<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
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OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9599
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LEWIS GALOOB TOYS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-1716574
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organizaton)
500 Forbes Boulevard, South San Francisco, California 94080
---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 952-1678
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Former name, former address and former fiscal year,
if changed since last report
Indicate by check 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 X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Common stock, par value $.01, 10,104,589 as of September 30, 1994.
<PAGE> 2
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
- --------------------------------
Item 1 Page
- Condensed Consolidated Balance Sheets 1
- Condensed Consolidated Statements of Operations 2
- Condensed Consolidated Statements of Cash Flows 3
- Notes to Condensed Consolidated Financial Statements 4-6
Item 2
- Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-12
PART II - OTHER INFORMATION
- -----------------------------
Item 1
- Legal Proceedings 13-14
Item 3
- Defaults Upon Senior Securities 14
Item 6
- Exhibits and Reports on Form 8-K 14
SIGNATURE 15
- ---------
</TABLE>
<PAGE> 3
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Audited)
Sept 30 Sept 30 December 31
ASSETS 1994 1993 1993
- ------ ---------- ---------- -----------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $ 3,094 $ 201 $ 2,325
Accounts receivable 55,050 34,953 33,383
Inventories 14,356 14,628 12,979
Tooling and related costs 5,594 3,932 5,020
Prepaid expenses and other assets 5,907 7,494 7,341
------- ------- -------
TOTAL CURRENT ASSETS 84,001 61,208 61,048
LAND, BUILDING AND EQUIPMENT, NET 8,428 8,788 8,562
OTHER ASSETS 1,224 367 1,395
------- ------- -------
$93,653 $70,363 $71,005
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable $ 5,653 $15,561 $ -
Accounts payable 12,569 9,184 10,834
Accrued expenses 17,829 12,729 18,916
Income taxes payable 562 814 282
Current portion of long-term debt 204 199 203
------- ------- -------
TOTAL CURRENT LIABILITIES $36,817 $38,487 $30,235
LONG-TERM DEBT 18,258 4,658 18,608
SHAREHOLDERS' EQUITY:
Preferred stock
Authorized 1,000,000 shares
Issued and outstanding 183,950
shares of $17 Convertible
Exchangeable Preferred Stock
at $200 liquidation value
per share 36,790 36,790 36,790
Common stock, par value $.01 per share
Authorized 50,000,000 shares
Issued and outstanding 10,104,589
shares, 9,547,057 shares and
9,559,357 shares 101 95 96
Additional paid-in capital 31,726 26,724 27,293
Retained earnings (deficit) (29,591) (35,969) (41,596)
Cumulative translation adjustment (448) (422) (421)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 38,578 27,218 22,162
------- ------- -------
$93,653 $70,363 $71,005
======= ======= =======
</TABLE>
The "Notes to Condensed Consolidated Financial Statements" are an integral part
of these statements.
1
<PAGE> 4
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30 Sept 30
----------------------- -----------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $50,273 $37,692 $114,227 $91,802
Costs of products sold 30,336 23,427 69,017 57,231
------- ------- -------- -------
Gross margin $19,937 $14,265 $ 45,210 $34,571
Operating expenses:
Advertising and promotion 7,267 5,796 19,483 13,771
Other selling and administrative 6,142 6,502 17,468 19,352
Research and development 1,930 1,889 6,470 5,677
------- ------- -------- -------
Total operating expenses 15,339 14,187 43,421 38,800
------- ------- -------- -------
Earnings (loss) from operations 4,598 78 1,789 (4,229)
Net proceeds from Nintendo award - - 12,124 -
Interest expense (597) (495) (1,730) (1,218)
Other income (expense), net 71 28 308 129
------- ------- -------- -------
Earnings (loss) before
income taxes 4,072 (389) 12,491 (5,318)
Provision for income taxes 163 - 477 -
------- ------- -------- -------
Net earnings (loss) 3,909 (389) 12,014 (5,318)
Preferred stock dividends
in arrears 781 781 2,345 2,345
------- ------- -------- -------
Net earnings (loss) applicable
to common shares $ 3,128 $(1,170) $ 9,669 $(7,663)
======= ======= ======== =======
Common shares and common share
equivalents outstanding - average 10,363 9,547 10,047 9,546
Net earnings (loss) per common share:
Primary $ 0.30 $ (0.12) $ 0.96 $ (0.80)
Fully diluted $ 0.29 $ (0.12) $ 0.91 $ (0.80)
</TABLE>
The "Notes to Condensed Consolidated Financial Statements" are an integral part
of these statements.
2
<PAGE> 5
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended Sept 30
-------------------------
1994 1993
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings (loss) $12,014 $(5,318)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation 486 515
Changes in assets and liabilities:
Accounts receivable (21,667) 953
Inventories (1,377) (958)
Tooling and related costs (574) (1,124)
Prepaid expenses and other assets 1,605 198
Accounts payable 1,735 (200)
Accrued expenses 2,756 (5,143)
Income taxes payable 280 (17)
------- -------
Net cash provided by (used in) operating
activities (4,742) (11,094)
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and
equipment, net (352) (141)
------- -------
Net cash provided by (used in) investing
activities (352) (141)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings under notes payable 5,653 9,863
Repayments under long-term debt agreements (146) (145)
Proceeds from issuance of common stock 382 299
Other, net (26) (10)
------- -------
Net cash provided by (used in) financing
activities 5,863 10,007
------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 769 (1,228)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,325 1,429
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,094 $ 201
======= =======
</TABLE>
Supplemental disclosure of non-cash activity:
The Company issued 449,732 shares of common stock in connection with the
termination of the 1992 Senior Management Stock Option Plan. (See Note E)
The "Notes to Condensed Consolidated Financial Statements" are an integral part
of these statements.
3
<PAGE> 6
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994
(Unaudited)
NOTE A - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets as of September 30, 1994 and 1993 and
the condensed consolidated statements of operations for the three and nine
month periods ended September 30, 1994 and 1993 and the condensed consolidated
statements of cash flows for the nine month periods ended September 30, 1994
and 1993 have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
The results of operations for the three and nine month periods ended September
30, 1994 and 1993 are not necessarily indicative of the operating results for
the full year.
NOTE B - CREDIT AGREEMENT
The Company is party to a loan and security agreement (the "Loan Agreement")
with Congress Financial Corporation (Central) (the "Lender") which makes
available to the Company through March 31, 1995 a line of credit up to $30
million, with provisions to increase to $40 million if an acquisition is made.
Borrowing availability is determined by a formula based on qualified assets.
The current interest rate is at prime rate plus 2%; the rate will increase by
0.25% if the increase in the credit occurs. In consideration for entering into
the Loan Agreement, the Company has paid a $375,000 fee. The Company has also
agreed to pay an unused line fee of 0.25% and certain management fees. The
deferred loan fee is included in other assets and is being amortized using a
straight-line method over the term of the loan. The Loan Agreement provides
that the preferred dividend payments may not be made without the prior consent
of the Lender.
4
<PAGE> 7
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994
(Unaudited)
NOTE C - INVENTORIES
(in thousands)
<TABLE>
<CAPTION>
September 30 December 31
---------------------- -----------
1994 1993 1993
---- ---- ----
<S> <C> <C> <C>
Finished goods $11,337 $ 9,360 $10,363
Raw materials and parts 3,019 5,268 2,616
------- ------- -------
$14,356 $14,628 $12,979
======= ======= =======
</TABLE>
NOTE D - INCOME TAXES
The income tax provision reflects the quarterly application of the estimated
annual rate based on projected full year earnings and includes the affect of
the utilization of net operating loss carryforwards.
In 1993, the Company retroactively adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Adoption of SFAS
109 had no effect on the financial statements.
At December 31, 1993, the Company had federal and California net operating loss
carryforwards for income tax purposes of approximately $31,700,000 and
$17,000,000, respectively. The federal and California carryforwards expire in
different years through the year 2008 and 1998, respectively. The Company also
has federal minimum tax credit carryforwards of approximately $537,000 that are
allowed to be carried forward indefinitely and federal research and development
credits of approximately $765,000, which will expire in different years through
the year 2003. If certain substantial changes in the Company's ownership
should occur, there would be an annual limitation on the amount of operating
loss carryforwards which may be utilized.
5
<PAGE> 8
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994
(Unaudited)
NOTE E - TERMINATION OF 1992 SENIOR MANAGEMENT STOCK OPTION PLAN
On January 26, 1994, the Board of Directors of the Company terminated the 1992
Senior Management Stock Option Plan (the "1992 Plan"), subject to shareholder
approval. In connection with the termination of the 1992 Plan, the Company
recorded an accrued liability on its balance sheet at December 31, 1993 in the
amount of $4,046,000 and recorded a non-recurring, non-cash charge to earnings.
In addition, in connection with the termination of the 1992 Plan, the Company
granted an aggregate of 449,732 shares of common stock to the holders of the
cancelled options, also subject to shareholder approval. In the second quarter
of 1994, subsequent to the approval by the shareholders, the Company eliminated
the accrued liability of $4,046,000 and increased shareholders' equity by the
same amount for the common stock issued.
NOTE F - LEGAL PROCEEDINGS
The current status of litigation is described in Part II, Item 1, herein.
6
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following table sets forth for the periods indicated the percentage
relationships between revenues and certain expense and earnings items:
<TABLE>
<CAPTION>
Percentage of Net Revenues
--------------------------
Three Nine
Months Ended Months Ended
Sept 30 Sept 30
--------------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Costs of products sold 60.3 62.2 60.4 62.3
----- ----- ----- -----
Gross margin 39.7 37.8 39.6 37.7
Advertising and promotion 14.5 15.4 17.0 15.0
Other selling and
administrative 12.2 17.2 15.3 21.1
Research and development 3.8 5.0 5.7 6.2
----- ----- ----- -----
Earnings (loss) from
operations 9.2 0.2 1.6 (4.6)
Net proceeds from Nintendo
award - - 10.6 -
Interest expense (1.2) (1.3) (1.5) (1.3)
Other income (expense), net 0.1 0.1 0.2 0.1
Provision for income taxes (0.3) - (0.4) -
------ ------- ------ -------
Net earnings (loss) 7.8% (1.0)% 10.5% (5.8)%
====== ======= ====== =======
</TABLE>
1994 Compared to 1993
Net revenues of $50.3 million in the third quarter of 1994 represented a 33%
increase from net revenues of $37.7 million in the third quarter of 1993.
Micro Machines(R) and Z-Bots(R) sales were $31.1 million in the third quarter
of 1994 as compared to $24.4 million in the same period in 1993, a 28%
increase. All segments of the Micro Machines line continued to generate
significant revenues in the third quarter. The space segment featuring Star
Trek(R) and Star Wars(R) was particularly strong. A new segment, Micro
Machines Power Rangers(R), will begin to ship in the fourth quarter of 1994.
7
<PAGE> 10
LEWIS GALOOB TOYS, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
Biker Mice From Mars(TM) sales were $14.4 million in the third quarter of 1994.
This product line was introduced in late 1993. In September 1994, the Biker
Mice From Mars television show went to five days per week airing from its
previous one day per week. Ratings since that time have been lower than
previously achieved and a smaller than anticipated increase in retail sales in
the U.S. market has occurred. However, demand has been stronger in most
European markets. Overall, the Company still expects this product line to
achieve its 1994 worldwide revenue goal. As a result of consumer demand falling
short of the Company's expectations for the U.S. in 1994, the Company has
lowered its expectations for domestic Biker Mice sales in 1995.
Game Genie(TM) sales were $1.4 million in the third quarter of 1994 as compared
to $5.3 million in the same period in 1993. This decrease reflected the normal
maturity cycle for such products and this trend is expected to continue.
Net revenues of $114.2 million in the nine months ended September 30, 1994
represented a 24% increase from net revenues of $91.8 million in the same
period in 1993. Micro Machines and Z-Bots sales were $65.2 million in the
first nine months of 1994 as compared to $50.3 million in the same period in
1993. This increase reflects the same factors as noted for the third quarter
increase along with a one-time Z-Bot promotion program. Biker Mice From Mars
sales were $33.3 million in the first nine months of 1994. The Biker Mice From
Mars sales trends are noted in the third quarter results.
Game Genie sales were $3.3 million in the first nine months of 1994 as compared
to $20.3 million in the same period in 1993. The decreasing sales trend for
these products is expected to continue.
Gross margins were $19.9 million in the third quarter of 1994 as compared to
$14.3 million in the same period in 1993. Approximately $4.7 million of the
increase was due to higher sales volume. The balance of the increase, $0.9
million, was due to a higher gross margin rate. The gross margin rate improved
to 39.7% in 1994 from 37.8% in 1993. This increase was mainly due to the
product sales mix and associated higher margins. This increase was partially
offset by the increase in foreign sales as a percentage of third quarter
worldwide revenues. The Company's gross margin on foreign sales is
significantly lower than domestic sales because foreign prices are lower as the
customer is responsible for the cost of importing and promoting the product.
8
<PAGE> 11
LEWIS GALOOB TOYS, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
Gross margins were $45.2 million in the nine month period ended September 30,
1994 as compared to $34.6 million in the same period in 1993. Approximately
$8.4 million was due to higher sales volume and $2.2 million was due to a
higher gross margin rate. The gross margin rate improved to 39.6% in 1994 from
37.7% in 1993. This improvement was mainly due to an increase in domestic
sales as a percentage of worldwide revenues and also due to product mix. This
increase was partially offset by the fixed costs included in the cost of sales,
primarily the amortization of tooling costs, which were a higher percentage of
net revenues as compared to 1993.
Advertising and promotion expenses were $7.3 million in the third quarter of
1994 as compared to $5.8 million in the same period in 1993. In the nine month
period ended September 30, these expenses were $19.5 million in 1994 as
compared to $13.8 million in 1993. The higher expenses were a result of an
increase in planned television advertising expense domestically in connection
with the Company's expanded product lines. Advertising and promotion expenses
as a percentage of net revenues in the nine month period ended September 30
were 17.0% in 1994 as compared to 15.0% in 1993.
Other selling and administrative expenses were $6.1 million in the third
quarter of 1994 as compared to $6.5 million in the same period in 1993. In the
nine month period ended September 30, these expenses were $17.5 million in 1994
as compared to $19.4 million in 1993. Both the three and nine month decreases
were due mainly to lower sales support costs and lower legal expenses. Other
selling and administrative expenses as a percentage in net revenues in the nine
month period ended September 30 were 15.3% in 1994 as compared to 21.1% in
1993.
Research and development expenses were approximately equal to the prior year's
expenses for the third quarter. In the nine month period ended September 30,
these expenses were $6.5 million in 1994 as compared to $5.7 million in 1993.
Research and development expenses as a percent of revenues decreased to 5.7% in
the nine month period ended September 30, 1994 from 6.2% in the same period in
1993.
Net proceeds from the Nintendo award represents the receipt, net of associated
legal and related expenses, of the Company's share of proceeds from the
litigation with Nintendo of America, Inc. (See Part II, Item I. Legal
Proceedings.)
9
<PAGE> 12
LEWIS GALOOB TOYS, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
Interest expense was approximately equal to the prior year's expense for the
third quarter. In the nine month period ended September 30, this expense was
$1.7 million in 1994 as compared to $1.2 million in 1993. The increase was due
mainly to interest expense related to the Company's 8% Convertible Subordinated
Debentures (the "8% Debentures") which were issued in November 1993.
Other income (expense), net was approximately equal to the prior year's income
in the third quarter. In the nine month period ended September 30, this income
was $0.3 million in 1994 as compared to $0.1 million in 1993.
The income tax provision reflects the quarterly application of the estimated
annual rate based on projected full year earnings and includes the effect of
the utilization of net operating loss carryforwards.
The earnings per share calculations include the dilutive effect of common stock
equivalents, the Company's $17.00 Convertible Exchangeable Preferred Stock (the
"Preferred Stock") and the 8% Debentures. These three items were anti-dilutive
in prior periods.
The Company's products are produced principally in China which currently is
designated with "most favored nation" ("MFN") status by the United States.
This allows products imported into the United States from China to be accorded
the most favored import duties. The loss of MFN status for China would result
in a substantial increase in import duty for the Company's products produced
in China and imported into the United States and would materially affect the
Company's business. Products shipped to other countries should not be
affected. Other toy companies also source product from China and would be
affected to various degrees. However, the ultimate impact on the Company would
depend on several factors including, but not limited to, the Company's ability
to procure alternative manufacturing sources outside of China and its ability
to pass resultant cost increases through as product price increases.
Liquidity, Financial Resources and Capital Expenditures
The Company is party to a Loan Agreement with the Lender which makes available
to the Company through March 31, 1995 a line of credit up to $30 million, with
provisions to increase to $40 million if an acquisition is made. Borrowing
availability is determined by a
10
<PAGE> 13
LEWIS GALOOB TOYS, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
formula based on qualified assets. The current interest rate is at
prime rate plus 2%; the rate will increase by 0.25% if the increase in the
credit limit occurs. In consideration for entering into the Loan Agreement,
the Company has paid a $375,000 fee. The Company has also agreed to pay
periodically an unused line fee of 0.25% and certain management fees. The Loan
Agreement provides that the preferred dividend payments may not be made without
the prior consent of the Lender.
In November 1993, the Company sold in a private placement $14 million in
principal amount of the 8% Debentures at par. The interest is to be paid
semi-annually at a rate of 8%. The 8% Debentures mature on November 30, 2000
and are convertible into shares of the Company's common stock at $9.26,
calculated based upon 115% of the average of the Company's closing common stock
price for the ten business days ended November 12, 1993. The Company has used
the net proceeds received from the 8% Debentures to invest in the production,
advertising and promotion of the Company's product lines.
Working capital was $47.2 million at September 30, 1994 as compared to $30.8
million at December 31, 1993 and $22.7 million at September 30, 1993. The
ratio of current assets to current liabilities was 2.3 to 1.0 at September 30,
1994 as compared to 2.0 to 1.0 at December 31, 1993 and 1.6 to 1.0 at September
30, 1993.
Capital expenditures are generally not significant for the Company. The
Company's current facilities are considered adequate to support expected future
levels of business.
On June 10, 1992, the Company announced it would not pay the July 1, 1992 $.425
per share quarterly dividend on its Depositary Shares which represent shares of
the Company's Preferred Stock. The Company has not paid the subsequent
dividends. As of October 1, 1994, the dividend was cumulatively ten quarters
in arrears, representing a total dividend arrearage of $7.8 million. The
Company believes that it is in its best interest not to reinstate the dividend
until the Company has generated consistent net income from operations and
continuations of such profitability can be reasonably expected. The net
earnings (loss) per share calculation includes a provision for the Preferred
Stock dividends in arrears. No common stock dividends may be paid unless all
Preferred Stock dividend payments are current. As a result of the cumulative
dividend being six or more quarters in arrears, on July 15, 1994, the holders
of the Preferred Stock exercised their right to elect two new directors.
11
<PAGE> 14
LEWIS GALOOB TOYS, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
The Company believes that with its own assets, the results of operations and
the Loan Agreement it has adequate liquidity and capital resources to meet its
current and anticipated needs.
12
<PAGE> 15
PART II
Item 1. Legal Proceedings
On May 17, 1990, the Company filed a complaint against Nintendo of America,
Inc. ("Nintendo") seeking a declaratory judgment and injunctive relief in the
United States District Court, Northern District of California (the "District
Court"). This complaint sought confirmation of the Company's right to market,
distribute and sell its Game Genie product. On June 1, 1990, Nintendo filed a
complaint in the same District Court alleging copyright and trademark
infringement and seeking a preliminary and permanent injunction and unspecified
damages.
On July 3, 1991, the District Court reversed an earlier preliminary injunction
against the Company and ruled that the sale of Game Genie products did not
infringe on Nintendo's copyrights. Nintendo appealed this ruling through the
Ninth Circuit Court of Appeals (the "Appeals Court") and ultimately filed a
petition for a Writ of Certiorari with the United States Supreme Court. On
March 22, 1993, the Supreme Court rejected Nintendo's petition and, in essence,
affirmed the District Court ruling.
Separately, the Company pursued recovery of damages from Nintendo that resulted
from the original issuance of the preliminary injunction. On July 6, 1992, the
District Court awarded the Company a $15 million damage judgment against
Nintendo, which was the maximum amount that could be awarded in light of the
$15 million bond that Nintendo had been required to post in the proceedings.
Nintendo appealed this damage award, and on February 17, 1994 the Appeals Court
unanimously affirmed the District Court's ruling. Subsequently, the Appeals
Court rejected an additional Nintendo petition on March 21, 1994.
On April 11, 1994, Nintendo paid the Company $16.1 million representing the
full damage award plus interest and related costs. The Company retained
approximately $12.2 million of this amount, and the Company's Game Genie
licensors were paid the remaining $3.9 million. Notwithstanding such payment,
on June 20, 1994, Nintendo filed a petition for a Writ of Certiorari with the
United States Supreme Court, which asked the Supreme Court to review the damage
award on a discretionary basis. On October 3, 1994, the Supreme Court rejected
Nintendo's petition and affirmed Galoob's right to the full damage award.
There is no further basis for appeal by Nintendo.
Nintendo's original trademark claim and the Company's original anti-trust
cross-claim against Nintendo were severed from the copyright claims that were
adjudicated on July 3, 1991. These claims have not been actively pursued, and
no date has been set for any hearings on these claims.
13
<PAGE> 16
The Company is involved in various litigation and other legal matters which are
being defended and handled in the ordinary course of business. None of these
matters is expected to result in outcomes having a material adverse effect on
the Company's consolidated financial position.
Item 3. Defaults Upon Senior Securities
On June 10, 1992, the Company announced it would not pay the July 1,
1992 $.425 per share quarterly dividend on its Depositary Shares which represent
shares of the Company's Preferred Stock. The Company has not paid the
subsequent dividends. As of October 1, 1994, the dividend was cumulatively ten
quarters in arrears, representing a total dividend arrearage of $7.8 million.
The Company believes that it is in its best interest not to reinstate the
dividend until the Company has generated consistent net income from operations
and continuations of such profitability can be reasonably expected. As a result
of the cumulative dividend being six or more quarters in arrears, on
July 15, 1994, the holders of the Preferred Stock exercised their right to
elect two new directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports were filed for the quarter ended September 30, 1994.
14
<PAGE> 17
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEWIS GALOOB TOYS, INC.
(Registrant)
DATE: November 14, 1994 BY: /s/ Mark C. Shepherd
------------------------
Mark C. Shepherd
Senior Vice President
Finance and Chief
Financial Officer
(Principal Accounting
Officer)
15
<PAGE> 18
EXHIBIT INDEX
Exhibit 27 - Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE LEWIS GALOOB TOYS, INC. FOR THE QUARTER ENDED
SEPTEMBER 30, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 3,024
<SECURITIES> 0
<RECEIVABLES> 62,612
<ALLOWANCES> 7,562
<INVENTORY> 14,356
<CURRENT-ASSETS> 84,001
<PP&E> 14,762
<DEPRECIATION> 6,334
<TOTAL-ASSETS> 93,653
<CURRENT-LIABILITIES> 36,817
<BONDS> 18,258
<COMMON> 101
36,790
0
<OTHER-SE> 1,687
<TOTAL-LIABILITY-AND-EQUITY> 93,653
<SALES> 114,227
<TOTAL-REVENUES> 0
<CGS> 69,017
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 43,421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,730
<INCOME-PRETAX> 12,491
<INCOME-TAX> 477
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,014
<EPS-PRIMARY> .96
<EPS-DILUTED> .91
</TABLE>
