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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
LEWIS GALOOB TOYS, INC.
(NAME OF ISSUER)
DEPOSITARY CONVERTIBLE EXCHANGEABLE PREFERRED SHARES,
EACH REPRESENTING 1/10TH OF A SHARE OF $17.00
CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
(TITLE OF CLASS OF SECURITIES)
364091207
(CUSIP NUMBER)
LEWIS GALOOB TOYS, INC.
(NAME OF PERSON FILING STATEMENT)
WITH A COPY TO:
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Mark D. Goldman Charles I. Weissman, Esq.
President and Chief Executive Officer Shereff, Friedman,
Lewis Galoob Toys, Inc. Hoffman & Goodman, LLP
500 Forbes Boulevard 919 Third Avenue
South San Francisco, CA 94080 New York, New York 10022
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(NAME, ADDRESS AND TELEPHONE NUMBER OF
PERSON AUTHORIZED TO RECEIVE NOTICES
AND COMMUNICATIONS ON BEHALF OF THE
PERSON FILING STATEMENT)
FEBRUARY 28, 1996
(DATE TENDER OFFER FIRST PUBLISHED, SENT OR GIVEN TO SECURITY HOLDERS)
THIS SCHEDULE INCLUDING ANNEXES CONSISTS OF 237 PAGES.
CALCULATION OF FILING FEE
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Transaction Valuation* Amount of filing fee
$52,536,120.00 $10,507.23
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* Estimated solely for the purpose of calculating the filing fee, pursuant to
Section 13(e)(3) under the Securities Exchange Act of 1934, as amended, on
the basis of 1/50th of one per centum of the value of securities proposed to
be purchased.
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This Schedule 13E-4 relates to an offer by Lewis Galoob Toys, Inc. (the
"Company") to exchange, upon the terms and subject to the conditions set
forth in the Company's Offering Circular dated February 28, 1995 (the
"Offering Circular") and the related Letter of Transmittal (the "Letter of
Transmittal," together with the Offering Circular, the "Exchange Offer"),
each of the Company's outstanding Depositary Convertible Exchangeable
Preferred Shares (the "Depositary Shares"), representing 1/10th of a share of
the $17.00 Convertible Exchangeable Preferred Stock (the "Preferred Stock")
of the Company, for 1.85 shares of Common Stock, $.01 par value per share
(the "Common Stock"), of the Company, forms of which are annexed to and filed
with this Schedule 13E-4 as Exhibits (a)(1) and (a)(2) and are incorporated
herein by reference. As of December 31, 1995, there was issued and
outstanding 1,839,500 Depositary Shares and 10,089,961 shares of Common
Stock.
ITEM 1. SECURITY AND ISSUER.
(a) The name of the issuer of the securities to which this Schedule 13E-4
relates is Lewis Galoob Toys, Inc. The principal executive office of the
Company is located at 500 Forbes Boulevard, South San Francisco, California
94080.
(b) The class of equity securities to which this Schedule 13E-4 relates is
the Depositary Shares. Reference is hereby made to the information set forth
on the cover page of the Offering Circular and in the Sections of the
Offering Circular entitled "Summary--The Exchange Offer" on page 5,
"Summary--Summary Pro Forma Financial Information" on page 11, "The Exchange
Offer--Terms of the Exchange Offer" on page 23 and "Description of
Securities" on pages 50 through 55, which information is incorporated herein
by reference.
(c) Reference is hereby made to the information set forth on the Cover
Page of the Offering Circular and in the Section of the Offering Circular
entitled "Market Price of Securities" on page 33, which information is
incorporated herein by reference.
(d) Not applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) Reference is hereby made to the information set forth on the Cover
Page of the Offering Circular and in the Sections of the Offering Circular
entitled "Summary--The Exchange Offer" on pages 5 through 8 and "The Exchange
Offer--Terms of the Exchange Offer" on page 23, which information is
incorporated herein by reference.
(b) Not applicable.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
Reference is hereby made to the information set forth on the Cover Page of
the Offering Circular and in the Sections of the Offering Circular entitled
"Risk Factors" on pages 13 through 14, "Summary--The Exchange Offer" on pages
5 through 8, "Summary--Summary Pro Forma Financial Information" on page 11
and "Capitalization" on page 35, which information is incorporated herein by
reference. The Company will retire and not reissue all Depositary Shares and
the underlying shares of Preferred Stock acquired pursuant to the Exchange
Offer. Except as set forth in the Offering Circular, the Company has no
present plans or proposals which would relate to, or would result in, any
transaction, change or other occurrence with respect to the Company or any
class of its equity securities set forth in paragraphs (a) through (j) of
Item 3 of Schedule 13E-4.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
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(f) Not applicable.
(g) Not applicable.
(h)-(j) Reference is hereby made to the information set forth in the
Sections of the Offering Circular entitled "Risk Factors" on pages 13 through
14 and "The Exchange Offer--Purpose and Effect of the Exchange Offer" on
pages 23 through 25, which information is incorporated herein by reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
None of the Company, or to the best knowledge of the Company, any of the
directors or executive officers of the Company, or any person controlling the
Company, or any of the directors or executive officers of any corporation
ultimately in control of the Company, or any associate or subsidiary of the
foregoing, has effected any transaction in the Depositary Shares during the
40 business days prior to the date hereof.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERTAKINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
Not applicable.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
Not Applicable.
ITEM 7. FINANCIAL INFORMATION.
(a)-(b) Reference is hereby made to the information set forth in Sections
of the Offering Circular entitled "Incorporation of Certain Documents by
Reference" on page 2, "Summary--1995 Financial Data" on pages 9 through 10,
"Summary--Summary Pro Forma Financial Information" on page 11,
"Summary--Summary Consolidated Financial Data" on page 12, "Selected
Consolidated Financial Data" on page 36 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 37
through 42, which information is incorporated herein by reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) Not Applicable.
(b) In certain jurisdictions, the Common Stock and the Company may be
required to be qualified or claims of exemption with respect to the Exchange
Offer described in the Offering Circular may be required to be made, under
the respective securities or blue sky laws thereof.
(c) Not applicable.
(d) Not applicable.
(e) Reference is hereby made to the entire text of the Offering Circular
and the related Letter of Transmittal, which information is incorporated
herein by reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1) Form of Offering Circular dated February 28, 1996.
(a)(2) Form of Letter of Transmittal dated February 28, 1996.
(a)(3) Form of Notice of Guaranteed Delivery dated February 28, 1996.
(a)(4) Form of Letter to the Depositary Stockholders, dated February
28, 1996, from the President and Chief Executive Officer of
Lewis Galoob Toys, Inc.
(a)(5) Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees, dated February 28, 1996, from
Chemical Mellon Shareholder Services, L.L.C.
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(a)(6) Form of Letter to Clients, dated February 28, 1996.
(a)(7) Form of Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and
correct.
Febuary 28, 1996 /s/ William G. Catron
- ----------------------------- -----------------------------------
(Date) (Signature)
William G. Catron
Executive Vice President, General
Counsel and
Chief Administrative Officer
-----------------------------------
(Name and Title)
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EXHIBIT INDEX
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(a)(1) Form of Offering Circular dated February 28, 1996.
(a)(2) Form of Letter of Transmittal dated February 28, 1996.
(a)(3) Form of Notice of Guaranteed Delivery dated February 28, 1996.
(a)(4) Form of Letter to Depositary Stockholders, dated February 28, 1996, from the
President and Chief Executive Officer of the Company.
(a)(5) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees, dated February 28, 1996, from Chemical Mellon Shareholder Services,
L.L.C.
(a)(6) Form of Letter to Clients, dated February 28, 1996.
(a)(7) Form of Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
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OFFERING CIRCULAR
LEWIS GALOOB TOYS, INC.
OFFER TO EXCHANGE
ONE DEPOSITARY CONVERTIBLE EXCHANGEABLE
PREFERRED SHARE REPRESENTING 1/10TH OF A SHARE
OF $17.00 CONVERTIBLE EXCHANGEABLE PREFERRED
STOCK FOR 1.85 SHARES OF COMMON STOCK
THE EXCHANGE OFFER, AND WITHDRAWAL RIGHTS FOR DEPOSITARY SHARES TENDERED
PURSUANT TO THE EXCHANGE OFFER, WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 29, 1996 (THE "EXPIRATION DATE"), UNLESS EXTENDED.
Lewis Galoob Toys, Inc. ("Galoob" or the "Company"), hereby offers, upon
the terms and subject to the conditions set forth in this Offering Circular
and the accompanying Letter of Transmittal, as each may be supplemented or
amended from time to time (which, collectively, constitute the "Exchange
Offer"), to exchange each of its outstanding Depositary Convertible
Exchangeable Preferred Shares (the "Depositary Shares") for 1.85 shares of
common stock, $.01 par value (the "Common Stock"), of the Company. Each
Depositary Share represents 1/10th of a share of $17.00 Convertible
Exchangeable Preferred Stock (the "Preferred Stock") of the Company. The
ratio of 1.85 shares of Common Stock for each Depositary Share so exchanged
is sometimes hereinafter referred to as the "Exchange Ratio." As of December
31, 1995, there was issued and outstanding 1,839,500 Depositary Shares and
10,089,961 shares of Common Stock. The Common Stock (NYSE symbol: GAL) and
Depositary Shares (NYSE symbol: GALPR) are traded on the New York Stock
Exchange (the "NYSE"). On February 9, 1996, the last trading day prior to the
announcement of the Exchange Offer, the closing sale prices of the Common
Stock and Depositary Shares, as reported by the NYSE, were $17.25 and $25.375
per share, respectively. As of February 27, 1996, the last trading day prior
to the commencement of the Exchange Offer, the closing sales prices of the
Common Stock and the Depositary Shares, as reported on the NYSE, were $16.00
and $29.00, respectively. DEPOSITARY STOCKHOLDERS ARE URGED TO OBTAIN A
CURRENT MARKET QUOTATION FOR THE COMMON STOCK AND THE DEPOSITARY SHARES. SEE
"MARKET PRICE OF SECURITIES."
THE EXCHANGE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THE
REDEMPTION OR CONVERSION OF THE COMPANY'S DEBENTURES (AS DESCRIBED HEREIN)
AND (II) AT LEAST 75% OF THE DEPOSITARY SHARES BEING VALIDLY TENDERED AND NOT
WITHDRAWN PRIOR TO THE EXPIRATION DATE. SEE "THE EXCHANGE OFFER--CONDITIONS
OF THE EXCHANGE OFFER" FOR OTHER CONDITIONS.
THE FINANCE COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY ("FINANCE
COMMITTEE") HAS UNANIMOUSLY APPROVED THE EXCHANGE OFFER, HAS DETERMINED THAT
THE EXCHANGE OFFER IS IN THE BEST INTEREST OF THE COMPANY AND FAIR TO ITS
STOCK- HOLDERS AND RECOMMENDS THAT HOLDERS OF THE DEPOSITARY SHARES ACCEPT
THE EXCHANGE OFFER. GERARD KLAUER MATTISON & CO., LLC ("GKM") HAS DELIVERED
AN OPINION TO THE BOARD OF DIRECTORS THAT, AS OF THE DATE HEREOF, THE
EXCHANGE OFFER IS FAIR, FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF THE
COMMON STOCK. THE FINANCE COMMITTEE RECEIVED AN OPINION FROM SCHRODER
WERTHEIM & CO. INCORPORATED ("SCHRODER WERTHEIM")THAT, BASED ON CERTAIN
ASSUMPTIONS AND CONDITIONS AND SUBJECT TO CERTAIN LIMITATIONS SET FORTH IN
SUCH OPINION, AS OF THE DATE HEREOF, THE EXCHANGE RATIO IS FAIR TO THE
HOLDERS OF THE DEPOSITARY SHARES FROM A FINANCIAL POINT OF VIEW. SEE
"BACKGROUND OF THE EXCHANGE OFFER," "FAIRNESS OPINIONS--COMMON STOCK;
- --PREFERRED SHARES," "THE EXCHANGE OFFER--PURPOSE AND EFFECT OF THE EXCHANGE
OFFER."
The Exchange Offer is intended to provide an economic incentive to the
holders of the Depositary Shares ("Depositary Stockholders") to exchange
their Depositary Shares for shares of Common Stock pursuant to the Exchange
Offer. In the absence of the Exchange Offer, upon conversion of a Depositary
Share, a Depositary Stockholder currently would receive approximately 1.185
shares of Common Stock. The Exchange Offer is being made to enhance the
Company's financial position and ability to capitalize on opportunities for
continued growth. The Company believes the Exchange Offer will enable the
holders of the Depositary Shares to obtain value exceeding both the market
price of the Depositary Shares prior to the announcement of the Exchange
Offer as well as the amount of the per share cash redemption value plus all
unpaid dividend arrearages ($27.06) on the Depositary Shares. BY EXCHANGING
DEPOSITARY SHARES HEREIN, THE DEPOSITARY STOCKHOLDERS ARE WAIVING THEIR RIGHT
TO RECEIVE ANY ACCUMULATED AND UNPAID DIVIDENDS ON THE DEPOSITARY SHARES
(CURRENTLY $6.375 PER DEPOSITARY SHARE).
Holders of Depositary Shares not tendered for exchange pursuant to the
Exchange Offer will continue to have all of the existing rights and
preferences of the Depositary Shares, including, among other things, (i) the
right to cumulative dividends, if any, when paid, at the rate of $1.70 per
Depositary Share per annum, (ii) the right, upon conversion, to receive for
each Depositary Share converted, approximately 1.185 shares of Common Stock,
subject to future adjustments for certain other events, and (iii) a
liquidation preference of $20.00 per Depositary Share (plus accumulated and
unpaid dividends thereon). See "The Exchange Offer--Acceptance Not
Mandatory"; "Description of Securities--Preferred Stock." On June 10, 1992
the Company announced that it would not pay the July 1, 1992 $0.425 per share
quarterly dividend on the Depositary Shares. The Company has not paid any
subsequent quarterly dividends. There can be no assurance that the Company
will reinstate the dividends or pay any dividend arrearages on the Depositary
Shares in the near future. The Company expressly reserves the right to extend
the period of the Exchange Offer, to terminate the Exchange Offer or to
otherwise amend the Exchange Offer in any respect, subject to the terms set
forth in this Offering Circular. Any such extension, termination or amendment
may be made by such method of announcement as the Company deems appropriate.
See "Recent Developments" and "The Exchange Offer--Extension; Termination;
Amendments."
SEE "RISK FACTORS" AND "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" FOR
DISCUSSIONS OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY THE HOLDERS OF
DEPOSITARY SHARES BEFORE MAKING ANY DECISION TO EXCHANGE THEIR DEPOSITARY
SHARES IN THE EXCHANGE OFFER.
NEITHER THIS TRANSACTION NOR THE SECURITIES OFFERED HEREBY HAS BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION")
OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING
CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DEPOSITARY AND INFORMATION AGENT FOR THE EXCHANGE OFFER IS:
CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C.
The date of this Offering Circular is February 28, 1996.
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No dealer, salesperson or other person has been authorized to give any
information or make any representation not contained in this Offering
Circular, and if given or made, such information or representation must not
be relied upon as having been authorized by the Company or Chemical Mellon
Shareholder Services, L.L.C., the Depositary for the receipts of the
Depositary Shares and Information Agent for the Exchange Offer (the
"Depositary"). This Offering Circular does not constitute an offer to sell
the Depositary Shares or a solicitation of an offer to buy any of the Common
Stock offered hereby in any jurisdiction to any person to whom it is unlawful
to make such offer in such jurisdiction. Neither the delivery of this
Offering Circular nor any sale made hereunder shall, under any circumstances,
create any implication that the information herein is correct as of any time
subsequent to the date hereof or that there has been no change in the affairs
of the Company since such date.
THIS OFFERING CIRCULAR HAS BEEN PREPARED SOLELY FOR, AND SHOULD BE USED
ONLY IN CONNECTION WITH, THE EXCHANGE OFFER DESCRIBED HEREIN IN RELIANCE UPON
THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") AFFORDED BY SECTION 3(A)(9) THEREOF. THE COMPANY,
THEREFORE, WILL NOT PAY ANY COMMISSION OR OTHER REMUNERATION TO ANY BROKER,
DEALER, SALESMAN OR OTHER PERSON FOR SOLICITING TENDERS OF THE DEPOSITARY
SHARES. REGULAR EMPLOYEES OF THE COMPANY, WHO WILL NOT RECEIVE ADDITIONAL
COMPENSATION THEREFOR, MAY SOLICIT EXCHANGES FROM HOLDERS OF THE DEPOSITARY
SHARES. THE COMPANY HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY BROKER,
SALESMAN OR OTHER PERSON TO SOLICIT TENDERS OF DEPOSITARY SHARES.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Current Report on Form 8-K filed on February 13, 1996, its
Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994
Form 10-K"), its Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 (the "Form 10-Q"), and the Notice of the Annual Meeting of
Stockholders and Proxy Statement dated May 16, 1995, which have been filed by
the Company with the Commission pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"), are attached to this Offering Circular
as Appendices A, B, C and D, respectively, and are incorporated herein by
this reference.
Any documents filed by the Company pursuant to Sections 13(a) and (c) and
14 of the Exchange Act after the date of this Offering Circular and prior to
the Expiration Date shall be deemed to be incorporated by reference into this
Offering Circular and to be made a part hereof. Any statement contained
herein or in a document incorporated or deemed to be incorporated by
reference shall be deemed to be modified or superseded for purposes of this
Offering Circular to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement.
The Company undertakes to provide, without charge, to each person to whom
this Offering Circular is delivered, upon the written or oral request of any
such person, a copy of any or all of the documents, other than the documents
that are attached as Appendices to this Offering Circular, that have been
incorporated in this Offering Circular by reference (but excluding the
exhibits to any such incorporated documents). Any such request should be
directed to Lewis Galoob Toys, Inc., 500 Forbes Boulevard, South San
Francisco, California 94080, Attention: Corporate Secretary, telephone (415)
952-1678, extension 2206.
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TABLE OF CONTENTS
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ..................................... 2
SUMMARY ............................................................................. 4
RISK FACTORS ........................................................................ 13
BACKGROUND OF THE EXCHANGE OFFER .................................................... 18
FAIRNESS OPINIONS ................................................................... 19
THE EXCHANGE OFFER .................................................................. 23
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ............................................. 31
MARKET PRICE OF SECURITIES .......................................................... 33
DIVIDENDS ........................................................................... 34
CAPITALIZATION ...................................................................... 35
SELECTED CONSOLIDATED FINANCIAL DATA ................................................ 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ......................................................................... 37
BUSINESS ............................................................................ 42
PRINCIPAL STOCKHOLDERS .............................................................. 49
DESCRIPTION OF SECURITIES ........................................................... 50
LEGAL MATTERS ....................................................................... 55
INDEPENDENT ACCOUNTANTS ............................................................. 55
Exhibit A--Fairness Opinion of Gerard Klauer Mattison & Co., LLC .................... A-1
Exhibit B--Fairness Opinion of Schroder Wertheim & Co. Incorporated ................ B-1
Appendix A--Current Report on Form 8-K filed February 13, 1996
Appendix B--Annual Report on Form 10-K for the Year Ended December 31, 1994
Appendix C--Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1995
Appendix D--Notice of Annual Meeting of Stockholders and Proxy Statement dated
May 16, 1995
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SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and
financial statements appearing elsewhere in this Offering Circular or the
Appendices hereto or incorporated by reference herein.
THE COMPANY
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 entertainment 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. Consequently, 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 develop, extend and expand its core
brand, Micro Machines(Registered Trademark), and to diversify the balance of
its other product lines by building other multi-year thematic brands. 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 44% of the Company's
total revenues in 1995, 51% in 1994 and 41% in 1993. Continuing demand for
this product line was strong and shipments for certain new 1996 product lines
commenced in the fourth quarter of 1995. 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 products will continue at
current or previous levels.
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.
RECENT DEVELOPMENTS
On February 6, 1996, the Company filed a Registration Statement on Form
S-1 (the "Registration Statement") relating to the offering of Common Stock
of the Company issuable upon (i) the conversion of the Company's 8%
Convertible Subordinated Debentures due 2000 (the "Debentures"), in
accordance with the provisions of the registration rights agreement governing
the Debentures and (ii) the exercise of certain warrants to purchase 172,527
shares of Common Stock. On February 12, 1996, the Company
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announced a call for redemption of its Debentures (the "Redemption"). Under
the terms of the Redemption, the Debentures outstanding will be redeemed on
or about March 22, 1996, unless converted into Common Stock by the holders
thereof prior to the date of Redemption. Until the date of the Redemption,
the Debentures are convertible into an aggregate of 1,511,873 shares of
Common Stock at the rate of $9.26 principal amount for each share of Common
Stock (the "Conversion").
On February 8, 1996, the Company announced its audited results for the
year ended December 31, 1995. For the second consecutive year, the Company
had record sales and earnings in the fourth quarter and its best full year
operating performance since 1989. Net profits applicable to the Common Stock
increased 78% compared to the prior year fourth quarter period. Sales in the
fourth quarter increased 29% from the prior year comparable period. Net
profits applicable to the Common Stock for 1995 increased 80% from 1994.
Sales increased from $178.8 million in 1994 to $220.0 million in 1995
principally due to the success of the Company's international unit and its
worldwide sales of girls' toys. See "Summary--1995 Financial Data."
THE EXCHANGE OFFER
TERMS .................. The Depositary Stockholders are being
offered the opportunity to exchange each of
their Depositary Shares for 1.85 shares of
Common Stock in the Exchange Offer. In the
absence of the Exchange Offer, upon
conversion of a Depositary Share, a
Depositary Stockholder currently would
receive approximately 1.185 shares of Common
Stock. See "The Exchange Offer--Terms of
the Exchange Offer."
PURPOSE AND EFFECT
OF THE EXCHANGE OFFER . The Finance Committee, in determining to
proceed with the Exchange Offer, considered,
among other things, the fact that the
Exchange Offer will enable the holders of
the Depositary Shares to obtain value (based
on the NYSE close on February 9, 1996)
exceeding both the market price of the
Depositary Shares prior to the announcement
of the Exchange Offer as well as the amount
of the per share cash redemption value plus
unpaid dividend arrearages ($27.06) on the
Depositary Shares. See "Background of the
Exchange Offer"; "Fairness Opinions"; "The
Exchange Offer--Purpose and Effect of the
Exchange Offer." The Exchange Ratio was
determined by the Finance Committee with the
advice of the Company's financial advisor,
GKM, based upon, among other things, the
relative trading ranges of the Common Stock
and Depositary Shares preceding the date of
determination, to provide an economic
incentive to the Depositary Stockholders to
exchange their Depositary Shares for shares
of Common Stock. The Company believes the
Exchange Offer will enhance the Company's
financial position and ability to capitalize
on opportunities for continued growth.
The principal effects of an acceptance of
the Exchange Offer, among other things, are
that the tendering Depositary Stockholders:
(a) will currently receive 1.85 shares of
Common Stock upon exchange of a Depositary
Share as compared to, upon conversion,
approximately 1.185 shares of Common Stock,
subject to future adjustments for certain
other events, but
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(b) will lose all of the existing rights
and preferences of the Depositary Shares
exchanged in the Exchange Offer, including
but not limited to, (i) the right to
cumulative dividends, if and when paid, at
the rate of $1.70 per Depositary Share per
annum, (ii) the right, upon conversion, to
receive for each Depositary Share converted,
approximately 1.185 shares of Common Stock,
subject to future adjustments for certain
other events, and (iii) a liquidation
preference of $20.00 per Depositary Share
(plus accumulated and unpaid dividends
thereon). See "The Exchange
Offer--Acceptance Not Mandatory" and
"Description of Securities--Preferred
Stock."
The Finance Committee has unanimously
approved the Exchange Offer, has determined
that the Exchange Offer is in the best
interest of the Company and is fair to its
stockholders, and recommends that the
holders of the Depositary Shares accept the
Exchange Offer. GKM, the Company's financial
advisor, has delivered an opinion to the
Board of Directors that, as of the date
hereof, the Exchange Offer is fair, from a
financial point of view, to the holders of
the Common Stock. A copy of the opinion of
GKM is attached to this Offering Circular as
Exhibit A. See "Fairness Opinions--Common
Stock." The Finance Committee has received
an opinion from Schroder Wertheim that,
based on certain assumptions and conditions
and subject to certain limitations set forth
in such opinion, as of the date hereof, the
Exchange Ratio is fair to the holders of the
Depositary Shares from a financial point of
view. A copy of the opinion of Schroder
Wertheim is attached to this Offering
Circular as Exhibit B. See "Fairness
Opinions --Preferred Stock."
ACCEPTANCE NOT MANDATORY .. Depositary Stockholders are free to exchange
or not exchange their Depositary Shares for
shares of Common Stock in the Exchange Offer
and may tender all or a portion of their
Depositary Shares by properly completing and
delivering a Letter of Transmittal, together
with the receipts evidencing their
Depositary Shares, to the Depositary. No
vote of the Depositary Stockholders is
required in connection with the Exchange
Offer. There can be no assurance that the
Company will reinstate the dividends or pay
any dividend arrearages on any remaining
Depositary Shares after completion of the
Exchange Offer. See "The Exchange
Offer--Acceptance Not Mandatory; --Procedure
for Exchanging Depositary Shares."
PROCEDURE FOR EXCHANGING
DEPOSITARY SHARES ..... For a Depositary Stockholder to exchange his
or her Depositary Shares for shares of
Common Stock pursuant to the Exchange Offer,
depositary receipts evidencing the
Depositary Shares being exchanged hereby (or
confirmation of receipt of such Depositary
Shares pursuant to the procedures for book
entry set forth herein), together with a
properly completed and duly executed Letter
of Transmittal, any required signature
guaran-
6
<PAGE>
tees, and any other documents required by
the Letter of Transmittal, must be received
on or prior to the Expiration Date by the
Depositary at one of the addresses set forth
on the back cover of this Offering Circular.
See "The Exchange Offer--Procedure for
Exchanging Depositary Shares--Tender of
Depositary Shares."
WITHDRAWAL RIGHTS ...... Any Depositary Shares tendered pursuant to
the Exchange Offer may be withdrawn, subject
to the procedures set forth herein, at any
time prior to the Expiration Date and,
unless accepted for exchange by the Company,
may be withdrawn at anytime after 12:00
midnight on April 23, 1996 (such date and
time being the expiration of 40 business
days from the commencement of the Exchange
Offer). See "The Exchange Offer-- Withdrawal
Rights."
CONDITIONS OF THE
EXCHANGE OFFER ......... The completion of the Exchange Offer is
subject to certain conditions, including (i)
the Redemption and/or the Conversion of the
Debentures (which is scheduled to occur on
or prior to March 22, 1996) and (ii) at
least 75% of the Depositary Shares being
validly tendered and not withdrawn prior to
the Expiration Date. See "Summary--Recent
Developments" and "The Exchange
Offer--Conditions of the Exchange Offer;
--Expiration Date; Extension of the Exchange
Offer. "
EXPIRATION DATE; EXTENSION
OF THE EXCHANGE OFFER . The Exchange Offer will expire at 5:00 p.m.,
New York City time, on March 29, 1996,
unless extended by the Company (the
"Expiration Date"), and is subject to prior
termination, extension and amendment by the
Company. See "The Exchange Offer--Expiration
Date; Extension of the Exchange Offer;
--Extension, Termination, Amendments."
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES ......... For a summary of certain federal income tax
consequences of the Exchange Offer, see
"Certain Federal Income Tax Consequences."
MARKET PRICES OF COMMON
STOCK AND DEPOSITARY SHARES The Common Stock (NYSE symbol: GAL) and
Depositary Shares (NYSE symbol: GALPR) are
traded on the NYSE. On February 9, 1996, the
last trading day prior to the announcement
of the Exchange Offer, the closing sale
prices of the Common Stock and Depositary
Shares, as reported by the NYSE, were $17.25
and $25.375, respectively. As of February
27, 1996, the last trading day prior to the
commencement of the Exchange Offer, the
closing sales prices of Common Stock and the
Depositary Shares, as reported on the NYSE,
were $16.00 and $29.00, respectively.
DEPOSITARY STOCKHOLDERS ARE URGED TO OBTAIN
A CURRENT MARKET QUOTATION FOR THE COMMON
STOCK AND THE
7
<PAGE>
DEPOSITARY SHARES. SEE "MARKET PRICE OF
SECURITIES."
DESCRIPTION OF
SECURITIES ............ As of December 31, 1995, the Company had
10,089,961 shares of Common Stock and
1,839,500 Depositary Shares issued and
outstanding. In addition, at the date of
this Exchange Offer, there were outstanding
(i) warrants to purchase 567,866 shares of
Common Stock, (ii) options to purchase an
aggregate of 1,330,092 shares of Common
Stock and (iii) the Debentures convertible
into 1,511,873 shares of Common Stock.
On February 12, 1996, the Debentures were
called for Redemption in accordance with
their terms. Pursuant to the terms of the
Debentures, the Conversion may occur prior
to the date of Redemption. See
"Summary--Recent Developments."
If all of the Depositary Shares are tendered
pursuant to the Exchange Offer, the warrants
for 172,527 shares of Common Stock (which
are part of the Registration Statement) are
exercised and, prior to the Redemption, all
of the Debentures are converted, the number
of shares of Common Stock issued and
outstanding will be increased by
approximately 5,087,475 shares to 15,177,436
shares, based on the number of shares of
Common Stock issued and outstanding on
December 31, 1995, excluding the shares
issuable upon exercise of currently
outstanding options and warrants which are
not part of the Registration Statement.
DEPOSITARY AND
INFORMATION AGENT ..... Chemical Mellon Shareholder Services, L.L.C.
is serving as Depositary of the receipts
evidencing Depositary Shares tendered in the
Exchange Offer and Information Agent for the
Exchange Offer. Requests for assistance,
additional information and additional copies
of the Offering Circular or the Letter of
Transmittal should be directed to the
Depositary at one of the addresses or the
telephone number set forth on the last page
of the Offering Circular or to William G.
Catron, Executive Vice President, General
Counsel and Chief Administrative Officer of
the Company.
8
<PAGE>
1995 FINANCIAL DATA
On February 8, 1996, the Company announced its detailed financial results
for the year ended December 31, 1995 as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31 DECEMBER 31
--------------------- ----------------------
1995 1994 1995 1994
---------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenues ................................ $ 82,966 $64,565 $220,044 $178,792
Costs of products sold ...................... 42,116 35,575 132,061 104,592
---------- --------- ---------- ----------
Gross margin ................................ 40,850 28,990 87,983 74,200
Operating expenses:
Advertising and promotion .................. 13,501 11,133 31,240 30,616
Other selling and administrative ........... 13,392 9,506 35,868 26,974
Research and development ................... 1,691 818 7,886 7,288
---------- --------- ---------- ----------
Total operating expenses .................. 28,584 21,457 74,994 64,878
---------- --------- ---------- ----------
Earnings from operations .................... 12,266 7,533 12,989 9,322
Net proceeds from Nintendo award ............ 0 0 0 12,124
Interest expense ............................ (1,072) (879) (3,429) (2,609)
Other income (expense), net ................. 226 57 439 365
---------- --------- ---------- ----------
Earnings before income taxes ................ 11,420 6,711 9,999 19,202
Provision for income taxes .................. 600 301 600 778
---------- --------- ---------- ----------
Net earnings ................................ 10,820 6,410 9,399 18,424
Preferred stock dividends in arrears ....... 782 782 3,127 3,127
---------- --------- ---------- ----------
Net earnings applicable to common shares ... $10,038 $ 5,628 $ 6,272 $ 15,297
========== ========= ========== ==========
Common shares--average ...................... 10,756 10,302 10,451 10,111
Net earnings per common share ............... $ 0.93 $ 0.55 $ 0.60 $ 1.51
Net earnings per common share--fully diluted $ 0.76 $ 0.48 $ 0.60 $ 1.41
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
ASSETS
CURRENT ASSETS
Cash and cash equivalents .......... $ 2,030 $ 2,225
Accounts receivable ................ 68,402 57,883
Inventories ........................ 17,491 16,824
Tooling and related costs .......... 8,311 8,379
Prepaid expenses and other assets . 10,348 5,492
------------- -------------
TOTAL CURRENT ASSETS ............. 106,582 90,803
LAND, BUILDING AND EQUIPMENT, NET .. 8,913 8,400
OTHER ASSETS ........................ 4,589 1,563
------------- -------------
$120,084 $100,766
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable ...................... $ 15,071 $ 6,971
Accounts payable ................... 17,141 14,973
Accrued expenses ................... 14,547 14,939
Income taxes payable ............... 731 499
Current portion of long-term debt . 4,422 202
------------- -------------
TOTAL CURRENT LIABILITIES ....... $ 51,912 $ 37,584
LONG-TERM DEBT ...................... 14,000 18,414
SHAREHOLDERS' EQUITY:
Preferred stock .................... 36,790 36,790
Common stock ....................... 101 101
Additional paid-in capital ......... 31,579 31,506
Retained earnings (deficit) ....... (13,851) (23,182)
Cumulative translation adjustment . (447) (447)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY ...... 54,172 44,768
------------- -------------
$120,084 $100,766
============= =============
</TABLE>
10
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
Set forth below is certain historical unaudited consolidated financial
information and unaudited summary pro forma consolidated financial
information of the Company for the nine month period ended September 30, 1995
and the year ended December 31, 1995, which information has been adjusted to
reflect the assumed exchange and retirement of 100% and 75%, respectively, of
the Depositary Shares pursuant to the Exchange Offer, 100% conversion of the
Debentures prior to the Redemption and the exercise of the warrants for
172,527 shares of Common Stock, effective January 1, 1995 for the Income
Statements and the balance sheet date for the Balance Sheets, and the
issuance upon such exchange, conversion and exercise of an aggregate of
5,087,475 and 4,236,706 shares of Common Stock, respectively. The assumptions
on which the pro forma financial information is based are further described
in the accompanying footnotes.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA (1) PRO FORMA (2) HISTORICAL PRO FORMA (1) PRO FORMA (2)
--------------- --------------- --------------- -------------- -------------- --------------
NINE MONTHS NINE MONTHS NINE MONTHS YEAR ENDED YEAR ENDED YEAR ENDED
ENDED SEPTEMBER ENDED SEPTEMBER ENDED SEPTEMBER DECEMBER 31, DECEMBER 31, DECEMBER 31,
30, 1995 30, 1995 30, 1995 1995 1995 1995
--------------- --------------- --------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Net revenues ........... $137,078 $ 137,078 $ 137,078 $220,044 $220,044 $220,044
Net earnings (loss) ... (1,421) (543) (543) 9,399 10,499 10,499
Net earnings (loss)
applicable to common
shares ................ (3,766) (543)(6) (1,129)(6) 6,272 10,499(6) 9,717(6)
Net earnings (loss) per
share of Common Stock
Primary (3) ........... $ (0.37) $ (0.04) $ (0.08) $ 0.60 $ 0.68 $ 0.66
Fully Diluted ......... $ (0.37) $ (0.04) $ (0.08)(4) $ 0.60 $ 0.68 $ 0.66(4)
Ratio of earnings to
fixed charges and
preferred stock
dividends (7) ......... 0.28 0.72 0.56 1.90 4.82 3.76
AS OF SEPTEMBER AS OF SEPTEMBER AS OF SEPTEMBER AS OF DECEMBER AS OF DECEMBER AS OF DECEMBER
BALANCE SHEET (5): 30, 1995 30, 1995 30, 1995 31, 1995 31, 1995 31, 1995
--------------- --------------- --------------- -------------- -------------- --------------
Working capital ........ $ 52,387 $ 52,911 $ 52,911 $ 54,670 $ 55,194 $ 55,194
Total assets ........... 117,344 117,344 117,344 120,084 120,084 120,084
Shareholders' equity .. 43,425 57,949 57,949 54,172 68,696 68,696
Book Value per share of
Common Stock .......... $ (0.43) $ 3.82 $ 3.21 $ 0.56 $ 4.53 $ 3.95
</TABLE>
- ------------
(1) Assumes that 100% of the Debentures have been converted, the exercise
of the warrants for 172,527 shares of Common Stock, and that 100% of
the outstanding Depositary Shares were exchanged into an aggregate of
5,087,475 shares of Common Stock on January 1, 1995. As a result of the
assumed conversion of the Depositary Shares, the dividend requirements
for Depositary Shares are eliminated while the average number of shares
of Common Stock and Common Stock equivalents outstanding are increased.
(2) Assumes that 100% of the Debentures have been converted, the exercise
of the warrants for 172,527 shares of Common Stock, and that 75% of the
outstanding Depositary Shares were exchanged into an aggregate of
4,236,706 shares of Common Stock on January 1, 1995. As a result of the
assumed conversion of the Depositary Shares, the dividend requirements
for Depositary Shares are reduced by 75% while the average number of
shares of Common Stock and Common Stock equivalents outstanding are
increased.
(3) Based upon the weighted average shares of Common Stock and Common Stock
equivalents actually outstanding of 10,068,190 at September 30, 1995
and 10,451,450 at December 31, 1995, plus 5,087,475 and 4,236,706
additional shares, assuming 100% and 75% exchange rates, respectively,
of the Depositary Shares, effective January 1, 1995.
(4) Assumes conversion of the 459,875 Depositary Shares assumed not to have
been exchanged pursuant to the Exchange Offer, effective January 1,
1995, at a rate of approximately 1.185 shares of Common Stock for each
Depositary Share, or 545,037 shares of Common Stock.
(5) The Company's consolidated pro forma balance sheets as of September 30,
1995 and December 31, 1995 have been adjusted to reflect the assumed
100% conversion of the Debentures, the exercise of the warrants for
172,527 shares of Common Stock, and the consummation of the Exchange
Offer as of January 1, 1995, assuming that 100% and 75%, respectively,
of the 1,839,500 issued and outstanding Depositary Shares were
exchanged in the Exchange Offer. The pro forma consolidated balance
sheet information also gives effect to the fees and expenses the
Company will be required to pay in cash in connection with the Exchange
Offer, estimated to be $1,000,000, which would be accounted for by the
Company as a reduction to capital in excess of par.
(6) Does not include the one time non-cash charge for the change in the
conversion ratio from approximately 1.185 to 1.85 of $21.1 million and
$15.8 million for the exchange of 100% and 75% of the Depositary
Shares, respectively. This charge does not affect the income statement
or balance sheet; only earnings (loss) applicable to common
shareholders and net earnings (loss) applicable to shares of Common
Stock.
(7) The ratio of earnings to fixed charges and preferred stock dividends
were 3.22 for the nine month period ended September 31, 1994 and 3.51
for the year ended December 31, 1994.
11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL 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 which are set forth
in the Form 10-Q and 1994 Form 10-K included in this Offering Circular as
Appendices C and B, respectively.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- ---------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ------------ ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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>
12
<PAGE>
RISK FACTORS
The Common Stock included in the Exchange Offer involves a high degree of
risk and Depositary Stockholders should carefully consider, among other
things, the following factors relating to the differences between the Common
Stock and the Depositary Shares before making any decision to exchange their
Depositary Shares for shares of Common Stock.
The Depositary Stockholders are being offered, for a limited time, the
opportunity to exchange their Depositary Shares for 1.85 shares of Common
Stock in the Exchange Offer. The terms of the Common Stock provide less
protection than the terms of the Preferred Stock represented by the
Depositary Shares against risks associated with the Company and its business
and, accordingly, the Common Stock involves a higher degree of risk than the
Depositary Shares. It is therefore important that the Depositary Stockholders
carefully compare the rights and privileges of the Depositary Shares and the
Common Stock, in light of their assessment of the performance, prospects and
risks of the Company, in order to decide whether and to what extent they wish
to exchange their Depositary Shares for shares of Common Stock in the
Exchange Offer.
Loss of Rights and Privileges of Depositary Stockholders Who Exchange
Their Shares in the Exchange Offer. As described below, a Depositary
Stockholder who exchanges all or portion of his or her Depositary Shares for
Common Stock will no longer own the Depositary Shares exchanged and,
consequently, will no longer be entitled to any of the rights and privileges
of the Depositary Shares or the Preferred Stock represented by the Depositary
Shares, including, but not limited to, the fixed cumulative dividends payable
thereon, the anti-dilution protection adjusting the number of shares of
Common Stock receivable upon conversion of Depositary Shares upon the
occurrence of certain events, and the liquidation preference therefor, as
follows:
Loss of Cumulative Quarterly Dividend. Dividends on the Depositary
Shares are payable at the rate of $1.70 per Depositary Share per annum,
quarterly, on the first day of January, April, July and October of each
year as of January 1, 1990, when, as and if declared by the Board of
Directors of the Company (the "Board of Directors"). Dividends not paid
accumulate and all accumulated dividends must be paid before any dividends
are declared or paid on the Common Stock or any capital stock ranking
junior to the Preferred Stock. By exchanging Depositary Shares herein, the
Depositary Stockholders are waiving their right to receive any accumulated
and unpaid dividends on the Depositary Shares (currently $6.375 per
Depositary Share). The Board of Directors determined not to declare and
pay the quarterly dividend of $0.425 per Depositary Share payable on July
1, 1992, which dividend has accumulated. Since the Company has failed to
pay dividends for six or more quarterly payment periods, whether or not
consecutive, the holders of the Preferred Stock are entitled to elect a
number of directors equal to the greater of two or such number that would
result in such holders electing at least 20% of the members of the
Company's Board of Directors, which right terminates upon the payment of
all accrued dividends. Accordingly, the holders of the Preferred Stock
elected Hoffer Kaback and George Riordan to the Board of Directors. There
can be no assurance that the Company will reinstate the dividends or pay
any dividend arrearages on any remaining Depositary Shares after
completion of the Exchange Offer.
Loss of Anti-Dilution Protection. At the election of the holder
thereof, each outstanding Depositary Share, by its terms, is convertible
into Common Stock at any time prior to redemption at a conversion rate
currently equal to approximately 1.185 shares of Common Stock for each
Depositary Share. The conversion rate is subject to adjustment from time
to time in the event of (i) the issuance of Common Stock as a dividend or
distribution on any class of capital stock of the Company, (ii) the
combination, subdivision or reclassification of the Common Stock, (iii)
the distribution to all holders of Common Stock of evidence of the
Company's indebtedness or assets (including securities, but excluding cash
dividends or options, warrants or convertible securities with an exercise
or conversion price per share less than current market price). No
adjustment in the conversion rate will be required until cumulative
adjustments require an adjustment of at least 1% in the conversion price.
No fractional shares will be issued upon conversion, but any fractions
will be adjusted in cash on the basis of the then current market price of
the Common Stock. No payment of accumulated and unpaid dividends will be
made upon conversion.
13
<PAGE>
Loss of Liquidation Preference. Upon liquidation, dissolution or
winding up of the Company, holders of Depositary Shares are entitled to
receive liquidation distributions equivalent to $20.00 per Depositary
Share (plus accumulated and unpaid dividends) before any distribution to
holders of the Common Stock or any capital stock ranking junior to the
Preferred Stock. See "Description of Securities--Preferred Stock."
No Dividends on Common Stock. The Company has never paid any dividends,
and does not intend to pay any dividends, on its Common Stock in the
foreseeable future. See "Dividends."
Potential Adverse Effects on Depositary Shares Not Exchanged. The Company
will retire and not reissue Depositary Shares and the underlying shares of
Preferred Stock exchanged for shares of Common Stock in the Exchange Offer.
The exchange of Depositary Shares in the Exchange Offer will reduce the
number of Depositary Shares which trade publicly and could adversely affect
the liquidity and market value of the remaining outstanding Depositary
Shares. The extent of trading of the Depositary Shares on the NYSE will
depend upon the number of outstanding Depositary Shares, the market value of
the remaining publicly-held Depositary Shares, the number of Depositary
Stockholders, the interest of securities firms in maintaining a market in the
Depositary Shares, any termination of registration of the Depositary Shares
under the Exchange Act as described below and other factors. The Company
cannot predict whether the reduction in the number of Depositary Shares that
might otherwise trade publicly will have an adverse or beneficial effect on
the market price or marketability of the Depositary Shares.
Possible Delisting of Depositary Shares from the NYSE. The NYSE may
require delisting of the Depositary Shares if, after the Expiration Date,
there are less than 100,000 publicly-held Depositary Shares, or the market
value of the remaining publicly-held Depositary Shares is less than $2
million. If in excess of 94.6% (or 1,739,500 Depositary Shares) of the
Depositary Shares are exchanged for shares of Common Stock in the Exchange
Offer or about 30% of the Depositary Stockholders exchange their Depositary
Shares, the Company may no longer satisfy all of the requirements for the
Depositary Shares to continue to be designated as a NYSE security.
Accordingly, there can be no assurance that the Depositary Shares will
continue to be listed on the NYSE after the Expiration Date. See "The
Exchange Offer--Purpose and Effect of the Exchange Offer."
Possible Termination of Registration of the Depositary Shares under the
Exchange Act. The Depositary Shares are currently registered under the
Exchange Act. Registration of the Depositary Shares under the Exchange Act
may be terminated upon application of the Company to the Commission if the
Depositary Shares are neither listed on the NYSE or another national
securities exchange nor held of record by 300 or more persons. Termination of
registration of the Depositary Shares would make certain provisions of the
Exchange Act, such as the requirements of Rule 13e-3 thereunder with respect
to "going private" transactions, no longer available in respect to the
Depositary Shares. If registration of the Depositary Shares under the
Exchange Act were terminated, the Depositary Shares would no longer be
"margin securities" under the regulations of the Board of Governors of the
Federal Reserve System, which has the effect, among other things, of allowing
brokers to extend credit on the collateral of such securities or be eligible
for reporting by the National Association of Securities Dealers, Inc. (the
"NASD") through the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"). See "The Exchange Offer--Purpose and Effect of
the Exchange Offer."
In addition to other information in this Offering Circular, the following
risk factors should be considered carefully in evaluating the Company and its
business before making any decision to exchange Depositary Shares for shares
of Common Stock.
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, the
Company put in place a new management team that strategically restructured
the Company resulting in a return to profitability
14
<PAGE>
as planned in 1994 and 1995. 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) incorporated by reference herein.
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. Consequently, a decrease in
popularity of a particular item during any year could have a material adverse
impact on revenues and profit for that year. The Micro Machines line of
collectible, miniature vehicles and accessories accounted for 44%, 51% and
41% of the Company's net revenues for the years 1995, 1994 and 1993,
respectively. Continuing demand for this product line was strong and
shipments for certain new 1996 product lines commenced in the fourth quarter
of 1995. 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 products will continue at current or previous 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 the
fact that a disproportionate share of receivables is created late in the year
and 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 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 to its
specifications by nonaffiliated 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 cost increases likely to be incurred resultant from (1)-(3) above
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
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cost of goods imported from the Orient. 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
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,
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 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 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 cost
increases likely to be incurred resultant from (1)-(3) above through to the
Company's customers as product price increases. See
"Business--Manufacturing."
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.
COMPETITION
The toy industry is highly competitive. The Company competes with several
larger domestic and foreign toy companies, such as Hasbro, Mattel, Tyco,
Bandai and Playmates, 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
channels, 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.
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 resulting in a
final judgment in excess of its insurance coverage could have a material
adverse effect on the Company. See "--Government Regulations" and
"Business--Government Regulations."
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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 63%, 66% and 66% of net sales in 1995, 1994 and 1993,
respectively. In 1995, 1994 and 1993, Toys "R" Us, Inc. accounted for
approximately 20% 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. 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 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 entertainment licenses, permit the Company to manufacture and
market toys based on characters or properties which develop their own popular
identity, often through exposure in various media such as television
programs, movies, cartoons and books. Normally most entertainment 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. The Company pays royalties to its licensors which 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 entertainment
licenses and has obtained domestic and international license rights for most
of its products. A determination to acquire an entertainment license must
frequently be made before the commercial introduction of the property in
which a licensed character or property appears, and license arrangements
often require the payment of non-refundable advances or guaranteed minimum
royalties. Accordingly, the success of an entertainment 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. There can be no assurance that the Company will be able
to enter into entertainment 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
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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 (the "Certificate") and By-Laws
(the "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 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 before making a bid 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 Securities--Preferred Stock
and--Certain Provisions of the Company's Certificate of Incorporation and
By-Laws."
BACKGROUND OF THE EXCHANGE OFFER
Following the October, 1989 public offering and sale of the Preferred
Stock, the Company suffered a significant deterioration of its business.
Sales of its principal brand, Micro Machines, declined from a peak of
approximately $169,100,000 in 1989 to approximately $43,004,000 in 1991. This
decline was not offset by the successful introduction of new promotional
products. In addition, the Company's general and administrative expenses had
increased to support substantially greater levels of sales than the Company
was able to generate. Accordingly, the Company experienced a loss of more
than $32,000,000 in 1990, reducing the Company's stockholders' equity by more
than 40%.
In mid-1991, the Company changed its senior management and initiated a
multi-year turn around program intended to establish consistent
profitability. That program involved changes in marketing and management
approaches. The Company announced an intention to focus on multi-year,
extendable product lines and brands with individual items carrying relatively
low price points. The initial objective of this strategy was to revitalize
and restore growth to the Micro Machine's brand. In order to improve the
Company's relationship with its customers and increase operating
efficiencies, the Company determined to impose additional discipline on its
product development cycle so that research and development activities would
be concluded in time for orderly and efficient manufacture of new products
and timely delivery to retailers in coordination with the Company's
advertising and promotional efforts. The alteration of the Company's approach
to product development inherently meant that there would be a period of
decline in product introductions, and, therefore, revenues as the Company
ceased to attempt to increase sales through relatively late additions of new
products to each year's line.
The Company recognized that one of the immediate effects of its multi-year
turn around program would be the continued recognition of losses in the near
term and the reduction of the financial resources available to the Company to
effectuate the program. On June 10, 1992, the Company announced that it was
suspending the preferred dividends payable with respect to the Depositary
Shares in order to conserve the resources necessary to finance the turn
around program. The Company further determined that issues surrounding the
Depositary Shares and the dividend arrearage on those shares could not be
addressed until the Company was confident of its ability to establish
consistent profitability.
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The implications and effects of the cessation of the dividends relating to
the Preferred Stock were examined by the Company regularly since the payment
of those dividends was discontinued. The Company believed that the continued
accretion of accrued and unpaid dividends as a right senior to the Common
Stock adversely affected the value of the Common Stock and the Company's
access to the capital markets. As the cumulative amount of unpaid dividends
increased, it became apparent that to pay arrearages in cash would weaken the
Company's balance sheet. The Company did not believe that the negative
effects of the failure to pay dividends on the Depositary Shares would be
substantially reduced by the mere resumption of current dividend payments.
The Company did believe that those effects would be reduced as a result of an
offer to issue to holders of the Depositary Shares Common Stock at a premium
to the current market value
The Finance Committee, in determining to proceed with the Exchange Offer,
considered, among other things, the fact that the Exchange Offer will enable
the holders of the Depositary Shares to obtain value (based on the NYSE close
on February 9, 1996) exceeding both the market price of the Depositary Shares
prior to the announcement of the Exchange Offer as well as the amount of the
per share cash redemption value plus unpaid dividend arrearages ($27.06) on
the Depositary Shares. The Finance Committee unanimously approved the
Exchange Offer and determined that the Exchange Offer was fair and in the
best interest of the Company and its stockholders. Prior to publishing a
formal recommendation to the holders of Depositary Shares, the Finance
Committee determined to engage the services of Schroder Wertheim to render a
fairness opinion regarding the Exchange Ratio to the Depositary Stockholders.
The Exchange Ratio was determined by the Finance Committee with the advice of
GKM, based upon, among other things, the relative trading ranges of the
Common Stock and Depositary Shares preceding the date of determination, to
provide an economic incentive to the Depositary Stockholders to exchange
their Depositary Shares for shares of Common Stock.
The Company's assessment of the effects of the Exchange Offer is based on
conversations which it has had from time-to-time with substantial holders of
the Depositary Shares as well as the advice received from the Company's
financial advisor, GKM. The Company's conversations with substantial holders
of the Depositary Shares were part of ongoing discussions in which such
holders communicated to the Company their views with respect to the courses
of action which they felt the Company should take with respect to the
Depositary Shares. In part, as a result of those discussions, the Company
believes that certain substantial holders of the Depositary Shares believe
that the Exchange Offer represents a responsible way for the Company to
address the issues relating to the Preferred Stock.
FAIRNESS OPINIONS
COMMON STOCK
GKM has acted as the Company's financial advisor in connection with the
Exchange Offer and also has been engaged by the Board of Directors to
consider the fairness of the Exchange Offer, from a financial point of view,
to the holders of the Common Stock. On February 11, 1996, GKM reviewed with
the Finance Committee its financial analysis of the Exchange Offer and
delivered its preliminary determination to the Finance Committee that, as of
such date, the Exchange Offer was fair, from a financial point of view, to
the holders of the Common Stock. On February 28, 1996, GKM delivered a
written fairness opinion to the Board of Directors stating that the Exchange
Offer is fair, from a financial point of view, to the holders of the Common
Stock as of the date hereof. The fairness opinion of GKM is attached to this
Offering Circular as Exhibit A. Holders of Depositary Shares are urged to
read GKM's opinion in its entirety as such opinion is subject to the
limitations and based on the assumptions, set forth therein. Pursuant to an
engagement letter dated February 11, 1996, Galoob agreed to pay to GKM (i) a
financial advisory fee of $500,000 no later than February 28, 1996 and (ii) a
fee of $200,000 upon the delivery by GKM of its fairness opinion. The Company
has also agreed to reimburse GKM for its reasonable out-of-pocket expenses
and to indemnify GKM, its officers, directors, controlling persons, employees
and agents, against certain liabilities, including liabilities under the
federal securities laws, relating to, arising out of, or in connection with,
the matters contemplated by the engagement letter or the Exchange Offer.
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PREFERRED STOCK
Schroder Wertheim has delivered to the Finance Committee its opinion, as
investment bankers, that the Exchange Ratio is fair to the holders of the
Depositary Shares from a financial point of view. Such opinion is subject to
certain limitations and is based on certain assumptions stated therein, and
the summary of such opinion set forth below is qualified in its entirety by
reference to the full text of such opinion which is attached as Exhibit B to
this Offering Circular. Holders of the Depositary Shares are urged to read
Schroder Wertheim's opinion in its entirety as such opinion is subject to the
limitations and based on the assumptions, set forth therein.
Schroder Wertheim's opinion does not constitute a recommendation as to any
action the Finance Committee of the Board of Directors, the Board of
Directors, any other committee thereof, or any shareholder of the Company or
any holder of Depositary Shares should take in connection with the Exchange
Offer. In rendering its opinion Schroder Wertheim has not been engaged to act
as an agent or fiduciary of the holders of Depositary Shares or any other
third party. Such opinion relates solely to the fairness of the Exchange
Ratio to the holders of Depositary Shares from a financial point of view.
Schroder Wertheim did not express any opinion as to the structure, terms or
effect of any other aspect of the Exchange Offer.
In connection with its opinion, Schroder Wertheim, among other things: (i)
reviewed the Offering Circular and Letter of Transmittal dated February 28,
1996; (ii) reviewed the Registration Statement ; (iii) reviewed the Company's
prospectus, dated October 4, 1989, relating to the offering of the Depositary
Shares as filed with the Commission; (iv) reviewed the 1994 Form 10-K, the
Company's 1994 Annual Report to Shareholders and the Company's Form 10-Q for
the quarter and nine months ended September 30, 1995; (v) reviewed the
Company's 1995 income statement and balance sheet for the fiscal year ended
December 31, 1995, audited by Price Waterhouse LLP, the Company's independent
public accountants; (vi) reviewed certain internal financial statements and
financial operating data concerning the Company prepared by management of the
Company; (vii) reviewed financial projections for the Company prepared by
management of the Company; (viii) held discussions with the Company's
management regarding the business, operations, historical financial
performance, projected financial performance and future prospects of the
Company; (ix) reviewed the historical trading prices and volumes of the
Common Stock and the Depositary Shares and analyzed the relationship between
the two securities; (x) performed various analyses of the Company and the
Exchange Offer using generally accepted valuation methodologies, including:
(a) comparable public company analysis; (b) discounted cash flow analysis;
and (c) comparable transactions analysis; (xi) analyzed the pro forma impact
of the Exchange Offer on the Company's capitalization and historical and
projected results; and (xii) performed such other studies, analyses,
inquiries and investigations as we deemed appropriate.
In rendering its opinion, Schroder Wertheim has assumed and relied upon
the accuracy and completeness of all information supplied or otherwise made
available to it by the Company or obtained by it from other sources, and upon
the assurance of the Company's management that it is unaware of any
information or facts that would make the information provided to it
incomplete or misleading. Schroder Wertheim did not independently verify such
information or undertake an independent appraisal of the assets or
liabilities (contingent or otherwise) of the Company and was not furnished
with any such appraisals. Schroder Wertheim also assumed that all financial
forecasts provided by the Company were reasonably prepared and reflect the
best currently available estimates and judgment of the senior management of
the Company as to the expected future financial performance of the Company.
Schroder Wertheim's opinion is necessarily based upon economic, market and
other conditions as they exist on, and the information made available to it
as of, the date hereof (including, without limitation, the respective market
prices of the Common Stock and the Depositary Shares). Moreover, given the
varying tax implications that the Exchange Offer could have on the holders of
Depositary Shares depending on their specific circumstances, Schroder
Wertheim has not taken into account the potential tax consequences of the
Exchange Offer to any holder or category of holders of the Depositary Shares,
including the application and effect of federal, state, local and foreign
income and other tax laws. See "Certain Federal Income Tax Consequences."
Holders of Depositary Shares should consult with their
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own tax advisors as to the specific tax consequences of the Exchange Offer to
them, including the application and effect of federal, state, local and
foreign income and other tax laws. Schroder Wertheim disclaims any
undertaking or obligation to advise any person of any change in any fact or
matter affecting its opinion which may come or be brought to its attention
after the date as of which such opinion is given.
The following is a brief summary of certain financial analyses performed
by Schroder Wertheim in connection with the preparation of its opinion. In
many of its analyses, Schroder Wertheim considered time periods involving two
key dates: (i) June 10, 1992, the date on which Galoob announced that it
would no longer pay cash dividends on the Depositary Shares and (ii) February
9, 1996, the last trading day prior to the date on which Galoob announced the
Exchange Offer.
Implied Market Price Exchange Ratio: Schroder Wertheim computed the
implied market price exchange ratio by dividing the historical market price
of the Depositary Shares by the historical market price of the Common Stock
on a daily basis for the period from June 10, 1992 to February 9, 1996 and
for the period from January 1, 1995 to February 9, 1996. Schroder Wertheim
noted that the Exchange Ratio was within the range of implied exchange ratios
derived by this method over both periods.
Weighted Average Trading History: Schroder Wertheim computed the average
trading price weighted by the volume of shares traded ("Weighted Average
Price") of the Depositary Shares and the Common Stock for the period from
June 10, 1992 to February 9, 1996 and for the period from January 1, 1995 to
February 9, 1996. For both periods Schroder Wertheim computed an implied
exchange ratio by dividing the historical weighted average market price of
the Depositary Shares by the historical weighted average market price of the
Common Stock. Schroder Wertheim noted that the Exchange Ratio was greater
than the implied exchange ratios derived by this method over both periods.
Implied Call Price Exchange Ratio: Schroder Wertheim also computed the
implied call price exchange ratio by dividing the historical call price of
the Depositary Shares (the redemption price as described in the Company's
prospectus, dated October 4, 1989, plus accrued dividend arrearages to date)
by the historical market price of the Common Stock on a daily basis for the
period from June 10, 1992 to February 9, 1996 and for the period from January
1, 1995 to February 9, 1996. Schroder Wertheim noted that the Exchange Ratio
was within the range of implied exchange ratios derived by this method over
both periods.
Depositary Share Market Price Discount to Call Price: Schroder Wertheim
computed the historical discount of the market price of the Depositary Shares
to the call price of the Depositary Shares on a monthly basis for the period
from June 30, 1992 to February 9, 1996 and weekly for the period from January
6, 1995 to February 9, 1996. Schroder Wertheim noted that the Depositary
Shares have traded in the public market at a significant discount to their
call price for both periods.
Toy Industry Comparable Company Analysis: Using publicly available
information, Schroder Wertheim compared selected historical and projected
financial and operating data, and selected stock market data, of Galoob to
the corresponding data of the following publicly traded toy manufacturing
companies which Schroder Wertheim considered comparable to Galoob
(collectively, the "Comparable Toy Companies"): Hasbro, Inc., Mattel, Inc.,
Toy Biz, Inc. and Tyco Toys, Inc.
In comparing Galoob's recent operating performance and market valuation to
the recent operating performance of the Galoob Comparable Toy Companies,
Schroder Wertheim noted, among other things, that: (i) Galoob is trading at
price to 1995, projected 1996 and projected 1997 earnings per share ("EPS")
multiples of 22.6x, 16.5x and 12.8x, respectively, compared to an average of
20.3x, 16.3x and 13.2x, respectively, for the Comparable Toy Companies; (ii)
Galoob's market value plus total debt minus total cash ("Enterprise Value"),
pro forma for the Exchange Offer, the conversion of the Debentures and the
exercise of certain warrants as indicated elsewhere in this Offering
Circular, to 1995, projected 1996 and projected 1997 earnings before
interest, taxes, depreciation and amortization ("EBITDA") multiples are
18.9x, 10.4x and 8.0x, respectively, compared to an average of 9.2x, 6.9x and
6.2x, respectively, for the Comparable Toy Companies; (iii) from 1992 to
1995, Galoob's earnings before interest and taxes ("EBIT") increased at a
compounded annual growth rate of 116.3% compared to an average of 32.3% for
the Comparable Toy Companies; and (iv) Galoob's EPS is projected (based
solely on analyst consensus
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estimates) to increase at a compounded annual growth rate of 32.8% between
1995 (pro forma for the Exchange Offer, the conversion of the Debentures and
the exercise of certain warrants as indicated elsewhere in this Offering
Circular) and 1997 compared to an average of 21.0% for the Comparable Toy
Companies.
Galoob Discounted Cash Flow Analysis: Schroder Wertheim performed a
discounted cash flow analysis of Galoob based on Galoob's financial forecasts
for the fiscal years ending 1996 to 1998 prepared and provided by the
management of Galoob (the "Financial Forecast"). A discounted cash flow
analysis is a traditional valuation methodology used to derive a valuation of
a corporate entity by capitalizing the estimated future earnings and
calculating the estimated future free cash flows of such corporate entity and
discounting such aggregated results back to the present.
Schroder Wertheim analyzed the Financial Forecast and discounted the
stream of free cash flows provided in such forecast back to January 1, 1996
using certain discount rates. To estimate the residual value of Galoob at the
end of the Financial Forecast period, Schroder Wertheim applied certain
terminal multiples to Galoob's projected fiscal 1998 EBITDA and discounted
such value estimates back to January 1, 1996 using certain discount rates.
Schroder Wertheim then summed the present values of the free cash flows and
the present value of the residual values to derive a range of implied equity
values for Galoob of $215.8 to $290.6 million (after adjustments for total
debt and cash and equivalents). These values represent $14.22 to $19.15 per
share of the Common Stock (pro forma for the Exchange Offer, the conversion
of the Debentures and the exercise of certain warrants as indicated elsewhere
in this Offering Circular).
Selected Comparable Transactions Analysis: Schroder Wertheim analyzed
certain publicly available information relating to selected comparable recent
exchange offers in which a public company successfully completed an offer to
exchange common stock for outstanding public preferred stock of the same
company. Schroder Wertheim computed the premium which the exchange offer
represented to the market price of the preferred stock on the day prior to
the announcement of the exchange offer. Schroder Wertheim noted that the
premium represented by the Exchange Offer on the day prior to the
announcement of the Exchange Offer was within the range of premiums in
comparable transactions.
The foregoing summary does not purport to be a complete description of
Schroder Wertheim's analyses or of the presentation by Schroder Wertheim to
the Finance Committee. Schroder Wertheim did not attribute any particular
weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis
or factor. Accordingly, Schroder Wertheim believes that its analyses must be
considered as a whole and that selecting portions of its analyses or of the
factors considered, without considering all analyses and factors, could
create an incomplete view of the processes underlying the preparation of its
opinion. The preparation of a fairness opinion is a complex process and is
not necessarily susceptible to partial analysis or summary description. In
performing its analyses, Schroder Wertheim made numerous assumptions with
respect to general business and economic conditions and other matters, many
of which are beyond the control of Galoob. The analyses performed by Schroder
Wertheim are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Additionally, analyses relating to the values of businesses
and various classes of securities do not purport to be appraisals or to
reflect the prices at which business may actually be sold or at which a
company's securities may trade at any time.
Schroder Wertheim is a nationally recognized investment banking firm
engaged in, among other things, the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, exchange offers, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate
and other purposes.
Pursuant to the terms of Schroder Wertheim's engagement by the Finance
Committee, the Company: (i) upon the signing of an engagement letter, paid to
Schroder Wertheim an initial cash fee of $100,000, and (ii) paid to Schroder
Wertheim a fee of $100,000 at the time Schroder Wertheim informed the Finance
Committee that it was ready to deliver its opinion. The Company has also
agreed to reimburse Schroder Wertheim for its reasonable out-of-pocket
expenses and to indemnify Schroder Wertheim, its officers, directors,
controlling persons, employees and agents, against certain liabilities,
including liabilities under the federal securities laws, relating to, arising
out of, or in connection with, the matters contemplated by the engagement
letter.
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Schroder Wertheim, in the normal course of business, trades in the
securities of Galoob for its own account and for the account of its
customers, and it expects to continue trading in such securities in the
future. Accordingly, Schroder Wertheim may from time to time hold a long or
short position in Galoob's securities.
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
The Depositary Stockholders are being offered, for a limited time, the
opportunity to exchange each of their Depositary Shares for 1.85 shares of
Common Stock. In the absence of the Exchange Offer, upon conversion of a
Depositary Share, a Depositary Stockholder would only receive approximately
1.185 shares of Common Stock.
The Company's obligation to consummate the Exchange Offer is subject to
the exchange of Depositary Shares. The Exchange Offer is conditioned upon (i)
the Redemption and/or Conversion (which is scheduled to occur on or prior to
March 22, 1996) and (ii) at least 75% of the Depositary Shares being validly
tendered and not withdrawn prior to the Expiration Period. The Company will
accept for exchange any and all Depositary Shares validly tendered after 9:00
a.m., New York City time, on February 28, 1996 and before the Expiration
Date. "Expiration Date" means 5:00 p.m., New York City time, on March 29,
1996, unless the Company, in its sole discretion, extends the period of time
for which the Exchange Offer is open, in which event "Expiration Date" shall
mean the latest time and date to which the Exchange Offer is extended. For a
description of the Company's rights to extend the period during which the
Exchange Offer is open and to amend the Exchange Offer, see "The Exchange
Offer--Expiration Date; Extension of the Exchange Offer."
The Company is not required to issue fractional shares of Common Stock
issuable upon exchange of the Depositary Shares. In lieu of issuing
fractional shares, the Company will pay for such fraction in cash based upon
the closing price of the Common Stock on its principal exchange or trading
market on the last trading day prior to the Expiration Date. No payment will
be made on account of accrued dividends upon exchange of the Depositary
Shares.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Company is making the Exchange Offer to the Depositary Stockholders to
provide an economic incentive to exchange their Depositary Shares for shares
of Common Stock in the Exchange Offer. The Exchange Offer is being made to
enhance the Company's financial position and ability to capitalize on
opportunities for continued growth. BY EXCHANGING DEPOSITARY SHARES FOR
COMMON STOCK, THE DEPOSITARY STOCKHOLDERS WILL FORFEIT THEIR OPPORTUNITY TO
RECEIVE (I) CUMULATIVE DIVIDENDS, IF AND WHEN PAID, AT THE RATE OF $1.70 PER
DEPOSITARY SHARE PER ANNUM, (II) UPON CONVERSION, FOR EACH DEPOSITARY SHARE
CONVERTED, APPROXIMATELY 1.185 SHARES OF COMMON STOCK, SUBJECT TO FUTURE
ADJUSTMENTS FOR CERTAIN OTHER EVENTS, AND (III) A LIQUIDATION PREFERENCE OF
$20.00 PER DEPOSITARY SHARE (PLUS ACCUMULATED AND UNPAID DIVIDENDS THEREON).
SEE "RISK FACTORS--LOSS OF RIGHTS AND PRIVILEGES OF DEPOSITARY STOCKHOLDERS
WHO EXCHANGE THEIR SHARES IN THE EXCHANGE OFFER." There can be no assurance
that the Company will reinstate the dividends or pay any arrearages on the
unexchanged Depositary Shares in the near future and it has no legal
obligation to do so. The conversion terms were determined by the Finance
Committee of the Company's Board of Directors, with the advice of GKM, based
upon, among other things, the relative trading ranges of the Common Stock and
Depositary Shares preceding the date of determination, to provide an economic
incentive to the Depositary Stockholders to exchange their Depositary Shares
for shares of Common Stock. The Finance Committee, in determining to proceed
with the Exchange Offer, considered, among other things, the fact that the
Exchange Offer will enable the holders of the Depositary Shares to obtain
value (based upon the NYSE close on February 9, 1996) exceeding both the
market price of the Depositary Shares prior to the announcement of the
Exchange Offer as well as the amount of the per share cash redemption value
plus all unpaid dividend arrearages ($27.06) on the Depositary Shares. The
Exchange Offer also gives the holders of the Depositary Shares the
opportunity to sell their
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Depositary Shares without the usual transaction costs associated with a
market sale. In light of the foregoing, the Company believes that in
proceeding with the Exchange Offer, it will have fulfilled any obligations to
the Depositary Stockholders.
The Finance Committee has unanimously approved the Exchange Offer, has
determined that the Exchange Offer is in the best interest of the Company and
fair to its stockholders, and recommends that the holders of the Depositary
Shares accept the Exchange Offer. GKM has delivered an opinion to the Board
of Directors that as of the date hereof, the Exchange Offer is fair, from a
financial point of view, to the holders of the Common Stock. See "Fairness
Opinions--Common Stock." The Finance Committee has received an opinion from
Schroder Wertheim that, based on certain assumptions and conditions and
subject to certain limitations set forth in such opinion, as of the date
hereof, the Exchange Ratio is fair to the holders of the Depositary Shares
from a financial point of view. See "Fairness Opinion--Preferred Stock."
The purchase of Depositary Shares pursuant to the Exchange Offer will
reduce the number of holders of Depositary Shares and the number of
Depositary Shares that might otherwise trade publicly, and, depending upon
the number of Depositary Shares so exchanged, could adversely affect the
liquidity and market value of the remaining Depositary Shares held by the
public.
Depending upon the number of Depositary Shares purchased pursuant to the
Exchange Offer, the Depositary Shares may no longer meet the requirements of
the NYSE for continued listing. As of December 31, 1995, there were 1,839,500
issued and outstanding Depositary Shares. According to the NYSE's published
guidelines, the NYSE would consider delisting the Depositary Shares if, among
other things, the number of publicly held Depositary Shares should fall below
100,000 or the aggregate market value of publicly held Depositary Shares
should fall below $2,000,000. If, as a result of the exchange of Depositary
Shares pursuant to the Exchange Offer, the listing of the Depositary Shares
is discontinued, the market for the Depositary Shares could be adversely
affected. Termination of the listing of the Depositary Shares on the NYSE
would substantially reduce the information required to be furnished by the
Company to holders of the Depositary Shares (although the Company would
remain subject to the information requirements of the NYSE and the reporting
obligations under the Exchange Act for so long as the Common Stock continues
to be listed on the NYSE and registered pursuant to the Exchange Act).
In the event of the delisting of the Depositary Shares by the NYSE, it is
possible that the Depositary Shares would continue to trade on another
securities exchange or in the over-the-counter market and that price
quotations would be reported by such exchange, by the NASD through the NASDAQ
or by other sources. The extent of the public market for the Depositary
Shares and the availability of such quotations would, however, depend upon
such factors as the number of holders of Depositary Shares remaining at such
time, the interest in maintaining a market in the Depositary Shares on the
part of securities firms, the possible termination of registration under the
Exchange Act as described below, and other factors. Accordingly, the Company
cannot assure that the Depositary Shares would continue to trade on another
securities exchange or in the over-the-counter market after the Expiration
Date.
The Depositary Shares are currently "margin securities" under the
regulations of the Board of Governors of the Federal Reserve System, which
has the effect, among other things, of allowing brokers to extend credit on
the collateral of such securities. If the Depositary Shares remain listed on
the NYSE, they will continue to be "margin securities." If the Depositary
Shares were delisted, depending upon factors similar to those described
above, they might no longer constitute "margin securities" and, therefore,
could no longer be used as collateral for loans made by brokers.
The Depositary Shares are currently registered under the Exchange Act.
Registration of the Depositary Shares under the Exchange Act may be
terminated upon application of the Company to the Commission if the
Depositary Shares are neither listed on the NYSE or another national
securities exchange nor held of record by 300 or more persons. Termination of
registration of the Depositary Shares would make certain provisions of the
Exchange Act, such as the requirements of Rule 13e-3 thereunder with respect
to "going private" transactions, no longer applicable in respect of the
Depositary Shares. If registration of the Depositary Shares under the
Exchange Act were terminated, the Depositary Shares would no longer be
"margin securities" or be eligible for NASDAQ reporting.
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<PAGE>
All Depositary Shares exchanged by the Company pursuant to the Exchange
Offer will, upon action by the Board of Directors, resume the status of
authorized and unissued shares of Preferred Stock of the Company without
designation as to series. Any shares of Preferred Stock (and the
corresponding Depositary Shares) remaining outstanding after the Exchange
Offer will continue to have all rights outlined under "Description of
Securities--Preferred Stock."
ACCEPTANCE NOT MANDATORY
Each Depositary Stockholder is free to exchange or not exchange his or her
Depositary Shares pursuant to the Exchange Offer and may tender all or a
portion of his or her Depositary Shares by properly completing and delivering
a Letter of Transmittal, together with the receipts evidencing the Depositary
Shares, to the Depositary. See "--Procedure for Exchanging Depositary
Shares." No vote of the Depositary Stockholders is required in connection
with the Exchange Offer. Holders of Depositary Shares not tendered for
exchange pursuant to the Exchange Offer will continue to have all of the
existing rights and preferences of the Depositary Shares, including, among
other things, (i) the right to cumulative dividends, if and when paid, at the
rate of $1.70 per Depositary Share per annum, (ii) the right, upon
conversion, to receive for each Depositary Share approximately 1.185 shares
of Common Stock, subject to future adjustments for certain other events, and
(iii) a liquidation preference of $20.00 per Depositary Share (plus
accumulated and unpaid dividends thereon). See "Description of
Securities--Preferred Stock." There can be no assurance that the Company will
reinstate the dividends or pay any dividend arrearages on any remaining
Depositary Shares after completion of the Exchange Offer.
PROCEDURE FOR EXCHANGING DEPOSITARY SHARES
Tender of Depositary Shares
For the Depositary Shares to be validly tendered pursuant to the Exchange
Offer:
(i) the depositary receipts for such Depositary Shares (or
confirmation of receipt of such Depositary Shares pursuant to the
procedures for book-entry delivery set forth below), together with
a properly completed and duly executed Letter of Transmittal, any
required signature guarantees, and any other documents required by
the Letter of Transmittal, must be received on or prior to the
Expiration Date by the Depositary at one of its addresses set
forth on the back cover of this Offering Circular; or
(ii) the exchanging holder of Depositary Shares must comply with the
guaranteed delivery procedure set forth below.
Signature Guarantees and Method of Delivery
Signatures on all Letters of Transmittal must be guaranteed by a financial
institution (including most commercial banks, savings and loan associations
and brokerage houses) that is a participant in the Security Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Guarantee
Program or the Stock Exchange Medallion Program ("Eligible Institution"),
except in cases in which Depositary Shares are tendered (i) by a registered
holder who has not completed either the box entitled "Special Issuance and
Payment Instructions" or the box entitled "Special Delivery Instructions" on
the Letter of Transmittal or (ii) for the account of an Eligible Institution.
If a depositary receipt representing the Depositary Shares is registered in
the name of a person other than the signer of the Letter of Transmittal, or
if depositary receipts representing Depositary Shares not tendered or not
accepted for exchange are to be issued to a person other than the registered
owner(s), the certificates must be endorsed or accompanied by appropriate
stock powers, in either case signed exactly as the name or names of the
registered owner or owners appear on the depositary receipts, with the
signature(s) on the depositary receipts or stock powers guaranteed as
aforesaid.
THE METHOD OF DELIVERY OF DEPOSITARY RECEIPTS AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE OPTION AND RISK OF THE TENDERING HOLDER OF DEPOSITARY
SHARES, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN
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<PAGE>
ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL
WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Book-entry Delivery
The Depositary will establish accounts with respect to the Depositary
Shares at each of The Depository Trust Company, Midwest Securities Trust
Company and Philadelphia Depository Trust Company (collectively, the
"Depository Institutions," and individually, a "Depository Institution") for
purposes of the Exchange Offer within two business days after the date of
this Offering Circular, and any financial institution that is a participant
in a Depository Institution's system may make book-entry delivery of the
Depositary Shares by causing the Depository Institution to transfer such
Depositary Shares into the Depositary's account in accordance with the
Depository Institution's procedure for such transfer. However, although
delivery of Depositary Shares may be effected through book-entry transfer
into the Depositary's account at one of the Depository Institutions, the
Letter of Transmittal, with any required signature guarantees and other
required documents, must, in any case, be transmitted to and received by the
Depositary at one of its addresses set forth on the back cover of this
Offering Circular on or prior to the Expiration Date, or the guaranteed
delivery procedure set forth below must be followed. Delivery of the Letter
of Transmittal and any other required documents to one of the Depository
Institutions does not constitute delivery to the Depositary.
Guaranteed Delivery
If a holder desires to tender Depositary Shares pursuant to the Exchange
Offer and the holder's depositary receipts are not immediately available (or
the procedures for book-entry transfer cannot be completed on a timely basis)
or time will not permit all required documents to reach the Depositary before
the Expiration Date, the holder's Depositary Shares may nevertheless be
tendered provided that all of the following conditions are satisfied:
(i) the tender is made by or through an Eligible Institution;
(ii) the Depositary receives (by hand, mail or facsimile transmission),
on or prior to the Expiration Date, a properly completed and duly
executed Notice of Guaranteed Delivery substantially in the form
the Company has provided with this Offering Circular; and
(iii) the depositary receipts for all tendered Depositary Shares in
proper form for transfer (or confirmation of book-entry transfer
of the Depositary Shares into the Depositary's account at one of
the Depository Institutions), together with a properly completed
and duly executed Letter of Transmittal, with any required
signature guarantees and any other documents required by the
Letter of Transmittal, are received by the Depositary within three
NYSE trading days after the date of execution of such Notice of
Guaranteed Delivery.
Upon acceptance of the receipts evidencing the Depositary Shares for
exchange in the Exchange Offer, the Depositary will deliver or cause to be
delivered shares of Common Stock (and cash in lieu of fractional shares of
Common Stock), and receipts evidencing Depositary Shares not to be exchanged
in the Exchange Offer, to the registered owner of the receipts tendered for
exchange. If (i) the receipts evidencing Depositary Shares are registered in
the name of a person other than the signer of the Letter of Transmittal or
(ii) the shares of Common Stock issuable upon exchange are to be issued (and
cash in lieu of fractional shares of Common Stock are to be paid), or
receipts evidencing Depositary Shares not to be exchanged in the Exchange
Offer are to be returned, to a person other than the registered owner of the
receipts tendered, then in each such case the tendered receipts must be
endorsed or accompanied by appropriate stock powers, in either such case
signed exactly as the name or names of the registered owner or owners appear
on the receipts, with the signatures on the receipts or stock powers
guaranteed as aforesaid.
Notwithstanding any other provision of this Offering Circular, acceptance
of the Depositary Shares tendered for exchange in the Exchange Offer will in
all cases be made only after timely receipt by the Depositary of receipts for
such Depositary Shares, a properly completed and duly executed Letter of
Transmittal (or a manually signed facsimile thereof) and any other required
documents.
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<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of any tender of Depositary Shares for exchange
hereunder will be determined by the Company, in its sole discretion, whose
determination will be final and binding on all parties. The Company reserves
the absolute right, in its sole discretion, to reject any and all tenders
determined by it not to be in proper form or the acceptance for exchange of
which may, in the opinion of the Company or its counsel, be unlawful. The
Company also reserves the absolute right, in its sole discretion, to waive
any of the conditions of the Exchange Offer relating to proper tender of the
Depositary Shares or any defect or irregularity in the tender of any such
shares. No tender of Depositary Shares will be deemed to be properly made
until all irregularities have been cured or waived. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the Letter of Transmittal) relating to the Depositary Shares will be final
and binding. None of the Company, the Depositary or any other person will be
under any duty to give notification of any defects or irregularities in
tenders or incur any liability for failure to give any such notification.
The valid tenders of Depositary Shares pursuant to the procedures
described above will constitute a binding agreement between the tendering
Depositary Stockholder and the Company upon the terms and subject to the
conditions of the Exchange Offer.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, a tender of Depositary Shares
pursuant to the Exchange Offer is irrevocable. Depositary Shares tendered for
exchange may be withdrawn, upon written notice to the Depositary, at any time
prior to the Expiration Date and, unless accepted for exchange by the
Company, may be withdrawn at any time after 12:00 midnight on April 23, 1996
(such date and time being the expiration of 40 business days from the
commencement of the Exchange Offer). To be effective, a written or facsimile
transmission of a notice of withdrawal must (i) be timely received by the
Depositary at one of its addresses specified on the back cover of this
Offering Circular before the Depositary receives notice of acceptance by the
Company of the Depositary Shares, (ii) specify the name of the person who
tendered the Depositary Shares to be withdrawn, (iii) if the Depositary
Shares have been deposited with or otherwise identified to the Depositary,
contain the description of the Depositary Shares to be withdrawn, indicate
the certificate number shown on the certificates evidencing such Depositary
Shares (except in the case of book-entry tenders) and (regardless of the
means of tendering) the aggregate principal amount represented by such
Depositary Shares and (iv) be signed by the holder of the Depositary Shares
in the same manner as the original signature on the Letter of Transmittal
(including any required signature guarantees) or be accompanied by evidence
satisfactory to the Company that the person withdrawing the tender has
succeeded to the beneficial ownership of the Depositary Shares. If the
Depositary Shares have been tendered pursuant to the procedure for book-entry
tender, a notice of withdrawal must specify, in lieu of certificate numbers,
the name and account number at a Book-Entry Transfer Facility to be credited
with the withdrawn Depositary Shares. All questions as to the validity
(including time of receipt) of tenders of Depositary Shares for exchange will
be determined by the Company in its sole discretion, whose determination will
be final and binding. Neither the Company nor the Depositary will be under
any duty to give notification of any defects or irregularities in any tenders
of Depositary Shares for exchange or incur any liability for failure to give
any such notification.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, and in addition
to (and not in limitation of) the Company's right to extend, amend or
terminate the Exchange Offer at any time in its sole discretion, the Company
reserves the right to withdraw, terminate or amend the Exchange Offer before
the issuance of any Common Stock or the payment of any cash for fractional
shares if:
(a) less than 75% of the Depositary Shares are properly tendered and not
withdrawn or deemed withdrawn prior to the Expiration Date;
(b) the Redemption and/or Conversion (which is scheduled to occur on or
prior to March 22, 1996) does not occur;
27
<PAGE>
(c) there shall have been threatened, instituted or pending any action or
proceeding by any government or governmental, regulatory or administrative
agency or authority or tribunal or any other person, domestic or foreign,
before any court or governmental, regulatory or administrative authority,
agency or tribunal, domestic or foreign, that (i) challenges the making of
the Exchange Offer, the acquisition of the Depositary Shares pursuant to the
Exchange Offer or otherwise relates in any manner to the Exchange Offer, or
(ii) in the sole judgement of the Company, could materially adversely affect
the business, condition (financial or other), income, operations or prospects
of the Company and its subsidiaries, taken as a whole, or otherwise
materially impair in any way the contemplated future conduct of the business
of the Company or any of its subsidiaries or materially impair the Exchange
Offer's contemplated benefits to the Company;
(d) there shall have been any action threatened, pending or taken, or
approval withheld, or any statute, rule, regulation, judgment, order or
injunction threatened, proposed, sought, promulgated, enacted, entered,
amended, enforced or deemed to be applicable to the Exchange Offer or the
Company or any of its subsidiaries, by any court or any government or
governmental, regulatory or administrative authority, agency or tribunal,
domestic or foreign, that, in the Company's sole judgment, would or might
directly or indirectly (i) make the acceptance for payment of, or payment
for, Depositary Shares illegal or otherwise restrict or prohibit consummation
of the Exchange Offer, (ii) delay or restrict the ability of the Company, or
render the Company unable, to accept for payment, or pay for, Depositary
Shares, (iii) materially impair the contemplated benefits of the Exchange
Offer to the Company, or (iv) materially adversely affect the business,
condition (financial or other), income, operations or prospects of the
Company and its subsidiaries, taken as a whole, or otherwise materially
impair in any way the contemplated future conduct of the business of the
Company or any of its subsidiaries;
(e) there shall have occurred after the date of the commencement of the
Exchange Offer, (i) any general suspension of trading in, or limitation on
prices for, securities on any United States national securities exchange or
in the over-the-counter market (excluding any coordinated trading halt
triggered solely as a result of a specified decrease in a market index), (ii)
the declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States, (iii) the commencement of a war, armed
hostilities or other international or national crisis directly or indirectly
involving the United States, (iv) any limitation (whether or not mandatory)
by any governmental, regulatory or administrative agency or authority on, or
any event that, in the sole judgment of the Company, might affect, the
extension of credit by banks or other lending institutions in the United
States, (v) any significant decrease in the market price of the Depositary
Shares, or (vi) any change in the general political, market, economic or
financial conditions in the United States or abroad that could, in the sole
judgment of the Company, have a material adverse effect on the Company's
business, operations, prospects or the trading in the Depositary Shares.
(f) after the date of the commencement of the Exchange Offer, any tender
or exchange offer with respect to the Depositary Shares (other than the
Exchange Offer) or any other class of the Company's equity securities, or any
merger, acquisition, business combination or other similar transaction with
or involving the Company or any subsidiary, shall have been proposed,
announced or made by any person or entity;
(g) after the date of the commencement of the Exchange Offer, any change
shall occur or be threatened in the business, condition (financial or other),
income, operations or prospects of the Company and its subsidiaries taken as
a whole, which, in the sole judgment of the Company, is or may be material to
the Company; or
(h) (i) any person, entity or "group" (as that term is used in Section
13(d)(3) of the Exchange Act) shall have acquired, or proposed to acquire,
beneficial ownership of stock possessing more than 5% of the outstanding
voting power of all classes of the Company's stock then outstanding (other
than a person, entity or group which had publicly disclosed such ownership in
a Schedule 13D or 13G (or an amendment thereto) on file with the Commission
prior to the date of the commencement of the Exchange Offer), (ii) any new
group shall have been formed that beneficially owns stock possessing more
than 5% of the aggregate voting power of all classes of the Company's stock
then outstanding, or (iii) any person, entity
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<PAGE>
or group shall have filed a Notification and Report Form under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, or made a public
announcement, reflecting an intent to acquire the Company or any of its
subsidiaries or any of their respective assets or securities; and, in the
sole judgment of the Company, in any such case and regardless of the
circumstances (including any action or inaction by the Company) giving rise
to such condition, such event makes it inadvisable to proceed with the
Exchange Offer.
The foregoing conditions are for the sole benefit of the Company and may
be asserted by the Company regardless of the circumstances (including any
action or inaction by the Company) giving rise to any such condition, and any
such condition may be waived by the Company, in whole or in part, at any time
and from time to time in its sole discretion; provided, however, that the
Exchange Act and the rules and regulations promulgated thereunder require
that all conditions to the Exchange Offer, other than those relating to the
receipt of certain necessary governmental approvals, must be satisfied or
waived on or prior to the Expiration Date. The Company's failure at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any
such right; the waiver of any such right with respect to particular facts and
circumstances shall not be deemed a waiver with respect to any other facts
and circumstances; and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time by the Company in its sole
discretion. Any determination by the Company concerning the events described
above and any related judgment by the Company regarding the inadvisability of
proceeding with the acceptance for exchange of any tendered Depositary Shares
will be final and binding on all parties.
EXPIRATION DATE; EXTENSION OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions of the Exchange Offer
(including, if the Exchange Offer is extended or amended, the terms and
conditions of the extension or amendment), the Company will accept for
exchange, and will exchange, Depositary Shares validly tendered and not
withdrawn on or prior to the Expiration Date. The term "Expiration Date"
means 5:00 p.m., New York City time, on March 29, 1996, unless the Company
shall have extended the period of time during which the Exchange Offer is
open, in which event the term "Expiration Date" shall refer to the latest
time and date at which the Exchange Offer, as so extended by the Company,
shall expire. See "--Extension; Termination; Amendments" for a description of
the Company's right to extend the time during which the Exchange Offer is
open and to delay, terminate or amend the Exchange Offer. See "--Conditions
of the Exchange Offer."
The Company expressly reserves the right, in its sole discretion, at any
time or from time to time, to extend the period of time during which the
Exchange Offer is open by giving oral or written notice of such extension to
the Depositary and making a public announcement thereof. See "--Extension;
Termination; Amendments."
If (i) the Company (x) increases or decreases the exchange ratio or (y)
decreases the number of Depositary Shares being sought, and (ii) the Exchange
Offer is scheduled to expire at any time earlier than the tenth business day
from and including the date that notice of such increase or decrease is first
published, sent or given in the manner specified in "--Extension;
Termination; Amendments," the Exchange Offer will be extended until the
expiration of such ten business day period. For purposes of the Exchange
Offer, "business day" means any day other than a Saturday, Sunday or federal
holiday and consists of the time period from 12:01 a.m. through 12:00
midnight, New York City time.
All Depositary Shares exchanged pursuant to the Exchange Offer will be
exchanged for 1.85 shares of Common Stock. Any Depositary Shares tendered and
withdrawn, will be returned to the tendering holders at the Company's expense
promptly after expiration of the Exchange Offer.
EXTENSION; TERMINATION; AMENDMENTS
The Company expressly reserves the right, in its sole discretion, at any
time or from time to time and regardless of whether or not any of the events
set forth in "--Conditions of the Exchange Offer" shall have occurred or
shall be deemed by the Company to have occurred, to extend the period of time
during
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<PAGE>
which the Exchange Offer is open and thereby delay acceptance for exchange of
any Depositary Shares by giving oral or written notice of the extension to
the Depositary and making a public announcement thereof. During any such
extension, all Depositary Shares previously tendered and not purchased or
withdrawn will remain subject to the Exchange Offer, except to the extent
that such Depositary Shares may be withdrawn as set forth in "The Exchange
Offer--Withdrawal Rights." The Company also expressly reserves the right, in
its sole discretion, to terminate the Exchange Offer, not accept for exchange
any Depositary Shares not theretofore accepted for exchange upon the
occurrence of any of the conditions specified in "The Exchange
Offer--Conditions of the Exchange Offer" by giving oral or written notice of
such termination to the Depositary and making a public announcement thereof.
Subject to compliance with applicable law, the Company further reserves the
right, in its sole discretion, and regardless of whether or not any of the
events set forth in "The Exchange Offer--Conditions of the Exchange Offer"
shall have occurred or shall be deemed by the Company to have occurred, to
amend the Exchange Offer in any respect. Amendments to the Exchange Offer may
be made at any time or from time to time and shall be effected by public
announcement thereof, such announcement, in the case of an extension, to be
issued no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date. Any public announcement made
pursuant to the Exchange Offer will be disseminated promptly to holders of
Depositary Shares in a manner reasonably designed to inform holders of such
change. Without limiting the manner in which the Company may choose to make a
public announcement, except as required by applicable law, the Company shall
have no obligation to publish, advertise or otherwise communicate any such
public announcement other than by making a release to the Dow Jones News
Service.
If the Company materially changes the terms of the Exchange Offer or the
information concerning the Exchange Offer or if it waives a material
condition of the Exchange Offer, the Company will extend the Exchange Offer
to the extent required by Rules 13e-4(d)(2) and 13e-4(e)(2) promulgated under
the Exchange Act. These rules provide that the minimum period during which an
offer must remain open following material changes in the terms of the offer
or information concerning the offer (other than a change in price, a change
in amount of securities sought, or a change in certain fees) will depend on
the facts and circumstances, including the relative materiality of such terms
or information.
CERTAIN LEGAL MATTERS; REGULATORY AND FOREIGN APPROVALS; NO APPRAISAL RIGHTS
The Company is not aware of any license or regulatory permit material to
its business that might be adversely affected by its acquisition of the
Depositary Shares as contemplated in the Exchange Offer or of any approval or
other action by any government or governmental, administrative or regulatory
authority or agency, domestic or foreign, that would be required for the
Company's acquisition or ownership of the Depositary Shares pursuant to the
Exchange Offer. The Company cannot predict whether it may determine that it
is required to delay the acceptance for payment of, or payment for, the
Depositary Shares tendered pursuant to the Exchange Offer pending the outcome
of any such matter. There can be no assurance that any approval or other
action, if needed, would be obtained or would be obtained without substantial
conditions or that the failure to obtain any approval or other action might
not result in adverse consequences to the Company's business.
The Company intends to make all required filings under the Exchange Act.
The Company's obligation under the Exchange Offer to accept for payment,
or make payment for, Depositary Shares is subject to certain conditions. See
"The Exchange Offer--Conditions of the Exchange Offer."
No approval of the holders of a majority of the Depositary Shares, whether
affiliated or unaffiliated, or of any holders of any of the Company's
securities is required in connection with the Exchange Offer.
No appraisal rights are available to holders of Depositary Shares in
connection with the Exchange Offer.
FEES AND EXPENSES
GKM is acting as financial advisor to the Company in connection with the
Exchange Offer. Officers and directors of the Company, but not GKM, may
contact Depositary Stockholders by mail, telephone,
30
<PAGE>
telex, telegraph and personal interview and may request brokers, dealers,
commercial banks, trust companies and their nominees to forward the Exchange
Offer materials to beneficial owners. As compensation for the financial
advisory services of GKM, the Company has agreed to pay GKM a fee of $500,000
and an additional fee of $200,000 in connection with its rendering of an
opinion regarding the fairness, from a financial point of view, of the
Exchange Offer to the common stockholders. The Company has also agreed to
indemnify GKM and certain related persons against certain liabilities and
expenses in connection with its services, including certain liabilities under
the federal securities laws. The Company will not pay any fees or commissions
to any broker or dealer or other person for soliciting tenders of Depositary
Shares in the Exchange Offer.
Pursuant to the terms of Schroder Wertheim's engagement, Galoob: (i) upon
the signing of an engagement letter, paid to Schroder Wertheim an initial
cash fee of $100,000, and (ii) paid to Schroder Wertheim a fee of $100,000 at
the time Schroder Wertheim informed the Finance Committee that it was ready
to deliver its opinion. The Company has also agreed to reimburse Schroder
Wertheim for its reasonable out-of-pocket expenses and to indemnify Schroder
Wertheim, its officers, directors, controlling persons, employees and agents,
against certain liabilities, including liabilities under the federal
securities laws, relating to, arising out of, or in connection with, the
matters contemplated by the engagement letter.
Each of the Depositary and Continental Stock Transfer & Trust Company will
receive reasonable and customary compensation for its services, will be
reimbursed for certain reasonable out-of-pocket expenses and will be
indemnified against certain liabilities and expenses in connection therewith,
including certain liabilities under the federal securities laws.
The Company estimates that the total fees and expenses it will be required
to pay in connection with the Exchange Offer will be approximately $1,000,000
as follows: ($900,000), financial advisor and investment banker, printing
($20,000), legal ($45,000), accounting ($5,000), mailing ($20,000) and
Depositary fees ($10,000).
TRANSFERABILITY OF SHARES OF COMMON STOCK ACQUIRED UPON EXCHANGE
The issuance of the shares of Common Stock upon exchange of the Depositary
Shares is exempt from the registration requirements of the Securities Act,
pursuant to Section 3(a)(9) of the Securities Act. As the issuance of the
Depositary Shares was registered under the Securities Act, the shares of
Common Stock issued upon exchange of the Depositary Shares will be freely
tradeable under federal law, without compliance with prospectus delivery
requirements; provided, however, that the person holding the Depositary
Shares, or the shares of Common Stock issued upon exchange of the Depositary
Shares, is not an affiliate of the Company. If the person holding the
Depositary Shares is an affiliate of the Company, the shares of Common Stock
issuable upon exchange of the Depositary Shares may only be sold pursuant to
an effective registration statement under the Securities Act with respect to
such shares of Common Stock or an exemption from registration thereunder.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The exchange of Depositary Shares for Common Stock in the Exchange Offer
will be treated for federal income tax purposes as a tax-free
recapitalization under Section 368(a)(1)(E) of the Internal Revenue Code of
1986, as amended (the "Code"). As such, tendering Depositary Stockholders
generally will not recognize gain or loss on the exchange of Depositary
Shares into shares of Common Stock. However, a tendering Depositary
Stockholder will be deemed to receive a distribution of property (i.e.,
Common Stock) from the Company in an amount equal to the lesser of (1) the
amount of dividends in arrears (currently $6.375 per Depositary Share) on the
Depositary Shares exchanged or (2) the excess of the fair market value of the
Common Stock received over the issue price of the Depositary Shares
surrendered by such Depositary Stockholder.
Under the Code, this deemed distribution will be treated as a dividend,
taxable as ordinary income, to the extent of the Company's current and
accumulated earnings and profits, which will not be determinable until the
end of the current fiscal year. Corporate Depositary Stockholders may,
subject to various restrictions and limitations, be entitled to claim the
dividends received deduction with respect to
31
<PAGE>
the portion of the deemed distribution which is treated as a dividend. To the
extent that the deemed distribution exceeds the Company's current and
accumulated earnings and profits, the deemed distribution will first reduce
the tendering Depositary Stockholder's tax basis in the Depositary Shares
exchanged, and any further excess will result in the Depositary Stockholder
recognizing capital gain (assuming that such Depositary Stockholder held the
Depositary Shares as a capital asset). A Depositary Stockholder's basis in
its Depositary Shares then will be increased by the full amount of the deemed
distribution, and its basis in the Common Stock received upon exchange will
equal its basis in the Depositary Shares exchanged (as adjusted above),
reduced by any cash received upon exchange.
Any cash received by a tendering Depositary Stockholder in lieu of
fractional shares of Common Stock will be treated as an amount paid in
redemption of such fractional shares. The holding period for the Common Stock
received upon exchange will include the tendering Depositary Stockholder's
holding period in the Depositary Shares exchanged. To the extent that the
cash received exceeds a Depositary Stockholder's basis in the fractional
shares, the excess will be treated as capital gain.
Foreign Depositary Stockholders generally will be subject to U.S. income
tax on the portion of any deemed distribution which is treated as a dividend
at the rate of 30% (or lower treaty rate).
Certain outstanding warrants issued by the Company contain anti-dilution
provisions which will be triggered as a result of the Exchange Offer. Under
Section 305(c) of the Code, a change in the conversion ratio or exercise
price of warrants will be treated as a deemed distribution to such holders
under certain circumstances if the change has the effect of increasing such
holders' proportionate interests in the assets or earnings and profits of the
Company. Changes pursuant to a bona fide anti-dilution provision will not be
treated as a deemed distribution; however, adjustments to compensate for
taxable distributions of cash or property will not be considered to be made
pursuant to a bona fide anti-dilution provision. The Company believes that
the adjustments made pursuant to the anti-dilution provisions in the warrants
will not result in a deemed stock distribution to the holders thereof;
however, there can be no assurance that the Internal Revenue Service will not
take a contrary position.
THE FOREGOING IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, DEPOSITARY STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE EXCHANGE OFFER TO THEM,
INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN
INCOME AND OTHER TAX LAWS. HOLDERS OF WARRANTS SHOULD CONSULT WITH THEIR OWN
TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF ANY ADJUSTMENT PURSUANT
TO ANTI-DILUTION PROVISIONS THEREIN TO THEM, INCLUDING THE APPLICATION AND
EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
32
<PAGE>
MARKET PRICE OF SECURITIES
The Common Stock (NYSE symbol: GAL) and Depositary Shares (NYSE symbol:
GALPR) are traded on the NYSE. The following table sets forth the closing
high and low closing sale prices for the Common Stock and Depositary Shares
for each calendar quarter from January 1, 1993.
<TABLE>
<CAPTION>
COMMON STOCK
FISCAL YEAR HIGH LOW
- ---------------------------------------------- -------- --------
<S> <C> <C>
1996
First Quarter (through February 27, 1996) .... $17 1/4 $10 3/8
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>
<TABLE>
<CAPTION>
DEPOSITARY SHARES
FISCAL YEAR HIGH LOW
- ----------------------------------------- ------ -----
<S> <C> <C>
1996
First Quarter (through February 27, 1996) $30 1/4 $19 3/4
1995
First Quarter ............................. $15 1/8 $11 1/8
Second Quarter ............................ 17 7/8 15 1/4
Third Quarter ............................. 19 1/4 16 1/4
Fourth Quarter ............................ 21 3/8 18 3/8
1994
First Quarter ............................. $15 3/4 $12
Second Quarter ............................ 13 1/2 11 3/4
Third Quarter ............................. 15 7/8 12
Fourth Quarter ............................ 13 7/8 10 5/8
1993
First Quarter ............................. $11 3/4 $ 8 3/4
Second Quarter ............................ 12 3/4 10 3/8
Third Quarter ............................. 10 3/4 10
Fourth Quarter ............................ 16 11
</TABLE>
On February 9, 1996, the last trading day prior to the announcement of the
Exchange Offer, the closing sale prices of the Common Stock and Depositary
Shares, as reported by the NYSE, were $17.25 and $25.375, respectively. As of
February 27, 1996, the last trading day prior to the commencement of the
Exchange Offer, the closing sale prices of the Common Stock and Depositary
Shares, as reported by the NYSE, were $16.00 and $29.00, respectively.
On December 31, 1995, there were approximately 1,700 and 430 holders of
record of the Common Stock and Depositary Shares, respectively, excluding
beneficial owners of shares registered in nominee or street name.
33
<PAGE>
DIVIDENDS
No cash dividends have been declared on the Common Stock by the Company
during the past 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 the 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 Securities--Preferred Stock."
In 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 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 (or $6.375 per share). By the terms of the Certificate of
Designations for the Preferred Stock, the Company is not legally obligated to
pay any such arrearage. Prior to the announcement of the Exchange Offer, the
Company had consistently maintained that it was not in its best interest to
reinstate the dividend until the Company had generated consistent net income
from operations and continuation of such profitability could be reasonably
expected. Prior to the announcement of the Exchange Offer, based upon recent
results, the Company had been evaluating its alternatives with regard to the
Preferred Stock. The net earnings (loss) per share calculation includes a
provision of 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 (Mr. Hoffer Kaback and Mr. George Riordan) to
the Board of Directors of the Company. See "Description of
Securities--Preferred Stock."
34
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 31, 1995, and as adjusted for the Exchange Offer
(assuming all outstanding Depositary Shares and the underlying shares of
Preferred Stock are exchanged and retired pursuant to the Exchange Offer),
100% conversion of the Debentures into 1,511,873 shares of Common Stock and
the exercise of the warrants covered by the Registration Statement for
172,527 shares of Common Stock. This table should be read in conjunction with
the information announced by the Company on February 8, 1996, which appears
under "Summary--1995 Financial Data."
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
ACTUAL ADJUSTED
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (including current portion of long-term
debt) (1)(2) .......................................... $ 19,493 $ 18,969
========== =============
8% Convertible Subordinated Debentures due 2000 ....... 14,000 0
Total long-term debt ................................... 14,000 0
---------- -------------
Stockholders' 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 0
Common Stock, $.01 par value; 50,000,000 shares
authorized; 10,089,961 and 15,177,436 shares issued
and outstanding, actual and as adjusted (3) .......... 101 152
Additional paid-in capital ............................. 31,579 104,755 (4)
Retained earnings (deficit) ............................ (13,851) (35,764)(4)
Cumulative translation adjustment ...................... (447) (447)
---------- -------------
Total shareholders' equity ........................... 54,172 68,696
---------- -------------
Total capitalization ................................... $ 87,665 $ 87,665
========== =============
</TABLE>
- ------------
(1) The current portion of the Company's long-term debt aggregated
$4,422,000 at December 31, 1995.
(2) The Company is party to a 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."
(3) Actual shares do not include (i) 1,324,092 shares of Common Stock
reserved for issuance upon exercise of outstanding stock options or
(ii) 395,339 shares of Common Stock reserved for issuance upon exercise
of outstanding warrants. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity, Financial
Resources and Capital Expenditures."
(4) Assumes a Common Stock price of $17.25 per share on February 9, 1996.
35
<PAGE>
SELECTED CONSOLIDATED FINANCIAL 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" and
"Business--Seasonality and Backlog" 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 Notes thereto which are set forth in the Form 10-Q
and the 1994 Form 10-K included in this Offering Circular as Appendices C and
B, respectively, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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
AT
SEPTEMBER 30, AT DECEMBER 31,
---------------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ----------- ----------- ----------- -----------
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
Stockholders' equity ..................... 43,425 38,578 44,768 22,162 32,246 35,092 45,610
</TABLE>
36
<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 years ended December 31, 1994, 1993 and
1992 and the nine months ended September 30, 1995 and 1994:
<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>
The following discussion should be read in conjunction with the Company's
Selected Consolidated Financial Data and the Company's Consolidated Financial
Statements, including the notes thereto, which are set forth in the Form 10-Q
and the 1994 Form 10-K included in this Offering Circular as Appendices C and
B, respectively.
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(Registered Trademark) 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.
37
<PAGE>
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 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's 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.
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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.
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 contained in the 1994 Form 10-K attached as
Appendix B).
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 contained in the 1994 Form
10-K attached as Appendix B).
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 such 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 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 cost increases likely to be incurred resultant from
(1)-(3) above through to the Company's customers as product price increases.
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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 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, 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 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 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 cost increases likely to be incurred resultant from
(1)-(3) above 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 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.
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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
terminated the 1992 Plan, subject to stockholder approval. The 1992 Plan was
canceled 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 of Directors' 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 of Directors also granted 449,732
shares of Common Stock to compensate such optionees for giving up their
existing gain that had arisen under the 1992 Plan measured by the difference
between the $9.00 market price and the option exercise price of the 1992 Plan
options at the time the 1992 Plan was terminated. All of the above changes
were approved by the stockholders on June 21, 1994. (See Note N to the
Company's Consolidated Financial Statements contained in the 1994 Form 10-K
attached as Appendix B).
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 No. 96, which the Company
had used since 1988, as SFAS No. 109 also requires, among other things, an
asset and liability approach for financial accounting and reporting for
income taxes. Adoption of SFAS No. 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 contained in the 1994 Form 10-K attached as Appendix B).
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.
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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, which establishes a fair value
base method of accounting for stock based compensation. The Company has not
yet considered the impact of SFAS No. 123 on its recording or disclosure of
stock-based compensation.
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 entertainment 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. Consequently, 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 by building other multi-year thematic brands. See "Business--Licensing
and Related Rights; Trademarks."
Consistent with the extendable product life strategy, the Company's Micro
Machines(Registered Trademark) 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 44% of the Company's total revenues in 1995, 51% in 1994 and 41%
in 1993. Continuing demand for this product line was strong and shipments for
certain new 1996 product lines commenced in the fourth quarter of 1995. 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
products will continue at current or previous levels.
PRODUCTS
The Company's 1996 product offering consists of four girls' lines,
including continuations and extensions of the Sky Dancers(Registered
Trademark), My Pretty DollHouse(Trademark) and Happy Ness(Trademark) lines,
and also the new Pound
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Puppies(Registered Trademark) line; and five boys' lines, including
continuations and extensions of the Micro Machines(Registered Trademark) and
Biker Mice From Mars(Registered Trademark) lines, and also the new Dragon
Flyz(Trademark), Real Adventures of Jonny Quest(Trademark) and
UltraForce(Trademark) lines.
In the girls' product area, the highly successful Sky Dancers(Registered
Trademark) flying doll and accessory line has been extended to include new
segments, including Pretty Lights(Registered Trademark) with light-up flying
dolls and launchers; smaller-size Fairy Flyers(Trademark) flying dolls, pets
and Magical Flying Carousel(Trademark) playset; Fairy Tale
Couples(Trademark); and the Flying Princess(Trademark) doll with graceful
fluttering wings. The My Pretty DollHouse(Trademark) line has been extended
with Enchanted Castles(Trademark) as well as new basic house and accessory
styles. The Happy Ness line includes play figures and playsets. The Company
has also reintroduced a small-scale version of Pound Puppies(Registered
Trademark) and Pound Pur-r-ries(Registered Trademark), the most successful
plush toy lines of the 1980's.
In the boys' product area, the Micro Machines line of miniature vehicles,
playsets and accessories now includes a new, larger Action Fleet(Trademark)
scale of Star Wars(Registered Trademark) articulated action figures, vehicles
and playsets, as well as the continuations and extensions of other successful
Star Wars vehicles, figures and playsets in the traditional Micro Machines
scale. Other Micro Machines licensed properties include Star Trek(Registered
Trademark), Babylon 5(Trademark), Aliens(Trademark), James Bond
007(Trademark), Indiana Jones(Trademark) and Predator(Trademark). A new
segment, Exploration, features the first Micro Machines that float in water.
Finally, three innovative new Double Takes(Trademark) playsets have been
added--two in the Basic segment and one in the Military segment. These
transforming playsets feature two action play environments in one toy.
The male action figure product area features three new lines, as well as
the continuation of the Biker Mice From Mars(Registered Trademark) line in
the international marketplace. Dragon Flyz(Trademark) is an assortment of
fully articulated flying warriors with dragon-styled launchers. The Real
Adventures of Jonny Quest(Trademark) is based on the updated reintroduction
of the classic 1960's animated television property from Hanna-Barbera
Cartoons and Turner Home Entertainment, featuring both real-world and
futuristic, virtual-reality QuestWorld(Trademark) figures and vehicles. The
UltraForce(Trademark) line of super heroes and villains is based on the
successful comic book series and animated television show.
The Company's 1995 product line consisted of continuations and extensions
of the Micro Machines line and introductions of several new product lines,
including a new extendable girls' brand, Sky Dancers (Trade Mark) dolls.
The Micro Machines line included the continuing licensed vehicles based on
the popular Star Wars(Registered Trademark) motion picture trilogy. The
Company had also added Star Wars playsets depicting scenes from the movies
and including action features, figures and vehicles. Other licensed products
included vehicles and figures from the Power Rangers (Trade Mark) television
series, and the James Bond 007 (Trade Mark) motion picture. There were also
new vehicles from the Star Trek(Registered Trademark) and Babylon 5 (Trade
Mark) television series. To extend the Micro Machines segment of military
vehicles and troops, new playsets included Night Attack! (Trade Mark) , with
its battery-powered searchlight and multi-missile launcher, as well as
FalconWing Skybase (Trade Mark) and Orion J-22 (Trade Mark) Submarine Base
transforming playsets. Also under the Micro Machines brand was
Z-Bots(Registered Trademark), a line of collectible robot figures, vehicles
and playsets.
The new and innovative Sky Dancers line of dolls and playsets featured 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 included Magic Rolling Launchers in the shape of a swan and
pegasus.
The Company's new My Pretty DollHouse line was based on a classic girls'
toys play pattern that incorporated the successful concepts of
miniaturization and collectibility. This product line consisted of modular,
finely-decorated miniature dollhouses that came with dolls and other surprise
accessories. Also available were 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 was UltraForce (Trade Mark) , a licensed male action line
of dramatic super heroes and villains, vehicles and accessories, based on the
Malibu (Trade Mark) (Marvel) Comics (Trade Mark) 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.
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Other licenses, referred to as entertainment licenses, permit the Company to
manufacture and market toys based on characters or properties which develop
their own popular identity, often through exposure in various media such as
television programs, movies, cartoons and books. Normally most entertainment
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,
which typically range from 2% to 14% of net sales. 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.
The Company is an active participant in the market for entertainment
licenses and has obtained domestic and international license rights for most
of its products. A determination to acquire an entertainment license must
frequently be made before the commercial introduction of the property in
which a licensed character or property appears, and license arrangements
often require the payment of non-refundable advances or guaranteed minimum
royalties. Accordingly, the success of an entertainment 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 entertainment 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 Twentieth- Century Fox Licensing and Merchandising that gives
the Company the exclusive worldwide first rights to license toys based on
various new Fox theatrical and television properties, until the year 2004
(including renewal rights granted to the Company). 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-Century Fox Television, Fox Broadcasting Company, Fox
Family Films, Fox 2000 Pictures, and Fox Searchlight Pictures. Pursuant to
this agreement, the Company has determined to initially produce toys based on
the recently announced full-length feature film Anastasia (Trade Mark) as
well as the current hit television science fiction series Space: Above and
Beyond (Trade Mark) .
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(Registered Trademark).
The Company has also been awarded the master toy license by Sony
Signatures for TriStar Pictures' science fiction adventure Starship Troopers,
which is being produced under an arrangement between TriStar Pictures and the
Walt Disney Motion Pictures Group.
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
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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 $7,886,000, $7,288,000, $7,451,000 and
$6,861,000 on research and development activities in 1995, 1994, 1993 and
1992, respectively, exclusive of amounts paid to certain inventors and
designers who receive royalties as licensors. Those amounts do not include
approximately $12,388,000, $7,149,000, $4,502,000 and $4,583,000 incurred in
1995, 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 80% of
the Company's products were produced in China in 1995 and 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 cost increases likely to be incurred resultant from
(1)-(3) above 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
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
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tooling located in China, (3) relocate its production in sufficient time to
meet demand and (4) pass cost increases likely to be incurred resultant from
(1)-(3) above 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
63%, 66%, 66% and 65% of net sales in 1995, 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
1995, 1994 and 1993, Toys "R" Us, Inc. accounted for approximately 20% 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 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 unit 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 1995 and 1994, approximately 50% of all Galoob toys
sold were shipped to countries outside the United States.
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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 the
fact that a disproportionate share of receivables is created late in the year
and 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.
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 domestic and foreign toy companies, such as Hasbro, Mattel, Tyco,
Bandai and Playmates, 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 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 224 employees; 125 in the United
States and 99 in the Far East. This compares to 239 total employees at
December 31, 1994, 108 in the United States and 131
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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 on 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 in Hong Kong consisting of
approximately 30,000 square feet under leases which expire at varying dates
through 1998.
The Company's properties will be expanded to support as necessary future
growth levels in the Company's business.
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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
Chief Executive Officer of the Company and the other four most highly
compensated executive officers of the Company for the Company's fiscal years
ended December 31, 1992, 1993, and 1994, and (d) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
PERCENT OF COMMON
NUMBER OF SHARES STOCK OWNERSHIP
NAME OF BENEFICIAL OWNER (1) (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 6.5%
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 2.0%
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%.
(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 Depositary Shares, based
on a conversion price of approximately 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 7, 1996 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.
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DESCRIPTION OF SECURITIES
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. 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 Preferred Stock were outstanding, held
of record by approximately 430 persons. In addition, at the date of this
Exchange Offer, there were outstanding (i) warrants to purchase 567,866
shares of Common Stock, (ii) options to purchase an aggregate of 1,330,092
shares of Common Stock and (iii) the Debenture convertible into 1,511,873
shares of Common Stock.
On February 12, 1996, the Company announced the call for Redemption in
accordance with their terms. See "Summary Recent Developments."
If all of the Depositary Shares are tendered pursuant to the Exchange
Offer, the warrants for 172,527 shares of Common Stock (which are part of the
Registration Statement) are exercised and, prior to the Redemption, all of
the Debentures are converted, the number of shares of Common Stock issued and
outstanding will be increased by approximately 5,087,475 shares to 15,177,436
shares, based on the number of shares of Common Stock outstanding as of
December 31, 1995, excluding the shares issuable upon exercise of currently
outstanding options and warrants which are not part of the Registration
Statement.
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 Preferred Stock. See
"--Preferred Stock." Except as otherwise required by law or provided in any
resolution adopted by the Board of Directors 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
of Directors 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.
PREFERRED STOCK
The Company's 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 of
Directors, without any further action by the stockholders of the Company. The
Board of Directors issued 183,950 shares of Preferred Stock. In addition, the
Board of Directors 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. The terms of the Preferred Stock and related Depositary Shares are
summarized below:
General
The following description of terms of the Preferred Stock does not purport
to be complete and is qualified in its entirety by reference to the
Certificate of Designations of the Preferred Stock. A copy of the Certificate
of Designations may be obtained by any Depositary Stockholder at no cost, by
written request to the Company.
Dividends
The holders of 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, as of
January 1, 1990, to the holders of record at the close of business on the
record dates (within 45 days of the dividend
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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 Preferred Stock. Accrued but unpaid dividends will not bear
interest.
The 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 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 Preferred Stock with
respect to dividend rights (except dividends paid in shares of stock ranking
junior to the 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 Preferred Stock have
been declared and paid.
Conversion Rights
Each share of the 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 Preferred Stock shall be valued at $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 Preferred
Stock. Holders of shares of 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 Preferred Stock or to
receive notice of and to vote at any meeting of stockholders, as holders of
record of Common Stock rather than 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 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 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 Preferred Stock in
respect of distributions upon liquidation, dissolution or winding up.
Voting Rights
The holders of the 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 Preferred Stock will
be entitled to one vote.
Whenever dividends on the Preferred Stock or on any other stock ranking
pari passu as to dividends with the 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 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 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 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 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
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pay dividends on the Preferred Stock for six or more quarterly payment
periods, pursuant to the voting provisions described above, the holders of
the Preferred Stock elected two directors (Mr. Hoffer Kaback and Mr. George
Riordan) to the Board of Directors.
Optional Redemption by the Company
The 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
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 Preferred Stock without the affirmative vote or consent of the holders
of at least a majority of the outstanding shares of the 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 Preferred Stock otherwise
than pursuant to a purchase or exchange offer made on the same terms to all
holders of the 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 Preferred Stock shall have the right, at the holder's option, to
cause the Company to exchange all or a portion of such holder's 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
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 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 Preferred Stock
will be entitled to receive $200.00 principal amount of the Convertible
Debentures in exchange for each share of 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 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 Preferred Stock (other than a dividend or distribution payable
in shares of Common Stock or other capital stock of the Company which is
junior to the 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 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
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 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 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 Board of Directors, whose determination shall be
conclusive) received by the Company from the issuance or sale
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<PAGE>
after March 31, 1989 of shares of its capital stock (excluding the shares of
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 Mellon Shareholder Services, L.L.C., 85 Challenger Road,
Ridgefield Park, New Jersey 07660, is the transfer agent for the Preferred
Stock.
DEPOSITARY SHARES
Each Depositary Share represents 1/10 th of a share of 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 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 "--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.
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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 of Directors divided
into three classes of directors serving staggered three-year terms. With
respect to the present Board of Directors, 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 of Directors, and a majority of the Board of Directors then in
office may fill any vacancies on the Board of Directors. 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.
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 of
Directors, the Chairman of the Board, the President of the Company or a
committee of the Board of Directors whose power and authority include the
power to call such a meeting or at the request of a majority of the Board of
Directors. 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 of Directors 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 of Directors, 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
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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 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 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
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
is the transfer agent and registrar for the Common Stock.
LEGAL MATTERS
Certain legal matters with respect to the Exchange Offer 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
9,473 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 the Registration Statement.
INDEPENDENT ACCOUNTANTS
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 Exchange Offer have been audited by Price Waterhouse LLP, independent
accountants, as stated in the reports appearing herein.
55
<PAGE>
EXHIBIT A
GKM LOGO
February 28, 1996
Board of Directors
Lewis Galoob Toys, Inc.
500 Forbes Boulevard
So. San Francisco, CA 94080
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the common stockholders of Lewis Galoob Toys, Inc. (the
"Company") of the proposed exchange offer (the "Exchange Offer") for the
Depositary Convertible Exchangeable Preferred Shares each representing 1/10th
Share of $17.00 Convertible Exchangeable Preferred Stock (the "Depositary
Shares"). The terms of the Exchange Offer, which are described in the
Offering Circular dated February 28, 1996 (together with the related letter
of transmittal, the "Exchange Offer Documents"), provide that for each
Depositary Share the exchanging holder will receive 1.85 shares of the
Company's common stock, par value $0.01 per share (the "Common Stock").
The Exchange Offer is conditioned on, among other things, the receipt of
valid tenders from the holders of at least seventy-five percent (75%) of the
outstanding Depositary Shares and there not having occurred certain material
changes in the business or financial affairs of the Company. The Company may
in its sole discretion amend or terminate the Exchange Offer or waive any of
the conditions to the Exchange Offer.
Gerard Klauer Mattison & Co., LLC ("GKM"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. GKM and
its affiliates have, in the past, been involved in assisting the Company with
placements of its securities and the rendering of other financial advisory
and financing services and have received fees in connection therewith. GKM
expects this relationship to continue. GKM has been retained by the Company
as a financial advisor in connection with the Exchange Offer and will receive
a fee for its financial advisory services in connection therewith. GKM is
also receiving a fee from the Company to render this opinion. GKM also holds
warrants to purchase 150,000 shares of the Company's Common Stock at $9.50
per share (the "Warrants"). The Warrants expire on November 16, 1998 and the
shares underlying the Warrants are included in the Company's registration
statement on Form S-1 filed on February 6, 1996 with the Securities and
Exchange Commission. In the ordinary course of their business, GKM and its
affiliates may actively trade in the debt and equity securities of the
Company for their own accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such
securities.
In connection with our opinion, we have reviewed the Exchange Offer
Documents as well as financial and other information that were publicly
available or furnished to us by the Company, including information provided
during discussions with the Company's management. In addition, we have
compared certain financial data of the Company with that of various other
companies whose securities are publicly traded, reviewed the historical
prices and trading volumes of the Common Stock and the Depositary Shares,
reviewed comparable exchange offer transactions, compared the effects of the
Exchange Offer to a possible cash redemption of the Depositary Shares,
performed income statement and balance sheet restructuring analyses, reviewed
the effects of the Exchange Offer on the Company's
A-1
<PAGE>
LOGO
earnings per share of Common Stock, and conducted such other financial
studies, analyses and investigations as we deemed appropriate for purposes of
this opinion. In addition, for purposes of this analysis, we have assumed no
material change in the business, operations, financial condition, or
prospects of the Company from that set forth in the Exchange Offer Documents.
In rendering this opinion, we have relied, without independent
verification, on the accuracy and completeness of all financial and other
information that was publicly available or furnished or otherwise
communicated to us by the Company. We have not made an independent evaluation
or appraisal of the assets or liabilities (contingent or otherwise) of the
Company, nor have we been furnished with any such evaluations or appraisals.
With respect to the financial projections supplied to us, we have assumed
that they have been reasonably prepared on bases reflecting the best
currently available estimates and good faith judgments of senior management
of the Company of the future competitive, operating, financial and regulatory
environments and related financial performance of the Company. Furthermore,
we have not assumed responsibility for conducting a physical inspection of
the properties or facilities of the Company.
This opinion does not constitute a recommendation to any holder of
Depositary Shares as to whether such holder should tender any of the
Depositary Shares pursuant to the Exchange Offer. No opinion is expressed
herein as to the price at which the Common Stock or the Depositary Shares may
trade at any time. Our opinion is necessarily based on economic, market and
other conditions and circumstances as they exist and can be evaluated on, and
the information made available to us as of, the date hereof.
It is understood that this opinion is for the information of the Board of
Directors of the Company and, aside from referring to this opinion and its
conclusions in the Offering Circular, may not be used or quoted for any other
purpose without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Offer is fair to the common shareholders of the
Company from a financial point of view.
Very truly yours,
SIGNATURE
<F1>
GERARD KLAUER MATTISON & CO., LLC
A-2
<PAGE>
EXHIBIT B
SCHRODERS LOGO
February 28, 1996
The Finance Committee of the
Board of Directors
Lewis Galoob Toys, Inc.
500 Forbes Boulevard
South San Francisco, CA 94080
Gentlemen:
Lewis Galoob Toys, Inc. (the "Company") proposes to offer (the "Exchange
Offer") to the holders of the Company's Depositary Convertible Exchangeable
Preferred Shares (the "Depositary Shares"), each of which represents 1/10th
share of the Company's $17.00 Convertible Exchangeable Preferred Stock, the
opportunity to exchange their Depositary Shares for shares of the Company's
Common Stock, par value $.01 per share ("Common Stock"), on the basis of 1.85
shares of Common Stock for each Depositary Share so exchanged (the "Exchange
Ratio"). The terms and conditions of the Exchange Offer are described in an
offering circular relating to the Exchange Offer which is being mailed to
holders of the Depositary Shares (the "Offering Circular").
You have requested our opinion, as investment bankers, as to the fairness of
the Exchange Ratio to the holders of the Depositary Shares from a financial
point of view.
In connection with our opinion set forth herein, we have, among other things:
LOGO
<TABLE>
<CAPTION>
<S> <C>
(i) reviewed the Offering Circular and Letter of Transmittal, dated February 28, 1996;
(ii) reviewed the Company's registration statement on Form S-1 filed with the Securities and Exchange
Commission (the "Commission") on February 6, 1996 related to the Common Stock underlying the
Company's 8% Convertible Subordinated Debentures due 2000 and 172,527 warrants to purchase
Common Stock;
(iii) reviewed the Company's prospectus dated October 4, 1989 relating to the offering of the
Depositary Shares as filed with the Commission;
(iv) reviewed the Company's 1994 Annual Report on Form 10-K, the Company's 1994 Annual Report to
Shareholders and the Company's Quarterly Report on Form 10-Q for the quarter and nine months
ended September 30, 1995;
(v) reviewed the Company's 1995 income statement and balance sheet for the fiscal year ended
December 31, 1995, audited by Price Waterhouse, the Company's independent public accountants;
(vi) reviewed certain internal financial statements and financial operating data concerning the
Company prepared by management of the Company;
(vii) reviewed financial projections for the Company prepared by management of the Company;
(viii) held discussions with the Company's management regarding the business, operations, historical
financial performance, projected financial performance and future prospects of the Company;
LOGO
B-1
<PAGE>
LOGO
(ix) reviewed the historical trading prices and volumes of the Company's Common Stock and Depositary
Shares and analyzed the relationship between the two securities;
(x) performed various analyses of the Company and the Exchange Offer using generally accepted
valuation methodologies including: (a) comparable public company analysis; (b) discounted cash
flow analysis; and (c) comparable transactions analysis;
(xi) analyzed the pro forma impact of the Exchange Offer on the Company's capitalization and
historical and projected results; and
(xii) performed such other studies, analyses, inquiries and investigations as we deemed appropriate.
</TABLE>
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all information supplied or otherwise made available to us by
the Company or obtained by us from other sources, and upon the assurance of
the Company's management that it is unaware of any information or facts that
would make the information provided to us incomplete or misleading. We have
not independently verified such information, undertaken an independent
appraisal of the assets or liabilities (contingent or otherwise) of the
Company or been furnished with any such appraisals. With respect to financial
forecasts furnished to us by the Company, we have been advised by the senior
management of the Company, and we have assumed, that they have been
reasonably prepared and reflect the best currently available estimates and
judgment of the senior management of the Company as to the expected future
financial performance of the Company.
Our opinion is necessarily based upon economic, market and other conditions
as they exist on, and the information made available to us as of, the date
hereof (including, without limitation, the respective market prices of the
Common Stock and the Depositary Shares). Moreover, given the varying tax
implications that the Exchange Offer could have on the holders of Depositary
Shares depending on their specific circumstances, we have not taken into
account the potential tax consequence of the Exchange Offer to any holder or
category of holders of the Depositary Shares, including the application and
effect of federal, state, local and foreign income and other tax laws.
Holders of Depositary Shares should consult with their own tax advisors as to
the specific tax consequences of the Exchange Offer to them, including the
application and effect of federal, state, local and foreign income and other
tax laws. We disclaim any undertaking or obligation to advise any person of
any change in any fact or matter affecting its opinion which may come or be
brought to its attention after the date as of which such opinion is given.
Schroder Wertheim & Co. Incorporated, as part of its investment banking
business, is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
The opinion expressed herein does not constitute a recommendation as to any
action the Finance Committee of the Board of Directors, the Board of
Directors, any other committee thereof, or any shareholder of the Company or
any holder of Depositary Shares should take in connection with the Exchange
Offer. In rendering this opinion we have not been engaged to act as an agent
or fiduciary of the holders of Depositary Shares or any other third party.
Such opinion relates solely to the fairness of the Exchange Ratio to the
holders of Depositary Shares from a financial point of view. We express no
opinion herein as to the structure, terms or effect of any other aspect of
the Exchange Offer.
- -----------------------------------------------------------------------------
B-2
<PAGE>
LOGO
This letter is for the information of the Finance Committee of the Board of
Directors of the Company only and is solely for use in its consideration of
the fairness of the Exchange Ratio to the holders of Depositary Shares from a
financial point of view and may not be used for any other purpose or referred
to without our prior written consent. Without limiting the foregoing, we
consent to the reference to our opinion in, and the inclusion of our opinion
as an exhibit to, the Offering Circular.
Based upon and subject to the foregoing, we are of the opinion, as investment
bankers, that, as of the date hereof, the Exchange Ratio is fair to the
holders of Depositary Shares from a financial point of view.
Very truly yours,
SIGNATURE LOGO
SCHRODER WERTHEIM & CO. INCORPORATED
- -----------------------------------------------------------------------------
B-3
<PAGE>
LEWIS GALOOB TOYS, INC.
500 FORBES BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
Depositary Stockholders who wish to accept the Exchange Offer should
either send, or cause such Depositary Stockholders' broker, dealer,
commercial bank, trust company or nominee to send Letters of Transmittal (or
facsimiles thereof), together with certificates for Depositary Shares and to
the Depositary at one of its addresses set forth below.
The Depositary and Information Agent for the Exchange Offer is: CHEMICAL
MELLON SHAREHOLDER SERVICES, L.L.C.
(800) 774-5469
(For Information Call Toll Free)
<TABLE>
<CAPTION>
<S> <C> <C>
By Mail: By Hand: Chemical Mellon Shareholder By Overnight Courier: Chemical Mellon
Chemical Mellon Shareholder Services, L.L.C. 120 Broadway, 13th Shareholder Services, L.L.C. 85
Services, L.L.C. Floor New York, New York 10271 Challenger Road Ridgefield Park, New
P.O. Box 845 Attention: Reorganization Department Jersey 07660 Attention: Reorganization
Midtown Station Department
New York, New York 10018
Attention: Reorganization Department
</TABLE>
Requests for assistance should be directed to the Depositary. Requests for
additional copies of this Offering Circular and the Letter of Transmittal
should be directed to the Depositary. You may also contact your broker,
dealer, commercial bank, trust company or nominee for assistance concerning
the Exchange Offer.
The date of this Offering Circular is February 28, 1996
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: (Date of earliest event reported): FEBRUARY 12, 1996
LEWIS GALOOB TOYS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-9599 94-1716574
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
500 FORBES BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(Address of principal executive offices) (Zip Code)
(415) 952-1678
(Registrant's telephone number, including area code)
<PAGE>
ITEM 5. OTHER EVENTS.
By press release dated February 12, 1996, the registrant
announced the redemption of its 8% Convertible Subordinated Debentures due
2000 on or about March 22, 1996. The registrant also announced its intent to
commence an exchange offer for the 1,839,000 outstanding Depositary
Convertible Exchangeable Preferred Shares (the "Preferred Shares") pursuant to
which the registrant will offer to exchange 1.85 shares of its common stock
for each outstanding Preferred Share. The exchange offer will have a
termination date of March 29, 1996 and will be conditioned on, among other
things, the receipt of valid tenders from the holders of at least 75 percent
of the outstanding Preferred Shares. The press release is attached hereto as
Exhibit 10.1 and incorporated by reference herein.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(C) Exhibits
Exhibit No.
- -----------
10.1 Press release dated February 12, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
LEWIS GALOOB TOYS, INC.
By: /s/ William B. Towne
-------------------------
William B. Towne
Executive Vice President, Finance
and Chief Financial Officer
Date: February 13, 1996
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
- ------- ----------- ----------
10.1 Press release dated February 12, 1996.
<PAGE>
GALOOB TOYS ANNOUNCES TWO FINANCING TRANSACTIONS TO
STRENGTHEN COMPANY AND POSITION IT FOR CONTINUED GROWTH
SOUTH SAN FRANCISCO, CALIF., FEBRUARY 12, 1996 -- Lewis Galoob Toys, Inc.
(NYSE: GAL; GALPR) today announced two transactions intended to strengthen the
Company's balance sheet and position it for continued growth. The Company said
that it was calling for redemption of its 8 percent Convertible Subordinated
Debentures, due 2000, and commencing an exchange offer for its Depositary
Convertible Exchangeable Preferred Shares (the "Preferred Shares").
Under the terms of the redemption, the $14,000,000 Debentures now
outstanding will be redeemed on or about March 22, 1996, unless converted into
the Company's Common Stock by the holders prior to the redemption date. Until
the redemption date, the Debentures are convertible into an aggregate of
1,511,879 shares of Common Stock at the rate of $9.26 principal amount for
each share of Common Stock. On Friday, February 9, 1996, the Company's Common
Stock closed at $17.25 in New York Stock Exchange trading.
The Company also announced that it will commence an exchange offer
for the 1,839,500 Preferred Shares currently outstanding. The Company will
offer to exchange 1.85 shares of Common Stock for each outstanding Preferred
Share, representing a premium of 26 percent, based on the respective prices of
the Common Stock and Preferred Shares on Friday, February 9 in New York Stock
Exchange trading. The Preferred Shares closed at $25.375 on that date. The
exchange offer, which will have an expiration date of March 29, 1996,
represents a premium of 18 percent over the $27.06 per share cash redemption
price and aggregate dividend arrearage represented by each Preferred Share.
The exchange offer will be conditioned on, among other things, the receipt of
valid tenders from the holders of at least 75 percent of the outstanding
Preferred Shares and will commence upon filing with the Securities and
Exchange Commission and distribution to holders of Preferred Shares of the
formal, definitive exchange offer documents.
Mark Goldman, president and chief executive officer of the Company,
stated, "We are delighted to be able to undertake these two transactions. The
redemption and exchange offer will substantially strengthen the Company and
enhance its ability to capitalize on the opportunities for growth available to
us." Commenting specifically on the exchange offer, Mr. Goldman noted that,
"When we suspended payment of the preferred dividend at the outset of the
Company's turnaround program we indicated that we would revisit issues
surrounding the Preferred Shares at such time as the Company had completed its
turnaround and established consistent earnings. Those objectives having been
achieved, we believe that we will have fulfilled any obligations to the
holders of the Preferred Shares by offering them an exchange which will enable
the holders to obtain value exceeding both the current market price as well as
the redemption value and all unpaid dividends on that security."
Lewis Galoob Toys, Inc. designs, develops, markets and sells high
quality toys worldwide.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------- -------------
Commission file number 1-9599
------------------------------
LEWIS GALOOB TOYS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1716574
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 Forbes Boulevard
So. San Francisco, CA 94080
--------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415)952-1678
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, Par Value $.01 Per Share New York Stock Exchange
Depositary Convertible Exchangeable New York Stock Exchange
Preferred Shares (each representing
1/10 share of $17.00 Convertible
Exchangeable Preferred Stock)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by persons who are not
officers or directors (or their affiliates) of the registrant, as of March 1,
1995, was approximately $65,000,000.
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 1, 1995, was as follows:
Class Number of Shares
----- ----------------
Common Stock, Par Value $.01 Per Share 10,066,844
DOCUMENTS INCORPORATED BY REFERENCE
The following document has been incorporated by reference:
The registrant's Proxy Statement to be used in connection with the
Annual Meeting of Shareholders to be held on June 20, 1995 (the "Proxy
Statement") incorporated into Part III.
PART I
Item 1. Business
Lewis Galoob Toys, Inc. (the "Company" or the "Corporation") designs, develops,
markets and sells high quality toys worldwide and has been engaged in business
since 1957. The Company's strategies in selecting and developing lines are to
focus primarily on low to medium priced extendable product lines that are
brandable, to capitalize on current trends in the toy industry and popular
culture and to expand and diversify its product categories. Consistent with
these strategies, the types of products which have produced the preponderance of
the Company's revenues have changed significantly. This product change evolved
both by developing and procuring new toys which are based on original ideas and
by seeking to obtain and develop new character licenses.
The Company's products are generally sold worldwide, with a substantial portion
of its revenues derived from sales in the United States and Europe. The Company
sells its products principally to retailers in the United States and to toy
distributors outside of the United States. U.S. retail outlets for the products
include specialty toy retailers, discount and chain stores, catalog and mail
order companies, department stores and variety stores. See
"Business--Distribution and Sales". The Company's products are generally
manufactured overseas, primarily in the People's Republic of China ("China").
The Company's results are dependent, in large part, on management's experience
in the toy industry and its ability to identify and capitalize on current trends
and market new products based on such trends in a timely and efficient manner.
As a result of changing consumer tastes, individual toys usually have relatively
short product lives. An increase or decrease in popularity of a particular item
during any year could have a material impact on revenues and profit for that
year.
Consistent with the extendable product life strategy, the Company's Micro
Machines(R) product line, first introduced in 1987, has generated significant
sales for a much longer product life than most toy products, and the Company
believes that the line will continue to generate significant sales in 1995.
Micro Machines sales represented 51% of the Company's total revenues in 1994
after representing 41% in 1993 and 28% in 1992. There can be no assurance that
the demand for Micro Machines will continue at current or previous levels.
1
Products
The Company has historically marketed a variety of toy products designed for
children of both sexes and of different age groups. In recent years, the
Company's main emphasis has been to revive, develop, extend and expand its core
brand, Micro Machines, and to diversify the balance of its other product lines.
See "Business--Licensing and Related Rights; Trademarks."
The Company's 1995 product line consists of continuations and extensions of the
Micro Machines line and introductions of several new lines, including two new
extendable girl's brands, Sky Dancers(TM) Dolls and My Pretty DollHouse(TM)
toys.
The Micro Machines line includes the continuing licensed vehicles based on the
popular Star Wars(R) motion picture trilogy. Star Wars playsets depicting scenes
from the movies and including action features, figures and vehicles have been
added. Other licensed products also include vehicles and figures from the Power
Rangers(TM) television series, The Tick(TM) animated television series, as well
as James Bond 007(TM). There are also new vehicles from the Star Trek(R) and
Babylon 5(TM) television series. A new speed performance segment consisting of
Ultra-fast Radicators(TM) vehicles and higher performance race sets is also in
the line. To extend the Micro Machines segment of military vehicles and troops,
new playsets include Night Attack!(TM) with battery-powered searchlight and
multi-missile launcher, as well as FalconWing Skybase(TM) and Orion J-22(TM)
Submarine Base transforming playsets. Also continuing under the Micro Machines
brand is Z-Bots(R), a line of collectible robot figures, vehicles and playsets.
New ultra- small Mini Z's(TM) robots, the smallest Z-Bots ever, have been
introduced along with five combat-action Mini Z's playsets.
The new and innovative Sky Dancers(TM) line of dolls and playsets feature the
first known girls' doll that flies. These collectible ballerina dolls fly
utilizing a special launcher with pull-cord action done in various themes. The
playsets include Magic Rolling Launchers in the shape of a swan and pegasus.
The Company's new My Pretty DollHouse(TM) line is based on a classic girl's toy
play pattern that incorporates the successful concepts of miniaturization and
collectibility. This line consists of modular, finely decorated miniature
dollhouses that come with dolls and other surprise accessories. Also available
are coordinated designer Furniture Packs, Back and Front Yard Sets, and snap- on
2nd Story Additions to expand the houses into even bigger mansions.
Mutant League(R) is a new licensed male action line with a sports theme.
Figures, vehicles and playsets are based on the syndicated television series and
the popular Electronic Arts video games.
Also introduced is UltraForce(TM), a licensed male action line of
2
dramatic super heroes and villains, vehicles and accessories, from the pages of
Malibu and Marvel Comics and the new syndicated animated TV show that is
scheduled to premier in September 1995.
Biker Mice From Mars(TM) is a continuing licensed male action line in our
international markets. The line consists of figures, accessories and playsets
based on the internationally successful animated series.
The Company's 1994 product line consisted of continuations and extensions of the
Micro Machines, Z-Bots, Game Genie(TM), and Splash Out(R) lines, and several new
product lines. These included Star Trek, Star Wars, and Biker Mice From Mars; My
Magic Kissing Dragon(TM) collectible dolls that spray a light scented mist when
you squeeze them; Sweet Secrets(R) miniature transforming dolls, accessories and
playsets; and Travel Pocket Play line of portable games and activity toys.
The Company's 1993 product line consisted of continuations and extensions of the
Micro Machines, Game Genie, and Splash Out lines, and several new product lines.
These included Fancy Sounds(TM), an electronic device that allowed the user to
add sound effects to any toy; Bow Wow Boutique(TM), plush dogs with removable
fur that could be cut and styled; Whispering Wishes(TM), a talking doll that
whispered special sayings when squeezed; and the Travel Pocket Play line of
portable games and activity toys.
The Company's 1992 product line consisted of continuations and extensions of the
Micro Machines, Game Genie, Baby Face(TM), Lazer Pro 9000(TM) and Splash Out
lines and several new product lines. These included Luv'n Handful(TM), a 13"
hand-puppet doll; Starlight(TM), a mechanical walking horse with light-up
features; and Trash Bag Bunch(TM), a line of collectible figures packaged in
dissolving bags.
Licensing and Related Rights; Trademarks
In 1994 and 1993, the Company produced substantially all of its products under
licenses from others. Some of these licenses confer rights to exploit original
concepts developed by toy inventors and designers. Other licenses, referred to
as character licenses, permit the Company to manufacture and market toys based
on characters which develop their own popular identity, often through exposure
in various media such as television programs, movies, cartoons and books. In
return for these rights, the Company pays royalties to its licensors.
Royalties paid by the Company to toy licensors typically range from 2% to 14% of
net sales. Electronic games typically have higher royalty rates than toys. In
certain instances, the Company may agree to guarantee payment of a minimum
royalty. As of December 31, 1994 and 1993, minimum future guaranteed payments
aggregated approximately $2,630,000 and $732,000, respectively. Royalties
3
expense in 1994 and 1993 totaled approximately $13,498,000 and $11,337,000,
respectively. As a result of increased competition among toy companies for
licenses, in certain instances the Company has paid, and may in the future be
required to pay, higher royalties and higher minimum guaranteed payments in
order to obtain attractive properties for the development of product lines.
The Company is an active participant in the market for character licenses. A
determination to acquire a character license must frequently be made before the
commercial introduction of the property in which a licensed character appears,
and license arrangements often require the payment of non-refundable advances or
guaranteed minimum royalties. Accordingly, the success of a character licensing
program is dependent upon the ability of management to accurately assess the
future success and popularity of the properties which it is evaluating, to bid
for products on a selective basis in accordance with such evaluation, and to
capitalize on the properties for which it has obtained licenses in an
expeditious manner. In 1994, the Company generated significant sales under
existing character license arrangements for Star Wars, Star Trek, Biker Mice
From Mars and Power Rangers. In 1994, the Company entered into character license
arrangements for Mutant League, Gore Corp, Nintendo(R), James Bond, The Tick,
Godzilla(TM), HappyNess and Ultraforce. The products under these license
arrangements will be sold in 1995 and beyond.
The Company has obtained domestic and international distribution rights for most
of its products. Normally most character licenses extend for one to three years
and are typically renewable at the option of the Company upon payment of certain
minimum guaranteed payments or the attainment of certain sales levels during the
initial term of the license. Licenses for original ideas typically extend for
the commercial life of the product.
Most of the Company's products are sold under trademarks and certain products
incorporate patented devices or designs. The Company customarily seeks
protection of its product patents and major product trademarks in the United
States and certain other countries. These trademarks, such as Micro Machines,
are significant assets of the Company. The Company believes that the loss of
certain of its license rights or trademarks for particular product lines may
have a material adverse effect on its business. However, the Company believes
its rights to these properties are adequately protected.
Research and Development
The Company employs its own designers and engineers and also utilizes the
services of independent designers and engineers on an ongoing basis. The Company
presents its designers with toy concepts licensed or, to a lesser extent,
originated by it and the designers create renderings of the proposed product.
Designs are
4
then presented to the Company's engineers, who, using the renderings, perform
mechanical drawings and engineering services and create prototypes for new
products. Prototypes for proposed products are then reviewed by the Company's
management, including representatives of marketing, sales and manufacturing,
prior to final acceptance. Character licensors usually retain the right to
approve the products being marketed by the Company.
The Company spent approximately $7,288,000, $7,451,000 and $6,861,000 on
research and development activities in 1994, 1993 and 1992, respectively,
exclusive of amounts paid to certain inventors and designers who receive
royalties as licensors. Those amounts do not include approximately $7,149,000,
$4,502,000 and $4,583,000, respectively, in 1994, 1993 and 1992 incurred for
tooling and package design.
Manufacturing
The Company's products are manufactured to its specifications by nonaffiliated
third party vendors, usually located in the Orient, principally in China where
over 87% of the Company's products were produced in 1994. These vendors are
responsible for all aspects of the production of the Company's products in
accordance with Company specifications.
The Company's manufacturing is currently performed by 19 manufacturers, some of
whom derive a substantial percentage of their business from the Company. In
1994, four manufacturers each produced in excess of 10% of the Company's
products and combined to produce 81%. It is anticipated in 1995 that
manufacturers' production will be similarly concentrated as in 1994.
The Company, through its wholly-owned subsidiary Galco International Toys, N.V.
("Galco") located in Hong Kong, maintains close contact with the manufacturers
and subcontractors and monitors the quality of the products produced. Decisions
related to the choice of manufacturer are based on price, quality of
merchandise, reliability and the ability of a manufacturer to meet the Company's
timing requirements for delivery. See "Business--Competition". Tooling is
ordinarily owned by the Company and may be utilized by different manufacturers
if the need arises for alternate sources of production. See "Business--Design
and Development".
The Company does not carry insurance for political, social or economic unrest or
disruption for several reasons including, but not limited to, costs of such
insurance and the limited insurance coverage available. The impact on the
Company from such unrest or disruption would depend on several factors,
including, but not limited to the nature, extent and location of such unrest or
disruption and the Company's ability to: (1) procure alternative manufacturing
sources outside of the country involved; (2)
5
retrieve its tooling; (3) relocate its production in sufficient time to meet
demand; and (4) pass resultant product cost increases likely to be incurred
outside of the country involved through to the Company's customers as product
price increases.
The Company's products are produced principally in China which currently
is designated with "most favored nation" ("MFN") status by the United
States. This designation allows products imported into the United States from
China to be accorded the most favorable import duties. In late 1994, Congress
approved the GATT (Uruguay round) which allows imports into the United States
of toy merchandise with unconditional duty free entry from any nation with MFN
status. Generally, the trade negotiations between China and the United States
have been difficult, but both sides have shown their willingness to resolve
trade disputes and avoid punitive sanctions. Punitive sanctions could result
in the United States imposing higher duties on selective Chinese made products
imported into the United States (these sanctions would be put in place through
Section 301). In the past, Section 301 sanctions proposed by the United States
did not include sanctions or punitive duties against toy imports from China.
As such, the Company would be unaffected. The loss of MFN status for China,
however, would result in a substantial increase in duty for the Company's
products produced there and imported into the United States. This increase in
duty would be large enough that it could materially affect the Company's
business. Products shipped to other countries should not be affected. Other
toy companies also source product from China and would be affected to similar
degrees. However, the impact on the Company from any significant change in
duties on its Chinese produced products would depend on several factors
including, but not limited to, the Company's ability to: (1) procure
alternative manufacturing sources outside of China; (2) retrieve its tooling;
(3) relocate its production in sufficient time to meet demand; and (4) pass
resultant cost increases through as product price increases.
In 1994, certain quotas on selected Chinese produced toy products were
introduced in the European Economic Community. These quotas are not expected to
have a material impact on the Company's business in 1995.
Transactions in which the Company purchases goods from manufacturers are mostly
denominated in Hong Kong dollars and, accordingly, fluctuations in Hong Kong
monetary exchange rates may have an impact on cost of goods. However, in recent
years, the value of the Hong Kong dollar has had a continuing stable
relationship to the value of the U.S. dollar and the Company has not experienced
any significant foreign currency fluctuations. Inflationary pressure in China
could have an effect on the cost of product sourced from China.
Galco's staff of 98 employees in Hong Kong (as of December 31,
6
1994) undertake certain elements of the design and development of new products.
Additionally, Galco arranges with manufacturers for the production, shipment and
delivery of products, and monitors the quality of the products produced. Galco
also has 33 employees in other countries in the Orient performing similar
activities.
The principal raw materials used in the production and sale of the Company's
products are plastics and paper products. The Company believes that an adequate
supply of raw materials used in the manufacture of its products are readily
available from existing and alternate sources.
Distribution and Sales
The Company markets and sells its products throughout the world, with sales to
customers in the United States aggregating on a consolidated basis 66%, 66% and
65% of net sales in 1994, 1993 and 1992, respectively.
Outlets for the Company's products in the United States include specialty toy
retailers, discount and chain stores, catalog and mail order companies,
department stores, variety stores and independent distributors which purchase
the products directly from the Company and ship them to retail outlets. In 1994
and 1993, Toys "R" Us, Inc. accounted for 21% of the Company's consolidated net
sales.
The Company has a sales staff of seven people supplemented by several
manufacturers' representative organizations in the United States who act as
independent contractors. The Company's sales staff and the manufacturers'
representatives offer the Company's products through the use of samples and
promotional materials at toy shows and by making regular customer sales calls.
The Company also directly introduces and markets to customer new products and
extensions to previously marketed product lines by participating in the major
trade shows in New York, Hong Kong and Europe and through the maintenance of a
showroom in New York City. Manufacturers' representatives utilized by the
Company receive commissions, which were approximately 1.0%, 1.3% and 1.3% of net
sales in 1994, 1993 and 1992, respectively.
The Company utilizes warehouse facilities primarily in Union City, California
for storage of its products. Disruptions in shipments from the Orient or from
this facility could have a material adverse effect on the Company. The Company
believes that adequate storage facilities are available.
Galoob has an extensive international sales program. The Company, in conjunction
with its Hong Kong subsidiary, Galco, actively sells it products into 35
countries and sells directly to 51 separate, independent toy distributors, each
of which is domiciled in the respective country to which sales are made. While
international sales have averaged approximately one-third of total company
sales, these sales are understated in proportion to the volume of Galoob
products sold outside of the United States. International sale
7
prices to distributors are significantly lower than U.S. domestic sale prices to
retail accounts since international distributors are generally responsible for
all importation, warehousing, marketing, promotional and selling related costs.
In 1994, approximately fifty percent of all Galoob toys sold were shipped to
countries outside the United States.
Sales by the Company to foreign customers are ordinarily denominated in U.S.
dollars and, accordingly, the Company's revenues are not affected by
fluctuations in monetary exchange rates. However, the value of the U.S. dollar
in relation to the value of other currencies may have a positive or negative
impact on the Company's sales volume over time, depending on the change in
relationship of the respective currencies.
The Company does not ordinarily sell its products on consignment and ordinarily
accepts returns only for defective merchandise. Returns have historically not
been significant. In certain instances, where retailers are unable to resell the
quantity of products which they have purchased from the Company, the Company
may, in accordance with industry practice, assist retailers to sell such excess
inventory by offering discounts and other price concessions.
Advertising
Although a portion of the Company's advertising budget is expended for newspaper
advertising, magazine advertising, catalogs and other promotional materials, the
Company allocates the bulk of its advertising budget to television. As is common
practice in the toy industry, the Company advertises on national network,
syndicated cable and local spot television.
Seasonality and Backlog
Because of heavy retail demand for toy products during the Christmas season, the
toy industry is highly seasonal in nature. Consistent with U.S. toy industry
practices, receivables from a significant portion of domestic sales are not
collected until the final weeks of the fourth quarter and the first quarter of
the succeeding year, which creates a substantial demand for working capital on a
seasonal basis. See "Business--Advertising" and "Business--Manufacturing".
The results of operations for any quarter are subject to a number of variables
and may not reflect the results of operations for the year. Similarly, any
comparisons between fiscal periods of successive years may not be indicative of
the results of operations for a full year.
Orders in the U.S. toy industry are generally cancelable until shipped.
Therefore, the Company believes that backlog may not be an accurate indicator of
the Company's future sales.
8
Competition
The toy industry is highly competitive. The Company competes with several larger
toy companies, such as Hasbro, Mattel and Tyco, and many smaller companies, in
the design and development of new toys, the procurement of licenses, the
improvement and expansion of previously introduced products and product lines
and the marketing and distribution of its products. In addition, it is common in
the toy industry for companies to market products which are similar to products
being successfully marketed by competitors. The Company believes that the
strength of its management team, quality of its products, its relationships with
inventors, designers and licensors, its distribution, and its overhead and
operational controls permit it to compete effectively in the marketplace. See
"Business--Design and Development", "Business--Distribution and Sales" and
"Business".
Government Regulations
The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws
empower the Consumer Product Safety Commission (the "CPSC") to protect consumers
from hazardous toys and other articles. The CPSC has the authority to exclude
from the market articles which are found to be hazardous and can require a
manufacturer to recall such products under certain circumstances. Similar laws
exist in some states and cities in the United States and in Canada and Europe.
Products are also designed and tested to meet or exceed ASTM F963, the Standard
Consumer Safety Specification on Toy Safety. The Company emphasizes the safety
and reliability of its products and has established a strong quality assurance
and control program to meet the Company's objective of delivering high quality
products.
Employees
As of December 31, 1994, the Company had 241 employees; 110 in the United States
and 131 in the Far East. This compares to 233 total employees at December 31,
1993; 111 in the United States and 122 in the Far East. Nine of the Company's
employees, some of which are employed only on a seasonal basis, are subject to a
collective bargaining agreement which expires May 31, 1998. The Company believes
that its labor relations are satisfactory.
Item 2. Properties
The Company's principal executive offices are located at 500 Forbes Boulevard,
South San Francisco, California, where the Company owns a building with
approximately 136,000 square feet. The Company occupies approximately 33,000
square feet of office space and leases the additional 103,000 square feet of
warehouse space to third parties. The Company also has 125,000 square feet of
warehouse space at Union City, California, under a lease which expires in 1997,
with rights to renew for one five year term. In addition, the Company has a
showroom, consisting of approximately
9
9,000 square feet, which is located at 200 Fifth Avenue, New York, New York,
under a lease that expires in 1996, and office and warehouse space in Hong Kong
consisting of approximately 25,388 square feet under leases which expire at
varying dates through 1996.
The Company's properties provide adequate capacity to support the present and
expected future levels of business.
10
Item 3. Legal Proceedings
On May 17, 1990, the Company filed a complaint against Nintendo of America, Inc.
("Nintendo") seeking a declaratory judgment and injunctive relief in the United
States District Court, Northern District of California (the "District Court").
This complaint sought confirmation of the Company's right to market, distribute
and sell its Game Genie product. On June 1, 1990, Nintendo filed a complaint in
the same District Court alleging copyright and trademark infringement and
seeking a preliminary and permanent injunction and unspecified damage.
On July 3, 1991, the District Court reversed an earlier preliminary injunction
against the Company and ruled that the sale of Game Genie products did not
infringe on Nintendo's copyrights. Nintendo appealed this ruling through the
Ninth Circuit Court of Appeals (the "Appeals Court") and ultimately filed a
petition for a writ of Certiorari with the United States Supreme Court. On March
22, 1993, the Supreme Court rejected Nintendo's petition and, in essence,
affirmed the District Court ruling.
Separately, the Company pursued recovery of damages from Nintendo that resulted
from the original issuance of the preliminary injunction. On July 6, 1992, the
District Court awarded the Company a $15 million damage judgement against
Nintendo, which was the maximum amount that could be awarded in light of the $15
million bond that Nintendo had been required to post in the proceedings.
Nintendo appealed this damage award, and on February 17, 1994 the Appeals Court
unanimously affirmed the District Court's ruling. Subsequently, the Appeals
Court rejected an additional Nintendo petition on March 21, 1994.
On April 11, 1994, Nintendo paid the Company $16.1 million representing the full
damage award plus interest and related costs. The Company retained approximately
$12.1 million of this amount, and the Company's Game Genie licensors were paid
the remaining $4.0 million. Notwithstanding such payment, on June 20, 1994,
Nintendo filed a petition for a Writ of Certiorari with the United States
Supreme Court, which asked the Supreme Court to review the the damage award on a
discretionary basis. On October 3, 1994, the Supreme Court rejected Nintendo's
petition and affirmed Galoob's right to the full damage award. There is no
further basis for appeal by Nintendo.
11
Nintendo's original trademark claim and the Company's original anti-trust
cross-claim against Nintendo were severed from the copyright claims that were
adjudicated on July 3, 1991. On January 18, 1995 these claims were dismissed
with prejudice by Nintendo and Galoob respectively. The Nintendo Game Genie
infringement lawsuit is now complete.
The Company is involved in various other litigation and legal matters which are
being prosecuted or defended in the ordinary course of business. None of these
matters is expected to result in outcomes having a material adverse effect on
the Company's consolidated financial position.
12
Item 4. Submission of Matters to a Vote of Security Holders
None.
13
Item 4a. Executive Officers of the Registrant
The following table sets forth the names, ages and all positions and offices
held by the Company's executive officers:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Mark D. Goldman 44 President, Chief
Executive Officer and
Director
William G. Catron 49 Executive Vice President,
General Counsel and Chief
Administrative Officer
Loren Hildebrand 55 Executive Vice President,
Sales
Ronald Hirschfeld 44 Executive Vice President,
International Sales and
Marketing
Gary Niles 55 Executive Vice President, Marketing and Product
Acquisition
Louis Novak 46 Executive Vice President and Chief Operating Officer
William B. Towne 50 Executive Vice President,
Finance and Chief Financial Officer
H. Alan Gaudie 54 Senior Vice President,
Finance
</TABLE>
Mark D. Goldman has served as President and Chief Executive Officer since June
1991. From 1987 to 1991 he served as Executive Vice President and Chief
Operating Officer. Prior to 1987, Mr. Goldman served in various executive
capacities at Ages Entertainment Software, Inc. (formerly Sega Enterprises Inc.)
and Mattel, Inc.
William G. Catron has served as Executive Vice President, General Counsel and
Chief Administrative Officer since May 1992. For the seven years prior to that,
Mr. Catron was Senior Vice President, Assistant General Counsel for Paramount
Pictures Corporation. Before 1985, Mr. Catron served in various executive
capacities at Ages Entertainment Software, Inc. (formerly Sega Enterprises,
Inc.) and Mattel, Inc.
Loren Hildebrand has served as Executive Vice President, Sales since April 1994.
From 1992 to 1994 he was President of Creative Consultants. From 1989 to 1992 he
was Executive Vice President and a partner in Toy Soldiers, Inc. a start-up
company. Prior to 1989,
14
Mr. Hildebrand was a consultant for Worlds of Wonder and executive for
Mattel, Inc.
Ronald Hirschfeld has served as Executive Vice President, International Sales
and Marketing since February 1994. From 1989 to 1994 he served as Senior Vice
President, International Sales and Marketing. Prior to that time, he served as
Senior Vice President, International Operations from 1987 to 1989 and has held
various positions within the Company since 1978.
Gary Niles has served as Executive Vice President, Marketing and Product
Acquisition since February 1992. From 1989 to 1992, he served as Senior Vice
President, FOB Division. Before joining the Company, he was an executive with
U.A.C., Ltd., a division of Universal Matchbox, Revell Incorporated and Ages
Entertainment Software, Inc. (formerly Sega Enterprises Inc.).
Louis Novak has served as Executive Vice President and Chief Operating Officer
since February 1992. From 1989 to 1992, he served as Senior Vice President,
Operations. From 1986 to 1989 he was Senior Vice President, Worldwide Product
Operations for Coleco Industries, Inc. ("Coleco"). Prior to that time, Mr. Novak
was an executive with All American Gourmet Company, Inc., a manufacturer of
frozen food products and for Mattel, Inc.
William B. Towne has served as Executive Vice President, Finance and Chief
Financial Officer since March 1995. From 1990 to 1995, he served as Executive
Vice President, Chief Financial Officer for Forstmann & Co, Inc. From 1982 to
1990, Mr. Towne worked for Tambrands, Inc. where he rose from Manager of
Forecast and Planning to Chief Financial Officer of their International
Division.
H. Alan Gaudie has served as Senior Vice President, Finance since April 1992.
From 1985 to 1992 he served as Corporate Controller, Vice President, Corporate
Controller and Senior Vice President, Acting Chief Financial Officer.
15
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
The Company's common stock, par value $.01 per share, has traded on the New York
Stock Exchange since July 9, 1987. The following table sets forth for each
quarter during the last two fiscal years the high and low closing sale prices as
reported by the New York Stock Exchange:
<TABLE>
<CAPTION>
Fiscal Year High Low
- ----------- ------ -------
<S> <C> <C> <C>
1994 First Quarter 10 5/8 6 1/8
Second Quarter 6 7/8 5 1/2
Third Quarter 8 1/2 6 1/8
Fourth Quarter 7 3/8 4 3/4
1993 First Quarter $ 4 1/8 $ 3 1/8
Second Quarter 3 7/8 3 3/8
Third Quarter 3 3/4 2 1/2
Fourth Quarter 10 3/4 4 1/4
</TABLE>
As of March 1, 1995, there were approximately 2,025 holders of record of the
Company's common stock.
No cash dividends were declared in 1994 or 1993 on the common stock. The Board
of Directors has no current plans to pay cash dividends on the common stock. The
Company's current credit agreement and the terms of its Convertible Exchangeable
Preferred Stock limit the Company's ability to pay cash dividends on the common
stock. (See Notes E and M of Notes to Consolidated Financial Statements.) Future
dividend policy will depend on the Company's earnings, capital requirements,
financial condition and other factors considered relevant by the Board of
Directors.
16
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Years ended December 31
-------------------------------------------------------------------------------
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Net revenues $178,792 $134,334 $166,280 $150,636 $126,943
Net earnings (loss) 18,424 (10,924) (2,447) (7,540) (29,245)
Preferred stock dividends:
Paid - - 782 3,127 3,127
In arrears 3,127 3,127 2,345 - -
Net earnings (loss)
applicable to
common shares $15,297 $(14,051) $ (5,574) $(10,667) $(32,372)
Net earnings (loss) per common share:
Primary $ 1.51 $ (1.47) $ (.59) $ (1.14) $ (3.48)
Fully diluted 1.41 (1.47) (.59) (1.14) (3.48)
Number of common shares
and common share
equivalents
outstanding - average 10,111 9,548 9,400 9,325 9,315
At December 31:
Total assets $100,766 $ 71,005 $ 71,604 $ 64,016 $ 75,546
Long-term debt 18,414 18,608 4,944 5,244 5,541
Working capital 53,219 30,813 27,070 29,127 37,914
Shareholders'
equity 44,768 22,162 32,246 35,092 45,610
</TABLE>
17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth for the periods indicated the percentage
relationships between revenues and certain expenses and earnings items:
<TABLE>
<CAPTION>
Percentage of Net Revenues
Years ended December 31
1994 1993 1992
------ ----- -----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of products sold 58.5 61.7 63.1
----- ----- -----
Gross margin 41.5 38.3 36.9
Advertising and promotion 17.1 17.5 13.7
Other selling and
administrative 15.1 19.1 18.3
Research and
development 4.1 5.6 4.1
Variable stock option plan
expense - 3.0 -
Earnings (loss)
from operations 5.2 (6.9) 0.8
Expenses related to
resignations of former
officers - - (1.3)
Net Proceeds from Nintendo award 6.8 - -
Interest expense (1.5) (1.3) (0.9)
Other income, net 0.2 0.1 0.1
Provision for income
taxes (0.4) - (0.2)
----- ----- ----
Net earnings (loss) 10.3% (8.1%) (1.5%)
===== ===== ====
</TABLE>
1994 Compared to 1993
In 1994, the Company was profitable, which was its best performance since
1989. This was a result of the successful implementation of the Company's
recovery plan which began in 1991.
The recovery plan objective was to reposition the Company so it could
generate sustainable profitability and growth. Essential to reaching
this objective were three key goals: (1) restore and expand the Company's
core business, the Micro Machines brand; (2) focus on growth opportunities
in new product areas, such as the male action category; and (3) to lower
breakeven versus the 1990 cost profile. The new management team was put in
place in 1991.
Overall, consolidated net sales, including both toy sales and sales
18
of the Game Genie video game enhancer, in 1994 were $178.8 million which
represented a 33% increase from 1993 net sales of $134.3 million. Worldwide toy
sales in 1994 achieved a 72% increase over 1993. Domestic toy sales rose by 103%
and international toy sales by 33% from 1993 to 1994.
A major key to the 1994 sales growth was the continuing expansion of the Micro
Machines brand. In 1994, sales of Micro Machines grew significantly for the
second consecutive year. Net sales in 1994 climbed to $113.0 million which
was a 59% increase over 1993 levels. This comes on top of a 55% increase in
sales in 1993 over 1992. A significant area of growth in the Micro Machines
line was from licensed products such as Star Wars, Star Trek and Power Rangers.
The Company also successfully entered a new, high-growth potential category -
male action. Biker Mice From Mars, which was introduced in late 1993, generated
sales in 1994 of $41.4 million as compared to $4.3 million in 1993. In
September 1994, the Biker Mice From Mars television show went to five days per
week airing from its previous one day per week. Ratings since that time have
been lower than previously achieved and a smaller than anticipated increase in
retail sales in the U.S. market has occurred. However, demand has been
stronger in most European markets. Overall the Company achieved its 1994
worldwide Biker Mice From Mars revenue goal. As a result of consumer demand
falling short of the Company's expectations for the U.S. in 1994, the
Company has ceased all sales and marketing activities for Biker Mice from Mars
domestically in 1995. However, strong international demand for Biker Mice From
Mars is expected to continue. In 1995, the Company is expanding in the male
action category with toy product introductions for Mutant League and
Ultraforce.
In late 1994, shipments of two new products, Sky Dancers, a flying doll, and My
Pretty Dollhouse, commenced and generated sales of $3.3 million and $3.0
million, respectively. The Company believes the category of girls' toys is a
significant growth opportunity.
Game Genie sales were $4.2 million in 1994 as compared to $32.8 million in 1993.
This decrease reflected the normal maturity cycle for such products and this
trend is expected to continue.
Gross margin totaled $74.2 million in 1994, an increase of $22.7 million from
1993. This increase was due to higher sales volume and a higher gross margin
rate. The gross margin rate improved to 41.5% in 1994 from 38.3% in 1993 due
to three factors. First, the international gross margin rate was higher due to
a change in product mix. Second, the percent of U.S. sales to worldwide sales
was greater. The Company's gross margin rate on domestic sales is
significantly higher than foreign sales because foreign prices are lower as
the customer is responsible for the cost of importing and promoting the
products. Third, while tooling, packaging and other costs in the aggregate
where higher in 1994 to 1993, they were
19
lower as a percent of sales in 1994 compared to 1993.
Advertising and promotion expenses were $30.6 million in 1994 compared to $23.5
million in 1993. The higher expenses were primarily a result of an increase in
planned television advertising expense domestically in connection with the
Company's expanded product lines. Other selling and administrative expenses were
$27.0 million in 1994 compared to $25.6 million in 1993. This increase was due
mainly to incentive compensation which was reinstated based on the Company's
1994 performance. Research and development expenses were approximately equal in
1994 compared to 1993.
The $4.0 million expense in 1993 related to the variable stock option plan was
a one-time charge. See discussion below.
The Company received $12.1 million in 1994 from the litigation award against
Nintendo of America, Inc. This amount was obtained by reducing the gross award
of $16.1 million by amounts due the Company's Game Genie licensors. (See Note L
of Notes to Consolidated Financial Statements).
Interest expense in 1994 was $2.6 million compared to $1.8 million in
1993. An increase of $1.0 million was due to the 8% Convertible Subordinated
Debentures being outstanding all of 1994 compared to being outstanding for
less than 2 months in 1993. Interest was reduced by lower average borrowings
under the line of credit in 1994, although interest rates were higher. The
increase in the prime rate which occurred during 1994 is expected to result in
a higher average interest rate during 1995.
Other income was $0.4 in 1994 compared to $0.1 in 1993.
The income tax expense for 1994 includes provisions for federal, state and
foreign income taxes, after taking into account the available net operating loss
carryforwards from prior years. In 1993, the tax provision represented only
foreign income taxes as there was no taxable U.S. income. At December 31, 1994,
the Company has federal net operating loss carryforwards of approximately $11.5
million and unused federal tax credits of approximately $1.8 million available
to reduce taxes in future periods. (See Notes A and F of Notes to Consolidated
Financial Statements).
The Company's breakeven point has been substantially reduced since 1990. In
1994, the Company's earnings from operations were $9.3 million on $178.8 million
sales which was a $39.1 million improvement in earnings from operations and a
$51.9 million sales improvement in comparison to 1990 sales of $126.9 million
and loss from operations of $29.8 million. The Company's operations have been
adjusted to generate profitability from a base of continuing business and
moderate success in newly introduced products.
In management's opinion, inflation did not have a material impact on
20
the Company's business in 1994. The Company did not have any substantial price
increases in 1994 or 1993.
The toy industry is affected by changing consumer tastes, shifting cultural and
demographic trends and general economic conditions. Consequently, the Company's
results are dependent, in large part, on management's experience in the toy
industry and its ability to identify and capitalize on current trends and market
new products in a timely and efficient manner. The Company may not always be
able to anticipate changes in consumer demand or to respond quickly to such
changes once they are identified, and such inabilities could have an adverse
impact on the Company.
Historically, a relatively small number of items have contributed a large
portion of the Company's revenues in each year. An increase or decrease in
popularity of a particular item during any year could have a material impact on
revenues and profit for that year. The Company's strategy emphasizing multi-year
extendable brands is intended to mitigate adverse impacts.
The Company does not carry insurance for political, social or economic unrest or
disruptions, for several reasons including, but not limited to, costs of such
insurance and the limited insurance coverage available. The impact on the
Company from such unrest or disruptions would depend on several factors,
including, but not limited to the nature, extent and location of such unrest or
disruptions and the Company's ability to: (1) procure alternative manufacturing
sources outside of the country involved; (2) retrieve its tooling; (3) relocate
its production in sufficient time to meet demand; and (4) pass resultant product
cost increases likely to be incurred outside of the country involved through to
the Company's customers as product price increases.
The Company's products are produced principally in China which currently is
designated with "most favored nation" ("MFN") status by the United States. This
allows products imported into the United States from China to be accorded the
most favorable import duties. In late 1994, Congress approved the GATT (Uruguay
round) which allows imports into the United States of toy merchandise with
unconditional duty free entry from any nation with MFN status. Generally, the
trade negotiations between China and the United States have been difficult, but
both sides have shown their willingness to resolve trade disputes and avoid
punitive sanction. Punitive sanctions could result in the United States imposing
higher duties on selective Chinese made products imported into the United States
(these sanctions would be put in place through Section 301). In the past,
section 301 sanctions proposed by the United States did not include sanctions or
punitive duties against toy imports from China. As such, the Company would be
unaffected. The loss of MFN status for China, however, would result in a
substantial increase in duty for the Company's products produced there and
imported into the United States. This increase in duty would be large enough
that it could materially affect the Company's
21
business. Products shipped to other countries should not be affected. Other toy
companies also source product from China and would be affected to similar
degrees. However, the impact on the Company from any significant change in
duties on its Chinese produced products would depend on several factors
including, but not limited to, the Company's ability to: (1) procure alternative
manufacturing sources outside of China; (2) retrieve its tooling; (3) relocate
its production in sufficient time to meet demand; and (4) pass resultant cost
increases through as product price increases.
In 1994, certain quotas on selected Chinese produced toy products were
introduced in the European Economic Community. The quotas are not expected to
have a material impact on the Company's business in 1995 and foreseeable future.
In 1995, the Company expects its import duties to be reduced pursuant to the
new GATT agreement. The Company is aware of substantial cost pressures
concerning the price of paper used in packaging and plastic resin used in
production, and such cost pressures could result in price increases that
completely or substantially offset the import duty reductions.
1993 Compared to 1992
- ---------------------
Net revenues of $134.3 million for 1993 represented a 19% decrease from 1992
revenues. Results were adversely affected by heightened inventory controls by
retailers. Despite that environment the Company experienced sales growth in its
toy product lines which was mainly attributable to its core brands Micro
Machines. Worldwide sales in 1993 of Micro Machines which included Z-Bots
increased 55% over 1992 sales levels. Micro Machines sales increased to $54.9
million in 1993 from $45.3 million in 1992 and Z-Bots generated sales of $16.0
million in 1993.
Game Genie sales were $32.8 million in 1993 as compared to $65.3 million in
1992. This decrease reflected the normal maturity cycle for such products.
In December 1993, shipments of Biker Mice From Mars commenced and generated $4.3
million of sales. This licensed product line consists of action figures,
accessories and playsets based on the Biker Mice From Mars syndicated television
animation series which first aired in September 1993.
In 1992, Trash Bag Bunch, Baby Face, World Championship Wrestling, Lazer Pro,
Macro Machines and Magic Diaper Babies had sales of $28.5 million; these
products had significantly reduced sales in 1993 to $3.3 million. The Company
continues to introduce new products each year, such as Z-Bots, to offset the
revenue lost as a result of the discontinuation of other products.
Gross margin totaled $51.5 million in 1993, a decrease of $9.8
22
million from 1992. The decrease was due to lower sales volume. The gross margin
rate improved to 38.3% in 1993 from 36.9% in 1992 due mainly to two factors.
First, sales of discontinued products, which sold at little or no margin,
decreased as a percentage of total revenues in 1993 over 1992. Second, domestic
gross margins were higher due to a change in product mix.
Advertising and promotion expenses were $23.5 million in 1993 compared to $22.8
million in 1992. The increase was due to various sales promotions and an
increase in television origination costs.
Other selling and administrative expenses were $25.6 million in 1993 compared to
$30.3 million in 1992. This decrease was due mainly to cost reductions in
foreign operations, reduced legal fees and reduced insurance expenses.
Research and development expenses increased in 1993 to $7.5 million from $6.9
million in 1992. This increase was attributable to outside contract expense and
the expansion of the number of products being developed.
Expenses related to the variable stock option plan were approximately $4.0
million in 1993 resulting from a fourth quarter non-recurring, non-cash charge.
This charge arose from the operation and termination of the Company's 1992
Senior Executive Stock Option Plan (the "1992 Plan"), a variable stock option
plan. The sharp rise in the price of the Company's common stock during the
fourth quarter (and the corresponding decrease in the exercise price of the
options granted under the 1992 Plan) led to the non-recurring charge. Generally
accepted accounting principles ("GAAP") for variable stock option plans required
the Company to record a compensation expense accrual measured by the difference
between the market price of the common stock underlying an option and the option
exercise price as of December 31, 1993. This charge against earnings was
recorded although no compensation payments were required by the 1992 Plan or
made by the Company.
The Company believed that the application of GAAP could have resulted in large
and repeated future distortions to reported quarterly earnings of the Company,
based on fluctuations in the stock price so long as the 1992 Plan remained in
effect. Therefore, on January 26, 1994, in order to prevent the distortion of
future reported earnings of the Company, the Board of Directors ("Board")
terminated the 1992 Plan, subject to shareholder approval. The 1992 Plan was
cancelled and replaced by a new plan, subject to shareholder approval. Under the
new plan, each holder of options under the 1992 Plan was granted new options
with an option exercise price of $9.00, the trading price of the common stock of
the Company at the time of the Board actions. In connection with the termination
of the 1992 Plan, the Company recorded an accrued liability on its balance sheet
at December 31, 1993 in the amount of approximately $4.0 million and recorded a
non-recurring, non-cash charge to earnings. In addition, in
23
connection with the termination of the 1992 Plan, subject to shareholder
approval, the Board also granted 449,732 shares of common stock to compensate
such optionees for giving up their existing gain that had arisen under the 1992
Plan measured by the difference between the $9.00 market price and the option
exercise price of the 1992 Plan options at the time the 1992 Plan was
terminated. All of the above changes were approved by the shareholders on June
21, 1994. (See Note N of Notes to Consolidated Financial Statements.)
Interest expense in 1993 was $1.8 million compared to $1.6 million in 1993. The
increase was due to two factors. First, the average line of credit borrowing
were higher in 1993 as compared to 1992 and the interest rates slightly
decreased. Second, the Company incurred interest expense related to the 8%
Convertible Subordinated Debentures issued in November 1993.
Other income, net was approximately equal in 1993 and 1992.
The tax provisions recorded represent taxes accrued on income of the Company's
wholly-owned foreign subsidiary for the years ended 1993 and 1992. No U.S. tax
recovery was recorded on the loss in the years ended 1993 and 1992 due to prior
year losses. In 1993, the Company retroactively adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. The new
standard is similar to SFAS 96, which the Company had used since 1988, as SFAS
109 also requires, among other things, an asset and liability approach for
financial accounting and reporting for income taxes. Adoption of SFAS 109 did
not have a material effect on the financial statements.
Liquidity, Financial Resources and Capital Expenditures
The Company is party to a loan and security agreement (the "Loan Agreement")
with Congress Financial Corporation (Central) (the "Lender") which makes
available to the Company through March 31, 1995 a line of credit up to $30
million, with provisions to increase the line to $40 million if an acquisition
is made. Borrowing availability is determined by a formula based on qualified
assets. The current interest rate is at prime rate plus 2%; the rate will
increase by 0.25% if the increase in the credit limit occurs. In consideration
for entering into the Loan Agreement, the Company paid a $375,000 fee. The
Company has also agreed to pay periodically an unused line fee of 0.25%
and certain management fees. The Loan Agreement provides that the preferred
dividend payments may not be made without the prior consent of the Lender.
On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "New Agreement") with the Lender. The New Agreement
extends through March 31, 1997 and provides a line of credit of $40 million,
with provision to increase the line to $60 million at the option of the Company.
Borrowing availability is determined by a formula based on qualified assets.
The interest is at prime rate plus 1% (1% lower then the rate applicable to
the old Loan Agreement). In consideration for entering into the New
24
Agreement, the Company paid a $100,000 fee; additional fees will be due if the
Company exercises its option to increase the line. The Company has also agreed
to pay an unused line fee of 0.25% and certain management fees. The New
Agreement provides that the preferred dividends payments may not be made
without the prior consent of the Lender.
On November 17, 1993, the Company sold in a private placement $14 million in
principal amount of 8% Convertible Subordinated Debentures (the "8%
Debentures"), at par. The interest is to be paid semi-annually. The 8%
Debentures mature on November 30, 2000 and are convertible into shares of the
Company's common stock at $9.26, calculated based upon 115% of the average of
the Company's closing common stock price for the ten business days ended
November 12, 1993. The Company applied the net proceeds received from the 8%
Debentures to the expansion of its product lines.
On June 10, 1992, the Company announced it would not pay the July 1, 1992 $0.425
per share quarterly dividend on its Depository Shares which represent shares of
the Company's Preferred Stock. The Company has not paid the subsequent quarterly
dividends. As of January 1, 1995, the dividend was cumulatively eleven quarters
in arrears, representing a total dividend arrearage of $8.6 million. By the
terms of the Certificate of Designations for the Company's Preferred Stock, the
Company is not legally obligated to pay any such arrearage. The Company believes
that it is in its best interest not to reinstate the dividend until the Company
has generated consistent net income from operations and continuation of such
profitability can be reasonably expected. The net earnings (loss) per share
calculation includes a provision for the Preferred Stock dividends in arrears.
No common stock dividends may be paid unless all Preferred Stock dividend
payments are current. As a result of the cumulative dividend being six or more
quarters in arrears, on July 15, 1994 the holders of the Preferred Stock
exercised their right to elect two new directors.
Net cash used by operating activity during 1994 was $6.5 million (due to asset
increases more than offsetting the cash provided by net earnings) compared to
$7.4 million used in 1993. Net cash used in investing activities during 1994 was
$0.5 million (investment in new equipment) compared to $0.2 million in 1993.
Cash utilized in the Company's operating and investing activities during 1994
was principally provided by borrowings under the Loan Agreement.
Working capital was $53.2 million at December 31, 1994 compared to $30.8 at
December 31, 1993. The ratio of current assets to current liabilities was 2.4 to
1.0 at December 31, 1994 compared to 2.0 to 1.0 at December 31, 1993.
The Company had no material commitments for capital expenditures at December 31,
1994.
The Company believes that with its assets, the results of operations and the
Loan Agreement it has adequate liquidity and capital resources to meet its
current and anticipated needs.
25
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and Financial Statement
Exhibits are listed in Item 14(a) and are included herein.
Item 9. Changes in and Disagreements with Accountants and Financial
Disclosure
Not applicable.
26
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
The section entitled "Election of Directors" contained
in the Proxy Statement is hereby incorporated by
reference.
(b) Identification of Executive Officers:
See PART I of this Form 10-K.
Item 11. Executive Compensation
The section entitled "Executive Compensation" contained in the
Proxy Statement is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section entitled "Security Ownership of Management"
contained in the Proxy Statement is hereby incorporated by
reference.
Item 13. Certain Relationships and Related Transactions
The section entitled "Executive Compensation" contained in the
Proxy Statement is hereby incorporated by reference.
27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
Index to Financial Statements
The following consolidated financial statements and schedules of the Company and
its subsidiaries are included as Part II, Item 8 of this Report:
<TABLE>
<CAPTION>
(a) 1. Financial Statements Page
-------------------- ----
<S> <C>
Report of Independent Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1994 and December F-2
31, 1993
Consolidated Statements of Operations for the years ended F-3
December 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Shareholders' Equity for F-4
the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended F-5
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements F-6 to
F-25
(a) 2. Financial Statement Schedules
-----------------------------
Schedule I - Marketable Securities - Other Investments - S-1
December 31, 1994 and December 31, 1993
Schedule VIII - Valuation and
Qualifying Accounts and Reserves S-2
for the years ended December 31,
1994, 1993 and 1992
Schedule X - Supplementary Income
Statement Information for the S-3
years ended December 31, 1994, 1993
and 1992
</TABLE>
All other schedules have been omitted because they are inapplicable or not
required, or the information is included in the financial statements or notes
thereto.
(a) 3. Exhibits
28
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
2 Agreement of Merger, dated as of July 6, 1987.
(Incorporated by reference to Exhibit 2 to the
Company's Amendment No. 1 on Form 8 to the Registration
Statement on Form 8-B, filed with the Commission on
January 11, 1988 (the "Amendment No. 1 to the Form
8-B").)
3.1 Certificate of Incorporation. (Incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to the Form
8-B.)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to
Amendment No. 1 to the Form 8-B.)
4.1 Form of Certificate for Shares of Common Stock of the
Corporation. (Incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form S-3,
Registration No. 33-33640, filed with the Commission on
February 26, 1990 (the "Form S-3").)
4.2 Form of 1986 Nontransferable Stock Purchase Warrant
issued to Paul Sullivan. (Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to the Form 8-B.)
4.4 Warrant Agreement, dated as of July 7, 1988, between
the Corporation and Wells Fargo Bank and warrants
issued to Wells Fargo Bank. (Incorporated by reference
to Exhibit 4.4 to Amendment No. 3 on Form 8 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987, filed with the Commission
on August 2, 1988. (the "Amendment No. 3 to the 1987
10-K").)
</TABLE>
29
<TABLE>
<S> <C>
4.4(1) Warrant Agreement, dated as of May 4, 1990, between the
Company and Camerica Corporation. (Incorporated by
reference to Exhibit 4.4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1991, filed with the Commission on March 30, 1992
(the "1991 Form 10-K").)
4.4(2) Warrant Agreement, dated as of May 4, 1990, between the
Company and David Darling. (Incorporated by reference
to the 1991 Form 10-K.)
4.4(3) Warrant Agreement, dated as of May 4, 1990, between the
Company and Jim Darling. (Incorporated by reference to
the 1991 Form 10-K.)
4.4(4) Warrant Agreement, dated as of May 4, 1990, between the
Company and Richard Darling. (Incorporated by reference
to the 1991 Form 10-K.)
4.4(5) Warrant Agreement, dated as of February 22, 1990, by
and between the Company and Roger Kowalsky.
(Incorporated by reference to Exhibit 28 to the Form
S-3.)
4.4(6) Warrant Agreement, dated as of December 11, 1991, by
and between the Company and Shereff, Friedman, Hoffman
and Goodman. (Incorporated by reference to Exhibit
4.4(6) to the Company's Annual Report on Form 10-K for
the fiscal year end December 31, 1993, filed with the
Commission on March 31, 1994 (the "1993 Form 10-K").)
4.4(7) Warrant Agreement, dated as of November 17, 1993, by
and between the Company and Gerard Klauer Mattison &
Co., Inc. (Incorporated by reference to Exhibit 4.4(7)
to the 1993 Form 10-K.)
</TABLE>
30
<TABLE>
<S> <C>
4.5 Form of Certificate of Designations of the Company's
$17.00 Convertible Exchangeable Preferred Stock.
(Incorporated by reference to Exhibit 4 to the
Company's Registration Statement on Form 8-A, filed
with the Commission on October 6, 1989 (the "October 6,
1989 Form 8-A").)
4.5(1) Form of Certificate of Designations of the Company's
Series A Preferred Stock (Incorporated by reference to
Exhibit 2.2 to the Company's Registration Statement on
Form 8-A, filed with the Commission on January 23, 1990
(the "January 23, 1990 Form 8-A").
4.6 Form of Indenture with respect to the Company's 8-1/2%
Convertible Subordinated Debentures due October 1,
2014, between the Company and Manufacturers Hanover
Trust Company as Trustee, including form of Convertible
Debenture. (Incorporated by reference to Exhibit 5 to
the October 6, 1989 Form 8-A).
4.7 Form of Indenture with respect to the Company's
Subordinated Debentures due October 1, 2014, between
the Company and Manufacturers Hanover Trust Company as
Trustee, including form of Debenture. (Incorporated by
reference to Exhibit 6 to the October 6, 1989 Form
8-A).
4.8 Form of Indenture with respect to the Company's 8-1/2%
Senior Subordinated Notes, between the Company and
Continental Stock Transfer & Trust Company, as Trustee,
including form of Note. (Incorporated by reference to
Exhibit 7 to the October 6, 1989 Form 8-A).
4.9 Form of Deposit Agreement between the Company and
Manufacturers Hanover Trust Company of California as
Depositary, including form of Depositary Receipt.
(Incorporated by reference to Exhibit 8 to the October
6, 1989 Form 8-A).
</TABLE>
31
<TABLE>
<S> <C>
4.10 Form of Rights Agreement, dated as of January 17, 1990,
between the Company and Mellon Securities Trust
Company. (Incorporated by Reference to Exhibit 2.1 to
the January 23, 1990 Form 8-A).
4.11 Indenture, with respect to the Company's 8% Convertible
Subordinated Debentures due year 2000, between the
Company and Continental Stock Transfer & Trust Company,
as Trustee, including form of Debenture Note.
(Incorporated by reference to Exhibit 4.11 to the 1993
Form 10-K)
10.1* 1984 Employee Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 4 to the
Corporation's Registration Statement on Form S-8,
Registration No. 33-9393, filed with the Commission on
September 2, 1987 (the "1987 Form S-8").)
10.1(1)* 1992 Senior Management Stock Option Plan. (Incorporated
by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-8, Registration No.
33-56004, filed with the Commission on December 18,
1992 (the "1992 Form S-8").)
10.1(2)* Amended and Restated 1984 Employee Stock Option Plan
(Incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-8, Registration
Statement No. 33-56585, filed with the Commission on
November 23, 1994.)
10.1(3)* 1994 Senior Management Stock Option Plan. (Incorporated by
reference to Exhibit 4.6 of the Company's Registration Statement
on Form S-8, Registration Statement No. 33-56587, filed with the
Commission on November 23, 1994.)
10.1(4)(a)* Form of Agreement between each of Mark Goldman, William
Catron, Lou Novak, Gary Niles, Mark Shepherd, Ronald
Hirschfeld and H. Alan Gaudie and the Corporation.
(Incorporated by reference to Exhibit 4.6 of the Company's
Registration Statement on Form S-8, Registration Statement No.
33-56589, filed with the Commission on November 23, 1994.)
10.1(4)(b)* Form of Amendment No. 1 between each of Mark Goldman,
William Catron, Lou Novak, Gary Niles, Mark Shepherd,
Ronald Hirschfeld and H. Alan Gaudie and the
Corporation.
10.2* Profit Sharing Plan. (Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on
Form S-1, Registration No. 33-6743, filed with the
Commission on August 12, 1986 (the "1986 Registration
Statement").)
</TABLE>
32
<TABLE>
<S> <C>
10.4(7)* Agreement, dated October 27, 1994, between Mark Goldman
and the Company.
10.4(10)* Agreement, dated as of December 11, 1991, by and
between Martin Nussbaum and the Company. (Incorporated
by reference to Exhibit 10.4(10) to the 1991 Form
10-K.)
10.4(11)(a)* Agreement, dated July 15, 1993, between William G.
Catron and the Company. (Incorporated by reference to
Exhibit 10.4 (11) (a) to the 1993 Form 10-K)
10.4(11)(b)* Agreement, dated July 15, 1993, between Lou Novak and
the Company. (Incorporated by reference to Exhibit 10.4
(11) (b) to the 1993 Form 10-K)
10.4(11)(c)* Agreement, dated July 15, 1993, between Ronald
Hirschfeld and the Company. (Incorporated by reference
to Exhibit 10.4 (11) (c) to the 1993 Form 10-K)
10.4(11)(d)* Agreement, dated July 15, 1993, between Gary Niles and
the Company. (Incorporated by reference to Exhibit 10.4
(11) (d) to the 1993 Form 10-K)
10.4(11)(e)* Agreement, dated March 29, 1994, between Loren
Hildebrand and the Company.
10.4(11)(f)* Agreement, dated February 27, 1995, between William B.
Towne and the Company.
10.7(3) Second Amended and Restated Credit Agreement dated as
of March 31, 1992 among the Company, Bank of America
National Trust and Savings Association and other
signatory thereto. (Incorporated by reference to
Exhibit 10.7(3) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992, filed
with the Commission on March 31, 1993 (the "1992 Form
10-K")).
</TABLE>
33
<TABLE>
<S> <C>
10.7(4) Amendments dated November 1, 1992 and February 17, 1993
to the Second Amended and Restated Credit Agreement
dated as of March 31, 1992. (Incorporated by reference
to Exhibit 10.7(4) to the 1992 Form 10-K.)
10.7(5) Securities Purchase Agreement, dated November 17, 1993,
by and among the Company and the purchasers executing
signature pages thereto (the "Purchasers").
(Incorporated by reference to Exhibit 10.7 (5) to the
1993 Form 10-K)
10.7(6) Registration Rights Agreement, dated as of November 17,
1993, by and among the Company and the Purchasers.
(Incorporated by reference to Exhibit 10.7 (6) to the
1993 Form 10-K)
10.7(7) Loan and Security Agreement, dated as of April 1, 1993,
by and among the Company and Congress Financial
Corporation (Central), including form of Revolving Loan
Note. (Incorporated by reference to Exhibit 10.7 (7) to
the 1993 Form 10-K)
10.7(7)(a) First Amendment to Loan and Security Agreement, dated
as of November 17, 1993. (Incorporated by reference to
Exhibit 10.7 (7) (a) to the 1993 Form 10-K)
10.7(7)(b) Amended and Restated Loan and Security Agreement, dated
as of March 31, 1995, by and among the Company and
Congress Financial Corporation (Central).
10.9(3) License Agreement, dated June 16, 1986, by and
between Funmaker as Licensor and the Company as
Licensee. (Incorporated by reference to Exhibit
10.10(5) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1986, filed
with the Commission on March 31, 1987 ("1986 Form
10-K").)
10.9(4) License Agreement, dated May 4, 1990, by and among the
Company as Licensee, Codemasters Software Company, Ltd.
and Camerica Corporation, Limited. (Incorporated by
reference to Exhibit 10.9(4) of the 1992 Form 10-K.)
</TABLE>
34
<TABLE>
<S> <C>
10.9(4)(a) Amendment No. 1 dated June 1991 to License Agreement
dated May 4, 1990. (Incorporated by reference to
Exhibit 10.9(4) (a) of the 1992 Form 10-K.)
10.9(4)(b) Amendment No. 2 dated December 23, 1991 to License
Agreement, dated May 4, 1990. (Incorporated by
reference to Exhibit 10.9(5) (b) of the 1992 Form
10-K.)
10.9(5) European License Agreement, dated December 23, 1991, by
and between the Codemasters Software Company, Ltd. and
the Company as Licensee. (Incorporated by reference to
Exhibit 10.9(5) of the 1992 Form 10-K.)
10.9(6) Third Amendment to United States License and First
Amendment to European License, dated November 4, 1992.
(Incorporated by reference to Exhibit 10.9(6) of the
1992 Form 10-K.)
10.9(7) Fourth Amendment to United States License Agreement,
dated October 14, 1994.
10.10 Agreement of Purchase and Sale, dated October 22, 1986,
by and between ATC Building Company as Seller and the
Company as Buyer. (Incorporated by reference to Exhibit
10.11 to the 1986 Form 10-K.)
10.12 Lease Agreement, dated March 12, 1987, by and between
Lincoln Alvarado and Patrician Associates, Inc. as
Lessor and the Company as Lessee. (Incorporated by
reference to Exhibit 10.12 to Amendment No. 1 to the
Form 8-B.)
10.12(1) Amendment No. 1 to Lease dated March 12, 1987.
(Incorporated by reference to Exhibit 10.12(1) to the
1991 Form 10-K.)
11 Computations of Earnings Per Share.
12 Computation of ratio of earnings to fixed charges and
preferred stock dividends.
22 Subsidiaries of the Company.
</TABLE>
35
<TABLE>
<S> <C>
24.1 Consent of Price Waterhouse.
27 Financial Data Schedules
</TABLE>
*Management contracts, compensatory plans and arrangements required to be filed
as an exhibit pursuant to Item 14(c) of this Report.
(b) Reports on Form 8-K
No Report on Form 8-K has been filed during the last quarter of the period
covered by this Report.
36
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LEWIS GALOOB TOYS, INC.
(Registrant)
By: /s/ Mark D. Goldman
--------------------
Mark D. Goldman
President, Chief Executive
Officer
Dated: March 29, 1995
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Mark D. Goldman President, Chief March 29, 1995
- ----------------------- Executive Officer and
Mark D. Goldman Director
/s/ Scott R. Heldfond Director March 29, 1995
- -----------------------
Scott R. Heldfond
/s/ Paul A. Gliebe, Jr. Director March 29, 1995
- -----------------------
Paul A. Gliebe, Jr.
/s/ Martin Nussbaum Director March 29, 1995
- -----------------------
Martin Nussbaum
/s/ S. Lee Kling Director March 29, 1995
- -----------------------
S. Lee Kling
/s/ Andrew Cavanaugh Director March 29, 1995
- -----------------------
Andrew Cavanaugh
/s/ Roger Kowalsky Director March 29, 1995
- -----------------------
Roger Kowalsky
/s/ George Riordan Director March 29, 1995
- -----------------------
George Riordan
/s/ Hoffer Kaback Director March 29, 1995
- -----------------------
Hoffer Kaback
/s/ William B. Towne Executive Vice March 29, 1995
- ----------------------- President, Finance
William B. Towne and Chief Financial Officer
</TABLE>
37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Lewis Galoob Toys, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 28 present fairly, in all material
respects, the financial position of Lewis Galoob Toys, Inc. and its subsidiaries
at December 31, 1994 and 1993, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
February 10, 1995
F-1
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31
-----------------------
1994 1993
-------- -------
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,225 $ 2,325
Accounts receivable, net 57,883 33,383
Inventories 16,824 12,979
Tooling and related costs 8,379 5,020
Prepaid expenses and other assets 5,492 7,341
-------- -------
TOTAL CURRENT ASSETS 90,803 61,048
LAND, BUILDING AND EQUIPMENT, NET 8,400 8,562
OTHER ASSETS 1,563 1,395
-------- -------
$100,766 $71,005
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable $ 6,971 $ -
Accounts payable 14,973 10,834
Accrued expenses 14,939 18,916
Income taxes payable 499 282
Current portion of long-term debt 202 203
-------- -------
TOTAL CURRENT LIABILITIES 37,584 30,235
LONG-TERM DEBT 18,414 18,608
SHAREHOLDERS' EQUITY:
Preferred stock
Authorized 1,000,000 shares
Issued and outstanding 183,950 shares of $17
Convertible Exchangeable Preferred Stock at
$200 liquidation value per share 36,790 36,790
Common stock, par value $.01 per share
Authorized 50,000,000 shares
Issued and outstanding 10,055,089 shares
in 1994 and 9,559,357 shares in 1993 101 96
Additional paid-in capital 31,506 27,293
Retained earnings (deficit) (23,182) (41,596)
Cumulative translation adjustment (447) (421)
-------- -------
TOTAL SHAREHOLDERS' EQUITY 44,768 22,162
-------- -------
$100,766 $71,005
======== =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-2
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net revenues $178,792 $134,334 $166,280
Costs of products sold 104,592 82,875 104,965
-------- -------- --------
Gross margin 74,200 51,459 61,315
-------- -------- --------
Operating expenses:
Advertising and promotion 30,616 23,537 22,826
Other selling and administrative 26,974 25,640 30,345
Research and development 7,288 7,451 6,861
Variable stock option plan expense - 4,046 -
-------- -------- --------
Total operating expenses 64,878 60,674 60,032
-------- -------- --------
Earnings (loss) from operations 9,322 (9,215) 1,283
Expenses related to resignation of former
officers - - (2,152)
Net proceeds from Nintendo award 12,124 - -
Interest expense (2,609) (1,836) (1,550)
Other income, net 365 136 210
-------- -------- --------
Earnings (loss) before income taxes 19,202 (10,915) (2,209)
Provision for income taxes 778 9 238
-------- -------- --------
Net earnings (loss) 18,424 (10,924) (2,447)
Preferred stock dividends paid - - 782
-------- -------- --------
Net earnings (loss) after dividends
paid 18,424 (10,924) (3,229)
Preferred stock dividends in arrears 3,127 3,127 2,345
-------- -------- --------
Net earnings (loss) applicable to
common shares $ 15,297 $(14,051) $ (5,574)
======== ======== ========
Common shares and common share
equivalents outstanding - average 10,111 9,548 9,400
Net earnings (loss) per common share:
Primary $ 1.51 $ (1.47) $ (.59)
Fully Diluted 1.41 (1.47) (.59)
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
<TABLE>
<CAPTION>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
(in thousands, except shares)
Additional Retained Cumulative
Preferred Stock Common Stock Paid-In Earnings Translation
Shares Amts Shares Amts Capital (Deficit) Adjustment Total
------ ---- ------ ---- ------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 12/31/91 183,950 36,790 9,365,441 94 26,005 (27,411) (386) 35,092
Net loss - - - - - (2,447) - (2,447)
Common stock issued - - 106,616 1 420 - - 421
Dividends declared
on preferred stock - - - - - (782) - (782)
Cumulative translation adj.
and other - - - - - (12) (26) (38)
------- ------ --------- --- ------ ------- ---- ------
Balance at 12/31/92 183,950 36,790 9,472,057 95 26,425 (30,652) (412) 32,246
Net loss - - - - - (10,924) - (10,924)
Common stock issued - - 89,800 1 343 - - 344
Warrants issued - - - - 525 - - 525
Common stock received in
exchange for shares
issued and cancelled - - (2,500) - - (20) - (20)
Cumulative translation adj.
and other - - - - - - (9) (9)
------- ------- ---------- --- ------- -------- ----- -------
Balance at 12/31/93 183,950 $36,790 9,559,357 $96 $27,293 $(41,596) $(421) $22,162
Net earnings - - - - - 18,424 - 18,424
Common stock issued, net - - 47,000 1 161 - - 162
Termination of 1992 Plan - - 449,732 4 4,042 - - 4,046
Common stock received in
exchange for shares
issued and cancelled - - (1,000) - 10 (10) - -
Cumulative translation adj.
and other - - - - - - (26) (26)
------- ------- ---------- ---- ------- -------- ----- -------
Balance at 12/31/94 183,950 $36,790 10,055,089 $101 $31,506 $(23,182) $(447) $44,768
======= ======= ========== ==== ======= ======== ===== =======
The accompanying notes are an integral part of these Consolidated Financial Statements.
</TABLE>
F-4
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------
1994 1993 1992
---- ---- ----
<S> <S> <S> <S>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 18,424 $ (10,924) $ (2,447)
Adjustments to reconcile net earnings
(loss) to net cash used in
operating activities:
Depreciation 628 682 885
Variable stock option plan accrual - 4,046 -
Changes in assets and liabilities:
Accounts receivable (24,500) 2,523 (10,465)
Inventories (3,845) 691 (4,152)
Tooling and related costs (3,359) (2,212) 134
Prepaid expenses and other assets 1,681 (152) (689)
Accounts payable 4,140 1,449 4,375
Accrued expenses 67 (3,002) 699
Income taxes payable 217 (549) (113)
Other - - 318
------- ------- --------
Net cash used in operating activities (6,547) (7,448) (11,455)
------- ------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and
equipment, net (466) (82) (114)
Repayment of loan due from officer - - 1,116
------- ------- --------
Net cash (used in) provided by
investing activities (466) (82) 1,002
------- ------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
notes payable 6,971 (5,698) 5,698
Borrowings under long-term debt
agreement - 14,000 -
Repayments under long-term debt agreements (194) (191) (225)
Dividends declared on preferred stock - - (782)
Proceeds from issuance of common stock 383 344 421
Repurchase of Common Stock (221) - -
Other, net (26) (29) (38)
------- ------- --------
Net cash provided by (used in)
financing activities 6,913 8,426 5,074
------- ------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (100) 896 (5,379)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,325 1,429 6,808
------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,225 $ 2,325 $ 1,429
======= ======== ========
Supplemental disclosure of non-cash activity:
In 1992, in connection with issuance of 8% Convertible Subordinated
Debentures the Company issued warrants for 150,000 shares of common
stock which were valued at $525,000.
In 1994, The Company issued 449,732 shares of common stock in connection
with the termination of the 1992 Senior Management Stock Option Plan.
(See Note N)
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,656 $ 1,604 $ 1,387
Cash paid for income taxes $ 822 $ 574 $ 228
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
NOTE A - Summary of Significant Accounting Policies
Organization and Business
The Company has been engaged in business since 1957 and was originally
incorporated in California on November 6, 1968, and reincorporated in Delaware
on August 28, 1987. The Company is engaged in the design, development, marketing
and distribution of high quality toys worldwide. The Company's products are
primarily manufactured in the People's Republic of China ("China").
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, principally Galco International Toys, N.V. ("Galco"). All
significant intercompany accounts have been eliminated in consolidation. Certain
amounts in the financial statements of prior years have been reclassified to
conform with the current year's presentation.
Revenue Recognition
The Company records a transaction as a sale when inventory is shipped to the
customer and title passes. The Company provides for returns using a percentage
of gross sales, based on historical experience.
Foreign Currency Translation
The financial statements of Galco have been translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
Foreign Currency Translation. All asset and liability accounts have been
translated using rates of exchange in effect at the balance sheet date.
Revenues and expenses are translated at the weighted average of exchange rates
in effect during the year. Gains or losses from foreign currency translation
adjustments are charged or credited directly to a separate component of
shareholders' equity.
F-6
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Cash and Cash Equivalents
Cash equivalents consist primarily of marketable securities with original
maturities of less than ninety days. Cash and cash equivalents are stated at
cost, which approximates market values.
Concentration of Credit Risk
Accounts receivable primarily represent balances due from customers. The Company
performs credit evaluations of each of its customers and maintains allowances
for potential credit losses. Such losses have generally been within management's
expectations.
Inventories
Inventories are stated at lower of cost (first-in, first-out) or market.
Tooling and Related Costs
Costs incurred for tooling and package design are deferred and amortized over
the life of the products, which range from one to two years.
Prepaid Expenses
Prepaid expenses include costs such as those incurred in the creation of
television commercials which are deferred and amortized over their lives which
is estimated to be one year or the period the commercial is used, if shorter. On
January 1, 1995, the company implemented SOP 93-7 "Reporting on Advertising
Costs." Implementation of the new standard will have no material impact on the
financial statements. Prepaid expenses also include prepaid insurance, prepaid
samples, prepaid advertising media, and royalty advances.
Land, Building and Equipment
Land, building and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets. Amortization of leasehold improvements is provided using the
straight-line method over the estimated useful lives of the assets, or the term
of the applicable lease, whichever is less. Estimated useful lives are 35 years
for building and building improvements, 1 to 12 years for leasehold
improvements, 5 years for office furniture, fixtures and equipment, (including
computer equipment), and 3 to 6 years for vehicles.
F-7
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Income Taxes
In 1993, the Company retroactively adopted Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. SFAS 109 prescribes
an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactments of changes in the tax law or rates.
Previously, the Company used the SFAS 96 asset and liability approach that gave
no recognition to future events other than the recovery of assets and settlement
of liabilities at their carrying amounts. Adoption of SFAS 109 did not have a
material effect on the financial statements.
Earnings Per Share
Primary earnings per share is based on the net earnings (loss) applicable to
common shares, after providing for the dividends in arrears on the preferred
stock, for the year divided by the weighted average number of common and common
equivalent shares outstanding. Primary earnings per share for the year ended
December 31, 1994, have been adjusted by common equivalent shares resulting from
the assumed exercise of common stock options and stock warrants. Primary
earnings per share for the years ended December 31, 1993 and 1992 have not been
adjusted by common equivalent shares since the effect would be anti-dilutive.
Fully diluted earnings per share for the year ended December 31, 1994 includes
the effect of the assumed conversion of the $17 Convertible Exchangeable
Preferred Stock and the 8% Convertible Subordinated Debentures into common
stock. Fully diluted earnings per share for the years ended December 31, 1993
and 1992 were the same as primary earnings per share since the effect of the
assumed conversion is anti-dilutive.
F-8
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
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE D - Land, Building and Equipment, Net
<TABLE>
<CAPTION>
(in thousands)
December 31
-----------------------
1994 1993
------- -------
<S> <C> <C>
Land and building $ 9,564 $ 9,402
Office furniture, fixtures and equipment 4,360 4,310
Leasehold improvements 787 787
Vehicles 104 161
------- -------
14,815 14,660
Less accumulated depreciation 6,415 6,098
------- -------
$ 8,400 $ 8,562
======= =======
</TABLE>
NOTE E - Notes Payable
The Company is party to a loan and security agreement (the "Loan Agreement")
with Congress Financial Corporation (Central) (the "Lender") which makes
available to the Company through March 31, 1995 a line of credit up to $30
million, with provisions to increase the line to $40 million if an acquisition
is made. Borrowing availability is determined by a formula based on qualified
assets. The current interest rate is at prime rate plus 2%; the rate will
increase by 0.25% if the increase in the credit occurs. In consideration for
entering into the Loan Agreement, the Company paid a $375,000 fee. The deferred
loan fee is included in other assets and is being amortized using a
straight-line method over the term of the loan. The Company has also agreed to
pay an unused line fee of 0.25% and certain management fees. The Loan Agreement
provides that the preferred dividend payments may not be made without the prior
consent of the Lender.
The Company has entered into a new agreement which increases and extends the
line of credit through March 31, 1997 and reduces the rate of interest. (See
Note Q for a description of the new agreement).
F-10
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The maximum outstanding borrowings, average outstanding balances and weighted
average rates of interest for notes payable were as follows:
<TABLE>
<CAPTION>
(in thousands)
1994 1993
---- ----
<S> <C> <C>
Maximum outstanding at month end $18,209 $18,663
Average outstanding amount during the year 4,184 7,322
Weighted average interest rate for the year 9.7% 8.1%
</TABLE>
NOTE F - Income Taxes
Earnings (loss) before income taxes and the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
(in thousands)
Years ended December 31
-----------------------------------------
1994 1993 1992
<S> <C> <C> <C>
Earnings (loss) before income taxes:
Domestic $18,861 $(10,806) $(5,346)
Foreign 341 (109) 3,137
------- -------- -------
$19,202 $(10,915) $(2,209)
======= ======== =======
Provision for income taxes:
Current:
Federal $ 490 $ - $ -
State 201 - -
Foreign 87 9 238
------- -------- -------
778 9 238
Deferred:
Federal - - -
State - - -
Foreign - - -
------- -------- --------
$ 778 $ 9 $ 238
======= ======== ========
</TABLE>
F-11
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Deferred tax liabilities (assets) consist of the following:
<TABLE>
<CAPTION>
(in thousands)
Years Ended December 31
--------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Prepaid expenses $ 1,586 $ 2,065 $ 1,697
Other temporary differences 705 647 624
------- ------- -------
Gross deferred tax liabilities 2,291 2,712 2,321
------- ------- -------
Accrued expenses (939) (1,377) (1,980)
Defectives provision (315) (560) (1,020)
Other temporary differences (2,970) (1,936) (1,542)
Net operating loss carryforwards (4,037) (11,128) (8,519)
Research and development tax credit
carryforward (765) (765) (765)
Other (944) (765) (666)
------- ------- -------
Gross deferred tax assets (9,970) (16,531) (14,492)
------- ------- -------
Deferred tax assets valuation
allowance 7,679 13,819 12,171
------- ------- -------
$ - $ - $ -
======= ======= =======
</TABLE>
The net change in the valuation allowance for deferred tax assets was an
increase (decrease) of ($6,140,000), $1,648,000 and $2,589,000 in 1994, 1993 and
1992, respectively.
F-12
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
The provision for income taxes differs from the provisions determined by
applying the applicable U.S. statutory federal income tax rates to pretax income
as a result of the following differences:
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------
1994 1993 1992
<S> <C> <C> <C>
Federal income taxes (benefit) at
the U.S. statutory rate 35.0% (34.0%) (34.0%)
Increase (decrease) in income taxes resulting from:
Effects of U.S. and foreign income
taxes on foreign operations (0.2) 0.1 10.8
State income taxes, net of loss 0.9 - -
carryfowards, less federal tax
benefits
Loss carryback/carryforward (31.6) 34.0 34.0
------ ----- -----
4.1% 0.1% 10.8%
====== ===== =====
</TABLE>
During 1993, the Company settled with the Internal Revenue Service (IRS) and the
California Franchise Tax Board (CFTB) regarding audits of the years 1982 through
1990 for federal purposes and 1983 through 1989 for California purposes. The
Company adequately provided for the amounts settled with the IRS and the CFTB.
At December 31, 1994, the Company had federal and California net operating loss
carryforwards for income tax purposes of approximately $11,500,000 and
$1,000,000, respectively. The federal and California carryforwards expire in
different years through the year 2008 and 1998, respectively. The Company also
has federal minimum tax credit carryforwards of $944,000 that are allowed to be
carried forward indefinitely and federal research and development credits of
$765,000, which will expire in different years through the year 2003. If certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of operating loss carryforwards which can be
utilized.
No domestic deferred taxes have been provided on unremitted earnings of the
foreign subsidiary. All such earnings are expected to be reinvested in the
subsidiary. Undistributed earnings for which the Company has not provided taxes,
which may be payable on distribution, were approximately $5,500,000 as of
December 31, 1994. No foreign taxes will be withheld on the distribution of the
untaxed earnings.
F-13
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE G - Leases
The Company leases its domestic warehouse and showroom facilities, and its
facilities in Hong Kong. The leases have been classified as operating leases and
are for terms expiring at various dates through 1998. Under the terms of the
facility leases, rents are adjusted annually for changes in the consumer price
index and increases in property taxes. The Company has a lease option on the
domestic warehouse to renew for one five year term.
Future minimum lease payments for all noncancellable operating leases as of
December 31, 1994 (in thousands), are as follows:
<TABLE>
<CAPTION>
Years ending
December 31
<S> <C>
1995 $1,452
1996 695
1997 239
1998 49
------
$2,435
======
</TABLE>
Net rental expense for the years ended December 31, 1994, 1993 and 1992 was
$1,515,000, $1,449,000 and $1,839,000, respectively.
NOTE H - Accrued Expenses
<TABLE>
<CAPTION>
(in thousands)
December 31
----------------------
1994 1993
---- ----
<S> <C> <C>
Accrued advertising $ 272 $ 2,582
Accrued royalties 6,039 4,709
Accrued expense related to variable stock
option plan - 4,046
Accrued compensation and commissions 3,875 745
Accrued freight and duty 1,483 1,527
Accrued interest 1,108 1,296
Accrued purchase commitments 1,320 1,900
Other accrued expenses 842 2,111
------- -------
14,939 $18,916
======= =======
</TABLE>
F-14
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
In 1993, the United States Customs Service ("Customs") completed the on-site
audit of duty due on importations of goods into the United States during 1988
through 1991. Customs has issued to the Company a notice stating that it is
contemplating the formal issuance of a demand claim wherein it would set forth
the amount they seek to recover. Management believes the recorded provisions at
December 31, 1994 are adequate to cover the final settlement.
NOTE I - Long-Term Debt
<TABLE>
<CAPTION>
(in thousands)
December 31
-----------------------
1994 1993
---- ----
<S> <C> <C>
8% Convertible Subordinated Debentures due and
payable on November 30, 2000,
interest paid semi-annually $14,000 $14,000
Mortgage secured by headquarters land and
building, payable in monthly installments of $55,314 (principal and interest)
through November 30, 1996 when the remaining outstanding
balance is due, interest rate 10.3% 4,616 4,783
Other - 28
------- -------
18,616 18,811
Current portion 202 203
------- -------
$18,414 $18,608
======= =======
</TABLE>
Payments of principal for the years 1995 and 1996 are $202,000 and $4,414,000,
respectively, with $14,000,000 due in the year 2000.
On November 17, 1993, the Company issued in a private placement $14 million in
principal amount of 8% Convertible Subordinated Debentures (the "8%
Debentures"), at par. The interest is to be paid semi-annually. The 8%
Debentures mature on November 30, 2000 and are convertible into shares of the
Company's common stock at $9.26 calculated based upon 115% of the average of the
Company's closing common stock price for the ten business days ending November
12, 1993. In connection with the 8% Debentures, the Company paid a commission to
its investment bankers of $560,000 and issued warrants for 150,000 shares, which
were valued at $525,000 and recorded as additional paid-in capital. These
deferred loan costs are included in other assets and are amortized using a
straight-line method over the term of the loan.
F-15
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE J - Major Customers
The Company had transactions with one customer, Toys "R" Us, Inc. that accounted
for approximately 21% of net revenues in 1994, 1993 and 1992, respectively.
NOTE K - Profit Sharing Plan
The Company has a 401(k) profit sharing plan covering all non-union full-time
employees. The plan is qualified under Section 401 (a) of the Internal Revenue
Code so that contributions to the plan by the Company are not taxable until
distributed to employees. Contributions under the plan are at the discretion of
the Board of Directors and are subject to the amounts allowable under applicable
provisions of the Internal Revenue Code. No Company contributions have been made
in 1994, 1993 or 1992.
NOTE L - Litigation
On May 17, 1990, the Company filed a complaint against Nintendo of America, Inc.
("Nintendo") seeking a declaratory judgment and injunctive relief in the United
States District Court, Northern District of California (the "District Court").
This complaint sought confirmation of the Company's right to market, distribute
and sell its Game Genie product. On June 1, 1990, Nintendo filed a complaint in
the same District Court alleging copyright and trademark infringement and
seeking a preliminary and permanent injunction and unspecified damages.
On July 3, 1991, the District Court reversed an earlier preliminary injunction
against the Company and ruled that the sale of Game Genie products against the
Company and ruled that the sale of Game Genie products did not infringe on
Nintendo's copyrights. Nintendo appealed this ruling through the Ninth Circuit
Court of Appeals (the "Appeals Court") and ultimately filed a petition of a Writ
of Certiorari with the United States Supreme Court. On March 22, 1993, the
Supreme Court rejected Nintendo's petition and, in essence, affirmed the
District Court ruling.
Separately, the Company pursued recovery of damages from Nintendo that resulted
from the original issuance of the preliminary injunction. On July 6, 1992, the
District Court awarded the Company a $15 million damage judgment against
Nintendo, which was the maximum amount that could be awarded in light of the $15
million bond that Nintendo had been required to post in the proceedings.
Nintendo appealed this damage award, and on February
F-16
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
17, 1994 the Appeals Court unanimously affirmed the District Court's ruling.
Subsequently, the Appeals Court rejected an additional Nintendo petition on
March 21, 1994.
On April 11, 1994, Nintendo paid the Company $16.1 million representing the full
damage award plus interest and related costs. The Company retained approximately
$12.1 million of this amount, and the Company's Game Genie licensors were paid
the remaining $4.0 million. Notwithstanding such payment, on June 20, 1994,
Nintendo filed a petition for a Writ of Certiorari with the United Sates Supreme
Court, which asked the Supreme Court to review the damage award on a
discretionary basis. On October 3, 1994, the Supreme Court rejected Nintendo's
petition and affirmed Galoob's right to the full damage award. There is no
further basis for appeal by Nintendo.
Nintendo's original trademark claim and the Company's original anti-trust
cross-claim against Nintendo were severed from the copyright claims that were
adjudicated on July 3, 1991. On January 18, 1995 these claims were dismissed
with prejudice by Nintendo and Galoob respectively. The Nintendo Game Genie
infringement lawsuit is now complete.
The Company is involved in various other litigation and legal matters which are
being defended and handled in the ordinary course of business. None of these
matters is expected to result in outcomes having a material adverse effect on
the Company's consolidated financial position.
F-17
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE M - Shareholders' Equity
In 1989, the Company issued 183,950 authorized shares of $17 Convertible
Exchangeable Preferred Stock with a $200 liquidation value (the "Preferred
Stock") and deposited them with a U.S. Bank (the Depositary) and sold in a
public offering an aggregate of 1,839,500 Depositary Convertible Exchangeable
Preferred Shares (the "Depositary Shares") at a price of $20 per share. Each
Depositary Share represents 1/10th share of Preferred Stock and has a cumulative
dividend rate of $1.70 per annum, payable quarterly, and may be converted into
common stock at the option of the holders at an initial price of $16.875 per
share of common stock.
The Depositary Shares are redeemable in whole or in part at any time, at the
option of the Company, at redemption prices ranging from $21.36 to $20.00 plus
dividends accrued and unpaid to the redemption date; provided certain redemption
requirements are met which are based on the market price of the Company's common
stock.
The entire issue of Depositary Shares (in multiples of ten) and the entire issue
of Preferred Stock is exchangeable, at the option of the Company, on any
dividend payment date for the Company's 8-1/2% Convertible Subordinated
Debentures due October 1, 2014 (the "8-1/2% Debentures") at the rate of $20.00
principal amount of 8-1/2% Debentures for each Depositary Share. At any time
following the occurrence of certain change in control transactions, each holder
of Depositary Shares, the Preferred Stock, or of 8-1/2% Debentures, as the case
may be, has the right to cause the Company to exchange the Depositary Shares (in
multiples of ten), the Preferred Stock or the 8-1/2% Debentures, as the case may
be, for the Company's Subordinated Debentures due October 1, 2014 (the "Reset
Debentures").
F-18
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
As long as the Preferred Stock, the 8-1/2% Debentures, or the Reset Debentures
are outstanding, the Company will be subject to limitations on the payment of
certain common stock dividends and other distributions and on the purchase,
redemption, or other acquisition of capital stock. No common stock dividends may
be paid unless the Preferred Stock dividends are current. The Company has
reserved 2,180,148 shares of common stock for the conversion of the Preferred
Stock.
On June 10, 1992, the Company announced it would not pay the July 1, 1992 $ .425
per share quarterly dividend on its Depository Shares which represent shares of
the Company's Preferred Stock. The Company has not paid the subsequent quarterly
dividends. As of January 1, 1995, the dividend was cumulatively eleven quarters
in arrears, representing a total dividend arrearage of $8.6 million. By the
terms of the Certificate of Designations for the Company's Preferred Stock, the
Company is not legally obligated to pay any such arrearage. The Company believes
that it is in its best interest not to reinstate the dividend until the Company
has generated consistent net income from operations and continuation of such
profitability can be reasonably expected. The net earnings (loss) per share
calculation includes a provision for the Preferred Stock dividends in arrears.
No common stock dividends may be paid unless all Preferred Stock dividend
payments are current. As a result of the cumulative dividend being six or more
quarters in arrears, on July 15, 1994, the holders of the Preferred Stock
exercised their right to elect two new directors.
In 1990, the Company adopted a Stockholder Rights Plan and declared a dividend
distribution of one Right for each outstanding share of common stock. Each Right
will entitle holders of the Company's common stock to buy one one-thousandth of
a share of Series A Preferred Stock of the Company at an exercise price of
$43.00, subject to adjustment. The Rights will be exercisable only if a person
or group acquires beneficial ownership of 20% or more of the common stock (other
than pursuant to certain transactions involving the Company) (an "Acquiring
Person") or announces a tender or exchange offer that would result in such
person or group beneficially owning 20% or more of the common stock (other than
a tender or exchange offer for all outstanding shares at a price determined by
the non-affiliated directors to be fair).
If any person becomes the beneficial owner of 20% or more of the common stock
(other than pursuant to certain transactions involving the Company or a tender
or exchange offer for all outstanding shares at a price determined by the
non-affiliated directors to be fair), or an Acquiring Person engages in certain
"self-dealing"
F-19
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
transactions including a merger in which the Company is the surviving
corporation, each Right not owned by such Acquiring Person will enable its
holder to purchase, at the Right's then-current exercise price, shares of the
common stock (or, in certain circumstances, cash, property or other securities
of the Company) having a value of twice the Right's exercise price. In addition,
if the Company is acquired in a merger or other business combination transaction
in which the Company is not the surviving corporation, or if the Company sells
or transfers 50% or more of its assets or earning power, each Right not owned by
such Acquiring Person will entitle its holder to purchase, at the Right's
then-current exercise price, common shares of the acquiring company having a
value of twice the Right's exercise price.
The Rights will expire January 17, 2000 or they may be redeemed by the Company
at $.01 per share prior to that date. The Rights do not have voting or dividend
rights, and until they become exercisable, have no dilutive effect on the
earnings of the Company.
NOTE N - Stock Options and Warrants
The Board of Directors and the shareholders adopted an Employee Stock Option
Plan in 1984 (the "1984 Plan"). During 1994, the 1984 Plan was amended to extend
the plan until April 20, 2004 and to increase the aggregate number of shares
available under the Plan. The 1984 Plan authorizes the Board of Directors to
grant to officers and employees of the Company and certain of its subsidiaries
options to purchase up to an aggregate of 1,589,997 common shares. Stock options
are exercisable in accordance with the determination of the Board of Directors
made at the time of their grant, and expire not more than ten years after the
date of grant. Stock options granted in 1994, 1993 and 1992 were at 100% of
market price.
At December 31, 1994, 541,205 shares remain available for future grants.
F-20
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Stock option activity pursuant to the 1984 Plan is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Options outstanding:
At January 1 275,399 320,608 239,062
Granted 161,000 120,000 190,000
Exercised (97,000) (14,800) (25,000)
Cancelled (7,500) (150,409) (83,454)
-------- -------- --------
At December 31 331,899 275,399 320,608
Options exercisable: ======== ======== ========
At December 31 181,899 174,149 320,608
======== ======== ========
Option prices per share:
Granted $5.75-8.38 $3.25-7.38 $3.88-5.63
Exercised 3.25-5.63 3.00 3.00
Cancelled 3.00-6.125 3.00-6.38 2.66-4.78
</TABLE>
In 1992, the Board of Directors and the shareholders adopted a Senior Executives
Stock Option Plan (the "1992 Plan"), a variable stock option plan. Under the
1992 Plan 800,000 shares were reserved and options for 800,000 shares were
issued and outstanding at December 31, 1993. These options vest over three years
and expire after ten years. The initial exercise prices were $5.625 for 700,000
shares and $3.25 for 100,000 shares, respectively, the market prices on the
dates granted. The exercise prices were adjusted downward on a pro-rata basis as
the trading price of the stock increased above the initial exercise price so
that the exercise price would be $.01 when the trading price of the stock was
$19.00.
Generally accepted accounting principles ("GAAP") for variable stock option
plans required the Company to record a compensation expense accrual measured by
the difference between the market price of the common stock underlying an option
and the option price as of December 31, 1993. The sharp rise in the price of the
Company's common stock during the fourth quarter of 1993, therefore, required a
charge to earnings.
F-21
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
The Company believed that the application of GAAP could have resulted in large
and repeated future distortion to reported quarterly earnings of the Company,
based on fluctuations in the stock price so long as the 1992 Plan remained in
effect. Therefore, on January 26, 1994, the Board of Directors of the company
("Board") terminated the 1992 Plan, subject to shareholder approval. In
connection with the termination of the 1992 Plan, the Company recorded an
accrued liability on its balance sheet at December 31, 1993 in the amount of
$4,046,000 and recorded a non-recurring, non-cash charge to earnings. In
addition, in connection with the termination of the 1992 Plan, the Company
granted an aggregate of 449,732 shares of common stock to the holders of the
cancelled options, also subject to shareholder approval. In the second quarter
of 1994, subsequent to the approval by the shareholders, the Company eliminated
the accrued liability of $4,046,000 and increased shareholders' equity by the
same amount for the common stock issued.
Also, on January 26, 1994 the Board adopted the 1994 Senior Management Stock
Option Plan (the "1994 Plan"), subject to shareholder approval. Under the 1994
Plan, each holder of options under the 1992 Plan was granted new options
with an option exercise price of $9.00, the trading price of the common stock of
the Company at the time of the Board actions. The shareholders approved the 1994
Plan in June 1994.
On March 11, 1986, the Company issued warrants to purchase 15,000 shares of
common stock at $7.83 per share. On July 7, 1988, in consideration for entering
into a credit agreement, the Company issued warrants to purchase 785,732 shares
of Common Stock at $4.50 per share. One half of the warrants issued on July 7,
1988, were repurchased on May 25, 1989, for $400,000. On May 4, 1990, the
Company issued warrants to purchase 100,000 shares of common stock at $10 per
share. On December 11, 1991, the Company issued warrants to purchase 25,000
shares of common stock at $4.375 per share. On November 17, 1993, the Company
issued warrants relating to the 8% Debentures to purchase 150,000 shares of
common stock at $9.50 per share.
The Company granted 1,000 shares of common stock at no cost to each employee of
the Company and Galco on November 8, 1991 and on January 2, 1992, respectively.
The shares vested one year from the date of grant and resulted in the issuance
of 84,000 shares of common stock in 1992 and 75,000 shares of common stock on
January 3, 1993. The $650,000 compensation cost related to this plan was charged
to expense over the vesting period.
F-22
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE O - Related Party Transactions
The Company has retained the legal services of Shereff, Freidman, Hoffman &
Goodman, LLP in recent years. One of the Company's directors is a partner in
this firm. The total amount of legal and director fees paid to the firm in
1994 and 1993 were approximately $0.4 million and $0.4 million, respectively.
The Company has retained the insurance brokerage services of Rollins Hudig Hall
("RHH") in recent years. One of the Company's directors is the President and
Chief Executive Officer of Rollins Real Estate/Investment, a division of RHH.
The total amount of insurance premiums paid to RHH in 1994 and 1993 were
approximately $1.4 million and $1.0 million, respectively.
In 1994, the Company sold its minority interest in Galoob Toys Canada, Inc.,
which continues to act as the Company's distributor in Canada and which
accounted for less than 5% of the Company sales.
NOTE P - Expenses Related to Resignations of Former Officers
During 1991, the Company's former chief executive officer resigned. In
additions, during 1991 and 1992, certain senior officers resigned and the
Company underwent a reorganization which included employee layoffs. Related
expenses incurred in 1992 were $2.2 million.
NOTE Q - Subsequent Event
On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "New Agreement") with the Lender. The New Agreement
extends through March 31, 1997 and provides a line of credit of $40 million,
with provision to increase the line to $60 million at the option of the
Company. Borrowing availability is determined by a formula based on qualified
assets. The interest is at prime rate plus 1% (1% lower then the rate
applicable to the old Loan Agreement). In consideration for entering in the
New Agreement, the Company paid a $100,000 fee; additional fees will be paid if
the Company exercises its option to increase the line. The Company has also
agreed to pay an unused line fee of 0.25% and certain management fees. The New
Agreement provides that the preferred dividend payments may not be made without
the prior consent of the Lender.
F-23
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE R - Segment Information
The Company's operations are in one industry segment: the sale of toys
primarily to major retail outlets. The Company operates in two primary
geographic areas, the U.S. and Europe, and there are no sales between
geographic areas.
Information about the Company's operations in different geographic locations
for 1994, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
(in thousands)
United States Foreign Consolidated
------------- ------- ------------
1994
- ----
<S> <C> <C> <C>
Net revenues from
unaffiliated
customers $ 119,702 $ 59,090 $178,792
Earnings (loss) before
income taxes 17,360 1,842 19,202
Identifiable assets at
December 31, 1994 87,653 13,113 100,766
1993
Net revenues from
unaffiliated
customers 88,821 45,513 134,334
Earnings (loss) before
income taxes (10,806) (109) (10,915)
Identifiable assets at
December 31, 1993 61,706 9,299 71,005
1992
Net revenues from
unaffiliated
customers 108,266 58,014 166,280
Earnings (loss) before
income taxes (5,346) 3,137 (2,209)
Identifiable assets at
December 31, 1992 55,700 15,904 71,604
</TABLE>
F-24
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE S - Quarterly Financial Data (Unaudited)
Quarterly financial data for 1994 and 1993 are summarized in the following
table:
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Net Net Earnings
Net Gross Earnings (Loss) Per
Revenues Margin (Loss) Common Share
-------- ------ -------- ------------
<S> <C> <C> <C> <C>
1994
- ----
1st Quarter $30,235 $12,673 $(1,648) $(0.25)
2nd Quarter 33,720 12,601 9,753 0.91
3rd Quarter 50,273 19,937 3,909 0.30
4th Quarter 64,565 28,994 6,410 0.55
1993
1st Quarter $27,341 $11,250 $(1,439) $(0.23)
2nd Quarter 26,769 9,056 (3,490) (0.45)
3rd Quarter 37,692 14,265 (389) (0.12)
4th Quarter 42,532 16,888 (5,606) (0.67)
</TABLE>
F-25
SCHEDULE I
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MARKETABLE SECURITIES-OTHER INVESTMENTS
(in thousands)
<TABLE>
<CAPTION>
Name of Issuer and Principal Market
Title of Issue Amount Cost Value
- ------------------ ----------- ---- ------
<S> <C> <C> <C>
At December 31, 1994
None
At December 31, 1993
U.S. treasury notes subject to
a repurchase agreement with
Sanwa Bank California $1,400 $1,400 $1,400
------ ------ ------
$1,400 $1,400 $1,400
====== ====== ======
</TABLE>
S-1
SCHEDULE VIII
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
----------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Year ended 12/31/94:
Provisions for returns and
allowances $5,249 $11,979 $9,131 $8,097
Year ended 12/31/93
Provisions for returns and
allowances 6,031 5,516 6,298 5,249
Year ended 12/31/92
Provisions for returns and
allowances 8,900 7,916 10,785 6,031
</TABLE>
See Note B of Notes to Consolidated Financial Statements.
S-2
SCHEDULE X
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(in thousands)
<TABLE>
<CAPTION>
Charged to Costs and Expenses
-----------------------------
Years ended December 31
-----------------------------
Items 1994 1993 1992
----- ---- ---- ----
<S> <C> <C> <C>
Maintenance and repairs * * *
Depreciation and amortization of
intangible assets, pre-operating
costs and similar deferrals * * *
Taxes, other than payroll and
income taxes * * *
Royalties $13,498 $11,337 $19,263
Advertising and promotion 30,616 23,537 22,826
</TABLE>
*Less than 1% of total sales.
S-3
<TABLE>
<CAPTION>
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Page
- ----------- ------------
<S> <C> <C>
2 Agreement of Merger, dated as of July 6, 1987.
(Incorporated by reference to Exhibit 2 to the
Company's Amendment No. 1 on Form 8 to the Registration
Statement on Form 8-B, filed with the Commission on
January 11, 1988 (the "Amendment No. 1 to the Form
8-B").)
3.1 Certificate of Incorporation. (Incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to the Form
8-B.)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to
Amendment No. 1 to the Form 8-B.)
4.1 Form of Certificate for Shares of Common Stock of the
Corporation. (Incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form S-3,
Registration No. 33-33640, filed with the Commission on
February 26, 1990 (the "Form S-3").)
4.2 Form of 1986 Nontransferable Stock Purchase Warrant
issued to Paul Sullivan. (Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to the Form 8-B.)
4.4 Warrant Agreement, dated as of July 7, 1988, between
the Corporation and Wells Fargo Bank and warrants
issued to Wells Fargo Bank. (Incorporated by reference
to Exhibit 4.4 to Amendment No. 3 on Form 8 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987, filed with the Commission
on August 2, 1988. (the "Amendment No. 3 to the 1987
10-K").)
</TABLE>
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
4.4(1) Warrant Agreement, dated as of May 4, 1990, between the
Company and Camerica Corporation. (Incorporated by
reference to Exhibit 4.4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1991, filed with the Commission on March 30, 1992
(the "1991 Form 10-K").)
4.4(2) Warrant Agreement, dated as of May 4, 1990, between the
Company and David Darling. (Incorporated by reference
to the 1991 Form 10-K.)
4.4(3) Warrant Agreement, dated as of May 4, 1990, between the
Company and Jim Darling. (Incorporated by reference to
the 1991 Form 10-K.)
4.4(4) Warrant Agreement, dated as of May 4, 1990, between the
Company and Richard Darling. (Incorporated by reference
to the 1991 Form 10-K.)
4.4(5) Warrant Agreement, dated as of February 22, 1990, by
and between the Company and Roger Kowalsky.
(Incorporated by reference to Exhibit 28 to the Form
S-3.)
4.4(6) Warrant Agreement, dated as of December 11, 1991, by
and between the Company and Shereff, Friedman, Hoffman
and Goodman. (Incorporated by reference to Exhibit
4.4(6) to the Company's Annual Report on Form 10-K for
the fiscal year end December 31, 1993, filed with the
Commission on March 31, 1994 (the "1993 Form 10-K").)
4.4(7) Warrant Agreement, dated as of November 17, 1993, by
and between the Company and Gerard Klauer Mattison &
Co., Inc. (Incorporated by reference to Exhibit 4.4(7)
to the 1993 Form 10-K.)
</TABLE>
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
4.5 Form of Certificate of Designations of the Company's
$17.00 Convertible Exchangeable Preferred Stock.
(Incorporated by reference to Exhibit 4 to the
Company's Registration Statement on Form 8-A, filed
with the Commission on October 6, 1989 (the "October 6,
1989 Form 8-A").)
4.5(1) Form of Certificate of Designations of the Company's
Series A Preferred Stock (Incorporated by reference to
Exhibit 2.2 to the Company's Registration Statement on
Form 8-A, filed with the Commission on January 23, 1990
(the "January 23, 1990 Form 8-A").
4.6 Form of Indenture with respect to the Company's 8-1/2%
Convertible Subordinated Debentures due October 1,
2014, between the Company and Manufacturers Hanover
Trust Company as Trustee, including form of Convertible
Debenture. (Incorporated by reference to Exhibit 5 to
the October 6, 1989 Form 8-A).
4.7 Form of Indenture with respect to the Company's
Subordinated Debentures due October 1, 2014, between
the Company and Manufacturers Hanover Trust Company as
Trustee, including form of Debenture. (Incorporated by
reference to Exhibit 6 to the October 6, 1989 Form
8-A).
4.8 Form of Indenture with respect to the Company's 8-1/2%
Senior Subordinated Notes, between the Company and
Continental Stock Transfer & Trust Company, as Trustee,
including form of Note. (Incorporated by reference to
Exhibit 7 to the October 6, 1989 Form 8-A).
4.9 Form of Deposit Agreement between the Company and
Manufacturers Hanover Trust Company of California as
Depositary, including form of Depositary Receipt.
(Incorporated by reference to Exhibit 8 to the October
6, 1989 Form 8-A).
</TABLE>
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
4.10 Form of Rights Agreement, dated as of January 17, 1990,
between the Company and Mellon Securities Trust
Company. (Incorporated by Reference to Exhibit 2.1 to
the January 23, 1990 Form 8-A).
4.11 Indenture, with respect to the Company's 8% Convertible
Subordinated Debentures due year 2000, between the
Company and Continental Stock Transfer & Trust Company,
as Trustee, including form of Debenture Note.
(Incorporated by reference to Exhibit 4.11 to the 1993
Form 10-K)
10.1* 1984 Employee Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 4 to the
Corporation's Registration Statement on Form S-8,
Registration No. 33-9393, filed with the Commission on
September 2, 1987 (the "1987 Form S-8").)
10.1(1)* 1992 Senior Management Stock Option Plan. (Incorporated
by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-8, Registration No.
33-56004, filed with the Commission on December 18,
1992 (the "1992 Form S-8").)
10.1(2)* Amended and Restated 1984 Employee Stock Option Plan
(Incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-8, Registration
Statement No. 33-56585, filed with the Commission on
November 23, 1994.)
10.1(3)* 1994 Senior Management Stock Option Plan. (Incorporated by
reference to Exhibit 4.6 of the Company's Registration Statement
on Form S-8, Registration Statement No. 33-56587, filed with the
Commission on November 23, 1994.)
10.1(4)(a)* Form of Agreement between each of Mark Goldman, William
Catron, Lou Novak, Gary Niles, Mark Shepherd, Ronald
Hirschfeld and H. Alan Gaudie and the Corporation.
(Incorporated by reference to Exhibit 4.6 of the Company's
Registration Statement on Form S-8, Registration Statement No.
33-56589, filed with the Commission on November 23, 1994.)
10.1(4)(b)* Form of Amendment No. 1 between each of Mark Goldman,
William Catron, Lou Novak, Gary Niles, Mark Shepherd,
Ronald Hirschfeld and H. Alan Gaudie and the
Corporation.
10.2* Profit Sharing Plan. (Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on
Form S-1, Registration No. 33-6743, filed with the
Commission on August 12, 1986 (the "1986 Registration
Statement").)
</TABLE>
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
10.4(7)* Agreement, dated October 27, 1994, between Mark Goldman
and the Company.
10.4(10)* Agreement, dated as of December 11, 1991, by and
between Martin Nussbaum and the Company. (Incorporated
by reference to Exhibit 10.4(10) to the 1991 Form
10-K.)
10.4(11)(a)* Agreement, dated July 15, 1993, between William G.
Catron and the Company. (Incorporated by reference to
Exhibit 10.4 (11) (a) to the 1993 Form 10-K)
10.4(11)(b)* Agreement, dated July 15, 1993, between Lou Novak and
the Company. (Incorporated by reference to Exhibit 10.4
(11) (b) to the 1993 Form 10-K)
10.4(11)(c)* Agreement, dated July 15, 1993, between Ronald
Hirschfeld and the Company. (Incorporated by reference
to Exhibit 10.4 (11) (c) to the 1993 Form 10-K)
10.4(11)(d)* Agreement, dated July 15, 1993, between Gary Niles and
the Company. (Incorporated by reference to Exhibit 10.4
(11) (d) to the 1993 Form 10-K)
10.4(11)(e)* Agreement, dated March 29, 1994, between Loren
Hildebrand and the Company.
10.4(11)(f)* Agreement, dated February 27, 1995, between William B.
Towne and the Company.
10.7(3) Second Amended and Restated Credit Agreement dated as
of March 31, 1992 among the Company, Bank of America
National Trust and Savings Association and other
signatory thereto. (Incorporated by reference to
Exhibit 10.7(3) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992, filed
with the Commission on March 31, 1993 (the "1992 Form
10-K")).
</TABLE>
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
10.7(4) Amendments dated November 1, 1992 and February 17, 1993
to the Second Amended and Restated Credit Agreement
dated as of March 31, 1992. (Incorporated by reference
to Exhibit 10.7(4) to the 1992 Form 10-K.)
10.7(5) Securities Purchase Agreement, dated November 17, 1993,
by and among the Company and the purchasers executing
signature pages thereto (the "Purchasers").
(Incorporated by reference to Exhibit 10.7 (5) to the
1993 Form 10-K)
10.7(6) Registration Rights Agreement, dated as of November 17,
1993, by and among the Company and the Purchasers.
(Incorporated by reference to Exhibit 10.7 (6) to the
1993 Form 10-K)
10.7(7) Loan and Security Agreement, dated as of April 1, 1993,
by and among the Company and Congress Financial
Corporation (Central), including form of Revolving Loan
Note. (Incorporated by reference to Exhibit 10.7 (7) to
the 1993 Form 10-K)
10.7(7)(a) First Amendment to Loan and Security Agreement, dated
as of November 17, 1993. (Incorporated by reference to
Exhibit 10.7 (7) (a) to the 1993 Form 10-K)
10.7(7)(b) Amended and Restated Loan and Security Agreement, dated
as of March 31, 1995, by and among the Company and
Congress Financial Corporation (Central).
10.9(3) License Agreement, dated June 16, 1986, by and
between Funmaker as Licensor and the Company as
Licensee. (Incorporated by reference to Exhibit
10.10(5) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1986, filed
with the Commission on March 31, 1987 ("1986 Form
10-K").)
10.9(4) License Agreement, dated May 4, 1990, by and among the
Company as Licensee, Codemasters Software Company, Ltd.
and Camerica Corporation, Limited. (Incorporated by
reference to Exhibit 10.9(4) of the 1992 Form 10-K.)
</TABLE>
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
10.9(4)(a) Amendment No. 1 dated June 1991 to License Agreement
dated May 4, 1990. (Incorporated by reference to
Exhibit 10.9(4) (a) of the 1992 Form 10-K.)
10.9(4)(b) Amendment No. 2 dated December 23, 1991 to License
Agreement, dated May 4, 1990. (Incorporated by
reference to Exhibit 10.9(5) (b) of the 1992 Form
10-K.)
10.9(5) European License Agreement, dated December 23, 1991, by
and between the Codemasters Software Company, Ltd. and
the Company as Licensee. (Incorporated by reference to
Exhibit 10.9(5) of the 1992 Form 10-K.)
10.9(6) Third Amendment to United States License and First
Amendment to European License, dated November 4, 1992.
(Incorporated by reference to Exhibit 10.9(6) of the
1992 Form 10-K.)
10.9(7) Fourth Amendment to United States License Agreement,
dated October 14, 1994.
10.10 Agreement of Purchase and Sale, dated October 22, 1986,
by and between ATC Building Company as Seller and the
Company as Buyer. (Incorporated by reference to Exhibit
10.11 to the 1986 Form 10-K.)
10.12 Lease Agreement, dated March 12, 1987, by and between
Lincoln Alvarado and Patrician Associates, Inc. as
Lessor and the Company as Lessee. (Incorporated by
reference to Exhibit 10.12 to Amendment No. 1 to the
Form 8-B.)
10.12(1) Amendment No. 1 to Lease dated March 12, 1987.
(Incorporated by reference to Exhibit 10.12(1) to the
1991 Form 10-K.)
11 Computations of Earnings Per Share.
12 Computation of ratio of earnings to fixed charges and
preferred stock dividends.
22 Subsidiaries of the Company.
</TABLE>
<TABLE>
Sequentially
Numbered
Page
------------
<S> <C> <C>
24.1 Consent of Price Waterhouse.
27 Financial Data Schedules
</TABLE>
*Management contracts, compensatory plans and arrangements required to be filed
as an exhibit pursuant to Item 14(c) of this Report.
EXHIBIT 11
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
COMPUTATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Primary Earnings:
- -----------------
Net earnings (loss) applicable
to common shares ($000) $ 15,297 $ (14,051) $ (5,574)
=========== =========== ===========
Average shares of common stock
outstanding during the period 9,852,673 9,548,422 9,399,600
Add: Incremental shares from
assumed exercise of stock
options and warrants 258,439 - -
----------- ----------- -----------
10,111,112 9,548,422 9,399,600
=========== =========== ===========
Net earnings (loss)
per common share - primary $ 1.51 $ (1.47) $ (0.59)
=========== =========== ===========
Fully Diluted Earnings:
- -----------------------
Net earnings (loss) applicable
to common shares ($000) $ 15,297 $ (14,051) $ (5,574)
Add: Preferred stock dividends:
Paid ($000) - - 782
In arrears ($000) 3,127 3,127 2,345
Add: Interest on Debentures ($000) 1,072 137 -
----------- ----------- -----------
$ 19,496 $ (10,787) $ (2,447)
=========== =========== ===========
Average shares of common stock
outstanding during the period 9,852,673 9,548,422 9,399,600
Add: Incremental shares from
assumed exercise of stock
options and warrants 261,458 236,825 -
Add: Shares issuable upon
assumed conversion of
Preferred Stock 2,180,148 2,180,148 2,180,148
Add: Shares issuable upon assumed
conversion of 8% Convertible
Subordinated Debentures, weighted 1,511,879 186,396 -
----------- ----------- -----------
13,806,158 12,151,791 11,579,748
=========== =========== ===========
Net earnings (loss)
per common share -
Fully Diluted $ 1.41 (A) (A)
=========== =========== ===========
</TABLE>
(A) Anti dilutive, therefore fully diluted earnings per share is same as primary
earnings per share, $(1.47) for 1993 and $(0.59) for 1992.
EXHIBIT 12
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(in thousands, except ratios)
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net earnings (loss) $18,424 $(10,924) $(2,447) $(7,540) $(29,245)
Income tax 778 9 238 - -
------- -------- ------- ------- --------
Charge (credit) 19,202 (10,915) (2,209) (7,540) (29,245)
------- -------- ------- ------- --------
Fixed charges:
Interest expense 2,609 1,836 1,550 1,775 3,046
Portion of
rental expense 505 483 613 728 625
------- -------- ------- ------- --------
Total fixed charges 3,114 2,319 2,163 2,503 3,671
------- -------- ------- ------- --------
Earnings (loss) before
income taxes and fixed
charges $22,316 $ (8,596) $ (46) $(5,037) $(25,574)
======= ======== ======= ======= ========
Preferred dividends
requirements $ 3,127(B) $ 3,127(B) $ 3,127(B) $ 3,127 $ 3,127
Ratio of pretax income
to net income 1.04 1.00 1.00 1.00 1.00
------- -------- ------- ------- --------
Preferred dividends
factored 3,252 3,127 3,127 3,127 3,127
Total fixed charges 3,114 2,319 2,163 2,503 3,671
------- -------- ------- ------- --------
Total fixed charges and
preferred dividends $ 6,366 $ 5,446 $ 5,290 $ 5,630 $ 6,798
======= ======== ======= ======= ========
Ratio of earnings to
fixed charges and
preferred dividends 3.51 (A) (A) (A) (A)
======= ======== ======= ======= ========
</TABLE>
(A) Earnings are inadequate to cover fixed charges and preferred dividends in
1993, 1992, 1991 and 1990.
(B) Includes Preferred Stock dividends in arrears.
EXHIBIT 22
SUBSIDIARIES OF THE COMPANY
Galco International Toys, N.V.
EXHIBIT 24-1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-8 (No. 33-9393 and
No. 33-56004) and Form S-3 (No. 33-33640) of Lewis Galoob Toys, Inc. and its
subsidiaries of our report dated February 10, 1995 appearing on page F-1 of this
Form 10-K.
Price Waterhouse L.L.P.
San Francisco, California
March 29, 1995
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number 1-9599
---------
LEWIS GALOOB TOYS, INC.
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1716574
-------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
500 Forbes Boulevard, South San Francisco, California 94080
-------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 952-1678
--------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Common stock, par value $.01, 10,077,265 as of September 30, 1995.
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
- --------------------------------
Item 1 Page
- Condensed Consolidated Balance Sheets 1
- Condensed Consolidated Statements of Operations 2
- Condensed Consolidated Statements of Cash Flows 3
- Notes to Condensed Consolidated Financial Statements 4-6
Item 2
- Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-10
PART II - OTHER INFORMATION
- -----------------------------
Item 1
- Legal Proceedings 11
Item 3
- Defaults Upon Senior Securities 11
Item 6
- Exhibits and Reports on Form 8-K 11
SIGNATURE 12
- ---------
</TABLE>
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Audited)
Sept 30 Sept 30 December 31
ASSETS 1995 1994 1994
- ------ ---------- ---------- -----------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
1
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30 Sept 30
------------------------- ---------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended Sept 30
-------------------------
1995 1994
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) $(1,422) $12,014
Adjustments to reconcile net earnings
(loss) to net cash provided by (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 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
======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
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
4
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995
(Unaudited)
the Company exercises its option to increase the line. The Company has also
agreed to pay an unused line fee of 0.25% and certain management fees. The New
Agreement provides that the preferred dividend payments may not be made without
the prior consent of the Lender.
NOTE C - INVENTORIES
(in thousands)
<TABLE>
<CAPTION>
September 30 December 31
------------------ -----------
1995 1994 1994
---- ---- ----
<S> <C> <C> <C>
Finished goods $18,521 $ 11,337 $15,596
Raw materials and parts 715 3,019 1,228
------- ------ ------
$19,236 $14,356 $16,824
------- ------- -------
</TABLE>
NOTE D - INCOME TAXES
At December 31, 1994, the Company had federal and California net operating loss
carryforwards for income tax purposes of approximately $11,500,000 and
$1,000,000, respectively. The federal and California carryforwards expire in
different years through the year 2008 and 1998, respectively. The Company also
has federal minimum tax credit carryforwards of $944,000 that are allowed to be
carried forward indefinitely and federal research and development credits of
$765,000, which will expire in different years through the year 2003. If
certain substantial changes in the Company's ownership should occur, there
would be an annual limitation on the amount of operating loss carryforwards
which can be utilized. The Company expects to utilize a substantial amount of
its net operating loss carryforwards by 1996.
No domestic deferred taxes have been provided on 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.
5
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995
(Unaudited)
NOTE E - LEGAL PROCEEDINGS
The current status of litigation is described in Part II, Item 1, herein.
6
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following table sets forth for the periods indicated the percentage
relationships between revenues and certain expense and earnings items:
<TABLE>
<CAPTION>
Percentage of Net Revenues
--------------------------
Three Nine
Months Ended Months Ended
Sept 30 Sept 30
-------------- --------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Costs of products sold 61.6 60.3 65.6 60.4
----- ----- ----- -----
Gross margin 38.4 39.7 34.4 39.6
Advertising and promotion 12.3 14.5 13.0 17.0
Other selling and
administrative 11.7 12.2 16.4 15.3
Research and development 2.6 3.8 4.5 5.7
----- ----- ---- ----
Earnings (loss) from
operations 11.8 9.2 0.5 1.6
Net proceeds from Nintendo
award - - - 10.6
Interest expense (1.5) (1.2) (1.7) (1.5)
Other income (expense), net 0.1 0.1 0.2 0.2
Provision for income taxes - (0.3) - (0.4)
------ ------ ----- -------
Net earnings (loss) 10.4 % 7.8 % (1.0) % 10.5 %
====== ====== ====== =======
</TABLE>
1995 Compared to 1994
Net revenues of $65.5 million in the third quarter of 1995 represented a 30%
increase from net revenues of $50.3 million in the third quarter of 1994. Both
domestic and international sales grew by 30%, with international sales reaching
record levels.
In the third quarter of 1995 Sky Dancers(TM) and My Pretty Dollhouse(TM) sales
were $24.1 million and $3.4 million, respectively. These products were first
introduced in late 1994.
7
LEWIS GALOOB TOYS, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
Micro Machines(TM) sales were $28.8 million in the third quarter of 1995 as
compared to $31.1 million in the same period in 1994. The decrease in sales is
mainly attributable to a decline in sales from the Micro Machines Z-BOTS(TM)
segment and this decline is expected to continue.
Biker Mice from Mars(TM) sales were $7.5 million in the third quarter of 1995
as compared to $14.4 million in 1994. Domestic sales to retailers have
discontinued, as planned, while international sales have been strong.
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. Micro Machines sales were $56.9 million as
compared to $65.2 million in 1994. Biker Mice from Mars sales were $19.6
million as compared to $33.3 million in 1994. These sales trends reflect the
same factors as noted for the third quarter results.
Gross margins were $25.2 million in the third quarter of 1995 as compared to
$19.9 million in the same period of 1994. The higher sales volume increased
gross margin by $6.0 million but was offset by a $0.7 million decrease from a
lower gross margin rate. The gross margin rate decreased to 38.4% in 1995 from
39.7% in 1994 due mainly to tooling and packaging development costs. These
costs were a higher percent of revenues in 1995 as compared to 1994, because of
planned increased spending in support of the Company's expanded product lines.
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 design 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 were $8.1 million in the third quarter of
1995 as compared to $7.3 million in the same period in 1994. The higher
expenses were a result of higher domestic sales because media is expensed as a
percent of sales.
8
LEWIS GALOOB TOYS, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
Advertising and promotion expenses as a percentage of net revenues in the third
quarter were 12.3% in 1995 compared to 14.5% in 1994. For the nine month
period ended September 30, 1995 advertising and promotion expenses were $17.7
million or 12.9% of net revenues in 1995 as compared to $19.5 million or 17.0%
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 were $7.6 million in the third
quarter of 1995 as compared to $6.1 million in the same period in 1994. For
the nine month period ended September 30, 1995, other selling and
administrative expenses were $22.5 million in 1995 as compared to $17.5 million
in the same period in 1994. For the quarter and nine month period ended
September 30, 1995 the increase in expenses was due mainly to (1) higher
planned personnel costs as a result of the Company's growth and product line
expansion,(2) higher legal expenses and (3) higher freight costs.
Research and development expenses were $1.7 million in the third quarter of
1995 as compared to $1.9 million in the same period in 1994. For the nine
month period ended September 30, 1995 research and development expenses were
$6.2 million in 1995 compared to $6.5 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.
Interest expense was $1.0 million in the third quarter of 1995 as compared to
$0.6 million in the same period in 1994. For the nine month period ended
September 30, 1995 interest expense was $2.4 million in 1995 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 annual rate based on the projected
full year earnings and includes the utilization of net operating loss
carryforwards.
9
LEWIS GALOOB TOYS, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
continued
The Company's products are produced principally in China which currently is
designated with "most favored nation" ("MFN") status by the United States.
This allows products imported into the United States from China to be accorded
the most favored import duties. In late 1994, Congress approved the GATT
(Uruguay round) unconditional duty-free entry from any nation with MFN status.
Generally, the trade negotiations between China and the United States have been
difficult, but both sides have shown their willingness to resolve trade
disputes and avoid punitive sanctions. Punitive sanctions could result in the
United States imposing higher duties on selective Chinese-made products
imported into the United States (these sanctions would be put in place through
Section 301). In the past Section 301 sanctions proposed by the United States
did not include sanctions or punitive duties against toy imports from China.
As such, the Company would be unaffected. The loss of MFN status for China
would result in a substantial increase in import duty for the Company's
products produced in China and imported into the United States. This increase
in duty would be large enough that it could materially affect the Company's
business. Products shipped to other countries should not be affected. Other
toy companies also source product from China and would be affected to similar
degrees. However, the impact on the Company from any significant change in
duties on its Chinese produced product would depend on several factors
including, but not limited to, the Company's ability to: (1) procure
alternative manufacturing sources outside of China; (2) retrieve its tooling
located in China; (3) relocate its production in sufficient time to meet
demand; and (4) pass resultant cost increases through as product price
increases.
Liquidity, Financial Resources and Capital Expenditures
On March 31, 1995, the Company entered into the New Agreement with the Lender.
(See Note B of the Notes to Condensed 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.
10
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings
The Company is involved in various legal and/or litigation matters which are
being defended and handled in the ordinary course of business. None of these
matters is expected to result in outcomes having a material adverse effect on
the Company's consolidated financial position.
Item 3. Defaults Upon Senior Securities
On June 10, 1992, the Company announced it would not pay the July 1, 1992
$0.425 per share quarterly dividend on its Depositary Shares which represent
shares of the Company's Preferred Stock. The Company has not paid the
subsequent quarterly dividends. As of 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 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 of the Preferred
Stock dividends in arrears. No common stock dividends may be paid unless all
preferred dividend payments are current. As a result of the cumulative
dividend being six or more quarters in arrears, on July 15, 1994 the holders of
the Preferred Stock exercised their right to elect two directors to the Board
of Directors of the Company.
Item 6. Exhibits, and Reports on Form 8-K
(a) Exhibits - Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None.
11
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEWIS GALOOB TOYS, INC.
(Registrant)
DATE: November 14, 1995 BY: \s\ William B. Towne
---------------------- -----------------------
William B. Towne
Executive Vice President,
Finance and
Chief Financial Officer
(Principal Accounting
Officer)
12
EXHIBIT INDEX
Exhibit 27 - Financial Data Schedule
<PAGE>
LEWIS GALOOB TOYS, INC.
500 Forbes Boulevard
South San Francisco, California 94080
__________________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
June 20, 1995
___________________
TO THE HOLDERS OF COMMON STOCK AND $17.00 CONVERTIBLE EXCHANGEABLE PREFERRED
STOCK OF LEWIS GALOOB TOYS, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Lewis
Galoob Toys, Inc. (the "Corporation") will be held at 10 o'clock A.M., local
time, on June 20, 1995, at the Crown Sterling Suites Hotel, 250 Gateway
Boulevard, South San Francisco, California.
At the Annual Meeting of Stockholders, the holders of the Corporation's
common stock, $.01 par value per share ("Common Stock"), will vote on the
following proposals:
1. The election of three (3) directors of the Corporation
to hold office until the 1998 Annual Meeting of
Stockholders and until the election and qualification
of their successors.
2. The approval of a proposal to approve the Corporation's
1995 Non-Employee Directors' Stock Option Plan for non-
employee directors of the Corporation.
3. The ratification of the appointment of Price Waterhouse
as the Corporation's independent accountants for the
fiscal year 1995.
4. The transaction of such other business as may properly
come before the meeting or any and all adjournments
thereof.
Only holders of record of the Common Stock at the close of business on
May 2, 1995 (the "Record Date") are entitled to receive notice of, and to vote
at, the Annual Meeting of
<PAGE>
Stockholders and any adjournment(s) thereof. Such stockholders may vote in
person or by proxy. The Common Stock transfer books of the Corporation will not
be closed.
At the Annual Meeting of Stockholders, the holders of the Corporation's
$17.00 Convertible Exchangeable Preferred Stock ("Preferred Stock") will vote
on the election of two (2) directors of the Corporation to hold office until the
earlier to occur of (a) the next Annual Meeting of Stockholders and the election
(by the holders of Preferred Stock) and qualification of their successors or (b)
the date on which the holders of Preferred Stock shall no longer be entitled to
designate directors.
Each share of Preferred Stock represents ten Depositary Convertible
Exchangeable Preferred Shares ("Depositary Shares"). Only holders of record of
the Preferred Stock and Depositary Shares at the close of business on the Record
Date are entitled to receive notice of the Annual Meeting of Stockholders and
any adjournment(s) thereof, and only holders of record of the Preferred Stock at
the close of business on the Record Date are entitled to vote at the Annual
Meeting of Stockholders and any adjournment(s) thereof. The holders of
Preferred Stock may vote in person or by proxy. The Preferred Stock and
Depositary Share transfer books of the Corporation will not be closed.
Stockholders who find it convenient are cordially invited to attend the
meeting in person. If you are not able to do so and wish that your shares be
voted, you are requested to fill in, sign, date and return the green instruction
form (for holders of Depositary Shares) or the white proxy card (for holders of
Common Stock) in the enclosed envelope. No postage is required if mailed in the
United States.
By Order of the Board of Directors,
WILLIAM G. CATRON
Assistant Secretary
Dated: May 16, 1995
- 2 -
<PAGE>
LEWIS GALOOB TOYS, INC.
500 Forbes Boulevard
South San Francisco, California 94080
_________________
PROXY STATEMENT
_________________
Annual Meeting of Stockholders
June 20, 1995
_________________
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Lewis Galoob Toys, Inc. (the "Corporation") of proxies
to be used at the Annual Meeting of Stockholders of the Corporation to be held
at 10:00 a.m., local time, on June 20, 1995, at the Crown Sterling Suites Hotel,
250 Gateway Boulevard, South San Francisco, California 94080, and at any
adjournment(s) thereof.
With respect to holders of the Corporation's common stock, $.01 par value
per share ("Common Stock"), if the white proxy card accompanying this Proxy
Statement is properly executed and returned, the shares of Common Stock
represented thereby will be voted as instructed on the white proxy card, but if
no instructions are given, such shares of Common Stock will be voted (1) for the
election as directors of the three nominees of the Board of Directors named
below, (2) in favor of the proposal to approve a new stock option plan for
non-employee directors of the Corporation (the "1995 Plan"), (3) in favor of the
ratification of the appointment of Price Waterhouse as the Corporation's
independent accountants for the fiscal year 1995 and (4) in the discretion of
the proxies named on the white proxy card on any other proposals to properly
come before the meeting or any adjournment(s) thereof.
Chemical Trust Company of California, as depositary (the "Depositary"),
is the holder of record of all of the outstanding shares of the Corporation's
$17.00 Convertible Exchangeable Preferred Stock ("Preferred Stock"). At the
Annual Meeting of Stockholders, the Depositary will be asked to vote for the
election as directors of the two nominees of the Board of Directors named
below. Each share of Preferred Stock represents ten of the Corporation's
Depositary Convertible Exchangeable Preferred Shares ("Depositary Shares"). The
Depositary is required to act in accordance with the written instructions of the
holders of the Depositary Shares. At or before the Annual Meeting of
Stockholders, the Depositary will complete the blue proxy card accompanying this
Proxy Statement, based upon the instructions given to the Depository by the
<PAGE>
holders of the Depository Shares. Therefore, with respect to holders of the
Depositary Shares, if the green instruction form accompanying this Proxy
Statement is properly executed and returned, the shares of Preferred Stock
represented thereby will be voted by the Depositary as instructed on the green
instruction form, but if no instructions are given, such shares of Preferred
Stock will be voted for the election as directors of the two nominees of the
Board of Directors named below.
Any of the green instruction forms, blue proxy cards or white proxy cards
may be revoked prior to its exercise, but the attendance at the meeting by any
stockholder who has previously given a green instruction form, blue proxy card
or white proxy card will not have the effect of revoking his or her green
instruction form, blue proxy card or white proxy card, as the case may be,
unless such stockholder delivers written notice of revocation to the secretary
of the Annual Meeting of Stockholders prior to the exercise of the rights
specified by the green instruction form, blue proxy card or white proxy card, as
the case may be. The approximate date of mailing of this Proxy Statement and
the accompanying green instruction form, blue proxy card and white proxy card is
May 16, 1995.
VOTING
Holders of record of the Common Stock on May 2, 1995 (the "Record Date")
will be entitled to vote at the Annual Meeting of Stockholders or any
adjournment(s) thereof. On the Record Date, there were 10,059,639 shares of
Common Stock outstanding and entitled to vote and a majority, or 5,029,820
shares of Common Stock, will constitute a quorum for the transaction of business
by the holders of the Common Stock. Each share of Common Stock entitles the
holder thereof to one vote on all matters to come before the Annual Meeting of
Stockholders, other than the election of two directors by the holders of
Preferred Stock.
Holders of record of the Depositary Shares on the Record Date will be
entitled to instruct the Depositary to vote at the Annual Meeting of
Stockholders or any adjournment(s) thereof. On the Record Date, there were
1,839,500 Depositary Shares outstanding. Holders of record of the Preferred
Stock on the Record Date will be entitled to vote at the Annual Meeting of
Stockholders or any adjournment(s) thereof. On the Record Date, there were
183,950 shares of Preferred Stock outstanding and entitled to vote and a
majority, or 91,976 shares of Preferred Stock, will constitute a quorum for the
transaction of business by the holders of the Preferred Stock. Each share of
Preferred Stock entitles the holder thereof to one vote on the election of two
(2) directors by the holders of Preferred Stock, but on no other matter to come
before the Annual Meeting of Stockholders.
The favorable vote of a majority of the shares of Common Stock
represented in person or by proxy and entitled to vote at the meeting is
necessary to (i) elect the three directors nominated below for election by the
holders of the Common Stock, (ii) approve the 1995 Plan and (iii) ratify the
appointment of Price Waterhouse as the Corporation's independent accountants for
the 1995 fiscal year. Abstentions will have the same effect as votes against
the
- 2 -
<PAGE>
proposals. Broker non-votes will be disregarded and will have no effect on
the outcome of the votes for the proposals. The Board of Directors recommends a
vote FOR each of the proposals set forth above.
The favorable vote of a majority of the shares of Preferred Stock
represented in person or by proxy and entitled to vote at the meeting is
necessary to elect the two directors nominated below for election by the holders
of the Preferred Stock. Abstentions will have the same effect as votes against
the proposal. Broker non-votes will be disregarded and will have no effect on
the outcome of the votes for the proposal. The Board of Directors recommends a
vote FOR the proposal set forth above.
ELECTION OF DIRECTORS
The Corporation's Certificate of Incorporation and By-laws provide for a
Board of Directors elected by the holders of Common Stock which is divided into
three classes of directors serving staggered three-year terms. Furthermore, the
Certificate of Designations with respect to the Preferred Stock provides that,
so long as the Corporation is six or more quarters in arrears in the payment of
dividends to the holders of the Preferred Stock, the holders of a majority of
the shares of Preferred Stock will be entitled to elect two directors to the
Board of Directors. The terms of the directors elected by the holders of
Preferred Stock continue until the earlier to occur of (a) the next Annual
Meeting of Stockholders and the election (by the holders of Preferred Stock) and
qualification of their successors or (b) the date on which the holders of
Preferred Stock shall no longer be entitled to designate directors.
At the forthcoming Annual Meeting of Stockholders to be held on June 20,
1995, three directors from the second class will be elected for a term expiring
at the 1998 Annual Meeting of Stockholders. The Board of Directors has
recommended Paul A. Gliebe, Jr., Scott R. Heldfond and Roger Kowalsky as the
nominees for election as directors from such class. The continuing directors
from the third class, S. Lee Kling and Andrew J. Cavanaugh, are serving terms
that expire on the date of the 1996 Annual Meeting of Stockholders; and the
continuing directors from the first class, Mark Goldman and Martin Nussbaum, are
serving terms that expire on the date of the 1997 Annual Meeting of
Stockholders.
At the forthcoming Annual Meeting of Stockholders to be held on June 20,
1995, two directors will be elected for a term expiring on the earlier to occur
of (a) the next Annual Meeting of Stockholders and the election (by the holders
of Preferred Stock) and qualification of their successors or (b) the date on
which the holders of Preferred Stock shall no longer be entitled to designate
directors. The Board of Directors has recommended Hoffer Kaback and George
Riordan as the nominees for election as directors from such class. Messrs.
Kaback and Riordan were initially elected to the Board of Directors by the
holders of Preferred Stock on July 15, 1994.
- 3 -
<PAGE>
Unless otherwise specified on the accompanying white proxy card, the
shares of Common Stock voted pursuant thereto will be cast for Paul A. Gliebe,
Jr., Scott R. Heldfond and Roger Kowalsky, as directors from the first class, to
hold office until the 1998 Annual Meeting of Stockholders and until their
respective successors shall be duly elected and shall have qualified. If, for
any reason, at the time of election, Mr. Gliebe, Mr. Heldfond or Mr. Kowalsky
should be unwilling to accept nomination or election, it is intended that such
white proxy card will be voted for the election, in his place, of a substitute
nominee recommended by the Board of Directors. However, the Board of Directors
has no reason to believe that Mr. Gliebe, Mr. Heldfond or Mr. Kowalsky will be
unable or unwilling to serve as a director.
Unless otherwise specified on the accompanying green instruction form (by
holders of Depositary Shares) or on the accompanying blue proxy card (by the
Depositary), the Depositary Shares or shares of Preferred Stock voted pursuant
thereto, as the case may be, will be cast for Hoffer Kaback and George Riordan
as directors to hold office until the earlier to occur of (a) the next Annual
Meeting of Stockholders and the election (by the holders of Preferred Stock) and
qualification of their successors or (b) the date on which the holders of
Preferred Stock shall no longer be entitled to designate directors. If, for any
reason, at the time of election, Mr. Kaback or Mr. Riordan should be unwilling
to accept nomination or election, it is intended that such green instruction
form or blue proxy card, as the case may be, will be voted for the election, in
his place, of a substitute nominee recommended by the Board of Directors.
However, the Board of Directors has no reason to believe that Mr. Kaback or Mr.
Riordan will be unable or unwilling to serve as a director.
- 4 -
<PAGE>
Information with respect to the Corporation's directors is set forth below.
Positions and
Offices
Presently Has Been a
Held With the Director
Name Age Corporation Since
---- --- ----------- -----
Current Nominees to be
Elected by Holders of
Common Stock:
Scott R. Heldfond . . . . 49 Director 1986
Paul A. Gliebe, Jr. . . . 60 Director 1986
Roger Kowalsky . . . . . 60 Director 1994
Current Nominees to be
Elected by Holders of
Preferred Stock:
Hoffer Kaback . . . . . . 45 Director 1994
George Riordan . . . . . 61 Director 1994
Directors Continuing in
Office:
Directors from Third Class:
S. Lee Kling . . . . . . 65 Director 1991
Andrew J. Cavanaugh . . . 48 Director 1993
Directors from Second Class:
Mark Goldman . . . . . . 44 President, Chief 1987
Executive
Officer and
Director
Martin Nussbaum . . . . . 47 Director 1985
- 5 -
<PAGE>
Scott R. Heldfond 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, since 1985. The
Corporation has retained the services of Rollins Hudig Hall in the past and
during the current fiscal year.
Paul A. Gliebe, Jr. has been a Vice President of Smith Barney Shearson
since 1982. Smith Barney Shearson has provided investment-related services to
the Corporation in the past and during the current fiscal year.
Hoffer Kaback has served as the president of Gloucester Capital
Corporation, a financial consulting 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.
George Riordan 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.
Roger Kowalsky 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 has served since 1991 as Chairman of the Board of Kling
Rechter & Company, a merchant banking company which operates in partnership with
Barclays 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.
He 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.
Andrew J. Cavanaugh serves as a Senior Vice President -- Corporate Human
Resources of Estee Lauder Inc. He 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.
- 6 -
<PAGE>
Mark Goldman has served as President and Chief Executive Officer of the
Corporation since June 1991. From 1987 to June 1991, he served as Executive
Vice President and Chief Operating Officer of the Corporation. From 1984 to
1987, Mr. Goldman served as Executive Vice President and Chief Operating Officer
of Ages Entertainment Software, Inc. (formerly Sega Enterprises Inc.). From
1981 to 1984, Mr. Goldman was employed by Mattel Inc., as Senior Vice President
- -- Finance at Mattel Electronics and as Vice President and Assistant to the
Chairman and Chief Executive Officer.
Martin Nussbaum has been a partner of the law firm of Shereff, Friedman,
Hoffman & Goodman, LLP since 1976. He has served as Chairman of the Executive
Committee of the Corporation's Board of Directors since June 1991. The
Corporation has retained Shereff, Friedman, Hoffman & Goodman, LLP in the past
and during the current fiscal year.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended December 31, 1994, the Board of Directors
held four (4) meetings. During such period, each of the then-current directors
of the Corporation attended 75% or more of the aggregate of (1) the total number
of meetings of the Board of Directors and (2) the total number of meetings held
by all committees of the Board of Directors on which such director served.
The Board of Directors has standing executive, audit, nominating,
compensation, finance and public responsibility committees.
The members of the executive committee are Martin Nussbaum, who serves as
Chairman, Andrew J. Cavanaugh, Mark Goldman and Scott R. Heldfond. The
executive committee has the authority to act in place of the Board of Directors
on all matters which would otherwise come before the Board of Directors except
for such matters which are required by law or by the Corporation's Certificate
of Incorporation or By-Laws to be acted upon exclusively by the Board of
Directors. The executive committee held one meeting during the fiscal year
ended December 31, 1994.
The members of the audit committee are Roger Kowalsky, who serves as
Chairman, Scott R. Heldfond, Hoffer Kaback and S. Lee Kling. The audit
committee's primary responsibilities are to review the Corporation's financial
statements, to recommend the appointment of the Corporation's independent
auditors and to review the overall scope of the audit. The audit committee held
three (3) meetings during the fiscal year ended December 31, 1994.
The members of the nominating committee are Martin Nussbaum, who serves as
Chairman, Andrew J. Cavanaugh and Roger Kowalsky. The nominating committee's
primary responsibility is to nominate persons for election as directors of the
Corporation. The
- 7 -
<PAGE>
nominating committee was established on April 21, 1994 and held no meetings
during the fiscal year ended December 31, 1994.
The members of the compensation committee are Andrew J. Cavanaugh, who
serves as Chairman, Scott R. Heldfond and Martin Nussbaum. The compensation
committee's primary responsibilities are to review the compensation arrangements
relating to senior officers of the Corporation and to administer and make
recommendations to the Board of Directors regarding the bonus plans for the
senior officers of the Corporation. The compensation committee also administers
the Corporation's Amended and Restated 1984 Employee Stock Option Plan (the
"1984 Plan") and 1994 Senior Management Stock Option Plan (the "1994 Plan").
The compensation committee held six (6) meetings during the fiscal year ended
December 31, 1994.
The members of the finance committee are Mark Goldman, who serves as
Chairman, Martin Nussbaum, Roger Kowalsky and S. Lee Kling. The finance
committee's primary responsibilities are monitoring the Corporation's financial
condition and reviewing its credit and other financing arrangements. The
finance committee held three (3) meetings during the fiscal year ended December
31, 1994.
The members of the public responsibility committee are Paul A. Gliebe,
Jr., who serves as Chairman, Mark Goldman, S. Lee Kling and George Riordan. The
public responsibility committee's primary responsibility is to review the
operations of the Corporation regarding product safety, environmental and
corporate governance issues. The public responsibility committee was
established on July 20, 1994 and held one meeting during the fiscal year ended
December 31, 1994.
- 8 -
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 16, 1994
with respect to the Common Stock of the Corporation beneficially owned by (a)
all persons known to the Corporation to own beneficially more than 5% of
the Common Stock of the Corporation, (b) all directors and nominees, (c)
the Named Executives (as defined under the caption "Executive Compensation") and
(d) all officers and directors of the Corporation as a group.
Amount and Percent of
Nature of Common
Name of Individual or Beneficial Stock
Identity of Group Ownership (1) Ownership (1)
--------------------- ------------- -------------
Dimensional Fund
Advisors, Inc.(2)
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 40401 . . . 625,300 6.2%
College Retirement
Equities Fund(3)
730 Third Avenue
New York, New York 10017 . . 541,500 5.4%
William Catron(4) . . . . . . 124,117 1.2%
Andrew J. Cavanaugh . . . . . 1,700 *
Paul A. Gliebe, Jr. . . . . . 2,350 *
Mark Goldman(5) . . . . . . . 459,041 4.5%
Scott R. Heldfond . . . . . . 3,450 *
Loren Hildebrand(6) . . . . . 100,000 *
Hoffer Kaback(7) . . . . . . 0 *
S. Lee Kling . . . . . . . . 5,000 *
Roger Kowalsky(8) . . . . . . 3,000 *
Gary Niles(9) . . . . . . . . 200,233 2.0%
Louis Novak(10) . . . . . . . 191,770 1.9%
Martin Nussbaum(11) . . . . . 7,473 *
- 9 -
<PAGE>
George Riordan(12) . . . . . 1,000 *
All officers and directors as
a group (consisting of 28
persons)(13) . . . . . . . . 1,426,927 12.9%
- ------------
* Less than 1%.
(1) This table identifies persons and entities having sole voting and/or
investment power with respect to the shares set forth opposite their
names as of March 16, 1995, according to information furnished to the
Corporation by each of them. Percent of Common Stock Ownership is based
on 10,054,167 shares of Common Stock outstanding, and assumes that in
each case the person or entity only, or the group only, exercised his or
its rights to purchase all shares of Common Stock underlying stock
options and warrants.
(2) As set forth in a Schedule 13G dated February 9, 1994 filed with the
Securities and Exchange Commission.
(3) As set forth in a Schedule 13G dated February 8, 1994 filed with the
Securities and Exchange Commission.
(4) Includes 86,111 options granted pursuant to the 1994 Plan.
(5) Includes 229,630 options granted pursuant to the 1994 Plan and 25,000
options granted pursuant to the 1984 Plan.
(6) Includes 100,000 options granted pursuant to the 1984 Plan.
(7) Mr. Kaback was elected as a director of the Corporation by the holders
of the Preferred Stock on July 15, 1994.
(8) Mr. Kowalsky was appointed as a director of the Corporation on April 21,
1994.
(9) Includes 157,870 options granted pursuant to the 1994 Plan and 7,500
options granted pursuant to the 1984 Plan.
(10) Includes 157,870 options granted pursuant to the 1994 Plan.
(11) Includes 2,473 shares which may be acquired pursuant to the exercise of
a warrant within 60 days of March 31, 1994. The shares are part 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 such other shares issuable upon
exercise of the warrant.
(12) Mr. Riordan was elected as a director of the Corporation by the holders
of the Preferred Stock on July 15, 1994.
(13) Includes an aggregate of 742,592 options granted pursuant to the 1994
Plan, 298,649 options granted pursuant to the 1984 Plan and 2,473 shares
which may be acquired pursuant to the exercise of a warrant.
- 10 -
<PAGE>
The Corporation is not aware of any officer or director, if applicable,
who failed to file an initial report of beneficial ownership upon becoming a
director or officer of the Corporation or an annual statement of changes in
beneficial ownership within forty-five days of the end of the Corporation's last
fiscal year.
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table shows, for the fiscal years ending December 31, 1992,
1993 and 1994, the cash compensation paid by the Corporation and its
subsidiaries, as well as certain other compensation paid or accrued for those
years, to (i) the chief executive officer and (ii) the other four most highly
compensated executive officers of the Corporation (collectively, the "Named
Executives") in all capacities in which they served:
<TABLE>
<CAPTION>
Summary Compensation Table(1)
Long-Term
Annual Compensation Compensation (1)
------------------------------------- ----------------
Other All
Annual Other
Name and Compen- Compen-
Principal Position Year Salary ($) Bonus ($) sation($) Options(#) sation($)
------------------ ---- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mark 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 Novak 1994 261,055 316,800 0 157,870(4) 870(5)
Executive Vice President 1993 256,797 0 0 20,370 510(5)
and Chief Operating 1992 238,917 0 0 137,500 510(5)
Officer
Gary 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 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>
- 11 -
<PAGE>
(1) Other than as provided in this table, there were no other transactions
among the Named Executives and the Corporation which are required to be
reported in this table.
(2) Represents 229,630 options granted pursuant to the 1994 Plan. Does not
include 129,311 shares of Common Stock granted in connection with the
termination of the 1992 Senior Management Stock Option Plan (the "1992
Plan").
(3) This amount represents $3,760 in premiums paid by the Corporation with
respect to term life insurance in 1994, $3,540 in premiums paid by the
Corporation with respect to term life insurance in 1993 and $2,830 in
premiums paid by the Corporation 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 Corporation with
respect to term life insurance in 1994 and $510 in premiums paid by the
Corporation 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 Corporation 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 Corporation 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 Corporation) paid by the Corporation in 1993 in
the amount of $14,400 and fees paid by the Corporation to the
Corporation'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 Corporation in connection with the Named
Executive's hiring.
(12) Represents 86,111 options granted pursuant to the 1994 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 Corporation with
respect to term life insurance in each of 1993 and 1994 and $508 in
premiums paid by the Corporation with respect to term life insurance in
1992.
- 12 -
<PAGE>
Stock Options
The following table contains information concerning the grant of stock
options to the Named Executives during the Corporation's last fiscal year:
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Potential Realized Value at
Assumed Annual Rates of
Stock Price Appreciation
for
Individual Grants Option Term
-------------------------------------- ---------------------------
% of Total
Options
Granted to
Employees in
Options Fiscal Year Exercise Expiration
Name Granted (#) (of 961,000) ($/Sh) Date 5% ($)(1) 10% ($)(2)
---- ----------- ------------ -------- ---- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mark Goldman 229,630 23.9 9.00 1/26/04 1,299,718 3,293,740
Louis Novak 157,870 16.4 9.00 1/26/04 893,552 2,264,437
Gary Niles 157,870 16.4 9.00 1/26/04 893,552 2,264,437
Loren Hildebrand 100,000 10.4 5.75 4/04/04 361,614 916,402
William Catron 86,111 9.0 9.00 1/26/04 487,393 1,235,149
</TABLE>
- ------------
(1) The projected stock price would be $14.66 per share.
(2) The projected stock price would be $23.34 per share.
The options granted to Messrs. Goldman, Novak, Niles and Catron were
issued under the 1994 Plan and the options granted to Mr. Hildebrand were issued
under the 1984 Plan. Without the prior written consent of the Corporation, the
Named Executives may not sell or otherwise transfer the shares acquired upon the
exercise of any option listed in the above table for seven months following the
date that a participant exercises such option. If at any time during the first
six months of such seven month period, the optionee ceases to be an employee of
the Corporation, the Corporation will have the right during the remainder of
such six month period to repurchase, at the exercise price therefor, the shares
which the optionee had acquired upon such option exercise. Unexercised options
will automatically terminate on the date that an optionee ceases to serve as an
employee of the Corporation unless such termination of the optionee's employment
with the Corporation results from his or her retirement, death or disability.
The Corporation does not currently grant stock appreciation rights.
- 13 -
<PAGE>
Option Holdings
The following table sets forth information with respect to the Named
Executives concerning the unexercised options held as of the end of the last
fiscal year. None of the Named Executives exercised options during the 1994
fiscal year.
<TABLE>
<CAPTION>
Fiscal Year-End Option Values
Value of Unexercised
Number of Unexercised In-the-Money Options at
Options at FY-End (#) FY-End ($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark Goldman 168,210 86,420 68,750 0
Louis Novak 98,457 59,413 0 0
Gary Niles 105,957 59,413 3,725 0
Loren Hildebrand 0 100,000 0 0
William Catron 53,704 32,407 0 0
</TABLE>
- ------------
(1) The closing price of the Common Stock on the New York Stock Exchange on
December 31, 1994 was $5.75.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee are set forth under "Meetings
of the Board of Directors," and their relationship to the Corporation is set
forth under "Election of Directors."
Compensation Committee Report
The compensation committee of the Board of Directors (the "Committee"),
subject to the approval of the entire Board of Directors, establishes and
reviews the Corporation's arrangements and programs for compensating its
executive officers, including the officers named in the compensation table
contained in this proxy statement. The Committee is composed entirely of
directors who are neither officers nor employees of the Corporation.
Background, Objectives and Philosophy
The Committee recognizes that the Corporation has successfully
implemented a multi-year program to turn around the Corporation's operations and
return the Corporation to consistently profitable operations. The Committee's
objective is to establish an over-all compensation program that is consistent
with the implementation of this program.
- 14 -
<PAGE>
The Committee believes that there are three principal components which
should be included in a compensation program:
1) base salary,
2) annual incentives which reward employees annually for
achieving goals each year, and
3) long-term incentives which reward employees for
achieving long-term objectives.
The Committee further believes that incentive programs should be based upon
performance and that the long-term incentive program should ally the economic
interests of the Corporation's officers with those of the Corporation's
stockholders. Therefore, the Committee believes that it is appropriate for a
substantial proportion of senior management compensation to consist of long-
term incentives.
Annual incentives are principally based on performance as measured by the
Corporation's net income. The Committee believes that net income, in large
part, is an appropriate measure of performance because it promotes the
achievement of corporate-wide goals and is the best measure of the success of
the Corporation's turnaround program. Each year, the Committee, in consultation
with the Chief Executive Officer, establishes objectives for corporate-wide net
after-tax earnings, the attainment of which serve as the basis for computing
annual bonuses. Individual bonus opportunities are computed as a percentage of
the participant's base salary. A portion of each executive's bonus is also
dependent on the achievement of numerate and non-numerate individual objectives
which are jointly established in advance by each such executive and the
Committee. In addition, the Committee believes that it is appropriate, from
time to time, to establish quantifiable annual individual goals for senior
executives and to award limited bonuses for the achievement of such goals,
without regard to net income.
The Board of Directors believes that increase in the value of the
Corporation's Common Stock should be the measure of performance for long term
incentives. The Board of Directors also believes that the use of stock options
as the principal basis for creating long term incentives also satisfies the
objective of aligning the interests of executive management with those of the
Corporation's stockholders. Levels of participation in the stock option plans
generally vary on the basis of the recipient's position grade level.
Option Cancellation and Regrant
In 1992, in connection with the reorganization of the Corporation's
senior management group, the Board of Directors adopted the 1992 Plan. The 1992
Plan was adopted as a one-time grant of options that vest over a three-year
period to certain members of senior management (the "Senior Officers"). The
substantial options granted under the 1992 Plan were intended to provide an
incentive to the Senior Officers to work through the several year period
required to
- 15 -
<PAGE>
end the Corporation's extensive losses and reposition the Corporation for
sustainable profitability.
The options granted under the 1992 Plan, although granted at the fair
market value of the Common Stock on the date of grant, contained a variable
pricing provision. The Board of Directors recognized that, so long as the 1992
Plan remained in effect, increases in the price of the Common Stock and the
application of generally accepted accounting principles ("GAAP") would have
resulted in repeated and potentially large charges against future quarterly
earnings of the Corporation. Conversely, decreases in the price of the Common
Stock and the application of GAAP would have resulted in add-backs to future
quarterly earnings of the Corporation. The Board of Directors believed that
such future charges would distort future reported earnings and make it difficult
for stockholders, stock analysts and potential investors to evaluate the
operating performance of the Corporation. Therefore, the Committee, after
consultation with outside experts, recommended to the Board of Directors, and
the Board of Directors and the stockholders of the Corporation approved, a plan
pursuant to which (i) the Senior Officers would terminate their options granted
under the 1992 Plan and receive shares of Common Stock in order to compensate
the Senior Officers for giving up their existing gain under such options and
(ii) new options would be granted to the Senior Officers, at a fixed exercise
price equal to the fair market value of the Common Stock on the date of grant,
in order to continue the Corporation's goal of compensating its senior
management team for effectuating its multi-year turnaround program through
one-time grants of stock options with options that vest over a three-year
period, thus providing an incentive for long-term performance tied to an
increase in the value of the Common Stock.
The Board of Directors cancelled each Senior Officer's options granted
under the 1992 Plan and granted an aggregate of 449,732 shares of Common Stock
to the Senior Officers in order to compensate them for giving up their existing
gain under their options. This gain was measured by the difference between the
$9.00 market price on January 26, 1994 and the exercise price of the options
granted under the 1992 Plan on January 26, 1994, the date on which the 1992 was
terminated. Furthermore, the Board of Directors granted to each Senior Officer
the same number of options under the 1994 Plan as were cancelled under
- 16 -
<PAGE>
the 1992 Plan, at a per share exercise price of $9.00, the trading price of the
Common Stock at the time of the Board of Directors' actions. The following
table shows the effect of the transaction:
<TABLE>
<CAPTION>
Ten-Year Option Repricings
Number of
Securities
Underlying Market Price Exercise
Date of Options of Stock at Price at Time New Expiration
Cancellation Cancelled Time of of Exercise Date of
Name and Principal and and Reissued Cancellation Cancellation Price Original
Position Reissuance (#) ($) ($) ($) Option
-------- ---------- ------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Mark Goldman 1/26/94 200,000 9.00 4.21 9.00 1/30/02
President and Chief 1/26/94 29,630 9.00 2.07 9.00 4/22/03
Executive Officer
Louis Novak 1/26/94 137,500 9.00 4.21 9.00 1/30/02
Executive Vice 1/26/94 20,370 9.00 2.07 9.00 4/22/03
President and Chief
Operating Officer
Gary Niles 1/26/94 137,500 9.00 4.21 9.00 1/30/02
Executive Vice 1/26/94 20,370 9.00 2.07 9.00 4/22/03
President, Marketing
and Product
Acquisition
William Catron 1/26/94 75,000 9.00 4.21 9.00 4/30/02
Executive Vice 1/26/94 11,111 9.00 2.07 9.00 4/22/03
President, General
Counsel and Chief
Administrative Officer
Ronald Hirschfeld 1/26/94 75,000 9.00 4.21 9.00 1/30/02
Executive Vice 1/26/94 11,111 9.00 2.07 9.00 4/22/03
President,
International Sales
and Marketing
Mark Shepherd 1/26/94 50,000 9.00 4.21 9.00 4/30/02
Senior Vice President, 1/26/94 7,408 9.00 2.07 9.00 4/22/03
Finance and Chief
Financial Officer (1)
H. Alan Gaudie 1/26/94 25,000 9.00 4.21 9.00 1/30/02
Senior Vice President,
Finance
</TABLE>
- ------------
(1) Mr. Shepherd resigned as an officer of the Corporation, effective as of
March 8, 1995. All of Mr. Shepherd's then unexercised options were
terminated on the date of Mr. Shepherd's resignation.
- 17 -
<PAGE>
Without the prior written consent of the Corporation, an optionee may not
sell or otherwise transfer the shares 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 Corporation, the
Corporation will have the right during the remainder of such six-month period to
repurchase, at the exercise price therefor, the shares 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
Corporation unless such termination of the optionee's employment with the
Corporation results from his or her retirement, death or disability.
No option under the 1994 Plan is an "Incentive Stock Option" as defined in
Section 422 of the Internal Revenue Code of 1986, as amended. Recipients of
grants under the 1994 Plan, upon approval of the 1994 Plan by the stockholders,
received non-transferable ten year options, some of which vested retroactive to
January 26, 1994 and some of which will vest on various dates through April 22,
1996. These dates parallel the vesting dates of the options granted under the
1992 Plan.
Compensation of the Chief Executive Officer
Prior to May 1994, Mr. Goldman's compensation was set by an employment
agreement entered into before he became the Corporation's chief executive
officer. Mr. Goldman's contract expired pursuant to its terms in May 1994 and
was not automatically renewed in accordance with its terms. The Committee and
Mr. Goldman have agreed that Mr. Goldman's compensation arrangements shall be
determined by the Committee and that Mr. Goldman's annual incentive will be
determined on the basis of the same profit plan used in determining the annual
bonuses for other executives. However, the amount of Mr. Goldman's annual bonus
will be based solely on the achievement of corporate objectives. Similarly,
options will be awarded to Mr. Goldman on the same basis as the Corporation's
other senior executives, recognizing his senior position grade level. In light
of the particular corporate-wide responsibilities of the Chief Executive
Officer, the Committee believes that, more than other senior executives, the
most substantial portion of Mr. Goldman's potential compensation should be tied
to the appreciation of the share price of the Corporation's Common Stock.
In setting Mr. Goldman's incentives, the Committee and Board of Directors
considered his leadership and responsibility for planning and executing the
current turnaround program with limited financial resources available to him.
In 1994, the Corporation completed its plan, ahead of schedule, by revitalizing
its core business and developing new products. The Committee has also
considered Mr. Goldman's leadership in positioning the Corporation to attain
additional resources in order to expand its business. Consistent with the
Committee's philosophy, the
- 18 -
<PAGE>
potential economic rewards to Mr. Goldman will only be realized by him to the
extent that the Corporation's business is successful.
COMPENSATION COMMITTEE
Andrew J. Cavanaugh (Chairman)
Scott R. Heldfond
Martin Nussbaum
Performance Graph
The following graph tracks an assumed investment of $100 on the last
trading day of the calendar year indicated below in the Corporation's Common
Stock, the S&P 500 Index and the Russell 1000 Consumer Discretionary Economic
Sector, assuming full reinvestment of dividends and no payment of brokerage or
other commissions or fees. Past performance is not necessarily indicative of
future performance.
[GRAPH]
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Lewis Galoob Toys, Inc. $100 $21 $34 $27 $80 $49
S&P 500 $100 $97 $125 $136 $150 $151
Russell 1000 Consumer
Discretionary
Economic Sector $100 $92 $134 $157 $167 $158
</TABLE>
- 19 -
<PAGE>
Employment Contracts and Termination of Employment Agreements
On October 27, 1994, the Corporation 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 Corporation, 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 Corporation 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 Corporation 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
Corporation 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) 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 Corporation 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 Corporation must
pay to Mr. Goldman his unpaid compensation for
- 20 -
<PAGE>
services prior to termination and the value of any accrued unused vacation pay
to the date of termination.
The maximum Severance Payment that the Corporation 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 Corporation as its President and Chief
Executive Officer without an employment agreement. The Corporation has
purchased a life insurance policy in a $2,000,000 face amount for Mr. Goldman
who designated the beneficiary of such insurance policy.
Each of the Named Executives (other than Mr. Goldman) has entered into a
letter agreement with the Corporation 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 above-described severance package is replaced with 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 Corporation.
Director Compensation
Directors who are not full-time employees of the Corporation other than
Mr. Nussbaum each received in fiscal year 1994 an annual director's fee of
$15,000 plus $500 for each meeting of the Board of Directors or any committee
thereof attended by such director. Furthermore, assuming the actions to be
taken by the stockholders with respect to the 1995 Plan are approved, directors
who are not full-time employees of the Corporation shall receive an option
immediately exercisable into 2,000 shares of Common Stock on July 1, 1995 and on
January 1 of each year thereafter. As compensation for Mr. Nussbaum's service
as Chairman of the Executive Committee of the Board of Directors, Mr. Nussbaum
received a fee of $10,000 per month in fiscal year 1994. This fee has been
terminated effective March 31, 1995, and Mr. Nussbaum will receive an annual
director's fee of $15,000 plus $500 for each meeting attended by Mr. Nussbaum.
All directors are reimbursed by the Corporation for out-of-pocket expenses
incurred by them as directors of the Corporation.
- 21 -
<PAGE>
APPROVAL OF THE 1995 NON-EMPLOYEE DIRECTORS'
STOCK OPTION PLAN
General
In the opinion of the Board of Directors, the future success of the
Corporation depends, in large part, on its ability to attract, retain and
motivate directors with experience and ability. In that respect, the Board of
Directors of the Corporation, after obtaining the recommendation of the
compensation committee of the Board of Directors (the "Committee"), adopted the
1995 Plan on January 21, 1995 to provide a program of regular option grants to
non-employee directors of the Corporation.
Description
The following description of the 1995 Plan is qualified in its entirety
by reference to the full text of the 1995 Plan which is set forth as Exhibit A
to this Proxy Statement.
The 1995 Plan provides for the automatic grant of options immediately
exercisable into 2,000 shares of Common Stock on an annual basis to non-employee
directors of the Corporation. The options shall be granted on July 1, 1995 and
January 1 of 1996 and each year thereafter. The aggregate number of shares
which may be issued under the 1995 Plan is 160,000, subject to adjustments
under certain circumstances. All non-employee directors of the Corporation
are eligible to participate in the 1995 Plan. The 1995 Plan is administered by
the Committee. All members of the Committee will be disinterested directors
within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, as amended. Subject to the terms of the 1995 Plan, the Committee will
have no authority to determine the participants in the 1995 Plan, the number of
shares subject to each option, the exercise periods or the conditions and dates
of the grants. The Committee will have the authority, subject to the terms of
the 1995 Plan, to construe and interpret any of the provisions of the 1995 Plan
or any option granted thereunder. Such interpretations are binding on the
Corporation and the optionee.
The 1995 Plan authorizes the issuance of stock options that do not conform
to the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and thus are not incentive stock options. The exercise
price of each stock option granted under the 1995 Plan shall be 100% of the fair
market value of the Common Stock at the time of grant. Unexercised options will
automatically terminate on the date that an optionee ceases to serve as a
director of the Corporation unless such termination of the director's service as
a director results from his or her death or disability.
Options granted under the 1995 Plan shall be immediately exercisable.
However, options may not be exercised after the tenth anniversary of their
grant. Options may not be transferred during the lifetime of an optionholder.
Payments by optionholders upon exercise of an option may be made (as determined
by the Committee) in cash or such other form of payment as may be permitted
under the 1995 Plan.
- 22 -
<PAGE>
Upon the exercise of an option granted under the 1995 Plan, an optionee
will generally recognize compensation income subject to withholding equal to the
difference between the exercise price of the stock option and the market value
of the Common Stock on the exercise date. The Corporation will be entitled to a
deduction in connection with the exercise of an option under the 1995 Plan at
such time and to the extent that the optionee recognizes ordinary income. Any
additional gain or any loss recognized upon the subsequent disposition of the
acquired shares will be a capital gain or loss, and will be a long-term gain or
loss if the shares are held for more than one year.
Section 162(m) of the Code, which generally disallows a tax deduction for
compensation over $1,000,000 paid to the Chief Executive Officer and certain
other highly compensated employees ("covered employees"), should not apply to
the 1995 Plan because employees of the Corporation are not eligible to
participate in the 1995 Plan. If an option holder becomes a covered employee
before exercising options granted under the 1995 Plan, compensation otherwise
deductible upon exercise of such options may be subject to the deduction
limitation of Section 162(m) of the Code unless another exception is available.
At the present time, the Company believes that such compensation would satisfy
the exception for "performance-based" compensation.
In the event of stock dividends, stock splits or other such changes in the
Corporation's capital structure, the 1995 Plan provides for adjustments to be
made on a pro rata basis to the number of shares available under the 1995 Plan,
the number of shares subject to outstanding options. If the Corporation
liquidates or dissolves or if the Corporation engages in a merger or
consolidation in which it is not the surviving corporation and (i) an optionee
is not given the option in connection with such merger or consolidation to
purchase on substantially equivalent terms, as determined by the Committee in
its sole discretion, the stock, securities or other property which he would have
been entitled to receive in connection with such merger or consolidation had he
exercised his option under the 1995 Plan immediately prior thereto, or (ii) the
surviving corporation does not expressly assume such outstanding options, his
options will become exercisable immediately prior to the record date for the
determination of stockholders entitled to participate in such merger,
consolidation, dissolution or liquidation regardless of any vesting period or
other installment provision contained in his options.
The 1995 Plan may be amended by the Committee except that any amendment
that (i) increases the total number of shares of Common Stock that may be
subject to options granted (in the aggregate or to any director) under the 1995
Plan, (ii) expands the class of individuals eligible to receive options under
the 1995 Plan, (iii) increases the period during which options may be granted or
the permissible term of options under the 1995 Plan or (iv) decreases the
minimum exercise price of such options will require stockholder approval prior
to its adoption.
The Board of Directors believes that the 1995 Plan will be beneficial in
enabling the Corporation to retain its current directors and to attract
qualified and experienced directors by providing them the opportunity to
participate in the ownership of the Corporation and in the increased value which
they have helped the Corporation to realize. In addition, the Board of
- 23 -
<PAGE>
Directors believes that the 1995 Plan will be beneficial in creating a unity of
economic interests between the Corporation's employees and its stockholders by
creating a long-term incentive compensation system based on the value of the
Common Stock.
The Board of Directors, therefore, believes that the adoption of the 1995
Plan is necessary to allow the Corporation to continue to attract and retain
qualified directors within the Corporation's cost structure.
Board Recommendation
The Board of Directors believes that the 1995 Plan is in the best
interest of the Corporation and its stockholders and therefore recommends that
the stockholders vote FOR the approval of the 1995 Plan.
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
Upon recommendation of the audit committee, the Board of Directors has
appointed Price Waterhouse as the Corporation's independent accountants for the
fiscal year ending December 31, 1995.
In the event stockholders do not ratify the appointment of Price
Waterhouse as the Corporation's independent accountants for the forthcoming
fiscal year, such appointment will be reconsidered by the audit committee and
the Board of Directors.
A representative of Price Waterhouse will be present at the Annual Meeting
to respond to appropriate questions and to make such statements as he may
desire.
Board Recommendation
The Board of Directors recommends that the stockholders vote FOR
ratification of the appointment of Price Waterhouse as the Corporation's
independent accountants.
OTHER BUSINESS
The Board of Directors of the Corporation knows of no other matters that
may be presented at the Annual Meeting of Stockholders other than as set forth
in the accompanying Notice of Annual Meeting of Stockholders. However, if any
other matters properly come before the meeting, or any adjournment thereof, it
is intended that proxies in the accompanying form will be voted in accordance
with the judgment of the persons named therein.
- 24 -
<PAGE>
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the next annual
meeting of the Corporation's stockholders must be received by the Corporation
for inclusion in the Corporation's 1996 Proxy Statement on or prior to January
16, 1996.
ANNUAL REPORTS AND FINANCIAL STATEMENTS
The Annual Report to Stockholders of the Corporation for the year ended
December 31, 1994 is being furnished simultaneously herewith. Such report and
the financial statements included therein are not to be considered a part of
this Proxy Statement.
Upon the written request of any stockholder, management will provide, free
of charge, a copy of the Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994, including the financial statements and schedules
thereto. Requests should be directed to Secretary, Lewis Galoob Toys, Inc., 500
Forbes Boulevard, South San Francisco, California 94080.
COST OF SOLICITATION
The cost of soliciting proxies in the accompanying form has been or will
be borne by the Corporation. In addition to solicitation by mail, solicitations
may be made personally, by telephone, by telegraph or by mail by officers,
directors and employees of the Corporation, without additional remuneration
therefor, and arrangements may be made with brokerage houses and other
custodians, nominees and fiduciaries to send proxies and proxy material to their
principals, and the Corporation may reimburse them for their reasonable
out-of-pocket expenses.
It is important that your shares be represented at the meeting. If you
are unable to be present in person, you are respectfully requested to sign the
enclosed proxy and return it in the enclosed stamped and addressed envelope as
promptly as possible.
By Order of the Board of Directors,
WILLIAM G. CATRON
Assistant Secretary
Dated: May 16, 1995
South San Francisco,
California
- 25 -
<PAGE>
Exhibit A
LEWIS GALOOB TOYS, INC.
1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
1. Purpose. The 1995 Non-Employee Directors' Stock Option Plan
(the "Plan") of Lewis Galoob Toys, Inc., a Delaware corporation (the
"Corporation"), is designed to aid the Corporation and its subsidiaries in
retaining and attracting non-employee directors of exceptional ability by
enabling such non-employee directors to purchase a proprietary interest in the
Corporation, thereby stimulating in such individuals an increased desire to
contribute to the continued growth and success of the Corporation and its
subsidiaries.
2. Amount and Source of Stock. The total number of shares of
the Corporation's Common Stock (the "Shares") which may be the subject of
options granted pursuant to the Plan shall be limited so that the total number
of Shares issued upon the exercise of options granted pursuant to the Plan shall
not exceed 160,000, subject to adjustment as provided in paragraph 11. None of
the options to be granted under the Plan are intended to be "Incentive Stock
Options" as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and the regulations (whether proposed, temporary or final)
promulgated thereunder. Such Shares may be reserved or made available from the
Corporation's authorized and unissued Shares or from Shares reacquired and held
in the Corporation's treasury. In the event that any option granted hereunder
shall terminate prior to its exercise in full for any reason, then the Shares
subject to such option shall be added to the Shares otherwise available for
issuance pursuant to the exercise of options under the Plan.
3. Administration of the Plan. The Plan shall be administered
by a committee (the "Committee") of the Board of Directors of the Corporation
(the "Board") comprised of three or more members of the Board, selected by the
Board, all of which members shall be "disinterested persons" as that term is
defined in Rule 16b-3(d)(3) (or any successor provision) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Committee
is hereinafter sometimes referred to as the "Administrative Body." The
Administrative Body shall have full authority to interpret the Plan, to
establish and amend rules and regulations relating to it and to make all other
determinations necessary or advisable for the administration of the Plan.
4. Eligibility/ Non-Discretionary Grants. All non-employee
directors of the Corporation then serving on the Board of Directors of the
Corporation shall be eligible for, and shall receive, an option exercisable to
purchase 2,000 Shares on July 1, 1995 and January 1 of 1996 and each year
thereafter. The date on which an option is granted hereunder to a specified
individual shall constitute the date of grant of such option (the "Date of
Grant").
<PAGE>
5. Option Price. The initial exercise price of the Shares
purchasable under any option granted pursuant to the Plan shall be 100% of the
fair market value of the Shares subject to such option on the Date of Grant. For
purposes of the Plan, the "fair market value per share" of the Shares on a given
date shall be: (i) if the Shares are listed on a registered securities exchange
or quoted on the National Market System, the closing price per share of the
Shares on such date (or, if there was no trading reported on such date, on the
next preceding day on which there was trading reported); (ii) if the Shares are
not listed on a registered securities exchange and not quoted on the National
Market System, but the bid and asked prices per share for the Shares are
provided by NASDAQ, the National Quotation Bureau Incorporated or any similar
organization, the average of the closing bid and asked price per share of the
Shares on such date (or, if there was no trading in the Shares on such date, on
the next preceding day on which there was trading) as provided by such
organization; and (iii) if the Shares are not traded on a registered securities
exchange and not quoted on the National Market System and the bid and asked
price per share of the Shares are not provided by NASDAQ, the National Quotation
Bureau Incorporated or any similar organization, solely as determined by the
Administrative Body in good faith.
6. Vesting and Term of Option.
(a) Subject to subparagraph 12(b) hereof,
options granted to a participant hereunder shall vest immediately upon grant.
(b) Options granted hereunder shall be
exercisable for a period of ten (10) years from the Date of Grant.
(c) The grant of options by the Administrative
Body shall be effective as of the Date of Grant; provided, however, that no
option granted hereunder shall be exercisable unless and until this Plan has
been approved by the Corporation's stockholders and unless and until the holder
has entered into an individual option agreement with the Corporation that shall
set forth the terms and conditions of such option. Each such agreement shall
expressly incorporate by reference the provisions of this Plan (a copy of which
shall be made available for inspection by the optionee during normal business
hours at the principal office of the Corporation), and shall state that in the
event of any inconsistency between the provisions hereof and the provisions of
such agreement, the provisions of this Plan shall govern.
7. Exercise of Options. An option shall be exercised when
written notice of such exercise, signed by the person entitled to exercise the
option, has been delivered or transmitted by registered or certified mail to the
Secretary of the Corporation at its then principal office. Such notice shall
specify the number of Shares for which the option is being exercised and shall
be accompanied by (i) such documentation, if any, as may be required by the
Corporation as provided in subparagraph 12(b), and (ii) payment of the aggregate
option price. Subject to paragraph 8 hereof, such payment shall be in the form
of (i) cash or a certified check (unless such certification is waived by the
Corporation) payable
- 2 -
<PAGE>
to the order of the Corporation in the amount of the aggregate option price,
(ii) certificates duly endorsed for transfer (with all transfer taxes paid or
provided for) evidencing a number of Shares of which the aggregate fair market
value on the date of exercise is equal to the aggregate option exercise price of
the Shares being purchased, or (iii) a combination of these methods of payment.
Delivery of such notice shall constitute an irrevocable election to purchase the
Shares specified in such notice, and the date on which the Corporation receives
the last of such notice, documentation and the aggregate option exercise price
for all of the shares covered by the notice shall, subject to the provisions of
paragraphs 8 and 12 hereof, be the date as of which the Shares so purchased
shall be deemed to have been issued. Subject to paragraph 8 hereof, the person
entitled to exercise the option shall not have the right or status as a holder
of the Shares to which such exercise relates prior to receipt by the Corporation
of the payment, notice and documentation expressly referred to in this paragraph
7. Notwithstanding the foregoing, a holder whose transactions in Common Stock
are subject to Section 16(b) of the Exchange Act may tender Shares in payment of
all or any portion of the option price only if the following additional
conditions are met: (i) the tender is made at least six months after the Date of
Grant and (ii) either (x) the election to tender is irrevocably made at least
six months in advance of the tender of Shares or (y) the tender of Shares takes
place during the period beginning on the third business day following the date
of release of the Corporation's quarterly or annual financial results and ending
on the twelfth business day following such date.
8. Loans. Anything in paragraph 7 to the contrary
notwithstanding, the making of a loan by the Corporation to an optionee for the
purpose of fully or partially exercising an option granted hereunder shall be
permissible, and the application of the proceeds of any such loan to such
exercise shall not be construed to contravene the requirement that payment of
the aggregate option price be made upon exercise of an option. Stockholder
approval of this Plan constitutes approval of all such loans which the
Administrative Body may in its sole discretion hereafter determine to make for
the express purpose of permitting the exercise of an option granted hereunder.
9. Exercise and Cancellation of Options After Termination,
Disability or Death. Except as set forth below, if a holder shall voluntarily or
involuntarily cease to serve as a director of the Corporation, the option of
such holder shall terminate upon the first day that the holder is no longer such
a director (the "Termination Date"), regardless of the expiration date specified
in such option. If the termination of such service is due to disability (as
defined by the Administrative Body in its sole discretion), the holder (or his
duly appointed guardian or conservator) shall have the privilege of exercising
any option that he could have exercised on the Termination Date; provided,
however, that such exercise must be accomplished within the term of such option
and within one (1) year of the Termination Date. If the termination of such
service is due to the death of the holder, the duly appointed executor or
administrator of his estate shall have the privilege at any time of exercising
any option that the holder could have exercised on the Termination Date;
provided, however, that such exercise must be accomplished within the term of
such option and within one (1) year of the Termination Date.
- 3 -
<PAGE>
Nothing contained herein or in any option agreement shall be
construed to confer on any option holder any right to continue as a director of
the Corporation or derogate from any right of the Corporation to remove such
option holder as a director of the Corporation, with or without cause.
10. Non-transferability of Options. No option granted under
the Plan shall be sold, pledged, assigned or transferred in any manner except to
the extent that options may be exercised by an executor or administrator as
provided in paragraph 9 hereof. An option may be exercised, during the lifetime
of the holder thereof, only by such holder or his duly appointed guardian or
conservator in the event of his disability.
11. Adjustments Upon Certain Events.
(a) If the outstanding Shares are subdivided,
consolidated, increased, decreased, changed into, or exchanged for a different
number or kind of shares or other securities of the Corporation through
reorganization, merger, recapitalization, reclassification, capital adjustment
or similar transaction, or if the Corporation shall issue additional Shares as a
dividend or pursuant to a stock split, then the number and kind of Shares
available for issuance pursuant to the exercise of options to be granted under
this Plan and all Shares subject to the unexercised portion of any option
theretofore granted and the exercise price of such options shall be adjusted on
a pro rata basis to prevent the inequitable enlargement or dilution of any
rights hereunder; provided, however, that any such adjustment in outstanding
options under the Plan shall be made without change in the aggregate exercise
price applicable to the unexercised portion of any such outstanding option.
Distributions to the Corporation's stockholders consisting of property other
than Shares of the Corporation or its successor and distributions to
stockholders of rights to subscribe for Shares shall not result in the
adjustment of the Shares purchasable under outstanding options or the exercise
price of outstanding options. Adjustments under this paragraph shall be made by
the Administrative Body, whose determination thereof shall be conclusive and
binding. Any fractional Share resulting from adjustments pursuant to this
paragraph shall be eliminated from any then outstanding option. Nothing
contained herein or in any option agreement shall be construed to affect in any
way the right or power of the Corporation to make or become a party to any
adjustments, reclassifications, reorganizations or changes in its capital or
business structure or to merge, consolidate, dissolve, liquidate or otherwise
transfer all or any part of its business or assets.
(b) In the event of the dissolution or
liquidation of the Corporation or in the event of a change in control of the
Corporation, the holder of any option theretofore granted under this Plan shall
have the right immediately prior to the record date for the determination of
stockholders entitled to participate in such change in control, dissolution or
liquidation, to exercise his option, in whole or in part, without regard to any
installment provision that may have been made part of the terms and conditions
of such option. In any such event, the Corporation will mail or cause to be
mailed to each holder of an option hereunder a notice specifying the date that
is to be fixed as of which all holders of record of
- 4 -
<PAGE>
the Shares shall be entitled to exchange their Shares for securities, cash or
other property issuable or deliverable pursuant to such merger, consolidation,
dissolution or liquidation. Such notice shall be mailed at least ten (10) days
prior to the date therein specified. For purposes of this paragraph, a "change
in control" of the Corporation shall be deemed to occur as of the date on which
a person or entity or group of persons or entities, acting in concert, shall, in
a transaction in which the Corporation is not a party, become the direct or
indirect beneficial owner (within the meaning of Rule 13d-3 of the Exchange Act,
as amended from time to time) of securities of the Corporation representing
fifty-one percent (51%) or more of the combined voting power of the issued and
outstanding voting securities of the Corporation.
12. General Restrictions.
(a) No option granted hereunder shall be
exercisable if the Corporation shall at any time determine that (i) the listing
upon any securities exchange, registration or qualification under any state or
federal law of any Shares otherwise deliverable upon such exercise, or (ii) the
consent or approval of any regulatory body or the satisfaction of withholding
tax or other withholding liabilities, is necessary or appropriate in connection
with such exercise. In any of the events referred to in clause (i) or clause
(ii) above, the exercisability of such options shall be suspended and shall not
be effective unless and until such withholding, listing, registration,
qualifications or approval shall have been effected or obtained free of any
conditions not acceptable to the Corporation in its sole discretion,
notwithstanding any termination of any option or any portion of any option
during the period when exercisability has been suspended.
(b) The Administrative Body may require, as a
condition to the right to exercise an option, that the Corporation receive from
the option holder, at the time of any such exercise, representations, warranties
and agreements to the effect that the Shares are being purchased by the option
holder for investment only and without any present intention to sell or
otherwise distribute such Shares and that the option holder will not dispose of
such Shares in transactions which, in the opinion of counsel to the Corporation,
would violate the registration provisions of the Securities Act of 1933, as then
amended, and the rules and regulations thereunder. The certificates issued to
evidence such Shares shall bear appropriate legends summarizing such
restrictions on the disposition thereof.
13. Exchange of Options. The Administrative Body shall have
the right to grant options hereunder that are granted subject to the condition
that the grantee shall agree with the Corporation to terminate all or a portion
of another option or options previously granted under the Plan. The Shares that
had been issuable pursuant to the exercise of the option terminated in the
exchange of options shall, upon such termination, again become available for
issuance pursuant to the exercise of options under the Plan.
14. Provision of Information to Optionees. The
Corporation shall furnish annually to each optionee while his or her option
remains in effect and not fully exercised,
- 5 -
<PAGE>
copies of all annual and quarterly reports filed by the Corporation with the
Securities and Exchange Commission during such period, or, if no such reports
are required to be so filed, copies of all annual and other periodic reports
provided by the Corporation to its stockholders generally.
15. Amendment. The Board shall have full authority to amend
the Plan; provided, however, that any amendment that (i) increases the total
number of Shares that may be subject to stock options granted (in the aggregate
or to any director) under the Plan, (ii) expands the class of individuals
eligible to receive options under the Plan, (iii) increases the period during
which options may be granted or the permissible term of options under the Plan
or (iv) decreases the minimum exercise price of such options shall only be
adopted by the Board subject to stockholder approval. No amendment to the Plan
shall, without the consent of the holder of an existing option, materially and
adversely affect his rights under any option.
16. Termination. Unless the Plan shall theretofore have been
terminated as provided hereinafter and in Section 17 hereof, the Plan shall
terminate on January 20, 2005, and no options under the Plan shall thereafter be
granted; provided, however, that the Board may at any time, in its sole
discretion, terminate the Plan prior to the foregoing date. No termination of
the Plan by the Board shall, without the consent of the holder of an existing
option, materially and adversely affect his rights under such option.
17. Stockholder Approval. The Plan shall be submitted to the
stockholders of the Corporation not later than at the 1995 Annual Meeting of the
Corporation's stockholders. Any options granted hereunder prior to such
stockholder approval shall not be exercisable unless and until such approval is
obtained. If such approval is not obtained by such date, the Plan and any
options granted hereunder shall terminate.
- 6 -
LETTER OF TRANSMITTAL
LEWIS GALOOB TOYS, INC.
IN RESPECT OF ITS OFFER TO EXCHANGE
ONE DEPOSITARY CONVERTIBLE EXCHANGEABLE PREFERRED SHARE
REPRESENTING 1/10TH OF A SHARE OF $17.00 CONVERTIBLE
EXCHANGEABLE PREFERRED STOCK FOR 1.85 SHARES OF COMMON STOCK
PURSUANT TO THE OFFERING CIRCULAR, DATED FEBRUARY 28, 1996
THE EXCHANGE OFFER, AND WITHDRAWAL RIGHTS FOR DEPOSITARY SHARES TENDERED
PURSUANT TO THE EXCHANGE OFFER, WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 29, 1996 (THE "EXPIRATION DATE"), UNLESS EXTENDED.
The Depositary and Information Agent:
Chemical Mellon Shareholder Services, L.L.C.
(800) 774-5469
(For Information Call Toll Free)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By Mail: By Hand: By Overnight Courier:
Chemical Mellon Shareholder Chemical Mellon Shareholder Chemical Mellon Shareholder
Services, L.L.C. Services, L.L.C. Services, L.L.C.
P.O. Box 845 120 Broadway, 13th Floor 85 Challenger Road
Midtown Station New York, New York 10271 Ridgefield Park, New Jersey 07660
New York, New York 10018 Attention: Attention:
Attention: Reorganization Department Reorganization Department
Reorganization Department
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL (THE "LETTER OF TRANSMITTAL") TO AN
ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The instructions accompanying this Letter of Transmittal should be read
carefully before this Letter of Transmittal is completed.
[ ] CHECK HERE IF TENDERED DEPOSITARY CONVERTIBLE EXCHANGEABLE PREFERRED
SHARES ("DEPOSITARY SHARES") ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY PRIOR TO THE DATE
HEREOF AND COMPLETE THE FOLLOWING:
Names of Registered Holder(s) _______________________________________________
Window Ticket Number (if any) _______________________________________________
Date of Execution of Notice of Guaranteed Delivery __________________________
Name of Eligible Institution that Guaranteed Delivery _______________________
<PAGE>
List below the Depositary Shares to which this Letter of Transmittal
relates. If the space provided below is inadequate, the receipt numbers
and/or the number of Depositary Shares should be listed on a separate signed
schedule attached hereto.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DESCRIPTION OF DEPOSITARY SHARES TENDERED
- -----------------------------------------------------------------------------------------
(1) (2) (3) (4)
- --------------------------- ------------------ --------------------- -----------------
Total Number of
Receipt Number(s) Depositary Shares Total Number of
Name(s) and Address(es) Attach list if Represented by Depositary Shares
of Registered Holder(s) necessary(1) Receipt(s) to be Exchanged(2)
- --------------------------- ------------------ --------------------- -----------------
- --------------------------- ------------------ --------------------- -----------------
- --------------------------- ------------------ --------------------- -----------------
- --------------------------- ------------------ --------------------- -----------------
- --------------------------- ------------------ --------------------- -----------------
- --------------------------- ------------------ --------------------- -----------------
Total Shares:
- --------------------------- ------------------ --------------------- -----------------
(1) Need not be completed by Book Entry Holders.
- -----------------------------------------------------------------------------------------
(2) Unless otherwise indicated, it will be assumed that all Depositary Shares described above
are tendered for exchange in the Exchange Offer. See Instruction 4. No payment is being made
in respect of accrued and unpaid dividends on Depositary Shares tendered and accepted for exchange.
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
Ladies and Gentlemen:
The undersigned hereby tenders to the Company the above-described
Depositary Shares of the Company, in accordance with the Company's offer to
exchange 1.85 shares of its common stock, par value $.01 per share (the
"Common Stock"), for each Depositary Share, upon the terms and subject to the
conditions set forth in the Offering Circular dated February 28, 1996 (the
"Offering Circular"), and in this Letter of Transmittal (together with the
Offering Circular, the "Exchange Offer"), receipt of which are hereby
acknowledged. No fractional shares of Common Stock will be issued in the
Exchange Offer. If a holder of Depositary Shares is entitled to receive a
fractional share of Common Stock, such holder shall be entitled to receive
cash in lieu thereof. The undersigned understands that holders of Depositary
Shares accepted for exchange will not receive any dividend payments in
respect of such Depositary Shares.
On the terms and subject to the conditions of the Exchange Offer,
including, without limitation, the condition that there have been received,
and not revoked, the requisite tenders for exchange from 75% of the
outstanding Depositary Shares, subject to, and effective upon, acceptance for
exchange by the Company of the Depositary Shares tendered herewith and the
issuance of shares of Common Stock in exchange therefor in accordance with
the terms of the Exchange Offer, the undersigned hereby sells, assigns, and
transfers to the Company all right, title and interest in and to all such
Depositary Shares as are being tendered hereby and that are accepted for
exchange pursuant to the Exchange Offer. The undersigned hereby irrevocably
constitutes and appoints the Depositary as the true and lawful agent and
attorney-in-fact of the undersigned (with full knowledge that the Depositary
also acts as the agent of the Company) with respect to the Depositary Shares
tendered hereby and accepted for exchange pursuant to the Exchange Offer,
with full power of substitution (such power of attorney being deemed to be an
irrevocable power coupled with an interest), to (a) deliver the Depositary
Shares tendered hereby to the Company for transfer on the books of the
Company and (b) receive all benefits and otherwise exercise all rights of
beneficial, ownership of such Depositary Shares, all in accordance with the
terms and subject to the conditions of the Exchange Offer.
The name and address of the registered holder(s) should be printed above
under "Description of Depositary Shares tendered," if not already printed
thereunder, exactly as they appear on the receipts representing the
Depositary Shares tendered hereby. The receipt number(s) and the number of
Depositary Shares that the undersigned wishes to tender should be indicated
in the appropriate box above under "Description of Depositary Shares
Tendered."
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, exchange, assign, and transfer the
Depositary Shares tendered hereby, and that, when the same are accepted for
exchange by the Company, the Company will acquire good and marketable title
thereto, free and clear of all liens, restrictions, charges, and encumbrances
and that such Depositary Shares are not subject to any adverse claim. The
undersigned, upon request, will execute and deliver any additional documents
deemed by the Depositary or the Company to be necessary or desirable to
complete the sale, exchange, assignment, and transfer of the Depositary
Shares tendered hereby.
All authority conferred, or agreed to be conferred, in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, legal representatives, successors, and assigns of
the undersigned. Except as stated in the Exchange Offer, this tender is
irrevocable.
The undersigned understands that the tender of Depositary Shares pursuant
to one of the procedures described in the Offering Circular under the caption
"The Exchange Offer--Procedures for Exchanging Depositary Shares" and in the
instructions hereto and the acceptance for exchange by the Company of such
Depositary Shares will constitute a binding agreement between the undersigned
and the Company, upon the terms and subject to the conditions of the Exchange
Offer.
Unless otherwise indicated herein under "Special Issuance and Payment
Instructions," please issue the shares of Common Stock due in respect of the
Depositary Shares accepted for exchange, and/or return any receipts for the
Depositary Shares not tendered or not accepted for exchange, in the name(s)
of the registered holder(s) appearing above under "Description of Depositary
Shares Tendered." In addition, unless otherwise indicated under "Special
Delivery Instructions," please mail the shares of Common Stock due in respect
of the Depositary Shares accepted for exchange, and/or return any receipts
for the Depositary Shares not tendered or not accepted for exchange (and
accompanying documents, as appropriate), to the registered holder(s) at the
address(es) appearing above under "Description of Depositary Shares
Tendered." If both the "Special Issuance and Payment Instructions" and
"Special Delivery Instructions" are completed, please issue the shares of
Common Stock due in respect of the Depositary Shares accepted for exchange,
and/or return any receipts for the Depositary Shares not tendered or not
accepted for exchange, in the name(s) of, and mail the shares of Common Stock
due in respect of the Depositary Shares accepted for exchange, and/or any
receipts of Depositary Shares not tendered or not accepted for exchange, to
the person(s) so indicated. The undersigned recognizes that the Company has
no obligation pursuant to the "Special Issuance and Payment Instructions" to
transfer any Depositary Shares from the name(s) of the registered holder(s)
thereof if the Company does not accept for exchange any of the Depositary
Shares so tendered. The undersigned acknowledges and agrees that the Company
and the Depositary may in appropriate circumstances defer effecting such
transfer and may retain such shares of Common Stock until satisfactory
evidence of the payment of transfer taxes payable on account of such transfer
by the undersigned, or exemption therefrom, is submitted to them.
<PAGE>
SPECIAL ISSUANCE AND PAYMENT
INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the shares of Common Stock, or the payment in lieu of
fractional shares, to be issued in exchange for the Depositary Shares
accepted for exchange, or receipts for Depositary Shares not tendered or not
accepted for exchange, are to be issued or reissued, respectively, in the
name of someone other than the undersigned.
Issue:
[ ] Depositary Shares [ ] Common Stock
To:
Name ........................................................................
(PLEASE TYPE OR PRINT)
Address .....................................................................
.............................................................................
.............................................................................
(ZIP CODE)
SPECIAL DELIVERY
INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if the shares of Common Stock, or the payment in lieu of
fractional shares, to be issued in exchange for the Depositary Shares
accepted for exchange, or receipts for Depositary Shares not tendered or not
accepted for exchange, are to be sent to someone other than appearing above
under "Description of Depositary Shares Tendered."
Issue:
[ ] Depositary Shares [ ] Common Stock
To:
Name ........................................................................
(PLEASE TYPE OR PRINT)
Address .....................................................................
.............................................................................
.............................................................................
(ZIP CODE)
SIGN AND DATE HERE
PURSUANT TO THE OFFERING CIRCULAR, THE UNDERSIGNED HEREBY TENDERS TO
THE COMPANY THE DEPOSITARY SHARES SET FORTH ABOVE UNDER "DESCRIPTION OF
DEPOSITARY SHARES TENDERED."
Dated:.......................................................... , 1996
.......................................................................
.......................................................................
(SIGNATURE(S) OF HOLDER(S))
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
receipt(s) representing the Depositary Shares or on a security position
listing or by person(s) authorized to become registered holder(s) by
certificates and documents transmitted herewith. If signature is by
trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or
representative capacity, please set forth the following information and
see Instruction 5.)
Name(s) ...............................................................
.......................................................................
(PLEASE PRINT)
Capacity ..............................................................
Name(s) of Record Holder(s)
.............................................................................
(PLEASE TYPE OR PRINT)
Address .....................................................................
.............................................................................
(INCLUDE ZIP CODE)
Area Code and
Telephone No. ...............................................................
Guarantee of Signature(s)
(IF REQUIRED SEE INSTRUCTIONS 1 AND 5)
Authorized Signature ........................................................
Name ........................................................................
(PLEASE PRINT)
Name of Firm ................................................................
Address .....................................................................
.............................................................................
(INCLUDE ZIP CODE)
Area Code and
Telephone No. ...............................................................
Dated: ................................................................ , 1996
HOLDERS WHO DO NOT WISH TO TENDER THEIR DEPOSITARY SHARES NEED NOT TAKE
ANY ACTION WITH RESPECT TO THE EXCHANGE OFFER
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES.
Except as otherwise provided below, signatures on this Letter of
Transmittal must be guaranteed by a financial institution (including most
commercial banks, savings and loan associations and brokerage houses) that is
a participant in the Security Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange
Medallion Program ("Eligible Institutions"), unless the Depositary Shares
tendered hereby are tendered (i) by a registered holder of such Depositary
Shares who has not completed the box entitled "Special Issuance and Payment
Instructions" or "Special Delivery Instructions" herein or (ii) for the
account of an Eligible Institution. If the Depositary Shares are registered
in the name of a person other than the signer of this Letter of Transmittal,
or if receipts representing shares of the Common Stock and/or receipts
representing untendered or unexchanged Depositary Shares are to be issued or
returned to a person other than the registered holder, then the Depositary
Shares must be endorsed by the registered holder, or be accompanied by a
written instrument or instruments of transfer or exchange, in form
satisfactory to the Company, duly executed by the registered holder, with
such signatures guaranteed by an Eligible Institution. See Instruction 5.
2. DELIVERY OF THIS LETTER OF TRANSMITTAL AND RECEIPTS.
This Letter of Transmittal is to be used if receipts representing
Depositary Shares are to be forwarded herewith. Receipts representing all
physically delivered Depositary Shares, as well as this Letter of Transmittal
(or facsimile thereof) properly completed and duly executed, and any required
signature guarantees and any other documents required by this Letter of
Transmittal, must be received by the Depositary at one of its addresses set
forth herein on or prior to the Expiration Date. Holders of Depositary Shares
whose receipts are not immediately available or who cannot deliver their
receipts and all other required documents to the Depositary before the
Expiration Date may tender their Depositary Shares by properly completing and
duly executing the Notice of Guaranteed Delivery pursuant to the guaranteed
delivery procedures set forth in the Offering Circular under the caption "The
Exchange Offer--Procedure for Exchanging Depositary Shares." Pursuant to such
procedures: (i) such tender must be made by or through an Eligible
Institution; (ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Company, must be received
by the Depositary on or prior to the Expiration Date; and (iii) all tendered
Depositary Shares, as well as this Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees and any other documents required by this Letter of Transmittal,
must be received by the Depositary within three (3) New York Stock Exchange
trading days after the Expiration Date, all as provided in the Offering
Circular under the caption "The Exchange Offer."
The method of delivery of Depositary Shares and all other required
documents to the Depositary is at the election and risk of the holder
tendering such shares. If sent by mail it is recommended that the holder use
an overnight delivery service or use a hand delivery service.
No alternative, conditional or contingent tenders will be accepted. All
tendering holders, by execution of this Letter of Transmittal (or facsimile
thereof), waive any right to receive any notice of the acceptance of their
Depositary Shares for exchange.
3. INADEQUATE SPACE.
If the space provided herein is inadequate, the receipt numbers and/or the
number of Depositary Shares should be listed on a separate signed schedule
attached hereto.
4. PARTIAL TENDERS.
Issuance of Common Stock in exchange for Depositary Shares will be made
only against deposit of tendered Depositary Shares. If fewer than all the
Depositary Shares evidenced by a submitted receipt are tendered, the
tendering holder of Depositary Shares should fill in the number of Depositary
Shares tendered in the appropriate boxes above under "Description of
Depositary Shares Tendered" with respect to the tender being made, but only
to the extent of the number of Depositary Shares being tendered. The
Depositary will then reissue and return to the tendering holder (unless
otherwise requested by the holder under "Special Issuance and Payment
Instructions" and "Special Delivery Instructions" in this Letter of
Transmittal), Depositary Shares equal to the number of such delivered
Depositary Shares not tendered, together with any tendered Depositary Shares
that were not accepted for exchange. All Depositary Shares represented by
receipts deposited with the Depositary will be deemed to have been tendered
unless otherwise indicated.
Tendered Depositary Shares not accepted for exchange by the Company, will
be returned without expense to the tendering holder of the Depositary Shares
as promptly as practicable following the Expiration Date.
5. SIGNATURES ON LETTERS OF TRANSMITTAL, WRITTEN INSTRUMENTS AND
ENDORSEMENTS.
If this Letter of Transmittal is signed by the registered holder(s) of the
Depositary Shares tendered hereby, the signatures must correspond with the
name(s) as written on the face of the receipts without alteration,
enlargement or any charge whatsoever.
If any of the Depositary Shares tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If this Letter of Transmittal or any certificate or written instrument or
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such persons should
so indicate when signing, and proper evidence satisfactory to the Company of
their authority to so act must be submitted.
When this Letter of Transmittal is signed by the registered holder(s) of
the Depositary Shares listed and transmitted hereby, no endorsements of
certificates or separate written instruments of transfer or exchange are
required unless the Common Stock due in respect of the Depositary Shares
accepted for exchange is to be issued to, and/or receipts for Depositary
Shares not
1
<PAGE>
tendered or not exchanged are to be issued in the name of, a person other
than the registered holder(s). Signatures on such certificates, receipts or
written instruments of transfer or exchange must be guaranteed by an Eligible
Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder of the receipt(s) listed, the receipt(s) must be endorsed
by the registered holder, or be accompanied by a written instrument or
instruments of transfer or exchange in form satisfactory to the Company duly
executed by the registered holder. Signatures on such certificates or written
instrument or instruments of transfer or exchange must be guaranteed by an
Eligible Institution.
6. TRANSFER TAXES.
The Company will pay any transfer taxes with respect to the transfer and
sale of Depositary Shares to it pursuant to the Exchange Offer. If, however,
the Common Stock due in respect of the Depositary Shares accepted for
exchange is to be issued to, or (in the circumstances permitted hereby) if
receipts for Depositary Shares not tendered or not exchanged are to be
registered in the name of any person other than the person(s) signing this
Letter of Transmittal, the amount of any transfer taxes (whether imposed on
the registered holder or such person) payable on account of the transfer to
such person must be paid by the holder requesting such transfer and such
holder hereby acknowledges and agrees that the Company and the Depositary may
defer effecting such transfer and may retain such shares of Common Stock
until satisfactory evidence of the payment of such taxes, or exemption
therefrom, is submitted to them.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the receipts listed in this Letter of
Transmittal.
7. SPECIAL ISSUANCE AND PAYMENT INSTRUCTIONS AND SPECIAL DELIVERY
INSTRUCTIONS.
If certificates representing shares of Common Stock and/or receipts
representing untendered or unexchanged Depositary Shares are to be issued,
reissued or returned to a person other than the person signing this Letter of
Transmittal or if such certificates and/or receipts are to be sent or
returned to someone other than the person signing this Letter of Transmittal
or to an address other than that shown above, the appropriate information set
forth in "Special Issuance and Payment" and "Special Delivery Instructions"
should be completed.
8. BACKUP WITHHOLDING.
Federal income tax law requires that, unless an exception applies, a
recipient (a "Payee") of the shares of Common Stock for tendered Depositary
Shares must provide the Depositary (as payor) with such Payee's taxpayer
identification number ("TIN") and certify that such number is correct. In the
case of a Payee who is an individual, the Payee's TIN is his or her social
security number. In addition, a Payee must certify that such Payee is not
subject to backup withholding. If the foregoing requirements are not
satisfied, the Payee may be subject to a $50 penalty imposed by the Internal
Revenue Service (the "IRS") and to backup withholding. The Payee with respect
to any tendered Depositary Shares will be either (i) the tendering holder of
such Depositary Shares or (ii) if the shares of Common Stock is issued to one
or more other persons pursuant to the Special Issuance Instructions, as
indicated in the applicable box, such other person or persons. Certain Payees
(including among others, all corporations and certain foreign Payees) are not
subject to these backup withholding and reporting requirements. Foreign
Payees should consult their own tax advisers with respect to the tax
consequences (including backup withholding requirements) of the Exchange
Offer.
If backup withholding applies, the Depositary is required to withhold 31%
of any payment made to the Payee. Backup withholding is not an additional
tax. Rather, the tax liability of persons subject to backup withholding will
be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
To prevent backup withholding, each nonexempt Payee must provide his or
her correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such Payee is awaiting a
TIN). See the enclosed Guidelines for Certification of TIN on Substitute Form
W-9 for additional instructions. In addition, the Payee must also certify
that he or she is not subject to backup withholding either because (i) such
Payee has not been notified by the IRS that he or she is subject to backup
withholding as a result of failure to report all interest or dividends or
(ii) the IRS has notified such Payee that he or she is no longer subject to
backup withholding.
9. WAIVER OF CONDITIONS.
Subject to the terms of the Exchange Offer, the conditions of the Exchange
Offer may be waived by the Company, in whole or in part, at any time and from
time to time, in the Company's sole discretion, in the case of any Depositary
Shares tendered. The Exchange Offer is conditioned upon, among other things,
there having been received and not revoked, at the Expiration Date, tenders
from 75% or more of the outstanding Depositary Shares.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Requests for assistance may be directed to, or additional copies of the
Offering Circular, this Letter of Transmittal and the Notice of Guaranteed
Delivery may be obtained from the Company, the Information Agent at one of
its addresses set forth above or from a broker, dealer, commercial bank trust
company or other nominees.
11. LOST, DESTROYED OR STOLEN RECEIPTS.
If any receipt evidencing Depositary Shares has been lost, mutilated,
destroyed or stolen, the holder should promptly notify the Information Agent
for the Exchange Offer, Chemical Mellon Shareholder Services, L.L.C., at
(800) 774-5469. The holder will then be instructed as to the steps that must
be taken in order to replace the receipt(s). This Letter of Transmittal and
related documents cannot be proceeded until the procedures for replacing
receipt(s) have been followed.
Important: In order to validly tender the Depositary Shares, this Letter
of Transmittal (or a facsimile thereof), together with receipts representing
Depositary Shares and any required signature guarantees and any other
required documents, must be received by the Depositary on or prior to the
Expiration Date or the Notice of Guaranteed Delivery must be received by the
Depositary on or prior to the Expiration Date.
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SUBSTITUTE FORM W-9 DEPARTMENT PART 1--PLEASE PROVIDE YOUR TIN IN TIN: ------------------------------
OF THE TREASURY THE BOX AT RIGHT AND CERTIFY BY SIGNING SOCIAL SECURITY NUMBER OR
AND DATING BELOW. EMPLOYER IDENTIFICATION NUMBER
PAYOR'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER ("TIN") ---------------------------------------------------------------------
PART 2--Check the box if you are NOT subject to backup withholding under
the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code because
(1) you have not been notified that you are subject to backup withholding
as a result of failure to report all interest or dividends or (2) the IRS
has notified you that you are no longer subject to backup withholding.
---------------------------------------------------------------------
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION
PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE. SIGNATURE . DATE .
----------------------------------------------------------------------
PART 3-- AWAITING TIN
----------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACK-UP
WITHHOLDING OF 31% OF THE EXCHANGE OFFER CONSIDERATION PAID TO YOU PURSUANT
TO THE EXCHANGE OFFER AND THE CONSENT SOLICITATION. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number within
sixty (60) days, 31% of all reportable payments made to me thereafter will
be withheld until I provide a number.
- ------------------------------------------ -------------------------
SIGNATURE DATE
The Information Agent for the Exchange Offer is: Chemical Mellon Shareholder
Services, L.L.C.
(800) 774-5469
(For Information Call Toll Free)
NOTICE OF GUARANTEED DELIVERY
FOR
EXCHANGE OF
OUTSTANDING DEPOSITARY CONVERTIBLE EXCHANGEABLE PREFERRED SHARES,
EACH REPRESENTING 1/10TH OF A SHARE OF $17.00 CONVERTIBLE
EXCHANGEABLE PREFERRED STOCK,
OF LEWIS GALOOB TOYS, INC.
PURSUANT TO THE OFFERING CIRCULAR
DATED FEBRUARY 28, 1996.
As set forth in the Offering Circular dated February 28, 1996 (as the same
may be amended from time to time, the "Offering Circular") of Lewis Galoob
Toys, Inc. (the "Company") under the caption "The Exchange Offer--Procedure
for Exchanging Depositary Shares," and in the accompanying Letter of
Transmittal (the "Letter of Transmittal," together with the Offering
Circular, the "Exchange Offer"), this form or one substantially equivalent
hereto must be used to accept the Company's offer to exchange each of its
outstanding Depositary Convertible Exchangeable Preferred Shares (the
"Depositary Shares"), representing 1/10th of a share of $17.00 Convertible
Exchangeable Preferred Stock of the Company, for 1.85 shares of common stock,
$.01 par value per share (the "Common Stock"), of the Company. This form,
properly completed and duly executed, may be delivered by mail or hand
delivery or transmitted, via facsimile, to the Depositary as set forth below.
All capitalized terms used herein but not defined herein shall have the
meanings ascribed to them in the Exchange Offer.
THE EXCHANGE OFFER, AND WITHDRAWAL RIGHTS FOR DEPOSITARY SHARES TENDERED
PURSUANT TO THE EXCHANGE OFFER, WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 29, 1996 (THE "EXPIRATION DATE"), UNLESS EXTENDED.
The Depositary and Information Agent for the Offer is:
CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C.
(800) 774-5469
(For Information Call Toll Free)
<TABLE>
<CAPTION>
<S> <C> <C>
By Mail: By Hand: By Overnight Courier:
Chemical Mellon Shareholder Chemical Mellon Shareholder 85 Challenger Road
Services, L.L.C. Services, L.L.C. Ridgefield Park, New Jersey 07660
P.O. Box 845 120 Broadway, 13th Floor Attention: Reorganization Department
Midtown Station New York, NY 10271
</TABLE>
New York, NY 10018 Attention: Reorganization
Attention: Reorganization Department Department
Facsimile
Transmission Number:
(201) 296-4293
Confirm by telephone:
(201) 296-4209
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR
TRANSMISSION VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE
A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by an "Eligible
Institution" under the instructions thereto, such signature guarantee must
appear in the applicable space provided in the signature box on the Letter of
Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company, upon the terms and
subject to the conditions set forth in the Offering Circular and Letter of
Transmittal, receipt of which are hereby acknowledged, the number of
Depositary Shares specified below pursuant to the guaranteed delivery
procedures set forth in the Offering Circurlar under the caption "The
Exchange Offer--Procedure for Exchanging Depositary Shares--Signature
Guarantees and Method of Delivery."
The undersigned hereby represents and warrants that the undersigned is
exchanging Depositary Shares for its own account, and not with a view towards
distribution of the Common Stock in violation of the Securities Act of 1933,
as amended, or any state securities laws.
The undersigned hereby represents and warrants that the undersigned has
been afforded the opportunity to request from the Company and to review all
additional information considered by it to be necessary to verify the
accuracy and completeness of the information in the Exchange Offer.
The undersigned authorizes the Depositary to deliver this Notice of
Guaranteed Delivery to the Company. In the event of a termination of the
Exchange Offer, the Depositary Shares tendered pursuant to the Exchange Offer
will be returned to the tendering holder thereof promptly.
- -----------------------------------------------------------------------------
ALL AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED BY THIS NOTICE OF
GUARANTEED DELIVERY SHALL SURVIVE THE DEATH OR INCAPACITY OF THE UNDERSIGNED
AND EVERY OBLIGATION OF THE UNDERSIGNED UNDER THIS NOTICE OF GUARANTEED
DELIVERY SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES,
EXECUTORS, ADMINISTRATORS, SUCCESSORS, ASSIGNS, TRUSTEES IN BANKRUPTCY AND
OTHER LEGAL REPRESENTATIVES OF THE UNDERSIGNED.
- -----------------------------------------------------------------------------
PLEASE SIGN AND COMPLETE
Signatures of Registered Holder(s) or Authorized
Signatory:
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
Name(s) of Registered Holder(s):
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
Depositary Shares Tendered:
___________________________________________________________________________
Certificate No.(s) of Depositary Shares
(if available): ____________________________________________________________
Date: _______________________________________________________________________
Address: ___________________________________________________________________
Area Code and Telephone No.: _______________________________________________
If Depositary Shares will be delivered by book-
entry transfer, check trust company below:
The Depository Trust Company []
Midwest Securities Trust Company []
Philadelphia Depository Trust Company []
Depository Account No.: ____________________________________________________
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a financial institution (including most commercial banks,
savings and loan associations and brokerage houses) that is a participant in
the Security Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Guarantee Program or the Stock Exchange Medallion
Program, hereby guarantees to deliver to the Depositary either the
depositary receipts representing the Depositary Shares tendered hereby, in
proper form for transfer, or confirmation of the book-entry transfer of such
Depositary Shares into the Depositary's account at The Depository Trust
Company, Midwest Securities Trust Company or Philadelphia Depository Trust
Company, in any such case together with a properly completed and duly
executed Letter(s) of Transmittal (or facsimile(s) thereof), with any
required signature guarantees and any other required documents within three
New York Stock Exchange trading days after the execution of this notice.
Name of Firm: ______________________________________________________________
Area Code and Telephone No. ________________________________________________
AUTHORIZED SIGNATURE
Name: ______________________________________________________________________
Title: _____________________________________________________________________
Date: ______________________________________________________________________
DO NOT SEND DEPOSITARY RECEIPTS WITH THIS FORM. ACTUAL SURRENDER OF
DEPOSITARY RECEIPTS MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A
PROPERLY COMPLETED AND VALIDLY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS.
This Notice of Guaranteed Delivery must be signed by the holder(s) of
Depositary Shares exactly as their name(s) appear on certificates for
Depositary Shares or on a security position listing as the owner of
Depositary Shares, or by person(s) authorized to become holder(s) of
Depositary Shares by endorsements and documents transmitted with this Notice
of Guaranteed Delivery. If signature is by a trustee, executor,
administrator, guardian, attorney_in_fact, officer of a corporation, agent
or other person acting in a fiduciary or representative capacity, such
person must provide the following information:
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s): __________________________________________________________________
Capacity (full title): ____________________________________________________
Address(es): ______________________________________________________________
DO NOT SEND DEPOSITARY SHARES WITH THIS FORM. DEPOSITARY SHARES SHOULD BE
SENT TO THE DEPOSITARY TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED
LETTER OF TRANSMITTAL.
[GALOOB LOGO]
February 28, 1996
To: Holders of the Depositary Convertible Exchangeable Preferred Shares
("Depositary Shares") of Lewis Galoob Toys, Inc. ("Galoob" or the "Company"),
each representing 1/10 th of a share of $17.00 Convertible Exchangeable
Preferred Stock ("$17.00 Preferred Stock") of the Company
Ladies and Gentlemen:
Galoob is offering you the opportunity, from 9:00 a.m., New York City
time, on February 28, 1996 (the "Commencement Date") until 5:00 p.m., New
York City time, on March 29, 1996 (the "Expiration Date"), to exchange your
Depositary Shares for 1.85 shares of Galoob common stock, $.01 par value per
share (the "Common Stock"), pursuant to the terms of the enclosed Offering
Circular dated February 28, 1996 (as the same may be amended from time to
time, the "Offering Circular"), and in the accompanying Letter of Transmittal
(the "Letter of Transmittal," together with the Offering Circular, the
"Exchange Offer"). Pursuant to the Exchange Offer, the effective conversion
rate has been raised to 18.50 shares of Common Stock for each share of $17.00
Preferred Stock, or 1.85 shares of Common Stock for each Depositary Share.
I am gratified that Galoob, at long last, now has the resources to make
this Exchange Offer. I urge you to accept the Exchange Offer for the same
reason the Company has made it--because it is a fair transaction in which all
participants win.
You, the preferred shareholders win because the Exchange Offer provides
you with market value premiums (based on the New York Stock Exchange ("NYSE")
close on February 27, 1996) that exceed both the highest value your
Depositary Shares have ever attained prior to the announcement of the
Exchange Offer ($25.38), and the cash redemption value of the Depositary
Shares plus dividend arrearages ($27.06).
Specifically, except during the limited period the Company will hold open
the Exchange Offer, the stated rate of conversion set forth in the
Certificate of Designations governing the $17.00 Preferred Stock is
approximately 11.85 shares of Common Stock for each share of $17.00 Preferred
Stock, or approximately 1.185 shares of Common Stock for each Depositary
Share. For the limited time that the Company is holding open the Exchange
Offer to you, the conversion ratio will be increased by 56%, meaning that you
will receive 18.50 shares of Common Stock for each share of Preferred Stock,
or 1.85 shares of Common Stock for each Depositary Share. As of February 27,
1996, the last trading day prior to the commencement of the Exchange Offer,
the closing prices of the Common Stock and the Depositary Shares as reported
on the NYSE were $16.00 and $29.00, respectively. At the proposed conversion
ratio of 1.85 shares of Common Stock for each Depositary Share, using the
respective closing stock prices as of February 27, 1996, the Company's
Exchange Offer would result in Depositary Shares being exchanged for $29.60
per share in Common Stock value, or a premium of 17% over the pre
announcement market value of your Depositary Shares, or 9% over the $27.06
per share cash redemption value plus dividend arrearages for the Depositary
Shares through the most recent dividend payment date.
As a preferred shareholder, you also win by accepting the Exchange Offer
because your uncertainty over if, how, when, and at what valuation would the
Company compensate you for dividend arrearages, is ended, once and for all.
Moreover, the shares of Common Stock received by you are far more liquid than
the Depositary Shares, and will be freely tradable on the NYSE, so long as
you are not an affiliate of Galoob.
The common shareholders win because successful conclusion of the Exchange
Offer ends their uncertainty over if, how, when, and at what valuation the
Company would compensate the preferred shareholders for dividend arrearages,
and importantly to them, the affect that the act of such compensation would
have on the market value of the Common Stock.
[GALOOB LOGO]
<PAGE>
Finally, the Company wins because successful conclusion of the Exchange
Offer will strengthen our financial position by eliminating a large and ever
growing dividend arrearage. In so doing, Galoob's credit worthiness is
enhanced. Most importantly Galoob's access to the public equity and credit
markets will be much improved, making the financing resources to support
continued growth, and exploit opportunities as they may present themselves,
far more readily available to the Company.
The Exchange Offer is conditioned upon, among other things, at least 75%
of the Depositary Shares being validly tendered and not withdrawn prior to
the Expiration Date. In the event that the Exchange Offer is completed, the
number of Depositary Shares which trade publicly will be dramatically reduced
and, as a result, that could adversely affect the liquidity and market value
of any Depositary Shares that remain outstanding after the Exchange Offer.
Additionally, if, after the Expiration Date, there are less than 100,000
publicly-held Depositary Shares, or the market value of the remaining
publicly-held Depositary Shares is less than $2 million, the NYSE may require
delisting of the Depositary Shares because the Depositary Shares would no
longer satisfy all of the requirements to be designated as a NYSE security.
If in excess of 94.6% (or 1,739,500 Depositary Shares) of the Depositary
Shares are exchanged for shares of Common Stock in the Exchange Offer, the
Depositary Shares would no longer satisfy all of the requirements to continue
to be designated as a NYSE security. Accordingly, there can be no assurance
that the Depositary Shares will continue to be listed on the NYSE after the
Expiration Date.
The Depositary Shares are currently registered under the Securities
Exchange Act of 1934, as amended. Registration may be terminated upon
application of the Company to the Securities and Exchange Commission if the
Depositary Shares are neither listed on the NYSE or another national
securities exchange nor held of record by at least 300 persons. This set of
circumstances may occur after the conclusion of the Exchange Offer.
Therefore, if you do not accept the Exchange Offer and you are a remaining
Depositary Shareholder, and these circumstances do arise, you may experience
significant difficulty in selling your shares, should you wish to do so,
after the Expiration Date of the Exchange Offer.
Dividends on the Depositary Shares are required to be paid on January 1,
April 1, July 1 and October 1 of each year for the immediately preceding
quarter. Galoob has not paid any dividends on the Depositary Shares since the
quarter beginning on April 1, 1992. The accrued and unpaid dividends on the
Depositary Shares, through December 31, 1995, equal $6.375 per Depositary
Share. BY CONVERTING YOUR DEPOSITARY SHARES INTO COMMON STOCK, YOU ARE
WAIVING YOUR RIGHT TO RECEIVE ANY ACCUMULATED AND UNPAID DIVIDENDS ON THE
DEPOSITARY SHARES. The Company makes no assurances that any accrued or future
dividends will be paid on any remaining Depositary Shares after completion of
the Exchange Offer. Galoob will, at its discretion, deal with any remaining
Depositary Shares after conclusion of the Exchange Offer as the Company deems
appropriate.
The Exchange Offer is further described in the accompanying Offering
Circular material, which includes copies of the Letter of Transmittal,
Galoob's Current Report on Form 8-K filed on February 13, 1996, Galoob's
Annual Report on Form 10-K for the year ended December 31, 1994, Galoob's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and
the Notice of the Annual Meeting of Stockholders and Galoob's Proxy Statement
dated May 16, 1995 in connection with Galoob's Annual Meeting of Stockholders
held on June 20, 1995. PLEASE READ THE ACCOMPANYING EXCHANGE OFFER MATERIAL
FOR A FULL DESCRIPTION OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER.
TO EXCHANGE EACH OF YOUR DEPOSITARY SHARES FOR 1.85 SHARES OF COMMON STOCK
PURSUANT TO THE EXCHANGE OFFER, CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C.,
THE DEPOSITARY FOR THE DEPOSITARY SHARES AND INFORMATION AGENT FOR THE
EXCHANGE OFFER, MUST RECEIVE YOUR LETTER OF TRANSMITTAL AND RECEIPTS
EVIDENCING YOUR DEPOSITARY SHARES BY 5:00 P.M., NEW YORK CITY TIME, ON MARCH
29, 1996.
For all these reasons I most earnestly urge you to accept this Exchange
Offer. If you have any questions regarding the Exchange Offer, please feel
free to call me at 1-800-STKSWAP. Either I or another member of executive
management will return your call promptly.
Very truly yours,
/s/ Mark D. Goldman
Mark D. Goldman
President and Chief Executive
Officer
Enclosures
CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C.
450 WEST 33RD STREET, 15TH FLOOR
NEW YORK, NY 10001-2697
OFFER TO EXCHANGE
BY
LEWIS GALOOB TOYS, INC.
OF
ONE DEPOSITORY CONVERTIBLE
EXCHANGEABLE PREFERRED SHARE, REPRESENTING 1/10TH OF A SHARE
OF $17.00 CONVERTIBLE
EXCHANGEABLE PREFERRED STOCK, FOR 1.85 SHARES OF COMMON STOCK
PURSUANT TO THE OFFERING CIRCULAR
DATED FEBRUARY 28, 1996
THE EXCHANGE OFFER, AND WITHDRAWAL RIGHTS FOR DEPOSITARY SHARES TENDERED
PURSUANT TO THE EXCHANGE OFFER, WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 29, 1996 (THE "EXPIRATION DATE"), UNLESS EXTENDED.
February 28, 1996
To: BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES AND OTHER NOMINEES:
We have been appointed by Lewis Galoob Toys, Inc. (the "Company") to act
as the Depositary and Information Agent in connection with the Company's
offer to exchange, upon the terms and subject to the conditions set forth in
the Offering Circular dated February 28, 1996 (the "Offering Circular") and
in the related Letter of Transmittal (the "Letter of Transmittal," together
with the Offering Circular, the "Exchange Offer"), each of its outstanding
Depositary Convertible Exchangeable Preferred Shares, representing 1/10th of
a share of $17.00 Convertible Exchangeable Preferred Stock of the Company,
for 1.85 shares of common stock, $.01 par value per share of the Company.
Enclosed herewith are copies of the following documents:
1. The Offering Circular;
2. The Letter of Transmittal for your use and for the information of your
clients, together with guidelines of the Internal Revenue Service for
Certification of Taxpayer Identification Number on Substitute Form W-9
providing information relating to backup federal income tax withholding;
3. Notice of Guaranteed Delivery to be used to accept the Exchange Offer
if the Depositary Shares and all other required documents cannot be delivered
to the Depositary on or prior to the Expiration Date;
4. A form of letter which may be sent to your clients for whose account
you hold the Depositary Shares in your name or in the name of a nominee, with
space provided for obtaining such clients' instructions with regard to the
Exchange Offer;
5. A return envelope addressed to the undersigned; and
6. A letter from the President and Chief Executive Officer of the Company.
PLEASE NOTE THAT THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON MARCH 29, 1996, UNLESS EXTENDED. WE URGE YOU TO CONTACT YOUR
CLIENTS AS PROMPTLY AS POSSIBLE.
<PAGE>
The Company will not pay any fees or commissions to any broker or dealer
or other person for soliciting tenders of the Depositary Shares pursuant to
the Exchange Offer. You will be reimbursed for customary mailing and handling
expenses incurred by you in forwarding the enclosed materials to your
clients.
Additional copies of the enclosed materials may be obtained from the
undersigned, at its address and telephone number set forth on the back cover
of the enclosed Offering Circular.
CHEMICAL MELLON SHAREHOLDER SERVICES, L.L.C.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE COMPANY OR THE DEPOSITARY AGENT OR
AUTHORIZE YOU OR ANY OTHER PERSON TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF ANY OF THEM WITH RESPECT TO THE EXCHANGE OFFER
NOT CONTAINED IN THE OFFERING CIRCULAR OR THE LETTER OF TRANSMITTAL.
LEWIS GALOOB TOYS, INC.
OFFER TO EXCHANGE
ONE OUTSTANDING DEPOSITARY CONVERTIBLE EXCHANGEABLE PREFERRED SHARE,
REPRESENTING 1/10TH OF A SHARE OF $17.00 CONVERTIBLE EXCHANGEABLE
PREFERRED STOCK, FOR 1.85 SHARES OF COMMON STOCK
THE EXCHANGE OFFER, AND WITHDRAWAL RIGHTS FOR DEPOSITARY SHARES TENDERED
PURSUANT TO THE EXCHANGE OFFER, WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 29, 1996, UNLESS EXTENDED.
February 28, 1996
TO OUR CLIENTS:
Enclosed for your consideration is the Offering Circular dated February
28, 1996 (as the same may be amended from time to time, the "Offering
Circular") and a related form of Letter of Transmittal and instructions
thereto (the "Letter of Transmittal," together with the Offering Circular,
the "Exchange Offer") relating to the offer by Lewis Galoob Toys, Inc. (the
"Company") to exchange each of its outstanding Depositary Convertible
Exchangeable Preferred Shares, representing 1/10th of a share of $17.00
Convertible Exchangeable Preferred Stock of the Company for 1.85 shares of
common stock, $.01 par value per share (the "Common Stock"), of the Company.
Consummation of the Exchange Offer is subject to certain conditions
described in the Exchange Offer.
WE ARE THE REGISTERED HOLDER OF THE DEPOSITARY SHARES HELD BY US FOR YOUR
ACCOUNT. A TENDER OF ANY SUCH DEPOSITARY SHARES CAN BE MADE ONLY BY US AS THE
REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF
TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED
BY YOU TO TENDER DEPOSITARY SHARES HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish us to tender
any or all of the Depositary Shares held by us for your account, pursuant to
the terms and conditions set forth in the Exchange Offer. We urge you to read
the Exchange Offer and related Letter of Transmittal carefully before
instructing us to tender your Depositary Shares.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to tender Depositary Shares on your behalf in accordance
with the provisions of the Exchange Offer. The Exchange Offer will expire at
5:00 p.m., New York City time, on March 29, 1996 (the "Expiration Date"),
unless extended. Depositary Shares tendered pursuant to the Exchange Offer
may be withdrawn, upon written notice to the Depositary, at any time prior to
the Expiration Date and subject to the procedures described in the Exchange
Offer.
Your attention is directed to the following:
1. The Exchange Offer is conditioned upon, among other things, at least
75% of the Depositary Shares being validly tendered and not withdrawn prior
to the Expiration Date.
2. The Company will not pay any fees or commissions to any broker or
dealer or other person for soliciting tenders of Depositary Shares in the
Exchange Offer.
3. Any transfer taxes incident to the transfer and sale of Depositary
Shares from the tendering holder to the Company will be paid by the Company,
except as provided in the Exchange Offer and the instructions to the Letter
of Transmittal.
If you wish to have us tender any or all of the Depositary Shares held by
us for your account, please so instruct us by completing, executing and
returning to us the instruction form that follows.
<PAGE>
INSTRUCTIONS WITH RESPECT TO THE OFFER TO EXCHANGE
THE OUTSTANDING DEPOSITARY CONVERTIBLE EXCHANGEABLE PREFERRED
SHARES OF LEWIS GALOOB TOYS, INC.
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer in connection
with the offer by Lewis Galoob Toys, Inc. to purchase each of its outstanding
Depositary Shares for 1.85 shares of Common Stock.
This will instruct you whether to tender the number of Depositary Shares
indicated below held by you for the account of the undersigned, pursuant to
the terms and conditions set forth in the Exchange Offer and the related
Letter of Transmittal.
[ ] By checking this box, all Depositary Shares held for the account of the
undersigned will be tendered. If fewer than all Depositary Shares are to be
tendered, please check the box AND indicate below the aggregate number of
Depositary Shares to be tendered. (Unless otherwise indicated, it will be
assumed that all Depositary Shares held for the account of the undersigned
are to be tendered.)
Number of Depositary Shares to be tendered: ________________
Date: __________________, 1996
______________________________________
Signature(s)
______________________________________
______________________________________
Please print name(s) here
______________________________________
______________________________________
______________________________________
Please type or print address
______________________________________
Area Code and Telephone Number
______________________________________
Taxpayer Identification or
Social Security Number
______________________________________
My Account Number With You
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYOR
- -- Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e., 00-0000000. The table below will help determine the
number to give the Payor.
<TABLE>
<CAPTION>
GIVE THE
FOR THIS TYPE OF ACCOUNT SOCIAL SECURITY
NUMBER OF--
<S> <C> <C>
1. An individual's account The individual
2. Two or more individuals
(joint account) The actual owner of the account
or, if combined funds, any one
of the individuals(1)
3. Husband and wife (joint account)
The actual owner of the account
or, if joint funds, either
person(1)
4. Custodian account of a minor
(Uniform Gift to Minors Act) The minor(2)
5. Adult and minor (joint account) The adult or, if the minor is
the only contributor, the
minor(1)
6. Account in the name of guardian The ward, minor, or incompetent
or committee for a designated person(3)
ward, minor, or incompetent
person
7. a.The usual revocable savings The grantor-trustee(1)
trust account (grantor is also
trustee)
b.So-called trust account that
is not a legal or valid trust
under State law The actual owner(1)
</TABLE>
<TABLE>
<CAPTION>
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF--
<S> <C> <C>
8. Sole proprietorship account The Owner(4)
9. A valid trust, estate, or pension Legal entity (Do not furnish
trust the identifying number of the
personal representative or
trustee unless the legal entity
itself is not designated in the
account title.)(5)
10. Corporate account The Corporation
11. Religious, charitable, or The organization
educational organization account
12. Partnership account held in the The partnership
name of the business
13. Association, club or other The organization
tax-exempt organization
14. A broker or registered nominee The broker or nominee
15. Account with the Department of The public entity
</TABLE>
Agriculture in the name of a public
entity (such as a State or local
governmental school district or
prison) that receives agricultural
program payments
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish
such person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate or pension
trust.
[/TABLE]
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
1
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local
office of the Social Security Administration or the Internal Revenue Service
and apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
o A corporation.
o A financial institution.
o An organization exempt from tax under section 501(a), or an individual
retirement plan.
o The United States or any agency or instrumentality thereof.
o A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
o A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
o An international organization or any agency, or instrumentality thereof.
o A registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
o A real estate investment trust.
o A common trust fund operated by a bank under section 584(a).
o An exempt charitable remainder trust, or a non- exempt trust described in
section 4947(a)(1).
o An entity registered at all times under the Investment Company Act of
1940.
o A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
o Payments to nonresident aliens subject to withholding under section 1441.
o Payments to Partnerships not engaged in a trade or business in the U.S.
and which have at least one nonresident partner.
o Payments of patronage dividends where the account received is not paid in
money.
o Payments made by certain foreign organizations.
o Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
o Payments of interest on obligations issued by individuals. Note: You may
be subject to backup withholding if this interest is $600 or more and is paid
in the course of the payer's trade or business and you have not provided your
correct taxpayer identification number to the payer.
o Payments of tax-exempt interest (including exempt interest dividends under
section 852).
o Payments described in section 6049(b)(5) to nonresident aliens.
o Payments on tax-free covenant bonds under section 1451.
o Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible
erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR
TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND
RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE
DIVIDENDS, ALSO SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends
that are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045, and 6050A.
PRIVACY ACT NOTICE--Section 6109 requires most recipients of dividend
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. IRS uses the numbers for identification
purposes. Payers must be given the numbers whether or not recipients are
required to file tax returns. Beginning January 1, 1993, payers must
generally withhold 31% of taxable interest, dividend, and certain other
payments to a payee who does not furnish a taxpayer identification number to
a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER--If you
fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due
to reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING--If you
make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION-- Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
2
