-----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, DhrJFGCOh51OycKbMiIgw2JubNzsHJg0lIrpF6KSzJ6LiHXzBV5UBZB3EtUA8brH EqcfMwUfUKywfZgg/gLdeg== 0000909518-97-000257.txt : 19970501 0000909518-97-000257.hdr.sgml : 19970501 ACCESSION NUMBER: 0000909518-97-000257 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970430 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GALOOB TOYS INC CENTRAL INDEX KEY: 0000751968 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 941716574 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-09599 FILM NUMBER: 97591701 BUSINESS ADDRESS: STREET 1: 500 FORBES BLVD CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4159521678 FORMER COMPANY: FORMER CONFORMED NAME: GALOOB LEWIS TOYS INC /DE/ DATE OF NAME CHANGE: 19920703 10-K/A 1 AMEND NO. 1 TO 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K/A ---------------- AMENDMENT NO. 1 [x] AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the fiscal year ended December 31, 1996 or [_] AMENDMENT TO TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from ___________ to ___________ Commission file number: 1-9599 GALOOB TOYS, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 94-1716574 - ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) InCompany or Organization) 500 FORBES BOULEVARD SO. SAN FRANCISCO, CA 94080 (415) 952-1678 - -------------------------------------------------------------------------------- (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - -------------------------------------- ----------------------------- COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE - -------------------------------------------------------------------------------- (Title of Class) 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 statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [_]. Aggregate market value of the voting stock (which consists solely of shares of Common Stock) held by non-affiliates of the registrant as of March 3, 1997, computed by reference to the closing sale price of the registrant's Common Stock New York Stock Exchange Stock Exchange on such date: $300,000,000. On March 3, 1997, the registrant had outstanding 18,019,864 shares of Common Stock, par value $.01 per share, which is the registrant's only class of common stock. DOCUMENTS INCORPORATED BY REFERENCE: NONE ================================================================================ EXPLANATORY NOTE This Amendment No.1 on Form 10-K/A amends and restates in their entirety the following items of Part III of the Annual Report on Form 10-K of Galoob Toys, Inc. (the "Company") for the fiscal year ended December 31, 1996 to add information required by Part III Item 10. Directors and Executive Officers of the Registrant; Item 11. Executive Compensation; Item 12. Security Ownership of Certain Beneficial Owners and Management; and Item 13. Certain Relationships and Related Transactions; and to add an Exhibit 10.1(h) and an amended Exhibit 23. PART III Item 10. Directors and Executive Officers of the Registrant The directors and executive officers and their respective positions are as follows: Name Age Position - ---- --- -------- Mark D. Goldman 46 President, Chief Executive Officer and Director William G. Catron 51 Executive Vice President, General Counsel, Chief Administrative Officer and Secretary Andrew J. Cavanaugh 50 Director Paul A. Gliebe, Jr. 62 Director Scott R. Heldfond 51 Director Loren H. Hildebrand 57 Executive Vice President, Sales Ronald D. Hirschfeld 46 Executive Vice President, International Sales & Marketing S. Lee Kling 68 Director Roger J. Kowalsky 62 Executive Vice President, Chief Financial Officer and Director Gary J. Niles 57 Executive Vice President, Marketing and Product Acquisition Louis R. Novak 49 Executive Vice President and Chief Operating Officer Jay B. Foreman 34 Senior Vice President of Galoob and Senior Vice President and Managing Director of Galoob Direct, Inc. H. Alan Gaudie 56 Senior Vice President, Finance and Assistant Secretary Ronnie Soong 50 Managing Director of Galco International Toys, N.V. 1 Terrell (Mark) Taylor 55 Senior Vice President, Product Design Mark D. Goldman, a Director of the Company since 1987, 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. Mr. Goldman's term will expire in 1997. 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. Andrew J. Cavanaugh, a Director of the Company since 1993, serves as a Senior Vice President -- Corporate Human Resources of The Estee Lauder Companies Inc. He has been affiliated with Estee Lauder in an executive capacity since 1988. Prior to undertaking his current position, Mr. Cavanaugh served as a Senior Consultant with Coopers & Lybrand, New York City, from 1986 through 1988, and Senior Vice President Administration of Paramount Pictures Corporation from 1984 through 1986. Mr. Cavanaugh's term will expire in 1999. Paul A. Gliebe, Jr., a Director of the Company since 1986, has served as a Vice President of Smith Barney Inc. since 1974. Smith Barney Inc. has provided investment-related services to the Company in the past and during the current fiscal year. Mr. Gliebe's term will expire in 1997. Scott R. Heldfond, a Director of the Company since 1986, has served as President and Chief Executive Officer of Frank Crystal & Co. of California Inc., an insurance brokerage firm since February 1997. Prior to undertaking his current position, Mr. Heldfond served as Managing Director of Hales Capital Advisors, LLC, an insurance industry merchant bank firm, since January 1995 and he also served as a consultant to AON Risk Services (successor entity to Rollins Hudig Hall and DSI Insurance Services) ("AON"), an insurance broker. From 1992 to 1994 he was President and CEO of Rollins Real Estate/Investment and prior thereto was President and CEO of DSI Insurance Services. The Company has retained AON (with which Mr. Heldfond is no longer associated) in the past and during the current fiscal year. Mr. Heldfond's term will expire in 1998. Loren H. Hildebrand has served as Executive Vice President, Sales of the Company since April 1994. From 1992 to 1994, Mr. Hildebrand was president of Creative Consultants and from 1991 to 1992 he was Executive Vice President of Bandai U.S. Inc., a toy manufacturer. From 1989 to 1992, Mr. Hildebrand was Executive Vice President and a partner in Toy Soldiers, Inc., a start-up company. Prior to 1989, Mr. Hildebrand was a consultant for Worlds of Wonder and Executive Vice President, Sales, Merchandising and Distribution for Mattel, Inc. Ronald D. Hirschfeld has served as Executive Vice President, International Sales and Marketing of the Company since February 1994. From 1989 to 1994, Mr. Hirschfeld served as Senior Vice President, International Sales and Marketing. Prior to 1989, Mr. Hirschfeld served as Senior Vice President, International Operations from 1987 to 1989 and has held various positions with the Company since 1978. S. Lee Kling, a Director of the Company since 1991, has served since 1991 as Chairman of the Board of Kling Rechter & Company, a merchant banking company which operates in partnership with Barclays Bank PLC. Mr. Kling served as Chairman of the Board of Landmark Bancshares Corporation, a bank holding company in St. Louis, Missouri ("Landmark"), until December 1991 when Landmark merged with Magna Group, Inc. Mr. Kling serves on the Boards of Directors of Magna Group, Inc., Falcon Products, Co., Bernard Chaus Inc., E-Systems, Inc., Top Air Manufacturing, Inc., National Beverage Corp. and Hanover Direct, Inc. Mr. Kling's term will expire in 1999. Roger J. Kowalsky, a Director of the Company since 1994, has served as Executive Vice President and Chief Financial Officer of the Company since June 1996 and as a Director of the Company since June 1994. From 1989 to 1996, Mr. Kowalsky served as Director of the Vermont Studio Center, an organization dedicated to visual artists and writers. From 1983 to 1986, Mr. Kowalsky served as Senior Vice President, Finance & Administration for Yale Materials Handling Corporation. Prior to such time, from 1969 to 1982, Mr. 2 Kowalsky worked at Pullman Inc., rising to Executive Vice President, Finance and Administration and President of Pullman Trailmobile, a subsidiary of Pullman, Inc. Mr. Kowalsky's term will expire in 1998. Gary J. Niles has served as Executive Vice President, Marketing and Product Acquisition of the Company since February 1992. From 1989 to 1992, Mr. Niles served as Senior Vice President, Toy Boys Division. Before joining the Company, Mr. Niles was an executive with U.A.C., Ltd., a division of Universal Matchbox, Revell Incorporated and Ages Entertainment Software, Inc. (formerly Sega Enterprises, Inc.) Louis R. Novak has served as Executive Vice President and Chief Operating Officer of the Company since February 1992. From 1989 to 1992, Mr. Novak served as Senior Vice President, Operations. From 1986 to 1989 he was Senior Vice President, Worldwide Product Operations for Coleco Industries, Inc. Prior to 1986, Mr. Novak was an executive with All American Gourmet Company, Inc., a manufacturer of frozen food products, and for Mattel, Inc. Jay B. Foreman has been Senior Vice President of Galoob Toys, Inc. and Senior Vice President and Managing Director of Galoob Direct, Inc., since May 1996. From 1992 to 1996, Mr. Foreman served as Executive Vice President-U.S. Operations of Play By Play Toys and Novelties, Inc. From 1990 until 1992, Mr. Foreman served as Co-General Manager of the Toys and Novelties Division of Pizza Management, Inc. H. Alan Gaudie has served as Senior Vice President, Finance of the Company since April 1992 and Assistant Secretary since June 1995. From 1985 to 1992, Mr. Gaudie served as Corporate Controller, Vice President, Senior Vice President and acting Chief Financial Officer. Ronnie Soong has served as Managing Director of Galco since May 1995. From 1993 to 1995, Mr. Soong served as General Manager of Galco. From 1989 to 1993, Mr. Soong was General Manager of Zindart Industrial Co., Ltd. Prior to 1989, Mr. Soong was the General Manager of Buddy L (HK) Ltd. and an executive with the Ertl Company in Taiwan from 1987 to 1989. Terrell (Mark) Taylor has served as Senior Vice President, Product Design of the Company since November 1995. From 1988 to 1995, Mr. Taylor served Senior Vice President, Product Design for Mattel, Inc. From 1987 to 1988, Mr. Taylor served as Vice President with Entertech/LJN Toys. Prior to 1987, Mr. Taylor served in various executive capacities at Playmates Toys, Tomy Toys, and Mattel, Inc. In addition, Mr. Taylor was a principal partner with Taylor/Salari Design. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers and directors, and any persons who own more than ten percent of the Company's Common Shares to file reports of initial ownership of the Company's Common Stock and subsequent changes in that ownership with the Securities and Exchange Commission and the New York Stock Exchange. Officers, directors and greater than ten-percent beneficial owners are also required to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of the forms furnished to the Company, or written representations from certain reporting persons that no Forms 5 were required, the Company believes that it complied with all Section 16(a) filing requirements during the 1996 fiscal year. 3 ITEM 11. Executive Compensation SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION The following table summarizes the compensation paid by the Company and its subsidiaries, as well as certain other compensation paid or accrued, to the Chief Executive Officer of the Company and the other five most highly compensated executive officers of the Company who earned in excess of $100,000 for the Company's fiscal years ended December 31, 1994, 1995 and 1996 (each person appearing in the table is referred to as a "Named Executive"): SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION ------------------------------------- LONG OTHER TERM ANNUAL COMPEN- ALL OTHER SALARY BONUS COMPEN- SATION COMPEN- NAME AND PRINCIPAL POSITION YEAR ($) ($) SATION($) OPTIONS(#) SATION($)(2) - --------------------------- ---- ------- ------- ---------- ---------- ------------- Mark D. Goldman................ 1996 500,000 937,500 0 36,140 4,660 President and Chief 1995 400,000 750,000 0 200,000 3,980 Executive Officer 1994 400,000 600,000 229,630(3) 3,760 Gary J. Niles.................. 1996 320,417 418,750 0 28,130 2,550 Executive Vice President, 1995 300,000 360,000 0 0 1,440 Marketing and Product 1994 261,055 316,800 0 157,870(4) 1,440 Acquisition Louis R. Novak................. 1996 291,169 375,000 0 28,130 870 Executive Vice President 1995 272,803 334,567 0 0 870 and Chief Operating Officer 1994 261,055 316,800 0 157,870(4) 870 William G. Catron.............. 1996 248,289 316,031 0 24,520 1,440 Executive Vice President, 1995 236,729 217,745 0 0 870 General Counsel, Chief 1994 226,535 206,640 0 86,111(5) 870 Administrative Officer and Secretary Ronald D. Hirschfeld........... 1996 246,552 313,821 0 24,520 870 Executive Vice President, 1995 235,073 216,222 0 0 1,440 International Sales and Marketing................... 1994 223,634 203,425 0 86,111(5) 510 Loren H. Hildebrand............ 1996 241,297 307,131 0 24,520 2,250 Executive Vice President, 1995 230,063 282,150 0 0 2,250 Sales 1994 159,375 275,000(6) 0 100,000 840 (1) Other than as provided in this table, there were no other transactions among the Named Executives and the Company which are required to be reported in this table. (2) These amounts represent premiums paid by the Company with respect to term life insurance. 4 (3) Represents 229,630 options granted pursuant to the 1994 Plan. Does not include 129,311 shares of Common Stock granted in connection with the termination of the 1992 Senior Management Stock Option Plan (the "1992 Plan"). (4) Represents 157,870 options granted pursuant to the 1994 Plan. Does not include 88,900 shares of Common Stock granted in connection with the termination of the 1992 Plan. (5) Represents 86,111 options granted pursuant to the 1994 Plan. Does not include 48,491 shares of Common Stock granted in connection with the termination of the 1992 Plan. (6) This amount includes a $50,000 bonus paid to the Named Executive in connection with the Named Executive's hiring.
5 STOCK OPTIONS The following table contains information concerning the grant of stock options to the Named Executives during the Company's last fiscal year: OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants ----------------------------------------------------- % of Total Shares of Options Common Stock Granted to Underlying Employees in Exercise Grant Date Options Fiscal Year Price Expiration Present Value Name Granted (of 380,908) ($/US) Date ($)(1) - ---- ------- ------------ ------ ---- ------------ Mark D. Goldman 36,140 9.5% 25.00 7/29/06 491,110 Gary J. Niles 18,050 4.7% 25.00 7/29/06 245,283 10,080 2.7% 21.25 4/29/06 116,431 Louis R. Novak 18,050 4.7% 25.00 7/29/06 245,283 10,080 2.7% 21.25 4/29/06 116,431 William G. Catron 14,440 3.8% 25.00 7/29/06 196,227 10,080 2.7% 21.25 4/29/06 116,431 Ronald D. Hirschfeld 14,440 3.8% 25.00 7/29/06 196,227 10,080 2.7% 21.25 4/29/06 116,431 Loren H. Hildebrand 14,440 3.8% 25.00 7/29/06 196,227 10,080 2.7% 21.25 4/29/06 116,431 (1) The Grant Date Present Values were determined using the Black-Scholes option pricing model. Assumptions used for the model are as follows: an option term of 4.4 years, stock volatility of 60%, dividend yield of 0%, and a risk-free rate of return of 6.3%. Options will only have values to the extent the Common Stock Price exceeds the Exercise Prices above. To fully realize the aggregates values shown above the Common Stock price must exceeed $36 per share. The Grant Date Present Values do not take into account risk factors such as non-transferability and limits on exercisability. The Black-Scholes option pricing model is a commonly utilized model for valuing options. The model assumes that the possibilities of future stock returns (dividends plus share price appreciation) resemble a normal "bell-shaped" curve. In assessing the Grant Date Present Values indicated in the above table, it should be kept in mind that no matter what theoretical value is placed on an option on the date of grant, the ultimate value of the option is dependent on the market value of the Common Stock at a future date, which will depend to a large degree on the efforts of the Named Executives to bring future success to the Company for the benefit of all stockholders.
The Company does not currently grant stock appreciation rights. 6 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to the options exercised by the Named Executives during the 1996 fiscal year and the unexercised options held by the Named Executives as of the end of the 1996 fiscal year.
NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS ACQUIRED OPTIONS AT FISCAL YEAR END(#) AT FISCAL YEAR-END($)(1) ON VALUE ---------------------------- -------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ----------- ----------- ------------- ----------- ------------- Mark D. Goldman......... 0 0 387,964 102,806 2,473,155 524,995 Gary J. Niles........... 5,000 31,900 167,950 18,050 789,350 0 Louis R. Novak.......... 0 0 167,950 18,050 789,350 0 William G. Catron....... 0 0 96,191 14,440 430,555 0 Ronald D. Hirshfeld..... 30,000 270,000 66,191 14,440 280,555 0 Loren H. Hildebrand..... 0 0 110,080 14,440 825,000 0 - ------------------ (1) The closing sales price of the Common Stock on the New York Stock Exchange on December 31, 1996 was $14.00 per share.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AGREEMENTS On October 27, 1994, the Company entered into a severance agreement (the "Severance Agreement") with Mark Goldman, effective as of July 13, 1994. The Severance Agreement sets forth severance benefits which are payable if Mr. Goldman's employment is terminated for various reasons, including termination by him of his employment following a change in control of the Company, as follows (the "Severance Payment"): (i) If Mr. Goldman is terminated without cause (as defined in the Severance Agreement) prior to a Change in Control (as defined in the Severance Agreement), or if Mr. Goldman terminates his employment for good reason (as defined in the Severance Agreement) prior to a Change in Control, the Severance Agreement provides that the Company shall pay to Mr. Goldman a lump sum payment equal to (a) two times Mr. Goldman's annualized current base compensation and (b) the greater of (1) two times the greater of (x) the incentive compensation bonus (excluding stock options or shares issued pursuant to a stock option, restricted stock or similar plan or long-term incentive bonuses) paid to Mr. Goldman for the previous year's performance or (y) the incentive compensation bonus (excluding stock options or shares issued pursuant to a stock option, restricted stock or similar plan or long-term incentive bonuses) that would be payable to Mr. Goldman if performance relative to plan for the current year was the same as performance relative to plan year-to-date (such performance is to be measured by the ratio of year-to-date actual performance divided by year-to-date plan performance; the index(es) of performance shall be the same as the most recent annual cash incentive compensation plan approved by the Board of Directors) (the amount equal to the greater of the amounts described in clauses (x) and (y) shall be hereinafter referred to as the "Annual Bonus"); or (2) five hundred thousand dollars ($500,000). (ii) If Mr. Goldman is terminated by the Company within twenty-four (24) months following a Change in Control (as defined in the Severance Agreement), or if Mr. Goldman terminates his employment for good reason (as defined in the Severance Agreement) within twenty-four (24) months following a Change in Control, the Severance Agreement provides that the Company shall pay to Mr. Goldman a lump sum payment equal to (a) three times Mr. Goldman's annualized current base compensation, (b) the greater of (1) three times the Annual Bonus or (2) five hundred thousand dollars ($500,000) and (c) three times the car allowance in effect for Mr. Goldman at the time of termination 7 and a lump sum amount equal to three times the insurance and maintenance cost incurred for said vehicle during Mr. Goldman's last full year of employment with the Company. Furthermore, the Severance Agreement provides that the Company shall continue to provide Mr. Goldman with certain fringe benefits for a period of three years following the date of Mr. Goldman's termination, subject to mitigation by Mr. Goldman. (iii) If Mr. Goldman is terminated for cause, or if Mr. Goldman terminates his employment other than for good reason (as defined in the Severance Agreement), the Severance Agreement provides that the Company must pay to Mr. Goldman his unpaid compensation for services prior to termination and the value of any accrued unused vacation pay to the date of termination. The maximum Severance Payment that the Company would have been required to make under the Severance Agreement if such amount became payable in the fiscal year 1996 was approximately $4,370,856. In addition, the Severance Agreement contains a "gross-up" provision which provides that, to the extent that any Severance Payment is subject to certain excise taxes occurring as a result of a Change in Control, the Company would make an additional gross-up payment so that Mr. Goldman would retain an amount of the Severance Payment equal to the amount he would have retained had there been no such excise taxes. Mr. Goldman is employed by the Company as its President and Chief Executive Officer without an employment agreement. The Company has purchased a life insurance policy in a $2,000,000 face amount for Mr. Goldman, who designated the beneficiary of such insurance policy. As of January 1, 1997, each of the Executive Vice Presidents of the Company entered into a Severance and Change in Control Agreement ("Severance and Change in Control Agreements") with the Company, which will provide, among other things, that if the executive is terminated other than for Cause (as such term is defined in the Severance and Change in Control Agreements) the executive is entitled to continue to receive his salary and certain benefits (excluding the continuation of any bonus) for a period of twelve (12) months. These severance payments will be reduced in the event that the executive commences regular full-time employment during such period. If there is a Change in Control (as such term is defined in the Severance and Change in Control Agreements) and the executive's employment is terminated voluntarily or involuntarily (other than for Cause) prior to the first anniversary of a Change in Control, the above-described severance package is replaced with a lump sum payment equal to three (3) times such executive's annual salary and bonus (as described in the Severance and Change in Control Agreements), plus the continuation of certain benefits for a thirty-six (36) month period of time. If the executive's employment is terminated involuntarily (other than for Cause) during the next twelve (12) months following the first anniversary of the Change in Control, the executive is entitled to continue to receive his salary and certain benefits (excluding the continuation of any bonus) for a period of up to twenty-four (24) months. Any payment or benefit received pursuant to the Severance and Change in Control Agreements will be reduced to the extent that such payment or benefit would be subject to certain excise taxes occurring as a result of a Change in Control. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information as of March 31, 1997 with respect to the Common Stock of the Company beneficially owned by (a) all persons known to the Company to own beneficially more than 5% of the Common Stock of the Company, (b) all directors and nominees, (c) the Named Executives (as defined under the caption "Executive Compensation") and (d) all executive officers and directors of the Company as a group.
AMOUNT AND PERCENT OF NATURE OF COMMON BENEFICIAL STOCK NAME OF BENEFICIAL OWNER(1) OWNERSHIP(2) OWNERSHIP(2) - --------------------------- ------------ ------------ Public Employees Retirement System of Ohio(3)............... 1,600,000 8.9% The Prudential Insurance Company of America(4).............. 1,061,690 5.9% William G. Catron(5)........................................ 126,917 * 8 Andrew J. Cavanaugh(6)...................................... 7,700 * Paul A. Gliebe, Jr.(6)...................................... 8,350 * Mark D. Goldman(7).......................................... 609,041 3.3% Scott R. Heldfond(6)........................................ 9,450 * Loren H. Hildebrand(8)...................................... 10,080 * Ronald D. Hirschfeld(9)..................................... 79,044 * S. Lee Kling(6)............................................. 11,000 * Roger Kowalsky(10).......................................... 6,550 * Gary J. Niles(11)........................................... 193,311 1.1% Louis R. Novak(11).......................................... 178,410 1.0% All executive officers and directors as a group (consisting of 14 persons)(12)...................... 1,311,304 6.9% - --------------------- * Less than 1%. (1) Unless otherwise indicated, beneficial owner's address is Company's address at 500 Forbes Boulevard, South San Francisco, California 94080. (2) This table identifies persons having sole voting and/or investment power with respect to the shares of Common Stock set forth opposite their names as of March 31, 1997, according to the information furnished to the Company by each of them. A person is deemed to be the beneficial owner of shares of Common Stock that can be acquired by such person within 60 days from March 31, 1997 upon the exercise of options. Percentage of Common Stock ownership is based on a total of 18,019,864 shares of Common Stock outstanding and assumes in each case that the person only, or group only, exercised his or its rights to purchase all shares of Common Stock underlying the options. (3) Address is 277 East Town Street, Columbus, OH 43215. (4) Address is 751 Broad Street, Newark, NJ 07102. (5) Includes options to purchase 96,191 shares of Common Stock. (6) Includes options to purchase 6,000 shares of Common Stock. (7) Includes options to purchase 454,630 shares of Common Stock. (8) Includes options to purchase 10,080 shares of Common Stock. (9) Includes options to purchase 66,191 shares of Common Stock. (10) Includes options to purchase 4,000 shares of Common Stock. (11) Includes options to purchase 167,950 shares of Common Stock. (12) Includes an aggregate of options to purchase 1,023,000 shares of Common Stock.
ITEM 13. Certain Relationships and Related Transactions On August 29, 1996, Mark D. Goldman, President, Chief Executive Officer and Director of the Company, borrowed $950,000 from the Company in connection with the purchase of a personal residence 9 and executed a note payable to the Company, which is secured by a second mortgage on such residence. The note bears no interest unless Mr. Goldman's employment with the Company is terminated, and, at such time, the note will bear interest at one percent per annum in excess of the Prime Rate charged by Citibank F.S.B. During the term of Mr. Goldman's employment with the Company, in accordance with the Internal Revenue Code of 1986, as amended (the "Code"), interest will be imputed at the applicable federal rate, as determined under the Code. Commencing on September 1, 1996, principal in the amount of $100 shall be paid on the first of each month by Mr. Goldman to the Company. The balance of the principal shall be paid on the earlier to occur of (i) August 29, 2006 or (ii) one year from the date Mr. Goldman's employment with the Company is terminated. Louis R. Novak, Executive Vice President and Chief Operating Officer of the Company, borrowed money from the Company on July 31, 1995 and April 15, 1996 and on each occasion executed a note payable to the Company. The first note, dated July 31, 1995, is in the principal amount of $57,042 and bears interest at the rate of 8.75%. The second note, dated April 15, 1996, is in the principal amount of $60,647 and bears interest at the rate of 8.5%. Mr. Novak repaid this indebtedness on September 4, 1996. DIRECTOR COMPENSATION Directors, who are not full-time employees of the Company, each received in fiscal year 1996 an annual director's fee of $15,000 plus $500 for each meeting of the Board of Directors or any committee thereof attended by such director. Furthermore, directors who were not full-time employees of the Company received an option immediately exercisable into 2,000 shares of Common Stock on July 1, 1996 and have received and will receive an option immediately exercisable into 2,000 shares of Common Stock on January 1 of each year thereafter until they no longer serve as directors of the Company. The exercise price of such options shall be at the market price on the date such options are received. All directors are reimbursed by the Company for out-of-pocket expenses incurred by them as directors of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Committee are set forth under "Meetings and Committees of the Board of Directors," and their relationship to the Company is set forth under "Election of Directors." None of the members of the Committee has served as a member of the compensation committee of another entity so as to create any compensation committee interlock. No members of the Committee are employed by the Company. 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, 1996 and December 31, 1995 F-2 10 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 F-3 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 F-5 Notes to Consolidated Financial Statements F-6 to F-17 (a) 2. Financial Statement Schedules Schedules VIII - Valuation and Qualifying Accounts and S-1 Reserves for the years ended December 31, 1996, 1995 and 1994
All other schedules have been omitted because they are inapplicable or not required, or the information is included in the financial statements or notes thereto. 11 (a) 3. Exhibits 3.1(a)(1) Certificate of Incorporation. 3.1(b)(1) Amendment to Certificate of Incorporation. 3.2(2) Bylaws. 4.1(3) Form of Certificate for Shares or Common Stock of the Company. 4.2(a)(4) Warrant Agreement, dated as of December 11, 1991, by and between the Company and Shereff, Friedman, Hoffman and Goodman, LLP. 4.2(b)(4) Warrant Agreement, dated as of November 17, 1993, by and between the Company and Gerard Klauer Mattison & Co., Inc. 4.3(5) Form of Rights Agreement, dated as of January 17, 1990, between the Company and Mellon Securities Trust Company. 10.1(a)(6)* Amended and Restated 1984 Employee Stock Option Plan. 10.1(b)(7)* 1994 Senior Management Stock Option Plan 10.1(c)(8)* Form of Agreement between each of Mark Goldman, William Catron, Lou Novak, Gary Niles, Mark Shephard, Ronald Hirschfeld and H. Alan Gaudie and the Company. 10.1(d)(9)* Form of Amendment No. 1 between each of Mark Goldman, William Catron, Lou Novak, Gary Niles, Mark Shepherd, Ronald Hirschfeld and H. Alan Gaudie and the Company. 10.1(e) (10) 1995 Non-Employee Directors' Stock Option Plan. 10.1(f)* Galoob Toys, Inc. 1996 Long Term Compensation Plan 10.1(g)* Galoob Toys, Inc. 1996 Share Incentive Plan 10.1(h)* Galoob Toys, Inc. Officer's Deferred Compensation Plan 10.2(10)* Lewis Galoob Toys, Inc. Savings and Retirement Plan (Formerly the Lewis Galoob Toys, Inc. Profit Sharing) (Amendment and Restatement effective January 1, 1987). 10.3(9)* Severance Agreement, dated October 27, 1994, between Mark Goldman and the Company. 10.4(a)* Agreement, dated January 1, 1997, between William G. Catron and the Company. 10.4(b)* Agreement, dated January 1, 1997, between Loren Hildebrand and the Company. 10.4(c)* Agreement, dated January 1, 1997, between Ronald D. Hirschfeld and the Company. 10.4(d)* Agreement, dated January 1, 1997, between Roger J. Kowalsky and the Company. 10.4(e)* Agreement, dated January 1, 1997, between Gary J. Niles and the Company. 10.4(f)* Agreement, dated January 1, 1997, between Louis R. Novak and the Company. 12 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 Company (Central). 10.6(a)(11) License Agreement, dated June 1, 1986, by and between Funmaker, as Licensor and the Company, as Licensee. 10.7(a)(12) License Agreement, dated May 4, 1990, by and among the Company as Licensee, Codemasters Software Company, Ltd. and America Company, Limited. 10.7(b)(12) Amendment No. 1 dated June 1991 to License Agreement dated May 4, 1990. 10.7(c)(12) Amendment No. 2 dated December 23, 1991 to License Agreement, dated May 4, 1990. 10.2(d)(12) European License Agreement, dated December 23, 1991, by and between Codemasters Software Company, Ltd. and the Company. 10.2(e)(12) Third Amendment to United States License and First Amendment to European License, dated November 4, 1992. 10.2(f)(9) Fourth Amendment to United States License Agreement, dated October 14, 1994. 10.8(11) 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, 1982, by and between Lincoln Alvarado and Patrician Associate, Inc., as Lessor, and the Company, as Lessee. 10.9(b)(13) Amendment No. 1 to Lease Agreement. 10.9(c)(10) Lease Agreement, dated December 1, 1995, by and between 200 Fifth Avenue Associates, as Lessor, and the Company, as Lessee. 10.9(d) Lease Agreement, dated December 3, 1996, between Prudential Insurance Company of America as Lessor and the Company, as Lessee. 11(14) Statement of Computation of Per Share Earnings. 21(14) Subsidiaries of the Company 23 Consent of Independent Public Accountants (filed herewith) 27(14) 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. 13 (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- 56587, 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 31, 1995. (11) 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, 1995. (12) Incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1995, filed with the Commission on March 31, 1995. (13) 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. (14) 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. * Indicates exhibits relating to executive compensation. All other schedules are omitted because they are not applicable or the required information is shown in the Company's consolidated financial statements or the notes thereto. 14 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment 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 Dated April 30, 1997 15 EXHIBIT INDEX EXHIBIT NO. PAGE 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 or Common Stock of the Company. 4.2(a)(4) Warrant Agreement, dated as of December 11, 1991, by and between the Company and Shereff, Friedman, Hoffman and Goodman, LLP. 4.2(b)(4) Warrant Agreement, dated as of November 17, 1993, by and between the Company and Gerard Klauer Mattison & Co., Inc. 4.3(5) Form of Rights Agreement, dated as of January 17, 1990, between the Company and Mellon Securities Trust Company. 10.1(a)(6)* Amended and Restated 1984 Employee Stock Option Plan. 10.1(b)(7)* 1994 Senior Management Stock Option Plan 10.1(c)(8)* Form of Agreement between each of Mark Goldman, William Catron, Lou Novak, Gary Niles, Mark Shephard, Ronald Hirschfeld and H. Alan Gaudie and the Company. 10.1(d)(9)* Form of Amendment No. 1 between each of Mark Goldman, William Catron, Lou Novak, Gary Niles, Mark Shepherd, Ronald Hirschfeld and H. Alan Gaudie and the Company. 10.1(e)(10) 1995 Non-Employee Directors' Stock Option Plan. 10.1(f)* Galoob Toys, Inc. 1996 Long Term Compensation Plan 10.1(g)* Galoob Toys, Inc. 1996 Share Incentive Plan 10.1(h)* Galoob Toys, Inc. 1996 Officer's Deferred Compensation Plan 10.2(10)* Lewis Galoob Toys, Inc. Savings and Retirement Plan (Formerly the Lewis Galoob Toys, Inc. Profit Sharing) (Amendment and Restatement effective January 1, 1987). 10.3(9)* Severance Agreement, dated October 27, 1994, between Mark Goldman and the Company. 10.4(a)* Agreement, dated January 1, 1997, between William G. Catron and the Company. 10.4(b)* Agreement, dated January 1, 1997, between Loren Hildebrand and the Company. 10.4(c)* Agreement, dated January 1, 1997, between Ronald D. Hirschfeld and the Company. 10.4(d)* Agreement, dated January 1, 1997, between Roger J. Kowalsky and the Company. 10.4(e)* Agreement, dated January 1, 1997, between Gary J. Niles and the Company. 16 10.4(f)* 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 Company (Central). 10.6(a)(11) License Agreement, dated June 1, 1986, by and between Funmaker, as Licensor and the Company, as Licensee. 10.7(a)(12) License Agreement, dated May 4, 1990, by and among the Company as Licensee, Codemasters Software Company, Ltd. and America Company, Limited. 10.7(b)(12) Amendment No. 1 dated June 1991 to License Agreement dated May 4, 1990. 10.7(c)(12) Amendment No. 2 dated December 23, 1991 to License Agreement, dated May 4, 1990. 10.2(d)(12) European License Agreement, dated December 23, 1991, by and between Codemasters Software Company, Ltd. and the Company. 10.2(e)(12) Third Amendment to United States License and First Amendment to European License, dated November 4, 1992. 10.2(f)(9) Fourth Amendment to United States License Agreement, dated October 14, 1994. 10.8(11) 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, 1982, by and between Lincoln Alvarado and Patrician Associate, Inc., as Lessor, and the Company, as Lessee. 10.9(b)(13) Amendment No. 1 to Lease Agreement. 10.9(c)(10) Lease Agreement, dated December 1, 1995, by and between 200 Fifth Avenue Associates, as Lessor, and the Company, as Lessee. 10.9(d) Lease Agreement, dated December 3, 1996, between Prudential Insurance Company of America as Lessor and the Company, as Lessee. 11(14) Statement of Computation of Per Share Earnings. 21(14) Subsidiaries of the Company 23 Consent of Independent Public Accountants (filed herewith) 27(14) 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. 17 (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- 56587, 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 31, 1995. (11) 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, 1995. (12) Incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1995, filed with the Commission on March 31, 1995. (13) 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. (14) 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. * Indicates exhibits relating to executive compensation. All other schedules are omitted because they are not applicable or the required information is shown in the Company's consolidated financial statements or the notes thereto. 18 EX-10 2 EXHIBIT 10.1(H) GALOOB TOYS, INC. OFFICERS' DEFERRED COMPENSATION PLAN 1. Participants. Any officer ("Officer") of Galoob Toys, Inc. (the "Corporation") who has been designated as eligible to participate in this Plan by the Compensation Committee of the Board of Directors of the Corporation may elect to become a participant ("Participant") by filing a written notice ("Notice") with the Corporation, in the form as prescribed by the Compensation Committee. 2. Deferred Compensation. Any Participant may elect, in accordance with Section 5 of this Plan, to defer annually the receipt of a portion of the bonus otherwise payable to him by the Corporation in any calendar year, which portion shall be designated by the Officer but shall not exceed an amount of such Officer's bonus as determined annually by the Compensation Committee. Any compensation deferred pursuant to this Section shall be credited to a deferred compensation account ("Account") maintained in the name of the Participant, which Account shall be credited annually on the date of payment of the Corporation's bonus in accordance with the Corporation's normal practices the total amount of compensation deferred pursuant to this Plan. The Corporation shall furnish each Participant with an annual statement of his or her Account, reflecting the crediting of interest or other earnings on investment of amounts in the Account on the date received through the date of final distribution of the Account pursuant to Section 4 of the Plan. The amount of compensation that a Participant elects to defer under this Section will remain in effect only for the calendar year of the election; subsequent deferrals will be made only pursuant to the filing of another election in accordance with Section 5 of the Plan. 3. Investment of Deferred Amounts. a) If a Participant so designates in the Notice, all or a portion of the amount credited to his Account (as specified by the Participant) will first be used to pay the premiums on a policy of insurance purchased by the Corporation on the life of the Participant ("Policy"), until all such premiums are fully paid pursuant to the terms of the Policy. The Policy shall be owned by and payable to the Corporation and the Participant shall have no control over or incidence of ownership with respect to the Policy. b) If the Participant so designates in the Notice, all or a portion of the amount credited to this Account (as specified by the Participant) shall be invested in shares of registered investment companies as selected from time to time by the Compensation Committee and as described in the Notice. Earnings and losses on said investment shall be calculated by the Corporation on an annual basis. 1 All amounts credited to an Account and not invested in accordance with paragraphs a) or b) of this Section 3 shall be credited with interest at a rate equal to the Corporation's cost of funds as calculated periodically by the Corporation. 4. Distribution a) Upon termination of the services of the Officer with the Corporation for any reason other than death, the Participant will be entitled to receive: 1) the Policy on his or her life, if any, or any amount equal to the cash surrender value of the Policy on the date on which the Participant's employment terminates, as determined by the Corporation in its discretion; and 2) all amounts (other than the Policy) credited to the Participant's Account as of the date of termination of employment. Said amounts shall be payable in a lump sum or in installments over a designated period of years, pursuant to the provisions of paragraph (e) of this Section. b) Upon termination of a Participant's employment by reason of death, the Participant's designated beneficiary or beneficiaries will be entitled to receive: 1) the proceeds of the Policy on the life of the Participant; and 2) all other amounts credited to the Account of the Participant as of the date of death. Said amounts shall be payable in a lump sum or in installments over a designated period of years, pursuant to the provisions of paragraph (e) of this Section. c) Upon the death of the Participant prior to complete distribution to him of the entire balance of his Account (and after the date of termination of his or her employment) the balance of the Account on the date of death, including the proceeds of the Policy on the life of the Participant if the Participant's death occurs prior to distribution of the Policy to the Officer pursuant to paragraph (a) of this Section, shall be payable to the Participant's designated beneficiary or beneficiaries pursuant to paragraph (e) of this Section. d) If the Participant demonstrates a financial hardship to the satisfaction of the Compensation Committee, the Participant, at the discretion of the Compensation Committee, may receive an amount in cash from his Account necessary to meet the financial hardship within the calendar quarter next following the demonstration of the financial hardship. A payment on account of financial hardship will only be approved by the Compensation Committee if the payment is necessary in light of immediate unanticipated financial needs of the Participant. A 2 payment on account of financial hardship cannot exceed the amount required to meet the immediate financial need created by the hardship and cannot be reasonably available from other resources of the Participant. The determination of the existence of financial hardship is entirely in the discretion of the Compensation Committee. e) The Corporation shall direct distribution of the amounts credited to a Participant's Account, including earnings pursuant to Section 3, to a Participant or his or her beneficiary or beneficiaries pursuant to the preceding paragraphs of this Section in a lump sum or installments over such period of years as elected by the Officer. Distributions shall be made or commence on the first day of the month next following: 1) the date upon which the Participant's employment with the Corporation terminates in the event of a distribution pursuant to paragraphs a) or b) of this Section; or 2) the date of the Participant's death in the event of a distribution pursuant to paragraph c) of this Section. Subsequent installments, if any, shall be made on the annual anniversary dates of the date of the first installment. Each such installment, if any, shall include interest credited to the balance of the Account pursuant to Section 3. 5. Election to Defer Compensation. The Notice by which a Participant elects to defer compensation as provided in this Agreement shall be in writing, signed by the Participant, and delivered to the Corporation at such date as stipulated by the Compensation Committee on an annual basis, but in no event later than the date on which the Officer becomes entitled to a bonus under the Corporation's plan of compensation. Such election shall be effective only for the calendar year in which the election is made, and separate elections will be required for each subsequent year. Any deferral election made by the Participant shall be irrevocable with respect to the compensation covered by such election. 6. Participant's Rights Unsecured. The right of the Participant or his or her designated beneficiary or beneficiaries to receive a distribution hereunder shall be an unsecured claim against the general assets of the Corporation, and neither the Participant nor any designated beneficiary shall have any rights in or against any amount credited to his Account or any other specific assets of the Corporation. All amounts credited to an Account shall constitute general assets of the Corporation and may be disposed of by the Corporation at such time and for such purposes as it may deem appropriate. An Account may not be encumbered or assigned by a Participant or any beneficiary. 7. Amendments to the Plan. The Board may amend the Plan at any time, without the consent of the Participants or their beneficiaries, provided, however, that no amendment shall divest any Participant or beneficiary of the credits to his Account, or of any rights to which he 3 would have been entitled if the Plan had been terminated immediately prior to the effective date of such amendment. 8. Termination of the Plan. The Board may terminate the Plan at any time. Upon termination of the Plan, distribution of the credits to a Participant's Account shall be made in the manner and at the time heretofore prescribed; provided that no additional credits shall be made to the Account of a Participant following termination of the Plan other than earnings credited thereon pursuant to Section 3. 9. Expenses. Costs of administration of the Plan will be paid by the Corporation. 10. Notices. Any notice or election required or permitted to be given hereunder shall be in writing and shall be deemed to be filed: a) on the date it is personally delivered to the Secretary of the Corporation; or b) three business days after it is sent by registered or certified mail, addressed to such Secretary in care of Galoob Toys, Inc. Attachment - Election Form 4 GALOOB TOYS, INC. ELECTION TO PARTICIPATE IN OFFICERS' DEFERRED COMPENSATION PLAN AND DESIGNATION OF BENEFICIARY Pursuant to the Galoob Toys, Inc. Officers' Deferred Compensation Plan (the "Plan"), I hereby elect to defer, as provided in the Plan, the receipt of _____ % of any bonus payable to me in connection with the performance of services for the year ended December 31, 19__. In accordance with Section 3 of the Plan, amounts deferred shall be invested in the following manner: _____% Life Insurance Policy Premiums _____% (insert name of mutual fund #1) _____% (insert name of mutual fund #2) _____% Fixed Income (Corporation cost of funds) 100 % Pursuant to Section 4, I hereby elect to receive distributions under the Plan in the following manner: _____ Lump sum _____ Installments over a period of _____ years (not to exceed 10) I hereby designate ________________________________________________________ as my beneficiary to receive all amounts held for me under the Plan which have not been paid to me at the date of my death. - ------------------------------------- Signature - ------------------------------------- Print Name - ------------------------------------- Date EX-10 3 EXHIBIT 10.4(A) SEVERANCE AND CHANGE IN CONTROL AGREEMENT AGREEMENT, dated as of January 1, 1997, by and between GALOOB TOYS, INC., a Delaware corporation (the "Company"), and WILLIAM G. CATRON (the "Employee"). PREAMBLE The Compensation Committee of the Board of Directors of the Company has determined that it is in the best interests of the Company and its stockholders for the Company to revise and restate the termination arrangements with the Employee in the event the Employee should leave the employ of the Company under the circumstances described in this Agreement. In part, this Agreement is being executed and delivered to help assure a continuing dedication by the Employee to his duties to the Company notwithstanding the occurrence of a business combination proposal. In particular, the Compensation Committee believes it imperative, should the Company receive proposals from third parties with respect to its future, to enable the Employee, without being influenced by the uncertainties of his own situation, to assess and advise management and the Board of Directors whether such proposals would be in the best interest of the Company and its stockholders and to enable the Employee to take such other action regarding such proposals as the Board of Directors might determine to be appropriate. NOW, THEREFORE, in view of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which each party acknowledges, the Company and the Employee hereby agree as follows: 1. EFFECTIVE DATE AND TERM OF AGREEMENT. (a) This Agreement is effective and binding on both parties as of the date hereof and, shall continue in effect through the second anniversary of the date hereof (the "Expira tion Date"); provided, however, that, if a Change in Control (as defined in Section 3(a) hereof) shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months beyond the Expiration Date. (b) Nothing in this Agreement shall affect any right which the Employee may otherwise have to terminate his employment from the Company. Likewise, nothing in this Agreement shall affect any right which the Company may have to terminate the Employee's employment at any time in any lawful manner, except the obligation of the Company to make the payments provided for herein. 2. EMPLOYMENT AND SEVERANCE. (a) Subject to Section 3(c) below, if the Employee is terminated by the Company for reasons other than "for Cause" or due to the Employee's "Disability" (as those terms, respectively, are defined in Sections 3(d)(ii) and (i) hereof), such Employee shall receive a continuation of his Base Salary (as defined in Section 3(d)(iii) hereof) and certain other benefits as hereinafter provided ("Other Benefits", and collectively with such Base Salary, "Severance Benefits") for a period of twelve (12) months from and after the Date of Termination (as defined in Section 3(d)(iv)) ("Extension Period"); provided, however, that from and after the Date of Termination the Employee shall not receive or be entitled to any continuation of any bonus, incentive or profit sharing participation or eligibility for any part or all of the Company's fiscal year in which the Date of Termination occurs or for any part of the Extension Period. Except as provided below, such Base Salary during the Extension Period shall be paid in accordance with the Company's normal payroll schedule. If, however, during the Extension Period the Employee commences regular full-time employment elsewhere, the ongoing Severance Benefits shall cease as of the date of commencement of such employment; provided, however, that as of such date a calculation shall be made to determine the aggregate amount of Base Salary (excluding Other Benefits) that remains unpaid and which the Employee would have otherwise been entitled to receive during the remaining portion of the Extension Period, and the Company shall promptly pay the Employee a lump sum (minus withholdings and other required deductions) of an amount equal to one-half (1/2) of such unpaid amount. (b) The Other Benefits referred to in Section 2(a) above include all medical, health and welfare and insurance benefits that were in effect and in which the Employee participated as of the Date of Termination and these will continue during the Extension Period until the earlier to occur of twelve (12) months from the Date of Termination or the date the Employee becomes eligible for benefits from a subsequent employer. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by the Employee on a monthly or other periodic basis, will be governed by the various plans as they are in effect from time to time. Notwithstanding the foregoing, earned Flexible Time Off ("FTO") shall stop accruing and/or being earned as of the Date of Termination and all contributions to the Company's 401K and "cafeteria" benefit plan shall stop as of the Date of Termination. The Employee shall however be entitled to receive the amount of any accrued but unused FTO or vacation time to which the Employee is entitled through the Date of Termination and any amounts to be paid to the Employee pursuant to any deferred compensation plan. (c) The Employee's automobile allowance and automobile program benefits, including Company gasoline credit card and reimbursement for maintenance, insurance and other auto-related expenses, will cease as of the Date of Termination and shall not be extended to the Employee during the Extension Period. (d) For purposes of this Agreement, "regular full-time employment elsewhere" shall not include or be deemed to include any situation where the Employee becomes self-employed, or any self-employment circumstances where the Employee owns or controls at least 51 percent of the stock or other controlling equity of an entity that serves as the Employee's employer and was created after the Date of Termination solely for the purpose of the Employee's ongoing employment. (e) In the event of (i) a termination for Cause, whether before or after a Change in Control, or (ii) the voluntary termination by the Employee of his employment at any time other than as provided for in Sections 3 and 4, the Company shall pay the Employee no later than five (5) days after the Date of Termination his Base Salary through the Date of Termination, the amount of any accrued but unused FTO or vacation time to which the Employee is entitled through the Date of Termination, and any amounts to be paid to the Employee pursuant to any deferred compensation plan. Except as provided in the preceding sentence, and except for other payments routinely owed to the Employee by the Company for such items as travel and expense reimbursement, the Company shall have no further obligations to the Employee under this Agreement or otherwise. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred upon any of the following events: (i) A person or entity or group of persons or entities, acting in concert, shall become the direct or indirect beneficial owner (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended from time to time) of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the issued and outstanding common stock of the Company (a "Significant Owner"), unless such shares are originally issued to such Significant Owner by the Company; or (ii) The majority of the Company's Board of Directors is no longer comprised of the incumbent directors who constitute the Board of Directors on the date of this Agreement and any other individual(s) who becomes a director subsequent to the date of this Agreement whose initial election or nomination for election as a director, as the case may be, was approved by at least a majority of the directors who comprised the incumbent directors as of the date of such election or nomination; or (iii) The Company's common stock, par value $.01 per share, shall cease to be publicly traded; or (iv) A sale of all or substantially all of the assets of the Company; or (v) The Board of Directors shall approve any merger, consolidation, or like business combination or reorganization of the Company, the consummation of which would result in the occurrence of any event described in clause (ii) or (iii) above, and such transaction shall have been consummated. (b) In the event that any person or organization commences a tender or exchange offer, circulates a proxy statement to the Company's stockholders, or takes other steps designed to effect a Change in Control of the Company, the Employee agrees that, in order to receive the benefits provided by Sections 3 and 4 of this Agreement, he will not voluntarily leave the employ of the Company and will continue to perform his regular duties and to render his regular services, until such person or organization has abandoned or terminated his or its efforts to effect a Change in Control or until a Change in Control has occurred. Should the Employee voluntarily terminate his employment before a Change in Control of the Company has so occurred, he shall not be entitled to the payments provided for in Sections 3 and 4 hereof. (c) If a Change in Control of the Company shall have occurred, the Employee shall be entitled (in lieu of the payments and benefits provided for in Sections 2(a) and 2(b)) to the payments and benefits pursuant to Section 4 hereof upon the subsequent voluntary or involuntary termination of his employment, unless such termination is (i) due to the Employee's death or (ii) by the Company by reason of the Employee's Disability or for Cause. (d) For purposes of this Agreement: (i) "Disability" shall mean that, as a result of the Employee's incapacity due to physical or mental illness or injury, the Employee has been absent from the full-time performance of his duties with the Company for six (6) consecutive months and within thirty (30) days after Notice of Termination is given to the Employee, he has not returned to the full-time performance of his duties for a period of at least 14 consecutive days. Any question as to the existence of Disability shall be determined by a qualified independent physician selected by the Employee (or, if he is unable to make such selection, such selection shall be made by any adult member of the Employee's family) and approved by the Company. The written determination of such physician shall be final and conclusive for purposes of this Agreement. (ii) "for Cause" shall mean: (A) The willful and continued failure by the Employee to substantially perform his duties with the Company (other than any such failure resulting from the Employee's incapacity due to physical or mental illness or injury); or (B) The willful engagement in conduct by the Employee which is demonstrably and materially injurious to the Company, monetarily or otherwise; or (C) Conviction for a felony or other crime punishable by imprisonment for more than one (1) year, or the entering of a plea of nolo contendere thereto. (iii) "Base Salary" shall mean (A) if a Change in Control has occurred, the annual base salary of the Employee in effect immediately prior to the Change in Control of the Company or immediately prior to the Date of Termination, whichever is greater, and (B) if no Change in Control has occurred, the annual base salary of the Employee in effect immediately prior to the Date of Termination. Base Salary does not include any amounts paid for automobile allowance. (iv) "Date of Termination" shall mean (A) if the Employee's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the full-time performance of his duties for a period of at least 14 consecutive days during such thirty (30) day period) and (B) if the Employee's employment is terminated otherwise by the Company or the Employee, the date specified in the Notice of Termination. (e) "Notice of Termination" shall mean a written notice of termination communicated in writing by one party to the other party hereunder in accordance with Section 6(e) hereof. 4. PAYMENTS UPON TERMINATION. If required pursuant to Section 3(c) hereof, the Company will pay to the Employee as compensation for services rendered: (a) Not later than the 5th day after the Date of Termination, the Employee's Base Salary through the Date of Termination, the amount of any accrued but unused FTO or vacation time to which the employee is entitled through the Date of Termination, and any amounts to be paid to the Employee pursuant to any deferred compensation plan; and (b) If the Date of Termination is within twelve (12) months following a Change in Control, the Employee shall also receive the following: (i) no later than ten (10) days after such Date of Termination, a lump sum payment (minus withholdings and other required deductions) of an amount equal to three (3) times the Employee's Base Salary, plus thirty-six (36) times the amount to which the Employee was then entitled immediately prior to the Change in Control for the monthly automobile allowance; and (ii) no later than ten (10) days after such Date of Termination, an additional lump sum payment (minus with-holdings and other required deductions) of an amount equal to three (3) times the greater of (x) the bonus, if any, that was actually paid to the Employee for the year's results for the Company's fiscal year immediately preceding the year in which the Date of Termination occurs, (y) the percentage of maximum bonus otherwise payable for the full fiscal year in which the Date of Termination occurs assuming performance relative to plan for the entirety of such fiscal year was the same as performance relative to plan year to date as of the Date of Termination, or (z) the average bonus actually paid to the Employee for the five fiscal years immediately preceding the year in which the Date of Termination occurs (for the purpose of this Section 4(b)(ii), " bonus" shall include regular annual bonus payments, annual PIC bonus payments, annual super performance bonus payments and any other designated annual (as opposed to long-term) bonus payments); and (iii) commencing upon the Date of Termination: (1) All Other Benefits that were in effect and in which the Employee participated immediately prior to the Change in Control, for the period of the earlier to occur of thirty-six (36) months following the Date of Termination or the date the Employee becomes eligible for benefits from a subsequent employer. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by the Employee on a monthly or other periodic basis, shall be governed by the various plans as they are in effect from time to time. Notwithstanding the foregoing, earned FTO shall stop accruing and/or being earned as of the Date of Termination and all contributions to the Company's 401k and "cafeteria" benefit plan shall stop as of the Date of Termination. (2) In addition to the lump sum payment of the monthly automobile allowance, for the period of thirty-six (36) months following the Date of Termination the Employee shall be entitled to continue to receive reimbursement for items such as automobile maintenance, insurance and other auto-related expenses, including the use of a Company gasoline credit card, all in accordance with the Company's executive automobile allowance and reimbursement program as it is in effect immediately prior to the Change in Control; or (c) If during the next twelve (12) months following the first anniversary of the Change in Control, the Employee is terminated involuntarily by the Company other than for Cause, the Employee shall be entitled to receive all of the payments and benefits provided for in Sections 2(a) and 2(b) hereof, except that all references to "12 months" shall read "24 months". (d)(i) In the event that any payment or benefit received or to be received by the Employee pursuant to the terms of this Agreement (the "Contract Payments") or of any other plan, arrangement or agreement of the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would, in the written opinion of independent tax counsel selected by the Company and reasonably acceptable to the Employee ("Tax Counsel"), which opinion will be provided to both the Employee and the Company, be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (in whole or in part), as determined as provided below, the Payments shall be reduced as provided herein, (but not below zero) until no portion of the Payments would be subject to the Excise Tax. For purposes of this limitation, (i) no portion of the Payments the receipt or enjoyment of which the Employee shall have effectively waived in writing shall be taken into account, (ii) only the portion of the Payments which in the opinion of Tax Counsel constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code shall be taken into account, (iii) the Payments shall be reduced only to the extent necessary so that the Payments would not be subject to the Excise Tax, in the opinion of Tax Counsel, and (iv) the value of any noncash benefit or any deferred payment or benefit included in such payments shall be determined in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. The Employee shall make the determination, by written notice to the Company, at his sole discretion, as to exactly how the Payments shall be reduced, and shall select from among the Payments those to be so reduced, unless the Employee refuses to make such a determination, whereupon the Company shall determine the Payments reduction. To assist the Employee in making the foregoing determination, the Company shall require the Tax Counsel to counsel and advise the Employee, at the Company's expense, as to how to reduce the Payments so the maximum net economic value can be achieved by the Employee. (ii) If it is established pursuant to an opinion of Tax Counsel or a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of Section 4(d)(1) hereof, any Payments paid to the Employee or for his benefit exceeded the limitation contained in Section 4(d)(1) hereof, then the Employee shall pay to the Company, within 90 days of receipt of notice of such final determination or opinion, an amount equal to the sum of the excess of the Payments paid to him or for his benefit over the maximum Payments that should have been paid to or for his benefit taking into account the limitations contained in Section 4(d)(1) hereof; provided, however, that (x) the Employee shall not be required to make any payment to the Company pursuant to this Section 4(d)(ii),(A) if, and to the extent that, such final determination requires the payment by him of an Excise Tax by reason of any Payment or portion thereof, or (B) in the case of the opinion of Tax Counsel, until the expiration of the applicable statute of limitations or a final determination of a court or an Internal Revenue Service proceeding that no Excise Tax is due and (y) the Employee shall only be required to make a payment to the Company pursuant to this Section 4(d)(ii) to the extent such payment is deductible or otherwise reduces the Employee's tax liability for federal income tax purposes. If for any reason hereunder, the Employee is required to pay any Excise Tax, the Company shall pay the Employee an additional payment (a "Gross-Up Payment") in such an amount that after the payment of all taxes (including, without limitation, any interest and penalties on such taxes and the Excise Tax) on the Payment and on the Gross-Up Payment, the Employee shall retain an amount equal to the Payment minus all ordinary taxes on the Payment. It is the intent of the parties that, in connection with this Section 4(d)(ii), the Company shall be responsible for, and shall pay the Employee, any amount constituting Excise Tax on any Payment and Gross-Up Payment and any taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment. (iii) If it is established pursuant to an opinion of Tax Counsel or a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of Section 4(d)(i) hereof, any Payments paid to him or for his benefit were in an amount less than the maximum Payments which could be payable to him without such payments being subject to the Excise Tax, then the Company shall pay to him, within ninety days of receipt of notice of such final determination or opinion, an amount equal to the sum of (A) the excess, if any, of the payments that should have been paid to him or for his benefit over the payments paid to or for his benefit and (B) interest on the amount set forth in clause (A) of this sentence at the applicable federal rate (as defined in Section 1274(d) of the Code) from the Date of his non-receipt of such excess until the date of such payment. 5. STOCK OPTIONS In the event of a Change in Control, unless the employment of the Employee is terminated for Cause, (i) all then outstanding stock options granted to the Employee 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 Employee voluntarily terminates his employment with the Company within 12 months following a Change in Control for a reason other than death or Disability, or if the Employee is terminated by the Company 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. 6. GENERAL (a) Subject to the second sentence hereof, the Company shall pay to the Employee reasonable attorneys' fees that may be incurred by the Employee in enforcing the terms of this Agreement. If litigation or an arbitration proceeding ensues, and the Employee prevails in such litigation or arbitration, the Company shall promptly reimburse the Employee for his attorneys' fees and disbursements incurred in such litigation or arbitration proceeding and pay prejudgment interest on any money judgment obtained by the Employee 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 Company's obligation to pay the Employee 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 Company may have against the Employee or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment and if Employee obtains such other employment, any compensation earned by Employee pursuant thereto shall not be applied to mitigate any payment made to Employee pursuant to this Agreement except as expressly provided herein. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or other-wise) to all or substantially all of the business and/or assets of the Company, by written agreement to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, the term "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement required by this Section 5(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 Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee 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 Employee's devisee, legatee or other designee or, if there be no such designee, to the Employee'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 Employee: WILLIAM G. CATRON 1060 Siskiyou Drive Menlo Park, CA 94025 If to the Company: Galoob Toys, Inc. 500 Forbes Blvd. South San Francisco, California 94080 Attn: President 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 Employee and the Company concerning the subject matter hereof, and performance of its obligations hereunder by the Company shall constitute full settlement and release of any claim or cause of action, of whatso ever nature, which the Employee might otherwise assert or claim against the Company or any of its directors, stockholders, officers or employees on account of any termination. This Agreement supersedes the letter agreement, dated July 15, 1995, between the Company and the Employee, and such letter 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 Employee and an authorized officer of the Company. 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 Employee or any agreement now existing or which hereafter may be entered into between the Company and the Employee. 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 Employee shall be entitled to seek specific performance 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 on the day and year first above written. GALOOB TOYS, INC. /s/ WILLIAM G. CATRON By: /s/ Roger Kowalsky ------------------------------ Name: Roger Kowalsky Title: Executive Vice President EX-10 4 EXHIBIT 10.4(B) SEVERANCE AND CHANGE IN CONTROL AGREEMENT AGREEMENT, dated as of January 1, 1997, by and between GALOOB TOYS, INC., a Delaware corporation (the "Company"), and LOREN HILDEBRAND (the "Employee"). PREAMBLE The Compensation Committee of the Board of Directors of the Company has determined that it is in the best interests of the Company and its stockholders for the Company to revise and restate the termination arrangements with the Employee in the event the Employee should leave the employ of the Company under the circumstances described in this Agreement. In part, this Agreement is being executed and delivered to help assure a continuing dedication by the Employee to his duties to the Company notwithstanding the occurrence of a business combination proposal. In particular, the Compensation Committee believes it imperative, should the Company receive proposals from third parties with respect to its future, to enable the Employee, without being influenced by the uncertainties of his own situation, to assess and advise management and the Board of Directors whether such proposals would be in the best interest of the Company and its stockholders and to enable the Employee to take such other action regarding such proposals as the Board of Directors might determine to be appropriate. NOW, THEREFORE, in view of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which each party acknowledges, the Company and the Employee hereby agree as follows: 1. EFFECTIVE DATE AND TERM OF AGREEMENT. (a) This Agreement is effective and binding on both parties as of the date hereof and, shall continue in effect through the second anniversary of the date hereof (the "Expira tion Date"); provided, however, that, if a Change in Control (as defined in Section 3(a) hereof) shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months beyond the Expiration Date. (b) Nothing in this Agreement shall affect any right which the Employee may otherwise have to terminate his employment from the Company. Likewise, nothing in this Agreement shall affect any right which the Company may have to terminate the Employee's employment at any time in any lawful manner, except the obligation of the Company to make the payments provided for herein. 2. EMPLOYMENT AND SEVERANCE. (a) Subject to Section 3(c) below, if the Employee is terminated by the Company for reasons other than "for Cause" or due to the Employee's "Disability" (as those terms, respectively, are defined in Sections 3(d)(ii) and (i) hereof), such Employee shall receive a continuation of his Base Salary (as defined in Section 3(d)(iii) hereof) and certain other benefits as hereinafter provided ("Other Benefits", and collectively with such Base Salary, "Severance Benefits") for a period of twelve (12) months from and after the Date of Termination (as defined in Section 3(d)(iv)) ("Extension Period"); provided, however, that from and after the Date of Termination the Employee shall not receive or be entitled to any continuation of any bonus, incentive or profit sharing participation or eligibility for any part or all of the Company's fiscal year in which the Date of Termination occurs or for any part of the Extension Period. Except as provided below, such Base Salary during the Extension Period shall be paid in accordance with the Company's normal payroll schedule. If, however, during the Extension Period the Employee commences regular full-time employment elsewhere, the ongoing Severance Benefits shall cease as of the date of commencement of such employment; provided, however, that as of such date a calculation shall be made to determine the aggregate amount of Base Salary (excluding Other Benefits) that remains unpaid and which the Employee would have otherwise been entitled to receive during the remaining portion of the Extension Period, and the Company shall promptly pay the Employee a lump sum (minus withholdings and other required deductions) of an amount equal to one-half (1/2) of such unpaid amount. (b) The Other Benefits referred to in Section 2(a) above include all medical, health and welfare and insurance benefits that were in effect and in which the Employee participated as of the Date of Termination and these will continue during the Extension Period until the earlier to occur of twelve (12) months from the Date of Termination or the date the Employee becomes eligible for benefits from a subsequent employer. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by the Employee on a monthly or other periodic basis, will be governed by the various plans as they are in effect from time to time. Notwithstanding the foregoing, earned Flexible Time Off ("FTO") shall stop accruing and/or being earned as of the Date of Termination and all contributions to the Company's 401K and "cafeteria" benefit plan shall stop as of the Date of Termination. The Employee shall however be entitled to receive the amount of any accrued but unused FTO or vacation time to which the Employee is entitled through the Date of Termination and any amounts to be paid to the Employee pursuant to any deferred compensation plan. (c) The Employee's automobile allowance and automobile program benefits, including Company gasoline credit card and reimbursement for maintenance, insurance and other auto-related expenses, will cease as of the Date of Termination and shall not be extended to the Employee during the Extension Period. (d) For purposes of this Agreement, "regular full-time employment elsewhere" shall not include or be deemed to include any situation where the Employee becomes self-employed, or any self-employment circumstances where the Employee owns or controls at least 51 percent of the stock or other controlling equity of an entity that serves as the Employee's employer and was created after the Date of Termination solely for the purpose of the Employee's ongoing employment. (e) In the event of (i) a termination for Cause, whether before or after a Change in Control, or (ii) the voluntary termination by the Employee of his employment at any time other than as provided for in Sections 3 and 4, the Company shall pay the Employee no later than five (5) days after the Date of Termination his Base Salary through the Date of Termination, the amount of any accrued but unused FTO or vacation time to which the Employee is entitled through the Date of Termination, and any amounts to be paid to the Employee pursuant to any deferred compensation plan. Except as provided in the preceding sentence, and except for other payments routinely owed to the Employee by the Company for such items as travel and expense reimbursement, the Company shall have no further obligations to the Employee under this Agreement or otherwise. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred upon any of the following events: (i) A person or entity or group of persons or entities, acting in concert, shall become the direct or indirect beneficial owner (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended from time to time) of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the issued and outstanding common stock of the Company (a "Significant Owner"), unless such shares are originally issued to such Significant Owner by the Company; or (ii) The majority of the Company's Board of Directors is no longer comprised of the incumbent directors who constitute the Board of Directors on the date of this Agreement and any other individual(s) who becomes a director subsequent to the date of this Agreement whose initial election or nomination for election as a director, as the case may be, was approved by at least a majority of the directors who comprised the incumbent directors as of the date of such election or nomination; or (iii) The Company's common stock, par value $.01 per share, shall cease to be publicly traded; or (iv) A sale of all or substantially all of the assets of the Company; or (v) The Board of Directors shall approve any merger, consolidation, or like business combination or reorganization of the Company, the consummation of which would result in the occurrence of any event described in clause (ii) or (iii) above, and such transaction shall have been consummated. (b) In the event that any person or organization commences a tender or exchange offer, circulates a proxy statement to the Company's stockholders, or takes other steps designed to effect a Change in Control of the Company, the Employee agrees that, in order to receive the benefits provided by Sections 3 and 4 of this Agreement, he will not voluntarily leave the employ of the Company and will continue to perform his regular duties and to render his regular services, until such person or organization has abandoned or terminated his or its efforts to effect a Change in Control or until a Change in Control has occurred. Should the Employee voluntarily terminate his employment before a Change in Control of the Company has so occurred, he shall not be entitled to the payments provided for in Sections 3 and 4 hereof. (c) If a Change in Control of the Company shall have occurred, the Employee shall be entitled (in lieu of the payments and benefits provided for in Sections 2(a) and 2(b)) to the payments and benefits pursuant to Section 4 hereof upon the subsequent voluntary or involuntary termination of his employment, unless such termination is (i) due to the Employee's death or (ii) by the Company by reason of the Employee's Disability or for Cause. (d) For purposes of this Agreement: (i) "Disability" shall mean that, as a result of the Employee's incapacity due to physical or mental illness or injury, the Employee has been absent from the full-time performance of his duties with the Company for six (6) consecutive months and within thirty (30) days after Notice of Termination is given to the Employee, he has not returned to the full-time performance of his duties for a period of at least 14 consecutive days. Any question as to the existence of Disability shall be determined by a qualified independent physician selected by the Employee (or, if he is unable to make such selection, such selection shall be made by any adult member of the Employee's family) and approved by the Company. The written determination of such physician shall be final and conclusive for purposes of this Agreement. (ii) "for Cause" shall mean: (A) The willful and continued failure by the Employee to substantially perform his duties with the Company (other than any such failure resulting from the Employee's incapacity due to physical or mental illness or injury); or (B) The willful engagement in conduct by the Employee which is demonstrably and materially injurious to the Company, monetarily or otherwise; or (C) Conviction for a felony or other crime punishable by imprisonment for more than one (1) year, or the entering of a plea of nolo contendere thereto. (iii) "Base Salary" shall mean (A) if a Change in Control has occurred, the annual base salary of the Employee in effect immediately prior to the Change in Control of the Company or immediately prior to the Date of Termination, whichever is greater, and (B) if no Change in Control has occurred, the annual base salary of the Employee in effect immediately prior to the Date of Termination. Base Salary does not include any amounts paid for automobile allowance. (iv) "Date of Termination" shall mean (A) if the Employee's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the full-time performance of his duties for a period of at least 14 consecutive days during such thirty (30) day period) and (B) if the Employee's employment is terminated otherwise by the Company or the Employee, the date specified in the Notice of Termination. (e) "Notice of Termination" shall mean a written notice of termination communicated in writing by one party to the other party hereunder in accordance with Section 6(e) hereof. 4. PAYMENTS UPON TERMINATION. If required pursuant to Section 3(c) hereof, the Company will pay to the Employee as compensation for services rendered: (a) Not later than the 5th day after the Date of Termination, the Employee's Base Salary through the Date of Termination, the amount of any accrued but unused FTO or vacation time to which the employee is entitled through the Date of Termination, and any amounts to be paid to the Employee pursuant to any deferred compensation plan; and (b) If the Date of Termination is within twelve (12) months following a Change in Control, the Employee shall also receive the following: (i) no later than ten (10) days after such Date of Termination, a lump sum payment (minus withholdings and other required deductions) of an amount equal to three (3) times the Employee's Base Salary, plus thirty-six (36) times the amount to which the Employee was then entitled immediately prior to the Change in Control for the monthly automobile allowance; and (ii) no later than ten (10) days after such Date of Termination, an additional lump sum payment (minus with-holdings and other required deductions) of an amount equal to three (3) times the greater of (x) the bonus, if any, that was actually paid to the Employee for the year's results for the Company's fiscal year immediately preceding the year in which the Date of Termination occurs, (y) the percentage of maximum bonus otherwise payable for the full fiscal year in which the Date of Termination occurs assuming performance relative to plan for the entirety of such fiscal year was the same as performance relative to plan year to date as of the Date of Termination, or (z) the average bonus actually paid to the Employee for the five fiscal years immediately preceding the year in which the Date of Termination occurs (for the purpose of this Section 4(b)(ii), " bonus" shall include regular annual bonus payments, annual PIC bonus payments, annual super performance bonus payments and any other designated annual (as opposed to long-term) bonus payments); and (iii) commencing upon the Date of Termination: (1) All Other Benefits that were in effect and in which the Employee participated immediately prior to the Change in Control, for the period of the earlier to occur of thirty-six (36) months following the Date of Termination or the date the Employee becomes eligible for benefits from a subsequent employer. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by the Employee on a monthly or other periodic basis, shall be governed by the various plans as they are in effect from time to time. Notwithstanding the foregoing, earned FTO shall stop accruing and/or being earned as of the Date of Termination and all contributions to the Company's 401k and "cafeteria" benefit plan shall stop as of the Date of Termination. (2) In addition to the lump sum payment of the monthly automobile allowance, for the period of thirty-six (36) months following the Date of Termination the Employee shall be entitled to continue to receive reimbursement for items such as automobile maintenance, insurance and other auto-related expenses, including the use of a Company gasoline credit card, all in accordance with the Company's executive automobile allowance and reimbursement program as it is in effect immediately prior to the Change in Control; or (c) If during the next twelve (12) months following the first anniversary of the Change in Control, the Employee is terminated involuntarily by the Company other than for Cause, the Employee shall be entitled to receive all of the payments and benefits provided for in Sections 2(a) and 2(b) hereof, except that all references to "12 months" shall read "24 months". (d)(i) In the event that any payment or benefit received or to be received by the Employee pursuant to the terms of this Agreement (the "Contract Payments") or of any other plan, arrangement or agreement of the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would, in the written opinion of independent tax counsel selected by the Company and reasonably acceptable to the Employee ("Tax Counsel"), which opinion will be provided to both the Employee and the Company, be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (in whole or in part), as determined as provided below, the Payments shall be reduced as provided herein, (but not below zero) until no portion of the Payments would be subject to the Excise Tax. For purposes of this limitation, (i) no portion of the Payments the receipt or enjoyment of which the Employee shall have effectively waived in writing shall be taken into account, (ii) only the portion of the Payments which in the opinion of Tax Counsel constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code shall be taken into account, (iii) the Payments shall be reduced only to the extent necessary so that the Payments would not be subject to the Excise Tax, in the opinion of Tax Counsel, and (iv) the value of any noncash benefit or any deferred payment or benefit included in such payments shall be determined in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. The Employee shall make the determination, by written notice to the Company, at his sole discretion, as to exactly how the Payments shall be reduced, and shall select from among the Payments those to be so reduced, unless the Employee refuses to make such a determination, whereupon the Company shall determine the Payments reduction. To assist the Employee in making the foregoing determination, the Company shall require the Tax Counsel to counsel and advise the Employee, at the Company's expense, as to how to reduce the Payments so the maximum net economic value can be achieved by the Employee. (ii) If it is established pursuant to an opinion of Tax Counsel or a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of Section 4(d)(1) hereof, any Payments paid to the Employee or for his benefit exceeded the limitation contained in Section 4(d)(1) hereof, then the Employee shall pay to the Company, within 90 days of receipt of notice of such final determination or opinion, an amount equal to the sum of the excess of the Payments paid to him or for his benefit over the maximum Payments that should have been paid to or for his benefit taking into account the limitations contained in Section 4(d)(1) hereof; provided, however, that (x) the Employee shall not be required to make any payment to the Company pursuant to this Section 4(d)(ii),(A) if, and to the extent that, such final determination requires the payment by him of an Excise Tax by reason of any Payment or portion thereof, or (B) in the case of the opinion of Tax Counsel, until the expiration of the applicable statute of limitations or a final determination of a court or an Internal Revenue Service proceeding that no Excise Tax is due and (y) the Employee shall only be required to make a payment to the Company pursuant to this Section 4(d)(ii) to the extent such payment is deductible or otherwise reduces the Employee's tax liability for federal income tax purposes. If for any reason hereunder, the Employee is required to pay any Excise Tax, the Company shall pay the Employee an additional payment (a "Gross-Up Payment") in such an amount that after the payment of all taxes (including, without limitation, any interest and penalties on such taxes and the Excise Tax) on the Payment and on the Gross-Up Payment, the Employee shall retain an amount equal to the Payment minus all ordinary taxes on the Payment. It is the intent of the parties that, in connection with this Section 4(d)(ii), the Company shall be responsible for, and shall pay the Employee, any amount constituting Excise Tax on any Payment and Gross-Up Payment and any taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment. (iii) If it is established pursuant to an opinion of Tax Counsel or a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of Section 4(d)(i) hereof, any Payments paid to him or for his benefit were in an amount less than the maximum Payments which could be payable to him without such payments being subject to the Excise Tax, then the Company shall pay to him, within ninety days of receipt of notice of such final determination or opinion, an amount equal to the sum of (A) the excess, if any, of the payments that should have been paid to him or for his benefit over the payments paid to or for his benefit and (B) interest on the amount set forth in clause (A) of this sentence at the applicable federal rate (as defined in Section 1274(d) of the Code) from the Date of his non-receipt of such excess until the date of such payment. 5. STOCK OPTIONS In the event of a Change in Control, unless the employment of the Employee is terminated for Cause, (i) all then outstanding stock options granted to the Employee 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 Employee voluntarily terminates his employment with the Company within 12 months following a Change in Control for a reason other than death or Disability, or if the Employee is terminated by the Company 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. 6. GENERAL (a) Subject to the second sentence hereof, the Company shall pay to the Employee reasonable attorneys' fees that may be incurred by the Employee in enforcing the terms of this Agreement. If litigation or an arbitration proceeding ensues, and the Employee prevails in such litigation or arbitration, the Company shall promptly reimburse the Employee for his attorneys' fees and disbursements incurred in such litigation or arbitration proceeding and pay prejudgment interest on any money judgment obtained by the Employee 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 Company's obligation to pay the Employee 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 Company may have against the Employee or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment and if Employee obtains such other employment, any compensation earned by Employee pursuant thereto shall not be applied to mitigate any payment made to Employee pursuant to this Agreement except as expressly provided herein. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or other-wise) to all or substantially all of the business and/or assets of the Company, by written agreement to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, the term "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement required by this Section 5(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 Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee 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 Employee's devisee, legatee or other designee or, if there be no such designee, to the Employee'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 Employee: LOREN HILDEBRAND 765 Mediterranean Lane Redwood Shores, CA 94065 If to the Company: Galoob Toys, Inc. 500 Forbes Blvd. South San Francisco, California 94080 Attn: President 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 Employee and the Company concerning the subject matter hereof, and performance of its obligations hereunder by the Company shall constitute full settlement and release of any claim or cause of action, of whatso ever nature, which the Employee might otherwise assert or claim against the Company or any of its directors, stockholders, officers or employees on account of any termination. This Agreement supersedes the letter agreement, dated July 15, 1995, between the Company and the Employee, and such letter 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 Employee and an authorized officer of the Company. 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 Employee or any agreement now existing or which hereafter may be entered into between the Company and the Employee. 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 Employee shall be entitled to seek specific performance 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 on the day and year first above written. GALOOB TOYS, INC. /s/ LOREN HILDEBRAND By: /s/ William G. Catron -------------------------- Name: William G. Catron Title: Executive Vice President EX-10 5 EXHIBIT 10.4(C) SEVERANCE AND CHANGE IN CONTROL AGREEMENT AGREEMENT, dated as of January 1, 1997, by and between GALOOB TOYS, INC., a Delaware corporation (the "Company"), and RONALD D. HIRSCHFELD (the "Employee"). PREAMBLE The Compensation Committee of the Board of Directors of the Company has determined that it is in the best interests of the Company and its stockholders for the Company to revise and restate the termination arrangements with the Employee in the event the Employee should leave the employ of the Company under the circumstances described in this Agreement. In part, this Agreement is being executed and delivered to help assure a continuing dedication by the Employee to his duties to the Company notwithstanding the occurrence of a business combination proposal. In particular, the Compensation Committee believes it imperative, should the Company receive proposals from third parties with respect to its future, to enable the Employee, without being influenced by the uncertainties of his own situation, to assess and advise management and the Board of Directors whether such proposals would be in the best interest of the Company and its stockholders and to enable the Employee to take such other action regarding such proposals as the Board of Directors might determine to be appropriate. NOW, THEREFORE, in view of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which each party acknowledges, the Company and the Employee hereby agree as follows: 1. EFFECTIVE DATE AND TERM OF AGREEMENT. (a) This Agreement is effective and binding on both parties as of the date hereof and, shall continue in effect through the second anniversary of the date hereof (the "Expira tion Date"); provided, however, that, if a Change in Control (as defined in Section 3(a) hereof) shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months beyond the Expiration Date. (b) Nothing in this Agreement shall affect any right which the Employee may otherwise have to terminate his employment from the Company. Likewise, nothing in this Agreement shall affect any right which the Company may have to terminate the Employee's employment at any time in any lawful manner, except the obligation of the Company to make the payments provided for herein. 2. EMPLOYMENT AND SEVERANCE. (a) Subject to Section 3(c) below, if the Employee is terminated by the Company for reasons other than "for Cause" or due to the Employee's "Disability" (as those terms, respectively, are defined in Sections 3(d)(ii) and (i) hereof), such Employee shall receive a continuation of his Base Salary (as defined in Section 3(d)(iii) hereof) and certain other benefits as hereinafter provided ("Other Benefits", and collectively with such Base Salary, "Severance Benefits") for a period of twelve (12) months from and after the Date of Termination (as defined in Section 3(d)(iv)) ("Extension Period"); provided, however, that from and after the Date of Termination the Employee shall not receive or be entitled to any continuation of any bonus, incentive or profit sharing participation or eligibility for any part or all of the Company's fiscal year in which the Date of Termination occurs or for any part of the Extension Period. Except as provided below, such Base Salary during the Extension Period shall be paid in accordance with the Company's normal payroll schedule. If, however, during the Extension Period the Employee commences regular full-time employment elsewhere, the ongoing Severance Benefits shall cease as of the date of commencement of such employment; provided, however, that as of such date a calculation shall be made to determine the aggregate amount of Base Salary (excluding Other Benefits) that remains unpaid and which the Employee would have otherwise been entitled to receive during the remaining portion of the Extension Period, and the Company shall promptly pay the Employee a lump sum (minus withholdings and other required deductions) of an amount equal to one-half (1/2) of such unpaid amount. (b) The Other Benefits referred to in Section 2(a) above include all medical, health and welfare and insurance benefits that were in effect and in which the Employee participated as of the Date of Termination and these will continue during the Extension Period until the earlier to occur of twelve (12) months from the Date of Termination or the date the Employee becomes eligible for benefits from a subsequent employer. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by the Employee on a monthly or other periodic basis, will be governed by the various plans as they are in effect from time to time. Notwithstanding the foregoing, earned Flexible Time Off ("FTO") shall stop accruing and/or being earned as of the Date of Termination and all contributions to the Company's 401K and "cafeteria" benefit plan shall stop as of the Date of Termination. The Employee shall however be entitled to receive the amount of any accrued but unused FTO or vacation time to which the Employee is entitled through the Date of Termination and any amounts to be paid to the Employee pursuant to any deferred compensation plan. (c) The Employee's automobile allowance and automobile program benefits, including Company gasoline credit card and reimbursement for maintenance, insurance and other auto-related expenses, will cease as of the Date of Termination and shall not be extended to the Employee during the Extension Period. (d) For purposes of this Agreement, "regular full-time employment elsewhere" shall not include or be deemed to include any situation where the Employee becomes self-employed, or any self-employment circumstances where the Employee owns or controls at least 51 percent of the stock or other controlling equity of an entity that serves as the Employee's employer and was created after the Date of Termination solely for the purpose of the Employee's ongoing employment. (e) In the event of (i) a termination for Cause, whether before or after a Change in Control, or (ii) the voluntary termination by the Employee of his employment at any time other than as provided for in Sections 3 and 4, the Company shall pay the Employee no later than five (5) days after the Date of Termination his Base Salary through the Date of Termination, the amount of any accrued but unused FTO or vacation time to which the Employee is entitled through the Date of Termination, and any amounts to be paid to the Employee pursuant to any deferred compensation plan. Except as provided in the preceding sentence, and except for other payments routinely owed to the Employee by the Company for such items as travel and expense reimbursement, the Company shall have no further obligations to the Employee under this Agreement or otherwise. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred upon any of the following events: (i) A person or entity or group of persons or entities, acting in concert, shall become the direct or indirect beneficial owner (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended from time to time) of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the issued and outstanding common stock of the Company (a "Significant Owner"), unless such shares are originally issued to such Significant Owner by the Company; or (ii) The majority of the Company's Board of Directors is no longer comprised of the incumbent directors who constitute the Board of Directors on the date of this Agreement and any other individual(s) who becomes a director subsequent to the date of this Agreement whose initial election or nomination for election as a director, as the case may be, was approved by at least a majority of the directors who comprised the incumbent directors as of the date of such election or nomination; or (iii) The Company's common stock, par value $.01 per share, shall cease to be publicly traded; or (iv) A sale of all or substantially all of the assets of the Company; or (v) The Board of Directors shall approve any merger, consolidation, or like business combination or reorganization of the Company, the consummation of which would result in the occurrence of any event described in clause (ii) or (iii) above, and such transaction shall have been consummated. (b) In the event that any person or organization commences a tender or exchange offer, circulates a proxy statement to the Company's stockholders, or takes other steps designed to effect a Change in Control of the Company, the Employee agrees that, in order to receive the benefits provided by Sections 3 and 4 of this Agreement, he will not voluntarily leave the employ of the Company and will continue to perform his regular duties and to render his regular services, until such person or organization has abandoned or terminated his or its efforts to effect a Change in Control or until a Change in Control has occurred. Should the Employee voluntarily terminate his employment before a Change in Control of the Company has so occurred, he shall not be entitled to the payments provided for in Sections 3 and 4 hereof. (c) If a Change in Control of the Company shall have occurred, the Employee shall be entitled (in lieu of the payments and benefits provided for in Sections 2(a) and 2(b)) to the payments and benefits pursuant to Section 4 hereof upon the subsequent voluntary or involuntary termination of his employment, unless such termination is (i) due to the Employee's death or (ii) by the Company by reason of the Employee's Disability or for Cause. (d) For purposes of this Agreement: (i) "Disability" shall mean that, as a result of the Employee's incapacity due to physical or mental illness or injury, the Employee has been absent from the full-time performance of his duties with the Company for six (6) consecutive months and within thirty (30) days after Notice of Termination is given to the Employee, he has not returned to the full-time performance of his duties for a period of at least 14 consecutive days. Any question as to the existence of Disability shall be determined by a qualified independent physician selected by the Employee (or, if he is unable to make such selection, such selection shall be made by any adult member of the Employee's family) and approved by the Company. The written determination of such physician shall be final and conclusive for purposes of this Agreement. (ii) "for Cause" shall mean: (A) The willful and continued failure by the Employee to substantially perform his duties with the Company (other than any such failure resulting from the Employee's incapacity due to physical or mental illness or injury); or (B) The willful engagement in conduct by the Employee which is demonstrably and materially injurious to the Company, monetarily or otherwise; or (C) Conviction for a felony or other crime punishable by imprisonment for more than one (1) year, or the entering of a plea of nolo contendere thereto. (iii) "Base Salary" shall mean (A) if a Change in Control has occurred, the annual base salary of the Employee in effect immediately prior to the Change in Control of the Company or immediately prior to the Date of Termination, whichever is greater, and (B) if no Change in Control has occurred, the annual base salary of the Employee in effect immediately prior to the Date of Termination. Base Salary does not include any amounts paid for automobile allowance. (iv) "Date of Termination" shall mean (A) if the Employee's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the full-time performance of his duties for a period of at least 14 consecutive days during such thirty (30) day period) and (B) if the Employee's employment is terminated otherwise by the Company or the Employee, the date specified in the Notice of Termination. (e) "Notice of Termination" shall mean a written notice of termination communicated in writing by one party to the other party hereunder in accordance with Section 6(e) hereof. 4. PAYMENTS UPON TERMINATION. If required pursuant to Section 3(c) hereof, the Company will pay to the Employee as compensation for services rendered: (a) Not later than the 5th day after the Date of Termination, the Employee's Base Salary through the Date of Termination, the amount of any accrued but unused FTO or vacation time to which the employee is entitled through the Date of Termination, and any amounts to be paid to the Employee pursuant to any deferred compensation plan; and (b) If the Date of Termination is within twelve (12) months following a Change in Control, the Employee shall also receive the following: (i) no later than ten (10) days after such Date of Termination, a lump sum payment (minus withholdings and other required deductions) of an amount equal to three (3) times the Employee's Base Salary, plus thirty-six (36) times the amount to which the Employee was then entitled immediately prior to the Change in Control for the monthly automobile allowance; and (ii) no later than ten (10) days after such Date of Termination, an additional lump sum payment (minus with-holdings and other required deductions) of an amount equal to three (3) times the greater of (x) the bonus, if any, that was actually paid to the Employee for the year's results for the Company's fiscal year immediately preceding the year in which the Date of Termination occurs, (y) the percentage of maximum bonus otherwise payable for the full fiscal year in which the Date of Termination occurs assuming performance relative to plan for the entirety of such fiscal year was the same as performance relative to plan year to date as of the Date of Termination, or (z) the average bonus actually paid to the Employee for the five fiscal years immediately preceding the year in which the Date of Termination occurs (for the purpose of this Section 4(b)(ii), " bonus" shall include regular annual bonus payments, annual PIC bonus payments, annual super performance bonus payments and any other designated annual (as opposed to long-term) bonus payments); and (iii) commencing upon the Date of Termination: (1) All Other Benefits that were in effect and in which the Employee participated immediately prior to the Change in Control, for the period of the earlier to occur of thirty-six (36) months following the Date of Termination or the date the Employee becomes eligible for benefits from a subsequent employer. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by the Employee on a monthly or other periodic basis, shall be governed by the various plans as they are in effect from time to time. Notwithstanding the foregoing, earned FTO shall stop accruing and/or being earned as of the Date of Termination and all contributions to the Company's 401k and "cafeteria" benefit plan shall stop as of the Date of Termination. (2) In addition to the lump sum payment of the monthly automobile allowance, for the period of thirty-six (36) months following the Date of Termination the Employee shall be entitled to continue to receive reimbursement for items such as automobile maintenance, insurance and other auto-related expenses, including the use of a Company gasoline credit card, all in accordance with the Company's executive automobile allowance and reimbursement program as it is in effect immediately prior to the Change in Control; or (c) If during the next twelve (12) months following the first anniversary of the Change in Control, the Employee is terminated involuntarily by the Company other than for Cause, the Employee shall be entitled to receive all of the payments and benefits provided for in Sections 2(a) and 2(b) hereof, except that all references to "12 months" shall read "24 months". (d)(i) In the event that any payment or benefit received or to be received by the Employee pursuant to the terms of this Agreement (the "Contract Payments") or of any other plan, arrangement or agreement of the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would, in the written opinion of independent tax counsel selected by the Company and reasonably acceptable to the Employee ("Tax Counsel"), which opinion will be provided to both the Employee and the Company, be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (in whole or in part), as determined as provided below, the Payments shall be reduced as provided herein, (but not below zero) until no portion of the Payments would be subject to the Excise Tax. For purposes of this limitation, (i) no portion of the Payments the receipt or enjoyment of which the Employee shall have effectively waived in writing shall be taken into account, (ii) only the portion of the Payments which in the opinion of Tax Counsel constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code shall be taken into account, (iii) the Payments shall be reduced only to the extent necessary so that the Payments would not be subject to the Excise Tax, in the opinion of Tax Counsel, and (iv) the value of any noncash benefit or any deferred payment or benefit included in such payments shall be determined in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. The Employee shall make the determination, by written notice to the Company, at his sole discretion, as to exactly how the Payments shall be reduced, and shall select from among the Payments those to be so reduced, unless the Employee refuses to make such a determination, whereupon the Company shall determine the Payments reduction. To assist the Employee in making the foregoing determination, the Company shall require the Tax Counsel to counsel and advise the Employee, at the Company's expense, as to how to reduce the Payments so the maximum net economic value can be achieved by the Employee. (ii) If it is established pursuant to an opinion of Tax Counsel or a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of Section 4(d)(1) hereof, any Payments paid to the Employee or for his benefit exceeded the limitation contained in Section 4(d)(1) hereof, then the Employee shall pay to the Company, within 90 days of receipt of notice of such final determination or opinion, an amount equal to the sum of the excess of the Payments paid to him or for his benefit over the maximum Payments that should have been paid to or for his benefit taking into account the limitations contained in Section 4(d)(1) hereof; provided, however, that (x) the Employee shall not be required to make any payment to the Company pursuant to this Section 4(d)(ii),(A) if, and to the extent that, such final determination requires the payment by him of an Excise Tax by reason of any Payment or portion thereof, or (B) in the case of the opinion of Tax Counsel, until the expiration of the applicable statute of limitations or a final determination of a court or an Internal Revenue Service proceeding that no Excise Tax is due and (y) the Employee shall only be required to make a payment to the Company pursuant to this Section 4(d)(ii) to the extent such payment is deductible or otherwise reduces the Employee's tax liability for federal income tax purposes. If for any reason hereunder, the Employee is required to pay any Excise Tax, the Company shall pay the Employee an additional payment (a "Gross-Up Payment") in such an amount that after the payment of all taxes (including, without limitation, any interest and penalties on such taxes and the Excise Tax) on the Payment and on the Gross-Up Payment, the Employee shall retain an amount equal to the Payment minus all ordinary taxes on the Payment. It is the intent of the parties that, in connection with this Section 4(d)(ii), the Company shall be responsible for, and shall pay the Employee, any amount constituting Excise Tax on any Payment and Gross-Up Payment and any taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment. (iii) If it is established pursuant to an opinion of Tax Counsel or a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of Section 4(d)(i) hereof, any Payments paid to him or for his benefit were in an amount less than the maximum Payments which could be payable to him without such payments being subject to the Excise Tax, then the Company shall pay to him, within ninety days of receipt of notice of such final determination or opinion, an amount equal to the sum of (A) the excess, if any, of the payments that should have been paid to him or for his benefit over the payments paid to or for his benefit and (B) interest on the amount set forth in clause (A) of this sentence at the applicable federal rate (as defined in Section 1274(d) of the Code) from the Date of his non-receipt of such excess until the date of such payment. 5. STOCK OPTIONS In the event of a Change in Control, unless the employment of the Employee is terminated for Cause, (i) all then outstanding stock options granted to the Employee 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 Employee voluntarily terminates his employment with the Company within 12 months following a Change in Control for a reason other than death or Disability, or if the Employee is terminated by the Company 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. 6. GENERAL (a) Subject to the second sentence hereof, the Company shall pay to the Employee reasonable attorneys' fees that may be incurred by the Employee in enforcing the terms of this Agreement. If litigation or an arbitration proceeding ensues, and the Employee prevails in such litigation or arbitration, the Company shall promptly reimburse the Employee for his attorneys' fees and disbursements incurred in such litigation or arbitration proceeding and pay prejudgment interest on any money judgment obtained by the Employee 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 Company's obligation to pay the Employee 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 Company may have against the Employee or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment and if Employee obtains such other employment, any compensation earned by Employee pursuant thereto shall not be applied to mitigate any payment made to Employee pursuant to this Agreement except as expressly provided herein. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or other-wise) to all or substantially all of the business and/or assets of the Company, by written agreement to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, the term "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement required by this Section 5(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 Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee 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 Employee's devisee, legatee or other designee or, if there be no such designee, to the Employee'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 Employee: RONALD D. HIRSCHFELD 425 Casteneda San Fransisco, CA 94116 If to the Company: Galoob Toys, Inc. 500 Forbes Blvd. South San Francisco, California 94080 Attn: President 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 Employee and the Company concerning the subject matter hereof, and performance of its obligations hereunder by the Company shall constitute full settlement and release of any claim or cause of action, of whatso ever nature, which the Employee might otherwise assert or claim against the Company or any of its directors, stockholders, officers or employees on account of any termination. This Agreement supersedes the letter agreement, dated July 15, 1995, between the Company and the Employee, and such letter 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 Employee and an authorized officer of the Company. 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 Employee or any agreement now existing or which hereafter may be entered into between the Company and the Employee. 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 Employee shall be entitled to seek specific performance 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 on the day and year first above written. GALOOB TOYS, INC. /s/ RONALD D. HIRSCHFELD By: /s/ William G. Catron -------------------------- Name: William G. Catron Title: Executive Vice President EX-10 6 EXHIBIT 10.4(D) SEVERANCE AND CHANGE IN CONTROL AGREEMENT AGREEMENT, dated as of January 1, 1997, by and between GALOOB TOYS, INC., a Delaware corporation (the "Company"), and ROGER J. KOWALSKY (the "Employee"). PREAMBLE The Compensation Committee of the Board of Directors of the Company has determined that it is in the best interests of the Company and its stockholders for the Company to revise and restate the termination arrangements with the Employee in the event the Employee should leave the employ of the Company under the circumstances described in this Agreement. In part, this Agreement is being executed and delivered to help assure a continuing dedication by the Employee to his duties to the Company notwithstanding the occurrence of a business combination proposal. In particular, the Compensation Committee believes it imperative, should the Company receive proposals from third parties with respect to its future, to enable the Employee, without being influenced by the uncertainties of his own situation, to assess and advise management and the Board of Directors whether such proposals would be in the best interest of the Company and its stockholders and to enable the Employee to take such other action regarding such proposals as the Board of Directors might determine to be appropriate. NOW, THEREFORE, in view of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which each party acknowledges, the Company and the Employee hereby agree as follows: 1. EFFECTIVE DATE AND TERM OF AGREEMENT. (a) This Agreement is effective and binding on both parties as of the date hereof and, shall continue in effect through the second anniversary of the date hereof (the "Expira tion Date"); provided, however, that, if a Change in Control (as defined in Section 3(a) hereof) shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months beyond the Expiration Date. (b) Nothing in this Agreement shall affect any right which the Employee may otherwise have to terminate his employment from the Company. Likewise, nothing in this Agreement shall affect any right which the Company may have to terminate the Employee's employment at any time in any lawful manner, except the obligation of the Company to make the payments provided for herein. 2. EMPLOYMENT AND SEVERANCE. (a) Subject to Section 3(c) below, if the Employee is terminated by the Company for reasons other than "for Cause" or due to the Employee's "Disability" (as those terms, respectively, are defined in Sections 3(d)(ii) and (i) hereof), such Employee shall receive a continuation of his Base Salary (as defined in Section 3(d)(iii) hereof) and certain other benefits as hereinafter provided ("Other Benefits", and collectively with such Base Salary, "Severance Benefits") for a period of twelve (12) months from and after the Date of Termination (as defined in Section 3(d)(iv)) ("Extension Period"); provided, however, that from and after the Date of Termination the Employee shall not receive or be entitled to any continuation of any bonus, incentive or profit sharing participation or eligibility for any part or all of the Company's fiscal year in which the Date of Termination occurs or for any part of the Extension Period. Except as provided below, such Base Salary during the Extension Period shall be paid in accordance with the Company's normal payroll schedule. If, however, during the Extension Period the Employee commences regular full-time employment elsewhere, the ongoing Severance Benefits shall cease as of the date of commencement of such employment; provided, however, that as of such date a calculation shall be made to determine the aggregate amount of Base Salary (excluding Other Benefits) that remains unpaid and which the Employee would have otherwise been entitled to receive during the remaining portion of the Extension Period, and the Company shall promptly pay the Employee a lump sum (minus withholdings and other required deductions) of an amount equal to one-half (1/2) of such unpaid amount. (b) The Other Benefits referred to in Section 2(a) above include all medical, health and welfare and insurance benefits that were in effect and in which the Employee participated as of the Date of Termination and these will continue during the Extension Period until the earlier to occur of twelve (12) months from the Date of Termination or the date the Employee becomes eligible for benefits from a subsequent employer. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by the Employee on a monthly or other periodic basis, will be governed by the various plans as they are in effect from time to time. Notwithstanding the foregoing, earned Flexible Time Off ("FTO") shall stop accruing and/or being earned as of the Date of Termination and all contributions to the Company's 401K and "cafeteria" benefit plan shall stop as of the Date of Termination. The Employee shall however be entitled to receive the amount of any accrued but unused FTO or vacation time to which the Employee is entitled through the Date of Termination and any amounts to be paid to the Employee pursuant to any deferred compensation plan. (c) The Employee's automobile allowance and automobile program benefits, including Company gasoline credit card and reimbursement for maintenance, insurance and other auto-related expenses, will cease as of the Date of Termination and shall not be extended to the Employee during the Extension Period. (d) For purposes of this Agreement, "regular full-time employment elsewhere" shall not include or be deemed to include any situation where the Employee becomes self-employed, or any self-employment circumstances where the Employee owns or controls at least 51 percent of the stock or other controlling equity of an entity that serves as the Employee's employer and was created after the Date of Termination solely for the purpose of the Employee's ongoing employment. (e) In the event of (i) a termination for Cause, whether before or after a Change in Control, or (ii) the voluntary termination by the Employee of his employment at any time other than as provided for in Sections 3 and 4, the Company shall pay the Employee no later than five (5) days after the Date of Termination his Base Salary through the Date of Termination, the amount of any accrued but unused FTO or vacation time to which the Employee is entitled through the Date of Termination, and any amounts to be paid to the Employee pursuant to any deferred compensation plan. Except as provided in the preceding sentence, and except for other payments routinely owed to the Employee by the Company for such items as travel and expense reimbursement, the Company shall have no further obligations to the Employee under this Agreement or otherwise. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred upon any of the following events: (i) A person or entity or group of persons or entities, acting in concert, shall become the direct or indirect beneficial owner (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended from time to time) of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the issued and outstanding common stock of the Company (a "Significant Owner"), unless such shares are originally issued to such Significant Owner by the Company; or (ii) The majority of the Company's Board of Directors is no longer comprised of the incumbent directors who constitute the Board of Directors on the date of this Agreement and any other individual(s) who becomes a director subsequent to the date of this Agreement whose initial election or nomination for election as a director, as the case may be, was approved by at least a majority of the directors who comprised the incumbent directors as of the date of such election or nomination; or (iii) The Company's common stock, par value $.01 per share, shall cease to be publicly traded; or (iv) A sale of all or substantially all of the assets of the Company; or (v) The Board of Directors shall approve any merger, consolidation, or like business combination or reorganization of the Company, the consummation of which would result in the occurrence of any event described in clause (ii) or (iii) above, and such transaction shall have been consummated. (b) In the event that any person or organization commences a tender or exchange offer, circulates a proxy statement to the Company's stockholders, or takes other steps designed to effect a Change in Control of the Company, the Employee agrees that, in order to receive the benefits provided by Sections 3 and 4 of this Agreement, he will not voluntarily leave the employ of the Company and will continue to perform his regular duties and to render his regular services, until such person or organization has abandoned or terminated his or its efforts to effect a Change in Control or until a Change in Control has occurred. Should the Employee voluntarily terminate his employment before a Change in Control of the Company has so occurred, he shall not be entitled to the payments provided for in Sections 3 and 4 hereof. (c) If a Change in Control of the Company shall have occurred, the Employee shall be entitled (in lieu of the payments and benefits provided for in Sections 2(a) and 2(b)) to the payments and benefits pursuant to Section 4 hereof upon the subsequent voluntary or involuntary termination of his employment, unless such termination is (i) due to the Employee's death or (ii) by the Company by reason of the Employee's Disability or for Cause. (d) For purposes of this Agreement: (i) "Disability" shall mean that, as a result of the Employee's incapacity due to physical or mental illness or injury, the Employee has been absent from the full-time performance of his duties with the Company for six (6) consecutive months and within thirty (30) days after Notice of Termination is given to the Employee, he has not returned to the full-time performance of his duties for a period of at least 14 consecutive days. Any question as to the existence of Disability shall be determined by a qualified independent physician selected by the Employee (or, if he is unable to make such selection, such selection shall be made by any adult member of the Employee's family) and approved by the Company. The written determination of such physician shall be final and conclusive for purposes of this Agreement. (ii) "for Cause" shall mean: (A) The willful and continued failure by the Employee to substantially perform his duties with the Company (other than any such failure resulting from the Employee's incapacity due to physical or mental illness or injury); or (B) The willful engagement in conduct by the Employee which is demonstrably and materially injurious to the Company, monetarily or otherwise; or (C) Conviction for a felony or other crime punishable by imprisonment for more than one (1) year, or the entering of a plea of nolo contendere thereto. (iii) "Base Salary" shall mean (A) if a Change in Control has occurred, the annual base salary of the Employee in effect immediately prior to the Change in Control of the Company or immediately prior to the Date of Termination, whichever is greater, and (B) if no Change in Control has occurred, the annual base salary of the Employee in effect immediately prior to the Date of Termination. Base Salary does not include any amounts paid for automobile allowance. (iv) "Date of Termination" shall mean (A) if the Employee's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the full-time performance of his duties for a period of at least 14 consecutive days during such thirty (30) day period) and (B) if the Employee's employment is terminated otherwise by the Company or the Employee, the date specified in the Notice of Termination. (e) "Notice of Termination" shall mean a written notice of termination communicated in writing by one party to the other party hereunder in accordance with Section 6(e) hereof. 4. PAYMENTS UPON TERMINATION. If required pursuant to Section 3(c) hereof, the Company will pay to the Employee as compensation for services rendered: (a) Not later than the 5th day after the Date of Termination, the Employee's Base Salary through the Date of Termination, the amount of any accrued but unused FTO or vacation time to which the employee is entitled through the Date of Termination, and any amounts to be paid to the Employee pursuant to any deferred compensation plan; and (b) If the Date of Termination is within twelve (12) months following a Change in Control, the Employee shall also receive the following: (i) no later than ten (10) days after such Date of Termination, a lump sum payment (minus withholdings and other required deductions) of an amount equal to three (3) times the Employee's Base Salary, plus thirty-six (36) times the amount to which the Employee was then entitled immediately prior to the Change in Control for the monthly automobile allowance; and (ii) no later than ten (10) days after such Date of Termination, an additional lump sum payment (minus with-holdings and other required deductions) of an amount equal to three (3) times the greater of (x) the bonus, if any, that was actually paid to the Employee for the year's results for the Company's fiscal year immediately preceding the year in which the Date of Termination occurs, (y) the percentage of maximum bonus otherwise payable for the full fiscal year in which the Date of Termination occurs assuming performance relative to plan for the entirety of such fiscal year was the same as performance relative to plan year to date as of the Date of Termination, or (z) the average bonus actually paid to the Employee for the five fiscal years immediately preceding the year in which the Date of Termination occurs (for the purpose of this Section 4(b)(ii), " bonus" shall include regular annual bonus payments, annual PIC bonus payments, annual super performance bonus payments and any other designated annual (as opposed to long-term) bonus payments); and (iii) commencing upon the Date of Termination: (1) All Other Benefits that were in effect and in which the Employee participated immediately prior to the Change in Control, for the period of the earlier to occur of thirty-six (36) months following the Date of Termination or the date the Employee becomes eligible for benefits from a subsequent employer. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by the Employee on a monthly or other periodic basis, shall be governed by the various plans as they are in effect from time to time. Notwithstanding the foregoing, earned FTO shall stop accruing and/or being earned as of the Date of Termination and all contributions to the Company's 401k and "cafeteria" benefit plan shall stop as of the Date of Termination. (2) In addition to the lump sum payment of the monthly automobile allowance, for the period of thirty-six (36) months following the Date of Termination the Employee shall be entitled to continue to receive reimbursement for items such as automobile maintenance, insurance and other auto-related expenses, including the use of a Company gasoline credit card, all in accordance with the Company's executive automobile allowance and reimbursement program as it is in effect immediately prior to the Change in Control; or (c) If during the next twelve (12) months following the first anniversary of the Change in Control, the Employee is terminated involuntarily by the Company other than for Cause, the Employee shall be entitled to receive all of the payments and benefits provided for in Sections 2(a) and 2(b) hereof, except that all references to "12 months" shall read "24 months". (d)(i) In the event that any payment or benefit received or to be received by the Employee pursuant to the terms of this Agreement (the "Contract Payments") or of any other plan, arrangement or agreement of the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would, in the written opinion of independent tax counsel selected by the Company and reasonably acceptable to the Employee ("Tax Counsel"), which opinion will be provided to both the Employee and the Company, be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (in whole or in part), as determined as provided below, the Payments shall be reduced as provided herein, (but not below zero) until no portion of the Payments would be subject to the Excise Tax. For purposes of this limitation, (i) no portion of the Payments the receipt or enjoyment of which the Employee shall have effectively waived in writing shall be taken into account, (ii) only the portion of the Payments which in the opinion of Tax Counsel constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code shall be taken into account, (iii) the Payments shall be reduced only to the extent necessary so that the Payments would not be subject to the Excise Tax, in the opinion of Tax Counsel, and (iv) the value of any noncash benefit or any deferred payment or benefit included in such payments shall be determined in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. The Employee shall make the determination, by written notice to the Company, at his sole discretion, as to exactly how the Payments shall be reduced, and shall select from among the Payments those to be so reduced, unless the Employee refuses to make such a determination, whereupon the Company shall determine the Payments reduction. To assist the Employee in making the foregoing determination, the Company shall require the Tax Counsel to counsel and advise the Employee, at the Company's expense, as to how to reduce the Payments so the maximum net economic value can be achieved by the Employee. (ii) If it is established pursuant to an opinion of Tax Counsel or a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of Section 4(d)(1) hereof, any Payments paid to the Employee or for his benefit exceeded the limitation contained in Section 4(d)(1) hereof, then the Employee shall pay to the Company, within 90 days of receipt of notice of such final determination or opinion, an amount equal to the sum of the excess of the Payments paid to him or for his benefit over the maximum Payments that should have been paid to or for his benefit taking into account the limitations contained in Section 4(d)(1) hereof; provided, however, that (x) the Employee shall not be required to make any payment to the Company pursuant to this Section 4(d)(ii),(A) if, and to the extent that, such final determination requires the payment by him of an Excise Tax by reason of any Payment or portion thereof, or (B) in the case of the opinion of Tax Counsel, until the expiration of the applicable statute of limitations or a final determination of a court or an Internal Revenue Service proceeding that no Excise Tax is due and (y) the Employee shall only be required to make a payment to the Company pursuant to this Section 4(d)(ii) to the extent such payment is deductible or otherwise reduces the Employee's tax liability for federal income tax purposes. If for any reason hereunder, the Employee is required to pay any Excise Tax, the Company shall pay the Employee an additional payment (a "Gross-Up Payment") in such an amount that after the payment of all taxes (including, without limitation, any interest and penalties on such taxes and the Excise Tax) on the Payment and on the Gross-Up Payment, the Employee shall retain an amount equal to the Payment minus all ordinary taxes on the Payment. It is the intent of the parties that, in connection with this Section 4(d)(ii), the Company shall be responsible for, and shall pay the Employee, any amount constituting Excise Tax on any Payment and Gross-Up Payment and any taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment. (iii) If it is established pursuant to an opinion of Tax Counsel or a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of Section 4(d)(i) hereof, any Payments paid to him or for his benefit were in an amount less than the maximum Payments which could be payable to him without such payments being subject to the Excise Tax, then the Company shall pay to him, within ninety days of receipt of notice of such final determination or opinion, an amount equal to the sum of (A) the excess, if any, of the payments that should have been paid to him or for his benefit over the payments paid to or for his benefit and (B) interest on the amount set forth in clause (A) of this sentence at the applicable federal rate (as defined in Section 1274(d) of the Code) from the Date of his non-receipt of such excess until the date of such payment. 5. STOCK OPTIONS In the event of a Change in Control, unless the employment of the Employee is terminated for Cause, (i) all then outstanding stock options granted to the Employee 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 Employee voluntarily terminates his employment with the Company within 12 months following a Change in Control for a reason other than death or Disability, or if the Employee is terminated by the Company 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. 6. GENERAL (a) Subject to the second sentence hereof, the Company shall pay to the Employee reasonable attorneys' fees that may be incurred by the Employee in enforcing the terms of this Agreement. If litigation or an arbitration proceeding ensues, and the Employee prevails in such litigation or arbitration, the Company shall promptly reimburse the Employee for his attorneys' fees and disbursements incurred in such litigation or arbitration proceeding and pay prejudgment interest on any money judgment obtained by the Employee 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 Company's obligation to pay the Employee 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 Company may have against the Employee or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment and if Employee obtains such other employment, any compensation earned by Employee pursuant thereto shall not be applied to mitigate any payment made to Employee pursuant to this Agreement except as expressly provided herein. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or other-wise) to all or substantially all of the business and/or assets of the Company, by written agreement to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, the term "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement required by this Section 5(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 Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee 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 Employee's devisee, legatee or other designee or, if there be no such designee, to the Employee'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 Employee: ROGER KOWALSKY 62 GRENARD TERRACE SAN FRANCISCO, CA 94109 If to the Company: Galoob Toys, Inc. 500 Forbes Blvd. South San Francisco, California 94080 Attn: President 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 Employee and the Company concerning the subject matter hereof, and performance of its obligations hereunder by the Company shall constitute full settlement and release of any claim or cause of action, of whatso ever nature, which the Employee might otherwise assert or claim against the Company or any of its directors, stockholders, officers or employees on account of any termination. This Agreement supersedes the letter agreement, dated July 15, 1995, between the Company and the Employee, and such letter 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 Employee and an authorized officer of the Company. 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 Employee or any agreement now existing or which hereafter may be entered into between the Company and the Employee. 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 Employee shall be entitled to seek specific performance 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 on the day and year first above written. GALOOB TOYS, INC. /s/ Roger J. Kowalsky By: /s/ William G. Catron ---------------------------- Name: William G. Catron Title: Executive Vice President EX-10 7 EXHIBIT 10.4(E) SEVERANCE AND CHANGE IN CONTROL AGREEMENT AGREEMENT, dated as of January 1, 1997, by and between GALOOB TOYS, INC., a Delaware corporation (the "Company"), and GARY J. NILES (the "Employee"). PREAMBLE The Compensation Committee of the Board of Directors of the Company has determined that it is in the best interests of the Company and its stockholders for the Company to revise and restate the termination arrangements with the Employee in the event the Employee should leave the employ of the Company under the circumstances described in this Agreement. In part, this Agreement is being executed and delivered to help assure a continuing dedication by the Employee to his duties to the Company notwithstanding the occurrence of a business combination proposal. In particular, the Compensation Committee believes it imperative, should the Company receive proposals from third parties with respect to its future, to enable the Employee, without being influenced by the uncertainties of his own situation, to assess and advise management and the Board of Directors whether such proposals would be in the best interest of the Company and its stockholders and to enable the Employee to take such other action regarding such proposals as the Board of Directors might determine to be appropriate. NOW, THEREFORE, in view of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which each party acknowledges, the Company and the Employee hereby agree as follows: 1. EFFECTIVE DATE AND TERM OF AGREEMENT. (a) This Agreement is effective and binding on both parties as of the date hereof and, shall continue in effect through the second anniversary of the date hereof (the "Expira tion Date"); provided, however, that, if a Change in Control (as defined in Section 3(a) hereof) shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months beyond the Expiration Date. (b) Nothing in this Agreement shall affect any right which the Employee may otherwise have to terminate his employment from the Company. Likewise, nothing in this Agreement shall affect any right which the Company may have to terminate the Employee's employment at any time in any lawful manner, except the obligation of the Company to make the payments provided for herein. 2. EMPLOYMENT AND SEVERANCE. (a) Subject to Section 3(c) below, if the Employee is terminated by the Company for reasons other than "for Cause" or due to the Employee's "Disability" (as those terms, respectively, are defined in Sections 3(d)(ii) and (i) hereof), such Employee shall receive a continuation of his Base Salary (as defined in Section 3(d)(iii) hereof) and certain other benefits as hereinafter provided ("Other Benefits", and collectively with such Base Salary, "Severance Benefits") for a period of twelve (12) months from and after the Date of Termination (as defined in Section 3(d)(iv)) ("Extension Period"); provided, however, that from and after the Date of Termination the Employee shall not receive or be entitled to any continuation of any bonus, incentive or profit sharing participation or eligibility for any part or all of the Company's fiscal year in which the Date of Termination occurs or for any part of the Extension Period. Except as provided below, such Base Salary during the Extension Period shall be paid in accordance with the Company's normal payroll schedule. If, however, during the Extension Period the Employee commences regular full-time employment elsewhere, the ongoing Severance Benefits shall cease as of the date of commencement of such employment; provided, however, that as of such date a calculation shall be made to determine the aggregate amount of Base Salary (excluding Other Benefits) that remains unpaid and which the Employee would have otherwise been entitled to receive during the remaining portion of the Extension Period, and the Company shall promptly pay the Employee a lump sum (minus withholdings and other required deductions) of an amount equal to one-half (1/2) of such unpaid amount. (b) The Other Benefits referred to in Section 2(a) above include all medical, health and welfare and insurance benefits that were in effect and in which the Employee participated as of the Date of Termination and these will continue during the Extension Period until the earlier to occur of twelve (12) months from the Date of Termination or the date the Employee becomes eligible for benefits from a subsequent employer. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by the Employee on a monthly or other periodic basis, will be governed by the various plans as they are in effect from time to time. Notwithstanding the foregoing, earned Flexible Time Off ("FTO") shall stop accruing and/or being earned as of the Date of Termination and all contributions to the Company's 401K and "cafeteria" benefit plan shall stop as of the Date of Termination. The Employee shall however be entitled to receive the amount of any accrued but unused FTO or vacation time to which the Employee is entitled through the Date of Termination and any amounts to be paid to the Employee pursuant to any deferred compensation plan. (c) The Employee's automobile allowance and automobile program benefits, including Company gasoline credit card and reimbursement for maintenance, insurance and other auto-related expenses, will cease as of the Date of Termination and shall not be extended to the Employee during the Extension Period. (d) For purposes of this Agreement, "regular full-time employment elsewhere" shall not include or be deemed to include any situation where the Employee becomes self-employed, or any self-employment circumstances where the Employee owns or controls at least 51 percent of the stock or other controlling equity of an entity that serves as the Employee's employer and was created after the Date of Termination solely for the purpose of the Employee's ongoing employment. (e) In the event of (i) a termination for Cause, whether before or after a Change in Control, or (ii) the voluntary termination by the Employee of his employment at any time other than as provided for in Sections 3 and 4, the Company shall pay the Employee no later than five (5) days after the Date of Termination his Base Salary through the Date of Termination, the amount of any accrued but unused FTO or vacation time to which the Employee is entitled through the Date of Termination, and any amounts to be paid to the Employee pursuant to any deferred compensation plan. Except as provided in the preceding sentence, and except for other payments routinely owed to the Employee by the Company for such items as travel and expense reimbursement, the Company shall have no further obligations to the Employee under this Agreement or otherwise. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred upon any of the following events: (i) A person or entity or group of persons or entities, acting in concert, shall become the direct or indirect beneficial owner (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended from time to time) of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the issued and outstanding common stock of the Company (a "Significant Owner"), unless such shares are originally issued to such Significant Owner by the Company; or (ii) The majority of the Company's Board of Directors is no longer comprised of the incumbent directors who constitute the Board of Directors on the date of this Agreement and any other individual(s) who becomes a director subsequent to the date of this Agreement whose initial election or nomination for election as a director, as the case may be, was approved by at least a majority of the directors who comprised the incumbent directors as of the date of such election or nomination; or (iii) The Company's common stock, par value $.01 per share, shall cease to be publicly traded; or (iv) A sale of all or substantially all of the assets of the Company; or (v) The Board of Directors shall approve any merger, consolidation, or like business combination or reorganization of the Company, the consummation of which would result in the occurrence of any event described in clause (ii) or (iii) above, and such transaction shall have been consummated. (b) In the event that any person or organization commences a tender or exchange offer, circulates a proxy statement to the Company's stockholders, or takes other steps designed to effect a Change in Control of the Company, the Employee agrees that, in order to receive the benefits provided by Sections 3 and 4 of this Agreement, he will not voluntarily leave the employ of the Company and will continue to perform his regular duties and to render his regular services, until such person or organization has abandoned or terminated his or its efforts to effect a Change in Control or until a Change in Control has occurred. Should the Employee voluntarily terminate his employment before a Change in Control of the Company has so occurred, he shall not be entitled to the payments provided for in Sections 3 and 4 hereof. (c) If a Change in Control of the Company shall have occurred, the Employee shall be entitled (in lieu of the payments and benefits provided for in Sections 2(a) and 2(b)) to the payments and benefits pursuant to Section 4 hereof upon the subsequent voluntary or involuntary termination of his employment, unless such termination is (i) due to the Employee's death or (ii) by the Company by reason of the Employee's Disability or for Cause. (d) For purposes of this Agreement: (i) "Disability" shall mean that, as a result of the Employee's incapacity due to physical or mental illness or injury, the Employee has been absent from the full-time performance of his duties with the Company for six (6) consecutive months and within thirty (30) days after Notice of Termination is given to the Employee, he has not returned to the full-time performance of his duties for a period of at least 14 consecutive days. Any question as to the existence of Disability shall be determined by a qualified independent physician selected by the Employee (or, if he is unable to make such selection, such selection shall be made by any adult member of the Employee's family) and approved by the Company. The written determination of such physician shall be final and conclusive for purposes of this Agreement. (ii) "for Cause" shall mean: (A) The willful and continued failure by the Employee to substantially perform his duties with the Company (other than any such failure resulting from the Employee's incapacity due to physical or mental illness or injury); or (B) The willful engagement in conduct by the Employee which is demonstrably and materially injurious to the Company, monetarily or otherwise; or (C) Conviction for a felony or other crime punishable by imprisonment for more than one (1) year, or the entering of a plea of nolo contendere thereto. (iii) "Base Salary" shall mean (A) if a Change in Control has occurred, the annual base salary of the Employee in effect immediately prior to the Change in Control of the Company or immediately prior to the Date of Termination, whichever is greater, and (B) if no Change in Control has occurred, the annual base salary of the Employee in effect immediately prior to the Date of Termination. Base Salary does not include any amounts paid for automobile allowance. (iv) "Date of Termination" shall mean (A) if the Employee's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the full-time performance of his duties for a period of at least 14 consecutive days during such thirty (30) day period) and (B) if the Employee's employment is terminated otherwise by the Company or the Employee, the date specified in the Notice of Termination. (e) "Notice of Termination" shall mean a written notice of termination communicated in writing by one party to the other party hereunder in accordance with Section 6(e) hereof. 4. PAYMENTS UPON TERMINATION. If required pursuant to Section 3(c) hereof, the Company will pay to the Employee as compensation for services rendered: (a) Not later than the 5th day after the Date of Termination, the Employee's Base Salary through the Date of Termination, the amount of any accrued but unused FTO or vacation time to which the employee is entitled through the Date of Termination, and any amounts to be paid to the Employee pursuant to any deferred compensation plan; and (b) If the Date of Termination is within twelve (12) months following a Change in Control, the Employee shall also receive the following: (i) no later than ten (10) days after such Date of Termination, a lump sum payment (minus withholdings and other required deductions) of an amount equal to three (3) times the Employee's Base Salary, plus thirty-six (36) times the amount to which the Employee was then entitled immediately prior to the Change in Control for the monthly automobile allowance; and (ii) no later than ten (10) days after such Date of Termination, an additional lump sum payment (minus with-holdings and other required deductions) of an amount equal to three (3) times the greater of (x) the bonus, if any, that was actually paid to the Employee for the year's results for the Company's fiscal year immediately preceding the year in which the Date of Termination occurs, (y) the percentage of maximum bonus otherwise payable for the full fiscal year in which the Date of Termination occurs assuming performance relative to plan for the entirety of such fiscal year was the same as performance relative to plan year to date as of the Date of Termination, or (z) the average bonus actually paid to the Employee for the five fiscal years immediately preceding the year in which the Date of Termination occurs (for the purpose of this Section 4(b)(ii), " bonus" shall include regular annual bonus payments, annual PIC bonus payments, annual super performance bonus payments and any other designated annual (as opposed to long-term) bonus payments); and (iii) commencing upon the Date of Termination: (1) All Other Benefits that were in effect and in which the Employee participated immediately prior to the Change in Control, for the period of the earlier to occur of thirty-six (36) months following the Date of Termination or the date the Employee becomes eligible for benefits from a subsequent employer. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by the Employee on a monthly or other periodic basis, shall be governed by the various plans as they are in effect from time to time. Notwithstanding the foregoing, earned FTO shall stop accruing and/or being earned as of the Date of Termination and all contributions to the Company's 401k and "cafeteria" benefit plan shall stop as of the Date of Termination. (2) In addition to the lump sum payment of the monthly automobile allowance, for the period of thirty-six (36) months following the Date of Termination the Employee shall be entitled to continue to receive reimbursement for items such as automobile maintenance, insurance and other auto-related expenses, including the use of a Company gasoline credit card, all in accordance with the Company's executive automobile allowance and reimbursement program as it is in effect immediately prior to the Change in Control; or (c) If during the next twelve (12) months following the first anniversary of the Change in Control, the Employee is terminated involuntarily by the Company other than for Cause, the Employee shall be entitled to receive all of the payments and benefits provided for in Sections 2(a) and 2(b) hereof, except that all references to "12 months" shall read "24 months". (d)(i) In the event that any payment or benefit received or to be received by the Employee pursuant to the terms of this Agreement (the "Contract Payments") or of any other plan, arrangement or agreement of the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would, in the written opinion of independent tax counsel selected by the Company and reasonably acceptable to the Employee ("Tax Counsel"), which opinion will be provided to both the Employee and the Company, be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (in whole or in part), as determined as provided below, the Payments shall be reduced as provided herein, (but not below zero) until no portion of the Payments would be subject to the Excise Tax. For purposes of this limitation, (i) no portion of the Payments the receipt or enjoyment of which the Employee shall have effectively waived in writing shall be taken into account, (ii) only the portion of the Payments which in the opinion of Tax Counsel constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code shall be taken into account, (iii) the Payments shall be reduced only to the extent necessary so that the Payments would not be subject to the Excise Tax, in the opinion of Tax Counsel, and (iv) the value of any noncash benefit or any deferred payment or benefit included in such payments shall be determined in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. The Employee shall make the determination, by written notice to the Company, at his sole discretion, as to exactly how the Payments shall be reduced, and shall select from among the Payments those to be so reduced, unless the Employee refuses to make such a determination, whereupon the Company shall determine the Payments reduction. To assist the Employee in making the foregoing determination, the Company shall require the Tax Counsel to counsel and advise the Employee, at the Company's expense, as to how to reduce the Payments so the maximum net economic value can be achieved by the Employee. (ii) If it is established pursuant to an opinion of Tax Counsel or a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of Section 4(d)(1) hereof, any Payments paid to the Employee or for his benefit exceeded the limitation contained in Section 4(d)(1) hereof, then the Employee shall pay to the Company, within 90 days of receipt of notice of such final determination or opinion, an amount equal to the sum of the excess of the Payments paid to him or for his benefit over the maximum Payments that should have been paid to or for his benefit taking into account the limitations contained in Section 4(d)(1) hereof; provided, however, that (x) the Employee shall not be required to make any payment to the Company pursuant to this Section 4(d)(ii),(A) if, and to the extent that, such final determination requires the payment by him of an Excise Tax by reason of any Payment or portion thereof, or (B) in the case of the opinion of Tax Counsel, until the expiration of the applicable statute of limitations or a final determination of a court or an Internal Revenue Service proceeding that no Excise Tax is due and (y) the Employee shall only be required to make a payment to the Company pursuant to this Section 4(d)(ii) to the extent such payment is deductible or otherwise reduces the Employee's tax liability for federal income tax purposes. If for any reason hereunder, the Employee is required to pay any Excise Tax, the Company shall pay the Employee an additional payment (a "Gross-Up Payment") in such an amount that after the payment of all taxes (including, without limitation, any interest and penalties on such taxes and the Excise Tax) on the Payment and on the Gross-Up Payment, the Employee shall retain an amount equal to the Payment minus all ordinary taxes on the Payment. It is the intent of the parties that, in connection with this Section 4(d)(ii), the Company shall be responsible for, and shall pay the Employee, any amount constituting Excise Tax on any Payment and Gross-Up Payment and any taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment. (iii) If it is established pursuant to an opinion of Tax Counsel or a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of Section 4(d)(i) hereof, any Payments paid to him or for his benefit were in an amount less than the maximum Payments which could be payable to him without such payments being subject to the Excise Tax, then the Company shall pay to him, within ninety days of receipt of notice of such final determination or opinion, an amount equal to the sum of (A) the excess, if any, of the payments that should have been paid to him or for his benefit over the payments paid to or for his benefit and (B) interest on the amount set forth in clause (A) of this sentence at the applicable federal rate (as defined in Section 1274(d) of the Code) from the Date of his non-receipt of such excess until the date of such payment. 5. STOCK OPTIONS In the event of a Change in Control, unless the employment of the Employee is terminated for Cause, (i) all then outstanding stock options granted to the Employee 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 Employee voluntarily terminates his employment with the Company within 12 months following a Change in Control for a reason other than death or Disability, or if the Employee is terminated by the Company 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. 6. GENERAL (a) Subject to the second sentence hereof, the Company shall pay to the Employee reasonable attorneys' fees that may be incurred by the Employee in enforcing the terms of this Agreement. If litigation or an arbitration proceeding ensues, and the Employee prevails in such litigation or arbitration, the Company shall promptly reimburse the Employee for his attorneys' fees and disbursements incurred in such litigation or arbitration proceeding and pay prejudgment interest on any money judgment obtained by the Employee 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 Company's obligation to pay the Employee 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 Company may have against the Employee or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment and if Employee obtains such other employment, any compensation earned by Employee pursuant thereto shall not be applied to mitigate any payment made to Employee pursuant to this Agreement except as expressly provided herein. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or other-wise) to all or substantially all of the business and/or assets of the Company, by written agreement to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, the term "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement required by this Section 5(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 Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee 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 Employee's devisee, legatee or other designee or, if there be no such designee, to the Employee'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 Employee: GARY NILES 230 FRANCIS LANE SAN CARLOS, CA 94070 If to the Company: Galoob Toys, Inc. 500 Forbes Blvd. South San Francisco, California 94080 Attn: President 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 Employee and the Company concerning the subject matter hereof, and performance of its obligations hereunder by the Company shall constitute full settlement and release of any claim or cause of action, of whatso ever nature, which the Employee might otherwise assert or claim against the Company or any of its directors, stockholders, officers or employees on account of any termination. This Agreement supersedes the letter agreement, dated July 15, 1995, between the Company and the Employee, and such letter 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 Employee and an authorized officer of the Company. 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 Employee or any agreement now existing or which hereafter may be entered into between the Company and the Employee. 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 Employee shall be entitled to seek specific performance 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 on the day and year first above written. GALOOB TOYS, INC. /s/ Gary J. Niles By: /s/ William G. Catron ------------------------------ Name: William G. Catron Title: Executive Vice President EX-10 8 EXHIBIT 10.4(F) SEVERANCE AND CHANGE IN CONTROL AGREEMENT AGREEMENT, dated as of January 1, 1997, by and between GALOOB TOYS, INC., a Delaware corporation (the "Company"), and LOUIS R. NOVAK (the "Employee"). PREAMBLE The Compensation Committee of the Board of Directors of the Company has determined that it is in the best interests of the Company and its stockholders for the Company to revise and restate the termination arrangements with the Employee in the event the Employee should leave the employ of the Company under the circumstances described in this Agreement. In part, this Agreement is being executed and delivered to help assure a continuing dedication by the Employee to his duties to the Company notwithstanding the occurrence of a business combination proposal. In particular, the Compensation Committee believes it imperative, should the Company receive proposals from third parties with respect to its future, to enable the Employee, without being influenced by the uncertainties of his own situation, to assess and advise management and the Board of Directors whether such proposals would be in the best interest of the Company and its stockholders and to enable the Employee to take such other action regarding such proposals as the Board of Directors might determine to be appropriate. NOW, THEREFORE, in view of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which each party acknowledges, the Company and the Employee hereby agree as follows: 1. EFFECTIVE DATE AND TERM OF AGREEMENT. (a) This Agreement is effective and binding on both parties as of the date hereof and, shall continue in effect through the second anniversary of the date hereof (the "Expira tion Date"); provided, however, that, if a Change in Control (as defined in Section 3(a) hereof) shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months beyond the Expiration Date. (b) Nothing in this Agreement shall affect any right which the Employee may otherwise have to terminate his employment from the Company. Likewise, nothing in this Agreement shall affect any right which the Company may have to terminate the Employee's employment at any time in any lawful manner, except the obligation of the Company to make the payments provided for herein. 2. EMPLOYMENT AND SEVERANCE. (a) Subject to Section 3(c) below, if the Employee is terminated by the Company for reasons other than "for Cause" or due to the Employee's "Disability" (as those terms, respectively, are defined in Sections 3(d)(ii) and (i) hereof), such Employee shall receive a continuation of his Base Salary (as defined in Section 3(d)(iii) hereof) and certain other benefits as hereinafter provided ("Other Benefits", and collectively with such Base Salary, "Severance Benefits") for a period of twelve (12) months from and after the Date of Termination (as defined in Section 3(d)(iv)) ("Extension Period"); provided, however, that from and after the Date of Termination the Employee shall not receive or be entitled to any continuation of any bonus, incentive or profit sharing participation or eligibility for any part or all of the Company's fiscal year in which the Date of Termination occurs or for any part of the Extension Period. Except as provided below, such Base Salary during the Extension Period shall be paid in accordance with the Company's normal payroll schedule. If, however, during the Extension Period the Employee commences regular full-time employment elsewhere, the ongoing Severance Benefits shall cease as of the date of commencement of such employment; provided, however, that as of such date a calculation shall be made to determine the aggregate amount of Base Salary (excluding Other Benefits) that remains unpaid and which the Employee would have otherwise been entitled to receive during the remaining portion of the Extension Period, and the Company shall promptly pay the Employee a lump sum (minus withholdings and other required deductions) of an amount equal to one-half (1/2) of such unpaid amount. (b) The Other Benefits referred to in Section 2(a) above include all medical, health and welfare and insurance benefits that were in effect and in which the Employee participated as of the Date of Termination and these will continue during the Extension Period until the earlier to occur of twelve (12) months from the Date of Termination or the date the Employee becomes eligible for benefits from a subsequent employer. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by the Employee on a monthly or other periodic basis, will be governed by the various plans as they are in effect from time to time. Notwithstanding the foregoing, earned Flexible Time Off ("FTO") shall stop accruing and/or being earned as of the Date of Termination and all contributions to the Company's 401K and "cafeteria" benefit plan shall stop as of the Date of Termination. The Employee shall however be entitled to receive the amount of any accrued but unused FTO or vacation time to which the Employee is entitled through the Date of Termination and any amounts to be paid to the Employee pursuant to any deferred compensation plan. (c) The Employee's automobile allowance and automobile program benefits, including Company gasoline credit card and reimbursement for maintenance, insurance and other auto-related expenses, will cease as of the Date of Termination and shall not be extended to the Employee during the Extension Period. (d) For purposes of this Agreement, "regular full-time employment elsewhere" shall not include or be deemed to include any situation where the Employee becomes self-employed, or any self-employment circumstances where the Employee owns or controls at least 51 percent of the stock or other controlling equity of an entity that serves as the Employee's employer and was created after the Date of Termination solely for the purpose of the Employee's ongoing employment. (e) In the event of (i) a termination for Cause, whether before or after a Change in Control, or (ii) the voluntary termination by the Employee of his employment at any time other than as provided for in Sections 3 and 4, the Company shall pay the Employee no later than five (5) days after the Date of Termination his Base Salary through the Date of Termination, the amount of any accrued but unused FTO or vacation time to which the Employee is entitled through the Date of Termination, and any amounts to be paid to the Employee pursuant to any deferred compensation plan. Except as provided in the preceding sentence, and except for other payments routinely owed to the Employee by the Company for such items as travel and expense reimbursement, the Company shall have no further obligations to the Employee under this Agreement or otherwise. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred upon any of the following events: (i) A person or entity or group of persons or entities, acting in concert, shall become the direct or indirect beneficial owner (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended from time to time) of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the issued and outstanding common stock of the Company (a "Significant Owner"), unless such shares are originally issued to such Significant Owner by the Company; or (ii) The majority of the Company's Board of Directors is no longer comprised of the incumbent directors who constitute the Board of Directors on the date of this Agreement and any other individual(s) who becomes a director subsequent to the date of this Agreement whose initial election or nomination for election as a director, as the case may be, was approved by at least a majority of the directors who comprised the incumbent directors as of the date of such election or nomination; or (iii) The Company's common stock, par value $.01 per share, shall cease to be publicly traded; or (iv) A sale of all or substantially all of the assets of the Company; or (v) The Board of Directors shall approve any merger, consolidation, or like business combination or reorganization of the Company, the consummation of which would result in the occurrence of any event described in clause (ii) or (iii) above, and such transaction shall have been consummated. (b) In the event that any person or organization commences a tender or exchange offer, circulates a proxy statement to the Company's stockholders, or takes other steps designed to effect a Change in Control of the Company, the Employee agrees that, in order to receive the benefits provided by Sections 3 and 4 of this Agreement, he will not voluntarily leave the employ of the Company and will continue to perform his regular duties and to render his regular services, until such person or organization has abandoned or terminated his or its efforts to effect a Change in Control or until a Change in Control has occurred. Should the Employee voluntarily terminate his employment before a Change in Control of the Company has so occurred, he shall not be entitled to the payments provided for in Sections 3 and 4 hereof. (c) If a Change in Control of the Company shall have occurred, the Employee shall be entitled (in lieu of the payments and benefits provided for in Sections 2(a) and 2(b)) to the payments and benefits pursuant to Section 4 hereof upon the subsequent voluntary or involuntary termination of his employment, unless such termination is (i) due to the Employee's death or (ii) by the Company by reason of the Employee's Disability or for Cause. (d) For purposes of this Agreement: (i) "Disability" shall mean that, as a result of the Employee's incapacity due to physical or mental illness or injury, the Employee has been absent from the full-time performance of his duties with the Company for six (6) consecutive months and within thirty (30) days after Notice of Termination is given to the Employee, he has not returned to the full-time performance of his duties for a period of at least 14 consecutive days. Any question as to the existence of Disability shall be determined by a qualified independent physician selected by the Employee (or, if he is unable to make such selection, such selection shall be made by any adult member of the Employee's family) and approved by the Company. The written determination of such physician shall be final and conclusive for purposes of this Agreement. (ii) "for Cause" shall mean: (A) The willful and continued failure by the Employee to substantially perform his duties with the Company (other than any such failure resulting from the Employee's incapacity due to physical or mental illness or injury); or (B) The willful engagement in conduct by the Employee which is demonstrably and materially injurious to the Company, monetarily or otherwise; or (C) Conviction for a felony or other crime punishable by imprisonment for more than one (1) year, or the entering of a plea of nolo contendere thereto. (iii) "Base Salary" shall mean (A) if a Change in Control has occurred, the annual base salary of the Employee in effect immediately prior to the Change in Control of the Company or immediately prior to the Date of Termination, whichever is greater, and (B) if no Change in Control has occurred, the annual base salary of the Employee in effect immediately prior to the Date of Termination. Base Salary does not include any amounts paid for automobile allowance. (iv) "Date of Termination" shall mean (A) if the Employee's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Employee shall not have returned to the full-time performance of his duties for a period of at least 14 consecutive days during such thirty (30) day period) and (B) if the Employee's employment is terminated otherwise by the Company or the Employee, the date specified in the Notice of Termination. (e) "Notice of Termination" shall mean a written notice of termination communicated in writing by one party to the other party hereunder in accordance with Section 6(e) hereof. 4. PAYMENTS UPON TERMINATION. If required pursuant to Section 3(c) hereof, the Company will pay to the Employee as compensation for services rendered: (a) Not later than the 5th day after the Date of Termination, the Employee's Base Salary through the Date of Termination, the amount of any accrued but unused FTO or vacation time to which the employee is entitled through the Date of Termination, and any amounts to be paid to the Employee pursuant to any deferred compensation plan; and (b) If the Date of Termination is within twelve (12) months following a Change in Control, the Employee shall also receive the following: (i) no later than ten (10) days after such Date of Termination, a lump sum payment (minus withholdings and other required deductions) of an amount equal to three (3) times the Employee's Base Salary, plus thirty-six (36) times the amount to which the Employee was then entitled immediately prior to the Change in Control for the monthly automobile allowance; and (ii) no later than ten (10) days after such Date of Termination, an additional lump sum payment (minus with-holdings and other required deductions) of an amount equal to three (3) times the greater of (x) the bonus, if any, that was actually paid to the Employee for the year's results for the Company's fiscal year immediately preceding the year in which the Date of Termination occurs, (y) the percentage of maximum bonus otherwise payable for the full fiscal year in which the Date of Termination occurs assuming performance relative to plan for the entirety of such fiscal year was the same as performance relative to plan year to date as of the Date of Termination, or (z) the average bonus actually paid to the Employee for the five fiscal years immediately preceding the year in which the Date of Termination occurs (for the purpose of this Section 4(b)(ii), " bonus" shall include regular annual bonus payments, annual PIC bonus payments, annual super performance bonus payments and any other designated annual (as opposed to long-term) bonus payments); and (iii) commencing upon the Date of Termination: (1) All Other Benefits that were in effect and in which the Employee participated immediately prior to the Change in Control, for the period of the earlier to occur of thirty-six (36) months following the Date of Termination or the date the Employee becomes eligible for benefits from a subsequent employer. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by the Employee on a monthly or other periodic basis, shall be governed by the various plans as they are in effect from time to time. Notwithstanding the foregoing, earned FTO shall stop accruing and/or being earned as of the Date of Termination and all contributions to the Company's 401k and "cafeteria" benefit plan shall stop as of the Date of Termination. (2) In addition to the lump sum payment of the monthly automobile allowance, for the period of thirty-six (36) months following the Date of Termination the Employee shall be entitled to continue to receive reimbursement for items such as automobile maintenance, insurance and other auto-related expenses, including the use of a Company gasoline credit card, all in accordance with the Company's executive automobile allowance and reimbursement program as it is in effect immediately prior to the Change in Control; or (c) If during the next twelve (12) months following the first anniversary of the Change in Control, the Employee is terminated involuntarily by the Company other than for Cause, the Employee shall be entitled to receive all of the payments and benefits provided for in Sections 2(a) and 2(b) hereof, except that all references to "12 months" shall read "24 months". (d)(i) In the event that any payment or benefit received or to be received by the Employee pursuant to the terms of this Agreement (the "Contract Payments") or of any other plan, arrangement or agreement of the Company (or any affiliate) ("Other Payments" and, together with the Contract Payments, the "Payments") would, in the written opinion of independent tax counsel selected by the Company and reasonably acceptable to the Employee ("Tax Counsel"), which opinion will be provided to both the Employee and the Company, be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (in whole or in part), as determined as provided below, the Payments shall be reduced as provided herein, (but not below zero) until no portion of the Payments would be subject to the Excise Tax. For purposes of this limitation, (i) no portion of the Payments the receipt or enjoyment of which the Employee shall have effectively waived in writing shall be taken into account, (ii) only the portion of the Payments which in the opinion of Tax Counsel constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code shall be taken into account, (iii) the Payments shall be reduced only to the extent necessary so that the Payments would not be subject to the Excise Tax, in the opinion of Tax Counsel, and (iv) the value of any noncash benefit or any deferred payment or benefit included in such payments shall be determined in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. The Employee shall make the determination, by written notice to the Company, at his sole discretion, as to exactly how the Payments shall be reduced, and shall select from among the Payments those to be so reduced, unless the Employee refuses to make such a determination, whereupon the Company shall determine the Payments reduction. To assist the Employee in making the foregoing determination, the Company shall require the Tax Counsel to counsel and advise the Employee, at the Company's expense, as to how to reduce the Payments so the maximum net economic value can be achieved by the Employee. (ii) If it is established pursuant to an opinion of Tax Counsel or a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of Section 4(d)(1) hereof, any Payments paid to the Employee or for his benefit exceeded the limitation contained in Section 4(d)(1) hereof, then the Employee shall pay to the Company, within 90 days of receipt of notice of such final determination or opinion, an amount equal to the sum of the excess of the Payments paid to him or for his benefit over the maximum Payments that should have been paid to or for his benefit taking into account the limitations contained in Section 4(d)(1) hereof; provided, however, that (x) the Employee shall not be required to make any payment to the Company pursuant to this Section 4(d)(ii),(A) if, and to the extent that, such final determination requires the payment by him of an Excise Tax by reason of any Payment or portion thereof, or (B) in the case of the opinion of Tax Counsel, until the expiration of the applicable statute of limitations or a final determination of a court or an Internal Revenue Service proceeding that no Excise Tax is due and (y) the Employee shall only be required to make a payment to the Company pursuant to this Section 4(d)(ii) to the extent such payment is deductible or otherwise reduces the Employee's tax liability for federal income tax purposes. If for any reason hereunder, the Employee is required to pay any Excise Tax, the Company shall pay the Employee an additional payment (a "Gross-Up Payment") in such an amount that after the payment of all taxes (including, without limitation, any interest and penalties on such taxes and the Excise Tax) on the Payment and on the Gross-Up Payment, the Employee shall retain an amount equal to the Payment minus all ordinary taxes on the Payment. It is the intent of the parties that, in connection with this Section 4(d)(ii), the Company shall be responsible for, and shall pay the Employee, any amount constituting Excise Tax on any Payment and Gross-Up Payment and any taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment. (iii) If it is established pursuant to an opinion of Tax Counsel or a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of Section 4(d)(i) hereof, any Payments paid to him or for his benefit were in an amount less than the maximum Payments which could be payable to him without such payments being subject to the Excise Tax, then the Company shall pay to him, within ninety days of receipt of notice of such final determination or opinion, an amount equal to the sum of (A) the excess, if any, of the payments that should have been paid to him or for his benefit over the payments paid to or for his benefit and (B) interest on the amount set forth in clause (A) of this sentence at the applicable federal rate (as defined in Section 1274(d) of the Code) from the Date of his non-receipt of such excess until the date of such payment. 5. STOCK OPTIONS In the event of a Change in Control, unless the employment of the Employee is terminated for Cause, (i) all then outstanding stock options granted to the Employee 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 Employee voluntarily terminates his employment with the Company within 12 months following a Change in Control for a reason other than death or Disability, or if the Employee is terminated by the Company 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. 6. GENERAL (a) Subject to the second sentence hereof, the Company shall pay to the Employee reasonable attorneys' fees that may be incurred by the Employee in enforcing the terms of this Agreement. If litigation or an arbitration proceeding ensues, and the Employee prevails in such litigation or arbitration, the Company shall promptly reimburse the Employee for his attorneys' fees and disbursements incurred in such litigation or arbitration proceeding and pay prejudgment interest on any money judgment obtained by the Employee 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 Company's obligation to pay the Employee 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 Company may have against the Employee or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment and if Employee obtains such other employment, any compensation earned by Employee pursuant thereto shall not be applied to mitigate any payment made to Employee pursuant to this Agreement except as expressly provided herein. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or other-wise) to all or substantially all of the business and/or assets of the Company, by written agreement to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, the term "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement required by this Section 5(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 Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts would still be payable to the Employee 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 Employee's devisee, legatee or other designee or, if there be no such designee, to the Employee'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 Employee: LOUIS NOVAK 97 FILBERT STREET SAUSALITO, CA 94965 If to the Company: Galoob Toys, Inc. 500 Forbes Blvd. South San Francisco, California 94080 Attn: President 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 Employee and the Company concerning the subject matter hereof, and performance of its obligations hereunder by the Company shall constitute full settlement and release of any claim or cause of action, of whatso ever nature, which the Employee might otherwise assert or claim against the Company or any of its directors, stockholders, officers or employees on account of any termination. This Agreement supersedes the letter agreement, dated July 15, 1995, between the Company and the Employee, and such letter 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 Employee and an authorized officer of the Company. 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 Employee or any agreement now existing or which hereafter may be entered into between the Company and the Employee. 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 Employee shall be entitled to seek specific performance 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 on the day and year first above written. GALOOB TOYS, INC. /s/ Louis R. Novak By: /s/ William G. Catron ---------------------------- Name: William G. Catron Title: Executive Vice President EX-23 9 EXHIBIT 23 CONSENT OF PRICE WATERHOUSE LLP Exhibit 23 ---------- CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the inCompany by reference in the Prospectus constituting part of this Registration Statement on Form S-8 (No. 33-09393, No. 33-29900, No. 33-56585, No. 33-56587, and 33-62083) of Galoob Toys, Inc. and its subsidiaries of our report dated January 31, 1997, appearing on page F-1 of Form 10-K. /s/ Price Waterhouse LLP San Francisco, California March 31, 1997 -----END PRIVACY-ENHANCED MESSAGE-----