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
For the fiscal year ended December 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
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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
- - - - ------------------------------------------ ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650)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 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 02,
1998, was approximately $159,000,000.
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 02, 1998, was as follows:
Class Number of Shares
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Common Stock, Par Value $.01 Per Share 18,109,864
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 1998 Annual Meeting of Shareholders has been incorporated
into Part III.
PART I
Item 1 Business
General
Founded in 1957, Galoob Toys, Inc. and subsidiaries ("the Company"), is an
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's current product categories include: (i) miniature
vehicles, led by the highly successful Micro Machines (R) line, introduced in
1987, which is the most comprehensive line of miniature scale toys for boys in
the world, embracing traditional vehicle, military and male action play
patterns; (ii) entertainment-based toys, led by Star Wars (TM), the leading
boys' toy in 1997, and Anastasia (TM), the first toy line from the Company's
long-term license agreement with Twentieth Century Fox ("Fox"); (iii) newly
introduced authentic military vehicles, figures and playsets led by Battle
Squads (TM); (iv) mini-dolls, comprised of the number one mini-doll brand in
1997, Pound Puppies (R), and the Company's newly introduced product line,
Backpack Club (TM); and (v) celebrity-based fashion dolls, with the Company's
first product offering based on the Spice Girls, a globally popular five-woman
British pop group.
In October, 1997, the Company entered into an exclusive, worldwide license with
Lucas Licensing Ltd. ("Lucas") to market small-scale figures, vehicles,
playsets and accessories for the next three Star Wars movies, as well as
maintaining the rights to market such small-scale toys based on the original
Star Wars Trilogy.
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 who, in turn, sell to retailers outside the United States.
The Company believes it is well positioned for future growth. The key elements
of the Company's growth strategy are: (i) expand the Company's core brand,
Micro Machines; (ii) maximize the value of the Company's major male action
entertainment offering, Star Wars; (iii) increase sales of toys based on the
Company's exclusive worldwide, long-term, first rights agreement with Fox; (iv)
continue to enter new product categories; and (v) expand profit margins on
rising sales.
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 $15.2 billion in 1997. 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 significant
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.
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. In the United
States, 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., and
Kay-Bee Toys, Inc. These large chains 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 1998 main product offerings consist of the following:
Boys' Products
o MICRO MACHINES (R) AND STAR WARS (TM)
Micro Machines is a broad array of miniature vehicles, figures, playsets and
accessories marketed in a variety of basic civilian, military, space,
exploration, action and other themes. Since 1987, Micro Machines has generated
over $1 billion in worldwide sales for the Company. For 1998, additions to the
military, basic, exploration and licensed segments have created a line of more
than 40 playsets, 325 vehicles and 85 collections. The popular military
segment has been enhanced for 1998 by the introduction of the Company's
innovative Transforming Action Sets, featuring a Navy SEAL and a jet fighter
pilot that open to reveal miniature action-scene playsets. Combat Carrier (TM)
is a giant military van with rolling wheels that opens into a complete
battlefield with firing missiles and a Micro Machines M60 tank. Other product
additions include three Transforming Action Sets in the basic line fashioned
after a motorcycle policeman, a race car driver and a construction foreman; a
new Earth Exploration segment featuring excavation-themed playsets and
vehicles; and new dinosaur and vehicle collections and playsets based on the
National Geographic Society (TM) license.
The Company's current rights to market toys based on the original Star Wars
trilogy have been included in a new, exclusive, worldwide license with Lucas
Licensing Ltd. to make small-scale figures, vehicles, playsets, and accessories
for the next three Star Wars movies. This continues the relationship that
began in 1992 with the introduction of Star Wars Micro Machines and broadened
in 1996 with the addition of the larger-scale Star Wars Action Fleet (R), also
marketed under the Micro Machines brand. The Action Fleet segment features
six-inch-long vehicles and one-and-one-half-inch-tall poseable figures, which
are compatible with separate Action Fleet playsets. For 1998, new toys enhance
the Company's collection of popular Star Wars products. A total of 41 vehicle
and figure packs and 23 playsets are available in the traditional Micro
Machines scale. Four new Transforming Action Sets have been added to the Micro
Machines assortment, including Jabba the Hutt, Yoda and, for the first time,
transforming vehicles, featuring the Star Destroyer and Slave I. Each
Transforming Action Set is a collectible model of a Star Wars character or
vehicle that opens to reveal an action scene utilizing miniature Star Wars
figures and vehicles. Within the larger-scale Action Fleet segment are 18
themed Battle packs and with the addition of 7 new vehicles, a total of 29
vehicle/creature sets with figures, including the highly requested and much
anticipated Millennium Falcon.
o BATTLE SQUADS (TM)
Based on the popularity of its Micro Machines military segment, the Company has
launched a new line of larger scale authentic military vehicles, figures and
playsets. The Battle Squads line presents realistically detailed military
vehicles, combat packs and combat platoons from World War II to the present
day. Vehicles from five-and-one-half-inches long to
eight-and-one-quarter-inches long are scaled to poseable figures
one-and-one-eighth-inches tall. Ten detailed, real-world Combat Vehicles
include a P-51 Mustang, F-4 Phantom and Armored Personnel Carrier and feature
quick-release bombs, firing missiles, rotating gun turrets and spinning
propellers. Combat Packs offer a Jeep, commando raft, Howitzer machine gun,
and a Kubelwagen featuring pivoting guns and rolling wheels. Each vehicle
comes with two poseable Battle Squads troops that fit inside the vehicles. The
C-130 Warbird (TM) deluxe vehicle/playset features firing missiles, a working
parachute to air-drop a vehicle, mechanized spinning propellers, retractable
landing gear, and an opening cockpit and cargo hatch.
Girls' Products
o POUND PUPPIES (R)
In 1996, the Company introduced an updated and miniaturized version of Pound
Puppies, a product line marketed by another toy company in the 1980's. The
line was expanded in 1997 to include new themes and concepts and, for the past
year, has been the leading mini-doll line in the United States. To enhance the
brand for 1998, additional Pound Puppies Purebreds and Pound Pur-r-ries
Purebreds have been introduced, along with some all-new pound animals: Pound
Ponies (TM), Pound Piggies (TM), Pound Bears (TM) and Pound Jungle (TM) wild
animals. Adding to the segment of miniature plastic Pound Puppies and Pound
Pur-r-ries play environments introduced in 1997 are two new Hideaway Playsets
and a new Pet Carrier Playset. New Pound Puppies and Pound Pur-r-ries
Wag-Alongs (TM) feature a mommy puppy or kitty that walks and wags her tail with
the help of a battery-powered remote-control leash. She comes with a baby
puppy or kitty that can be carried in the mother's mouth or on her back.
o ANASTASIA (TM)
The Anastasia product line, introduced in 1997, resulted from the Company's
exclusive worldwide toy license with Fox. Anastasia was Fox's animated family
film for the 1997 holiday season. For 1998, the Company plans to expand its
marketing of the Anastasia line, timed with Fox's worldwide distribution of the
film and video.
o BACKPACK CLUB (TM)
The Company continues to build its girls' toy business with the introduction of
Backpack Club dolls and playsets. The five-inch-tall dolls wear backpacks that
transform into themed play environments such as Camp-Out Fun and Beach Party.
Also featured in the line are Funtastic Packs (TM), two-packs including one
transforming doll-size backpack that opens into a game, and another backpack
that holds a craft girls can create themselves. Larger Cool Adventure packs
include backpacks a child can actually wear and open into adventure playsets.
There is also the wearable Secret Clubhouse (TM) deluxe backpack that opens into
a multi-level doll playhouse with elevator, fold-down bed, swing, sailboard,
and canoe.
o SPICE GIRLS (TM)
In late 1997, the Company introduced its Spice Girls fashion dolls, based on
the five-woman British pop group. The eleven-and-one-half-inch-tall poseable
dolls feature Posh, Baby, Scary, Sporty and Ginger Spice dressed in
trendsetting fashions that reflect each band member's unique style. In 1998,
to coincide with the band's worldwide Spiceworld Tour, five On Tour (TM) dolls
will be introduced. Other fashion doll gift sets, playsets, and accessories are
scheduled for release throughout 1998.
Galoob Direct
In 1996, the Company established Galoob Direct, Inc., a wholly owned subsidiary
created to sell non-promoted toys to retailers on a direct-import basis from
Hong Kong and China. For 1998, Galoob Direct offers a wide array of products
complementing several of the Company's promoted brands, including Micro
Machines, Battle Squads, Anastasia, Pound Puppies, and Spice Girls. These
direct-import products, though not advertised on television, receive the
benefit of the advertising and marketing support that Galoob Toys, Inc., as the
parent company, puts behind its brands.
Licensing Strategy
Historically, substantially all of the Company's products have been produced
under licenses from other parties. During 1997, the Company took two actions
to reduce its reliance on licenses. First, the Company acquired all rights to
its Micro Machines brand when it entered into a Settlement and Release
Agreement. See Item 3-"Legal Procedures-Licensing Litigation." Acquisition of
these rights by the Company eliminated all future royalty payments to the
former licensors of Micro Machines. Second, the Company expanded its efforts
to market products conceived and developed internally. The result of this
internal development are two new lines, Battle Squads and Motor Mouths, a Micro
Machines offering with a larger size and ability to talk, which is directed at a
younger target audience.
The Company continues to produce and market many products under licenses from
other parties. Some of these licenses confer rights to exploit original
concepts or products developed by toy inventors and designers. This type of
license typically extends for either a set number of years or the commercial
life of the product.
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. During 1997, the
Company redirected its product strategy to reduce its reliance on unproven new
entertainment licenses.
Lucas Agreements
On October 14, 1997, the Company entered into an exclusive, worldwide license
with Lucas to market small-scale figures, vehicles, playsets and accessories for
the next three Star Wars movies. In addition, the Company's current rights to
market such small-scale toys based on the original Star Wars trilogy was
included in the new license. In a separate agreement, the Company also
acquired long-term preferential negotiating rights from Lucasfilm Ltd. for the
same categories of toys based on other Lucasfilm movies.
In consideration for these agreements, the Company has granted to the two Lucas
Companies warrants for slightly less than 20% of the Company's issued and
outstanding common stock, equal to approximately 3.6 million shares, at an
exercise price of $15.00 per share. The agreements contain certain antidilution
provisions. In addition, the Company is required to issue additional warrants
to the Lucas Companies if the Company grants stock options or other equity
securities to employees or directors. The new Star Wars agreement also 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.
Twentieth Century Fox Agreement
In 1995, the Company 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 for which Fox controls the intellectual
and merchandise rights (excluding the Fox Children's Network) to the year 2004
(including renewal rights granted to the Company). The agreement assures the
Company 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 marketed toys based on the full-length animated feature film
Anastasia, released in November 1997.
The Company pays royalties to its licensors based upon net sales of the
licensed products. The Company also frequently guarantees payment of a minimum
royalty. As of December 31, 1997, the combination of future advance payments
against royalties and minimum future guaranteed payments aggregated
approximately $155.1 million, including amounts related to the Company's
exclusive, worldwide license with Lucas. Royalties expense totaled
approximately $25,676,000, $27,458,000 and $16,326,000 for the years ended
December 31, 1997, 1996 and 1995, 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 accounting for 68%, 69% and 63% of worldwide
net sales in 1997, 1996 and 1995, 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 1997 and
1996, Toys "R" Us accounted for approximately 20% and 23% of the Company's
consolidated net sales, respectively. Wal-Mart accounted for approximately 15%
and 13% of consolidated net sales in 1997 and 1996, respectively.
The Company has a sales staff of seven people, supplemented by several
manufacturers' representative organizations in the United States that act as
independent contractors. The Company's sales staff and the manufacturers'
representatives offer the Company's products through the use of samples and
promotional materials at toy shows and by making regular customer sales calls.
The Company 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 0.9%, 1.0% and 0.8% of net
sales in 1997, 1996 and 1995, respectively.
The Company utilizes warehouse facilities primarily in Ontario, California for
storage of its products.
The Company does not sell its products on consignment. 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 sells its products to approximately 60 independent toy
distributors, each domiciled in the respective countries to which sales are
made. These distributors, in turn, sell to retailers in over 50 countries.
While the dollar volume of international sales accounted for approximately
one-third of Company worldwide sales in 1997, approximately 47% 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 selling to leading toy distributors who
bear the commercial risks associated with marketing toys in their markets, and
by requiring payment for the Company's products through letters of credit.
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 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 is
able to leverage its advertising and promotional activities with those of the
entertainment licensor.
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 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 $9,425,000, $10,210,000, and
$7,886,000 on research and development activities in 1997, 1996 and 1995,
respectively, in each case exclusive of amounts paid to certain inventors and
designers who receive royalties as licensors.
Manufacturing
The Company's products are manufactured by non-affiliated third party
manufacturers, usually located in the Far East. Over 90% of the Company's
products were produced in China in 1997. 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 13 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 1997, five companies manufactured approximately
88% of the Company's products and a single group, Harbour Ring, produced
approximately 32% 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 International Toys,
Ltd. ("Galco") (formerly known as Galco International Toys, N.V.) located in
Hong Kong, maintains close contact with the Company's manufacturers and
subcontractors and monitors the quality of the products produced. The
Company's employees arrange with manufacturers for the production, shipment
and delivery of products, monitor the quality of the products produced, and
undertake certain elements of the design and development of new products. The
Company holds the manufacturers responsible for conformance to safety
standards. See "Government Regulations." 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. Approximately $20,931,000, $12,367,000 and $12,388,000 was
incurred in 1997, 1996 and 1995, respectively, for tooling and package design.
The 1997 tooling and package design amount of $20,931,000 includes provisions
for unrecovered costs associated with the Company's discontinued lines. See
Part II, Item 7, -"Management Discussion and Analysis of Financial Condition
and Results of Operations."
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 May,
1997) 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 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. 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 on 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 1997 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, Galco is located in Hong Kong. On July 1, 1997, ownership of Hong
Kong reverted back to China. To date, this ownership change has not impacted
the Company's business. At the present time, the Company is unable to predict
the effect, if any, that such changes 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.
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 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 that
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. This seasonality
also 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 Consumer Product Safety Commission ("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.
Year 2000 Compliance
Many currently installed computer systems and software products, including
several used by the Company, are coded to accept only two-digit entries in the
date code field. Beginning in the year 2000, these date code fields will need
to accept four-digit entries to distinguish 21st-Century dates from 20th-
Century dates. As a result, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
The Company has purchased new system software and hardware and has begun a
comprehensive upgrade of its information systems to improve operating
efficiencies and to comply with Year 2000 requirements. The Company expects
to incur approximately $3 to $4 million in the next two years for such upgrades.
Although the Company believes that it will be Year 2000 compliant, there can
be no assurance that the Company's computer systems will be Year 2000 compliant
in a timely manner or that the Company will not incur significant expenditures
pursuing Year 2000 compliance. Furthermore, even if the Company's systems are
Year 2000 compliant, there can be no assurance that the Company will not be
adversely effected by the failure of others to become Year 2000 compliant.
Employees
As of December 31, 1997, the Company had 216 employees, 126 in the United
States and 90 in the Far East. The Company's warehouse operation is serviced
by a third-party warehouse management company.
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
69,000 square feet of office space and leases the remaining approximately
67,000 square feet of warehouse space to third parties. Pursuant to a lease
which expires in 2002, with rights to renew for an additional five year option,
the Company also has approximately 432,000 square feet of warehouse space in
Ontario, California. 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.
Item 3. 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 named
Clemens V. Hedeen, Jr., Patti Jo Hedeen, and various affiliated entities (the
"Licensor") as defendants, and sought a determination that the Company was 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, among other things, damages for past royalties allegedly
due but not paid under the license agreement, and claiming entitlement to
additional royalties on future sales of such product. On June 2, 1997, the
Company entered into a Settlement & Release Agreement (the "Agreement") with
all of the defendants in this pending litigation. Under the Agreement, the
litigation was terminated and the various claims and counterclaims were
dismissed with prejudice, and the Company acquired all of the outstanding
rights to its Micro Machines brand. Acquisition of these rights by the
Company eliminated all future royalty payments by it to the defendants in
connection with the Micro Machines brand, effective after March 31, 1997.
See Part II, Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 named
Abrams Gentile Entertainment Inc. and Up, Up and Away as defendants, and
alleged 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. In 1997, the Company settled all of the open
matters in this litigation, and the various claims and counterclaims were
dismissed with prejudice. The settlement did not result in additional
liabilities to the Company, and the Company's rights under the license
agreements were 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. 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.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on December 12, 1997.
At the Annual Meeting, the following matters were approved by the
shareholders:
1. The election of Mark D. Goldman to the Board of Directors for a term
expiring at the 2000 Annual Meeting of Shareholders and until the election and
qualification of his successor. There were 13,608,759 votes in favor of Mr.
Goldman and 208,558 withheld.
2. The ratification of the appointment of Price Waterhouse LLP as the Company's
independent accountants for fiscal 1998. There were 13,770,706 in favor, 27,914
votes against and 18,697 abstentions.
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 02, 1998, was 8 7/8.
<TABLE>
<CAPTION>
Fiscal Year High Low
- - - ----------- ---- ---
<S> <C> <C> <C>
1997 First Quarter....................... $19 3/4 $ 12 5/8
Second Quarter...................... 19 5/8 16 1/4
Third Quarter....................... 23 13/16 13 9/16
Fourth Quarter...................... 17 13/16 9 3/16
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
</TABLE>
As of March 02, 1998, there were approximately 1,258 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 Item
7 - "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.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
(in thousands, except per share data)
Years ended December 31,
-------------------------------------------------------
1997 (1)(2) 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues ....................... $239,551 $284,905 $220,044 $178,792 $134,334
========= ========= ========= ========= =========
Net earnings (loss) ................ (29,450) 18,451 9,399 18,424 (10,924)
Preferred stock dividends:
Paid .......................... -- 6 -- -- --
In arrears .................... -- 15 3,127 3,127 3,127
Charge related to exchange of ......
preferred stock for common .... -- 24,279 (3) -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) applicable to
common shares ................. ($29,450) ($5,849) $6,272 $15,297 ($14,051)
========= ========= ========= ========= =========
Net earnings (loss) per common share:
Basic ........................ ($1.63) ($0.41) $0.62 $1.51 ($1.47)
========= ========= ========= ========= =========
Fully diluted .................. ($1.63) ($0.41) $0.60 $1.41 ($1.47)
========= ========= ========= ========= =========
Average common shares outstanding... 18,040 14,289 10,071 10,111 9,548
Common shares assuming dilution..... 18,040 14,289 10,451 13,806 9,548
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital .................... $82,800 $134,394 $54,670 $53,219 $30,813
Total assets ....................... 207,783 196,905 120,084 100,766 71,005
Long-term debt ..................... -- -- 14,000 18,414 18,608
Shareholders' equity ............... 162,030 149,791 54,172 44,768 22,162
</TABLE>
NOTES:
(1) During the third quarter of 1997, the Company incurred special charges of
$17.9 million after tax or $0.98 per share. These charges were principally
for the revaluation of certain assets as the Company realigned its product
line priorities in connection with the award of an exclusive license with
Lucas to make small-scale toys for the next three Star Wars movies.
The special charges include the acceleration of the amortization and
additional reserves related to discontinued product lines and several future
product lines as well as expenses incurred for the successful award of the
Star Wars license.
(2) During 1997, the Company acquired all rights to its line of miniature
vehicles, playsets and accessories marketed under the Micro Machines brand.
The agreement ends all litigation between the Company and the Licensor over
past royalties claimed by the Licensor and the extent of the Licensor's
rights in Micro Machines. The Company has accounted for this agreement by
taking a pre-tax charge in the amount of $22,949,000 in 1997 and $4,462,000
is being amortized.
(3) During 1996, the Company offered to exchange 1.85 shares of common stock
for each Depository Convertible Exchangeable Preferred Share outstanding. This
offer was accepted by 98% of the shares resulting in the issuance of 3,336,433
shares of common stock. Generally accepted accounting principles require a
non-cash charge to reduce Net Earnings Applicable to Common Shares in the
calculation of EPS for the fair value of the securities issued in excess of
the existing rate of approximately 1.185 common shares.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
On October 14, 1997, the Company entered into an exclusive, worldwide license
with Lucas to market small-scale figures, vehicles, playsets and accessories for
the next three Star Wars movies. In addition, the Company's current rights to
market such small-scale toys based on the original Star Wars trilogy was
included in the new license. In a separate agreement, the Company also
acquired long-term preferential negotiating rights from Lucasfilm Ltd. for the
same categories of toys based on other Lucasfilm movies.
In consideration for these agreements, the Company has granted to the two Lucas
companies warrants for slightly less than 20% of the Company's issued and
outstanding common stock, equal to approximately 3.6 million shares at an
exercise price of $15.00 per share. The agreements contain certain antidilution
provisions. In addition, the Company is required to issue additional warrants
to the Lucas Companies if the Company grants stock options or other equity
securities to employees or directors. The new Star Wars agreement also 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.
In the third quarter of 1997, the Company restructured its product portfolio
and changed its production selection strategy, incurring special charges
amounting to $17.9 million, after-tax. These special charges principally
related to the costs of discontinuing all of the Company's male action toy
lines introduced in 1996 and 1997, and all future male action properties under
development. These charges also included provisions for unrecovered costs
associated with the Company's Sky Dancers (TM) line, miscellaneous expenses, and
expenses incurred for arranging financing the Company ultimately did not need
to use in connection with the acquisition of the Star Wars license.
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 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); 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.
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, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Costs of products sold 59.8 50.6 55.3
---------- ---------- ----------
Gross margin 40.2 49.4 44.7
Advertising and promotion expenses 20.5 15.3 14.2
Other selling and administrative expenses 14.1 12.6 13.6
Royalties, research and development expenses 14.7 13.2 11.0
---------- ---------- ----------
Earnings (loss) from operations (9.1) 8.3 5.9
Micro Machines license rights and
litigation settlement (9.6) -- --
Interest expense (0.2) (1.1) (1.5)
Other income expense, net (0.9) 0.2 0.2
Provision (benefit) for income taxes (7.5) 0.9 0.3
---------- ---------- ----------
Net earnings (loss) (12.3)% 6.5% 4.3%
========== ========== ==========
</TABLE>
Years ended December 31, 1997 and 1996
Net revenues in 1997 were $239.6 million, which represented a 16% decrease from
1996 net revenues of $284.9 million. Domestic sales decreased 17% to
$163.3 million while international sales decreased 13% to $76.3 million.
The Company's worldwide sales of boys' toys decreased 21% in 1997 as compared
to 1996. This decrease in worldwide sales of boys' toys was partially the
result of lower sales of the Company's male action product lines introduced in
1996 (primarily Dragon Flyz and Jonny Quest (TM)), which were not offset by the
sales of male action lines introduced in 1997 (primarily Men In Black (TM) and
Starship Troopers (TM)). In the third quarter of 1997, the Company discontinued
all of its male action lines introduced in 1996 and 1997, and all future male
action properties under development except Star Wars. In addition, sales of the
Company's Micro Machines line of toys decreased in 1997 as compared to 1996
because of the timing of the theatrical film release of the Star Wars Trilogy
Special Edition. During the fourth quarter of 1996, the Company shipped large
quantities of its Star Wars toys to meet retail demand for Star Wars products
fueled by the January 1997 release of the Trilogy Special Edition.
The Company's 1997 worldwide sales of girls' toys were unchanged as compared to
1996. Sales of the Company's newly introduced Anastasia and Spice Girls lines
offset a decrease in sales of the Company's Sky Dancers line.
Gross margins decreased $44.2 million to $96.4 million in 1997 from $140.6
million in 1996. The lower sales volume decreased gross margin by $22.4
million and a decrease in the gross margin rate accounted for $21.8 million.
The gross margin rate decreased to 40.2% in 1997 as compared to 49.4% in 1996.
The change in the gross margin rate was attributable to provisions for
unrecovered costs associated with the Company's discontinued lines
including tooling, packaging development, inventory valuation allowances and
price concessions and a change in the product mix. Additionally, to a lesser
extent, during 1997, the Company commenced shipments of product through its
wholly-owned subsidiary, Galoob Direct. Galoob Direct products are non-promoted
and are primarily shipped direct to the customer from the Orient. As such,
the gross margin rate on Galoob Direct product is lower than the gross margin
rate on the Company's promoted product.
Advertising and promotion expenses were $49.3 million in 1997, as compared to
$43.5 million in 1996. The increase in the advertising and promotion expenses
reflects higher television advertising expense, trade show and product
promotion expenses and sample costs, including the impact of the Company's
discontinued lines.
Other selling and administrative expenses were $33.9 million in 1997 as compared
to $35.8 million in 1996. This decrease was primarily related to lower
personnel costs in 1997 as compared to 1996.
Royalties, research and development expenses were $35.1 million, or 14.7% of net
revenues in 1997 as compared to $37.7 million, or 13.2% of net revenues in
1996. The increase in royalties, research and development as a percentage of
net revenues was primarily attributable to the write-off of royalty advances
and commitments associated with discontinued products.
During 1997, the Company acquired all outstanding rights to its line of
miniature vehicles, playsets and accessories marketed under the Micro Machines
brand and settled related litigation. In 1986, the Licensor licensed a concept
to the Company that contributed to the origination of Micro Machines. The
Company had paid royalties to the Licensor on the majority of Micro Machine
sales. The settlement agreement eliminated all future royalty payments to the
Licensor, effective after March 31, 1997. The agreement also ended litigation
between the Company and the Licensor over past royalties claimed by the
Licensor and the extent of the Licensor's rights in Micro Machines. The
Company recorded a pre-tax charge to earnings of $22.9 million in 1997 relating
to this transaction. Additionally, the Company capitalized $4.5 million, which
is being amortized.
Interest expense was $0.6 million in 1997, as compared to $3.2 million in 1996.
The decrease 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 expense was $2.1 million in 1997, as compared to
other income of $0.5 million in 1996. Other expenses include expenses incurred
for arranging financing the Company ultimately did not use in connection with
the acquisition of the Star Wars license.
The income tax benefit in 1997 is based upon an income tax rate of 38%. No
deferred tax valuation allowance was required at December 31, 1997 since the
net deferred tax assets are considered realizable. The income tax expense in
1996 is based upon an income tax rate of 11.9%. The 1996 tax rate is lower
than the Federal statutory rate primarily due to the effects of the utilization
of net operating loss carryforwards and federal tax credits.
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 male action product
introductions. 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 58% versus 1995. New male action product introductions
started in March, 1996 when the Company initiated sales of Dragon Flyz, a line
of flying articulated action figures, 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 Biker Mice from Mars (TM).
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(TM) 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 1996 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.
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.
In 1995, the Company entered into an amended and restated loan and security
agreement (the "Loan Agreement") with Congress Financial Corporation (Central)
(the "Lender"). 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 1997, the Company used $24.5 million of cash in its operating
activities. Approximately $22.5 million of the cash usage was a result of the
acquisition of the Micro Machines rights and litigation settlement.
Working capital was $82.8 million at December 31, 1997 as compared to $134.4
million at December 31, 1996. The ratio of current assets to current
liabilities was 3.0 to 1.0 at December 31, 1997 as compared to 3.9 to 1.0 at
December 31, 1996.
The Company had no material commitments for capital expenditures at December 31,
1997.
On October 14, 1997, the Company entered into an exclusive, worldwide license
with Lucas to make small-scale figures, vehicles, playsets and accessories
for the next three Star Wars movies as well as the Company's current
rights to market such small-scale toys based on the original Star Wars
trilogy. 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.
Recent Accounting Pronouncement
The FASB has recently issued two new standards, SFAS No. 130, Reporting
Comprehensive Income and SFAS No. 131, Disclosures and Segments of an Enterprise
and Related Information. SFAS No. 130, establishes standards for reporting
comprehensive income, and its components in a financial statement and display
of the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital. The Company does not expect
the implementation of SFAS No.130 to have a significant impact on the financial
statements. SFAS No. 131 establishes standards for the reporting of selected
information about operating segments in annual financial statements and interim
financial reports issued to shareholders and the related disclosures about
products and services, geographic areas and major customers. The Company is in
the process of determining the impact of SFAS No. 131 on the financial
statements. The Company will be required to adopt SFAS No. 130 and SFAS No. 131
in the year ending December 31, 1998.
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,
general inflation did not have a material impact on the Company's business in
1997 and 1996. The Company did not implement any substantial price increases
in 1997 or 1996 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.
<PAGE>
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....... 47 President, Chief Executive Officer and Director
William G. Catron..... 52 Executive Vice President, General Counsel, Chief
Administrative Officer and Secretary
Ronald D. Hirschfeld.. 47 Executive Vice President, International Sales and
Marketing
Roger J. Kowalsky..... 63 Executive Vice President and Director
Gary J. Niles......... 58 Executive Vice President, Marketing and Product
Acquisition
Louis R. Novak........ 50 Executive Vice President and Chief Operating
Officer
Craig S. Louisana...... 41 Senior Vice President, Sales
Kathleen R. McElwee... 43 Senior Vice President and Chief Financial Officer
Ronnie Soong.......... 51 Managing Director of Galco International Toys
</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.
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, International Sales and Marketing.
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 of the Company
since June, 1996 and Chief Financial Officer of the Company from June, 1996 to
December, 1997, and as a Director of the Company since June, 1994. From 1989
to 1996, Mr. Kowalsky served as Director of the Vermont Studio Center. From
1983 to 1986, Mr. Kowalsky served as Senior Vice President, Finance &
Administration for Yale Materials Handling Corporation. 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.
Craig Louisana has served as Senior Vice President, Sales of the Company
since November, 1997. From 1995 to 1997, Mr. Louisana served as Director of
Field Sales for the Company and as Senior Account Executive from 1993 to 1995.
Prior to joining the Company, Mr. Louisana held various sales positions with
Mattel, Inc. and Kenner Toys.
Kathleen R. McElwee has served as Senior Vice President and Chief
Financial Officer of the Company since January, 1998. From 1995 to December,
1997, Ms. McElwee was Vice President of Corporate Financial Planning, Analysis
and Reporting. From 1993 to 1995, Ms. McElwee held various positions with
Nissan Motor Corporation. From 1990 to 1993, Ms. McElwee was with Canteen
Corporation, a subsidiary of the Flagstar Cos., and served as Chief Financial
Officer in 1993.
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.
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.
<PAGE>
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:
(a) 1. Financial Statements Page
Report of Independent Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1997 and
December 31, 1996 F-2
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1997,
1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 F-5 to
F-6
Notes to Consolidated Financial Statements F-7 to
F-23
(a) 2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and
Reserves for the years ended December 31, 1997, 1996
and 1995 S-1
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.
(a) 3. Exhibits
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.
4.4(a)(18) Warrant, dated as of October 14, 1997, between Lucasfilm Ltd.
and Galoob Toys, Inc.
4.4(b)(18) Warrant, dated as of October 14, 1997, between Lucas Licensing
Ltd. and Galoob Toys, Inc.
4.4(c)(18)+ Agreement of Strategic Relationship, dated as of October 14,
1997, between Lucasfilm Ltd., a California corporation, and
Galoob Toys, Inc.
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, Ronald Hirschfeld and the Company.
10.1(d)(9)* Form of Amendment No. 1 between each of Mark Goldman, William
Catron, Lou Novak, Gary Niles, Ronald Hirschfeld and the Company.
10.1(e)(10) 1995 Non-Employee Directors' Stock Option Plan.
10.1(f)(15)* Galoob Toys, Inc. 1996 Long Term Compensation Plan
10.1(g)(15)* Galoob Toys, Inc. 1996 Share Incentive Plan
10.1(h)(16)* Galoob Toys, Inc. Officers Deferred Compensation Plan
10.3* Severance and Change in Control Agreement dated November 17, 1997
between Mark D. Goldman and the Company
10.4(a)(16)* Agreement, dated January 1, 1997, between William G. Catron and
the Company.
10.4(b)(16)* Agreement, dated January 1, 1997, between Ronald Hirschfeld and
the Company.
10.4(c)(16)* Agreement, dated January 1, 1997, between Roger J. Kowalsky and
the Company.
10.4(d)(16)* Agreement, dated January 1, 1997, between Gary J. Niles and the
Company.
10.4(e)(16)* Agreement, dated January 1, 1997, 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)(15) Lease Agreement, dated December 3, 1996, between Prudential
Insurance Company of America as Lessor and the Company, as
Lessee.
10.10(17) Settlement and Release Agreement, dated June 2, 1997.
10.11(18) Toy License Agreement, dated as of October 14, 1997, between
Lucas Licensing Ltd. and Galoob Toys, Inc.
10.11(c) Trademark License Agreement, dated as of October 14, 1997,
between Lucas Licensing, Ltd. and Galoob Toys, Inc.
10.12 Amendment No. 4 to Amended and Restated Loan and Security
Agreement, dated December 17, 1997, by and among the Company and
Congress Financial Corporation (Central)
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. 33-00743, 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.
(15) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1996, filed with the Commission on March 31,
1997.
(16) Incorporated by reference to the Company's Form 10-K/A for the fiscal
year ended December 1996, filed with the Commission on April 30, 1997.
(17) Incorporated by reference to the Company's Form 10-Q for the six months
ended June 30, 1997, filed with the Commission on August 6, 1997.
(18) Incorporated by reference to the Company's Form 10-Q for the nine
months ended September 30, 1997, filed with the Commission on November
14, 1997.
* Indicates exhibits relating to executive compensation.
+ Portions of this agreement have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
<PAGE>
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 26, 1998
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.
Signature Title Date
- - - ------------------------ --------------------------------------- --------------
/s/ Mark D. Goldman President, Chief Executive Officer and March 26, 1998
- - - ----------------------- Director
Mark D. Goldman
/s/ Scott R. Heldfond Director March 26, 1998
- - - -----------------------
Scott R. Heldfond
/s/ S. Lee Kling Director March 26, 1998
- - - -----------------------
S. Lee Kling
/s/ Andrew Cavanaugh Director March 26, 1998
- - - -----------------------
Andrew Cavanaugh
/s/ Roger J. Kowalsky Executive Vice President and Director March 26, 1998
- - - -----------------------
Roger Kowalsky
/s/ Kathleen R. McElwee Senior Vice President and March 26, 1998
- - - ----------------------- Chief Financial Officer
Kathleen R. McElwee
<PAGE>
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, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, 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, 1998
<PAGE>
<PAGE> F-1
GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $3,359 $27,920
Accounts receivable, net 73,810 102,322
Inventories 24,707 19,974
Tooling and related costs 12,434 15,436
Prepaid expenses and other assets 9,900 12,361
Deferred income taxes -- 2,404
---------- ----------
Total Current Assets 124,210 180,417
Land, Building and Equipment, net 10,451 10,013
Indebtedness from Related Party 950 950
Other Assets 10,276 5,525
License Rights 43,250 --
Deferred income taxes 18,646 --
---------- ----------
Total Assets $207,783 $196,905
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $19,156 $19,655
Accrued expenses 21,520 24,680
Income taxes payable 734 1,671
Other current liabilities -- 17
---------- ----------
Total Current Liabilities 41,410 46,023
Other liabilities 4,343 20
Deferred income taxes -- 1,071
---------- ----------
Total Liabilities 45,753 47,114
---------- ----------
Shareholders' Equity:
Preferred stock
Authorized 1,000,000 shares -- --
Common stock, par value $.01 per share
Authorized 50,000,000 shares
Issued and outstanding 18,108,864 shares in
1997 and 17,919,864 shares in 1996 181 179
Warrants 40,350 --
Additional paid-in capital 171,745 170,291
Retained earnings (deficit) (49,682) (20,232)
Cumulative translation adjustment (564) (447)
---------- ----------
Total Shareholders' Equity 162,030 149,791
---------- ----------
Total Liabilities and Shareholders' Equity $207,783 $196,905
========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
<PAGE>
F-2
GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues $239,551 $284,905 $220,044
Costs of products sold 143,156 144,282 121,742
---------- ---------- ----------
Gross margin 96,395 140,623 98,302
---------- ---------- ----------
Operating expenses:
Advertising and promotion 49,280 43,515 31,240
Other selling and administrative 33,872 35,776 29,860
Royalties, research and development 35,101 37,668 24,213
---------- ---------- ----------
Total operating expenses 118,253 116,959 85,313
---------- ---------- ----------
Earnings (loss) from operations (21,858) 23,664 12,989
Micro Machines license rights and
litigation settlement (22,949) -- --
Interest expense (602) (3,183) (3,429)
Other income (expense), net (2,095) 455 439
---------- ---------- ----------
Earnings (loss) before income taxes (47,504) 20,936 9,999
Provision for (benefit from) income taxes (18,054) 2,485 600
---------- ---------- ----------
Net earnings (loss) (29,450) 18,451 9,399
Preferred stock dividends:
Paid -- 6 --
In arrears -- 15 3,127
Charge related to the exchange of
preferred stock for common -- 24,279 --
---------- ---------- ----------
Net earnings (loss) applicable to
common shareholders ($29,450) ($5,849) $6,272
========== ========== ==========
Net earnings (loss) per common share:
Basic ($1.63) ($0.41) $0.62
Diluted ($1.63) ($0.41) $0.60
Common shares outstanding 18,040 14,289 10,071
Common shares assuming dilution 18,040 14,289 10,451
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
<PAGE>
F-3
GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Retained Cumulative
-------------------- -------------------- Paid-In Earnings Translation
Shares Amounts Shares Amounts Warrants Capital (Deficit) Adjustment Total
--------- --------- ----------- --------- --------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 12/31/94 183,950 $36,790 10,055,089 $101 $ -- $31,506 ($23,182) ($447) $44,768
Net earnings -- -- -- -- -- -- 9,399 -- 9,399
Common stock issued, net -- -- 58,751 -- -- 228 -- -- 228
Common stock received in
exchange for shares
issued and canceled -- -- (11,202) -- -- (155) (68) -- (223)
Reclamation of shares -- -- (12,677) -- -- -- -- -- --
--------- --------- ----------- --------- --------- --------- --------- ------------ ---------
Balance at 12/31/95 183,950 36,790 10,089,961 101 -- 31,579 (13,851) (447) 54,172
Net earnings -- -- -- -- -- -- 18,451 -- 18,451
Common stock issued, net -- -- 2,492,679 24 -- 62,334 -- -- 62,358
Conversion of preferred
stock to common stock (182,290) (36,458) 3,359,432 34 -- 60,703 (24,279) -- --
Redemption of preferred
stock (1,660) (332) -- -- -- (11) (118) -- (461)
Conversion of debentures
to common stock -- -- 1,511,872 15 -- 13,479 -- -- 13,494
Costs associated with
preferred stock exchange
and debenture conversion -- -- -- -- -- (1,282) -- -- (1,282)
Warrants exercised -- -- 490,280 5 -- 2,515 -- -- 2,520
Common stock received in
exchange for shares
issued and canceled -- -- (24,360) -- -- (76) (435) -- (511)
Tax benefits from stock
plans -- -- -- -- -- 1,050 -- -- 1,050
--------- --------- ----------- --------- --------- --------- --------- ------------ ---------
Balance at 12/31/96 -- -- 17,919,864 179 -- 170,291 (20,232) (447) 149,791
Net earnings (loss) -- -- -- -- -- -- (29,450) -- (29,450)
Common stock issued, net -- -- 114,000 1 -- 666 -- -- 667
Warrants issued -- -- -- -- 40,350 -- -- -- 40,350
Warrants exercised -- -- 75,000 1 -- 711 -- -- 712
Cumulative translation
adjustment and other -- -- -- -- -- 77 -- (117) (40)
--------- --------- ----------- --------- --------- --------- --------- ------------ ---------
Balance at 12/31/97 0 $ 0 18,108,864 $181 $40,350 $171,745 ($49,682) ($564) $162,030
========= ========= =========== ========= ========= ========= ========= ============ =========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
<PAGE>
F-4
GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except shares)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings ($29,450) $18,451 $9,399
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 1,045 751 528
Changes in assets and liabilities:
Accounts receivable 28,512 (33,920) (10,519)
Inventories (4,733) (2,483) (667)
Tooling and related costs 3,002 (7,125) 68
Prepaid expenses and other current assets 2,461 (2,013) (4,856)
Other assets (7,780) (2,260) (3,026)
Deferred taxes (17,313) (1,333) --
Accounts payable (499) 2,514 2,168
Accrued expenses and other liabilities 1,146 10,460 (392)
Income taxes payable (937) 1,990 232
--------- --------- ---------
Net cash used in operating activities (24,546) (14,968) (7,065)
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and equipment, net (1,354) (2,310) (1,041)
--------- --------- ---------
Net cash used in investing activities (1,354) (2,310) (1,041)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under notes payable -- (15,071) 8,100
Repayments under long-term debt agreements -- (4,385) (194)
Proceeds from issuance of common stock, net 1,379 64,367 5
Redemption of preferred stock -- (461) --
Cost associated with the conversion of debenture
and the preferred shares exchange -- (1,282) --
Other, net (40) -- --
--------- --------- ---------
Net cash provided by financing activities 1,339 43,168 7,911
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,561) 25,890 (195)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 27,920 2,030 2,225
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $3,359 $27,920 $2,030
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $970 $3,231 $3,050
Cash paid for income taxes $950 $1,747 $390
</TABLE>
<PAGE>
F-5
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 E.)
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 M.)
During the year ended December 31, 1997, the Company issued 3,594,105
warrants with a value of $40,350, in connection with the license agreement
with Lucas Licensing Ltd.
The accompanying notes are an integral part of these
Consolidated Financial Statements.
<PAGE>
F-6
NOTE A - Summary of Significant Accounting Policies
Organization and Business
Galoob Toys, Inc. and subsidiaries ("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, Ltd. (formerly known as
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.
<PAGE>
F-7
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 believed by management to be adequate.
Credit losses have generally been within management's expectations.
Inventories
Inventories are stated at lower of cost (first-in, first-out) or market.
Tooling and Related Costs
Costs incurred for tooling and package design are deferred and amortized over
the life of the products, which range from one to two years.
Prepaid Expenses
Prepaid expenses include costs such as those incurred in the creation of
television commercials which are deferred and expensed in the year 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.
License Rights
License rights are deferred and amortized over the lesser of the estimated
life of the products or contractual term, which range from 5 to 12 years.
Amortization is based upon future sales of the applicable products.
Research and Development
Research and development costs is expensed as it is incurred. Total
expenses for the years ended December 31, 1997, 1996 and 1995 were $9,425,000,
$10,210,000 and $7,886,000, 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.
<PAGE>
F-8
Earnings Per Share
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share". SFAS 128 redefines
earnings per share under generally accepted accounting principles. Under the
new standard, primary net income per share is replaced by basic net income per
share and fully diluted net income per share is replaced by diluted net income
per share. All historical earnings per share information has been restated as
required by SFAS 128. Basic net income (loss) per share is computed using the
weighted average number of common shares outstanding during the periods
presented. Diluted net income (loss) per share is computed using the weighted
average number of common and common equivalent shares outstanding during the
periods presented. Stock options and warrants were dilutive in 1995. Diluted
earnings per share for the years ended December 31, 1996 and 1997 was the same
as basic earnings per share since the effects of any potential dilution was
anti-dilutive.
The following is a reconciliation between the components of the basic and
diluted net income (loss) per share calculations (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995
---------------------------- -------------------------- --------------------------
Per Per Per
Share Share Share
Loss Shares Amount Loss Shares Amount Income Shares Amount
--------- --------- -------- -------- --------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic Earnings (Loss) Per Share:
Net earnings (loss) applicable to
common shareholders ($29,450) 18,040 ($1.63) ($5,849) $14,289 ($0.41) $6,272 $10,071 $0.62
Effect of Delusive Securities:
Options -- -- -- -- -- -- -- 380
Diluted Earnings (Loss) Per Share:
Net earnings (loss) applicable
to common shareholders plus
assumed conversions and exercises ($29,450) $18,040 ($1.63) ($5,849) $14,289 ($0.41) $6,272 $10,451 $0.60
</TABLE>
Recent Accounting Pronouncements
The FASB has recently issued two new standards, SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures and Segments of an
Enterprise and Related Information. SFAS No. 130 establishes standards for
reporting comprehensive income and its components in a financial statement and
display of the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital. The Company does not
expect the implementation of SFAS No. 130 to have a significant impact on the
<PAGE>
F-9
financial statements. SFAS No. 131 establishes standards for the reporting of
selected information about operating segments in annual financial statements
and interim financial reports issued to shareholders and the related
disclosures about products and services, geographic areas and major customers.
The Company is in the process of determining the impact of SFAS No. 131 on the
financial statements. The Company will adopt SFAS No. 130 and SFAS No. 131 in
the year ending December 31, 1998.
NOTE B - Accounts Receivable, Net (in thousands):
December 31,
-------------------
1997 1996
--------- ---------
Trade receivables $85,894 $111,049
Provisions for:
Advertising allowances (10,096) (7,514)
Return of defective goods (300) (700)
Markdowns and discounts (2,323) (1,086)
Doubtful accounts (470) (597)
--------- ---------
Net trade receivables 72,705 101,152
Other receivables 1,105 1,170
--------- ---------
$73,810 $102,322
========= =========
NOTE C - Inventories (in thousands):
December 31,
-------------------
1997 1996
--------- ---------
Finished goods $24,291 $19,667
Raw materials and parts 416 307
--------- ---------
$24,707 $19,974
========= =========
NOTE D - Land, Building and Equipment, Net (in thousands):
December 31,
-------------------
1997 1996
--------- ---------
Land and building $9,861 $9,851
Office furniture, fixtures and
equipment 6,123 5,081
Leasehold improvements 1,108 1,026
Vehicles 103 133
--------- ---------
17,195 16,091
Accumulated depreciation (6,744) (6,078)
--------- ---------
$10,451 $10,013
========= =========
<PAGE>
F-10
NOTE E - Credit Facilities
In 1995, the Company entered into an amended and restated loan and security
agreement (the "Loan Agreement") with Congress Financial Corporation (Central)
(the "Lender"). 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. The Company was in compliance with all debt
covenants at December 31, 1997.
No amounts were outstanding on the line of credit at December 31, 1997 and 1996.
The maximum outstanding borrowings, average outstanding balances and weighted
average rates of interest for the line of credit were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Maximum outstanding at month end $9,958 $43,202
Average outstanding amount 1,765 23,969
Weighted average interest rate for the year 9.5% 9.6%
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 million 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.
<PAGE>
F-11
NOTE F - Income Taxes
Earnings (loss) before income taxes and the provision for (benefit from)
income taxes are as follows (in thousands):
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Earnings (loss) before income taxes:
Domestic ($48,046) $20,396 $9,288
Foreign 542 540 711
--------- --------- ---------
($47,504) $20,936 $9,999
========= ========= =========
Provision for (benefit from) income taxes:
Current:
Federal ($733) $2,078 $187
State (72) 1,689 278
Foreign 64 51 135
--------- --------- ---------
(741) 3,818 600
Deferred:
Federal (15,452) (1,159) --
State (1,861) (174) --
--------- --------- ---------
($18,054) $2,485 $600
========= ========= =========
</TABLE>
<PAGE>
F-12
Deferred tax liabilities (assets) consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Prepaid expenses $2,596 $2,321 $2,475
Other temporary differences 2,067 1,024 766
--------- --------- ---------
Gross deferred tax liabilities 4,663 3,345 3,241
--------- --------- ---------
Accrued expenses (6,185) (1,232) (613)
Other temporary differences (4,156) (3,446) (4,516)
Net operating loss carryforwards (12,968) -- (2,567)
Research and development tax credit
carryforward -- -- (765)
--------- --------- ---------
Gross deferred tax assets (23,309) (4,678) (8,461)
--------- --------- ---------
Deferred tax assets valuation allowance -- -- 5,220
--------- --------- ---------
($18,646) ($1,333) $ --
========= ========= =========
</TABLE>
No deferred tax valuation allowance was required at December 31, 1997 since
the net deferred tax assets are considered realizable. Valuation allowances
were provided in 1995 when realization was uncertain. The net change in the
valuation allowance for deferred tax assets was a decrease of $5,220,000,
and $2,459,000 in 1996 and 1995, respectively. At December 31, 1997, the
Company had federal and state operating loss carryforwards of $12,968,000
which expire in different years through the year 2013.
<PAGE>
F-13
The provision for (benefit from) income taxes differs from the provisions
determined by applying the applicable U.S. statutory federal income tax
rates to pretax earnings (loss) as a result of the following differences:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996 1995
--------- --------- ---------
<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)
State income taxes, net of loss
carryforwards, less federal tax
benefits (2.7%) 5.1 2.8
Benefit of reversing temporary
differences for which benefits were
not previously recorded -- -- (20.9)
Loss carryback/carryforward utilized -- (15.0) (13.8)
Tax credits/carryforward utilized -- (16.4) --
Other (0.3) 3.0 4.0
--------- --------- ---------
(38.0%) 11.9% 6.0%
========= ========= =========
</TABLE>
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, 1997. 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 its domestic warehouse for one five-year term, renewable
in the year 2002.
<PAGE>
F-14
Future minimum lease payments for all noncancelable operating leases as of
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1998 $2,312
1999 1,836
2000 1,736
2001 1,786
2002 880
Thereafter 1,433
---------
$9,983
=========
</TABLE>
Rental expense for the years ended December 31, 1997, 1996 and 1995 was
$2,442,000, $1,965,000 and $1,988,000, respectively.
NOTE H - Royalty Contracts
The Company has future minimum royalty guarantee payments as of December 31,
1997 as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1998 $5,375
1999 828
2000 750
---------
$6,953
=========
</TABLE>
$938 of the above amount was reserved for in 1997 in connection with the
Company's discontinued product lines. The Company has additional minimum
commitments due in connection with the renewal of a worldwide license with
Lucas Licensing Ltd. to make small-scale figures, vehicles, playsets and
accessories for the next three Star Wars movies. These additional minimum
commitments amount to $148.1 million and are due 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.
<PAGE>
F-15
NOTE I - Accrued Expenses (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
--------- ---------
<S> <C> <C>
Accrued royalties $5,480 $10,797
Accrued compensation and commissions 3,095 6,484
Accrued inventory purchase commitments 3,000 1,414
Accrued legal and litigation 2,477 1,053
Accrued discounts and allowances 2,085 2,127
Other accrued expenses 5,383 2,805
--------- ---------
$21,520 $24,680
========= =========
</TABLE>
NOTE J - Major Customers
The Company had transactions with one customer, Toys "R" Us, Inc. that accounted
for approximately 20%, 23% and 20% of net revenues in 1997, 1996 and 1995,
respectively. Wal-Mart accounted for approximately 15%, 13% and 11% of net
revenues in 1997, 1996 and 1995, respectively.
NOTE K - Profit Sharing Plan
The Company has a 401(k) profit sharing plan covering all non-union full-time
employees. The plan is qualified under Section 401(a) of the Internal Revenue
Code so that contributions to the plan by the Company are not taxable until
distributed to employees. Contributions under the plan are at the discretion of
the Board of Directors and are subject to the amounts allowable under applicable
provisions of the Internal Revenue Code. No Company contributions have been made
in 1997, 1996 or 1995.
NOTE L - Litigation
In June 1995, the Company filed a declaratory judgment action in the United
States District Court for the Northern District of California. The suit named
Clemens V. Hedeen, Jr., Patti Jo Hedeen, and various affiliated entities, as
defendants, and sought 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, among other things, damages for past royalties allegedly due but not
paid under the license agreement, and claiming entitlement to additional
royalties on future sales of such product. On June 2, 1997, the Company
entered into a Settlement & Release Agreement (the "Agreement") with all of
the defendants in this pending litigation. Under the Agreement, the
litigation was terminated and the various claims and counterclaims were
dismissed with prejudice, and the Company acquired all of the outstanding
<PAGE>
F-16
rights to its Micro Machines brand. Acquisition of these rights by the Company
eliminated all future royalty payments by it to the defendants in connection
with the Micro Machines brand, effective after March 31, 1997. Under the
agreement, the Company paid the Licensor an initial payment of $22,500,000.
Additional amounts with a present value of $4,911,000, as of the agreement
date, are due periodically through June 1, 2012.
The Company accounted for this agreement by taking a pre-tax charge of
$22,949,000 in the year ended December 31, 1997. The present value of the
remaining balance amounting to $4,462,000 was classified as license rights and
is being amortized.
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 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 M - Shareholders' Equity
In 1989, the Company issued 183,950 authorized shares of $17 Convertible
Exchangeable Preferred Stock with a $200 liquidation value (the "Preferred
Stock") and deposited them with a U.S. Bank (the "Depositary") and sold in a
public offering an aggregate of 1,839,500 Depositary Convertible Exchangeable
Preferred Shares (the "Depositary Shares") at a price of $20 per share. Each
Depositary Share 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, or $1.55 per common share in the year ended December
31, 1996.
<PAGE>
F-17
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 N - Stock Compensation Plans
The Company has four stock compensation plans: the 1984 Employee Stock Option
Plan, the 1994 Senior Management Stock 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 1,204,685 and 1,994,029 shares
available for future grants under the terms of the Company's stock option plans
at December 31, 1997 and 1996, 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.
<PAGE>
F-18
The following table summarizes information about stock option activity for the
three years ended December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number Price
of Per
Options Share
---------- ---------
<S> <C> <C>
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
Granted 936,000 15.54
Exercised 114,000 5.84
Canceled 145,520 18.24
- - - ---------------------------------- ----------
Outstanding at December 31, 1997 2,166,230 $13.14
==========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Outstanding Remaining Exercise Exercisable Exercise
Range of as of Contractual Price per as of Price per
Exercise Prices 12/31/97 Life (1) Share 12/31/97 Share
- - - ----------------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$3.00 - $9.00 983,342 4.9 8.04 983,342 8.04
10.25 - 18.13 888,500 9.0 15.37 41,500 12.06
20.50 - 30.63 294,388 8.4 23.43 112,161 22.80
------------ ------------
2,166,230 7.0 $13.14 1,137,003 9.64
============ ============
</TABLE>
- - - -----------------------
(1) Weighted average remaining contractual life in years.
<PAGE>
F-19
There were 1,118,004 and 929,228 options exercisable at weighted average
exercise prices per share of $8.69 and $8.11 at December 31, 1996 and 1995,
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 $2.2
million ($0.12 per share), $1.2 million ($0.09 per share) and $0.6 million
($0.05 per share) in 1997, 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:
1997 1996 1995
Historical dividend yield 0% 0% 0%
Expected life in years 4.7 4.4 4.4
Historical volatility 66% 60% 65%
Risk-free rate of return 6.1% 6.3% 6.1%
The weighted average fair value of
options granted during the year $9.21 $12.22 $3.74
NOTE O - Warrants
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 were exercised in 1997. On October 14, 1997, in consideration for
entering into the Lucas Licensing and Lucas Film agreements, the Company issued
warrants to purchase 3,580,000 shares of common stock at $15.00 per share.
These warrants have a term of 12 years. The agreements contain certain
antidilution provisions. In addition, the Company is required to issue
additional warrants to the Lucas Companies if the Company grants stock options
or other equity securities to employees or directors. This resulted in the
issuance in 1997 of warrants to purchase 14,105 additional shares of common
stock at $12.56 to $13.88 per share. The warrants were valued at $40,350,000
using the Black-Scholes option pricing model, at the date of issuance. Each
warrant provides the Lucas Companies the right to purchase one share of the
Company's common stock.
<PAGE>
F-20
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 was amended and restated on
November 17, 1997. Commencing on the first day of September, 1996, principal
in the amount of $100 is payable on the first of each month. The note bears
interest at a rate of zero percent per annum. The remaining principal balance
of the note shall be due and payable on (i) August 30, 2006, or (ii) as
governed in the Amended and Restated Note and Mr. Goldman's Severance and
Change in Control Agreement, if termination of Mr. Goldman's employment with
the Company occurs.
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 and 1995 were
approximately $0.2 million and $0.3 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 1997,
1996 and 1995 were approximately $1.4 million, $1.2 million and $1.3 million,
respectively. On December 24, 1997, the Company retained the insurance
brokerage services of Frank Crystal & Co. of California, Inc. ("Frank
Crystal"). Scott R. Heldfond, a Director of the Company is the President and
Chief Executive Officer of Frank Crystal. No amounts were paid to Frank
Crystal during 1997.
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 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, 1997 was
$517,000 based on a discounted cash flow basis.
<PAGE>
F-21
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 (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
United States
Non-affiliated customer revenue $163,276 $196,735 $139,373
Earnings (loss) from operations (24,192) 16,930 8,229
Identifiable assets 183,768 177,439 111,639
Foreign
Non-affiliated customer revenue 76,275 88,170 80,671
Earnings from operations 2,334 6,734 4,760
Identifiable assets 24,015 19,466 8,445
Consolidated
Net revenues 239,551 284,905 220,044
Earnings (loss) from operations (21,858) 23,664 12,989
Micro Machines license rights and
litigation settlement (22,949) -- --
Interest expense (602) (3,183) (3,429)
Other income (expense), net (2,095) 455 439
--------- --------- ---------
Earnings (loss) before income taxes (47,504) 20,936 9,999
Identifiable assets $207,783 $196,905 $120,084
</TABLE>
<PAGE>
F-22
NOTE S - Quarterly Financial Data (Unaudited)
Quarterly financial data for 1997 and 1996 are summarized
in the following table:
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
--------------------------------------------------
Net earnings
Net (Loss) per
Net Gross Earnings Common
Revenues Margin (Loss) Share
----------- --------- --------- ------------
<S> <C> <C> <C> <C>
1997:
- - - ---------------
1st Quarter $40,598 $17,744 ($2,326) ($0.13)
2nd Quarter 52,356 23,484 (13,115) (0.73)
3rd Quarter 83,248 26,514 (11,135) (0.62)
4th Quarter 63,349 28,653 (2,874) (0.16)
1996:
- - - ---------------
1st Quarter $37,522 $15,931 ($4,115) ($2.71)
2nd Quarter 49,201 22,511 387 0.02
3rd Quarter 88,547 42,957 9,269 0.57
4th Quarter 109,635 59,224 12,910 0.74
</TABLE>
<PAGE>
F-23
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 12/31/97
Provisions for returns
and allowance $12,024 $19,259 $15,996 $15,287
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
</TABLE>
<PAGE>
<PAGE>
S-1
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.
4.4(a)(18) Warrant, dated as of October 14, 1997, between Lucasfilm Ltd.
and Galoob Toys, Inc.
4.4(b)(18) Warrant, dated as of October 14, 1997, between Lucas Licensing
Ltd. and Galoob Toys, Inc.
4.4(c)(18)+ Agreement of Strategic Relationship, dated as of October 14,
1997, between Lucasfilm Ltd., a California corporation, and
Galoob Toys, Inc.
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, Ronald Hirschfeld and the Company.
10.1(d)(9)* Form of Amendment No. 1 between each of Mark Goldman, William
Catron, Lou Novak, Gary Niles, Ronald Hirschfeld and the Company.
10.1(e)(10) 1995 Non-Employee Directors' Stock Option Plan.
10.1(f)(15)* Galoob Toys, Inc. 1996 Long Term Compensation Plan
10.1(g)(15)* Galoob Toys, Inc. 1996 Share Incentive Plan
10.1(h)(16)* Galoob Toys, Inc. Officers Deferred Compensation Plan
10.3* Severance and Change in Control Agreement dated November 17, 1997
between Mark D. Goldman and the Company
10.4(a)(16)* Agreement, dated January 1, 1997, between William G. Catron and
the Company.
10.4(b)(16)* Agreement, dated January 1, 1997, between Ronald Hirschfeld and
the Company.
10.4(c)(16)* Agreement, dated January 1, 1997, between Roger J. Kowalsky and
the Company.
10.4(d)(16)* Agreement, dated January 1, 1997, between Gary J. Niles and the
Company.
10.4(e)(16)* Agreement, dated January 1, 1997, 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)(15) Lease Agreement, dated December 3, 1996, between Prudential
Insurance Company of America as Lessor and the Company, as
Lessee.
10.10(17) Settlement and Release Agreement, dated June 2, 1997.
10.11(18) Toy License Agreement, dated as of October 14, 1997, between
Lucas Licensing Ltd. and Galoob Toys, Inc.
10.11(c) Trademark License Agreement, dated as of October 14, 1997,
between Lucas Licensing, Ltd. and Galoob Toys, Inc.
10.12 Amendment No. 4 to Amended and Restated Loan and Security
Agreement, dated December 17, 1997, by and among the Company and
Congress Financial Corporation (Central)
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. 33-00743, 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.
(15) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1996, filed with the Commission on March 31,
1997.
(16) Incorporated by reference to the Company's Form 10-K/A for the fiscal
year ended December 1996, filed with the Commission on April 30, 1997.
(17) Incorporated by reference to the Company's Form 10-Q for the six months
ended June 30, 1997, filed with the Commission on August 6, 1997.
(18) Incorporated by reference to the Company's Form 10-Q for the nine
months ended September 30, 1997, filed with the Commission on November
14, 1997.
* Indicates exhibits relating to executive compensation.
+ Portions of this agreement have been omitted pursuant to a request for
confidential treatment under Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
1934, as amended.
<PAGE> 1
EXHIBIT 10.3
SEVERANCE AND CHANGE IN CONTROL AGREEMENT
AGREEMENT effective as of November 17, 1997 between GALOOB TOYS,
INC. (the "Corporation") and MARK D. GOLDMAN (the "Executive").
WHEREAS, the Executive is currently employed by the Corporation in
an executive or key management position capacity and is currently
serving as President and Chief Executive Officer, as a member of the
Board of Directors and as a member of the Executive Committee of the
Board of Directors; and
WHEREAS, the Executive is willing to enter into this Agreement
upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual promises and
covenants herein contained, the Corporation and Executives agree as
follows:
1. Term of Agreement. The term of the Agreement shall be
deemed to have commenced as of November 17, 1997 and shall continue
indefinitely unless terminated by either the Executive or the
Corporation subject to the conditions set forth in Section 3 hereto.
2. Position. During the term hereof, the Executive shall
continue to serve as an officer or key management employee of the
Corporation with the office or position, duties and responsibilities as
follows: President and Chief Executive Officer of the Corporation
responsible for managing, planning and directing the performance,
operation and all other aspects of the Corporation; member of the Board
of Directors; and member of the Executive Committee or any other
committee, regardless of name, having authority similar to or greater
than that currently vested in the Executive Committee.
3. Termination of Employment. The termination of the
employment of the Executive during the period of this Agreement may
occur, under this Agreement, in one of the following ways:
a. By the Corporation. The Corporation may terminate
the employment of the Executive with "cause." Termination shall be
defined to be for "cause" only if:
(1) The Executive knowingly and willfully breaches
or habitually neglects material duties and responsibilities within
the course and scope of his authority as Chief Executive Officer and
President of the Corporation; provided, however, the Board of
Directors shall have given the Executive written notice specifying the
conduct alleged to have constituted such cause and the Executive has
failed to cure such conduct, if curable, within thirty (30) days
following receipt of such notice.
(2) The Executive knowingly and willfully commits an
act of dishonesty, fraud, or misrepresentation which is monetarily
materially adverse to the Corporation.
b. By the Executive. The Executive may terminate his
employment at any time during the period of this Agreement:
(1) For any reason, including retirement; or
(2) For "good reason." Termination shall be deemed
for "good reason" if:
(a) the Corporation makes, or the
stockholders make, a material change in the Executive's
duties, responsibilities or authority, without his express
written consent, or any change which would cause the
Executive's position with the Corporation to become of less
dignity, responsibility, importance or scope from the
position and attributes therefor described in Section
2;
(b) the Corporation reduces the Executive's
base annual salary or annual cash incentive compensation bonus formula; or
(c) any of the following events shall occur
(each such event shall be referred to hereinafter as a
"Change in Control" of the Corporation and shall be
deemed to occur as of the first date on which any of the following
events occur):
(i) A Person shall, in a transaction to
which the Corporation is not a party, become the direct or
indirect Beneficial Owner of securities of the Corporation
representing twenty five percent (25%) or more of the
combined voting power of the issued and outstanding common
stock voting securities of the Corporation ("Significant
Owner"). For purposes of this Agreement, the terms "Person"
and "Beneficial Owner" shall be given the definitions
contained in Rule 13d-3 under the Securities Exchange Act of
1934, as amended from time to time.
(ii) (A) Directors who constituted the
Board of Directors on January 1, 1997, and any other
individual(s) who becomes a director subsequent to the date
of this Agreement whose election as a director was initially
approved by at least a majority of directors who comprised
the Board of Directors as of the date of such election or
nomination ("incumbent Directors"), comprise two-thirds
(2/3) or less of the Board of Directors; or (B) the
Corporation or the Board of Directors elects or appoints
anyone other than the Executive as Chairman of the Board; or
(C) notwithstanding anything else in this Agreement,
including approval by the majority of Incumbent Directors,
if the Corporation is a party to a transaction resulting in
a Person becoming the direct or indirect Beneficial Owner of
the securities of the Corporation representing twenty-five
percent (25%) or more of the combined voting power of the
issued and outstanding common stock voting securities of the
Corporation, and, in conjunction with the transaction or in
a period twelve (12) months from the date of that
transaction, one-third (1/3) or more of the Board of
Directors is composed of directors who were not Incumbent
Directors prior to such transaction, or during the period
commencing twenty-four (24) months from the date of such
transaction, one-half (1/2) or more of the Board of
Directors is composed of directors who were not Incumbent
Directors prior to such transaction.
(iii) The Corporation's common stock, par
value $.01 per share, shall cease to be publicly traded.
(iv) A sale of all or substantially all
of the assets of the Corporation.
(v) The Board of Directors shall approve
any merger, consolidation, or like business
combination or reorganization of the Corporation, the
consummation of which would result in the occurrence of any event
described in clause (ii) or (iii) above, and such
transaction shall have been consummated.
c. By Death or Disability. This Agreement shall
terminate upon the death of the Executive. In addition, if the
Executive shall be prevented during the term of this Agreement from
properly performing services hereunder by reason of a disability, this
Agreement may be terminated as hereinafter provided. "Disability" shall
mean that, as a result of the Executive's incapacity due to physical or
mental illness or injury, the Executive has been absent from the full-
time performance of his duties with the Corporation for six (6)
consecutive months and within thirty (30) days after written notice of
termination due to a Disability is given to the Executive by the
Corporation, he has not returned to the full-time performance of his
duties for a period of at least 14 consecutive days, whereupon this
Agreement and Executive's employment will be terminated. Any question
as to the existence of Disability shall be determined by a qualified
independent physician selected by the Executive (or, if he is unable to
make such selection, such selection shall be made by any adult member of
the Executive's family) and approved by the Corporation. The written
determination of such physician shall be final and conclusive for
purposes of this Agreement.
4. Consequences of Termination. The termination of the
employment of the Executive will cause the following results:
a. If the termination is by the Corporation for cause or
is by the Executive for any reason other than for good reason, the
Corporation will pay the Executive within five (5) days after the date
of termination any unpaid compensation for services performed prior to
the date of termination and the amount of any accrued but unused FTO or
vacation time to which the Executive may be entitled to under the
Corporation's vacation plan and any amounts to be paid to the Executive
pursuant to any deferred compensation plan. Except as provided in the
preceding sentence, and except for other payments routinely owed to the
Executive by the Corporation for such items as travel and expense
reimbursement, the Corporation shall have no further obligations to the
Executive under this Agreement or otherwise; or
b. If the termination is by the Corporation for other
than cause prior to a Change in Control, or by the Executive for good
reason prior to a Change in Control, the Corporation shall pay the
Executive within five (5) days after the date of termination, a lump sum
payment equal to three times the Executive's annualized current base
compensation and:
(1) pay three times an amount equal to the largest
dollar bonus paid (including, for this purpose, any bonus amount
that was deferred by Executive) in the last five years, including
the year in which the Executive's termination of employment
occurs. The term "bonus" herein shall include regular annual
bonus payments, any annual super performance bonus payments, and
any other designated annual (as opposed to long term) bonus
payments. The amount determined pursuant to the first sentence of
this paragraph 4.b.(1) above shall be hereinafter referred to as
the "Owed Bonus"; and
(2) pay a lump sum amount equal to three times the
annual car allowance in effect for the Executive at the time of
termination and a lump sum amount equal to three times the annual
insurance, maintenance, and gasoline costs incurred for the
Executive's vehicle during the Executive's last full year of
employment with the Corporation; and
(3) the corporation shall continue all medical,
health and welfare and insurance benefits that were in effect and
in which the Executive participated as of the date of termination
for a period of thirty-six (36) months from the date of
termination; the provisions and conditions covering the foregoing
benefits, including the amount of any contributions to be made by
the Executive on a monthly or other periodic basis, will be
governed by the various benefit plans as they are in effect from
time to time.
c. If the termination is by the Corporation for other
than cause within the twenty-four (24) months following a Change in
Control, or by the Executive for good reason within twenty-four (24)
months following a Change in Control, the Corporation shall pay to the
Executive within five (5) days after the date of termination, a lump sum
payment equal to three times the Executive's annualized current base
compensation and three times the Owed Bonus; and
(1) pay a lump sum amount equal to $948,400
("Special Payment") plus the Corporation shall make a payment to
the Executive ("Make-Whole Payment") in such an amount as to pay
any income taxes and employment taxes on the Special Payment; any
income taxes and employment taxes on the Make-Whole Payment; and
the value of the lost tax benefit caused by the loss of any tax
deduction resulting from the receipt of the Special Payment and/or
the Make-Whole Payment;
(2) pay a lump sum amount equal to three times the
annual car allowance in effect for the Executive at the time of
termination and a lump sum amount equal to three times the annual
insurance, maintenance, and gasoline costs incurred for the
Executive's vehicle during the Executive's last full year of
employment with the Corporation;
(3) the Corporation shall continue all medical,
health and welfare and insurance benefits that were in effect and
in which the Executive participated as of the date of termination
for a period of thirty-six (36) months from the date of
termination; the provisions and conditions covering the foregoing
benefits, including the amount of any contributions to be made by
the Executive on a monthly or other periodic basis, will be
governed by the various benefit plans as they are in effect from
time to time; and
(4) if the Amended and Restated Promissory Note -
Balloon Payment, dated November 17, 1997, between the Corporation,
as the Lender, and the Executive and his spouse, as the Borrower
(a copy of which is attached hereto and made a part hereof as
Exhibit A) (the "Note") is forgiven and released in accordance
with the provisions of paragraph 3(c)(iii) of the Note, then as
between the Corporation and the Executive it will be deemed that
the forgiveness and release of the Note would subject the
Executive and the Borrower to taxes on the total amount that is
forgiven and released ("Taxable Amount") and, therefore, the
Corporation shall make a payment to the Executive within five (5)
days after the effective date of such forgiveness and release
("Other Make-Whole Payment") in such an amount as to pay any
income taxes and employment taxes on the Taxable Amount; any
income taxes and employment taxes on the Other Make-Whole Payment;
and the value of the lost tax benefit caused by the loss of any
tax deduction resulting from the receipt of the Taxable Amount
and/or the Other Make-Whole Payment.
(5) Appendix 1 to this Agreement, attached hereto
and made a part hereof, presents the computation of the Make-Whole
Payment and the Other Make-Whole Payment pursuant to Sections
4c(1) and (4) above, respectively. Appendix 1 is intended to set
forth the amount of the Make-Whole Payment and the Other Make-
Whole Payment, as the case may be, under current law, and it is
intended that any pertinent changes in the law that impact the
methodology used to compute these Payments would require the
Corporation and the Executive to agree on the appropriate
modification(s) to Appendix 1.
d. Nothing in this Agreement shall prevent the Executive
from receiving any benefits to which the Executive may be entitled under
any plan or program of the Corporation, except any severance pay
benefits for which the Executive may otherwise be eligible under any
plan, program or policy of the Corporation other than this Agreement.
e. (1) Notwithstanding anything to the contrary
contained herein, in the event it shall be determined that any payment
or distribution by the Corporation to or for the benefit of the
Executive including the value of the Taxable Amount in Section 4(c)(4)
above, (whether paid or payable or distributed or distributable pursuant
to the terms of this Agreement, or by operation of other agreements or
undertakings (including option agreements)), but determined without
regard to any additional payments required under this Section 4.e. (a
"Payment"), would be subject to the excise tax imposed by Section 4999
of the Internal Revenue Code of 1986 as amended (the "Code"), or any
comparable Federal, state or local excise tax (such excise tax, together
with any interest and penalties, are hereinafter collectively referred
to as the "Excise Tax"), then the Executive shall be entitled to receive
an additional payment (a "Gross-Up Payment"). The Gross-Up Payment
shall be in such amount as to pay the Excise Tax, any excise tax imposed
by Code Section 4999 on the Gross-Up Payment, any income taxes and
employment taxes (including, without limitation, penalties and interest)
on the Gross-Up Payment, and the value of the lost tax benefit caused by
the loss of any tax deduction resulting from the receipt of the Gross-Up
Payment. An example under current law under which Executive could lose
the benefit of tax deductions to which the Executive might otherwise be
entitled because of the receipt of a Gross-Up Payment is the overall
limitation on itemized deductions under Code Section 68. This example
of the loss of tax deduction is intended to be illustrative and is not
intended to be exclusive. Appendix 2 to this Agreement attached hereto
and made a part hereof, presents an illustrative example of the
operation of the Gross-Up Payment. Appendix 2 is only intended to
present an illustration of the methodology to use to compute the Gross-
Up Payment under current law and it is intended that changes in the law
may impact the methodology used to compute the Gross-Up Payment.
(2) All determinations required to be made under
this Section 4.e., including, without limitation, whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determinations, shall
be made by Price Waterhouse or any other nationally recognized
accounting firm which is the Corporation's outside auditor at the time
of such determination, which firm must be reasonably acceptable to the
Executive (the "Accounting Firm"). The Corporation shall cause the
Accounting Firm to provide detailed supporting calculations to the
Corporation and the Executive within fifteen (15) business days after a
notice is given by the Executive to the Corporation that there has been
a Payment, or such earlier time as is requested by the Corporation.
Within two (2) business days after said notice is given to the
Corporation, the Corporation shall instruct the Accounting Firm to
timely provide the data required by this Section 4.e. to the Executive.
All fees and expenses of the Accounting Firm shall be borne solely by
the Corporation. Any Gross-Up Payment, as determined pursuant to this
Section 4.e., shall be paid by the Corporation to the Internal Revenue
Service ("IRS") and/or other appropriate taxing authority on the
Executive's behalf within five (5) days after receipt of the Accounting
Firm's determination. If the Accounting Firm determines that there is
substantial authority (within the meaning of Section 6662 of the Code)
that no Excise Tax is payable by the Executive, the Accounting Firm
shall furnish the Executive with a written opinion that failure to
disclose or report the Excise Tax on the Executive's Federal income tax
return will not constitute a substantial understatement of tax or be
reasonably likely to result in the imposition of a negligence or similar
penalty. Any determination by the Accounting Firm shall be binding upon
the Corporation and the Executive in the absence of material
mathematical or legal error. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments will not have been made by the Corporation that
should have been made ("Underpayment") or that Gross-Up Payments have
been made that should not have been made ("Overpayment"), in each case,
consistent with the calculations required to be made hereunder. In the
event that the Corporation exhausts its remedies pursuant to Section
4.e.(3) below and the Executive thereafter is required to make a payment
of any Excise Tax, the Accounting Firm shall determine the amount of
Underpayment, if any, that has occurred along with any required interest
and/or penalties thereon, and any such Underpayment along with any
required interest and/or penalties thereon, shall be promptly paid by
the Corporation to the IRS or other appropriate taxing authority on the
Executive's behalf or, if such Underpayment has been previously paid by
the Executive, the Corporation shall pay such Underpayment to the
Executive. In the event that the Accounting Firm determines that an
Overpayment has been made, any such Overpayment shall be treated for all
purposes as a loan to the Executive, effective as of the date the
Overpayment was made, with interest at the applicable Federal rate
provided for in Section 7872(r)(2) of the Code, due and payable on the
later to occur of (i) ninety (90) days after written demand to the
Executive by the Corporation; (ii) the date such Overpayment has been
refunded by the IRS to the Executive or (iii) the date such Overpayment
has been deducted by the Executive from Federal and State income taxes
and such deduction has reduced the Executive's tax payments by a like
amount; provided, however, that the Executive shall have no duty or
obligation whatsoever to repay said loan unless the Executive's receipt
of the Overpayment, or any portion thereof, is includible in the
Executive's income and the Executive's repayment of same is deductible
by the Executive for Federal and state income tax purposes.
(3) The Executive shall notify the Corporation in
writing of any claim by the IRS or state or local taxing authority that,
if successful, would result in any Excise Tax or an Underpayment
("Claim"). Such notice shall be given as soon as practicable but no
more than sixty (60) business days after the Executive is informed in
writing of the Claim and shall apprise the Corporation of the nature of
the Claim, the administrative or judicial appeal period, and the date on
which any payment of the Claim must be paid. The Executive shall not
pay any portion of the Claim prior to the expiration of the thirty (30)
day period following the date on which the Executive gives such notice
to the Corporation (or such shorter period ending on the date that any
amount under the Claim is due). If the Corporation notifies the
Executive in writing prior to the expiration of such thirty (30) day
period that it desires to contest the Claim, the Executive shall:
(a) give the Corporation any information
reasonably requested by the Corporation relating to the Claim;
(b) take such action in connection with
contesting the Claim as the Corporation shall reasonably request
in writing from time to time, including without limitation,
accepting legal representation concerning the Claim by an attorney
selected by the Corporation who is reasonably acceptable to the
Executive; and
(c) cooperate with the Corporation in good
faith in order to effectively contest the Claim; provided,
however, that the Corporation shall bear and pay directly all
costs and expenses (including, without limitation, additional
interest and penalties and reasonable attorneys' fees) incurred in
such contests and shall indemnify and hold the Executive harmless,
on an after-tax basis, for any Excise Tax or income tax
(including, without limitation, interest and penalties thereon)
imposed as a result of such representation. Without limitation
upon the foregoing provisions of this Section 4.e., except as
provided below, the Corporation shall control all proceedings
concerning such contest and, at its sole option, may pursue or
forego any and all administrative appeal, proceedings, hearings
and conferences with the taxing authority pertaining to the Claim.
At the written request of the Corporation and upon payment to the
Executive of an amount at least equal to the Claim plus any
additional amount necessary to obtain the jurisdiction of the
appropriate tribunal and/or court ("Additional Sum") the Executive
shall pay same and sue for a refund. The Executive agrees to
prosecute any contest of a Claim to a determination before any
administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Corporation shall determine;
provided, however, that if the Corporation requests the Executive
to pay the Claim and sue for refund, the Corporation shall
advance the amount of such payment to the Executive, on an
interest-free basis, and shall indemnify and hold the Executive
harmless on an after-tax basis, from any Excise Tax or income tax
(including, without limitation, interest, penalties thereon, or
lost deductions) imposed on such advance or for any imputed income
on such advance. Any extension of the statute of limitation
relating to assessment of any Excise Tax for the taxable year of
the Executive which is the subject of the Claim is to be limited
solely to the Claim. Furthermore, the Corporation's control of
the contest shall be limited to issues for which a Gross-Up
Payment would be payable hereunder. The Executive shall be
entitled to settle or contest, as the case may be, any other issue
raised by the IRS or any other taxing authority.
(4) If, after the receipt by the Executive of any
amount advanced by the Corporation pursuant to Section 4.e.(3)
above, the Executive receives any refund of a Claim and/or any
Additional Sum, the Executive shall promptly pay to the
Corporation the amount of such refund (together with any interest
paid or credited thereon after taxes applicable thereto). If,
after the receipt by the Executive of an amount advanced by the
Corporation pursuant to Section 4.e.(3) above, a final
determination or a non-final determination is made by the taxing
authority that the Executive shall not be entitled to any refund
of the Claim (and, in the case of a non-final determination, the
Corporation does not notify the Executive in writing of its intent
to contest such denial of refund of a Claim prior to the
expiration of thirty (30) days after such determination), then the
portion of such advance attributable to a Claim shall be forgiven
and shall not be required to be repaid. The amount of such
advance attributable to a Claim shall offset, to the extent
thereof, the amount of the Underpayment required to be paid by the
Corporation to the Executive. A "final determination" shall occur
when a court of appellate jurisdiction shall have finally
adjudicated a claim or when the period to contest or otherwise
appeal any decision by an administrative tribunal or court of
initial jurisdiction has been waived or the time for contention on
appealing same has expired.
5. Income Tax Withholding. The Corporation may withhold from
any benefits payable under this Agreement any Federal, state, city or
other taxes as may be required pursuant to any law, regulation or
ruling.
6. Confidentiality. Executive covenants and agrees to regard
and preserve as confidential all proprietary information and trade
secrets that have been or may be obtained by the Executive in the course
of his employment with the Corporation.
7. Stock Options. In the event of a Change in Control, unless
the employment of the Executive is terminated for Cause, (i) all then
outstanding stock options granted to the Executive under the Amended and
Restated 1984 Employee Stock Option Plan and the 1994 Senior Management
Stock Option Plan shall become immediately exercisable without regard to
any installment or vesting provisions that may have been made part of
the terms and conditions of such options. If the Executive terminates
his employment with the Corporation for good reason within 24 months
following a Change in Control, or if the Executive is terminated by the
Corporation within 24 months following a Change in Control other than
for Cause, any and all then outstanding stock options and stock
appreciation rights granted to such employee under the 1996 Share
Incentive Plan shall become immediately exercisable.
8. General
(a) Subject to the second sentence hereof, the Corporation
shall pay to the Executive reasonable attorneys' fees that may be
incurred by the Executive in enforcing the terms of this Agreement. If
litigation or an arbitration proceeding ensues, and the Executive
prevails in such litigation or arbitration, the Corporation shall
promptly reimburse the Executive for his attorneys' fees and
disbursements, costs and expenses ("Costs") incurred in such litigation
or arbitration proceeding, plus interest on such Costs from the date
they are incurred by the Executive, and pay prejudgment interest on any
money judgment obtained by the Executive, such interest on such Costs
and such prejudgment interest to be calculated at the base rate of
interest charged from time to time by Citibank, N.A. from the date that
payment should have been made under this Agreement.
(b) The Corporation's obligation to pay the Executive the
compensation and to make the arrangements provided herein shall be
absolute and unconditional and shall not be affected by any
circumstance, including, without limitation, any setoff, counterclaim,
recoupment, defense or other right which the Corporation may have
against the Executive or anyone else. All amounts payable by the
Corporation hereunder shall be paid without notice or demand. The
Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment and if
Executive obtains such other employment, any compensation earned by
Executive pursuant thereto shall not be applied to mitigate any payment
made to Executive pursuant to this Agreement except as expressly
provided herein.
(c) The Corporation shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the
Corporation, by written agreement to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that
the Corporation would be required to perform it if no such succession
had taken place. As used in this Agreement, the term "Corporation"
shall mean the Corporation as hereinbefore defined and any successor to
its business and/or assets as aforesaid which executes and delivers the
agreement required by this Section 8(c), or which otherwise becomes
bound by all terms and provisions of this Agreement by operation of law.
(d) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amounts would still be
payable to the Executive hereunder if he had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to the Executive's devisee, legatee or
other designee or, if there be no such designee, to the Executive's
estate.
(e) For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed by
United States registered mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Executive:
Mark D. Goldman
2320 Vallejo Street
San Francisco, CA 94123
If to the Corporation:
Galoob Toys, Inc.
500 Forbes Blvd.
South San Francisco, California 94080
Attn: General Counsel
or to such other address as either party may have furnished to the other
in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt.
(f) This Agreement shall constitute the entire agreement
between the Executive and the Corporation concerning the subject matter
hereof, and performance of its obligations hereunder by the Corporation
shall constitute full settlement and release of any claim or cause of
action, of whatsoever nature, which the Executive might otherwise assert
or claim against the Corporation or any of its directors, stockholders,
officers or employees on account of any termination. This Agreement
supersedes the severance agreement, dated October 27, 1994, between the
Corporation and the Executive, and such agreement is hereby terminated
and of no further force or effect. No provisions of this Agreement may
be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing, signed by the Executive and an
authorized officer of the Corporation. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of any similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
No assurances or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party
which are not set forth expressly in this Agreement. However, this
Agreement is in addition to and not in lieu of any other plan providing
for payments to or benefits for the Executive or any agreement now
existing or which hereafter may be entered into between the Corporation
and the Executive. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State
of Delaware without giving effect to the provisions, principles, or
policies thereof relating to choice or conflict of laws.
(g) The invalidity or unenforceability of any provision of
this Agreement in any circumstance shall not affect the validity or
enforceability of such provision in any other circumstance or the
validity or enforceability of any other provision of this Agreement, and
except to the extent such provision is invalid or unenforceable, this
Agreement shall remain in full force and effect. Any provision in this
Agreement which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective only to the extent of
such prohibition or unenforceability without invalidating or affecting
the remaining provisions hereof in such jurisdiction, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction.
(h) Except as otherwise explicitly provided herein, any
dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with
the rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that the Executive shall be entitled to
seek specific performance in a court of law, of his right to be paid as
provided in this Agreement in the event of any dispute.
(i) The masculine or neuter gender shall include the
feminine gender. This Agreement may be executed in more than one
counterpart, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the day and year first above written.
GALOOB TOYS, INC.
By:
Name: Mark D. Goldman
Title:
mgsever
CALCULATION OF GROSS-UP FACTOR APPENDIX 2
AND PROOF OF GROSS-UP PAYMENT
ASSUMPTIONS:
FEDERAL INCOME TAX RATE 39.600%
ADJUSTMENT TO FEDERAL RATE FOR
ITEMIZED DEDUCTION PHASE OUT 1.188%
GOLDEN PARACHUTE EXCISE TAX RATE 20.000%
MEDICARE PORTION OF FICA TAX RATE 1.450%
STATE INCOME TAX RATE 9.300%
EXCISE TAX LIABILITY BEFORE GROSS UP $100,000
CALCULATION OF GROSS-UP FACTOR:
FEDERAL INCOME TAX RATE 39.600%
ADJUSTMENT FOR ITEMIZED DEDUCTION
PHASE OUT 1.188%
GOLDEN PARACHUTE EXCISE TAX RATE 20.000%
MEDICARE PORTION OF FICA TAX RATE 1.450%
STATE INCOME TAX RATE NET OF TAX
BENEFIT (9.3% X [1 - .396]) 5.617%
SUM OF APPLICABLE TAX RATE 67.855%
GROSS-UP FACTOR (1 / [1 - .67855]) 3.11092
PROOF:
EXCISE TAX ON EXCESS PARACHUTE PAYMENTS (SEE ABOVE) $100,000
GROSS-UP FACTOR 3.11092
-----------
GROSS-UP PAYMENT (EXCISE TAX x GROSS-UP FACTOR) $311,092
COMPONENTS OF GROSS UP:
FEDERAL INCOME TAX ON GROSS-UP PAYMENT (40.788%)
(40.788% OF GROSS-UP PAYMENT) $126,888
GOLDEN PARACHUTE EXCISE TAX ON EXCESS
PARACHUTE PAYMENT (20% [SEE ABOVE]) $100,000
GOLDEN PARACHUTE EXCISE TAX ON GROSS-
UP PAYMENT (20% OF GROSS-UP PAYMENT) 62,218
FICA MEDICARE TAX ON GROSS-UP PAYMENT
(1.45% OF GROSS-UP PAYMENT) 4,511
STATE INCOME TAX (NET) ON GROSS-UP
PAYMENT (5.617% OF GROSS-UP PAYMENT 17,475
TOTAL TAXES GROSSED UP $311,092
<PAGE> 1
EXHIBIT 10.11(c)
TRADEMARK LICENSE AGREEMENT
AGREEMENT dated as of this l4~~ day of October 1997, by and among Lucas
Licensing Ltd.
("Licensor") and Galoob Toys, Inc. and all "Permitted Licensee
Affiliates" (as defined in the
License Agreement) (collectively, "Licensee").
1. TRADEMARKS, PRODUCTS AND LICENSED TERRrrORY: Licensor is, as
between Licensor and Licensee, the owner of the trademarks indicated on
Schedule A-i attached hereto and made a part hereof ("Licensor
Trademarks"). Licensor desires that Licensee be permitted to use the
Licensor Trademarks on those goods indicated on Schedule A-2 attached
hereto and made a part hereof ("Licensed Products") in the country or
countries ("Licensed Territory") listed on Schedule A-3 listed on
Schedule A-2s attached hereto and made a part hereof pursuant to the
terms and conditions hereof. The parties acknowledge and agree that the
designations of the Licensed Products and Licensed Territory contained
in Schedules A-2 and A-3, respectively, are not intended to, and shall
not, supersede or alter in any manner the designations used with respect
to these matters in any commercial agreement between the parties related
to the subject matter hereof including but not limited to the Toy
License Agreement dated as of October 14, 1997 among the parties hereto
(the "License Agreement").
2. LICENSE: Licensor hereby grants to Licensee a license (as
provided in the License Agreement) to use the Licensor Trademarks on and
in connection with the Licensed Products and for the sole purpose to
affix the Licensor Trademarks to or on the Licensed Products and
packaging, containers, display materials, advertising and promotional
materials sold, used or distributed in connection with the Licensed
Products. Licensee hereby agrees to limit its use of the Licensor
Trademarks in accordance with the foregoing and according to processes,
specifications and other quality standards established or approved by
Licensor pursuant to the License Agreement for the Licensed Products
with respect to which the Licensor Trademarks are used. Without limiting
the generality of the foregoing, the quality of all such Licensed
Products shall be at least as high as that of similar goods presently
sold or distributed by Licensee, and shall be subject to such approval
procedures established by any commercial agreement between the parties
related to the subject matter hereof.
3. TERM: The Term of this Agreement shall be concurrent with the
"Term" of the License Agreement (as that term is defined therein), including any
so-called "sell-off period", to which Licensee is entitled, if at all.
4. UMnED GRANT: All rights in the Licensor Trademarks other than
those specifically granted herein are reserved to Licensor for its own
use and benefit. Licensee acknowledges that it shall not acquire any
rights of whatsoever nature in the Licensor Trademarks as a result of
Licensee's use thereof, and that all use of the Licensor Trademarks by
Licensee shall inure to the benefit of Licensor.
5. DISPLAY OF TRADEMARKS AND PROPRIETARY N~CES: Pursuant to the
terms and conditions of the License Agreement: (a) Licensee agrees that
the Licensor Trademarks shall be displayed only in such form and manner as
shall be specifically approved by Licensor; (1)) Licensee shall cause to
appear on all material on or in connection with which the
Licensor Trademarks are used, such legends, markings and notices as
Licensor may require; (c) Licensee agrees that it shall use no markings,
legends or notices relating to the Licensor Trademarks on the Licensed
Products and packaging and advertising therefor other than as approved
in advance in writing by Licensor; (d) Licensor reserves the right to
make such changes in the specified notices as Licensor reasonably deems
necessary or desirable to protect Licensor's interests in the Licensed
Trademarks, provided however that such changes shall not be required to
be made on Licensed Products and packaging or advertising therefor which
have already been manufactured or printed in accordance with Licensor's
previous instructions or approval. The foregoing shall not limit
Licensor's ability to reasonably require so-called "running changes" or
to otherwise to enforce the provisions of this Agreement or any other
agreement between the parties.
The words "Registered User" andlor the Symbol TM or r shall be used on
all Licensed Products, packaging and advertising manufactured or printed
after Licensor notifies Licensee in writing that such words and symbol
are legally permitted in the specific country or countries in the
Licensed Territory within which the Licensed Products will be
distributed.
6. COMPLIANCE WITH QUALITY STANDARDS: if the quality standards set
forth herein are not met, or if said quality standards are not
maintained throughout the period of manufacture of any Licensed Products
hereunder, then, upon written notice from Licensor, Licensee shall
immediately discontinue the manufacture and distribution of such
Licensed Products that do not meet said quality standards. The foregoing
shall not limit Licensor's rights or remedies for failure to maintain
such quality standards as provided elsewhere herein or in any other
agreement between the parties hereto.
7. PRODUCTION SAMPLES: In accordance with the terms and conditions of
the License Agreement, Licensee agrees to submit to Licensor and to any
other recipient(s) which Licensor may from time to time designate in
writing, on a regular basis, representative samples of the Licensed
Products and of any or all materials bearing the Trademarks in order
Licensor may be assured that the provisions of this Agreement are being
observed. Said samples should be submitted to Licensor at the address
specified by Licensor.
8. GOODWILL OF THE TRADEMARK: Licensee recognizes the great value of
the goodwill associated with the Licensor Trademarks and acknowledges
that the Licensor Trademarks and all rights therein and goodwill
pertaining thereto belong exclusively to Licensor.
9. SIMILAR TRADEMARKS: Licensee shall give Licensor prompt written
notice of any adverse use in the Licensed Territory of a trademark or
other designation similar to the Licensor Trademarks of which Licensee
is or becomes aware. Licensee further agrees that it shall not at any
time apply for any registration of any copyright, trademark or other
designation, nor file any document with any governmental authority, nor
take any other action which would affect the ownership of the Licensor
Trademarks.
10. TERMINATION: Upon the expiration or earlier termination of this
Agreement, all rights to use the Licensor Trademarks or any other
symbols of goodwill owned by Licensor relative to the Licensed Products,
together with the appurtenant goodwill thereof shall revert
automatically to Licensor, and Licensee shall immediately discontinue all
use of the Licensor Trademarks except as may herein be provided.
11. ASSIGNMENT UPON TERMINATION: Upon written request by
Licensor, or in any event upon the termination of this
Agreement for whatever reason, Licensee shall execute and
deliver to Licensor a document, in form and substance
reasonably satisfactory to Licensor, assigning to Licensor
all of Licensee's right, title and interest, if any, in and
to the Licensor Trademarks. In the event Licensee fails to
execute and deliver said document, Licensor shall have the
right to execute same as Licensee's attorney-in-fact, and
Licensee does hereby irrevocably appoint (such appointment
being irrevocable and coupled with an interest) Licensor its
true and lawful attorney-in-fact only for the purpose of
executing such document.
12. RECORDATION OF AGREEMENT, REGISTERED USER: Licensor, at
its discretion, shall have the right to record this Agreement
at the appropriate Registry or governmental authority in the
Licensed Territory at Licensor's expense, and Licensee agrees
to cooperate as requested by Licensor in arranging such
recordation, or in varying or canceling such recordation in
the event of amendments to, or termination of, this
Agreement. Licensee hereby appoints Licensor as its agent for
the purpose of lodging, prosecuting and completing registered
user entries at the appropriate registry in the Territory and
at Licensor's expense, such appointment being irrevocable and
coupled with an interest.
13. GENERAL: The terms and conditions of this Agreement are
subject to the terms and conditions of the License Agreement
and in the event of a conflict between the terms or
conditions herein contained and those of the License
Agreement, the latter shall prevail. Approvals hereunder
shall be made subject to the terms of the License Agreement.
This Agreement does not constitute either party the agent of
the other or create a partnership or joint venture between
the parties except as provided herein, and Licensee shall
have no power to obligate or bind Licensor in any manner
whatsoever. This Agreement shall be governed by the laws of
the State of California applicable to agreements made and
fully performed in California.
Galoob Toys, Inc., on behalf of itself and all Lucas
Licensing Ltd. ("Licensor")
Permi d Licensee Mfiliates ("Licensee")
______________________________________________ A
IN witness WHEREOF, this Agreement is executed as of the day and year first
above written.
Name:
Title:
Title: President and
CEO
Schedule A-i to TRADEMARK LICENSE AGREEMENT LICENSOR TRADEMARKS
The Licensor Trademarks include such original trademarks, tradenames,
servicemarks and servicenames owned by
Licensor and arising out of and which have become direcfly associated
with the "Pictures" or the "Spin-Off
Properties" (as such terms are defined in the License Agreement), to the
extent of Licensor's rights in each
applicable country of the Territory under such country's applicable
trademark laws, including, but not limited to:
Artoo-Detoo (~-D2)
Ben (Obi-Wan) Kenobi
Chewbacca
Darth Vader
The Emperor
Ewok
Han Solo
Jabba the Hutt
Lando Cairissian
Lord Darth Vader
Luke Skywalker
Princess Leia Organa
Return of the Jedi
Return of the Jedi Logo
See-Threepio (C-3P0)
Star Wars
Star Wars Logo
The Empire Strikes Back
The Empire Strikes Back Logo
The Force
Yoda
Schedule A-2 to TRADEMARK LICENSE AGREEMENT
LICENSED PRODUCTS
The term "Licensed Products" as used in the License
Agreement, means MICRO TOYS (as hereinafter defined).
The term "MICRO TOYS," as used in the License Agreement,
means "Intermediate Vehicles," "Micro Vehicles," "Micro Playsets," and
"Micro Figures" (as such terms are defined hereinbelow) made of
injection-molded plastic (or materials that are comparable in cost or
physical characteristics to plastics and/or all other materials that are
approved in advance by Licensor) with or without electrical or
electronic parts (excluding radio control).
1. Intermediate Vehicles: The term "Intermediate
Vehicles," as used in the Agreement, means pre-assembled,
decorated toy vehicles, the size of which vehicles is over three
inches (3") but not more than six inches (6") in maximum
dimension.
2. Micro Vehicles: The term "Micro Vehicles," as
used in the Agreement, means pre-assembled, decorated toy
vehicles, the size of which vehicles is under three inches (3") in
maximum dimension.
3. Micro Figures: The term "Micro Agreement, means
articulated or non-articulated, decorated figures is less than two
inches (2") in height and designed to Vehicles and/or Intermediate
Vehicles; and
Figures," as used in the figures, the size of which fit and be used with
Micro
4. Micro Playsets: The term "Micro Playsets," as
used in the Agreement, means decorated toy playsets (and their
accessories) in a scale and designed to fit and be used with Micro
Figures and/or Micro Vehicles.
Schedule A-3 to TRADEMARK LICENSE AGREEMENT
LICENSED TERRITORY
The territory of Licensee's rights pursuant to the Trademark
License Agreement to which this Schedule A-3 is attached (the
"Territory") consists of the following applicable countries:
United States Bulgaria Uruguay
Canada Romania Chile
UK/Eire Albania Peru
Germany Latvia Venezuela
Austria Estonia Colombia
Switzerland Lithuania Ecuador
France Poland Caribbean
Belgium Russia Guatemala
Netherlands (and other former Costa Rica
Luxembourg Soviet Union Panama
Italy countries) Nicaragua
Spain Japan El Salvador
Portugal Australia Honduras
Sweden New Zealand Beliz
Denmark Hong Kong Israel
Iceland Taiwan Lebanon
Finland Korea Saudi Arabia
Norway Singapore Egypt
Turkey Malaysia United Arab Ernirates
Greece Indonesia Djibouti
Slovenia Thailand South Africa
Bosnia Philippines Zimbabwe
Herzegovina (and Mexico
other former Brazil
Yugoslavia Argentina
countries) Paraguay
Czech Republic
Slovak Republic
<PAGE> 1
EXHIBIT 10.12
AMENDMENT NO. 4 TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 4 TO AMENDED AND RESTATED LOAN AND
SECURITY AGREEMENT ("Amendment"), dated as of December __, 1997 is
entered into between GALOOB TOYS, INC. (f/k/a Lewis Galoob Toys, Inc.),
a Delaware corporation ("Debtor"), and CONGRESS FINANCIAL CORPORATION
(CENTRAL) ("Congress").
W I T N E S E T H:
WHEREAS, the parties hereto are parties to that certain
Amended and Restated Loan and Security Agreement dated as of March 31,
1995 (as amended and/or modified prior to the date hereof, the "Existing
Agreement," and as amended by this Amendment, the "Loan Agreement";
capitalized terms used herein not otherwise defined herein shall have
the meanings ascribed to such terms in the Loan Agreement); and
WHEREAS, Debtor and Congress desire to amend the Existing
Agreement to, inter alia, (i) increase the amount of credit available to
Debtor to $75,000,000, (ii) extend the scheduled maturity date in
Section 2.5 of the Existing Agreement, (iii) modify the interest rates
and other fees under the Existing Agreement and (iv) provide for other
modifications of the Existing Agreement, as described below.
NOW, THEREFORE, in consideration of the premises, the mutual
covenants herein contained and other good and valuable consideration
(the receipt, adequacy and sufficiency of which are hereby
acknowledged), the parties hereto, intending legally to be bound, hereby
agree as follows:
1. Amendment to Existing Agreement.
1.1. The definitions contained in Section 1.1 of the
Existing Agreement shall be amended to reflect the following additions
or, in the case of terms already defined in the Existing Agreement,
modifications:
"Adjusted Eurodollar Rate" shall mean, with respect to
each Interest Period for any Eurodollar Rate Loan, the rate
per annum (rounded upwards, if necessary, to the next one-
sixteenth (1/16) of one (1%) percent) determined by dividing
(a) the Eurodollar Rate for such Interest Period by (b) a
percentage equal to: (i) one (1) minus (ii) the Reserve
Percentage. For purposes hereof, "Reserve Percentage" shall
mean the reserve percentage, expressed as a decimal,
prescribed by any United States or foreign banking authority
for determining the reserve requirement which is or would be
applicable to deposits of United States dollars in a non-
United States or an international banking office of
Reference Bank used to fund a Eurodollar Rate Loan or any
Eurodollar Rate Loan made with the proceeds of such deposit,
whether or not the Reference Bank actually holds or has made
any such deposits or loans. The Adjusted Eurodollar Rate
shall be adjusted on and as of the effective day of any
change in the Reserve Percentage.
"Business Day" shall mean (a) for the Prime Rate
Loans, any day other than a Saturday, Sunday, or other day
on which commercial banks are authorized or required to
close under the laws of the States of New York or Illinois
or the Commonwealth of Pennsylvania, and a day on which the
Reference Bank and Lender are open for the transaction of
business, and (b) for all Eurodollar Rate Loans, any such
day as described in (a) above in this definition of Business
Day, excluding any day on which banks are closed for
dealings in dollar deposits in the London interbank market
or other applicable Eurodollar Rate market.
"Eurodollar Rate" shall mean with respect to the
Interest Period for a Eurodollar Rate Loan, the interest
rate per annum equal to the arithmetic average of the rates
of interest per annum (rounded upwards, if necessary, to the
next one-sixteenth (1/16) of one (1%) percent) at which
Reference Bank is offered deposits of United States dollars
in the London interbank market (or other Eurodollar Rate
market selected by Debtor and approved by Lender) on or
about 9:00 a.m. (New York time) two (2) Business Days prior
to the commencement of such Interest Period in amounts
substantially equal to the principal amount of the
Eurodollar Rate Loans requested by and available to Debtor
in accordance with this Agreement, with a maturity of
comparable duration to the Interest Period selected by
Debtor.
"Eurodollar Rate Loans" shall mean any Loans or
portion thereof on which interest is payable based on the
Adjusted Eurodollar Rate in accordance with the terms
hereof.
"Interest Period" shall mean for any Eurodollar Rate
Loan, a period of approximately one (1), two (2), or three
(3) months duration as Debtor may elect, the exact duration
to be determined in accordance with the customary practice
in the applicable Eurodollar Rate market; provided, that,
Debtor may not elect an Interest Period which will end after
the last day of the then-current term of this Agreement.
"Interest Rate" shall mean, as to Prime Rate Loans,
the Prime Rate and, as to Eurodollar Rate Loans, a rate of
one and three quarters percent (1 3/4%) per annum in excess
of the Adjusted Eurodollar Rate (based on the Eurodollar
Rate applicable for the Interest Period selected by Debtor
as in effect three (3) Business Days after the date of
receipt by Lender of the request of Debtor for such
Eurodollar Rate Loans in accordance with the terms hereof,
whether such rate is higher or lower than any rate
previously quoted to Debtor); provided that, the Interest
Rate shall mean the rate of two percent (2%) per annum in
excess of the Prime Rate as to Prime Rate Loans and the rate
of three and three quarters percent (3 3/4%) per annum in
excess of the Adjusted Eurodollar Rate as to Eurodollar Rate
Loans, at Lender's option, without notice, (a) for the
period on and after the date of termination or non-renewal
hereof, or the date of the occurrence of any Event of
Default or event which with notice or passage of time or
both would constitute an Event of Default, and for so long
as such Event of Default or other event is continuing as
determined by Lender and until such time as all Obligations
are indefeasibly paid in full (notwithstanding entry of any
judgment against Debtor) and (b) on the Revolving Loans at
any time outstanding in excess of the amounts available to
Debtor under Section 2 (whether or not such excess(es),
arise or are made with or without Lender's knowledge or
consent and whether made before or after an Event of
Default).
"Maximum Credit" shall mean the amount of $75,000,000.
"Prime Rate Loans" shall mean any Loans or portion
thereof on which interest is payable based on the Prime Rate
in accordance with the terms thereof.
"Reference Bank" shall mean CoreStates Bank, N.A., or
such other bank as Lender may from time to time designate.
"Settlement Agreement" shall mean that certain
Settlement and Release Agreement dated as of June 2, 1997
between Debtor and Hedeen and Companies, FunMaker, Clemens
V. Hedeen, Jr., Patti Jo Hedeen, Ned Cain, Carol Cain, C.V.
Hedeen's Fun Factory, Hedeen International and CV Hedeen's
Fun City, U.S.A.
1.2 The definition of "Eligible Accounts" set forth in
Section 1.1 of the Existing Agreement is hereby amended by deleting the
phrase "30 days" which appear in clause (c) of the third sentence
thereof and inserting the phrase "60 days" in their place.
1.3 The definition of Eligible Inventory set forth in
Section 1.1 of the Existing Agreement is hereby amended by amending and
restating clause (e) thereof to read as follows:
"(e) The Inventory is (i) at a location permitted
under Section 8.24 hereof or (ii) in transit to such a
location, Congress has a first priority perfected security
interest in such Inventory and Debtor has delivered to
Congress such documents or instruments, which shall be in
form and substance satisfactory to Congress, as are
necessary, appropriate or desirable to perfect or otherwise
protect Congress' interest in such Inventory."
1.4 Section 2.1 of the Existing Agreement is hereby amended
as follows:
(a) The words "seventy five percent (75%)" are
hereby deleted from the first sentence of Section 2.1 of the
Existing Agreement and the words "eighty percent (80%)" are
hereby inserted in their place.
(b) Clause (b) in the first sentence of
Section 2.1 of the Existing Agreement is hereby
amended and restated to read as "fifty percent
(50%) of the Value of Eligible Inventory".
(c) The dollar amount "$8,000,000" is
hereby deleted from the second sentence of
Section 2.1 of the Existing Agreement and the
dollar amount "$12,000,000" is hereby inserted
in its place.
1.5 Section 2.3 of the Existing Agreement is hereby amended
by deleting the dollar amount "$60,000,000" which appears therein and
inserting the dollar amount "$75,000,000" in its place.
1.6 Section 2.5 of the Existing Agreement is hereby amended
and restated in its entirety to read as follows:
"2.5 Term of Agreement. This Agreement shall be
effective as of its date and shall continue in full force
and effect for a term ending on December 31, 2000, unless
sooner terminated pursuant to the terms hereof. Congress
shall have the right to terminate this Agreement immediately
at any time upon the occurrence of an Event of Default.
Debtor shall have the right to terminate this Agreement upon
not less than 30 days prior written notice to Congress by
indefeasibly paying to Congress all Obligations. Upon
expiration of the term of this Agreement, all Obligations
shall become due and payable, without demand or notice of
any kind. No termination of this Agreement, however, shall
relieve or discharge Debtor of its duties, obligations and
covenants hereunder until all Obligations have been paid in
full, and Congress' continuing security interest in the
Collateral shall remain in effect until such Obligations
have been fully discharged."
1.7 Section 2.6 of the Existing Agreement is hereby amended
and restated in its entirety to read as follows:
"2.6 Early Termination. If Congress terminates this
Agreement (i) upon the occurrence of an Event of Default,
and Congress is repaid prior to September 30, 2000 or (ii)
at Debtor's request, and Congress is repaid prior to
September 30, 2000, in view of the impracticability and
extreme difficulty in ascertaining actual damages and by
mutual agreement of the parties as to a reasonable
calculation of Congress' lost profits as a result thereof,
Debtor hereby agrees that it shall pay to Congress, upon the
effective date of such termination, an early termination fee
in an amount equal to one percent (1.0%) of the Maximum
Credit, if such termination occurs prior to September 30,
2000; provided, however, that no such early termination fee
shall be payable hereunder if, Congress is fully repaid upon
the termination of this Agreement (i) with the proceeds
received by the Debtor of a sale of an equity interest in,
or equity securities of, Debtor or (ii) which occurs upon a
Change in Control. Such termination fee shall be presumed
to be the amount of damages sustained by said early
termination and Debtor agrees that it is reasonable under
the circumstances currently existing. The early termination
fee provided for in this Section 2.6 shall be deemed
included in the Obligations;"
1.8 Section 3.1 of the Existing Agreement is hereby amended
and restated in its entirety to read as follows:
"3.1 Interest.
(a) Debtor shall pay to Congress interest on the
daily average outstanding principal amount of the Loans and,
to the extent permitted by applicable law, the other non-
contingent Obligations from and after the date when actually
paid by Lender, at the Interest Rate (with all Obligations
which are not Loans being treated as Prime Rate Loans solely
for this purpose). All interest accruing hereunder on and
after the date of any Event of Default or termination or
non-renewal hereof shall be payable on demand.
(b) Debtor may from time to time request that Prime
Rate Loans be converted to Eurodollar Rate Loans or that any
existing Eurodollar Rate Loans continue for an additional
Interest Period. Such request from Debtor shall specify the
amount of the Prime Rate Loans which will constitute
Eurodollar Rate Loans (subject to the limits set forth
below) and the Interest Period to be applicable to such
Eurodollar Rate Loans. Subject to the terms and conditions
contained herein, three (3) Business Days after receipt by
Lender of such a request from Debtor, such Prime Rate Loans
shall be converted to Eurodollar Rate Loans or such
Eurodollar Rate Loans shall continue, as the case may be,
provided, that, (i) no Event of Default, or event which with
notice or passage of time or both would constitute an Event
of Default exists or has occurred and is continuing, (ii) no
party hereto shall have sent any notice of termination or
non-renewal of this Agreement, (iii) Debtor shall have
complied with such customary procedures as are established
by Lender and specified by Lender to Debtor from time to
time for requests by Debtor for Eurodollar Rate Loans, (iv)
no more than four (4) Interest Periods may be in effect at
any one time, (v) the aggregate amount of the Eurodollar
Rate Loans must be in an amount not less than $5,000,000 or
an integral multiple of $1,000,000 in excess thereof, (vi)
the maximum amount of the Eurodollar Rate Loans at any time
requested by Debtor shall not exceed the amount equal to
eighty-five (85%) percent of the daily average of the
principal amount of the Revolving Loans which it is
anticipated will be outstanding during the applicable
Interest Period, as determined by Lender (but with no
obligation of Lender to make such Revolving Loans) and (vii)
Lender shall have determined that the Interest Period or
Adjusted Eurodollar Rate is available to Lender through the
Reference Bank and can be readily determined as of the date
of the request for such Eurodollar Rate Loan by Debtor. Any
request by Debtor to convert Prime Rate Loans to Eurodollar
Rate Loans or to continue any existing Eurodollar Rate Loans
shall be irrevocable. Notwithstanding anything to the
contrary contained herein, Lender and Reference Bank shall
not be required to purchase United States Dollar deposits in
the London interbank market or other applicable Eurodollar
Rate market to fund any Eurodollar Rate Loans, but the
provisions hereof shall be deemed to apply as if Lender and
Reference Bank had purchased such deposits to fund the
Eurodollar Rate Loans.
(c) Any Eurodollar Rate Loans shall automatically
convert to Prime Rate Loans upon the last day of the
applicable Interest Period, unless Lender has received and
approved a request to continue such Eurodollar Rate Loan at
least three (3) Business Days prior to such last day in
accordance with the terms hereof. Any Eurodollar Rate Loans
shall, at Lender's option, upon notice by Lender to Debtor,
convert to Prime Rate Loans in the event that (i) an Event
of Default or event which with the notice or passage of time
or both would constitute an Event of Default, shall exist,
(ii) this Agreement shall terminate or not be renewed, or
(iii) the aggregate principal amount of the Prime Rate Loans
which have previously been converted to Eurodollar Rate
Loans or existing Eurodollar Rate Loans continued, as the
case may be, at the beginning of an Interest Period shall at
any time during such Interest Period exceed either (A) the
aggregate principal amount of the Loans then outstanding, or
(B) the sum of the then outstanding principal amount of the
Revolving Loans then available to Debtor under Section 2
hereof. Debtor shall pay to Lender, upon demand by Lender
(or Lender may, at its option, charge any loan account of
Debtor) any amounts required to compensate Lender, the
Reference Bank or any participant with Lender for any loss
(including loss of anticipated profits), cost or expense
incurred by such person, as a result of the conversion of
Eurodollar Rate Loans to Prime Rate Loans pursuant to any of
the foregoing.
(d) Interest shall be payable by Debtor to Lender
monthly in arrears not later than the first day of each
calendar month and shall be calculated on the basis of a
three hundred sixty (360) day year and actual days elapsed.
The interest rate on non-contingent Obligations (other than
Eurodollar Rate Loans) shall increase or decrease by an
amount equal to each increase or decrease in the Prime Rate
effective on the first day of the month after any change in
such Prime Rate is announced based on the Prime Rate in
effect on the last day of the month in which any such change
occurs. In no event shall charges constituting interest
payable by Debtor to Lender exceed the maximum amount or the
rate permitted under any applicable law or regulation, and
if any such part or provision of this Agreement is in
contravention of any such law or regulation, such part or
provision shall be deemed amended to conform thereto."
1.9 Section 3.2 of the Existing Agreement is hereby amended
and restated in its entirety to read as follows:
"3.2 Changes in Laws and Increased Costs of Loans.
(a) Notwithstanding anything to the contrary
contained herein, all Eurodollar Rate Loans shall, upon
notice by Lender to Debtor, convert to Prime Rate Loans in
the event that (i) any change in applicable law or
regulation (or the interpretation or administration thereof)
shall either (A) make it unlawful for Lender, Reference Bank
or any participant to make or maintain Eurodollar Rate Loans
or to comply with the terms hereof in connection with the
Eurodollar Rate Loans, by an amount deemed by Lender to be
material, or (B) shall result in the increase in the costs
to Lender, Reference Bank or any participant of making or
maintaining any Eurodollar Rate Loans or (C) reduce the
amounts received or receivable by Lender in respect thereof,
by an amount deemed by Lender to be material or (ii) the
cost to Lender, Reference Bank or any participant of making
or maintaining any Eurodollar Rate Loans shall otherwise
increase by an amount deemed by Lender to be material.
Debtor shall pay to Lender, upon demand by Lender (or Lender
may, at its option, charge any loan account of Debtor) any
amounts required to compensate Lender, the Reference Bank or
any participant with Lender for any loss (including loss of
anticipated profits), cost or expense incurred by such
person as a result of the foregoing, including, without
limitation, any such loss, cost or expense incurred by
reason of the liquidation or reemployment of deposits or
other funds acquired by such person to make or maintain the
Eurodollar Rate Loans or any portion thereof. A certificate
of Lender setting forth the basis for the determination of
such amount necessary to compensate Lender as aforesaid
shall be delivered to Debtor.
(b) If any payments or prepayments in respect of the
Eurodollar Rate Loans are received by Lender other than on
the last day of the applicable Interest Period (whether
pursuant to acceleration, upon maturity or otherwise),
including any payments pursuant to the application of
collections under Section 6.3 or any other payments made
with the proceeds of Collateral, Debtor shall pay to Lender
upon demand by Lender (or Lender may, at its option, charge
any loan account of Debtor) any amounts required to
compensate Lender, the Reference Bank or any participant
with Lender for any additional loss (including loss of
anticipated profits), cost or expense incurred by such
person as a result of such prepayment or payment, including,
without limitation, any loss, cost or expense incurred by
reason of the liquidation or reemployment of deposits or
other funds acquired by such person to make or maintain such
Eurodollar Rate Loans or any portion thereof."
1.10 Section 3.4 of the Existing Agreement is hereby
amended and restated in its entirety to read as follow:
"3.4 Unused Line Fee. If the average outstanding
daily principal balance of the sum of all Revolving Loans
plus Letter of Credit Outstandings in any calendar month
shall be less than the Maximum Credit, Debtor shall pay to
Congress in arrears on or before the tenth (10th) day of the
next succeeding calendar month an unused line fee equal to
one quarter of one percent (0.25%) per annum upon the
difference between (A) the average outstanding daily
principal balance of all such Revolving Loans plus Letter of
Credit Outstandings in respect of such month and (B) the
applicable base amount for such month as set forth below:
Base
Period
Amount
January 1, 1998 through September 30, 1998 $25,000,000
October 1, 1998 and thereafter $50,000,000
1.11 Section 3.6 of the Existing Agreement is hereby
amended and restated in its entirety to read as follows:
"3.6 Amendment Closing Fees. Debtor shall pay to
Lender as a closing fee for Amendment No. 4 to this
Agreement the amount of $750,000, which shall be fully
earned as of and payable on the effective date of that
Amendment."
1.12 Section 8.22(b) of the Existing Agreement is hereby
amended by deleting the dollar amount "$1,000,000" which appears therein
and inserting the dollar amount "$2,500,000" in its place.
1.13 The Existing Agreement is amended by adding a new
Section 8.26 which shall read as follows:
"8.26 Title Insurance On or prior to December 31,
1997, Debtor shall deliver to Congress a fully paid lender's
policy of title insurance, in form and substance
satisfactory to Congress, with respect to Debtor's
headquarters building and related real property.
1.14 Schedules. Schedules 1.1(b), 7.2, 7.6, 7.9, 7.11(b),
7.14(b), 7.15, 8.6, 8.8 and 9.1(b)(ii) to the Existing Agreement are
hereby amended and restated to read in their entirety as Schedules
1.1(b), 7.2, 7.6, 7.9, 7.11(b), 7.14(b), 7.15, 8.6, 8.8 and 9.1(b)(ii)
hereto.
2. Effective Date of this Amendment. This Amendment shall
be deemed effective the later of (i) January 1, 1998 or (ii) the date
when each of the following conditions have been satisfied:
(a) each of the parties to this Amendment shall have
executed and delivered to each other counterparts hereto;
(b) Congress shall have received the following
documents, in form and substance acceptable to Congress and
its counsel:
(i) a certificate of the Secretary of Debtor,
dated as of the date hereof certifying, among other
things, (a) the names and true signatures of the
officers of Debtor authorized to execute this
Amendment and the Amended and Restated Revolving Note;
(b) that attached thereto is a true and complete copy
of the Articles of Incorporation and the by-laws of
Debtor as in effect of the date of such certification;
and (c) that attached thereto is a true and complete
copy of the resolutions of Debtor's Board of Directors
approving and authorizing the execution and delivery
of this Amendment and the Amended Restated Revolving
Note;
(ii) a title commitment for $10,000,000 of
title insurance with respect to Debtor's headquarters
building;
(iii) the Amended and Restated Revolving Credit
Note (the "Amended and Restated Revolving Note") to
reflect the increase in the Maximum Credit;
(iv) the Opinion of counsel to the Debtor;
(c) Debtor shall have entered into an agreement with
Lucas Licensing Ltd., to allow Debtor to manufacture and
sell small scale versions of the characters, replicas of
vehicles and other related paraphernalia from the second
Star Wars Trilogy films (the first of which is currently due
for release in 1999); and
(d) Congress shall have received an updated
appraisal, in form and substance acceptable to Congress and
its counsel in their sole discretion, of Debtor's Inventory.
3. Absence of Waiver or Setoff.
3.1. No Waiver. Congress and Debtor agree that the
amendments set forth in Section 1 hereof shall be limited precisely as
written and except as expressly set forth in Section 1 of this
Amendment, shall not be deemed to be a consent to any waiver or
modification of any other term or condition of the Existing Agreement,
the Loan Agreement or any Loan Document.
3.2. Acknowledgment of Liabilities. Debtor hereby
acknowledges and agrees that there is no defense, setoff or counterclaim
of any kind, nature or description to the Obligations or the payment
thereof when due.
4. Representations. Debtor hereby represents and warrants
to Congress that:
(i) Debtor is a corporation duly organized, validly
existing, and in good standing under the laws of the state
of its incorporation;
(ii) the execution, delivery and performance of each
of this Amendment and the Amended and Restated Revolving
Note by Debtor are within its corporate powers and have been
duly authorized by all necessary corporate action;
(iii) each of this Amendment and the Amended and
Restated Revolving Note is a legal, valid, and binding
obligation of Debtor, enforceable against Debtor in
accordance with its terms; and
(iv) the Settlement Agreement has been duly executed
and delivered and constitutes the valid and binding
obligation of each of the parties thereto, enforceable in
accordance with its terms, and the Debtor has duly performed
all of its obligations thereunder and is in full compliance
therewith.
5. References in Other Documents. References to the
Existing Agreement in any Loan Document shall be deemed to include a
reference to the Loan Agreement, whether or not reference is made to
this Amendment.
6. Miscellaneous.
(i) Debtor acknowledges its obligation under the
Existing Agreement to pay, and specifically agrees to pay on
demand, any and all costs or expenses of Congress (including
costs of counsel) in connection with the execution of this
Amendment regardless of whether the conditions to
effectiveness shall be satisfied.
(ii) Section headings used in this Amendment are for
convenience of reference only and shall not affect the
construction of this Amendment.
(iii) This Amendment may be executed in any number of
counterparts and by the different parties on separate
counterparts and each such counterpart shall be deemed to be
an original, but all such counterparts shall together
constitute but one and the same agreement.
(iv) This Amendment shall be a contract made under
and governed by the laws of the State of Illinois, without
giving effect to principles of conflicts of laws.
(v) All obligations of Debtor and rights of Congress
that are expressed herein, shall be in addition to and not
in limitation of those provided by applicable law.
(vi) Whenever possible, each provision of this
Amendment shall be interpreted in such manner as to be
effective and valid under applicable law; but if any
provision of this Amendment shall be prohibited by or
invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the
remaining provisions of this Amendment.
(vii) This Amendment shall be binding upon Debtor and
Congress and their respective successors and assigns, and
shall inure to the benefit of Debtor and Congress and the
successors and assigns of Congress.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
GALOOB TOYS, INC.
(f/k/a Lewis Galoob Toys, Inc.)
a Delaware corporation
By:
Name:
Title:
CONGRESS FINANCIAL CORPORATION
(CENTRAL)
By:
Name:
Title:
<PAGE> 1
EXHIBIT 21
GALOOB TOYS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Galco International Toys, N.V., an Aruba corporation
Galco International Toys, Ltd., a Hong Kong 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 Registration
Statement on Form S-8 (Nos. 33-09393, 33-29900, 33-56585, 33-56587,
33-62083, 33-34571) of Galoob Toys, Inc. and subsidiaries of our report dated
January 31, 1998 appearing on page F-1 of this Form 10-K.
Price Waterhouse LLP
San Francisco, California
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<PERIOD-TYPE> 12-MOS
<CASH> 3,359
<SECURITIES> 0
<RECEIVABLES> 86,999
<ALLOWANCES> 13,189
<INVENTORY> 24,707
<CURRENT-ASSETS> 124,210
<PP&E> 17,195
<DEPRECIATION> 6,744
<TOTAL-ASSETS> 207,783
<CURRENT-LIABILITIES> 41,410
<BONDS> 0
0
0
<COMMON> 181
<OTHER-SE> 161,849
<TOTAL-LIABILITY-AND-EQUITY> 207,783
<SALES> 239,551
<TOTAL-REVENUES> 239,551
<CGS> 143,156
<TOTAL-COSTS> 143,156
<OTHER-EXPENSES> 118,253
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 602
<INCOME-PRETAX> (47,504)
<INCOME-TAX> (18,054)
<INCOME-CONTINUING> (29,450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,450)
<EPS-PRIMARY> ($1.63)
<EPS-DILUTED> ($1.63)
</TABLE>
