<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
------------------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9599
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LEWIS GALOOB TOYS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1716574
- --------------------------------------------------------------------------------
(State or other jurisdiction of(I.R.S. Employer Identification Number)
incorporation or organization)
500 Forbes Boulevard, South San Francisco, California 94080
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 952-1678
--------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes No
----- ----
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Common stock, par value $.01, 10,059,639 as of March 31, 1995.
<PAGE> 2
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1 Page
<S> <C>
- Condensed Consolidated Balance Sheets 1
- Condensed Consolidated Statements of Operations 2
- Condensed Consolidated Statements of Cash Flows 3
- Notes to Condensed Consolidated Financial
Statements 4-6
Item 2
- Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-10
PART II - OTHER INFORMATION
Item 1
- Legal Proceedings 11
Item 3
- Defaults Upon Senior Securities 11
Item 6
- Exhibits and Reports on Form 8-K 11
SIGNATURE 12
</TABLE>
<PAGE> 3
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Audited)
March 31 March 31 December 31
ASSETS 1995 1994 1994
- ------ ----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,689 $ 1,542 $ 2,225
Accounts receivable, net 31,920 28,620 57,883
Inventories 16,959 12,097 16,824
Tooling and related costs 8,716 5,070 8,379
Prepaid expenses and other assets 14,998 8,367 5,492
------- ------- --------
TOTAL CURRENT ASSETS 74,282 55,696 90,803
LAND, BUILDING AND EQUIPMENT, NET 8,304 8,411 8,400
OTHER ASSETS 1,431 1,477 1,563
------- ------- --------
$84,017 $65,584 $100,766
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 5,131 $ 4,591 $ 6,971
Accounts payable 10,409 6,573 14,973
Accrued expenses 8,964 14,824 14,939
Income taxes payable 323 88 499
Current portion of long-term debt 207 206 202
------- ------- --------
TOTAL CURRENT LIABILITIES $25,034 $26,282 37,584
LONG-TERM DEBT 18,361 18,557 18,414
SHAREHOLDERS' EQUITY:
Preferred stock
Authorized 1,000,000 shares
Issued and outstanding 183,950
shares of $17 Convertible
Exchangeable Preferred Stock
at $200 liquidation value
per share 36,790 36,790 36,790
Common stock, par value $.01 per share
Authorized 50,000,000 shares
Issued and outstanding 10,059,639
shares, 9,613,357 shares and
10,055,089 shares 101 96 101
Additional paid-in capital 31,596 27,534 31,506
Retained earnings (deficit) (27,417) (43,253) (23,182)
Cumulative translation adjustment (448) (422) (447)
------- ------- --------
TOTAL SHAREHOLDERS' EQUITY 40,622 20,745 44,768
------- ------- --------
$84,017 $65,584 $100,766
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
1
<PAGE> 4
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended March 31
---------------------------
1995 1994
---- ----
<S> <C> <C>
Net revenues $33,341 $30,235
Costs of products sold 22,488 17,562
------- -------
Gross margin 10,853 12,673
------- -------
Operating expenses:
Advertising and promotion 4,304 5,963
Other selling and administrative 7,769 5,780
Research and development 2,336 2,055
------- -------
Total operating expenses 14,409 13,798
------- -------
Earnings (loss) from operations (3,556) (1,125)
Interest expense (650) (557)
Other income (expense), net 35 34
------- -------
Earnings (loss) before income taxes (4,171) (1,648)
Provision for income taxes - -
------- -------
Net earnings (loss) (4,171) (1,648)
Preferred stock dividends
in arrears 782 782
------- -------
Net earnings (loss) applicable
to common shares $(4,953) $(2,430)
======= =======
Common shares and common share
equivalents outstanding -
average 10,061 9,571
Net earnings (loss) per
common share $ (0.49) $ (0.25)
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE> 5
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended March 31
---------------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) $(4,171) $(1,648)
Adjustments to reconcile net earnings
(loss) to net cash (used in) provided by
operating activities:
Depreciation 138 168
Changes in assets and liabilities:
Accounts receivable 25,963 4,763
Inventories (135) 882
Tooling and related costs (337) (50)
Prepaid expenses and other assets (9,374) (149)
Accounts payable (4,564) (4,261)
Accrued expenses (5,970) (5,051)
Income taxes payable (176) (194)
------- -------
Net cash (used in) provided by
operating activities 1,374 (5,540)
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and
equipment, net (42) (17)
------- -------
Net cash (used in) provided by
investing activities (42) (17)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings under notes payable (1,840) 4,591
Repayments under long-term debt agreements (53) (48)
Proceeds from issuance of common stock 26 241
Other, net (1) (10)
------- -------
Net cash (used in) provided by
financing activities (1,868) 4,774
------- -------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (536) (783)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,225 2,325
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,689 $ 1,542
======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 6
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1995
(Unaudited)
NOTE A - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets as of March 31, 1995 and 1994 and the
condensed consolidated statements of operations for the three month periods
ended March 31, 1995 and 1994 and the condensed consolidated statements of cash
flows for the three month periods ended March 31, 1995 and 1994 have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
March 31, 1995 and 1994 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994. Certain amounts in the financial statements of prior years
have been reclassified to conform with the current year's presentation.
The results of operations for the three month periods ended March 31,
1995 and 1994 are not necessarily indicative of the operating results for the
full year.
NOTE B - CREDIT AGREEMENT
The Company was party to a loan and security agreement (the "Loan Agreement")
with Congress Financial Corporation (Central) (the "Lender") which made
available to the Company through March 31, 1995 a line of credit up to $30
million. Borrowing availability was determined by a formula based on accounts
receivable. The interest rate was prime rate plus 2%. In consideration for
entering into the Loan Agreement, the Company paid a $375,000 fee. The Company
also agreed to pay an unused line fee of 0.25% and certain management fees. The
Loan Agreement provided 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 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
4
<PAGE> 7
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1995
(Unaudited)
NOTE B - CREDIT AGREEMENT (con't)
increase the line to $60 million at the option of the Company. Borrowing
availability is determined by a formula based on both accounts receivable and
inventories. The interest is at prime rate plus 1% (1% lower than the rate
applicable to the Loan Agreement). In consideration for entering into the New
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 dividend payments may not be made without
the prior consent of the Lender.
NOTE C - INVENTORIES
(in thousands)
<TABLE>
<CAPTION>
March 31
----------------- December 31
1995 1994 1994
---- ---- -----------
<S> <C> <C> <C>
Finished goods 15,452 $ 8,892 15,596
Raw materials and parts 1,507 3,205 1,228
------ ------- ------
16,959 $12,097 16,824
====== ======= ======
</TABLE>
NOTE D - INCOME TAXES
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. The Company expects to utilize a substantial amount of its net
operating loss carryforwards by 1996.
No domestic deferred taxes have been provided on unremitted earnings of the
Company's foreign subsidiary. All such earnings are expected to be reinvested in
the subsidiary. Undistributed earnings for distribution were approximately
$5,500,000 as of
5
<PAGE> 8
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1995
(Unaudited)
NOTE D - INCOME TAXES(con't)
December 31, 1994. No foreign taxes will be withheld on the distribution of the
untaxed earnings.
NOTE E - LEGAL PROCEEDINGS
The current status of litigation is described in Part II, Item 1, herein.
6
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth for the periods indicated the percentage
relationships between revenues and certain expense and earnings items:
<TABLE>
<CAPTION>
Percentage of Net Revenues
--------------------------
Three Months Ended
March 31
-------------------
1995 1994
---- ----
<S> <C> <C>
Net revenues 100.0% 100.0%
Costs of products sold 67.5 58.1
---- ----
Gross margin 32.5 41.9
Advertising and promotion 12.9 19.7
Other selling and administrative 23.3 19.1
Research and development 7.0 6.8
----- -----
Earnings (loss) from operations (10.7) (3.7)
Interest expense (1.9) (1.9)
Other income (expense), net 0.1 0.1
Provision for income taxes -. -.
----- -----
Net earnings (loss) (12.5)% (5.5)%
===== =====
</TABLE>
1995 Compared to 1994
Net revenues of $33.3 million for the first quarter of 1995 represented a 10%
increase from net revenues of $30.2 million for the first quarter of 1994. This
sales increase was led by strong demand for the Company's two new girl's
products - Sky Dancers(TM) and My Pretty Dollhouse(TM).
Sky Dancers and My Pretty Dollhouse sales were $5.5 million and $3.1 million,
respectively. These products were first introduced in late 1994.
Micro Machines(R) sales were $11.8 million in the first quarter of 1995 as
compared to $9.9 million in the same period in 1994, a 19% increase. The
licensed product segment of Micro Machines continues to be strong.
7
<PAGE> 10
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
Biker Mice From Mars(TM) sales were $6.1 million in the first quarter of 1995 as
compared to $9.5 million in 1994. Domestic sales have decreased as the Company
has forecast, while international sales continue to be strong.
Game Genie(TM) sales were $2.0 million in the first quarter of 1995 as compared
to $1.2 million in the same period of 1994. This increase was a result of sales
of discontinued Game Genie(TM) products at closeout prices.
Gross margins were $10.9 million in the first quarter of 1995 as compared to
$12.7 million in the same period in 1994. The gross margin rate decreased to
32.6% in 1995 from 41.9% in 1994 due to three factors. First, the percent of
international sales to worldwide sales was greater. The Company's gross margin
on international sales is significantly lower than domestic sales because
outside of the United States the customer is responsible for the cost of
importing and promoting the products and, thus, the price points are lower.
Second, other costs of sales were incurred in 1995, including a higher
percentage of tooling costs amortization as a percentage of revenues as compared
to 1994 and a higher air freight expense incurred in an effort to respond to
strong consumer demand for Sky Dancers. Third, sales of discontinued products,
which sell normally at little or no margin, increased as a percentage of
revenues as compared to 1994.
Advertising and promotion expenses were $4.3 million in the first quarter of
1995 as compared to $6.0 million in the same period in 1994. The lower expenses
were a result of a decrease in planned television advertising expense as a
percent of sales domestically combined with lower domestic sales in the first
quarter of 1995 as compared to 1994. Other selling and administrative expenses
were $7.8 million in the first quarter of 1995 as compared to $5.8 million in
the same period in 1994. The increase was due mainly to higher personnel costs
and higher legal expenses. Research and development expenses were approximately
equal to the prior year's expenses for the first quarter.
Interest expense and other income (expense), net were approximately equal to the
prior year's expense for the first quarter.
No tax recovery was reported because of the cumulative net operating loss
brought forward into the year.
The Company's products are produced principally in China which currently is
designated with "most favored nation" ("MFN") status
8
<PAGE> 11
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
by the United States. This allows products imported into the United States from
China to be accorded the most favored import duties. In late 1994, Congress
approved the GATT (Uruguay round) 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 would result in a substantial increase in import duty for the Company's
products produced in China 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 product 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 located in
China; (3) relocate its production in sufficient time to meet demand; and (4)
pass resultant cost increases through as product price increases.
Liquidity, Financial Resources and Capital Expenditures
On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "New Agreement") with the Lender. (See Note B of the
Notes to Consolidated Financial Statements.)
Working capital was $49.2 million at March 31, 1995 as compared to $53.2 million
at December 31, 1994 and $29.4 million at March 31, 1994. The ratio of current
assets to current liabilities was 3.0 to 1.0 at March 31, 1995 as compared to
2.4 to 1.0 at December 31, 1994 and 2.1 to 1.0 at March 31, 1994.
The Company had no material commitments for capital expenditures at March 31,
1995.
9
<PAGE> 12
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
The Company believes that with its assets, the results of operations and the New
Agreement it has adequate liquidity and capital resources to meet its current
and anticipated operating needs.
10
<PAGE> 13
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings
The Company is involved in various legal and/or litigation matters which are
being defended and handled in the ordinary course of business. None of these
matters is expected to result in outcomes having a material adverse effect on
the Company's consolidated financial position.
Item 3. Defaults Upon Senior Securities
On June 10, 1992, the Company announced it would not pay the July 1, 1992 $0.425
per share quarterly dividend on its Depositary Shares which represent shares of
the Company's Preferred Stock. The Company has not paid the subsequent quarterly
dividends. As of April 1, 1995 the dividend was cumulatively twelve quarters in
arrears, representing a total dividend arrearage of $9.4 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 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 directors to the Board of Directors of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) No reports were filed for the quarter ended March 31, 1995.
11
<PAGE> 14
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEWIS GALOOB TOYS, INC.
-----------------------
(Registrant)
DATE: BY: /s/ William B. Towne
---------------------------- -----------------------
William B. Towne
Executive Vice President,
Finance and Chief
Financial Officer
(Principal Accounting
Officer)
12
<PAGE> 15
EXHIBIT INDEX
Exhibit No. Description Page No.
- ---------- ------------- -------
Ex-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 1,689
<SECURITIES> 0
<RECEIVABLES> 35,965
<ALLOWANCES> 4,045
<INVENTORY> 16,959
<CURRENT-ASSETS> 74,282
<PP&E> 14,865
<DEPRECIATION> 6,561
<TOTAL-ASSETS> 84,017
<CURRENT-LIABILITIES> 25,034
<BONDS> 18,361
<COMMON> 101
36,790
0
<OTHER-SE> 3,731
<TOTAL-LIABILITY-AND-EQUITY> 84,017
<SALES> 33,341
<TOTAL-REVENUES> 0
<CGS> 22,488
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,409
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 650
<INCOME-PRETAX> (4171)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4171)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
</TABLE>
