-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CaWGBXNwRZRCDkUb4gMRa+LEjcS+/UL4HU9vwcvro7TJ9N82g5beOzUY4t38HKVg sLl+74htIwV7zrEmhApmjw== 0000751968-98-000005.txt : 19980408 0000751968-98-000005.hdr.sgml : 19980408 ACCESSION NUMBER: 0000751968-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 DATE AS OF CHANGE: 19980407 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GALOOB TOYS INC CENTRAL INDEX KEY: 0000751968 STANDARD INDUSTRIAL CLASSIFICATION: 3944 IRS NUMBER: 941716574 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09599 FILM NUMBER: 98585065 BUSINESS ADDRESS: STREET 1: 500 FORBES BLVD CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4159521678 MAIL ADDRESS: STREET 1: 500 FORBES BLVD CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 FORMER COMPANY: FORMER CONFORMED NAME: GALOOB LEWIS TOYS INC /DE/ DATE OF NAME CHANGE: 19920703 10-K 1 GALOOB TOYS DECEMBER 31, 1997 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 ------ GALOOB TOYS, INC. (Exact name of registrant as specified in its charter) Delaware 94-1716574 ------------------------------- ---------------- (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 ------------------- ---------------- 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 ----- ----- 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 ----- ---------------- 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.
Fiscal Year High Low - - - ----------- ---- --- 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
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
(in thousands, except per share data) Years ended December 31, ------------------------------------------------------- 1997 (1)(2) 1996 1995 1994 1993 --------- --------- --------- --------- --------- 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
At December 31, ------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- 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
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. 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:
Years Ended December 31, -------------------------------- 1997 1996 1995 ---------- ---------- ---------- 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% ========== ========== ==========
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. 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:
Name Age Position - - - ----------------------- ---- -------------------------------------------------- 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
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. 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. 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 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 F-1 GALOOB TOYS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except shares and per share data)
December 31, --------------------- 1997 1996 ---------- ---------- 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 ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. F-2 GALOOB TOYS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Years Ended December 31, -------------------------------- 1997 1996 1995 ---------- ---------- ---------- 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
The accompanying notes are an integral part of these Consolidated Financial Statements. F-3 GALOOB TOYS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands, except shares)
Preferred Stock Common Stock Additional Retained Cumulative -------------------- -------------------- Paid-In Earnings Translation Shares Amounts Shares Amounts Warrants Capital (Deficit) Adjustment Total --------- --------- ----------- --------- --------- --------- --------- ------------ --------- 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 ========= ========= =========== ========= ========= ========= ========= ============ =========
The accompanying notes are an integral part of these Consolidated Financial Statements. F-4 GALOOB TOYS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except shares)
Years Ended December 31, ----------------------------- 1997 1996 1995 --------- --------- --------- 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
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. 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. 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. 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):
Year Ended December 31, ---------------------------------------------------------------------------------- 1997 1996 1995 ---------------------------- -------------------------- -------------------------- Per Per Per Share Share Share Loss Shares Amount Loss Shares Amount Income Shares Amount --------- --------- -------- -------- --------- ------- -------- --------- ------- 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
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 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 ========= ========= 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):
1997 1996 --------- --------- 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. F-11 NOTE F - Income Taxes Earnings (loss) before income taxes and the provision for (benefit from) income taxes are as follows (in thousands):
Years Ended December 31, ----------------------------- 1997 1996 1995 --------- --------- --------- 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 ========= ========= =========
F-12 Deferred tax liabilities (assets) consist of the following (in thousands):
December 31, ----------------------------- 1997 1996 1995 --------- --------- --------- 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) $ -- ========= ========= =========
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. 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:
Years Ended December 31, ----------------------------- 1997 1996 1995 --------- --------- --------- 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% ========= ========= =========
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. F-14 Future minimum lease payments for all noncancelable operating leases as of December 31, 1997 are as follows (in thousands):
Years ending December 31, 1998 $2,312 1999 1,836 2000 1,736 2001 1,786 2002 880 Thereafter 1,433 --------- $9,983 =========
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):
Years ending December 31, 1998 $5,375 1999 828 2000 750 --------- $6,953 =========
$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. F-15 NOTE I - Accrued Expenses (in thousands):
December 31, 1997 1996 --------- --------- 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 ========= =========
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 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. 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. F-18 The following table summarizes information about stock option activity for the three years ended December 31, 1997:
Weighted Average Exercise Number Price of Per Options Share ---------- --------- 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 ==========
The following table summarizes information about stock options outstanding at December 31, 1997:
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 - - - ----------------- ------------ ----------- ----------- ------------ ----------- $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 ============ ============
- - - ----------------------- (1) Weighted average remaining contractual life in years. 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. 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. 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):
Years Ended December 31, ----------------------------- 1997 1996 1995 --------- --------- --------- 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
F-22 NOTE S - Quarterly Financial Data (Unaudited) Quarterly financial data for 1997 and 1996 are summarized in the following table:
(in thousands, except per share amounts) -------------------------------------------------- Net earnings Net (Loss) per Net Gross Earnings Common Revenues Margin (Loss) Share ----------- --------- --------- ------------ 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
F-23 SCHEDULE II GALOOB TOYS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands)
Additions Balance at Charged to Balance Beginning Costs and at end Description of Period Expenses Deductions of Period ----------- --------- -------- ---------- --------- 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
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. EX-10.3 2 SEVERANCE AND CHANGE IN CONTROL AGREEMENT 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 EX-10.11(C) 3 TRADEMARK LICENSE AGREEMENT 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 EX-10.12 4 AMENDMENT #4 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT 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: EX-21 5 SUBSIDIARIES 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 EX-23.1 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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 EX-27 7 ARTICLE 5 FIN. DATA SCHEDULE FOR 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 Dec-31-1997 Jan-01-1997 Dec-31-1997 12-MOS 3,359 0 86,999 13,189 24,707 124,210 17,195 6,744 207,783 41,410 0 0 0 181 161,849 207,783 239,551 239,551 143,156 143,156 118,253 0 602 (47,504) (18,054) (29,450) 0 0 0 (29,450) ($1.63) ($1.63)
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