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, 1998
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 (650) 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, 18,109,864 as of March 31, 1998.
<PAGE>
GALOOB TOYS, INC. AND SUBSIDIARIES
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1 Page
- Consolidated Balance Sheets
- Consolidated Statements of Operations
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial Statements
Item 2
- Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART 2 - OTHER INFORMATION
Item 1
- Legal Proceedings
Item 6
- Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
March 31, March 31, Dec. 31,
1998 1997 1997
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $26,549 $32,271 $3,359
Accounts receivable, net 30,151 71,141 73,810
Inventories 21,980 17,729 24,707
Tooling and related costs 12,774 16,439 12,434
Prepaid expenses and other assets 15,451 20,192 9,900
Deferred income taxes -- 2,404 --
----------- ----------- -----------
Total Current Assets 106,905 160,176 124,210
Land, building and equipment, net 10,356 10,550 10,451
Indebtedness from related party 950 950 950
Other assets 9,653 4,094 10,276
License rights 43,046 -- 43,250
Deferred income taxes 20,031 -- 18,646
----------- ----------- -----------
Total Assets $190,941 $175,770 $207,783
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $9,982 $11,628 $19,156
Accrued expenses 15,866 14,571 21,520
Income taxes payable 815 516 734
Other current liabilities 66 10 --
----------- ----------- -----------
Total Current Liabilities 26,729 26,725 41,410
Other liabilities 4,404 18 4,343
Deferred income taxes -- 1,071 --
----------- ----------- -----------
Total Liabilities 31,133 27,814 45,753
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock
Authorized 1,000,000 shares -- -- --
Common stock, par value $.01 per share
Authorized 50,000,000 shares
Issued and outstanding 18,109,864 shares,
18,019,864 shares and 18,108,864 shares 181 180 181
Warrants 40,369 -- 40,350
Additional paid-in capital 171,752 170,865 171,745
Retained earnings (deficit) (51,930) (22,558) (49,682)
Cumulative translation adjustment (564) (531) (564)
----------- ----------- -----------
Total Shareholders' Equity 159,808 147,956 162,030
----------- ----------- -----------
Total Liabilities and Shareholders' Equity $190,941 $175,770 $207,783
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
<PAGE>
GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Net revenues $30,262 $40,598
Costs of products sold 16,678 22,854
--------- ---------
Gross margin 13,584 17,744
Operating expenses:
Advertising and promotion 4,446 7,386
Other selling and administrative 7,119 8,007
Royalties, research and development 5,777 6,564
--------- ---------
Total operating expenses 17,342 21,957
--------- ---------
Earnings (loss) from operations (3,758) (4,213)
Interest expense (191) (69)
Other income (expense), net 316 469
--------- ---------
Earnings (loss) before income taxes (3,633) (3,813)
Income tax benefit (1,385) (1,487)
--------- ---------
Net earnings (loss) ($2,248) ($2,326)
========= =========
Average common shares outstanding 18,110 17,964
Net earnings (loss) per common share ($0.12) ($0.13)
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
<PAGE>
GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except shares)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) ($2,248) ($2,326)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization 440 238
Changes in assets and liabilities:
Accounts receivable 43,659 31,181
Inventories 2,727 2,245
Tooling and related costs (340) (1,003)
Prepaid expenses and other current assets (5,551) (7,831)
Other assets 666 895
Deferred taxes (1,385) --
Accounts payable (9,174) (8,027)
Accrued expenses and other liabilities (5,527) (10,109)
Income taxes payable 81 (1,155)
--------- ---------
Net cash provided by operating activities 23,348 4,108
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and
equipment, net (165) (239)
--------- ---------
Net cash used in investing activities (165) (239)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments under long-term debt agreements -- (9)
Proceeds from issuance of common stock 7 575
Other, net -- (84)
--------- ---------
Net cash provided by financing activities 7 482
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 23,190 4,351
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,359 27,920
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $26,549 $32,271
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
<PAGE>
GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
NOTE A - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheets as of March 31, 1998 and 1997
and the consolidated statements of operations for the three
month periods ended March 31, 1998 and 1997 and the consolidated
statements of cash flows for the three month periods ended March 31, 1998
and 1997 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, 1998 and 1997 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 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,
1997. 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 months ended March 31, 1998 and 1997
are not necessarily indicative of the operating results for the full year.
NOTE B - LOAN AGREEMENT
On April 1, 1993, the Company entered into a Loan and Security Agreement with
Congress Financial Corporation. On March 31, 1995, this original agreement
was amended and restated in full including increasing the credit limit to
$40 million, with a provision to increase the limit to $60 million at the
option of the Company. On December 19, 1997, the loan agreement was amended,
increasing the credit limit to $75 million and extending the term of the loan
agreement until December 2000 . Borrowing availability is determined by a
formula based on both accounts receivable and inventories. The current interest
rate is equal to prime with a LIBOR option. The Company also agreed to pay an
unused line fee of 0.25% and certain management fees. In consideration of this
amendment, the Company paid loan fees of $750,000. The loan fee is included
in other assets and is being amortized straight-line over the term of the loan.
<PAGE>
NOTE C - INVENTORIES
(in thousands)
<TABLE>
<CAPTION>
March 31 December 31
1998 1997 1997
---------- ---------- -----------
<S> <C> <C> <C>
Finished goods $21,485 $17,293 $24,291
Raw materials and parts 495 436 416
---------- ---------- -----------
$21,980 $17,729 $24,707
========== ========== ===========
</TABLE>
NOTE D - RESEARCH AND DEVELOPMENT
Research and development expenses amounted to $1.2 million and $2.8 million for
the three months ended March 31, 1998 and 1997, respectively.
<PAGE>
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>
Three Months Ended
March 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Net revenues 100.0% 100.0%
Costs of products sold 55.1% 56.3%
--------- ---------
Gross margin 44.9% 43.7%
Operating expenses:
Advertising and promotion 14.7% 18.2%
Other selling and administrative 23.5% 19.7%
Royalties, research and development 19.1% 16.2%
--------- ---------
Total operating expenses 57.3% 54.1%
--------- ---------
Earnings (loss) from operations -12.4% -10.4%
Interest expense -0.6% -0.2%
Other income (expense), net 1.0% 1.2%
--------- ---------
Earnings (loss) before income taxes -12.0% -9.4%
Income tax benefit 4.6% 3.7%
--------- ---------
Net earnings (loss) -7.4% -5.7%
========= =========
</TABLE>
Net revenues decreased 25% to $30.3 million in the first quarter of 1998
as compared to $40.6 million in the first quarter of 1997. Domestic
sales decreased 35% to $20.5 million while international sales increased
5% to $9.8 million.
The Company's worldwide sales of boys' toys decreased 64% in the first
quarter of 1998 as compared to the first quarter of 1997. Sales for the first
quarter of 1997 were driven by the demand for Star Wars (TM) toys created
by the theatrical release of the Star Wars Trilogy Special Edition in that
quarter. The absence of a similar film event in the first quarter of 1998
led to comparatively lower worldwide sales of boys' toys.
The Company's worldwide sales of girls' toys increased 108% in the first
quarter of 1998 as compared to the first quarter of 1997. This increase
was attributable to sales of the Company's Spice Girls (TM) and
Anastasia (TM) product lines.
Gross margin decreased $4.1 million to $13.6 million in the first
quarter of 1998 from $17.7 million in the first quarter of 1997. The
lower sales volume decreased gross margin by $4.5 million and an
increase in the gross margin rate accounted for $0.4 million. The gross
margin rate increased to 44.9% in the first quarter of 1998 as compared
to 43.7% in the first quarter of 1997. The increase in the gross margin
rate was primarily attributable to a reduction of sales of discontinued
products in the current year, which normally sell at little or no margin
partially offset by higher tooling and packaging development costs and
an increase in international sales as a percentage of worldwide sales.
The Company's gross margin on international sales is significantly lower
than domestic sales because the Company's prices on international sales
are lower than the prices for identical items sold domestically. This is
because the Company's international customers are distributors who are
responsible for selling to retailers. As such, the distributors incur the
costs of importing, selling to retailers, and promoting the products to the
consumer. In contrast, these selling and promotion activities are undertaken
by the Company domestically.
Advertising and promotion expenses were $4.4 million, or 14.7% of net
revenues in the first quarter of 1998, as compared to $7.4 million, or
18.2% of net revenues in the first quarter of 1997. The decrease in
advertising and promotion expenses was primarily attributable to a
reduction in television advertising, trade show and product promotion
expenses.
Other selling and administrative expenses were $7.1 million in the
first quarter of 1998 as compared to $8.0 million in the first quarter
of 1997. This decrease was primarily related to lower personnel costs
as well as lower freight expenses due to the reduction in domestic sales.
Royalties, research and development expenses were $5.8 million, or 19.1%
of net revenues in the first quarter of 1998 as compared to $6.6
million, or 16.2% of net revenues in the first quarter of 1997. The
increase in royalties, research and development expenses as a percentage
of net revenues was primarily attributable to higher royalty expenses,
partially offset by reductions in research and development spending.
Interest expense and other income in the first quarter of 1998 were
relatively unchanged from the first quarter of 1997.
The income tax benefit in the first quarter of 1998 and 1997 reflects
the quarterly application of the estimated annual rate based upon
projected full year earnings.
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 the Private Securities Litigation Reform Act of 1995. Such forward
looking statements involve known and unknown risks, uncertainties and other
important factors that could cause actual results, performance or achievements
of results to differ materially from any future results, performance or
achievements, expressed or implied by such forward-looking statements. Such
risks, uncertainties and other important factors include among others: the
Company's dependence on timely development, introduction and customer acceptance
of continuing and new products (including those products to be developed under
the new Star Wars license); the continuing trend of increased concentration of
the Company's revenues in the second half of the fiscal year, together with
the increased reliance by retailers on quick response inventory management,
which increases the risk of the Company's underproduction of popular items,
overproduction of less popular items and failure to achieve tight and compressed
shipping schedules; possible weakness of the Company's markets; the impact
of competition on revenues, margin 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 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 April 1, 1993, the Company entered into a Loan and Security Agreement with
Congress Financial Corporation. On March 31, 1995, this original agreement
was amended and restated in full including increasing the credit limit to
$40 million, with a provision to increase the limit to $60 million at the
option of the Company. On December 19, 1997, the loan agreement was amended,
increasing the credit limit to $75 million and extending the term of the loan
agreement until December 2000 . Borrowing availability is determined by a
formula based on both accounts receivable and inventories. The current interest
rate is equal to prime with a LIBOR option. The Company also agreed to pay an
unused line fee of 0.25% and certain management fees. In consideration of this
amendment, the Company paid loan fees of $750,000.
During the first quarter of 1998, the Company generated $23.3 million of cash
from its operating activities. The net cash provided by operating activities
resulted primarily from collections of accounts receivable offset by the net
loss, an increase in prepaid expenses and other current assets and decreases
in accounts payable and accrued expenses.
Working capital was $80.2 million at March 31, 1998 as compared to $82.8
million at December 31, 1997 and $133.5 million at March 31, 1997. The
ratio of current assets to current liabilities was 4.0 to 1.0 at March 31, 1998
as compared to 3.0 to 1.0 at December 31, 1997 and 6.0 to 1.0 at March 31, 1997.
The Company had no material commitments for capital expenditures at March 31,
1998.
On October 14, 1997, the Company entered into an exclusive, worldwide license
with Lucas Licensing Ltd. to make small-scale figures, vehicles, playsets and
accessories for the next three Star Wars movies, and the Company's current
rights to market such small-scale toys based on the original Star Wars trilogy
were also included. The licensing agreement calls for minimum commitments,
primarily in the form of advance payments against future royalties, of $148.1
million payable throughout the release schedule of the three new films. The
first payment is due upon the theatrical release of the first film, which is
anticipated to be in May, 1999.
The Company expects that its cash flow from operations, cash on hand and
borrowings under the extended credit arrangement 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.
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
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. In March 1998, the Company settled all of the open
matters in this litigation. The settlement will not result in any additional
material liabilities to the Company.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
<PAGE>
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, 1998 By: /s/ Kathleen R. McElwee
--------------------------
Kathleen R. McElwee
Senior Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the financial statements of Galoob Toys, Inc. for the three
months ended March 31, 1998, 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 26,549
<SECURITIES> 0
<RECEIVABLES> 39,839
<ALLOWANCES> 9,688
<INVENTORY> 21,980
<CURRENT-ASSETS> 106,905
<PP&E> 17,335
<DEPRECIATION> 6,979
<TOTAL-ASSETS> 190,941
<CURRENT-LIABILITIES> 26,729
<BONDS> 0
0
0
<COMMON> 181
<OTHER-SE> 159,627
<TOTAL-LIABILITY-AND-EQUITY> 190,941
<SALES> 30,262
<TOTAL-REVENUES> 30,262
<CGS> 16,678
<TOTAL-COSTS> 16,678
<OTHER-EXPENSES> 17,342
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 191
<INCOME-PRETAX> (3,633)
<INCOME-TAX> (1,385)
<INCOME-CONTINUING> (2,248)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,248)
<EPS-PRIMARY> ($0.12)
<EPS-DILUTED> ($0.12)
</TABLE>
