably, the sensors were

similar to the ones used in the application that mimicked ninja sounds. As Mannak

recalled: From my experience with the Ninja Master, I knew it should be possible to

develop far more complex sounds with these same sensors.

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The episode gave Mannak and Grasso the idea of developing improved air-drums that

could make multiple, far more realistic sounds. The two also realized that one instrument

did not make a band and during a later brainstorm session, the idea of an air-guitar was

born. Finally, inspired by the work Mannak was already doing on peer-to-peer networks

they came up with the idea of a virtual network, where like-minded people could get

together to develop and share music made by the newly-developed electronic music toys.

By the end of 2005, at a time when the world was not yet familiar with Wii and Guitar

Hero, they developed the idea of building a bridge between the toy and video-game

market and introduce next generation toys that were not just fun to play with, but also

had an educational dimension.

The company By early 2006, Mannak was convinced that putting electronic music toys on the market

would require his full time attention so he decided to drop out of his PhD course. As he

observed: Doing research and setting up a company was hard to combine. I realized I

had to make a choice. While both Grasso and Mannak were willing to invest several

thousand Euros in setting up a company, the latter realized that to make it a success he

would need to draw on all his Delft University technical and design knowledge, as well

as his contacts. However, although several of Mannaks former colleagues were willing

to help him realise his dream, they did not want to risk their money on the chance of a

single toy becoming a hit, so they stayed put in their jobs.

To reduce the risk, Mannak decided first to try and sell the idea and only then to develop

the actual products. As Mannak recalled: I thought it would be a good move to contact a

toy chain and try to get an introduction into the industry from them. Casper Klinkhamer,

the director of Toys R Us in the Netherlands which operated 17 large retail stores, was a

friend of someone I knew. I wangled an invitation to visit him at their Utrecht

headquarters and presented our plan, supported by the Ninja Master and several

schematic drawings though without a working prototype (Exhibit 1). Klinkhamer saw the

potential of the plan and advised us to contact the rising Hong Kong-based toy

manufacturer Silverlit (Exhibit 2). He put me in touch with John Boeyen, managing

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director of Spectron, Silverlits Dutch importer located in Deventer (Exhibit 3). Boeyen

was willing to introduce us to the Chinese company.

Developing prototypes In February 2006, Mannak pitched his ideas to Eddie Wong, marketing manager of

Silverlit, and some of Wongs colleagues at the large Nuremberg toy-fair. Again, his

audience was enthusiastic and said they would be interested in seeing a prototype that

could demonstrate every function working together in two months time, when Silverlit

again visited Europe to attend the Paris toy-fair. In February 2006, back in the

Netherlands, Mannak officially founded a company named 1uptoys. He and Grasso

invested a combined sum of 24,000 in the company, Mannak taking a 55% share.

Mannak had three months in which to develop the prototypes, something he could not do

alone within that time frame. Via contacts at Delft UT he managed to set up a small team

consisting of Joris Beets, a graduate student in industrial design engineering and Martin

Luxen, who had just graduated as a microelectronics engineer. Although a number of

technical challenges, such as a sound delay when the drumsticks were moved up and

down, were not resolved to their complete satisfaction, the team progressed steadily. By

the end of May 2006 a prototype of the air-drums was ready for showing to Silverlit in

Paris.

The licensing deal In June 2006, Silverlit and 1uptoys signed a licensing deal. This deal concerned the first

three 1uptoys products: air-drums, air-guitar, and boombox. Although 1uptoys wanted to

introduce the products in 2006, Silverlit did not believe this was feasible. Finally, the

introduction target date was set for August 2007. This meant that mass-producible

prototypes would have to be ready by April 2007. 1uptoys would develop the concepts

and the embedded software until the final prototypes were ready for mass production.

Silverlits part of the deal involved taking care of sourcing and engineering,

manufacturing, and supplying their network of local distributers in Europe, North and

South America, and Asia. These distributers would be responsible for promoting and

selling the products to local toy shops and retail chains.

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Silverlit would pay 1uptoys non-refundable advances of US$50,0002 for the air-guitar,

US$50,000 for the air-drums, and US$25,000 for the boombox. These advances would

be paid in three stages: the first when the contract was signed; the second when the

prototypes were ready for mass production and the last when the first shipments to shops

and retail stores took place. Silverlit would pay 1uptoys royalties once sales of the toys

had paid off the advance. Silverlit also guaranteed that a minimum of 100,000 units air-

drums, 100,000 air-guitar, and 50,000 units boombox would be shipped for sale.

Mannak tried to convince Silverlit to pay the advances earlier because under the

conditions of the deal, 1uptoys would receive most of the advance only after it had

invested in the development of mass-producible prototypes. However, he failed to

persuade them to alter the terms of what was the standard deal Silverlit offered toy

inventors, one they refused to deviate from. Since Mannak realized that Silverlits first

advance payment would run out within several months, his main priority at end of the

summer of 2006 was finding additional finance to fund the production of the prototypes.

The team

Ronald Mannak Mannak had always been interested in computers and computer games. Apart from the

technical aspects, he was also attracted by their usability and design. Whilst studying

Architecture at Delft UT he co-founded a web development company, Zappwerk, which

was sold to Total Design and renamed Total Active Media in 1999.

Between 1999 and 2002, Mannak worked as acting Chief Technology Officer for various

internet start-ups including NedCargo, Wannahaves, and TradingCars. As he

himself said, he was earning lots of money at that time.

After the internet bubble burst Mannak returned to Delft UT as a PhD student in the

department of industrial design. But alongside his research, during evening and 2 US$1 = 0.80 (average exchange rate for 2006)

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weekends, he was busy developing electronic toys. He involved various colleagues,

mostly fellow PhD students, in these projects on an ad-hoc basis.

Mannak was very good at networking. As Martin Luxen observed, I have never met

anyone who could match Ronald as a networker. Unfortunately his negotiation skills

were less well developed. As his start-up coach recalled, Ronald needed to improve

there. He wasnt that good when it came to negotiating contractshe never learned how

to do it, despite all his education and business experience.

Patrick Grasso Grasso was a part time business administration student at Erasmus University Rotterdam

from 1993 to 2007. During those years he spent most of his time setting up and managing

several companies such as De Beker, which sold commercial space on university

coffee-cups. He also worked as a business advisor and in 2006 became CEO of the public

limited company Royal Delft Porceleyne Fles. Grasso met Mannak at an innovation

event in 2002. Grasso did not work full-time for 1uptoys but provided ad-hoc advice on

marketing, sales, and new concepts. He received no management fee but owned 45% of

the business.

Martin Luxen Luxen was hired by 1uptoys in May 2006 as a full-time micro-electronics engineer,

following his graduation from The Hague University of Applied Sciences. Luxen had

studied electronics, computer, and data communication but had no prior experience of

either the toy industry or start-ups. He was responsible for developing the electronics for

the new musical toys.

Joris Beets Beets worked for 1uptoys while at Delft UT where from 2000-2006 he studied industrial

design engineering. He joined 1uptoys right after its creation and focused on designing

hardware interactions. Although an experienced drummer, like Luxen he had no prior

experience of the toy industry or start-ups.

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The global toy industry

Within the toy industry, as Mannak discovered, a distinction was made between

traditional toys, such as dolls and building sets, and more recent video games. These two

super-categories differed in size and had different growth rates (Exhibit 4). In the early

part of the 21st century the videogames segment was generally growing faster than the

traditional toys segment.

The global toy industry was characterised by highly concentrated seasonality, short

product life cycles, and intense competition on innovation and price.

Most toys were sold cyclically, with sales concentrated in a short selling-window. Sales

and volumes grew exponentially in the fourth quarter just before the Christmas holiday

season. November and December alone were responsible for nearly 45% of annual toy

sales (Exhibits 5, 6, 7).

Toy life cycles were relatively short. Although there were classic brands that had been

around for ages, such as Mattels Barbie, most individual toys did not last longer than

one or two years. This was due to fast-changing consumer preferences. Kids attention

spans had always been short and on the available evidence, were getting shorter. Since

play was mostly driven by stories and characters, successful toys were linked to fast-

changing fashions and fads. Demand for toys could move from moderate to skyrocketing

overnight, and then suddenly evaporate when the next hot product came onto the market.

Toy manufacturers competed on innovation and price. Innovation was critical because

95% of new toys did not live up to market expectations. However, the remaining 5%

could include hits that surpassed all expectations. For example, Furby, a hamster/owl-like

electronic toy creature, went through a period of being a must have toy following its

launch during the 1998 Christmas holiday season. Over its three years of original

production, over 40 million units were sold.

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Price competition was linked with the markets frequent-discount strategy. Falling prices

forced many toy manufacturers to balance the introduction of new concepts with the

production of more retro-toys (old-toys or toys based on old ideas) and toys based on

entertainment licences (toys based on movie characters or television series). Such

products had built-in brand awareness and required lower marketing investment than

completely new ones.

New products in the toy industry

The main activities in commercializing new products within the traditional toy segment

were product concept development, product development, manufacturing, distribution

and sales. Generally, different players were involved in the industry chain at each stage.

Important actors included Original Equipment Manufacturers (OEMs), retailers, and

independent inventors.

OEMs A group of (Western) OEMs represented familiar toy names including large players such

as Hasbro and Mattel, and smaller ones like the UKs Vivid and the Chinese-owned

Silverlit (Exhibit 8). Usually, OEMs carried their own brands and designs. These firms

operated worldwide and often covered large parts of the overall value chain. While some

of them operated their own factories, many no longer manufactured toys themselves but

outsourced this activity to so-called vendors. Since the manufacture of toys usually

required relatively simple manual assembly processes, outsourcing to low labour cost

countries was a common strategy. In 2005, about 80% of all toys imported by EU

countries from non-EU countries, which represented over half the products sold, were

produced in China (Exhibit 9).

As a result, Western companies largely lost their flexibility in supply. Production

quantities had to be specified months before the holiday season whilst long transportation

lead times (75 days was not an exception), customs delays, and communication barriers

all made supply management a challenge.

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The big OEMs, like Mattel, Namco Bandai, and Hasbro, benefited from economies of

scale, brand recognition and the resources necessary to secure licensing agreements.

Smaller players had to compete on new product development, hoping that they stumbled

on a hit. They often lacked the marketing clout necessary to secure shelf space and

market their products effectively through the major retail channels.

However, in an industry characterised by rapid change and relatively unpredictable

consumer preferences, small companies often had speed advantages in product

development that could make the difference between bankruptcy and a hit product. Brand

and market share seldom determined consumer preferences in the toy industry, especially

when the consumer was only six years old. Smaller companies were sometimes able to

make a big impact with a single hot product. The board game Cranium, developed and

launched by the small American firm Cranium, Inc in 1998, sold more copies during its

first week than Trivial Pursuit sold in its first year. By 2006, the game had sold almost

one million units and won several awards.

Retailers Retailers were mostly involved in product distribution and sales. They could broadly be

divided into toy specialists, such as Toys R Us and La Grande Rcr, and more general

retailers, such as Carrefour and Wal-Mart (Exhibit 10).

Consolidation had taken place among the retailers; in 1998 Wal-Mart, for example, sold

over 17% of all toys in the United States (Exhibit 11). The shifting channel structure and

related market power heavily favoured the large retailers.

Independent inventors Although many OEMs possessed an in-house product concept and development capacity,

many were also receptive to independent inventors who wanted to see their idea

commercialized but lacked the necessary financial and human resources to do so. In fact,

highly popular toys such as Furby, Aktion Man, Rubiks Cube and Beanie Babies were

all examples of toys created by independent inventors.

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Generally, an independent inventor licensed the idea to an OEM who paid the inventor a

royalty on every item sold. These payments usually ranged between 2-10% of the item's

ex-factory price.

Because product life cycles were so short, established toy OEMs were always on the

lookout for creative new ideas either from within or outside their company. Large OEMs

even had specific inventor affairs departments. Although the toy business was relatively

welcoming towards inventors, the increased introduction of retro-toys and use of

entertainment licenses, made it harder for independent inventors to co-operate with

OEMs. Several leading OEMs cut costs in several ways; by working solely with a select

group of inventors; by restricting their co-operation to agents and brokers who acted as

go-betweens, or by acquiring smaller OEMs with a proven product.

1uptoys ambitions

At its foundation, 1uptoys ambition was to become a leading inventor of next

generation, highly innovative electronic toys for children and gadget enthusiasts. Mannak

aimed to position the company between electronic toys and video games, since he

anticipated that as toys became increasingly based on complex electronics, opportunities

would emerge to fill the gap between independent inventors and the toy OEMs R&D

departments. 1uptoys believed that although toy companies had highly skilled R&D

units, these were unlikely to invent innovative toys. Independent toy inventors, by

contrast, had the creative freedom and flexibility to design highly innovative toys, but

often lacked the knowledge and resources to utilize the technology fully. Many of

Mannaks former university colleagues believed it would be too difficult for a start-up to

enter such a highly competitive industry but despite such critical reactions, Mannak had

great confidence in his idea. He saw 1uptoys as an inventive company, small enough to

explore innovative concepts yet large enough to prototype mass-producible technology.

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The product range

1uptoys first product was a line of musical toys that included virtual drums, a virtual

guitar and a boombox (Exhibit 12). It exemplified Mannaks view of the companys

innovations as a combination of existing toy concepts and academic research. So

although toy virtual drums already existed in the marketplace, their user had to press

buttons to select very simple drum sounds. Instead of buttons, 1uptoys used sensor

technology that allowed for more complex sounds. These sensors measured vibration and

distance and were used in the academic world for basic motion recognition.

Sales projections

As an independent company, 1uptoys planned to supply multiple toy OEMs, licensing

toy concepts to them on a royalty per unit basis. However, while licensing would provide

1uptoys with cash flow and a financial basis at the start, in the future Mannak foresaw a

gradual transition of 1uptoys business model from a concept-generation only company

to an organization that conceptualized, developed, produced and marketed next

generation toys.

The licensing deal with Silverlit specified that royalties would be 7% ex-factory selling

price for the air-guitar and air-drum, and 3.5% of the ex-factory price for the boombox.

Given these numbers, 1uptoys anticipated royalty payments from Silverlit of between

US$0.42 and US$0.53 per shipped air-drum and air-guitar, and between US$0.21 and

US$0.26 per shipped boombox. 1uptoys expected that, in total, they could ship 500,000

toys in 2007. For 2008, on the assumption that additional products would be introduced,

this figure was expected to climb to a total of about 5,750,000 toys (Exhibit 13).

Cost projections

1uptoys foresaw that salaries would form the largest part of the companys operational

expenses. Although Mannak had some knowledge of the technical aspects involved in

producing toys, he estimated that initially he would need a full-time software engineer,

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and a graduate student specialized in hardware design. This team, he believed, would be

able to develop the first three products and new concepts in 2006. To continue operations

in 2007 and beyond, 1uptoys planned further recruitment (Exhibit 14).

The company budgeted for gross salaries ranging from 1,800 to 3,500 per month, an

average early-career salary in the Netherlands. Graduate students would receive 400 per

month up to a maximum of 6 months per student. Mannak would receive a management

fee of 4,000 per month, which was the minimum fee for directors of public limited

companies required by the Dutch tax authorities.

During its first few months of existence 1uptoys was able to use city office space for free.

In May 2006, Mannak began negotiations with the city of Rotterdam for financial

support in the form of two years rent and interior and equipment for an office space, to

be shared with a group of small technical and creative companies. Further cost

projections for the first two years covered office and communication equipment,

computer equipment, legal and accounting, and travel (Exhibit 15).

Financing 1uptoys

Trying to find investors From June 2006 onwards, Mannak tried to arrange additional financing. 1uptoys,

Mannak believed, would be refused a bank loan because there was no collateral to offer.

Therefore he focused on trying to persuade potential investors to co-invest in 1uptoys.

However this proved easier said than done.

Potential investors saw significant risks in an industry characterized by fads, high

competition, short product life cycles and the problems involved in coordinating with

Asian manufacturers. As one potential investor recalled, It was very hard for me to form

a view of potential toy sales. They seemed to me rather trivial products, whose sales were

influenced by fads so they came and went in no-time just like the fashion industry.

Another saw risks in working with an Asian partner: Mannak had found a potential

Chinese partner, he observed, but this nearly always leads to communication

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difficulties and misunderstandings over contracts, manufacturing and delivery issues. I

thought there would have been far less risk if he had found a European partner.

In the summer of 2006, a funding offer came from an unexpected source. Joop Boeyen,

father of John and founder and co-director of Spectron (Silverlits Dutch importer)

offered to invest 150,000 in 1uptoys in return for a 30% share in the company. Joop

Boeyen had been in the toy industry for over 20 years and sensed that 1uptoys products

could become a hit. At first Mannak thought the offer ridiculous, and that a 10%

maximum share would be more realistic: In silicon valley, 10% would be very

reasonable for an investment of 150,000 seed capital, he commented. However, given

his lack of progress in attracting investors he was willing to hear what Joop Boeyen had

to say. Unfortunately for Mannak, Boeyen senior and junior failed to agree about

Spectrons strategic direction and eventually decided not to invest in 1uptoys.

The bank loan Disillusioned, Mannak turned to Bart Blokhuis, the start-up coach assigned to 1uptoys by

Stichting Nieuwe Bedrijvigheid Rotterdam, a foundation for stimulating high impact

entrepreneurship in the city. It was almost September and the first advance payment of

Silverlit was fast running out. Mannak had to find money from somewhere to pay Luxen

and Beets. If they decided to quit because they had not been paid, the prototypes would

not be finished in time and the toys would not be on the market in time for the 2007

Christmas holiday season; or in the worst case nightmare scenario - not at all

Blokhuis advised Mannak to apply for a bank loan under a new government scheme to

stimulate banks to grant loans to small and medium enterprises. Once a credit application

had been accepted, the state guaranteed the pay-back of a percentage of the bank loan,

making it more attractive for banks to lend money to entrepreneurs. An important

condition, however, was that the entrepreneur involved had to guarantee to pay back the

remaining percentage of the bank loan (Exhibit 16).

Mannak took Blokhuis advice and applied for a state guaranteed bank loan of 225,000.

In September 2006, backed by Rabobank Rotterdam, he submitted his business plan for

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assessment to SenterNovem, the government agency involved in the new scheme.

Although Rabobank had assured Mannak the assessment would only be a formality,

SenterNovem rejected the application. Meanwhile, money was running out and Mannak

had paid last months salaries from his own account.

In an attempt to reverse the decision, Mannak made an appointment with SenterNovem

in The Hague to discuss his application. He was told that his application had been

rejected because the assessor thought Mannak had not put enough effort into searching

for investors. As the assessor explained, A government-backed bank loan should be

used as a supplement to money brought in by investors, not as a substitute. In addition,

it emerged that SenterNovem did not really understand 1uptoys product concepts.

During the meeting, Mannak was able to persuade SenterNovem to reverse its decision

and accept the application. However, the amount of money Mannak had to guarantee was

raised from 40,000 to 80,000.

Optimistically, Mannak returned to Rotterdam only to suffer a further shock when

Rabobank informed him that because his initial application had been rejected, it was no

longer prepared to grant him the loan. After getting over this disappointment and on the

advice of Blokhuis, Mannak took his business plan to ABN-AMRO bank, which agreed

to grant Mannak the state-backed loan.

But by then it was December 2006 and morale among the two developers, and hence

productivity, was at an all time low. In November, there was only enough money to pay

50% of their salaries and 1uptoys was seriously behind schedule. Meeting the April 2007

deadline was becoming more challenging by the day. Backed by ABN-AMRO Mannak

re-submitted the application to SenterNovem, which then had to re-approve it because a

different bank was involved. However, Mannak had regained his optimism and

confidence: SenterNovem had already approved his plans when he was working with

Rabobank. He thought it would take a week at most for the application to be approved.

In the belief that 1uptoyss money problems would soon be history he called a team

meeting just before Christmas to discuss how they could still meet the April 2007

15

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deadline. Mannak was already thinking about using the loan money to hire additional

engineers.

But then the day before the meeting Mannak received the letter from SenterNovem

informing him that the application must be re-assessed, a process that would take at least

a month. Distressed and angry, Mannak saw the April 2007 deadline receding even

further into the future.

He now had no option but to take a serious decision about the companys future, and

make it before tomorrow so he could announce it in the team meeting.

On the positive side, there were several signs that the products would become a success:

interest from Silverlit and Spectron both experts in the toy industry; the approval of

SenterNovem, and the willingness of ABN-AMRO to grant the loan. However, if

everyone wanted out, then this was the time to do it, since their total investment only

amounted to several tens of thousand Euros.

If 2007 was a disaster because they had to delay product introduction until 2008 and sales

were lower than expected, it would be difficult for the company to survive. If that

happened, 1uptoys could go bankrupt leaving Mannak with a personal debt of 80,000.

His heart told him to ask for commitment from his team to continue and try to make the

April 2007 deadline. But was this the right thing to do in the circumstances.?

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Exhibit 1

Schematic drawing first product concepts

Source: 1uptoys

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Exhibit 2

Silverlit

www.silverlit.com

Since its establishment in 1977, Silverlit has been committed to designing and

manufacturing innovative and quality toys for kids of all ages. In 2006, the organization,

that started as a Hong Kong-based company, also included manufacturing facilities in

China. Its integrated operation included product design, tooling, engineering and

production and was located in a 70,000 square meters factory in Dongguan, China, a 1.5

hours drive from Hong Kong. Silverlit had about 3,000 employees and a turnover of

about US$270 million. North and South America were its key markets; 50% of its

turnover came from these regions. The remaining 50% came from Europe and Asia.

Within Europe, important countries for Silverlit were the United Kingdom, Germany,

and France.

Silverlit was one of the first groups of toy manufacturers to be awarded a Certificate by

the Import and Export Commodity Inspection Bureau in China. This award was given to

those toy manufacturers that had met the safety standards laid down by the Chinese

authorities. In 1994, Silverlit received an ISO Certificate and became the first toy

manufacturer in Asia to attain this quality recognition.

Silverlit's corporate mission has been continuous product innovation. It was felt that this

was the only way the company could survive and grow in the ultra-competitive toy

business. The company had experience with both licensing ideas from independent toy

inventors and taking entertainment licenses.

Source: Based mainly on about us section of Silverlits website

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Exhibit 3

Spectron

www.spectronsales.nl

Since its establishment in 1982, Spectron has been dedicated to the import and

distribution of products of several worldwide operating toy and gadget manufactures in

the Netherlands, Belgium, and Luxembourg. In 2006, Spectrons head office and

warehouses were based in Deventer, the Netherlands. Additionally the company had a

sales office in Belgium.

Spectron supplied major toy chains, buying groups, department stores, hypermarkets,

mail-order companies, multi-media-stores, hobby shops, gadget stores, and on-line

retailers.

The company had a sales staff, a help desk, a repair department and a public relations

manager. In total, the company consisted of 12 employees. The sales staff took care of

selling to outlets mentioned above. The helpdesk took care of toy-related questions from

both retailers and customers. The repair department took care of all returns and provided

the necessary service on some products. Finally, the public relations manager was

responsible for advertising and contacts with the trade media and journals. Spectron was

founded by Joop Boeyen, who in 2006 was still involved in the company. The Managing

Director of Spectron was Joops 34 year-old son, John.

Source: Based mainly on about us section of Spectrons website

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Exhibit 4

Overview of the global toy industry 2002 2003 2004 2005 2006Traditional toys (market size million US$) 55,000 60,000 61,200 63,700 67,000Traditional toys (growth rate %) 9.1 2.0 4.1 5.2Videogames (market size million US$) 25,000 27,000 31,500 34,000 37,500Videogames (growth rate %) 7.4 14.3 7.4 9.3

Source: NPD Group market research agency

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Exhibit 5

Overview of global yearly toy sales

27.0%

17.8%

8.2%

5.1%

5.5%

5.8%

5.6%

5.3%

5.5%

5.4%

4.5%

4.3%

December

November

October

September

August

July

June

May

April

March

February

January


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Exhibit 6

Cyclic behaviour toy OEMs

Source: Mattel analyst presentation, 2009

Q1

Year Y Christmas

holiday season

procurement

Q4 Q3 Q3 Q2 Q2 Q1 Q4

Start year Y Christmas

holiday season products

introduction to retailers

Year Y Christmas

holiday season

development

Year Y Christmas

holiday season selling

Year X Year Y

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Exhibit 7

Inventory and accounts receivable toy OEMs

Source: Mattel analyst presentation, 2009

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Exhibit 8

Characteristics of top 6 toy OEMs and several smaller ones (2005)

Firm Country of origin

Revenues (million US$)

Market share (%)^

# of employees (Dec. 31)+

Important product lines

(1) Mattel United States

5,179 8.1 26,000 Barbie Hot Wheels Matchbox Fisher-Price Games and

puzzles (2) Namco Bandai

Japan 3,837 6.0 7,000 Power Rangers Ben10 Tamagotchi Tekken

(videogame) RidgeRacer

(videogame)(3) Hasbro United

States 3,087 4.8 5,900 Playskool

ActionMan Furby Monopoly TrivialPursuit

(4) MGA Entertainment

United States

2,000 3.1 1,500 Bratz LittleDikes

(5) Lego Denmark 1,288 2.0 5,000 A line of building sets

(6) Takara Japan 1,000 1.6 1,768 Microman Battle Beasts

(x) V tech China

(Hong Kong)

281 0.4 7,020 A line of electronic learning toys

(y) Silverlit China (Hong Kong)

270 0.4 3,000 Picoo Z

(z) Vivid Imaginations

United Kingdom

248 0.4 100 Timmy Time Anymagic

^ Global traditional toy market; lots of smaller players share the rest of the market. + Large differences may be based on the extent to which manufacturing employees are Included. Sources: Annual reports and websites

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Exhibit 9

Toy imports from non EU-countries into the EU Country Imports (%)

Year 2003 2004 2005 Asia / Oceania 93.2 92.0 94.6 China 78.6 78.2 79.4 Japan 6.2 4.0 7.3 Hong Kong 1.8 2.4 2.1 Taiwan 1.2 1.3 1.5 Thailand 1.3 1.3 1.3 Other European Countries 3.3 3.7 2.5 Switzerland 1.7 2.2 1.5 Romania 1.2 1.1 0.7 Bulgaria 0.2 0.2 0.2 Norway 0.1 0.1 0.1 North America 2.7 3.3 2.1 United States 2.3 2.8 1.9 Canada 0.5 0.4 0.2 Middle East Countries 0.4 0.5 0.5 Central and South America

0.2 0.3 0.2

CIS 0.1 0.1 0.1 Others 0.1 0.2 0.1 TOTAL 100.0 100.0 100.0 Traditional toys accounted for 82.8% in 2005 compared to 87% in 2004 and 78,6% in 2003 Video games accounted for 17,2% in 2005 compared to 13% in 2004 and 21.4% in 2003 Sources: NPD Group, Toy Industry Association, Toy Industries of Europe

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Exhibit 10

Distribution channel breakdown (%) Europe and US

Europe % US % 2003 2004 2005 2003 Toy specialists 36 37 36 25 Mass merchant/Discount stores 24 24 24 51 General merchandise 13 13 13 09 Department stores 07 07 07 03 Mail order 05 05 04 04 All other 15 15 16 08 Traditional toys Sources: NPD Group, Toy Industry Association, Toy Industries of Europe Distribution channels are defined as follows: Toy Specialists: Toy chains and toy shops, i.e. Toys R Us, La Grande Rcr, Toys Center. Mass merchant/Discount stores: Hypermarkets, Discounters, i.e. Carrefour, Auchan, Tesco, Wal-Mart, K-Mart. General Merchandise: Urban non-toys specialists (Book shops, CD shops, small generalists, small groceries) i.e. Woolworths. Department Stores: Stores such as El Corte Ingles, Karstadt, Galeries Lafayettes. Mail order: Include companies such as Quelle, La Redoute. All Other: Non-toy specialists, Catalogue showrooms, Markets, Dedicated internet shops Others, i.e. Argos, Go Sport.

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Exhibit 11

Top 10 retailers toy industry

(US$ share, US, 1998)

1.1%

1.1%

1.2%

1.3%

1.6%

4.9%

6.9%

8.0%

16.8%

17.4%

Sears

Hills

Meijer

Ames

J.C.Penny

KB Toys/Toy works

Target

Kmart

Toys R Us

Wal-Mart


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Exhibit 12

1uptoys first products 1uptoys initial products were two motion-controlled virtual toy instruments and a

boombox. The products were planned to be announced at the Nurnberg Toy Fair

(Germany) in February 2007.

Air-drums In the air-drums product, sensors placed in the drumsticks sensed when certain spots in

the air were hit and accordingly, made a drumming sound. The product came with a base

station that could be clipped to the belt. The product could be connected to an iPod or PC

so the user could drum along to songs. The air-drums had three built-in play-along

melodies and four different drum kits. For the Netherlands, the product retailed at 29.95

including VAT.

Air-guitar The air-guitar allowed for playing 48 tones and 48 chords and could be played without

prior musical experience. The product came with a base station that could be clipped to

the belt. The product could be connected to an iPod or PC to play along with songs. The

air-guitar had three built-in, play-along melodies and four different guitar sounds,

including distorted electric and bass guitar. For the Netherlands the product retailed at

29.95 including VAT.

Boombox The internet ready boombox allowed for mixing and recording songs played with the air-

drums and air-guitar. It would also be possible to record voices by using its microphone.

Using a USB connection, self-composed songs could be converted to MP3 or published

on a specific website to be developed by 1uptoys. The boombox retail price was expected

to be in a similar range to the one for the air-drums and air-guitar.

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The air-drums and air-guitar in action (photo: 1uptoys)

See http://www.youtube.com/watch?v=3YZ6M0Ki29I&feature=related for a YouTube

demo of one of the first prototypes of the air-drums.

Other product ideas and concepts (business plan 2006) 1uptoys had several other ideas and concepts, all using low-end and mass-producible

electronics, to be developed after the market introduction of the music toys. Two

examples were:

C.A.R.R.s: Hybrid radio-controlled and line-following toy cars and the infrastructure for

building race-tracks. The cars would react to stickers placed on the roads and adjust their

speed to the surface when using CoolCars floor elements.

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WhizzGirl: High-tech toys for computer-savvy girls, such as a journal that unlocked

when the owners fingerprint was recognized. The concept was in development in co-

operation with the Institute for Micro-electronics and Submicron-technology of Delft

University of Technology.

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Exhibit 13

Sales projections (units) 2007 2008 2009Air-drums 250,000 2,000,000 1,000,000Air-guitar 200,000 2,000,000 1,000,000Boombox 50,000 500,000 250,000Product X 250,000 500,000Product Y 500,000 1,000,000Product Z 500,000 1,000,000 Source: 1uptoys business plan, 2006

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Exhibit 14

Employee planning

2006 2007 2008 2009Hardware engineer 1 2 2.5 3Embedded software engineer

1 2 2 3

Internet engineer 0 0.2 2 2Scientist 0 0.2 1 1Marketing & sales 0 0 1 2Support & evangelisation 0 0.5 1 1.5User experience and usability

0 0.5 0.5 1.5

Design & concept 0 0.2 2 3QA & sourcing 0 0 0 1Management support 0 0 1 1Management 1 1 2 2TOTAL 3 6.6 15 21

Source: 1uptoys business plan, 2006

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Exhibit 15

Projected start-up expenses 1uptoys ()

20061 2007Salaries 72,000 140,000Rent 6,500 11,000Office and communication 11,000 3,000Computer equipment 14,500 2,000Legal and accounting 5,000 4,000Travel 7,000 12,000Miscellaneous 7,500 10,000TOTAL 123,500 182,0001 From February 5, 2006

Source: 1uptoys business plan, 2006

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Exhibit 16

Government scheme The government scheme (named BBMKB) was focused on both start-ups and established

small and medium enterprises unable to offer enough in the way of security to get a bank

loan.

Conditions An R&D statement, which was granted if the enterprise met the conditions of the R&D support law. In general, this review took about one month.

Payback term A maximum of twelve years, starting after the credit agreement took effect.

Repayment First instalment not later than the first day of the fourteenth quarter after the credit agreement took effect.

Postponement Twice up to a maximum of four continuous quarters.

Source: BBMKB brochure, translated from Dutch into English by the authors

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1uptoys_global toy industry

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