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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 Forbes Boulevard
So. San Francisco, CA 94080
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415)952-1678
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, Par Value $.01 Per Share New York Stock Exchange
Depositary Convertible Exchangeable New York Stock Exchange
Preferred Shares (each representing
1/10 share of $17.00 Convertible
Exchangeable Preferred Stock)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by persons who are not
officers or directors (or their affiliates) of the registrant, as of March 1,
1995, was approximately $65,000,000.
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 1, 1995, was as follows:
Class Number of Shares
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Common Stock, Par Value $.01 Per Share 10,066,844
DOCUMENTS INCORPORATED BY REFERENCE
The following document has been incorporated by reference:
The registrant's Proxy Statement to be used in connection with the
Annual Meeting of Shareholders to be held on June 20, 1995 (the "Proxy
Statement") incorporated into Part III.
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PART I
Item 1. Business
Lewis Galoob Toys, Inc. (the "Company" or the "Corporation") designs, develops,
markets and sells high quality toys worldwide and has been engaged in business
since 1957. The Company's strategies in selecting and developing lines are to
focus primarily on low to medium priced extendable product lines that are
brandable, to capitalize on current trends in the toy industry and popular
culture and to expand and diversify its product categories. Consistent with
these strategies, the types of products which have produced the preponderance of
the Company's revenues have changed significantly. This product change evolved
both by developing and procuring new toys which are based on original ideas and
by seeking to obtain and develop new character licenses.
The Company's products are generally sold worldwide, with a substantial portion
of its revenues derived from sales in the United States and Europe. The Company
sells its products principally to retailers in the United States and to toy
distributors outside of the United States. U.S. retail outlets for the products
include specialty toy retailers, discount and chain stores, catalog and mail
order companies, department stores and variety stores. See
"Business--Distribution and Sales". The Company's products are generally
manufactured overseas, primarily in the People's Republic of China ("China").
The Company's results are dependent, in large part, on management's experience
in the toy industry and its ability to identify and capitalize on current trends
and market new products based on such trends in a timely and efficient manner.
As a result of changing consumer tastes, individual toys usually have relatively
short product lives. An increase or decrease in popularity of a particular item
during any year could have a material impact on revenues and profit for that
year.
Consistent with the extendable product life strategy, the Company's Micro
Machines(R) product line, first introduced in 1987, has generated significant
sales for a much longer product life than most toy products, and the Company
believes that the line will continue to generate significant sales in 1995.
Micro Machines sales represented 51% of the Company's total revenues in 1994
after representing 41% in 1993 and 28% in 1992. There can be no assurance that
the demand for Micro Machines will continue at current or previous levels.
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Products
The Company has historically marketed a variety of toy products designed for
children of both sexes and of different age groups. In recent years, the
Company's main emphasis has been to revive, develop, extend and expand its core
brand, Micro Machines, and to diversify the balance of its other product lines.
See "Business--Licensing and Related Rights; Trademarks."
The Company's 1995 product line consists of continuations and extensions of the
Micro Machines line and introductions of several new lines, including two new
extendable girl's brands, Sky Dancers(TM) Dolls and My Pretty DollHouse(TM)
toys.
The Micro Machines line includes the continuing licensed vehicles based on the
popular Star Wars(R) motion picture trilogy. Star Wars playsets depicting scenes
from the movies and including action features, figures and vehicles have been
added. Other licensed products also include vehicles and figures from the Power
Rangers(TM) television series, The Tick(TM) animated television series, as well
as James Bond 007(TM). There are also new vehicles from the Star Trek(R) and
Babylon 5(TM) television series. A new speed performance segment consisting of
Ultra-fast Radicators(TM) vehicles and higher performance race sets is also in
the line. To extend the Micro Machines segment of military vehicles and troops,
new playsets include Night Attack!(TM) with battery-powered searchlight and
multi-missile launcher, as well as FalconWing Skybase(TM) and Orion J-22(TM)
Submarine Base transforming playsets. Also continuing under the Micro Machines
brand is Z-Bots(R), a line of collectible robot figures, vehicles and playsets.
New ultra- small Mini Z's(TM) robots, the smallest Z-Bots ever, have been
introduced along with five combat-action Mini Z's playsets.
The new and innovative Sky Dancers(TM) line of dolls and playsets feature the
first known girls' doll that flies. These collectible ballerina dolls fly
utilizing a special launcher with pull-cord action done in various themes. The
playsets include Magic Rolling Launchers in the shape of a swan and pegasus.
The Company's new My Pretty DollHouse(TM) line is based on a classic girl's toy
play pattern that incorporates the successful concepts of miniaturization and
collectibility. This line consists of modular, finely decorated miniature
dollhouses that come with dolls and other surprise accessories. Also available
are coordinated designer Furniture Packs, Back and Front Yard Sets, and snap- on
2nd Story Additions to expand the houses into even bigger mansions.
Mutant League(R) is a new licensed male action line with a sports theme.
Figures, vehicles and playsets are based on the syndicated television series and
the popular Electronic Arts video games.
Also introduced is UltraForce(TM), a licensed male action line of
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dramatic super heroes and villains, vehicles and accessories, from the pages of
Malibu and Marvel Comics and the new syndicated animated TV show that is
scheduled to premier in September 1995.
Biker Mice From Mars(TM) is a continuing licensed male action line in our
international markets. The line consists of figures, accessories and playsets
based on the internationally successful animated series.
The Company's 1994 product line consisted of continuations and extensions of the
Micro Machines, Z-Bots, Game Genie(TM), and Splash Out(R) lines, and several new
product lines. These included Star Trek, Star Wars, and Biker Mice From Mars; My
Magic Kissing Dragon(TM) collectible dolls that spray a light scented mist when
you squeeze them; Sweet Secrets(R) miniature transforming dolls, accessories and
playsets; and Travel Pocket Play line of portable games and activity toys.
The Company's 1993 product line consisted of continuations and extensions of the
Micro Machines, Game Genie, and Splash Out lines, and several new product lines.
These included Fancy Sounds(TM), an electronic device that allowed the user to
add sound effects to any toy; Bow Wow Boutique(TM), plush dogs with removable
fur that could be cut and styled; Whispering Wishes(TM), a talking doll that
whispered special sayings when squeezed; and the Travel Pocket Play line of
portable games and activity toys.
The Company's 1992 product line consisted of continuations and extensions of the
Micro Machines, Game Genie, Baby Face(TM), Lazer Pro 9000(TM) and Splash Out
lines and several new product lines. These included Luv'n Handful(TM), a 13"
hand-puppet doll; Starlight(TM), a mechanical walking horse with light-up
features; and Trash Bag Bunch(TM), a line of collectible figures packaged in
dissolving bags.
Licensing and Related Rights; Trademarks
In 1994 and 1993, the Company produced substantially all of its products under
licenses from others. Some of these licenses confer rights to exploit original
concepts developed by toy inventors and designers. Other licenses, referred to
as character licenses, permit the Company to manufacture and market toys based
on characters which develop their own popular identity, often through exposure
in various media such as television programs, movies, cartoons and books. In
return for these rights, the Company pays royalties to its licensors.
Royalties paid by the Company to toy licensors typically range from 2% to 14% of
net sales. Electronic games typically have higher royalty rates than toys. In
certain instances, the Company may agree to guarantee payment of a minimum
royalty. As of December 31, 1994 and 1993, minimum future guaranteed payments
aggregated approximately $2,630,000 and $732,000, respectively. Royalties
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expense in 1994 and 1993 totaled approximately $13,498,000 and $11,337,000,
respectively. As a result of increased competition among toy companies for
licenses, in certain instances the Company has paid, and may in the future be
required to pay, higher royalties and higher minimum guaranteed payments in
order to obtain attractive properties for the development of product lines.
The Company is an active participant in the market for character licenses. A
determination to acquire a character license must frequently be made before the
commercial introduction of the property in which a licensed character appears,
and license arrangements often require the payment of non-refundable advances or
guaranteed minimum royalties. Accordingly, the success of a character licensing
program is dependent upon the ability of management to accurately assess the
future success and popularity of the properties which it is evaluating, to bid
for products on a selective basis in accordance with such evaluation, and to
capitalize on the properties for which it has obtained licenses in an
expeditious manner. In 1994, the Company generated significant sales under
existing character license arrangements for Star Wars, Star Trek, Biker Mice
From Mars and Power Rangers. In 1994, the Company entered into character license
arrangements for Mutant League, Gore Corp, Nintendo(R), James Bond, The Tick,
Godzilla(TM), HappyNess and Ultraforce. The products under these license
arrangements will be sold in 1995 and beyond.
The Company has obtained domestic and international distribution rights for most
of its products. Normally most character licenses extend for one to three years
and are typically renewable at the option of the Company upon payment of certain
minimum guaranteed payments or the attainment of certain sales levels during the
initial term of the license. Licenses for original ideas typically extend for
the commercial life of the product.
Most of the Company's products are sold under trademarks and certain products
incorporate patented devices or designs. The Company customarily seeks
protection of its product patents and major product trademarks in the United
States and certain other countries. These trademarks, such as Micro Machines,
are significant assets of the Company. The Company believes that the loss of
certain of its license rights or trademarks for particular product lines may
have a material adverse effect on its business. However, the Company believes
its rights to these properties are adequately protected.
Research and Development
The Company employs its own designers and engineers and also utilizes the
services of independent designers and engineers on an ongoing basis. The Company
presents its designers with toy concepts licensed or, to a lesser extent,
originated by it and the designers create renderings of the proposed product.
Designs are
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then presented to the Company's engineers, who, using the renderings, perform
mechanical drawings and engineering services and create prototypes for new
products. Prototypes for proposed products are then reviewed by the Company's
management, including representatives of marketing, sales and manufacturing,
prior to final acceptance. Character licensors usually retain the right to
approve the products being marketed by the Company.
The Company spent approximately $7,288,000, $7,451,000 and $6,861,000 on
research and development activities in 1994, 1993 and 1992, respectively,
exclusive of amounts paid to certain inventors and designers who receive
royalties as licensors. Those amounts do not include approximately $7,149,000,
$4,502,000 and $4,583,000, respectively, in 1994, 1993 and 1992 incurred for
tooling and package design.
Manufacturing
The Company's products are manufactured to its specifications by nonaffiliated
third party vendors, usually located in the Orient, principally in China where
over 87% of the Company's products were produced in 1994. These vendors are
responsible for all aspects of the production of the Company's products in
accordance with Company specifications.
The Company's manufacturing is currently performed by 19 manufacturers, some of
whom derive a substantial percentage of their business from the Company. In
1994, four manufacturers each produced in excess of 10% of the Company's
products and combined to produce 81%. It is anticipated in 1995 that
manufacturers' production will be similarly concentrated as in 1994.
The Company, through its wholly-owned subsidiary Galco International Toys, N.V.
("Galco") located in Hong Kong, maintains close contact with the manufacturers
and subcontractors and monitors the quality of the products produced. Decisions
related to the choice of manufacturer are based on price, quality of
merchandise, reliability and the ability of a manufacturer to meet the Company's
timing requirements for delivery. See "Business--Competition". Tooling is
ordinarily owned by the Company and may be utilized by different manufacturers
if the need arises for alternate sources of production. See "Business--Design
and Development".
The Company does not carry insurance for political, social or economic unrest or
disruption for several reasons including, but not limited to, costs of such
insurance and the limited insurance coverage available. The impact on the
Company from such unrest or disruption would depend on several factors,
including, but not limited to the nature, extent and location of such unrest or
disruption and the Company's ability to: (1) procure alternative manufacturing
sources outside of the country involved; (2)
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retrieve its tooling; (3) relocate its production in sufficient time to meet
demand; and (4) pass resultant product cost increases likely to be incurred
outside of the country involved through to the Company's customers as product
price increases.
The Company's products are produced principally in China which currently
is designated with "most favored nation" ("MFN") status by the United
States. This designation allows products imported into the United States from
China to be accorded the most favorable import duties. In late 1994, Congress
approved the GATT (Uruguay round) which allows imports into the United States
of toy merchandise with unconditional duty free entry from any nation with MFN
status. Generally, the trade negotiations between China and the United States
have been difficult, but both sides have shown their willingness to resolve
trade disputes and avoid punitive sanctions. Punitive sanctions could result
in the United States imposing higher duties on selective Chinese made products
imported into the United States (these sanctions would be put in place through
Section 301). In the past, Section 301 sanctions proposed by the United States
did not include sanctions or punitive duties against toy imports from China.
As such, the Company would be unaffected. The loss of MFN status for China,
however, would result in a substantial increase in duty for the Company's
products produced there and imported into the United States. This increase in
duty would be large enough that it could 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 similar
degrees. However, the impact on the Company from any significant change in
duties on its Chinese produced products would depend on several factors
including, but not limited to, the Company's ability to: (1) procure
alternative manufacturing sources outside of China; (2) retrieve its tooling;
(3) relocate its production in sufficient time to meet demand; and (4) pass
resultant cost increases through as product price increases.
In 1994, certain quotas on selected Chinese produced toy products were
introduced in the European Economic Community. These quotas are not expected to
have a material impact on the Company's business in 1995.
Transactions in which the Company purchases goods from manufacturers are mostly
denominated in Hong Kong dollars and, accordingly, fluctuations in Hong Kong
monetary exchange rates may have an impact on cost of goods. However, in recent
years, the value of the Hong Kong dollar has had a continuing stable
relationship to the value of the U.S. dollar and the Company has not experienced
any significant foreign currency fluctuations. Inflationary pressure in China
could have an effect on the cost of product sourced from China.
Galco's staff of 98 employees in Hong Kong (as of December 31,
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1994) undertake certain elements of the design and development of new products.
Additionally, Galco arranges with manufacturers for the production, shipment and
delivery of products, and monitors the quality of the products produced. Galco
also has 33 employees in other countries in the Orient performing similar
activities.
The principal raw materials used in the production and sale of the Company's
products are plastics and paper products. The Company believes that an adequate
supply of raw materials used in the manufacture of its products are readily
available from existing and alternate sources.
Distribution and Sales
The Company markets and sells its products throughout the world, with sales to
customers in the United States aggregating on a consolidated basis 66%, 66% and
65% of net sales in 1994, 1993 and 1992, respectively.
Outlets for the Company's products in the United States include specialty toy
retailers, discount and chain stores, catalog and mail order companies,
department stores, variety stores and independent distributors which purchase
the products directly from the Company and ship them to retail outlets. In 1994
and 1993, Toys "R" Us, Inc. accounted for 21% of the Company's consolidated net
sales.
The Company has a sales staff of seven people supplemented by several
manufacturers' representative organizations in the United States who act as
independent contractors. The Company's sales staff and the manufacturers'
representatives offer the Company's products through the use of samples and
promotional materials at toy shows and by making regular customer sales calls.
The Company also directly introduces and markets to customer new products and
extensions to previously marketed product lines by participating in the major
trade shows in New York, Hong Kong and Europe and through the maintenance of a
showroom in New York City. Manufacturers' representatives utilized by the
Company receive commissions, which were approximately 1.0%, 1.3% and 1.3% of net
sales in 1994, 1993 and 1992, respectively.
The Company utilizes warehouse facilities primarily in Union City, California
for storage of its products. Disruptions in shipments from the Orient or from
this facility could have a material adverse effect on the Company. The Company
believes that adequate storage facilities are available.
Galoob has an extensive international sales program. The Company, in conjunction
with its Hong Kong subsidiary, Galco, actively sells it products into 35
countries and sells directly to 51 separate, independent toy distributors, each
of which is domiciled in the respective country to which sales are made. While
international sales have averaged approximately one-third of total company
sales, these sales are understated in proportion to the volume of Galoob
products sold outside of the United States. International sale
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prices to distributors are significantly lower than U.S. domestic sale prices to
retail accounts since international distributors are generally responsible for
all importation, warehousing, marketing, promotional and selling related costs.
In 1994, approximately fifty percent of all Galoob toys sold were shipped to
countries outside the United States.
Sales by the Company to foreign customers are ordinarily denominated in U.S.
dollars and, accordingly, the Company's revenues are not affected by
fluctuations in monetary exchange rates. However, the value of the U.S. dollar
in relation to the value of other currencies may have a positive or negative
impact on the Company's sales volume over time, depending on the change in
relationship of the respective currencies.
The Company does not ordinarily sell its products on consignment and ordinarily
accepts returns only for defective merchandise. Returns have historically not
been significant. In certain instances, where retailers are unable to resell the
quantity of products which they have purchased from the Company, the Company
may, in accordance with industry practice, assist retailers to sell such excess
inventory by offering discounts and other price concessions.
Advertising
Although a portion of the Company's advertising budget is expended for newspaper
advertising, magazine advertising, catalogs and other promotional materials, the
Company allocates the bulk of its advertising budget to television. As is common
practice in the toy industry, the Company advertises on national network,
syndicated cable and local spot television.
Seasonality and Backlog
Because of heavy retail demand for toy products during the Christmas season, the
toy industry is highly seasonal in nature. Consistent with U.S. toy industry
practices, receivables from a significant portion of domestic sales are not
collected until the final weeks of the fourth quarter and the first quarter of
the succeeding year, which creates a substantial demand for working capital on a
seasonal basis. See "Business--Advertising" and "Business--Manufacturing".
The results of operations for any quarter are subject to a number of variables
and may not reflect the results of operations for the year. Similarly, any
comparisons between fiscal periods of successive years may not be indicative of
the results of operations for a full year.
Orders in the U.S. toy industry are generally cancelable until shipped.
Therefore, the Company believes that backlog may not be an accurate indicator of
the Company's future sales.
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Competition
The toy industry is highly competitive. The Company competes with several larger
toy companies, such as Hasbro, Mattel and Tyco, and many smaller companies, in
the design and development of new toys, the procurement of licenses, the
improvement and expansion of previously introduced products and product lines
and the marketing and distribution of its products. In addition, it is common in
the toy industry for companies to market products which are similar to products
being successfully marketed by competitors. The Company believes that the
strength of its management team, quality of its products, its relationships with
inventors, designers and licensors, its distribution, and its overhead and
operational controls permit it to compete effectively in the marketplace. See
"Business--Design and Development", "Business--Distribution and Sales" and
"Business".
Government Regulations
The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws
empower the Consumer Product Safety Commission (the "CPSC") to protect consumers
from hazardous toys and other articles. The CPSC has the authority to exclude
from the market articles which are found to be hazardous and can require a
manufacturer to recall such products under certain circumstances. Similar laws
exist in some states and cities in the United States and in Canada and Europe.
Products are also designed and tested to meet or exceed ASTM F963, the Standard
Consumer Safety Specification on Toy Safety. The Company emphasizes the safety
and reliability of its products and has established a strong quality assurance
and control program to meet the Company's objective of delivering high quality
products.
Employees
As of December 31, 1994, the Company had 241 employees; 110 in the United States
and 131 in the Far East. This compares to 233 total employees at December 31,
1993; 111 in the United States and 122 in the Far East. Nine of the Company's
employees, some of which are employed only on a seasonal basis, are subject to a
collective bargaining agreement which expires May 31, 1998. The Company believes
that its labor relations are satisfactory.
Item 2. Properties
The Company's principal executive offices are located at 500 Forbes Boulevard,
South San Francisco, California, where the Company owns a building with
approximately 136,000 square feet. The Company occupies approximately 33,000
square feet of office space and leases the additional 103,000 square feet of
warehouse space to third parties. The Company also has 125,000 square feet of
warehouse space at Union City, California, under a lease which expires in 1997,
with rights to renew for one five year term. In addition, the Company has a
showroom, consisting of approximately
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9,000 square feet, which is located at 200 Fifth Avenue, New York, New York,
under a lease that expires in 1996, and office and warehouse space in Hong Kong
consisting of approximately 25,388 square feet under leases which expire at
varying dates through 1996.
The Company's properties provide adequate capacity to support the present and
expected future levels of business.
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Item 3. 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 damage.
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 judgement 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
$12.1 million of this amount, and the Company's Game Genie licensors were paid
the remaining $4.0 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 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.
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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. On January 18, 1995 these claims were dismissed
with prejudice by Nintendo and Galoob respectively. The Nintendo Game Genie
infringement lawsuit is now complete.
The Company is involved in various other litigation and legal matters which are
being prosecuted or defended 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.
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Item 4. Submission of Matters to a Vote of Security Holders
None.
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Item 4a. Executive Officers of the Registrant
The following table sets forth the names, ages and all positions and offices
held by the Company's executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mark D. Goldman 44 President, Chief
Executive Officer and
Director
William G. Catron 49 Executive Vice President,
General Counsel and Chief
Administrative Officer
Loren Hildebrand 55 Executive Vice President,
Sales
Ronald Hirschfeld 44 Executive Vice President,
International Sales and
Marketing
Gary Niles 55 Executive Vice President, Marketing and Product
Acquisition
Louis Novak 46 Executive Vice President and Chief Operating Officer
William B. Towne 50 Executive Vice President,
Finance and Chief Financial Officer
H. Alan Gaudie 54 Senior Vice President,
Finance
</TABLE>
Mark D. Goldman has served as President and Chief Executive Officer since June
1991. From 1987 to 1991 he served as Executive Vice President and Chief
Operating Officer. Prior to 1987, Mr. Goldman served in various executive
capacities at Ages Entertainment Software, Inc. (formerly Sega Enterprises Inc.)
and Mattel, Inc.
William G. Catron has served as Executive Vice President, General Counsel and
Chief Administrative Officer since May 1992. For the seven years prior to that,
Mr. Catron was Senior Vice President, Assistant General Counsel for Paramount
Pictures Corporation. Before 1985, Mr. Catron served in various executive
capacities at Ages Entertainment Software, Inc. (formerly Sega Enterprises,
Inc.) and Mattel, Inc.
Loren Hildebrand has served as Executive Vice President, Sales since April 1994.
From 1992 to 1994 he was President of Creative Consultants. From 1989 to 1992 he
was Executive Vice President and a partner in Toy Soldiers, Inc. a start-up
company. Prior to 1989,
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Mr. Hildebrand was a consultant for Worlds of Wonder and executive for
Mattel, Inc.
Ronald Hirschfeld has served as Executive Vice President, International Sales
and Marketing since February 1994. From 1989 to 1994 he served as Senior Vice
President, International Sales and Marketing. Prior to that time, he served as
Senior Vice President, International Operations from 1987 to 1989 and has held
various positions within the Company since 1978.
Gary Niles has served as Executive Vice President, Marketing and Product
Acquisition since February 1992. From 1989 to 1992, he served as Senior Vice
President, FOB Division. Before joining the Company, he was an executive with
U.A.C., Ltd., a division of Universal Matchbox, Revell Incorporated and Ages
Entertainment Software, Inc. (formerly Sega Enterprises Inc.).
Louis Novak has served as Executive Vice President and Chief Operating Officer
since February 1992. From 1989 to 1992, he served as Senior Vice President,
Operations. From 1986 to 1989 he was Senior Vice President, Worldwide Product
Operations for Coleco Industries, Inc. ("Coleco"). Prior to that time, Mr. Novak
was an executive with All American Gourmet Company, Inc., a manufacturer of
frozen food products and for Mattel, Inc.
William B. Towne has served as Executive Vice President, Finance and Chief
Financial Officer since March 1995. From 1990 to 1995, he served as Executive
Vice President, Chief Financial Officer for Forstmann & Co, Inc. From 1982 to
1990, Mr. Towne worked for Tambrands, Inc. where he rose from Manager of
Forecast and Planning to Chief Financial Officer of their International
Division.
H. Alan Gaudie has served as Senior Vice President, Finance since April 1992.
From 1985 to 1992 he served as Corporate Controller, Vice President, Corporate
Controller and Senior Vice President, Acting Chief Financial Officer.
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PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
The Company's common stock, par value $.01 per share, has traded on the New York
Stock Exchange since July 9, 1987. The following table sets forth for each
quarter during the last two fiscal years the high and low closing sale prices as
reported by the New York Stock Exchange:
<TABLE>
<CAPTION>
Fiscal Year High Low
----------- ------ -------
<S> <C> <C> <C>
1994 First Quarter 10 5/8 6 1/8
Second Quarter 6 7/8 5 1/2
Third Quarter 8 1/2 6 1/8
Fourth Quarter 7 3/8 4 3/4
1993 First Quarter $ 4 1/8 $ 3 1/8
Second Quarter 3 7/8 3 3/8
Third Quarter 3 3/4 2 1/2
Fourth Quarter 10 3/4 4 1/4
</TABLE>
As of March 1, 1995, there were approximately 2,025 holders of record of the
Company's common stock.
No cash dividends were declared in 1994 or 1993 on the common stock. The Board
of Directors has no current plans to pay cash dividends on the common stock. The
Company's current credit agreement and the terms of its Convertible Exchangeable
Preferred Stock limit the Company's ability to pay cash dividends on the common
stock. (See Notes E and M of Notes to Consolidated Financial Statements.) Future
dividend policy will depend on the Company's earnings, capital requirements,
financial condition and other factors considered relevant by the Board of
Directors.
16
<PAGE> 19
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Years ended December 31
-------------------------------------------------------------------------------
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Net revenues $178,792 $134,334 $166,280 $150,636 $126,943
Net earnings (loss) 18,424 (10,924) (2,447) (7,540) (29,245)
Preferred stock dividends:
Paid - - 782 3,127 3,127
In arrears 3,127 3,127 2,345 - -
Net earnings (loss)
applicable to
common shares $15,297 $(14,051) $ (5,574) $(10,667) $(32,372)
Net earnings (loss) per common share:
Primary $ 1.51 $ (1.47) $ (.59) $ (1.14) $ (3.48)
Fully diluted 1.41 (1.47) (.59) (1.14) (3.48)
Number of common shares
and common share
equivalents
outstanding - average 10,111 9,548 9,400 9,325 9,315
At December 31:
Total assets $100,766 $ 71,005 $ 71,604 $ 64,016 $ 75,546
Long-term debt 18,414 18,608 4,944 5,244 5,541
Working capital 53,219 30,813 27,070 29,127 37,914
Shareholders'
equity 44,768 22,162 32,246 35,092 45,610
</TABLE>
17
<PAGE> 20
Item 7. 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 expenses and earnings items:
<TABLE>
<CAPTION>
Percentage of Net Revenues
Years ended December 31
1994 1993 1992
------ ----- -----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of products sold 58.5 61.7 63.1
----- ----- -----
Gross margin 41.5 38.3 36.9
Advertising and promotion 17.1 17.5 13.7
Other selling and
administrative 15.1 19.1 18.3
Research and
development 4.1 5.6 4.1
Variable stock option plan
expense - 3.0 -
Earnings (loss)
from operations 5.2 (6.9) 0.8
Expenses related to
resignations of former
officers - - (1.3)
Net Proceeds from Nintendo award 6.8 - -
Interest expense (1.5) (1.3) (0.9)
Other income, net 0.2 0.1 0.1
Provision for income
taxes (0.4) - (0.2)
----- ----- ----
Net earnings (loss) 10.3% (8.1%) (1.5%)
===== ===== ====
</TABLE>
1994 Compared to 1993
In 1994, the Company was profitable, which was its best performance since
1989. This was a result of the successful implementation of the Company's
recovery plan which began in 1991.
The recovery plan objective was to reposition the Company so it could
generate sustainable profitability and growth. Essential to reaching
this objective were three key goals: (1) restore and expand the Company's
core business, the Micro Machines brand; (2) focus on growth opportunities
in new product areas, such as the male action category; and (3) to lower
breakeven versus the 1990 cost profile. The new management team was put in
place in 1991.
Overall, consolidated net sales, including both toy sales and sales
18
<PAGE> 21
of the Game Genie video game enhancer, in 1994 were $178.8 million which
represented a 33% increase from 1993 net sales of $134.3 million. Worldwide toy
sales in 1994 achieved a 72% increase over 1993. Domestic toy sales rose by 103%
and international toy sales by 33% from 1993 to 1994.
A major key to the 1994 sales growth was the continuing expansion of the Micro
Machines brand. In 1994, sales of Micro Machines grew significantly for the
second consecutive year. Net sales in 1994 climbed to $113.0 million which
was a 59% increase over 1993 levels. This comes on top of a 55% increase in
sales in 1993 over 1992. A significant area of growth in the Micro Machines
line was from licensed products such as Star Wars, Star Trek and Power Rangers.
The Company also successfully entered a new, high-growth potential category -
male action. Biker Mice From Mars, which was introduced in late 1993, generated
sales in 1994 of $41.4 million as compared to $4.3 million in 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 achieved its 1994
worldwide Biker Mice From Mars revenue goal. As a result of consumer demand
falling short of the Company's expectations for the U.S. in 1994, the
Company has ceased all sales and marketing activities for Biker Mice from Mars
domestically in 1995. However, strong international demand for Biker Mice From
Mars is expected to continue. In 1995, the Company is expanding in the male
action category with toy product introductions for Mutant League and
Ultraforce.
In late 1994, shipments of two new products, Sky Dancers, a flying doll, and My
Pretty Dollhouse, commenced and generated sales of $3.3 million and $3.0
million, respectively. The Company believes the category of girls' toys is a
significant growth opportunity.
Game Genie sales were $4.2 million in 1994 as compared to $32.8 million in 1993.
This decrease reflected the normal maturity cycle for such products and this
trend is expected to continue.
Gross margin totaled $74.2 million in 1994, an increase of $22.7 million from
1993. This increase was due to higher sales volume and a higher gross margin
rate. The gross margin rate improved to 41.5% in 1994 from 38.3% in 1993 due
to three factors. First, the international gross margin rate was higher due to
a change in product mix. Second, the percent of U.S. sales to worldwide sales
was greater. The Company's gross margin rate on domestic sales is
significantly higher than foreign sales because foreign prices are lower as
the customer is responsible for the cost of importing and promoting the
products. Third, while tooling, packaging and other costs in the aggregate
where higher in 1994 to 1993, they were
19
<PAGE> 22
lower as a percent of sales in 1994 compared to 1993.
Advertising and promotion expenses were $30.6 million in 1994 compared to $23.5
million in 1993. The higher expenses were primarily a result of an increase in
planned television advertising expense domestically in connection with the
Company's expanded product lines. Other selling and administrative expenses were
$27.0 million in 1994 compared to $25.6 million in 1993. This increase was due
mainly to incentive compensation which was reinstated based on the Company's
1994 performance. Research and development expenses were approximately equal in
1994 compared to 1993.
The $4.0 million expense in 1993 related to the variable stock option plan was
a one-time charge. See discussion below.
The Company received $12.1 million in 1994 from the litigation award against
Nintendo of America, Inc. This amount was obtained by reducing the gross award
of $16.1 million by amounts due the Company's Game Genie licensors. (See Note L
of Notes to Consolidated Financial Statements).
Interest expense in 1994 was $2.6 million compared to $1.8 million in
1993. An increase of $1.0 million was due to the 8% Convertible Subordinated
Debentures being outstanding all of 1994 compared to being outstanding for
less than 2 months in 1993. Interest was reduced by lower average borrowings
under the line of credit in 1994, although interest rates were higher. The
increase in the prime rate which occurred during 1994 is expected to result in
a higher average interest rate during 1995.
Other income was $0.4 in 1994 compared to $0.1 in 1993.
The income tax expense for 1994 includes provisions for federal, state and
foreign income taxes, after taking into account the available net operating loss
carryforwards from prior years. In 1993, the tax provision represented only
foreign income taxes as there was no taxable U.S. income. At December 31, 1994,
the Company has federal net operating loss carryforwards of approximately $11.5
million and unused federal tax credits of approximately $1.8 million available
to reduce taxes in future periods. (See Notes A and F of Notes to Consolidated
Financial Statements).
The Company's breakeven point has been substantially reduced since 1990. In
1994, the Company's earnings from operations were $9.3 million on $178.8 million
sales which was a $39.1 million improvement in earnings from operations and a
$51.9 million sales improvement in comparison to 1990 sales of $126.9 million
and loss from operations of $29.8 million. The Company's operations have been
adjusted to generate profitability from a base of continuing business and
moderate success in newly introduced products.
In management's opinion, inflation did not have a material impact on
20
<PAGE> 23
the Company's business in 1994. The Company did not have any substantial price
increases in 1994 or 1993.
The toy industry is affected by changing consumer tastes, shifting cultural and
demographic trends and general economic conditions. Consequently, the Company's
results are dependent, in large part, on management's experience in the toy
industry and its ability to identify and capitalize on current trends and market
new products in a timely and efficient manner. The Company may not always be
able to anticipate changes in consumer demand or to respond quickly to such
changes once they are identified, and such inabilities could have an adverse
impact on the Company.
Historically, a relatively small number of items have contributed a large
portion of the Company's revenues in each year. An increase or decrease in
popularity of a particular item during any year could have a material impact on
revenues and profit for that year. The Company's strategy emphasizing multi-year
extendable brands is intended to mitigate adverse impacts.
The Company does not carry insurance for political, social or economic unrest or
disruptions, for several reasons including, but not limited to, costs of such
insurance and the limited insurance coverage available. The impact on the
Company from such unrest or disruptions would depend on several factors,
including, but not limited to the nature, extent and location of such unrest or
disruptions and the Company's ability to: (1) procure alternative manufacturing
sources outside of the country involved; (2) retrieve its tooling; (3) relocate
its production in sufficient time to meet demand; and (4) pass resultant product
cost increases likely to be incurred outside of the country involved through to
the Company's customers as product price increases.
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 favorable import duties. In late 1994, Congress approved the GATT (Uruguay
round) which allows imports into the United States of toy merchandise with
unconditional duty free entry from any nation with MFN status. Generally, the
trade negotiations between China and the United States have been difficult, but
both sides have shown their willingness to resolve trade disputes and avoid
punitive sanction. Punitive sanctions could result in the United States imposing
higher duties on selective Chinese made products imported into the United States
(these sanctions would be put in place through Section 301). In the past,
section 301 sanctions proposed by the United States did not include sanctions or
punitive duties against toy imports from China. As such, the Company would be
unaffected. The loss of MFN status for China, however, would result in a
substantial increase in duty for the Company's products produced there and
imported into the United States. This increase in duty would be large enough
that it could materially affect the Company's
21
<PAGE> 24
business. Products shipped to other countries should not be affected. Other toy
companies also source product from China and would be affected to similar
degrees. However, the impact on the Company from any significant change in
duties on its Chinese produced products would depend on several factors
including, but not limited to, the Company's ability to: (1) procure alternative
manufacturing sources outside of China; (2) retrieve its tooling; (3) relocate
its production in sufficient time to meet demand; and (4) pass resultant cost
increases through as product price increases.
In 1994, certain quotas on selected Chinese produced toy products were
introduced in the European Economic Community. The quotas are not expected to
have a material impact on the Company's business in 1995.
In 1995, the Company expects its import duties to be reduced pursuant to the
new GATT agreement. The Company is aware of substantial cost pressures
concerning the price of paper used in packaging and plastic resin used in
production, and such cost pressures could result in price increases that
completely or substantially offset the import duty reductions.
1993 Compared to 1992
---------------------
Net revenues of $134.3 million for 1993 represented a 19% decrease from 1992
revenues. Results were adversely affected by heightened inventory controls by
retailers. Despite that environment the Company experienced sales growth in its
toy product lines which was mainly attributable to its core brands Micro
Machines. Worldwide sales in 1993 of Micro Machines which included Z-Bots
increased 55% over 1992 sales levels. Micro Machines sales increased to $54.9
million in 1993 from $45.3 million in 1992 and Z-Bots generated sales of $16.0
million in 1993.
Game Genie sales were $32.8 million in 1993 as compared to $65.3 million in
1992. This decrease reflected the normal maturity cycle for such products.
In December 1993, shipments of Biker Mice From Mars commenced and generated $4.3
million of sales. This new licensed product line consists of action figures,
accessories and playsets based on the Biker Mice From Mars syndicated television
animation series which first aired in September 1993.
In 1992, Trash Bag Bunch, Baby Face, World Championship Wrestling, Lazer Pro,
Macro Machines and Magic Diaper Babies had sales of $28.5 million; these
products had significantly reduced sales in 1993 to $3.3 million. The Company
continues to introduce new products each year, such as Z-Bots, to offset the
revenue lost as a result of the discontinuation of other products.
Gross margin totaled $51.5 million in 1993, a decrease of $9.8
22
<PAGE> 25
million from gross margin of $61.3 million in 1992. The decrease was due to
lower sales volume. The gross margin rate improved to 38.3% in 1993 from 36.9%
in 1992 due mainly to two factors. First, sales of discontinued products, which
sold at little or no margin, decreased as a percentage of total revenues in
1993 over 1992. Second, domestic gross margins were higher due to a change in
product mix.
Advertising and promotion expenses were $23.5 million in 1993 compared to $22.8
million in 1992. The increase was due to various sales promotions and an
increase in television origination costs.
Other selling and administrative expenses were $25.6 million in 1993 compared to
$30.3 million in 1992. This decrease was due mainly to cost reductions in
foreign operations, reduced legal fees and reduced insurance expenses.
Research and development expenses increased in 1993 to $7.5 million from $6.9
million in 1992. This increase was attributable to outside contract expense and
the expansion of the number of products being developed.
Expenses related to the variable stock option plan were approximately $4.0
million in 1993 resulting from a fourth quarter non-recurring, non-cash charge.
This charge arose from the operation and termination of the Company's 1992
Senior Executive Stock Option Plan (the "1992 Plan"), a variable stock option
plan. The sharp rise in the price of the Company's common stock during the
fourth quarter (and the corresponding decrease in the exercise price of the
options granted under the 1992 Plan) led to the non-recurring charge. Generally
accepted accounting principles ("GAAP") for variable stock option plans required
the Company to record a compensation expense accrual measured by the difference
between the market price of the common stock underlying an option and the option
exercise price as of December 31, 1993. This charge against earnings was
recorded although no compensation payments were required by the 1992 Plan or
made by the Company.
The Company believed that the application of GAAP could have resulted in large
and repeated future distortions to reported quarterly earnings of the Company,
based on fluctuations in the stock price so long as the 1992 Plan remained in
effect. Therefore, on January 26, 1994, in order to prevent the distortion of
future reported earnings of the Company, the Board of Directors ("Board")
terminated the 1992 Plan, subject to shareholder approval. The 1992 Plan was
cancelled and replaced by a new plan, subject to shareholder approval. Under the
new plan, each holder of options under the 1992 Plan was granted new options
with an option exercise price of $9.00, the trading price of the common stock of
the Company at the time of the Board actions. 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 approximately $4.0 million and recorded a
non-recurring, non-cash charge to earnings. In addition, in
23
<PAGE> 26
connection with the termination of the 1992 Plan, subject to shareholder
approval, the Board also granted 449,732 shares of common stock to compensate
such optionees for giving up their existing gain that had arisen under the 1992
Plan measured by the difference between the $9.00 market price and the option
exercise price of the 1992 Plan options at the time the 1992 Plan was
terminated. All of the above changes were approved by the shareholders on June
21, 1994. (See Note N of Notes to Consolidated Financial Statements.)
Interest expense in 1993 was $1.8 million compared to $1.6 million in 1993. The
increase was due to two factors. First, the average line of credit borrowing
were higher in 1993 as compared to 1992 and the interest rates slightly
decreased. Second, the Company incurred interest expense related to the 8%
Convertible Subordinated Debentures issued in November 1993.
Other income, net was approximately equal in 1993 and 1992.
The tax provisions recorded represent taxes accrued on income of the Company's
wholly-owned foreign subsidiary for the years ended 1993 and 1992. No U.S. tax
recovery was recorded on the loss in the years ended 1993 and 1992 due to prior
year losses. In 1993, the Company retroactively adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. The new
standard is similar to SFAS 96, which the Company had used since 1988, as SFAS
109 also requires, among other things, an asset and liability approach for
financial accounting and reporting for income taxes. Adoption of SFAS 109 did
not have a material effect on the financial statements.
Liquidity, Financial Resources and Capital Expenditures
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 the line 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 limit occurs. In consideration
for entering into the Loan Agreement, the Company 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.
On March 31, 1995, the Company entered into an amended and restated security
agreement (the "New Agreement") with the Lender. The New Agreement extends
through March 31, 1997 and provides a line of credit of $40 million, with
provision to increase the line to $60 million at the option of the Company.
Borrowing availability is determined by a formula based on qualified assets.
The interest is at prime rate plus 1% (1% lower then the rate applicable to
the old Loan Agreement). In consideration for entering into the New
24
<PAGE> 27
Agreement, the Company paid a $100,000 fee; additional fees will be due if the
Company exercises its option to increase the line. The Company has also agreed
to pay an unused line fee of 0.25% and certain management fees. The New
Agreement provides that the preferred dividends payments may not be made
without the prior consent of the Lender.
On November 17, 1993, the Company sold in a private placement $14 million in
principal amount of 8% Convertible Subordinated Debentures (the "8%
Debentures"), at par. The interest is to be paid semi-annually. 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 applied the net proceeds received from the 8%
Debentures to the expansion of its product lines.
On June 10, 1992, the Company announced it would not pay the July 1, 1992 $0.425
per share quarterly dividend on its Depository Shares which represent shares of
the Company's Preferred Stock. The Company has not paid the subsequent quarterly
dividends. As of January 1, 1995, the dividend was cumulatively eleven quarters
in arrears, representing a total dividend arrearage of $8.6 million. By the
terms of the Certificate of Designations for the Company's Preferred Stock, the
Company is not legally obligated to pay any such arrearage. 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 continuation 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.
Net cash used by operating activity during 1994 was $6.5 million (due to asset
increases more than offsetting the cash provided by net earnings) compared to
$7.4 million used in 1993. Net cash used in investing activities during 1994 was
$0.5 million (investment in new equipment) compared to $0.2 million in 1993.
Cash utilized in the Company's operating and investing activities during 1994
was principally provided by borrowings under the Loan Agreement.
Working capital was $53.2 million at December 31, 1994 compared to $30.8 at
December 31, 1993. The ratio of current assets to current liabilities was 2.4 to
1.0 at December 31, 1994 compared to 2.0 to 1.0 at December 31, 1993.
The Company had no material commitments for capital expenditures at December 31,
1994.
The Company believes that with its assets, the results of operations and the
Loan Agreement it has adequate liquidity and capital resources to meet its
current and anticipated needs.
25
<PAGE> 28
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and Financial Statement
Exhibits are listed in Item 14(a) and are included herein.
Item 9. Changes in and Disagreements with Accountants and Financial
Disclosure
Not applicable.
26
<PAGE> 29
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
The section entitled "Election of Directors" contained
in the Proxy Statement is hereby incorporated by
reference.
(b) Identification of Executive Officers:
See PART I of this Form 10-K.
Item 11. Executive Compensation
The section entitled "Executive Compensation" contained in the
Proxy Statement is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section entitled "Security Ownership of Management"
contained in the Proxy Statement is hereby incorporated by
reference.
Item 13. Certain Relationships and Related Transactions
The section entitled "Executive Compensation" contained in the
Proxy Statement is hereby incorporated by reference.
27
<PAGE> 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
Index to Financial Statements
The following consolidated financial statements and schedules of the Company and
its subsidiaries are included as Part II, Item 8 of this Report:
<TABLE>
<CAPTION>
(a) 1. Financial Statements Page
-------------------- ----
<S> <C>
Report of Independent Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1994 and December F-2
31, 1993
Consolidated Statements of Operations for the years ended F-3
December 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Shareholders' Equity for F-4
the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended F-5
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements F-6 to
F-25
(a) 2. Financial Statement Schedules
-----------------------------
Schedule I - Marketable Securities - Other Investments - S-1
December 31, 1994 and December 31, 1993
Schedule VIII - Valuation and
Qualifying Accounts and Reserves S-2
for the years ended December 31,
1994, 1993 and 1992
Schedule X - Supplementary Income
Statement Information for the S-3
years ended December 31, 1994, 1993
and 1992
</TABLE>
All other schedules have been omitted because they are inapplicable or not
required, or the information is included in the financial statements or notes
thereto.
(a) 3. Exhibits
28
<PAGE> 31
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C>
2 Agreement of Merger, dated as of July 6, 1987.
(Incorporated by reference to Exhibit 2 to the
Company's Amendment No. 1 on Form 8 to the Registration
Statement on Form 8-B, filed with the Commission on
January 11, 1988 (the "Amendment No. 1 to the Form
8-B").)
3.1 Certificate of Incorporation. (Incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to the Form
8-B.)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to
Amendment No. 1 to the Form 8-B.)
4.1 Form of Certificate for Shares of Common Stock of the
Corporation. (Incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form S-3,
Registration No. 33-33640, filed with the Commission on
February 26, 1990 (the "Form S-3").)
4.2 Form of 1986 Nontransferable Stock Purchase Warrant
issued to Paul Sullivan. (Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to the Form 8-B.)
4.4 Warrant Agreement, dated as of July 7, 1988, between
the Corporation and Wells Fargo Bank and warrants
issued to Wells Fargo Bank. (Incorporated by reference
to Exhibit 4.4 to Amendment No. 3 on Form 8 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987, filed with the Commission
on August 2, 1988. (the "Amendment No. 3 to the 1987
10-K").)
</TABLE>
29
<PAGE> 32
<TABLE>
<S> <C>
4.4(1) Warrant Agreement, dated as of May 4, 1990, between the
Company and Camerica Corporation. (Incorporated by
reference to Exhibit 4.4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1991, filed with the Commission on March 30, 1992
(the "1991 Form 10-K").)
4.4(2) Warrant Agreement, dated as of May 4, 1990, between the
Company and David Darling. (Incorporated by reference
to the 1991 Form 10-K.)
4.4(3) Warrant Agreement, dated as of May 4, 1990, between the
Company and Jim Darling. (Incorporated by reference to
the 1991 Form 10-K.)
4.4(4) Warrant Agreement, dated as of May 4, 1990, between the
Company and Richard Darling. (Incorporated by reference
to the 1991 Form 10-K.)
4.4(5) Warrant Agreement, dated as of February 22, 1990, by
and between the Company and Roger Kowalsky.
(Incorporated by reference to Exhibit 28 to the Form
S-3.)
4.4(6) Warrant Agreement, dated as of December 11, 1991, by
and between the Company and Shereff, Friedman, Hoffman
and Goodman. (Incorporated by reference to Exhibit
4.4(6) to the Company's Annual Report on Form 10-K for
the fiscal year end December 31, 1993, filed with the
Commission on March 31, 1994 (the "1993 Form 10-K").)
4.4(7) Warrant Agreement, dated as of November 17, 1993, by
and between the Company and Gerard Klauer Mattison &
Co., Inc. (Incorporated by reference to Exhibit 4.4(7)
to the 1993 Form 10-K.)
</TABLE>
30
<PAGE> 33
<TABLE>
<S> <C>
4.5 Form of Certificate of Designations of the Company's
$17.00 Convertible Exchangeable Preferred Stock.
(Incorporated by reference to Exhibit 4 to the
Company's Registration Statement on Form 8-A, filed
with the Commission on October 6, 1989 (the "October 6,
1989 Form 8-A").)
4.5(1) Form of Certificate of Designations of the Company's
Series A Preferred Stock (Incorporated by reference to
Exhibit 2.2 to the Company's Registration Statement on
Form 8-A, filed with the Commission on January 23, 1990
(the "January 23, 1990 Form 8-A").
4.6 Form of Indenture with respect to the Company's 8-1/2%
Convertible Subordinated Debentures due October 1,
2014, between the Company and Manufacturers Hanover
Trust Company as Trustee, including form of Convertible
Debenture. (Incorporated by reference to Exhibit 5 to
the October 6, 1989 Form 8-A).
4.7 Form of Indenture with respect to the Company's
Subordinated Debentures due October 1, 2014, between
the Company and Manufacturers Hanover Trust Company as
Trustee, including form of Debenture. (Incorporated by
reference to Exhibit 6 to the October 6, 1989 Form
8-A).
4.8 Form of Indenture with respect to the Company's 8-1/2%
Senior Subordinated Notes, between the Company and
Continental Stock Transfer & Trust Company, as Trustee,
including form of Note. (Incorporated by reference to
Exhibit 7 to the October 6, 1989 Form 8-A).
4.9 Form of Deposit Agreement between the Company and
Manufacturers Hanover Trust Company of California as
Depositary, including form of Depositary Receipt.
(Incorporated by reference to Exhibit 8 to the October
6, 1989 Form 8-A).
</TABLE>
31
<PAGE> 34
<TABLE>
<S> <C>
4.10 Form of Rights Agreement, dated as of January 17, 1990,
between the Company and Mellon Securities Trust
Company. (Incorporated by Reference to Exhibit 2.1 to
the January 23, 1990 Form 8-A).
4.11 Indenture, with respect to the Company's 8% Convertible
Subordinated Debentures due year 2000, between the
Company and Continental Stock Transfer & Trust Company,
as Trustee, including form of Debenture Note.
(Incorporated by reference to Exhibit 4.11 to the 1993
Form 10-K)
10.1* 1984 Employee Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 4 to the
Corporation's Registration Statement on Form S-8,
Registration No. 33-9393, filed with the Commission on
September 2, 1987 (the "1987 Form S-8").)
10.1(1)* 1992 Senior Management Stock Option Plan. (Incorporated
by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-8, Registration No.
33-56004, filed with the Commission on December 18,
1992 (the "1992 Form S-8").)
10.1(2)* Amended and Restated 1984 Employee Stock Option Plan
(Incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-8, Registration
Statement No. 33-56585, filed with the Commission on
November 23, 1994.)
10.1(3)* 1994 Senior Management Stock Option Plan. (Incorporated by
reference to Exhibit 4.6 of the Company's Registration Statement
on Form S-8, Registration Statement No. 33-56587, filed with the
Commission on November 23, 1994.)
10.1(4)(a)* Form of Agreement between each of Mark Goldman, William
Catron, Lou Novak, Gary Niles, Mark Shepherd, Ronald
Hirschfeld and H. Alan Gaudie and the Corporation.
(Incorporated by reference to Exhibit 4.6 of the Company's
Registration Statement on Form S-8, Registration Statement No.
33-56589, filed with the Commission on November 23, 1994.)
10.1(4)(b)* Form of Amendment No. 1 between each of Mark Goldman,
William Catron, Lou Novak, Gary Niles, Mark Shepherd,
Ronald Hirschfeld and H. Alan Gaudie and the
Corporation.
10.2* Profit Sharing Plan. (Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on
Form S-1, Registration No. 33-6743, filed with the
Commission on August 12, 1986 (the "1986 Registration
Statement").)
</TABLE>
32
<PAGE> 35
<TABLE>
<S> <C>
10.4(7)* Agreement, dated October 27, 1994, between Mark Goldman
and the Company.
10.4(10)* Agreement, dated as of December 11, 1991, by and
between Martin Nussbaum and the Company. (Incorporated
by reference to Exhibit 10.4(10) to the 1991 Form
10-K.)
10.4(11)(a)* Agreement, dated July 15, 1993, between William G.
Catron and the Company. (Incorporated by reference to
Exhibit 10.4 (11) (a) to the 1993 Form 10-K)
10.4(11)(b)* Agreement, dated July 15, 1993, between Lou Novak and
the Company. (Incorporated by reference to Exhibit 10.4
(11) (b) to the 1993 Form 10-K)
10.4(11)(c)* Agreement, dated July 15, 1993, between Ronald
Hirschfeld and the Company. (Incorporated by reference
to Exhibit 10.4 (11) (c) to the 1993 Form 10-K)
10.4(11)(d)* Agreement, dated July 15, 1993, between Gary Niles and
the Company. (Incorporated by reference to Exhibit 10.4
(11) (d) to the 1993 Form 10-K)
10.4(11)(e)* Agreement, dated March 29, 1994, between Loren
Hildebrand and the Company.
10.4(11)(f)* Agreement, dated February 27, 1995, between William B.
Towne and the Company.
10.7(3) Second Amended and Restated Credit Agreement dated as
of March 31, 1992 among the Company, Bank of America
National Trust and Savings Association and other
signatory thereto. (Incorporated by reference to
Exhibit 10.7(3) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992, filed
with the Commission on March 31, 1993 (the "1992 Form
10-K")).
</TABLE>
33
<PAGE> 36
<TABLE>
<S> <C>
10.7(4) Amendments dated November 1, 1992 and February 17, 1993
to the Second Amended and Restated Credit Agreement
dated as of March 31, 1992. (Incorporated by reference
to Exhibit 10.7(4) to the 1992 Form 10-K.)
10.7(5) Securities Purchase Agreement, dated November 17, 1993,
by and among the Company and the purchasers executing
signature pages thereto (the "Purchasers").
(Incorporated by reference to Exhibit 10.7 (5) to the
1993 Form 10-K)
10.7(6) Registration Rights Agreement, dated as of November 17,
1993, by and among the Company and the Purchasers.
(Incorporated by reference to Exhibit 10.7 (6) to the
1993 Form 10-K)
10.7(7) Loan and Security Agreement, dated as of April 1, 1993,
by and among the Company and Congress Financial
Corporation (Central), including form of Revolving Loan
Note. (Incorporated by reference to Exhibit 10.7 (7) to
the 1993 Form 10-K)
10.7(7)(a) First Amendment to Loan and Security Agreement, dated
as of November 17, 1993. (Incorporated by reference to
Exhibit 10.7 (7) (a) to the 1993 Form 10-K)
10.7(7)(b) Amended and Restated Loan and Security Agreement, dated
as of March 31, 1995, by and among the Company and
Congress Financial Corporation (Central).
10.9(3) License Agreement, dated June 16, 1986, by and
between Funmaker as Licensor and the Company as
Licensee. (Incorporated by reference to Exhibit
10.10(5) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1986, filed
with the Commission on March 31, 1987 ("1986 Form
10-K").)
10.9(4) License Agreement, dated May 4, 1990, by and among the
Company as Licensee, Codemasters Software Company, Ltd.
and Camerica Corporation, Limited. (Incorporated by
reference to Exhibit 10.9(4) of the 1992 Form 10-K.)
</TABLE>
34
<PAGE> 37
<TABLE>
<S> <C>
10.9(4)(a) Amendment No. 1 dated June 1991 to License Agreement
dated May 4, 1990. (Incorporated by reference to
Exhibit 10.9(4) (a) of the 1992 Form 10-K.)
10.9(4)(b) Amendment No. 2 dated December 23, 1991 to License
Agreement, dated May 4, 1990. (Incorporated by
reference to Exhibit 10.9(5) (b) of the 1992 Form
10-K.)
10.9(5) European License Agreement, dated December 23, 1991, by
and between the Codemasters Software Company, Ltd. and
the Company as Licensee. (Incorporated by reference to
Exhibit 10.9(5) of the 1992 Form 10-K.)
10.9(6) Third Amendment to United States License and First
Amendment to European License, dated November 4, 1992.
(Incorporated by reference to Exhibit 10.9(6) of the
1992 Form 10-K.)
10.9(7) Fourth Amendment to United States License Agreement,
dated October 14, 1994.
10.10 Agreement of Purchase and Sale, dated October 22, 1986,
by and between ATC Building Company as Seller and the
Company as Buyer. (Incorporated by reference to Exhibit
10.11 to the 1986 Form 10-K.)
10.12 Lease Agreement, dated March 12, 1987, by and between
Lincoln Alvarado and Patrician Associates, Inc. as
Lessor and the Company as Lessee. (Incorporated by
reference to Exhibit 10.12 to Amendment No. 1 to the
Form 8-B.)
10.12(1) Amendment No. 1 to Lease dated March 12, 1987.
(Incorporated by reference to Exhibit 10.12(1) to the
1991 Form 10-K.)
11 Computations of Earnings Per Share.
12 Computation of ratio of earnings to fixed charges and
preferred stock dividends.
22 Subsidiaries of the Company.
</TABLE>
35
<PAGE> 38
<TABLE>
<S> <C>
24.1 Consent of Price Waterhouse.
27 Financial Data Schedules
</TABLE>
*Management contracts, compensatory plans and arrangements required to be filed
as an exhibit pursuant to Item 14(c) of this Report.
(b) Reports on Form 8-K
No Report on Form 8-K has been filed during the last quarter of the period
covered by this Report.
36
<PAGE> 39
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LEWIS GALOOB TOYS, INC.
(Registrant)
By: /s/ Mark D. Goldman
--------------------
Mark D. Goldman
President, Chief Executive
Officer
Dated: March 29, 1995
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Mark D. Goldman President, Chief March 29, 1995
----------------------- Executive Officer and
Mark D. Goldman Director
/s/ Scott R. Heldfond Director March 29, 1995
-----------------------
Scott R. Heldfond
/s/ Paul A. Gliebe, Jr. Director March 29, 1995
-----------------------
Paul A. Gliebe, Jr.
/s/ Martin Nussbaum Director March 29, 1995
-----------------------
Martin Nussbaum
/s/ S. Lee Kling Director March 29, 1995
-----------------------
S. Lee Kling
/s/ Andrew Cavanaugh Director March 29, 1995
-----------------------
Andrew Cavanaugh
/s/ Roger Kowalsky Director March 29, 1995
-----------------------
Roger Kowalsky
/s/ George Riordan Director March 29, 1995
-----------------------
George Riordan
/s/ Hoffer Kaback Director March 29, 1995
-----------------------
Hoffer Kaback
/s/ William B. Towne Executive Vice March 29, 1995
----------------------- President, Finance
William B. Towne and Chief Financial Officer
</TABLE>
37
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Lewis Galoob Toys, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 28 present fairly, in all material
respects, the financial position of Lewis Galoob Toys, Inc. and its subsidiaries
at December 31, 1994 and 1993, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
February 10, 1995
F-1
<PAGE> 41
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31
-----------------------
1994 1993
-------- -------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,225 $ 2,325
Accounts receivable, net 57,883 33,383
Inventories 16,824 12,979
Tooling and related costs 8,379 5,020
Prepaid expenses and other assets 5,492 7,341
-------- -------
TOTAL CURRENT ASSETS 90,803 61,048
LAND, BUILDING AND EQUIPMENT, NET 8,400 8,562
OTHER ASSETS 1,563 1,395
-------- -------
$100,766 $71,005
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 6,971 $ -
Accounts payable 14,973 10,834
Accrued expenses 14,939 18,916
Income taxes payable 499 282
Current portion of long-term debt 202 203
-------- -------
TOTAL CURRENT LIABILITIES 37,584 30,235
LONG-TERM DEBT 18,414 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
Common stock, par value $.01 per share
Authorized 50,000,000 shares
Issued and outstanding 10,055,089 shares
in 1994 and 9,559,357 shares in 1993 101 96
Additional paid-in capital 31,506 27,293
Retained earnings (deficit) (23,182) (41,596)
Cumulative translation adjustment (447) (421)
-------- -------
TOTAL SHAREHOLDERS' EQUITY 44,768 22,162
-------- -------
$100,766 $71,005
======== =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-2
<PAGE> 42
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net revenues $178,792 $134,334 $166,280
Costs of products sold 104,592 82,875 104,965
-------- -------- --------
Gross margin 74,200 51,459 61,315
-------- -------- --------
Operating expenses:
Advertising and promotion 30,616 23,537 22,826
Other selling and administrative 26,974 25,640 30,345
Research and development 7,288 7,451 6,861
Variable stock option plan expense - 4,046 -
-------- -------- --------
Total operating expenses 64,878 60,674 60,032
-------- -------- --------
Earnings (loss) from operations 9,322 (9,215) 1,283
Expenses related to resignation of former
officers - - (2,152)
Net proceeds from Nintendo award 12,124 - -
Interest expense (2,609) (1,836) (1,550)
Other income, net 365 136 210
-------- -------- --------
Earnings (loss) before income taxes 19,202 (10,915) (2,209)
Provision for income taxes 778 9 238
-------- -------- --------
Net earnings (loss) 18,424 (10,924) (2,447)
Preferred stock dividends paid - - 782
-------- -------- --------
Net earnings (loss) after dividends
paid 18,424 (10,924) (3,229)
Preferred stock dividends in arrears 3,127 3,127 2,345
-------- -------- --------
Net earnings (loss) applicable to
common shares $ 15,297 $(14,051) $ (5,574)
======== ======== ========
Common shares and common share
equivalents outstanding - average 10,111 9,548 9,400
Net earnings (loss) per common share:
Primary $ 1.51 $ (1.47) $ (.59)
Fully Diluted 1.41 (1.47) (.59)
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
<PAGE> 43
<TABLE>
<CAPTION>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
(in thousands, except shares)
Additional Retained Cumulative
Preferred Stock Common Stock Paid-In Earnings Translation
Shares Amts Shares Amts Capital (Deficit) Adjustment Total
------ ---- ------ ---- ------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 12/31/91 183,950 36,790 9,365,441 94 26,005 (27,411) (386) 35,092
Net loss - - - - - (2,447) - (2,447)
Common stock issued - - 106,616 1 420 - - 421
Dividends declared
on preferred stock - - - - - (782) - (782)
Cumulative translation adj.
and other - - - - - (12) (26) (38)
------- ------ --------- --- ------ ------- ---- ------
Balance at 12/31/92 183,950 36,790 9,472,057 95 26,425 (30,652) (412) 32,246
Net loss - - - - - (10,924) - (10,924)
Common stock issued - - 89,800 1 343 - - 344
Warrants issued - - - - 525 - - 525
Common stock received in
exchange for shares
issued and cancelled - - (2,500) - - (20) - (20)
Cumulative translation adj.
and other - - - - - - (9) (9)
------- ------- ---------- --- ------- -------- ----- -------
Balance at 12/31/93 183,950 $36,790 9,559,357 $96 $27,293 $(41,596) $(421) $22,162
Net earnings - - - - - 18,424 - 18,424
Common stock issued, net - - 47,000 1 161 - - 162
Termination of 1992 Plan - - 449,732 4 4,042 - - 4,046
Common stock received in
exchange for shares
issued and cancelled - - (1,000) - 10 (10) - -
Cumulative translation adj.
and other - - - - - - (26) (26)
------- ------- ---------- ---- ------- -------- ----- -------
Balance at 12/31/94 183,950 $36,790 10,055,089 $101 $31,506 $(23,182) $(447) $44,768
======= ======= ========== ==== ======= ======== ===== =======
The accompanying notes are an integral part of these Consolidated Financial Statements.
</TABLE>
F-4
<PAGE> 44
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------
1994 1993 1992
---- ---- ----
<S> <S> <S> <S>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 18,424 $ (10,924) $ (2,447)
Adjustments to reconcile net earnings
(loss) to net cash used in
operating activities:
Depreciation 628 682 885
Variable stock option plan accrual - 4,046 -
Changes in assets and liabilities:
Accounts receivable (24,500) 2,523 (10,465)
Inventories (3,845) 691 (4,152)
Tooling and related costs (3,359) (2,212) 134
Prepaid expenses and other assets 1,681 (152) (689)
Accounts payable 4,140 1,449 4,375
Accrued expenses 67 (3,002) 699
Income taxes payable 217 (549) (113)
Other - - 318
------- ------- --------
Net cash used in operating activities (6,547) (7,448) (11,455)
------- ------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and
equipment, net (466) (82) (114)
Repayment of loan due from officer - - 1,116
------- ------- --------
Net cash (used in) provided by
investing activities (466) (82) 1,002
------- ------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
notes payable 6,971 (5,698) 5,698
Borrowings under long-term debt
agreement - 14,000 -
Repayments under long-term debt agreements (194) (191) (225)
Dividends declared on preferred stock - - (782)
Proceeds from issuance of common stock 383 344 421
Repurchase of Common Stock (221) - -
Other, net (26) (29) (38)
------- ------- --------
Net cash provided by (used in)
financing activities 6,913 8,426 5,074
------- ------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (100) 896 (5,379)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,325 1,429 6,808
------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,225 $ 2,325 $ 1,429
======= ======== ========
Supplemental disclosure of non-cash activity:
In 1992, in connection with issuance of 8% Convertible Subordinated
Debentures the Company issued warrants for 150,000 shares of common
stock which were valued at $525,000.
In 1994, The Company issued 449,732 shares of common stock in connection
with the termination of the 1992 Senior Management Stock Option Plan.
(See Note N)
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,656 $ 1,604 $ 1,387
Cash paid for income taxes $ 822 $ 574 $ 228
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE> 45
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
NOTE A - Summary of Significant Accounting Policies
Organization and Business
The Company has been engaged in business since 1957 and was originally
incorporated in California on November 6, 1968, and reincorporated in Delaware
on August 28, 1987. The Company is engaged in the design, development, marketing
and distribution of high quality toys worldwide. The Company's products are
primarily manufactured in the People's Republic of China ("China").
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, principally Galco International Toys, N.V. ("Galco"). All
significant intercompany accounts have been eliminated in consolidation. Certain
amounts in the financial statements of prior years have been reclassified to
conform with the current year's presentation.
Revenue Recognition
The Company records a transaction as a sale when inventory is shipped to the
customer and title passes. The Company provides for returns using a percentage
of gross sales, based on historical experience.
Foreign Currency Translation
The financial statements of Galco have been translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
Foreign Currency Translation. All asset and liability accounts have been
translated using rates of exchange in effect at the balance sheet date.
Revenues and expenses are translated at the weighted average of exchange rates
in effect during the year. Gains or losses from foreign currency translation
adjustments are charged or credited directly to a separate component of
shareholders' equity.
F-6
<PAGE> 46
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Cash and Cash Equivalents
Cash equivalents consist primarily of marketable securities with original
maturities of less than ninety days. Cash and cash equivalents are stated at
cost, which approximates market values.
Concentration of Credit Risk
Accounts receivable primarily represent balances due from customers. The Company
performs credit evaluations of each of its customers and maintains allowances
for potential credit losses. Such losses have generally been within management's
expectations.
Inventories
Inventories are stated at lower of cost (first-in, first-out) or market.
Tooling and Related Costs
Costs incurred for tooling and package design are deferred and amortized over
the life of the products, which range from one to two years.
Prepaid Expenses
Prepaid expenses include costs such as those incurred in the creation of
television commercials which are deferred and amortized over their lives which
is estimated to be one year or the period the commercial is used, if shorter. On
January 1, 1995, the company implemented SOP 93-7 "Reporting on Advertising
Costs." Implementation of the new standard will have no material impact on the
financial statements. Prepaid expenses also include prepaid insurance, prepaid
samples, prepaid advertising media, and royalty advances.
Land, Building and Equipment
Land, building and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets. Amortization of leasehold improvements is provided using the
straight-line method over the estimated useful lives of the assets, or the term
of the applicable lease, whichever is less. Estimated useful lives are 35 years
for building and building improvements, 1 to 12 years for leasehold
improvements, 5 years for office furniture, fixtures and equipment, (including
computer equipment), and 3 to 6 years for vehicles.
F-7
<PAGE> 47
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Income Taxes
In 1993, the Company retroactively adopted Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. SFAS 109 prescribes
an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactments of changes in the tax law or rates.
Previously, the Company used the SFAS 96 asset and liability approach that gave
no recognition to future events other than the recovery of assets and settlement
of liabilities at their carrying amounts. Adoption of SFAS 109 did not have a
material effect on the financial statements.
Earnings Per Share
Primary earnings per share is based on the net earnings (loss) applicable to
common shares, after providing for the dividends in arrears on the preferred
stock, for the year divided by the weighted average number of common and common
equivalent shares outstanding. Primary earnings per share for the year ended
December 31, 1994, have been adjusted by common equivalent shares resulting from
the assumed exercise of common stock options and stock warrants. Primary
earnings per share for the years ended December 31, 1993 and 1992 have not been
adjusted by common equivalent shares since the effect would be anti-dilutive.
Fully diluted earnings per share for the year ended December 31, 1994 includes
the effect of the assumed conversion of the $17 Convertible Exchangeable
Preferred Stock and the 8% Convertible Subordinated Debentures into common
stock. Fully diluted earnings per share for the years ended December 31, 1993
and 1992 were the same as primary earnings per share since the effect of the
assumed conversion is anti-dilutive.
F-8
<PAGE> 48
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE B - Accounts Receivable, Net
<TABLE>
<CAPTION>
(in thousands)
December 31
----------------------
1994 1993
---- ----
<S> <C> <C>
Trade receivables $65,757 $38,437
Provisions for:
Advertising allowances (2,900) (1,400)
Return of defective goods (900) (1,600)
Markdowns and discounts (3,400) (1,400)
Doubtful accounts (897) (849)
------- -------
Net trade receivables 57,660 33,188
Other receivables 223 195
------- -------
$57,883 $33,383
======= =======
</TABLE>
On May 15, 1991, the Company entered into an amended maturity factoring
agreement which provided for ledgering and collection of submitted accounts. In
addition, the factor assumed the credit risk for submitted accounts based
generally on pre-established customer credit criteria. A fee of 0.7% to 1.0% of
the gross invoice amounts was paid to the factor. This agreement ended on March
31, 1993 and was not renewed.
NOTE C - Inventories
<TABLE>
<CAPTION>
(in thousands)
December 31
----------------------
1994 1993
---- ----
<S> <C> <C>
Finished goods $15,596 $10,363
Raw materials and parts 1,228 2,616
------- -------
$16,824 $12,979
======= =======
</TABLE>
F-9
<PAGE> 49
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE D - Land, Building and Equipment, Net
<TABLE>
<CAPTION>
(in thousands)
December 31
-----------------------
1994 1993
------- -------
<S> <C> <C>
Land and building $ 9,564 $ 9,402
Office furniture, fixtures and equipment 4,360 4,310
Leasehold improvements 787 787
Vehicles 104 161
------- -------
14,815 14,660
Less accumulated depreciation 6,415 6,098
------- -------
$ 8,400 $ 8,562
======= =======
</TABLE>
NOTE E - Notes Payable
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 the line 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 paid a $375,000 fee. 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 Company has also agreed to
pay 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.
The Company has entered into a new agreement which increases and extends the
line of credit through March 31, 1997 and reduces the rate of interest. (See
Note Q for a description of the new agreement).
F-10
<PAGE> 50
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The maximum outstanding borrowings, average outstanding balances and weighted
average rates of interest for notes payable were as follows:
<TABLE>
<CAPTION>
(in thousands)
1994 1993
---- ----
<S> <C> <C>
Maximum outstanding at month end $18,209 $18,663
Average outstanding amount during the year 4,184 7,322
Weighted average interest rate for the year 9.7% 8.1%
</TABLE>
NOTE F - Income Taxes
Earnings (loss) before income taxes and the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
(in thousands)
Years ended December 31
-----------------------------------------
1994 1993 1992
<S> <C> <C> <C>
Earnings (loss) before income taxes:
Domestic $18,861 $(10,806) $(5,346)
Foreign 341 (109) 3,137
------- -------- -------
$19,202 $(10,915) $(2,209)
======= ======== =======
Provision for income taxes:
Current:
Federal $ 490 $ - $ -
State 201 - -
Foreign 87 9 238
------- -------- -------
778 9 238
Deferred:
Federal - - -
State - - -
Foreign - - -
------- -------- --------
$ 778 $ 9 $ 238
======= ======== ========
</TABLE>
F-11
<PAGE> 51
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Deferred tax liabilities (assets) consist of the following:
<TABLE>
<CAPTION>
(in thousands)
Years Ended December 31
--------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Prepaid expenses $ 1,586 $ 2,065 $ 1,697
Other temporary differences 705 647 624
------- ------- -------
Gross deferred tax liabilities 2,291 2,712 2,321
------- ------- -------
Accrued expenses (939) (1,377) (1,980)
Defectives provision (315) (560) (1,020)
Other temporary differences (2,970) (1,936) (1,542)
Net operating loss carryforwards (4,037) (11,128) (8,519)
Research and development tax credit
carryforward (765) (765) (765)
Other (944) (765) (666)
------- ------- -------
Gross deferred tax assets (9,970) (16,531) (14,492)
------- ------- -------
Deferred tax assets valuation
allowance 7,679 13,819 12,171
------- ------- -------
$ - $ - $ -
======= ======= =======
</TABLE>
The net change in the valuation allowance for deferred tax assets was an
increase (decrease) of ($6,140,000), $1,648,000 and $2,589,000 in 1994, 1993 and
1992, respectively.
F-12
<PAGE> 52
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
The provision for income taxes differs from the provisions determined by
applying the applicable U.S. statutory federal income tax rates to pretax income
as a result of the following differences:
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------
1994 1993 1992
<S> <C> <C> <C>
Federal income taxes (benefit) at
the U.S. statutory rate 35.0% (34.0%) (34.0%)
Increase (decrease) in income taxes resulting from:
Effects of U.S. and foreign income
taxes on foreign operations (0.2) 0.1 10.8
State income taxes, net of loss 0.9 - -
carryfowards, less federal tax
benefits
Loss carryback/carryforward (31.6) 34.0 34.0
------ ----- -----
4.1% 0.1% 10.8%
====== ===== =====
</TABLE>
During 1993, the Company settled with the Internal Revenue Service (IRS) and the
California Franchise Tax Board (CFTB) regarding audits of the years 1982 through
1990 for federal purposes and 1983 through 1989 for California purposes. The
Company adequately provided for the amounts settled with the IRS and the CFTB.
At December 31, 1994, the Company had federal and California net operating loss
carryforwards for income tax purposes of approximately $11,500,000 and
$1,000,000, 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 $944,000 that are allowed to be
carried forward indefinitely and federal research and development credits of
$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 can be
utilized.
No domestic deferred taxes have been provided on unremitted earnings of the
foreign subsidiary. All such earnings are expected to be reinvested in the
subsidiary. Undistributed earnings for which the Company has not provided taxes,
which may be payable on distribution, were approximately $5,500,000 as of
December 31, 1994. No foreign taxes will be withheld on the distribution of the
untaxed earnings.
F-13
<PAGE> 53
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE G - Leases
The Company leases its domestic warehouse and showroom facilities, and its
facilities in Hong Kong. The leases have been classified as operating leases and
are for terms expiring at various dates through 1998. Under the terms of the
facility leases, rents are adjusted annually for changes in the consumer price
index and increases in property taxes. The Company has a lease option on the
domestic warehouse to renew for one five year term.
Future minimum lease payments for all noncancellable operating leases as of
December 31, 1994 (in thousands), are as follows:
<TABLE>
<CAPTION>
Years ending
December 31
<S> <C>
1995 $1,452
1996 695
1997 239
1998 49
------
$2,435
======
</TABLE>
Net rental expense for the years ended December 31, 1994, 1993 and 1992 was
$1,515,000, $1,449,000 and $1,839,000, respectively.
NOTE H - Accrued Expenses
<TABLE>
<CAPTION>
(in thousands)
December 31
----------------------
1994 1993
---- ----
<S> <C> <C>
Accrued advertising $ 272 $ 2,582
Accrued royalties 6,039 4,709
Accrued expense related to variable stock
option plan - 4,046
Accrued compensation and commissions 3,875 745
Accrued freight and duty 1,483 1,527
Accrued interest 1,108 1,296
Accrued purchase commitments 1,320 1,900
Other accrued expenses 842 2,111
------- -------
14,939 $18,916
======= =======
</TABLE>
F-14
<PAGE> 54
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
In 1993, the United States Customs Service ("Customs") completed the on-site
audit of duty due on importations of goods into the United States during 1988
through 1991. Customs has issued to the Company a notice stating that it is
contemplating the formal issuance of a demand claim wherein it would set forth
the amount they seek to recover. Management believes the recorded provisions at
December 31, 1994 are adequate to cover the final settlement.
NOTE I - Long-Term Debt
<TABLE>
<CAPTION>
(in thousands)
December 31
-----------------------
1994 1993
---- ----
<S> <C> <C>
8% Convertible Subordinated Debentures due and
payable on November 30, 2000,
interest paid semi-annually $14,000 $14,000
Mortgage secured by headquarters land and
building, payable in monthly installments of $55,314 (principal and interest)
through November 30, 1996 when the remaining outstanding
balance is due, interest rate 10.3% 4,616 4,783
Other - 28
------- -------
18,616 18,811
Current portion 202 203
------- -------
$18,414 $18,608
======= =======
</TABLE>
Payments of principal for the years 1995 and 1996 are $202,000 and $4,414,000,
respectively, with $14,000,000 due in the year 2000.
On November 17, 1993, the Company issued in a private placement $14 million in
principal amount of 8% Convertible Subordinated Debentures (the "8%
Debentures"), at par. The interest is to be paid semi-annually. 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 ending November
12, 1993. In connection with the 8% Debentures, the Company paid a commission to
its investment bankers of $560,000 and issued warrants for 150,000 shares, which
were valued at $525,000 and recorded as additional paid-in capital. These
deferred loan costs are included in other assets and are amortized using a
straight-line method over the term of the loan.
F-15
<PAGE> 55
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE J - Major Customers
The Company had transactions with one customer, Toys "R" Us, Inc. that accounted
for approximately 21% of net revenues in 1994, 1993 and 1992, respectively.
NOTE K - Profit Sharing Plan
The Company has a 401(k) profit sharing plan covering all non-union full-time
employees. The plan is qualified under Section 401 (a) of the Internal Revenue
Code so that contributions to the plan by the Company are not taxable until
distributed to employees. Contributions under the plan are at the discretion of
the Board of Directors and are subject to the amounts allowable under applicable
provisions of the Internal Revenue Code. No Company contributions have been made
in 1994, 1993 or 1992.
NOTE L - Litigation
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 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 of 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
F-16
<PAGE> 56
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
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
$12.1 million of this amount, and the Company's Game Genie licensors were paid
the remaining $4.0 million. Notwithstanding such payment, on June 20, 1994,
Nintendo filed a petition for a Writ of Certiorari with the United Sates 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. On January 18, 1995 these claims were dismissed
with prejudice by Nintendo and Galoob respectively. The Nintendo Game Genie
infringement lawsuit is now complete.
The Company is involved in various other litigation and 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.
F-17
<PAGE> 57
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE M - Shareholders' Equity
In 1989, the Company issued 183,950 authorized shares of $17 Convertible
Exchangeable Preferred Stock with a $200 liquidation value (the "Preferred
Stock") and deposited them with a U.S. Bank (the Depositary) and sold in a
public offering an aggregate of 1,839,500 Depositary Convertible Exchangeable
Preferred Shares (the "Depositary Shares") at a price of $20 per share. Each
Depositary Share represents 1/10th share of Preferred Stock and has a cumulative
dividend rate of $1.70 per annum, payable quarterly, and may be converted into
common stock at the option of the holders at an initial price of $16.875 per
share of common stock.
The Depositary Shares are redeemable in whole or in part at any time, at the
option of the Company, at redemption prices ranging from $21.36 to $20.00 plus
dividends accrued and unpaid to the redemption date; provided certain redemption
requirements are met which are based on the market price of the Company's common
stock.
The entire issue of Depositary Shares (in multiples of ten) and the entire issue
of Preferred Stock is exchangeable, at the option of the Company, on any
dividend payment date for the Company's 8-1/2% Convertible Subordinated
Debentures due October 1, 2014 (the "8-1/2% Debentures") at the rate of $20.00
principal amount of 8-1/2% Debentures for each Depositary Share. At any time
following the occurrence of certain change in control transactions, each holder
of Depositary Shares, the Preferred Stock, or of 8-1/2% Debentures, as the case
may be, has the right to cause the Company to exchange the Depositary Shares (in
multiples of ten), the Preferred Stock or the 8-1/2% Debentures, as the case may
be, for the Company's Subordinated Debentures due October 1, 2014 (the "Reset
Debentures").
F-18
<PAGE> 58
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
As long as the Preferred Stock, the 8-1/2% Debentures, or the Reset Debentures
are outstanding, the Company will be subject to limitations on the payment of
certain common stock dividends and other distributions and on the purchase,
redemption, or other acquisition of capital stock. No common stock dividends may
be paid unless the Preferred Stock dividends are current. The Company has
reserved 2,180,148 shares of common stock for the conversion of the Preferred
Stock.
On June 10, 1992, the Company announced it would not pay the July 1, 1992 $ .425
per share quarterly dividend on its Depository Shares which represent shares of
the Company's Preferred Stock. The Company has not paid the subsequent quarterly
dividends. As of January 1, 1995, the dividend was cumulatively eleven quarters
in arrears, representing a total dividend arrearage of $8.6 million. By the
terms of the Certificate of Designations for the Company's Preferred Stock, the
Company is not legally obligated to pay any such arrearage. 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 continuation 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.
In 1990, the Company adopted a Stockholder Rights Plan and declared a dividend
distribution of one Right for each outstanding share of common stock. Each Right
will entitle holders of the Company's common stock to buy one one-thousandth of
a share of Series A Preferred Stock of the Company at an exercise price of
$43.00, subject to adjustment. The Rights will be exercisable only if a person
or group acquires beneficial ownership of 20% or more of the common stock (other
than pursuant to certain transactions involving the Company) (an "Acquiring
Person") or announces a tender or exchange offer that would result in such
person or group beneficially owning 20% or more of the common stock (other than
a tender or exchange offer for all outstanding shares at a price determined by
the non-affiliated directors to be fair).
If any person becomes the beneficial owner of 20% or more of the common stock
(other than pursuant to certain transactions involving the Company or a tender
or exchange offer for all outstanding shares at a price determined by the
non-affiliated directors to be fair), or an Acquiring Person engages in certain
"self-dealing"
F-19
<PAGE> 59
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
transactions including a merger in which the Company is the surviving
corporation, each Right not owned by such Acquiring Person will enable its
holder to purchase, at the Right's then-current exercise price, shares of the
common stock (or, in certain circumstances, cash, property or other securities
of the Company) having a value of twice the Right's exercise price. In addition,
if the Company is acquired in a merger or other business combination transaction
in which the Company is not the surviving corporation, or if the Company sells
or transfers 50% or more of its assets or earning power, each Right not owned by
such Acquiring Person will entitle its holder to purchase, at the Right's
then-current exercise price, common shares of the acquiring company having a
value of twice the Right's exercise price.
The Rights will expire January 17, 2000 or they may be redeemed by the Company
at $.01 per share prior to that date. The Rights do not have voting or dividend
rights, and until they become exercisable, have no dilutive effect on the
earnings of the Company.
NOTE N - Stock Options and Warrants
The Board of Directors and the shareholders adopted an Employee Stock Option
Plan in 1984 (the "1984 Plan"). During 1994, the 1984 Plan was amended to extend
the plan until April 20, 2004 and to increase the aggregate number of shares
available under the Plan. The 1984 Plan authorizes the Board of Directors to
grant to officers and employees of the Company and certain of its subsidiaries
options to purchase up to an aggregate of 1,589,997 common shares. Stock options
are exercisable in accordance with the determination of the Board of Directors
made at the time of their grant, and expire not more than ten years after the
date of grant. Stock options granted in 1994, 1993 and 1992 were at 100% of
market price.
At December 31, 1994, 541,205 shares remain available for future grants.
F-20
<PAGE> 60
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Stock option activity pursuant to the 1984 Plan is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Options outstanding:
At January 1 275,399 320,608 239,062
Granted 161,000 120,000 190,000
Exercised (97,000) (14,800) (25,000)
Cancelled (7,500) (150,409) (83,454)
-------- -------- --------
At December 31 331,899 275,399 320,608
Options exercisable: ======== ======== ========
At December 31 181,899 174,149 320,608
======== ======== ========
Option prices per share:
Granted $5.75-8.38 $3.25-7.38 $3.88-5.63
Exercised 3.25-5.63 3.00 3.00
Cancelled 3.00-6.125 3.00-6.38 2.66-4.78
</TABLE>
In 1992, the Board of Directors and the shareholders adopted a Senior Executives
Stock Option Plan (the "1992 Plan"), a variable stock option plan. Under the
1992 Plan 800,000 shares were reserved and options for 800,000 shares were
issued and outstanding at December 31, 1993. These options vest over three years
and expire after ten years. The initial exercise prices were $5.625 for 700,000
shares and $3.25 for 100,000 shares, respectively, the market prices on the
dates granted. The exercise prices were adjusted downward on a pro-rata basis as
the trading price of the stock increased above the initial exercise price so
that the exercise price would be $.01 when the trading price of the stock was
$19.00.
Generally accepted accounting principles ("GAAP") for variable stock option
plans required the Company to record a compensation expense accrual measured by
the difference between the market price of the common stock underlying an option
and the option price as of December 31, 1993. The sharp rise in the price of the
Company's common stock during the fourth quarter of 1993, therefore, required a
charge to earnings.
F-21
<PAGE> 61
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
The Company believed that the application of GAAP could have resulted in large
and repeated future distortion to reported quarterly earnings of the Company,
based on fluctuations in the stock price so long as the 1992 Plan remained in
effect. Therefore, on January 26, 1994, the Board of Directors of the company
("Board") terminated 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.
Also, on January 26, 1994 the Board adopted the 1994 Senior Management Stock
Option Plan (the "1994 Plan"), subject to shareholder approval. Under the 1994
Plan, each holder of options under the 1992 Plan was granted new options
with an option exercise price of $9.00, the trading price of the common stock of
the Company at the time of the Board actions. The shareholders approved the 1994
Plan in June 1994.
On March 11, 1986, the Company issued warrants to purchase 15,000 shares of
common stock at $7.83 per share. On July 7, 1988, in consideration for entering
into a credit agreement, the Company issued warrants to purchase 785,732 shares
of Common Stock at $4.50 per share. One half of the warrants issued on July 7,
1988, were repurchased on May 25, 1989, for $400,000. On May 4, 1990, the
Company issued warrants to purchase 100,000 shares of common stock at $10 per
share. On December 11, 1991, the Company issued warrants to purchase 25,000
shares of common stock at $4.375 per share. On November 17, 1993, the Company
issued warrants relating to the 8% Debentures to purchase 150,000 shares of
common stock at $9.50 per share.
The Company granted 1,000 shares of common stock at no cost to each employee of
the Company and Galco on November 8, 1991 and on January 2, 1992, respectively.
The shares vested one year from the date of grant and resulted in the issuance
of 84,000 shares of common stock in 1992 and 75,000 shares of common stock on
January 3, 1993. The $650,000 compensation cost related to this plan was charged
to expense over the vesting period.
F-22
<PAGE> 62
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE O - Related Party Transactions
The Company has retained the legal services of Shereff, Freidman, Hoffman &
Goodman, LLP in recent years. One of the Company's directors is a partner in
this firm. The total amount of legal and director fees paid to the firm in
1994 and 1993 were approximately $0.4 million and $0.4 million, respectively.
The Company has retained the insurance brokerage services of Rollins Hudig Hall
("RHH") in recent years. One of the Company's directors is the President and
Chief Executive Officer of Rollins Real Estate/Investment, a division of RHH.
The total amount of insurance premiums paid to RHH in 1994 and 1993 were
approximately $1.4 million and $1.0 million, respectively.
In 1994, the Company sold its minority interest in Galoob Toys Canada, Inc.,
which continues to act as the Company's distributor in Canada and which
accounted for less than 5% of the Company sales.
NOTE P - Expenses Related to Resignations of Former Officers
During 1991, the Company's former chief executive officer resigned. In
additions, during 1991 and 1992, certain senior officers resigned and the
Company underwent a reorganization which included employee layoffs. Related
expenses incurred in 1992 were $2.2 million.
NOTE Q - Subsequent Event
On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "New Agreement") with the Lender. The New Agreement
extends through March 31, 1997 and provides a line of credit of $40 million,
with provision to increase the line to $60 million at the option of the
Company. Borrowing availability is determined by a formula based on qualified
assets. The interest is at prime rate plus 1% (1% lower then the rate
applicable to the old Loan Agreement). In consideration for entering in the
New Agreement, the Company paid a $100,000 fee; additional fees will be paid if
the Company exercises its option to increase the line. The Company has also
agreed to pay an unused line fee of 0.25% and certain management fees. The New
Agreement provides that the preferred dividend payments may not be made without
the prior consent of the Lender.
F-23
<PAGE> 63
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE R - Segment Information
The Company's operations are in one industry segment: the sale of toys
primarily to major retail outlets. The Company operates in two primary
geographic areas, the U.S. and Europe, and there are no sales between
geographic areas.
Information about the Company's operations in different geographic locations
for 1994, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
(in thousands)
United States Foreign Consolidated
------------- ------- ------------
1994
----
<S> <C> <C> <C>
Net revenues from
unaffiliated
customers $ 119,702 $ 59,090 $178,792
Earnings (loss) before
income taxes 17,360 1,842 19,202
Identifiable assets at
December 31, 1994 87,653 13,113 100,766
1993
Net revenues from
unaffiliated
customers 88,821 45,513 134,334
Earnings (loss) before
income taxes (10,806) (109) (10,915)
Identifiable assets at
December 31, 1993 61,706 9,299 71,005
1992
Net revenues from
unaffiliated
customers 108,266 58,014 166,280
Earnings (loss) before
income taxes (5,346) 3,137 (2,209)
Identifiable assets at
December 31, 1992 55,700 15,904 71,604
</TABLE>
F-24
<PAGE> 64
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE S - Quarterly Financial Data (Unaudited)
Quarterly financial data for 1994 and 1993 are summarized in the following
table:
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Net Net Earnings
Net Gross Earnings (Loss) Per
Revenues Margin (Loss) Common Share
-------- ------ -------- ------------
<S> <C> <C> <C> <C>
1994
----
1st Quarter $30,235 $12,673 $(1,648) $(0.25)
2nd Quarter 33,720 12,601 9,753 0.91
3rd Quarter 50,273 19,937 3,909 0.30
4th Quarter 64,565 28,994 6,410 0.55
1993
1st Quarter $27,341 $11,250 $(1,439) $(0.23)
2nd Quarter 26,769 9,056 (3,490) (0.45)
3rd Quarter 37,692 14,265 (389) (0.12)
4th Quarter 42,532 16,888 (5,606) (0.67)
</TABLE>
F-25
<PAGE> 65
SCHEDULE I
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MARKETABLE SECURITIES-OTHER INVESTMENTS
(in thousands)
<TABLE>
<CAPTION>
Name of Issuer and Principal Market
Title of Issue Amount Cost Value
------------------ ----------- ---- ------
<S> <C> <C> <C>
At December 31, 1994
None
At December 31, 1993
U.S. treasury notes subject to
a repurchase agreement with
Sanwa Bank California $1,400 $1,400 $1,400
------ ------ ------
$1,400 $1,400 $1,400
====== ====== ======
</TABLE>
S-1
<PAGE> 66
SCHEDULE VIII
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
----------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Year ended 12/31/94:
Provisions for returns and
allowances $5,249 $11,979 $9,131 $8,097
Year ended 12/31/93
Provisions for returns and
allowances 6,031 5,516 6,298 5,249
Year ended 12/31/92
Provisions for returns and
allowances 8,900 7,916 10,785 6,031
</TABLE>
See Note B of Notes to Consolidated Financial Statements.
S-2
<PAGE> 67
SCHEDULE X
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(in thousands)
<TABLE>
<CAPTION>
Charged to Costs and Expenses
-----------------------------
Years ended December 31
-----------------------------
Items 1994 1993 1992
----- ---- ---- ----
<S> <C> <C> <C>
Maintenance and repairs * * *
Depreciation and amortization of
intangible assets, pre-operating
costs and similar deferrals * * *
Taxes, other than payroll and
income taxes * * *
Royalties $13,498 $11,337 $19,263
Advertising and promotion 30,616 23,537 22,826
</TABLE>
*Less than 1% of total sales.
S-3
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Page
----------- ------------
<S> <C> <C>
2 Agreement of Merger, dated as of July 6, 1987.
(Incorporated by reference to Exhibit 2 to the
Company's Amendment No. 1 on Form 8 to the Registration
Statement on Form 8-B, filed with the Commission on
January 11, 1988 (the "Amendment No. 1 to the Form
8-B").)
3.1 Certificate of Incorporation. (Incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to the Form
8-B.)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to
Amendment No. 1 to the Form 8-B.)
4.1 Form of Certificate for Shares of Common Stock of the
Corporation. (Incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form S-3,
Registration No. 33-33640, filed with the Commission on
February 26, 1990 (the "Form S-3").)
4.2 Form of 1986 Nontransferable Stock Purchase Warrant
issued to Paul Sullivan. (Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to the Form 8-B.)
4.4 Warrant Agreement, dated as of July 7, 1988, between
the Corporation and Wells Fargo Bank and warrants
issued to Wells Fargo Bank. (Incorporated by reference
to Exhibit 4.4 to Amendment No. 3 on Form 8 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987, filed with the Commission
on August 2, 1988. (the "Amendment No. 3 to the 1987
10-K").)
</TABLE>
<PAGE> 69
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
4.4(1) Warrant Agreement, dated as of May 4, 1990, between the
Company and Camerica Corporation. (Incorporated by
reference to Exhibit 4.4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1991, filed with the Commission on March 30, 1992
(the "1991 Form 10-K").)
4.4(2) Warrant Agreement, dated as of May 4, 1990, between the
Company and David Darling. (Incorporated by reference
to the 1991 Form 10-K.)
4.4(3) Warrant Agreement, dated as of May 4, 1990, between the
Company and Jim Darling. (Incorporated by reference to
the 1991 Form 10-K.)
4.4(4) Warrant Agreement, dated as of May 4, 1990, between the
Company and Richard Darling. (Incorporated by reference
to the 1991 Form 10-K.)
4.4(5) Warrant Agreement, dated as of February 22, 1990, by
and between the Company and Roger Kowalsky.
(Incorporated by reference to Exhibit 28 to the Form
S-3.)
4.4(6) Warrant Agreement, dated as of December 11, 1991, by
and between the Company and Shereff, Friedman, Hoffman
and Goodman. (Incorporated by reference to Exhibit
4.4(6) to the Company's Annual Report on Form 10-K for
the fiscal year end December 31, 1993, filed with the
Commission on March 31, 1994 (the "1993 Form 10-K").)
4.4(7) Warrant Agreement, dated as of November 17, 1993, by
and between the Company and Gerard Klauer Mattison &
Co., Inc. (Incorporated by reference to Exhibit 4.4(7)
to the 1993 Form 10-K.)
</TABLE>
<PAGE> 70
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
4.5 Form of Certificate of Designations of the Company's
$17.00 Convertible Exchangeable Preferred Stock.
(Incorporated by reference to Exhibit 4 to the
Company's Registration Statement on Form 8-A, filed
with the Commission on October 6, 1989 (the "October 6,
1989 Form 8-A").)
4.5(1) Form of Certificate of Designations of the Company's
Series A Preferred Stock (Incorporated by reference to
Exhibit 2.2 to the Company's Registration Statement on
Form 8-A, filed with the Commission on January 23, 1990
(the "January 23, 1990 Form 8-A").
4.6 Form of Indenture with respect to the Company's 8-1/2%
Convertible Subordinated Debentures due October 1,
2014, between the Company and Manufacturers Hanover
Trust Company as Trustee, including form of Convertible
Debenture. (Incorporated by reference to Exhibit 5 to
the October 6, 1989 Form 8-A).
4.7 Form of Indenture with respect to the Company's
Subordinated Debentures due October 1, 2014, between
the Company and Manufacturers Hanover Trust Company as
Trustee, including form of Debenture. (Incorporated by
reference to Exhibit 6 to the October 6, 1989 Form
8-A).
4.8 Form of Indenture with respect to the Company's 8-1/2%
Senior Subordinated Notes, between the Company and
Continental Stock Transfer & Trust Company, as Trustee,
including form of Note. (Incorporated by reference to
Exhibit 7 to the October 6, 1989 Form 8-A).
4.9 Form of Deposit Agreement between the Company and
Manufacturers Hanover Trust Company of California as
Depositary, including form of Depositary Receipt.
(Incorporated by reference to Exhibit 8 to the October
6, 1989 Form 8-A).
</TABLE>
<PAGE> 71
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
4.10 Form of Rights Agreement, dated as of January 17, 1990,
between the Company and Mellon Securities Trust
Company. (Incorporated by Reference to Exhibit 2.1 to
the January 23, 1990 Form 8-A).
4.11 Indenture, with respect to the Company's 8% Convertible
Subordinated Debentures due year 2000, between the
Company and Continental Stock Transfer & Trust Company,
as Trustee, including form of Debenture Note.
(Incorporated by reference to Exhibit 4.11 to the 1993
Form 10-K)
10.1* 1984 Employee Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 4 to the
Corporation's Registration Statement on Form S-8,
Registration No. 33-9393, filed with the Commission on
September 2, 1987 (the "1987 Form S-8").)
10.1(1)* 1992 Senior Management Stock Option Plan. (Incorporated
by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-8, Registration No.
33-56004, filed with the Commission on December 18,
1992 (the "1992 Form S-8").)
10.1(2)* Amended and Restated 1984 Employee Stock Option Plan
(Incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-8, Registration
Statement No. 33-56585, filed with the Commission on
November 23, 1994.)
10.1(3)* 1994 Senior Management Stock Option Plan. (Incorporated by
reference to Exhibit 4.6 of the Company's Registration Statement
on Form S-8, Registration Statement No. 33-56587, filed with the
Commission on November 23, 1994.)
10.1(4)(a)* Form of Agreement between each of Mark Goldman, William
Catron, Lou Novak, Gary Niles, Mark Shepherd, Ronald
Hirschfeld and H. Alan Gaudie and the Corporation.
(Incorporated by reference to Exhibit 4.6 of the Company's
Registration Statement on Form S-8, Registration Statement No.
33-56589, filed with the Commission on November 23, 1994.)
10.1(4)(b)* Form of Amendment No. 1 between each of Mark Goldman,
William Catron, Lou Novak, Gary Niles, Mark Shepherd,
Ronald Hirschfeld and H. Alan Gaudie and the
Corporation.
10.2* Profit Sharing Plan. (Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on
Form S-1, Registration No. 33-6743, filed with the
Commission on August 12, 1986 (the "1986 Registration
Statement").)
</TABLE>
<PAGE> 72
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
10.4(7)* Agreement, dated October 27, 1994, between Mark Goldman
and the Company.
10.4(10)* Agreement, dated as of December 11, 1991, by and
between Martin Nussbaum and the Company. (Incorporated
by reference to Exhibit 10.4(10) to the 1991 Form
10-K.)
10.4(11)(a)* Agreement, dated July 15, 1993, between William G.
Catron and the Company. (Incorporated by reference to
Exhibit 10.4 (11) (a) to the 1993 Form 10-K)
10.4(11)(b)* Agreement, dated July 15, 1993, between Lou Novak and
the Company. (Incorporated by reference to Exhibit 10.4
(11) (b) to the 1993 Form 10-K)
10.4(11)(c)* Agreement, dated July 15, 1993, between Ronald
Hirschfeld and the Company. (Incorporated by reference
to Exhibit 10.4 (11) (c) to the 1993 Form 10-K)
10.4(11)(d)* Agreement, dated July 15, 1993, between Gary Niles and
the Company. (Incorporated by reference to Exhibit 10.4
(11) (d) to the 1993 Form 10-K)
10.4(11)(e)* Agreement, dated March 29, 1994, between Loren
Hildebrand and the Company.
10.4(11)(f)* Agreement, dated February 27, 1995, between William B.
Towne and the Company.
10.7(3) Second Amended and Restated Credit Agreement dated as
of March 31, 1992 among the Company, Bank of America
National Trust and Savings Association and other
signatory thereto. (Incorporated by reference to
Exhibit 10.7(3) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992, filed
with the Commission on March 31, 1993 (the "1992 Form
10-K")).
</TABLE>
<PAGE> 73
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
10.7(4) Amendments dated November 1, 1992 and February 17, 1993
to the Second Amended and Restated Credit Agreement
dated as of March 31, 1992. (Incorporated by reference
to Exhibit 10.7(4) to the 1992 Form 10-K.)
10.7(5) Securities Purchase Agreement, dated November 17, 1993,
by and among the Company and the purchasers executing
signature pages thereto (the "Purchasers").
(Incorporated by reference to Exhibit 10.7 (5) to the
1993 Form 10-K)
10.7(6) Registration Rights Agreement, dated as of November 17,
1993, by and among the Company and the Purchasers.
(Incorporated by reference to Exhibit 10.7 (6) to the
1993 Form 10-K)
10.7(7) Loan and Security Agreement, dated as of April 1, 1993,
by and among the Company and Congress Financial
Corporation (Central), including form of Revolving Loan
Note. (Incorporated by reference to Exhibit 10.7 (7) to
the 1993 Form 10-K)
10.7(7)(a) First Amendment to Loan and Security Agreement, dated
as of November 17, 1993. (Incorporated by reference to
Exhibit 10.7 (7) (a) to the 1993 Form 10-K)
10.7(7)(b) Amended and Restated Loan and Security Agreement, dated
as of March 31, 1995, by and among the Company and
Congress Financial Corporation (Central).
10.9(3) License Agreement, dated June 16, 1986, by and
between Funmaker as Licensor and the Company as
Licensee. (Incorporated by reference to Exhibit
10.10(5) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1986, filed
with the Commission on March 31, 1987 ("1986 Form
10-K").)
10.9(4) License Agreement, dated May 4, 1990, by and among the
Company as Licensee, Codemasters Software Company, Ltd.
and Camerica Corporation, Limited. (Incorporated by
reference to Exhibit 10.9(4) of the 1992 Form 10-K.)
</TABLE>
<PAGE> 74
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
10.9(4)(a) Amendment No. 1 dated June 1991 to License Agreement
dated May 4, 1990. (Incorporated by reference to
Exhibit 10.9(4) (a) of the 1992 Form 10-K.)
10.9(4)(b) Amendment No. 2 dated December 23, 1991 to License
Agreement, dated May 4, 1990. (Incorporated by
reference to Exhibit 10.9(5) (b) of the 1992 Form
10-K.)
10.9(5) European License Agreement, dated December 23, 1991, by
and between the Codemasters Software Company, Ltd. and
the Company as Licensee. (Incorporated by reference to
Exhibit 10.9(5) of the 1992 Form 10-K.)
10.9(6) Third Amendment to United States License and First
Amendment to European License, dated November 4, 1992.
(Incorporated by reference to Exhibit 10.9(6) of the
1992 Form 10-K.)
10.9(7) Fourth Amendment to United States License Agreement,
dated October 14, 1994.
10.10 Agreement of Purchase and Sale, dated October 22, 1986,
by and between ATC Building Company as Seller and the
Company as Buyer. (Incorporated by reference to Exhibit
10.11 to the 1986 Form 10-K.)
10.12 Lease Agreement, dated March 12, 1987, by and between
Lincoln Alvarado and Patrician Associates, Inc. as
Lessor and the Company as Lessee. (Incorporated by
reference to Exhibit 10.12 to Amendment No. 1 to the
Form 8-B.)
10.12(1) Amendment No. 1 to Lease dated March 12, 1987.
(Incorporated by reference to Exhibit 10.12(1) to the
1991 Form 10-K.)
11 Computations of Earnings Per Share.
12 Computation of ratio of earnings to fixed charges and
preferred stock dividends.
22 Subsidiaries of the Company.
</TABLE>
<PAGE> 75
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
24.1 Consent of Price Waterhouse.
27 Financial Data Schedules
</TABLE>
*Management contracts, compensatory plans and arrangements required to be filed
as an exhibit pursuant to Item 14(c) of this Report.
<PAGE> 1
EXHIBIT 10.1[4][b]
LEWIS GALOOB TOYS, INC.
500 FORBES BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
December 20, 1994
Mark D. Goldman
1960 Grant Avenue, Unit 16
San Francisco, California 94133
Dear Mr. Goldman:
Reference is made to that certain Agreement (the "Agreement")
dated February 13, 1994 by and between you and Lewis Galoob Toys, Inc. This
letter shall confirm your agreement to the amendment and restatement in its
entirety of Annex A to the Agreement in the form set forth on Revised Annex A
attached hereto.
Please indicate your acceptance of and agreement with the terms
hereof by returning an executed copy of this letter to my attention.
Sincerely,
LEWIS GALOOB TOYS, INC.
By: /s/ Mark Shepherd
-------------------------------
Mark Shepherd
Senior Vice President, Finance
and Chief Financial Officer
Accepted and Agreed to
as of this 20th day of December, 1994.
/s/ Mark D. Goldman
-------------------
Mark D. Goldman
<PAGE> 2
REVISED ANNEX A
Mark D. Goldman
The Holder agrees, without the prior written authorization of the
Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any
shares of Common Stock acquired upon the exercise of New Options or any interest
therein for a period of seven (7) months following such exercise. The Holder
further agrees, without the prior written authorization of the Company, not to
sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a
period of seven (7) months after the applicable Restriction Date (as hereinafter
defined) for such Shares. Finally, and in addition to the foregoing, the Holder
agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any
Shares until after the expiration of the period ending on the date of public
release of the results of operations of the Company for the quarter and year
ending December 31, 1994 (the "Blackout Period").
In the event that, during the first six (6) months of any seven
(7) month period set forth above, the Holder shall, for any reason (other than
death), cease to be an officer of the Company, then forthwith upon the
occurrence of such event, the Holder, upon demand by the Company, hereby agrees
(i) to sell to the Company all shares of Common Stock which are subject to
restriction for the seven (7) month period during which such event occurred for
a price equal to the number of shares of Common Stock multiplied by $9.00 and
(ii) to surrender to the Company all Shares which are subject to restriction for
the seven (7) month period during which such event occurred. In addition, in the
event that, during the Blackout Period, the Holder shall voluntarily terminate
his employment with the Company, then forthwith upon the occurrence of such
event, the Holder, upon demand by the Company, hereby agrees to surrender to the
Company all Shares which are or were subject to the Blackout Period.
The Holder's New Options will vest as follows:
133,334 shares issuable upon exercise of New Options vested upon grant;
9,877 shares issuable upon exercise of New Options vested on April 22, 1994;
66,666 shares issuable upon exercise of New Options shall vest on January 30,
1995;
9,877 shares issuable upon exercise of New Options shall vest on April 22,
1995;
9,876 shares issuable upon exercise of New Options shall vest on
April 22, 1996.
In addition to the restrictions set forth above which will be
legended on the certificates evidencing the Holder's Shares, the certificates
evidencing the Holder's Shares will contain a restrictive legend preventing the
Shares from being sold, transferred, pledged, hypothecated or otherwise disposed
of until the dates (each, a "Restriction Date") set forth next to the amounts
below:
70,991 Shares - no additional legend
7,609 Shares - legend is no longer applicable
35,495 Shares - January 30, 1995
7,608 Shares - April 22, 1995
7,608 Shares - April 22, 1996
<PAGE> 3
LEWIS GALOOB TOYS, INC.
500 FORBES BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
December 20, 1994
Louis Novak
97 Filbert Street
Sausalito, California 94965
Dear Mr. Novak:
Reference is made to that certain Agreement (the "Agreement" )
dated February 13, 1994 by and between you and Lewis Galoob Toys, Inc. This
letter shall confirm your agreement to the amendment and restatement in its
entirety of Annex A to the Agreement in the form set forth on Revised Annex A
attached hereto.
Please indicate your acceptance of and agreement with the terms
hereof by returning an executed copy of this letter to my attention.
Sincerely,
LEWIS GALOOB TOYS, INC.
By: /s/ Mark Shepherd
------------------------------
Mark Shepherd
Senior Vice President, Finance
and Chief Financial Officer
Accepted and Agreed to
as of this 20th day of December, 1994.
/s/ Louis Novak
---------------
Louis Novak
<PAGE> 4
REVISED ANNEX A
Louis Novak
The Holder agrees, without the prior written authorization of the
Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any
shares of Common Stock acquired upon the exercise of New Options or any interest
therein for a period of seven (7) months following such exercise. The Holder
further agrees, without the prior written authorization of the Company, not to
sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a
period of seven (7) months after the applicable Restriction Date (as hereinafter
defined) for such Shares. Finally, and in addition to the foregoing, the Holder
agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any
Shares until after the expiration of the period ending on the date of public
release of the results of operations of the Company for the quarter and year
ending December 31, 1994 (the "Blackout Period").
In the event that, during the first six (6) months of any seven
(7) month period set forth above, the Holder shall, for any reason (other than
death), cease to be an officer of the Company, then forthwith upon the
occurrence of such event, the Holder, upon demand by the Company, hereby agrees
(i) to sell to the Company all shares of Common Stock which are subject to
restriction for the seven (7) month period during which such event occurred for
a price equal to the number of shares of Common Stock multiplied by $9.00 and
(ii) to surrender to the Company all Shares which are subject to restriction for
the seven (7) month period during which such event occurred. In addition, in the
event that, during the Blackout Period, the Holder shall voluntarily terminate
his employment with the Company, then forthwith upon the occurrence of such
event, the Holder, upon demand by the Company, hereby agrees to surrender to the
Company all Shares which are or were subject to the Blackout Period.
The Holder's New Options will vest as follows:
91,667 shares issuable upon exercise of New Options vested upon grant;
6,790 shares issuable upon exercise of New Options vested on April 22, 1994;
45,833 shares issuable upon exercise of New Options shall vest on January 30,
1995;
6,790 shares issuable upon exercise of New Options shall vest on April
22, 1995;
6,790 shares issuable upon exercise of New Options shall vest on
April 22, 1996.
In addition to the restrictions set forth above which will be
legended on the certificates evidencing the Holder's Shares, the certificates
evidencing the Holder's Shares will contain a restrictive legend preventing the
Shares from being sold, transferred, pledged, hypothecated or otherwise disposed
of until the dates (each, a "Restriction Date") set forth next to the amounts
below:
48,806 Shares - no additional legend
5,231 Shares - legend is no longer applicable
24,403 Shares - January 30, 1995
5,230 Shares - April 22, 1995
5,230 Shares - April 22, 1996
<PAGE> 5
LEWIS GALOOB TOYS, INC.
500 FORBES BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
December 20, 1994
Gary Niles
255 Beverly Drive
San Carlos, California 94070
Dear Mr. Niles:
Reference is made to that certain Agreement (the "Agreement" )
dated February 13, 1994 by and between you and Lewis Galoob Toys, Inc. This
letter shall confirm your agreement to the amendment and restatement in its
entirety of Annex A to the Agreement in the form set forth on Revised Annex A
attached hereto.
Please indicate your acceptance of and agreement with the terms
hereof by returning an executed copy of this letter to my attention.
Sincerely,
LEWIS GALOOB TOYS, INC.
By: /s/ Mark Shepherd
------------------------------
Mark Shepherd
Senior Vice President, Finance
and Chief Financial Officer
Accepted and Agreed to
as of this 20th day of December, 1994.
/s/ Gary Niles
--------------
Gary Niles
<PAGE> 6
REVISED ANNEX A
Gary Niles
The Holder agrees, without the prior written authorization of the
Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any
shares of Common Stock acquired upon the exercise of New Options or any interest
therein for a period of seven (7) months following such exercise. The Holder
further agrees, without the prior written authorization of the Company, not to
sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a
period of seven (7) months after the applicable Restriction Date (as hereinafter
defined) for such Shares. Finally, and in addition to the foregoing, the Holder
agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any
Shares until after the expiration of the period ending on the date of public
release of the results of operations of the Company for the quarter and year
ending December 31, 1994 (the "Blackout Period").
In the event that, during the first six (6) months of any seven
(7) month period set forth above, the Holder shall, for any reason (other than
death), cease to be an officer of the Company, then forthwith upon the
occurrence of such event, the Holder, upon demand by the Company, hereby agrees
(i) to sell to the Company all shares of Common Stock which are subject to
restriction for the seven (7) month period during which such event occurred for
a price equal to the number of shares of Common Stock multiplied by $9.00 and
(ii) to surrender to the Company all Shares which are subject to restriction for
the seven (7) month period during which such event occurred. In addition, in the
event that, during the Blackout Period, the Holder shall voluntarily terminate
his employment with the Company, then forthwith upon the occurrence of such
event, the Holder, upon demand by the Company, hereby agrees to surrender to the
Company all Shares which are or were subject to the Blackout Period.
The Holder's New Options will vest as follows:
91,667 shares issuable upon exercise of New Options vested upon grant;
6,790 shares issuable upon exercise of New Options vested on April 22, 1994;
45,833 shares issuable upon exercise of New Options shall vest on January 30,
1995;
6,790 shares issuable upon exercise of New Options shall vest on April
22, 1995;
6,790 shares issuable upon exercise of New Options shall vest on
April 22, 1996.
In addition to the restrictions set forth above which will be
legended on the certificates evidencing the Holder's Shares, the certificates
evidencing the Holder's Shares will contain a restrictive legend preventing the
Shares from being sold, transferred, pledged, hypothecated or otherwise disposed
of until the dates (each, a "Restriction Date") set forth next to the amounts
below:
48,806 Shares - no additional legend
5,231 Shares - legend is no longer applicable
24,403 Shares - January 30, 1995
5,230 Shares - April 22, 1995
5,230 Shares - April 22, 1996
<PAGE> 7
LEWIS GALOOB TOYS, INC.
500 FORBES BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
December 20, 1994
William G. Catron
1060 Siskiyou Drive
Menlo Park, California 94025
Dear Mr. Catron:
Reference is made to that certain Agreement (the "Agreement" )
dated February 13, 1994 by and between you and Lewis Galoob Toys, Inc. This
letter shall confirm your agreement to the amendment and restatement in its
entirety of Annex A to the Agreement in the form set forth on Revised Annex A
attached hereto.
Please indicate your acceptance of and agreement with the terms
hereof by returning an executed copy of this letter to my attention.
Sincerely,
LEWIS GALOOB TOYS, INC.
By: /s/ Mark Shepherd
-----------------------------
Mark Shepherd
Senior Vice President, Finance
and Chief Financial Officer
Accepted and Agreed to
as of this 20th day of December, 1994.
/s/ William G. Catron
---------------------
William G. Catron
<PAGE> 8
REVISED ANNEX A
William G. Catron
The Holder agrees, without the prior written authorization of the
Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any
shares of Common Stock acquired upon the exercise of New Options or any interest
therein for a period of seven (7) months following such exercise. The Holder
further agrees, without the prior written authorization of the Company, not to
sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a
period of seven (7) months after the applicable Restriction Date (as hereinafter
defined) for such Shares. Finally, and in addition to the foregoing, the Holder
agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any
Shares until after the expiration of the period ending on the date of public
release of the results of operations of the Company for the quarter and year
ending December 31, 1994 (the "Blackout Period").
In the event that, during the first six (6) months of any seven
(7) month period set forth above, the Holder shall, for any reason (other than
death), cease to be an officer of the Company, then forthwith upon the
occurrence of such event, the Holder, upon demand by the Company, hereby agrees
(i) to sell to the Company all shares of Common Stock which are subject to
restriction for the seven (7) month period during which such event occurred for
a price equal to the number of shares of Common Stock multiplied by $9.00 and
(ii) to surrender to the Company all Shares which are subject to restriction for
the seven (7) month period during which such event occurred. In addition, in the
event that, during the Blackout Period, the Holder shall voluntarily terminate
his employment with the Company, then forthwith upon the occurrence of such
event, the Holder, upon demand by the Company, hereby agrees to surrender to the
Company all Shares which are or were subject to the Blackout Period.
The Holder's New Options will vest as follows:
25,000 shares issuable upon exercise of New Options vested upon grant;
3,704 shares issuable upon exercise of New Options vested on April 22, 1994;
25,000 shares issuable upon exercise of New Options vested on April 30, 1994;
3,704 shares issuable upon exercise of New Options shall vest on April 22,
1995;
25,000 shares issuable upon exercise of New Options shall vest on April 30,
1995;
3,703 shares issuable upon exercise of New Options shall vest on April
22, 1996.
In addition to the restrictions set forth above which will be
legended on the certificates evidencing the Holder's Shares, the certificates
evidencing the Holder's Shares will contain a restrictive legend preventing the
Shares from being sold, transferred, pledged, hypothecated or otherwise disposed
of until the dates (each, a "Restriction Date") set forth next to the amounts
below:
13,311 Shares - no additional legend
2,853 Shares - legend is no longer applicable
13,311 Shares - legend is no longer applicable
2,853 Shares - April 22, 1995
13,310 Shares - April 30, 1995
2,853 Shares - April 22, 1996
<PAGE> 9
LEWIS GALOOB TOYS, INC.
500 FORBES BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
December 20, 1994
Ronald Hirschfeld
425 Castenada
San Francisco, California 94116
Dear Mr. Hirschfeld:
Reference is made to that certain Agreement (the "Agreement" )
dated February 13, 1994 by and between you and Lewis Galoob Toys, Inc. This
letter shall confirm your agreement to the amendment and restatement in its
entirety of Annex A to the Agreement in the form set forth on Revised Annex A
attached hereto.
Please indicate your acceptance of and agreement with the terms
hereof by returning an executed copy of this letter to my attention.
Sincerely,
LEWIS GALOOB TOYS, INC.
By: /s/ Mark Shepherd
------------------------------
Mark Shepherd
Senior Vice President, Finance
and Chief Financial Officer
Accepted and Agreed to
as of this 20th day of December, 1994.
/s/ Ronald Hirschfeld
---------------------
Ronald Hirschfeld
<PAGE> 10
REVISED ANNEX A
Ronald Hirschfeld
The Holder agrees, without the prior written authorization of the
Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any
shares of Common Stock acquired upon the exercise of New Options or any interest
therein for a period of seven (7) months following such exercise. The Holder
further agrees, without the prior written authorization of the Company, not to
sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a
period of seven (7) months after the applicable Restriction Date (as hereinafter
defined) for such Shares. Finally, and in addition to the foregoing, the Holder
agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any
Shares until after the expiration of the period ending on the date of public
release of the results of operations of the Company for the quarter and year
ending December 31, 1994 (the "Blackout Period").
In the event that, during the first six (6) months of any seven
(7) month period set forth above, the Holder shall, for any reason (other than
death), cease to be an officer of the Company, then forthwith upon the
occurrence of such event, the Holder, upon demand by the Company, hereby agrees
(i) to sell to the Company all shares of Common Stock which are subject to
restriction for the seven (7) month period during which such event occurred for
a price equal to the number of shares of Common Stock multiplied by $9.00 and
(ii) to surrender to the Company all Shares which are subject to restriction for
the seven (7) month period during which such event occurred. In addition, in the
event that, during the Blackout Period, the Holder shall voluntarily terminate
his employment with the Company, then forthwith upon the occurrence of such
event, the Holder, upon demand by the Company, hereby agrees to surrender to the
Company all Shares which are or were subject to the Blackout Period.
The Holder's New Options will vest as follows:
50,000 shares issuable upon exercise of New Options vested upon grant;
3,704 shares issuable upon exercise of New Options vested on April 22, 1994;
25,000 shares issuable upon exercise of New Options shall vest on January 30,
1995;
3,704 shares issuable upon exercise of New Options shall vest on April
22, 1995;
3,703 shares issuable upon exercise of New Options shall vest on
April 22, 1996.
In addition to the restrictions set forth above which will be
legended on the certificates evidencing the Holder's Shares, the certificates
evidencing the Holder's Shares will contain a restrictive legend preventing the
Shares from being sold, transferred, pledged, hypothecated or otherwise disposed
of until the dates (each, a Restriction Date") set forth next to the amounts
below:
26,622 Shares - no additional legend
2,853 Shares - legend is no longer applicable
13,310 Shares - January 30, 1995
2,853 Shares - April 22, 1995
2,853 Shares - April 22, 1996
<PAGE> 11
LEWIS GALOOB TOYS, INC.
500 FORBES BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
December 20, 1994
Mark Shepherd
2975 Eaton Avenue
San Carlos, California 94070
Dear Mr. Shepherd:
Reference is made to that certain Agreement (the "Agreement" )
dated February 13, 1994 by and between you and Lewis Galoob Toys, Inc. This
letter shall confirm your agreement to the amendment and restatement in its
entirety of Annex A to the Agreement in the form set forth on Revised Annex A
attached hereto.
Please indicate your acceptance of and agreement with the terms
hereof by returning an executed copy of this letter to my attention.
Sincerely,
LEWIS GALOOB TOYS, INC.
By: /s/ Mark D. Goldman
-------------------------------------
Mark D. Goldman
President and Chief Executive Officer
Accepted and Agreed to
as of this 20th day of December, 1994.
/s/ Mark Shepherd
-----------------
Mark Shepherd
<PAGE> 12
REVISED ANNEX A
Mark Shepherd
The Holder agrees, without the prior written authorization of the
Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any
shares of Common Stock acquired upon the exercise of New Options or any interest
therein for a period of seven (7) months following such exercise. The Holder
further agrees, without the prior written authorization of the Company, not to
sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a
period of seven (7) months after the applicable Restriction Date (as hereinafter
defined) for such Shares. Finally, and in addition to the foregoing, the Holder
agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any
Shares until after the expiration of the period ending on the date of public
release of the results of operations of the Company for the quarter and year
ending December 31, 1994 (the "Blackout Period").
In the event that, during the first six (6) months of any seven
(7) month period set forth above, the Holder shall, for any reason (other than
death), cease to be an officer of the Company, then forthwith upon the
occurrence of such event, the Holder, upon demand by the Company, hereby agrees
(i) to sell to the Company all shares of Common Stock which are subject to
restriction for the seven (7) month period during which such event occurred for
a price equal to the number of shares of Common Stock multiplied by $9.00 and
(ii) to surrender to the Company all Shares which are subject to restriction for
the seven (7) month period during which such event occurred. In addition, in the
event that, during the Blackout Period, the Holder shall voluntarily terminate
his employment with the Company, then forthwith upon the occurrence of such
event, the Holder, upon demand by the Company, hereby agrees to surrender to the
Company all Shares which are or were subject to the Blackout Period.
The Holder's New Options will vest as follows:
16,667 shares issuable upon exercise of New Options vested upon grant;
2,470 shares issuable upon exercise of New Options vested on April 22, 1994;
16,666 shares issuable upon exercise of New Options vested on April 30, 1994;
2,469 shares issuable upon exercise of New Options shall vest on April 22,
1995;
16,667 shares issuable upon exercise of New Options shall vest on April 30,
1995;
2,469 shares issuable upon exercise of New Options shall vest on April
22, 1996;
In addition to the restrictions set forth above which will be
legended on the certificates evidencing the Holder's Shares, the certificates
evidencing the Holder's Shares will contain a restrictive legend preventing the
Shares from being sold, transferred, pledged, hypothecated or otherwise disposed
of until the dates (each, a Restriction Date") set forth next to the amounts
below:
8,874 Shares - no additional legend
1,903 Shares - legend is no longer applicable
8,874 Shares - legend is no longer applicable
1,902 Shares - April 22, 1995
8,873 Shares - April 30, 1995
1,902 Shares - April 22, 1996
<PAGE> 13
LEWIS GALOOB TOYS, INC.
500 FORBES BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
December 20, 1994
H. Alan Gaudie
1448 Ranchita Court
Los Altos, California 94024
Dear Mr. Gaudie:
Reference is made to that certain Agreement (the "Agreement" )
dated February 15, 1994 by and between you and Lewis Galoob Toys, Inc. This
letter shall confirm your agreement to the amendment and restatement in its
entirety of Annex A to the Agreement in the form set forth on Revised Annex A
attached hereto.
Please indicate your acceptance of and agreement with the terms
hereof by returning an executed copy of this letter to my attention.
Sincerely,
LEWIS GALOOB TOYS, INC.
By: /s/ Mark Shepherd
---------------------------
Mark Shepherd
Senior Vice President, Finance
and Chief Financial Officer
Accepted and Agreed to
as of this 20th day of December, 1994.
H. Alan Gaudie
--------------
H. Alan Gaudie
<PAGE> 14
REVISED ANNEX A
H. Alan Gaudie
The Holder agrees, without the prior written authorization of the
Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any
shares of Common Stock acquired upon the exercise of New Options or any interest
therein for a period of seven (7) months following such exercise. The Holder
further agrees, without the prior written authorization of the Company, not to
sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a
period of seven (7) months after the applicable Restriction Date (as hereinafter
defined) for such Shares. Finally, and in addition to the foregoing, the Holder
agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any
Shares until after the expiration of the period ending on the date of public
release of the results of operations of the Company for the quarter and year
ending December 31, 1994 (the "Blackout Period").
In the event that, during the first six (6) months of any seven
(7) month period set forth above, the Holder shall, for any reason (other than
death), cease to be an officer of the Company, then forthwith upon the
occurrence of such event, the Holder, upon demand by the Company, hereby agrees
(i) to sell to the Company all shares of Common Stock which are subject to
restriction for the seven (7) month period during which such event occurred for
a price equal to the number of shares of Common Stock multiplied by $9.00 and
(ii) to surrender to the Company all Shares which are subject to restriction for
the seven (7) month period during which such event occurred. In addition, in the
event that, during the Blackout Period, the Holder shall voluntarily terminate
his employment with the Company, then forthwith upon the occurrence of such
event, the Holder, upon demand by the Company, hereby agrees to surrender to the
Company all Shares which are or were subject to the Blackout Period.
The Holder's New Options will vest as follows:
16,667 shares issuable upon exercise of New Options vested upon grant;
8,333 shares issuable upon exercise of New Options shall vest on January 30,
1995;
In addition to the restrictions set forth above which will be
legended on the certificates evidencing the Holder's Shares, the certificates
evidencing the Holder's Shares will contain a restrictive legend preventing the
Shares from being sold, transferred, pledged, hypothecated or otherwise disposed
of until the dates (each, a Restriction Date") set forth next to the amounts
below:
8,874 Shares - no legend
4,437 Shares - January 30, 1995
<PAGE> 1
EXHIBIT 10.4[7]
SEVERANCE AGREEMENT
AGREEMENT made as of October 27, 1994 between LEWIS GALOOB TOYS, INC. (the
"Corporation" ) and MARK D. GOLDMAN (the "Executive").
WHEREAS, the Executive is currently employed by the Corporation in an
executive or key management position capacity and is currently serving as
President and Chief Executive Officer, as a member of the Board of Directors and
as a member of the Executive Committee of the Board of Directors; and
WHEREAS, the Corporation believes by approving this Agreement that it is in
the best interest of its stockholders to encourage the Executive to continue his
employment with the Corporation; and
WHEREAS, the Executive is willing to enter into this Agreement upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the Corporation and Executive agree as follows:
1. Term of Agreement. The term of this Agreement shall commence as of July 13,
1994 and shall continue indefinitely unless terminated by either the Executive
or the Corporation subject to the conditions set forth in Section 3 hereto.
2. Position. During the term hereof, the Executive shall continue to
serve as an officer or key management employee of the Corporation with the
office or position, duties and responsibilities as follows: President and Chief
Executive Officer of the Corporation responsible for managing, planning and
directing the performance, operation and all other aspects of the Corporation;
member of the Board of Directors; and member of the Executive Committee or any
other committee, regardless of name, having authority similar to or greater than
that currently vested in the Executive Committee (the Executive Committee and
such other committee are hereinafter collectively referred to as the "Executive
Committee").
3. Termination of Employment. The termination of the employment of the
Executive during the period of this Agreement may occur, under this Agreement,
in one of the following ways:
a. By the Corporation. The Corporation may terminate the employment
of the Executive with "cause." Termination shall be defined to be for "cause"
only if:
<PAGE> 2
(1) The Executive knowingly and willfully breaches or habitually
neglects material duties and responsibilities within the course and
scope of his authority as Chief Executive Officer and President of the
Corporation; provided, however, the Board of Directors shall have
given the Executive written notice specifying the conduct alleged to
have constituted such cause and the Executive has failed to cure such
conduct, if curable, within thirty (30) days following receipt of such
notice.
(2) The Executive knowingly and willfully commits an act of
dishonesty, fraud, misrepresentation which is materially adverse to
the Corporation.
b. By the Executive. The Executive may terminate his employment at
any time during the period of this Agreement:
(1) For any reason, including retirement pursuant to the
provisions of the Corporation's retirement plan in effect at the time of
termination; or
(2) For "good reason." Termination shall be deemed for" good
reason" if:
(a) the Corporation makes a material change in the
Executive's duties, responsibilities or authority, without his express
written consent, or any change which would cause the Executive's
position with the Corporation to become of less dignity,
responsibility, importance or scope from the position and attributes
therefor described in Section 2;
(b) the Corporation reduces the Executive's base annual
salary or annual cash incentive compensation bonus formula;
(c) the Corporation elects or appoints anyone other than the
Executive as Chairman of the Board; or
(d) any of the following events shall occur (each such event
shall be referred to hereinafter as a "Change in Control" of the
Corporation and shall be deemed to occur as of the first date on which
any of the following events occur):
(i) A Person shall, in a transaction to which the
Corporation is not a party, become the direct or indirect Beneficial
Owner of securities of the Corporation representing fifty percent
(50%) or more of the combined voting power of the issued and
outstanding common stock voting securities of the Corporation
("Majority Owner"). For
- 2 -
<PAGE> 3
purposes of this Agreement, the terms "Person" and "Beneficial Owner"
shall be given the definitions contained in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended from time to time.
(ii) (A) Directors who constituted the Board of Directors on
June 30, 1994, and any other individual(s) who becomes a director
subsequent to the date of this Agreement whose election or nomination
for election as a director, as the case may be, was initially approved
by at least a majority of directors who comprised the Board of
Directors as of the date of such election or nomination ("Incumbent
Directors") comprise two-thirds (2/3) or less of the Board of
Directors; or (B) notwithstanding anything else in this Agreement,
including approval by the majority of Incumbent Directors, if the
Corporation is a party to a transaction resulting in a Person becoming
the direct or indirect Beneficial Owner of the securities of the
Corporation representing twenty-five percent (25%) or more of the
combined voting power of the issued and outstanding common stock
voting securities of the Corporation, and, in conjunction with the
transaction or in a period twelve (12) months from the date of that
transaction, one-third (1/3) or more of the Board of Directors is
composed of directors who were not Incumbent Directors prior to such
transaction, or during the period commencing twenty-four (24) months
from the date of such transaction, one-half (1/2) or more of the Board
of Directors is composed of directors who were not Incumbent Directors
prior to such transaction.
(iii) The Executive ceases to be a member of the Board of
Directors or the Executive Committee.
c. By Death or Disability. If the Executive shall be prevented
during the term of this Agreement from properly performing services hereunder by
reason of illness or other physical or mental incapacity for a period of one
hundred eighty (180) consecutive days, the Executive shall terminate his
employment with the Corporation. The Agreement shall also terminate upon the
death of the Executive.
4. Consequences of Termination. The termination of the employment of the
Executive will cause the following results:
a. If the termination is by the Corporation for cause or is by the
Executive for any reason other than for good reason, the Corporation will pay
the Executive within five (5) days after the date of termination any unpaid
compensation for services performed prior to the date of termination and the
amount of any accrued unused vacation pay to which the Executive may be entitled
to under the Corporation's vacation plan; or
- 3 -
<PAGE> 4
b. If the termination is by the Corporation without cause prior to a
Change in Control, or by the Executive for good reason prior to a Change in
Control, the Corporation shall pay to the Executive within five (5) days after
the date of termination, a lump sum payment equal to two times the Executive's
annualized current base compensation and the greater of:
(1) two times the greater of (x) the incentive compensation bonus
(excluding stock options or shares issued pursuant to a stock option,
restricted stock or similar plan or long-term incentive bonuses) paid
to the Executive for the previous year's performance or (y) the
incentive compensation bonus (excluding stock options or shares issued
pursuant to a stock option, restricted stock or similar plan or
long-term incentive bonuses) that would be payable to the Executive if
performance relative to plan for the current year was the same as
performance relative to plan year-to-date. Such performance is to be
measured by the ratio of year-to-date actual performance divided by
year-to-date plan performance; the index(es) of performance (e.g.,
pre-tax income, operating income, income before preferred dividends,
etc.) shall be the same as the most recent annual cash incentive
compensation plan approved by the Board of Directors (the amount equal
to the greater of the amounts described in clauses (x) and (y) shall
be hereinafter referred to as the "Annual Bonus"); or (2) five hundred
thousand dollars ($500,000).
c. If the termination is by the Corporation within the twenty-four
(24) months following a Change in Control, or by the Executive for good reason
within twenty-four (24) months following a Change in Control, the Corporation
shall pay to the Executive a lump sum payment equal to three times the
Executive's annualized current base compensation and the greater of: (1) three
times the Annual Bonus or (2) five hundred thousand dollars ($500,000).
d. (1) If the termination is by the Corporation without cause within
the twenty-four (24) months following a Change in Control, or by the Executive
for good reason within the twenty-four (24) months following a Change in
Control, the Corporation shall continue, subject to Section 6, for a period of
three years following the date of the Executive's termination the applicable
benefits under the following employee benefit plans:
(a) basic medical, hospitalization and surgical coverage
and Major Medical coverage; and
(b) executive life insurance and accidental death and
dismemberment coverage.
(2) In such event, the Corporation shall additionally pay to the
Executive a lump sum amount equal to three times the car allowance in
effect
- 4 -
<PAGE> 5
for the Executive at the time of termination and a lump sum amount
equal to three times the insurance and maintenance cost incurred for
said vehicle during the Executive's last full year of employment with
the Corporation.
e. The Corporation shall pay to the Executive reasonable attorneys'
fees that may be incurred by the Executive in enforcing the terms of this
Agreement.
f. Nothing in this Agreement shall prevent the Executive from
receiving any benefits to which the Executive may be entitled under any plan or
program of the Corporation, except any severance pay benefits for which the
Executive may otherwise be eligible under any plan, program or policy of the
Corporation.
g. (1) Notwithstanding anything to the contrary contained herein, in
the event it shall be determined that any payment or distribution by
the Corporation to or for the benefit of the Executive (whether paid
or payable or distributed or distributable pursuant to the terms of
clause 2(d)(i) of Section 3.b. of this Agreement, or by operation of
other agreements or undertakings (including option agreements) but
determined without regard to any additional payments required under
this Section 4.g.) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"), or any comparable Federal, state or local excise
tax (such excise tax, together with any interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then the
Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in such an amount that after the payment of all
taxes (including, without limitation, any interest and penalties on
such taxes and the Excise Tax) on the Payment and on the Gross-Up
Payment, the Executive shall retain an amount equal to the Payment
minus all ordinary taxes on the Payment. The intent of the parties is
that the Corporation shall be solely responsible for, and shall pay,
any Excise Tax on any Payment and Gross-Up Payment and any income and
employment taxes (including, without limitation, penalties and
interest) imposed on any Gross-Up Payment, as well as any loss of tax
deduction caused by the GrossUp Payment. Appendix 1 to this Agreement
presents an illustrative example of the operation of the Gross-Up
Payment.
(2) All determinations required to be made under this Section
4.g., including, without limitation, whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determinations, shall
be made by Price Waterhouse or any other nationally recognized
accounting firm which is the Corporation's outside auditor at the time
of such determination, which firm must be reasonably acceptable to the
Executive (the "Accounting Firm"). The Corporation shall cause the
Accounting Firm to provide detailed supporting calculations to the
- 5 -
<PAGE> 6
Corporation and the Executive within fifteen (15) business days after
notice is given by the Executive to the Corporation that there has
been a Payment, or such earlier time as is requested by the
Corporation. Within two (2) business days after said notice is given
to the Corporation, the Corporation shall instruct the Accounting Firm
to timely provide the data required by this Section 4.g. to the
Executive. All fees and expenses of the Accounting Firm shall be borne
solely by the Corporation. Any Gross-Up Payment, as determined
pursuant to this Section 4.g., shall be paid by the Corporation to the
Internal Revenue Service ("IRS") and/or other appropriate taxing
authority on the Executive's behalf within five (5) days after receipt
of the Accounting Firm's determination. If the Accounting Firm
determines that there is substantial authority (within the meaning of
Section 6662 of the Code) that no Excise Tax is payable by the
Executive, the Accounting Firm shall furnish the Executive with a
written opinion that failure to disclose or report the Excise Tax on
the Executive's Federal income tax return will not constitute a
substantial understatement of tax or be reasonably likely to result in
the imposition of a negligence or similar penalty. Any determination
by the Accounting Firm shall be binding upon the Corporation and the
Executive in the absence of material mathematical or legal error. As a
result of the uncertainty in the application of Section 4999 of the
Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that GrossUp Payments will not have been
made by the Corporation that should have been made ("Underpayment") or
that Gross-Up Payments have been made that should not have been made
("Overpayment"), in each case, consistent with the calculations
required to be made hereunder. In the event that the Corporation
exhausts its remedies pursuant to Section 4.g.(5) below and the
Executive thereafter is required to make a payment of any Excise Tax,
the Accounting Firm shall determine the amount of Underpayment that
has occurred and any such Underpayment shall be promptly paid by the
Corporation to the IRS or other appropriate taxing authority on the
Executive's behalf or, if such Underpayment has been previously paid
by the Executive, to the Executive. In the event that the Accounting
Firm determines that an Overpayment has been made, any such
Overpayment shall be treated for all purposes as a loan to the
Executive with interest at the applicable Federal rate provided for in
Section 7872(r)(2) of the Code, due and payable with ninety (90) days
after written demand to the Executive by the Corporation; provided,
however, that the Executive shall have no duty or obligation
whatsoever to repay said loan unless the Executive's receipt of the
Overpayment, or any portion thereof, is includible in the Executive's
income and the Executive's repayment of same is deductible by the
Executive for Federal and state income tax purposes.
(3) The Executive shall notify the Corporation in writing of any
claim by the IRS or state or local taxing authority that, if
successful, would result in any Excise Tax or an Underpayment
("Claim"). Such notice shall be given as
- 6 -
<PAGE> 7
soon as practicable but no more than fifteen (15) business days after
the Executive is informed in writing of the Claim and shall apprise
the Corporation of the nature of the Claim, the administrative or
judicial appeal period, and the date on which any payment of the Claim
must be paid. The Executive shall not pay any portion of the Claim
prior to the expiration of the thirty (30) day period following the
date on which the Executive gives such notice to the Corporation (or
such shorter period ending on the date that any amount under the Claim
is due). If the Corporation notifies the Executive in writing prior to
the expiration of such thirty (30) day period that it desires to
contest the Claim, the Executive shall:
(a) give the Corporation any information reasonably
requested by the Corporation relating to the Claim;
(b) take such action in connection with contesting the
Claim as the Corporation shall reasonably request in writing from
time to time, including, without limitation, accepting legal
representation concerning the Claim by an attorney selected by
the Corporation who is reasonably acceptable to the Executive;
and
(c) cooperate with the Corporation in good faith in
order to effectively contest the Claim;
provided, however, that the Corporation shall bear and pay
directly all costs and expenses (including, without limitation,
additional interest and penalties and reasonable attorneys' fees)
incurred in such contests and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including, without limitation, interest and penalties
thereon) imposed as a result of such representation. Without
limitation upon the foregoing provisions of this Section 4.g.,
except as provided below, the Corporation shall control all
proceedings concerning such contest and, at its sole option, may
pursue or forego any and all administrative appeal, proceedings,
hearings and conferences with the taxing authority pertaining to
the Claim. At the written request of the Corporation and upon
payment to the Executive of an amount at least equal to the Claim
plus any additional amount necessary to obtain the jurisdiction
of the appropriate tribunal and/or court ("Additional Sum") the
Executive shall pay same and sue for a refund. The Executive
agrees to prosecute any contest of a Claim to a determination
before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the
Corporation shall determine; provided, however, that if the
Corporation requests the Executive to pay the Claim and sue for a
refund, the Corporation shall advance the amount of such payment
to the Executive, on an interest-free basis, and shall indemnify
and hold
- 7 -
<PAGE> 8
the Executive harmless on an after-tax basis, from any Excise Tax
or income tax (including, without limitation, interest and
penalties thereon) imposed on such advance or for any imputed
income on such advance. Any extension of the statute of
limitation relating to assessment of any Excise Tax for the
taxable year of the Executive which is the subject of the Claim
is to be limited solely to the Claim. Furthermore, the
Corporation's control of the contest shall be limited to issues
for which a Gross-Up Payment would be payable hereunder. The
Executive shall be entitled to settle or contest, as the case may
be, any other issue raised by the IRS or any other taxing
authority.
(4) If, after the receipt by the Executive of an amount
advanced by the Corporation pursuant to Section 4.g.(3) above, the
Executive receives any refund of a Claim and/or any Additional Sum,
the Executive shall promptly pay to the Corporation the amount of such
refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of
an amount advanced by the Corporation pursuant to Section 4.g.(3)
above, a final determination or a non-final determination is made by
the taxing authority that the Executive shall not be entitled to any
refund of the Claim (and, in the case of a non-final determination,
the Corporation does not notify the Executive in writing of its intent
to contest such denial of refund of a Claim prior to the expiration of
thirty (30) days after such determination), then the portion of such
advance attributable to a Claim shall be forgiven and shall not be
required to be repaid. The amount of such advance attributable to a
Claim shall offset, to the extent thereof, the amount of the
Underpayment required to be paid by the corporation to the Executive.
A "final determination" shall occur when a court of appellate
jurisdiction shall have finally adjudicated a claim or when the period
to contest or otherwise appeal any decision by an administrative
tribunal or court of initial jurisdiction has been waived or the time
for contention on appealing same has expired.
h. In the event that Payment under this Agreement, except
pursuant to the terms of clause 2(d)(i) of Section 3.b., together with all other
Payments and the value of any benefit received or to be received by the
Executive, would result in all or a portion of such Payment to be subject to
excise tax under Section 4999 of the Code, then the Executive's Payment shall be
either (i) the full Payment or (ii) such lesser amount which would result in no
portion of the Payment being subject to excise tax under Section 4999 of the
Code, whichever of the foregoing amounts, taking into account the applicable
Federal, state, and local employment taxes, income taxes, and the excise tax
imposed by Section 4999 of the Code, results in the receipt by the Executive, on
an after-tax basis, of the greatest amount of the Payment, notwithstanding that
all or some portion of the payment may be taxable under Section 4999 of the
Code. All determinations required to be made under this Section 4.h. shall be
made by the Accounting Firm. The Corporation shall cause the Accounting
- 8 -
<PAGE> 9
Firm to provide detailed supporting calculations of its determinations to the
Corporation and the Executive. Notice must be given to the Accounting Firm
within fifteen (15) business days after an event entitling the Executive to a
Payment under this Agreement except a Payment pursuant to the terms of clause
2(d)(i) of Section 3.b. All fees and expenses of the Accounting Firm shall be
borne solely by the Corporation. The Accounting Firm's determinations must be
made with substantial authority (within the meaning of Section 6662 of the
Code).
5. Income Tax Withholding. The Corporation may withhold from any benefits
payable under this Agreement any Federal, state, city or other taxes as may be
required pursuant to any law, regulation or ruling.
6. Nonmitigation. The Executive shall not be required to mitigate the
amount of any Payment provided for in Section 4 by seeking other employment,
remitting any amounts received in connection with other employment or otherwise;
provided, however, that the extended group insurance benefits provided to the
Executive under Section 4.d., to the extent not paid, shall terminate when
similar group insurance coverage begins upon the Executive's reemployment.
7. Confidentiality. Executive covenants and agrees to regard and preserve
as confidential all such proprietary information and trade secrets that have
been or may be obtained by the Executive in the course of his employment with
the Corporation.
8. Enforceability. If any term or provision of this Agreement or the
application thereof to any person or circumstances shall, to any extent, be
invalid or unenforceable, then such term or provision shall be modified and
construed hereunder in such a manner as to give the fullest effect permissible
to its original intent, without rendering such term or provision invalid or
unenforceable. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
9. Amendment. This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
10. Notices. Unless either party notifies the other to the contrary, any
notice hereunder shall be duly given if delivered in person or by registered
first class mail to the party at the Corporation's principal place of business
and at the Executive's then primary residence.
11. Remedies. In the event of a breach of this Agreement or if either
party shall cause any other party or entity to engage in any act in violation of
any provision hereof, the party not causing such breach shall be entitled, in
addition to all other
- 9 -
<PAGE> 10
remedies, to damages and relief available under applicable law, to an injunction
prohibiting such other party or person from engaging in any act or specifically
enforcing this Agreement, as the case may be.
12. Governing Law. This Agreement shall be subject to, and governed by,
the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Agreement as of the date first above written.
/s/ Andrew J. Cavannaugh /s/ Mark D. Goldman
--------------------------------- ----------------------------------
LEWIS GALOOB TOYS, INC. MARK D. GOLDMAN, President
Its Authorized Representative and Chief Executive Officer
- 10 -
<PAGE> 1
EXHIBIT 10.4[11][e]
March 29, 1994
Mr. Loren H. Hildebrand
38362 Crocus Lane
Palm Desert, CA 92260
Dear Loren:
In connection with, and in consideration of, your continuing services in the
position of Executive Vice President - Sales with Lewis Galoob Toys, Inc. (the
"Company"), the Company hereby offers you the following:
1. a. If you are terminated by the Company for reasons other than
"cause" (as hereinafter defined), or other than in connection
with a change in control of the Company (which is provided for
in paragraph 2 below), you will receive a continuation of your
base annual salary ("Salary Continuation") that is in effect
as of the date of termination of your employment ("Termination
Date") and a continuation of certain other benefits as
hereinafter provided ("Other Benefits", and collectively with
the Salary Continuation "Severance Benefits"), for a maximum
period of twelve (12) months from and after the Termination
Date ("Extension Period"); provided, however, that from and
after your Termination Date you will not receive or be
entitled to any continuation of any bonus or profit sharing
participation or eligibility for any part or all of the
Company's fiscal year in which the Termination Date occurs.
Except as provided below, Salary Continuation during the
Extension Period will be paid on the Company's normal payroll
schedule. If, however, during the Extension Period you
commence regular full-time employment elsewhere, your ongoing
Severance Benefits shall cease as of the date you commence
said employment; provided, however, that as of that date a
calculation shall be made to determine the aggregate amount of
Salary Continuation (excluding Other Benefits) that remains
unpaid and which you would have otherwise been entitled to
receive during the remaining portion of the Extension Period,
and the Company shall promptly pay you a lump sum (minus
withholdings and other required deductions) of an amount equal
to one-half (1/2) of that
<PAGE> 2
Salary Continuation calculation.
b. The Other Benefits referred to in paragraph 1.a. above include
all medical, health and welfare and insurance benefits that
were in effect and in which you participated as of the
Termination Date and these will continue during the Extension
Period until the earlier to occur of twelve (12) months from
the Termination Date or the date you commence regular
full-time employment elsewhere. The provisions and conditions
covering these Other Benefits, including but not limited to
the amount of any contributions to be made by you on a monthly
or other periodic basis, will be governed by the various plans
as they are in effect from time to time. Notwithstanding the
foregoing, earned Flexible Time Off ("FTO") stops accruing
and/or being earned as of your Termination Date and all
contributions to the Company's 401k and "cafeteria" benefit
plan shall stop as of the Termination Date.
c. Your automobile allowance and automobile program benefits,
including your Company gasoline credit card and reimbursement
for maintenance, insurance and other auto-related expenses,
will cease as of the Termination Date and will not be extended
to you during the Extension Period. The amount constituting
the Salary Continuation that you are paid during the Extension
Period will be adjusted downward to eliminate the monthly auto
allowance that you were receiving immediately prior to the
Termination Date.
d. For purposes of this letter, "regular full-time employment
elsewhere" shall not include or be deemed to include any
situation where you become self-employed, or any
self-employment circumstances where you own or control at
least 51% percent of the stock or other controlling equity of
an entity that serves as your employer and was created after
the Termination Date solely for the purpose of your ongoing
employment.
e. For purposes of this letter, "cause" shall mean:
i. Your gross neglect, knowing refusal or wilful failure
to properly perform the material duties and
responsibilities of your position or to properly
perform to a material extent the reasonable
directives or instructions of your immediate
supervisor, whether any of the foregoing is evidenced
by a single act or a series of acts;
ii. Your gross neglect, knowing refusal or wilful failure
to adhere or conform to, or abide by, the Company's
policies and procedures, whether evidenced by a
single act or a series of acts;
2
<PAGE> 3
iii. Any act or acts of dishonesty, gross negligence,
wilfulness, theft, fraud, violations of law
(including, but not limited to, convictions of a
felony or other crime involving moral turpitude, or
the entering of a guilty plea or a plea of nolo
contendre in connection with any such felony or moral
turpitude charge) or other intentional conduct,
whether or not in the course of or outside the scope
of your employment, which in the reasonable opinion
of the Company has had, or may or will have, a
material adverse effect on the Company's business,
property, goodwill or reputation.
2. Change in Control
a. For purposes of this letter, a "change in control" of the
Company shall be deemed to occur as of the date on which: (i)
a person or entity or group of persons or entities, acting in
concert ("Person") shall, in a transaction in which the
Company is not a party, become the direct or indirect
beneficial owner (within the meaning of Rule 13d-3 of the
Securities and Exchange Act of 1934, as amended from time to
time) of securities of the Company representing fifty-one
percent (51%) or more of the combined voting power of the
issued and outstanding voting securities of the Company (a
"Majority Owner") and/or (ii) the majority of the Company's
Board of Directors is no longer comprised of the incumbent
Directors who constitute the Board of Directors on the date of
this letter and any other individual(s) who becomes a Director
subsequent to the date of this letter whose election or
nomination for election as a Director, as the case may be, was
approved by at least a majority of the Directors who comprise
the incumbent Directors as of the date of such election or
nomination ("Incumbent Directors"); provided, however, that if
the composition of the Company's Board of Directors changes
after or in conjunction with a transaction to which the
Company is a party that results in a Person becoming a
Majority Owner then, for purposes of this Paragraph 3(a), and
notwithstanding the approval of the majority of the Incumbent
Directors, a change in control will be deemed to have taken
place if there is a change in more than one-third (1/3) of the
Board of Directors during the twelve (12) month period
following such a transaction or in more than one-half (1/2) of
the Board of Directors during the twenty-four (24) month
period following such a transaction.
3
<PAGE> 4
b. Subject to paragraph 2.d. below, if within a period of
eighteen (18) months following the date of such a change in
control:
-- you are either terminated for reasons other than
cause, or
-- you experience a material diminution of your job
responsibilities or authority or a demotion in the
level of your reporting relationship or a reduction
in your then-existing salary, or you are required to
relocate outside of the San Francisco Bay area, and
within thirty (30) days from the occurrence of such
act you exercise your right to terminate your
employment by written notice to the Company,
then upon such Termination Date you will receive the following:
(i) A lump sum payment (minus withholdings and other
required deductions) of an amount equal to two (2)
times your total base annual salary that is in effect
immediately prior to the Termination Date, plus
twenty-four (24) times the amount to which you are
then entitled for the monthly automobile allowance;
and
(ii) An additional lump sum payment (minus withholdings
and other required deductions) of an amount equal to
the greater of two (2) times: (x) the bonus that was
actually paid to you for the year's results for the
Company's fiscal year immediately preceding the year
in which your Termination Date occurs, or (y) the
bonus anticipated, if any, for the current fiscal
year in which your Termination Date occurs based upon
the actual results as compared to the Company's
financial plan as of such Termination Date. For
clarification purposes, an example of this
alternative bonus calculation is set forth in
Schedule 1, which is attached hereto and hereby made
part of this letter. It is also acknowledged that
the amount payable under this subparagraph may be
zero if there was no bonus paid in the preceding year
and no bonus anticipated in the current year as of
the Termination Date.
c. Subject to paragraph 2.d. below, in addition to the lump sum
payments provided for in paragraph 2.b. above, upon
termination of your employment pursuant to such paragraph 2.b.
you will also receive and be entitled to the following:
4
<PAGE> 5
(i) All Other Benefits that were in effect and in which
you participated immediately prior to the Termination
Date, for a period of twenty-four (24) months
following the Termination Date. The provisions and
conditions covering these Other Benefits, including
but not limited to the amount of any contributions to
be made by you on a monthly or other periodic basis,
will be governed by the various plans as they are in
effect from time to time. Notwithstanding the
foregoing, earned FTO stops accruing and/or being
earned as of your Termination Date and all
contributions to the Company's 401k and "cafeteria"
benefit plan shall stop as of the Termination Date.
(ii) In addition to the lump sum payment of the monthly
automobile allowance (referred to in paragraph
2.b.(i) above), for the period of twenty four (24)
months following the Termination Date you will be
entitled to continue to receive reimbursement for
items such as automobile maintenance, insurance and
other auto- related expenses, including the use of a
Company gasoline credit card, all in accordance with
the Company's executive automobile allowance and
reimbursement program as it is in effect on the
Termination Date and from time to time thereafter.
d. It is acknowledged and understood that the compensation plus
other benefits for which you are otherwise eligible pursuant to
a change in control of the Company in accordance with
paragraphs 2b. and c. above may constitute "parachute payments"
within the meaning of Section 280G of the Internal Revenue Code
of 1986, as amended (the "Code"), and that payment of the
aggregate total of such compensation and benefits could
constitute an "excess parachute payment" under Section 280G of
the Code if it equals an amount in excess of 2.99 times your
"Base Amount" as that term is defined in said Section 280G,
thereby resulting in some or all of such aggregate total being
subject to the excise tax under Section 4999 of the Code. (See
attached letter from Shereff, Friedman for further
explanation.) It is agreed that in such event the aggregate
total of such compensation and benefits shall be reduced by
the minimum amount necessary so that no portion thereof will be
subject to the excise tax under Section 4999 of the Code. It
is also understood and agreed that the Company will not
"gross-up" or make any other additional payments to you that
are intended, directly or indirectly, to partially or wholly
offset any such excise tax obligations.
5
<PAGE> 6
- 5 -
3. This letter and the other documents expressly referenced herein
constitute the sole and exclusive agreement between you and the
Company with regard to the specific subject matter contained herein
concerning your severance for a termination other than for cause, the
definition of "cause", and a change in control, and this letter
supersedes and replaces that portion of any prior agreement or
covenant, whether written or oral, between you and the Company
expressly covering any one or more of these specific items. However,
subject to this paragraph 3 and except as expressly set forth and/or
amended herein, any other written agreement that you have with the
Company concerning your current employment will remain in full force
and effect.
4. The terms and conditions of this letter shall continue in full force
and effect for a period of twenty-four (24) months from the date of
this letter, at which time such terms and conditions shall
automatically terminate unless renewed in writing by the Company, or
unless prior to that date you have been terminated pursuant to the
terms hereof or a change in control has occurred in which event the
terms and conditions of this letter will continue for the purposes
thereof.
Please sign and date the duplicate originals of this letter in the place
provided below, retain one fully executed original for your file and return the
other fully executed original to my attention.
Sincerely yours,
LEWIS GALOOB TOYS, INC.
/s/ William G. Catron
------------------------
William G. Catron
Executive Vice President,
General Counsel and
Chief Administrative Officer
ACCEPTED AND AGREED TO THIS 29th DAY OF March, 1994:
/s/ Loren H. Hildebrand
------------------------
Loren H. Hildebrand
6
<PAGE> 7
Attachments - Schedule 1
SCHEDULE 1
BONUS CALCULATION EXAMPLE
Pursuant to paragraph 2.b.(ii) of the letter dated March 30, 1995, to which
this Schedule is attached, assume that the executive has a bonus potential
based upon achievement of the annual income plan as follows:
<TABLE>
<CAPTION>
PLAN BONUS POTENTIAL
---- ---------------
<S> <C>
150% 100%
125% 75%
100% 50%
90% 25%
</TABLE>
Assume that the executive in question has a maximum bonus potential of 75% of
base salary. As the table above illustrates, at 150% of plan, that executive
can earn the maximum available bonus or, in this case, 75% of base. If the
executive in question had a base salary of $250,000 per year, then the maximum
bonus potential in the year for that executive would be $187,500.
Let us assume that the termination of employment for this executive pursuant to
paragraph 3.b. of the letter occurs as of June 30 of a particular year. If the
net income plan for the Company through June 30 of the year in question was to
earn $1 million, and actual earning were $1.5 million, then the executive in
question would qualify for a bonus of 2 X $187,500 as the bonus plan component
pursuant to paragraph 3.b.(ii)(y) of the letter. In the event that this
payment is larger than 2 X the bonus paid to the executive in connection with
the previous year's results, he would be paid 2 X $187,500 pursuant to
paragraph 3.b.(ii). In the event that the bonus paid to the executive in
connection with the previous year's results was higher than $187,500, the
executive will be paid 2 X the previous year's bonus payment, as the payment
component pursuant to paragraph 3.b.(ii).
7
<PAGE> 1
EXHIBIT 10.4 [11][f]
March 28, 1995
Mr. William B. Towne
59 Hawxhurst Road
Cold Spring Harbor, New York 11724
Dear Bill:
In connection with, and in consideration of, your continuing services in the
position of Executive Vice President - Finance and Chief Financial Officer,
with Lewis Galoob Toys, Inc. (the "Company"), the Company hereby offers you the
following:
1. a. If you are terminated by the Company for reasons other than
"cause" (as hereinafter defined), or other than in connection
with a change in control of the Company (which is provided for
in paragraph 2 below), you will receive a continuation of your
base annual salary ("Salary Continuation") that is in effect
as of the date of termination of your employment ("Termination
Date") and a continuation of certain other benefits as
hereinafter provided ("Other Benefits", and collectively with
the Salary Continuation "Severance Benefits"), for a maximum
period of twelve (12) months from and after the Termination
Date ("Extension Period"); provided, however, that from and
after your Termination Date you will not receive or be
entitled to any continuation of any bonus or profit sharing
participation or eligibility for any part or all of the
Company's fiscal year in which the Termination Date occurs.
Except as provided below, Salary Continuation during the
Extension Period will be paid on the Company's normal payroll
schedule. If, however, during the Extension Period you
commence regular full-time employment elsewhere, your ongoing
Severance Benefits shall cease as of the date you commence
said employment; provided, however, that as of that date a
calculation shall be made to determine the aggregate amount of
Salary Continuation (excluding Other Benefits) that remains
unpaid and which you would have otherwise been entitled to
receive during the remaining portion of the Extension Period,
and the Company shall promptly pay you a lump sum (minus
withholdings and other required deductions) of an amount equal
<PAGE> 2
Mr. William B. Towne
February 27, 1995
to one-half (1/2) of that Salary Continuation calculation.
b. The Other Benefits referred to in paragraph 1.a. above include
all medical, health and welfare and insurance benefits that
were in effect and in which you participated as of the
Termination Date and these will continue during the Extension
Period until the earlier to occur of twelve (12) months from
the Termination Date or the date you commence regular
full-time employment elsewhere. The provisions and conditions
covering these Other Benefits, including but not limited to
the amount of any contributions to be made by you on a monthly
or other periodic basis, will be governed by the various plans
as they are in effect from time to time. Notwithstanding the
foregoing, earned Flexible Time Off ("FTO") stops accruing
and/or being earned as of your Termination Date and all
contributions to the Company's 401k and "cafeteria" benefit
plan shall stop as of the Termination Date.
c. Your automobile allowance and automobile program benefits,
including your Company gasoline credit card and reimbursement
for maintenance, insurance and other auto-related expenses,
will cease as of the Termination Date and will not be extended
to you during the Extension Period. The amount constituting
the Salary Continuation that you are paid during the Extension
Period will be adjusted downward to eliminate the monthly auto
allowance that you were receiving immediately prior to the
Termination Date.
d. For purposes of this letter, "regular full-time employment
elsewhere" shall not include or be deemed to include any
situation where you become self-employed, or any
self-employment circumstances where you own or control at
least 51% percent of the stock or other controlling equity of
an entity that serves as your employer and was created after
the Termination Date solely for the purpose of your ongoing
employment.
e. For purposes of this letter, "cause" shall mean:
i. Your gross neglect, knowing refusal or wilful failure
to properly perform the material duties and
responsibilities of your position or to properly
perform to a material extent the reasonable
directives or
10
<PAGE> 3
Mr. William B. Towne
February 27, 1995
instructions of your immediate supervisor, whether any
of the foregoing is evidenced by a single act or a
series of acts;
ii. Your gross neglect, knowing refusal or wilful failure
to adhere or conform to, or abide by, the Company's
policies and procedures, whether evidenced by a
single act or a series of acts;
iii. Any act or acts of dishonesty, gross negligence,
wilfulness, theft, fraud, violations of law
(including, but not limited to, convictions of a
felony or other crime involving moral turpitude, or
the entering of a guilty plea or a plea of nolo
contendre in connection with any such felony or moral
turpitude charge) or other intentional conduct,
whether or not in the course of or outside the scope
of your employment, which in the reasonable opinion
of the Company has had, or may or will have, a
material adverse effect on the Company's business,
property, goodwill or reputation.
2. Change in Control
a. For purposes of this letter, a "change in control" of the
Company shall be deemed to occur as of the date on which: (i)
a person or entity or group of persons or entities, acting in
concert ("Person") shall, in a transaction in which the
Company is not a party, become the direct or indirect
beneficial owner (within the meaning of Rule 13d-3 of the
Securities and Exchange Act of 1934, as amended from time to
time) of securities of the Company representing fifty-one
percent (51%) or more of the combined voting power of the
issued and outstanding voting securities of the Company (a
"Majority Owner") and/or (ii) the majority of the Company's
Board of Directors is no longer comprised of the incumbent
Directors who constitute the Board of Directors on the date of
this letter and any other individual(s) who becomes a Director
subsequent to the date of this letter whose election or
nomination for election as a Director, as the case may be, was
approved by at least a majority of the Directors who comprise
the incumbent Directors as of the date of such election or
nomination ("Incumbent Directors"); provided, however, that if
the composition of the Company's Board of Directors changes
after or in conjunction with a transaction to which the
Company is a party that results in a Person becoming a
Majority Owner then, for
11
<PAGE> 4
Mr. William B. Towne
February 27, 1995
purposes of this Paragraph 3(a), and notwithstanding the
approval of the majority of the Incumbent Directors, a change
in control will be deemed to have taken place if there is a
change in more than one-third (1/3) of the Board of Directors
during the twelve (12)month period following such a transaction
or in more than one-half (1/2) of the Board of Directors during
the twenty-four (24) month period following such a transaction.
b. Subject to paragraph 2.d. below, if within a period of
eighteen (18) months following the date of such a change in
control:
-- you are either terminated for reasons other than
cause, or
-- you experience a material diminution of your job
responsibilities or authority or a demotion in the
level of your reporting relationship or a reduction
in your then-existing salary, or you are required to
relocate outside of the San Francisco Bay area, and
within thirty (30) days from the occurrence of such
act you exercise your right to terminate your
employment by written notice to the Company,
then upon such Termination Date you will receive the following:
(i) A lump sum payment (minus withholdings and other
required deductions) of an amount equal to two (2)
times your total base annual salary that is in effect
immediately prior to the Termination Date, plus
twenty-four (24) times the amount to which you are
then entitled for the monthly automobile allowance;
and
(ii) An additional lump sum payment (minus withholdings
and other required deductions) of an amount equal to
the greater of two (2) times: (x) the bonus that was
actually paid to you for the year's results for the
Company's fiscal year immediately preceding the year
in which your Termination Date occurs, or (y) the
bonus anticipated, if any, for the current fiscal
year in which your Termination Date occurs based upon
the actual results as compared to the Company's
financial plan as of such Termination Date. For
clarification purposes, an example of this
alternative bonus calculation is set forth in
Schedule 1, which is attached hereto and hereby made
part of this
12
<PAGE> 5
Mr. William B. Towne
February 27, 1995
letter. It is also acknowledged that the amount
payable under this subparagraph may be zero if there
was no bonus paid in the preceding year and no bonus
anticipated in the current year as of the Termination
Date.
c. Subject to paragraph 2.d. below, in addition to the lump sum
payments provided for in paragraph 2.b. above, upon
termination of your employment pursuant to such paragraph 2.b.
you will also receive and be entitled to the following:
(i) All Other Benefits that were in effect and in which
you participated immediately prior to the Termination
Date, for a period of twenty-four (24) months
following the Termination Date. The provisions and
conditions covering these Other Benefits, including
but not limited to the amount of any contributions to
be made by you on a monthly or other periodic basis,
will be governed by the various plans as they are in
effect from time to time. Notwithstanding the
foregoing, earned FTO stops accruing and/or being
earned as of your Termination Date and all
contributions to the Company's 401k and "cafeteria"
benefit plan shall stop as of the Termination Date.
(ii) In addition to the lump sum payment of the monthly
automobile allowance (referred to in paragraph
2.b.(i) above), for the period of twenty four (24)
months following the Termination Date you will be
entitled to continue to receive reimbursement for
items such as automobile maintenance, insurance and
other auto- related expenses, including the use of a
Company gasoline credit card, all in accordance with
the Company's executive automobile allowance and
reimbursement program as it is in effect on the
Termination Date and from time to time thereafter.
d. It is acknowledged and understood that the compensation plus
other benefits for which you are otherwise eligible pursuant
to a change in control of the Company in accordance with
paragraphs 2b. and c. above may constitute "parachute
payments" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), and that
payment of the aggregate total of such compensation and
benefits could constitute an
13
<PAGE> 6
Mr. William B. Towne
February 27, 1995
"excess parachute payment" under Section 280G of the Code if it
equals an amount in excess of 2.99 times your "Base Amount" as
that term is defined in said Section 280G, thereby resulting in
some or all of such aggregate total being subject to the excise
tax under Section 4999 of the Code. (See attached letter from
Shereff, Friedman for further explanation.) It is agreed that
in such event the aggregate total of such compensation and
benefits shall be reduced by the minimum amount necessary so
that no portion thereof will be subject to the excise tax under
Section 4999 of the Code. It is also understood and agreed
that the Company will not "gross-up" or make any other
additional payments to you that are intended, directly or
indirectly, to partially or wholly offset any such excise tax
obligations.
3. This letter and the other documents expressly referenced herein
constitute the sole and exclusive agreement between you and the
Company with regard to the specific subject matter contained herein
concerning your severance for a termination other than for cause, the
definition of "cause", and a change in control, and this letter
supersedes and replaces that portion of any prior agreement or
covenant, whether written or oral, between you and the Company
expressly covering any one or more of these specific items. However,
subject to this paragraph 3 and except as expressly set forth and/or
amended herein, any other written agreement that you have with the
Company concerning your current employment will remain in full force
and effect.
4. The terms and conditions of this letter shall continue in full force
and effect for a period of twenty-four (24) months from the date of
this letter, at which time such terms and conditions shall
automatically terminate unless renewed in writing by the Company, or
unless prior to that date you have been terminated pursuant to the
terms hereof or a change in control has occurred in which event the
terms and conditions of this letter will continue for the purposes
thereof.
Please sign and date the duplicate originals of this letter in the place
provided below, retain one fully executed original for your file and return the
other fully executed original to my attention.
Sincerely yours,
LEWIS GALOOB TOYS, INC.
14
<PAGE> 7
Mr. William B. Towne
February 27, 1995
/s/ William G. Catron
---------------------
William G. Catron
Executive Vice President,
General Counsel and
Chief Administrative Officer
ACCEPTED AND AGREED TO THIS 29th DAY OF March, 1995:
/s/ William B. Towne
---------------------
William B. Towne
Attachments - Schedule 1
SCHEDULE 1
BONUS CALCULATION EXAMPLE
Pursuant to paragraph 2.b.(ii) of the letter dated March 30, 1995, to which
this Schedule is attached, assume that the executive has a bonus potential
based upon achievement of the annual income plan as follows:
<TABLE>
<CAPTION>
PLAN BONUS POTENTIAL
---- ---------------
<S> <C>
150% 100%
125% 75%
100% 50%
</TABLE>
15
<PAGE> 8
Mr. William B. Towne
February 27, 1995
<TABLE>
<S> <C>
90% 25%
</TABLE>
Assume that the executive in question has a maximum bonus potential of 75% of
base salary. As the table above illustrates, at 150% of plan, that executive
can earn the maximum available bonus or, in this case, 75% of base. If the
executive in question had a base salary of $250,000 per year, then the maximum
bonus potential in the year for that executive would be $187,500.
Let us assume that the termination of employment for this executive pursuant to
paragraph 2.b. of the letter occurs as of June 30 of a particular year. If the
net income plan for the Company through June 30 of the year in question was to
earn $1 million, and actual earning were $1.5 million, then the executive in
question would qualify for a bonus of 2 X $187,500 as the bonus plan component
pursuant to paragraph 2.b.(ii)(y) of the letter. In the event that this
payment is larger than 2 X the bonus paid to the executive in connection with
the previous year's results, he would be paid 2 X $187,500 pursuant to
paragraph 2.b.(ii). In the event that the bonus paid to the executive in
connection with the previous year's results was higher than $187,500, the
executive will be paid 2 X the previous year's bonus payment, as the payment
component pursuant to paragraph 2.b.(ii).
16
<PAGE> 1
EXECUTION COPY
EXHIBIT 10.7[7][b]
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
Dated as of March 31, 1995
between
LEWIS GALOOB TOYS, INC.
500 Forbes Boulevard
South San Francisco, CA 94080
and
CONGRESS FINANCIAL CORPORATION (CENTRAL)
100 South Wacker Drive
Chicago, Illinois 60606
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C> <C>
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Interrelationship with the Original Agreement . . . . . . . . . . . . . . . 18
SECTION 2. LOANS; TERM; EARLY TERMINATION . . . . . . . . . . . . . . . . . . . . . . 18
2.1 Revolving Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.2 Loan Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.3 Maximum Loan Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.4 Amounts Charged to Debtor's Account; Place of Payment . . . . . . . . . . . 20
2.5 Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.6 Early Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3. INTEREST AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.2 Default Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.3 Interest Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.4 Unused Line Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.5 Management Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.6 Closing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.7 Maximum Credit Increase Fee . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 4. LETTER OF CREDIT FACILITY . . . . . . . . . . . . . . . . . . . . . . . . 23
4.1 Letter of Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.2 Letter of Credit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.3 Letter of Credit Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.4 Letter of Credit Claims . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 5. SECURITY INTEREST AND COLLATERAL . . . . . . . . . . . . . . . . . . . . . 25
5.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 6. COLLECTION AND ADMINISTRATION OF ACCOUNTS AND CASH
MANAGEMENT RELATIONSHIPS . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.1 Collection by Debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.2 Rights of Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.3 Reclaimed Goods; Account Adjustments . . . . . . . . . . . . . . . . . . . 27
6.4 Lockboxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 7. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . 28
7.1 Collateral Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.2 Location of Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.3 Representations as to Eligible Accounts . . . . . . . . . . . . . . . . . . 29
7.4 Investigations and Litigation . . . . . . . . . . . . . . . . . . . . . . . 29
7.5 Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.6 Corporate Organization; Foreign Qualification; Subsidiaries . . . . . . . . 30
7.7 Use of Corporate Name . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.8 No Default Under Other Contracts . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
i
<PAGE> 3
<TABLE>
Page
<S> <C> <C>
7.9 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.10 Adequate Licenses, Patents, etc. . . . . . . . . . . . . . . . . . . . . 30
7.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.12 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.13 Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.14 Representations as to Inventory and Equipment . . . . . . . . . . . . . 31
7.15 Location of Cash Accounts . . . . . . . . . . . . . . . . . . . . . . . 32
7.16 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.17 Internal Controversies . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 8. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.1 Financial Information; Maintenance of Forms . . . . . . . . . . . . . . 33
8.2 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.3 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.4 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.5 Sale of Assets; Preservation of Corporate Existence . . . . . . . . . . 35
8.6 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.7 Liability for Indebtedness of Third Parties . . . . . . . . . . . . . . 36
8.8 Officer Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.9 Redemption of Capital Stock; Dividends . . . . . . . . . . . . . . . . . 36
8.10 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . 37
8.11 Payment on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . 37
8.12 Amendment of Articles of Incorporation . . . . . . . . . . . . . . . . . 37
8.13 Maintenance of Liability and Casualty Insurance . . . . . . . . . . . . 37
8.14 Litigation; Contested Taxes . . . . . . . . . . . . . . . . . . . . . . 38
8.15 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.16 Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.17 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
8.18 Notices of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.19 Maintenance of Records of Accounts . . . . . . . . . . . . . . . . . . . 42
8.20 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
8.21 Covenants as to Inventory and Equipment . . . . . . . . . . . . . . . . 42
8.22 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . 44
(a) Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . 44
(b) Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . 44
8.23 Loan Agreement as Financing Statement . . . . . . . . . . . . . . . . . 44
8.24 Location and Use of Collateral . . . . . . . . . . . . . . . . . . . . . 44
8.25 Location of Chief Executive Office . . . . . . . . . . . . . . . . . . . 44
SECTION 9. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . 44
9.1 Conditions Precedent to Rollover Advance . . . . . . . . . . . . . . . . 44
9.2 Conditions Precedent to All Advances . . . . . . . . . . . . . . . . . . 46
SECTION 10. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10.2 Effect of Event of Default; Remedies . . . . . . . . . . . . . . . . . . 49
10.3 Possession of Collateral by Judicial Process . . . . . . . . . . . . . . 49
10.4 Notice of Public Sale . . . . . . . . . . . . . . . . . . . . . . . . . 49
10.5 Net Cash Proceeds Deficiency or Excess . . . . . . . . . . . . . . . . . 49
10.6 Remedies Not Exclusive . . . . . . . . . . . . . . . . . . . . . . . . . 50
10.7 No Waiver of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 50
</TABLE>
ii
<PAGE> 4
<TABLE>
Page
<S> <C> <C>
10.8 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
10.9 Additional Remedies in Respect of Inventory . . . . . . . . . . . . . . 50
SECTION 11. TAXES; EXPENSES; INDEMNITY . . . . . . . . . . . . . . . . . . . . . . 51
11.1 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
11.2 General Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
11.3 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
11.4 Benefits of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 12. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
12.1 GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL;
WAIVER OF DAMAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
12.2 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
12.3 Modification of Agreement . . . . . . . . . . . . . . . . . . . . . . . 55
12.4 Reimbursement for Congress' Costs . . . . . . . . . . . . . . . . . . . 55
12.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
12.6 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
12.7 Waiver of Notice, Hearing and Bond . . . . . . . . . . . . . . . . . . 57
12.8 Advice of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
12.9 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
12.10 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
12.11 Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
12.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
12.13 No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . 59
12.14 Existing Agreements Superseded . . . . . . . . . . . . . . . . . . . . 59
</TABLE>
iii
<PAGE> 5
Schedules
---------
<TABLE>
<CAPTION>
Page
<S> <C>
Schedule 1.1(a) - Description of Headquarters Property
Schedule 1.1(b) - Certain Permitted Indebtedness
Schedule 1.1(c) - Galco Investment
Schedule 1.1(d) - Inactive Subsidiaries
Schedule 7.2 - Location of Offices and Records
Schedule 7.4 - Investigations and Litigation
Schedule 7.6 - Subsidiaries
Schedule 7.9 - Compliance with Laws
Schedule 7.10 - Licenses
Schedule 7.11(a) - ERISA Matters
Schedule 7.11(b) - Multi-Employer Plans
Schedule 7.13 - Environmental Matters
Schedule 7.14(b) - Locations of Collateral
Schedule 7.15 - Locations of Cash Accounts
Schedule 8.4 - Certain Permitted Liens
Schedule 8.6 - Certain Permitted Investments
Schedule 8.7 - Accommodation Obligations
Schedule 8.8 - Officer's Compensation
Schedule 8.15 - Funding Deficiencies
Schedule 9.1(b)(ii) - Form of Amended and Restated Revolving Note
Schedule 9.1(b)(vi) - UCC Search Results
Schedule 9.1(b)(vii) - Form of Debtor Secretary's Certificate
Schedule 9.1(b)(viii) - Form of Closing Certificate
</TABLE>
iv
<PAGE> 6
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated as
of March 31, 1995 (as the same may be modified, amended, extended, restated or
supplemented from time to time, this "Agreement") is entered into by and
between LEWIS GALOOB TOYS, INC., a Delaware corporation ("Debtor"), whose
principal place of business is located at 500 Forbes Boulevard, South San
Francisco, California 94080, and CONGRESS FINANCIAL CORPORATION (CENTRAL), an
Illinois corporation ("Congress"), having an office at 100 South Wacker Drive,
Suite 1940, Chicago, Illinois 60606, AMENDS AND RESTATES IN FULL the Loan and
Security Agreement dated as of April 1, 1993, among the Debtor and Congress, as
previously amended by that certain First Amendment dated as of November 17,
1993 (such agreement, as so amended, the "Original Agreement").
W I T N E S S E T H:
WHEREAS, the Debtor and Congress entered into the Original
Agreement pursuant to which the Debtor obtained from Congress a $40,000,000
revolving credit facility for the purposes indicated therein;
WHEREAS, the Debtor and Congress desire to amend and restate
the Original Agreement in full as set forth herein;
WHEREAS, the Debtor has requested that Congress enter into
this Agreement in order to continue to make Revolving Loans to the Debtor in an
aggregate amount of up to $60,000,000 and to provide Letters of Credit to the
Debtor in order to refinance the existing indebtedness under the Original
Agreement and to continue to obtain revolving loans and advances to provide for
its letter of credit and ongoing working capital requirements;
WHEREAS, it is the intent of the Debtor and Congress that this
Agreement amend and restate in its entirety the Original Agreement and that,
from and after the date hereof, the Original Agreement shall be of no force and
effect except to evidence the terms and conditions under which the Debtor
heretofore has incurred obligations and liabilities to Congress as evidenced by
the Original Agreement and Congress' books and records.
WHEREAS, this Agreement is made in renewal, amendment,
restatement and modification of the obligations under the Original Agreement;
NOW, THEREFORE, in consideration of the premises, the mutual
covenants set forth herein, and for other good and
1
<PAGE> 7
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Debtor and Congress agree as follows:
SECTION 1. DEFINITIONS.
1.1 Definitions. All terms used herein which are defined in
Article 1 or Article 9 of the Illinois Uniform Commercial Code (the "UCC")
shall have the meanings given therein, unless otherwise defined in this
Agreement, and all references to the plural shall also mean the singular. Any
accounting term used herein and not specifically defined herein shall have the
meaning customarily given to such term in accordance with GAAP. When used
herein, the following terms shall have the following meanings:
"Accommodation Obligation" of any Person shall mean any direct
or indirect guaranty or other contractual obligation, contingent or otherwise,
of such Person with respect to any Indebtedness or other obligation or
liability of another, including any such Indebtedness, obligation or liability
directly or indirectly guaranteed, endorsed (other than for collection or
deposit in the ordinary course of business), co-made or discounted or sold with
recourse by such Person, or in respect of which such Person is otherwise
directly or indirectly liable, including any contractual obligations
(contingent or otherwise) arising through any agreement to purchase,
repurchase, or otherwise acquire such Indebtedness, obligation or liability or
any security therefor, or to provide funds for the payment or discharge thereof
(whether in the form of loans, advances, stock purchases, capital contributions
or otherwise), or to maintain solvency, assets, level of income, or other
financial condition.
"Account Debtor" shall mean each account debtor or obligor in
any way obligated on or in connection with any Account.
"Accounts" shall mean all of Debtor's present and future
accounts, as such term is defined in the UCC, including, without limitation,
all obligations for the payment of money arising out of Debtor's sale, lease or
other disposition of goods or other property or rendition of services.
"Acquisition" shall mean the Debtor's acquisition of all of
the capital stock or assets of another company in the same or similar line of
business as the Debtor, which acquisition shall be subject to the conditions
set forth in the definition of "Permitted Investments" set forth herein.
"Advance" shall mean any loan or extension of credit by
Congress pursuant to the Loan Documents, including the face amount of any
Letter of Credit issued pursuant to Section 4.1 hereof.
2
<PAGE> 8
"Affiliate" shall mean any Person (i) that directly or
indirectly, through one or more intermediaries, controls or is controlled by,
or is under common control with Debtor, other than officers and directors of
Debtor, unless any such officer or director satisfies clause (ii) below, (ii)
that directly or beneficially owns or holds thirty-five percent (35%) or more
of any class of the voting stock of Debtor or (iii) thirty-five percent (35%)
or more of whose voting stock equity interests are owned directly or
beneficially or held by Debtor. Nothing herein shall be deemed to constitute
an agreement by the Debtor with respect to the definition of "Affiliate" for
the purposes of the securities laws of the United States.
"Agreement" shall have the meaning set forth in the preamble
to this Agreement.
"Availability Report" shall mean with respect to any date, a
borrowing base certificate of the chief financial officer or any controller of
Debtor in such form as Congress may prescribe from time to time, certifying,
among other things, (i) a schedule of Debtor's calculation of the Net Amount of
Eligible Accounts and (ii) a schedule of Debtor's calculation of the Value of
Eligible Inventory, in each case, giving effect to all objectively determinable
standards of eligibility known by the Debtor to be in effect (which
calculations shall not be binding on Congress).
"Bankruptcy Code" shall mean Title 11 of the United States
Code (11 U.S.C. Section 101 et seq.) as amended from time to time, and any
successor statute.
"Benefit Plan" shall mean any employee benefit plan as defined
in Section 3(3) of ERISA, other than a Multiemployer Plan, which is subject to
Title IV of ERISA and in respect of which Debtor, or any ERISA Affiliate of
Debtor, is, or at any time during the immediately preceding five years was, an
"employer" (as defined in Section 3(5) of ERISA).
"Business Day" shall mean any day other than a Saturday,
Sunday or public holiday or the equivalent for banks in Chicago, Illinois or
New York, New York.
"Capital Lease" shall mean any lease which is or should be
capitalized on the balance sheet of lessee in accordance with GAAP.
"Cash Equivalents" shall mean (i) securities issued,
guaranteed or insured by the United States or any of its agencies with
maturities of not more than one year from the date acquired, (ii) certificates
of deposit with maturities of not more than one year from the date acquired
issued by a U.S. federal or state chartered commercial bank of recognized
standing, which has capital and unimpaired surplus in excess of $200,000,000
and
3
<PAGE> 9
which bank or its holding company has a short term commercial paper rating of
at least A-2 or the equivalent by Standard & Poor's Corporation or at least P-2
or the equivalent by Moody's Investors Services, Inc., (iii) commercial paper
or finance company paper issued by any Person incorporated under the laws of
the United States or any state thereof and rated at least A-2 or the equivalent
by Standard & Poor's Corporation or at least P-2 or the equivalent by Moody's
Investors Services, Inc., in each case with maturities of not more than one
year from the date acquired, (iv) investments in money market funds registered
under the Investment Company Act of 1940, which have net assets of at least
$200,000,000 and at least eighty five percent (85%) of whose assets consist of
securities and other obligations of the type described in clauses (i) through
(iii) above, and (v) interest bearing or time deposits which are insured by the
Federal Deposit Insurance Corporation or a similar federal insurance program;
provided, however, that the Debtor may, in the ordinary course of its business,
maintain in its disbursement accounts from time to time amounts in excess of
such then applicable program insurance limits.
"Change in Control" shall mean one or more of the following
events:
(a) less than a majority of the members of the Debtor's board
of directors (other than members of the Board of Directors elected by holders
of the Debtor's preferred stock) shall be persons (i) who were serving as
directors on the Closing Date or (ii) who are elected or nominated for election
after the Closing Date by at least a majority of directors who comprised the
Board of Directors as of the date of such election or nomination; or
(b) the stockholders of the Debtor shall approve any plan or
proposal for the liquidation or dissolution of the Debtor; or
(c) a Person or group of Persons acting in concert (other
than the direct or indirect beneficial owners of the capital stock of the
Debtor as of the Closing Date) shall, as a result of a tender or exchange
offer, open market purchases, privately negotiated purchases or otherwise, have
become the direct or indirect beneficial owner (within the meaning of Rule
13d-3 under the Securities Exchange Act of 1934, as amended from time to time)
of securities of the Debtor representing more than thirty- five percent (35%)
of the combined voting power of the outstanding voting securities for the
election of directors or shall have the right to elect a majority of the Board
of directors of the Debtor.
"Closing Date" shall mean the first date on which all of the
conditions to Congress' obligation to make the Rollover Advance have been
satisfied.
4
<PAGE> 10
"Collateral" shall have the meaning set forth in Section 5.1
hereof.
"Collections" shall mean all cash, checks, remittances and
other cash proceeds of Collateral or other property received by or payable to
or in respect of Debtor.
"Consolidated Tangible Net Worth" shall mean, as of any date,
(a) the excess of the Debtor's total assets over its total liabilities (other
than any Indebtedness under the Convertible Subordinated Debentures), as
determined in accordance with GAAP on a consolidated basis, less (b) the value
of all intangible assets as defined by GAAP including, without limitation,
goodwill, organization costs, patents, trademarks, copyrights, franchises,
research and development expenses, and any amount reflected as treasury stock.
"Convertible Subordinated Debentures" shall mean the Debtor's
$14,000,000 principal amount of 8.0% Convertible Subordinated Debentures due
2000 issued pursuant to the Convertible Subordinated Debenture Indenture.
"Convertible Subordinated Debenture Indenture" shall mean the
indenture governing the Convertible Subordinated Debentures, dated as of
November 17, 1993, from the Debtor to Continental Stock Transfer & Trust
Company, as Trustee.
"Credit Reserve" shall mean on any day (a "Measurement Day"):
(A) during the period commencing August 1 of each year and
ending on the last day of December of such year an amount equal to the lesser
of:
(i) $3,000,000, or such greater amount as Congress
shall determine is necessary in the exercise of its Permitted
Discretion based upon, among other things, a review of the actual
level of Cumulative Daily Sales during such period, and
(ii) the sum of (a) five percent (5%) of Cumulative
Daily Sales through the day immediately preceding such Measurement Day
less (b) the Cumulative Daily Credits through the day immediately
preceding such Measurement Day, or such greater amount as Congress
shall determine in the exercise of its Permitted Discretion; or
(B) during the period commencing January 1 of each year and
ending on the last day of July of such year an amount equal to the Credit
Reserve in effect as of December 31 as calculated pursuant to clause (A) above
as such amount may be reduced by Congress from time to time in the exercise of
its Permitted
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Discretion based upon a review of the level of actual credits against
the Eligible Accounts;
provided, however, that at no time during the year shall the amount of the
Credit Reserve as calculated pursuant to clause (A) or (B) above be less than
$1,000,000 or such other amount as Congress shall determine from time to time
in the exercise of its Permitted Discretion.
"Cumulative Daily Credits" shall mean on any day during the
period commencing December 1 and ending December 31, the aggregate amount of
domestic non-cash credits or reductions of Accounts during such period through
such day.
"Cumulative Daily Sales" shall mean on any day during the
period commencing August 1 and ending on the immediately succeeding November
30, the aggregate amount of domestic non-cash sales during such period through
such day.
"Customer Sales Reports" shall mean the retail tracking
reports generated by the Debtor from information received from Toys-R-Us and
other retail customers detailing such retail customer's (i) inventory stock
status of the Debtor's products and (ii) sales of the Debtor's products.
"Eligible Accounts" shall mean Accounts created by Debtor in
the ordinary course of business arising out of Debtor's sale of goods or
rendition of services, which are and at all times shall continue to be
acceptable to Congress in all respects. Standards of eligibility may be fixed
and revised from time to time solely by Congress in the exercise of its
Permitted Discretion, based upon the information then available to Congress.
In determining eligibility, Congress may, but need not, rely on agings, reports
and schedules of Accounts furnished by Debtor, but reliance by Congress thereon
from time to time shall not be deemed to limit Congress' right to revise
standards of eligibility at any time as to both Debtor's present and future
Accounts in accordance with the terms hereof. In general, an Account shall not
be deemed eligible unless: (a) the Account Debtor on such Account is and at all
times continues to be acceptable to Congress, (b) such Account complies in all
respects with the representations, covenants and warranties hereinafter set
forth, and (c) no more than 120 days have elapsed since the invoice date of
such Account and no more than 30 days have elapsed since the original due date
of such Account; provided, however, that (i) upon the written request of the
Debtor, Congress may, in the exercise of its Permitted Discretion, from time to
time, elect to include as an Eligible Account an Account where more than 120
days but less than 151 days have elapsed since the invoice date of such
Account, (ii) Congress will not treat Accounts owing by Toys-R-Us or Kay-bee
Toys which are subject to December 10 dating terms as ineligible by virtue of
such Account's failure to meet the foregoing condition contained
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in clause (c) hereof and (iii) Congress may, in the exercise of its Permitted
Discretion, upon the written request of the Debtor, approve as Eligible
Accounts December 10 dating terms from other Account Debtors from time to time.
In addition, without limiting the generality of Congress' Permitted Discretion
in determining eligibility, the following Accounts shall be deemed to be
ineligible:
(a) Accounts with respect to which the Account Debtor is a
director, officer, employee, Subsidiary or Affiliate of Debtor;
(b) all Accounts owing by a single Account Debtor if Accounts
constituting fifty percent (50%) or more of the aggregate balance
owing by such Account Debtor to Debtor remain unpaid more than 30 days
past the applicable due dates of such Accounts or 120 days, or such
longer period as may be applicable in connection with any approved
dating program, after the applicable invoice dates of such Accounts;
(c) Accounts from any Account Debtor who is also a creditor
of Debtor, but only to the extent of the outstanding amount owing by
Debtor to such Account Debtor;
(d) Accounts owing in a currency other than U.S. Dollars or
with respect to which the Account Debtor is not a resident of the
United States of America or Canada unless the Account Debtor has
supplied Debtor with an irrevocable letter of credit that: (i) has
been issued by a financial institution satisfactory to Congress; (ii)
is satisfactory in form and substance to Congress; and (iii) such
letter of credit has been endorsed in blank and delivered to Congress;
in which event such Accounts may be eligible to the extent of the face
amount of such letter of credit;
(e) Accounts with respect to which Congress does not have a
first and valid fully perfected security interest;
(f) Except as approved by Congress from time to time in
writing, Accounts with respect to which the Account Debtor is the
subject of bankruptcy or a similar insolvency proceeding or has made
an assignment for the benefit of creditors or whose assets have been
conveyed to a receiver or trustee;
(g) Accounts with respect to which the Account Debtor's
obligation to pay the Account is conditional upon the Account Debtor's
approval or is otherwise subject to any repurchase obligation or
return right other than return rights for defective products, as with
sales made on a bill-and-hold, guaranteed sale, sale-and-return, sale
on approval or consignment basis;
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(h) Accounts with respect to which Toys-R-Us is the Account
Debtor which are subject to December 10 dating terms, to the extent
that such Accounts exceed sixty percent (60%) of the aggregate amount
of all Accounts with respect to which the Account Debtor is a resident
of the United States or Canada.
"Eligible Inventory" shall mean Inventory deemed by Congress
to meet the following requirements:
(a) The Inventory is a finished toy product that is in good
condition, meets all standards imposed by any governmental agency, or
department or division thereof, having regulatory authority over the
Inventory, its use and/or sale and is either currently usable or
currently saleable in the ordinary course of Debtor's business and is
not otherwise unacceptable to Congress because of age, type, category,
quality and/or quantity;
(b) The Inventory has not been consigned to a customer of
Debtor, has not been used or repossessed, and has not been attached,
seized, made subject to a writ or distress warrant, levied upon or
brought within the possession of any receiver, trustee, custodian or
assignee for the benefit or creditors;
(c) Each of the warranties and representations set forth in
this Agreement has been reaffirmed with respect thereto at the time
the most recent Availability Report was delivered to Congress;
(d) The Inventory was not purchased by Debtor in or as
part of a "bulk" transfer or sale of assets and was not acquired in
any transaction other than in the ordinary course of business unless
(i) Debtor has complied with all applicable bulk sales or bulk
transfer laws or (ii) Congress has given its prior written consent to
Debtor's non-compliance with such laws in connection with an
Acquisition approved by Congress as a Permitted Investment, which
consent shall not be unreasonably withheld; and
(e) The Inventory is at a location permitted under Section
8.24 hereof.
In addition, without limiting the generality of Congress' Permitted Discretion
in determining eligibility, the following Inventory shall be deemed to be
ineligible: raw materials, work-in-process, slow-moving items, obsolete
Inventory, discontinued or close-out Inventory and any other category of
Inventory that Congress deems, in the exercise of its Permitted Discretion, to
be ineligible.
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"Environmental Laws" shall mean any federal, state, district,
local and foreign laws, to the extent applicable to the Debtor, and all rules,
regulations, or orders issued, promulgated or entered thereunder, and any
licenses, permits or other requirements issued to or for the benefit of Debtor
or its Subsidiaries pursuant thereto, relating to pollution or protection of
the environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
(a) laws relating to the identification, reporting, generation, manufacture,
processing, distribution, use, treatment, storage, disposal, transport or other
handling of any pollutants, contaminants, chemicals or any other industrial,
toxic or hazardous substances, materials or wastes, (b) laws relating to
emission, discharge, or other release or threatened release of any pollutants,
contaminants, chemicals, or any other industrial, toxic or hazardous
substances, materials or wastes into the environment, and (c) laws relating to
any liability for the performance or payment of the costs of any response to
any release or threatened release of hazardous substances.
"Equipment" shall mean all of the Debtor's equipment,
including, without limitation, machinery, equipment, office equipment and
supplies, computers and related equipment, furniture, furnishings, tools,
tooling, jigs, dies, fixtures, manufacturing implements, fork lifts, trucks,
trailers, motor vehicles, and other equipment.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time, and any successor statute.
"ERISA Affiliate" shall mean with respect to any Person (i)
any corporation that is a member of the same controlled group of corporations
(within the meaning of Section 414(b) of the Internal Revenue Code) as such
Person; (ii) a trade or business under common control (within the meaning of
Section 414(c) of the Internal Revenue Code) with such Person; or (iii) a
member of the same affiliated service group (within the meaning of Section
414(m) of the Internal Revenue Code) as any corporation described in clause (i)
above, or as any trade or business described in clause (ii) above.
"Event of Default" shall have the meaning set forth in Section
10.1 hereof.
"Existing Revolving Loans" shall mean the "Revolving Loans"
outstanding under the Original Agreement on the Closing Date.
"GAAP" shall mean generally accepted accounting principles as
in effect from time to time, consistently applied.
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"Galco" shall mean Galco International Toys, N.V., a
Netherlands Antilles corporation and a subsidiary of the Debtor, or the
successor entity resulting from the merger or sale of stock or assets of such
corporation to a Hong Kong corporation owned by the Debtor.
"Governmental Authority" shall mean any nation or government,
any state or other political subdivision thereto and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Guarantor" shall mean any guarantor of the Obligations.
"Hazardous Substances" shall mean any pollutants,
contaminants, chemicals or toxic or hazardous substance, material or waste,
including, without limitation, more than 100 gallons of petroleum (or any
volume of petroleum that is released into the environment), PCBs, asbestos
(when in a friable condition, when removed or contained or when required to be
removed or contained pursuant to Environmental Laws), flammable explosives,
radioactive materials, and any other substance, material or waste that is
regulated pursuant to any Environmental Laws.
"Headquarters Property" shall mean the tract of real property
owned by the Debtor located at 500 Forbes Boulevard, South San Francisco,
California 94080, described in Schedule 1.1(a) hereto, and (i) all rights,
title and interests appurtenant thereto, including, all water, water rights,
reservoirs, ponds, ditches, flumes and related equipment and fixtures
appurtenant to or used in connection with such real property and (ii) all
buildings, parking areas and improvements, and any and all additions,
alterations or appurtenances thereto now or at any time hereafter existing,
placed or constructed on such real property or any part thereof.
"Indebtedness" of any Person shall mean, without duplication,
(i) any obligation of such Person for borrowed money, including, without
limitation, (a) any obligation of such Person evidenced by bonds, debentures,
notes or other similar debt instruments, and (b) any obligation for borrowed
money which is non-recourse to the credit of such person but which is secured
by any asset of such Person, up to the lesser of the amount of such obligation
and the value of such asset as indicated in an appraisal delivered to Congress
that is reasonably satisfactory to Congress, (ii) any obligation of such Person
on account of deposits or advances, (iii) any obligation of such Person for the
deferred purchase price of any property or services other than trade payables
arising in the ordinary course of such Person's business, (iv) any obligation
of such Person as lessee under a Capital Lease, (v) any Indebtedness of another
Person secured by a Lien on any asset of such first Person up to the amount of
such
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Indebtedness, except that if such Indebtedness is not assumed by such first
Person, then up to the lesser of the amount of such Indebtedness or the value
of such asset as indicated in an appraisal delivered to Congress that is
reasonably satisfactory to Congress, and (vi) any Accommodation Obligation of
such Person. Notwithstanding anything to the contrary in the foregoing, the
following shall not constitute "Indebtedness:" payroll liabilities, accounts
payable, normal accruals and other normal and customary expenses incident to
the Debtor's business incurred in the ordinary course of such business.
"Indemnitees" shall have the meaning set forth in Section 11.2
hereof.
"Internal Revenue Code" shall mean the Internal Revenue Code
of 1986, as amended from time to time, and the regulations and rules
promulgated thereunder in effect from time to time.
"Inventory" shall mean all inventory, including, without
limitation, raw materials, work in process, parts, components, assemblies,
supplies and materials used, sold or consumed in Debtor's business, finished
toy products and other goods, and all other inventory of whatsoever kind or
nature, wherever located, whether now owned or hereafter existing or acquired
by Debtor, including without limitation, all wrapping, packaging, advertising,
shipping materials, and all other goods consumed in Debtor's business, all
labels and other devices, names or marks affixed or to be affixed thereto for
purposes of selling or of identifying the same or the seller or manufacturer
thereof and all of Debtor's right, title and interest therein and thereto;
Inventory shall also include all goods, wares and merchandise, finished or
unfinished, held for sale or lease or furnished or to be furnished under
contracts of service, and all goods returned to or repossessed by Debtor.
"Investment" shall mean any investment, made in cash or by
delivery of any kind of property or asset, in any Person, whether by
acquisition of shares of stock or similar interest, indebtedness or other
obligation or security, or by loan, advance or capital contribution, or
otherwise.
"Issuing Bank" shall have the meaning set forth in Section 4.1
hereof.
"L/C Fee" shall have the meaning set forth in Section 4.2
hereof.
"Letter of Credit Outstandings" shall mean, at any time, the
sum of (i) the aggregate maximum amount available for drawing under the then
outstanding Letters of Credit and (ii) any unpaid reimbursement obligations of
Debtor with respect to Letters of Credit.
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"Letters of Credit" shall mean any standby or commercial
letters of credit which are now or at any time hereafter guaranteed, issued, or
caused to be issued by Congress at the request of and for the account of Debtor
and which have not expired or been rescinded, revoked or terminated.
"Lien" shall mean any interest in any kind of property or
asset, whether real, personal or mixed, tangible or intangible ("Property")
securing an obligation owed to, or a claim by, a Person other than the owner of
the Property, whether such interest is based on the common law, statute or
contract, and including, but not limited to, the security interest, charge,
claim, or lien arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, security agreement, conditional
sale or trust receipt or a lease, consignment or bailment for security
purposes. The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions, restrictments,
leases and other title exceptions and encumbrances affecting Property.
"Loan Documents" shall mean this Agreement, the Stock Pledge
Agreement, the Patent Collateral Assignment, the Trademark Security Agreement,
the Mortgage, the Revolving Note and all other security agreements, financing
statements, lease assignments, guaranties, blocked account agreements, Letters
of Credit and other agreements, instruments, documents and written indicia of
contractual obligations between Debtor and Congress, any Affiliate of Debtor
and Congress, any Person owning Collateral and Congress, any Guarantor and
Congress, or any Participant and Congress delivered to Congress in connection
with the Original Agreement, this Agreement or the transactions contemplated
hereby, as each such document may be amended or supplemented from time to time.
"Material Judgment" shall mean any final judgment rendered
against Debtor which (i) materially adversely affects Debtor's business, (ii)
adversely affects the priority of Congress' liens or (iii) require the payment
of more than $750,000.
"Maximum Credit" shall mean $40,000,000 or such increased
amount requested by the Debtor in accordance with Section 2.3(b) hereof;
provided, however, that at no time shall such amount exceed $60,000,000.
"Mortgage" shall mean the Deed of Trust and Assignment of
Rents made by the Debtor in favor of Congress, encumbering the Headquarters
Property, as amended by the Mortgage Amendment and as the same may be
supplemented, amended, extended, assigned or otherwise modified from time to
time.
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"Mortgage Amendment" shall mean the Amendment to Deed of Trust
and Assignment of Rents, of even date herewith, made by the Debtor in favor of
Congress.
"Multiemployer Plan" shall mean any multiemployer plan (as
such term is defined in Sections 3(37)(A) and 4001(a)(3) of ERISA) with respect
to which Debtor or any ERISA Affiliate of Debtor has had an obligation to
contribute that has not been satisfied.
"Net Amount of Eligible Accounts" shall mean, at any time, the
gross amount of Eligible Accounts less (i) the Credit Reserve and less (ii)
sales, excise or similar taxes, and less returns, discounts, claims, credits
and allowances of any nature at any time issued, owing, granted, outstanding,
available or claimed.
"Obligations" shall mean any and all loans, Indebtedness,
liabilities and obligations of any kind owing by Debtor to Congress, however
evidenced, whether as principal, Guarantor or otherwise, arising under this
Agreement or any other Loan Document (including, without limitation, all
Letters of Credit issued hereunder) or any supplement thereto, whether now
existing or hereafter arising, whether direct or indirect, absolute or
contingent, joint or several, due or not due, primary or secondary, liquidated
or unliquidated, secured or unsecured, original, renewed or extended, and
whether arising directly or acquired from others (including, without
limitation, Congress' participations or interests in Debtor's obligations to
others) and including, without limitation, Congress' charges, commissions,
interest, expenses, costs and attorneys' and paralegal fees and disbursements
chargeable to Debtor in connection with all of the foregoing.
"Original Agreement" shall have the meaning set forth in the
preamble to this Agreement.
"Participant" shall mean any Affiliate of Congress or any
other Person who participates in a Participation.
"Participation" shall mean any arrangement by which a
Participant, now or at any time or times hereafter, participates (whether
through the purchase of a participation or an assignment) with Congress or any
other participant or assignee in the Obligations of Debtor pursuant to the Loan
Documents.
"Patent Collateral Assignment" shall mean the Patent
Collateral Assignment, dated as of April 1, 1993, between Debtor and Congress.
"Permitted Discretion" shall mean Congress' judgment exercised
in good faith based upon Congress' consideration of any factor which Congress
believes in good faith: (a) could affect
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the value of any Collateral, the enforceability or priority of Congress' Liens
thereon, or the amount which Congress would be likely to receive (after giving
consideration to delays in payment and costs of enforcement) in the liquidation
of any Collateral, (b) suggests that any collateral report or financial
information delivered to Congress by Debtor or by Debtor's accountants or other
advisors on Debtor's behalf is incomplete, inaccurate or misleading in any
material respect, (c) materially increases the likelihood of a bankruptcy,
reorganization or other insolvency proceeding involving Debtor or any of the
Collateral, or (d) creates or, with notice or the passage of time, would create
an Event of Default or a breach of any condition set forth in Section 9 hereof.
In the exercise of such judgment, Congress may take into account factors which
are already included in or tested by the definitions of Eligible Accounts or
Eligible Inventory, as well as any of the following: (i) the current financial
and business climate of Debtor's industry (giving due regard to the Debtor's
position within such industry) and general macroeconomic conditions which
impact Debtor's cost structure, (ii) material changes in the average collection
history and the average dilution with respect to the Accounts, (iii) changes in
levels of back-orders and demand for, and pricing of, Inventory, (iv) changes
in any concentration of risk with respect to Accounts and Inventory and (v) any
other factors that change the credit risk of lending to Debtor based upon the
security of the Collateral. The burden of establishing Congress' lack of good
faith shall be on Debtor.
"Permitted Indebtedness" shall mean (i) the Obligations; (ii)
Indebtedness issued in exchange for, or the proceeds of which are used to
refinance or refund, outstanding Indebtedness, other than Indebtedness incurred
pursuant to clause (i) or (iii), so long as the principal amount of the
Indebtedness so issued does not exceed the principal amount of, premium, if
any, and accrued interest on the Indebtedness so exchanged, refinanced or
refunded; (iii) Indebtedness of Debtor incurred in connection with the
redemption, acquisition or other retirement for value of capital stock of
Debtor or a Subsidiary, stock options or stock appreciation rights held by
officers, employees or employee benefit plans upon death, disability,
retirement or termination of employment so long as the amount of such
Indebtedness at any one time outstanding does not exceed $250,000; (iv)
Indebtedness of Galco in an aggregate amount not to exceed at any one time
$1,000,000; (v) Indebtedness assumed as part of an Acquisition in an aggregate
amount not to exceed at any one time an amount to be determined by Congress at
the time of its approval of the Acquisition; (vi) Indebtedness secured by a
mortgage on the Headquarters Property in an amount not to exceed $5,000,000,
which mortgage may be a first priority mortgage; (vii) Indebtedness described
on Schedule 1.1(b) hereto; (viii) Indebtedness permitted under Section 8.7
hereof; and (ix) Indebtedness owed pursuant to the Convertible Subordinated
Debentures.
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"Permitted Investments" shall mean any of the following: (i)
any Investment in Galco existing on the date hereof and described on Schedule
1.1(c) hereto; (ii) any additional Investment in Galco after the date hereof,
to the extent that the cumulative amount of such additional Investments do not
exceed $250,000 in the aggregate; (iii) Acquisitions; (iv) any Investment in
Debtor by any Subsidiary; (v) loans or advances to employees made in the
ordinary course of business and consistent with past practices of Debtor and
its Subsidiaries; (vi) sales of goods on trade credit terms, consistent with
the past practices of Debtor or any Subsidiary or as otherwise consistent with
trade credit terms in common use in the industry; (vii) negotiable instruments
held for collection, lease, utility and other similar deposits, or stock,
obligations or securities received in settlement of debts owing to Debtor or a
Subsidiary as a result of foreclosure, perfection or enforcement of any Lien,
in each case as to debt that arose in the ordinary course of business of Debtor
or any such Subsidiary; and (viii) as long as there are no Obligations
outstanding under this Agreement (other than the aggregate maximum amount
available for drawing under the then outstanding Letters of Credit),
investments in Cash Equivalents, provided that, unless waived in writing by
Congress, Debtor shall take any actions deemed necessary by Congress to perfect
its security interest in such Cash Equivalents; provided, however, that, with
respect to any Investment by Debtor described in clause (ii) or (iii) of this
definition, all of the following conditions must have been satisfied:
(a) The aggregate amount of Revolving Loans available to
Debtor pursuant to Section 2 hereof minus the outstanding Revolving Loans minus
the face amount of the Letters of Credit minus the total amount of such
Investment ("Availability") immediately after such Investment is made is not
less than $1,500,000;
(b) The Availability (determined for the days during
which the applicable loans were outstanding) for the 30 days preceding the date
of the making of such Investment is not less than $1,500,000;
(c) Debtor shall have delivered financial projections
(setting forth the reasonable assumptions therefor approved by Congress) for
the 90-day period subsequent to the date of the making of such Investment
demonstrating that the Availability is not less than $1,500,000 at any time
during such 90-day period. Such financial projections shall be accompanied by
a certificate signed by an officer of Debtor stating that, to the best
knowledge of such officer, such financial projections are based upon reasonable
assumptions of fact, no known material facts are inconsistent with such
projections, and such projections accurately reflect such officer's
expectations for Debtor during the period covered by such projections;
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(d) Debtor's accounts payable are all current or are paid to
an extent and in a manner which Congress, in its Permitted Discretion, deems
satisfactory;
(e) There shall not have occurred an Event of Default; and
(f) At least five days (or such shorter time as Congress
agrees) prior to the making of such Investment, Debtor shall have provided
Congress with written notice which (i) sets forth the total amount of such
Investment, (ii) has attached to it a certified aging report which contains
information to verify the satisfaction of the condition set forth in clause (d)
above, and (iii) certifies that the conditions set forth in clauses (a) through
(e) above shall have been satisfied as of the date on which such Investment is
to be made;
provided, further, that with respect to any Investment by Debtor described in
clause (iii) of this definition, all of the following additional conditions
must have been satisfied:
(g) Congress shall have completed its due diligence
inspection, testing, credit investigation, analysis and review of the assets
and liabilities of the proposed target company and shall be satisfied with the
results thereof in all respects; and
(h) the structure and documentation of the Acquisition shall
be in form and substance reasonably satisfactory to Congress and its counsel in
all material respects.
"Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, institution, entity, party or government (whether national,
federal, state, provincial, county, city, municipal or otherwise, including,
without limitation, any instrumentality, division, agency, body or department
thereof).
"Pledged Securities" shall mean and include (i) one share
less than sixty-six and two-thirds percent (66.67%) of the issued and
outstanding shares of Galco, or such lesser percentage of such shares as
Congress may require in the exercise of its Permitted Discretion because of the
adverse tax impact on the Debtor of the pledge of such shares, (ii) all of the
issued and outstanding shares, whether now owned or hereafter acquired by
Debtor, of the capital stock of any Subsidiaries of the Debtor other than the
inactive Subsidiaries set forth on Schedule 1.1(d) hereto, (iii) all shares of
any other Person owned or held by the Debtor which, after the date of the
Original Agreement, is or becomes a Subsidiary of the Debtor and (iv) any
shares, stock, certificates, instruments, warrants, options or rights issued as
an addition to, in substitution of, or in exchange for any such shares
described in the preceding clauses, and any and all
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proceeds thereof and dividends and distributions with respect thereto, now or
hereafter owned or acquired by Debtor.
"Prime Rate" shall mean the prime commercial interest rate
from time to time publicly announced by The Philadelphia National Bank,
incorporated as CoreStates Bank, N.A., Philadelphia, Pennsylvania, whether or
not such announced rate is the best rate available at such bank.
"Prohibited Transaction" shall mean any "prohibited
transaction" (as defined in Section 4975 of the Internal Revenue Code or
Section 406 of ERISA) to which a statutory, regulatory, class or individual
exemption does not exist.
"Records" shall mean all books, records, documents, ledger
cards, computer programs, and other property and general intangibles evidencing
or relating to the Accounts, the Inventory, the Equipment and any other
Collateral or any Account Debtor, together with the file cabinets or containers
in which the foregoing are stored.
"Reportable Event" shall mean any event described in Section
4043(b)(6) of ERISA and the regulations issued thereunder.
"Revolving Loans" shall mean the loans advanced pursuant to
Section 2 hereof.
"Revolving Note" shall have the meaning set forth in Section
9.1(b)(ii) hereof.
"Rollover Advance" shall mean the rollover of the Existing
Revolving Loans into Revolving Loans hereunder.
"Stock Pledge Agreement" shall mean the Stock Pledge
Agreement, dated as of April 1, 1993, between Debtor and Congress.
"Subsidiary" shall mean any Person of which or in which Debtor
and its other Subsidiaries own directly or indirectly more than fifty percent
(50%) of (i) the combined voting power of all classes of stock having general
voting power to elect a majority of the board of directors of such Person, if
it is a corporation, (ii) the capital interest or profit interest of such
Person, if it is a partnership, or (iii) the beneficial interest of such
Person, if it is a trust, association or other unincorporated organization.
"Taxes" with respect to any Person shall mean taxes,
assessments or other governmental charges or levies imposed upon such Person,
its income or any of its properties, franchises or assets.
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"Termination Event" shall mean (i) with respect to any Benefit
Plan, a Reportable Event; (ii) the withdrawal of Debtor or any of its ERISA
Affiliates from a Benefit Plan during a Plan Year (as defined in Section 3(39)
of ERISA) in which it is a "substantial employer" as defined in Section
4001(a)(2) of ERISA; (iii) the provision by Debtor or any of its ERISA
Affiliates to participants and other affected parties of a written notice of
intent to terminate a Benefit Plan in a distress termination described in
Section 4041(c) of ERISA; (iv) the institution of proceedings to terminate a
Benefit Plan of Debtor or any of its ERISA Affiliates by the Pension Benefit
Guaranty Corporation; (v) the Pension Benefit Guaranty Corporation's
application under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Benefit Plan of Debtor or any of
its ERISA Affiliates; or (vi) the partial or complete withdrawal (within the
meaning of Sections 4205 and 4203, respectively, of ERISA) of Debtor or any of
its ERISA Affiliates from a Multiemployer Plan.
"Trademark Security Agreement" shall mean the Amended and
Restated Trademark Agreement, of even date herewith, in which, among other
things, Debtor (i) grants to Congress a security interest in certain
trademarks, (ii) upon an Event of Default, grants to Congress a license to use
such trademarks and (iii) upon an Event of Default, if requested by Congress,
agrees to assign to Congress all of its right, title and interest in and to
such trademarks.
"Value" shall mean FIFO cost or market price, as determined by
Congress, whichever is lower.
1.2 Interrelationship with the Original Agreement. As stated
in the preamble hereof, this Agreement is intended to amend and restate the
provisions of the Original Agreement and, notwithstanding the substitution of
the Revolving Note on the Closing Date, the Debtor and Congress agree that,
upon (i) the execution and delivery by each of the parties hereto of this
Agreement and (ii) the satisfaction of each of the conditions set forth in
Section 9 hereof, the terms and provisions of the Original Agreement shall be
and hereby are amended and restated in their entirety by the terms and
provisions of this Agreement. This Agreement is not intended to and shall not
constitute a novation. All Existing Revolving Loans made and Obligations
incurred under the Original Agreement which are outstanding on the Effective
Date shall continue as Revolving Loans and Obligations under (and shall be
governed by the terms of) this Agreement. All references in the Revolving Note
and the other Loan Documents to the Original Agreement, as it may be amended
from time to time, shall be deemed to include references to this Agreement.
SECTION 2. LOANS; TERM; EARLY TERMINATION
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2.1 Revolving Loans. On the terms and conditions set forth
in this Agreement, Congress agrees to roll over Existing Revolving Loans into
Revolving Loans and to continue, in the exercise of its Permitted Discretion,
to make Revolving Loans (net of applicable reserves pursuant to Section 4.1
hereof) to Debtor from time to time, at Debtor's request, of (a) up to seventy
five percent (75%) of the Net Amount of Eligible Accounts (or such greater or
lesser percentage thereof as Congress shall, in the exercise of its Permitted
Discretion, determine from time to time), plus (b) up to the following
percentages of the Value of Eligible Inventory during the relevant periods set
forth below (or such greater or lesser percentages thereof as Congress shall,
in the exercise of its Permitted Discretion, determine from time to time):
<TABLE>
<CAPTION>
Period Percentage
------ ----------
<S> <C>
March 15 through September 30 50%
October 1 through March 14 35%
</TABLE>
less (c) the Letter of Credit Outstandings, and less (d) such reserves as
Congress may, in its Permitted Discretion, establish from time to time,
including reserves on account of judgments not yet satisfied. Except as may be
expressly permitted by Congress in Congress' sole discretion, the outstanding
aggregate principal amount of Advances by Congress to Debtor hereunder with
respect to Eligible Inventory shall not exceed, at any time, the lesser of (a)
the aggregate amount of the above percentages of Value of the above categories
of Eligible Inventory or (b) $8,000,000. The Revolving Loans made pursuant to
this Section 2.1 shall be repaid in full upon termination of this Agreement in
accordance with Section 2.5 hereof. On each day that Debtor shall request an
Advance, and on any other day that Congress may reasonably request, Debtor
shall deliver to Congress an assignment schedule, a remittance report and a
report of credit returns and allowances together with such other documents as
Congress may reasonably request, including, without limitation, documents
setting forth total sales, total non-cash credits and cash collections of
Debtor. In addition, Debtor shall furnish to Congress on the first Business
Day of each week, and on any other day that Congress may reasonably request, an
Availability Report as of the last Business Day of the preceding week or as of
such other date as Congress may reasonably request. In no event shall the
information set forth in the Availability Report or otherwise delivered to
Congress in connection therewith limit Congress' Permitted Discretion to
determine the Eligible Accounts, the Eligible Inventory, the Net Amount of
Eligible Accounts or the Value of Eligible Inventory.
2.2 Loan Account. All loans shall be charged to a loan
account in Debtor's name on Congress' books. Congress shall render to Debtor
each month a statement of Debtor's loan account, which shall be considered
correct and deemed accepted by, and
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<PAGE> 25
conclusively binding upon, Debtor as an account stated, except to the extent
that Congress receives a written notice of any specific exceptions by Debtor
thereto within 30 days after the date of such statement.
2.3 Maximum Loan Amount.
(a) Except as may be expressly permitted by Congress in
Congress' sole discretion, the outstanding aggregate principal amount of all
Advances by Congress to Debtor hereunder or under any supplement hereto shall
not exceed the Maximum Credit at any time.
(b) Upon at least five (5) Business Days written notice to
Congress, the Debtor may request a permanent increase in the Maximum Credit
available hereunder in multiples of $5,000,000 up to an aggregate Maximum
Credit amount of $60,000,000. Such increase shall be effective on the date set
forth by the Debtor in the notice (which date shall not be earlier than the
fifth Business Day after receipt of such notice), subject to the payment of the
fee required by Section 3.7 hereof.
(c) Without limiting Congress' right to demand payment of the
Obligations, or any portion thereof, in accordance with any other terms of this
Agreement, or any supplement hereto, in the event that the outstanding
aggregate principal amount of Advances by Congress to Debtor exceeds the
Maximum Credit or the formula set forth in Section 2.1 hereof, Debtor shall
remain liable therefor and the entire amount of such excess(es) shall, at
Congress' option, become immediately due and payable upon Congress' demand, and
all payments thereof shall be applied to the Revolving Loans or to cash
collateralize any outstanding Letters of Credit.
2.4 Amounts Charged to Debtor's Account; Place of Payment.
At Congress' option, all principal, interest, fees, commissions, costs,
expenses or other charges with respect to this Agreement or any other Loan
Document and any and all loans and Advances by Congress to Debtor may be
charged directly to Debtor's account maintained by Congress. All loans shall
be payable at Congress' office specified above or at such other place as
Congress may hereafter designate from time to time and, at Congress' option and
upon Congress' request, Debtor shall execute and deliver to Congress one or
more promissory notes in form and substance reasonably satisfactory to Congress
to further evidence such loans.
2.5 Term of Agreement. This Agreement shall be effective as
of its date and shall continue in full force and effect for a term ending on
March 31, 1997 unless sooner terminated pursuant to the terms hereof. This
Agreement may be renewed for one year from the termination date hereof, or any
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<PAGE> 26
future termination date, upon the mutual agreement of the Debtor and Congress
no later than 60 days prior to such termination date. Congress shall have the
right to terminate this Agreement immediately at any time upon the occurrence
of an Event of Default. No termination of this Agreement, however, shall
relieve or discharge Debtor of its duties, obligations and covenants hereunder
until all Obligations have been paid in full, and Congress' continuing security
interest in the Collateral shall remain in effect until such Obligations have
been fully discharged.
2.6 Early Termination. If Congress terminates this Agreement
(i) upon the occurrence of an Event of Default (other than an Event of Default
arising out of the Debtor's inability to repay), and Congress is repaid prior
to March 31, 1997, (ii) at Debtor's request (other than because the Debtor is
required to pay amounts under Section 11.3 hereof), and Congress is repaid
prior to March 1, 1997 or (iii) at Debtor's request, and Congress is repaid on
or after March 1, 1997 and prior to March 31, 1997 from any source other than
from the proceeds of an offering of equity or unsecured Indebtedness of the
Debtor, in view of the impracticability and extreme difficulty in ascertaining
actual damages and by mutual agreement of the parties as to a reasonable
calculation of Congress' lost profits as a result thereof, Debtor hereby agrees
that it shall pay to Congress, upon the effective date of such termination, an
early termination fee in an amount equal to one percent (1.00%) of the Maximum
Credit; provided, however, that if the Debtor wishes to terminate this
Agreement because it is required to pay amounts under Section 11.3 hereof, it
shall notify Congress of such intent to terminate within thirty (30) days of
the charging of such amounts by Congress, and, unless Congress agrees to waive
the payment of such amounts within fifteen (15) days of such notice, this
Agreement will terminate no later than ninety (90) days from such notice. Such
termination fee shall be presumed to be the amount of damages sustained by said
early termination and Debtor agrees that it is reasonable under the
circumstances currently existing. The early termination fee provided for in
this Section 2.6 shall be deemed included in the Obligations.
SECTION 3. INTEREST AND FEES.
3.1 Interest. Interest shall be payable by Debtor to
Congress in arrears on the first day of each month upon the closing daily
balances in Debtor's loan account for each day during the immediately preceding
month, at a rate equal to one percent (1.00%) per annum in excess of the Prime
Rate. The interest rate charged hereunder shall increase or decrease by an
amount equal to each increase or decrease, respectively, in the Prime Rate,
effective on the first day of the month after any change in the Prime Rate
based on the Prime Rate in effect on the last day of the month in which any
such change occurs.
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<PAGE> 27
3.2 Default Interest Rate. On and after the date of any
Event of Default or termination or non-renewal hereof, Congress may elect to
charge and collect interest on all outstanding unpaid Obligations at a rate
equal to two percent (2%) per annum in excess of the pre-default rate set forth
above from the date of such Event of Default or termination or non-renewal, and
all interest accruing hereunder shall thereafter be payable on demand.
3.3 Interest Calculation. Interest shall be calculated for
actual days elapsed on the basis of a 360-day year and shall be included in
each monthly statement of Debtor's loan account. Congress shall have the
right, at Congress' option, to charge all interest to Debtor's loan account on
the first day of each month, and such interest shall be deemed to be paid by
the first amounts subsequently credited thereto. In no event shall charges
constituting interest, payable by Debtor under this Agreement or any other Loan
Document, exceed the rate permitted under any applicable law or regulation, and
if any part or provision of this Agreement or other Loan Document is in
contravention of any such law or regulation, such part or provision shall be
deemed amended to conform thereto.
3.4 Unused Line Fee. If the average outstanding daily
principal balance of the sum of all Revolving Loans plus Letter of Credit
Outstandings in any calendar month shall be less than the Maximum Credit,
Debtor shall pay to Congress in arrears on or before the tenth (10th) day of
the next succeeding calendar month an unused line fee equal to one quarter of
one percent (0.25%) per annum upon the difference between (A) the average
outstanding daily principal balance of all such Revolving Loans plus Letter of
Credit Outstandings in respect of such month and (B) the greater of (i) the
applicable base amount for such month as set forth below or (ii) the percentage
for such month as set forth below of the Maximum Credit:
<TABLE>
<CAPTION>
Period Amount Percentage
------ ------ ----------
<S> <C> <C>
January through June $22,500,00 56.25%
July through August $30,000,00 75.00%
September through November $40,000,00 100.00%
December $22,500,00 56.25%
</TABLE>
3.5 Management Fee. Debtor shall pay to Congress a fee in an
amount equal to $12,500 on or before the tenth (10th) day of each calendar
quarter, in respect of Congress' collateral management services for such
quarter during the term, including all renewal terms, of this Agreement or so
long as any of the Obligations are outstanding. The management fee is intended
to cover Congress' internal costs of (i) monitoring the Collateral, (ii)
performing Congress' routine field examinations and (iii) other loan
administration activities performed by Congress, in each case in the ordinary
course prior to the occurrence of an Event of Default. From and after the
occurrence of an
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<PAGE> 28
Event of Default, all such out-of-pocket costs and expenses of Congress
incurred in connection with such activities shall be payable by Debtor.
3.6 Closing Fees. Debtor shall pay Congress closing fees in
an amount equal to $100,000, payable on the date hereof.
3.7 Maximum Credit Increase Fee. Debtor shall pay Congress a
fee in the amount of $50,000 for each $5,000,000 increase in Maximum Credit
requested pursuant to Section 2.3(b) hereof, payable on the date on which such
increase becomes effective in accordance with such Section.
SECTION 4. LETTER OF CREDIT FACILITY.
4.1 Letter of Credit Facility. Subject to the terms and
conditions of this Agreement, and provided there does not then exist an Event
of Default, or any event or condition which, with notice, lapse of time and/or
the issuance of such Letter of Credit, would constitute an Event of Default,
Congress shall, upon Debtor's request and upon execution and delivery of
whatever documents or applications Congress, in its sole discretion, may
require of Debtor, guarantee or cause to be issued one or more Letters of
Credit. All such Letters of Credit shall be issued by banks or other financial
institutions designated by Congress in its sole discretion (an "Issuing Bank"),
and Congress makes no representation to Debtor that any particular bank or
financial institution will serve as Issuing Bank hereunder. The aggregate face
amount of all Letters of Credit outstanding at any time shall not exceed
$4,000,000, and each Letter of Credit shall be in form and substance
satisfactory to Congress. In no event shall any Letter of Credit be issued if
the face amount of such proposed Letter of Credit exceeds the amount then
available for Revolving Loans pursuant to the formula set forth in Section 2.1
hereof. In addition, Congress may, in the exercise of its reasonable
discretion, reserve from the availability of Revolving Loans the expected
amount of any import duties, insurance and freight which may be applicable to
any goods being acquired in connection with the issuance of any Letter of
Credit. Debtor shall reimburse Congress on demand for any and all amounts
which Congress at any time pays with respect to a Letter of Credit including,
without limitation, application fees, opening fees, bank charges, commissions
and all other fees, expenses and amounts of any nature whatsoever payable to
the Issuing Bank and for any other out-of-pocket costs, fees, commissions and
expenses incurred by Congress in connection with the application for and
issuance of any Letter of Credit. Congress shall have the right, at its
option, to charge all such Letter of Credit charges to Debtor's loan account on
the first day of each month, and such charges shall be deemed to be paid, after
amounts charged
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<PAGE> 29
pursuant to Section 2.4 hereof are paid, by the first amounts subsequently
credited thereto.
4.2 Letter of Credit Fees. In addition to any fees,
expenses, commissions or other amounts payable to Congress or the Issuing Bank
pursuant to Section 4.1 hereof, for each outstanding Letter of Credit, Debtor
shall pay to Congress each month in advance a fee (an "L/C Fee") equal to (i)
one-half percent (.50%) of the average daily face amount of such Letter of
Credit for the initial 60 days after issuance, and (ii) two-tenths of one
percent (.20%) of the average daily face amount of such Letter of Credit
thereafter; provided, however, if any Letter of Credit expires with any amount
remaining undrawn thereunder the L/C Fee shall continue until the earlier of
(i) the payment of any undrawn amount under such Letter of Credit or (ii) a
period of 30 days after the stated expiration of such Letter of Credit. On and
after the occurrence of an Event of Default or termination of this Agreement,
Congress may, in its sole discretion, elect to charge and collect an L/C Fee
not in excess of (i) the applicable L/C Fee due and owing pursuant to the
immediately preceding sentence, plus (ii) two percent (2.00%) per annum on the
average daily face amount of each Letter of Credit. All L/C Fees shall be
computed on the basis of a 360-day year for the actual number of days elapsed.
The L/C Fee for each Letter of Credit shall be payable in advance (i) upon the
issuance of such Letter of Credit for the number of days remaining in the month
during which such Letter of Credit is issued and (ii) thereafter, monthly, on
the first day of each month during which such Letter of Credit remains
outstanding. Any L/C Fees not paid upon these terms shall immediately
constitute part of the Obligations and shall be payable by Debtor to Congress
in accordance with the terms of this Agreement.
4.3 Letter of Credit Risks. Debtor assumes all risks of the
acts and omissions of, or misuse of Letters of Credit by, the respective
beneficiaries of the Letters of Credit. In furtherance and not in limitation
of the foregoing, subject to the provisions of the Letter of Credit
applications, Congress, its correspondents and agents, the Issuing Bank and any
correspondent banks or financial institutions used in connection with the
issuance of Letters of Credit, shall not be responsible: (a) for the form,
validity, sufficiency, accuracy, genuineness or legal effect of any document
submitted by any party in connection with the application for and issuance of
the Letters of Credit, even if it should in fact prove to be in any or all
respects invalid, insufficient, inaccurate, fraudulent or forged; (b) for the
validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign a Letter of Credit or the rights or benefits
thereunder or proceeds thereof, in whole or in part, which may prove to be
invalid or ineffective for any reason; (c) for failure of the beneficiary of a
Letter of Credit to comply fully with conditions required in order to draw upon
such Letter of Credit; (d) for errors, omissions,
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<PAGE> 30
interruptions or delays in transmission or delivery of any messages, by mail,
cable, telegraph, telex or otherwise, whether or not they be in cipher; (e) for
errors in interpretation of technical terms; (f) for any loss or delay in the
transmission or otherwise of any document required in order to make a drawing
under any Letter of Credit or of the proceeds thereof; (g) for the
misapplication by the beneficiary of a Letter of Credit of the proceeds of any
drawing under such Letter of Credit; or (h) for any consequences arising from
causes beyond the control of Congress, the Issuing Bank or of the various
correspondents, agents, and banks or financial institutions used in connection
with the issuance of Letters of Credit, including, without limitation, any
governmental acts. In furtherance of the foregoing, and without limiting the
generality thereof, Debtor agrees to indemnify and hold harmless Congress, and
any such correspondent, agent, and bank or financial institution used in
connection with the issuance of Letters of Credit, from and against each and
every claim which might arise against them by reason of any transfer, sale,
delivery, surrender or endorsement of any bill of lading, warehouse receipt or
other document held by Congress or for its account, except to the extent that
it is finally determined by a court of competent jurisdiction that such claim
shall have resulted from their own fraud or gross negligence. None of the
above shall affect, impair, or prevent the vesting of any of Congress' rights
or powers hereunder, or Debtor's obligation to make reimbursement.
4.4 Letter of Credit Claims. Debtor shall promptly examine
(a) the copy of any Letter of Credit, including any amendments thereof, sent to
it by or on behalf of Congress and (b) all documents and instruments delivered
to it by or on behalf of Congress in connection with such Letters of Credit.
In the event of any claim of noncompliance with Debtor's instructions or other
irregularity, Debtor will immediately notify Congress thereof in writing.
Debtor will be conclusively deemed to have waived any such claim against
Congress, the Issuing Bank, their respective correspondents and agents, and any
banks or other financial institutions used in connection with the issuance of
Letters of Credit, unless such notice is given as aforesaid.
SECTION 5. SECURITY INTEREST AND COLLATERAL.
5.1 Grant of Security Interest. As security for the prompt
performance, observance and payment in full of all Obligations, Debtor hereby
grants to Congress a continuing security interest in, the following (which,
together with any of Debtor's other property in which Congress may at any time
have a Lien, whether pursuant to this Agreement, any other Loan Document or
otherwise, are herein collectively referred to as the "Collateral"):
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<PAGE> 31
All present and future
(a) Accounts;
(b) moneys, securities and other property (including all
Cash Equivalents) and the proceeds thereof, now or hereafter held or received
by, or in transit to, Congress from or for Debtor, whether for safekeeping,
pledge, custody, transmission, collection or otherwise, and all of Debtor's
deposits (general or special), balances, sums and credits with Congress at any
time existing;
(c) Inventory;
(d) Equipment;
(e) Pledged Securities;
(f) right, title and interest of Debtor, and all of
Debtor's rights, remedies, security and liens, in, to and in respect of the
Accounts and other Collateral, including, without limitation, rights of
stoppage in transit, replevin, repossession and reclamation and other rights
and remedies of an unpaid vendor, lienor or secured party, guaranties or other
contracts of suretyship with respect to the Accounts, deposits or other
security for the obligation of any Account Debtor, and credit and other
insurance;
(g) right, title and interest of Debtor in, to and in
respect of all goods relating to, or which by sale have resulted in, Accounts,
including, without limitation, all goods described in invoices, documents,
contracts or instruments with respect to, or otherwise representing or
evidencing, any Accounts or other Collateral, including without limitation, all
returned, reclaimed or repossessed goods;
(h) deposit accounts of Debtor;
(i) Records;
(j) general intangibles of every kind and description of
Debtor and licenses, to the extent reasonably necessary to facilitate
liquidation of other Collateral;
(k) the Headquarters Property; and
(l) products and proceeds of the foregoing, in any form,
including, without limitation, identifiable proceeds in deposit accounts of
Debtor, insurance proceeds and any claims against third parties for loss or
damage to or destruction of any or all of the foregoing.
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<PAGE> 32
SECTION 6. COLLECTION AND ADMINISTRATION OF ACCOUNTS AND CASH
MANAGEMENT RELATIONSHIPS.
6.1 Collection by Debtor. Until Debtor's authority to do so
is curtailed or terminated at any time by Congress, Debtor shall, at its
expense, collect all remittances and all amounts unpaid on Accounts and all
other Collections, and Debtor shall not commingle such Collections with
Debtor's funds. Debtor shall, on the day received, remit all Collections to
Congress in the form received, duly endorsed by Debtor for deposit with
Congress, unless Congress shall direct Debtor otherwise. All amounts collected
on Accounts, when received by Congress, shall be credited to Debtor's loan
account after adding one and one-half Business Days for collection, clearance
and transfer of remittances, conditional upon final payment to Congress.
6.2 Rights of Inspection. Congress or Congress'
representatives shall at all reasonable times have free access to and right of
inspection of the Collateral and have full access to and the right to examine
and make copies of Debtor's Records, to confirm and verify all Accounts, to
perform general audits and to do whatever else Congress deems reasonably
necessary to protect its interests. Congress may, at any time that an Event of
Default has occurred and is continuing, remove from Debtor's premises or
require Debtor, or require Debtor to instruct any accountants and auditors
employed by Debtor, to deliver any Records and Congress may, without cost or
expense to Congress, use such of Debtor's personnel, supplies, computer
equipment and space at Debtor's places of business as may be reasonably
necessary for the handling of Collections.
6.3 Reclaimed Goods; Account Adjustments. Debtor shall, as
soon as practicable upon obtaining knowledge thereof, report to Congress, in
each Availability Report and the related reports and schedules delivered in
connection therewith, (a) all reclaimed, repossessed and returned goods and (b)
all Account Debtor claims and any other matter affecting the value,
enforceability or collectability of any of the Accounts. All claims and
disputes relating to Accounts are to be promptly adjusted within a reasonable
time, at Debtor's own cost and expense. Congress may, after the occurrence of
an Event of Default, settle, adjust or compromise claims and disputes relating
to Accounts which are not adjusted by Debtor within a reasonable time.
6.4 Lockboxes. Without limiting the generality of Congress'
discretion regarding Debtor's collection and administration of Accounts as
provided in Sections 6.1, 6.2 and 6.3 hereof, Debtor shall at all times
hereafter maintain lockboxes ("Lockboxes") with such banks as are acceptable to
Congress ("Collecting Banks") to which Debtor shall promptly remit, and shall
direct its Account Debtors to remit, all payments on Accounts and all payments
made for Inventory or other
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<PAGE> 33
payments constituting proceeds of Collateral in the identical form in which
such payments are made, whether by cash or check. The Collecting Banks shall
acknowledge and agree, in a manner satisfactory to Congress, that all payments
made, and items submitted, to the Lockboxes are the sole and exclusive property
of Congress and the Debtor, that the Collecting Banks have no right to setoff
against the Lockboxes and that the Collecting Banks will wire, or otherwise
transfer immediately available funds in a manner satisfactory to Congress,
collected funds deposited into the Lockboxes to Congress on a daily basis.
Debtor hereby agrees that all payments made to such Lockboxes or otherwise
received and collected by Congress, whether on the Accounts or as proceeds of
other Collateral or otherwise will be the sole and exclusive property of
Congress and for purposes of calculating (i) interest on the Obligations, will
be applied (which application shall be conditional upon final collection) on
account of the Obligations upon the expiration of one and one-half Business
Days following the date of receipt by Congress of funds or other items of
payment from the Collecting Banks and (ii) availability of Advances to Debtor
in accordance with the guidelines set forth in Section 2 hereof, will be
applied (which application shall be conditional upon final collection) on
account of the Obligations upon receipt by Congress from such Collecting Banks.
Debtor agrees to pay Congress any and all reasonable fees and actual costs and
expenses, that Congress incurs in connection with opening and maintaining the
Lockboxes and depositing for collection by Congress any check or item of
payment received and/or delivered to the Collecting Banks or Congress on
account of the Obligations; and Debtor agrees to reimburse Congress for any
amounts paid to any Collecting Bank arising out of Congress' indemnification of
such Collecting Bank against damages incurred by the Collecting Banks in the
operation of the Lockboxes.
SECTION 7. REPRESENTATIONS AND WARRANTIES.
Debtor hereby represents and warrants to Congress as of the
date hereof and continuing so long as any Obligations remain outstanding, and
(even if there shall be no Obligations outstanding) so long as this Agreement
remains in effect, the following, the truth and accuracy of which, or
compliance with, being a continuing condition of the making of Advances
hereunder by Congress:
7.1 Collateral Ownership. Other than the Liens permitted
under Section 8.4 hereof, Debtor is and shall be, with respect to all
Collateral now existing or hereafter acquired, the owner of such Collateral
free from any Lien, security interest, claim or encumbrance of any kind, except
in Congress' favor and as otherwise consented to in writing by Congress, and
Debtor shall defend the same against the claims of all Persons.
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<PAGE> 34
7.2 Location of Records. The office where Debtor keeps
Debtor's Records, Debtor's chief executive office, all of Debtor's other places
of business, and all locations and places of business of each of Debtor's
Subsidiaries as of the date hereof are set forth on Schedule 7.2 hereto.
7.3 Representations as to Eligible Accounts.
(a) Each Account classified by Debtor as an "Eligible
Account" on the most recently submitted Availability Report delivered to
Congress represents a valid and legally enforceable Indebtedness based upon an
actual and bona fide sale and delivery of goods or rendition of services in the
ordinary course of Debtor's business which has been finally accepted by the
Account Debtor and for which the Account Debtor is unconditionally liable
(except for return rights for defective products) to make payment of the amount
stated in each invoice, document or instrument evidencing the Eligible Account
in accordance with the terms thereof, without offset, defense or counterclaim,
and is expected by Debtor to be paid in full at maturity; and
(b) All statements made and all unpaid balances appearing
in the invoices, documents and instruments evidencing each Eligible Account are
true and correct in all material respects and are in all respects what they
purport to be and, to the Debtor's knowledge, all signatures and endorsements
that appear thereon are genuine and all signatories and endorsers have full
capacity to contract and each Account Debtor is financially able to pay in full
the Eligible Account when it matures. None of the transactions underlying or
giving rise to any Account violate any state or federal laws or regulations,
and all documents relating to the Accounts are legally sufficient in all
material respects under such laws or regulations and are legally enforceable in
accordance with their terms and all recording, filing and other requirements of
giving public notice under any applicable law have been duly complied with in
all material respects.
7.4 Investigations and Litigation. Except as set forth on
Schedule 7.4 hereto, there is no present investigation by any governmental
agency pending or, to the best of Debtor's knowledge, threatened against
Debtor. Except as otherwise disclosed to Congress in writing prior to the date
hereof, there is no action, suit, proceeding or claim pending or, to the best
of Debtor's knowledge, threatened against Debtor or its assets or goodwill, or
affecting any transactions contemplated by this Agreement or any of the other
Loan Documents before any court, arbitrator, or governmental or administrative
body or agency which, if adversely determined with respect to Debtor, would
result in any material adverse change in Debtor's business, properties, assets
(tangible or intangible), goodwill, or condition (financial or otherwise).
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7.5 Non-Contravention. The execution, delivery and
performance of this Agreement or any of the other Loan Documents are within
Debtor's corporate powers, have been duly authorized, are not in contravention
of (a) any indenture, agreement or undertaking to which Debtor is a party or by
which it is bound, (b) law, or (c) the terms of Debtor's Articles of
Incorporation or by-laws.
7.6 Corporate Organization; Foreign Qualification;
Subsidiaries. Debtor is a corporation duly organized and in good standing
under the laws of the State of Delaware. Debtor is duly qualified as a foreign
corporation in all other states where the nature and extent of the business
transacted by it or the ownership of its assets makes such qualification
necessary. The corporations listed on Schedule 7.6 hereto are all of the
Subsidiaries and are duly organized and in good standing in their respective
states, provinces or countries shown on Schedule 7.6.
7.7 Use of Corporate Name. Except as otherwise
disclosed to Congress prior to the date hereof, Debtor has not used and has no
current plans to use, any corporate or fictitious name other than the corporate
name shown on Debtor's Articles of Incorporation.
7.8 No Default Under Other Contracts. Except as otherwise
disclosed to Congress in writing prior to the date hereof, Debtor is not in
default under any material contract, lease or commitment to which it is a party
or by which it is bound. Debtor knows of no disputes regarding any such
contract, lease or commitment that is material to the financial position and
well- being of Debtor.
7.9 Compliance with Laws. Except as set forth on Schedule
7.9 hereto, Debtor and each of its Subsidiaries are in compliance in all
material respects with all laws, orders, regulations and ordinances of all
federal, foreign, state and local governmental authorities (excluding
Environmental Laws) relating to the business operations and the assets of
Debtor and such Subsidiaries the violation of which might materially adversely
affect the conditions (financial or otherwise), operations, properties or
prospects of Debtor or any such Subsidiary.
7.10 Adequate Licenses, Patents, etc.. Debtor possesses
adequate licenses, patents, patent applications, copyrights, service marks,
trademarks, trademark applications and trade names to continue to conduct its
business as heretofore conducted. All such licenses are listed on Schedule
7.10 attached hereto and made a part hereof.
7.11 ERISA.
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(a) Except as set forth on Schedule 7.11(a) hereto (i)
neither Debtor nor any Subsidiary has received from any Governmental Authority
any notice to the effect that any of them is not in compliance with any of the
requirements of ERISA and the regulations promulgated thereunder (including,
without limitation, minimum funding requirements); (ii) to the best of Debtor's
knowledge, there exists no Reportable Event with respect to any Benefit Plan
maintained by Debtor or any of its ERISA Affiliates which could result in a
material liability to Debtor or its Subsidiaries; and (iii) neither Debtor nor
any of its ERISA Affiliates has incurred any withdrawal liability under Section
4201 of ERISA with respect to any Multiemployer Plan that has not been
satisfied.
(b) As of the date hereof, neither Debtor nor any ERISA
Affiliate of Debtor is a party to, or is obligated to contribute under, any
defined benefit plan (as defined in ERISA) or a Multiemployer Plan except as
set forth on Schedule 7.11(b).
7.12 Solvency. Debtor is solvent, is able to pay its debts
as they become due and has capital sufficient to carry on its business and all
businesses in which it is about to engage. Debtor will not be rendered
insolvent by the execution and delivery of this Agreement or any of the other
agreements, documents or instruments executed in connection with this Agreement
or by the transactions contemplated hereunder or thereunder.
7.13 Environmental. Except as set forth on Schedule 7.13
hereto, to the knowledge of Debtor ("knowledge" for purposes hereof shall mean
the actual knowledge of William G. Catron or other officers or employees
charged by Debtor's board of directors (or a duly designated committee thereof)
or executive officers with responsibility for environmental or legal matters):
(a) the operations and facilities owned or controlled by Debtor or any of its
Subsidiaries (i) are in compliance in all material respects with all
Environmental Laws, (ii) are not the subject of any United States federal or
state or Canadian federal or provincial investigation of which Debtor or any of
its Subsidiaries has notice evaluating whether any remedial action is required
or purported to be required pursuant to any Environmental Laws to respond to a
release of any Hazardous Substance into the environment, and (iii) are not
contaminated with any Hazardous Substance that may reasonably be expected to
require a remedial action requiring the expenditure of $250,000 or more in
remediation costs; and (b) neither Debtor nor or any of its Subsidiaries has
received written notice to the effect that any of them is or may be liable to
any Person (including, without limitation, any individual or government,
whether federal, state, provincial, or local) as a result of the release or
threatened release of any Hazardous Substance into the environment.
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7.14 Representations as to Inventory and Equipment.
(a) Debtor is and shall be, with respect to the Equipment,
the owner of such Equipment free from any lien, security interest, claim and
encumbrance of any kind, except in Congress' favor or as permitted by Section
8.4(d) hereof.
(b) All of the Collateral is located at the addresses set
forth on Schedule 7.14(b) hereto or at such other addresses as are hereafter
approved in writing by Congress pursuant to Section 8.24 hereof.
(c) The Inventory and the Equipment are and shall be used
in Debtor's business and not for personal, family, household or farming use.
(d) The Equipment is now and shall remain personal
property. Debtor shall not permit any of the Equipment to be or become a part
of or affixed to real property without (i) prior written notice to Congress and
(ii) first making all arrangements, and delivering or causing to be delivered
to Congress, such agreements and other documentation requested by Congress for
the protection and preservation of Congress' security interests and liens, in
form and substance reasonably satisfactory to Congress, including, without
limitation, waivers and subordination agreements by any landlords or mortgagees
of statutory and non- statutory liens and rights of distraint.
7.15 Location of Cash Accounts. Except as set forth on
Schedule 7.15 hereto, Debtor has no cash accounts with any bank, savings and
loan or similar institution, and Schedule 7.15 accurately reflects the location
of each such account.
7.16 Financial Statements. All financial statements,
including the notes thereto, provided to Congress by Debtor fairly present the
financial condition of Debtor as of the respective dates thereof, all
Indebtedness of Debtor is reflected thereon or has been previously disclosed to
Congress in writing, and there has been no material adverse change in Debtor's
operations, properties, assets (tangible or intangible) or condition (financial
or otherwise) since December 31, 1994.
7.17 Internal Controversies. There are no controversies
pending or, to the best of Debtor's knowledge, threatened between Debtor or any
Subsidiary of Debtor and any of its employees (other than employee grievances
arising in the ordinary course of business) which, if adversely determined with
respect to Debtor, would result in any material adverse change in Debtor's
business, properties, assets (tangible or intangible), goodwill, or condition
(financial or otherwise).
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SECTION 8. COVENANTS.
Debtor covenants and agrees that, so long as any Obligations
remain outstanding, and (even if there shall be no Obligations outstanding) so
long as this Agreement remains in effect (unless Congress shall give its prior
written consent thereto):
8.1 Financial Information; Maintenance of Forms. Debtor
shall maintain Debtor's shipping forms, invoices and other related documents in
a form reasonably satisfactory to Congress and shall maintain Debtor's books,
records and accounts in accordance with GAAP. Debtor agrees to furnish
Congress monthly with accounts receivable agings, inventory reports (if
requested by Congress) and interim financial statements (including a balance
sheet and statements of income and cash flows) and to furnish Congress, at any
time or from time to time with such other information regarding Debtor's
business affairs and financial condition as Congress may reasonably request,
including, without limitation, balance sheets, statements of profit and loss,
financial statements, cash flow and other projections, earnings forecasts,
schedules, agings and reports. Debtor agrees to provide Congress with copies
of all Customer Sales Reports generated by the Debtor. Debtor hereby
irrevocably authorizes and directs all accountants, auditors or other similar
third parties to deliver to Congress, at Debtor's expense, copies of Debtor's
financial statements and to provide Congress with access to, and the right to
copy, at Debtor's expense, all papers related thereto, and other accounting
records of any nature in such parties' possession and to disclose to Congress
any information such parties may have regarding Debtor's business affairs and
financial condition. Debtor shall provide Congress with a copy of all filings
made by Debtor with the Securities and Exchange Commission within five (5)
Business Days of the filing thereof, including, without limitation, all filings
and reports made in connection with the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, and all applicable rules and
regulations promulgated thereunder. Debtor shall furnish Congress with audited
financial statements on an annual basis certified by independent public
accountants selected by Debtor and acceptable to Congress within 120 days from
year end. Congress hereby designates Price Waterhouse & Co. LLP as acceptable
for purposes of this Section 8.1. All such statements and information shall
fairly present Debtor's financial condition as of the dates, and the results of
Debtor's operations for the periods, for which the same are furnished. Any
documents, schedules, invoices or other papers delivered to Congress may be
destroyed or otherwise disposed of by Congress one year after the date the same
are delivered to Congress, unless Debtor makes a written request therefor and
pays all expenses attendant to their return, in which event Congress shall
return same when Congress' actual or anticipated need therefor has ceased.
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8.2 Payment of Taxes. Debtor shall duly pay and discharge
all taxes, assessments, contributions and governmental charges upon or against
Debtor or its properties or assets (tangible or intangible) prior to the date
on which penalties attach thereto, other than taxes the liability for which is
being contested in good faith by appropriate proceedings, and as to which (i)
Debtor shall, if appropriate under GAAP, have set aside on its books and
records adequate reserves; and (ii) Congress has determined the maximum amount
of the asserted tax liability and reduced the loan availability by such amount.
Debtor shall be liable for any tax or penalty imposed on it arising out of this
Agreement or any supplement hereto or giving rise to the Accounts or any other
Collateral or which Congress may be required to withhold or pay for any reason
and Debtor agrees to indemnify and hold Congress harmless with respect thereto,
and to repay to Congress on demand the amount thereof, and until paid by Debtor
such amount shall be added to and deemed part of Congress' loans to Debtor.
8.3 Further Assurances. Debtor shall, at Debtor's expense,
duly execute and deliver, or shall cause to be duly executed and delivered,
such further agreements, instruments and documents, including, without
limitation, additional security agreements, collateral assignments, UCC
financing statements or amendments or continuations thereof, landlord's or
mortgagee's waivers of liens and consents to the exercise by Congress of all
Congress' rights and remedies hereunder, under any supplement hereto, or under
any other Loan Document or applicable law with respect to the Collateral, and
do or cause to be done such further acts as may be necessary or proper in
Congress' opinion to evidence, perfect, maintain and enforce Congress' security
interest and the priority thereof in the Collateral and to otherwise effectuate
the provisions or purposes of this Agreement or any other Loan Document. Where
permitted by law, Debtor hereby authorizes Congress to execute and file one or
more UCC financing statements signed only by Congress.
8.4 Liens. Debtor will not, and will not cause Galco or any
of its active Subsidiaries to, create, incur, assume or suffer to exist any
Lien or other encumbrance of any nature whatsoever on any of its assets, except
for:
(a) Liens in favor of Congress;
(b) the Liens set forth on Schedule 8.4 hereto;
(c) Liens securing the payment of taxes, either not yet due
and payable or the validity of which are being contested in good faith by
appropriate proceedings, and as to which (i) Debtor shall, if appropriate under
GAAP, have set aside on its books and records adequate reserves; and (ii)
Congress has determined the maximum amount of the asserted tax liability and
reduced the loan availability by such amount;
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(d) purchase money Liens relating to Equipment (including the
interest of a lessor under a capital lease or an operating lease having
substantially the same economic effect and Liens to which any property is
subject at the time of Debtor's purchase thereof) securing an amount not to
exceed $250,000 in the aggregate at any time, provided that such Liens shall
not apply to any property of Debtor other than that purchased or leased, as the
case may be;
(e) deposits under worker's compensation, unemployment
insurance, social security and other similar laws, or to secure the performance
of bids, tenders or contracts (other than for the repayment of borrowed money)
or to secure indemnity, performance or other similar bonds for the performance
of bids, tenders or contracts (other than for the repayment of borrowed money)
or to secure statutory obligations or surety or appeal bonds, or to secure
indemnity, performance or other similar bonds in the ordinary course of
business;
(f) Liens on the stock of the target company in favor of the
seller of such stock to the Debtor in the Acquisition, which Liens may only
secure obligations owing by the Debtor to such seller in connection with the
Acquisition; and
(g) Liens on the Headquarters Property securing Indebtedness
(other than the Obligations hereunder) in an amount not to exceed $5,000,000,
which liens may be first priority liens.
Debtor acknowledges that Congress has consented only to the Liens permitted by
this Section 8.4.
8.5 Sale of Assets; Preservation of Corporate Existence.
Debtor shall not, and shall not permit its Subsidiaries to, sell, lease,
transfer, abandon or otherwise dispose of its properties, assets or rights
(tangible or intangible), except for (a) sales of Inventory in the ordinary
course of Debtor's business, (b) the sale of assets, other than Inventory in
the ordinary course of Debtor's business (which shall include close-out sales
of Inventory), during any fiscal year which have an aggregate value based upon
the higher of fair market value and appraised orderly liquidation value not in
excess of $500,000, (c) the sale of the Headquarters Property and (d) the sale,
lease, transfer, or other disposition of Equipment so long as (i) such
Equipment is promptly replaced with like-kind Equipment of the same or greater
value or (ii) the Debtor determines in its reasonable business judgment that
such Equipment is not necessary to its business. On or before the twentieth
day of each month, Debtor shall deliver to Congress a report of dispositions of
assets during the preceding month pursuant to Section 8.5(c) hereof. Debtor
shall not, and shall cause each of its Subsidiaries not to, consolidate or
merge with or into any other entity or permit any other entity to
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consolidate or merge with or into Debtor or its Subsidiaries, except for
mergers of any Subsidiary with Debtor solely to effect a name change as
permitted in accordance with the immediately following sentence. Debtor shall
give Congress 30 days' prior written notice of any proposed change in Debtor's
corporate name or merger with any wholly owned Subsidiary of Debtor solely to
effect such name change, which notice shall set forth the new name. Debtor
will at all times preserve, renew and keep in full force and effect Debtor's
existence as a corporation and the rights and franchises with respect thereto
and continue to engage in business of the same type as Debtor is engaged as of
the date hereof.
8.6 Investments. Except as set forth on Schedule 8.6 hereto
and as otherwise provided herein, Debtor shall not make or permit to exist any
investments other than Permitted Investments.
8.7 Liability for Indebtedness of Third Parties. Debtor
shall not, and shall cause its Subsidiaries not to, directly or indirectly,
create or become liable in respect of any Accommodation Obligation, except (i)
the Obligations, (ii) trade obligations and other normal accruals in the
ordinary course of business not yet due and payable, (iii) guarantees resulting
from endorsement of negotiable instruments which are being collected in
accordance with Section 6 hereof, (iv) Accommodation Obligations existing on
the date hereof which are listed on Schedule 8.7 hereto, (v) the guaranty of
Indebtedness of Galco in an aggregate amount not to exceed $500,000 outstanding
at any time and (vi) as permitted under Section 8.4(d) hereof.
8.8 Officer Compensation. Except as set forth in Schedule
8.8 hereto, Debtor shall not, and shall cause its Subsidiaries not to, make any
loans to, or pay any bonuses, management or other fees, amounts or other form
of compensation to any officers, directors, employees or stockholders of Debtor
or its Subsidiaries, except for (a) advances or reimbursements by Debtor or its
Subsidiaries for reasonable travel, entertainment or other expenses to Debtor's
or such Subsidiaries's officers, directors or employees in the ordinary course
of Debtor's business, (b) compensation (including reasonable bonuses and
benefits) for all officers, directors and other personnel which has been
approved by the Debtor's board of directors or a duly designated committee
thereof, and (c) professional, legal and consulting fees incurred in the
ordinary course of Debtor's and its Subsidiaries' business.
8.9 Redemption of Capital Stock; Dividends. Debtor shall
not, except with the prior written consent of Congress, which consent shall not
be unreasonably withheld, (a) redeem, purchase or otherwise retire any of its
shares of capital stock, and shall not permit its Subsidiaries to redeem,
purchase, or otherwise retire any of their shares of capital stock, (b) declare
or pay any dividends in any fiscal year on any class of
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stock or classes of stock, (c) return capital to its stockholders, (d) make any
other distribution on or in respect of any shares of any class of capital stock
of Debtor, or (e) issue or distribute any capital stock or other securities for
consideration or otherwise, except capital stock of the Debtor granted, issued
or otherwise distributed to the Debtor's employees or directors pursuant to a
stock option plan of the Debtor existing on the date hereof.
8.10 Transactions with Affiliates. Debtor shall not enter
into any transaction, including, without limitation, the purchase, sale or
exchange of property or the rendering of any service to or by any Affiliate,
except in the ordinary course of Debtor's business and upon fair and reasonable
terms no less favorable to Debtor than Debtor would obtain in a comparable
arm's- length transaction with a Person who is not an Affiliate.
8.11 Payment on Indebtedness. Except for (i) scheduled
payments of interest on Permitted Indebtedness and (ii) the repayment of any
Permitted Indebtedness in connection with the permitted refinancing or
refunding thereof, Debtor shall not pay or agree to pay any of Debtor's
existing Indebtedness (including, without limitation, Indebtedness owed
pursuant to the Convertible Subordinated Debentures), or pay or make any
distribution or loan to permit the payment of any existing Indebtedness of any
of its Subsidiaries or Affiliates, prior to the scheduled maturity of such
Indebtedness.
8.12 Amendment of Articles of Incorporation. Debtor may
amend its Articles of Incorporation (including, without limitation, to effect a
change in its corporate name), provided that Debtor provides Congress with 30
days' prior written notice thereof and thereafter furnishes to Congress a copy
of such amendment, certified by the Secretary of State of Delaware, within ten
days after the date such amendment is filed with the Secretary of State of
Delaware.
8.13 Maintenance of Liability and Casualty Insurance. Debtor
shall maintain, at its expense, such public liability and third party property
damage insurance in such amounts, with such deductibles and with such insurance
companies, as are reasonably acceptable to Congress. Debtor shall not, without
Congress' prior written consent, amend, modify or change in any way any such
insurance policy and shall provide Congress with written notice of any
expiration of any such policy or any failure by Debtor to renew any such policy
within five Business Days of such expiration or failure to renew. Debtor shall
at all times maintain, with financially sound and reputable insurers, casualty
and hazard insurance with respect to the Collateral for not less than its full
market value and against all risks to which it may be exposed for which such
insurance is customary in Debtor's industry. All such insurance policies shall
be in such form, substance, amounts and coverage as in effect on the date of
the
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Original Agreement or as otherwise may be satisfactory to Congress and shall
provide for ten days' minimum prior cancellation notice in writing to Congress.
In the event that the Debtor fails to timely act hereunder, Congress may act as
attorney for Debtor in obtaining, adjusting, settling, amending and cancelling
such insurance. Debtor shall promptly (i) obtain endorsements to all existing
and future insurance policies with respect to the Collateral specifying that
the proceeds of such insurance shall be payable to Congress and Debtor as their
interests may appear and further specifying that Congress shall be paid
regardless of any act, omission or breach of warranty by Debtor, (ii) deliver
to Congress original executed copies of such endorsements and, at Congress'
request, originals or certified duplicate copies of the underlying insurance
policies, (iii) deliver to Congress certificates of insurance executed by such
insurers (or their agents) stating that such policies are presently in effect
and the amounts and types of coverage of such policies, (iv) deliver to
Congress copies of the insurance binders describing the terms of such insurance
policies, and (v) deliver to Congress such other evidence which is satisfactory
to Congress of compliance with the provisions hereof. Congress hereby
acknowledges that it presently considers the insurance in effect as of the date
hereof to be acceptable for purposes of this Section 8.13. Any insurance
monies received at any time shall, at Congress' option, (i) be applied to the
cost of repairs to or replacement for the damaged Collateral on account of
which such proceeds were paid or (ii) be applied to payment of any of the
Obligations, whether or not due, in any order and in such manner as Congress,
in its sole discretion, may determine.
8.14 Litigation; Contested Taxes. Debtor shall, as soon as
possible, and in any event within ten Business Days after Debtor learns of the
following, give written notice to Congress of (i) any proceeding(s) being
instituted or overtly threatened to be instituted by or against Debtor or any
of its Subsidiaries in any federal, state, local or foreign court or before any
commission or other regulatory body (federal, state, local or foreign) in which
money damages in excess of $500,000 are claimed or any material nonmonetary
relief is requested, and (ii) any material adverse change in the business,
properties, assets (tangible or intangible) or condition (financial or
otherwise) of Debtor, any of its Subsidiaries or any Guarantor. Debtor shall
promptly notify Congress of any taxes, assessments, contributions and
governmental charges which are not paid prior to the date on which penalties
attach thereto.
8.15 ERISA.
(a) Debtor shall, and will cause each Subsidiary to, (i)
refrain from terminating any Benefit Plan that is presently in existence unless
such Benefit Plan can be terminated without liability that is material to
Debtor in connection with such termination; (ii) make contributions to all of
Debtor's and its
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Subsidiaries' Benefit Plans in a timely manner and in a sufficient amount to
comply with the minimum funding requirements of ERISA so that no liability of
Debtor arises as a result of a failure to make such contributions; (iii) comply
with all requirements of ERISA that relate to any Benefit Plan so that no
material liability of Debtor with respect to any non-compliance will arise; and
(iv) notify Congress immediately upon receipt by Debtor or any of its
Subsidiaries of any notice issued by the Pension Benefit Guaranty Corporation
of the institution of any proceeding to terminate any Benefit Plan.
(b) Debtor shall notify Congress in writing as soon as
reasonably practicable upon becoming aware of the occurrence of any Termination
Event or Prohibited Transaction in connection with any Benefit Plan or trust
created thereunder, specifying the nature thereof, what action Debtor or its
ERISA Affiliates have taken and, when known, any action taken or threatened by
the Internal Revenue Service, the Department of Labor or the Pension Benefit
Guaranty Corporation with respect thereto, and shall provide Congress as soon
as reasonably practicable, copies of (i) all notices received by Debtor or any
of its ERISA Affiliates of the Pension Benefit Guaranty Corporation's intent to
terminate any Benefit Plan or to have a trustee appointed to administer any
Benefit Plan, (ii) all notices received by Debtor or any of its ERISA
Affiliates from the sponsor of a Multiemployer Plan pursuant to Section 4201 of
ERISA involving any withdrawal liability, and (iii) all funding waiver requests
filed by Debtor or any of its ERISA Affiliates with the Internal Revenue
Service with respect to any Benefit Plan, and all communications received by
Debtor or any of its ERISA Affiliates from the Internal Revenue Service with
respect to any such funding waiver request.
(c) Debtor shall not (i) engage or permit any Subsidiary
to engage in any Prohibited Transaction which could result in material
liability to Debtor or any Subsidiary; (ii) except as set forth on Schedule
8.15 hereto, permit to exist any accumulated funding deficiency, as defined in
Section 302(a) of ERISA and Section 412(a) of the Internal Revenue Code, or
fail to pay any installment necessary to amortize any waived funding
deficiency, with respect to any Benefit Plan maintained by Debtor or any
Subsidiary; (iii) fail to make any payments to any Multiemployer Plan that
Debtor may be required to make under any agreement relating to such
Multiemployer Plan or any law pertaining thereto; (iv) terminate any Benefit
Plan so as to result in any material liability of Debtor or any Subsidiary
under Title IV of ERISA; or (v) permit to exist any occurrence of any
Reportable Event which presents a material risk of material liability of such
Debtor or any Subsidiary of Debtor under ERISA or the Internal Revenue Code.
(d) Debtor will provide to Congress from time to time as
necessary to keep such information complete and current, a description of all
Benefit Plans maintained by Debtor and its
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Subsidiaries and confirmation satisfactory to Congress that (i) except as set
forth on Schedule 8.15 hereto, such Benefit Plans are adequately funded in
accordance with at least the minimum statutory requirements for funding; (ii)
no Reportable Event with respect thereto has occurred which could result in a
material liability to Debtor or any Subsidiary that has not been satisfied; and
(iii) no termination of, or withdrawal from, such Benefit Plans has occurred or
is contemplated by Debtor or any Subsidiary which could result in a material
liability to Debtor or any Subsidiary that has not been satisfied.
(e) Upon the written request of Congress, Debtor shall
provide Congress with an officer's certificate stating that Debtor and each of
its Subsidiaries have made all payments required to be made by Debtor and its
Subsidiaries to the Benefit Plans.
(f) Debtor shall prior to becoming a party to or
obligated to make payments under any Multiemployer Plan (i) provide Congress
with an analysis of Debtor's projected funding obligations under such
Multiemployer Plan over the immediately succeeding two-year period together
with such other financial or other relevant information as Congress may
reasonably request and (ii) obtain Congress' prior written consent, which
consent shall not be unreasonably withheld.
8.16 Environmental.
(a) Debtor shall, and shall cause each of its
Subsidiaries to, conduct its business and maintain its facilities so as to
comply in all material respects with all Environmental Laws, provided, however,
that nothing contained in this Section 8.16 shall prevent Debtor or any such
Subsidiary from contesting, in good faith by appropriate legal proceedings, any
Environmental Laws or the application thereof. Notwithstanding the foregoing,
an Event of Default shall not arise hereunder if, after discovery of any
material noncompliance with any Environmental Laws Debtor within 15 Business
Days of such discovery notifies Congress and corrects or remedies such material
noncompliance within the earlier of a reasonable period of time after discovery
or as required pursuant to any judicial or administrative order or any other
Environmental Laws, that is not the subject of a good faith contest in any
appropriate legal proceeding.
(b) If Debtor or any Subsidiary shall receive written
notice (i) that any violation of any Environmental Laws may have occurred or is
about to occur in connection with the facilities or operations owned or
controlled by Debtor or any such Subsidiary; (ii) that any administrative or
judicial complaint or order has been filed or is about to be filed against
Debtor or any such Subsidiary alleging any violation of Environmental Laws or
requiring Debtor or any such Subsidiary to take any action in connection with
the release or threatened release of any
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Hazardous Substance into the environment, or (iii) that Debtor or any such
Subsidiary may be liable or responsible for response costs associated with a
release or threatened release of any Hazardous Substance into the environment
or any damages caused thereby, then and in each case Debtor shall provide
Congress with a copy of such notice within 15 Business Days of Debtor's receipt
thereof.
(c) If Debtor or any Subsidiary discovers or otherwise
becomes aware of (i) any release of any Hazardous Substance at or from the
operations and facilities owned or controlled by Debtor or any Subsidiary, or
(ii) any violation of Environmental Laws arising out of or in connection with
the operations and facilities owned or controlled by Debtor or any such
Subsidiary, which release or violation will have a material adverse effect on
the operations or facilities (solely for the purpose of this subparagraph (c),
"material adverse effect" shall mean requiring the expenditure of $250,000 or
more in remediation costs or directly related expense or costs or interfering
in a material respect with the operation of any plant or major production line
of Debtor), then Debtor shall provide Congress with written notice of such
release or violation within 15 Business Days of discovery and confirmation
thereof by Debtor or any such Subsidiary.
(d) Debtor shall provide Congress with a copy of any
report of any environmental audit, study, or other investigation relating to
the operations and facilities owned or controlled by Debtor or the Subsidiaries
within 20 Business Days of Debtor's receipt thereof.
(e) Within 30 Business Days of Debtor having become aware
of the enactment, promulgation or issuance of any Environmental Laws that may
result in any material adverse change in the condition, financial or otherwise,
of Debtor, Debtor shall provide Congress with written notice thereof.
(f) Within 30 Business Days of Debtor having received
notice, discovered or otherwise become aware of any non- compliance with any
Environmental Laws, Debtor shall deliver (i) an estimate of the costs and
related expenses of any response or remedial action required pursuant to any
Environmental Laws, but only if such estimate exceeds $250,000 and, (ii) if
such estimate is required to be delivered pursuant to this Section 8.16(f), a
statement setting forth in reasonable detail projections showing compliance
with financial covenants after giving effect to the payment of such costs and
expenses, including all premises or assumptions on which such projections are
based.
8.17 Indebtedness. Debtor shall not, and shall not permit
its Subsidiaries to, incur or permit to remain outstanding any Indebtedness
other than Permitted Indebtedness.
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8.18 Notices of Default. Debtor shall provide Congress with
a copy of all notices of default under any material contract (as defined in
Section 10.1(i) hereof) (other than notice of Event of Default delivered to
Debtor by Congress) delivered to Debtor or any of its Subsidiaries no later
than two Business Days after Debtor receives such notice. In the event Debtor
is informed orally of an Event of Default by any Person other than Congress,
Debtor shall immediately notify Congress by telephone of such Event of Default,
with written confirmation thereof to be delivered to Congress no later than two
Business Days after Debtor was initially informed of such Event of Default.
8.19 Maintenance of Records of Accounts. Debtor shall keep
and maintain, at its cost and expense, satisfactory and complete books and
records of all Accounts, all payments received or credits granted thereon, and
all other dealings therewith. At such times as Congress may reasonably
request, Debtor shall deliver to Congress copies of documents evidencing the
sale and delivery of goods or the performance of services which created any
Accounts, including but not limited to any contracts, orders, invoices, bills
of lading, warehouse receipts, delivery tickets and shipping receipts, together
with schedules describing the Accounts and/or written confirmatory assignments
to Congress of each Account, in form and substance reasonably satisfactory to
Congress and duly executed by Debtor, together with such other information as
Congress may reasonably request. In no event shall the making or the failure
to make or the content of any schedule or assignment or Debtor's failure to
comply with the provisions hereof be deemed or construed as a waiver,
limitation or modification of Congress' security interest in, Lien upon and
assignment of the Collateral or Debtor's representations, warranties or
covenants under this Agreement or any other Loan Document.
8.20 Use of Proceeds. Debtor agrees that the funds advanced
to it by Congress pursuant to the terms of this Agreement shall be utilized
only for the following purposes:
(a) for Debtor's working capital purposes;
(b) to make capital expenditures to the extent otherwise
permitted hereunder; and
(c) for the Acquisition and fees and expenses incurred in
connection therewith to the extent otherwise permitted hereunder; and
.
8.21 Covenants as to Inventory and Equipment.
(a) Debtor shall promptly notify Congress in writing of
the details of any loss, damage, investigation, action, suit,
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proceeding or claim relating to the Collateral which would result in any
material adverse change in Debtor's business, properties (tangible or
intangible) or condition (financial or otherwise).
(b) Upon Congress' request, but in any case prior to an
Event of Default no more than once during any fiscal year of Debtor, Debtor
shall, at Debtor's sole cost and expense, execute and deliver to Congress
written reports or updated appraisals as to the Inventory and Equipment listing
all items and categories thereof, describing the condition of same and setting
forth the value thereof (the lower of cost or market value of the Inventory and
the lower of net cost less depreciation, fair market value and/or liquidation
value of the Equipment), in such form as is satisfactory to Congress.
(c) Debtor shall, at Debtor's own expense, keep the
Equipment in good working order, repair, and operating condition, subject to
normal wear and tear.
(d) Debtor shall (i) use, store and maintain the
Inventory and the Equipment with all reasonable care and caution, and (ii) use
the Inventory and Equipment for lawful purposes only and in conformity with
applicable laws, ordinances and regulations.
(e) All Inventory shall be produced in accordance with
the requirements of the Federal Fair Labor Standards Act of 1938, as amended
and all rules, regulations and orders related thereto.
(f) Debtor shall assume, as against Congress, all
responsibility and liability arising from or relating to the use, sale or other
disposition of the Inventory and the Equipment.
(g) In addition to the requirements of (a)-(f) above and
without limiting the generality of Congress' discretion in requesting written
inventory records and reports, Debtor shall at all times hereafter maintain a
perpetual inventory, keeping correct and accurate records itemizing and
describing the kind, type, quality and quantity of Inventory, Debtor's cost
therefor and daily withdrawals therefrom and additions thereto, all of which
records shall be maintained in accordance with GAAP, if applicable, and
consistent with Debtor's past practice and which records shall be available
during Debtor's usual business hours at the request of any of Congress'
officers, employees or agents. Debtor shall conduct a physical count of the
Inventory for which a statistical sampling will be sufficient, provided that
such statistical sampling is consistent with prior practice of Debtor and
performed in accordance with generally accepted auditing standards, at least
once a year and promptly following such physical inventory shall supply
Congress with a report in a form and with such specificity as may be
satisfactory to Congress concerning such physical count of the Inventory.
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8.22 Financial Covenants. From the date hereof and
thereafter until the Obligations have been satisfied, Debtor shall:
(a) Consolidated Tangible Net Worth. Maintain at all times a
Consolidated Tangible Net Worth of not less $20,000,000.
(b) Capital Expenditures. Not, and not permit any
Subsidiary to, purchase or otherwise acquire (including, without
limitation, acquisition by way of Capital Lease), or commit to
purchase or otherwise acquire, any fixed asset if, after giving
effect to such purchases or other acquisition, the aggregate cost of
all fixed assets purchased or otherwise acquired by Debtor and its
Subsidiaries on a consolidated basis in any one fiscal year would
exceed $1,000,000; provided, however, that expenses incurred in
connection with the development and acquisition of tools and molds for
the manufacture of Inventory shall not be considered capital
expenditures for the purposes of this Section 8.22(b).
8.23 Loan Agreement as Financing Statement. Debtor agrees
that a carbon, photographic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement.
8.24 Location and Use of Collateral. Debtor shall not keep
Collateral at any location not set forth on Schedule 7.14(b) unless a financing
statement with respect to such Collateral is on file in the appropriate filing
office and in effect for such location and Debtor has delivered to Congress a
bailee letter satisfactory to Congress in its sole discretion. Debtor shall
use the Collateral only in Debtor's business and not for personal, family,
household or farming use.
8.25 Location of Chief Executive Office. Debtor shall not
change the location of its chief executive office without Congress' prior
written consent, which shall not be unreasonably withheld, and prior to making
any such change, Debtor shall execute any additional financing statements or
other documents or notices which Congress may require in order to maintain
Congress' perfected security interest in the Collateral.
SECTION 9. CONDITIONS PRECEDENT.
9.1 Conditions Precedent to Rollover Advance. The
effectiveness of this amendment and restatement of the Original Agreement and
the obligation of Congress to roll over the Existing Revolving Loans into
Revolving Loans hereunder shall be subject to the satisfaction of each of the
following conditions:
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(a) There shall have been no material adverse change in the
business, assets, properties, conditions (financial or otherwise) or prospects
of Debtor from the date of completion of Congress' latest field audit to the
date hereof and no information reasonably deemed by Congress to be reliable
shall have been received on or prior to the date hereof by Congress
demonstrating or reflecting a material adverse change from the results obtained
in Congress' latest field audit.
(b) Congress shall have received all of the following, each
fully executed by the appropriate parties and in form and substance satisfactory
to Congress as Congress, in its sole discretion, shall determine:
(i) this Agreement, together with all schedules and exhibits
hereto which are in each case true, complete and correct;
(ii) an Amended and Restated Revolving Note in the form
attached hereto as Schedule 9.1(b)(ii) duly executed by Debtor (the
"Revolving Note");
(iii) an opinion letter from Shereff, Friedman, Hoffman &
Goodman, LLP;
(iv) the Trademark Security Agreement;
(v) the Mortgage Amendment and such evidence of the
condition of title to the Headquarters Property as shall be reasonably
acceptable to Congress, including, without limitation, title insurance
with respect to the Headquarters Property;
(vi) current Uniform Commercial Code searches made in such
places as Congress may specify, covering Debtor and any Subsidiary
which executes any of the Loan Documents showing no filings relating
to, or which could relate to, the Collateral or the improvements on
the Property, other than (i) those filings made under the Original
Agreement and (ii) those other filings set forth on Schedule
9.1(b)(vi) hereto;
(vii) a certificate of the Secretary of Debtor in the form of
Schedule 9.1(b)(vii) hereto, dated as of the date of the Rollover
Advance certifying, among other things, (a) the names and true
signatures of the officers of Debtor authorized to sign any of the
Loan Documents to which Debtor is a party; (b) that attached thereto
is a true and complete copy of the Articles of Incorporation and the
by-laws of Debtor as in effect on the date of such certification; and
(c) that attached thereto is a true and complete copy of the
resolutions of Debtor's Board of Directors approving and authorizing
the execution and delivery of the Loan Documents to which Debtor is a
party;
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(viii) a certificate in the form of Schedule 9.1(b)(viii)
hereto confirming representations and warranties and the satisfaction
of conditions precedent;
(ix) good standing certificates for Debtor issued by the
Secretary of State of each of Delaware and California;
(x) copies of the Articles of Incorporation of Debtor
certified by the Secretary of State of Delaware; and
(xi) any other documents required pursuant to the terms of
any Loan Document or as Congress, in its sole discretion, may require.
(c) there shall be remaining Availability immediately after
the Rollover Advance of not less than $1,500,000.
(d) Congress shall have sold Participations in an aggregate
amount equal to at least $40,000,000.
(e) No Event of Default (as defined in the Original
Agreement) or event that with time or notice or both would result in an Event
of Default (as defined in the Original Agreement), in each case under the
Original Agreement, shall have occurred and be continuing.
9.2 Conditions Precedent to All Advances. The obligation of
Congress to make any Advance (including the Rollover Advance) shall be subject
to the satisfaction of each of the following conditions:
(a) During the period commencing on the date of the most
recent audited financial statement delivered to Congress prior to the date
hereof and ending on the date on which Congress makes such Advance, Debtor's
operations shall have been conducted in the ordinary course and there shall have
been no material adverse change, as determined by Congress, in its sole
discretion, in the business, operations, properties, assets, condition
(financial or otherwise) or prospects of Debtor;
(b) All of Debtor's representations and warranties contained
in this Agreement and any other agreement executed in connection therewith
(other than the representations and warranties that are expressly made as of a
certain date, which shall be true and correct on and as of such date) shall be
true and correct on and as of the date on which Congress makes such Advance as
though made on and as of that date;
(c) No Event of Default or event that with time or notice or
both would result in an Event of Default shall have occurred and be continuing
or would result from the making of any Advance as of the date on which Congress
makes such Advance;
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(d) No law or regulation shall prohibit, and no order,
judgment or decree of any Governmental Authority shall enjoin or restrain,
Congress from making such Advance; and
(e) Debtor shall have paid to Congress the fees and
expenses due and payable under this Agreement on or before the date of the
making of such Advance.
SECTION 10. EVENTS OF DEFAULT.
10.1 Events of Default. All Obligations shall be, at
Congress' option, immediately due and payable without notice or demand
(notwithstanding any deferred or installment payments allowed, if any, by any
instrument evidencing or relating to the Obligations) and any provision of this
Agreement or any supplement hereto, as to future loans and advances by Congress
shall, at Congress' option, terminate forthwith, upon the termination or
non-renewal of this Agreement or upon the occurrence of any one or more of the
following ("Events of Default"):
(a) if Debtor (i) shall fail to pay to Congress interest
and fees and, when due any other Obligations owing to Congress, (ii) shall
breach any of the terms, covenants, conditions or provisions contained in
Sections 8.15(b), 8.15(c), 8.15(d), 8.15(e) or 8.22 hereof, (iii) shall breach
any of the reporting requirements contained in Sections 2.1 or 8.1 hereof,
which breach is not cured by the Debtor within five (5) Business Days of the
receipt of written notice thereof from Congress, (iv) shall breach and continue
to breach for the period provided therein any covenant, condition or provision
of this Agreement or any of the Loan Documents which contains an express cure
period, or (v) shall breach any other term, covenant, condition or provision of
this Agreement or any of the Loan Documents;
(b) if any Guarantor, endorser or other Person liable on
the Obligations shall terminate or breach any of the terms, covenants,
conditions or provisions of any guarantee, endorsement or other agreement of
such person with, or in favor of, Congress;
(c) if any representation, warranty, or statement of fact
made to Congress at any time by Debtor or on Debtor's behalf is false or
misleading in any material respect when made;
(d) if Debtor, or any Guarantor, endorser or other Person
liable on the Obligations, shall become insolvent, fail to meet Debtor's or its
debts as they mature, call a meeting of creditors or have a creditors'
committee appointed, make an assignment for the benefit of creditors, commence
or have commenced against Debtor or any of them any action or proceeding for
relief under any bankruptcy law, or if Debtor or any of them suspend or
discontinue doing business for any reason, or if a
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receiver, custodian or trustee of any kind is appointed for Debtor or any of
them or any of Debtor's or their respective properties;
(e) if there shall be a material adverse change in
Debtor's business, assets or condition (financial or otherwise) from the date
of the Original Agreement;
(f) if at any time Congress shall, in Congress' Permitted
Discretion, consider the Obligations insecure or any part of the Collateral
insufficient and Debtor shall not on Congress' demand furnish other Collateral
or make payment on account, satisfactory to Congress;
(g) upon the occurrence of any Material Judgment;
(h) upon the occurrence of any Change in Control;
(i) upon the occurrence of a default or an event that
will mature into an event of default with notice or the passage of time or both
by Debtor or any Subsidiary of Debtor (subject to any applicable grace period)
under any material contract, lease or commitment by which Debtor or any
Subsidiary of Debtor or any Guarantor is bound. For purposes of this Section
10.1(i), "material contract" shall mean any contract the breach in question of
which could reasonably be expected to have a material adverse effect upon
Debtor and its Subsidiaries taken as a whole, or upon any Collateral;
(j) upon the occurrence of a default in the payment when
due, whether by acceleration or otherwise (subject to any applicable grace
period), of any Indebtedness of, or guaranteed by, Debtor, any Subsidiary or
any Guarantor (other than (i) any Indebtedness under this Agreement, (ii) any
Indebtedness of any Subsidiary to Debtor or to any other Subsidiary, or (iii)
any Indebtedness which does not exceed $250,000). Debtor shall provide
Congress with a copy of all notices of default (other than notice of Event of
Default delivered to Debtor by Congress) delivered to Debtor no later than two
Business Days after Debtor receives such notice. In the event Debtor is
informed orally of any default by any Person other than Congress, Debtor shall
immediately notify Congress by telephone of such default, with written
confirmation thereof to be delivered to Congress no later than two Business
Days after Debtor was initially informed of such default;
(k) upon the occurrence of any event or condition which
results in the acceleration of the maturity of any Indebtedness in an amount
not less than $250,000 of, or guaranteed by, Debtor, any Subsidiary or any
Guarantor (other than (i) any Indebtedness under this Agreement or (ii) any
Indebtedness of any Subsidiary to Debtor or to any other Subsidiary) or enables
the holder or holders of such other
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Indebtedness or any trustee or agent for such holders (any required notice of
default having been given and any applicable grace period having expired) to
accelerate the maturity of such other Indebtedness; and
(l) upon the occurrence of a default or an event of
default under the Convertible Subordinated Debenture Indenture.
10.2 Effect of Event of Default; Remedies. Upon the
occurrence and during the continuance of any Event of Default which has not
been waived in writing and at any time thereafter, Congress shall have the
right (in addition to any other rights Congress may have under this Agreement,
the other Loan Documents or otherwise) without further notice to Debtor, to
appropriate, set off and apply to the payment of any or all of the Obligations,
any or all Collateral, in such manner as Congress shall in Congress' sole
discretion determine, to enforce payment of any Collateral, to cash
collateralize any Letter of Credit, to settle, compromise or release in whole
or in part, any amounts owing on the Collateral, to prosecute any action, suit
or proceeding with respect to the Collateral, to extend the time of payment of
any and all Collateral, to make allowances and adjustments with respect
thereto, to issue credits in Congress' or Debtor's name, to sell, assign and
deliver the Collateral (or any part thereof), at public or private sale, at
broker's board, for cash, upon credit or otherwise, at Congress' sole option
and discretion, and Congress may bid or become purchaser at any such sale, if
public, free from any right of redemption which is hereby expressly waived.
10.3 Possession of Collateral by Judicial Process. In the
event Congress seeks to take possession of all or any portion of the Collateral
by judicial process, Debtor irrevocably waives: (a) the posting of any bond,
surety or security with respect thereto which might otherwise be required, (b)
any demand for possession prior to the commencement of any suit or action to
recover the Collateral, and (c) any requirement that Congress retains
possession and does not dispose of any Collateral until after trial or final
judgment.
10.4 Notice of Public Sale. Debtor agrees that the giving of
ten days notice by Congress sent by ordinary mail, postage prepaid, to Debtor's
address set forth below, designating the place and time of any public sale or
of the time after which any private sale or other intended disposition of the
Collateral is to be made, shall be deemed to be reasonable notice thereof and
Debtor waives any other notice with respect thereto.
10.5 Net Cash Proceeds Deficiency or Excess. The net cash
proceeds resulting from the exercise of any of the foregoing rights or remedies
shall be applied by Congress to the payment of the Obligations in such order as
Congress may elect, and Debtor shall remain liable to Congress for any
deficiency. Without
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limiting the generality of the foregoing, if Congress enters into any credit
transaction, directly or indirectly, in connection with the disposition of any
Collateral, Congress shall have the option, at any time, in Congress' sole
discretion, to reduce the Obligations by the principal amount of such credit
transaction or to defer the reduction thereof until actual receipt by Congress
of cash or other immediately available funds in connection therewith.
10.6 Remedies Not Exclusive. The enumeration of the
foregoing rights and remedies is not intended to be exclusive, and such rights
and remedies are in addition to and not by way of limitation of any other
rights or remedies Congress may have under the UCC or other applicable law.
Congress shall have the right, in its sole discretion, to determine which
rights and remedies, and in which order any of the same, are to be exercised,
and to determine which Collateral is to be proceeded against and in which
order, and the exercise of any right or remedy shall not preclude the exercise
of any others, all of which shall be cumulative.
10.7 No Waiver of Remedies. No act, failure or delay by
Congress shall constitute a waiver of any of Congress' rights and remedies. No
single or partial waiver by Congress of any provision of this Agreement or any
other Loan Document, or breach or default hereunder, or of any right or remedy
which Congress may have shall operate as a waiver of any other provision,
breach, default, right or remedy or of the same provision, breach, default,
right or remedy on a future occasion.
10.8 Waivers. Debtor waives presentment, notice of dishonor,
protest and notice of protest of all instruments included in or evidencing any
of the Obligations or the Collateral and any and all notices or demands
whatsoever (except as expressly provided herein). Congress may, at all times,
proceed directly against Debtor to enforce payment of the Obligations and shall
not be required to take any action of any kind to preserve, collect or protect
its or Debtor's rights in the Collateral.
10.9 Additional Remedies in Respect of Inventory and
Equipment. Congress shall have the right (in addition to any other rights it
may have under this Agreement, without notice to Debtor, at any time and from
time to time, in Congress' discretion, with or without judicial process or the
aid or assistance of others and without cost to Congress):
(a) To enter upon any premises on or in which any of the
Inventory or Equipment may be located and, without resistance or interference
by Debtor, take possession of the Inventory and Equipment;
(b) To complete processing, manufacturing and repair of
all or any portion of the Inventory;
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(c) To sell, foreclose or otherwise dispose of any part
or all of the Inventory and Equipment on or in any of Debtor's premises or
premises of any other party;
(d) To require Debtor, at Debtor's expense, to assemble
and make available to Congress any part or all of the Inventory or Equipment at
any place and time designated by Congress; and
(e) To remove any or all of the Inventory and Equipment
from any premises on or in which the same may be located, for the purpose of
effecting the sale, foreclosure or other disposition thereof or for any other
purpose.
SECTION 11. TAXES; EXPENSES; INDEMNITY.
11.1 Taxes. All payments by Debtor of principal of, and
interest on, the Obligations and all other amounts payable hereunder shall be
made free and clear of and without deduction for any present or future income,
excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or
other charges of any nature whatsoever imposed by any taxing authority, but
excluding taxes imposed on or measured by any net income or receipts of
Congress or any Participant (such non-excluded items being herein called
"Non-excluded Taxes"). In the event that any withholding or deduction from any
payment to be made by Debtor hereunder is required in respect of any
Non-excluded Taxes pursuant to applicable law, rule or regulation, then Debtor
will:
(a) pay directly to the relevant authority the full
amount required to be so withheld or deducted;
(b) promptly forward to Congress an official receipt or
other documentation satisfactory to Congress evidencing such payment to such
authority; and
(c) pay to Congress any additional amount necessary to
ensure that the net amount actually received by Congress (and its Participants)
will equal the full amount Congress (and its Participants) would have received
had not such withholding or deduction been required.
Moreover, if any Non-excluded Taxes are directly asserted against Congress or
any Participant with respect to any payment received by Congress or such
Participant hereunder, Congress or such Participant may pay such Non-excluded
Taxes and Debtor will promptly pay any additional amount (including any
penalties, interest or expenses) necessary in order that the net amount
received by such Person after the payment of such Non-excluded Taxes (including
any Non-excluded Taxes on such additional amount) shall equal that amount such
Person would have received had such Non-excluded Taxes not been asserted. If
Debtor fails
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to pay any Non-excluded Taxes (other than any such Taxes which (i) are being
contested by Debtor in good faith and by appropriate proceedings and (ii) if
not paid, will not result in the imposition of any penalty on Congress or any
Participant, as reasonably determined by such Person) when due to the
appropriate taxing authority or fails to remit to Congress the required
receipts or other required documentary evidence, Debtor shall compensate
Congress and each Participant for and hold each harmless against, any
incremental Non-excluded Taxes, interest or penalties that may become payable
as a result of such failure. A distribution hereunder by Congress to or for
the account of any Participant shall be deemed a payment by Debtor.
11.2 General Indemnity. Whether or not the transactions
contemplated hereby shall be consummated, Debtor agrees to indemnify, pay and
hold Congress and each Participant, and the officers, directors, employees,
agents, and affiliates thereof (collectively the "Indemnitees"), harmless from
and against any and all other liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and disbursements
of any kind or nature whatsoever (including, without limitation, the reasonable
fees and disbursements of counsel for any of such Indemnitees in connection
with any investigative, administrative or judicial proceeding commenced or
threatened, whether or not any of such Indemnitees shall be designated a party
thereto) that may be imposed on, incurred by, or asserted against any
Indemnitee in any manner relating to or arising out of this Agreement or any
other agreements executed and delivered by Debtor in connection herewith, the
statements contained in any proposal or commitment letter, any Indemnitee's
agreement to make the Advances or to issue Letters of Credit hereunder, the use
or intended use of any Letters of Credit, or the use or intended use of the
proceeds of any of the Advances hereunder (the "indemnified liabilities"). To
the extent that the undertaking to indemnify, pay and hold harmless set forth
in the preceding sentence may be unenforceable because it is violative of any
law or public policy, Debtor shall contribute the maximum portion that it is
permitted to pay and satisfy under applicable law to the payment and
satisfaction of all indemnified liabilities incurred by the Indemnitees or any
of them. The provisions of the undertakings and indemnification set out in
this Section 11.2 shall survive satisfaction and payment of the Obligations and
termination of this Agreement.
11.3 Capital Adequacy. If Congress or any Participant shall
reasonably determine that the application, adoption or phase-in of any law,
rule, regulation, directive, interpretation, treaty or guideline regarding
capital adequacy, or any change therein or in the interpretation or
administration thereof, whether or not having the force of law (including,
without limitation, application of changes to Regulation H and Regulation Y of
the Federal Reserve Board issued by the Federal Reserve Board on January 19,
1989 and regulations of the Comptroller of
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the Currency, Department of the Treasury, 12 CFR Part 3, Appendix A, issued by
the Comptroller of the Currency on January 27, 1989) increases from that
required at closing the amount of capital required or expected to be maintained
by Congress or such Participant or any Person controlling such Person, and such
increase is based upon the existence of such Person's obligations hereunder and
other commitments of this type, then from time to time, within 10 days after
demand from such Person, Debtor shall pay to such Person such amount or amounts
as will compensate such Person or such controlling Person, as the case may be,
for such increased capital requirement. The determination of any amount to be
paid by Debtor under this Section 11.3 shall take into consideration the
policies of Congress or such Participant or any Person controlling Congress or
such Participant with respect to capital adequacy and shall be based upon any
reasonable averaging, attribution and allocation methods. A certificate of the
applicable Person setting forth the amount or amounts as shall be necessary to
compensate such Person as specified in this Section 11.3 shall be delivered to
Debtor and shall be conclusive in the absence of manifest error. If Debtor so
requests, Congress shall use its best efforts to replace any Participant who
makes a demand for payment pursuant to this Section 11.3, provided that Debtor
shall have made such request no later than 90 days following Debtor's receipt
of such demand for payment.
11.4 Benefits of Agreement. Debtor agrees that the
provisions of this Section 11 are for the express benefit of Congress and the
Participants and such provisions may be enforced by Congress on behalf of such
Participants.
SECTION 12. MISCELLANEOUS.
12.1 GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF
JURY TRIAL; WAIVER OF DAMAGES.
(a) THIS AGREEMENT AND, UNLESS OTHERWISE EXPRESSLY STATED,
EACH LOAN DOCUMENT TO WHICH DEBTOR IS A PARTY (COLLECTIVELY THE "AGREEMENTS")
SHALL BE GOVERNED BY AND INTERPRETED UNDER THE INTERNAL LAWS (AS OPPOSED TO
CONFLICTS OF LAWS PROVISIONS) AND DECISIONS OF THE STATE OF ILLINOIS, AND ANY
DISPUTE ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN DEBTOR AND CONGRESS IN CONNECTION WITH THE
AGREEMENTS AND WHETHER ARISING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE
RESOLVED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF
LAWS PROVISIONS) AND DECISIONS OF THE STATE OF ILLINOIS.
(b) EXCEPT AS PROVIDED IN THE NEXT PARAGRAPH, CONGRESS BY
ITS ACCEPTANCE HEREOF AND DEBTOR AGREE THAT ALL DISPUTES BETWEEN THEM ARISING
OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP
ESTABLISHED BETWEEN THEM IN CONNECTION WITH THE AGREEMENTS, AND WHETHER ARISING
IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE OR
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FEDERAL COURTS LOCATED IN CHICAGO, ILLINOIS, BUT CONGRESS BY ITS ACCEPTANCE
HEREOF AND DEBTOR ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
HEARD BY A COURT LOCATED OUTSIDE OF CHICAGO, ILLINOIS. IN ANY SUCH DISPUTE,
DEBTOR WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT
CONSIDERING SUCH DISPUTE INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE
LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS.
(c) DEBTOR AGREES THAT CONGRESS SHALL HAVE THE RIGHT, TO
THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST DEBTOR OR ANY
COLLATERAL IN A COURT IN ANY LOCATION REASONABLY SELECTED IN GOOD FAITH TO
ENABLE CONGRESS TO REALIZE ON ANY COLLATERAL, OR TO ENFORCE A JUDGMENT OR OTHER
COURT ORDER ENTERED IN FAVOR OF CONGRESS. DEBTOR AGREES THAT IT WILL NOT
ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY SUCH PROCEEDING BROUGHT BY CONGRESS
(OUTSIDE OF COURTS LOCATED IN CHICAGO) TO REALIZE ON ANY COLLATERAL OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF CONGRESS. TO THE EXTENT
THAT CONGRESS PROCEEDS WITH ANY DISPUTE IN A COURT LOCATED IN NEW YORK,
CALIFORNIA OR ILLINOIS, DEBTOR WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE
LOCATION OF THE COURT IN WHICH CONGRESS HAS COMMENCED A PROCEEDING DESCRIBED IN
THIS PARAGRAPH INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF
VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS.
(d) CONGRESS BY ITS ACCEPTANCE HEREOF AND DEBTOR EACH
WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER
SOUNDING IN CONTRACT, TORT, OR OTHERWISE ARISING OUT OF, CONNECTED WITH,
RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. INSTEAD, ANY
DISPUTES RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL WITHOUT A JURY.
(e) DEBTOR HEREBY IRREVOCABLY DESIGNATES CT CORPORATION
SYSTEM, CHICAGO, ILLINOIS, AS THE DESIGNEE, APPOINTEE AND AGENT OF DEBTOR TO
RECEIVE, FOR AND ON BEHALF OF DEBTOR, SERVICE OF PROCESS IN SUCH RESPECTIVE
JURISDICTIONS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT
OR ANY DOCUMENTS RELATED HERETO. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS
SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY MAIL TO DEBTOR AT ITS
ADDRESS SET FORTH IN THIS AGREEMENT, BUT THE FAILURE OF DEBTOR TO RECEIVE SUCH
COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. DEBTOR FURTHER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO DEBTOR AT ITS SAID ADDRESS,
SUCH SERVICE TO BECOME EFFECTIVE FOUR DAYS AFTER SUCH MAILING.
(f) NOTHING HEREIN SHALL AFFECT THE RIGHT OF CONGRESS, OR
ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER
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PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST
DEBTOR IN ANY OTHER JURISDICTION.
(g) DEBTOR (I) AGREES THAT CONGRESS SHALL NOT HAVE ANY
LIABILITY TO DEBTOR (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) FOR
LOSSES SUFFERED BY DEBTOR IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY
RELATED TO, THE TRANSACTIONS CONTEMPLATED AND THE RELATIONSHIP ESTABLISHED BY
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, OR ANY ACT, OMISSION OR EVENT
OCCURRING IN CONNECTION HEREWITH, UNLESS IT IS DETERMINED BY A JUDGMENT OF A
COURT THAT IS BINDING ON CONGRESS (WHICH JUDGMENT SHALL BE FINAL AND NOT
SUBJECT TO REVIEW ON APPEAL), THAT SUCH LOSSES WERE THE RESULT OF ACTS OR
OMISSIONS ON THE PART OF CONGRESS CONSTITUTING WILLFUL MISCONDUCT OR KNOWING
VIOLATIONS OF LAW AND (II) WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY
CLAIM AGAINST CONGRESS (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE),
EXCEPT A CLAIM BASED UPON WILLFUL MISCONDUCT OR KNOWING VIOLATIONS OF LAW.
WHETHER OR NOT SUCH DAMAGES ARE RELATED TO A CLAIM THAT IS SUBJECT TO THE
WAIVER EFFECTED ABOVE AND WHETHER OR NOT SUCH WAIVER IS EFFECTIVE, CONGRESS
SHALL NOT HAVE ANY LIABILITY WITH RESPECT TO, AND DEBTOR HEREBY WAIVES,
RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR, ANY SPECIAL, INDIRECT,
CONSEQUENTIAL OR PUNITIVE DAMAGES SUFFERED BY DEBTOR IN CONNECTION WITH,
ARISING OUT OF, OR IN ANY WAY RELATED TO THE TRANSACTIONS CONTEMPLATED OR THE
RELATIONSHIP ESTABLISHED BY THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, OR ANY
ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS
DETERMINED BY A JUDGMENT OF A COURT THAT IS BINDING ON CONGRESS (WHICH JUDGMENT
SHALL BE FINAL AND NOT SUBJECT TO REVIEW ON APPEAL), THAT SUCH DAMAGES WERE THE
RESULT OF ACTS OR OMISSIONS ON THE PART OF CONGRESS CONSTITUTING WILLFUL
MISCONDUCT OR KNOWING VIOLATIONS OF LAW.
12.2 Entire Agreement. This Agreement, any supplement
hereto, the other Loan Documents and any agreements, instruments or documents
delivered or to be delivered in connection herewith or therewith represent the
parties' entire agreement and understanding concerning the subject matter
hereof and thereof, and supersede all other prior and contemporaneous
agreements, understandings, negotiations and discussions, representations,
warranties, commitments, offers, contracts, whether oral or written.
12.3 Modification of Agreement. No provision hereof shall be
modified or amended orally or by course of conduct but only by a written
instrument expressly referring hereto signed by both parties.
12.4 Reimbursement for Congress' Costs. Upon Congress'
request Debtor shall pay to Congress, or reimburse Congress for, (i) all sums,
costs and expenses (including the reasonable fees and disbursements of counsel
to Congress) which Congress may pay or incur in connection with or related to
the
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negotiation, preparation and consummation of this Agreement, the other Loan
Documents and all other agreements, instruments and documents in connection
herewith and therewith, and the transactions contemplated hereunder and
thereunder, (ii) the reasonable fees and disbursements of counsel to Congress
relating to any amendments, supplements, consents or modifications which may be
hereafter made or entered into in respect hereof or thereof, (iii) filing fees
and taxes, title insurance premiums, recording taxes, expenses for searches,
expenses heretofore incurred by Congress during the course of periodic field
examinations of the Collateral and Debtor's operations, wire transfer fees and
check dishonor fees, (iv) the reasonable fees and disbursements of counsel to
Congress in connection with the ongoing interpretation and administration of
this Agreement (including, without limitation, field audit expenses billed at
$500 per day for field and office time plus out-of-pocket disbursements related
to travel by the auditors), the other Loan Documents and all other agreements,
instruments and documents in connection herewith and therewith, and the
transactions contemplated hereunder and thereunder, and (v) all sums, costs and
expenses (including the reasonable fees and disbursements of counsel to
Congress) which Congress may pay or incur in connection with or related to the
enforcement of this Agreement, the other Loan Documents and all other
agreements, instruments and documents in connection herewith and therewith, and
all efforts made to defend, protect or enforce the security interest granted
herein or therein or in enforcing payment of the Obligations, including without
limitation, all fees and expenses for the service and filing of papers,
premiums on bonds and undertakings, fees of marshals, sheriffs, custodians,
auctioneers and others, travel expenses and all court costs and collection
charges, all of which shall be part of the Obligations and shall accrue
interest after demand thereof at a rate equal to the highest rate then payable
on any of the Obligations.
12.5 Notices. All notices, requests and demands to or upon
the respective parties hereto shall be deemed to have been duly given or made:
if by hand, telex, telegram or facsimile, immediately upon sending; if by
Federal Express, Express Mail or any other overnight delivery service, one (1)
day after dispatch; and if mailed by certified mail, return receipt requested,
five (5) days after mailing. All notices, requests and demands are to be given
or made to the respective parties at the addresses (or to such other addresses
as either party may designate by notice in accordance with the provisions of
this paragraph) set forth herein.
12.6 Power of Attorney. Debtor hereby constitutes Congress
and Congress' agent and any designee, as Debtor's attorney-in-fact, at Debtor's
own cost and expense, to exercise at any time all or any of the following
powers which, being coupled with an interest, shall be irrevocable until all
Obligations have been paid in full: (a) to receive, take,
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endorse, assign, deliver, accept and deposit any and all checks, notes, drafts,
remittances and other instruments and documents relating to the Collateral; (b)
on or after the occurrence and during the continuance of an Event of Default to
receive, open and dispose of all mail addressed to Debtor and to notify postal
authorities to change the address for delivery thereof to such address as
Congress may designate; (c) on or after the occurrence and during the
continuance of an Event of Default to transmit to Account Debtors notice of
Congress' interest therein and to request from such Account Debtors at any
time, in Congress' or Debtor's name or that of Congress' designees, information
concerning the Accounts and the amounts owing thereon; (d) on or after the
occurrence and during the continuance of an Event of Default, to notify Account
Debtors to make payment directly to Congress; (e) on or after the occurrence
and during the continuance of an Event of Default, to take or bring, in
Congress' or Debtor's name, all steps, actions, suits or proceedings deemed by
you necessary or desirable to effect collection of the Collateral; and (f) to
execute in Debtor's name and on Debtor's behalf any UCC financing statements or
amendments thereto. Debtor hereby releases Congress and its officers,
employees and designees from any liability arising from any act or acts under
this Agreement or in furtherance thereof, whether of omission or commission,
and whether based upon any error of judgment or mistake of law or fact, except
to the extent that it is finally determined by a court of competent
jurisdiction that such liability shall have resulted from their own fraud or
gross negligence.
12.7 Waiver of Notice, Hearing and Bond. Debtor waives all
rights of notice and hearing of any kind prior to the exercise by Congress of
its rights from and after the occurrence of an Event of Default to repossess
the Collateral with judicial process or to replevy, attach or levy upon the
Collateral, real property, or other security for the Obligations. Debtor
waives the posting of any bond otherwise required of Congress in connection
with any judicial process or proceeding to obtain possession of, replevy,
attach or levy upon Collateral, real property, or other security for the
Obligations, to enforce any judgment or other court order entered in favor of
Congress, or to enforce by specific performance, temporary restraining order,
preliminary or permanent injunction, this Agreement or any other agreement or
document between Congress and Debtor.
12.8 Advice of Counsel. Debtor represents to Congress that
it has discussed this Agreement and the other Loan Documents with Debtor's
lawyers.
12.9 Confidentiality. Congress shall hold all information
with respect to Debtor or any Subsidiary that is obtained pursuant to or in
connection with this Agreement (including, without limitation, the Customer
Sales Reports) in accordance with its customary procedures for handling
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confidential information of such nature and in accordance with safe and sound
banking practices; it being understood that Congress may disclose such
information (a) to any of its examiners, Affiliates, outside auditors, counsel
and other professional advisors in connection with this Agreement, (b) to any
actual or prospective Participant, (c) as required or requested by any
governmental agency or representative thereof or pursuant to legal process or
(d) in connection with any action by Congress to enforce this Agreement or to
assert, defend or substantiate any rights of Congress hereunder; provided,
however, that
(a) unless specifically prohibited by applicable law or
court order, Congress shall notify Debtor of any request by any governmental
agency or representative thereof (other than any such request in connection
with an examination of the financial condition of Congress by such governmental
agency) for disclosure of any such information prior to disclosure of such
information; and
(b) prior to any disclosure by Congress to an actual or
prospective Participant (except those Participants participating in the
Advances on the date of the Rollover Advance, in which case prior to the date
of the Rollover Advance), Congress shall require such Participant to agree in
writing
(i) to be bound by this Section 12.9; and
(ii) to require any other Person to whom such Participant
discloses such information to be similarly bound by this Section 12.9.
Notwithstanding the foregoing, Congress may disclose any information that (i)
becomes publicly available other than as a result of a breach of this
Agreement, (ii) becomes available to Congress on a nonconfidential basis from a
source other than Debtor or a Subsidiary and not in contravention of any other
confidentiality obligations of which Congress has actual knowledge or (iii) was
available to Congress on a nonconfidential basis prior to its disclosure to
Congress by Debtor or a Subsidiary.
12.10 Survival. All representations and warranties contained
in this Agreement shall survive the execution and delivery of this Agreement.
Notwithstanding any investigation by Congress, all covenants, agreements,
representations and warranties made herein by Debtor shall be deemed to be
material to and to have been relied upon by Congress. Any indemnification that
Debtor has granted to Congress in this Agreement and in connection therewith
shall survive the execution, delivery and termination of this Agreement.
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12.11 Participations. Congress shall be entitled to sell
Participations in the Advances without the consent of Debtor. Congress agrees
that any agreement between Congress and any such Participants in respect of such
Participations shall not restrict Congress' right to agree to any immaterial
amendment, supplement, waiver or modification to this Agreement or any other
Loan Document.
12.12 Severability. If any part of this Agreement is invalid
or in contravention of any applicable law or regulation, such part or provision
shall be severable without affecting the validity of any other part or
provision of this Agreement.
12.13 No Third Party Beneficiaries. Nothing expressed or
implied in this Agreement is intended, or shall be construed, to confer upon or
give any Person, other than the signatories to this Agreement and the
Participants, any rights or remedies under or by reason of this Agreement. Any
benefit conferred to any other Person which is not a signatory to this
Agreement or a Participant is incidental and unintended.
12.14 Existing Agreements Superseded. As set forth in
Section 1.2 hereof, the Original Agreement is superseded by this Agreement,
which has been executed in renewal, amendment, restatement and modification of
the obligations under the Original Agreement.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered as of the day and year first above written.
LEWIS GALOOB TOYS, INC.
By:
---------------------------
Name:
-------------------------
Title:
------------------------
ATTEST:
By:
-------------------------
Name:
-----------------------
Title:
----------------------
CONGRESS FINANCIAL CORPORATION
(CENTRAL)
By:
---------------------------
Name:
-------------------------
Title:
------------------------
<PAGE> 1
EXHIBIT 10.9[7]
FOURTH AMENDMENT TO LICENSE AGREEMENT
THIS AGREEMENT is made and entered into as of this 14th day of
October, 1994 and is by and between
LEWIS GALOOB TOYS, INC.
a corporation organized and existing under the laws of the
State of Delaware and having its principal office at 500
Forbes Boulevard, South San Francisco, California 94080
("Galoob"),
and
CODEMASTERS SOFTWARE COMPANY, LTD.,
a corporation organized and existing under the laws of the
United Kingdom and having its principal offices at Lower Farm
House, Stoneythorpe, Southam, Warwick CV33 ODL, England
("Codemasters"),
and
CAMERICA CORPORATION, by Deloitte & Touche Inc., in its
capacity as Receiver and Manager of the assets and
undertakings of Camerica Corporation and not in its personal
capacity, ("Camerica") (Codemasters and Camerica being
hereinafter collectively referred to as "Licensors").
and
DELOITTE & TOUCHE INC., a corporation organized and existing
under the laws of Canada and having its principal office at
390 Bay Street, Suite 2400, Toronto, Ontario, Canada
("Deloitte")
WHEREAS:
(a) Galoob, Codemasters and Camerica entered into a License
Agreement dated May 4, 1990 (hereinafter referred to as the
"License Agreement");
(b) Galoob, Codemasters and Camerica entered into an amendment to
the License Agreement dated June (undated) 1991 (hereinafter
referred to as the "First Amendment to License Agreement");
(c) Galoob, Codemasters and Camerica entered into a
second amendment to the License Agreement date
December 23, 1991 (hereinafter referred to as the
"Second Amendment to License Agreement");
<PAGE> 2
(d) Galoob, Codemasters and Camerica entered into a third
amendment to the License Agreement dated November 4, 1992
(hereinafter referred to as the "Third Amendment to License
Agreement") (collectively the agreements referenced in (a)
through (d) being referred to as "License Agreement, as
amended"); and
(e) Galoob, Codemasters and Camerica want to enter into this
Fourth Amendment to License Agreement, to resolve certain
royalty-related disputes and other matters on the terms
hereinafter set out.
NOW THEREFORE, in consideration of the mutual promises and
covenants hereinafter set forth, and the payment by each of the parties to the
other of the sum of Ten Dollars ($10.00) and other good and valuable
consideration (the receipt of which consideration is hereby acknowledged by
each of the parties), the parties mutually agree as follows:
ARTICLE 1
INTERPRETATION
1.1 Whenever used in this Fourth Amendment to License Agreement or
the attachments hereto, unless something in the subject matter or context is
inconsistent therewith, capitalized terms and other terms which are not
specifically defined herein will have the meanings ascribed to them in the
License Agreement, as amended.
1.2 The division of this Agreement into Articles and Sections and
the insertion of headings are for convenience of reference only and shall not
affect the construction or interpretation of this Agreement. The terms "this
Agreement", "hereof", "hereunder" and similar expressions refer to this
Agreement and not to any particular Article or Section or other portion hereof
and include any agreement supplemental hereto. Unless something in the subject
matter or context is inconsistent therewith, references herein to Articles or
Sections are to Articles or Sections of this Agreement.
ARTICLE 2
SETTLEMENT OF ROYALTY DISPUTES
2.1 The Licensors hereto have disputed the method by which Galoob
has determined the Initial Published Price of its Nintendo Super NES Derivative
Work and Sega Genesis Derivative Work for purposes of royalty calculations and
payments under the License Agreement, as amended. Pursuant to the calculations
shown on Schedule "A" (which is attached hereto and made a part hereof), it is
agreed that the total amount in dispute concerning this Initial Published Price
issue is U.S. $282,000.00. In full and final settlement of this dispute, it is
agreed that Galoob will be entitled to retain 25% of this amount, equalling
U.S. $71,000.00, and Galoob will pay Codemasters and Camerica an aggregate
amount of 75%, equalling U.S. $211,500.00 as follows: Codemasters 70% thereof,
equalling U.S. $148,050.00; and Camerica 30% thereof,
<PAGE> 3
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equalling U.S. $63,450.00. Commencing with the royalties calculated and
determined for the entirety of the third calendar quarter of 1994 and for the
balance of the term of the License Agreement, as amended, it is agreed that
Galoob will use its actual published average list price of each Game Genie
Derivative Work sold in the first two calendar quarters during which such Game
Genie Derivative Work is or was first commercially distributed for the purposes
of determining the Initial Published Price and royalty calculations. It is
agreed that the Initial Published Price for the Super NES, Sega Genesis, Game
Boy and Game Gear Derivative Works are the following respectively, namely,
$44.99, $44.99, $29.99 and $29.99.
2.2 (a) The parties have also disputed whether or not Galoob
has the right to withhold certain royalties including those paid to Sega of
America, Inc. under Galoob's license for the Sega Genesis Derivative Work, from
the royalties otherwise due and payable under the License Agreement, as
amended, to Codemasters and Camerica pursuant to Section 4.4 of the License
Agreement. The parties agree that, as demonstrated on Schedule "A", the total
amount of the certain Sega royalties withheld equals U.S. $666,200.00. In
full and final settlement of this dispute, it is agreed that Galoob will be
entitled to retain 60% of this amount, equalling U.S. $399,720.00, and Galoob
will pay Codemasters and Camerica an aggregate amount of 40%, equalling U.S.
$266,480.00 as follows: Codemasters 70% thereof, equalling U.S. $186,536.00;
and Camerica 30% thereof, equalling U.S. $79,944.00.
(b) Section 4.4 of the License Agreement is deleted and
is replaced with the following:
Commencing with the royalties calculated and determined for the
entirety of the third calendar quarter of 1994 and for the balance of
the term of the License Agreement, as amended, and in the absence of
any agreement between the parties hereto to the contrary, which Galoob
can solicit from the Licensors in good faith, it is agreed as follows:
the amounts of all royalties payable to Licensors under this License
Agreement, as amended, for any Derivative Work, will be reduced by the
amounts of any and all royalty payments made by Galoob to bona fide
arm's length third parties in connection with such Derivative Works
for the use of third party intellectual property rights relating to
the manufacture and distribution of the Derivative Works up to a
maximum aggregate amount per unit of the lesser of (i) fifty percent
(50%) of the royalty paid to said third party/third parties for each
unit manufactured and distributed, (ii) 87.5 cents (U.S. $0.875) for
each unit manufactured and distributed, or (iii) the amount of the
royalty otherwise payable to Licensors for each unit manufactured and
distributed.
(c) Galoob represents and warrants to Codemasters and
Camerica that pursuant to Galoob's license for the Sega Genesis Derivative Work
with Sega of America, Inc, ("Sega") that Galoob is required to pay to Sega
royalties in connection with such Derivative Work for the use of Sega
intellectual property rights relating to the manufacture and distribution of
the Sega Genesis Derivative Work. Based on the forgoing, and subject to
<PAGE> 4
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the limits set forth in Section 2.2(b) above, Codemasters and Camerica
acknowledge Galoob's right to make deductions from royalties paid hereunder in
respect of such payments to Sega.
2.3 The Licensors hereto have claimed royalties from Galoob in
connection with the sale and collateral merchandising by Galoob under Section
2.2(c) of the License Agreement of codebooks. In full and final settlement of
this dispute, it is agreed that the last sentence of Section 2.2(c) of the
License Agreement is deleted and is replaced with the following:
Commencing with the royalties calculated and determined for the
entirety of the third calendar quarter of 1994 and for the balance of
the term of the License Agreement, as amended, and in the absence of
any agreement between the parties hereto to the contrary, it is agreed
that Galoob will pay Licensors a royalty calculated as follows: thirty
percent (30%) of the Net Profits of Galoob in connection with the sale
and collateral merchandising by Galoob of collateral merchandise
(including codebooks) related to the Items (which for the avoidance of
doubt includes the Game Genie and Derivative Works) such as collateral
merchandise that uses characters, trademarks, or copyrights related to
the Items or any Intellectual Property or Intellectual Property Rights
(except for Galoob Modifications) related thereto, in the Exclusive
Territory ("Collateral Merchandise"), sold or otherwise commercially
distributed by Galoob or any third party under license from Galoob, in
separate and independent payments in the following proportions:
Codemasters 60% and Camerica 40% in respect of Collateral Merchandise
for or related to the Game Genie and Codemasters 70% and Camerica 30%
in respect of Collateral Merchandise for or related to all other
Derivative Works. In this paragraph, the term "Net Profits" means the
gross revenue (including royalties and license fees from third
parties) received by Galoob (exclusive of tax) less actual costs
incurred by Galoob (including but not limited to costs of goods sold,
commissions and fees, and expenses to develop codes for inclusion
solely in codebooks to be sold as collateral merchandise, but not
including overhead) in connection with the collateral merchandising
activities referred to in this section.
2.4 Subject to Galoob's payment obligation in Section 2.9(b), each
of Codemasters and Camerica hereby jointly waive and release their rights, if
any, under the License Agreement, as amended, to the receipt of any interest on
or in connection with the payments by Galoob to the Licensors pursuant to
Sections 2.1, 2.2, 2.3 and 2.9, as well as the payment to Camerica of the U.S.
$345,757.00 amount pursuant to Section 2.6 below. Nothing herein shall,
however, waive or release any right of Licensors to interest on any other
payments that they are or may hereinafter become entitled to.
2.5 Galoob, Codemasters and Camerica agree that, other than as set
forth in Section 2.1, 2.2, 2.3 or 2.9, as of the date hereof, there are no
other open, disputed or unresolved royalty issues or issues in any way related
to the owing and/or the payment of royalties by Galoob to Codemasters and/or
Camerica up to and including the date of
<PAGE> 5
- 5 -
March 31, 1994, whether arising in the ordinary course of events under the
License Agreement, as amended, or pursuant to the royalty audit that was
undertaken by Ernst & Young on behalf of Codemasters during the months of
December 1993 and January 1994. In this regard, simultaneous with the execution
of this Fourth Amendment to License Agreement, Galoob, Codemasters and Camerica
have executed a Release Agreement in the form attached hereto as Exhibit "I"
which is made a part hereof.
2.6 Subject to Galoob's right to make deductions pursuant to
Section 5.2(d) of the License Agreement, as amended, from royalties due to
Licensors in respect of Costs incurred by Galoob in connection with the
Proceedings (including Costs incurred by it in respect of the trademark claims
therein) and to make deductions pursuant to Section 12.3 of the License
Agreement, as amended by Section 2.10 of the Second Amendment to License
Agreement in respect of Costs for which Licensors are responsible and fail to
re- imburse Galoob as required by the said Section, and subject to Galoob's
rights under Section 3.5 of the Second Amendment to License Agreement, the
parties agree that Galoob shall no longer have the right to withhold any
royalty payments in connection with the Proceedings under Section 5.2 or any
other provision of the License Agreement, as amended. All royalties withheld by
Galoob under Section 5.2(e) of the License Agreement, as amended, will be
released separately to Licensors in the proportions to which they are entitled
and in this regard, Galoob will wire transfer U.S. $345,757.00 to Camerica as
its share of said withholding, and Galoob hereby notifies Codemasters that it
no longer has an obligation to maintain letters of credit which were put in
place to cover the royalties that had otherwise been withheld by Galoob from
Codemasters, but upon creation of the letters of credit were subsequently paid
back to Codemasters. Galoob shall also co-operate and take all reasonable steps
requested by Codemasters or its bank to have such letters of credit cancelled.
2.7 Notwithstanding anything to the contrary in the License
Agreement, as amended, and except as expressly provided in this Fourth
Amendment to License Agreement, Galoob shall pay all amounts due to be paid to
Camerica and Codemasters under the License Agreement, as amended, or under
Article 2 hereof, by separate and independent payments, in accordance with the
Licensors' respective wire transfer instructions, in the following proportions:
Codemasters 60% and Camerica 40% for payments related to the Game Genie and
Codemasters 70% and Camerica 30% for payments related to all other Derivative
Works. Without limiting the generality of the forgoing, Licensors' entitlement
to 23% of any settlement or damage recovery under Section 3.5 of the Second
Amendment to License Agreement shall be paid in the following proportions:
Codemasters 60% and Camerica 40%. Licensors' obligation for the Expenses
referred to in that Section shall be apportioned as follows: Codemasters 60%
and Camerica 40%. Further, all amounts payable to Licensors under Article 5 of
the First Amendment to License Agreement in respect of the Proceedings,
including the Injunction Damages to which Licensors are entitled and the
amounts payable pursuant to Section 5.1(g) thereof relating to Attorney's Fees
and Costs, shall be paid in separate and independent payments to Codemasters
and Camerica in the following proportions: Codemasters 60% and Camerica 40%.
<PAGE> 6
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2.8 All payments due to Codemasters and Camerica under this
Article 2 shall be made by wire transfer, without deduction or set-off of any
kind, by no later than five (5) days following the execution of this Agreement
by the parties. For the avoidance of doubt, the amount due to Codemasters and
Camerica under this Article 2, as shown in Schedule A is as follows: to
Codemasters U.S. $2,618,286.40 ($2,388,885.46 plus $229,401.00); to Camerica
U.S. $1,829,764.3 ($1,747,107.44 plus $82,656.90). As shown in Schedule A the
said sums are the remainder after deducting from amounts payable hereunder of
withholding tax from the amount due to Camerica in the amount of U.S.
$204,593.61 and the adjustments described in Schedule A under the heading "1st
& 2nd QTR 1994 Royalty statements" totalling $156,738.00.
2.9 (a) The parties agree that Galoob has been paid by
Nintendo Injunction Damages (comprising the $15 million damage award plus
interest and related costs) in the total amount of U.S. $16,134,575.14.
Pursuant to Section 5.1(a) of the First Amendment to License Agreement, the
amount thereof owed by Galoob to the Licensors (the "Licensors Injunction
Damages") is as follows: to Codemasters - U.S. $1,336,955.89, and to Camerica -
U.S. $891,303.92. Pursuant to Section 5.1(b) of the First Amendment to License
Agreement the total actual amount withheld and that is owed to Licensors with
respect to Attorneys Fees and Costs as of the date hereof (the "Licensors
Attorney Fee Recovery") is U.S. $1,705,745.00, which amount is owed to
Licensors as follows: U.S. $1,023,447 to Codemasters and U.S. $682,298 to
Camerica. (In this Agreement the term "Licensors Bond Recovery" means the
Licensors Injunction Damages and the Licensors Attorney Fee Recovery and the
term "Licensor Entitlement" means the entitlement of Camerica and Codemasters,
as the case may be, to its share of the Licensors Bond Recovery).
(b) The parties hereto have disputed the date upon which
Galoob has had "unconditional receipt" of the Injunction Damages. In full and
final settlement of this dispute, it is agreed that Galoob has had
"unconditional receipt" of the Injunction Damages, and notwithstanding anything
to the contrary in Section 5.1 of the First Amendment to License Agreement,
Galoob shall pay each of Codemasters and Camerica it's Licensor Entitlement by
no later than five (5) days following the execution of this Agreement by the
parties. Galoob shall also pay to Codemasters and Camerica as interest on the
amounts due under Section 5.1, as follows: Codemasters U.S. $28,482.57; and
Camerica U.S. $23,158.13 . A per diem amount in the amount of U.S. $256.57 to
Codemasters and U.S. $208.61 to Camerica shall also be paid to each of
Codemasters and Camerica in the event the said Licensor Entitlements are not
paid as and when specified in this Section 2.9.
(c) The parties acknowledge and agree that upon the
payment to Camerica and Codemasters, as the case may be, of its Licensor
Entitlement, that such payment shall constitute full, final and complete
payment and satisfaction of such parties' rights and Galoob's obligations with
regard to the Injunction Damages and Attorneys Fees and Costs to which such
party is entitled under Article 5 of the First Amendment to License Agreement
and any amounts withheld from royalties by Galoob in connection with the
Proceedings including but without limitation Section 2.7 of the Second
Amendment to License Agreement
<PAGE> 7
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and Section 5.2 of the License Agreement up to the date hereof, provided that
nothing shall release Galoob from any payment obligations it may have for any
additional Injunction Damages or attorneys fees and costs other than those
described in Section 2.9(a), if any, it receives from Nintendo, or from any
obligation of Galoob under Section 3.5 of the Second Amendment to License
Agreement.
(d) Galoob represents and warrants to Codemasters and Camerica
that the Attorneys Fees and Costs (including all attorneys and expert witness
fees and other costs which Galoob has paid to its attorneys, Galoob has been
billed by its attorneys or expects to pay within ninety (90) days, or which
Galoob is or may become liable to pay its attorneys for services rendered up to
the date hereof) and for which, pursuant to Section 12.3 of the License
Agreement, as amended by Section 2.10 of the Second Amendment to License
Agreement Licensors were equally liable with Galoob, is U.S. $3,446,489.00.
Galoob acknowledges that sum of U.S. $3,446,489.00 includes the sum of U.S.
$35,000.00, which sum represents Attorneys Fees and Costs which Galoob expects
to pay within ninety (90) days.
2.10 Camerica acknowledges and agrees that Galoob may deduct from
payments due under this Fourth Amendment to License Agreement amounts equal to
any withholding tax which is exigible in respect of amounts payable hereunder,
but not to exceed U.S. $204,593.61, provided that Galoob shall remit the
applicable amount to the relevant taxing authorities and shall furnish to
Camerica particulars of such withholding and remittance in sufficient detail to
enable Camerica to substantiate a claim for a foreign tax credit in respect
thereof.
2.11 The parties agree that in the event Codemasters or Camerica (a
"Defaulting Licensor") shall fail to make any payment it is required to make to
Galoob under the License Agreement, as amended, including making any payment to
Galoob pursuant to Section 12.3 of the License Agreement, as amended by Section
2.10 of the Second Amendment to License Agreement, and the other such party
(the "Paying Licensor") shall make such payment to Galoob or shall have
deducted from it's share of royalties or other amounts due under the License
Agreement, as amended, an amount in respect of such debt (the amount so paid or
deducted from royalties shall be referred to herein as the "Debt Obligation"),
then the Paying Licensor shall have the right to be repaid the Debt Obligation
by the Defaulting Licensor. In addition, upon giving no less than five (5)
business days notice in writing to Galoob and the Defaulting Licensor, the
Paying Licensor shall have the right to receive an amount equal to the Debt
Obligation from royalties and other amounts due and payable to the Defaulting
Licensor by Galoob under the License Agreement, as amended. Provided however,
Galoob shall not make such payment to the Paying Licensor in the event the
Defaulting Licensor, within the five (5) business day period, notifies Galoob
in writing that it disputes the Debt Obligation and provides Galoob with
documentary proof that the Debt Obligation has been satisfied. The parties
agree that Galoob shall not be liable to the Defaulting Licensor for any such
payment made to the Paying Licensor in good faith. This provision shall not
apply to
<PAGE> 8
- 8 -
the payments to be made by Galoob to Codemasters and Camerica herein set out in
Schedule A.
ARTICLE 3
MISCELLANEOUS PROVISIONS
3.1 Each of the parties represents, warrants and covenants to the
other parties that it has the requisite power and authority to execute and
deliver this Agreement. Deloitte represents, warrants and covenants to Galoob
and Codemasters that it is and has been duly appointed as the Receiver and
Manager of Camerica Corporation and that it has the requisite power and
authority to execute and deliver this Agreement and the attached mutual release
and to bind Camerica Corporation hereto and thereto.
3.2 In the event that there is any inconsistency between the
provisions of this Fourth Amendment to License Agreement and either the License
Agreement or the First Amendment to License Agreement, the Second Amendment to
License Agreement, or the Third Amendment to License Agreement, then and in
that event the provisions of this Fourth Amendment to License Agreement shall
prevail.
3.3 This Fourth Amendment to License Agreement can only be
modified by an Agreement in writing signed by Galoob and Licensors.
3.4 This Fourth Amendment to License Agreement will be governed
by, and construed in accordance with, the laws of the State of California. The
parties hereto hereby submit to the exclusive jurisdiction of the United States
District Court for the Northern District of California, the Superior Court for
the County of San Francisco, California, or such other court or administrative
forums in or around San Francisco, California as may hear claims arising under
this Fourth Amendment to License Agreement (the "Court"). The parties hereto
consent to the personal jurisdiction of the Court, and expressly waive any
right or claim of forum non conveniens and any similar rule of law related to
this Fourth Amendment to License Agreement.
3.5 This Fourth Amendment to License Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original and
all of which taken together shall be deemed to constitute one and the same
instrument. Each party hereto will receive by delivery or facsimile
transmission a duplicate original of the Fourth Amendment to License Agreement
executed by each party, and each party agrees that the delivery of the Fourth
Amendment to License Agreement by facsimile transmission will be deemed to be
an original of the Fourth Amendment to License Agreement so transmitted.
<PAGE> 9
- 9 -
3.6 This Fourth Amendment to License Agreement and the License
Agreement, as amended, constitute the entire agreement between Licensors and
Galoob pertaining to the subject matter hereof and supersede all prior and
contemporaneous agreements, understandings, negotiations and discussions,
whether oral or written, pertaining to the subject matter hereof, but nothing
herein shall affect the letter agreements related to the Micro-Machines License
dated October 9, 1992 and March 24, 1994, the Game Boy Game Genie and
Co-Operative Manufacturing Agreement dated the 25th day of June, 1992 or the
European License Agreement between Codemasters and Galoob.
LEWIS GALOOB TOYS INC.
/s/ Virginia Yoshida By: /s/ William G. Catron
--------------------- ---------------------------
Witness Name: William G. Catron
Title: Executive Vice President
Date: October 14, 1994
CODEMASTERS SOFTWARE COMPANY, LTD.
/s/ Marion Mae Varish By: /s/ David Darling
--------------------- ---------------------------
Witness Name: David Darling
Title: Managing Director
Date: October 14, 1994
CAMERICA CORPORATION, BY ITS RECEIVER
AND MANAGER DELOITTE & TOUCHE INC.
/s/ Paul Denton By: /s/ G. S. MacLeod
--------------------- ---------------------------
Witness Name: G. S. MacLeod
Title: Senior Vice President
Date: October 14, 1994
DELOITTE & TOUCHE INC.,
/s/ Paul Denton By: /s/ G. S. MacLeod
--------------------- ---------------------------
Name: G. S. MacLeod
Title: Senior Vice President
Date: October 14, 1994
<PAGE> 10
EXHIBIT "I"
MUTUAL RELEASE
This Mutual Release is entered into this October 14th, 1994 among Lewis Galoob
Toys, Inc., ("Galoob"), Codemasters Software Company, Ltd. ("Codemasters"), and
Camerica Corporation ("Camerica").
In consideration of the mutual covenants contained herein, Codemasters,
Camerica and Galoob hereby agree as follows:
1. Mutual Release
Except for the obligations and rights of Camerica, Codemasters and
Galoob otherwise expressed or retained in this Mutual Release or in the Fourth
Amendment to License Agreement, Codemasters and Camerica release and forever
discharge Galoob and its employees, attorneys, officers, directors,
shareholders, partners, and agents, and Galoob releases and forever discharges
Codemasters and Camerica and their employees, attorneys officers, directors,
shareholders, partners and agents, from any and all known claims, demands,
obligations, and causes of action of any nature whatsoever, whether based on a
tort, contract, statutory, or other theory of recovery, and whether for
compensatory, punitive, statutory, or other form of damages or relief (legal or
equitable) which exists as of the date of this mutual release arising out of or
in any way connected with or resulted from (i) the calculation, methodology,
determination and/or payment of royalties by Galoob under the License
Agreement, as amended, for the period of time up to and through March 31, 1994,
or (ii) the royalty audit that was undertaken by Ernst & Young on behalf of
Codemasters during the months of December, 1993 and January, 1994.
Notwithstanding the foregoing, (i) Camerica, Codemasters and Galoob retain all
of their rights under the License Agreement, as amended in connection with and
to receive royalties as of April 1, 1994 and thereafter, and to audit pursuant
to section 6.2(a) of the License Agreement the amount of such royalties and
deductions on various products for said time period and to assert rights to
<PAGE> 11
- 2 -
additional royalties based on such audits, and (ii) the parties retain all
future rights relating to the License Agreement, as amended, the Fourth
Amendment to License Agreement and the European License Agreement dated the
23rd day of December, 1991.
LEWIS GALOOB TOYS, INC.
/s/ Virginia Yoshida By: /s/ William G. Catron
--------------------- ---------------------------
Witness
CODEMASTERS SOFTWARE COMPANY, LTD.
/s/ Marion Mae Varish By: /s/ David Darling
--------------------- ---------------------------
Witness
CAMERICA CORPORATION, by Deloitte &
Touche Inc., in its capacity as Receiver and Manager of the assets and
undertakings of Camerica Corporation and not in its personal capacity
/s/ David Denton By: /s/ G. S. MacLeod
--------------------- ---------------------------
Witness
<PAGE> 12
Schedule A
FOURTH AMENDMENT TO LICENSE AGREEMENT
<TABLE>
<CAPTION>
LICENSORS CODEMASTERS CAMERICA
SHARE DOLLARS PERCENT DOLLARS PERCENT
------------ -------------------- --------------------
<S> <C> <C> <C> <C> <C>
PAYMENT UPON FULLY EXECUTED
FOURTH AMENDMENT
2.1 Initial Published price $211,500.00 $148,050.00 70.0% $63,450.00 30.0%
2.2 Third party royalty offset $266,480.00 $186,536.00 70.0% $79,944.00 30.0%
1st & 2nd QTR 1994 Royalty statements
NES format ($23,939.00) ($14,363.00) 60.0% ($9,576.00) 40.0%
All others formats ($65,904.00) ($46,134.00) 70.0% ($19,770.00) 30.0%
Third party offset ($45,514.00) ($31,860.00) 70.0% ($13,654.00) 30.0%
Fenwick & West legal expens ($6,546.00) ($3,928.00) 60.0% ($2,618.00) 40.0%
Nintendo litigation expense ($14,835.00) ($8,901.00) 60.0% ($5,934.00) 40.0%
------------ ------------ -----------
SUB TOTAL ($156,738.00) ($105,185.00) ($51,553.00)
------------ ------------ -----------
TOTAL $321,242.00 $229,401.00 $91,841.00
2.10 Less tax withholding ($9,184.00) $0.00 ($9,184.10)
------------ ------------ -----------
@ 10% on Royalty Income
TOTAL NET OF TAX $312,058.00 $229,401.00 $82,656.90
============= ============= ==========
PAYMENT UPON FULLY EXECUTED FOURTH AMENDMENT
AND UNCONDITIONAL RECEIPT PER AGREEMENT
2.6 withheld per 5.2(e)(i) 20% $345,757.00 $0.00 0.0% $345,757.00 100.0%
2.9a 23% of excess* $2,228,259.81 $1,336,955.89 60.0% $891,303.92 40.0%
2.9a withhold due $1,705,745.00 $1,023,447.00 60.0% $682,298.00 40.0%
------------- ------------- -------------
SUBTOTAL $4,279,761.81 $2,360,402.89 $1,919,358.92
2.9b interest $51,640.70 $28,482.57 $23,158.13
------------- ------------- -------------
TOTAL $4,331,402.51 $2,388,885.46 $1,942,517.05
2.10 Less tax withholding ($195,409.61) $0.00 ($195,409.61)
@ 10% on Royalty & 15% on Interest
TOTAL NET OF TAX $4,135,992.90 $2,388,885.46 $1,747,107.44
============= ============= =============
* Includes impact of estimated future attorney fees of $35,000, which is subject
to final actual fees.
</TABLE>
<PAGE> 13
FOURTH AMENDMENT
TO LICENSE AGREEMENT
Schedule B
Nintendo Bond Recovery
Sharing of Bond Recovery - Article 5
<TABLE>
<CAPTION>
<S> <C> <C>
Injunction Damages $16,134,575.14
Less: Base Recovery $3,000,000.00
Attorney Fees and Costs (through 3/31/94) $3,411,489.00
Estimated Attorney Fees and Costs (after 3/31/94) $35,000.00
-------------
$ 6,446,489.00
Excess of Base Recovery and Attorney Fees $ 9,688,086.14
Due Licensor: 23% of Excess $2,228,259.81
(due within sixty days of unconditional receipt) -------------
Total Due LGT $13,906,315.33
==============
Withhold Due Licensor on amount equal up to 50% of legal fees(thru 3/31/94) $ 1,705,745.00
(due within sixty days of unconditional receipt)
Total Due Licensor (23% of Excess plus Withhold regarding legal fees) $ 3,934,004.81
==============
Net Proceeds to LGT after Total Due Licensor $12,200,570.33
(prior to dismissal of trademark infrigement case). ==============
Withhold Due Licensor on dismissal on trademark infrigement case $345,757.00
(only due to Camerica since cash already paid
to Codemaster with backing of letter of credit).
Net Proceeds to LGT after Total Due Licensor $11,854,813.33
(after dismissal of trademark infrigement case). ==============
</TABLE>
<PAGE> 1
EXHIBIT 11
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Primary Earnings:
-----------------
Net earnings (loss) applicable
to common shares ($000) $ 15,297 $ (14,051) $ (5,574)
=========== =========== ===========
Average shares of common stock
outstanding during the period 9,852,673 9,548,422 9,399,600
Add: Incremental shares from
assumed exercise of stock
options and warrants 258,439 - -
----------- ----------- -----------
10,111,112 9,548,422 9,399,600
=========== =========== ===========
Net earnings (loss)
per common share - primary $ 1.51 $ (1.47) $ (0.59)
=========== =========== ===========
Fully Diluted Earnings:
-----------------------
Net earnings (loss) applicable
to common shares ($000) $ 15,297 $ (14,051) $ (5,574)
Add: Preferred stock dividends:
Paid ($000) - - 782
In arrears ($000) 3,127 3,127 2,345
Add: Interest on Debentures ($000) 1,072 137 -
----------- ----------- -----------
$ 19,496 $ (10,787) $ (2,447)
=========== =========== ===========
Average shares of common stock
outstanding during the period 9,852,673 9,548,422 9,399,600
Add: Incremental shares from
assumed exercise of stock
options and warrants 261,458 236,825 -
Add: Shares issuable upon
assumed conversion of
Preferred Stock 2,180,148 2,180,148 2,180,148
Add: Shares issuable upon assumed
conversion of 8% Convertible
Subordinated Debentures, weighted 1,511,879 186,396 -
----------- ----------- -----------
13,806,158 12,151,791 11,579,748
=========== =========== ===========
Net earnings (loss)
per common share -
Fully Diluted $ 1.41 (A) (A)
=========== =========== ===========
</TABLE>
(A) Anti dilutive, therefore fully diluted earnings per share is same as primary
earnings per share, $(1.47) for 1993 and $(0.59) for 1992.
<PAGE> 1
EXHIBIT 12
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(in thousands, except ratios)
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net earnings (loss) $18,424 $(10,924) $(2,447) $(7,540) $(29,245)
Income tax 778 9 238 - -
------- -------- ------- ------- --------
Charge (credit) 19,202 (10,915) (2,209) (7,540) (29,245)
------- -------- ------- ------- --------
Fixed charges:
Interest expense 2,609 1,836 1,550 1,775 3,046
Portion of
rental expense 505 483 613 728 625
------- -------- ------- ------- --------
Total fixed charges 3,114 2,319 2,163 2,503 3,671
------- -------- ------- ------- --------
Earnings (loss) before
income taxes and fixed
charges $22,316 $ (8,596) $ (46) $(5,037) $(25,574)
======= ======== ======= ======= ========
Preferred dividends
requirements $ 3,127(B) $ 3,127(B) $ 3,127(B) $ 3,127 $ 3,127
Ratio of pretax income
to net income 1.04 1.00 1.00 1.00 1.00
------- -------- ------- ------- --------
Preferred dividends
factored 3,252 3,127 3,127 3,127 3,127
Total fixed charges 3,114 2,319 2,163 2,503 3,671
------- -------- ------- ------- --------
Total fixed charges and
preferred dividends $ 6,366 $ 5,446 $ 5,290 $ 5,630 $ 6,798
======= ======== ======= ======= ========
Ratio of earnings to
fixed charges and
preferred dividends 3.51 (A) (A) (A) (A)
======= ======== ======= ======= ========
</TABLE>
(A) Earnings are inadequate to cover fixed charges and preferred dividends in
1993, 1992, 1991 and 1990.
(B) Includes Preferred Stock dividends in arrears.
<PAGE> 1
EXHIBIT 22
SUBSIDIARIES OF THE COMPANY
Galco International Toys, N.V.
<PAGE> 1
EXHIBIT 24-1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-8 (No. 33-9393 and
No. 33-56004) and Form S-3 (No. 33-33640) of Lewis Galoob Toys, Inc. and its
subsidiaries of our report dated February 10, 1995 appearing on page F-1 of this
Form 10-K.
Price Waterhouse L.L.P.
San Francisco, California
March 29, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 2,225
<SECURITIES> 0
<RECEIVABLES> 65,757
<ALLOWANCES> 7,874
<INVENTORY> 16,824
<CURRENT-ASSETS> 90,803
<PP&E> 14,814
<DEPRECIATION> 6,414
<TOTAL-ASSETS> 100,766
<CURRENT-LIABILITIES> 37,584
<BONDS> 18,414
<COMMON> 101
36,790
0
<OTHER-SE> 7,877
<TOTAL-LIABILITY-AND-EQUITY> 100,766
<SALES> 178,792
<TOTAL-REVENUES> 0
<CGS> 104,592
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 64,878
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,609
<INCOME-PRETAX> 19,202
<INCOME-TAX> 778
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,424
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.41
</TABLE>
