<PAGE> 1
FILED PURSUANT TO
RULES 424(B)(3) AND 424(C)
REGISTRATION NO. 333-00743
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED MARCH 18, 1996
--------------------------------------------------------
LEWIS GALOOB TOYS, INC.
1,684,398 SHARES OF COMMON STOCK
---------------------------------------------------
This supplements the Prospectus, dated March 18, 1996, relating to an
aggregate of up to 1,684,398 shares of common stock, $.01 par value (the
"Common Stock"), of Lewis Galoob Toys, Inc. (the "Company"), beneficially
owned by certain stockholders and which may be offered by such stockholders
from time to time.
The Prospectus to which this Prospectus Supplement relates is hereby
supplemented by the information contained in the attached copy of the Company's
Quarterly Report on Form 10-Q for the fiscal period ended June 30, 1996, filed
with the Securities and Exchange Commission on August 13, 1996.
This Prospectus Supplement, together with the Prospectus Supplement,
dated May 28, 1996, and the Prospectus to which such supplements relate,
constitutes the Prospectus required to be delivered pursuant to Section 5(b) of
the Securities Act of 1933, as amended, with respect to the securities
currently being offered or sold.
The Common Stock of the Company is traded on the New York Stock
Exchange ("NYSE") under the symbol "GAL". On September 19, 1996, the closing
price of the Common Stock as reported by the NYSE was $28.00 per share.
The date of this Prospectus Supplement is September 20, 1996.
---------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------------------------------------
<PAGE> 2
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 June 30, 1996
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
Number) incorporation or organization)
500 Forbes Boulevard, South San Francisco, California 94080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 952-1678
Former name, former address and former fiscal year,
if changed since last report
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Common stock, par value $.01, 15,119,651 as of June 30, 1996.
<PAGE> 3
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 Page
- Condensed Consolidated Balance Sheets 1
- Condensed Consolidated Statements of Operations 2
- Condensed Consolidated Statements of Cash Flows 3
- Notes to Condensed Consolidated Financial Statements 4-6
Item 2
- Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-12
PART II - OTHER INFORMATION
Item 1
- Legal Proceedings 13
Item 6
- Exhibits and Reports on Form 8-K 13
SIGNATURE 14
<PAGE> 4
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Audited)
June 30 June 30 December 31
ASSETS 1996 1995 1995
- ------ --------- --------- ---------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,920 $ 1,106 $ 2,030
Accounts receivable, net 61,773 43,189 68,402
Inventories 20,686 18,004 17,491
Tooling and related costs 12,983 8,095 8,311
Prepaid expenses and other assets 10,861 12,610 10,348
--------- --------- ---------
TOTAL CURRENT ASSETS 109,223 83,004 106,582
LAND, BUILDING AND EQUIPMENT, NET 10,081 8,233 8,913
OTHER ASSETS 5,390 3,511 4,589
--------- --------- ---------
$ 124,694 $ 94,748 $ 120,084
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 34,644 $ 17,147 $ 15,071
Accounts payable 13,785 12,768 17,141
Accrued expenses 8,493 9,467 14,547
Income taxes payable 372 272 731
Current portion of long-term debt 4,318 213 4,422
--------- --------- ---------
TOTAL CURRENT LIABILITIES 61,612 39,867 51,912
LONG-TERM DEBT -- 18,309 14,000
SHAREHOLDERS' EQUITY:
Preferred stock
Authorized 1,000,000 shares
Issued and outstanding 0 shares, 183,950 shares and 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 15,119,651
shares, 10,070,889 shares and
10,089,961 shares 151 101 101
Additional paid-in capital 105,774 31,638 31,579
Retained earnings (deficit) (42,396) (31,510) (13,851)
Cumulative translation adjustment (447) (447) (447)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 63,082 36,572 54,172
--------- --------- ---------
$ 124,694 $ 94,748 $ 120,084
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
1
<PAGE> 5
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 49,201 $ 38,219 $ 86,723 $ 71,560
Costs of products sold 26,443 24,961 47,780 46,453
-------- -------- -------- --------
Gross margin 22,758 13,258 38,943 25,107
-------- -------- -------- --------
Operating expenses:
Advertising and promotion 6,607 5,358 12,411 9,662
Other selling and administrative 5,876 5,910 13,253 12,332
Royalties, research and development 9,192 5,414 15,502 10,093
-------- -------- -------- --------
Total operating expenses 21,675 16,682 41,166 32,087
-------- -------- -------- --------
Earnings (loss) from operations 1,083 (3,424) (2,223) (6,980)
Interest expense (767) (737) (1,596) (1,387)
Other income (expense), net 71 74 91 109
-------- -------- -------- --------
Earnings (loss) before
income taxes 387 (4,087) (3,728) (8,258)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net earnings (loss) 387 (4,087) (3,728) (8,258)
Preferred stock dividends:
Paid 6 -- 6 --
In arrears -- 782 15 1,564
Charge related to the exchange
of preferred stock for common -- -- 24,279 --
-------- -------- -------- --------
Net earnings (loss) applicable
to common shares $ 381 $ (4,869) $(28,028) $ (9,822)
======== ======== ======== ========
Common shares and common share
equivalents outstanding - Average 16,222 10,067 12,774 10,064
Net earnings (loss) per common share:
Primary $ 0.02 ($ 0.48) ($ 2.19) ($ 0.98)
Fully diluted $ 0.02 ($ 0.48) ($ 2.19) ($ 0.98)
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE> 6
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except shares)
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended June 30
------------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (3,728) $ (8,258)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation 350 130
Changes in assets and liabilities:
Accounts receivable 6,629 14,695
Inventories (3,195) (1,180)
Tooling and related costs (4,672) 284
Prepaid expenses and other assets (2,148) (9,067)
Accounts payable (3,356) (2,205)
Accrued expenses (5,727) (5,461)
Income taxes payable (359) (227)
-------- --------
Net cash (used in) provided by operating
activities (16,206) (11,289)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and
equipment, net (1,518) 37
-------- --------
Net cash (used in) provided by investing
activities (1,518) 37
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings under notes payable 19,573 10,176
Repayments under long-term debt agreements (104) (105)
Proceeds from issuance of common stock 875 62
Redemption of preferred stock (462) --
Costs associated with the conversion
of debentures and the preferred shares exchange (1,268) --
-------- --------
Net cash (used in) provided by financing
activities 18,614 10,133
-------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 890 (1,119)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,030 2,225
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,920 $ 1,106
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
During the six months ended June 30, 1996, $14,000 of the Company's 8%
convertible subordinated debentures were converted into 1,511,872 shares of its
common stock. Deferred loan costs and accrued interest amounting to
approximately $505, net, were debited to additional paid-in capital. See Note H.
During the six months ended June 30, 1996, 1,822,899 depositary shares of the
Company's preferred stock were exchanged for 3,359,432 shares of its common
stock. See Note I.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 7
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
NOTE A - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets as of June 30, 1996 and 1995 and the
condensed consolidated statements of operations for the three and six month
periods ended June 30, 1996 and 1995 and the condensed consolidated statements
of cash flows for the six month periods ended June 30, 1996 and 1995 have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
June 30, 1996 and 1995 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1995. Certain amounts in the financial statements of prior years have been
reclassified to conform with the current year's presentation.
The results of operations for the three and six month periods ended June 30,
1996 and 1995 are not necessarily indicative of the operating results for the
full year.
NOTE B - LEGAL RECOVERY
For the three and six month periods ended June 30, 1996, other selling and
administrative expenses were reduced by $2.3 million received in settlement of a
claim for damages. This benefit was partially offset by $1.3 million and $2.0
million of unusual legal expenses incurred during the three and six month
periods ended June 30, 1996, respectively, related to this claim and a lawsuit
where the Company is the plaintiff.
NOTE C - CREDIT AGREEMENT
On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "Loan Agreement") with Congress Financial Corporation
(Central) (the "Lender"). The Loan Agreement extends 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 at prime rate plus 1%. In consideration for entering into the
Loan 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.
4
<PAGE> 8
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
NOTE D - INVENTORIES
(in thousands) June 30 December 31
--------------------- -------
1996 1995 1995
------- ------- -------
<S> <C> <C> <C>
Finished goods $19,589 $17,120 $17,023
Raw materials and parts 1,097 884 468
------- ------- -------
$20,686 $18,004 $17,491
======= ======= =======
</TABLE>
NOTE E - TOOLING AND RELATED COSTS
Effective beginning January 1, 1996, the Company changed the timing of its
annual amortization of tooling, packaging design and sample costs. These costs
are now being amortized on a percentage of annual sales basis rather than the
previous straight-line basis. The Company believes this change improves the
matching of costs and revenues within the annual period. The effect of this
change in timing was to decrease costs of products sold and increase net income
by approximately $900,000 or $.06 per common share for the three months ended
June 30, 1996 and decrease costs of products sold and net loss by approximately
$1,500,000 or $.12 per common share for the six months ended June 30, 1996.
This change in estimate will result in no impact on net income on an annual
basis.
Research and development expenses incurred amounted to $2,631,000 and $2,130,000
for the three months ended June 30, 1996 and 1995, respectively and $5,063,000
and $4,466,000 for the six months ended June 30, 1996 and 1995, respectively.
NOTE F - INCOME TAXES
At December 31, 1995, the Company had federal net operating loss carryforwards
for income tax purposes of approximately $7,300,000. The carryforwards expire in
various years through the year 2008. The Company also has federal minimum tax
credit carryforwards of $1,028,000 that are allowed to be carried forward
indefinitely and federal research and development credits of $765,000, which
will expire in various 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
Company's foreign subsidiary. All such earnings are expected to be reinvested in
the subsidiary. Undistributed earnings, for which the Company has not provided
U.S. taxes which may be payable on distribution, were approximately $5,200,000
as of December 31, 1995. No foreign taxes will be withheld on the distribution
of the untaxed earnings.
NOTE G - LEGAL PROCEEDINGS
The current status of litigation is described in Part II, Item 1, herein.
5
<PAGE> 9
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
NOTE H - LONG-TERM DEBT
In February 1996, the Company issued a call for the redemption of its 8%
Convertible Subordinated Debentures originally due November 30, 2000 (the
"Debentures"). This call resulted in the conversion on March 15, 1996, of all
$14,000,000 Debentures at $9.26 per share and the issuance of 1,511,872 new
shares of common stock.
NOTE I - SHAREHOLDER'S EQUITY
In February 1996, the Company offered to exchange 1.85 shares of its common
stock for each Depositary Exchangeable Preferred Share (the "Depositary Shares")
outstanding. Each Depositary Share represents 1/10th of a share of $17.00
Convertible Exchangeable Preferred Stock. This inducement offer was accepted by
the owners of 98% of the Depositary Shares resulting in the issuance of
3,336,433 shares of common stock on March 29, 1996. Generally accepted
accounting principles require a non-cash charge to reduce Net Earnings
Applicable to Common Shares in the calculation of Earnings Per Share for the
fair value of the securities issued in excess of the existing conversion rate of
approximately 1.185 common shares. This charge amounted to $24,279,000 and had
the effect of increasing the net loss per common share by $2.32 from $.39 to
$2.71 in the first quarter of 1996 and by $1.90 from $.29 to $2.19 in the six
months ended June 30, 1996.
Of the remaining 2% Depositary Shares, approximately 1% of the shares were
converted using the conversion rate of approximately 1.185 common shares and the
remaining 1% were redeemed in cash for approximately $462,000 during the quarter
ended June 30, 1996.
NOTE J - RECENT ACCOUNTING PRONOUNCEMENT
The FASB issued a new standard, SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. Alternatively, the
standard permits entities to continue accounting for employee stock options and
similar equity instruments under APB Opinion 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion 25 are required to make pro forma disclosures of net income and earnings
per share, as if the fair value-based method of accounting defined in SFAS No.
123 had been applied. The Company has determined to continue to account for
stock options using APB Opinion 25 and will make required pro forma disclosures
in the notes to its consolidated financial statements. The Company will be
required to adopt the new standard for the year ending December 31, 1996.
6
<PAGE> 10
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
To improve the matching of costs and revenues, the Company has revised the
timing of its annual amortization of tooling, packaging design and sample costs.
These costs are now being amortized on a percentage of annual sales basis rather
than the previous straight-line basis. This change increased net income for the
three months ended June 30, 1996 by $.06 per common share and reduced the net
loss for the six months ended June 30, 1996 by $.12 per common share.
The following table sets forth for the periods indicated the percentage
relationships between revenues and certain expense and earnings items:
<TABLE>
<CAPTION>
Percentage of Net Revenues
-----------------------------------------------
Three Months Six Months
Ended Ended
June 30 June 30
------------------- -------------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Costs of products sold 53.7 65.3 55.1 64.9
----- ----- ----- -----
Gross margin 46.3 34.7 44.9 35.1
Advertising and promotion 13.5 14.0 14.3 13.6
Other selling and administrative 11.9 15.5 15.3 17.2
Royalties, research and development 18.7 14.2 17.9 14.1
----- ----- ----- -----
Earnings (loss) from operations 2.2 (9.0) (2.6) (9.8)
Interest expense (1.5) (1.9) (1.8) (1.9)
Other income (expense), net 0.1 0.2 0.1 0.2
Provision for income taxes -- -- -- --
----- ----- ----- -----
Net earnings (loss) 0.8% (10.7)% (4.3)% (11.5)%
===== ===== ===== =====
</TABLE>
1996 Compared to 1995
Net sales increased 29% to $49.2 million in the second quarter of 1996 as
compared to $38.2 million in the second quarter of 1995. These second quarter
results were driven by high worldwide consumer demand across virtually the
entire Galoob product line. The Company's second quarter domestic sales rose by
53% over 1995, marking the second consecutive quarter of sales growth in excess
of 50%. Domestic consumer demand for the Company's products, a key indicator of
product line strength, ran at more than 50% ahead of the prior year.
Internationally, the product line's strength overcame a difficult retail
environment. The Company's international unit set a new second quarter sales
record as international sales increased 4% to $19.5 million in 1996 from $18.8
million in 1995.
7
<PAGE> 11
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's worldwide sales of boys' toys increased 59.4% in the second
quarter of 1996 as compared to the second quarter of 1995. The growth in net
sales of the boys' toys line of business for the three months ended June 30,
1996 was attributable to the following: (1) worldwide sales of Micro
Machines(R), led by the recently introduced Star Wars(TM) Action Fleet(TM), an
extensive line of Star Wars vehicles, playsets and miniature action figures,
increased by 41% versus the comparable period from the previous year, and (2) in
March 1996, the Company initiated sales of Dragon Flyz(TM) , a line of flying
action figures plus vehicles and accessories. This increase was offset by a
decrease in sales of Biker Mice From Mars(TM).
The Company's worldwide sales of girls' toys increased slightly for the three
months ended June 30, 1996 as compared to the three months ended June 30, 1995.
The increase was led principally by the Pound Puppies(R) line.
Net sales increased 21% to $86.7 million in the six months ended June 30, 1996
as compared to $71.6 million in the six months ended June 30, 1995. The growth
in net sales in the first six months of 1996 was attributable to the domestic
sales which increased 53.7%, rising to $56.3 million. International sales
decreased 13%, reflecting slower first quarter sales prior to the second quarter
recovery.
The growth in net sales of the boys' and girls' toys line of business for the
six months ended June 30, 1996 was attributable to the same factors noted for
the second quarter.
Gross margins increased $9.5 million to $22.8 in the second quarter of 1996 from
$13.3 million in the second quarter of 1995. The higher sales volume increased
gross margin by $3.8 million and an increase in the gross margin rate accounted
for $5.7 million. The gross margin rate increased to 46.3% in the second quarter
of 1996 from 34.7% in the second quarter of 1995. The increase in the gross
margin rate was attributable to the following: (1) economies of scale associated
with the utilization of tooling, (2) reduced product costs, (3) a change in
product mix, and (4) a favorable mix of sales between domestic and international
markets. The Company's gross margin rate on domestic sales is significantly
greater than foreign sales because the Company's prices on foreign sales are
lower than on domestic sales as the foreign customer is responsible for the cost
of importing and promoting the products. To improve the matching of costs and
revenues, in January 1996, the Company revised the timing of its amortization of
tooling and packaging design costs. These costs are now being amortized on a
percentage of annual sales basis rather than the previous straight-line basis.
This change also contributed to the gross margin improvement but will reverse
during the second half of the year.
Gross margins increased $13.8 million to $38.9 million in the first six months
of 1996 from $25.1 million in the first six months of 1995. The higher sales
volume increased the gross margin by $5.3 million and an increase in the gross
margin rate accounted for $8.5 million. The gross margin rate
8
<PAGE> 12
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
increased to 44.9% in the first six months of 1996 from 35.1% in the first six
months of 1995. The increase in the gross margin rate was attributable to the
same factors noted for the second quarter.
Advertising and promotion expenses were $6.6 million in the second quarter of
1996 as compared to $5.4 million in the second quarter of 1995. For the six
months ended June 30, 1996, these expenses were $12.4 million as compared to
$9.7 million in the six months ended June 30, 1995. The higher expenses were
primarily a result of a planned increase in domestic television advertising
expenses in connection with the Company's expanded product lines and sales
growth. For the three and six month periods ended June 30, 1996, these
television advertising expenses were a higher percentage of consolidated net
revenues as compared to the three and six month periods ended June 30, 1995.
However, as a percentage of domestic net revenues, these expenses were slightly
lower.
Other selling and administrative expenses were $5.9 million in the second
quarter of 1996 as compared to $5.9 million in the second quarter of 1995. For
the six months ended June 30, 1996, these expenses were $13.3 million as
compared to $12.3 million in the six months ended June 30, 1995. Other selling
and administrative expenses in the second quarter and six months ended June 30,
1996 were reduced by $2.3 million received in settlement of a claim for damages.
This benefit was partially offset by $1.3 million and $2.0 million of unusual
legal expenses incurred during the second quarter and six months ended June 30,
1996, respectively, related to this claim and a lawsuit where the Company is the
plaintiff. Additionally, the Company incurred higher planned personnel costs
during the second quarter and six months ended June 30, 1996.
Royalties, research and development expenses were $9.2 million in the second
quarter of 1996 as compared to $5.4 million in the second quarter of 1995. For
the six months ended June 30, 1996, these expenses were $15.5 million as
compared to $10.1 million in the six months ended June 30, 1995. The increase in
the second quarter of 1996 was due to higher royalty expenses associated with
increased sales volume and the write-off of royalty advances associated with
discontinued products as well as increased research and development expenses
associated with the expansion of the Company's lines of toys. The increase in
royalties, research and development for the six months ended June 30, 1996 as
compared to the six months ended June 30, 1995 was due to the same factors noted
for the second quarter.
Interest expense was $0.8 million in the second quarter of 1996 as compared to
$0.7 million in the second quarter of 1995. For the six months ended June 30,
1996, this expense was $1.6 million as compared to $1.4 million in the six
months ended June 30, 1995. The increase was due primarily to higher average
borrowings outstanding during the three and six month periods partially offset
by a lower average interest rate and the retirement of the 8% Convertible
Subordinated Debentures originally due November 30, 2000 (the "Debentures").
9
<PAGE> 13
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
No tax recovery was reported because of the cumulative net operating loss
brought forward into the year. At December 31, 1995, the Company had net
operating loss carryforwards of approximately $7.3 million and unused federal
tax credits of approximately $1.8 million available to reduce taxes in future
periods. At December 31, 1995 and June 30, 1996, the Company maintained a
valuation reserve on its net deferred tax assets. The Company will continue to
periodically evaluate this reserve in accordance with Statement of Financial
Accounting Standards Number 109, "Accounting for Income Taxes."
The Company's products are produced principally in China, which currently is
designated with Most Favored Nations ("MFN") status by the United States. This
allows products imported into the United States from China to be accorded the
most favorable import duties. In late 1994, Congress approved the GATT (Uruguay
round), which allows imports into the United States of toy merchandise with
unconditional duty-free entry from any nation with MFN status. Generally, the
trade negotiations between China and the United States have been difficult, but
both sides have shown their willingness to resolve trade disputes and avoid
punitive sanctions. Punitive sanctions could result in the United States
imposing higher duties on selective Chinese-made products imported into the
United States (these sanctions would be put in place through Section 301 of the
Trade Act of 1974, as amended). In the past, Section 301 sanctions proposed by
the United States did not include sanctions or punitive damages against toy
imports from China. As such, the Company would be unaffected. The loss of MFN
status for China, however, would result in a substantial increase in import duty
for the Company's products produced in China and imported into the United
States. This increase in duty would be large enough that it could materially
affect the Company's business. Products shipped from China to other countries
should not be affected. Other toy companies also source product from China and
would be affected to similar degrees. However, the impact on the Company from
any significant change in duties on its Chinese-produced product would depend on
several factors including, but not limited to, the Company's ability to (1)
procure alternative manufacturing sources outside of China, (2) retrieve its
tooling located in China, (3) relocate its production in sufficient time to meet
demand, and (4) pass cost increases likely to be incurred resultant from (1)-(3)
above through to the Company's customers as product price increases.
When used in this Form 10-Q, in any filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "projected," "projections," "plans" or similar expression are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made.
10
<PAGE> 14
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity, Financial Resources and Capital Expenditures
Demand for the Company's products is greatest in the third and fourth quarter of
the year. A substantial portion of the Company's shipments to customers in the
United States are made on terms that permit payment more than 90 days after
shipment of merchandise. This results in collections peaking in the fourth
quarter and first quarter of the following year. Goods sold directly from the
Far East are primarily sold under bank letters of credit, with most payments
received within 30 days of shipment.
Due to the seasonality of its revenues and collections, the Company's working
capital requirements fluctuate significantly during the year. The Company's
seasonal financing requirements are highest during the fourth quarter.
On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "Loan Agreement") with Congress Financial Corporation
(Central) (the "Lender"). The Loan 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%.
The Loan Agreement provides that dividend payments may not be made without the
prior consent of the Lender. At June 30, 1996, approximately $34.6 million was
outstanding and $5.1 million was available to borrow under the Loan Agreement.
During the first quarter of 1996, the Company completed two transactions which
strengthened its capital structure. First, in February 1996, the Company issued
a call for the redemption of its Debentures. This call resulted in the
conversion on March 15, 1996, of all $14,000,000 Debentures at $9.26 per share.
This conversion resulted in the issuance of 1,511,872 new shares of common
stock. Second, also in February 1996, the Company offered to exchange 1.85
shares of its common stock for each Depositary Exchangeable Preferred Share (the
"Depositary Shares") outstanding. Each Depositary Share represents 1/10th of a
share of $17.00 Convertible Exchangeable Preferred Stock. This inducement offer
was accepted by the owners of 98% of the Depositary Shares resulting in the
issuance of 3,336,433 shares of common stock on March 29, 1996. In June 1996,
the remaining 2% Depositary Shares were converted into common stock or redeemed
for cash. See Note I.
During the six months ended June 30, 1996, the Company used $16.2 million of
cash in its operating activities. The usage resulted from the net loss,
increases in inventories, tooling and related costs and prepaid expenses and
decreases in accounts payable and accrued expenses. These changes reflect the
Company's normal seasonal pattern and the increase in sales volume.
Working capital was $47.6 million at June 30, 1996 as compared to $54.7 million
at December 31, 1995 and $43.1 million at June 30, 1995. The ratio of current
assets to current liabilities was 1.8 to
11
<PAGE> 15
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1.0 at June 30, 1996 as compared to 2.1 to 1.0 at December 31, 1995 and 2.1 to
1.0 at June 30, 1995.
The Company had no material commitments for capital expenditures at June 30,
1996.
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 operating needs.
12
<PAGE> 16
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various litigation and legal matters which are being
prosecuted and defended in the ordinary course of business. None of these
matters are expected to result in outcomes having a material adverse effect on
the Company's consolidated financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
13
<PAGE> 17
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEWIS GALOOB TOYS, INC.
(Registrant)
Date: August 13, 1996 By: /s/ Roger J. Kowalsky
--------------------------
Roger J. Kowalsky
Executive Vice President, Finance
and Chief Financial Officer
14
<PAGE> 18
EXHIBIT 27
----------
Exhibit 27 Financial Data Schedule
<PAGE> 19
[ARTICLE] 5
[LEGEND]
This schedule contains summary financial information extracted from the
financial statements of Lewis Galoob Toys, Inc. for the quarter ended June 30,
1996, and is qualified in its entirety by reference to such financial
statements.
[/LEGEND]
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-START] APR-01-1996
[PERIOD-END] JUN-30-1996
[CASH] 2,920
[SECURITIES] 0
[RECEIVABLES] 66,620
[ALLOWANCES] 4,847
[INVENTORY] 20,686
[CURRENT-ASSETS] 109,223
[PP&E] 15,870
[DEPRECIATION] 5,789
[TOTAL-ASSETS] 124,694
[CURRENT-LIABILITIES] 61,612
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 151
[OTHER-SE] 62,931
[TOTAL-LIABILITY-AND-EQUITY] 124,694
[SALES] 49,201
[TOTAL-REVENUES] 49,201
[CGS] 26,443
[TOTAL-COSTS] 26,443
[OTHER-EXPENSES] 21,675
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 767
[INCOME-PRETAX] 387
[INCOME-TAX] 0
[INCOME-CONTINUING] 387
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 387
[EPS-PRIMARY] .02
[EPS-DILUTED] .02
</TABLE>
