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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended December 31, 1996
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
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GALOOB TOYS, INC. (formerly known as Lewis Galoob Toys, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 94-1716574
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 Forbes Boulevard So. San Francisco, CA 94080
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415)952-1678
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, Par Value $.01 Per Share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by persons who are not
officers or directors (or their affiliates) of the registrant, as of March 3,
1996, was approximately $300,000,000.
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 1, 1996, was as follows:
Class Number of Shares
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Common Stock, Par Value $.01 Per Share 18,019,864
DOCUMENTS INCORPORATED BY REFERENCE
The following document has been incorporated by reference:
The registrant's Proxy Statement (the "Proxy Statement") to be used in
connection with its 1997 Annual Meeting of Shareholders has been incorporated
into Part III.
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PART I
Item 1 Business
General
Founded in 1957, Galoob Toys, Inc. ("the Company") is a leading
international toy company that designs, develops, markets and sells a variety of
high-quality toy products in an expanding number of product categories.
The Company believes it is a leading innovator in the toy industry as
evidenced by its award-winning Sky Dancers(R), the world's first flying doll,
introduced in late 1994; its Double Takes(TM) line of Micro Machines(R)
transforming playsets, introduced in 1995; its line of Star Wars(TM)Action
Fleet(TM) toys representing a new scale in the male action category; and Dragon
Flyz(TM), the world's first fully articulated flying male action figure. The
Company's Micro Machines line, introduced in 1987, is the most comprehensive
line of miniature scale play for boys in the world, embracing traditional
vehicle, military and male action play patterns. The Company's Sky Dancers line
was the number-one new mini-doll brand in the United States in 1995 and the
number one mini-doll in 1996. Action Fleet was the number one new mini-vehicle
brand of 1996, and Pound Puppies(R) the number one new mini-doll brand of 1996.
The Company's 1996 product offerings consisted of six product lines: Micro
Machines, Star Wars Action Fleet, Dragon Flyz, Jonny Quest(R), Sky Dancers, and
Pound Puppies. In addition to continuations and expansions of these product
lines, the Company's 1997 product offerings include new product lines called All
Star MVP(TM)s and Star Fairies(TM) and three new product lines based on movie
entertainment properties: Men in Black(TM), a new science-fiction adventure
comedy film scheduled to be released by Sony Pictures Entertainment ("Sony") in
the summer of 1997; Starship Troopers(TM), a new science-fiction adventure film
scheduled to be released by Sony in the fall of 1997; and Anastasia(TM), a new
animated film scheduled to be released by Fox Animation ("Fox") in the fall of
1997. In connection with the scheduled release of the Special Edition of the
Star Wars movie trilogy in early 1997, the Company has introduced new Star Wars
Micro Machines and Action Fleet toys.
The Company's products are sold in more than 50 countries worldwide. These
products are principally sold direct to retailers in the United States and to
toy distributors outside of the United States. Since 1993, the Company's
revenues have grown approximately 112% from $134 million in 1993 to $179
million, $220 million and $285 million in 1994, 1995 and 1996, respectively. In
1996, approximately one-third of the Company's revenues were derived from
international sales, which have increased approximately 94% since 1993.
The Company believes its recent success has left it well positioned for
future growth. The key elements of the Company's growth strategy are: (a) build
the Company's core brand-Micro Machines; (b) enter new product categories; (c)
expand profit margins on rising sales; (d) develop additional strategic
alliances with major content providers; and (e) leverage international
distribution networks.
Industry Overview
According to the Toy Manufacturers of America, Inc. ("TMA"), an industry
trade group, total domestic shipments of toys, excluding video games and
accessories, were approximately $13.9 billion in 1996. According to the TMA, the
United States is the world's largest toy market, followed by Japan and Western
Europe. The Company estimates that the two largest U.S. toy companies, Mattel,
Inc. ("Mattel") and Hasbro, Inc. ("Hasbro") collectively hold a dominant share
of the domestic non-video toy market. In addition, hundreds of smaller companies
compete 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 toy products.
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A substantial majority of the toys sold in the U.S. are manufactured,
either in whole or in part, overseas where labor rates are comparatively low.
The largest foreign producer markets are China and, to a lesser extent, other
countries in the Far East.
Toy manufacturers sell their products either directly to retailers, or to
wholesalers who carry the product lines of many manufacturers. Retail toy sales
have become increasingly concentrated through a small number of large chains,
such as Toys "R" Us, Inc. ("Toys "R" Us"), Wal-Mart Stores, Inc. ("Wal-Mart"),
Kmart Corporation, Target Stores, Inc., a division of Dayton-Hudson Corp., and
Kay-Bee Toys, Inc., a division of Consolidated Stores Inc., which generally
feature a large selection of toys, some at discount prices, and seek to maintain
lean inventories to reduce their own inventory risk. According to the TMA, the
top five U.S. toy retailers collectively hold more than half of the domestic
retail market for toy sales, and their collective market share has grown in
recent years.
Products
The Company's 1997 product offerings consist of the following:
Boys' Products
- - MICRO MACHINES
Now in its tenth year, the Micro Machines line today comprises the most
comprehensive universe of miniature play for children in the brand's history,
embracing basic vehicle, military, space, sea exploration and a variety of male
action play patterns. The Company continues to grow and expand its segments of
Micro Machines as additions to the basic, sea exploration, space, military and
licensed segments have created more than 55 playsets, 600 vehicles and 200
collections for 1997. The line has been enhanced for 1997 by the introduction of
innovative new products, including the Super Auto World(TM) flagship playset in
the basic segment, featuring a multi-level auto center with a service station
and showroom in one; a new racing segment featuring licensed Indianapolis 500(R)
vehicle collections and gift sets; vehicle collections and the Company's
innovative transforming action sets based on the popular science-fiction movie
properties Aliens(R), Predator(TM) and Terminator 2(R): Judgment Day; and Micro
Machines Exploration(TM) playsets that float in water for play in the tub or
pool. The Micro Machines line also includes products based on the popular Star
Wars motion picture trilogy and on other licensed properties including Men in
Black, Starship Troopers and Star Trek(R).
- - STAR WARS
The Company produces a wide variety of Star Wars vessels, creatures, figures,
play environments and collectibles in two categories. In our traditional Micro
Machines scale is a total of 55 vehicle and figure packs and 17 playsets for
1997. In our larger-scale category innovation, Action Fleet, are 11 Battle
Packs(TM) (smaller vehicles or creatures with included figures), 22 larger
vehicles with figures, and three large Action Fleet playsets. Among notable new
Star Wars products in these categories is the Micro Machines Death Star(TM)
Double Takes playset. Employing the Company's innovative Double Takes (patent
pending) play pattern, the spherical Death Star battle station opens at the
touch of a lever to reveal a six-level Planet Tatooine play environment. Among
Action Fleet entries, The Yavin Rebel Base(TM) Action Fleet Set allows children
to reenact memorable scenes from the first Star Wars movie with an
interior-exterior playset replicating the command post used to launch the final
attack on the Death Star.
- - ACTION FLEET
In 1996, the Company introduced Action Fleet, based on the successful expansion
of the Company's Star Wars line. Action Fleet became the number one new
mini-vehicle brand of 1996. The line consists of authentically detailed
vehicles, figures and playsets that create a new scale that is larger than Micro
Machines but less than half the size of traditional male action scale: five-to
seven-inch-long vehicles and fully poseable, one-to-one-and-one-
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half-inch-tall figures, which are compatible with separate Action Fleet
playsets. The bulk of the Action Fleet range consists of the Star Wars product
previously described. For 1997 the Action Fleet concept has been broadened to
include vehicles, creatures and figures based on other popular science-fiction
action licenses such as Starship Troopers, Aliens and Predator. New for 1997 is
the Outer World Station(TM), a new Action Fleet Set for use with Action Fleet
vehicles and figures and based on the Aliens motion picture.
- - MEN IN BLACK
In the Spring of 1997, the Company will introduce new product lines in both the
traditional male action figure and Micro Machines scales, based on the
characters in Columbia Pictures' and Amblin Entertainment's science fiction
movie adventure comedy about a secret government organization charged with
protecting the earth from criminal alien elements, scheduled to be released in
the summer of 1997. The Company's Men in Black toys will include a collection of
five action figures standing five inches tall, a segment of deluxe figures with
spring-loaded action and surprise elements such as "exploding" body parts and
rotating heads, a 12-inch-tall Alien Terrorist Edgar figure, and the Zap-Em
Van(TM) playset with numerous action play features.
- - STARSHIP TROOPERS
In the fall of 1997, the Company plans to introduce new product lines based on
the science-fiction movie adventure Starship Troopers, a large-scale epic of
interplanetary war between Earth and a race of giant warrior insects. The film
is being produced under an arrangement between TriStar Pictures and Walt Disney
Motion Pictures Group, and is expected to be released in the fall of 1997. The
Company's toy product will be released in the Micro Machines, Action Fleet, and
traditional male action figure scales. Starship Troopers Micro Machines recreate
in miniature the vehicles, characters and creatures from the film. In the Action
Fleet segment, Deluxe Bugs and Deluxe Vehicles will each be sold with two
figures and have moving parts. Battle Packs each include an action-scaled alien
bug or cannon, plus three articulated figures. The Company is also offering two
special remote control items, the Hopper Bug(TM) and the Drop Ship.
- - ALL-STAR MVPs
The Company has entered the sports collectible segment with the introduction of
All-Star MVPs, five-packs of officially licensed miniature sports figures in
realistic poses. NFL All-Star MVPs are micro-sized replicas of high-profile
football stars from some of the premier teams in the National Football League.
Similarly, NBA All-Star MVPs brings to fans of professional basketball miniature
scale replicas of many of the National Basketball Association's most popular
players.
- - DRAGON FLYZ
In 1996, the Company introduced Dragon Flyz, the first poseable flying action
figures for boys, supported domestically and internationally by an independently
produced animated syndicated television show which began airing in the U.S. in
September 1996. Although sales of Dragon Flyz in the United States have not met
expectations, Dragon Flyz is continuing in many international markets in 1997
with the introduction of new F.I.S.T. Force(TM) and Blazin' Battle
Screamers(TM) flying action toys.
- - JONNY QUEST
The Company's Jonny Quest product line, also introduced in 1996, resulted from
the Company's worldwide master toy license with Turner Home Entertainment for
The Real Adventures of Jonny Quest property. The Real Adventures of Jonny Quest
is based on the updated reintroduction of the 1960's animated television
property from Hanna-Barbera Cartoons. The Jonny Quest line will be launching
internationally in France, Germany, Spain and other international markets in
1997.
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Girls' Products
- - POUND PUPPIES
In 1996, the Company introduced a small-scale version of Pound Puppies, the most
successful plush toy line of the 1980's, creating a new miniature scale in plush
toys and adding new themes to expand the line. Since its introduction, the
Company's Pound Puppies quickly became the number one selling new mini-doll
brand in the U.S. and, as of March 1997, the number one mini- doll brand in the
United Kingdom. The line of small plush dogs and cats has been extended in 1997
with Purebreds Pound Puppies and Pound Pur-r-ries(TM), and also with Pound
Bunnies(TM). Three Hideaway Playsets and three Pet Carrier playsets feature, for
the first time, miniature plastic Pound Puppies and Pound Pur-r-ries in a new,
even smaller scale. New Wiggle 'n Walk features a walking mommy puppy with two
baby pups which follow her when her leash is pulled.
- - ANASTASIA
Anastasia, which will be the first animated film from Fox's The Animation
Studio, re-explores the classic legend of the lost princess Anastasia, the
surviving daughter of Russia's last Czar, and is scheduled for a fall 1997
release. Timed to coincide with the premiere of the film, the Company plans to
introduce a full line of Anastasia products, including a new line of 11-1/2
inch-tall poseable Fashion Dolls; a Royal Fashions(TM) Collection; doll
accessories including a Royal Horse and Carriage and a Music Box;
four-and-three-quarter-inch-tall poseable action figures, three-inch-tall
collectible figures, child-sized Pretend-and-Play Dress Up(TM) outfits,
miniature Take-Along Playsets, plush puppets and plush characters, and a
Huggable Anastasia soft doll.
- - STAR FAIRIES
The Company continues to build on the momentum of its successes in the girls'
toy business by introducing Star Fairies, two-inch-tall dolls that light up and
play music when they are attached to their battery-powered "magic" light wands.
By pressing a button on the wand, the fairies light up and "sing." The wands
come in three themes, Flower, Pegasus and Castle. Each plays its own special
tune and is packaged with a pair of dolls. The Star Fairies 1997 line will also
include two playsets with numerous play features. The dolls fit on posts around
the playsets, causing lights to sparkle and music to play.
- - SKY DANCERS
First introduced in late 1994, the award-winning Sky Dancers line has been one
of the most successful new girls' toy concepts in recent years. Sky Dancers was
the number one selling new mini-doll brand in the United States as well as many
countries around the world in 1995, and the best-selling domestic mini-doll in
1996. Sky Dancers is featured in an independently produced animated syndicated
television show that began airing in the U.S. in September 1996. As expected,
Sky Dancers domestic sales will decline in 1997, but the product line will
continue in international markets with the introduction of New Pretty Scent(TM)
Sky Dancers and Sparkle Dome(TM) Sky Dancers.
Galoob Direct Products
The Company established a new subsidiary, Galoob Direct, Inc. ("Galoob Direct"),
in 1996. In 1997, it will sell lines of toys that will not be advertised on
television by the Company. Galoob Direct will offer a wide array of products
complimenting several of the Company's promoted brands, as well as one Galoob
Direct exclusive brand, Dr. Seuss(TM). Under the Micro Machines brand for 1997,
Galoob Direct will offer popular playsets including Orion J-22(TM), a submarine
that changes into a naval command center with firing torpedoes and missiles, and
FalconWing Skybase(TM), a stealth bomber that transforms into an airbase; four
Hiways & Byways(R) Street Corners(TM) playsets; and the Tool Box City(TM)
playset. Micro Machines Z-Bots(R), miniature collectible robots with moving
parts and colorful detail, will include micro-sized Mini Z's(TM) along with
three Attack Station
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playsets and two Mobile Base playsets; Z-Bots Combat Vehicles; Fang Fighter(TM),
a jet that transforms into a complete assault base; and Megabot(TM), a
nine-inch-tall robot playset equipped with numerous action features.
Additional Men in Black products from Galoob Direct include eight Bendable
Figures, the MiB Role-Play Set featuring child-size Men in Black sunglasses plus
an electronic Alien Communicator and two play weapons from the movie; and the
Alien Blaster play weapon, fashioned after the signature weapon from the movie.
Galoob Direct offers more Starship Troopers bugs and troopers for staging play
scenes from the movie. A large Warrior Bug(TM) features opening jaws, monster
bug sound effects, and poseable legs that can be ripped apart. Six
five-and-a-half-inch-tall action figures are also available, each with a
spring-fired weapon.
Under the Pound Puppies brand, Galoob Direct offers Playset Pet Packs that
feature additional plastic puppies and kitties for Galoob's Hideaway and Pet
Carrier playsets. Pound Puppies Clip-Ons are plush puppy and kitty clips that
attach to a child's notebook, clothing or hair. The Pound Puppies Veterinarian
Role-Play Set includes mommy pup with two baby plush puppies.
Galoob Direct will offer an extensive range of Anastasia products.
In 1997, Galoob Direct will offer a number of exclusive items from The Wubbulous
World of Dr. Seuss(TM), a license based on the new animated television show and
also including Dr. Seuss characters. The Fabolicious Flashlight(TM) includes
stencil disks to create Dr. Seuss silhouette art. The Kerzippity(TM) a key chain
doubles as a zipper pull. The Plink, Plunk Coin Bank(TM) and Beautemous
Bookends(TM) are adorned with well-known Dr. Seuss characters, and Pencil
Toppers decorate pencils with the heads of the characters. Taffeta Funfaces(TM)
are huggable pillows featuring the faces of The Cat in the Hat, Horton the
elephant and the Grinch. The 'Lectro Soundtastic Bank is a battery-operated coin
bank that features sound and movement when a child deposits a coin.
Product Life Cycle
Product attrition is a fundamental part of the life cycle of a toy.
Through new product introductions, the Company has been successful in managing
these product sales declines, which have averaged approximately 30% of the
prior year's sales in recent years, and has grown net sales each year since
1993 at an average compounded rate of 28.5%. Furthermore, as noted above in the
comments on individual product lines, international sales of a product
generally continue after domestic sales have started their decline.
Licensing Strategy
The Company produces substantially all of its products under licenses from
other parties. Some of these licenses confer rights to exploit original concepts
or products developed by toy inventors and designers. Other licenses, referred
to as entertainment licenses, permit the Company to design, develop, manufacture
and market toys based on characters or properties which have 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
from toy inventors or designers typically extend for either a set number of
years or the commercial life of the product. The Company typically obtains both
the domestic and international rights for the licensed products.
The Company is an active participant in the market for entertainment
licenses. A determination to acquire an entertainment license must usually be
made before the commercial introduction of the property in which a
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licensed character or property appears, and these license arrangements usually
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 that 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 a license in an expeditious manner.
In October 1992, the Company first obtained a license from Lucasfilm Ltd.
("Lucasfilm") to produce three collections of vehicles based on the Star Wars
trilogy. As a result of the Company's continued success with the Star Wars
products, Lucasfilm has extended and expanded the Company's right to produce
Star Wars toys, including the innovative Action Fleet line of vehicles, figures
and playsets introduced in 1996. Beginning in late January 1997, Lucasfilm
released its Special Edition of the original Star Wars trilogy in theaters
across the United States with enhanced digital sound and previously unreleased
footage, which has had a positive impact on the sales of the Company's Star Wars
products. The Company's current Star Wars license from Lucasfilm expires on
December 31, 1997. The Company expects this license to be renewed for 1998. In
addition, the Company is aggressively pursuing licensing rights in connection
with the new Star Wars movie trilogy scheduled to be released starting in 1999.
The failure to renew or obtain any part of such licensing rights could have a
material adverse effect on the business, financial condition and results of
operations of the Company.
As part of its strategic licensing program, the Company has signed an
agreement with Fox that gives the Company the exclusive worldwide first rights
to license toys based on all new Fox theatrical and television properties
(excluding the Fox Children's Network) to the year 2004 (including renewal
rights granted to the Company). The agreement fulfills a key growth objective by
forming an alliance with a powerful content provider and assures access to a
continuous flow of quality 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 will produce toys based on the
full-length animated feature film Anastasia due to be released in the fall of
1997.
In addition to the Fox agreement, Sony Signatures Licensing has awarded the
Company the worldwide master toy license for Columbia Pictures' and Amblin
Entertainment's science fiction adventure comedy Men in Black, which is
scheduled to be released in the summer of 1997. In addition, the Company has
also been awarded the worldwide master toy license by Sony 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
and is scheduled to be released in the fall of 1997.
The Company pays royalties to its licensors which typically range from 2%
to 20% of net sales. The Company also frequently guarantees payment of a minimum
royalty. As of December 31, 1996 minimum future guaranteed payments aggregated
approximately $3,589,000. Royalties expense totaled approximately $27,458,000,
$16,326,000 and $13,498,000 for the years ended December 31, 1996, 1995 and
1994, 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.
Sales, Marketing and Distribution
Domestic
The Company markets and sells its products throughout the world, with sales
to customers in the United States aggregating 69%, 63% and 66% of consolidated
net sales in 1996, 1995 and 1994, respectively.
The Company sells its products in the United States directly to specialty
toy retailers, discount and chain stores, catalog and mail order companies,
department stores, variety stores and independent distributors that purchase the
products directly from the Company and ship them to retail outlets. In 1996 and
1995, Toys "R"
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Us accounted for approximately 23% and 20% of the Company's consolidated net
sales, respectively. Wal-Mart accounted for approximately 13% and 11% of
consolidated net sales in 1996 and 1995, respectively.
The Company has a sales staff of 6 people, supplemented by several
manufacturer's representative organizations in the United States that act as
independent contractors. The Company's sales staff and the manufacturer's
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 presents its products directly to key retail accounts. 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, Dallas, Hong Kong and Europe and through the maintenance of showrooms
in New York City and Dallas. Manufacturers' representatives utilized by the
Company receive commissions, which were approximately 1.0%, 0.8% and 1.0% of net
sales in 1996, 1995 and 1994, respectively.
The Company utilizes warehouse facilities primarily in Union City,
California for storage of its products. During 1997, these operations are moving
to a new warehouse facility in Southern California.
The Company does not 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 in selling such
excess inventory by offering credits and other price concessions.
International
The Company has an extensive international sales program. In conjunction
with its wholly-owned subsidiary Galco International Toys, N.V. ("Galco"),
located in Hong Kong, the Company actively sells its products in over 50
countries and sells directly to approximately 60 separate, independent toy
distributors, each of which is domiciled in the respective country to which
sales are made. While the dollar volume of international sales accounted for
approximately one-third of total Company sales in 1996, approximately 42% of all
of the Company's toys sold were shipped to countries outside the United States.
This is because 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 costs.
The Company believes that it has significantly reduced many of the risks
associated with international sales by dealing with leading toy distributors in
certain of its markets and by requiring the Company's distributors to advertise
and promote the Company's products in their markets, to pay for the Company's
products through letters of credit, and to bear the cost of transportation as
well as the risk of damage or loss upon delivery to the distributors in the Far
East. The Company's risks are further reduced because its distributors bear the
cost and risk of carrying inventory in the Company's products and the credit
risk of collecting receivables from their retail customers.
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 of the countries into which the
Company's products are sold 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, because the Company's products compete with products for
which wholesale prices are denominated in the local currency.
Advertising and Promotion
The Company's advertising and promotion expenses are significant. 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
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toy industry, the Company advertises on national network, syndicated, cable and
local spot television. The Company often pre-tests advertisements to evaluate
their effectiveness on the target market. The bulk of the Company's advertising
and promotions occur in the early spring leading up to Easter and the fall
season leading up to Christmas. The Company's retail customers also provide
advertising for the Company's products and may, from time to time, receive a
credit allowance in connection with such advertising. With respect to
entertainment licenses, the Company believes it benefits from advertising and
promotion from the major studios with respect to their entertainment properties
and their promotion tie-ins.
Research and Development
The Company employs its own designers and engineers and also utilizes the
services of independent designers and engineers on an ongoing basis. The Company
presents its designers with toy concepts licensed or, to a lesser extent,
originated by it, and the designers create renderings of the proposed product.
Designs are then presented to the Company's engineers, who, using the
renderings, perform mechanical drawings and engineering services and create
prototypes for new products. Prototypes for proposed products are continuously
reviewed by the Company's management, including representatives of marketing,
sales and manufacturing, prior to final acceptance. Licensors of entertainment
properties usually retain the rights to approve the products being marketed by
the Company.
The Company spent approximately $10,210,000, $7,886,000, and $7,288,000 on
research and development activities in 1996, 1995 and 1994, respectively, in
each case exclusive of amounts paid to certain inventors and designers who
receive royalties as licensors. Such amounts do not include approximately
$12,367,000, $12,388,000 and $7,149,000 incurred in 1996, 1995 and 1994,
respectively, for tooling and package design.
Manufacturing
The Company's products are manufactured to its specifications by
nonaffiliated third party manufacturers, usually located in the Far East. Over
90% of the Company's products were produced in China in 1996. These
manufacturers are responsible for all aspects of the production of the Company's
products in accordance with Company product specifications. In addition, the
manufacturers must comply with the Company's Code of Business Conduct, which
requires vendors and their subcontractors to meet certain worker health, safety
and quality-of-life conditions in order to do business with the Company.
The Company's manufacturing is currently performed by 21 manufacturers,
some of whom derive a substantial percentage of their business from the Company.
During the last four years, the Company has reduced the number of its
manufacturers and concentrated its sourcing of products on a limited number of
high quality manufacturers. In 1996, four companies manufactured approximately
85% of the Company's products and a single group, Harbour Ring, produced
approximately 31% of the Company's products. The Company believes that its
relationships with Harbour Ring and its other key manufacturers are excellent.
The Company, through its wholly-owned subsidiary Galco, maintains close
contact with the Company's manufacturers and subcontractors and monitors the
quality of the products produced. 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. 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. Generally,
tooling is owned by the Company but may be utilized by different manufacturers
if the need arises for alternate sources of production.
Changes in tariffs could have an adverse effect on the cost of goods
imported from China. While China is currently accorded Most Favored Nation
("MFN") status by the United States, this status (which was last renewed in June
1996) is subject to annual review and could be revoked prospectively for any
given year. Current MFN tariffs on toys imported into the United States are
zero, and the loss of MFN status for China would result in a substantial
increase in tariffs applicable to toys imported from China. This increase in
duty would be large
9
<PAGE> 10
enough that it could have a material adverse effect on the Company's business,
financial condition and results of operations. Products shipped from China to
other countries would not be affected by China's loss of MFN status with the
United States without similar actions being taken by the other importing
countries. Moreover, many other toy companies also source products from China
and could be affected to similar degrees.
The Company can also be subject to the imposition of retaliatory tariffs or
other import restrictions as a result of a trade dispute between China and the
United States. Generally, trade negotiations over matters in dispute between the
two countries have been difficult but have been resolved without the imposition
of trade retaliation. In the past, proposed retaliation by the United States has
not included increased tariffs or other trade restrictions applicable to toys
imported from China. It is possible, however, that some future trade dispute
could result in substantial increases in tariffs or other restrictions on
imports, such as quotas, of toys from China. These increased tariffs or other
restrictions could be imposed under Section 301 of the Trade Act of 1974, as
amended, whether or not the trade dispute itself involved toys. Such increased
tariffs or other trade restrictions could have a material adverse effect on the
Company's business, financial condition and results of operations.
The impact on the Company of any political or economic unrest or
disruptions in China, the loss of China's MFN status or the imposition of
retaliatory trade restrictions on products manufactured in China would depend on
several factors, including, but not limited to, the Company's ability to (i)
procure alternative manufacturing sources satisfactory to the Company, (ii)
retrieve its tooling located in China, (iii) relocate its production in
sufficient time to meet demand, and (iv) pass cost increases likely to be
incurred as a result of such factors to the Company's customers through product
price increases. As a result, any political or economic unrest or disruptions in
China, the loss of China's MFN status or the imposition of retaliatory trade
restrictions on products manufactured in China could have a material adverse
effect on the Company's business, financial condition and results of operations.
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 pressures in China
could have an effect on the cost of product sourced from China.
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.
Intellectual Property Rights
Most of the Company's products are copyrighted and sold under trademarks
owned by or licensed to the Company. In addition, certain products incorporate
patented devices or designs. The Company or its licensors customarily seek
protection of major product patents, trademarks and copyrights in the United
States and certain other countries. These intellectual property rights can be
significant assets of the Company. Although the Company believes it is
adequately protected, the loss of certain of its rights for particular product
lines may have a material adverse effect on its business, financial condition
and results of operations.
Competition
The toy industry is highly competitive. The Company competes with several
larger domestic and foreign toy companies, such as Hasbro and Mattel, and many
smaller companies in all aspects of its business, including 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 including obtaining adequate retail shelf
space. 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
10
<PAGE> 11
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.
Seasonality and Backlog
Toy industry sales are highly seasonal and driven by disproportionate
customer demand for toys to be sold during the Christmas holiday season.
Approximately two-thirds of the Company's shipments typically occur in the
second half of the year. As a result, the Company's operating results vary
significantly from quarter to quarter within any given year. Orders placed with
the Company for shipment are cancelable until the time of shipment. The
combination of seasonal demand and the potential for order cancellation makes
accurate forecasting of future sales difficult and causes the Company to believe
backlog may not be an accurate indicator of the Company's future sales.
Similarly, comparison between fiscal periods of successive years may not be
indicative of results of operations for any given full year. The seasonality
creates significant peaks in working capital requirements.
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 unsafe or 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. The Company's products are designed and
tested to meet or exceed all applicable regulatory and voluntary toy industry
safety standards. 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. The
Company believes that all of its products meet or exceed applicable safety
standards in the United States and other jurisdictions.
Employees
As of December 31, 1996, the Company had 235 employees, 138 in the United
States and 97 in the Far East. Seven of the Company's warehouse employees, some
of whom 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
67,000 square feet of office space and leases the remaining approximately 69,000
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. Beginning in 1997, the Company has signed a new lease, which
expires in 2002, for approximately 432,000 square feet of warehouse space in
Ontario, California. This warehouse space will replace the warehouse space in
Union City, California. This lease includes an option to extend the expiration
date to 2007. 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, a showroom, consisting of approximately 1,000 square
feet, which is located in Dallas, Texas, under a lease that expires in 2000, and
office and warehouse space in Hong Kong consisting of approximately 30,000
square feet under leases which expire at varying dates through 1998. Management
believes that its current facilities are suitable and adequate for the Company's
business as currently conducted. The Company's properties will be expanded as
necessary to support future growth levels in the Company's business.
11
<PAGE> 12
Item 3 Legal Proceedings
Licensing Litigation
In June 1995, the Company filed a declaratory judgement action in United
States District Court for the Northern District of California. The suit names
Clemens V. Hedeen, Jr., Patti Jo Hedeen, and various affiliated entities, as
defendants, and seeks a determination that the Company is not obligated to pay
royalties to the defendants under their license agreement on certain specific
products sold under the Company's "Micro Machines" name and trademark. The
defendants filed a cross-complaint for breach of this license agreement claiming
damages for past royalties allegedly due but not paid under the license
agreement, and claiming entitlement to additional royalties on future sales of
such products. The defendants also are asking the court to order that the
Company cease the manufacture and sale of certain portions of the Micro Machines
product line, and convey to the defendants certain rights to the Micro Machines
product line, including patent and trademark rights. The defendants also claim
the license agreement to be terminated for the non-payment of the royalties at
issue. The defendants filed a motion for summary judgment, which was denied by
the court in late 1995. The Company's complaint has been amended to address
additional issues between the parties. Although there can be no assurance of the
outcome of this matter, the Company believes that it has meritorious factual and
legal claims in connection with this matter.
In October 1995, the Company filed a breach of contract action in the
United States District Court for the Northern District of California. The suit
names Abrams Gentile Entertainment Inc. and Up, Up and Away as defendants, and
alleges damages for the licensing, marketing and sale of products that are in
violation of the Company's rights as licensee under its Sky Dancers and Dragon
Flyz license agreements with Abrams Gentile Entertainment, Inc. The defendants
have filed a number of counterclaims, including breach of contract, interference
with contractual relationships, misappropriation of copyright, unfair
competition and trade libel. The Company's attempt to obtain a partial temporary
restraining order was denied by the court in December 1995 on the basis that
equitable relief was not appropriate and that the Company could be adequately
compensated through legal damages. Although there can be no assurances of the
outcome of this matter if it goes to trial, the Company believes that it has
meritorious factual and legal claims in connection with this matter. The Company
has reached an agreement in principle to settle and amicably resolve all open
issues in this litigation, subject to final documentation. The settlement will
not result in additional liabilities to the Company, and the Company's rights
under the license agreements will be preserved.
Manufacturer Litigation
In January 1991, the Company, through its wholly owned subsidiary, Galco,
filed a lawsuit in Hong Kong against Kader Industrial Co., Ltd. ("Kader"),
alleging damages suffered by both Galco and the Company as a result of Kader's
defective manufacturing of two lead doll items for the Company's Bouncin' Babies
toy line in 1990. Kader filed counterclaims alleging breach of 17 individual
contracts. In August 1996, the trial court rendered a decision in favor of Kader
on the general issue of liability in this matter, including an award of damages
based on Kader's counterclaims which was approximately $250,000, plus
prejudgment interest. In addition, the court awarded certain litigation costs to
Kader, the amount of which will be determined in future proceedings and could
substantially exceed the amount of the damages awarded.
In the opinion of management of the Company, none of three above matters of
litigation is likely to have a material adverse effect on the business,
financial condition and results of operations of the Company.
Item 4 Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on November 4, 1996
and November 22, 1996. At the Annual Meeting, the following matters were
approved by the shareholders:
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<PAGE> 13
1. The election of Paul A. Gliebe, Jr. to the Board of Directors for a term
expiring at the 1997 Annual Meeting of Shareholders and until the election
and qualification of his successor and the election of S. Lee
Kling and Andrew J. Cavanaugh to the Board of Directors for terms expiring
at the 1999 Annual Meeting of Shareholders and until the election and
qualification of their successors. There were 12,846,359 votes in favor of
Mr. Gliebe and 444,788 withheld. There were 12,849,559 votes in favor of
Mr. Kling and 441,588 withheld. There were 12,850,459 votes in favor of Mr.
Cavanaugh and 440,688 withheld. Mark D. Goldman, Scott R. Heldfond and
Roger J. Kowalsky are other directors of the Company whose terms continue
after the meeting.
2. The amendment to the Company's Certificate of Incorporation to change the
name of the Company to Galoob Toys, Inc. There were 13,247,350 votes in
favor, 6,245 votes against and 37,552 abstentions.
3. The approval of the 1996 Long-Term Compensation Plan. There were 10,342,340
votes in favor, 167,839 votes against and 81,061 abstentions.
4. The approval of the 1996 Share Incentive Plan. There were 5,727,907 votes
in favor, 5,466,193 votes against and 76,436 abstentions.
5. The ratification of the appointment of Price Waterhouse LLP as the
Company's independent accountants for fiscal 1997. There were 13,132,535
votes in favor, 119,119 votes against and 39,493 abstentions.
13
<PAGE> 14
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Company is listed on the NYSE under the symbol
GAL. The following table sets forth the high and low closing sale prices for the
Common Stock, as reported on the NYSE, Composite Tape. The reported last sale of
Common Stock on the NYSE on March 21, 1997, was $16.
<TABLE>
<CAPTION>
Fiscal Year High Low
----------- ---- ---
<S> <C> <C> <C>
1996 First Quarter................................... $20 1/4 $10 1/2
Second Quarter.................................. 28 1/4 18 7/8
Third Quarter................................... 30 1/2 22 3/8
Fourth Quarter.................................. 33 1/4 14
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 3/4 9 1/4
</TABLE>
As of March 21, 1997, there were approximately 1,200 holders of record of
the Common Stock, excluding beneficial owners of shares registered in nominee or
street name.
The Company has not declared or paid any cash dividends on the Common
Stock since its initial public offering in 1984. The Board of Directors of the
Company has no current plans to pay cash dividends on the Common Stock. The
Company's existing credit facility prevents the Company from paying cash
dividends on the Common Stock without consent of its lender. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity, Financial Resources and Capital Expenditures." 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.
14
<PAGE> 15
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
(in thousands, except per share data)
Years ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues ....................... $ 284,905 $220,044 $178,792 $ 134,334 $ 166,280
========= ======== ======== ========= =========
Net earnings (loss) ................ 18,451 9,399 18,424 (10,924) (2,447)
Preferred stock dividends:
Paid .......................... 6 -- -- -- 782
In arrears .................... 15 3,127 3,127 3,127 2,345
Charge related to exchange of ...... --
preferred stock for common .... 24,279 -- -- -- --
--------- -------- -------- --------- ---------
Net earnings (loss) applicable to
common shares ................. $ (5,849) $ 6,272 $ 15,297 $ (14,051) $ (5,574)
========= ======== ======== ========= =========
Net earnings (loss)per common share:
Primary ........................ $ (0.41) $ 0.60 $ 1.51 $ (1.47) $ (0.59)
========= ======== ======== ========= =========
Fully diluted .................. $ (0.41) $ 0.60 $ 1.41 $ (1.47) $ (0.59)
========= ======== ======== ========= =========
Number of common shares and
common share equivalents
outstanding - average .......... 14,289 10,451 10,111 9,548 9,400
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital .................... $ 134,394 $ 54,670 $ 53,219 $ 30,813 $ 27,070
Total assets ....................... 196,905 120,084 100,766 71,005 71,604
Long-term debt ..................... 20 14,000 18,414 18,608 4,944
Shareholders' equity ............... 149,791 54,172 44,768 22,162 32,246
</TABLE>
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<PAGE> 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
From 1990 through 1993, the Company had a period of declining revenues
and suffered net losses. Commencing in 1991, the Company installed a new
management team and began implementing a recovery plan designed to reposition
the Company, return the Company to profitablity and enable it to capitalize on
its growth strategy. The recovery plan focused on three key goals: (i) to
restore and expand the Company's core business of the Micro Machines product
line, (ii) to focus on growth opportunities in new product areas such as the
male action figure category and girls' product lines and (iii) to reduce the
Company's cost structure and lower its break-even point. Due to the relatively
long lead time for new products and product lines in the toy industry, the
recovery plan was designed to turn the Company around for a three-year period
and return the Company to profitability in 1994.
Since 1993, the Company's revenues have grown approximately 112% from
approximately $134 million in 1993 to approximately $285 million in 1996. In
addition, from 1994 to 1996, the Company had record sales and net earnings
during the important fourth quarter of each year. The Company believes that its
operating performance over the past three years demonstrates that its recovery
plan has succeeded and that the Company is now well positioned for future
growth.
The successful implementation of its recovery plan has enabled the
Company to restructure its balance sheet to improve its liquidity and cash flow.
In March 1995, the Company renegotiated its existing credit facility to extend
the maturity by two years, increase availability from $40 million to $60 million
and decrease the annual interest rate by one percent. In February 1996, the
Company gave notice of its intention to redeem its 8% Convertible Subordinated
Debentures due 2000 (the "Debentures"). As a result, the $14 million aggregate
principal amount of outstanding Debentures was converted into an aggregate of
approximately 1.5 million shares of Common Stock. In addition, in March 1996, an
offer by the Company to exchange shares of its Common Stock for its outstanding
shares of Depositary Convertible Exchangeable Preferred Stock (the "Depositary
Shares") resulted in 98% of the holders of Depositary Shares converting such
shares into an aggregate of approximately 3.3 million shares of Common Stock.
The remainder of such Depositary Shares were either redeemed or converted into
Common Stock in June 1996. As a result of the foregoing, the Company reduced its
outstanding indebtedness and the aggregate liquidation preference of preferred
stock outstanding by approximately $51 million, increased shareholders' equity
by approximately $12 million, reduced annual interest payments by $1.1 million
and eliminated annual preferred stock dividend obligations of $3.1 million.
Disclosure Regarding Forward-Looking Statements
All statements other than statements of historical fact included in
this Form 10-K Report, including, without limitation the statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Important factors that could cause actual results to differ materially
from those discussed in such forward-looking statements ("Cautionary
Statements") include: the demand for the Company's products, the Company's
dependence on timely development, introduction and customer acceptance of new
products; possible weakness of the Company's markets; the impact of competition
on revenues, margins and pricing; the effect of currency fluctuations; other
risks and uncertainties as may be disclosed from time to time in the Company's
public announcements; the gross national product in the United States and other
countries, which also influences demand for the Company's products; customer
inventory levels; and the cost and availability of raw materials. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on behalf of one or both of them are expressly
qualified in their entirety by such Cautionary Statements.
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<PAGE> 17
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, 1996, 1995 and
1994:
<TABLE>
<CAPTION>
Years Ended
December 31
-------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net revenues ........................................ 100.0% 100.0% 100.0%
Cost of products sold ............................... 50.6 55.3 53.5
----- ----- -----
Gross margin ........................................ 49.4 44.7 46.5
Advertising and promotion expenses .................. 15.3 14.2 17.1
Other selling and
administrative expenses ......................... 12.6 13.6 12.5
Royalties, research and development expenses ........ 13.2 11.0 11.7
----- ----- -----
Earnings from operations ............................ 8.3 5.9 5.2
Net proceeds from Nintendo award .................... -- -- 6.8
Interest expense .................................... (1.1) (1.5) (1.5)
Other income, net ................................... 0.2 0.2 0.2
Provision for income taxes .......................... (0.9) (0.3) (0.4)
----- ----- -----
Net earnings ........................................ 6.5% 4.3% 10.3%
===== ===== =====
</TABLE>
Net earnings (loss) have been affected by certain unusual, non-recurring
items. A comparison of the net earnings (loss) per common share and the net
earnings per common share adjusted to exclude unusual items is set forth below.
<TABLE>
<CAPTION>
Years Ended
December 31
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net earnings (loss) per common share on a primary basis,
as reported ............................................ $(.41) $0.60 $1.51
Net earnings per common share on a primary basis,
adjusted to exclude unusual items ...................... $1.20 $0.60 $0.34
</TABLE>
The unusual items excluded are as follows: net proceeds from Nintendo
award of $11.8 million (after taxes) in 1994, and a one-time charge related to
the exchange of preferred stock for common stock of $24.3 million in 1996.
Years ended December 31, 1996 and 1995
Net revenues in 1996 were $284.9 million which represented a 29%
increase from 1995 net revenues of $220.0 million. The growth in net sales in
1996 was attributable to domestic sales which increased 41%, rising to $196.7
million. International sales increased 10% to $88.2 million, reflecting a strong
fourth quarter of 1996.
The Company's worldwide sales of boys' toys increased 74% in 1996 as
compared to 1995. The growth in net sales of boys' toys for 1996 was primarily
attributable to Micro Machines growth and new product introductions. Worldwide
sales of Micro Machines, led by the recently introduced Star Wars Action Fleet,
an extensive line of Star Wars vessels, playsets, and miniature action figures,
increased by 58% versus 1995. United States retail sales success of Micro
Machines continued, reaching its sixteenth consecutive quarter of growth. New
product introductions started in March 1996 when the Company initiated sales of
Dragon Flyz, a line of flying articulated action figures plus vehicles and
accessories, and continued in June 1996 when the Company initiated sales of
Jonny Quest, a line of vehicles and miniature figures based on characters from
the TV show. This increase was partially offset by the anticipated decrease in
international sales of boys' toys based on Biker Mice from Mars.
17
<PAGE> 18
The Company's worldwide sales of girls' toys decreased 20% in 1996 as
compared to 1995. A decrease in the sales of Sky Dancers and My Pretty DollHouse
was partially offset by an increase generated by the new Pound Puppies line.
Gross margins were $140.6 million in 1996, an increase of $42.3 million
from 1995. This increase was due to higher sales volume and an increase in the
gross margin rate to 49.4% in 1996 from 44.7% in 1995. The increase in the gross
margin rate was primarily attributable to the following: (i) economies of scale
associated with the efficient utilization of tooling, (ii) reduced product
costs, (iii) a change in the product mix, and (iv) a different 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.
Advertising and promotion expenses were $43.5 million, or 15.3% of net
revenues, in 1996 as compared to $31.2 million, or 14.2% of net revenues, in
1995. The higher expenses were primarily a result of a planned increase in
domestic television advertising expenses and the higher percentage relates to
the different mix of domestic and international sales.
Other selling and administrative expenses were $35.8 million in 1996 as
compared to $29.9 million in 1995. The increase in expenses principally resulted
from higher freight and commission expenses due to the growth in sales, legal
expenses and personnel costs as planned. However, other selling and
administrative expenses as a percentage of net revenues decreased to 12.6% in
1996 from 13.6% in 1995.
Royalties, research and development expenses were $37.7 million in 1996
as compared to $24.2 million in 1995. The increase in 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.
Interest expense was $3.2 million in 1996 as compared to $3.4 million
in 1995. The decrease was due primarily to lower average borrowings outstanding
during 1996. The 8% Convertible Subordinated Debentures originally due November
30, 2000 (the "Debentures") were eliminated by being converted to common stock
in the first quarter of 1996, eliminating the interest payments thereunder.
Credit line borrowings were repaid in the fourth quarter from the proceeds of
the Company's Common Stock offering.
The provision for income taxes was $2.5 million, or 11.9% of earnings
before taxes, in 1996 as compared to $0.6 million, or 6.0% of earnings before
taxes, in 1995. The current year tax rate is lower than the federal statutory
rate primarily due to the effect of the utilization of net operating loss
carryforwards and federal tax credits. 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.
Years ended December 31, 1995 and 1994
Net revenues in 1995 were $220.0 million which represented a 23%
increase from 1994 net revenues of $178.8 million. The strong sales growth for
1995 was attributable to two principal factors: (i) record international sales
of $80.7 million, an increase of 35% from 1994, and (ii) an increase in
worldwide sales of girls' toys by more than 500% to $88.0 million, which
represented 40% of net revenues as compared to only 8% of net revenues in 1994.
The girls' toys line increase was due to the introduction of the popular Sky
Dancers flying dolls and the My Pretty DollHouse line of miniature houses and
accessories.
The Company's boys' toys business declined 22% in 1995 as compared to
1994 as a result of the discontinuance of the Biker Mice from Mars line to
domestic retailers and a decline in consumer demand for the Z-Bots and Power
Rangers segments of Micro Machines. The Company had anticipated such
discontinuance of and sales declines in these products. However, the Company's
worldwide Micro Machines sales in 1995,
18
<PAGE> 19
excluding Z-Bots and Power Rangers, grew by 15% over 1994. Micro Machines,
through the fourth quarter of 1995, had twelve consecutive quarters of U.S.
retail sales growth.
Gross margin was $98.3 million in 1995, an increase of 18.2% or $15.1
million from 1994. The increase was due to higher sales volume offset slightly
by a lower gross margin rate. The gross margin rate decreased to 44.7% in 1995
from 46.5% in 1994 due mainly to three factors. First, tooling and packaging
design costs were a higher percentage of net revenues in 1995 as compared to
1994 in support of the Company's expanded product line. Second, international
sales as a percentage of worldwide revenues were higher in 1995 compared to
1994. Third, sharp price increases on plastics and packaging materials in the
third and fourth quarters of 1995 occurred too late in the year for the Company
to pass such increases on to its customers. The reduced gross margin rate was
partially offset by the elimination of duty on toys imported into the United
States from China.
Advertising and promotion expenses were $31.2 million or 14.2% of net
revenues in 1995 as compared to $30.6 million or 17.1% of net revenues in 1994.
The decrease in advertising and promotion expenses as a percentage of net
revenues was a result of higher marketing efficiencies domestically, coupled
with the effects of the higher sales growth rate internationally where the
Company's distributors absorb their own advertising costs. Other selling and
administrative expenses were $29.9 million in 1995 as compared to $22.4 million
in 1994. The increase in expenses was due mainly to higher planned personnel
costs as a result of the Company's growth and product line expansion, higher
freight costs, and higher legal expenses. Royalties, research and development
expenses increased to $24.2 million in 1995 as compared to $20.8 million in
1994. The increase in 1995 was due to higher royalty expenses associated with
increased sales volume as well as increased research and development expenses
due to expansion of the number of product lines. Although total operating
expenses increased by $11.5 million in 1995 as compared to 1994, operating
expenses as a percentage of net revenues declined to 38.8% in 1995 from 41.3% in
1994.
Earnings from operations were $13.0 million, an increase of 39% from
1994 earnings from operations of $9.3 million, reflecting the growth of net
revenues of 23% and lower operating expenses as a percentage of net revenues.
In 1994, the net proceeds of $12.1 million from the Nintendo award
represents the receipt of the Company's share of proceeds from its litigation
with Nintendo of America Inc. The amount was reflected in 1994 results and had
no impact on 1995 results.
Interest expense was $3.4 million in 1995 as compared to $2.6 million
in 1994. The increase was due primarily to higher average borrowings needed to
fund working capital to support higher sales, offset by a slightly lower
interest rate in 1995 as compared to 1994 on the Company's revolving credit
facility.
Income tax expense for 1995 and 1994 includes provisions for federal,
state and foreign income taxes, after taking into account the available net
operating loss carryforwards from prior years. At December 31, 1995, the Company
has federal 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.
Liquidity, Financial Resources and Capital Expenditures
Demand for the Company's products is greatest in the third and fourth
quarters of the year. As a result collections of accounts typically peak in the
fourth quarter and early first quarter of the following year. Due to the
seasonality of its revenues and collections, the Company's working capital
requirements are usually highest during the fourth quarter of each year.
On March 31, 1995, the Company entered into an amended and restated
loan and security agreement (the "Credit Agreement") with Congress Financial
Corporation (Central) (the "Lender"). The Credit Agreement extends through March
31, 1997 and provides a revolving line of credit of $40 million secured by
substantially
19
<PAGE> 20
all the assets of the Company, 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. Borrowings under the Credit Agreement are
secured by a lien on substantially all of the assets of the Company. The annual
interest rate is equal to the prime rate of CoreStates Bank N.A. as announced
from time to time plus 1%. At December 31, 1996, there were no loans outstanding
and $60 million was available to borrow under the Credit Agreement. On February
28, 1997, the Company signed an initial commitment letter for a $200 million
credit facility with BT Commercial Corporation, a unit of Bankers Trust New York
Corporation ("BT Facility"). The commitment is subject to certain conditions,
and it is expected that an agreement can be finalized within 60 days. The
Congress Credit Agreement has been extended while the new agreement is being
finalized.
During 1996, the Company used $15.0 million of cash in its operating
activities. This usage resulted from increases in accounts receivable,
inventories, tooling and related costs, prepaid expenses, deferred tax and other
assets, offset by net earnings, and increases in accounts payable, accrued
expenses and income and deferred taxes payable.
Working capital was $134.4 million at December 31, 1996 compared to
$54.7 million at December 31, 1995. The ratio of current assets to current
liabilities was 3.9 to 1.0 at December 31, 1996 compared to 2.1 to 1.0 at
December 31, 1995.
Capital expenditures for 1996 were approximately $2.3 million. The
Company had no material commitments for capital expenditures at December 31,
1996.
The Company believes that its cash flow from operations, cash on hand
and borrowings under a new credit agreement now being negotiated will be
sufficient to meet its working capital and capital expenditure requirements and
provide the Company with adequate liquidity to meet its anticipated operating
needs for the foreseeable future.
The Company is aggressively pursuing the renewal and extension of its
current Star Wars license as well as licenses in connection with the expected
release of the new Star Wars trilogy in 1999. If the Company is successful in
extending its current license and adding new licenses for additional Star Wars
product lines, the Company may need significant additional capital to pay for
such license rights as well as to finance expenditures to support new Star Wars
product lines. Should the expected new $200 million BT Facility be insufficient
for these needs, the Company believes that additional financing can be arranged.
There can be no assurance that the Company will be successful in obtaining
licenses related to the new Star Wars trilogy. The failure to renew or obtain
any part of such licensing rights could have a material adverse effect on the
business, financial condition and results of operations of the Company.
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 has made the required pro
forma disclosures in the notes to its consolidated financial statements. The
Company adopted this new standard for the year ending December 31, 1996.
20
<PAGE> 21
Impact of Inflation
The cost of the Company's operations is influenced to the extent of any
price increases in the cost of raw materials. In management's opinion, other
than the sharp increases in prices of plastics and packaging materials
experienced in the third and fourth quarters of 1995, general inflation did not
have a material impact on the Company's business in 1996 and 1995. The Company
did not implement any substantial price increases in 1996 or 1995 on continuing
product lines.
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 Accounting and
Financial Disclosure
Not Applicable.
21
<PAGE> 22
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
The executive officers and their respective positions are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mark D. Goldman.................... 46 President, Chief Executive Officer and Director
William G. Catron.................. 51 Executive Vice President, General Counsel, Chief
Administrative Officer and Secretary
Loren H. Hildebrand................ 57 Executive Vice President, Sales
Ronald D. Hirschfeld............... 46 Executive Vice President, International Sales & Marketing
Roger J. Kowalsky.................. 62 Executive Vice President, Chief Financial Officer
and Director
Gary J. Niles...................... 57 Executive Vice President, Marketing and Product Acquisition
Louis R. Novak..................... 49 Executive Vice President and Chief Operating Officer
Jay B. Foreman..................... 34 Senior Vice President of Galoob and Senior Vice President
and Managing Director of Galoob Direct, Inc.
H. Alan Gaudie..................... 56 Senior Vice President, Finance and Assistant Secretary
Ronnie Soong....................... 50 Managing Director of Galco International Toys, N.V.
Terrell (Mark) Taylor.............. 55 Senior Vice President, Product Design
</TABLE>
Mark D. Goldman, a Director of the Company, has served as President and
Chief Executive Officer of the Company since June 1991. From 1987 to 1991, Mr.
Goldman served as Executive Vice President and Chief Operating Officer. Prior to
1987, Mr. Goldman served in various executive capacities at Ages Entertainment
Software, Inc. (formerly Sega Enterprises, Inc.) and Mattel, Inc.
William G. Catron has served as Executive Vice President, General Counsel
and Chief Administrative Officer since May 1992 and as Corporate Secretary of
the Company since June 1995. From 1985 to 1992, Mr. Catron was Senior Vice
President, Assistant General Counsel for Paramount Pictures Corporation. Prior
to 1985, Mr. Catron served in various executive capacities at Ages Entertainment
Software, Inc. (formerly Sega Enterprises, Inc.) and Mattel, Inc.
Loren H. Hildebrand has served as Executive Vice President, Sales of the
Company since April 1994. From 1992 to 1994, Mr. Hildebrand was president of
Creative Consultants and from 1991 to 1992 he was Executive Vice President of
Bandai U.S. Inc., a toy manufacturer. From 1989 to 1992, Mr. Hildebrand was
Executive Vice President and a partner in Toy Soldiers, Inc., a start-up
company. Prior to 1989, Mr. Hildebrand was a consultant for Worlds of Wonder and
Executive Vice President, Sales, Merchandising and Distribution for Mattel, Inc.
Ronald D. Hirschfeld has served as Executive Vice President, International
Sales and Marketing of the Company since February 1994. From 1989 to 1994, Mr.
Hirschfeld served as Senior Vice President,
22
<PAGE> 23
International Sales and Marketing. Prior to 1989, Mr. Hirschfeld served as
Senior Vice President, International Operations from 1987 to 1989 and has held
various positions with the Company since 1978.
Roger J. Kowalsky has served as Executive Vice President and Chief
Financial Officer of the Company since June 1996 and as a Director of the
Company since June 1994. From 1989 to 1996, Mr. Kowalsky served as Director of
the Vermont Studio Center, an organization dedicated to visual artists and
writers. From 1983 to 1986, Mr. Kowalsky served 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 and Administration and President of Pullman
Trailmobile, a subsidiary of Pullman, Inc.
Gary J. Niles has served as Executive Vice President, Marketing and
Product Acquisition of the Company since February 1992. From 1989 to 1992, Mr.
Niles served as Senior Vice President, Toy Boys Division. Before joining the
Company, Mr. Niles was an executive with U.A.C., Ltd., a division of Universal
Matchbox, Revell Incorporated and Ages Entertainment Software, Inc. (formerly
Sega Enterprises, Inc.)
Louis R. Novak has served as Executive Vice President and Chief Operating
Officer of the Company since February 1992. From 1989 to 1992, Mr. Novak served
as Senior Vice President, Operations. From 1986 to 1989 he was Senior Vice
President, Worldwide Product Operations for Coleco Industries, Inc. Prior to
1986, Mr. Novak was an executive with All American Gourmet Company, Inc., a
manufacturer of frozen food products, and for Mattel, Inc.
Jay B. Foreman has been Senior Vice President of Galoob Toys, Inc. and
Senior Vice President and Managing Director of Galoob Direct, Inc., since May
1996. From 1992 to 1996, Mr. Foreman served as Executive Vice President-U.S.
Operations of Play By Play Toys and Novelties, Inc. From 1990 until 1992, Mr.
Foreman served as Co-General Manager of the Toys and Novelties Division of Pizza
Management, Inc.
H. Alan Gaudie has served as Senior Vice President, Finance of the Company
since April 1992 and Assistant Secretary since June 1995. From 1985 to 1992, Mr.
Gaudie served as Corporate Controller, Vice President, Senior Vice President and
acting Chief Financial Officer.
Ronnie Soong has served as Managing Director of Galco since May 1995. From
1993 to 1995, Mr. Soong served as General Manager of Galco. From 1989 to 1993,
Mr. Soong was General Manager of Zindart Industrial Co., Ltd. Prior to 1989, Mr.
Soong was the General Manager of Buddy L (HK) Ltd. and an executive with the
Ertl Company in Taiwan from 1987 to 1989.
Terrell (Mark) Taylor has served as Senior Vice President, Product Design
of the Company since November 1995. From 1988 to 1995, Mr. Taylor served as
Senior Vice President, Product Design for Mattel, Inc. From 1987 to 1988, Mr.
Taylor served as Vice President with Entertech/LJN Toys. Prior to 1987, Mr.
Taylor served in various executive capacities at Playmates Toys, Tomy Toys, and
Mattel, Inc. In addition, Mr. Taylor was a principal partner with Taylor/Salari
Design.
23
<PAGE> 24
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.
24
<PAGE> 25
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>
<S> <C>
(a) 1. Financial Statements Page
Report of Independent Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1996 and
December 31, 1995 F-2
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6 to
F-17
(a) 2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and
Reserves for the years ended December 31, 1996, 1995
and 1994 S-1
</TABLE>
All other schedules have been omitted because they are inapplicable or
not required, or the information is included in the consolidated financial
statements or notes thereto.
25
<PAGE> 26
(a) 3. Exhibits
--------
3.1(a)(1) Certificate of Incorporation.
3.1(b)(1) Amendment to Certificate of Incorporation.
3.2(2) Bylaws.
4.1(3) Form of Certificate for Shares of Common Stock of Company.
4.2(a)(4) Warrant Agreement, dated as of December 11, 1991, by and between
the Company and Shereff, Friedman, Hoffman and Goodman, LLP.
4.2(b)(4) Warrant Agreement, dated as of November 17, 1993, by and between
the Company and Gerard Klauer Mattison & Co., Inc.
4.3(5) Form of Rights Agreement, dated as of January 17, 1990,
between the Company and Mellon Securities Trust Company.
10.1(a)(6)* Amended and Restated 1984 Employee Stock Option Plan.
10.1(b)(7)* 1994 Senior Management Stock Option Plan.
10.1(c)(8)* Form of Agreement between each of Mark Goldman, William Catron,
Lou Novak, Gary Niles, Mark Shepherd, Ronald Hirschfeld and H.
Alan Gaudie and the Company.
10.1(d)(9)* 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 Company.
10.1(e)(10) 1995 Non-Employee Directors' Stock Option Plan.
10.1(f)* Galoob Toys, Inc. 1996 Long Term Compensation Plan
10.1(g)* Galoob Toys, Inc. 1996 Share Incentive Plan
10.2(10)* Lewis Galoob Toys, Inc. Savings and Retirement Plan (Formerly the
Lewis Galoob Toys, Inc. Profit Sharing) (Amendment and
Restatement effective January 1, 1987).
10.3(9)* Severance Agreement, dated October 27, 1994, between Mark Goldman
and the Company.
10.4(a)(11)* Agreement, dated July 15, 1995, between William G. Catron and the
Company.
10.4(b)(11)* Agreement, dated July 15, 1995, between Loren Hildebrand and the
Company.
10.4(c)(11)* Agreement, dated July 15, 1995, between Ronald Hirschfeld and the
Company.
10.4(d)(11)* Agreement, dated July 15, 1995, between Gary J. Niles and the
Company.
10.4(e)(11)* Agreement, dated July 15, 1995, between Louis R. Novak and the
Company.
10.5(e)(9) Amended and Restated Loan and Security Agreement, dated as of
March 31, 1995, by and among the Company and Congress Financial
Corporation (Central).
10.6(a)(12) License Agreement, dated June 16, 1986, by and between Funmaker,
as Licensor and the Company, as Licensee.
10.7(a)(13) License Agreement, dated May 4, 1990, by and among the Company as
Licensee, Codemasters Software Company, Ltd. and America
Corporation, Limited.
10.7(b)(13) Amendment No. 1 dated June 1991 to License Agreement dated May 4,
1990.
10.7(c)(13) Amendment No. 2 dated December 23, 1991 to License Agreement,
dated May 4, 1990.
10.7(d)(13) European License Agreement, dated December 23, 1991, by and
between Codemasters Software Company, Ltd. and the Company.
10.7(e)(13) Third Amendment to United States License and First Amendment to
European License, dated November 4, 1992.
10.7(f)(9) Fourth Amendment to United States License Agreement, dated
October 14, 1994.
10.8(12) Agreement of Purchase and Sale, dated October 22, 1986, by and
between AT Building Company, as Seller, and the Company, as
Buyer.
10.9(a)(2) Lease Agreement, dated March 12, 1987, by and between Lincoln
Alvarado and Patrician Associates, Inc., as Lessor, and the
Company, as Lessee.
10.9(b)(14) Amendment No. 1 to Lease Agreement.
10.9(c)(10) Lease Agreement, dated December 1, 1995, by and between 200 Fifth
Avenue Associates, as Lessor, and the Company, as Lessee.
10.9(d) Lease Agreement, dated December 3, 1996, between Prudential
Insurance Company of America as Lessor and the Company, as
Lessee.
26
<PAGE> 27
11 Statement of Computation of Per Share Earnings.
21 Subsidiaries of the Company.
23.1 Consent of Independent Public Accountants.
27 Financial Data Schedule
- --------------------
(1) Incorporated by reference to the Company's Amendment No. 2 to the
Registration Statement on Form S-1, filed with the Commission on
November 8, 1996.
(2) Incorporated by reference to the Company's Amendment No. 1 to
Registration Statement on Form 8-B, filed with the Securities and
Exchange Commission (the "Commission") on January 11, 1988.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-3, filed with the Commission on February 26, 1990.
(4) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1993, filed with the Commission on March 31,
1994.
(5) Incorporated by reference to the Company's Registration Statement on
Form 8-A, filed with the Commission on January 23, 1990.
(6) Incorporated by reference to the Company's Registration Statement on
Form S-8, Registration No. 33-56585, filed with the Commission on
November 23, 1994.
(7) Incorporated by reference to the Company's Registration Statement on
Form S-8, Registration No. 33-56587, filed with the Commission on
November 23, 1994.
(8) Incorporated by reference to the Company's Registration Statement on
Form S-8, Registration No. 33-56589, filed with the Commission on
November 23, 1994.
(9) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1994, filed with the Commission on March 31,
1995.
(10) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1995, filed with the Commission on March 11
1996.
(11) Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-00743, filed with the Commission on
February 6, 1996.
(12) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1986, filed with the Commission on March 31,
1987.
(13) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1992, filed with the Commission on March 31,
1993.
(14) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1991, filed with the Commission on March 30,
1992.
* Indicates exhibits relating to executive compensation.
All other schedules are omitted because they are not applicable or the
required information is shown in the Company's consolidated financial statements
or the notes thereto.
27
<PAGE> 28
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.
GALOOB TOYS, INC.
(Registrant)
By: /s/ Mark D. Goldman
--------------------------
Mark D. Goldman
President, Chief Executive
Officer
Dated: March 31, 1997
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 31, 1997
- --------------------------------- Executive Officer and
Mark D. Goldman Director
/s/ Scott R. Heldfond Director March 31, 1997
- ---------------------------------
Scott R. Heldfond
/s/ Paul A. Gliebe, Jr. Director March 31, 1997
- ---------------------------------
Paul A. Gliebe, Jr.
/s/ S. Lee Kling Director March 31, 1997
- ---------------------------------
S. Lee Kling
/s/ Andrew Cavanaugh Director March 31, 1997
- ---------------------------------
Andrew Cavanaugh
/s/ Roger J. Kowalsky Executive Vice President, Finance, March 31, 1997
- --------------------------------- Chief Financial Officer and Director
Roger Kowalsky
</TABLE>
28
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Galoob Toys, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 25 present fairly, in all material
respects, the financial position of Galoob Toys, Inc. and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, 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
January 31, 1997
F-1
<PAGE> 30
GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
--------- ---------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 27,920 $ 2,030
Accounts receivable, net 102,322 68,402
Inventories 19,974 17,491
Tooling and related costs 15,436 8,311
Prepaid expenses and other assets 12,361 10,348
Deferred tax asset 2,404 --
--------- ---------
Total Current Assets 180,417 106,582
Land, Building and Equipment, net 10,472 8,913
Indebtedness from Related Party 950 --
Other Assets 5,066 4,589
--------- ---------
Total Assets $ 196,905 $ 120,084
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ -- $ 15,071
Accounts payable 19,655 17,141
Accrued expenses 24,680 14,547
Income taxes payable 1,671 731
Current portion of long-term debt 17 4,422
--------- ---------
Total Current Liabilities 46,023 51,912
Long-term Debt 20 14,000
Deferred Tax Liability 1,071 --
--------- ---------
Total Liabilities 47,114 65,912
--------- ---------
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 -- 36,790
per share in 1995
Common stock, par value $.01 per share
Authorized 50,000,000 shares
Issued and outstanding 17,919,864 shares in 1996 and
10,089,961 shares in 1995 179 101
Additional paid-in capital 170,291 31,579
Retained earnings (deficit) (20,232) (13,851)
Cumulative translation adjustment (447) (447)
--------- ---------
Total Shareholders Equity 149,791 54,172
--------- ---------
Total Liabilities and Shareholders' Equity $ 196,905 $ 120,084
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-2
<PAGE> 31
GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net revenues $ 284,905 $ 220,044 $ 178,792
Costs of products sold 144,282 121,742 95,636
--------- --------- ---------
Gross margin 140,623 98,302 83,156
--------- --------- ---------
Operating expenses:
Advertising and promotion 43,515 31,240 30,616
Other selling and administrative 35,776 29,860 22,433
Royalties, research and development 37,668 24,213 20,785
--------- --------- ---------
Total operating expenses 116,959 85,313 73,834
--------- --------- ---------
Earnings from operations 23,664 12,989 9,322
Net proceeds from Nintendo award -- -- 12,124
Interest expense (3,183) (3,429) (2,609)
Other income, net 455 439 365
--------- --------- ---------
Earnings before income taxes 20,936 9,999 19,202
Provision for income taxes 2,485 600 778
--------- --------- ---------
Net earnings 18,451 9,399 18,424
Preferred stock dividends:
Paid 6 -- --
In arrears 15 3,127 3,127
Charge related to the exchange of
preferred stock for common 24,279 -- --
--------- --------- ---------
Net earnings (loss) applicable to
common shares $ (5,849) $ 6,272 $ 15,297
========= ========= =========
Average common shares outstanding 14,289 10,451 10,111
Net earnings (loss) per common share:
Primary $ (0.41) $ 0.60 $ 1.51
Fully Diluted (0.41) 0.60 1.41
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
<PAGE> 32
GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Shares Amts Shares Amts
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at 12/31/93 183,950 $ 36,790 9,559,357 $ 96
Net earnings -- -- -- --
Common stock issued, net -- -- 47,000 1
Termination of 1992 Plan -- -- 449,732 4
Common stock received in exchange
for shares issued and canceled -- -- (1,000) --
Cumulative translation adj. and other -- -- -- --
------------ ------------ ------------ ------------
Balance at 12/31/94 183,950 36,790 10,055,089 101
Net earnings -- -- -- --
Common stock issued, net -- -- 58,751 --
Common stock received in exchange for
shares issued and canceled -- -- (11,202) --
Reclamation of shares -- -- (12,677) --
------------ ------------ ------------ ------------
Balance at 12/31/95 183,950 36,790 10,089,961 101
Net earnings -- -- -- --
Common stock issued, net -- -- 2,492,679 24
Conversion of preferred stock to common stock (182,290) (36,458) 3,359,432 34
Redemption of preferred stock (1,660) (332) -- --
Conversion of debentures to common stock -- -- 1,511,872 15
Costs associated with preferred stock exchange
and debenture conversion -- -- -- --
Warrants exercised -- -- 490,280 5
Common stock received in exchange for shares
issued and canceled -- -- (24,360) --
Tax benefits from stock plans -- -- -- --
------------ ------------ ------------ ------------
Balance at 12/31/96 0 $ 0 17,919,864 $ 179
============ ============ ============ ============
<CAPTION>
Additional Retained Cumulative
Paid-In Earnings Translation
Capital (Deficit) Adjustment Total
------- ------- ----------- ------
<S> <C> <C> <C> <C>
Balance at 12/31/93 $ 27,293 $ (41,596) $ (421) $ 22,162
Net earnings -- 18,424 -- 18,424
Common stock issued, net 161 -- -- 162
Termination of 1992 Plan 4,042 -- -- 4,046
Common stock received in exchange
for shares issued and canceled 10 (10) -- --
Cumulative translation adj. and other -- -- (26) (26)
------------ ------------ ------------ ------------
Balance at 12/31/94 31,506 (23,182) (447) 44,768
Net earnings -- 9,399 -- 9,399
Common stock issued, net 228 -- -- 228
Common stock received in exchange for
shares issued and canceled (155) (68) -- (223)
Reclamation of shares -- -- -- --
------------ ------------ ------------ ------------
Balance at 12/31/95 31,579 (13,851) (447) 54,172
Net earnings -- 18,451 -- 18,451
Common stock issued, net 62,334 -- -- 62,358
Conversion of preferred stock to common stock 60,703 (24,279) -- --
Redemption of preferred stock (11) (118) -- (461)
Conversion of debentures to common stock 13,479 -- -- 13,494
Costs associated with preferred stock exchange
and debenture conversion (1,282) -- -- (1,282)
Warrants exercised 2,515 -- -- 2,520
Common stock received in exchange for shares
issued and canceled (76) (435) -- (511)
Tax benefits from stock plans 1,050 -- -- 1,050
------------ ------------ ------------ ------------
Balance at 12/31/96 $ 170,291 $ (20,232) $ (447) $ 149,791
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
<PAGE> 33
GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except shares)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 18,451 $ 9,399 $ 18,424
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation 751 528 628
Changes in assets and liabilities:
Accounts receivable (33,920) (10,519) (24,500)
Inventories (2,483) (667) (3,845)
Tooling and related costs (7,125) 68 (3,359)
Prepaid expenses and other current assets (2,013) (4,856) 1,849
Accounts payable 2,514 2,168 4,140
Accrued expenses 10,460 (392) 67
Income and deferred taxes payable 3,061 232 217
Deferred tax and other assets (4,664) (3,026) (168)
-------- -------- --------
Net cash (used in) provided by operating activities (14,968) (7,065) (6,547)
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and equipment, net (2,310) (1,041) (466)
-------- -------- --------
Net cash (used in) provided by investing activities (2,310) (1,041) (466)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under notes payable (15,071) 8,100 6,971
Repayments under long-term debt agreements (4,385) (194) (194)
Proceeds from issuance of common stock, net 64,367 5 162
Redemption of preferred stock (461) -- --
Cost associated with the conversion of debenture
and the preferred shares exchange (1,282) -- --
Other, net -- -- (26)
-------- -------- --------
Net cash provided by (used in) financing activities 43,168 7,911 6,913
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,890 (195) (100)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,030 2,225 2,325
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,920 $ 2,030 $ 2,225
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,231 $ 3,050 $ 2,656
Cash paid for income taxes $ 1,747 $ 390 $ 822
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY
During the year ended December 31, 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 charged against additional paid-in capital. (See Note J.)
During the year ended December 31, 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 N.)
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 O.)
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE> 34
GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
NOTE A - Summary of Significant Accounting Policies
Organization and Business
Galoob Toys, Inc. and subsidiaries (formerly known as Lewis Galoob Toys, Inc.)
("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") and
Galoob Direct, Inc. 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 and allowances 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist primarily of money market funds invested in U.S.
Government securities and other high quality U.S. money market securities.
Concentration of Credit Risk
Accounts receivable primarily represent balances due from customers. The Company
performs credit evaluations of each of its customers and maintains allowances
for potential credit losses. Such losses have generally been within management's
expectations.
Inventories
Inventories are stated at lower of cost (first-in, first-out) or market.
Tooling and Related Costs
Costs incurred for tooling and package design are deferred and amortized over
the life of the products, which range from one to two years.
F-6
<PAGE> 35
GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1996, 1995 and 1994
Prepaid Expenses
Prepaid expenses include costs such as those incurred in the creation of
television commercials which are deferred and expensed in the period first
aired. 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.
For the year ended December 31, 1995, the Company implemented SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets". Implementation of SFAS No.
121 had no material impact on the Company's financial condition or results of
operations.
Research and Development
Research and development is expensed as it is incurred. Total expenses for the
years ended December 31, 1996, 1995 and 1994 were $10,210,000, $7,886,000 and
$7,288,000, respectively.
Income Taxes
The Company accounts for income taxes in accordance with 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.
Earnings Per Share
Primary earnings per share is based on the net earnings (loss) applicable to
common shares, after providing for the dividends paid or in arrears on
the preferred stock and charges related to the conversion of preferred stock to
common stock, for the year divided by the weighted average number of common and
common equivalent shares outstanding. The dilutive effect of common stock
equivalents, such as stock options and warrants, is calculated using the
treasury stock method. Stock options and warrants were dilutive for 1995 and
1994. Fully diluted earnings per share for the year ended 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 year ended December 31, 1995 was the same as
primary earnings per share since the effect of the assumed conversion is
anti-dilutive.
Recent Accounting Pronouncement
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which defines 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
has made the required pro forma disclosures in these notes. See Note O.
F-7
<PAGE> 36
GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1996, 1995 and 1994
NOTE B - Accounts Receivable, Net
<TABLE>
<CAPTION>
(in thousands)
December 31,
1996 1995
---- ----
<S> <C> <C>
Trade receivables $ 111,049 $ 76,834
Provisions for:
Advertising allowances (7,514) (5,800)
Return of defective goods (700) (700)
Markdowns and discounts (1,086) (2,975)
Doubtful accounts (597) (507)
--------- ---------
Net trade receivables 101,152 66,852
Other receivables 1,170 1,550
--------- ---------
$ 102,322 $ 68,402
========= =========
NOTE C - Inventories
(in thousands)
December 31,
1996 1995
--------- ---------
Finished goods $ 19,667 $ 17,023
Raw materials and parts 307 468
--------- ---------
$ 19,974 $ 17,491
========= =========
NOTE D - Land, Building and Equipment, Net
(in thousands)
December 31,
1996 1995
--------- ---------
Land and building $ 9,851 $ 9,567
Office furniture, fixtures and
equipment 5,579 4,646
Leasehold improvements 1,026 1,267
Vehicles 133 104
--------- ---------
16,589 15,584
Accumulated depreciation (6,117) (6,671)
--------- ---------
$ 10,472 $ 8,913
========= =========
</TABLE>
NOTE E - Notes Payable
On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "New Agreement") with Congress Financial Corporation
(Central) (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 generally prime rate
plus 1%. In consideration for entering into the New Agreement, the Company paid
a $100,000 fee; additional fees of $100,000 were paid in 1996 when the Company
exercised 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 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 was in compliance with all debt
covenants at December 31,1996.
F-8
<PAGE> 37
GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1996, 1995 and 1994
The maximum outstanding borrowings, average outstanding balances and weighted
average rates of interest for notes payable were as follows:
<TABLE>
<CAPTION>
(in thousands)
1996 1995
---- ----
<S> <C> <C>
Maximum outstanding at month end $43,202 $30,235
Average outstanding amount during the year 23,969 14,211
Weighted average interest rate for the year 9.6% 10.4%
</TABLE>
NOTE F - Income Taxes
Earnings before income taxes and the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
(in thousands)
Years ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Earnings before income taxes:
Domestic $ 20,396 $ 9,288 $ 18,861
Foreign 540 711 341
-------- -------- --------
$ 20,936 $ 9,999 $ 19,202
======== ======== ========
Provision for income taxes:
Current:
Federal $ 2,078 $ 187 $ 490
State 1,689 278 201
Foreign 51 135 87
-------- -------- --------
3,818 600 778
Deferred:
Federal (1,159) -- --
State (174) -- --
Foreign -- -- --
-------- -------- --------
$ 2,485 $ 600 $ 778
======== ======== ========
</TABLE>
F-9
<PAGE> 38
GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1996, 1995 and 1994
Deferred tax liabilities (assets) consist of the following:
<TABLE>
<CAPTION>
(in thousands)
December 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Prepaid expenses $ 2,321 $ 2,475 $ 1,586
Other temporary differences 1,024 766 705
------- ------- -------
Gross deferred tax liabilities 3,345 3,241 2,291
------- ------- -------
Accrued expenses (1,232) (613) (939)
Defectives provision (285) (245) (315)
Other temporary differences (3,161) (3,244) (2,970)
Net operating loss carryforwards -- (2,567) (4,037)
Research and development tax credit carryforward -- (765) (765)
Other -- (1,027) (944)
------- ------- -------
Gross deferred tax assets (4,678) (8,461) (9,970)
------- ------- -------
Deferred tax assets valuation allowance -- 5,220 7,679
------- ------- -------
$(1,333) $ -- $ --
======= ======= =======
</TABLE>
No deferred tax valuation allowance was required at December 31, 1996 since the
net deferred tax assets are considered realizable. Valuation allowances were
provided in 1994 and 1995 when realization was uncertain. The net change in the
valuation allowance for deferred tax assets was a decrease of $5,220,000,
$2,459,000, and $6,140,000 in 1996, 1995 and 1994, respectively.
The provision for income taxes differs from the provisions determined by
applying the applicable U.S. statutory federal income tax rates to pretax income
as a result of the following differences:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal income taxes
at the U.S. statutory rate 35.0% 35.0% 35.0%
Increase (decrease) in income taxes resulting from:
Effects of U.S. and foreign income
taxes on foreign operations 0.2 (1.1) (0.2)
State income taxes, net of loss carryforwards,
less federal tax benefits 5.1 2.8 0.9
Benefit of reversing temporary differences for
which benefits were not previously recorded -- (20.9) --
Loss carryback/carryforward utilized (15.0) (13.8) (31.6)
Tax credits/carryforward utilized (16.4) -- --
Other 3.0 4.0 --
------ ------ ------
11.9% 6.0% 4.1%
====== ====== ======
</TABLE>
F-10
<PAGE> 39
GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1996, 1995 and 1994
No domestic deferred taxes have been provided on unremitted earnings of the
foreign subsidiary. All such earnings are expected to be permanently reinvested
in the subsidiary. Undistributed earnings for which the Company has not
provided taxes, which may be payable on distribution, were approximately
$5,200,000 as of December 31, 1996. No foreign taxes will be withheld on the
distribution of the untaxed earnings.
NOTE G - Leases
The Company leases its domestic warehouse and showroom facilities, and its
facilities in Hong Kong. The leases have been classified as operating leases and
are for terms expiring at various dates through 2006. The Company has a lease
option on a new domestic warehouse to renew for one five-year term, renewable
in the year 2002.
Future minimum lease payments for all noncancellable operating leases as of
December 31, 1996 (in thousands) are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1997 $ 2,001
1998 2,260
1999 1,804
2000 1,718
2001 1,779
Thereafter 2,313
-----------
$ 11,875
===========
</TABLE>
Net rental expense for the years ended December 31, 1996, 1995 and 1994 was
$1,965,000, $1,988,000 and $1,515,000, respectively.
NOTE H - Royalty Contracts
The Company has future minimum royalty guarantee payments as of December 31,
1996 (in thousands) as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1997 $2,489
1998 600
1999 500
--------
$3,589
--------
</TABLE>
NOTE I - Accrued Expenses
<TABLE>
<CAPTION>
(in thousands)
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Accrued royalties $10,797 $ 6,003
Accrued compensation and commissions 6,484 4,814
Other accrued expenses 7,399 3,730
------- -------
$24,680 $14,547
======= =======
</TABLE>
During 1995, the Company settled with the United States Customs Service
("Customs") regarding the audit of duty due on importations of goods into the
United States of the years 1988 through 1991. The Company adequately provided
for the amount settled with Customs.
F-11
<PAGE> 40
GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1996, 1995 and 1994
NOTE J - Long-Term Debt
<TABLE>
<CAPTION>
(in thousands)
December 31,
------------
1996 1995
------- -------
<S> <C> <C>
8% Convertible Subordinated Debentures due and payable on
November 30, 2000, interest paid semi-annually $ -- $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 was paid, interest rate 10.3% -- 4,422
Capital lease obligation 37 --
------- -------
37 18,422
Current portion (17) (4,422)
------- -------
$ 20 $14,000
======= =======
</TABLE>
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, with interest paid semi-annually. 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.
In February 1996, the Company issued a call for the redemption of its 8%
Debentures. This call resulted in the conversion on March 15, 1996, of all
$14,000,000 8% Debentures at $9.26 per share and the issuance of 1,511,872 new
shares of common stock. Unamortized debt issuance costs of $833,000 were charged
against additional paid-in-capital on conversion of the 8% Debentures.
NOTE K - Major Customers
The Company had transactions with one customer, Toys "R" Us, Inc. that accounted
for approximately 23%, 20% and 21% of net revenues in 1996, 1995 and 1994,
respectively. Wal-Mart accounted for approximately 13% and 11% of net revenues
in 1996 and 1995, respectively.
NOTE L - 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 1996, 1995 or 1994.
NOTE M - 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 April 11, 1994, Nintendo paid the Company $16.1 million representing the full
damage award plus interest and related costs. The Company retained approximately
$12.1 million of this amount, and the Company's Game Genie licensors were paid
the remaining $4.0 million. Notwithstanding such payment, on June 20, 1994,
Nintendo filed a petition for a Writ of Certiorari with the United States
Supreme Court, which asked the Supreme Court to review the damage award on a
discretionary basis. On October 3, 1994, the Supreme Court rejected Nintendo's
petition and affirmed Galoob's right to the full damage award. There is no
further basis for appeal by Nintendo.
F-12
<PAGE> 41
GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1996, 1995 and 1994
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 or results of operation.
NOTE N - 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 represented 1/10th share of Preferred Stock and had a
cumulative dividend rate of $1.70 per annum, payable quarterly, and could be
converted into common stock at the option of the holders at an initial price of
$16.875 per share of common stock. On July 1, 1992, the Company discontinued
payment of dividends on the Depositary Shares.
In February 1996, the Company offered to exchange 1.85 shares of its common
stock for each Depositary Share outstanding. 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 per Depositary Share. This non-cash charge
amounted to $24,279,000. Without this charge, the Company would have reported
net earnings per common share of $1.20 as compared to the reported net loss per
common share of $0.41 in the year ended December 31, 1996.
The balance of the Depositary Shares were converted at the specified 1.185
exchange rate or redeemed by the Company in June 1996.
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-thousandth of a
share of Series A Preferred Stock of the Company at an exercise price of $43.00,
subject to adjustment. The Rights will be exercisable only if a person or group
acquires beneficial ownership of 20% or more of the common stock (other than
pursuant to certain transactions involving the Company) (an "Acquiring Person")
or announces a tender or exchange offer that would result in such person or
group beneficially owning 20% or more of the common stock (other than a tender
or exchange offer for all outstanding shares at a price determined by the
non-affiliated directors to be fair).
If any person becomes the beneficial owner of 20% or more of the common stock
(other than pursuant to certain transactions involving the Company or a tender
or exchange offer for all outstanding shares at a price determined by the
non-affiliated directors to be fair), or an Acquiring Person engages in certain
"self-dealing" transactions including a merger in which the Company is the
surviving corporation, each Right not owned by such Acquiring Person will enable
its holder to purchase, at the Right's then-current exercise price, shares of
the common stock (or, in certain circumstances, cash, property or other
securities of the Company) having a value of twice the Right's exercise price.
In addition, if the Company is acquired in a merger or other business
combination transaction in which the Company is not the surviving corporation,
or if the Company sells or transfers 50% or more of its assets or earning power,
each Right not owned by such Acquiring Person will entitle its holder to
purchase, at the Right's then-current exercise price, common shares of the
acquiring company having a value of twice the Right's exercise price.
The Rights will expire January 17, 2000 or they may be redeemed by the Company
at $.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 O - Stock Compensation Plans
The Company has four stock compensation plans: the 1984 Employee Stock Option
Plan, the 1994 Senior Management Option Plan, the 1995 Non-Employee Directors
Stock Option Plan, and the 1996 Share Incentive Plan. The aggregate number of
common shares available under these plans are 1,589,997, 800,000, 160,000 and
1,850,000, respectively. There were 1,994,029 and
F-13
<PAGE> 42
GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1996, 1995 and 1994
442,437 shares available for future grants under the terms of the Company's
stock option plans at December 31, 1996 and 1995, respectively. Stock options
outstanding have a term of 10 years and are non-qualified options. An option
becomes exercisable at such times and in such installments as set by the
Compensation Committee of the Board of Directors. Certain options granted to
senior management have vesting schedules that depend on the achievement of
designated prices for the Company's common stock and the passage of specific
time periods.
The following table summarizes information about stock option activity for the
three years ended December 31, 1996:
<TABLE>
<CAPTION> Weighted
Number of Average Exercise
Options Price Per Share
------- ---------------
<S> <C> <C>
Outstanding at December 31, 1993 1,075,399 4.93
Granted 961,000 8.50
Exercised 97,000 4.06
Canceled 807,500 5.33
- --------------------------------- ---------
Outstanding at December 31, 1994 1,131,899 7.75
Granted 336,000 6.63
Exercised 60,575 3.68
Canceled 77,232 7.56
- --------------------------------- ---------
Outstanding at December 31, 1995 1,330,092 7.67
Granted 380,908 22.38
Exercised 138,750 7.00
Canceled 82,500 6.41
- --------------------------------- ---------
Outstanding at December 31, 1996 1,489,750 11.57
=========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Range of Weighted Weighted Weighted
Exercise Number Average Average Exercise Number Average Exercise
Prices Outstanding Life (1) Price Per Share Exercisable Price Per Share
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.00-9.00 1,094,842 7.2 $ 7.80 1,028,176 $ 7.91
10.25-16.00 50,000 9.0 12.44 32,500 11.26
20.50-30.63 344,908 9.5 23.39 57,408 21.25
--------- ---------
1,489,750 7.8 $ 11.57 1,118,084 $ 8.69
</TABLE>
(1) Weighted Average remaining contractual life in years.
There were 929,228 and 683,399 options exercisable at weighted average exercise
prices per share of $8.11 and $7.58 at December 31, 1995 and 1994,
respectively.
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123), effective for 1996, the Company
continues to account for stock compensation costs in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". Had compensation cost been determined based on the fair
value at the grant dates for awards under the Company's stock plans in
accordance with SFAS No. 123, net income would have been reduced by $1.2 million
($0.09 per share) and $0.6 million ($0.05 per share) in 1996 and 1995,
respectively. As required by SFAS No. 123, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions for 1996 and 1995, respectively: historical
dividend yield of 0% in both years; an expected life of 4.4 years; historical
volatility of 60% and 65% and a risk-free rate of return of 6.3% and 6.1%. The
weighted-average fair values of the options granted during 1996 and 1995 were
$12.22 and $3.74 per share, respectively.
On July 7, 1988, in consideration for entering into a credit agreement, the
Company issued warrants to purchase shares of common stock; in 1996 the
remaining outstanding warrants for 392,866 shares were exercised at $4.44 per
share. On December 11, 1991, the Company issued warrants to purchase 25,000
shares of common stock at $4.375 per share; all these warrants were exercised in
1996. 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;
warrants for 75,000 shares were exercised in 1996 and warrants for 75,000 shares
remain outstanding at December 31, 1996.
F-14
<PAGE> 43
GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1996, 1995 and 1994
NOTE P - Related Party Transactions
On August 29, 1996, Mark D. Goldman, President, Chief Executive Officer and
Director of the Company, borrowed $950,000 in connection with the purchase of a
personal residence and executed a note payable to the Company, which is secured
by a second mortgage on such residence. The note will bear no interest unless
Mr. Goldman's employment with the Company is terminated and, at such time, the
note will bear interest at one percent per annum in excess of the Prime Rate
charged by Citibank F.S.B. During the term of Mr. Goldman's employment with the
Company, in accordance with the Internal Revenue Code of 1986, as amended ("the
Code"), interest will be imputed at the applicable federal rate as determined
under the Code. Commencing on the first day of September 1996, principal in the
amount of $100 is payable on the first of each month. The balance of the
principal shall be paid on the earlier to occur of (i) August 30, 2006 or (ii)
one year from the date Mr. Goldman's employment with the Company is terminated.
Until May 1996, the Company had retained the legal services of Shereff,
Friedman, Hoffman & Goodman, LLP. A partner of Shereff, Friedman, Hoffman &
Goodman, LLP was one of the Company's directors until June 1, 1996. The total
fees paid to Shereff, Friedman, Hoffman & Goodman, LLP in 1996, 1995 and 1994
were approximately $0.2 million, $0.3 million and $0.4 million, respectively,
exclusive of the director's fees paid to Martin Nussbaum, a partner in the firm
of Shereff, Friedman, Hoffman & Goodman, LLP, as compensation for his service
as Chairman of the Executive Committee of the Board of Directors.
The Company has retained the insurance brokerage services of Aon Risk Services
("Aon") in recent years. One of the Company's directors was previously the
President and Chief Executive Officer of Rollins Real Estate/Investment, a
division of Aon. The total amount of insurance premiums paid to Aon in 1996,
1995 and 1994 were approximately $1.2 million, $1.3 million and $1.4 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 Q - Disclosure About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
o Current Assets and Current Liabilities
The carrying value of cash, cash equivalents, accounts receivables,
short-term borrowings, accounts payable and accrued expenses approximate
fair value because of their short maturity.
* Indebtedness from Related Party
The carrying value of indebtedness from related party is stated at the face
value of the note. The fair value of the note at December 31, 1996 was
$483,000 based on a discounted cash flow basis.
F-15
<PAGE> 44
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 are
as follows:
<TABLE>
<CAPTION>
(in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
United States
Non-affiliated customer revenue $ 196,735 $ 139,373 $ 119,702
Earnings from operations 16,930 8,229 6,440
Identifiable assets 177,439 111,639 87,653
Foreign
Non-affiliated customer revenue 88,170 80,671 59,090
Earnings from operations 6,734 4,760 2,882
Identifiable assets 19,466 8,445 13,113
Consolidated
Net revenues 284,905 220,044 178,792
Earnings from operations 23,664 12,989 9,322
Net proceeds from Nintendo award -- -- 12,124
Interest expense (3,183) (3,429) (2,609)
Other income, net 455 439 365
--------- --------- ---------
Earnings before income taxes 20,936 9,999 19,202
Identifiable assets $ 196,905 $ 120,084 $ 100,766
</TABLE>
F-16
<PAGE> 45
NOTE S - Quarterly Financial Data (Unaudited)
Quarterly financial data for 1996 and 1995 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>
1996
1st Quarter $ 37,522 $ 15,931 $ (4,115) $ (2.71)
2nd Quarter 49,201 22,511 387 .02
3rd Quarter 88,547 42,957 9,269 .57
4th Quarter 109,635 59,224 12,910 .74
1995
1st Quarter $ 33,341 $ 11,649 $ (4,171) $ (0.49)
2nd Quarter 38,219 13,105 (4,087) (0.48)
3rd Quarter 65,518 28,617 6,837 0.58
4th Quarter 82,966 44,931 10,820 0.93
</TABLE>
F-17
<PAGE> 46
SCHEDULE II
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 12/31/96
Provisions for returns
and allowance $ 9,982 $15,115 $13,073 $12,024
Year ended 12/31/95
Provisions for returns
and allowance 8,097 12,707 10,822 9,982
Year ended 12/31/94
Provisions for returns
and allowance 5,249 11,979 9,131 8,097
</TABLE>
S-1
<PAGE> 47
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
3.1(a)(1) Certificate of Incorporation.
3.1(b)(1) Amendment to Certificate of Incorporation.
3.2(2) Bylaws.
4.1(3) Form of Certificate for Shares of Common Stock of Company.
4.2(a)(4) Warrant Agreement, dated as of December 11, 1991, by and between
the Company and Shereff, Friedman, Hoffman and Goodman, LLP.
4.2(b)(4) Warrant Agreement, dated as of November 17, 1993, by and between
the Company and Gerard Klauer Mattison & Co., Inc.
4.3(5) Form of Rights Agreement, dated as of January 17, 1990,
between the Company and Mellon Securities Trust Company.
10.1(a)(6)* Amended and Restated 1984 Employee Stock Option Plan.
10.1(b)(7)* 1994 Senior Management Stock Option Plan.
10.1(c)(8)* Form of Agreement between each of Mark Goldman, William Catron,
Lou Novak, Gary Niles, Mark Shepherd, Ronald Hirschfeld and H.
Alan Gaudie and the Company.
10.1(d)(9)* 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 Company.
10.1(e)(10) 1995 Non-Employee Directors' Stock Option Plan.
10.1(f)* Galoob Toys, Inc. 1996 Long Term Compensation Plan
10.1(g)* Galoob Toys, Inc. 1996 Share Incentive Plan
10.2(10)* Lewis Galoob Toys, Inc. Savings and Retirement Plan (Formerly the
Lewis Galoob Toys, Inc. Profit Sharing) (Amendment and
Restatement effective January 1, 1987).
10.3(9)* Severance Agreement, dated October 27, 1994, between Mark Goldman
and the Company.
10.4(a)(11)* Agreement, dated July 15, 1995, between William G. Catron and the
Company.
10.4(b)(11)* Agreement, dated July 15, 1995, between Loren Hildebrand and the
Company.
10.4(c)(11)* Agreement, dated July 15, 1995, between Ronald Hirschfeld and the
Company.
10.4(d)(11)* Agreement, dated July 15, 1995, between Gary J. Niles and the
Company.
10.4(e)(11)* Agreement, dated July 15, 1995, between Louis R. Novak and the
Company.
10.5(e)(9) Amended and Restated Loan and Security Agreement, dated as of
March 31, 1995, by and among the Company and Congress Financial
Corporation (Central).
10.6(a)(12) License Agreement, dated June 16, 1986, by and between Funmaker,
as Licensor and the Company, as Licensee.
10.7(a)(13) License Agreement, dated May 4, 1990, by and among the Company as
Licensee, Codemasters Software Company, Ltd. and America
Corporation, Limited.
10.7(b)(13) Amendment No. 1 dated June 1991 to License Agreement dated May 4,
1990.
10.7(c)(13) Amendment No. 2 dated December 23, 1991 to License Agreement,
dated May 4, 1990.
10.7(d)(13) European License Agreement, dated December 23, 1991, by and
between Codemasters Software Company, Ltd. and the Company.
10.7(e)(13) Third Amendment to United States License and First Amendment to
European License, dated November 4, 1992.
10.7(f)(9) Fourth Amendment to United States License Agreement, dated
October 14, 1994.
10.8(12) Agreement of Purchase and Sale, dated October 22, 1986, by and
between AT Building Company, as Seller, and the Company, as
Buyer.
10.9(a)(2) Lease Agreement, dated March 12, 1987, by and between Lincoln
Alvarado and Patrician Associates, Inc., as Lessor, and the
Company, as Lessee.
10.9(b)(14) Amendment No. 1 to Lease Agreement.
10.9(c)(10) Lease Agreement, dated December 1, 1995, by and between 200 Fifth
Avenue Associates, as Lessor, and the Company, as Lessee.
10.9(d) Lease Agreement, dated December 3, 1996, between Prudential
Insurance Company of America as Lessor and the Company, as
Lessee.
<PAGE> 48
11 Statement of Computation of Per Share Earnings.
21 Subsidiaries of the Company.
23.1 Consent of Independent Public Accountants.
27 Financial Data Schedule
- --------------------
(1) Incorporated by reference to the Company's Amendment No. 2 to the
Registration Statement on Form S-1, filed with the Commission on
November 8, 1996.
(2) Incorporated by reference to the Company's Amendment No. 1 to
Registration Statement on Form 8-B, filed with the Securities and
Exchange Commission (the "Commission") on January 11, 1988.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-3, filed with the Commission on February 26, 1990.
(4) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1993, filed with the Commission on March 31,
1994.
(5) Incorporated by reference to the Company's Registration Statement on
Form 8-A, filed with the Commission on January 23, 1990.
(6) Incorporated by reference to the Company's Registration Statement on
Form S-8, Registration No. 33-56585, filed with the Commission on
November 23, 1994.
(7) Incorporated by reference to the Company's Registration Statement on
Form S-8, Registration No. 33-56587, filed with the Commission on
November 23, 1994.
(8) Incorporated by reference to the Company's Registration Statement on
Form S-8, Registration No. 33-56589, filed with the Commission on
November 23, 1994.
(9) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1994, filed with the Commission on March 31,
1995.
(10) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1995, filed with the Commission on March 11
1996.
(11) Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-00743, filed with the Commission on
February 6, 1996.
(12) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1986, filed with the Commission on March 31,
1987.
(13) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1992, filed with the Commission on March 31,
1993.
(14) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1991, filed with the Commission on March 30,
1992.
* Indicates exhibits relating to executive compensation.
All other schedules are omitted because they are not applicable or the
required information is shown in the Company's consolidated financial statements
or the notes thereto.
<PAGE> 1
GALOOB TOYS, INC.
1996 LONG TERM COMPENSATION PLAN
1. Purpose. Galoob Toys, Inc. 1996 Long Term Compensation Plan (the
"Plan") has been adopted for the purposes of enhancing shareholder value over
the long term by providing meaningful financial rewards to executive management
for exceptional performance as measured by the achievement of rigorous long-term
goals.
2. Performances Period and Measurement Standard. The Plan shall cover
the financial performance period of July 1, 1996 through December 31, 1998 (the
"Performance Period"). Performance shall be measured by reported earnings per
share for Galoob Toys, Inc. (the "Company") during the Performance Period
("Earnings per Share"). Earnings Per Share for this purpose will be "fully
diluted" or "diluted" Earnings Per Share, whichever may be applicable under
generally accepted accounting principles for the particular reporting period.
The reported Earnings Per Share amount used for measuring performance under the
Plan shall reflect adjustments due to:
(a) any extraordinary gains or losses, as defined under
generally accepted accounting principles ("GAAP");
(b) gains or losses resulting from one-time adjustments due to
changes in tax law or GAAP; and
(c) any other extraordinary, unusual, or non-recurring gains
or losses which are quantified and identified separately in footnotes
to the annual financial statements or in "Management's Discussion and
Analysis of Financial Conditions and Results of Operation" appearing in
an applicable annual report to shareholders of the Company.
3. Participation. The Compensation Committee (the "Committee") of the
Board of Directors shall select and designate in writing those members of
executive management who shall be eligible to participate in the Plan no later
than September 28, 1996. Each person designated a participant shall be notified
in writing of his or her eligibility to participate in the Plan and of the
dollar amount of his or her Target Award Opportunity (as described below).
4. Target Award Opportunities. Each participant shall have a target
award opportunity equal to 300% of his or her annualized salary as of July 1,
1996 (a "Target Award
<PAGE> 2
Opportunity"); provided, however, no participant shall receive an award in
excess of $1.875 million under the Plan with respect to the Performance Period.
The extent, if any, to which this Target Award Opportunity will result in a
monetary payment will depend on the degree of achievement of certain Earnings
Per Share goals during the Performance Period.
5. Earnings Per Share Goal and Payment Schedule. The Earnings Per Share
performance standard for the Plan shall be cumulative Earnings Per Share, as
reported quarterly during the Performance Period. Upon reaching a 75% threshold
level of % of Plan Achievement (set forth below), the % of Target Award
Opportunity Earned (set forth below) shall begin to increase pro rata up to the
next higher % of Target Award Opportunity Earned.
The following schedule sets forth the amounts to be paid to Plan participants
upon the Company's achievement of certain cumulative Earnings Per Share during
the Performance Period:
Plan Achievement
(Cumulative
Earnings
Per Share for % of
7/1/96 Target Award
Through % of Plan Opportunity
12/31/98) Achievement Earned
--------- ----------- ------
$6.98 150% 125%
$4.65 100 100
$3.49 75 50
----- ------------ ---
$3.49 less than 90 0
6. Payment Terms. Prior to the time any payments to Plan Participants
are made pursuant to the Plan and in all events prior to March 30, 1999, the
Committee shall certify the cumulative Earnings Per Share for the Performance
Period in writing and direct the Company to make the appropriate payment, if
any, to each participant and/or to establish a deferred payment account in the
name of a participant, provided such participant has filed a valid deferral
payment election with the Committee no later than June 30, 1998. Each
participant shall be notified by the Company prior to April 1, 1998 of the
conditions governing any deferral accounts and delayed payments, including the
interest or investment return rates terms which shall be available.
2
<PAGE> 3
7. Termination of Employment.
(a) Termination of employment with the Company for any reason
prior to January 1, 1999 shall result in full forfeiture of a
participant's right to any payment under the Plan, except in the event
of a participant's death or disability or as otherwise determined by
the Committee. In the event of termination of employment due to death
or disability of a participant prior to January 1, 1999, the
participant, or the executor or administrator of the estate of the
deceased participant, or the person or persons to whom the deceased
participant's rights hereunder shall pass by will or the laws of
descent or distribution shall be entitled to a pro rata payment, within
30 days of such termination of employment, based upon the participant's
actual period of service during the Performance Period.
(b) For purposes of this Section 7, the "pro rata payment
amount" shall be determined by multiplying (x) the product obtained by
multiplying the participant's Target Award Opportunity by (y) the
quotient obtained by dividing (a) the cumulative Earnings Per Share
during the Performance Period through the date of death or disability,
as the case may be, by (b) $4.65.
8. Plan Administration.
(a) Authority-The Committee shall be responsible for
overseeing the administration of the Plan and accordingly has full
power to interpret the Plan and to adopt such rules and regulations and
guides for carrying out the Plan as it may deem necessary or proper.
All decisions shall be made solely in the best interests of the Company
and in keeping with the purposes of the Plan. The Committee's powers
include, but are not limited to, selecting participants, establishing
such additional terms and conditions governing the Plan as it deems
appropriate, adopting any and all modifications, amendments, procedures
and regulations, and making all other determinations as it deems
appropriate for the administration of this Plan. All decisions made by
the Committee shall be final and binding on all persons affected by
such decisions.
(b) Plan Amendment and Termination-The Committee
may amend or terminate the Plan in its sole discretion.
3
<PAGE> 4
9. Miscellaneous. The following provisions are generally
applicable to the Plan:
(a) Non-transferability-No interest in the Plan shall be
assignable or transferable other than by will or by laws of descent and
distribution, or by power of attorney if a participant is deemed
incompetent.
(b) Tax Withholding-The Company shall have the right to deduct
from any payment made under the Plan a sufficient amount, as may be
applicable, to cover any statutory withholding tax requirements or to
take such other action as may be necessary to satisfy any such tax
withholding obligations.
(c) Other Plan "Compensation"-No payments under the Plan shall
be deemed a part of any participant's regular, recurring compensation
for purposes of calculating payments or benefits from any other Company
benefit, compensation, severance or similar plan.
(d) No Right to Benefit or to Employment-Except as designated
by the Committee, no person shall have any right to participate under
this Plan, and no participant, by virtue of participation in the Plan
shall have a right to be retained as an employee of the Company.
(e) Binding Arbitration-Any dispute or disagreement regarding
participation and a participant's claim under the Plan shall be settled
solely by arbitration in accordance with the applicable rules of the
American Arbitration Association.
(f) Unfunded Plan-The Plan shall be unfunded and shall not
create (or be construed to create) a trust or a separate fund or funds.
The Plan shall not establish any fiduciary relationship between the
Company and any participant or beneficiary of a participant. To the
extent any person holds any obligation of the Company by participation
in the Plan, such obligation shall merely constitute a general
unsecured liability to the Company and accordingly shall not confer
upon such person any right, title or interest in any assets of the
Company.
(g) Effective Date-The Plan shall be effective as of July 29,
1996, the date on which the Plan was adopted by the Committee (the
"Effective Date"), provided that
4
<PAGE> 5
the Plan is approved by the stockholders of the Company at an annual
meeting or any special meeting of stockholders of the Company within 12
months of the Effective Date, and such approval of stockholders shall
be a condition to the right of each participant to receive a Target
Award Opportunity hereunder.
5
<PAGE> 1
GALOOB TOYS, INC.
1996 SHARE INCENTIVE PLAN
1. Purpose. Galoob Toys, Inc. 1996 Share Incentive Plan (the "Plan") is
intended to provide incentives which will attract, retain and motivate highly
competent persons as key employees of Galoob Toys, Inc. (the "Company") and of
any subsidiary corporation now existing or hereafter formed or acquired, by
providing them opportunities to acquire shares of the common stock, par value
$.01 per share, of the Company ("Common Stock") or to receive monetary payments
based on the value of such shares pursuant to the Benefits (as defined below)
described herein. Furthermore, the Plan is intended to assist in aligning the
interests of the Company's key employees to those of its stockholders.
2. Administration.
(a) The Plan will be administered by a committee (the
"Committee") appointed by the Board of Directors of the Company from
among its members (which may be the Compensation Committee), and shall
be comprised solely of not less than two members who shall be (i)
"Non-Employee Directors" within the meaning of Rule 16b-3(b)(3) (or any
successor rule) promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and (ii) unless otherwise determined
by the Board of Directors, "outside directors" within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"). The Committee is authorized, subject to the provisions of the
Plan, to establish such rules and regulations as it deems necessary for
the proper administration of the Plan and to make such determinations
and interpretations and to take such action in connection with the Plan
and any Benefits (as defined below) granted hereunder as it deems
necessary or advisable. All determinations and interpretations made by
the Committee shall be binding and conclusive on all participants and
their legal representatives. No member of the Board of the Directors,
no member of the Committee and no employee of the Company shall be
liable for any act or failure to act hereunder, except in circumstances
involving his or her bad faith, gross negligence or willful misconduct,
or for any act or failure to act hereunder by any other member or
employee or by any agent to whom duties in connection with the
administration of this
<PAGE> 2
Plan have been delegated. The Company shall indemnify members of the
Committee and any agent of the Committee who is an employee of the
Company, against any and all liabilities or expenses to which they may
be subjected by reason of any act or failure to act with respect to
their duties on behalf of the Plan, except in circumstances involving
such person's bad faith, gross negligence or willful misconduct.
(b) The Committee may delegate to one or more of its members,
or to one or more agents, such administrative duties as it may deem
advisable, and the Committee, or any person to whom it has delegated
duties as aforesaid, may employ one or more persons to render advice
with respect to any responsibility the Committee or such person may
have under the Plan. The Committee may employ such legal or other
counsel, consultants and agents as it may deem desirable for the
administration of the Plan and may rely upon any opinion or computation
received from any such counsel, consultant or agent. Expenses incurred
by the Committee in the engagement of such counsel, consultant or agent
shall be paid by the Company, or the subsidiary or affiliate whose
employees have benefitted from the Plan, as determined by the
Committee.
3. Participants. Participants will consist of such key employees of the
Company and any subsidiary corporation of the Company as the Committee in its
sole discretion determines to be significantly responsible for the success and
future growth and profitability of the Company and whom the Committee may
designate from time to time to receive Benefits under the Plan. Designation of a
participant in any year shall not require the Committee to designate such person
to receive a Benefit in any other year or, once designated, to receive the same
type or amount of Benefit as granted to the participant in any other year. The
Committee shall consider such factors as it deems pertinent in selecting
participants and in determining the type and amount of their respective
Benefits.
4. Type of Benefits. Benefits under the Plan may be granted in any one
or a combination of (a) Stock Options, (b) Stock Appreciation Rights, (c) Stock
Awards, (d) Performance Awards and (e) Stock Units (each as described below, and
collectively, the "Benefits"). Stock Awards, Performance Awards and Stock Units
may, as determined by the Committee in its discretion, constitute
Performance-Based
2
<PAGE> 3
Awards, as described in Section 11 below. Benefits shall be evidenced by
agreements (which need not be identical) in such forms as the Committee may from
time to time approve; provided, however, that in the event of any conflict
between the provisions of the Plan and any such agreements, the provisions of
the Plan shall prevail.
5. Common Stock Available Under the Plan. The aggregate number of
shares of Common Stock that may be subject to Benefits, including Stock Options,
granted under this Plan shall be 1,850,000 shares of Common Stock, which may be
authorized and unissued or treasury shares, subject to any adjustments made in
accordance with Section 12 hereof. The maximum number of shares of Common Stock
with respect to which Benefits may be granted or measured to any individual
participant under the Plan during the term of the Plan shall not exceed 500,000,
provided, however, that the maximum number of shares of Common Stock with
respect to which Stock Options and Stock Appreciation Rights may be granted to
an individual participant under the Plan during the term of the Plan shall not
exceed 500,000 (in each case, subject to adjustments made in accordance with
Section 12 hereof). Other than those shares of Common Stock subject to Benefits
that are cancelled or terminated as a result of the Committee's exercise of its
discretion with respect to Performance-Based Awards as provided for in Section
11, any shares of Common Stock subject to a Stock Option or Stock Appreciation
Right which for any reason is cancelled or terminated without having been
exercised, any shares subject to Stock Awards, Performance Awards or Stock Units
which are forfeited, any shares subject to Performance Awards settled in cash or
any shares delivered to the Company as part of full payment for the exercise of
a Stock Option or Stock Appreciation Right shall again be available for Benefits
under the Plan. The preceding sentence shall apply only for purposes of
determining the aggregate number of shares of Common Stock subject to Benefits
and shall not apply for purposes of determining the maximum number of shares of
Common Stock subject to Benefits (including the maximum number of shares of
Common Stock subject to Stock Options and Stock Appreciation Rights) that any
individual participant may receive.
6. Stock Options. Stock Options will consist of awards from the Company
that will enable the holder to purchase a specific number of shares of Common
Stock, at set terms and at a fixed purchase price. Stock Options may be
"incentive stock options" ("Incentive Stock Options"), within the
3
<PAGE> 4
meaning of Section 422 of the Code, or Stock Options which do not constitute
Incentive Stock Options ("Nonqualified Stock Options"). The Committee will have
the authority to grant to any participant one or more Incentive Stock Options,
Nonqualified Stock Options, or both types of Stock Options (in each case with or
without Stock Appreciation Rights). Each Stock Option shall be subject to such
terms and conditions consistent with the Plan as the Committee may impose from
time to time, subject to the following limitations:
(a) Exercise Price. Each Stock Option granted hereunder shall
have such per-share exercise price as the Committee may determine at
the date of grant; provided, however, subject to subsection (d) below,
that the per-share exercise price shall not be less than 100% of the
Fair Market Value (as defined below) of the Common Stock on the date
the option is granted.
(b) Payment of Exercise Price. The option exercise price may
be paid in cash or, in the discretion of the Committee determined at
the date of grant, by the delivery of shares of Common Stock of the
Company then owned by the participant, by the withholding of shares of
Common Stock for which a Stock Option is exercisable, or by a
combination of these methods. In the discretion of the Committee
determined at the date of grant, payment may also be made by delivering
a properly executed exercise notice to the Company together with a copy
of irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds to pay the exercise price.
To facilitate the foregoing, the Company may enter into agreements for
coordinated procedures with one or more brokerage firms. The Committee
may prescribe any other method of paying the exercise price that it
determines to be consistent with applicable law and the purpose of the
Plan, including, without limitation, in lieu of the exercise of a Stock
Option by delivery of shares of Common Stock of the Company then owned
by a participant, providing the Company with a notarized statement
attesting to the number of shares owned, where, upon verification by
the Company, the Company would issue to the participant only the number
of incremental shares to which the participant is entitled upon
exercise of the Stock Option. In determining which methods a
participant may utilize to pay the exercise
4
<PAGE> 5
price, the Committee may consider such factors as it determines are
appropriate.
(c) Exercise Period. Stock Options granted under the Plan
shall be exercisable at such time or times and subject to such terms
and conditions as shall be determined by the Committee; provided,
however, that no Stock Option shall be exercisable later than ten years
after the date it is granted. All Stock Options shall terminate at such
earlier times and upon such conditions or circumstances as the
Committee shall in its discretion set forth in such option agreement at
the date of grant.
(d) Limitations on Incentive Stock Options. Incentive Stock
Options may be granted only to participants who are key employees of
the Company or subsidiary corporation of the Company at the date of
grant. The aggregate market value (determined as of the time the option
is granted) of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by a participant during any
calendar year (under all option plans of the Company) shall not exceed
$100,000. For purposes of the preceding sentence, (i) Incentive Stock
Options will be taken into account in the order in which they are
granted and (ii) Incentive Stock Options granted before 1987 shall not
be taken into account. Incentive Stock Options may not be granted to
any participant who, at the time of grant, owns stock possessing (after
the application of the attribution rules of Section 424(d) of the Code)
more than 10% of the total combined voting power of all outstanding
classes of stock of the Company or any subsidiary corporation of the
Company, unless the option price is fixed at not less than 110% of the
Fair Market Value of the Common Stock on the date of grant and the
exercise of such option is prohibited by its terms after the expiration
of five years from the date of grant of such option. Notwithstanding
anything to the contrary contained herein, no Incentive Stock Option
may be exercised later than ten years after the date it is granted.
7. Stock Appreciation Rights. The Committee may, in its discretion,
grant Stock Appreciation Rights to the holders of any Stock Options granted
hereunder. In addition, Stock Appreciation Rights may be granted independently
of, and without relation to, options. A Stock Appreciation Right
5
<PAGE> 6
means a right to receive a payment, in cash, Common Stock or a combination
thereof, in an amount equal to the excess of (x) the Fair Market Value, or other
specified valuation, of a specified number of shares of Common Stock on the date
the right is exercised over (y) the Fair Market Value, or other specified
valuation (which shall be no less than the Fair Market Value), of such shares of
Common Stock on the date the right is granted, all as determined by the
Committee; provided, however, that if a Stock Appreciation Right is granted
retroactively in tandem with or in substitution for a Stock Option, the
designated Fair Market Value in the award agreement may be the Fair Market Value
on the date such Stock Option was granted. Each Stock Appreciation Right shall
be subject to such terms and conditions as the Committee shall impose from time
to time.
8. Stock Awards. The Committee may, in its discretion, grant Stock
Awards (which may include mandatory payment of bonus incentive compensation in
stock) consisting of Common Stock issued or transferred to participants with or
without other payments therefor as additional compensation for services to the
Company. Stock Awards may be subject to such terms and conditions as the
Committee determines appropriate, including, without limitation, restrictions on
the sale or other disposition of such shares, the right of the Company to
reacquire such shares for no consideration upon termination of the participant's
employment within specified periods, and may constitute Performance-Based
Awards, as described below. The Committee may require the participant to deliver
a duly signed stock power, endorsed in blank, relating to the Common Stock
covered by such an Award. The Committee may also require that the stock
certificates evidencing such shares be held in custody or bear restrictive
legends until the restrictions thereon shall have lapsed. The Stock Award shall
specify whether the participant shall have, with respect to the shares of Common
Stock subject to a Stock Award, all of the rights of a holder of shares of
Common Stock of the Company, including the right to receive dividends and to
vote the shares.
9. Performance Awards.
(a) Performance Awards may be granted to participants at any
time and from time to time, as shall be determined by the Committee.
Performance Awards may, as determined by the Committee in its sole
discretion, constitute Performance-Based Awards. The Committee shall
have complete discretion in determining
6
<PAGE> 7
the number, amount and timing of awards granted to each participant.
Such Performance Awards may be in the form of shares of Common Stock or
Stock Units. Performance Awards may be awarded as short-term or
long-term incentives. With respect to those Performance Awards that are
intended to constitute Performance-Based Awards, the Committee shall
set performance targets at its discretion which, depending on the
extent to which they are met, will determine the number and/or value of
Performance Awards that will be paid out to the participants, and may
attach to such Performance Awards one or more restrictions. Performance
targets may be based upon, without limitation, Company-wide, divisional
and/or individual performance.
(b) With respect to those Performance Awards that are not
intended to constitute Performance-Based Awards, the Committee shall
have the authority at any time to make adjustments to performance
targets for any outstanding Performance Awards which the Committee
deems necessary or desirable unless at the time of establishment of
goals the Committee shall have precluded its authority to make such
adjustments.
(c) Payment of earned Performance Awards shall be made in
accordance with terms and conditions prescribed or authorized by the
Committee. The participant may elect to defer, or the Committee may
require or permit the deferral of, the receipt of Performance Awards
upon such terms as the Committee deems appropriate.
10. Stock Units.
(a) The Committee may, in its discretion, grant Stock Units to
participants hereunder. Stock Units may, as determined by the Committee
in its sole discretion, constitute Performance-Based Awards. The
Committee shall determine the criteria for the vesting of Stock Units.
A Stock Unit granted by the Committee shall provide payment in shares
of Common Stock at such time as the award agreement shall specify.
Shares of Common Stock issued pursuant to this Section 10 may be issued
with or without other payments therefor as may be required by
applicable law or such other consideration as may be determined by the
Committee. The Committee shall determine whether a participant granted
a Stock Unit shall be entitled to a Dividend Equivalent Right (as
defined below).
7
<PAGE> 8
(b) Upon vesting of a Stock Unit, unless the Committee has
determined to defer payment with respect to such unit or a Participant
has elected to defer payment under subsection (c) below, shares of
Common Stock representing the Stock Units shall be distributed to the
participant unless the Committee, with the consent of the participant,
provides for the payment of the Stock Units in cash or partly in cash
and partly in shares of Common Stock equal to the value of the shares
of Common Stock which would otherwise be distributed to the
participant.
(c) Prior to the year with respect to which a Stock Unit may
vest, the participant may elect not to receive Common Stock upon the
vesting of such Stock Unit and for the Company to continue to maintain
the Stock Unit on its books of account. In such event, the value of a
Stock Unit shall be payable in shares of Common Stock pursuant to the
agreement of deferral.
(d) A "Stock Unit" means a notational account representing one
share of Common Stock. A "Dividend Equivalent Right" means the right to
receive the amount of any dividend paid on the share of Common Stock
underlying a Stock Unit, which shall be payable in cash or in the form
of additional Stock Units.
11. Performance-Based Awards. Certain Benefits granted under the Plan
may be granted in a manner such that the Benefits qualify for the
performance-based compensation exemption of Section 162(m) of the Code
("Performance-Based Awards"). As determined by the Committee in its sole
discretion, either the granting or vesting of such Performance-Based Awards are
to be based upon one or more of the following factors: net sales, pretax income
before allocation of corporate overhead and bonus, budget, earnings per share,
net income, division, group or corporate financial goals, return on
stockholders' equity, return on assets, attainment of strategic and operational
initiatives, appreciation in and/or maintenance of the price of the Common Stock
or any other publicly-traded securities of the Company, market share, gross
profits, earnings before interest and taxes, earnings before interest, taxes,
dividends and amortization, economic value-added models and comparisons with
various stock market indices, reductions in costs or any combination of the
foregoing. With respect to Performance-Based Awards, (i) the Committee shall
establish in writing (x) the objective performance-based goals
8
<PAGE> 9
applicable to a given period and (y) the individual employees or class of
employees to which such performance-based goals apply no later than 90 days
after the commencement of such period (but in no event after 25% of such period
has elapsed) and (ii) no Performance-Based Awards shall be payable to or vest
with respect to, as the case may be, any participant for a given period until
the Committee certifies in writing that the objective performance goals (and any
other material terms) applicable to such period have been satisfied. With
respect to any Benefits intended to qualify as Performance-Based Awards, after
establishment of a performance goal, the Committee shall not revise such
performance goal or increase the amount of compensation payable thereunder (as
determined in accordance with Section 162(m) of the Code) upon the attainment of
such performance goal. Notwithstanding the preceding sentence, the Committee may
reduce or eliminate the number of shares of Common Stock or cash granted or the
number of shares of Common Stock vested upon the attainment of such performance
goal.
12. Adjustment Provisions; Change in Control.
(a) If there shall be any change in the Common Stock of the
Company, through merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, reverse stock split,
split up, spinoff, combination of shares, exchange of shares, dividend
in kind or other like change in capital structure or distribution
(other than normal cash dividends) to stockholders of the Company, an
adjustment shall be made to each outstanding Stock Option and Stock
Appreciation Right such that each such Stock Option and Stock
Appreciation Right shall thereafter be exercisable for such securities,
cash and/or other property as would have been received in respect of
the Common Stock subject to such Stock Option or Stock Appreciation
Right had such Stock Option or Stock Appreciation Right been exercised
in full immediately prior to such change or distribution, and such an
adjustment shall be made successively each time any such change shall
occur. In addition, in the event of any such change or distribution, in
order to prevent dilution or enlargement of participants' rights under
the Plan, the Committee will have authority to adjust, in an equitable
manner, the number and kind of shares that may be issued under the
Plan, the exercisability and vesting provisions of such Benefits, the
number and
9
<PAGE> 10
kind of shares subject to outstanding Benefits, the exercise price
applicable to outstanding Benefits, and the Fair Market Value of the
Common Stock and other value determinations applicable to outstanding
Benefits. Appropriate adjustments may also be made by the Committee in
the terms of any Benefits under the Plan to reflect such changes or
distributions and to modify any other terms of outstanding Benefits on
an equitable basis, including modifications of performance targets and
changes in the length of performance periods. In addition, other than
with respect to Stock Options, Stock Appreciation Rights and other
awards intended to constitute Performance-Based Awards, the Committee
is authorized to make adjustments to the terms and conditions of, and
the criteria included in, Benefits in recognition of unusual or
nonrecurring events affecting the Company or the financial statements
of the Company, or in response to changes in applicable laws,
regulations, or accounting principles. Notwithstanding the foregoing,
(i) any adjustment with respect to an Incentive Stock Option shall
comply with the rules of Section 424(a) of the Code, and (ii) in no
event shall any adjustment be made which would render any Incentive
Stock Option granted hereunder other than an incentive stock option for
purposes of Section 422 of the Code.
(b) In the event of a Change in Control (as defined below),
the Committee, in its discretion, may take such actions as it deems
appropriate with respect to outstanding Benefits, including, without
limitation, accelerating the exercisability or vesting of such
Benefits.
The Committee, in its discretion, may determine that, upon the
occurrence of a Change in Control of the Company, each Stock Option and Stock
Appreciation Right outstanding hereunder shall terminate within a specified
number of days after notice to the holder, and such holder shall receive, with
respect to each share of Common Stock subject to such Stock Option or Stock
Appreciation Right, an amount equal to the excess of the Fair Market Value of
such shares of Common Stock immediately prior to the occurrence of such Change
in Control over the exercise price per share of such Stock Option or Stock
Appreciation Right; such amount to be payable in cash, in one or more kinds of
property (including the property, if any, payable in the transaction) or in a
10
<PAGE> 11
combination thereof, as the Committee, in its discretion, shall determine.
For purposes of this Section 12(b), a "Change in Control" of the
Company shall be deemed to have occurred upon any of the following events:
(A) A person or entity or group of persons or entities, acting
in concert, shall become the direct or indirect beneficial owner
(within the meaning of Rule 13d-3 of the Exchange Act) of securities of
the Company representing twenty-five percent (25%) or more of the
combined voting power of the issued and outstanding common stock of the
Company (a "Significant Owner"), unless such shares are originally
issued to such Significant Owner by the Company; or
(B) The majority of the Company's Board of Directors is no
longer comprised of the incumbent directors who constitute the Board of
Directors on the Effective Date (as hereinafter defined) and any other
individual(s) who becomes a director subsequent to the date of this
Agreement whose initial election or nomination for election as a
director, as the case may be, was approved by at least a majority of
the directors who comprised the incumbent directors as of the date of
such election or nomination; or
(C) The Company's Common Stock shall cease to be publicly
traded; or
(D) A sale of all or substantially all of the assets of the
Company; or
(E) The Board of Directors shall approve any merger,
consolidation, or like business combination or reorganization of the
Company, the consummation of which would result in the occurrence of
any event described in clause (B) or (C) above, and such transaction
shall have been consummated.
13. Transferability. Each Benefit granted under the Plan to a
participant shall not be transferable otherwise than by will or the laws of
descent and distribution, and shall be exercisable, during the participant's
lifetime, only by the participant. In the event of the death of a participant,
each Stock Option or Stock Appreciation Right theretofore granted to him or her
shall be exercisable
11
<PAGE> 12
during such period after his or her death as the Committee shall in its
discretion set forth in such option or right at the date of grant and then only
by the executor or administrator of the estate of the deceased participant or
the person or persons to whom the deceased participant's rights under the Stock
Option or Stock Appreciation Right shall pass by will or the laws of descent and
distribution. Notwithstanding the foregoing, at the discretion of the Committee,
an award of a Benefit other than an Incentive Stock Option may permit the
transferability of a Benefit by a participant solely to the participant's
spouse, siblings, parents, children and grandchildren or trusts for the benefit
of such persons or partnerships, corporations, limited liability companies or
other entities owned solely by such persons, including trusts for such persons,
subject to any restriction included in the award of the Benefit.
14. Other Provisions. The award of any Benefit under the Plan may also
be subject to such other provisions (whether or not applicable to the Benefit
awarded to any other participant) as the Committee determines, at the date of
grant, appropriate, including, without limitation, for the installment purchase
of Common Stock under Stock Options, for the installment exercise of Stock
Appreciation Rights, to assist the participant in financing the acquisition of
Common Stock, for the forfeiture of, or restrictions on resale or other
disposition of, Common Stock acquired under any form of Benefit, for the
acceleration of exercisability or vesting of Benefits in the event of a change
in control of the Company, for the payment of the value of Benefits to
participants in the event of a change in control of the Company, or to comply
with federal and state securities laws, or understandings or conditions as to
the participant's employment in addition to those specifically provided for
under the Plan.
15. Fair Market Value. For purposes of this Plan and any Benefits
awarded hereunder, Fair Market Value shall be the closing price of the Company's
Common Stock on the date of calculation (or on the last preceding trading date
if Common Stock was not traded on such date) if the Company's Common Stock is
readily tradeable on a national securities exchange or other market system, and
if the Company's Common Stock is not readily tradeable, Fair Market Value shall
mean the amount determined in good faith by the Committee as the fair market
value of the Common Stock of the Company.
12
<PAGE> 13
16. Withholding. All payments or distributions of Benefits made
pursuant to the Plan shall be net of any amounts required to be withheld
pursuant to applicable federal, state and local tax withholding requirements. If
the Company proposes or is required to distribute Common Stock pursuant to the
Plan, it may require the recipient to remit to it or to the corporation that
employs such recipient an amount sufficient to satisfy such tax withholding
requirements prior to the delivery of any certificates for such Common Stock. In
lieu thereof, the Company or the employing corporation shall have the right to
withhold the amount of such taxes from any other sums due or to become due from
such corporation to the recipient as the Committee shall prescribe. The
Committee may, in its discretion and subject to such rules as it may adopt
(including any as may be required to satisfy applicable tax and/or non-tax
regulatory requirements), permit an optionee or award or right holder to pay all
or a portion of the federal, state and local withholding taxes arising in
connection with any Benefit consisting of shares of Common Stock by electing to
have the Company withhold shares of Common Stock having a Fair Market Value
equal to the amount of tax to be withheld, such tax calculated at rates required
by statute or regulation.
17. Tenure. A participant's right, if any, to continue to serve the
Company as a director, officer, employee, or otherwise, shall not be enlarged or
otherwise affected by his or her designation as a participant under the Plan.
18. Unfunded Plan. Participants shall have no right, title, or interest
whatsoever in or to any investments which the Company may make to aid it in
meeting its obligations under the Plan. Nothing contained in the Plan, and no
action taken pursuant to its provisions, shall create or be construed to create
a trust of any kind, or a fiduciary relationship between the Company and any
participant, beneficiary, legal representative or any other person. To the
extent that any person acquires a right to receive payments from the Company
under the Plan, such right shall be no greater than the right of an unsecured
general creditor of the Company. All payments to be made hereunder shall be paid
from the general funds of the Company and no special or separate fund shall be
established and no segregation of assets shall be made to assure payment of such
amounts except as expressly set forth in the Plan. The Plan is not intended to
be subject to the Employee Retirement Income Security Act of 1974, as amended.
13
<PAGE> 14
19. No Fractional Shares. No fractional shares of Common Stock shall be
issued or delivered pursuant to the Plan or any Benefit. The Committee shall
determine whether cash, or Benefits, or other property shall be issued or paid
in lieu of fractional shares or whether such fractional shares or any rights
thereto shall be forfeited or otherwise eliminated.
20. Duration, Amendment and Termination. No Benefit shall be granted
more than ten years after the Effective Date; provided, however, that the terms
and conditions applicable to any Benefit granted prior to such date may
thereafter be amended or modified by mutual agreement between the Company and
the participant or such other persons as may then have an interest therein.
Also, by mutual agreement between the Company and a participant hereunder, under
this Plan or under any other present or future plan of the Company, Benefits may
be granted to such participant in substitution and exchange for, and in
cancellation of, any Benefits previously granted such participant under this
Plan, or any other present or future plan of the Company. The Committee may
amend the Plan from time to time or suspend or terminate the Plan at any time.
However, no action authorized by this Section 20 shall reduce the amount of any
existing Benefit or change the terms and conditions thereof without the
participant's consent. No amendment of the Plan shall, without approval of the
stockholders of the Company, (i) increase the total number of shares which may
be issued under the Plan or the maximum number of shares with respect to Stock
Options, Stock Appreciation Rights and other Benefits that may be granted to any
individual under the Plan or (ii) modify the requirements as to eligibility for
Benefits under the Plan; provided, however, that no amendment may be made
without approval of the stockholders of the Company if the amendment will
disqualify any Incentive Stock Options granted hereunder.
21. Governing Law. This Plan, Benefits granted hereunder and actions
taken in connection herewith shall be governed and construed in accordance with
the laws of the State of Delaware (regardless of the law that might otherwise
govern under applicable Delaware principles of conflict of laws).
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<PAGE> 15
22. Effective Date.
(a) The Plan shall be effective as of July 29, 1996, the date
on which the Plan was adopted by the Committee (the "Effective Date"),
provided that the Plan is approved by the stockholders of the Company
at an annual meeting or any special meeting of stockholders of the
Company within 12 months of the Effective Date, and such approval of
stockholders shall be a condition to the right of each participant to
receive any Benefits hereunder. Any Benefits granted under the Plan
prior to such approval of stockholders shall be effective as of the
date of grant (unless, with respect to any Benefit, the Committee
specifies otherwise at the time of grant), but no such Benefit may be
exercised or settled and no restrictions relating to any Benefit may
lapse prior to such stockholder approval, and if stockholders fail to
approve the Plan as specified hereunder, any such Benefit shall be
cancelled.
(b) This Plan shall terminate on July 28, 2006 (unless sooner
terminated by the Committee).
15
<PAGE> 1
EXHIBIT 10.9(d)
LEASE
between
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
and
GALOOB TOYS, INC.,
a Delaware corporation
December 3, 1996
<PAGE> 2
TABLE OF CONTENTS
Page
LEASE....................................................................1
1. Parties.........................................................1
2. Premises........................................................1
3. Term............................................................1
3.1 Term.......................................................1
3.2 Delay in Possession........................................1
3.3 Early Possession...........................................2
4. Rent............................................................2
4.1 Base Rent..................................................2
4.2 Rent Commencement Date.....................................2
5. Security Deposit................................................2
6. Use.............................................................3
6.1 Use .......................................................3
6.2 Compliance with Law........................................3
6.3 Condition of Premises......................................4
7. Maintenance, Repairs and Alterations............................5
7.1 Lessee's Obligations.......................................5
7.2 Surrender..................................................6
7.3 Lessor's Rights............................................6
7.4 Lessor's Obligations.......................................7
7.5 Alterations and Additions..................................9
8. Insurance; Indemnity...........................................14
9. Damage or Destruction..........................................19
9.1 Definitions...............................................19
9.2 Partial Damage -- Insured Loss............................19
9.3 Partial Damage -- Uninsured Loss..........................20
9.4 Total Destruction.........................................20
9.5 Damage Near End of Term...................................20
9.6 Abatement of Rent; Lessee's Remedies......................21
9.7 Termination -- Advance Payments...........................22
9.8 Waiver....................................................22
10. Real Property Taxes............................................22
10.1 Payment of Taxes.........................................22
10.2 Definition of "Real Property Tax"........................22
10.3 Joint Assessment.........................................23
10.4 Additional Provisions Regarding Real Property Taxes......23
10.5 Personal Property Taxes..................................24
11. Utilities......................................................24
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<PAGE> 3
12. Assignment and Subletting......................................24
12.1 Lessor's Consent Required................................24
12.2 Procedure................................................24
12.3 Lessees Other Than Individuals...........................26
12.4 Lessee Affiliate.........................................26
12.5 No Release of Lessee.....................................26
12.6 Assignment to Lessor.....................................27
12.7 Attorney's Fees..........................................27
12.8 Certain Permitted Subleases..............................27
12.9 Deemed Approval..........................................28
13. Defaults; Remedies.............................................28
13.1 Defaults.................................................28
13.2 Remedies.................................................29
13.3 Default by Lessor........................................31
13.4 Late Charges.............................................31
13.5 Impounds.................................................32
14. Condemnation...................................................32
15. Broker's Commissions...........................................33
16. Estoppel Certificate...........................................34
17. Lessor's Liability.............................................35
18. Severability...................................................35
19. Interest on Past-due Obligations...............................35
20. Time of Essence................................................36
21. Additional Rent................................................36
22. Incorporation of Prior Agreements; Amendments..................36
23. Notices........................................................36
24. Waivers........................................................37
25. No Recording...................................................37
26. Holding Over...................................................37
27. Cumulative Remedies............................................38
28. [Intentionally Omitted]........................................38
29. Binding Effect; Choice of Law..................................38
30. Subordination..................................................38
-ii-
<PAGE> 4
31. Attorney's Fees................................................39
32. Lessor's Access................................................39
33. Auctions.......................................................39
34. Signs..........................................................39
35. Merger.........................................................40
36. Consents.......................................................40
37. [Intentionally Omitted]........................................40
38. Quiet Possession...............................................40
39. Options........................................................40
39.1 Definition...............................................40
39.2 Options Personal. ......................................41
39.3 Option...................................................41
39.4 C.P.I. Adjusted Option Rent..............................41
39.5 Effect of Default on Options.............................42
40. [Intentionally Omitted]........................................43
41. Security Measures..............................................43
42. Easements......................................................43
43. Performance Under Protest......................................43
44. Authority......................................................43
45. Cashier's Checks...............................................43
46. Amendments to Lease............................................44
47. Storage Tanks..................................................44
48. Lessee's Covenants Regarding Hazardous Materials...............44
48.1 Lessor's Prior Consent...................................44
48.2 Compliance with Hazardous Materials Laws.................45
48.3 Hazardous Materials Removal..............................46
48.4 Notices..................................................46
48.5 Indemnification of Lessor................................47
48.6 Preexisting Conditions...................................47
49. Rail Spur......................................................47
50. Early Entry By Lessee and Lessee's Work........................47
51. Lessor's Work..................................................48
-iii-
<PAGE> 5
52. Delay in Completion of Lessor's Work...........................49
Exhibit "A" Premises (Paragraph 2)
Exhibit "B" Schedule of Reports
-iv-
<PAGE> 6
LEASE
1. Parties. This Lease, dated, for reference purposes only, December 3, 1996, is
made by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey
corporation ("Lessor") and GALOOB TOYS, INC., a Delaware corporation ("Lessee").
2. Premises. Lessor hereby leases to Lessee and Lessee leases from Lessor for
the term, at the rental, and upon all of the conditions set forth herein, that
certain real property (and all improvements thereon) situated in the County of
Los Angeles, State of California, commonly known as 5431 Philadelphia Street,
Ontario, California and consisting of an approximately 432,308 square foot
building (the "Building") and adjacent land and more particularly delineated on
Exhibit "A" attached hereto and by this reference incorporated herein. Said real
property including the land and all improvements thereon, is herein called "the
Premises".
3. Term.
3.1 Term. The term of this Lease (the "Lease Term") shall be for five
(5) years commencing on May 1, 1997 (the "Commencement Date"), and ending on
April 30, 2002, unless sooner terminated pursuant to any provision hereof. The
Lease Term is subject to extension for a 5-year option term in accordance with
Paragraph 39 of this Lease.
3.2 Delay in Possession. Notwithstanding the later Commencement Date,
Lessee shall be given possession of the Premises on the first business day after
the date of full execution and delivery of this Lease (the "Execution Date"). If
for any reason Lessor fails to deliver possession of the Premises to Lessee by
the Date (the "Early Access Date") that is 30 days after the Execution Date,
Lessor shall not be subject to liability therefor, nor shall such failure affect
the validity of this Lease, but the Rent Commencement Date (defined in Paragraph
4.2) shall be postponed for one day for each day of delay in delivery of
possession of the Premises to Lessee beyond the Early Access Date.
Notwithstanding the foregoing, if Lessor shall not have delivered possession of
the Premises within sixty (60) days following the Execution Date, Lessee may, at
Lessee's option, by notice in writing to Lessor within thirty (30) days
following such 60-day period, cancel this Lease, in which event the parties
shall be discharged from all obligations hereunder; provided further, however,
that if such written notice of Lessee is not received by Lessor within said
30-day period, Lessee's right to cancel this Lease hereunder shall terminate and
be of no further force or effect. Lessee acknowledges that after delivery of
possession to Lessee, Lessor shall continue to have the right to enter the
Premises to perform Lessor's Work (as defined in
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<PAGE> 7
Paragraph 51) and otherwise as permitted by this Lease. Lessee further
acknowledges that due to Lessor's construction of Lessor's Work there will exist
disruption of and interference with Lessee's use of the Premises. No such
disruption or interference or presence on the Premises by Lessor or its
contractors to perform Lessor's Work shall be deemed to be a failure by Lessor
to deliver possession.
3.3 Early Possession. Lessee's use and occupancy of the Premises prior
to the Commencement Date shall be subject to all provisions hereof, provided,
however, Lessee shall have no obligation to pay Base Rent (as defined below)
until the Rent Commencement Date. From and after the date of commencement of
Lessee's early occupancy and use of the Premises, Lessee shall be responsible
for payment of all costs and expenses (other than Base Rent) payable by Lessee
under this Lease.
4. Rent.
4.1 Base Rent. From and after the Rent Commencement Date (as defined in
Paragraph 4.2), Lessee shall pay to Lessor as rent for the Premises, monthly
payments of $112,400.00("Base Rent"), in advance, on the first day of each month
of the term hereof. Lessee shall pay Lessor upon the execution hereof
$112,400.00 as rent for May, 1997. Rent for any period during the term hereof
which is for less than one month shall be a pro rata portion of the monthly
installment. Rent shall be payable in lawful money of the United States to
Lessor at the address stated herein or to such other persons or at such other
places as Lessor may designate in writing, without any offset or deduction.
4.2 Rent Commencement Date. Provided that (i) possession of the
Premises is delivered to Lessee upon the Early Access Date of this Lease as set
forth in Paragraph 3.2 and (ii) all of Lessor's Work is substantially completed
(as defined in Paragraph 52) prior to the Lessor Completion Date (as defined in
Paragraph 52), Lessee's obligation to pay Base Rent shall commence on May 1,
1997 (the "Rent Commencement Date"). The Rent Commencement Date is subject to
postponement in accordance with the terms of Paragraphs 3.2 and 52 of this
Lease. If the Rent Commencement Date is postponed in accordance with the terms
of this Lease, Lessee shall have no obligation to pay Base Rent hereunder until
such postponed date. Lessor and Lessee agree that for tax reporting purposes,
none of the Base Rent in periods in which the Base Rent is not being abated
shall be allocated to any other period.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
$112,400.00 ("Security Deposit"), as security for Lessee's faithful performance
of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges
due hereunder, or otherwise defaults with respect to any provision of this
Lease, Lessor may use, apply or retain all or any portion of
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said deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Lessor may become obligated by reason of
Lessee's default, or to compensate Lessor for any loss or damage which Lessor
may suffer thereby. If Lessor so uses or applies all or any portion of said
deposit following the occurrence of an Event of Default, Lessee shall within ten
(10) days after written demand therefor deposit cash with Lessor in an amount
sufficient to restore said deposit to the full amount hereinabove stated and
Lessee's failure to do so shall be material breach of this Lease. If Lessee
exercises its option pursuant to Paragraph 39, and the monthly rent during the
Option Period (as defined below) is greater than the initial Security Deposit,
Lessee shall thereupon deposit with Lessor an additional security deposit so
that the amount of security deposit held by Lessor shall at all times bear the
same proportion to current rent as the original security deposit bears to the
original monthly rent set forth in Paragraph 4 hereof. Lessor shall not be
required to keep said deposit separate from its general accounts. If Lessee
performs all of Lessee's obligations hereunder, said deposit, or so much thereof
as has not theretofore been applied by Lessor, shall be returned, without
payment of interest or other increment for its use, to Lessee (or, at Lessor's
option, to the last assignee, if any, of Lessee's interest hereunder) at the
expiration of the term hereof, and after Lessee has vacated the Premises. No
trust relationship is created herein between Lessor and Lessee with respect to
said Security Deposit.
6. Use.
6.1 Use. The Premises shall be used and occupied for warehousing and
distribution of toys and related products and for purposes consistent with the
class and character of the Premises and in compliance with applicable laws,
rules and regulations (including zoning requirements). It is acknowledged that
the Premises include, without limitation, each of the following facilities, all
of which are included as permitted uses under this Lease: warehouse space,
executive and administrative offices, computer rooms, lunch room, conference
rooms, copy/mail rooms, restrooms/locker rooms.
6.2 Compliance with Law. Subject to the terms of this Paragraph 6.2 and
except as otherwise set forth in this Lease, Lessee shall, at Lessee's expense,
comply promptly with all applicable codes, statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements in
effect during the term or any part of the term hereof relating in any way to the
Premises. Lessee shall not use nor permit the use of the Premises in any manner
that will tend to create waste or a nuisance. Notwithstanding anything to the
contrary herein, (i) in no event will the terms of this Paragraph 6.2 be deemed
or construed to relieve Lessor from any of its obligations to repair or maintain
the Premises as required under this Lease, and (ii)
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the obligations of Lessee and Lessor with respect to any repairs, maintenance,
replacements or capital improvements which are expected to cost in excess of
$100,000 for any single project (each, a "Major Project") which is not Lessee
Caused Compliance Work (as defined below) shall be governed by Paragraphs 7.4(e)
and 7.4(f). It is further agreed that Lessee's obligations under this Paragraph
6.2 shall not be applicable in the event of casualty or condemnation, which
events will be governed by the terms of Paragraph 9 and 14 of this Lease. As
used herein, "Lessee Caused Compliance Work" shall mean work made necessary by
Lessee's particular use of the Premises (as compared with general permitted
uses), any alteration of the Premises by Lessee or any Event of Default by
Lessee under this Lease.
6.3 Condition of Premises.
(a) Lessor shall deliver the Premises to Lessee clean and free
of debris on the date provided for in Paragraph 3.2 and Lessor further warrants
to Lessee that the ESFR sprinkler system, the roof membrane and HVAC systems
shall be in good condition and good working order as of the date Lessee first
occupies the Premises and as of the date of completion of Lessor's Work. In the
event that it is determined that this warranty has been violated, then it shall
be the obligation of Lessor, after receipt of written notice from Lessee setting
forth with specificity the nature of the violation, to promptly, at Lessor's
sole cost, rectify such violation. Lessee's failure to give such written notice
to Lessor within ninety (90) days after the earlier of the Lease Commencement
Date or the date on which Lessee first occupies the Premises for business
purposes shall cause the conclusive presumption that Lessor has complied with
all of Lessor's obligations under this Paragraph 6.3(a); provided that nothing
in this sentence shall limit Lessor's obligations under Paragraph 7.4. Lessee
shall also receive the benefit of any warranty or other similar assurance issued
in connection with the completion of Lessor's Work.
(b) Subject to Lessor's obligation to complete all of Lessor's
Work and perform its other obligations under this Lease throughout the Lease
Term, Lessee agrees to accept the Premises subject to all applicable zoning,
municipal, county and state laws, ordinances and regulations governing and
regulating the use of the Premises, and any covenants or restrictions or
easements of record, and accepts this Lease subject thereto and to all matters
disclosed by any exhibits attached hereto or otherwise disclosed in writing to
Lessee prior to the Execution Date. Lessee acknowledges that neither Lessor nor
Lessor's agent has made any representation or warranty as to the present or
future suitability of the Premises for the conduct of Lessee's business. Lessor
hereby represents and warrants that it has no actual knowledge of any violations
of any laws, rules, regulations or restrictions applicable to the Premises
existing as of the Execution Date. Lessor further represents that to Lessor's
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actual knowledge (i) true and complete copies of all reports, studies, and
evaluations pertaining to the Premises have been delivered to Lessee and (ii)
there exist no other reports or studies relating to the Premises except those
listed in Exhibit "B" or being prepared pursuant to Paragraph 6.3(c)
(collectively, the "Reports"). As used in this Paragraph 6.3(c), reference to
"Lessor's actual knowledge" means and refers to written notices actually
received by, or to facts in question being actually known (as opposed to
imputed, inquiry or constructive knowledge) to Mark Harryman (an employee of
Lessor's managing agent), without any due diligence or duty of inquiry. Lessor
shall have no duty of investigation with respect to any representation made to
its actual knowledge.
(c) Delivery of Reports. Prior to December 15, 1996, Lessor
shall provide Lessee with reports prepared by reputable, qualified contractors
certifying that the ESFR sprinkler system, the roof membrane, mechanical dock
leveler equipment and the HVAC systems are in good condition and repair, and in
compliance with applicable laws, rules and regulations. Lessee acknowledges that
the contractors listed in Exhibit "B" and ACS (an HVAC contractor) satisfy the
required qualifications of this Paragraph 6.3(c).
7. Maintenance, Repairs and Alterations.
7.1 Lessee's Obligations.
(a) Subject to the terms and conditions of Para graph 7.4 and
as otherwise set forth in this Lease, Lessee shall keep in good order, condition
and repair the interior of the Premises and every nonstructural part thereof
(whether or not such portion of the Premises requiring repair, or the means of
repairing the same are reasonably or readily accessible to Lessee, and whether
or not the need for such repairs occurs as a result of Lessee's use, any prior
use, the elements or the age of such portion of the Premises) including, without
limiting the generality of the foregoing, all plumbing, heating, ventilation and
air conditioning (HVAC) systems (Lessee shall procure and maintain, at Lessee's
expense, an air conditioning system maintenance contract) electrical, lighting
facilities and equipment within the Premises, fixtures, walls (interior and
exterior), ceilings, roofs (excluding any structural work or work relating to
the roof membrane which Lessor is to perform pursuant to Paragraph 7.4), floors,
windows, doors, plate glass and skylights located within the Premises, and all
driveways, parking lots, fences and signs located on the Premises and sidewalks
and parkways adjacent to the Premises.
(b) Lessee shall maintain the Premises as provided in
Paragraph 7.1(a) and in accordance with the requirements of any covenants or
restrictions as may from time to time be applicable to the Premises, provided
that Lessee has received reasonable
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advance notice of such requirements. Lessee, in keeping the Premises in good
order, condition and repair, shall exercise and perform good maintenance
practices and any damage or deterioration shall not be deemed "ordinary wear and
tear" if the same could have been prevented by good maintenance practice.
Subject to the terms and conditions of Paragraphs 7.4, Lessee's obligations
shall include restorations, replacements or renewals when necessary and when
determined not to be due to ordinary wear and tear, in order to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. Subject to Paragraph 8 (Insurance) and Paragraph 9
(Casualty), Lessee shall make all repairs whatsoever on the Premises to the
extent necessitated by the negligence, misconduct or fault of Lessee, or its
employees, agents, licensees or contractors (each, a "Lessee Party").
(c) If Lessor shall have painted the exterior of the Building
during the initial term of this Lease (which shall be done, if at all, at
Lessor's sole cost and expense), Lessor shall have the right to require Lessee
to repaint the exterior of the Building once during the Option Period (as
defined below)
(d) Lessee shall cause the roof to be maintained pursuant to a
roof maintenance contract with a reputable, qualified roof contractor approved
by Lessor. In addition, Lessor reserves the right on 30 days' notice to Lessee
to procure and maintain a roof maintenance contract with a reputable, qualified
roof contractor and, if Lessor so elects, Lessee shall reimburse Lessor upon
demand for the cost thereof, not to exceed the costs for those services
generally charged in the area where the Premises are located for comparable work
on comparable buildings.
7.2 Surrender. On the last day of the Lease Term,, or on any sooner
termination, Lessee shall surrender the Premises to Lessor broom-clean and free
of debris and in reasonable working order and condition, ordinary wear and tear
excepted. Lessee shall repair any damage to the Premises occasioned by the
installation or removal of Lessee's trade fixtures, furnishings and equipment.
Notwithstanding anything to the contrary otherwise stated in this Lease, upon
termination of this Lease, Lessee shall leave the air lines, power panels,
electrical distribution systems, mechanical systems, lighting fixtures, air
conditioning, plumbing, heating (including space heaters) and fencing on the
Premises in good condition and operating order, and Lessee shall upon demand pay
to Lessor that portion of the cost to restore such items to good condition and
operating order as may be reasonably allocable to Lessee's tenancy.
7.3 Lessor's Rights. If Lessee fails to perform Lessee's obligations
under this Paragraph 7, or under any other paragraph of this Lease, Lessor may
at its option (but shall, not be required to) enter upon the Premises after ten
(10) days' prior
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written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and the
cost thereof together with interest thereon at the Interest Rate (as defined
below) shall become due and payable as additional rental to Lessor together with
Lessee's next rental installment. Without limiting the foregoing, in the event
Lessee fails to appropriately maintain the HVAC system, Lessor reserves the
right to procure and maintain HVAC system contract and if Lessor so elects,
Lessee shall reimburse Lessor upon demand for the cost thereof, not to exceed
the costs for those services generally charged in the area where the Premises
are located for comparable work on comparable buildings
7.4 Lessor's Obligations.
(a) Except for the obligations of Lessor under Paragraphs
6.2(a) and 6.3(a) (relating to Lessor's warranty), Paragraph 9 (relating to
destruction of the Premises), under Paragraph 14 (relating to condemnation of
the Premises), Paragraphs 7.4(b), 7.4(c), 7.4(d), 7.4(e), 7.4(f) and 7.4(g))and
Paragraph 51, it is intended by the parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises nor
the Building located thereon nor the equipment therein, all of which obligations
are intended to be that of the Lessee under Paragraph 7.1 hereof. Lessee
expressly waives the benefit of any statute now or hereinafter in effect which
would otherwise afford Lessee the right to make repairs at Lessor's expense or
to terminate this Lease because of Lessor's failure to keep the Premises in good
order, condition and repair.
(b) Structural Components. Lessor shall maintain and repair
the structural components of the Building on the Premises, including exterior
walls, foundations and structural portions of the roof, but excluding the
floors, subject to normal wear and tear, except to the extent the need for such
maintenance or repair arises because of the negligence, misconduct or fault of
Lessee or any Lessee Party.
(c) Replacement of HVAC System Units. Prior to December 15,
1996, the HVAC system shall be certified as being in good condition and repair.
If any of the HVAC system units needs to be replaced or retrofitted to comply
with legal requirements relating to the phase-out of CFCs during the term of the
Lease, Lessor shall cause that replacement or retrofit to be made at Lessor's
sole cost and expense subject to reimbursement from Lessee as provided in
Paragraph 7.4(f).
(d) Roof. During the initial 5 year term of this Lease, Lessor
shall be responsible for any replacement of the roof membrane, except to the
extent that replacement is due to (i) Lessee's failure to properly maintain and
repair the roof and/or (ii) the negligence, misconduct or fault of Lessee or any
Lessee Party (collectively, "Lessee's Fault"). With respect to
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any replacement of the roof membrane during the Option Period, Lessor shall
cause such replacement work to be made at Lessor's sole cost and expense, except
to the extent that replacement is due to Lessee's Fault, subject to
reimbursement from Lessee as provided in Paragraph 7.4(f). The need for any
replacement of the roof membrane shall be determined by Lessor in good faith
based on advice from a reputable roof contractor.
(e) Certain Major Projects. If maintenance of the Building
involves any Major Project that is not (a) Lessee Caused Compliance Work, (b)
work that would otherwise be the obligation of Lessor under any of Paragraphs
7.4(b), 7.4(c), 7.4(d) or 7.4(g), or (c) required due to the negligence,
misconduct or fault of Lessee or any Lessee Party, Lessor shall cause such Major
Project to be made at Lessor's sole cost and expense, subject to reimbursement
from Lessee as provided in Paragraph 7.4(f).
(f) Lessee's Contribution. With respect to any replacement or
retrofitting of the HVAC systems pursuant to Paragraph 7.4(c), any replacement
of the roof membrane during the Option Period pursuant to Paragraph 7.4(d), or
any Major Project which is not Lessee Caused Compliance Work, the obligation of
Lessee to pay a portion of the cost of such item (each, a "Major Item") shall be
governed by this Paragraph 7.4(f). Lessee shall pay Lessor within 15 days after
demand from Lessor a sum ("Lessee's Contribution"), equal to the product of (i)
an amount equal to the cost to Lessor of the applicable Major Item multiplied by
(ii) a fraction (not to exceed one) the numerator of which is the number of
months remaining in the term of the Lease after Lessor completes the Major Item
and the denominator of which is the number of months in the useful life of the
Major Item, as reasonably determined by Lessor. If Lessor's demand for
reimbursement is made prior to Lessee's exercise of its option for the Option
Period, and Lessee thereafter exercises that option, then Lessor may recalculate
Lessee's Contribution as to each Major Item to account for the increase in the
number of months in the term due to the addition of the Option Period and Lessee
shall pay Lessor within 15 days of demand that recalculated Lessee's
Contribution to the extent not previously paid by Lessee to Lessor.
(g) Earthquake Retrofitting. Lessor shall be responsible for
any earthquake retrofitting of the Building structure required by applicable
laws during the initial term of this Lease or the Option Period.
(h) Lessee Right to Make Repairs and Deduct Costs. If Lessee
provides written notice to Lessor of an event or circumstance which requires the
action of Lessor with respect to repair and/or maintenance of the structural
elements of the Premises, and Lessor's failure to commence such action within 5
business days will result in a material, adverse impact on
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Lessee's business in the Premises, and Lessor fails to commence such action
within 2 business days after receipt of such written notice, then Lessee may
proceed to take the required action upon delivery of an additional written
notice to Lessor specifying that Lessee is taking such required action and, if
such action was required under the terms of this Lease to be taken by Lessor,
then Lessee shall be entitled to prompt reimbursement by Lessor for Lessee's
reasonable costs and expenses in taking such action as provided in this
Paragraph (unless, pursuant to this Lease, Lessee is responsible for the cost of
such repair). If Lessor delivers a written objection to Lessee within 30 days
after receipt of an invoice by Lessee for its costs of taking action which
Lessee claims should have been taken by Lessor, which objection may be that
Lessor was not required to perform the action, the action was unnecessary and/or
the costs expended by Lessee were excessive, or does not respond to Lessee's
demand, the matter shall be resolved by arbitration as provided in this
Paragraph. Lessor and Lessee shall select an arbitrator acceptable to them to
resolve the dispute. If the parties are unable to agree on an arbitrator within
15 days after a request by either party to arbitrate, then either party may
petition the Presiding Judge of the Los Angeles Superior Court to select a
single arbitrator. The arbitrator shall be qualified pursuant to the rules of
the American Arbitration Association and the arbitration shall be conducted in
accordance with the rules of the American Arbitration Association. The costs of
such arbitration shall be paid for by the losing party unless it is not clear
that there is a "losing" party, in which event the costs of arbitration shall be
shared equally. If Lessor fails to pay such amounts (if any) as determined by
such arbitration to be due Lessee within 30 days after written demand, then
Lessee shall be entitled to deduct the reasonable costs and expense determined
by arbitration to be due Lessee from the rent next coming due.
7.5 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent
make any alterations, improvements, additions, or Utility Installations in, on
or about the Premises, except for nonstructural alterations not exceeding
$40,000 in cumulative costs during the term of this Lease or $10,000 as to any
single project (collectively, the "Threshold Amounts"). In any event, whether or
not in excess of either of the Threshold Amounts, Lessee shall make no material
change or alteration to the exterior of the Premises nor the exterior of the
Building(s) on the Premises without Lessor's prior written consent. As used in
Paragraph 7.5, the term "Utility Installation" shall mean carpeting, window
coverings, air lines, power panels, electrical distribution systems, lighting
fixtures, space heaters, air conditioning, plumbing and fencing. If Lessee
intends to perform work at the Premises which is expected to cost in excess of
either Threshold Amount, Lessor may require Lessee to provide Lessor, at
Lessee's sole cost and expense, a lien and completion
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bond in an amount equal to one and one-half times the estimated cost of such
improvements, to insure Lessor against any liability for mechanic's and
materialmen's liens and to insure completion of the work.
(b) Any alterations, improvements, additions, or Utility
Installations made by Lessee during the term of this Lease shall be done in a
good and workmanlike manner and of good and sufficient materials, and Lessee
shall, within thirty (30) days after completion of such alteration,
improvements, addition or Utility Installation, provide Lessor with as-built
plans and specifications for same. Notwithstanding anything contained in this
Lease to the contrary, Paragraphs 7.5(d)(1)(ii) and (iii) shall apply to
non-structural alterations, improvements, additions or Utility Installations
(other than racking, shelving and temporary partitions) not exceeding either of
the Threshold Amounts in cost.
(c) Any alterations, improvements, additions or Utility
Installations in, or about the Premises that Lessee shall desire to make and
which require the consent of the Lessor under the terms of this Paragraph 7.5
shall be presented to Lessor in written form, with proposed detailed plans. If
Lessor shall give its consent, the consent shall be conditioned upon
satisfaction of all of the requirements set forth in Paragraph 7.5(d) below.
(d) For any additions, alterations, improvements, or Utility
Installations requiring Lessor's prior written consent:
(1) Lessee shall:
(i) Request Lessor's approval in writing at
least thirty (30) days prior to proposed construction.
(ii) Employ a California licensed architect,
contractor and structural engineer in connection with the
proposed construction if the work is structural or, in the
case of non-structural work, if the employment of such person
is appropriate in connection with the work being performed and
the cost of such work exceeds $10,000.00.
(iii) Be fully responsible for the acts of
Lessee's consultants, employees, contractors, sub contractors,
invitees and agents, and cause them to fully comply with any
applicable terms of this Lease and documents referred to by
this Lease and all applicable laws, rules and regulations.
(iv) Enter into written agreements with an
architect and general contractor on standard American
Institute of Architects (AIA) form or reasonable
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equivalent for the contract itself as well as payment
schedules, change order, etc. Copies of executed agreements
will be forwarded to Lessor promptly following execution.
(v) Cause to be obtained an applicable
building permit for any and all construction and
modifications, and construct the additions and alterations and
perform the construction work in accordance with all
applicable laws, including without limitation the Americans
With Disabilities Act.
(2) Lessee's architect shall:
(i) Be licensed by the State of California.
(ii) Design and specify within the para
meters of approved building specifications or have received
specific written exceptions from the Lessor.
(iii) Secure Lessor's written approval
before submitting plans to the general contractor for bidding
or to governmental agencies for approval.
(iv) Secure Lessor's written approval of any
changes or alternates to the plans recommended by the general
contractor or required by governmental agencies.
(v) Submit a copy of the final application
for permit and issued permit to Lessor.
(vi) Incorporate the building standard
details supplied by Lessor onto the drawings.
(vii) Submit final plans for Lessor's
written approval prior to construction.
(viii) Be available for final inspection
with Lessor at job completion.
(ix) Secure Lessor's written approval of
details of any changes in specifications or finishes
during construction.
(x) Provide samples and specifications as
required by Lessor.
(xi) Sign off on the as-built drawings as
the Architect's certification that the improvements have, in
fact, been built as per the Architect's design.
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(3) Lessee's general contractor and/or subcontractors
shall:
(i) Be licensed by the State of California.
(ii) Have substantial experience providing
similar quality and quantity of improvements. Work history
shall be provided to Lessor prior to being awarded contract.
(iii) Have a bonding capacity equal to or
exceeding the valuation of the job. Lessor may, at its sole
option, require the job to be bonded.
(iv) Maintain in full force and effect,
throughout the duration of its performance under the contract
with the Lessee, a Worker's Compensation insurance policy and
a Commercial General Liability insurance policy issued by an
insurer satisfactory to Lessor with liability coverage of not
less than $1,000,000.00 for personal injury and $500,000.00 to
cover property damage. The Commercial General Liability
insurance policy shall include assumption of contractual
liability. Certificates of insurance containing a thirty (30)
day cancellation clause shall be furnished to Lessor prior to
commencement of performance under the construction contract
naming Lessor (The Prudential Insurance Company of America)
and its managing agent (currently Cushman & Wakefield of
California, Inc.) as additional insureds.
(v) Provide a construction schedule to
Lessor prior to commencement of work and weekly written
progress reports.
(vi) Warrant the Contractor's work and that
of the Contractor's subcontractors, for a minimum of one (1)
year.
(vii) Provide Lessor with as-built drawings
of all improvements.
(e) All approvals by Lessor, as provided for in this Paragraph
7.5, shall not be unreasonably withheld. All requests to be submitted to Lessor
shall be submitted through Lessor's managing agent. If Lessor shall give its
consent, the consent shall be deemed conditioned upon the compliance by Lessee
in a prompt and expeditious manner of all conditions of all permits obtained
pursuant to Paragraph 7.5(d) above. Lessor agrees not to unreasonably withhold,
condition or delay its consent or
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response to any requests or submissions made by Lessee under this
Paragraph 7.5.
(f) Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use in the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) business days' notice prior to the
commencement of any work in the Premises, and Lessor shall have the right to
post notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense defend itself and Lessor against
the same and shall pay and satisfy any such adverse judgment that may be
rendered thereon before the enforcement thereof against the Lessor or the
Premises, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorneys fees and costs in
participating in such action if Lessor shall decide it is in its best interest
to do so.
(g) Unless otherwise agreed in writing, Lessor may require
that any or all alterations, improvements, additions or Utility Installations
made or installed by Lessee or any Lessee Party be removed by the expiration or
earlier termination of this Lease, notwithstanding their installation may have
been consented to by Lessor, and that the Premises be restored to their prior
condition. Should Lessee make any alterations, improvements, additions or
Utility Installations without the prior approval of Lessor, Lessor may require
that Lessee remove any or all of the same. Prior to commencing any addition,
alteration or improvement, Lessee may request that Lessor waive Lessee's
obligation to remove such addition, alteration or improvement at the end of the
Lease Term. Any such waiver must be in writing and shall only apply to the
additions, alterations or improvements described therein.
(h) Unless Lessor requires their removal, as set forth in
Paragraph 7.5(g), and except as set forth below in Paragraph 7.5(h), all
alterations, improvements, additions and Utility Installations (whether or not
such Utility Installations constitute trade fixtures of Lessee), which may be
made on the Premises, shall become the property of Lessor and remain upon and be
surrendered with the Premises at the expiration of the Lease Term.
Notwithstanding the provisions of this Paragraph 7.5(h), any of Lessee's
machinery and equipment and all alterations, improvements and Utility
Installations made by Lessee, other than those affixed to the Premises so that
they cannot be removed without material and irreparable damage to the Premises,
shall
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<PAGE> 19
remain the property of Lessee and may be removed by Lessee subject to the
provisions of Paragraph 7.2.
8. Insurance; Indemnity.
(a) Subject to the waiver of subrogation contained in this
Lease, Lessee hereby agrees to indemnify, defend and hold harmless Lessor, its
successors, assigns, subsidiaries, directors, officers, agents and employees
from and against any and all damage, loss, liability or expense including, but
not limited to, attorney's fees and legal costs suffered by same directly or by
reason of any claim, suit or judgment brought by or in favor of any person or
persons for damage, loss or expense due to, but not limited to, bodily injury,
including death resulting any time therefrom, and property damage sustained by
such person or persons which arises out of, is occasioned by or in any way
attributable to the use or occupancy of the Premises by the Lessee, the acts or
omission of the Lessee, its agents, employees or any other contractors brought
onto said Premises by the Lessee, or any breach or default in the performance of
any obligation on Lessee's part to be performed under the terms of this Lease,
except to the extent caused by the negligence or wilful misconduct of Lessor,
its employees, agents or contractors. If any action or proceeding is brought
against Lessor by reason of any such claim, Lessee, upon notice from Lessor,
shall defend same at Lessee's expense by counsel reasonably satisfactory to
Lessor. Lessor and Lessee agree that Lessor's belief that a conflict of interest
exists shall be deemed a reasonable basis for Lessor to object to such counsel.
Such loss or damage shall include, but not be limited to, any injury or damage
to Lessor's personnel (including death resulting any time therefrom) on the
Premises. Lessee agrees that the obligations assumed herein shall survive the
termination of this Lease.
(b) Lessee hereby agrees to maintain and to cause its
contractors occupying or performing work in the Premises from time to time to
maintain in full force and effect at all times during the term of this Lease
(or, in the case of contractors, during the period of such occupancy or term of
work in the Premises), at no cost to Lessor, for the protection of Lessee,
Lessor and Lessor's property manager, as their interest may appear, policies of
insurance issued by a responsible carrier or carriers to Lessor which afford the
following coverages:
(i) Workers' Compensation with statutory limits as
required by the State of California.
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(ii) Employers' Liability insurance with the
following minimum limits:
Bodily injury by disease per person $1,000,000
Bodily injury by accident policy limit $1,000,000
Bodily injury by disease policy limit $1,000,000
(iii) Property insurance on a special causes of loss
insurance form (excluding earthquake and flood) covering any
and all personal property of Lessee including but not limited
to improvements, betterments, furniture, fixtures, Utility
Installations, and equipment in an amount not less than their
full replacement cost, with a deductible not to exceed
$50,000. This policy should contain a waiver of subrogation.
(iv) Commercial General Liability Insurance including
Broad Form Property Damage and Contractual Liability with the
following minimum limits:
General Aggregate $2,000,000
Products/Completed Operations Aggregate $2,000,000
Each Occurrence $1,000,000
Personal & Advertising Injury $1,000,000
Medical Payments $5,000 per
person
(v) Umbrella/Excess Liability on a following form
basis with the following minimum limits:
General Aggregate $10,000,000
Each Occurrence $10,000,000
The limits of said insurance in this Paragraph 8(b)(i) shall not
however, limit the liability of Lessee hereunder.
(c) Lessor shall at all times during the term of this Lease,
maintain the following property insurance with respect to the Premises:
(i) a policy or policies of all-risk property
insurance, issued by and binding upon an insurance company
having a rating of at least A-VIII as set forth in the most
current issue of "A.M. Best's Insurance Guide," insuring for
the full replacement cost of the Building on the Premises.
Lessor shall not be obligated to insure, and shall not assume
any liability or risk of loss for, any of Lessee's furniture,
equipment, machinery, goods, supplies, utility installations,
improvements, or alterations upon the Premises. This policy
shall contain an agreed
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amount endorsement and be written with no coinsurance.
Lessor may, but shall not be obligated to, obtain
earthquake and flood insurance.
(ii) Rent insurance on an all-risk basis in an amount
equal to all that is called for under Paragraph 4 of this
Lease (Base Rent and any additional rents payable under this
Lease including tax and insurance costs) for a period of at
least twelve (12) months commencing with the date of loss.
(iii) Boiler and machinery insurance in an amount
satisfactory to Lessor on a comprehensive coverage form.
Lessor may elect to have reasonable deductibles in connection with the insurance
specified in Paragraph 8(c), and Lessee shall be liable for such deductible
amount; provided that with respect to the deductible under any policy of
earthquake insurance maintained by Lessor, Lessee shall be liable and
responsible for that deductible amount up to a maximum amount equal to 50% of
the total deductible amount. If the earthquake loss exceeds an amount equal to
50% of the total deductible amount, Lessor shall be responsible for that excess
deductible. Notwithstanding the foregoing, if the Lease is terminated pursuant
to Paragraph 9, Lessee shall not be liable for the deductible amount with
respect to the casualty resulting in that termination of the Lease.
(d) The party required to carry insurance as required
hereunder shall deliver to the other party prior to the time such insurance is
first required to be carried, and thereafter at least twenty (20) days prior to
expiration of such policy, certificates of insurance evidencing the above
coverage with limits not less than those specified above. Insurance required
hereunder shall be in companies holding a "General Policyholders Rating" of at
least A-VIII as set forth in the most current issue of "A.M. Best's Insurance
Guide." With respect to policies to be carried by Lessee, such Certificates with
the exception of Worker's Compensation, shall name Lessor, and its property
manager as additional insureds. With respect to the liability insurance policies
to be carried by Lessor, such Certificates shall name Lessee as additional
insured. Further, all Certificates shall expressly provide that no less than
thirty (30) days prior written notice shall be given to the party not carrying
such insurance in the event of material alteration to or cancellation of the
coverage evidenced by such Certificates.
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(e) Upon demand, Lessee shall provide Lessor, at Lessee's
expense, with such increased amount of existing insurance and such other
insurance coverage in such limits as Lessor may require in its sole judgement to
afford Lessor adequate protection, but in no event will Lessee be required to
carry insurance in excess of the types and amounts of insurance typically
carried by lessees of buildings of comparable class, size and quality in the
same general location as the Building.
(f) From and after the date upon which the Lessor transfers
its interest in this Lease such that neither The Prudential Insurance Company of
America nor any entity directly or indirectly controlled or managed by The
Prudential Insurance Company of America is the Lessor under this Lease, Lessor
shall be obligated to obtain competitive bids on all insurance to be obtained by
Lessor under this Lease and to secure that insurance from the qualified bidder
or bidders with the lowest premiums for comparable insurance coverage from
insurers meeting the requirements of this Lease.
(g) Lessor makes no representation that the limits of
liability specified to be carried by Lessee under the term of this Lease are
adequate to protect Lessee against Lessee's undertaking under this Paragraph 8
and in the event Lessee believes that any such insurance coverage called for
under this Lease is insufficient, Lessee shall provide, at its own expense, such
additional insurance as Lessee deems adequate.
(h) Anything in this Lease to the contrary notwithstanding,
Lessor and Lessee hereby waive and release each other of and from any and all
rights of recovery, claims, action or cause of action, against each other, their
agents, officers and employees, for any loss or damage that may occur to the
Premises, improvements to the building of which the Premises are a part,
personal property (building contents) within the building on the Premises, any
furniture, equipment, machinery, goods or supplies not covered by this Lease
which Lessee may bring or obtain upon the Premises or any additional
improvements which Lessee may construct on the Premises, by reason of fire, the
elements or any other cause which could be insured against under the terms of
all risk property insurance policies, regardless of cause or origin, including
negligence of Lessor or Lessee and their agents, officers and employees. Because
this Paragraph will preclude the assignment of any claim mentioned in it by way
of subrogation (or otherwise) to an insurance company (or any other person) each
party to this Lease agrees immediately to give to each insurance company,
written notice of the terms of the mutual waivers contained in this Paragraph,
and to have the insurance policies properly endorsed if necessary to prevent the
invalidation of the insurance coverages by reason of the mutual waivers
contained in this Paragraph. Lessee also waives and releases Lessor, its agents,
officers and employees of and from any and all rights of
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recovery, claim, action or cause of action for any loss or damage to the extent
insured against under any other policies of insurance carried by Lessee.
(i) Lessee shall pay to Lessor during the term hereof,
additional rent in the amount of any premiums for the insurance obtained under
Paragraphs 8(c)(i), 8(c)(ii), and 8(c)(iii). Lessee shall pay any such premiums
to Lessor within thirty (30) days after receipt by Lessee of a copy of the
premiums statement or other satisfactory evidence of the amount due. If the
insurance policies maintained hereunder cover other improvements in addition to
the Premises, Lessor shall also deliver to Lessee a statement of the amount of
such premiums attributable to the Premises and showing in reasonable detail the
manner in which such amount was computed. If the term of this Lease shall not
expire concurrently with the expiration of the period covered by such insurance,
Lessee's liability for premiums shall be prorated on an annual basis.
(j) Lessor may also maintain commercial general liability
insurance in addition to, and not in lieu of, the commercial general liability
insurance required to be maintained by Lessee. Lessee shall be named as an
additional insured therein. If Lessor maintains such insurance, Lessee shall pay
to Lessor during the term of this Lease additional rent in the amount of any
premiums for such insurance in the same manner as provided in the second
sentence of Paragraph 8(i). All insurance to be carried by Lessee shall be
primary to and not contributory with any similar insurance carried by Lessor,
whose insurance shall be considered excess insurance only.
(k) Lessor shall not be liable for injury or damage to the
person or goods, wares, merchandise or other property of Lessee, Lessee's
employees, contractors, invitees, customers, or any other person in or about the
Premises, whether such damage or injury is caused by or results from fire,
steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, fire sprinklers, wires, appliances,
plumbing, air conditioning or lighting fixtures, or from any other cause,
whether said injury or damage results from conditions arising upon the Premises
or upon other portions of the building of which the Premises are a part, from
other sources or places, and regardless of whether the cause of such damage or
injury or the means of repairing the same is accessible or not. Notwithstanding
Lessor's negligence or breach of this Lease, Lessor shall under no circumstances
be liable for injury to Lessee's business or for any loss of income or profit
therefrom. Notwithstanding anything in the first sentence of this Paragraph 8(k)
to the contrary, but subject to Paragraph 8(h), nothing in this Lease shall
limit Lessor's liability for injuries to natural persons or damage to property
to the extent caused by the negligence or willful misconduct of Lessor. Nothing
contained herein is intended to, or shall be deemed or construed to limit
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or otherwise affect any rights of Lessor or Lessee to claim or receive the
benefit of any available insurance proceeds attributable to an event or
circumstance affecting the Premises.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is less than
25% of the then replacement cost of the Premises. "Premises Building Partial
Damage" shall herein mean damage or destruction to the building of which the
Premises are a part to the extent that the cost of repair is less than 25% of
the then replacement cost of such building as a whole.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is 25% or more
of the then replacement cost of the Premises. "Premises Building Total
Destruction" shall herein mean damage or destruction to the building of which
the Premises are a part to the extent that the cost of repair is 25% or more of
the then replacement cost of such building as a whole.
(c) "Insured Loss" shall herein mean damage or destruction
which was caused by an event required to be covered by the insurance described
in Paragraph 8.
9.2 Partial Damage -- Insured Loss. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is an Insured Loss and which falls into the classification of
Premises Partial Damage or Premises Building Partial Damage, then Lessor shall,
at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or
tenant improvements unless the same have become a part of the Premises pursuant
to Paragraph 7.5 hereof as soon as reasonably possible and this Lease shall
continue in full force and effect. Notwithstanding the above, if the insurance
proceeds received by Lessor are not sufficient to effect such repair, Lessor
shall give notice to Lessee of the amount required in addition to the insurance
proceeds to effect such repair. Lessee may contribute the required amount to
Lessor within ten days after Lessee has received notice from Lessor of the
shortage in the insurance. When Lessee shall contribute such amount to Lessor,
Lessor shall make such repairs as soon as reasonably possible and this Lease
shall continue in full force and effect. Lessee shall in no event have any right
to reimbursement for any such amounts so contributed. In the event Lessee does
not elect to contribute the amount of the insurance shortfall within ten days of
written notice from Lessor, as provided in Paragraph 9.2, Lessor may elect
within thirty (30) days after Lessee's failure to contribute the amount of the
insurance shortfall either to (a) fund the shortfall itself, in which event
Lessor shall
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proceed with the repair and restoration, or (b) terminate this Lease.
9.3 Partial Damage -- Uninsured Loss. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is not an Insured Loss and which falls within the classification
of Premises Partial Damage or Premises Building Partial Damage, unless caused by
a negligent or willful act of Lessee (in which event Lessee shall make the
repairs at Lessee's expense to the extent that damage was caused by Lessee),
Lessor may at Lessor's option either (i) repair such damage as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) give written notice to Lessee within
thirty (30) days after the date of the occurrence of such damage of Lessor's
intention to cancel and terminate this Lease, as of the date of the occurrence
of such damage. In the event Lessor elects to give such notice of Lessor's
intention to cancel and terminate this Lease, Lessee shall have the right within
ten (10) days after the receipt of such notice to give written notice to Lessor
of Lessee's intention to repair such damage at Lessee's expense, without
reimbursement from Lessor, in which event this Lease shall continue in full
force and effect, and Lessee shall proceed to make such repairs as soon as
reasonably possible. If Lessee does not give such notice within such 10-day
period this Lease shall be canceled and terminated as of the date of the
occurrence of such damage.
9.4 Total Destruction. If at any time during the term of this Lease
there is damage, whether or not an Insured Loss, (including destruction required
by any authorized public authority), which falls into the classification of
Premises Total Destruction or Premises Building Total Destruction, this Lease
shall automatically terminate as of the date of such total destruction.
9.5 Damage Near End of Term.
(a) If at any time during the last twelve (12) months of the
term of this Lease there is damage which would cost in excess of $250,000.00 to
repair, whether or not an Insured Loss, which falls within the classification of
the Premises Partial Damage, either Lessee or Lessor may at its option, cancel
and terminate this Lease as of the date of occurrence of such damage by giving
written notice to the other party of its election to do so within 30 days after
the date of occurrence of such damage.
(b) Notwithstanding Paragraph 9.5(a) in the event that Lessee
has an option to extend or renew this Lease, and the time within which said
option may be exercised has not yet expired, Lessee shall exercise such option,
if it is to be exercised at all, no later than 30 days after the occurrence of
an Insured Loss falling with the classification of Premises Partial Damage
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during the last six months of the term of this Lease. If Lessee duly exercises
such option during said 30 day period, Lessor shall, at Lessor's expense, repair
such damage as soon as reasonably possible and this Lease shall continue in full
force and effect, provided Lessee after notice from Lessor first deposits with
Lessor any shortfall in necessary funds. In the event Lessee does not elect to
contribute the amount of the insurance shortfall within ten days of written
notice from Lessor, as provided in Paragraph 9.5(b), Lessor may elect within
thirty (30) days after Lessee's failure to contribute the amount of the
insurance shortfall either to (a) fund the shortfall itself, in which event
Lessor shall proceed with the repair and restoration, or (b) terminate this
Lease. If Lessee fails to exercise such option during said 30 day period, then
Lessor may at Lessor's option terminate and cancel this Lease as of the
expiration of said 30 day period by giving written notice to Lessee of Lessor's
election to do so within 20 days after the expiration of said 30 day period,
notwithstanding any term or provision in the grant of option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in Paragraphs 9.2, 9.3 or
9.5 and Lessor or Lessee repairs or restores the Premises pursuant to the
provisions of Paragraph 9, the rent payable hereunder for the period during
which such damage, repair or restoration continues shall be abated in proportion
to the degree to which Lessee's use of the Premises is impaired (until such
impairment no longer exists). Except for abatement of rent, if any, Lessee shall
have no claim against Lessor for any damage suffered by reason of any such
damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of Paragraph 9 and shall not commence such repair
or restoration within 90 days after such obligations shall accrue, Lessee may at
Lessee's option cancel and terminate this Lease by giving Lessor written notice
of Lessee's election to do so at any time prior to the commencement of such
repair or restoration. In such event this Lease shall terminate as of the date
of such notice.
(c) If any repair or restoration that Lessor shall be
obligated to or shall elect to undertake under the provisions of this Paragraph
9 is estimated by Lessor's architect to take more than 270 days from the event
of damage to complete, either party at such party's election, may cancel and
terminate this Lease by giving the other party written notice of the electing
party's election to do so at any time prior to the commencement of such repair
or restoration. In such event, this Lease shall terminate as of the date of such
notice. Lessor agrees to cause its architect to provide its estimate of the time
necessary to
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complete the repair or restoration within 60 days after the
damage or destruction.
(d) If Lessor shall be obligated to repair or restore the
Building under the provisions of this Paragraph 9 and shall not complete such
repair or restoration within one year (subject to extension for delays beyond
the control of Lessor, including without limitation delays in obtaining permits)
after the damage or destruction, Lessee may at Lessee's option cancel and
terminate this Lease by giving Lessor written notice of Lessee's election to do
so at any time prior to the Lessor's completion of such repair or restoration.
In such event, this Lease shall terminate as of the date of such notice.
Lessee's right to terminate this Lease pursuant to this Paragraph 9.6(d) shall
be the sole right and remedy of Lessee against Lessor, and Lessor shall have no
other liability to Lessee for damages, specific performance or otherwise in
connection with any such failure to complete such repair or restoration.
9.7 Termination -- Advance Payments. Upon termination of this Lease
pursuant to Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.8 Waiver. Lessor and Lessee waive the provisions of any statutes
which relate to termination of leases when leased property is destroyed and
agree that such event shall be governed by the terms of this Lease.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessee shall pay the real property tax, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. All such payments shall be made at least ten (10) days prior to the
delinquency date of such payment. Lessee shall promptly furnish Lessor with
satisfactory evidence that such taxes have been paid. If any such taxes paid by
Lessee shall cover any period of time prior to or after the expiration of the
term hereof, Lessee's share of such taxes shall be equitably prorated to cover
only the period of time within the tax fiscal year during which this Lease shall
be in effect, and Lessor shall reimburse Lessee to the extent required. If
Lessee shall fail to pay any such taxes, Lessor shall have the right to pay the
same, in which case Lessee shall repay such amount to Lessor with Lessee's next
rent installment together with interest at the Interest Rate.
10.2 Definition of "Real Property Tax". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extra ordinary, and any license fee, commercial rental tax,
improvement
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bond or bonds, levy or tax (other than inheritance, personal income or estate
taxes) imposed on the Premises by any authority having the direct or indirect
power to tax, including any city, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage or other improvement district
thereof, as against any legal or equitable interest of Lessor in the Premises or
in the real property of which the Premises are a part, as against Lessor's right
to rent or other income there from, and as against Lessor's business of leasing
the Premises. The term "real property tax" shall also include any tax, fee,
levy, assessment or charge (a) in substitution of, partially or totally, any
tax, fee, levy, assessment or charge hereinabove included within the definition
of "real property tax," or (b) the nature of which was hereinbefore included
within the definition of "real property tax," or (c) which is imposed for a
service or right not charged prior to June 1, 1978, or, if previously charged,
has been increased since June 1, 1978, or (d) which is imposed as a result of a
transfer, either partial or total, of Lessor's interest in the Premises or which
is added to a tax or charge hereinbefore included within the definition of real
property tax by reason of such transfer, or (e) which is imposed by reason of
this transaction, any modifications or changes hereto, or any transfers hereof.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith
(and based upon a commercially reasonable review of available data and
materials), shall be conclusive.
10.4 Additional Provisions Regarding Real Property Taxes. Lessor shall
have the option to pay the real property taxes, and in such case, Lessee shall,
as additional rent for the Premises, pay for cost of all real property taxes
paid hereunder. If Lessor pays the real property taxes, Lessee shall, within ten
(10) days following demand by Lessor, reimburse Lessor for the cost of the real
property taxes so paid. Lessor shall have the right to (and upon Lessee's
reasonable request agrees to) contest or appeal any real property taxes or
assessments applicable to the Premises and to seek a reduction in the assessed
valuation of the Premises (collectively, "Tax Contests"). Any refund of real
property taxes resulting from any such Tax Contest shall be applied first to
reimburse Lessor for its costs and expenses in connection with the Tax Contest
(including, without limitation attorneys' fees and the costs of consultants) and
then, out of and to the extent of the balance of such refund, Lessor shall
reimburse to Lessee the portion of such reduction attributable to the Premises
and the term of this Lease, if previously paid by Lessee.
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10.5 Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere. When
reasonably possible, Lessee shall cause said trade fixtures, furnishings,
equipment and all other personal property to be assessed and billed separately
from the real property of Lessor.
(b) If any of Lessee's said personal property shall be
assessed with Lessor's real property, Lessee shall pay Lessor the taxes
attributable to Lessee within 10 days after receipt of a written statement
setting forth the taxes applicable to Lessee's property.
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of
all charges jointly metered with other premises.
12. Assignment and Subletting.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold or delay. Lessor shall respond to Lessee's request for consent
hereunder in a timely manner and any attempted assignment, transfer, mortgage,
encumbrance or subletting without such consent shall be void, and shall
constitute a noncurable breach of this Lease, without the need for notice to
Lessee under Paragraph 13.1.
12.2 Procedure. If at any time or from time to time during the term of
this Lease, Lessee desires to assign or sublet all or any part of Lessee's
interest in this Lease or in the Premises, Lessee shall give prior written
notice to Lessor setting forth the terms of the proposed assignment or
subletting and the space so proposed to be assigned or sublet. Such assignment
or sublease shall be subject to, without limitation, all the conditions in
Paragraph 12 and the following conditions:
(a) The assignment or sublease shall be on the terms set forth
in the notice given to Lessor. Any subsequent material changes or modifications
or reduction in effective sublease rental by more than 10% will require Lessor's
prior written consent.
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(b) Lessee acknowledges that Lessor's agreement to lease these
Premises to Lessee at the rent and terms stated herein is made in material
reliance upon Lessor's evaluation of this particular Lessee's background,
experience and ability, as well as the nature of the use of the Premises by this
Lessee as set forth in Paragraph 6. In the event that Lessee shall request
Lessor's written consent to assign or sublease the Premises as required in
Paragraphs 12.1 and 12.2 hereof, then each such request for consent shall be
accompanied by the following:
(i) Financial statements of the proposed assignee or
sublessee;
(ii) A statement of the specific uses for which the
Premises will be utilized by the proposed assignee or
sublessee; and
(iii) Preliminary plans prepared by an architect or
civil engineer for all alterations to the Premises that are
contemplated to be made by Lessee, the proposed assignee or
sublessee.
(c) No assignment or sublease shall be valid and no assignee
or sublessee shall take possession of the Premises assigned or subleased until
an executed counterpart of such assignment or sublease has been delivered to
Lessor.
(d) No sublessee or assignee shall have a right further to
sublet or assign.
(e) Fifty percent (after deduction of reasonable real estate
brokerage commission paid by Lessee) of any sums or other economic consideration
received by Lessee as a result of such assignment or subletting (except rental
or other payments received which are attributable to amortization of the cost of
leasehold improvements other than building standard tenant improvements made to
the assigned or sublet portion of the Premises by Lessor) whether denominated
rentals under the assignment or sublease or otherwise, which exceed, in the
aggregate, the total sums which Lessee is obligated to pay Lessor under this
Lease (prorated to reflect obligations allocable to that portion of the Premises
subject to such assignment or sublease) shall be payable to Lessor as additional
rental under this Lease without affecting or reducing any other obligation of
Lessee hereunder. In the event of subletting of only a portion of the Premises,
in calculating whether the rent received by Lessee exceeds the rent payable
under this Lease, the rent payable under the Lease shall be prorated according
to the square footage involved in order to reflect the rent applicable to the
space sublet. The provisions of this Paragraph 12.2(e) shall not apply to any
sublease permitted under Paragraph 12.4 or Paragraph 12.8 of this Lease.
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12.3 Lessees Other Than Individuals.
(a) If Lessee is a partnership, a transfer of any interest of
a general partner, a withdrawal of any general partner from the partnership, or
the dissolution of the partner ship, shall be deemed to be an assignment of this
Lease.
(b) If Lessee is a corporation, unless Lessee is a public
corporation whose stock is regularly traded on a national stock exchange, or is
regularly traded in the over-the-counter market and quoted on NASDAQ, any sale
or other transfer of a percentage of capital stock of Lessee which results in a
change of controlling persons, or the sale or other transfer of substantially
all of the assets of Lessee, shall be deemed to be an assignment of this Lease.
12.4 Lessee Affiliate. Notwithstanding any other provision of this
Paragraph 12, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease. Any such assignment shall not, in any
way, affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are materially
changed or altered without the consent of Lessee, the consent of whom shall not
be necessary.
12.5 No Release of Lessee. Regardless of Lessor's consent, any
subletting or assignment shall not (a) be effective without the express written
assumption by such assignee or sublessee of the obligations of Lessee under this
Lease, (b) release Lessee of any of Lessee's obligations hereunder or (c) alter
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any other person shall not be deemed to be a waiver by Lessor of any
provision hereof or any default by Lessee. Consent to one assignment or
subletting shall not be deemed consent to any subsequent assignment or
subletting. In the event of default by any assignee of Lessee or any successor
of Lessee, in the performance of any of the terms hereof, Lessor may proceed
directly against Lessee without the necessity of exhausting remedies against
said assignee. Lessor may consent to subsequent assignments or subletting of
this Lease or amendments or modifications to this Lease with assignees of
Lessee, without notifying Lessee, or any successor of Lessee, and without
obtaining its or their consent thereto and such action shall not relieve Lessee
of liability under this Lease.
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12.6 Assignment to Lessor. The terms of this Paragraph 12.3 shall apply
only to amounts Lessor is entitled to receive under this Lease and not to any
amounts which a sublessee may be obligated to pay to Lessee which are in excess
of the amounts Lessee is obligated to pay under this Lease. Subject to the
foregoing, Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease heretofore or
hereafter made by Lessee, and Lessor may collect such rent and income and apply
same toward Lessee's obligations under this Lease; provided however, that until
an Event of Default shall occur in the performance of Lessee's obligations under
this Lease, and subject to Paragraph 12.2(e) Lessee may receive, collect and
enjoy the rents accruing under such sub lease. Lessor shall not, by reason of
this or any other assignment of such sublease to Lessor nor by reason of the
collection of the rents from a sublessee, be deemed liable to the sublessee for
any failure of Lessee to perform and comply with any of Lessee's obligations to
such sublessee under such sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that an Event of Default exists in the performance of Lessee's obligations under
this Lease, to pay to Lessor the rents due and to become due under the sublease.
Lessee agrees that such sublessee shall have the right to rely upon any such
statement and request from Lessor, and that such sublessee shall pay such rents
to Lessor without any obligation or right to inquire as to whether such an Event
of Default exists and notwithstanding any notice from or claim from Lessee to
the contrary. Lessee shall have no right or claim against such sublessee or
Lessor for any such rents so paid by said sublessee to Lessor, subject to the
terms of this Paragraph 12.6.
12.7 Attorney's Fees. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do,
then Lessee shall pay Lessor's reasonable attorneys' fees incurred in connection
therewith, such attorneys' fees not to exceed $350.00 for each such request.
Notwithstanding the foregoing, the parties agree that a payment of $750.00 is a
reasonable fee for Lessor's review of Lessee's request to assign or sublease.
The provisions of this Paragraph 12.7 shall not apply to any sublease or
assignment permitted under Paragraph 12.4 or Paragraph 12.8 of this Lease.
12.8 Certain Permitted Subleases. Notwithstanding anything in this
Lease to the contrary, Lessee may sublease up to 150,000 square feet in the
Premises in the aggregate without Lessor's prior consent; provided that (a)
Lessee gives Lessor notice of and a copy of each such sublease within 20 days
after it is executed, (b) the terms of all such subleases expire prior to the
third anniversary of the Commencement Date, and (c) the subleases are subject to
all of the terms and conditions of this Lease.
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12.9 Deemed Approval. In the event Lessor fails to respond at all to
any written request for consent of a sublease of less than all of the Premises
within 10 business days of actual receipt of that request by Lessor, the same
shall be deemed approved; provided that such written request for consent shall
(a) conspicuously state that pursuant to Paragraph 12.9 of the Lease, Lessor's
failure to respond within that 10-business day period shall result in Lessor's
being deemed to have given its approval, (b) have been delivered in accordance
with this Lease, and (c) contain the information required under Paragraph 12.2
(other than the plans described in Paragraph 12.2(b)(iii), which need only be
provided at that time if those plans then exist).
13. Defaults; Remedies.
13.1 Defaults. The occurrence of any one or more of the following
events shall constitute a material default and breach of this Lease by Lessee
(each, following the giving of notice and the passage of the cure period
afforded hereunder, an "Event of Default"):
(a) The vacating or abandonment of the Premises by Lessee;
provided that the vacating of the Premises by Lessee shall be an Event of
Default only in the event it results in an impairment or limitation on the
insurance coverage for the Premises, and the abandonment of the Premises by
Lessee shall be an Event of Default only in the event Lessee, pursuant to
California Civil Code Section 1951.3, shall have been deemed to have abandoned
the Premises.
(b) The failure by Lessee to make any payment of rent or any
other payment required to be made by Lessee hereunder, as and when due, where
such failure shall continue for a period of ten (10) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes,
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph so long as the Notice to Pay Rent or Quit provides for the 10
days to cure required hereunder in lieu of the 3 days provided in the applicable
Unlawful Detainer statutes.
(c) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Lessee, other than described in para graph (b) above, where such failure shall
continue for a period of 30 days after written notice thereof from Lessor to
Lessee; provided, however, that if the nature of Lessee's default is such that
more than 30 days are reasonably required for its cure, then Lessee shall not be
deemed to be in default if Lessee commenced such cure within said 30-day period
and thereafter diligently prosecutes such cure to completion. To the extent
permitted by law, said thirty (30) day notice shall constitute the sole and
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exclusive notice required to be given to Lessee under applicable unlawful
detainer statutes.
(d) (i) The making by Lessee of any general arrangement or
assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as
defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the
case of a petition filed against Lessee, the same is dismissed within 60 days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within 60
days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within 60 days.
Provided, however, in the event that any provision of this Paragraph 13.1(d) is
contrary to any applicable law, such provision shall be of no force or effect.
(e) The discovery by Lessor that any financial statement
given to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any
successor in interest of Lessee or any guarantor of Lessee's obligations
hereunder, and any of them, was materially false and that such financial
statement was known by Lessee or the other parties who delivered it to be
materially false at the time it was delivered.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. In the event of an Event of Default by
Lessee, as defined in Paragraph 13.1, with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at the
time of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the
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amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided,; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provisions (i) and (ii) of the prior sentence shall be calculated based on an
interest rate equal to the Interest Rate. The worth at the time of award of the
amount referred to in provision (iii) of the prior sentence shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent. Efforts by Lessor to mitigate
damages caused by Lessee's breach of this Lease shall not waive Lessor's right
to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under Paragraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under Paragraphs 13.1(b), (c) or (d) and under
the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in
effect (in California under California Civil Code Section 1951.4) after Lessee's
breach and abandonment and recover the rent as it becomes due, provided Lessee
has the right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reason able. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
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(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the State of California. Unpaid
installments of rent and other unpaid monetary obligations of Lessee under the
terms of this Lease shall bear interest from the date due at the Interest Rate.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but in
no event later than thirty (30) days after written notice by Lessee to Lessor
and to the holder of any first mortgage or deed of trust encumbering the
Premises whose name and address shall have theretofore been furnished to Lessee
in writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and thereafter
diligently prosecutes the same to completion. Any damages or judgments arising
out of Lessor's default of its obligations under this Lease shall be satisfied
only out of Lessor's interest and estate in the Premises, and Lessor shall have
no personal liability beyond such interest and estate with respect to such
damages or judgments.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Lessor by the terms of any mortgage or trust deed encumbering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to 5% of such overdue amount. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's default with respect to such overdue amount, not prevent Lessor from
exercising any of the other rights and remedies granted hereunder. In the event
that a late charge is payable hereunder, whether or not collected, for three (3)
consecutive installments of rent, then rent shall automatically become due and
payable quarterly in advance, rather than monthly, notwith-
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standing Paragraph 4 or any other provision of this Lease to the contrary.
13.4.1 Notice Before Late Charge.
Notwithstanding the provisions of Paragraph 13.4, the 5% late charge described
in Paragraph 13.4 shall not be imposed with respect to the first late payment
during the term unless the applicable payment due from Lessee is not received by
Lessor or Lessor's designee within ten (10) days following written notice from
Lessor that such payment was not received when due. Following the first such
written notice from Lessor during the term (and regardless of whether such
payment is then received within such 10-day period), a late charge will be
imposed without notice (as set forth in Paragraph 13.4) for any subsequent
payment due from Lessee which is not received within ten (10) days of this due
date.
13.5 Impounds. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) consecutive installments of rent or any
other monetary obligation of Lessee under the terms of this Lease, Lessee shall
pay to Lessor, if Lessor shall so request, in addition to any other payments
required under this Lease, a monthly advance installment, payable at the same
time as the monthly rent, as estimated by Lessor, for real property tax and
insurance expenses on the Premises which are payable by Lessee under the terms
of this Lease. Such fund shall be established to insure payment when due, before
delinquency, of any or all such real property taxes and insurance premiums. If
the amounts paid to Lessor by Lessee under the provisions of this paragraph are
insufficient to discharge the obligations of Lessee to pay such real property
taxes and insurance premiums as the same become due, Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums necessary to pay such obligations.
All moneys paid to Lessor under this paragraph may be intermingled with other
moneys of Lessor and shall not bear interest. In the event of a default in the
obligations of Lessee to perform under this Lease, then any balance remaining
from funds paid to Lessor under the provisions of this paragraph may, at the
option of Lessor, be applied to the payment of any monetary default of Lessee in
lieu of being applied to the payment of real property tax and insurance
premiums.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain, or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than 10% of the floor area of the
building on the Premises, or more than 25% of the land area of the Premises
which is not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing only within ten (10) days
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after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the rent shall be
reduced in the proportion that the floor area of the building taken bears to the
total floor area of the building situated on the Premises. No reduction of rent
shall occur if the only area taken is that which does not have a building
located thereon. Any award for the taking of all or any part of the Premises
under the power of eminent domain or any payment made under threat of the
exercise of such power shall be the property of Lessor, whether such award shall
be made as compensation for diminution in value of the leasehold or for the
taking of the fee, or as severance damages; provided, however, that Lessee shall
be entitled to any award for loss of or damage to Lessee's trade fixtures and
removable personal property. In the event that this Lease is not terminated by
reason of such condemnation, Lessor shall to the extent of net severance damages
received by Lessor in connection with such condemnation, over and above the
legal and other expenses incurred by Lessor in the condemnation matter, repair
any damage to the Premises caused by such condemnation except to the extent that
Lessee has been reimbursed therefor by the condemning authority. Lessee may pay
any amount in excess of such net severance damages required to complete such
repair after notice from Lessor. In the event Lessee does not elect to
contribute the amount of the shortfall in damages necessary for the repair, as
provided in Paragraph 14, Lessor may elect either to (a) fund the shortfall
itself, in which event Lessor shall proceed with the repair and restoration or
(b) terminate this Lease.
15. Broker's Commissions. Lessee and Lessor each represent and warrant to the
other that neither has had any dealings with any person, firm, broker or finder
(other than those persons, if any, whose names are set forth in this Paragraph
15) in connection with the negotiation of this Lease and/or the consummation of
the transaction contemplated hereby, and no other broker or other person, firm
or entity is entitled to any commission or finder's fee in connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses, attorneys' fees or liability for
compensation, commission or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying party. Named brokers:
Lessor's Broker: Cushman & Wakefield of California, Inc.
Lessee's Broker: Los Angeles Real Estate Management, Inc.
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The commission payable to Lessor's Broker with respect to this Lease shall be
pursuant to the terms of the separate commission agreement in effect between
Lessor and Lessor's Broker. Lessor's Broker shall pay a portion of its
commission to Lessee's Broker, if so provided in any agreement between Lessor's
Broker and Lessee's Broker. Nothing in this Lease shall impose any obligation
on Lessor to pay a commission or fee (a) to any party other than Lessor's Broker
or (b) to any party with respect to (i) the exercise by Lessee of any option or
right of first refusal pursuant to this Lease, or (ii) any extension or renewal
of this Lease.
16. Estoppel Certificate.
(a) Lessee shall at any time upon not less than twenty (20)
days' prior written notice from Lessor execute, acknowledge and deliver to
Lessor a statement in writing (i) certifying that this Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to Lessee's
knowledge, any uncured defaults on the part of Lessor hereunder, or specifying
such defaults if any are claimed. Any such statement may be conclusively relied
upon by any prospective purchaser or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such
statement within such time shall be a material breach of this Lease or shall be
conclusive upon Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that there are no
uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance or such failure may be considered by
Lessor as a default by Lessee under this Lease. Anything to the contrary
notwithstanding in this Paragraph 16(b) of the Lease, Lessee's failure to
deliver an estoppel certificate will not be deemed a default or breach by Lessee
of the Lease unless Lessee's failure continues uncured for five days after an
additional written notice to Lessee of such default.
(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser to evaluate the ability of
Lessee to perform its obligations under this Lease. Such statements shall
include the past two years' financial statements of Lessee. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
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(d) Lessor shall at any time upon no less than 20 days' prior
written notice from Lessee referring to this Paragraph of the Lease execute,
acknowledge and deliver to Lessee a statement in writing (a) certifying that the
Lease is unmodified and to Lessor's actual knowledge in full force and effect
(or, if modified, stating the nature of such modification and certifying that to
Lessor's actual knowledge of this Lease, as so modified, it is in full force and
effect) and the date to which rent and other charges are paid in advance, if
any, and (b) acknowledging that it has not given Lessee any written notices of
default, or providing copies of such notices if any have been given.
17. Lessor's Liability. The term "Lessor" as used herein shall mean only the
owner or owners at the time in question of the fee title or a lessee's interest
in a ground lease of the Premises, and in the event of any transfer of such
title or interest, Lessor herein named (and in case of any subsequent transfers
then the grantor) shall be relieved from and after the date of such transfer of
all liability for Lessor's obligations to be performed after the date of such
transfer, but shall remain fully liable for all obligations of Lessor arising
under the Lease prior to the date of such transfer. Lessor agrees that any funds
in the hands of Lessor or the then grantor at the time of such transfer, in
which Lessee has an interest, shall be delivered to the grantee. The obligations
contained in this Lease to be performed by Lessor shall, subject as aforesaid,
be binding on Lessor's successors and assigns, only during their respective
periods of ownership.
18. Severability. The invalidity of any provision of this Lease as determined by
a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof, provided that Lessee shall have no obligation to perform
its monetary obligations under this Lease if Lessor has no obligation to deliver
the Premises to Lessee and perform the obligations of Lessor as set forth in
this Lease.
19. Interest on Past-due Obligations. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the Interest Rate
from the date due. Payment of such interest shall not excuse or cure any default
by Lessee under this Lease, provided, however, that interest shall not be
payable on late charges incurred by Lessee nor on any amounts upon which late
charges are paid by Lessee. Likewise, except as specifically set forth in this
Lease any payments or credits to be made to Lessee hereunder shall bear interest
at the Interest Rate from the date due. As used herein, the term "Interest Rate"
means the lesser of (a) a floating annual interest rate equal to three percent
(3%) over the prime rate (for corporate loans at large United States money
center commercial banks) published in the Wall Street Journal on the first
business day of each month, or (b) the maximum rate permitted by applicable law.
In the
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event that the Wall Street Journal fails to publish such a prime rate, the
"prime rate" shall be the prime rate or reference rate quoted by a national bank
having offices in California selected by Lessor in its sole discretion.
20. Time of Essence. Time is of the essence.
21. Additional Rent. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
agreement or understanding pertaining to any such matter shall be effective.
This Lease may be modified in writing only, signed by the parties in interest
at the time of the modification. Except as otherwise stated in this Lease,
Lessee hereby acknowledges that neither the real estate broker listed in
Paragraph 15 hereof nor any cooperating broker on this transaction nor the
Lessor or any employees or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of said Premises and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use and
adaptability of the Premises and the compliance thereof with all applicable laws
and regulations in effect during the term of this Lease except as otherwise
specifically stated in this Lease.
23. Notices. Any notice given pursuant to this Lease shall be in writing, shall
be personally delivered, delivered by Federal Express or comparable overnight
courier, providing written evidence of delivery, or delivered by U.S. registered
or certified mail, return receipt requested, postage prepaid and sent to Lessor
and Lessee at the following addresses:
LESSOR:
Prudential Real Estate Investors
2029 Century Park East
Suite 2050
Los Angeles, California 90067
Attn: Regional Counsel
With a copy by the same method to:
Prudential Real Estate Investors
c/o Cushman & Wakefield of California, Inc.
555 South Flower Street, Suite 4200
Los Angeles, CA 90071
Attn: Mark Harryman
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LESSEE:
Galoob Toys, Inc.
500 Forbes Boulevard
South San Francisco, CA 94080
Attn: Vice President, Operations
With a copy by the same method to:
Galoob Toys, Inc.
500 Forbes Boulevard
South San Francisco, CA 94080
Attn: William G. Catron, Esq.
General Counsel
or such other address as either party may from time to time designate as its
notice address by notifying the other party thereof. Notice so sent shall be
deemed given (a) when personally delivered, or (b) on the first business day
following deposit with Federal Express or a comparable overnight courier service
providing written evidence of delivery, or (c) five business days following
deposit in the United States mail, if notice is sent by registered or certified
mail, return receipt requested, postage prepaid. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
25. No Recording. Lessee shall not record this Lease.
26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the
Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, except that the monthly rent
shall be 125% of the rent payable in the last month of the Lease Term, but all
options and rights of first refusal, if any, granted under the terms of this
Lease shall be deemed terminated and be of no further effect during said month
to month tenancy.
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27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. [Intentionally Omitted]
29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of Paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State of
California.
30. Subordination.
(a) Subject to the terms of this Paragraph 30, this Lease, at
Lessor's option, shall be subordinate to any ground lease, mortgage, deed of
trust, or any other hypothecation or security now or hereafter placed upon the
real property of which the Premises are a part and to any and all advances made
on the security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. Notwithstanding anything to the contrary
herein, Lessee's right to quiet possession of the Premises shall not be
disturbed if Lessee is not in default and so long as Lessee shall pay the rent
and observe and perform all of the provisions of this Lease, unless this Lease
is otherwise terminated pursuant to its terms. If any mortgagee, trustee or
ground lessor shall elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and shall give written notice thereof to Lessee
prior to the effective date of any transfer of ownership of the Premises through
foreclosure of that mortgage or deed of trust or termination of that ground
lease, this Lease shall be deemed prior to such mortgage, deed of trust or
ground lease, whether this Lease is dated prior or subsequent to the date of
said mortgage, deed of trust or ground lease or the date of recording thereof.
(b) Provided that such documents confirm the non-disturbance
protection of Lessee as set forth in Paragraph 30(a) above, Lessee agrees to
execute any documents required to effectuate an attornment, a subordination or
to make this Lease prior to the lien of any mortgage, deed of trust or ground
lease, as the case may be. Lessee's failure to execute such documents within 20
days after written demand shall constitute a material default by Lessee
hereunder.
(c) Lessor represents and warrants that there are currently no
monetary encumbrances affecting the Premises. Lessor acknowledges and agrees
that as a condition to any subordination of this Lease to any mortgage, deed of
trust or ground lease affecting the Premises (whether now existing or put in
place in the future), Lessee shall receive a written assurance
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in recordable form from the holder of such lien or mortgage (or the lessor under
the ground lease) that upon any foreclosure (or deed in lieu thereof) or
termination of such ground lease, this Lease and Lessee's right to quiet
possession and occupancy of the Premises shall not be disturbed so long as no
Event of Default by Lessee exists under this Lease.
31. Attorney's Fees.
(a) If either party brings an action or proceeding to enforce
the terms hereof or declare rights hereunder, the prevailing party in any such
proceeding, action, or appeal thereon, shall be entitled to his reasonable
attorney's fees and such fees as may be awarded in the same suit or recovered in
a separate suit, whether or not such action or proceeding is pursued to decision
or judgment. The term, "prevailing party" shall include, without limitation, a
party who obtains legal counsel or brings an action against the other by reason
of the other's breach or default, or who defends such action, and substantially
obtains or defeats the relief sought, whether by compromise, settlement,
judgment, or abandonment of the claim or defense by the other party.
(b) The attorney's fee award shall not be computed in
accordance with any court fee schedule, but shall be such as to fully reimburse
all attorney's fees reasonably incurred in good faith.
32. Lessor's Access. Lessor and Lessor's agents shall have the right to enter
the Premises at reasonable times for the purpose of inspecting the same, showing
the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part as Lessor may deem necessary or desirable.
Lessor may at any time place on or about the Premises any ordinary "For Sale"
signs and Lessor may at any time during the last 120 days of the term hereof
place on or about the Premises any ordinary "For Lease" signs, all without
rebate of rent or liability to Lessee. Notwithstanding anything to the contrary
in Paragraph 32, except in the case of emergency or during periods in which an
Event of Default exists under this Lease, Lessor shall give Lessee notice in
advance (not to exceed 2 business days) of Lessor's intent to enter the
Premises.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises without Lessor's
prior written consent; provided, however, that
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Lessee shall have the right, at its sole cost and expense, to install a sign on
the exterior of the Building identifying its name and logo and the name and logo
of Skyway Distribution. The graphics, materials, color, design, lettering, size,
location and specifications of Lessee's signage shall be subject to the prior
written approval of Lessor, which approval shall not be unreasonably withheld or
delayed, and the approval of the City of Ontario. The sign shall be installed
and maintained, at Lessee's sole cost and expense, pursuant to an installation
and maintenance program approved by Lessor. At the expiration or earlier
termination of this Lease, Lessor shall, at Lessee's sole cost and expense,
cause the sign to be removed and the exterior of the Building affected by the
sign to be restored to the condition existing prior to the installation of the
sign. Lessor may disapprove any signage that contains a name which relates to an
entity or individual which is of a character or reputation, or is associated
with a political orientation or faction, which would reasonably offend the
landlord of a comparable building. This signage right is personal to Galoob
Toys, Inc.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. Consents. Except for Paragraphs 33, 34 and 47 hereof, wherever in this Lease
the consent of one party is required to an act of the other party, such consent
shall not be unreasonably withheld.
37. [Intentionally Omitted]
38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing
and performing all of the covenants, conditions and provisions on Lessee's part
to be observed and performed hereunder, Lessee shall have quiet possession of
the Premises for the entire term hereof subject to all of the provisions of
this Lease, and all easements, covenants, conditions and restrictions of record.
The individuals executing this Lease on behalf of Lessor represent and warrant
to Lessee that they are fully authorized and legally capable of executing this
Lease on behalf of Lessor and that such execution is binding upon all parties
holding an ownership interest in the Premises.
39. Options.
39.1 Definition. As used in this paragraph the word "Options" has the
following meaning: (a) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the option or right of first refusal to lease the
Premises or
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the right of first offer to lease the Premises or the right of first refusal to
lease other property of Lessor or the right of first offer to lease other
property of Lessor; (c) the right or option to purchase the Premises, or the
right of first refusal to purchase the Premises, or the right of first offer to
purchase the Premises or the right or option to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor or
the right of first offer to purchase other property of Lessor.
39.2 Options Personal. Each Option granted to Lessee in this Lease is
personal to Lessee and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assigned to any Lessee Affiliate as
defined in Paragraph 12.4 of this Lease. The Options herein granted to Lessee
are not assignable separate and apart from this Lease.
39.3 Option. Lessor hereby grants to Lessee the option to extend the
term of this Lease for a five (5) year period commencing on the date following
the date of expiration of the initial Lease Term (the "Option Period") upon each
and all of the following terms and conditions:
(a) Lessee shall deliver to Lessor (in the manner set forth in
Paragraph 23 of this Lease) at least 180 and not more than 270 days prior to the
expiration of the initial Lease Term a written notice of exercise of the option
to extend this Lease for said additional term, time being of the essence. If
said notification of the exercise of said option is not so given and received,
this option shall automatically expire.
(b) The provisions of Paragraph 39, including the provision
relating to default of Lessee set forth in Para graph 39.5, of this Lease are
conditions of this option;
(c) All of the terms and conditions of this Lease as modified
by this option shall apply; and
(d) The monthly Base Rent for each month of the Option Period
shall be the C.P.I. Adjusted Option Rent (as defined below) of the Premises as
of the commencement of the Option Period, but in no event less than $112,400.00.
39.4 C.P.I. Adjusted Option Rent. With respect to any
Option Period the "C.P.I. Adjusted Option Rent" shall mean a Base
Rent calculated as follows:
(a) As used herein, the term "C.P.I." shall mean the Consumer
Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor
for Urban Wage Earners and Clerical Workers, Los Angeles-Anaheim-Riverside,
California (1982-84=100). With respect to the Option Period the Base Rent of
$112,400.00
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payable as set forth in Paragraph 4 of the Lease, shall be multiplied by a
fraction the numerator of which shall be the C.P.I. of the calendar month during
which the Option Period commences, and the denominator of which shall be the
C.P.I. for the calendar month in which the original Lease term commenced. The
sum so calculated shall constitute the "C.P.I. Adjusted Option Rent" hereunder.
(b) Pending determination of the C.P.I. Adjusted Option Rent,
Lessee shall pay an estimated adjusted Base Rent equal to an estimated C.P.I.
Adjusted Option Rent, as reasonably determined by Lessor by reference to the
then available C.P.I. information. Upon notification of the actual adjustment
after publication of the required C.P.I., any overpayment shall be credited
against the next installment of rent due, and any underpayment shall be
immediately due and payable by Lessee. Lessor's failure to request payment of an
estimated or actual rent adjustment shall not constitute a waiver of the right
to any adjustment provided for in the Lease or this Paragraph 39.4.
(c) In the event the compilation and/or publication of the
C.P.I. shall be transferred to any other governmental department or bureau or
agency or shall be discontinued, then the index most nearly the same as the
C.P.I. (as selected by Lessor) shall be used to make such calculation.
39.5 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i) if an
Event of Default has occurred under this Lease and is continuing as of the date
the Option is exercised, or (ii) in the event that Lessor has given to Lessee
three or more notices of default under Paragraph 13.1(b), where a late charge
has become payable under Paragraph 13.4 for each of such defaults, whether or
not the defaults are cured, during the 12 month period prior to the time that
Lessee intends to exercise the subject Option, or (iii) in the event that Lessor
has given to Lessee three or more notices of default under Paragraph 13.1(c),
whether or not the defaults are cured, during the 12 month period prior to the
time Lessee intends to exercise the subject option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.5.
(c) All rights of Lessee under the provisions of an Option
shall terminate and be of no further force or effect, notwithstanding Lessee's
due and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee
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for a period of 30 days after notice that such obligation is due, or (ii) Lessee
fails to commence to cure a default specified in Paragraph 13.1(c) within 30
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion.
40. [Intentionally Omitted]
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of Lessee, its agents and
invitees from acts of third parties.
42. Easements. Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or desirable,
and to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not interfere with or
otherwise affect the use of the Premises by Lessee or any rights or obligations
of Lessee under this Lease. Lessee shall sign any of the aforementioned
documents upon request of Lessor and failure to do so shall constitute a
material breach of this Lease by Lessee without the need for further notice to
Lessee.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.
44. Authority. Each individual executing this Lease on behalf of Lessor or
Lessee, respectively, represents and warrants that he or she is duly authorized
to execute and deliver this Lease on behalf of said entity and to bind such
entity to the terms hereof.
45. Cashier's Checks.
(a) In the event that any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn on two or more
occasions, then Lessor, at its option may require all future payments to be made
by Lessee under this Lease to be made by cashier's checks.
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(b) Any payment made by Lessee pursuant to a written notice to
pay or be deemed in default under this Lease shall be made by cashier's check.
46. Amendments to Lease.
(a) At such times as a rental adjustment is made to this Lease
by virtue of any provision of this Lease, the parties shall execute a written
amendment to this Lease to reflect said change.
(b) Lessee agrees to make any non-monetary modifications to
this Lease that may be required by an institutional mortgagee of Lessor, so long
as such modifications do not materially affect the rights or obligations of
Lessee under this Lease.
47. Storage Tanks.
(a) Notwithstanding anything to the contrary in Paragraph 7.5
hereof, Lessee shall not install storage tanks of any size or shape in the
Premises, above or below ground, without the consent of the Lessor which can be
withheld in Lessor's sole discretion. If Lessor elects to grant its consent,
Lessor shall have the right to condition its consent upon Lessee agreeing to
give to Lessor such assurances that Lessor, in its sole discretion, deems
necessary to protect itself against potential problems concerning the
installation, use, removal and contamination of the Premises as a result of the
installation and/or use of such tank, including but not limited to the
installation of a concrete encasement for said tank. Lessee shall comply at its
expense with all applicable permit and/or registration requirements and repair
any damage caused by the installation, maintenance or removal of such tank.
Upon termination of the Lease, Lessee shall, at its sole cost and expense,
remove any tank from the Premises, remove and replace any contaminated soil or
materials (and compact or treat the same as then required by law) and repair
any damage or change to the Premises caused by said installation and/or removal.
Nothing contained herein shall be construed to diminish or reduce Lessee's
obligations under Paragraph 48.
(b) Lessor shall have the right to employ experts and/or
consultants, at Lessee's expense, to advise Lessor with respect to the
installation, operation, monitoring, maintenance and removal and restoration of
any such tank.
48. Lessee's Covenants Regarding Hazardous Materials.
48.1 Lessor's Prior Consent. Notwithstanding anything contained in this
Lease to the contrary, Lessee has not caused or permitted, and shall not cause
or permit any "Hazardous Materials" (as defined in Paragraph 48.2, below) to be
brought
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upon, kept, stored, discharged, released or used in, under or about the Premises
by Lessee, its agents, employees, contractors, subcontractors, licensees or
invitees, unless (a) such Hazardous Materials are reasonably necessary to
Lessee's business and will be handled, used, kept, stored and disposed of in a
manner which complies with all "Hazardous Materials Laws" (as defined in
Paragraph 48.2, below); (b) Lessee will comply with such other rules or
requirements as Lessor may from time to time impose, including without
limitation that (i) such materials are in small quantities, properly labeled and
contained, (ii) such materials are handled and disposed of in accordance with
the highest accepted industry standards for safety, storage, use and disposal,
(iii) such materials are for use in the ordinary course of business (i.e., as
with office or cleaning supplies), (c) notice of and a copy of the current
material safety data sheet is provided to Lessor for each such Hazardous
Material, and (d) Lessor shall have granted its prior written consent to the use
of such Hazardous Materials.
48.2 Compliance with Hazardous Materials Laws. As used herein, the term
"Hazardous Materials" means any (a) oil, petroleum, petroleum products,
flammable substances, explosives, radioactive materials, hazardous wastes or
substances, toxic wastes or substances or any other wastes, materials or
pollutants which (i) pose a hazard to the Premises or to persons on or about the
Premises or (ii) cause the Premises to be in violation of any Hazardous
Materials Laws (as hereinafter defined); (b) asbestos in any form, urea
formaldehyde foam insulation, transformers or other equipment which contain
dielectric fluid containing levels of polychlorinated biphenyls, or radon gas;
(c) chemical, material or substance defined as or included in the definition of
"hazardous substances," "hazardous wastes," "hazardous materials," "extremely
hazardous waste," "restricted hazardous waste," or "toxic substances" or words
of similar import under any applicable local, state or federal law or under the
regulations adopted or publications promulgated pursuant thereto, including,
but not limited to, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, 42 U.S.C. ss. 9601, et seq.; the Resources
Conservation Recovery Act, 42 U.S.C. ss. 6901, et seq.; the Hazardous Materials
Transportation Act, as amended, 49 U.S.C. ss. 1801, et seq.; the Federal Water
Pollution Control Act, as amended, 33 U.S.C. ss. 1251, et seq.; Sections 25115,
25117, 25122.7, 25140, 25249.8, 25281, 25316 and 25501 of the California Health
and Safety Code; and Article 9 or Article 11 of Title 22 of the California Code
of Regulations, Division 4, Chapter 20; (d) other chemical, material or
substance, exposure to which is prohibited, limited or regulated by any
governmental authority or may or could pose a hazard to the health and safety of
the occupants of the Premises or the owners and/or occupants of property
adjacent to or surrounding the Premises, or any other Person coming upon the
Premises or adjacent property; and (e) other chemical, materials or substance
which may or could pose a hazard to the environment. As used
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herein the term "Hazardous Materials Laws" means any federal, state or local
laws, ordinances, regulations or policies relating to the environment, health
and safety, and Hazardous Materials (including, without limitation, the use,
handling, transportation, production, disposal, discharge or storage thereof)
or to industrial hygiene or the environmental conditions on, under or about the
Premises, including, without limitation, soil, ground water and indoor and
ambient air conditions. Lessee shall at all times and in all respects comply
with all Hazardous Materials Laws with respect to Hazardous Materials brought
onto or used on the Premises by Lessee or any Lessee Party.
48.3 Hazardous Materials Removal. Upon expiration or earlier
termination of this Lease, Lessee shall, at Lessee's sole cost and expense,
cause all Hazardous Materials brought on the Premises with Lessor's consent to
be removed from the Premises in compliance with all applicable Hazardous
Materials Laws. If Lessee or its employees, agents, or contractors violates the
provisions of the foregoing two paragraphs, or if Lessee's acts, negligence, or
business operations contaminate, or expand the scope of contamination of, the
Premises from such Hazardous Materials, then Lessee shall promptly, at Lessee's
expense, take all investigatory and/or remedial action (collectively, the
"Remediation") that is necessary in order to clean up, remove and dispose of
such Hazardous Materials causing the violation on the Premises or the underlying
groundwater or the properties adjacent to the Premises to the extent such
contamination was caused by Lessee, in compliance with all applicable Hazardous
Materials Laws. Lessee shall further repair any damage to the Premises caused by
the Hazardous Materials contamination caused by Lessee or any Lessee Party.
Lessee shall provide prior written notice to Lessor of such Remediation, and
Lessee shall commence such Remediation no later than thirty (30) days after such
notice to Lessor and diligently and continuously complete such Remediation. Such
written notice shall also include Lessee's method, time and procedure for such
Remediation and Lessor shall have the right to require reasonable changes in
such method, time or procedure of the Remediation. Lessee shall not take any
Remediation in response to the presence of any Hazardous Materials in or about
the Premises or enter into any settlement agreement, consent decree or other
compromise in respect to any claims relating to any Hazardous Materials in any
way connected with the Premises, without first notifying Lessor of Lessee's
intention to do so and affording Lessor ample opportunity to appear, intervene
or otherwise appropriately assert and protect Lessor's interests with respect
thereto.
48.4 Notices. Lessee shall immediately notify Lessor in writing of: (a)
any enforcement, cleanup, removal or other governmental or regulatory action
threatened, instituted, or completed pursuant to any Hazardous Materials Laws
with respect to the Premises; (b) any claim, demand, or complaint made or
threatened by any person against Lessee or the Premises relating
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to damage, contribution, cost recovery compensation, loss or injury resulting
from any Hazardous Materials; and (c) any reports made to any governmental
authority arising out of any Hazardous Materials on or removed from the
Premises. Lessor shall have the right (but not the obligation) to join and
participate, as a party, in any legal proceedings or actions affecting the
Premises initiated in connection with any Hazardous Materials Laws.
48.5 Indemnification of Lessor. Lessee shall indemnify, protect, defend
and forever hold Lessor harmless from any and all damages, losses, expenses,
liabilities, obligations and costs arising out of any failure of Lessee to
observe the foregoing covenants in Paragraphs 47 and 48.
48.6 Preexisting Conditions. Notwithstanding anything to the contrary
in this Lease, Lessee shall not be liable to Lessor under this Lease for any
cost associated with Hazardous Materials, if any, to the extent that the
Hazardous Materials existed on the Premises prior to the date of this Lease and
were not brought on to the Premises by Lessee, its agents, employees,
contractors, subcontractors, licensees or invitees (the "Preexisting
Conditions"). Lessor hereby reserves the right to enter upon the Premises at
reasonable times to perform any work necessary or, in Lessor's judgment,
advisable in connection with any such Preexisting Conditions, and no such entry
or performance of work shall constitute a constructive eviction or otherwise
entitle Lessee to any damages or reduction in rent, or to terminate this Lease.
The foregoing right of entry may be exercised by Lessor, its agents, employees,
and contractors and by any person Lessor may identify as being connected with
the Preexisting Conditions, and such person's agents, employees and contractors.
Without limiting any other provision of this Lease, Lessee shall provide Lessor
with the original of any notices or other documents received by Lessee in
connection with the Preexisting Conditions.
49. Rail Spur. Lessor makes no representation or warranty to Lessee with respect
to the condition, fitness or suitability for Lessee's use of the rail spur
adjacent to the Premises. Lessee shall be solely responsible for all costs and
expenses incurred in connection with the use, maintenance, repair and operation
of the rail spur.
50. Early Entry By Lessee and Lessee's Work.
50.1 Without limiting Paragraph 3.3 of the Lease, Lessee shall be
permitted to enter the Premises prior to the Lease commencement, but not earlier
than December 1, 1996, without the obligation for payment of Base Rent for the
purpose of installing racking, transfer of stock and other specific improvements
needed for Lessee's use; provided that (a) Lessee first provides Lessor with all
insurance required by the terms of this Lease to be
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carried by Lessee, and (b) all construction by Lessee shall be performed in
accordance with the terms of this Lease, including without limitation Paragraph
7.5.
50.2 Without limiting any other provision of this Lease, Lessor shall
not be responsible for damages or loss to any work performed by Lessee or to
Lessee's personal property or the personal property of Lessee's contractors,
employees or agents which occurs during such period of early access, except to
the extent resulting from any act or negligence of Lessor, its agents, employees
or contractors.
51. Lessor's Work. Lessor shall, at Lessor's sole cost and expense prior to the
Lessor Completion Date, Substantially Complete the following improvements
("Lessor's Work"):
(a) Recarpet, and/or replace with tile as necessary the floor
coverings in the office areas and repaint the primary office area.
(b) Clean and paint office and shop restrooms. Replace floors
as necessary.
(c) Construct a security guard station improved with
electrical and communication conduits connected to the building at the entry to
the truck court. Secure the entry to the truck court with an electrical rolling
gate that can be controlled from the security guard station and the building.
(d) Restripe the truck court and number the parking spaces per
a Lessee approved container parking plan. Provide heavy duty truck bumpers along
the westerly fence line in the truck court.
(e) Thoroughly clean and seal the slab floor in the battery
charging area with a Silikal Floor Sealer.
(f) Install dock light/fan units and related power at each
truck-high loading position.
(g) Replace the existing westerly chain-link fence with a new
8" high chain-link fence. The top of the new fence line will be improved with
three strands of barbed wire and the chain-link mesh with slats for screening
yard area operations.
(h) Ensure that building fire alarm is in good operating
condition and actively monitored. Lessee shall be responsible for monitoring the
fire alarm system beginning the first day Lessee takes possession of the
Premises.
(i) Ensure that pit levelers and edge of dock equipment are in
good operating condition.
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(j) Erect an 8-foot high chain-link demising fence separating
the northern portion of the warehouse from the southerly portion. The chain-link
demising fence should be improved with three strands of barbed wire.
Lessor will consider modifications to the existing curtains per fire department
high pile storage requirements (if necessary).
52. Delay in Completion of Lessor's Work. As used in this Lease, the term
"Lessor's Completion Date" means the date that is the later of (a) 60 days after
the date upon which Lessor and Lessee agree upon the final specifications for
Lessor's Work, or (b) 60 days after Lessor receives a building permit for
Lessor's Work, if a building permit is required for Lessor's Work. As used in
this Lease, "Substantial Completion" means that the work in question is
completed except for (a) minor so-called "punch-list" items, (b) items that do
not materially affect Lessee's ability to use the Premises, or (c) the proposed
security guard station. Lessor's Completion Date shall be postponed by one day
for each day Substantial Completion is delayed by reason of Lessee Delays (as
defined below) or Force Majeure Delays (as defined below). As used herein, the
term "Force Majeure Delay" shall mean delays in the construction and completion
of Lessor's Work caused by strikes, lockouts, labor disputes, acts of God, fire,
floods, earthquake, epidemics, freight embargoes, unavailability of materials
and supplies, development moratoria imposed by any governmental authority, or
other causes beyond the reasonable control of Lessor or its contractors,
subcontractors or suppliers. As used herein, the term "Lessee Delay" shall mean
any delay in Substantial Completion of Lessor's Work which is caused by any act
or failure to act by Lessee, its agents, or contractors. No Lessee Delay shall
be deemed to occur unless and until Lessor provides written notice to Lessee, in
compliance with the notice provisions of the Lease, claiming that such delay(s)
occurred and specifying in detail the action or inaction on the part of Lessee
which is the basis for such claim. If such action or inaction is not cured by
Lessee by the date which is one (1) business day after Lessee's receipt of such
notice (the "Cure Date"), then unless Lessee proves that such action or inaction
did not actually cause a delay in Substantial Completion of Lessor's Work, the
Lessee Delay as set forth in such notice shall be deemed to have occurred
commencing as of the date after the Cure Day and continuing for the number of
days the inaction or action claimed by Lessor in such notice remains uncured and
actually and directly causes a delay in Substantial Completion of the Lessor
Work beyond such date. If Lessor's Work is not Substantially Complete by the
Lessor Completion Date, the Rent Commencement Date under this Lease shall be
postponed by one day
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for each day of delay in Substantial Completion of Lessor's Work until
Substantial Completion occurs.
"LESSOR":
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA, a New Jersey corporation
By: Cushman & Wakefield of California, Inc.
Its Managing Agent
By: /s/ Mark F. Hardyman
------------------------------------
Mark F. Hardyman, Portfolio Mgr.
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[Printed Name and Title]
By: /s/ William Durecae
------------------------------------
William Durecae, Director
------------------------------------
[Printed Name and Title]
"LESSEE":
GALOOB TOYS, INC., a Delaware corporation
By: /s/ Lou Novak
------------------------------------
Lou Novak, C.O.O.
------------------------------------
[Printed Name and Title]
By:
------------------------------------
------------------------------------
[Printed Name and Title]
-50-
<PAGE> 56
EXHIBIT A
Premises Description
The westerly 595 feet of Lot 15 of Tract No. 13645 in the City of Ontario,
County of San Bernardino, State of California, as per map filed in Book 215,
Pages 27 through 30 of Maps, records of said county.
EXHIBIT A
Page 1 of 1
<PAGE> 57
EXHIBIT B
Schedule of Reports
1. Fire Sprinkler System Report dated October 30, 1995,
including 5-Year Certification dated October 18, 1995.
2. Report of Inspection of Fire Sprinkler System Pump
prepared September 11, 1996 by Grinnel Fire Protection
Company.
3. Roofing Report prepared by Stout Roofing, Inc.
4. 1996 statement from South Coast Air Quality Management
District regarding operation of diesel fuel fire pump.
EXHIBIT B
Page 1 of 1
<PAGE> 1
EXHIBIT 11
GALOOB TOYS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Years ended December 31
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Primary Earnings:
- -----------------
Net earnings (loss) applicable to
common shares ($000) $ (5,849) $ 6,272 $ 15,297
=========== =========== ===========
Average shares of common stock
outstanding during the period 14,289,364 10,071,304 9,852,673
Add: Incremental shares from assumed
exercise of stock options and warrants -- 380,146 258,439
---------- ---------- ----------
14,289,364 10,451,450 10,111,112
========== ========== ==========
Net earnings (loss) per common
share - primary $(.41) $ 0.60 $ 1.51
Fully Diluted Earnings:
- -----------------------
Net earnings (loss) applicable to
common shares ($000) $(5,849) $ 6,272 $ 15,297
Add: Preferred stock dividends:
Paid ($000) 6 -- --
In arrears ($000) 15 3,127 3,127
Add: Interest on Debentures ($000) 205 1,030 1,072
---------- ---------- ----------
$(5,623) $ 10,429 $ 19,496
========== ========== ==========
Average shares of common stock
outstanding during the period 14,289,364 10,071,304 9,852,673
Add: Incremental shares from assumed
exercise of stock options and warrants 1,113,296 444,409 261,458
Add: Shares issuable upon assumed
conversion of Preferred Stock 534,309 2,180,148 2,180,148
Add: Shares issuable upon assumed
conversion of 8% Convertible
Subordinated Debentures, weighted 310,660 1,511,879 1,511,879
---------- ---------- ----------
16,247,629 14,207,740 13,806,158
========== ========== ==========
Net earnings (loss) per common
share - Fully diluted $ (A) $ (A) $ 1.41
========== ========== ==========
</TABLE>
(A) Anti dilutive, therefore fully diluted earnings per share is same as
primary earnings per share, $(0.41) and $(0.60) for 1996 and 1995,
respectively.
<PAGE> 1
EXHIBIT 21
GALOOB TOYS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Galco International Toys, N.V., an Aruba corporation
Galoob Direct, Inc., a California corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No.33-33640)
and Registration Statements on Form S-8 (No. 33-9393 and No. 33-56004) of
Galoob Toys, Inc. and subsidiaries of our report dated January 31, 1997,
appearing on page F-1 of this Form 10-K.
Price Waterhouse LLP
San Francisco, California
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 27,920
<SECURITIES> 0
<RECEIVABLES> 112,219
<ALLOWANCES> 9,897
<INVENTORY> 19,974
<CURRENT-ASSETS> 180,417
<PP&E> 16,589
<DEPRECIATION> 6,117
<TOTAL-ASSETS> 196,905
<CURRENT-LIABILITIES> 46,023
<BONDS> 0
0
0
<COMMON> 179
<OTHER-SE> 149,612
<TOTAL-LIABILITY-AND-EQUITY> 196,905
<SALES> 284,905
<TOTAL-REVENUES> 284,905
<CGS> 144,282
<TOTAL-COSTS> 144,282
<OTHER-EXPENSES> 116,959
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,183
<INCOME-PRETAX> 20,936
<INCOME-TAX> 2,485
<INCOME-CONTINUING> 20,936
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,451
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
