<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from to
------ ------
Commission file number 1-9599
GALOOB TOYS, INC
(Exact name of registrant as specified in its charter)
Delaware 94-1716574
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
500 Forbes Boulevard, South San Francisco, California 94080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 952-1678
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest
practicable date.
Common stock, par value $.01, 18,019,864 as of March 31, 1997.
<PAGE> 2
GALOOB TOYS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 Page
- Condensed Consolidated Balance Sheets 1
- Condensed Consolidated Statements of Operations 2
- Condensed Consolidated Statements of Cash Flows 3
- Notes to Condensed Consolidated Financial Statements 4-5
Item 2
- Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-9
PART II - OTHER INFORMATION
Item 1
- Legal Proceedings 10
Item 6
- Exhibits and Reports on Form 8-K 10
SIGNATURE 11
<PAGE> 3
GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Audited)
March 31 March 31 December 31
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 32,271 $ 2,226 $ 27,920
Accounts receivable, net 71,141 47,698 102,322
Inventories 17,729 17,925 19,974
Tooling and related costs 16,439 10,041 15,436
Prepaid expenses and other assets 20,192 12,630 12,361
Deferred tax asset 2,404 -- 2,404
--------- --------- ---------
Total Current Assets 160,176 90,520 180,417
Land, building and equipment, net 10,550 9,733 10,472
Indebtedness from related party 950 -- 950
Other assets 4,094 6,052 5,066
--------- --------- ---------
Total Assets $ 175,770 $ 106,305 $ 196,905
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ -- $ 18,773 $ --
Accounts payable 11,628 13,252 19,655
Accrued expenses 14,571 7,058 24,680
Income taxes payable 516 400 1,671
Current portion of long-term debt 10 4,371 17
--------- --------- ---------
Total Current Liabilities 26,725 43,854 46,023
Long-term debt 18 -- 20
Deferred tax liability 1,071 -- 1,071
--------- --------- ---------
Total Liabilities 27,814 43,854 47,114
--------- --------- ---------
SHAREHOLDERS' EQUITY
Preferred stock
Authorized 1,000,000 shares
Issued and outstanding 0 shares, 3,602 shares
and 0 shares of $17 Convertible Exchangeable
Preferred Stock at $200 liquidation value per share -- 720 --
Common stock, par value $.01 per share
Authorized 50,000,000 shares
Issued and outstanding 18,019,864 shares,
14,981,960 shares and 17,919,864 shares 180 150 179
Additional paid-in capital 170,865 104,349 170,291
Retained earnings (deficit) (22,558) (42,321) (20,232)
Cumulative translation adjustment (531) (447) (447)
--------- --------- ---------
Total Shareholders' Equity 147,956 62,451 149,791
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 175,770 $ 106,305 $ 196,905
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
1
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GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------
1997 1996
-------- --------
<S> <C> <C>
Net revenues $ 40,598 $ 37,522
Costs of products sold 22,854 21,591
-------- --------
Gross margin 17,744 15,931
Operating expenses:
Advertising and promotion 7,386 5,804
Other selling and administrative 8,007 7,123
Royalties, research and development 6,564 6,310
-------- --------
Total operating expenses 21,957 19,237
-------- --------
Earnings (loss) from operations (4,213) (3,306)
Interest expense (69) (829)
Other income (expense), net 469 20
-------- --------
Earnings (loss) before income taxes (3,813) (4,115)
Income tax benefit (1,487) --
-------- --------
Net earnings (loss) (2,326) (4,115)
Preferred stock dividends in arrears -- 15
Charge related to the exchange of
preferred stock for common -- 24,279
-------- --------
Net earnings (loss) applicable
to common shares $ (2,326) $(28,409)
======== ========
Average common shares outstanding 17,964 10,491
Net earnings (loss) per common share $ (0.13) $ (2.71)
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
2
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GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except shares)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (2,326) $ (4,115)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation 238 162
Changes in assets and liabilities:
Accounts receivable 31,181 20,704
Inventories 2,245 (434)
Tooling and related costs (1,003) (1,730)
Prepaid expenses and other assets (6,859) (4,577)
Accounts payable (8,027) (3,889)
Accrued expenses (10,109) (7,162)
Income taxes payable (1,155) (331)
-------- --------
Net cash (used in) provided by operating
activities 4,185 (1,372)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and
equipment, net (316) (982)
-------- --------
Net cash (used in) provided by investing
activities (316) (982)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings under notes payable -- 3,702
Repayments under long-term debt agreements (9) (51)
Proceeds from issuance of common stock 575 124
Costs associated with the conversion
of debentures and the preferred shares exchange -- (1,225)
Other, net (84) --
-------- --------
Net cash (used in) provided by financing activities 482 2,550
-------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,351 196
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 27,920 2,030
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,271 $ 2,226
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
During the three months ended March 31, 1996, $14 million 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 $0.5 million, net, were charged against additional paid-in
capital. See Note F.
During the three months ended March 31, 1996, 1,803,481 depositary shares of the
Company's preferred stock were exchanged for 3,336,433 shares of its common
stock. See Note G.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
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GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
NOTE A - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets as of March 31, 1997 and 1996 and the
condensed consolidated statements of operations for the three month periods
ended March 31, 1997 and 1996 and the condensed consolidated statements of cash
flows for the three month periods ended March 31, 1997 and 1996 have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
March 31, 1997 and 1996 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1996. Certain amounts in the financial statements of prior years have been
reclassified to conform with the current year's presentation.
The results of operations for the three month periods ended March 31, 1997 and
1996 are not necessarily indicative of the operating results for the full year.
NOTE B - LEGAL
The current status of litigation is described in Part II, Item 1, herein.
NOTE C - LOAN AGREEMENT
On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "Loan Agreement") with Congress Financial Corporation
(Central) (the "Lender"). The Loan Agreement originally extended to March 31,
1997 and provided an original line of credit of $40 million which has been
increased to $50 million, with a provision to increase the line to $60 million
at the option of the Company. Borrowing availability is determined by a formula
based on both accounts receivable and inventories. The interest rate is
generally prime rate plus 1%. In consideration for entering into the Loan
Agreement, the Company paid a $100,000 fee; additional fees of $100,000 were
paid as 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. 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. The BT Facility will be finalized when the Company's credit
requirements are defined. These requirements will be determined when Lucasfilm
makes its decision regarding the licensing arrangement(s) for the new Star Wars
trilogy. The Congress Loan Agreement has been extended while the new agreement
is being finalized. No fee was paid for this extension, however, future
borrowing, if any, will carry an interest rate of prime rate plus 2%.
NOTE D - INVENTORIES
<TABLE>
<CAPTION>
(in thousands) March 31 December 31
---------------------- -----------
1997 1996 1996
------- ------- -------
<S> <C> <C> <C>
Finished goods $17,293 $17,318 $19,667
Raw materials and parts 436 607 307
------- ------- -------
$17,729 $17,925 $19,974
======= ======= =======
</TABLE>
4
<PAGE> 7
GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
NOTE E - RESEARCH AND DEVELOPMENT
Research and development expenses amounted to $2.8 million and $2.4 million for
the three months ended March 31, 1997 and 1996, respectively.
NOTE F - LONG-TERM DEBT
In February 1996, the Company issued a call for the redemption of its 8%
Convertible Subordinated Debentures originally due November 30, 2000 (the
"Debentures"). This call resulted in the conversion on March 15, 1996, of all
$14,000,000 Debentures at $9.26 per share and the issuance of 1,511,872 new
shares of common stock. Unamortized debt issuance costs of $833,000 were charged
against additional paid-in capital on conversion of the Debentures.
NOTE G - SHAREHOLDERS' EQUITY
In February 1996, the Company offered to exchange 1.85 shares of its common
stock for each Depositary Exchangeable Preferred Share (the "Depositary Shares")
outstanding. Each Depositary Share represents 1/10th of a share of $17.00
Convertible Exchangeable Preferred Stock. This inducement offer was accepted by
the owners of 98% of the Depositary Shares resulting in the issuance of
3,336,433 shares of common stock on March 29, 1996. Generally accepted
accounting principles require a non-cash charge to reduce Net Earnings
Applicable to Common Shares in the calculation of Earnings Per Share for the
fair value of the securities issued in excess of the existing conversion rate of
approximately 1.185 common shares per Depositary Share. This non-cash charge
amounted to $24,279,000 and had the effect of increasing the net loss per common
share by $2.32 from $.39 to $2.71 in the first quarter of 1996.
The balance of the Depositary Shares were converted at the specified 1.185
exchange rate or redeemed by the Company in June 1996.
NOTE H - RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" which
establishes standards for computing and presenting earnings per share. This
statement simplifies the standards for computing earnings per share ("EPS")
previously found in APB Opinion No. 15 "Earnings per Share". The new standard
which is effective for years ending after December 15, 1997, replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. For the three months ended March 31, 1997, SFAS 128 would have had no
impact on the reported EPS as primary and basic are equal since the potentially
dilutive securities were anti-dilutive.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table sets forth for the periods indicated the percentage
relationships between revenues and certain expense and earnings items:
<TABLE>
<CAPTION>
Percentage of Net Revenues
--------------------------
Three Months
Ended
March 31
--------------------------
1997 1996
----- -----
<S> <C> <C>
Net revenues 100.0% 100.0%
Costs of products sold 56.3 57.6
----- -----
Gross margin 43.7 42.4
Advertising and promotion 18.2 15.5
Other selling and administrative 19.7 19.0
Royalties, research and development 16.2 16.8
----- -----
Earnings (loss) from operations (10.4) (8.9)
Interest expense (0.2) (2.2)
Other income (expense), net 1.2 0.1
Provision for income taxes 3.7 --
----- -----
Net earnings (loss) (5.7)% (11.0)%
===== =====
</TABLE>
Net earnings (loss) per common share in the first quarter of 1996 were affected
by an unusual, non-recurring item, the charge related to the exchange of
preferred stock for common stock of $24.3 million. A comparison of the net
earnings (loss) per common share and the net earnings (loss) per common share
adjusted to exclude the unusual item is set forth below.
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------
1997 1996
-------- --------
<S> <C> <C>
Net earnings (loss) per common share on a primary basis,
as reported $ (0.13) $ (2.71)
Net earnings (loss) per common share on a primary basis,
adjusted to exclude the unusual item $ (0.13) $ (0.39)
</TABLE>
1997 Compared to 1996
Net revenues increased 8% to $40.6 million in the first quarter of 1997 as
compared to $37.5 million in the first quarter of 1996. The growth in net sales
in the first quarter of 1997 was attributable to domestic sales which increased
18%, rising to $31.3 million. International sales decreased 15% to $9.3 million
in the first quarter of 1997 due to generally weak retail conditions in Europe.
The Company's worldwide sales of boys' toys increased 37% in the first quarter
of 1997 as compared to the first quarter of 1996. The growth in net sales of
boys' toys was attributable to Micro Machines growth. Worldwide sales of Micro
Machines, led by Star Wars Action Fleet, an extensive line of Star Wars vessels,
playsets, and miniature action figures, increased by 67% in the first quarter of
1997 as compared to the first quarter of 1996. United States retail sales
success of Micro Machines continued, reaching its seventeenth consecutive
quarter of growth. The increase in the Company's Micro Machines sales was
partially offset by a decrease in sales of the Dragon Flyz line.
The Company's worldwide sales of girls' toys decreased 35% in the first quarter
of 1997 as compared to the first quarter of 1996. Although the sales of the
Pound Puppies line increased, this was more than offset by a decrease in the
sales of the Sky Dancers line.
Gross margins increased $1.8 million to $17.7 million in the first quarter of
1997 from $15.9 million in the first quarter of 1996. The higher sales volume
increased gross margin by $1.3 million and an increase in the gross margin rate
accounted for $0.5 million. The gross margin rate increased to 43.7%
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in the first quarter of 1997 as compared to 42.4% in the first quarter of 1996.
The increase in the gross margin rate was primarily attributable to a change in
product mix partially offset by higher tooling, packaging development and
inventory valuation allowances.
Advertising and promotion expenses were $7.4 million, or 18.2% of net revenues
in the first quarter of 1997, as compared to $5.8 million, or 15.5% of net
revenues in the first quarter of 1996. The increase included higher television
advertising, trade show and product promotion expenses.
Other selling and administrative expenses were $8.0 million in the first quarter
of 1997 as compared to $7.1 million in the first quarter of 1996. The increase
in selling and administrative expenses principally resulted from higher freight
expenses due to the growth in sales, higher legal expenses and the relocation
expenses associated with the Company's move to a new warehouse facility.
Royalties, research and development expenses were $6.6 million in the first
quarter of 1997 as compared to $6.3 million in the first quarter of 1996. The
increase was primarily the result of an increase in research and development
expenses due to the expansion of the Company's product lines. Royalty expenses
were essentially unchanged from the prior year. Royalty expenses in 1996
included a charge related to the write-off of an advance on a discontinued
product line; this was replaced by higher royalty expenses related to increased
sales in 1997.
Interest expense was $0.1 million in the first quarter of 1997 as compared to
$0.8 million in the first quarter of 1996. The decrease in interest expense was
due to the paydown of the Company's borrowings under its loan agreement with
Congress Financial Corporation in the fourth quarter of 1996 and the conversion
of the $14 million convertible debentures to common stock in the first quarter
of 1996. Other income was $0.5 million in the first quarter of 1997 as compared
to $20,000 in the first quarter of 1996. The increase in other income was
primarily attributable to interest income earned on cash generated from the
Company's common stock offering in November 1996.
The income tax benefit in the first quarter of 1997 reflects the quarterly
application of the estimated annual rate based on projected full year earnings.
No tax recovery was reported in the first quarter of 1996 due to the cumulative
net operating loss brought forward into the year.
All of the Company's products are manufactured to its specifications by
nonaffiliated parties located in China and, to a lesser extent, other foreign
locations. Therefore, the Company could be adversely affected by political or
economic unrest or disruptions affecting business in such countries. The Company
does not carry insurance for political or economic unrest or disruptions for
several reasons, including, but not limited to, costs of such insurance and the
limited insurance coverage available. The political unrest in 1989 in China had
an insignificant impact on the manufacturing and shipping of the Company's
products. There can be no assurance that in the future the Company will not be
adversely affected by political or economic disruptions in China or other
foreign locations.
Further, 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 could be large 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 trade disputes 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
7
<PAGE> 10
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.
In 1994, certain quotas on toy products made in China were introduced in the
European Economic Community. The quotas did not have a material impact on the
Company's business in 1995 and, although no assurance can be given, are not
expected to have a material impact on the Company's business in the foreseeable
future.
In addition, the Company's subsidiary, Galco International Toys, N.V. ("Galco")
is located in Hong Kong. On July 1, 1997, ownership of Hong Kong, currently a
dependency of the United Kingdom, will revert back to China. At the present
time, the Company is unable to predict the effect, if any, that such change will
have on the Company's or Galco's business, financial condition or results of
operations. In addition, changes in the relationship between the United States
dollar and the Hong Kong dollar may have an impact on the cost of goods
purchased from manufacturers.
Disclosure Regarding Forward-Looking Statements
All statements other than statements of historical fact included in this Form
10-Q 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; the cost and
availability of raw materials; failure to renew or obtain Star Wars licenses;
and changes in trade conditions regarding China. 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.
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
fluctuate significantly during the year. The Company's seasonal financing
requirements are usually highest during the fourth quarter of each calendar
year.
On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "Loan Agreement") with Congress Financial Corporation
(Central) (the "Lender"). The Loan Agreement originally extended to March 31,
1997 and provided an original line of credit of $40 million secured by
substantially all the assets of the Company, with a provision to increase the
line to $60 million at the option of the Company. Borrowing availability is
determined by a formula based on
8
<PAGE> 11
qualified assets. Borrowings under the Loan 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%. 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. The BT Facility will be finalized when the Company's credit
requirements are defined. These requirements will be determined when Lucasfilm
makes its decision regarding the licensing arrangement(s) for the new Star Wars
trilogy. The Congress Loan Agreement has been extended while the new agreement
is being finalized.
During the first quarter of 1997, the Company generated $4.2 million of cash in
its operating activities. The net cash provided by operating activities resulted
primarily from decreases in accounts receivable and inventories, primarily
offset by the net loss, increase in prepaid expenses and other assets, and
decreases in accounts payable and accrued expenses.
Working capital was $133.5 million at March 31, 1997 compared to $134.4 million
at December 31, 1996 and $46.7 million at March 31, 1996. The ratio of current
assets to current liabilities was 6.0 to 1.0 at March 31, 1997 compared to 3.9
to 1.0 at December 31, 1996 and 2.1 to 1.0 at March 31, 1996.
The Company had no material commitments for capital expenditures at March 31,
1997.
The Company believes that its cash flow from operations, cash on hand and
borrowings under the new BT Facility 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 $200 million BT Facility, which has not been finalized, 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.
9
<PAGE> 12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
Licensing Litigation
In June 1995, the Company filed a declaratory judgment 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 filed
a number of counterclaims, including breach of contract, interference with
contractual relationships, misappropriation of copyright, unfair competition and
trade libel. The Company has settled all of the open matters in this litigation,
and the various claims and counterclaims have been dismissed with prejudice. The
settlement will not result in additional liabilities to the Company, and the
Company's rights under the license agreements have been 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
10
<PAGE> 13
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GALOOB TOYS, INC.
(Registrant)
Date: May 14, 1997 By: /s/ Roger J. Kowalsky
------------------------------------
Roger J. Kowalsky
Executive Vice President, Finance
and Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Galoob Toys, Inc. for the quarter ended March 31, 1997,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 32,271
<SECURITIES> 0
<RECEIVABLES> 77,138
<ALLOWANCES> 5,997
<INVENTORY> 17,729
<CURRENT-ASSETS> 160,176
<PP&E> 16,891
<DEPRECIATION> 6,341
<TOTAL-ASSETS> 175,770
<CURRENT-LIABILITIES> 26,725
<BONDS> 0
0
0
<COMMON> 180
<OTHER-SE> 147,776
<TOTAL-LIABILITY-AND-EQUITY> 175,770
<SALES> 40,598
<TOTAL-REVENUES> 40,598
<CGS> 22,854
<TOTAL-COSTS> 22,854
<OTHER-EXPENSES> 21,957
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> (3,813)
<INCOME-TAX> (1,487)
<INCOME-CONTINUING> (2,326)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,326)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
