As filed with the Securities and Exchange Commission on February 6, 1996
Registration No. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
LEWIS GALOOB TOYS, INC.
(Exact name of registrant as specified in its charter)
Delaware 5040 94-1716574
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or classification code number) identification no.)
organization)
500 Forbes Boulevard
South San Francisco, California 94080
(415) 952-1678
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Mark D. Goldman
President and Chief Executive Officer
Lewis Galoob Toys, Inc.
500 Forbes Boulevard
South San Francisco, California 94080
(415) 952-1678
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
William G. Catron, Esq.
Lewis Galoob Toys, Inc.
500 Forbes Boulevard
South San Francisco, California 94080
(415) 952-1678
and
Charles I. Weissman, Esq.
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
(212) 758-9500
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
-----------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
-----------
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class of Proposed Proposed Maximum Amount of
Securities Amount to Maximum Offering Price Aggregate Registration
to be Registered be Registered Per Security (1) Offering Price (1) Fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value 1,414,422 shares $12.9375 $18,299,084 $6,310.03
=====================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
Pursuant to Rule 457(c), equals the average of the high and low sales prices of
the Common Stock on the New York Stock Exchange on January 31, 1996.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
LEWIS GALOOB TOYS, INC.
Cross-Reference Sheet
Pursuant to Item 501(b) of Regulation S-K
<TABLE>
<CAPTION>
Form S-1 Item Number and Heading Caption or Location in Prospectus
-------------------------------- ----------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Facing Page of Registration Statement;
Outside Front Cover Page of Prospectus Cross-Reference Sheet; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page and Outside Back
of Prospectus Cover Page of Prospectus
3. Summary Information, Risk Factors and Prospectus Summary; Risk Factors; Not
Ratio of Earnings to Fixed Charges Applicable
4. Use of Proceeds Prospectus Summary; Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Outside Front Cover Page; Selling
Stockholders
8. Plan of Distribution Outside Front Cover Page; Plan of
Distribution
9. Description of Securities to be Registered Outside Front Cover Page; Prospectus
Summary; Dividends; Price Range
of Common Stock; Description of Capital
Stock
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information with Respect to the Registrant Outside Front Cover Page; Prospectus
Summary; Risk Factors; Dividends; Price
Range of Common Stock; Capitalization;
Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Executive Compensation; Principal
Stockholders; Certain Transactions;
Description of Capital Stock; Index to
Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
</TABLE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1996
PROSPECTUS
LEWIS GALOOB TOYS, INC.
1,414,422 SHARES OF COMMON STOCK
This Prospectus relates to an offering (the "Offering") by
certain stockholders (the "Selling Stockholders") of an aggregate of up to
1,414,422 shares of common stock, $.01 par value per share (the "Common
Stock"), of Lewis Galoob Toys, Inc. (the "Company"), of which (i) 1,241,895
shares of Common Stock are issuable upon the conversion of $11,500,000
aggregate principal amount of the Company's 8% Convertible Subordinated
Debentures due 2000 (the "Debentures") and (ii) an aggregate of 172,527 shares
of Common Stock are issuable upon exercise of outstanding warrants (the
"Warrants"). All of the Common Stock offered hereby will be sold for the
accounts of the Selling Stockholders, and the Company will not receive any
proceeds from the Offering, other than the proceeds from the exercise of the
Warrants by the Selling Stockholders. All of the shares of Common Stock offered
hereby may be sold in the open market, in privately negotiated transactions or
otherwise by the holders thereof. See "Selling Stockholders."
The Common Stock is traded on the New York Stock Exchange
(the "NYSE") under the symbol "GAL." On January 31, 1996, the closing price per
share of Common Stock, as reported by the NYSE, was $12 3/4.
The Selling Stockholders directly, through agents designated
from time to time or through dealers or underwriters also to be designated, may
sell the Common Stock offered for sale hereby from time to time on terms to be
determined at the time of sale. To the extent required, the purchase price, the
public offering price, the names of any such agents, dealers or underwriters
and any applicable commissions or discount with respect to a particular offer
will be set forth in an accompanying Prospectus supplement.
The Selling Stockholders and any broker-dealers, agents or
underwriters that participate with the Selling Stockholders in the distribution
of the Securities may be deemed to be "Underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), and any commissions
received by them and any profit on the resale of the shares of Common Stock
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. See "Plan of Distribution" for certain
indemnification arrangements.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES CERTAIN RISKS.
SEE "RISK FACTORS" LOCATED AT PAGES 6-9 OF THIS PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is __________ __, 1996
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by
reference to, and should be read in conjunction with, the more detailed
information (including the financial statements and the notes thereto)
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety and should carefully consider the matters
set forth in "Risk Factors."
THE COMPANY
Lewis Galoob Toys, Inc. (the "Company") designs, develops,
markets and sells high quality toys worldwide and has been engaged in the toy
business since 1957. The Company's strategies in selecting and developing
product 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.
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(R), and to diversify the balance of
its other product lines. See "Business-Licensing and Related Rights;
Trademarks."
Consistent with the extendable product life strategy, the
Company's Micro Machines 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 product line will continue to generate
significant sales in the immediate future. Micro Machines sales represented 51%
of the Company's total revenues in 1994 as compared to 41% in 1993 and 28% in
1992. There can be no assurance that the demand for Micro Machines products
will continue at current or previous levels.
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1995 Product Line
The Company's 1995 product line consists of continuations and
extensions of the Micro Machines line and introductions of several new product
lines, including a new extendable girls' brand, Sky Dancers(TM) dolls.
The Micro Machines line includes the continuing licensed
vehicles based on the popular Star Wars(R) motion picture trilogy. The Company
has also added Star Wars playsets depicting scenes from the movies and
including action features, figures and vehicles. Other licensed products
include vehicles and figures from the Power Rangers(TM) television series and
the James Bond 007(TM) motion picture. There are also new vehicles from the
Star Trek(R) and Babylon 5(TM) television series. To extend the Micro Machines
segment of military vehicles and troops, new playsets include Night
Attack!(TM), with its battery-powered searchlight and multi-missile launcher,
as well as FalconWing Skybase(TM) and Orion J-22(TM) Submarine Base
transforming playsets. Also under the Micro Machines brand is Z-Bots(R), a line
of collectible robot figures, vehicles and playsets.
The new and innovative Sky Dancers 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 created in various
themes. The playsets include Magic Rolling Launchers in the shape of a swan and
pegasus.
The Company's new My Pretty DollHouse line is based on a
classic girls' toys play pattern that incorporates the successful concepts of
miniaturization and collectibility. This product 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.
Also introduced is UltraForce(TM), a licensed male action
line of dramatic super heroes and villains, vehicles and accessories, based on
the Malibu (Marvel) Comics strips and the new syndicated animated television
series that premiered in October 1995.
GENERAL
The Company was incorporated under the laws of the State of
California in 1968. The Company was reincorporated in the State of Delaware in
1987. The Company's principal executive offices are located at 500 Forbes
Boulevard, South San Francisco, California 94080 and its telephone number is
(415) 952-1678.
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THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock Outstanding as of December 31, 1995(1)........................... 10,089,961 shares
Common Stock Offered by the Company........................................... None
Common Stock Offered by the Selling Stockholders.............................. 1,414,422 shares
Common Stock Outstanding after the Offering(2)................................ 11,504,383 shares
NYSE Symbol for the Common Stock.............................................. GAL
</TABLE>
(1) Excludes (i) 1,330,092 shares of Common Stock reserved for issuance upon
exercise of outstanding stock options, none of which are being offered
hereby, (ii) 1,511,871 shares of Common Stock reserved for issuance upon
conversion of the Debentures, including 1,241,895 shares of Common Stock
being offered by the Selling Stockholders herein, (iii) 567,866 shares of
Common Stock reserved for issuance upon exercise of outstanding warrants,
including 172,527 shares of Common Stock being offered by the Selling
Stockholders herein, and (iv) 2,180,148 shares of Common Stock reserved
for issuance upon conversion of the Company's outstanding Depositary
Convertible Exchangeable Shares ("Depositary Shares"), each representing
1/10th of a share of the Company's $17.00 Convertible Exchangeable
Preferred Stock ("$17.00 Preferred Stock"). See "Capitalization,"
"Executive Compensation" and "Description of Capital Stock."
(2) Based on Common Stock outstanding as of December 31, 1995. Excludes (i)
1,330,092 shares of Common Stock reserved for issuance upon exercise of
outstanding stock options, (ii) 269,976 shares of Common Stock reserved
for issuance upon conversion of the Debentures not being offered hereby,
(iii) 395,339 shares of Common Stock reserved for issuance upon exercise
of outstanding warrants not being offered hereby and (iv) 2,180,148
shares of Common Stock reserved for issuance upon conversion of the
$17.00 Preferred Stock.
4
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The information set forth below should be read in conjunction
with "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues............... $137,078 $114,227 $178,792 $134,334 $166,280 $150,636 $126,943
======== ======== ======== ======== ======== ======== ========
Net earnings (loss)........ (1,421) 12,014 18,424 (10,924) (2,447) (7,540) (29,245)
Preferred stock dividends:
Paid..................... - - - - 782 3,127 3,127
In arrears............... 2,345 2,345 3,127 3,127 2,345 - -
------- ----- ---------- --------- -------- ---------- ---------
Net earnings (loss)
applicable to common
shares................... $ (3,766) $ 9,669 $15,297 $ (14,051) $ (5,574) $(10,667) $(32,372)
========== ======== ======== ========== =========== ========= =========
Net earnings (loss) per common share:
Primary.................. $ (0.37) $ 0.96 $ 1.51 $ (1.47) $ (0.59) $ (1.14) $ (3.48)
========== ========= ======== ========= ========== ========== ==========
Fully diluted............ $ (0.37) $ 0.91 $ 1.41 $ (1.47) $ (0.59) $ (1.14) $ (3.48)
========== ========= ======== ========= ========== ========== ==========
Number of common shares
and common shares
equivalents outstanding -
average.................. 10,068 10,047 10,111 9,548 9,400 9,325 9,315
AT SEPTEMBER 30, AT DECEMBER 31,
------------------ --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital............ $ 52,387 $ 47,184 $ 53,219 $ 30,813 $ 27,070 $ 29,127 $ 37,914
Total assets............... 117,344 93,653 100,766 71,005 71,604 64,016 75,546
Long-term debt............. 18,256 18,258 18,414 18,608 4,944 5,244 5,541
Shareholders' equity....... 43,425 38,578 44,768 22,162 32,246 35,092 45,610
</TABLE>
5
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RISK FACTORS
In addition to other information in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the shares of Common Stock offered hereby.
HISTORICAL NET LOSSES
The Company has sustained a net loss of $32.4 million, $10.7
million, $5.6 million, and $14.1 million for fiscal years 1990, 1991, 1992 and
1993, respectively. The loss in 1990 is largely attributable to the 44% decline
in sales from 1989, primarily in the Micro Machines toy line. In 1991 through
1993, the Company put in place a new management team that restructured the
product lines resulting in a return to profitability in 1994. See "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and financial statements of the
Company (and related notes thereto) included elsewhere in this document.
CONSUMER PREFERENCES
The toy industry is affected by changing consumer
preferences, resulting in many products in the toy industry being successfully
marketed only for a limited period of time (often one year or less). The toy
industry is also affected by 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 respond
quickly to changes in consumer preferences, and such inability could have an
adverse impact on the Company. See "Business."
DEPENDENCE ON SINGLE PRODUCT CATEGORY
Historically, a relatively small number of items have
contributed a large portion of the Company's revenues in each year. A decrease
in popularity of a particular item during any year could have a material
adverse impact on revenues and income for that year. The Micro Machines line of
collectible, miniature vehicles and accessories accounted for 51% and 41% of
the Company's net revenues for the years 1994 and 1993, respectively. The
Company believes this product line is likely to account for a substantial
portion of net revenues for fiscal 1995. The Micro Machines line accounted for
42% of net revenues in the nine months ended September 30, 1995. Continuing
demand for this product line was strong and shipments for certain new 1995
product lines commenced in the fourth quarter. While the Micro Machines line
has generated continuing sales for an extended period of time, there can be no
assurance that the demand for Micro Machines will continue to increase or
remain at current levels. See "Business."
SEASONALITY
Because of heavy consumer 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. 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
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cancelable until shipped. Therefore, the Company believes that backlog may not
be an accurate indicator of the Company's future sales. See "Business--
Seasonality and Backlog."
FOREIGN OPERATIONS
Nearly all of the Company's products are manufactured by
unaffiliated parties located in China and, to a lesser extent, other foreign
locations. Therefore, the Company could be affected by political or economic
disruptions affecting business in such countries. 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 general 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 cost increases likely to
be incurred outside of the country involved through to the Company's customers
as product price increases. The political unrest in 1989 in China had an
insignificant impact on the manufacturing and shipping of the Company's
products. There can be no assurance that in the future the Company will not be
adversely affected by political or economic disruptions in China or other
foreign locations. In addition, changes in the relationship between the United
States dollar and the Hong Kong dollar may have an impact on the cost of goods
purchased from manufacturers. Further, changes in tariffs could have an adverse
effect on the cost of goods imported from the Orient. See
"Business-Manufacturing."
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. Some of these
companies have longer operating histories, broader product lines and greater
financial resources and advertising budgets than the Company. 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--Competition."
DEPENDENCE ON KEY PERSONS
The success of the Company may depend to a significant degree
upon the services of Mark D. Goldman, President and Chief Executive Officer of
the Company. The Company maintains a key man life insurance policy on Mr.
Goldman in the amount of $2,000,000. In addition, the loss of the services of
senior management and the inability to attract replacements of these key
personnel could have a material adverse effect on the Company. See
"Management."
POTENTIAL PRODUCT LIABILITY
The Company is engaged in a business which could result in
possible claims for injury resulting from the failure of its products. To date,
the Company has not been named as a defendant in any product liability lawsuit.
While the Company currently maintains product liability insurance, there can be
no assurance that it will be able to maintain such insurance on acceptable
terms or that any such insurance will provide adequate protection against
potential liabilities. A successful claim brought against the Company
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resulting in a final judgment in excess of its insurance coverage could have a
material adverse effect on the Company. See "Business--Government Regulations."
RELIANCE ON MAJOR CUSTOMERS
The Company markets and sells its products throughout the
world. Sales to customers in the United States accounted for on a consolidated
basis approximately 66%, 66% and 65% of net sales in 1994, 1993 and 1992,
respectively. In 1994 and 1993, Toys "R" Us, Inc. accounted for 21% of the
Company's consolidated net sales. Any decision by Toys "R" Us, Inc. to
substantially reduce or cease its purchases from the Company would have a
material adverse effect on the Company's business. See "Business--Distribution
and Sales."
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 for 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, safe products. While the
Company believes that it is in compliance in all material respects with
applicable laws, rules and regulations, there can be no assurance that more
restrictive laws, rules or regulations will not be adopted in the future which
could make compliance more difficult or expensive or otherwise adversely affect
the Company's business or prospects. See "Business--Government Regulations."
LICENSING AND RELATED RIGHTS
The Company normally produces substantially all of its
products under licenses from other parties. 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. 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. In addition, the
Company pays royalties to its licensors. Royalties paid by the Company to toy
licensors typically range from 2% to 14% of net sales. 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. See "Business - Licensing and Related Rights;
Trademarks."
The Company is an active participant in the market for
character licenses and has obtained domestic and international license rights
for most of its products. 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 assess accurately 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
8
<PAGE>
the properties for which it has obtained licenses in an expeditious manner.
There can be no assurance that the Company will be able to enter into character
licensing arrangements in the future for successful and popular properties on
terms acceptable to the Company.
TRADEMARKS AND PROPRIETARY TECHNOLOGY
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. See "Business--Licensing and Related Rights; Trademarks."
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and By-Laws
contain, among other things, provisions establishing a classified Board of
Directors, authorizing shares of preferred stock with respect to which the
Board of Directors of the Company has the power to fix the rights, preferences,
privileges and restrictions without any further vote or action by the
stockholders, and requiring the vote of holders of 80% of the voting power of
the Company in order to remove directors, amend the By-Laws and approve certain
business combinations with "Related Persons." Such provisions may delay, deter
or prevent a merger, consolidation, tender offer, or other business combination
or change of control involving the Company that some or a majority of the
Company's stockholders might consider to be in their best interests, including
offers or attempted takeovers that might otherwise result in such stockholders
receiving a premium over the market price for the Common Stock. In addition,
such provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company first to negotiate with the Company bids for the
Common Stock at a premium over the market price of the Common Stock. Such
provisions may also adversely affect the market price of, and the voting and
other rights of the holders of, Common Stock. See "Description of Capital Stock
- --Preferred Stock" and "Certain Provisions of the Company's Certificate of
Incorporation and By-Laws."
USE OF PROCEEDS
If all of the holders of the outstanding Warrants held for
the respective accounts of the Selling Stockholders named herein elect to
exercise their Warrants, the estimated net proceeds to the Company would be
approximately $1,488,556 (including expenses of the Offering estimated to be
approximately $35,000). The Company intends to apply the net proceeds, if any,
received by the Company from the exercise of the Warrants for linking capital
and general corporate purposes. The Company will not receive any of the
proceeds from this Offering. All of the proceeds from this Offering will be
received by the Selling Stockholders.
DIVIDENDS
No cash dividends have been declared on the Common Stock by
the Company in the last five years. The Board of Directors of the Company has
no current plans to pay cash dividends on the Common Stock. The Company's
current credit agreement with Congress Financial Corporation (Central) and the
terms of its $17.00 Preferred Stock limit the Company's ability to pay cash
dividends on the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity, Financial Resources
and Capital Expenditures" and "Description of Capital Stock--Preferred Stock."
In
9
<PAGE>
addition, future dividend policy will depend on the Company's earnings,
capital requirements, financial condition and other factors considered relevant
by the Board of Directors.
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 $17.00 Preferred Stock. The Company has not paid the
subsequent quarterly dividends. As of December 31, 1995, the dividend was
cumulatively fifteen quarters in arrears, representing a total dividend
arrearage of $11.7 million. By the terms of the Certificate of Designations for
the $17.00 Preferred Stock, the Company is not legally obligated to pay any
such arrearage. The Company has consistently maintained that it is not in its
best interest to reinstate the dividend until the Company has generated
consistent net income from operations and continuation of such profitability can
be reasonably expected. Based upon recent results, the Company has been
evaluating its alternatives with regard to the $17.00 Preferred Stock. The net
earnings (loss) per share calculation includes a provision of the $17.00
Preferred Stock dividends in arrears. No Common Stock dividends may be paid
unless all $17.00 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 $17.00 Preferred Stock exercised their right to elect two
directors (Mr. Hoffer Kaback and Mr. George Riordan) to the Board of Directors
of the Company. See "Description of Capital Stock--Preferred Stock."
PRICE RANGE OF COMMON STOCK
The Common Stock has traded on the NYSE (NYSE symbol: GAL)
since July 9, 1987. From April 16, 1985 until July 8, 1987, Common Stock was
quoted on the NASDAQ National Market System. The following table sets forth for
the indicated periods the high and low closing sale prices of the Common Stock
as reported by the NYSE:
<TABLE>
<CAPTION>
Fiscal Year High Low
- ---------- ---- ---
<S> <C> <C> <C>
1996 First Quarter $14 1/2 $10 1/2
(through February 1, 1996)
1995 First Quarter $ 7 3/4 $ 5 1/4
Second Quarter 8 3/8 6
Third Quarter 9 1/2 6 1/2
Fourth Quarter 13 5/8 9 1/4
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 November 27, 1995, there were approximately 1,700
holders of record of the Common Stock.
10
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and
capitalization of the Company at September 30, 1995 and as adjusted to give
effect to the issuance of 1,241,895 shares of Common Stock resulting from the
conversion of $11,500,000 aggregate principal amount of the Debentures and the
exercise of the Warrants to purchase 172,527 shares of Common Stock by the
Selling Stockholders. The following table should be read in conjunction with
the consolidated financial statements of the Company and the notes related
thereto included elsewhere in this Prospectus. See also "Use of Proceeds,"
"Selected Consolidated Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Description of Capital
Stock."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
ACTUAL ADJUSTED(1)(2)
------ --------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (including current portion of long-term debt) (3)........... $25,526 $24,037
======= ======
8% Convertible Subordinated Debentures due 2000............................. 14,000 2,500
Mortgage and other long-term debt (4)....................................... 4,256 4,256
--------- --------
Total long-term debt ....................................................... 18,256 6,756
--------- --------
Shareholders' equity:
Preferred Stock; 1,000,000 shares authorized; 183,950 shares of $17.00
Convertible Exchangeable Preferred Stock of $200.00 liquidation value
per share issued and outstanding ........................................... 36,790 36,790
Common Stock, $.01 par value; 50,000,000 shares authorized; 10,077,265 and
11,491,687 shares issued and outstanding, actual and as adjusted (5)........ 101 115
Additional paid-in capital.................................................. 31,671 44,646
Retained earnings (deficit)................................................. (24,690) (24,690)
Cumulative translation adjustment........................................... (447) (447)
------------ --------
Total shareholders' equity........................................ 43,425 56,414
----------- --------
Total capitalization........................................................ $61,681 $63,170
======= =======
- ---------------
(1) Assumes (i) the conversion of $11,500,000 aggregate principal amount of
the Debentures into 1,241,895 shares of Common Stock; (ii) the exercise
of warrants to purchase 150,000 shares of Common Stock at an exercise
price of $9.50 per share; and (iii) the exercise of warrants to
purchase 22,527 shares of Common Stock at an exercise price of $4.375
per share.
(2) Assumes that the proceeds of the Warrants are used to reduce
the Company's short-term debt.
(3) The current portion of the Company's
long-term debt aggregated $214,000 at September 30, 1995.
(4) The Company has recently entered into a new credit agreement which makes available
to the Company a maximum credit line of $60,000,000 through March 31,
1997. For additional information on long-term debt, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity, Financial Resources and Capital Expenditures."
(5) Actual and adjusted outstanding shares do not include (i) 2,180,148
shares of Common Stock reserved for issuance upon conversion of the
$17.00 Preferred Stock, (ii) 1,322,217 shares of Common Stock reserved
for issuance upon exercise of outstanding stock options, (iii) 269,976
shares of Common Stock reserved for issuance upon exercise of the
Debentures not offered hereby or (iv) 395,339 shares of Common Stock
reserved for issuance upon exercise of outstanding warrants not offered
hereby. Actual outstanding shares also do not include (x) 1,241,895
shares of Common Stock reserved for issuance upon conversion of the
Debentures offered by the Selling Stockholders herein or (y) 172,527
shares of Common Stock reserved for issuance upon exercise of the
Warrants offered by the Selling Stockholders herein. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity, Financial Resources and Capital Expenditures."
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data for each of the five
years ended December 31, 1994 are derived from the audited consolidated
financial statements of the Company. The selected consolidated financial data
at September 30, 1995 and 1994 and for the nine month periods then ended is
unaudited but includes all adjustments (consisting solely of normal accruals
and adjustments) which the Company considers necessary for a fair presentation
of the financial position and results of operations at those dates and for
those periods. The Company's business is highly seasonal, and the information
for the nine month period ended September 30, 1995 may not be indicative of the
operating results for the entire year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business--Seasonality and Backlog" and "Risk Factors--Seasonality" for factors
which should be considered in evaluating interim results. The selected
consolidated financial data set forth below should be read in conjunction with
the Company's consolidated financial statements and related notes thereto
included elsewhere in this Prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- --------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................ $137,078 $114,227 $178,792 $134,334 $166,280 $150,636 $126,943
Cost of products sold................... 89,945 69,017 104,592 82,875 104,965 95,181 90,152
------ ------ ------- ------- ------- ------- ------
Gross margin............................ 47,133 45,210 74,200 51,459 61,315 55,455 36,791
------ ------ ------- ------- ------- ------- ------
Operating expenses:
Advertising and promotion............. 17,739 19,483 30,616 23,537 22,826 22,848 27,134
Other selling and administrative...... 22,476 17,468 26,974 25,640 30,345 29,372 31,694
Research and development.............. 6,195 6,470 7,288 7,451 6,861 6,213 7,717
Variable stock option plan............ - - - 4,046 - - -
------ ------- --------- -------- ------- ------- ------
Total operating expenses................ 46,410 43,421 64,878 60,674 60,032 58,433 66,545
------ ------ -------- ------ ------ ------ ------
Earnings (loss) from operations......... 723 1,789 9,322 (9,215) 1,283 (2,978) (29,754)
Expenses related to resignation of
former officer
- - - - (2,152) (3,807) -
Net proceeds from Nintendo award........ - 12,124 12,124 - - - -
Interest expense........................ (2,357) (1,730) (2,609) (1,836) (1,550) (1,775) (3,046)
Interest and other income............... 213 308 365 136 210 1,020 3,555
---------- --------- --------- ------- -------- -------- -------
Earnings (loss) before income
taxes.............................. (1,421) 12,491 19,202 (10,915) (2,209) (7,540) (29,245)
Provision for income taxes ............. - 477 778 9 238 - -
--------- --------- ---------- ------- -------- -------- -------
Net earnings (loss)..................... (1,421) 12,014 18,424 (10,924) 2,447) (7,540) (29,245)
Preferred stock dividends paid.......... - - - - 782 3,127 3,127
Preferred stock dividends in arrears.... 2,345 2,345 3,127 3,127 2,345 - -
------- -------- ------- --------- -------- -------- -------
Net earnings (loss)
applicable to common shares........... $(3,766) $9,669 $15,297 $(14,051) $(5,574) $(10,667) $(32,372)
======== ======= ======== ========= ======== ========= =========
Net earnings (loss) per common share
Primary............................... $(0.37) $0.96 $1.51 $(1.47) $(0.59) $(1.14) $(3.48)
====== ==== ==== ====== ====== ====== =======
Fully-diluted......................... $(0.37) $0.91 $1.41 $(1.47) $(0.59) $(1.14) $(3.48)
====== ==== ==== ====== ====== ======= =======
Common shares and common share
equivalents outstanding-average....... 10,068 10,047 10,111 9,548 9,400 9,325 9,315
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------ ------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
Working capital......................... $52,387 $47,184 $53,219 $30,813 $27,070 $29,127 $37,914
Total assets............................ 117,344 93,653 100,766 71,005 71,604 64,016 75,546
Long-term debt.......................... 18,256 18,258 18,414 18,608 4,944 5,244 5,541
Shareholders' equity.................... 43,425 38,578 44,768 22,162 32,246 35,092 45,610
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain operating data (as a
percentage of the Company's net revenues) for the nine months ended September
30, 1995 and 1994 and the years ended December 31, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------- ----------------------------------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold................... 65.6 60.4 58.5 61.7 63.1
---- ---- ---- ---- ----
Gross margin............................ 34.4 39.6 41.5 38.3 36.9
Advertising and
promotion expenses.................... 13.0 17.0 17.1 17.5 13.7
Other selling and
administrative expenses............... 16.4 15.3 15.1 19.1 18.3
Research and
development expenses.................. 4.5 5.7 4.1 5.6 4.1
Variable stock option plan expenses..... - - - 3.0 -
-------- --------- -------- -------- -------
Earnings (loss) from operations......... 0.5 1.6 5.2 (6.9) 0.8
Expenses related to resignations of
former officers...................... - - - - (1.3)
Net proceeds from
Nintendo award........................ - 10.6 6.8 - -
Interest expense........................ (1.7) (1.5) (1.5) (1.3) (0.9)
Other income, net....................... 0.2 0.2 0.2 0.1 0.1
Provision for income taxes.............. - (0.4) (0.4) - (0.2)
-------- --------- -------- -------- -------
Net earnings (loss)..................... (1.0)% 10.5% 10.3% (8.1)% (1.5)%
======== ========= ======== ======== =======
</TABLE>
13
<PAGE>
Nine Months Ended September 30, 1995 and 1994
Net revenues of $137.1 million in the nine month period ended
September 30, 1995 represented a 20% increase from net revenues of $114.2
million in the same period in 1994. Sky Dancers and My Pretty DollHouse sales
were $44.0 million and $7.3 million, respectively. These products were first
introduced in late 1994. Micro Machines sales were $56.9 million as compared to
$65.2 million in 1994. The decrease in sales is mainly attributable to a
decline in sales from the Micro Machines Z-Bots segment and this decline is
expected to continue. Biker Mice from Mars(R) worldwide sales were $19.6
million as compared to $33.3 million in 1994. In 1995, domestic sales to
retailers have been discontinued, as planned, while international sales have
been strong.
Gross margins were $47.1 million in the nine month period
ended September 30, 1995, as compared to $45.2 million in the same period in
1994. The higher sales volume increased gross margins by $9.0 million but was
offset by a $7.1 million decrease from a lower gross margin rate. The gross
margin rate decreased to 34.4% in 1995 from 39.6% in 1994 due primarily to two
factors. First, tooling and packaging development costs were a higher percent
of revenues in 1995 as compared to 1994 in support of the Company's expanded
product lines. Second, international sales as a percentage of worldwide
revenues were higher in 1995 compared to 1994. The Company's gross margin on
international sales is significantly lower than domestic sales because
international prices are lower as the customer is responsible for the cost of
importing and promoting the product.
Advertising and promotion expenses in the nine month period
ended September 30, 1995 were $17.7 million as compared to $19.5 million in the
same period in 1994. The lower expenses were a result of a decrease in planned
domestic television advertising expense as a percent of sales.
Other selling and administrative expenses for the nine month
period ended September 30, 1995 were $22.5 million in 1995 as compared to $17.5
million in the same period in 1994. The increase in expenses was due mainly to
(1) higher planned personnel costs as a result of increased marketing and
selling efforts, (2) higher legal expenses and (3) higher freight costs.
Research and development expenses for the nine month period
ended September 30, 1995 were $6.2 million compared to $6.5 million in the same
period in 1994. The decrease was due to timing of expenditures in 1995 as
compared to 1994.
In 1994, the net proceeds from the Nintendo award represents
the receipt, net of associated legal and related expenses, of the Company's
share of proceeds from its litigation with Nintendo of America, Inc.
Interest expense for the nine month period ended September
30, 1995 was $2.4 million as compared to $1.7 million in the same period in
1994. The increase was due to higher average borrowings and a higher interest
rate in 1995 as compared to 1994.
In 1995, no tax provisions were recorded due to the Company's
net operating loss and tax credit carryforwards. In 1994, the income tax
provision reflects the quarterly application of the estimated
14
<PAGE>
annual rate based on the projected full year earnings and includes the
utilization of net operating loss carryforwards.
Years Ended December 31, 1994 and 1993
- --------------------------------------
In 1994, the Company was profitable and had 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 to
enable it to 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)
lower breakeven versus the 1990 cost profile. The new management team was put
in place in 1991.
Overall, consolidated net revenues, including both toy sales
and sales 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 as compared to 1993.
Domestic toy sales rose by 103% and international toy sales rose by 33% from
1993 to 1994.
In 1994, sales of Micro Machines products 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 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. Game Genie sales were $4.2 million in 1994 as compared
to $32.8 million in 1993. This decrease in Game Genie sales 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 were
higher in 1994 compared to 1993, they were 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 domestic television advertising expense 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.
15
<PAGE>
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 from 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 to the Company's 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 Debentures being
outstanding during all of 1994 compared to being outstanding for less than 2
months in 1993. Interest was reduced by lower average borrowings under the
Company's line of credit in 1994, although interest rates were higher.
Other income was $0.4 million in 1994, as compared to $0.1
million 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 had federal net operating loss
carryforwards of approximately $11.5 million and unused federal tax credits of
approximately $1.7 million available to reduce taxes in future periods. (See
Notes A and F to the Company's 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 in sales, which was a $39.1 million improvement in earnings
from operations and a $51.9 million improvement in sales in comparison to 1990
sales of $126.9 million and loss from operations of $29.8 million.
In management's opinion, inflation did not have a material
impact on 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 adverse 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 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 general
factors, including, but not limited to, the nature, extent and location of such
unrest or disruption and the Company's
16
<PAGE>
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 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 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 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 damages 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 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 from China 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 likely to be incurred outside of China through to
the Company's customers as product price increases.
In 1994, certain quotas on 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 the foreseeable future.
Years Ended December 31, 1993 and 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 brand 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 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
17
<PAGE>
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 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 (the "Board") of the Company terminated the 1992 Plan, subject to
stockholder approval. The 1992 Plan was cancelled and replaced by a new plan,
subject to stockholder 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's 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 connection with the termination of
the 1992 Plan, subject to stockholder 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
18
<PAGE>
were approved by the stockholders on June 21, 1994. (See Note N to the Company's
consolidated financial statements.)
Interest expense in 1993 was $1.8 million compared to $1.6
million in 1992. The increase was due to two factors. First, the average line
of credit borrowing was higher in 1993 as compared to 1992 and the interest
rates slightly decreased. Second, the Company incurred interest expense related
to the 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 Company's
consolidated financial statements.
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 Congress
Financial Corporation (Central). (See Note Q to the Company's consolidated
financial statements.)
Working capital was $52.4 million at September 30, 1995
compared to $53.2 million at December 31, 1994 and $47.2 million at September
30, 1994. The ratio of current assets to current liabilities was 1.9 to 1.0 at
September 30, 1995 compared to 2.4 to 1.0 at December 31, 1994 and 2.3 to 1.0
at September 30, 1994.
The Company had no material commitments for capital
expenditures at September 30, 1995.
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.
Recent Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. The Company has not yet
considered the input of SFAS 123 on its recording or disclosure of stock-based
compensation.
19
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BUSINESS
GENERAL
The Company designs, develops, markets and sells high quality
toys worldwide and has been engaged in the toy business since 1957. The
Company's strategies in selecting and developing product 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 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.
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."
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 product line will continue to
generate significant sales in the immediate future. Micro Machines sales
represented 51% of the Company's total revenues in 1994 as compared to 41% in
1993 and 28% in 1992. There can be no assurance that the demand for Micro
Machines products will continue at current or previous levels.
PRODUCTS
The Company's 1995 product line consists of continuations and
extensions of the Micro Machines line and introductions of several new product
lines, including a new extendable girls' brand, Sky Dancers(TM) dolls.
20
<PAGE>
The Micro Machines line includes the continuing licensed
vehicles based on the popular Star Wars(R) motion picture trilogy. The Company
has also added Star Wars playsets depicting scenes from the movies and
including action features, figures and vehicles. Other licensed products
include vehicles and figures from the Power Rangers(TM) television series, and
the James Bond 007(TM) motion picture. There are also new vehicles from the
Star Trek(R) and Babylon 5(TM) television series. To extend the Micro Machines
segment of military vehicles and troops, new playsets include Night
Attack!(TM), with its battery-powered searchlight and multi-missile launcher,
as well as FalconWing Skybase(TM) and Orion J-22 (TM) Submarine Base
transforming playsets. Also under the Micro Machines brand is Z-Bots(R), a line
of collectible robot figures, vehicles and playsets.
The new and innovative Sky Dancers 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 created in various
themes. The playsets include Magic Rolling Launchers in the shape of a swan and
pegasus.
The Company's new My Pretty DollHouse line is based on a
classic girls' toys play pattern that incorporates the successful concepts of
miniaturization and collectibility. This product 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.
Also introduced is UltraForce(TM), a licensed male action
line of dramatic super heroes and villains, vehicles and accessories, based on
the Malibu(TM) (Marvel) Comics(TM) strips and the new syndicated animated
television series that premiered in October 1995.
LICENSING AND RELATED RIGHTS; TRADEMARKS
The Company normally produces substantially all of its
products under licenses from other parties. 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. 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. In addition, 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 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.
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The Company is an active participant in the market for
character licenses, and the Company has obtained domestic and international
distribution rights for most of its products. 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 assess accurately 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.
As part of its strategic licensing program, the Company has
signed an agreement with TwentiethCentury Fox Licensing and Merchandising that
gives the Company the exclusive worldwide first rights to license toys based on
all new Fox theatrical and television properties, excluding the Fox Children's
Network, until the year 2000. The agreement fulfills a key growth objective of
forming an alliance with a powerful content provider and assures access to a
continuous flow of first-rank entertainment properties from Twentieth-Century
Fox Film Corporation, Fox Animation Studios, Twentieth Television, Fox
Broadcasting Company, Fox Family Films, Fox 2000 Pictures, and Fox Searchlight
Pictures.
In addition to the Twentieth-Century Fox agreement, the
Company has signed a master toy license agreement with Turner Home
Entertainment for The Real Adventures of Jonny Quest(R). The agreement calls
for the Company to create an action figure toy line, plush toys and Micro
Machines. The toys will hit retail shelves in Fall 1996, coinciding with the
launch of the new television series.
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 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
22
<PAGE>
and designers who receive royalties as licensors. Those amounts do not include
approximately $7,149,000, $4,502,000 and $4,583,000 incurred in 1994, 1993 and
1992, respectively, 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. Over 87%
of the Company's products were produced in China 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%. In 1995, manufacturer
production has been 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 Company's 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." Generally, tooling is owned by the
Company but may be utilized by different manufacturers if the need arises for
alternate sources of production.
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) retrieve its
tooling; (3) relocate its production in sufficient time to meet demand; and (4)
pass resultant 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 principally produced in China,
which currently is designated with 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 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, which 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 damages 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 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 from
China to other countries should not be affected. Other toy
23
<PAGE>
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 located in
China, (3) relocate its production in sufficient time to meet demand and (4)
pass resultant cost increases likely to be incurred outside of China through to
the Company's customers 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 the foreseeable
future.
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 employees arrange with manufacturers for the
production, shipment and delivery of products, monitor the quality of the
products produced, and undertake certain elements of the design and development
of new products.
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,
that 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 customers new
products and extensions to previously marketed product lines by
24
<PAGE>
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
Asia or from the Union City facility could have a material adverse effect on
the Company. The Company believes that adequate storage facilities are
available.
The Company has an extensive international sales program. The
Company, in conjunction with Galco, actively sells its 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 accounted, on average, for only approximately
one-third of total Company sales, these sales amount to a greater proportion of
the volume of Company products sold outside of the United States. International
sale prices to distributors are significantly lower than U.S. domestic sale
prices to retail accounts since international distributors are responsible for
all importation, warehousing, marketing, promotional and selling related costs.
In 1994, approximately 50% 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.
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<PAGE>
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.
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. Some of
these companies have longer operating histories, broader product lines and
greater financial resources and advertising budgets than the Company. 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, the quality of its
products, its relationships with inventors, designers and licensors, its
distribution channels and its overhead and operational controls allow the
Company to compete effectively in the marketplace. See "Business-Research and
Development" and "Business-Distribution and Sales."
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. These 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, safe products.
EMPLOYEES
As of December 31, 1995, the Company had 223 employees; 125
in the United States and 98 in the Far East. This compares to 241 total
employees at December 31, 1994; 110 in the United States and 131 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.
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 remaining
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 an additional five-year term.
The Company has a showroom, consisting of approximately 17,200 square feet,
which is located at 1107 Broadway, New York, New York, under a lease that
expires in 2006, and office and warehouse space
26
<PAGE>
in Hong Kong consisting of approximately 30,000 square feet under leases which
expire at varying dates through 1996.
The Company's properties will be expanded to support as
necessary future growth levels in the Company's business.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and members of the Board of the
Company and their respective positions are as follows:
<TABLE>
<CAPTION>
NAME Age POSITION
- ---- --- --------
<S> <C> <C>
Mark D. Goldman............................ 45 President, Chief Executive Officer and
Director
William G. Catron.......................... 50 Executive Vice President, General
Counsel, Chief Administrative Officer
and Secretary
Loren Hildebrand........................... 56 Executive Vice President, Sales
Ronald Hirschfeld.......................... 45 Executive Vice President, International
Sales and Marketing
Gary J. Niles.............................. 57 Executive Vice President, Marketing and
Product Acquisition
Louis R. Novak............................. 47 Executive Vice President and Chief
Operating Officer
William B. Towne........................... 51 Executive Vice President, Finance and
Chief Financial Officer
H. Alan Gaudie............................. 55 Senior Vice President, Finance and
Assistant Secretary
Ronnie Soong............................... 49 Managing Director of Galco
International Toys, N.V.
Terrell (Mark) Taylor...................... 54 Senior Vice President, Preliminary
Design
Andrew J. Cavanaugh........................ 49 Director
Paul A. Gliebe, Jr......................... 61 Director
Scott R. Heldfond.......................... 50 Director
Hoffer Kaback.............................. 46 Director
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
NAME Age POSITION
- ---- --- --------
<S> <C> <C>
Roger Kowalsky............................. 61 Director
S. Lee Kling............................... 66 Director
Martin Nussbaum............................ 48 Director
George Riordan............................. 62 Director
</TABLE>
Mark D. Goldman, a Director of the Company, has served as
President and Chief Executive Officer of the Company since June 1991. From 1987
to 1991, Mr. Goldman 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. From 1985 to
1992, Mr. Catron was Senior Vice President, Assistant General Counsel for
Paramount Pictures Corporation. Prior to 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, Mr. Hildebrand was Executive Vice President and
a partner in Toy Soldiers, Inc., a start-up company. Prior to 1989, Mr.
Hildebrand was a consultant for Worlds of Wonder and Executive Vice President,
Sales, Merchandising and Distribution for Mattel, Inc.
Ronald Hirschfeld has served as Executive Vice President,
International Sales and Marketing since February 1994. From 1989 to 1994, Mr.
Hirschfeld served as Senior Vice President, International Sales and Marketing.
Prior to 1989, Mr. Hirschfeld served as Senior Vice President, International
Operations from 1987 to 1989 and has held various positions with the Company
since 1978.
Gary J. Niles has served as Executive Vice President,
Marketing and Product Acquisition since February 1992. From 1989 to 1992, Mr.
Niles served as Senior Vice President, International Division. Before joining
the Company, Mr. Niles 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 R. Novak has served as Executive Vice President and
Chief Operating Officer since February 1992. From 1989 to 1992, Mr. Novak
served as Senior Vice President, Operations. From 1986 to 1989 he was Senior
Vice President, Worldwide Product Operations for Coleco Industries, Inc. Prior
to 1986, 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, Mr.
Towne 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 Divisions.
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H. Alan Gaudie has served as Senior Vice President, Finance
since April 1992. From 1985 to 1992, Mr. Gaudie served as Corporate Controller,
Vice President, Senior Vice President and acting Chief Financial Officer.
Ronnie Soong has served as Managing Director of Galco
International Toys, N.V., a wholly-owned subsidiary of the Company ("Galco"),
since May 1995. From April 1993 to 1995, Mr. Soong served as General Manager of
Galco. From 1989 to 1993, Mr. Soong was General Manager of Zindart Industrial
Co., Ltd. Prior to 1989, Mr. Soong was the General Manager of Buddy L (HK) Ltd.
and an executive with the Ertl Company in Taiwan.
Terrell (Mark) Taylor has served as Senior Vice President,
Preliminary Design since November 1995. From 1988 to 1995, Mr. Taylor served as
Senior Vice President, Product Design for Mattel Toys. From 1987 to 1988, Mr.
Taylor served as Vice President with Entertech/LJN Toys. Prior to 1987, Mr.
Taylor served in various executive capacities at Playmates Toys, Tomy Toys, and
Mattel Toys. In addition, Mr. Taylor was a principal partner with Taylor/Salari
Design.
Andrew J. Cavanaugh, a Director of the Company, serves as a
Senior Vice President--Corporate Human Resources of Estee Lauder Inc. Mr.
Cavanaugh has been affiliated with Estee Lauder in an executive capacity since
1988. Prior to undertaking his current position, Mr. Cavanaugh served as a
Senior Consultant with Coopers and Lybrand, New York City, from 1986 through
1988, and Senior Vice President--Administration of Paramount Pictures
Corporation from 1984 through 1986.
Paul A. Gliebe, Jr., a Director of the Company, has been a
Vice President of Smith Barney Shearson Inc. since 1982. Smith Barney Shearson
Inc. has provided investment-related services to the Company in the past and
during the current fiscal year.
Scott R. Heldfond, a Director of the Company, has served as
President and Chief Executive Officer of the Real Estate/Investment Division of
Rollins Hudig Hall (the successor entity to DSI Insurance Services), an
insurance brokerage firm ("RHH"), since 1985. The Company has retained the
services of RHH in the past and during the current fiscal year. See "Certain
Transactions."
Hoffer Kaback, a Director of the Company, has served as the
President of Gloucester Capital Corporation, an investment firm, since 1980 and
has been a General Partner of Bosworth Partners, an investment partnership,
since 1986. Mr. Kaback serves on the Boards of Directors of Biotechnology
General Corp. and Sunshine Mining and Refining Company.
Roger Kowalsky, a Director of the Company, served from 1983
to 1986 as Senior Vice President, Finance & Administration for Yale Materials
Handling Corporation. Prior to such time, from 1969 to 1982, Mr. Kowalsky
worked at Pullman Inc., rising to Executive Vice President, Finance &
Administration and President of Pullman Trailmobile, a subsidiary of Pullman
Inc. Since 1989, Mr. Kowalsky has served as Director of the Vermont Studio
Center, an organization dedicated to visual artists and writers located in
northern Vermont. From 1986 to 1989, Mr. Kowalsky was retired.
S. Lee Kling, a Director of the Company, has served since 1991
as Chairman of the Board of Kling Rechter & Company, a merchant banking company
which operates in partnership with Barclays
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<PAGE>
Bank PLC. Mr. Kling served as Chairman of the Board of Landmark Bancshares
Corporation, a bank holding company in St. Louis, Missouri ("Landmark"), until
December 1991 when Landmark merged with Magna Group, Inc. Mr. Kling had served
in such capacity with Landmark since 1974 and had also served as Chief Executive
Officer of Landmark from 1974 through October 1990 except for the period from
May 1978 to January 1979 when he served as Assistant Special Counselor on
Inflation for the White House and Deputy for Ambassador Robert S. Strauss. Mr.
Kling serves on the Boards of Directors of Magna Group, Inc., Falcon Products,
Co., Bernard Chaus Inc., E-Systems, Inc., Top Air Manufacturing, Inc., National
Beverage Corp. and Hanover Direct, Inc.
Martin Nussbaum, a Director of the Company, has been a partner
of the law firm of Shereff, Friedman, Hoffman & Goodman, LLP since 1976. Mr.
Nussbaum has served as Chairman of the Executive Committee of the Company's
Board of Directors since June 1991. The Company has retained Shereff, Friedman,
Hoffman & Goodman, LLP in the past and during the current fiscal year. See
"Certain Transactions."
George Riordan, a Director of the Company, has served as the
Managing Partner of George Riordan & Co., an investment banking firm, since
1991. From 1989 to 1991, Mr. Riordan served as a Managing Director of Dean
Witter Reynolds. Mr. Riordan serves on the Boards of Directors of the
Macneal-Schwendler Corp. and Pancho's Mexican Buffet, Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Executive Committee, an Audit
Committee, a Nominating Committee, a Finance Committee, a Compensation
Committee and a Public Responsibility Committee.
The Executive Committee is composed of Martin Nussbaum,
Andrew J. Cavanaugh, Mark Goldman and Scott R. Heldfond. The Executive
Committee has the authority to act in place of the Board on all matters which
would otherwise come before the Board except for such matters which are
required by law or by the Company's Certificate of Incorporation or By-Laws to
be acted upon exclusively by the Board.
The Audit Committee is composed of Roger Kowalsky, Scott R.
Heldfond, Hoffer Kaback and S. Lee Kling. The Audit Committee is responsible for
reviewing the Company's financial statements, recommending the appointment of
the Company's independent auditors and reviewing the overall scope of the
audit.
The Nominating Committee is composed of Martin Nussbaum,
Andrew J. Cavanaugh and Roger Kowalsky. The Nominating Committee is responsible
for nominating persons for election as directors of the Company.
The Compensation Committee is composed of Andrew J. Cavanaugh,
Scott R. Heldfond and Martin Nussbaum. The Compensation Committee is responsible
for reviewing the compensation arrangements relating to senior officers of the
Company and administering and making recommendations to the Board regarding the
bonus plans for the senior officers of the Company. The Compensation Committee
also administers the Company's Amended and Restated 1984 Employee Stock Option
Plan, the 1994 Senior Management Stock Option Plan and the 1995 Non-Employee
Directors' Stock Option Plan.
30
<PAGE>
The Finance Committee is composed of Mark Goldman, Martin
Nussbaum, Roger Kowalsky and S. Lee Kling. The Finance Committee is responsible
for monitoring the Company's financial condition and reviewing its credit and
other financing arrangements.
The Public Responsibility Committee is composed of Paul A.
Gliebe, Jr., Mark Goldman, S. Lee Kling and George Riordan. The Public
Responsibility Committee is responsible for reviewing the operations of the
Company regarding product safety, environmental and corporate governance issues.
31
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the
Company and its subsidiaries, as well as certain other compensation paid or
accrued, to the Chief Executive Officer of the Company and the other four most
highly compensated executive officers of the Company who earned in excess of
$100,000 for the Company's fiscal years ended December 31, 1992, 1993 and 1994
(each person appearing in the table is referred to as a "Named Executive"):
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- ------------------------
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPEN- COMPEN-
NAME AND PRINCIPAL POSITION YEAR ($) ($) SATION($) OPTIONS(#) SATION($)
--------------------------- ---- ---- ----- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mark D. Goldman ................. 1994 400,000 600,000 0 229,630(2) 3,760(3)
President and Chief 1993 319,500 0 0 29,630 3,540(3)
Executive Officer 1992 307,385 0 0 200,000 2,830(3)
Louis R. Novak .................. 1994 261,055 316,800 0 157,870(4) 870(5)
Executive Vice President and 1993 256,797 0 0 20,370 510(5)
Chief Operating Officer 1992 238,917 0 0 137,500 510(5)
Gary J. Niles ................... 1994 261,055 316,800 0 157,870(6) 1,440(7)
Executive Vice President, 1993 212,623 0 0 20,370 1,440(7)
Marketing and Product 1992 214,167 0 0 137,500 1,440(7)
Acquisition
Loren Hildebrand ................ 1994 159,375 275,000(8) 0 100,000 840(9)
Executive Vice President,
Sales
William G. Catron ............... 1994 226,535 206,640 0 86,111(12) 870(13)
Executive Vice President, 1993 214,813 25,000(10) 27,429(11) 11,111 870(13)
General Counsel and Chief 1992 135,288 25,000(10) 115,261(11) 75,000 508(13)
Administrative Officer
</TABLE>
(1) Other than as provided in this table, there were no other transactions
among the Named Executives and the Company which are required to be
reported in this table.
(2) Represents 229,630 options granted pursuant to the 1994 Senior
Management Stock Option Plan (the "1994 Plan"). Does not include
129,311 shares of Common Stock granted in connection with the
termination of the 1992 Plan.
32
<PAGE>
(3) This amount represents $3,760 in premiums paid by the Company with
respect to term life insurance in 1994, $3,540 in premiums paid by the
Company with respect to term life insurance in 1993 and $2,830 in
premiums paid by the Company with respect to term life insurance in
1992.
(4) Represents 157,870 options granted pursuant to the 1994 Plan. Does not
include 88,900 shares of Common Stock granted in connection with the
termination of the 1992 Plan.
(5) This amount represents $870 in premiums paid by the Company with
respect to term life insurance in 1994 and $510 in premiums paid by the
Company with respect to term life insurance in each of 1992 and 1993.
(6) Represents 157,870 options granted pursuant to the 1994 Plan. Does
not include 88,900 shares of Common Stock granted in connection with
the termination of the 1992 Plan.
(7) This amount represents $1,440 in premiums paid by the Company with
respect to term life insurance in each of 1992, 1993 and 1994.
(8) This amount includes a $50,000 bonus paid to the Named Executive in
connection with the Named Executive's hiring.
(9) This amount represents premiums paid by the Company with respect to
term life insurance in 1994.
(10) This amount represents a bonus paid to the Named Executive in
connection with the Named Executive's hiring.
(11) This amount includes an automobile allowance (which is provided to all
senior officers of the Company) paid by the Company in 1993 in the
amount of $14,400 and fees paid by the Company to the Company's
accountants in the amount of $7,700 in 1993 in connection with the
Named Executive's hiring. This amount also includes $103,394 of
relocation expenses (including reimbursements of income taxes thereon)
paid by the Company in connection with the Named Executive's hiring.
(12) Represents 86,111 options granted pursuant to the 1994 Senior
Management Stock Option Plan. Does not include 48,491 shares of Common
Stock granted in connection with the termination of the 1992 Plan.
(13) This amount represents $870 in premiums paid by the Company with
respect to term life insurance in each of 1993 and 1994 and $508 in
premiums paid by the Company with respect to term life insurance in
1992.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are set forth under
"Management--Committees of the Board of Directors" and their relationship with
the Company is set forth under "Management--Executive Officers and Directors."
33
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding options
granted to the Named Executives during the Company's 1994 fiscal year:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------
SHARES OF % OF TOTAL
COMMON OPTIONS
STOCK GRANTED TO Potential Realized Value at Assumed
UNDERLYING EMPLOYEES IN Exercise Annual Rates of Stock Price
OPTIONS FISCAL YEAR Price Expiration Appreciation for Option Term
NAME GRANTED(#) (OF 961,000) ($/sh) Date 5%($)(3) 10%($)(4)
- ---- ---------- ------------ ------ ---- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mark D. Goldman......... 229,630(1) 23.9% 9.00 1/26/04 1,299,718 3,293,740
Louis R. Novak.......... 157,870(1) 16.4% 9.00 1/26/04 893,552 2,264,437
Gary J. Niles........... 157,870(1) 16.4% 9.00 1/26/04 893,552 2,264,437
Loren Hildebrand........ 100,000(2) 10.4% 5.75 4/04/04 361,614 916,402
William G. Catron....... 86,111(1) 9.0% 9.00 1/26/04 487,393 1,235,149
</TABLE>
(1) Options granted under the 1994 Plan.
(2) Options granted under the Amended and Restated 1984 Employee Stock
Option Plan.
(3) The projected stock price would be $14.66 per share.
(4) The projected stock price would be $23.34 per share.
Without the prior consent of the Company, the Named Executives may
not sell or otherwise transfer the shares of Common Stock acquired upon the
exercise of any option listed in the above table for seven months following the
date that a participant exercises such option. If at any time during the first
six months of such seven-month period, the optionee ceases to be an employee of
the Company, the Company will have the right to repurchase, at the exercise
price therefor, the shares of Common Stock which the optionee had acquired upon
such option exercise. Unexercised options will automatically terminate on the
date that an optionee ceases to serve as an employee of the Company unless such
termination of the optionee's employment with the Company results from the his
or her retirement, death or disability.
The Company does not currently grant stock appreciation rights.
34
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information with respect to the unexercised
options held by the Named Executives as of the end of the Company's 1994 fiscal
year. None of the Named Executives exercised any options during the 1994 fiscal
year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END (#) OPTIONS AT FISCAL YEAR-END($)(1)
------------------------------ ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark D. Goldman........... 168,210 86,420 68,750 0
Louis R. Novak............ 98,457 59,413 0 0
Gary J. Niles............. 105,957 59,413 3,725 0
Loren Hildebrand.......... 0 100,000 0 0
William G. Catron......... 53,704 32,407 0 0
</TABLE>
(1) The closing sales price of the Common Stock on the New York Stock
Exchange on December 31, 1994 was $5.75 per share.
STOCK OPTION PLANS
In 1984, the Board of Directors of the Company adopted, and
the stockholders approved, the 1984 Employee Stock Option Plan of the Company
(the "1984 Plan"). The 1984 Plan was developed to provide an incentive to
officers and employees of the Company by making available to them an
opportunity to acquire a proprietary interest or to increase their proprietary
interest in the Company. In 1994, the 1984 Plan was amended and restated (the
"Amended 1984 Plan") to extend the 1984 Plan until April 20, 2004 and to
increase the aggregate number of shares available under the 1984 Plan. Under
the Amended 1984 Plan, the Compensation Committee is authorized to grant
options to officers and employees of the Company and certain of its
subsidiaries for up to an aggregate of 1,589,997 shares of Common Stock. The
maximum term of options granted under the Amended 1984 Plan is ten years. As of
December 31, 1995, the Company has granted options to purchase 1,348,968 shares
to officers and employees of the Company under the Amended 1984 Plan. The
Amended 1984 Plan is construed, interpreted and administered by the
Compensation Committee and the terms of exercise of specific options are
determined by the Board.
In 1994, the Company terminated the 1992 Plan and adopted the
1994 Plan. The 1992 Plan was adopted as a one-time grant of options for 800,000
shares of Common Stock that vest over a three year period to certain members of
senior management of the Company. Under the 1994 Plan, each holder of options
under the 1992 Plan was granted new options at a fixed exercise price equal to
the fair market value of the Common Stock on the date of grant and also issued
shares of Common Stock in order to compensate such holder for forfeiting his or
her existing gain under such canceled option, measured by the difference
between the market price and the exercise price of the options on the date on
which the options were
35
<PAGE>
canceled. The maximum term of options granted under the 1994 Plan is ten years.
Options granted under the 1994 Plan are to be non-qualified stock options under
the Internal Revenue Code of 1986, as amended (the "Code").
The Company adopted the 1995 Non-Employee Directors' Stock
Option Plan (the "1995 Plan") in June 1995. The 1995 Plan was developed to
attract, retain and motivate non-employee directors and to encourage
non-employee directors to acquire an equity interest or increase their stock
ownership in the Company. Under the 1995 Plan, the Compensation Committee is
authorized to grant options to non-employee directors for up to 160,000 shares
of the Company's Common Stock. The maximum term of options granted under the
1995 Plan is ten years. Options granted are to be non-qualified stock options
under the Code. Under the 1995 Plan, non-employee directors are automatically
granted an option to purchase 2,000 shares of Common Stock on January 1 of each
calendar year. Options were also granted on July 1, 1995. As of January 1,
1996, the Compensation Committee has granted options to purchase 32,000 shares
of Common Stock under the 1995 Plan. The 1995 Plan is construed, interpreted
and administered by the Compensation Committee.
SEVERANCE AGREEMENTS WITH MANAGEMENT
On October 27, 1994, the Company entered into a severance
agreement (the "Severance Agreement") with Mark Goldman, effective as of July
13, 1994. The Severance Agreement sets forth severance benefits which are
payable if Mr. Goldman's employment is terminated for various reasons,
including termination by him of his employment following a change in control of
the Company, as follows (the "Severance Payment"):
(i) If Mr. Goldman is terminated without cause (as defined in
the Severance Agreement) prior to a Change in Control (as defined in the
Severance Agreement), or if Mr. Goldman terminates his employment for good
reason (as defined in the Severance Agreement) prior to a Change in Control,
the Severance Agreement provides that the Company shall pay to Mr. Goldman a
lump sum payment equal to (a) two times Mr. Goldman's annualized current base
compensation and (b) 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 Mr. Goldman 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 Mr. Goldman 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 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).
(ii) If Mr. Goldman is terminated by the Company within
twenty-four (24) months following a Change in Control (as defined in the
Severance Agreement), or if Mr. Goldman terminates his employment for good
reason (as defined in the Severance Agreement) within twenty-four (24) months
following a Change in Control, the Severance Agreement provides that the
Company shall pay to Mr. Goldman a lump sum payment equal to (a) three times
Mr. Goldman's annualized current base compensation, (b) the greater of (1)
36
<PAGE>
three times the Annual Bonus or (2) five hundred thousand dollars ($500,000)
and (c) three times the car allowance in effect for Mr. Goldman at the time of
termination and a lump sum amount equal to three times the insurance and
maintenance cost incurred for said vehicle during Mr. Goldman's last full year
of employment with the Corporation. Furthermore, the Severance Agreement
provides that the Company shall continue to provide Mr. Goldman with certain
fringe benefits for a period of three years following the date of Mr. Goldman's
termination, subject to mitigation by Mr. Goldman.
(iii) If Mr. Goldman is terminated for cause, or if Mr.
Goldman terminates his employment other than for good reason (as defined in the
Severance Agreement), the Severance Agreement provides that the Company must
pay to Mr. Goldman his unpaid compensation for services prior to termination
and the value of any accrued unused vacation pay to the date of termination.
The maximum Severance Payment that the Company would have been required to make
under the Severance Agreement if such amount became payable in fiscal 1994 was
approximately $3,059,883.
Mr. Goldman is employed by the Company as its President and
Chief Executive Officer without an employment agreement. The Company has
purchased a life insurance policy in a $2,000,000 face amount for Mr. Goldman
who designated the beneficiary of such insurance policy.
All of the Executive Vice Presidents (six) of the Company
have entered into a letter agreement with the Company which provides, among
other things, that if the executive is terminated other than for cause the
executive is entitled to continue to receive his salary and certain benefits
(excluding bonus) for a period of up to twelve (12) months. These severance
payments may be reduced in the event that the executive commences regular
full-time employment during such period. In addition, if there is a change in
control and the executive's employment is terminated or the executive resigns
under certain circumstances, the executive shall instead receive a lump sum
payment equal to a multiple of such executive's salary, bonus and certain
benefits, plus the continuation of certain benefits for a specified period of
time. None of the Named Executives has an employment agreement with the
Company.
DIRECTOR COMPENSATION
Directors who are not full-time employees of the Company
receive an annual fee of $15,000 plus $500 for each meeting of the Board or any
committee thereof attended by such director. In addition, non-employee
directors are automatically granted an option to purchase 2,000 shares of
Common Stock on January 1 of each year under the 1995 Non-Employee Directors'
Stock Option Plan adopted June 20, 1995. Options were also granted on July 1,
1995. See "Executive Compensation--Stock Option Plans." All directors are
reimbursed by the Company for out-of-pocket expenses incurred by them as
directors of the Company.
As compensation for Mr. Nussbaum's service as Chairman of the
Executive Committee of the Board of Directors, and in lieu of an annual
director's fee, Mr. Nussbaum received a fee of $15,000 per month from 1991
through September 1993 and $10,000 per month from October 1993 through March
1995. Commencing in April 1995, Mr. Nussbaum has been paid the annual
director's fee and meeting fees described above.
37
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of
December 31, 1995, with respect to the Common Stock of the Company beneficially
owned by (a) each director of the Company, (b) all persons known by the Company
to be the beneficial owner of more than 5% of the Common Stock of the Company,
(c) the Named Executives and (d) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
PERCENT OF COMMON
NAME OF BENEFICIAL OWNER NUMBER OF SHARES (1) STOCK OWNERSHIP (1)
- ------------------------ -------------------- -------------------
<S> <C> <C>
FMR Corp. (2).............................. 1,187,963 11.1%
Dimensional Fund Advisors, Inc. (3)........ 625,300 6.2%
College Retirement Equities Fund (4)....... 541,500 5.4%
William G. Catron (5)...................... 124,137 1.2%
Andrew J. Cavanaugh........................ 3,700 *
Paul A. Gliebe, Jr......................... 4,350 *
Mark D. Goldman (6)........................ 659,041 6.3%
Scott R. Heldfond.......................... 5,450 *
Loren Hildebrand (7)....................... 100,000 *
Hoffer Kaback ............................. 2,000 *
S. Lee Kling............................... 7,000 *
Roger Kowalsky............................. 5,000 *
Gary J. Niles (8).......................... 199,567 1.9%
Louis R. Novak (9)......................... 192,770 1.9%
Martin Nussbaum (10)....................... 9,473 *
George Riordan............................. 3,000 *
All executive officers and directors as a group
(consisting of 28 persons) (11)............ 1,615,287 14.3%
</TABLE>
- -----------------------
* Less than 1%.
38
<PAGE>
(1) This table identifies persons having sole voting and/or
investment power with respect to the shares of Common Stock
set forth opposite their names as of December 31, 1995,
according to the information furnished to the Company by each
of them. A person is deemed to be the beneficial owner of
shares of Common Stock that can be acquired by such person
within 60 days from the date of this Prospectus upon the
conversion of convertible securities or the exercise of
warrants or options. Percentage of Beneficial Ownership is
based on a total of 10,089,961 shares of Common Stock
outstanding and assumes in each case that the person only, or
group only, exercised his rights to purchase all shares of
Common Stock underlying convertible securities, options or
warrants.
(2) Address is 82 Devonshire Street, Boston, Massachusetts 02109.
As set forth in Amendment No. 5 to Schedule 13D filed January
24, 1996 filed with the Securities and Exchange Commission.
Includes 619,163 shares of Common Stock issuable upon
conversion of the Company's Depositary Convertible
Exchangeable Preferred Shares ("Depositary Shares")
representing shares of $17.00 Preferred Stock, based on a
conversion price of 1.185 shares of Common Stock per
Depositary Share.
(3) Address is 1299 Ocean Avenue, 11th Floor, Santa Monica,
California 40401. As set forth in a Schedule 13G dated
February 9, 1994 filed with the Securities and Exchange
Commission.
(4) Address is 730 Third Avenue, New York, New York 10017. As set
forth in a Schedule 13G dated February 8, 1994 filed with the
Securities and Exchange Commission.
(5) Includes options to purchase 86,111 shares of Common Stock.
(6) Includes options to purchase 454,630 shares of Common Stock.
(7) Includes options to purchase 100,000 shares of Common Stock.
(8) Includes options to purchase 162,870 shares of Common Stock.
(9) Includes options to purchase 157,870 shares of Common Stock.
(10) Includes 2,473 shares of Common Stock which are issuable upon
exercise of a warrant which was issued to Shereff, Friedman,
Hoffman & Goodman, LLP on December 11, 1991 in connection
with Mr. Nussbaum's service as Chairman of the Executive
Committee of the Board of Directors. Mr. Nussbaum disclaims
beneficial ownership of the other shares of Common Stock
issuable upon exercise of the warrant.
(11) Includes an aggregate of options to purchase 1,236,092 shares
of Common Stock and 2,473 shares which may be acquired
pursuant to the exercise of a warrant.
39
<PAGE>
SELLING STOCKHOLDERS
The following table provides certain information with respect
to the shares of Common Stock beneficially owned by each Selling Stockholder.
The shares of Common Stock offered by this Prospectus may be offered from time
to time in whole or in part by the persons named below or by their transferees,
as to whom applicable information will be set forth in a prospectus supplement
to the extent required.
<TABLE>
<CAPTION>
NUMBER OF
SHARES SHARES OF SHARES OF
OF COMMON COMMON STOCK COMMON STOCK
STOCK OWNED OFFERED FOR AFTER GIVING EFFECT
PRIOR TO THIS SALE IN THIS TO PROPOSED SALE
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OFFERING (2) OFFERING IN THIS OFFERING
- ---------------------------------------- ------------ --------- ----------------
<S> <C> <C> <C>
Gerald Adler (3) 953 953 0
Adrienne Partners, L.P. (4) 7,559 7,559 0
Chesapeake Partners Institutional Fund Limited 19,438 19,438 0
Partnership (5)
Chesapeake Partners International Ltd. (5) 18,358 18,358 0
Chesapeake Partners Limited Partnership (5) 259,179 259,179 0
Davos Partners, L.P. (4) 42,116 42,116 0
Joseph F. Donley (3) 1,082 1,082 0
Forest Fulcrum Fund (6) 107,991 107,991 0
Estate of Stanley J. Friedman (3) 1,726 1,726 0
Gerard Klauer Mattison & Co., LLC (7) 150,000 150,000 0
Joel H. Goldberg (3) 1,545 1,545 0
Richard A. Goldberg (3) 1,167 1,167 0
Lawrence G. Goodman (3) 1,365 1,365 0
Michael A. Green (3) 1,120 1,120 0
Don D. Grubman (3) 747 747 0
Harvest Partners L.P. (8) 137,688 137,688 0
Highbridge International LDC (9) 121,490 121,490 0
Jeffry S. Hoffman (3) 1,365 1,365 0
HPB Associates, L.P. (10) 161,987 161,987 0
Robert J. Jossen (3) 1,545 1,545 0
Andrew J. Levander (3) 1,545 1,545 0
Andrew J. Levinson (3) 902 902 0
Jeffrey Lowin (3) 1,030 1,030 0
Margery K. Neale (3) 876 876 0
James H. Nix (3) 1,041 1,041 0
Paloma Securities L.P. (11) 215,982 215,982 0
Quasar International Partners, C.V. (4) 58,315 58,315 0
Quasar International Partners, C.V. (8) 91,792 91,792 0
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES SHARES OF SHARES OF
OF COMMON COMMON STOCK COMMON STOCK
STOCK OWNED OFFERED FOR AFTER GIVING EFFECT
PRIOR TO THIS SALE IN THIS TO PROPOSED SALE
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OFFERING (2) OFFERING IN THIS OFFERING
- ---------------------------------------- ------------- ------------- ----------------
<S> <C> <C> <C>
Michael J. Shapiro (3) ...................... 1,082 1,082 0
Source One Mortgage Services Corporation (12) 107,991 0 107,991
The Boston Co. (13) ......................... 53,995 0 53,995
The Crown Fund (14) ......................... 53,995 0 53,995
The Crown Investment Fund (14) .............. 53,995 0 53,995
Gregory Todd (3) ............................ 773 773 0
Richard D. Weinberg (3) ..................... 1,545 1,545 0
Charles I. Weissman (3) ..................... 1,118 1,118 0
--------- --------- ---------
Total ..................... 1,684,398 1,414,422 269,976
</TABLE>
(1) Except as set forth in the footnotes below, there are no material
relationships between any of the Selling Stockholders and the Company.
(2) Includes shares of Common Stock issuable upon conversion of
the Debentures or upon exercise of the Warrants.
(3) Address is c/o Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third
Avenue, New York, New York 10022. The Company has retained the legal
services of Shereff, Friedman, Hoffman & Goodman, LLP in recent years.
See "Certain Transactions."
(4) Address is c/o D. Nolan Management Co., Inc., 245 Park Avenue, New York,
New York 10167.
(5) Address is c/o Goldman Sachs, 85 Broad Street, New York, New York 10004.
(6) Address is c/o Forest Investment Management, 53 Forest
Avenue, Old Greenwich, Connecticut 06870.
(7) Address is 529 Fifth Avenue, New York, New York 10017. The Company has
retained the financial advisory services of Gerard Klauer
Mattison & Co., LLC in recent years. See "Certain Transactions."
(8) Address is 885 Second Avenue, New York, New York 10017.
(9) Address is 767 Fifth Avenue, New York, New York 10153.
(10) Address is 888 Seventh Avenue, New York, New York 10106.
(11) Address is Two American Lane, Greenwich, Connecticut 06836-2571.
(12) Address is 777 Westchester Avenue, White Plains, New York 10604.
(13) Address is One Boston Place, Boston, Massachusetts 02018.
(14) Address is 222 North LaSalle Street, Chicago, Illinois 60601.
Each Selling Stockholder is registering the number of shares
of Common Stock set forth opposite its name above. Because the Selling
Stockholders may offer all or some part of the shares of Common Stock which
they hold pursuant to this Prospectus and because this Offering is not being
underwritten on a firm commitment basis, no estimate can be given as to the
amount of shares of Common Stock to be offered for sale by the Selling
Stockholders nor the amount of shares of Common Stock that will be held by the
Selling Stockholders upon termination of this Offering. See "Plan of
Distribution." To the extent required, the specific number of shares of Common
Stock to be sold by a Selling Stockholder in connection with a particular offer
will be set forth in an accompanying supplement to this Prospectus.
41
<PAGE>
PLAN OF DISTRIBUTION
The Selling Stockholders may sell the Common Stock underlying
the Debentures and Warrants from time to time.
The shares of Common Stock being sold hereby may be offered
to purchasers directly by any of the Selling Stockholders or through
underwriters, brokers, dealers or agents from time to time in one or more
transactions (i) in the over-the-counter market, (ii) other than in the
over-the-counter market or (iii) through the writing of options (whether such
options are listed on an options exchange or otherwise) on, or in settlement of
short sales of the shares of Common Stock. Any of such transactions may be at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices, at varying prices determined at the time of sale or
at negotiated or fixed prices, in each case as determined by the Selling
Stockholders or by agreement between the Selling Stockholders and such
underwriters, brokers, dealers or agents or purchasers if the Selling
Stockholders effect such transaction by selling shares to or through
underwriters, brokers, dealers or agents, such underwriters, brokers, dealers,
or agents receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of securities
for whom they may act as agent (which discounts, concessions or commissions as
to particular underwriters, brokers, dealers or agents may be in excess of
those customary in the types of transaction involved). The Selling Stockholders
and any dealers or agents that participate in the distribution of the shares of
Common Stock offered hereby may be deemed to be underwriters, and any profit on
the sale of such securities by them and any discounts, commissions, or
concessions received by any such dealers or agents might be deemed to be
underwriting discounts and commissions under the Securities Act.
The shares of Common Stock may be sold pursuant to this
Prospectus or pursuant to an available exemption from the registration
requirements of the Securities Act, such as the provisions of Rule 144
promulgated under the Securities Act, to the extent applicable. Under the
securities laws of certain states, the shares of Common Stock offered hereby
may be sold in such states only through registered or licensed brokers or
dealers. In addition, in certain states the shares of Common Stock may not be
sold unless the securities have been registered or qualified for sale in such
state or an exemption from registration or qualification is available with.
The Company will pay substantially all of the expenses
incident to this Offering, other than commissions and fees and fees of others
employed by a Selling Stockholder, including attorneys' fees. Under agreements
entered into with the Company, certain of the Selling Stockholders and any
broker-dealer they may utilize will be indemnified by the Company against
certain civil liabilities, including liabilities under the Securities Act. The
Company will not receive any of the proceeds from the sale of any of the
securities in this Offering by the Selling Stockholders.
Each Selling Stockholder will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including, without limitation, Rules 10b-2, 106-2 and 10b-7, which provisions
may limit the timing of purchases and sales of any of the securities by the
Selling Stockholders. All of the foregoing may affect the marketability of the
shares of Common Stock offered hereby.
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CERTAIN TRANSACTIONS
The Company has retained the legal services of Shereff,
Friedman, Hoffman & Goodman, LLP in recent years. One of the Company's
directors is a partner of Shereff, Friedman, Hoffman & Goodman, LLP. Several
partners and former partners of Shereff, Friedman, Hoffman & Goodman, LLP are
Selling Stockholders. The total amount of fees paid to Shereff, Friedman,
Hoffman & Goodman, LLP in 1994 and 1993 were approximately $0.2 million and
$0.2 million, respectively, exclusive of the director's fees paid to Mr.
Nussbaum, a partner in the firm of Shereff, Friedman, Hoffman & Goodman, LLP,
as compensation for his service as Chairman of the Executive Committee of the
Board of Directors. See "Executive Compensation--Director Compensation."
The Company has retained the financial advisory services of
Gerard Klauer Mattison & Co., LLC in recent years. Gerard Klauer Mattison &
Co., LLC is a Selling Stockholder. The total amount of fees paid to Gerard
Klauer Mattison & Co., LLC in 1993 and 1994 were approximately $560,000 and
$19,642, respectively.
The Company has retained the insurance brokerage services of
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.
DESCRIPTION OF CAPITAL STOCK
The Company has an authorized capital of 50,000,000 shares of
Common Stock, and 1,000,000 shares of preferred stock, par value $1.00 per
share ("Preferred Stock"). As of December 31, 1995, 10,089,961 shares of Common
Stock were outstanding, held of record by approximately 1,700 persons and
1,839,500 Depositary Shares representing 183,950 shares of $17.00 Preferred
Stock were outstanding, held of record by approximately 430 persons.
COMMON STOCK
The holders of Common Stock are entitled to one vote per
share on all matters voted on by stockholders, including the election of
directors, other than the election of two directors by the holders of the
$17.00 Preferred Stock. See "Description of Capital Stock--Preferred Stock."
Except as otherwise required by law or provided in any resolution adopted by
the Board with respect to any series of Preferred Stock of the Company, the
holders of Common Stock exclusively possess all voting power. Subject to any
preferential rights of any outstanding series of Preferred Stock, the holders
of Common Stock are entitled to such dividends as may be declared from time to
time by the Board from funds available for distribution to such holders. No
holder of Common Stock has any preemptive right to subscribe to any securities
of the Company of any kind or class or any cumulative voting rights.
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PREFERRED STOCK
The Company's Certificate of Incorporation (the
"Certificate") authorizes the issuance of 1,000,000 shares of Preferred Stock,
in one or more series and having such rights, including voting, conversion and
redemption rights, and such preferences, including dividend and liquidation
preferences, as may be fixed by the Board, without any further action by the
stockholders of the Company. The Board issued 183,950 shares of $17.00
Preferred Stock. In addition, the Board may from time to time, without the
consent of the holders of the Preferred Stock, create and issue one or more
classes of other preferred stock, which may be junior or on a parity in rank to
the Preferred Stock and may, among other things, be convertible into shares of
Common Stock of the Company. The terms of the $17.00 Preferred Stock and
related Depositary Shares are summarized below:
$17.00 Preferred Stock
General
The following description of terms of the $17.00 Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the Certificate of Designations of the $17.00 Preferred Stock. A
copy of the Certificate of Designations may be obtained by any shareholder at
no cost, by written request to the Company.
Dividends
The holders of $17.00 Preferred Stock are entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available therefor, cash dividends at an annual rate of $17.00 per share.
Dividends are payable quarterly, on January 1, April 1, July 1 and October 1 of
each year, commencing on January 1, 1990, to the holders of record at the close
of business on the record dates (within 45 days of the dividend payment dates)
specified by the Board of Directors at the times such dividends are declared.
Dividends will be cumulative from the date of issuance of the $17.00 Preferred
Stock. Accrued but unpaid dividends will not bear interest.
The $17.00 Preferred Stock has priority as to dividends over
the Common Stock and any other series or class of the Company's stock hereafter
issued which ranks junior to the $17.00 Preferred Stock as to dividends. No
dividends may be declared or paid or funds set apart for payment by the Company
on the Common Stock or any other of the Company's stock ranking junior to the
$17.00 Preferred Stock with respect to dividend rights (except dividends paid
in shares of stock ranking junior to the $17.00 Preferred Stock as to
dividends), unless prior to or concurrently with such declaration, payments,
setting apart, as the case may be, all accrued and unpaid dividends on shares
of the $17.00 Preferred Stock have been declared and paid.
Conversion Rights
Each share of the $17.00 Preferred Stock is convertible, at
the option of the holder thereof, at any time, into shares of Common Stock at a
conversion price of $16.875 per share of Common Stock. For purposes of
conversion, each share of $17.00 Preferred Stock shall be valued at
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<PAGE>
$200.00 per share, which shall be divided by the then current conversion price
to determine the number of shares of Common Stock issuable upon conversion. No
payment or adjustment will be made on account of accrued dividends upon
conversion of the $17.00 Preferred Stock. Holders of shares of $17.00 Preferred
Stock which are converted into shares of Common Stock will be treated for all
purposes, including the determination of stockholders entitled to receive
dividends on such $17.00 Preferred Stock or to receive notice of and to vote at
any meeting of stockholders, as holders of record of Common Stock rather than
$17.00 Preferred Stock as of the date of conversion. The conversion price is
subject to adjustment upon the occurrence of certain events. The Company may at
any time reduce the conversion price.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of the $17.00 Preferred Stock will be
entitled to receive, out of assets of the Company available for distribution to
its stockholders, an amount in cash equal to $200.00 for each share of $17.00
Preferred Stock outstanding, plus any accrued and unpaid dividends to the date
of final distribution, before any distribution is made to holders of Common
Stock or any other shares of capital stock ranking junior to the $17.00
Preferred Stock in respect of distributions upon liquidation, dissolution or
winding up.
Voting Rights
The holders of the $17.00 Preferred Stock have no voting
rights except as described below or as required by Delaware law. In exercising
any of the voting rights described below, each outstanding share of $17.00
Preferred Stock will be entitled to one vote.
Whenever dividends on the $17.00 Preferred Stock or on any
other stock ranking pari passu as to dividends with the $17.00 Preferred Stock
("Parity Dividend Stock") have not been paid in an aggregate amount equal to at
least six quarterly dividends on such shares (whether or not consecutive), the
number of directors of the Company will be increased by two (or by the greater
number described below) and the holders of the $17.00 Preferred Stock voting
separately as a class with the holders of such Parity Dividend Stock, if so
provided by the terms of such stock, will be entitled to elect such two
additional directors or such greater number of directors which would result in
such holders electing at least 20% of the Company's Board of Directors at any
meeting of stockholders of the Company at which directors are to be elected
during the period such dividends remain in arrears. Such voting right will
terminate when all such dividends accrued and in default on the $17.00
Preferred Stock have been paid in full. The term of office of all directors so
elected will terminate immediately upon such payment. Whenever the foregoing
right to elect directors shall be exercised and subsequently terminated upon
payment of dividends in arrears, such right shall again accrue if the Company
subsequently fails to pay dividends on the $17.00 Preferred Stock or any other
Parity Dividend Stock in an amount equal to at least six quarterly dividends
(whether or not consecutive).
The Board of Directors determined not to declare and pay the
quarterly dividend of $0.425 per Depositary Share payable July 1, 1992, which
dividend has accumulated. Since the Company has failed to pay dividends on the
$17.00 Preferred Stock for six or more quarterly payment periods,
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pursuant to the voting provisions described above, the holders of the $17.00
Preferred Stock elected two directors to the Board of Directors of the Company.
Optional Redemption by the Company
The $17.00 Preferred Stock is redeemable, in whole or in
part, at the option of the Company, at the redemption prices per share set
forth in the Certificate of Designations, plus accrued and unpaid dividends to
the date fixed for redemption. Unless full cumulative dividends on all
outstanding shares of $17.00 Preferred Stock have been or contemporaneously are
declared and paid for all past dividend periods, the Company may not (i) redeem
fewer than all shares of the $17.00 Preferred Stock without the affirmative
vote or consent of the holders of at least a majority of the outstanding shares
of the $17.00 Preferred Stock voting as a class or (ii) purchase or otherwise
acquire (except by redemption as set forth above) fewer than all shares of the
$17.00 Preferred Stock otherwise than pursuant to a purchase or exchange offer
made on the same terms to all holders of the $17.00 Preferred Stock.
Change in Control Option
At any time following the occurrence of a Change in Control
(as defined in the Certificate of Designations) which occurs prior to October
1, 2014, each holder of $17.00 Preferred Stock shall have the right, at the
holder's option, to cause the Company to exchange all or a portion or such
holder's $17.00 Preferred Stock on the date that is 35 business days (subject
to extension as set forth below) after the Change in Control has occurred (the
"Reset Exchange Date"), for a principal amount of the Company's Subordinated
Debentures due October 1, 2014 (the "Reset Debentures") equal to the
liquidation preference of the $17.00 Preferred Stock so exchanged plus a cash
payment of accrued and unpaid dividends, if any, to the Reset Exchange Date.
Exchange for Convertible Debentures
The entire issue of $17.00 Preferred Stock is exchangeable at
the option of the Company, in whole but not in part, on any dividend payment
date through October 1, 2014, into the Company's 8 1/2% Convertible
Subordinated Debentures due October 1, 2014 (the "Convertible Debentures"). The
Convertible Debentures will be unsecured, subordinated general obligations of
the Company, limited to an aggregate principal amount equal to the aggregate
liquidation value (excluding accrued and unpaid dividends payable upon such
exchange) of the Preferred Stock for which the Convertible Debentures are
exchanged, and will mature on October 1, 2014. Holders of the $17.00 Preferred
Stock will be entitled to receive $200.00 principal amount of the Convertible
Debentures in exchange for each share of $17.00 Preferred Stock held by them at
the time of exchange and a cash payment of accrued and unpaid dividends to the
date of exchange.
Restricted Payments
So long as any shares of $17.00 Preferred Stock are
outstanding, the Company will not (i) declare or pay any dividend
or make any distribution in respect of its Common Stock or any other class of
capital stock of the Company ranking junior to the $17.00 Preferred Stock (other
than a dividend
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<PAGE>
or distribution payable in shares of Common Stock or other capital
stock of the Company which is junior to the $17.00 Preferred Stock or rights,
warrants or options to purchase Common Stock or such other capital stock) or
(ii) make any payment on account of the purchase, redemption or other
acquisition or retirement of any Common Stock or any other class of capital
stock of the Company ranking junior to the $17.00 Preferred Stock or rights,
options or warrants to purchase Common Stock or any other class of capital
stock of the Company ranking junior to the $17.00 Preferred Stock or permit any
subsidiary to do so (other than payments made in shares of Common Stock or
capital stock of the Company ranking junior to the $17.00 Preferred Stock or
payments made in rights, warrants or options to purchase Common Stock or such
other capital stock) if, after giving effect to (i) and (ii) above, the
aggregate amount of all such dividends, distributions and payments (the amount
of any such non-cash payments to be determined by the Company's Board of
Directors, whose determination shall be conclusive) declared or made after the
issuance of the Preferred Stock exceeds the sum of (a) the aggregate net
proceeds, including the fair market value of non-cash property (as determined by
the Company's Board of Directors, whose determination shall be conclusive)
received by the Company from the issuance or sale after March 31, 1989 of shares
of its capital stock (excluding the shares of $17.00 Preferred Stock) or of
rights, warrants or options to purchase or acquire any such capital stock, plus
(b) the aggregate amount of any indebtedness of the Company which is converted
into shares of capital stock subsequent to March 31, 1989 (other than conversion
of Convertible Debentures), plus (c) 50% of the Consolidated Net Income of the
Company measured on a cumulative basis subsequent to March 31, 1989 plus (d) in
the case of any purchase, redemption or other acquisition or retirement referred
to in (ii) above, $10,000,000 (such $10,000,000 being hereinafter referred to as
the "Minimum Additional Repurchase Basket") subject to adjustment as set forth
in the next sentence. An amount equal to the aggregate amount of all net after
tax gains realized from the sale of assets not in the ordinary course of the
Company's business shall accrue and be added to the Minimum Additional
Repurchase Basket at the annual rate of 20% of such realized net gains in each
of the first five years commencing with the fiscal year in which such assets
were sold; provided, however, that the Company may not effect any acquisition
referred to in (ii) above from the amounts added to the Minimum Additional
Repurchase Basket as provided in this sentence, if after giving effect to such
acquisition, the common equity of the Company is less than $31,066,000. The
foregoing provisions shall not prevent (1) the payment of any dividend within
60 days after the date of declaration thereof if at the time of declaration the
declaration complied with the provisions described above or (2) the retirement
of any shares of any class of the Company's capital stock in exchange for
(including any such exchange pursuant to which cash in an aggregate amount of
less than $100,000 is paid in lieu of fractional shares) or out of the
substantially concurrent sale of, other shares of its capital stock, and no
such retirement or the proceeds of any such sale or exchange shall be included
in the computation described above. "Consolidated Net Income" shall mean 100%
of the consolidated net income (exclusive of the gains on the sale of assets
not in the ordinary course of business) minus 100% of the consolidated net loss
of the Company and its subsidiaries from continuing operations as determined in
accordance with generally accepted accounting principles.
Transfer Agent
Chemical Trust Company of California, 50 California Street,
San Francisco, California, is the transfer agent for the $17.00 Preferred
Stock.
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Depositary Shares
Each Depositary Share represents 1/10th of a share of $17.00
Preferred Stock deposited under the Deposit Agreement (the "Deposit Agreement")
among the Company, the Depositary and the holders from time to time of the
depositary receipts issued thereunder, evidencing the Depositary Shares.
Subject to the terms of the Deposit Agreement, each owner of a Depositary Share
is entitled, proportionally, to all of the rights and preferences of the $17.00
Preferred Stock (including dividend, conversion, redemption, exchange,
liquidation and voting rights) contained in the Company's Certificate of
Incorporation and the Certificate of Designations and summarized under
"Description of Securities--Preferred Stock--$17.00 Preferred Stock." The
Depositary Shares are not a separate class of stock of the Company.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
General
In 1987, the Company reincorporated in Delaware. In
connection with the reincorporation, the Certificate and By-Laws were amended.
The Certificate and the By-Laws of the Company contain several provisions that
will make difficult the acquisition of control of the Company by means of a
tender offer, open market purchases, proxy fight or otherwise. These provisions
are expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
the Company first to negotiate with the Company. The Company believes that the
benefits of increased protection of the Company's potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to take
over or restructure the Company outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
Set forth below is a summary of certain provisions in the
Certificate and the By-Laws. The description is intended as a summary only and
is qualified in its entirety by reference to the Certificate and the By-Laws.
Board of Directors
The Certificate and the By-Laws provide for a Board divided
into three classes of directors serving staggered three-year terms. With
respect to the present Board, the term of the first class of directors will
expire at the 1997 annual meeting of stockholders, the term of the second class
of directors will expire at the 1996 annual meeting of stockholders and the
term of the third class of directors will expire at the 1998 annual meeting of
stockholders. The Certificate and the By-Laws provide that the number of
directors will be fixed from time to time exclusively by the Board, and a
majority of the Board then in office may fill any vacancies on the Board. These
rights would be subject to the voting rights of holders of the Preferred Stock
or any other issue of preferred stock of the Company. The Certificate also
provides that, subject to the rights of the holders of preferred stock of the
Company, directors may be removed only for cause and only by the affirmative
vote of holders of at least 80% of the voting power of the Company ("Voting
Stock"), voting together as a single class.
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Stockholder Actions and Special Meetings
The Certificate provides that stockholder action can be taken
only at an annual or special meeting of stockholders and prohibits stockholder
action by written consent in lieu of a meeting. The Certificate and the By-Laws
provide that, subject to the rights of holders of any series of preferred
stock, special meetings of stockholders can be called only by the Board, the
Chairman of the Board, the President of the Company or a committee of the Board
whose power and authority include the power to call such a meeting or at the
request of a majority of the Board. Subject to the rights of holders of any
series of preferred stock, stockholders are not permitted to call a special
meeting or to require that the Board call a special meeting of stockholders.
The By-Laws establish an advance notice procedure with regard
to business introduced by a stockholder to be brought before an annual meeting
of stockholders of the Company which is not specified in the notice of annual
meeting. In addition, pursuant to the Certificate, the By-Laws establish an
advance notice procedure with regard to nominations for the election of
directors by a stockholder.
The Certificate requires the vote of not less than 80% of the
Voting Stock to approve certain business combinations with any person which
beneficially owns at least 25% or more of the outstanding Voting Stock of the
Company (a "Related Person") unless (1) the directors of the Company by a two-
thirds vote of all directors in office have approved in advance the acquisition
of Voting Stock that caused the Related Person to become a Related Person or
have approved the business combination or (2) such Related Person has been a
Related Person for at least three years prior to the business combination.
Amendment of Certain Provisions of the Certificate and By-Laws
Subject to the voting rights of holders of the Preferred
Stock or any other issue of preferred stock of the Company, the Certificate and
the By-Laws contain provisions requiring the affirmative vote of the holders of
at least 80% of the Voting Stock to amend certain provisions of the Certificate
and certain provisions of the By-Laws relating to the classified board, fixing
the number of directors, removal of directors, filling vacancies on the Board,
requiring that any stockholder action be taken only at an annual
or special meeting of stockholders and prohibiting the calling of special
meetings by stockholders.
Section 203 of the Delaware General Corporation Law
The Company is subject to the provisions of Section 203 of
the Delaware General Corporation Law ("DGCL"). Section 203 provides, with
certain exceptions, that a Delaware corporation may not engage in any of a
broad range of business combinations with a person or affiliate or associate of
such person who is an "interested stockholder" for a period of three years from
the date such person became an interested stockholder unless: (i) the
transaction resulting in a person's becoming an interested stockholder, or the
business combination, is approved by the board of directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquires 85% or more of the outstanding voting stock of the
corporation in the same transaction which makes it an interested stockholder
(excluding certain employee stock option plans); or (iii) on or after the date
the person becomes an interested stockholder, the business combination is
approved by the corporation's board of directors and by the holders of at least
66 2/3% of the corporation's outstanding voting stock at an annual
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or special meeting, excluding shares owned by the interested stockholder. An
"interested stockholder" is defined as any person that is (x) the owner of 15%
or more of the outstanding voting stock of the corporation or (y) an affiliate
or associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
Directors' Liability
The Company's Certificate of Incorporation contains
provisions to (i) eliminate the personal liability of its directors for
monetary damages resulting from breaches of their fiduciary duty (other than
breaches of the duty of loyalty, acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, violations under
Section 174 of the DGCL or for any transaction from which the director derived
an improper personal benefit) and (ii) indemnify its directors and officers to
the fullest extent permitted by Section 145 of the DGCL, including
circumstances in which indemnification is otherwise discretionary. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company, the
Company has been advised that, in the opinion of the commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore , unenforceable. The Company believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is
Continental Stock Transfer & Trust Company, New York, New York.
LEGAL MATTERS
The validity, authorization and issuance of the Common Stock offered
hereby will be passed upon for the Company by Shereff, Friedman, Hoffman &
Goodman, LLP, New York, New York. Mr. Nussbaum, a director of the Company, is a
partner in the firm of Shereff, Friedman, Hoffman & Goodman, LLP. Mr. Nussbaum
beneficially owns 7,473 shares of Common Stock of the Company. Certain partners
and former partners of Shereff, Friedman, Hoffman & Goodman, LLP, other than
Mr. Nussbaum, are Selling Stockholders in this Offering. See "Selling
Stockholders."
EXPERTS
The consolidated financial statements as of December 31, 1994
and 1993 and for each of the three years in the period ended December 31, 1994
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Exchange Act and in accordance therewith, files reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). These reports, proxy statements and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024 of the Commission's office at 450
Fifth Street N.W., Washington, D.C. 20549, and at its regional offices located
at Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661 and at Suite 1300, Seven World Trade Center, New York, New York
10048. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Company's Common Stock is listed on the New York Stock
Exchange and copies of reports, proxy statements and other information
concerning the Company can be inspected at the offices of the New York Stock
Exchange at 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration
Statement on Form S-1 and schedules and exhibits thereto under the Act with
respect to the Common Stock offered hereby. This Prospectus, which constitutes
a part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain portions of which are omitted in accordance with the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract, agreement, or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the copy of such contract, agreement or document filed as
an exhibit to the Registration Statement for more complete description of the
matter involved, and each such statement be deemed qualified in its entirety by
such reference. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to such Registration Statement
and the exhibits and schedules thereto.
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Index to Financial Statements:
Financial Statements Page
Report of Independent Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1994
and December 31, 1993 F-3
Consolidated Statements of Operations for the years
ended December 31, 1994, 1993 and 1992 F-4
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1994, 1993 and 1992 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1993 and 1992 F-6
Notes to Consolidated Financial Statements F-7 to F-22
Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets -
September 30, 1995, September 30, 1994 and December 31, 1994 F-23
Condensed Consolidated Statements of Operations
for the three months and the nine months ended
September 30, 1995 and 1994 F-24
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1995 and 1994 F-25
Notes to Condensed Consolidated Financial Statements F-26 to F-27
F-1
<PAGE>
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
accompanying Index to Financial Statements 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-2
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
<TABLE>
<CAPTION>
December 31,
--------------------
1994 1993
---- ----
<S> <C> <C>
ASSETS
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-3
<PAGE>
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-4
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- -------------------
Shares Amts Shares Amts
------ ---- ------ -----
<S> <C> <C> <C> <C>
Balance at 12/31/91 183,950 $ 36,790 9,365,441 $ 94
Net loss -- -- -- --
Common stock issued -- -- 106,616 1
Dividends declared on preferred stock -- -- -- --
Cumulative translation adj. and other -- -- -- --
----------- ----------- -----------
Balance at 12/31/92 183,950 36,790 9,472,057 95
Net loss -- -- -- --
Common stock issued -- -- 89,800 1
Warrants issued -- -- -- --
Common stock received in exchange
for shares issued and cancelled -- -- (2,500) --
Cumulative translation adj. and other -- -- -- --
----------- -----------
Balance at 12/31/93 183,950 36,790 9,559,357 96
Net earnings -- -- -- --
Common stock issued, net -- -- 47,000 1
Termination of 1992 Plan -- -- 449,732 4
Common stock received in exchange
for shares issued and cancelled -- -- (1,000) --
Cumulative translation adj. and other -- -- -- --
----------- ----------- ----------- -----------
Balance at 12/31/94 183,950 $ 36,790 10,055,089 $ 101
=========== =========== =========== ===========
</TABLE>
(RESTUB TABLE)
<TABLE>
<CAPTION>
Additional Retained Cumulative
Paid-In Earnings Translation
Capital (Deficit) Adjustment Total
---------- ------------ ------------- ------
<S> <C> <C> <C> <C>
Balance at 12/31/91 $ 26,005 $ (27,411) $ (386) $ 35,092
Net loss -- (2,447) -- (2,447)
Common stock issued 420 -- -- 421
Dividends declared on preferred stock -- (782) -- (782)
Cumulative translation adj. and other -- (12) (26) (38)
----------- ----------- ----------- -----------
Balance at 12/31/92 26,425 (30,652) (412) 32,246
Net loss -- (10,924) -- (10,924)
Common stock issued 343 -- -- 344
Warrants issued 525 -- -- 525
Common stock received in exchange
for shares issued and cancelled -- (20) -- (20)
Cumulative translation adj. and other -- -- (9) (9)
----------- ----------- ----------- -----------
Balance at 12/31/93 27,293 (41,596) (421) 22,162
Net earnings -- 18,424 -- 18,424
Common stock issued, net 161 -- -- 162
Termination of 1992 Plan 4,042 -- -- 4,046
Common stock received in exchange
for shares issued and cancelled 10 (10) -- --
Cumulative translation adj. and other -- -- (26) (26)
----------- ----------- ----------- -----------
Balance at 12/31/94 $ 31,506 $ (23,182) $ (447) $ 44,768
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except shares)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
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:
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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-6
<PAGE>
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.
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.
F-7
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
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.
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>
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>
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 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 current interest rate was prime 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).
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>
F-10
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
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>
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.
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
carryforwards, less federal
tax benefits 0.9 - -
Loss carryback/carryforward (31.6) 34.0 34.0
------- ------ ------
4.1% 0.1% 10.8%
======= ====== ======
</TABLE>
F-12
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
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.
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:
Years ending December 31,
1995 $1,452
1996 695
1997 239
1998 49
--------
$2,435
========
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.
F-13
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE H - Accrued Expenses
(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
======= =======
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
(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
======= =======
F-14
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
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.
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 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 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.
F-15
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
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 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.
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").
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
$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 September 30, 1995, the dividend was
cumulatively fourteen quarters in arrears, representing a total dividend
arrearage of $11.0 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 has consistently maintained that it
F-16
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
is not in its best interest to reinstate the dividend until the Company has
generated consistent net income from operations and continuation of such
profitability can be reasonably expected. Based upon recent results, the
Company has been evaluating its alternatives with regard to the Preferred
Stock. 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 directors to
the Board of Directors of the Company.
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" 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 $.0l 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 1984 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-17
<PAGE>
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 3.00-6.13 3.00-6.38 2.66-4.78
</TABLE>
In 1992, the Board of Directors and the shareholders adopted the 1992 Senior
Management 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 $.0l 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.
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
F-18
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
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. 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 $10.00 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.
NOTE O - Related Party Transactions
The Company has retained the legal services of Shereff, Friedman, Hoffman &
Goodman, LLP in recent years. One of the Company's directors is a partner of
Shereff, Friedman, Hoffman & Goodman, LLP. The total amount of fees paid to
Shereff, Friedman, Hoffman & Goodman, LLP in 1994 and 1993 were approximately
$0.2 million and $0.2 million, respectively, exclusive of the director's fees
paid to Martin Nussbaum, a partner in the firm of Shereff, Friedman, Hoffman &
Goodman, LLP, as compensation for his service as Chairman of the Executive
Committee of the Board of Directors.
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
addition, 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.
F-19
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
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 than the rate
applicable to the old Loan Agreement). In consideration for entering into 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.
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.
F-20
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Information about the Company's operations in different geographic locations
for 1994, 1993 and 1992 is as follows:
(in thousands)
United States Foreign Consolidated
-------------- ------- -------------
1994
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
F-21
<PAGE>
NOTE S - Quarterly Financial Data (Unaudited)
Quarterly financial data for 1994 and 1993 are summarized in the following
table:
(in thousands, except per share amounts)
Net Net Earnings
Net Gross Earnings (Loss) Per
Revenues Margin (Loss) Common Share
-------- ------ -------- ------------
1994
----
lst 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
----
lst 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)
F-22
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Sept 30 Sept 30 December 31
1995 1994 1994
------- ------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,758 $ 3,094 $ 2,225
Accounts receivable 65,873 55,050 57,883
Inventories 19,236 14,356 16,824
Tooling and related costs 7,298 5,594 8,379
Prepaid expenses and other assets 11,885 5,907 5,492
---------- ---------- ----------
TOTAL CURRENT ASSETS 108,050 84,001 90,803
LAND, BUILDING AND EQUIPMENT, NET 8,168 8,428 8,400
OTHER ASSETS 1,126 1,224 1,563
---------- ---------- ----------
$ 117,344 $ 93,653 $100,766
========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 25,312 $ 5,653 $ 6,971
Accounts payable 18,968 12,569 14,973
Accrued expenses 10,921 17,829 14,939
Income taxes payable 248 562 499
Current portion of long-term debt 214 204 202
------------ -------------- -------------
TOTAL CURRENT LIABILITIES $ 55,663 $ 36,817 $ 37,584
LONG-TERM DEBT 18,256 18,258 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
10,077,265 shares, 10,104,589
shares and 10,055,089 shares 101 101 101
Additional paid-in capital 31,671 31,726 31,506
Retained earnings (deficit) (24,690) (29,591) (23,182)
Cumulative translation adjustment (447) (448) (447)
----------- ------------- ------------
TOTAL SHAREHOLDERS' EQUITY 43,425 38,578 44,768
----------- ----------- -----------
$ 117,344 $ 93,653 $ 100,766
=========== ========== =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-23
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
Sept 30 Sept 30
------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
Net revenues $ 65,518 $ 50,273 $ 137,078 $ 114,227
Costs of products sold 40,369 30,336 89,945 69,017
---------- --------- ----------- -----------
Gross margin $ 25,149 $ 19,937 $ 47,133 $ 45,210
Operating expenses:
Advertising and
promotion 8,077 7,267 17,739 19,483
Other selling and
administrative 7,640 6,142 22,476 17,468
Research and
development 1,729 1,930 6,195 6,470
----------- ---------- ------------ ------------
Total operating
expenses 17,446 15,339 46,410 43,421
---------- --------- ----------- -----------
Earnings (loss) from
operations 7,703 4,598 723 1,789
Net proceeds from
Nintendo award 0 0 0 12,124
Interest expense (970) (597) (2,357) (1,730)
Other income (expense),
net 104 71 213 308
---------- --------- ----------- -----------
Earnings (loss) before
income taxes 6,837 4,072 (1,421) 12,491
Provision for income
taxes 0 163 0 477
---------- --------- ----------- -----------
Net earnings (loss) 6,837 3,909 (1,421) 12,014
Preferred stock
dividends in arrears 781 781 2,345 2,345
---------- --------- ----------- -----------
Net earnings (loss)
applicable to common
shares $ 6,056 $ 3,128 $ (3,766) $ 9,669
========== ========== ============= ==========
Common shares and common
share equivalents
outstanding - average 10,373 10,363 10,068 10,047
Net earnings (loss)
per common share:
Primary $ 0.58 $ 0.30 $ (0.37) $ 0.96
Fully Diluted $ 0.50 $ 0.29 $ (0.37) $ 0.91
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-24
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended Sept 30
1995 1994
------ -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (1,422) $ 12,014
Adjustments to reconcile net earnings
(loss) to net cash (used in) operating
activities:
Depreciation 130 486
Changes in assets and liabilities:
Accounts receivable (7,990) (21,667)
Inventories (2,412) (1,377)
Tooling and related costs 1,081 (574)
Prepaid expenses and other assets (5,956) 1,605
Accounts payable 3,995 1,735
Accrued expenses (4,006) 2,756
Income taxes payable (251) 280
----------- ------------
Net cash provided by (used in)
operating activities (16,831) (4,742)
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and equipment, net 102 (352)
------------ ------------
Net cash provided by (used in) investing
activities 102 (352)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under notes
payable 18,341 5,653
Repayments under long-term debt agreements (158) (146)
Proceeds from issuance of common stock 79 382
Other, net 0 (26)
------------ --------------
Net cash provided by (used in)
financing activities 18,262 5,863
------------ --------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,533 769
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 2,225 2,325
------------ --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,758 $ 3,094
============ ==============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-25
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995
(Unaudited)
NOTE A - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets as of September 30, 1995 and 1994 and
the condensed consolidated statements of operations for the three and nine
month periods ended September 30, 1995 and 1994 and the condensed consolidated
statements of cash flows for the nine month periods ended September 30, 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 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.
The results of operations for the three and nine month periods ended September
30, 1995 and 1994 may not necessarily be indicative of the operating results
for the full year. Certain amounts in the financial statements have been
reclassified to conform with the current year's presentation.
NOTE B - CREDIT AGREEMENT
The Company was party to a loan and security agreement (the "Loan Agreement")
with Congress Financial Corporation (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 plus 2%.
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 the loan term through March 31, 1997 and provides a line of credit of
$40 million, with a provision to 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 rate is prime plus 1% (1%
lower than the rate applicable to the previous 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)
September 30 December 31
------------------ --------------
1995 1994 1994
---- ---- ----
Finished goods $ 18,521 $ 11,337 $ 15,596
Raw materials and parts 715 3,019 1,228
---------- --------- -----------
$ 19,236 $ 14,356 $ 16,824
---------- -------- -----------
F-26
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 (Continued)
(Unaudited)
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 undistributed earnings of the
Company's foreign subsidiary. All such earnings are expected to be reinvested
in the subsidiary. Undistributed earnings were approximately $5,500,000 as of
December 31, 1994. No foreign taxes will be withheld on the distribution of the
untaxed earnings.
NOTE E - 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.
F-27
- ------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any information
or to make any representations other than those contained in this Prospectus in
connection with the offer made by this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the Common Stock offered
hereby, nor does it constitute an offer to sell or a solicitation of an offer to
buy the Common Stock by anyone in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall under any circumstances create any implication
that the information contained herein is correct as of any date subsequent to
the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary ..................................... 2
Risk Factors ........................................... 6
Use of Proceeds ........................................ 9
Dividends .............................................. 9
Price Range of Common Stock ............................ 10
Capitalization ......................................... 11
Selected Consolidated Financial Data ................... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ......................................... 13
Business ............................................... 20
Management ............................................. 27
Executive Compensation ................................. 32
Principal Stockholders ................................. 38
Selling Stockholders ................................... 40
Plan of Distribution ................................... 42
Certain Transactions ................................... 43
Description of Capital Stock ........................... 43
Legal Matters .......................................... 50
Experts ................................................ 50
Available Information .................................. 51
Index to Financial Statements .......................... F-1
</TABLE>
1,414,422 Shares of Common Stock
LEWIS GALOOB TOYS, INC.
------------
PROSPECTUS
------------
________________, 1996
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated costs and
expenses in connection with the issuance and distribution of the securities
being registered, other than underwriting commissions and discounts:
SEC registration fee $6,310.03
Accounting fees and expenses* $2,500.00
Legal fees and expenses* $20,000.00
Printing costs* $5,000.00
Miscellaneous* $1,189.97
----------
Total $35,000.00
==========
_____________
* Estimated
The Company will pay all expenses of the Company and the
Selling Stockholders relating to this Offering.
Item 14. Indemnification of Directors and Officers.
The indemnification of officers and directors of the
Company is governed by Section 145 of the General Corporation Law of the State
of Delaware (the "DGCL") and the Certificate of Incorporation and By-Laws of the
Company. Among other things, the DGCL permits indemnification of a director,
officer, employee or agent in civil, criminal, administrative or investigative
actions, suits or proceedings (other than an action by or in the right of the
corporation) to which such person is a party or is threatened to be made a party
by reason of the fact of such relationship with the corporation or the fact that
such person is or was serving in a similar capacity with another entity at the
request of the corporation against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him if such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, if he had no reasonable cause to
believe his conduct was unlawful. No indemnification may be made in any such
suit to any person adjudged to be liable to the corporation unless and only to
the extent that the Delaware Court of Chancery or the court in which the action
was brought determines that, despite the adjudication of liability, such person
is under all circumstances, fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper. Under the DGCL, to the extent that
a director, officer, employee or agent is successful, on the merits or
otherwise, in the defense of any action, suit or proceeding or any claim, issue
or matter therein (whether or not the suit is brought by or in the right of the
corporation), he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him. In all cases in which
indemnification is permitted (unless ordered by a court), it may be made by the
corporation only as authorized in the specific case upon a determination that
the applicable standard of conduct has been met by the party to be indemnified.
The determination must be made by a majority vote of a quorum consisting of the
directors who were not parties to the action or, if such a quorum is not
obtainable, or even if obtainable, if a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or by the
stockholders. The statute authorizes the corporation to pay expenses incurred
by an officer or director in advance of a final disposition of a proceeding upon
receipt of an undertaking by or on behalf of the person to whom the advance will
be made, to repay the advances if it shall ultimately be determined that he was
not entitled to indemnification. The DGCL provides that indemnification and
advances of expenses permitted thereunder are not to be exclusive of any rights
to which those seeking indemnification or advancement of expenses may be
entitled under any By-Law, agreement, vote of stockholders or disinterested
directors, or otherwise. The DGCL also authorizes the Company to purchase and
maintain
II-I
liability insurance on behalf of its directors, officers, employees and agents
regardless of whether the Company would have the statutory power to indemnify
such persons against the liabilities insured.
The Certificate of Incorporation of the Company (the
"Certificate") provides that no director of the Company shall be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for paying a dividend or approving a stock
repurchase in violation of Section 174 of the DGCL or (iv) for any transaction
from which the director derived an improper personal benefit.
The Certificate also provides that directors, officers,
employees and others shall be indemnified to the fullest extent authorized by
the DGCL, as in effect (or, to the extent indemnification is broadened, as it
may be amended), against any and all expense, liability and loss (including
attorneys' fees, judgments, penalties, fines, ERISA excise taxes and judgments,
fines and amounts paid or to be paid in settlement) from threatened, pending or
completed actions, suits or proceedings, whether civil, criminal,
administrative or investigative. The Certificate further provides that, to the
extent permitted by the DGCL, expenses so incurred by any such person in
defending an action, suit or proceeding shall, at his request, be paid by the
Company in advance of the final disposition of such action or proceeding.
The Certificate provides that the right to
indemnification and the payment of expenses incurred in defending a proceeding
in advance of its final disposition shall not be exclusive of any other right
which any person may have or acquire under any statute, provision of the
Certificate or By-Laws of the Company, agreement, vote of stockholder or
disinterested directors, or otherwise.
The Company has obtained directors' and officers'
liability and company reimbursement insurance which, among other things (i)
provides for payment on behalf of its officers and directors against loss as
defined in the policy stemming from acts committed by directors and officers in
their capacity as such and (ii) provides for payment on behalf of the Company
against such loss but only when the Company shall be required or permitted to
indemnify directors or officers for such loss pursuant to statutory or common
law or pursuant to duly effective Certificate or By-Law provisions.
Insofar as indemnification for liabilities arising
under the Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against liabilities (other than the payment by the Company of expenses incurred
or paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
Item 15. Recent Sales of Unregistered Securities.
In a November 1993 private placement, the Company
raised $14,000,000 through the sale of its 8% Convertible Subordinated
Debentures due 2000 (the "Debentures"). The Debentures mature on November 30,
2000 and are convertible into 1,511,879 shares of Common Stock based on the
current $9.26 conversion price. In connection with the sale of the Debentures,
the Company paid a commission to its investment banker of $560,000 and issued
it warrants to purchase 150,000 shares of Common Stock, at an exercise price
of $9.50 per share.
The issuance of the above securities were deemed to be
exempt from the registration under the Act, in reliance on Section 4(2) thereof
or Regulation D promulgated thereunder, as transactions by an issuer not
involving any public offering.
II-2
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed as part of the Registration Statement:
2.1(1) Agreement of Merger, dated as of July 6, 1987.
3.1(1) Certificate of Incorporation.
3.2(1) Bylaws.
4.1(2) Form of Certificate for Shares of Common Stock of Registrant.
4.4(a)(3) Warrant Agreement, dated as of July 7, 1988, between the
Registrant and Wells Fargo Bank and warrants issued to Wells
Fargo Bank.
4.4(b)(4) Warrant Agreement, dated as of December 11, 1991, by and
between the Registrant and Shereff, Friedman, Hoffman and
Goodman, LLP.
4.4(c)(4) Warrant Agreement, dated as of November 17, 1993, by and
between the Registrant and Gerard Klauer Mattison & Co., Inc.
4.5(a)(5) Form of Certificate of Designations of the Registrant's $17.00
Convertible Exchangeable Preferred Stock.
4.5(b)(6) Form of Certificate of Designations of the Registrant's Series
A Preferred Stock.
4.6(5) Form of Indenture with respect to the Registrant's 8-1/2%
Convertible Subordinated Debentures due October 1, 2014,
between the Registrant and Manufacturers Hanover Trust Company
as Trustee, including form of Convertible Debenture.
4.7(5) Form of Indenture with respect to the Registrant's Subordinated
Debentures due October 1, 2014, between the Registrant and
Manufacturers Hanover Trust Company as Trustee, including form
of Debenture.
4.8(5) Form of Indenture with respect to the Registrant's 8-1/2%
Senior Subordinated Notes, between the Registrant and
Continental Stock Transfer & Trust Company, as Trustee,
including form of Note.
4.9(5) Form of Deposit Agreement between the Registrant and
Manufacturers Hanover Trust Company of California as
Depositary, including form of Depositary Receipt.
4.10(6) Form of Rights Agreement, dated as of January 17, 1990, between
the Registrant and Mellon Securities Trust Company.
4.11(4) Indenture, with respect to the Registrant's 8% Convertible
Subordinated Debentures due year 2000, between the Company and
Continental Stock Transfer & Trust Company, as Trustee,
including form of Debenture Note.
5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.
10.1(a)(7)* Amended and Restated 1984 Employee Stock Option Plan.
10.1(b)(8)* 1994 Senior Management Stock Option Plan.
10.1(c)(9)* Form of Agreement between each of Mark Goldman, William Catron,
Lou Novak, Gary Niles, Mark Shepherd, Ronald Hirschfeld and
H. Alan Gaudie and the Registrant.
10.1(d)(10)* 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 Registrant.
10.2(11)* Profit Sharing Plan.
10.4(10)* Severance Agreement, dated October 27, 1994, between
Mark Goldman and the Registrant.
10.5(12)* Agreement, dated as of December 11, 1991, by and between
Martin Nussbaum and the Registrant.
10.6(a)* Agreement, dated July 15, 1995, between William G. Catron and
the Registrant.
10.6(b)* Agreement, dated July 15, 1995, between Loren Hildebrand and
the Registrant.
10.6(c)* Agreement, dated July 15, 1995, between Ronald Hirschfeld and
the Registrant.
10.6(d)* Agreement, dated July 15, 1995, between Gary J. Niles and the
Registrant.
10.6(e)* Agreement, dated July 15, 1995, between Louis R. Novak and the
Registrant.
10.6(f)* Agreement, dated July 15, 1995, between William B. Towne and
the Registrant.
10.7(a)(4) Securities Purchase Agreement, dated November 17, 1993, by and
among the Registrant and the purchasers thereto (the
"Purchasers").
10.7(b)(4) Registration Rights Agreement, dated as of November 17, 1993,
by and among the Registrant and the Purchasers.
10.7(c)(4) Loan and Security Agreement, dated as of April 1, 1993, by and
among the Registrant and Congress Financial Corporation
(Central), including form of Revolving Loan Note.
II-3
10.7(d)(4) First Amendment to Loan and Security Agreement, dated as of
November 17, 1993.
10.7(e)(10) Amended and Restated Loan and Security Agreement, dated as of
March 31, 1995, by and among the Registrant and Congress
Financial Corporation (Central).
10.9(a)(13) License Agreement, dated June 16, 1986, by and between
Funmaker, as Licensor and the Registrant, as Licensee.
10.9(b)(14) License Agreement, dated May 4, 1990, by and among the
Registrant as Licensee, Codemasters Software Company, Ltd. and
Camerica Corporation, Limited.
10.9(c)(14) Amendment No. 1 dated June 1991 to License Agreement dated
May 4, 1990.
10.9(d)(14) Amendment No. 2 dated December 23, 1991 to License Agreement,
dated May 4, 1990.
10.9(e)(14) European License Agreement, dated December 23, 1991, by and
between Codemasters Software Company, Ltd. and the Registrant.
10.9(f)(14) Third Amendment to United States License and First Amendment to
European License, dated November 4, 1992.
10.9(g)(10) Fourth Amendment to United States License Agreement, dated
October 14, 1994.
10.10(13) Agreement of Purchase and Sale, dated October 22, 1986, by and
between ATC Building Company, as Seller, and the Registrant,
as Buyer.
10.12(a)(1) Lease Agreement, dated March 12, 1987, by and between Lincoln
Alvarado and Patrician Associates, Inc., as Lessor, and the
Registrant, as Lessee.
10.12(b)(12) Amendment No. 1 to Lease Agreement.
11 Statement of Computation of Per Share Earnings.
12 Statement of Computation of Rate of Earnings to Fixed Charges
and Preferred Stock Dividends.
21 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Shereff, Friedman, Hoffman & Goodman, LLP (included
in their opinion which appears as Exhibit 5.1).
24 Power of Attorney (included on the signature page).
____________________
(1) Incorporated by reference to the Registrant's Amendment No. 1 to
Registration Statement on Form 8-B, filed with the Securities and
Exchange Commission (the "Commission") on January 11, 1988.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, filed with the Commission on February 26, 1990.
(3) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1987, filed with the Commission on
August 2, 1988.
(4) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1993, filed with the Commission on
March 31, 1994.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form 8-A, filed with the Commission on October 6, 1989.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form 8-A, filed with the Commission on January 23, 1990.
(7) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, Registration No. 33-56585, filed with the Commission on
November 23, 1994.
(8) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, Registration No. 33-56587, filed with the Commission on
November 23, 1994.
(9) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, Registration No. 33-56589, filed with the Commission on
November 23, 1994.
(10) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1994, filed with the Commission on
March 31, 1995.
(11) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, filed with the Commission on August 12, 1986.
(12) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1991, filed with the Commission on
March 30, 1992.
(13) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1986, filed with the Commission on
March 31, 1987.
(14) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1992, filed with the Commission on
March 31, 1993.
* Indicates exhibits relating to executive compensation.
II-4
(b) Financial Statements Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves for the
years ended December 31, 1994, 1993 and 1992.
All other schedules are omitted because they are not applicable or the
required information is shown in the Company's consolidated financial
statements or the notes thereto.
Item 17. Undertakings.
The Registrant hereby undertakes:
(1) That, for purposes of determining any liability under
the Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A under
the Act and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective;
(2) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
Provided, however, that paragraphs (2)(i) and (2)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
the section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(3) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(4) To remove from registration by means of a post-
effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
II-5
SIGNATURES
Pursuant to the requirements of the Act, the Registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of South San
Francisco, State of California, on the 29th day of January, 1996.
LEWIS GALOOB TOYS, INC.
By: /s/ Mark D. Goldman
-----------------------------
Mark D. Goldman
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the
undersigned whose signature appears below constitutes and appoints Mark Goldman
and William B. Towne, his or her true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution for him or her and on his or
her behalf, and in his or her name, place and stead, in any and all capacities
to execute and sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or any of his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof
and the Company hereby confers like authority on its behalf.
Pursuant to the requirements of the Act, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLES DATE
- --------- ------ ----
<S> <C> <C>
/s/ Mark D. Goldman President, Chief Executive January 29, 1996
- ------------------- Officer and Director
Mark D. Goldman
/s/ William B. Towne Executive Vice President, January 29, 1996
- ------------------- Finance and Chief Financial Officer
William B. Towne
/s/ Andrew Cavanaugh Director January 29, 1996
- -------------------
Andrew Cavanaugh
/s/ Paul A. Gliebe, Jr. Director January 29, 1996
- -----------------------
Paul A. Gliebe, Jr.
/s/ Scott R. Heldfond Director January 29, 1996
- ---------------------
Scott R. Heldfond
/s/ Hoffer Kaback Director January 29, 1996
- ---------------------
Hoffer Kaback
</TABLE>
II-6
<TABLE>
<CAPTION>
SIGNATURE TITLES DATE
- --------- ------ ----
<S> <C> <C>
/s/ S. Lee Kling Director January 29, 1996
- ---------------------
S. Lee Kling
/s/ Roger Kowalsky Director January 29, 1996
- ---------------------
Roger Kowalsky
/s/ Martin Nussbaum Director January 29, 1996
- ---------------------
Martin Nussbaum
Director January 29, 1996
- ---------------------
George Riordan
</TABLE>
February 6, 1996
Lewis Galoob Toys, Inc.
500 Forbes Boulevard
South San Francisco, California 94080
Dear Sirs:
Lewis Galoob Toys, Inc., a Delaware corporation (the "Company"),
intends to transmit for filing with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended, on Form S-1
(the "Registration Statement") which relates to 1,414,422 shares (the "Shares")
of the Company's common stock, par value $.01 per share (the "Common Stock"),
which are being offered for resale by certain selling stockholders (i) upon
conversion of warrants issued to Gerard Klauer Mattison & Co., LLC (the "GKM
Warrant"), (ii) upon conversion of warrants issued to this firm (the "SFH&G
Warrant") (which warrant was subsequently distributed to certain members of this
firm) or (iii) upon exercise of the Company's 8% Convertible Subordinated
Debentures due 2000 (the "Debentures"), and the related Preferred Stock Purchase
Rights (the "Rights") to be issued in connection with the issuance of the Shares
pursuant to the Rights Agreement by and between the Company and Continental
Stock Transfer & Trust Company, as substitute Rights Agent (the "Rights
Agreement"). This opinion is an exhibit to the Registration Statement.
We have acted as counsel to the Company in connection with the
proposed offer and sale of the Shares and related Rights as contemplated by the
Registration Statement. However, we are not general counsel to the Company and
would not ordinarily be familiar with or aware of matters relating to the
Company unless they are brought to our attention by representatives of the
Company. We note further that Martin Nussbaum, a member of this firm, has been
a director of the Company since 1985 and is the beneficial owner of 7,473 shares
of Common Stock, including 2,473 shares of Common Stock issuable upon exercise
of that portion of the SFH&G Warrant distributed to him. Mr. Nussbaum disclaims
beneficial ownership of 22,527 shares of Common Stock issuable upon exercise of
the remaining portion of the SFH&G Warrant distributed to other members of this
firm. The SFH&G Warrant was issued to this firm by the Company in connection
with Mr. Nussbaum's services as Chairman of the Executive Committee of the Board
of Directors.
We have examined copies (in each case signed, certified or
otherwise proved to our satisfaction) of the Company's Certificate of
Incorporation, its By-Laws as presently in effect, minutes and other instruments
evidencing actions taken by its directors and stockholders, and such other
documents and instruments relating to the Company and the proposed offering as
we have deemed necessary under the circumstances. In our examination of all
such agreements, documents, certificates and instruments, we have assumed the
genuineness of all signatures and the authenticity of all agreements, documents,
certificates and instruments submitted to us as originals and the conformity
with the originals of all agreements, instruments, documents and certificates
submitted to us as copies. Insofar as this opinion relates to securities to be
issued in the future, we have assumed that all applicable laws, rules and
regulations in effect at the time of such issuance are the same as such laws,
rules and regulations in effect as of the date hereof.
We note that we are members of the Bar of the State of New York
and do not hold ourselves out as experts in or opine on the laws of any
jurisdiction other than the State of New York and the federal laws of the United
States. Insofar as the opinions set forth below relate to the laws of the State
of Delaware, we have relied solely upon our reading of standard compilations of
the Delaware General Corporation Law, as presently in effect.
Based on the foregoing, and subject to and in reliance on the
accuracy and completeness of the information relevant thereto provided to us, it
is our opinion that:
1. The Company has been duly incorporated under the laws of
the State of Delaware and has an authorized capital stock consisting of
50,000,000 shares of common stock, par value $.01 per share, and 1,000,000
shares of preferred stock, par value $1.00 per share.
2. The Shares underlying the Debentures have been duly
authorized and, when paid for and issued upon conversion of such Debentures, in
accordance with the Indenture (the "Indenture") by and between the Company and
Continental Stock Transfer & Trust Company, as Trustee, will be legally and
validly issued, fully paid and non-assessable.
3. The Shares underlying the GKM Warrant have been duly
authorized and, when paid for and issued upon exercise of such GKM Warrant, in
accordance with the Warrant Agreement (the "GKM Warrant Agreement") by and
between the Company and Gerard Klauer Mattison & Co., LLC, will be legally and
validly issued, fully paid and non-assessable.
4. The Shares underlying the SFH&G Warrant have been duly
authorized and, when paid for and issued upon exercise of such SFH&G Warrant, in
accordance with the Warrant Agreement (the "SFH&G Warrant Agreement") by and
between the Company and this firm, will be legally and validly issued, fully
paid and non-assessable.
5. The Rights issued in connection with the issuance of the
Shares underlying the Debentures pursuant to the Rights Agreement have been duly
authorized and, when paid for and issued upon conversion of such Debentures, in
accordance with the Indenture, will be legally and validly issued.
6. The Rights issued in connection with the issuance of the
Shares underlying the GKM Warrant pursuant to the Rights Agreement have been
duly authorized and, when paid for and issued upon exercise of such GKM Warrant
in accordance with the GKM Warrant Agreement, will be legally and validly
issued.
7. The Rights issued in connection with the issuance of the
Shares underlying the SFH&G Warrant pursuant to the Rights Agreement have been
duly authorized and, when paid for and issued upon exercise of such SFH&G
Warrant in accordance with the SFH&G Warrant Agreement, will be legally and
validly issued.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and as an exhibit to any filing made by the Company
under the securities or "Blue Sky" laws of any state.
This opinion is rendered as of the date hereof and we undertake
no obligation to advise you of any change in any matters herein, whether legal
or factual. This opinion is
furnished to you in connection with the filing of the Registration Statement,
and is not to be used, circulated, quoted or otherwise relied upon by any other
person or for any other purposes without our prior written consent, except as
expressly provided in the preceding paragraph.
Very truly yours,
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
SFH&G:CIW:GA:AMF
GALOOB
[LOGO]
Mark D. Goldman July 15, 1995
President and
Chief Executive Officer
William G. Catron
1060 Siskiyou Drive
Menlo Park, CA 94025
Dear William:
In connection with, and in consideration of, your continuing services in the
position of Executive Vice President, General Counsel and Chief Administrative
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 to one-half (1/2) of such unpaid amount.
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 become eligible for benefits from a subsequent employer. 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 knowing 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 willful 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, willfulness, 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 contendere 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
2
opinion of the Company has had, or may or will have, a material adverse
effect on the Company's business, property, goodwill or reputation.
In the event of a termination for cause, including one that occurs after a
change in control, the Company will pay you, no later than five (5) days after
the Termination Date, any unpaid compensation for services performed prior to
the Termination Date and the amount of any accrued but unused FTO to which you
are entitled. Thereafter, the Company shall have no further obligations to you.
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 common stock of the Company (a "Majority Owner") 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 initial 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 2.a., and notwithstanding the
approval of the majority of the Incumbent Directors, a change in control will be
deemed to have taken place if, and on the date that, 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:
(i) you are either terminated for reasons other than cause, or
(ii) 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
3
outside of the San Francisco Bay area, and within thirty (30) days from the
occurrence of such act you exercise your right under this subparagraph b.
to terminate your employment by written notice to the Company,
whereupon the Termination Date will be the date of receipt of such notice
by the Company,
then, no later than five (5) days after such Termination Date you will receive
the following:
(aa) A lump sum payment (minus withholdings and other required
deductions) of an amount equal to three (3) times your total base annual salary
that is in effect immediately prior to the Termination Date or, if applicable,
immediately prior to the date of a reduction in salary, plus thirty-six (36)
times the amount to which you are then entitled for the monthly automobile
allowance; and
(bb) An additional lump sum payment (minus withholdings and other
required deductions) of an amount equal to the greater of three (3) 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, commencing upon the Termination Date you
will also start receiving 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 the period of the earlier to
occur of thirty-six (36) months following the Termination Date or the date
you become eligible for benefits from a subsequent employer. 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.
4
(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 thirty-six (36)
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 your payment shall be your
choice of either (i) the aggregate total of such compensation and benefits, or
(ii) the aggregate total of such compensation and benefits 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, including without
limitation that letter agreement dated July 15, 1993. 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
5
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/ Mark D. Goldman
Mark D. Goldman
President and
Chief Executive Officer
ACCEPTED AND AGREED TO THIS 7TH DAY OF SEPTEMBER 1995:
/s/ William G. Catron
- ------------------------
William G. Catron
Attachments - Schedule 1
Tax Letter
6
GALOOB
[LOGO]
Mark D. Goldman July 15, 1995
President and
Chief Executive Officer
Loren 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 such unpaid amount.
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 become eligible for benefits from a subsequent employer. 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% 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 knowing 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 willful 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, willfulness, 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 contendere 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
2
opinion of the Company has had, or may or will have, a material adverse
effect on the Company's business, property, goodwill or reputation.
In the event of a termination for cause, including one that occurs after a
change in control, the Company will pay you, no later than five (5) days after
the Termination Date, any unpaid compensation for services performed prior to
the Termination Date and the amount of any accrued but unused FTO to which you
are entitled. Thereafter, the Company shall have no further obligations to you.
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 common stock of the Company (a "Majority Owner") 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 initial 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 2.a., and notwithstanding the
approval of the majority of the Incumbent Directors, a change in control will be
deemed to have taken place if, and on the date that, 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:
(i) you are either terminated for reasons other than cause, or
(ii) 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
3
outside of the San Francisco Bay area, and within thirty (30) days
from the occurrence of such act you exercise your right under this
subparagraph b. to terminate your employment by written notice to
the Company, whereupon the Termination Date will be the date of
receipt of such notice by the Company,
then, no later than five (5) days after such Termination Date you will receive
the following:
(aa) 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 or, if applicable, immediately prior to the date of a reduction
in salary, plus twenty-four (24) times the amount to which you are
then entitled for the monthly automobile allowance; and
(bb) 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, commencing upon the Termination Date you
will also start receiving 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 the period of the
earlier to occur of twenty-four (24) months following the
Termination Date or the date you become eligible for benefits from
a subsequent employer. 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.
4
(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 your payment shall be
your choice of either (i) the aggregate total of such compensation and benefits,
or (ii) the aggregate total of such compensation and benefits 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,
including without limitation that letter agreement dated March 29, 1994.
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
5
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/ Mark D. Goldman
Mark D. Goldman
President and
Chief Executive Officer
ACCEPTED AND AGREED TO THIS 28TH DAY OF JULY, 1995:
/s/ Loren Hildebrand
- ---------------------
Loren Hildebrand
Attachments - Schedule 1
Tax Letter
6
GALOOB
[LOGO]
Mark D. Goldman July 15, 1995
President and
Chief Executive Officer
Ronald Hirschfeld
425 Castenada
San Francisco, CA 94116
Dear Ron:
In connection with, and in consideration of, your continuing services in the
position of Executive Vice President - International Sales and Marketing 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 w11l 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 such unpaid amount.
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 become eligible for benefits from a subsequent employer. 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 knowing 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 willful 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, willfulness, 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 contendere 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
2
opinion of the Company has had, or may or will have, a material adverse
effect on the Company's business, property, goodwill or reputation.
In the event of a termination for cause, including one that occurs after a
change in control, the Company will pay you, no later than five (5) days after
the Termination Date, any unpaid compensation for services performed prior to
the Termination Date and the amount of any accrued but unused FTO to which you
are entitled. Thereafter, the Company shall have no further obligations to you.
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 common stock of the Company (a "Majority Owner") 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 initial 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 2.a., and notwithstanding the
approval of the majority of the Incumbent Directors, a change in control will be
deemed to have taken place if, and on the date that, 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:
(i) you are either terminated for reasons other than cause, or
(ii) 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
3
outside of the San Francisco Bay area, and within thirty (30) days from the
occurrence of such act you exercise your right under this subparagraph b.
to terminate your employment by written notice to the Company,
whereupon the Termination Date will be the date of receipt of such notice
by the Company,
then, no later than five (5) days after such Termination Date you will receive
the following:
(aa) 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 or, if applicable,
immediately prior to the date of a reduction in salary, plus twenty-four (24)
times the amount to which you are then entitled for the monthly automobile
allowance; and
(bb) 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, commencing upon the Termination Date you
will also start receiving 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 the period of the earlier to
occur of twenty-four (24) months following the Termination Date or the
date you become eligible for benefits from a subsequent employer. 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.
4
(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 your payment shall be
your choice of either (i) the aggregate total of such compensation and benefits,
or (ii) the aggregate total of such compensation and benefits 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,
including without limitation that letter agreement dated July 15, 1993. 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
5
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/ Mark D. Goldman
Mark D. Goldman
President and
Chief Executive Officer
ACCEPTED AND AGREED TO THIS 1 DAY OF AUGUST, 1995:
/s/ Ronald Hirschfeld
- -----------------------
Ronald Hirschfeld
Attachments - Schedule 1
Tax Letter
GALOOB
[LOGO]
Mark D. Goldman July 15, 1995
President and
Chief Executive Officer
Gary J. Niles
230 Francis Lane
San Carlos, CA 94070
Dear Gary:
In connection with, and in consideration of, your continuing services in the
position of Executive Vice President - Marketing and Product Acquisition 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 such unpaid amount.
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 become eligible for benefits from a subsequent employer. 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% 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 knowing 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 willful 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, willfulness, 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 contendere 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
2
opinion of the Company has had, or may or will have, a material adverse
effect on the Company's business, property, goodwill or reputation.
In the event of a termination for cause, including one that occurs after a
change in control, the Company will pay you, no later than five (5) days after
the Termination Date, any unpaid compensation for services performed prior to
the Termination Date and the amount of any accrued but unused FTO to which you
are entitled. Thereafter, the Company shall have no further obligations to you.
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 common stock of the Company (a "Majority Owner") 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 initial 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 2.a., and notwithstanding the
approval of the majority of the Incumbent Directors, a change in control will be
deemed to have taken place if, and on the date that, 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:
(i) you are either terminated for reasons other than cause, or
(ii) 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
3
outside of the San Francisco Bay area, and within thirty (30) days from the
occurrence of such act you exercise your right under this subparagraph b.
to terminate your employment by written notice to the Company,
whereupon the Termination Date will be the date of receipt of such notice
by the Company,
then, no later than five (5) days after such Termination Date you will receive
the following:
(aa) 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 or, if applicable,
immediately prior to the date of a reduction in salary, plus twenty-four (24)
times the amount to which you are then entitled for the monthly automobile
allowance; and
(bb) 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, commencing upon the Termination Date you
will also start receiving 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 the period of the earlier to
occur of twenty-four (24) months following the Termination Date or the
date you become eligible for benefits from a subsequent employer. 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.
4
(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 your payment shall be
your choice of either (i) the aggregate total of such compensation and benefits,
or (ii) the aggregate total of such compensation and benefits 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, including without
limitation that letter agreement dated July 15, 1993. 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
5
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/ Mark D. Goldman
Mark D. Goldman
President and
Chief Executive Officer
ACCEPTED AND AGREED TO THIS 27 DAY OF JULY, 1995:
/s/ Gary J. Niles
- -----------------------
Gary J. Niles
Attachments - Schedule 1
Tax Letter
July 15, 1995
Louis R. Novak
97 Filbert Street
Sausalito, CA 94965
Dear Lou:
In connection with, and in consideration of, your continuing services in the
position of Executive Vice President & Chief Operating 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 to one-half (1/2) of such unpaid amount.
b. The Other Benefits referred to in paragraph l.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 become eligible for benefits from a subsequent employer. 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 knowing 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 willful 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,
willfulness, 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.
In the event of a termination for cause, including one that occurs after
a change in control, the Company will pay you, no later than five (5) days after
the Termination Date, any unpaid compensation for services performed prior to
the Termination Date and the amount of any accrued but unused FTO to which you
are entitled. Thereafter, the Company shall have no further obligations to you.
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 common stock of the Company (a "Majority Owner") 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 initial 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 2.a., and notwithstanding the
approval of the majority of the Incumbent Directors, a change in control will be
deemed to have taken place if, and on the date that, 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:
(i) you are either terminated for reasons other than cause,
or
(ii) 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 under this subparagraph b. to
terminate your employment by written notice to the Company, whereupon the
Termination Date will be the date of receipt of such notice by the Company,
then, no later than five (5) days after such Termination Date you will
receive the following:
(aa) 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 or, if
applicable, immediately prior to the date of a reduction in salary, plus twenty-
four (24) times the amount to which you are then entitled for the monthly
automobile allowance; and
(bb) 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, commencing upon the Termination
Date you will also start receiving 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 the period of the
earlier to occur of twenty-four (24) months following the Termination Date or
the date you become eligible for benefits from a subsequent employer. 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 your
payment shall be your choice of either (i) the aggregate total of such
compensation and benefits, or (ii) the aggregate total of such compensation and
benefits 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, including without
limitation that letter agreement dated July 15, 1993. 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/ Mark D. Goldman
- -------------------
Mark D. Goldman
President and
Chief Executive Officer
ACCEPTED AND AGREED TO THIS 28TH DAY OF JULY, 1995:
/s/ Louis R. Novak
- ---------------------
Louis R. Novak
Attachments - Schedule 1
Tax Letter
GALOOB
[LOGO]
Mark D. Goldman July 15, 1995
President and
Chief Executive Officer
William B. Towne
1093 Valley View Court
Los Altos, CA 94024
Dear William:
In connection with, and in consideration of, your continuing services in the
position of Executive Vice President - Finance & 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 to one-half (1/2) of such unpaid amount.
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 become eligible for benefits from a subsequent employer. 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 knowing 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 willfull 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, willfulness, 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 contendere 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
2
opinion of the Company has had, or may or will have, a material adverse
effect on the Company's business, property, goodwill or reputation.
In the event of a termination for cause, including one that occurs after a
change in control, the Company will pay you, no later than five (5) days after
the Termination Date, any unpaid compensation for services performed prior to
the Termination Date and the amount of any accrued but unused FTO to which you
are entitled. Thereafter, the Company shall have no further obligations to you.
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
common stock of the Company (a "Majority Owner") 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
initial 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 2.a., and notwithstanding the approval of the majority of the
Incumbent Directors, a change in control will be deemed to have taken place if,
and on the date that, 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:
(i) you are either terminated for reasons other than cause, or
(ii) 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
3
outside of the San Francisco Bay area, and within thirty (30) days from the
occurrence of such act you exercise your right under this subparagraph b.
to terminate your employment by written notice to the Company,
whereupon the Termination Date will be the date of receipt of such notice
by the Company,
then, no later than five (5) days after such Termination Date you will receive
the following:
(aa) 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 or, if applicable,
immediately prior to the date of a reduction in salary, plus twenty-four (24)
times the amount to which you are then entitled for the monthly automobile
allowance; and
(bb) 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, commencing upon the Termination Date you
will also start receiving 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 the period of the earlier to
occur of twenty-four (24) months following the Termination Date or the
date you become eligible for benefits from a subsequent employer. 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.
4
(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 your payment shall be
your choice of either (i) the aggregate total of such compensation and benefits,
or (ii) the aggregate total of such compensation and benefits 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,
including without limitation that letter agreement dated February 27, 1995.
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
5
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/ Mark D. Goldman
Mark D. Goldman
President and
Chief Executive Officer
ACCEPTED AND AGREED TO THIS 25 DAY OF JULY, 1995:
/s/ William B. Towne
- -----------------------
William B. Towne
Attachments - Schedule 1
Tax Letter
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
COMPUTATION 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.
1
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
------------------------- --------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary Earnings:
Net earnings (loss) applicable
to common shares ($000) $6,056 $3,128 ($3,766) $9,669
====== ====== ======== ======
Average shares of common
stock outstanding during
the period 10,072,672 10,079,361 10,068,190 9,771,807
Add: Incremental shares
from assumed exercise of
stock options and warrants 300,019 283,900 -- 275,583
---------- ----------- ------------- ---------
10,372,691 10,363,261 10,068,190 10,047,390
========== ========== ========== ==========
Net earnings (loss) per
common share - primary $0.58 $0.30 ($0.37) $0.96
=========== =========== ============ ===========
Fully Diluted Earnings
Net earnings (loss) applicable
to common shares ($000) $6,056 $3,128 ($3,766) $9,669
Add: Preferred stock
dividends in arrears ($000) 781 (A) 2,345 (A)
Add: Interest on Debentures
($000) 280 269 840 808
------- -------- ------- ---------
$7,117 $3,397 ($581) $10,477
====== ====== ====== =======
Average shares of common
stock outstanding during
the period 10,072,672 10,079,361 10,068,190 9,771,807
Add: Incremental shares from
assumed exercise of stock
options and warrants 405,756 283,900 -- 279,610
Add: Shares issuable upon
assumed conversion of
Preferred Stock 2,180,148 (A) 2,180,148 (A)
Add: Shares issuable upon
assumed conversion of 8%
Convertible Subordinated
Debentures 1,511,879 1,511,879 1,511,879 1,511,879
--------- --------- --------- ---------
14,170,455 11,875,140 13,760,217 11,563,296
========== ========== ========== ==========
Net earnings (loss) per
common share - Fully
Diluted $0.50 $0.29 (B) $0.91
=========== ============ ============ =============
</TABLE>
(A) Anti dilutive, factor excluded from calculation.
(B) Anti dilutive, therefore fully diluted earnings per share is same as
primary earnings per share.
2
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.
1
<PAGE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(in thousands, except ratios)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
------------------------- --------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) $6,837 $3,909 ($1,421) $12,014
Income tax 0 163 0 477
-------- ------- ---------- --------
Charge (credit) $6,837 $4,072 ($1,421) $12,491
------ ------ -------- -------
Fixed Charges:
Interest expense 970 597 2,357 1,730
Portion of rental expense 160 130 493 369
------ ------ -------- -------
Total fixed charges 1,130 727 2,850 2,099
------ ------ ------- -------
Earnings (loss) before income
taxes and fixed charges $7,967 $4,799 $1,429 $14,590
====== ====== ====== =======
Preferred dividends
requirements $781(B) $781(B) $2,345(B) $2,345(B)
Ratio of pretax income to
net income 1.00 1.04 1.00 1.04
---- ---- ---- ----
Preferred dividends factored 781 812 2,345 2,439
Total fixed charges 1,130 727 2,850 2,099
----- --- ----- -----
Total fixed charges and
preferred dividends $1,911 $1,539 $5,195 $4,538
====== ====== ====== ======
Ratio of earnings to fixed
charges and preferred
dividends 4.17 3.12 (A) 3.22
---- ---- --- ----
</TABLE>
(A) Earnings are inadequate to cover fixed charges and preferred dividends.
(B) Includes Preferred Stock dividends in arrears.
2
SUBSIDIARIES OF THE REGISTRANT
Galco International Toys, N.V, a Hong Kong corporation
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 10, 1995,
relating to the financial statements of Lewis Galoob Toys, Inc., which appears
in such Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the three years ended December 31, 1994 listed
under Item 16(b) of this Registration Statement when such schedule is read in
conjunction with the financial statements referred to in our report. The audits
referred to in such report also included this schedule. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE, LLP
/s/ PRICE WATERHOUSE, LLP
San Francisco, CA
February 6, 1996
