10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1994 OR / / 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 ------------------------------ LEWIS GALOOB TOYS, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 94-1716574 ------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 500 Forbes Boulevard So. San Francisco, CA 94080 --------------------------------------- -------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415)952-1678 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, Par Value $.01 Per Share New York Stock Exchange Depositary Convertible Exchangeable New York Stock Exchange Preferred Shares (each representing 1/10 share of $17.00 Convertible Exchangeable Preferred Stock) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- 2 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by persons who are not officers or directors (or their affiliates) of the registrant, as of March 1, 1995, was approximately $65,000,000. The number of shares outstanding of each of the registrant's classes of common stock, as of March 1, 1995, was as follows: Class Number of Shares ----- ---------------- Common Stock, Par Value $.01 Per Share 10,066,844 DOCUMENTS INCORPORATED BY REFERENCE The following document has been incorporated by reference: The registrant's Proxy Statement to be used in connection with the Annual Meeting of Shareholders to be held on June 20, 1995 (the "Proxy Statement") incorporated into Part III. 3 PART I Item 1. Business Lewis Galoob Toys, Inc. (the "Company" or the "Corporation") designs, develops, markets and sells high quality toys worldwide and has been engaged in business since 1957. The Company's strategies in selecting and developing lines are to focus primarily on low to medium priced extendable product lines that are brandable, to capitalize on current trends in the toy industry and popular culture and to expand and diversify its product categories. Consistent with these strategies, the types of products which have produced the preponderance of the Company's revenues have changed significantly. This product change evolved both by developing and procuring new toys which are based on original ideas and by seeking to obtain and develop new character licenses. The Company's products are generally sold worldwide, with a substantial portion of its revenues derived from sales in the United States and Europe. The Company sells its products principally to retailers in the United States and to toy distributors outside of the United States. U.S. retail outlets for the products include specialty toy retailers, discount and chain stores, catalog and mail order companies, department stores and variety stores. See "Business--Distribution and Sales". The Company's products are generally manufactured overseas, primarily in the People's Republic of China ("China"). The Company's results are dependent, in large part, on management's experience in the toy industry and its ability to identify and capitalize on current trends and market new products based on such trends in a timely and efficient manner. As a result of changing consumer tastes, individual toys usually have relatively short product lives. An increase or decrease in popularity of a particular item during any year could have a material impact on revenues and profit for that year. Consistent with the extendable product life strategy, the Company's Micro Machines(R) product line, first introduced in 1987, has generated significant sales for a much longer product life than most toy products, and the Company believes that the line will continue to generate significant sales in 1995. Micro Machines sales represented 51% of the Company's total revenues in 1994 after representing 41% in 1993 and 28% in 1992. There can be no assurance that the demand for Micro Machines will continue at current or previous levels. 1 4 Products The Company has historically marketed a variety of toy products designed for children of both sexes and of different age groups. In recent years, the Company's main emphasis has been to revive, develop, extend and expand its core brand, Micro Machines, and to diversify the balance of its other product lines. See "Business--Licensing and Related Rights; Trademarks." The Company's 1995 product line consists of continuations and extensions of the Micro Machines line and introductions of several new lines, including two new extendable girl's brands, Sky Dancers(TM) Dolls and My Pretty DollHouse(TM) toys. The Micro Machines line includes the continuing licensed vehicles based on the popular Star Wars(R) motion picture trilogy. Star Wars playsets depicting scenes from the movies and including action features, figures and vehicles have been added. Other licensed products also include vehicles and figures from the Power Rangers(TM) television series, The Tick(TM) animated television series, as well as James Bond 007(TM). There are also new vehicles from the Star Trek(R) and Babylon 5(TM) television series. A new speed performance segment consisting of Ultra-fast Radicators(TM) vehicles and higher performance race sets is also in the line. To extend the Micro Machines segment of military vehicles and troops, new playsets include Night Attack!(TM) with battery-powered searchlight and multi-missile launcher, as well as FalconWing Skybase(TM) and Orion J-22(TM) Submarine Base transforming playsets. Also continuing under the Micro Machines brand is Z-Bots(R), a line of collectible robot figures, vehicles and playsets. New ultra- small Mini Z's(TM) robots, the smallest Z-Bots ever, have been introduced along with five combat-action Mini Z's playsets. The new and innovative Sky Dancers(TM) line of dolls and playsets feature the first known girls' doll that flies. These collectible ballerina dolls fly utilizing a special launcher with pull-cord action done in various themes. The playsets include Magic Rolling Launchers in the shape of a swan and pegasus. The Company's new My Pretty DollHouse(TM) line is based on a classic girl's toy play pattern that incorporates the successful concepts of miniaturization and collectibility. This line consists of modular, finely decorated miniature dollhouses that come with dolls and other surprise accessories. Also available are coordinated designer Furniture Packs, Back and Front Yard Sets, and snap- on 2nd Story Additions to expand the houses into even bigger mansions. Mutant League(R) is a new licensed male action line with a sports theme. Figures, vehicles and playsets are based on the syndicated television series and the popular Electronic Arts video games. Also introduced is UltraForce(TM), a licensed male action line of 2 5 dramatic super heroes and villains, vehicles and accessories, from the pages of Malibu and Marvel Comics and the new syndicated animated TV show that is scheduled to premier in September 1995. Biker Mice From Mars(TM) is a continuing licensed male action line in our international markets. The line consists of figures, accessories and playsets based on the internationally successful animated series. The Company's 1994 product line consisted of continuations and extensions of the Micro Machines, Z-Bots, Game Genie(TM), and Splash Out(R) lines, and several new product lines. These included Star Trek, Star Wars, and Biker Mice From Mars; My Magic Kissing Dragon(TM) collectible dolls that spray a light scented mist when you squeeze them; Sweet Secrets(R) miniature transforming dolls, accessories and playsets; and Travel Pocket Play line of portable games and activity toys. The Company's 1993 product line consisted of continuations and extensions of the Micro Machines, Game Genie, and Splash Out lines, and several new product lines. These included Fancy Sounds(TM), an electronic device that allowed the user to add sound effects to any toy; Bow Wow Boutique(TM), plush dogs with removable fur that could be cut and styled; Whispering Wishes(TM), a talking doll that whispered special sayings when squeezed; and the Travel Pocket Play line of portable games and activity toys. The Company's 1992 product line consisted of continuations and extensions of the Micro Machines, Game Genie, Baby Face(TM), Lazer Pro 9000(TM) and Splash Out lines and several new product lines. These included Luv'n Handful(TM), a 13" hand-puppet doll; Starlight(TM), a mechanical walking horse with light-up features; and Trash Bag Bunch(TM), a line of collectible figures packaged in dissolving bags. Licensing and Related Rights; Trademarks In 1994 and 1993, the Company produced substantially all of its products under licenses from others. Some of these licenses confer rights to exploit original concepts developed by toy inventors and designers. Other licenses, referred to as character licenses, permit the Company to manufacture and market toys based on characters which develop their own popular identity, often through exposure in various media such as television programs, movies, cartoons and books. In return for these rights, the Company pays royalties to its licensors. Royalties paid by the Company to toy licensors typically range from 2% to 14% of net sales. Electronic games typically have higher royalty rates than toys. In certain instances, the Company may agree to guarantee payment of a minimum royalty. As of December 31, 1994 and 1993, minimum future guaranteed payments aggregated approximately $2,630,000 and $732,000, respectively. Royalties 3 6 expense in 1994 and 1993 totaled approximately $13,498,000 and $11,337,000, respectively. As a result of increased competition among toy companies for licenses, in certain instances the Company has paid, and may in the future be required to pay, higher royalties and higher minimum guaranteed payments in order to obtain attractive properties for the development of product lines. The Company is an active participant in the market for character licenses. A determination to acquire a character license must frequently be made before the commercial introduction of the property in which a licensed character appears, and license arrangements often require the payment of non-refundable advances or guaranteed minimum royalties. Accordingly, the success of a character licensing program is dependent upon the ability of management to accurately assess the future success and popularity of the properties which it is evaluating, to bid for products on a selective basis in accordance with such evaluation, and to capitalize on the properties for which it has obtained licenses in an expeditious manner. In 1994, the Company generated significant sales under existing character license arrangements for Star Wars, Star Trek, Biker Mice From Mars and Power Rangers. In 1994, the Company entered into character license arrangements for Mutant League, Gore Corp, Nintendo(R), James Bond, The Tick, Godzilla(TM), HappyNess and Ultraforce. The products under these license arrangements will be sold in 1995 and beyond. The Company has obtained domestic and international distribution rights for most of its products. Normally most character licenses extend for one to three years and are typically renewable at the option of the Company upon payment of certain minimum guaranteed payments or the attainment of certain sales levels during the initial term of the license. Licenses for original ideas typically extend for the commercial life of the product. Most of the Company's products are sold under trademarks and certain products incorporate patented devices or designs. The Company customarily seeks protection of its product patents and major product trademarks in the United States and certain other countries. These trademarks, such as Micro Machines, are significant assets of the Company. The Company believes that the loss of certain of its license rights or trademarks for particular product lines may have a material adverse effect on its business. However, the Company believes its rights to these properties are adequately protected. Research and Development The Company employs its own designers and engineers and also utilizes the services of independent designers and engineers on an ongoing basis. The Company presents its designers with toy concepts licensed or, to a lesser extent, originated by it and the designers create renderings of the proposed product. Designs are 4 7 then presented to the Company's engineers, who, using the renderings, perform mechanical drawings and engineering services and create prototypes for new products. Prototypes for proposed products are then reviewed by the Company's management, including representatives of marketing, sales and manufacturing, prior to final acceptance. Character licensors usually retain the right to approve the products being marketed by the Company. The Company spent approximately $7,288,000, $7,451,000 and $6,861,000 on research and development activities in 1994, 1993 and 1992, respectively, exclusive of amounts paid to certain inventors and designers who receive royalties as licensors. Those amounts do not include approximately $7,149,000, $4,502,000 and $4,583,000, respectively, in 1994, 1993 and 1992 incurred for tooling and package design. Manufacturing The Company's products are manufactured to its specifications by nonaffiliated third party vendors, usually located in the Orient, principally in China where over 87% of the Company's products were produced in 1994. These vendors are responsible for all aspects of the production of the Company's products in accordance with Company specifications. The Company's manufacturing is currently performed by 19 manufacturers, some of whom derive a substantial percentage of their business from the Company. In 1994, four manufacturers each produced in excess of 10% of the Company's products and combined to produce 81%. It is anticipated in 1995 that manufacturers' production will be similarly concentrated as in 1994. The Company, through its wholly-owned subsidiary Galco International Toys, N.V. ("Galco") located in Hong Kong, maintains close contact with the manufacturers and subcontractors and monitors the quality of the products produced. Decisions related to the choice of manufacturer are based on price, quality of merchandise, reliability and the ability of a manufacturer to meet the Company's timing requirements for delivery. See "Business--Competition". Tooling is ordinarily owned by the Company and may be utilized by different manufacturers if the need arises for alternate sources of production. See "Business--Design and Development". The Company does not carry insurance for political, social or economic unrest or disruption for several reasons including, but not limited to, costs of such insurance and the limited insurance coverage available. The impact on the Company from such unrest or disruption would depend on several factors, including, but not limited to the nature, extent and location of such unrest or disruption and the Company's ability to: (1) procure alternative manufacturing sources outside of the country involved; (2) 5 8 retrieve its tooling; (3) relocate its production in sufficient time to meet demand; and (4) pass resultant product cost increases likely to be incurred outside of the country involved through to the Company's customers as product price increases. The Company's products are produced principally in China which currently is designated with "most favored nation" ("MFN") status by the United States. This designation allows products imported into the United States from China to be accorded the most favorable import duties. In late 1994, Congress approved the GATT (Uruguay round) which allows imports into the United States of toy merchandise with unconditional duty free entry from any nation with MFN status. Generally, the trade negotiations between China and the United States have been difficult, but both sides have shown their willingness to resolve trade disputes and avoid punitive sanctions. Punitive sanctions could result in the United States imposing higher duties on selective Chinese made products imported into the United States (these sanctions would be put in place through Section 301). In the past, Section 301 sanctions proposed by the United States did not include sanctions or punitive duties against toy imports from China. As such, the Company would be unaffected. The loss of MFN status for China, however, would result in a substantial increase in duty for the Company's products produced there and imported into the United States. This increase in duty would be large enough that it could materially affect the Company's business. Products shipped to other countries should not be affected. Other toy companies also source product from China and would be affected to similar degrees. However, the impact on the Company from any significant change in duties on its Chinese produced products would depend on several factors including, but not limited to, the Company's ability to: (1) procure alternative manufacturing sources outside of China; (2) retrieve its tooling; (3) relocate its production in sufficient time to meet demand; and (4) pass resultant cost increases through as product price increases. In 1994, certain quotas on selected Chinese produced toy products were introduced in the European Economic Community. These quotas are not expected to have a material impact on the Company's business in 1995. Transactions in which the Company purchases goods from manufacturers are mostly denominated in Hong Kong dollars and, accordingly, fluctuations in Hong Kong monetary exchange rates may have an impact on cost of goods. However, in recent years, the value of the Hong Kong dollar has had a continuing stable relationship to the value of the U.S. dollar and the Company has not experienced any significant foreign currency fluctuations. Inflationary pressure in China could have an effect on the cost of product sourced from China. Galco's staff of 98 employees in Hong Kong (as of December 31, 6 9 1994) undertake certain elements of the design and development of new products. Additionally, Galco arranges with manufacturers for the production, shipment and delivery of products, and monitors the quality of the products produced. Galco also has 33 employees in other countries in the Orient performing similar activities. The principal raw materials used in the production and sale of the Company's products are plastics and paper products. The Company believes that an adequate supply of raw materials used in the manufacture of its products are readily available from existing and alternate sources. Distribution and Sales The Company markets and sells its products throughout the world, with sales to customers in the United States aggregating on a consolidated basis 66%, 66% and 65% of net sales in 1994, 1993 and 1992, respectively. Outlets for the Company's products in the United States include specialty toy retailers, discount and chain stores, catalog and mail order companies, department stores, variety stores and independent distributors which purchase the products directly from the Company and ship them to retail outlets. In 1994 and 1993, Toys "R" Us, Inc. accounted for 21% of the Company's consolidated net sales. The Company has a sales staff of seven people supplemented by several manufacturers' representative organizations in the United States who act as independent contractors. The Company's sales staff and the manufacturers' representatives offer the Company's products through the use of samples and promotional materials at toy shows and by making regular customer sales calls. The Company also directly introduces and markets to customer new products and extensions to previously marketed product lines by participating in the major trade shows in New York, Hong Kong and Europe and through the maintenance of a showroom in New York City. Manufacturers' representatives utilized by the Company receive commissions, which were approximately 1.0%, 1.3% and 1.3% of net sales in 1994, 1993 and 1992, respectively. The Company utilizes warehouse facilities primarily in Union City, California for storage of its products. Disruptions in shipments from the Orient or from this facility could have a material adverse effect on the Company. The Company believes that adequate storage facilities are available. Galoob has an extensive international sales program. The Company, in conjunction with its Hong Kong subsidiary, Galco, actively sells it products into 35 countries and sells directly to 51 separate, independent toy distributors, each of which is domiciled in the respective country to which sales are made. While international sales have averaged approximately one-third of total company sales, these sales are understated in proportion to the volume of Galoob products sold outside of the United States. International sale 7 10 prices to distributors are significantly lower than U.S. domestic sale prices to retail accounts since international distributors are generally responsible for all importation, warehousing, marketing, promotional and selling related costs. In 1994, approximately fifty percent of all Galoob toys sold were shipped to countries outside the United States. Sales by the Company to foreign customers are ordinarily denominated in U.S. dollars and, accordingly, the Company's revenues are not affected by fluctuations in monetary exchange rates. However, the value of the U.S. dollar in relation to the value of other currencies may have a positive or negative impact on the Company's sales volume over time, depending on the change in relationship of the respective currencies. The Company does not ordinarily sell its products on consignment and ordinarily accepts returns only for defective merchandise. Returns have historically not been significant. In certain instances, where retailers are unable to resell the quantity of products which they have purchased from the Company, the Company may, in accordance with industry practice, assist retailers to sell such excess inventory by offering discounts and other price concessions. Advertising Although a portion of the Company's advertising budget is expended for newspaper advertising, magazine advertising, catalogs and other promotional materials, the Company allocates the bulk of its advertising budget to television. As is common practice in the toy industry, the Company advertises on national network, syndicated cable and local spot television. Seasonality and Backlog Because of heavy retail demand for toy products during the Christmas season, the toy industry is highly seasonal in nature. Consistent with U.S. toy industry practices, receivables from a significant portion of domestic sales are not collected until the final weeks of the fourth quarter and the first quarter of the succeeding year, which creates a substantial demand for working capital on a seasonal basis. See "Business--Advertising" and "Business--Manufacturing". The results of operations for any quarter are subject to a number of variables and may not reflect the results of operations for the year. Similarly, any comparisons between fiscal periods of successive years may not be indicative of the results of operations for a full year. Orders in the U.S. toy industry are generally cancelable until shipped. Therefore, the Company believes that backlog may not be an accurate indicator of the Company's future sales. 8 11 Competition The toy industry is highly competitive. The Company competes with several larger toy companies, such as Hasbro, Mattel and Tyco, and many smaller companies, in the design and development of new toys, the procurement of licenses, the improvement and expansion of previously introduced products and product lines and the marketing and distribution of its products. In addition, it is common in the toy industry for companies to market products which are similar to products being successfully marketed by competitors. The Company believes that the strength of its management team, quality of its products, its relationships with inventors, designers and licensors, its distribution, and its overhead and operational controls permit it to compete effectively in the marketplace. See "Business--Design and Development", "Business--Distribution and Sales" and "Business". Government Regulations The Company is subject to the provisions of, among other laws, the Federal Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws empower the Consumer Product Safety Commission (the "CPSC") to protect consumers from hazardous toys and other articles. The CPSC has the authority to exclude from the market articles which are found to be hazardous and can require a manufacturer to recall such products under certain circumstances. Similar laws exist in some states and cities in the United States and in Canada and Europe. Products are also designed and tested to meet or exceed ASTM F963, the Standard Consumer Safety Specification on Toy Safety. The Company emphasizes the safety and reliability of its products and has established a strong quality assurance and control program to meet the Company's objective of delivering high quality products. Employees As of December 31, 1994, the Company had 241 employees; 110 in the United States and 131 in the Far East. This compares to 233 total employees at December 31, 1993; 111 in the United States and 122 in the Far East. Nine of the Company's employees, some of which are employed only on a seasonal basis, are subject to a collective bargaining agreement which expires May 31, 1998. The Company believes that its labor relations are satisfactory. Item 2. Properties The Company's principal executive offices are located at 500 Forbes Boulevard, South San Francisco, California, where the Company owns a building with approximately 136,000 square feet. The Company occupies approximately 33,000 square feet of office space and leases the additional 103,000 square feet of warehouse space to third parties. The Company also has 125,000 square feet of warehouse space at Union City, California, under a lease which expires in 1997, with rights to renew for one five year term. In addition, the Company has a showroom, consisting of approximately 9 12 9,000 square feet, which is located at 200 Fifth Avenue, New York, New York, under a lease that expires in 1996, and office and warehouse space in Hong Kong consisting of approximately 25,388 square feet under leases which expire at varying dates through 1996. The Company's properties provide adequate capacity to support the present and expected future levels of business. 10 13 Item 3. Legal Proceedings On May 17, 1990, the Company filed a complaint against Nintendo of America, Inc. ("Nintendo") seeking a declaratory judgment and injunctive relief in the United States District Court, Northern District of California (the "District Court"). This complaint sought confirmation of the Company's right to market, distribute and sell its Game Genie product. On June 1, 1990, Nintendo filed a complaint in the same District Court alleging copyright and trademark infringement and seeking a preliminary and permanent injunction and unspecified damage. On July 3, 1991, the District Court reversed an earlier preliminary injunction against the Company and ruled that the sale of Game Genie products did not infringe on Nintendo's copyrights. Nintendo appealed this ruling through the Ninth Circuit Court of Appeals (the "Appeals Court") and ultimately filed a petition for a writ of Certiorari with the United States Supreme Court. On March 22, 1993, the Supreme Court rejected Nintendo's petition and, in essence, affirmed the District Court ruling. Separately, the Company pursued recovery of damages from Nintendo that resulted from the original issuance of the preliminary injunction. On July 6, 1992, the District Court awarded the Company a $15 million damage judgement against Nintendo, which was the maximum amount that could be awarded in light of the $15 million bond that Nintendo had been required to post in the proceedings. Nintendo appealed this damage award, and on February 17, 1994 the Appeals Court unanimously affirmed the District Court's ruling. Subsequently, the Appeals Court rejected an additional Nintendo petition on March 21, 1994. On April 11, 1994, Nintendo paid the Company $16.1 million representing the full damage award plus interest and related costs. The Company retained approximately $12.1 million of this amount, and the Company's Game Genie licensors were paid the remaining $4.0 million. Notwithstanding such payment, on June 20, 1994, Nintendo filed a petition for a Writ of Certiorari with the United States Supreme Court, which asked the Supreme Court to review the the damage award on a discretionary basis. On October 3, 1994, the Supreme Court rejected Nintendo's petition and affirmed Galoob's right to the full damage award. There is no further basis for appeal by Nintendo. 11 14 Nintendo's original trademark claim and the Company's original anti-trust cross-claim against Nintendo were severed from the copyright claims that were adjudicated on July 3, 1991. On January 18, 1995 these claims were dismissed with prejudice by Nintendo and Galoob respectively. The Nintendo Game Genie infringement lawsuit is now complete. The Company is involved in various other litigation and legal matters which are being prosecuted or defended in the ordinary course of business. None of these matters is expected to result in outcomes having a material adverse effect on the Company's consolidated financial position. 12 15 Item 4. Submission of Matters to a Vote of Security Holders None. 13 16 Item 4a. Executive Officers of the Registrant The following table sets forth the names, ages and all positions and offices held by the Company's executive officers:
Name Age Position ---- --- -------- Mark D. Goldman 44 President, Chief Executive Officer and Director William G. Catron 49 Executive Vice President, General Counsel and Chief Administrative Officer Loren Hildebrand 55 Executive Vice President, Sales Ronald Hirschfeld 44 Executive Vice President, International Sales and Marketing Gary Niles 55 Executive Vice President, Marketing and Product Acquisition Louis Novak 46 Executive Vice President and Chief Operating Officer William B. Towne 50 Executive Vice President, Finance and Chief Financial Officer H. Alan Gaudie 54 Senior Vice President, Finance
Mark D. Goldman has served as President and Chief Executive Officer since June 1991. From 1987 to 1991 he served as Executive Vice President and Chief Operating Officer. Prior to 1987, Mr. Goldman served in various executive capacities at Ages Entertainment Software, Inc. (formerly Sega Enterprises Inc.) and Mattel, Inc. William G. Catron has served as Executive Vice President, General Counsel and Chief Administrative Officer since May 1992. For the seven years prior to that, Mr. Catron was Senior Vice President, Assistant General Counsel for Paramount Pictures Corporation. Before 1985, Mr. Catron served in various executive capacities at Ages Entertainment Software, Inc. (formerly Sega Enterprises, Inc.) and Mattel, Inc. Loren Hildebrand has served as Executive Vice President, Sales since April 1994. From 1992 to 1994 he was President of Creative Consultants. From 1989 to 1992 he was Executive Vice President and a partner in Toy Soldiers, Inc. a start-up company. Prior to 1989, 14 17 Mr. Hildebrand was a consultant for Worlds of Wonder and executive for Mattel, Inc. Ronald Hirschfeld has served as Executive Vice President, International Sales and Marketing since February 1994. From 1989 to 1994 he served as Senior Vice President, International Sales and Marketing. Prior to that time, he served as Senior Vice President, International Operations from 1987 to 1989 and has held various positions within the Company since 1978. Gary Niles has served as Executive Vice President, Marketing and Product Acquisition since February 1992. From 1989 to 1992, he served as Senior Vice President, FOB Division. Before joining the Company, he 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 Novak has served as Executive Vice President and Chief Operating Officer since February 1992. From 1989 to 1992, he served as Senior Vice President, Operations. From 1986 to 1989 he was Senior Vice President, Worldwide Product Operations for Coleco Industries, Inc. ("Coleco"). Prior to that time, Mr. Novak was an executive with All American Gourmet Company, Inc., a manufacturer of frozen food products and for Mattel, Inc. William B. Towne has served as Executive Vice President, Finance and Chief Financial Officer since March 1995. From 1990 to 1995, he served as Executive Vice President, Chief Financial Officer for Forstmann & Co, Inc. From 1982 to 1990, Mr. Towne worked for Tambrands, Inc. where he rose from Manager of Forecast and Planning to Chief Financial Officer of their International Division. H. Alan Gaudie has served as Senior Vice President, Finance since April 1992. From 1985 to 1992 he served as Corporate Controller, Vice President, Corporate Controller and Senior Vice President, Acting Chief Financial Officer. 15 18 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company's common stock, par value $.01 per share, has traded on the New York Stock Exchange since July 9, 1987. The following table sets forth for each quarter during the last two fiscal years the high and low closing sale prices as reported by the New York Stock Exchange:
Fiscal Year High Low ----------- ------ ------- 1994 First Quarter 10 5/8 6 1/8 Second Quarter 6 7/8 5 1/2 Third Quarter 8 1/2 6 1/8 Fourth Quarter 7 3/8 4 3/4 1993 First Quarter $ 4 1/8 $ 3 1/8 Second Quarter 3 7/8 3 3/8 Third Quarter 3 3/4 2 1/2 Fourth Quarter 10 3/4 4 1/4
As of March 1, 1995, there were approximately 2,025 holders of record of the Company's common stock. No cash dividends were declared in 1994 or 1993 on the common stock. The Board of Directors has no current plans to pay cash dividends on the common stock. The Company's current credit agreement and the terms of its Convertible Exchangeable Preferred Stock limit the Company's ability to pay cash dividends on the common stock. (See Notes E and M of Notes to Consolidated Financial Statements.) Future dividend policy will depend on the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Board of Directors. 16 19 Item 6. Selected Financial Data
(in thousands, except per share amounts) Years ended December 31 ------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 Net revenues $178,792 $134,334 $166,280 $150,636 $126,943 Net earnings (loss) 18,424 (10,924) (2,447) (7,540) (29,245) Preferred stock dividends: Paid - - 782 3,127 3,127 In arrears 3,127 3,127 2,345 - - Net earnings (loss) applicable to common shares $15,297 $(14,051) $ (5,574) $(10,667) $(32,372) Net earnings (loss) per common share: Primary $ 1.51 $ (1.47) $ (.59) $ (1.14) $ (3.48) Fully diluted 1.41 (1.47) (.59) (1.14) (3.48) Number of common shares and common share equivalents outstanding - average 10,111 9,548 9,400 9,325 9,315 At December 31: Total assets $100,766 $ 71,005 $ 71,604 $ 64,016 $ 75,546 Long-term debt 18,414 18,608 4,944 5,244 5,541 Working capital 53,219 30,813 27,070 29,127 37,914 Shareholders' equity 44,768 22,162 32,246 35,092 45,610
17 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth for the periods indicated the percentage relationships between revenues and certain expenses and earnings items:
Percentage of Net Revenues Years ended December 31 1994 1993 1992 ------ ----- ----- Net revenues 100.0% 100.0% 100.0% Cost of products sold 58.5 61.7 63.1 ----- ----- ----- Gross margin 41.5 38.3 36.9 Advertising and promotion 17.1 17.5 13.7 Other selling and administrative 15.1 19.1 18.3 Research and development 4.1 5.6 4.1 Variable stock option plan expense - 3.0 - Earnings (loss) from operations 5.2 (6.9) 0.8 Expenses related to resignations of former officers - - (1.3) Net Proceeds from Nintendo award 6.8 - - Interest expense (1.5) (1.3) (0.9) Other income, net 0.2 0.1 0.1 Provision for income taxes (0.4) - (0.2) ----- ----- ---- Net earnings (loss) 10.3% (8.1%) (1.5%) ===== ===== ====
1994 Compared to 1993 In 1994, the Company was profitable, which was its best performance since 1989. This was a result of the successful implementation of the Company's recovery plan which began in 1991. The recovery plan objective was to reposition the Company so it could generate sustainable profitability and growth. Essential to reaching this objective were three key goals: (1) restore and expand the Company's core business, the Micro Machines brand; (2) focus on growth opportunities in new product areas, such as the male action category; and (3) to lower breakeven versus the 1990 cost profile. The new management team was put in place in 1991. Overall, consolidated net sales, including both toy sales and sales 18 21 of the Game Genie video game enhancer, in 1994 were $178.8 million which represented a 33% increase from 1993 net sales of $134.3 million. Worldwide toy sales in 1994 achieved a 72% increase over 1993. Domestic toy sales rose by 103% and international toy sales by 33% from 1993 to 1994. A major key to the 1994 sales growth was the continuing expansion of the Micro Machines brand. In 1994, sales of Micro Machines grew significantly for the second consecutive year. Net sales in 1994 climbed to $113.0 million which was a 59% increase over 1993 levels. This comes on top of a 55% increase in sales in 1993 over 1992. A significant area of growth in the Micro Machines line was from licensed products such as Star Wars, Star Trek and Power Rangers. The Company also successfully entered a new, high-growth potential category - male action. Biker Mice From Mars, which was introduced in late 1993, generated sales in 1994 of $41.4 million as compared to $4.3 million in 1993. In September 1994, the Biker Mice From Mars television show went to five days per week airing from its previous one day per week. Ratings since that time have been lower than previously achieved and a smaller than anticipated increase in retail sales in the U.S. market has occurred. However, demand has been stronger in most European markets. Overall the Company achieved its 1994 worldwide Biker Mice From Mars revenue goal. As a result of consumer demand falling short of the Company's expectations for the U.S. in 1994, the Company has ceased all sales and marketing activities for Biker Mice from Mars domestically in 1995. However, strong international demand for Biker Mice From Mars is expected to continue. In 1995, the Company is expanding in the male action category with toy product introductions for Mutant League and Ultraforce. In late 1994, shipments of two new products, Sky Dancers, a flying doll, and My Pretty Dollhouse, commenced and generated sales of $3.3 million and $3.0 million, respectively. The Company believes the category of girls' toys is a significant growth opportunity. Game Genie sales were $4.2 million in 1994 as compared to $32.8 million in 1993. This decrease reflected the normal maturity cycle for such products and this trend is expected to continue. Gross margin totaled $74.2 million in 1994, an increase of $22.7 million from 1993. This increase was due to higher sales volume and a higher gross margin rate. The gross margin rate improved to 41.5% in 1994 from 38.3% in 1993 due to three factors. First, the international gross margin rate was higher due to a change in product mix. Second, the percent of U.S. sales to worldwide sales was greater. The Company's gross margin rate on domestic sales is significantly higher than foreign sales because foreign prices are lower as the customer is responsible for the cost of importing and promoting the products. Third, while tooling, packaging and other costs in the aggregate where higher in 1994 to 1993, they were 19 22 lower as a percent of sales in 1994 compared to 1993. Advertising and promotion expenses were $30.6 million in 1994 compared to $23.5 million in 1993. The higher expenses were primarily a result of an increase in planned television advertising expense domestically in connection with the Company's expanded product lines. Other selling and administrative expenses were $27.0 million in 1994 compared to $25.6 million in 1993. This increase was due mainly to incentive compensation which was reinstated based on the Company's 1994 performance. Research and development expenses were approximately equal in 1994 compared to 1993. The $4.0 million expense in 1993 related to the variable stock option plan was a one-time charge. See discussion below. The Company received $12.1 million in 1994 from the litigation award against Nintendo of America, Inc. This amount was obtained by reducing the gross award of $16.1 million by amounts due the Company's Game Genie licensors. (See Note L of Notes to Consolidated Financial Statements). Interest expense in 1994 was $2.6 million compared to $1.8 million in 1993. An increase of $1.0 million was due to the 8% Convertible Subordinated Debentures being outstanding all of 1994 compared to being outstanding for less than 2 months in 1993. Interest was reduced by lower average borrowings under the line of credit in 1994, although interest rates were higher. The increase in the prime rate which occurred during 1994 is expected to result in a higher average interest rate during 1995. Other income was $0.4 in 1994 compared to $0.1 in 1993. The income tax expense for 1994 includes provisions for federal, state and foreign income taxes, after taking into account the available net operating loss carryforwards from prior years. In 1993, the tax provision represented only foreign income taxes as there was no taxable U.S. income. At December 31, 1994, the Company has federal net operating loss carryforwards of approximately $11.5 million and unused federal tax credits of approximately $1.8 million available to reduce taxes in future periods. (See Notes A and F of Notes to Consolidated Financial Statements). The Company's breakeven point has been substantially reduced since 1990. In 1994, the Company's earnings from operations were $9.3 million on $178.8 million sales which was a $39.1 million improvement in earnings from operations and a $51.9 million sales improvement in comparison to 1990 sales of $126.9 million and loss from operations of $29.8 million. The Company's operations have been adjusted to generate profitability from a base of continuing business and moderate success in newly introduced products. In management's opinion, inflation did not have a material impact on 20 23 the Company's business in 1994. The Company did not have any substantial price increases in 1994 or 1993. The toy industry is affected by changing consumer tastes, shifting cultural and demographic trends and general economic conditions. Consequently, the Company's results are dependent, in large part, on management's experience in the toy industry and its ability to identify and capitalize on current trends and market new products in a timely and efficient manner. The Company may not always be able to anticipate changes in consumer demand or to respond quickly to such changes once they are identified, and such inabilities could have an adverse impact on the Company. Historically, a relatively small number of items have contributed a large portion of the Company's revenues in each year. An increase or decrease in popularity of a particular item during any year could have a material impact on revenues and profit for that year. The Company's strategy emphasizing multi-year extendable brands is intended to mitigate adverse impacts. The Company does not carry insurance for political, social or economic unrest or disruptions, for several reasons including, but not limited to, costs of such insurance and the limited insurance coverage available. The impact on the Company from such unrest or disruptions would depend on several factors, including, but not limited to the nature, extent and location of such unrest or disruptions and the Company's ability to: (1) procure alternative manufacturing sources outside of the country involved; (2) retrieve its tooling; (3) relocate its production in sufficient time to meet demand; and (4) pass resultant product cost increases likely to be incurred outside of the country involved through to the Company's customers as product price increases. The Company's products are produced principally in China which currently is designated with "most favored nation" ("MFN") status by the United States. This allows products imported into the United States from China to be accorded the most favorable import duties. In late 1994, Congress approved the GATT (Uruguay round) which allows imports into the United States of toy merchandise with unconditional duty free entry from any nation with MFN status. Generally, the trade negotiations between China and the United States have been difficult, but both sides have shown their willingness to resolve trade disputes and avoid punitive sanction. Punitive sanctions could result in the United States imposing higher duties on selective Chinese made products imported into the United States (these sanctions would be put in place through Section 301). In the past, section 301 sanctions proposed by the United States did not include sanctions or punitive duties against toy imports from China. As such, the Company would be unaffected. The loss of MFN status for China, however, would result in a substantial increase in duty for the Company's products produced there and imported into the United States. This increase in duty would be large enough that it could materially affect the Company's 21 24 business. Products shipped to other countries should not be affected. Other toy companies also source product from China and would be affected to similar degrees. However, the impact on the Company from any significant change in duties on its Chinese produced products would depend on several factors including, but not limited to, the Company's ability to: (1) procure alternative manufacturing sources outside of China; (2) retrieve its tooling; (3) relocate its production in sufficient time to meet demand; and (4) pass resultant cost increases through as product price increases. In 1994, certain quotas on selected Chinese produced toy products were introduced in the European Economic Community. The quotas are not expected to have a material impact on the Company's business in 1995. In 1995, the Company expects its import duties to be reduced pursuant to the new GATT agreement. The Company is aware of substantial cost pressures concerning the price of paper used in packaging and plastic resin used in production, and such cost pressures could result in price increases that completely or substantially offset the import duty reductions. 1993 Compared to 1992 --------------------- Net revenues of $134.3 million for 1993 represented a 19% decrease from 1992 revenues. Results were adversely affected by heightened inventory controls by retailers. Despite that environment the Company experienced sales growth in its toy product lines which was mainly attributable to its core brands Micro Machines. Worldwide sales in 1993 of Micro Machines which included Z-Bots increased 55% over 1992 sales levels. Micro Machines sales increased to $54.9 million in 1993 from $45.3 million in 1992 and Z-Bots generated sales of $16.0 million in 1993. Game Genie sales were $32.8 million in 1993 as compared to $65.3 million in 1992. This decrease reflected the normal maturity cycle for such products. In December 1993, shipments of Biker Mice From Mars commenced and generated $4.3 million of sales. This new licensed product line consists of action figures, accessories and playsets based on the Biker Mice From Mars syndicated television animation series which first aired in September 1993. In 1992, Trash Bag Bunch, Baby Face, World Championship Wrestling, Lazer Pro, Macro Machines and Magic Diaper Babies had sales of $28.5 million; these products had significantly reduced sales in 1993 to $3.3 million. The Company continues to introduce new products each year, such as Z-Bots, to offset the revenue lost as a result of the discontinuation of other products. Gross margin totaled $51.5 million in 1993, a decrease of $9.8 22 25 million from gross margin of $61.3 million in 1992. The decrease was due to lower sales volume. The gross margin rate improved to 38.3% in 1993 from 36.9% in 1992 due mainly to two factors. First, sales of discontinued products, which sold at little or no margin, decreased as a percentage of total revenues in 1993 over 1992. Second, domestic gross margins were higher due to a change in product mix. Advertising and promotion expenses were $23.5 million in 1993 compared to $22.8 million in 1992. The increase was due to various sales promotions and an increase in television origination costs. Other selling and administrative expenses were $25.6 million in 1993 compared to $30.3 million in 1992. This decrease was due mainly to cost reductions in foreign operations, reduced legal fees and reduced insurance expenses. Research and development expenses increased in 1993 to $7.5 million from $6.9 million in 1992. This increase was attributable to outside contract expense and the expansion of the number of products being developed. Expenses related to the variable stock option plan were approximately $4.0 million in 1993 resulting from a fourth quarter non-recurring, non-cash charge. This charge arose from the operation and termination of the Company's 1992 Senior Executive Stock Option Plan (the "1992 Plan"), a variable stock option plan. The sharp rise in the price of the Company's common stock during the fourth quarter (and the corresponding decrease in the exercise price of the options granted under the 1992 Plan) led to the non-recurring charge. Generally accepted accounting principles ("GAAP") for variable stock option plans required the Company to record a compensation expense accrual measured by the difference between the market price of the common stock underlying an option and the option exercise price as of December 31, 1993. This charge against earnings was recorded although no compensation payments were required by the 1992 Plan or made by the Company. The Company believed that the application of GAAP could have resulted in large and repeated future distortions to reported quarterly earnings of the Company, based on fluctuations in the stock price so long as the 1992 Plan remained in effect. Therefore, on January 26, 1994, in order to prevent the distortion of future reported earnings of the Company, the Board of Directors ("Board") terminated the 1992 Plan, subject to shareholder approval. The 1992 Plan was cancelled and replaced by a new plan, subject to shareholder approval. Under the new plan, each holder of options under the 1992 Plan was granted new options with an option exercise price of $9.00, the trading price of the common stock of the Company at the time of the Board actions. In connection with the termination of the 1992 Plan, the Company recorded an accrued liability on its balance sheet at December 31, 1993 in the amount of approximately $4.0 million and recorded a non-recurring, non-cash charge to earnings. In addition, in 23 26 connection with the termination of the 1992 Plan, subject to shareholder approval, the Board also granted 449,732 shares of common stock to compensate such optionees for giving up their existing gain that had arisen under the 1992 Plan measured by the difference between the $9.00 market price and the option exercise price of the 1992 Plan options at the time the 1992 Plan was terminated. All of the above changes were approved by the shareholders on June 21, 1994. (See Note N of Notes to Consolidated Financial Statements.) Interest expense in 1993 was $1.8 million compared to $1.6 million in 1993. The increase was due to two factors. First, the average line of credit borrowing were higher in 1993 as compared to 1992 and the interest rates slightly decreased. Second, the Company incurred interest expense related to the 8% Convertible Subordinated Debentures issued in November 1993. Other income, net was approximately equal in 1993 and 1992. The tax provisions recorded represent taxes accrued on income of the Company's wholly-owned foreign subsidiary for the years ended 1993 and 1992. No U.S. tax recovery was recorded on the loss in the years ended 1993 and 1992 due to prior year losses. In 1993, the Company retroactively adopted Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. The new standard is similar to SFAS 96, which the Company had used since 1988, as SFAS 109 also requires, among other things, an asset and liability approach for financial accounting and reporting for income taxes. Adoption of SFAS 109 did not have a material effect on the financial statements. Liquidity, Financial Resources and Capital Expenditures The Company is party to a loan and security agreement (the "Loan Agreement") with Congress Financial Corporation (Central) (the "Lender") which makes available to the Company through March 31, 1995 a line of credit up to $30 million, with provisions to increase the line to $40 million if an acquisition is made. Borrowing availability is determined by a formula based on qualified assets. The current interest rate is at prime rate plus 2%; the rate will increase by 0.25% if the increase in the credit limit occurs. In consideration for entering into the Loan Agreement, the Company paid a $375,000 fee. The Company has also agreed to pay periodically an unused line fee of 0.25% and certain management fees. The Loan Agreement provides that the preferred dividend payments may not be made without the prior consent of the Lender. On March 31, 1995, the Company entered into an amended and restated security agreement (the "New Agreement") with the Lender. The New Agreement extends through March 31, 1997 and provides a line of credit of $40 million, with provision to increase the line to $60 million at the option of the Company. Borrowing availability is determined by a formula based on qualified assets. The interest is at prime rate plus 1% (1% lower then the rate applicable to the old Loan Agreement). In consideration for entering into the New 24 27 Agreement, the Company paid a $100,000 fee; additional fees will be due if the Company exercises its option to increase the line. The Company has also agreed to pay an unused line fee of 0.25% and certain management fees. The New Agreement provides that the preferred dividends payments may not be made without the prior consent of the Lender. On November 17, 1993, the Company sold in a private placement $14 million in principal amount of 8% Convertible Subordinated Debentures (the "8% Debentures"), at par. The interest is to be paid semi-annually. The 8% Debentures mature on November 30, 2000 and are convertible into shares of the Company's common stock at $9.26, calculated based upon 115% of the average of the Company's closing common stock price for the ten business days ended November 12, 1993. The Company applied the net proceeds received from the 8% Debentures to the expansion of its product lines. On June 10, 1992, the Company announced it would not pay the July 1, 1992 $0.425 per share quarterly dividend on its Depository Shares which represent shares of the Company's Preferred Stock. The Company has not paid the subsequent quarterly dividends. As of January 1, 1995, the dividend was cumulatively eleven quarters in arrears, representing a total dividend arrearage of $8.6 million. By the terms of the Certificate of Designations for the Company's Preferred Stock, the Company is not legally obligated to pay any such arrearage. The Company believes that it is in its best interest not to reinstate the dividend until the Company has generated consistent net income from operations and continuation of such profitability can be reasonably expected. The net earnings (loss) per share calculation includes a provision for the Preferred Stock dividends in arrears. No common stock dividends may be paid unless all Preferred Stock dividend payments are current. As a result of the cumulative dividend being six or more quarters in arrears, on July 15, 1994 the holders of the Preferred Stock exercised their right to elect two new directors. Net cash used by operating activity during 1994 was $6.5 million (due to asset increases more than offsetting the cash provided by net earnings) compared to $7.4 million used in 1993. Net cash used in investing activities during 1994 was $0.5 million (investment in new equipment) compared to $0.2 million in 1993. Cash utilized in the Company's operating and investing activities during 1994 was principally provided by borrowings under the Loan Agreement. Working capital was $53.2 million at December 31, 1994 compared to $30.8 at December 31, 1993. The ratio of current assets to current liabilities was 2.4 to 1.0 at December 31, 1994 compared to 2.0 to 1.0 at December 31, 1993. The Company had no material commitments for capital expenditures at December 31, 1994. The Company believes that with its assets, the results of operations and the Loan Agreement it has adequate liquidity and capital resources to meet its current and anticipated needs. 25 28 Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements and Financial Statement Exhibits are listed in Item 14(a) and are included herein. Item 9. Changes in and Disagreements with Accountants and Financial Disclosure Not applicable. 26 29 PART III Item 10. Directors and Executive Officers of the Registrant (a) Identification of Directors The section entitled "Election of Directors" contained in the Proxy Statement is hereby incorporated by reference. (b) Identification of Executive Officers: See PART I of this Form 10-K. Item 11. Executive Compensation The section entitled "Executive Compensation" contained in the Proxy Statement is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The section entitled "Security Ownership of Management" contained in the Proxy Statement is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions The section entitled "Executive Compensation" contained in the Proxy Statement is hereby incorporated by reference. 27 30 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, 1994 and December F-2 31, 1993 Consolidated Statements of Operations for the years ended F-3 December 31, 1994, 1993 and 1992 Consolidated Statements of Changes in Shareholders' Equity for F-4 the years ended December 31, 1994, 1993 and 1992 Consolidated Statements of Cash Flows for the years ended F-5 December 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements F-6 to F-25 (a) 2. Financial Statement Schedules ----------------------------- Schedule I - Marketable Securities - Other Investments - S-1 December 31, 1994 and December 31, 1993 Schedule VIII - Valuation and Qualifying Accounts and Reserves S-2 for the years ended December 31, 1994, 1993 and 1992 Schedule X - Supplementary Income Statement Information for the S-3 years ended December 31, 1994, 1993 and 1992
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. (a) 3. Exhibits 28 31
Exhibit No. ----------- 2 Agreement of Merger, dated as of July 6, 1987. (Incorporated by reference to Exhibit 2 to the Company's Amendment No. 1 on Form 8 to the Registration Statement on Form 8-B, filed with the Commission on January 11, 1988 (the "Amendment No. 1 to the Form 8-B").) 3.1 Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Form 8-B.) 3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Form 8-B.) 4.1 Form of Certificate for Shares of Common Stock of the Corporation. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, Registration No. 33-33640, filed with the Commission on February 26, 1990 (the "Form S-3").) 4.2 Form of 1986 Nontransferable Stock Purchase Warrant issued to Paul Sullivan. (Incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Form 8-B.) 4.4 Warrant Agreement, dated as of July 7, 1988, between the Corporation and Wells Fargo Bank and warrants issued to Wells Fargo Bank. (Incorporated by reference to Exhibit 4.4 to Amendment No. 3 on Form 8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, filed with the Commission on August 2, 1988. (the "Amendment No. 3 to the 1987 10-K").)
29 32 4.4(1) Warrant Agreement, dated as of May 4, 1990, between the Company and Camerica Corporation. (Incorporated by reference to Exhibit 4.4.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, filed with the Commission on March 30, 1992 (the "1991 Form 10-K").) 4.4(2) Warrant Agreement, dated as of May 4, 1990, between the Company and David Darling. (Incorporated by reference to the 1991 Form 10-K.) 4.4(3) Warrant Agreement, dated as of May 4, 1990, between the Company and Jim Darling. (Incorporated by reference to the 1991 Form 10-K.) 4.4(4) Warrant Agreement, dated as of May 4, 1990, between the Company and Richard Darling. (Incorporated by reference to the 1991 Form 10-K.) 4.4(5) Warrant Agreement, dated as of February 22, 1990, by and between the Company and Roger Kowalsky. (Incorporated by reference to Exhibit 28 to the Form S-3.) 4.4(6) Warrant Agreement, dated as of December 11, 1991, by and between the Company and Shereff, Friedman, Hoffman and Goodman. (Incorporated by reference to Exhibit 4.4(6) to the Company's Annual Report on Form 10-K for the fiscal year end December 31, 1993, filed with the Commission on March 31, 1994 (the "1993 Form 10-K").) 4.4(7) Warrant Agreement, dated as of November 17, 1993, by and between the Company and Gerard Klauer Mattison & Co., Inc. (Incorporated by reference to Exhibit 4.4(7) to the 1993 Form 10-K.)
30 33 4.5 Form of Certificate of Designations of the Company's $17.00 Convertible Exchangeable Preferred Stock. (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form 8-A, filed with the Commission on October 6, 1989 (the "October 6, 1989 Form 8-A").) 4.5(1) Form of Certificate of Designations of the Company's Series A Preferred Stock (Incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form 8-A, filed with the Commission on January 23, 1990 (the "January 23, 1990 Form 8-A"). 4.6 Form of Indenture with respect to the Company's 8-1/2% Convertible Subordinated Debentures due October 1, 2014, between the Company and Manufacturers Hanover Trust Company as Trustee, including form of Convertible Debenture. (Incorporated by reference to Exhibit 5 to the October 6, 1989 Form 8-A). 4.7 Form of Indenture with respect to the Company's Subordinated Debentures due October 1, 2014, between the Company and Manufacturers Hanover Trust Company as Trustee, including form of Debenture. (Incorporated by reference to Exhibit 6 to the October 6, 1989 Form 8-A). 4.8 Form of Indenture with respect to the Company's 8-1/2% Senior Subordinated Notes, between the Company and Continental Stock Transfer & Trust Company, as Trustee, including form of Note. (Incorporated by reference to Exhibit 7 to the October 6, 1989 Form 8-A). 4.9 Form of Deposit Agreement between the Company and Manufacturers Hanover Trust Company of California as Depositary, including form of Depositary Receipt. (Incorporated by reference to Exhibit 8 to the October 6, 1989 Form 8-A).
31 34 4.10 Form of Rights Agreement, dated as of January 17, 1990, between the Company and Mellon Securities Trust Company. (Incorporated by Reference to Exhibit 2.1 to the January 23, 1990 Form 8-A). 4.11 Indenture, with respect to the Company's 8% Convertible Subordinated Debentures due year 2000, between the Company and Continental Stock Transfer & Trust Company, as Trustee, including form of Debenture Note. (Incorporated by reference to Exhibit 4.11 to the 1993 Form 10-K) 10.1* 1984 Employee Stock Option Plan, as amended. (Incorporated by reference to Exhibit 4 to the Corporation's Registration Statement on Form S-8, Registration No. 33-9393, filed with the Commission on September 2, 1987 (the "1987 Form S-8").) 10.1(1)* 1992 Senior Management Stock Option Plan. (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-8, Registration No. 33-56004, filed with the Commission on December 18, 1992 (the "1992 Form S-8").) 10.1(2)* Amended and Restated 1984 Employee Stock Option Plan (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-8, Registration Statement No. 33-56585, filed with the Commission on November 23, 1994.) 10.1(3)* 1994 Senior Management Stock Option Plan. (Incorporated by reference to Exhibit 4.6 of the Company's Registration Statement on Form S-8, Registration Statement No. 33-56587, filed with the Commission on November 23, 1994.) 10.1(4)(a)* Form of Agreement between each of Mark Goldman, William Catron, Lou Novak, Gary Niles, Mark Shepherd, Ronald Hirschfeld and H. Alan Gaudie and the Corporation. (Incorporated by reference to Exhibit 4.6 of the Company's Registration Statement on Form S-8, Registration Statement No. 33-56589, filed with the Commission on November 23, 1994.) 10.1(4)(b)* 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 Corporation. 10.2* Profit Sharing Plan. (Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, Registration No. 33-6743, filed with the Commission on August 12, 1986 (the "1986 Registration Statement").)
32 35 10.4(7)* Agreement, dated October 27, 1994, between Mark Goldman and the Company. 10.4(10)* Agreement, dated as of December 11, 1991, by and between Martin Nussbaum and the Company. (Incorporated by reference to Exhibit 10.4(10) to the 1991 Form 10-K.) 10.4(11)(a)* Agreement, dated July 15, 1993, between William G. Catron and the Company. (Incorporated by reference to Exhibit 10.4 (11) (a) to the 1993 Form 10-K) 10.4(11)(b)* Agreement, dated July 15, 1993, between Lou Novak and the Company. (Incorporated by reference to Exhibit 10.4 (11) (b) to the 1993 Form 10-K) 10.4(11)(c)* Agreement, dated July 15, 1993, between Ronald Hirschfeld and the Company. (Incorporated by reference to Exhibit 10.4 (11) (c) to the 1993 Form 10-K) 10.4(11)(d)* Agreement, dated July 15, 1993, between Gary Niles and the Company. (Incorporated by reference to Exhibit 10.4 (11) (d) to the 1993 Form 10-K) 10.4(11)(e)* Agreement, dated March 29, 1994, between Loren Hildebrand and the Company. 10.4(11)(f)* Agreement, dated February 27, 1995, between William B. Towne and the Company. 10.7(3) Second Amended and Restated Credit Agreement dated as of March 31, 1992 among the Company, Bank of America National Trust and Savings Association and other signatory thereto. (Incorporated by reference to Exhibit 10.7(3) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, filed with the Commission on March 31, 1993 (the "1992 Form 10-K")).
33 36 10.7(4) Amendments dated November 1, 1992 and February 17, 1993 to the Second Amended and Restated Credit Agreement dated as of March 31, 1992. (Incorporated by reference to Exhibit 10.7(4) to the 1992 Form 10-K.) 10.7(5) Securities Purchase Agreement, dated November 17, 1993, by and among the Company and the purchasers executing signature pages thereto (the "Purchasers"). (Incorporated by reference to Exhibit 10.7 (5) to the 1993 Form 10-K) 10.7(6) Registration Rights Agreement, dated as of November 17, 1993, by and among the Company and the Purchasers. (Incorporated by reference to Exhibit 10.7 (6) to the 1993 Form 10-K) 10.7(7) Loan and Security Agreement, dated as of April 1, 1993, by and among the Company and Congress Financial Corporation (Central), including form of Revolving Loan Note. (Incorporated by reference to Exhibit 10.7 (7) to the 1993 Form 10-K) 10.7(7)(a) First Amendment to Loan and Security Agreement, dated as of November 17, 1993. (Incorporated by reference to Exhibit 10.7 (7) (a) to the 1993 Form 10-K) 10.7(7)(b) Amended and Restated Loan and Security Agreement, dated as of March 31, 1995, by and among the Company and Congress Financial Corporation (Central). 10.9(3) License Agreement, dated June 16, 1986, by and between Funmaker as Licensor and the Company as Licensee. (Incorporated by reference to Exhibit 10.10(5) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, filed with the Commission on March 31, 1987 ("1986 Form 10-K").) 10.9(4) License Agreement, dated May 4, 1990, by and among the Company as Licensee, Codemasters Software Company, Ltd. and Camerica Corporation, Limited. (Incorporated by reference to Exhibit 10.9(4) of the 1992 Form 10-K.)
34 37 10.9(4)(a) Amendment No. 1 dated June 1991 to License Agreement dated May 4, 1990. (Incorporated by reference to Exhibit 10.9(4) (a) of the 1992 Form 10-K.) 10.9(4)(b) Amendment No. 2 dated December 23, 1991 to License Agreement, dated May 4, 1990. (Incorporated by reference to Exhibit 10.9(5) (b) of the 1992 Form 10-K.) 10.9(5) European License Agreement, dated December 23, 1991, by and between the Codemasters Software Company, Ltd. and the Company as Licensee. (Incorporated by reference to Exhibit 10.9(5) of the 1992 Form 10-K.) 10.9(6) Third Amendment to United States License and First Amendment to European License, dated November 4, 1992. (Incorporated by reference to Exhibit 10.9(6) of the 1992 Form 10-K.) 10.9(7) Fourth Amendment to United States License Agreement, dated October 14, 1994. 10.10 Agreement of Purchase and Sale, dated October 22, 1986, by and between ATC Building Company as Seller and the Company as Buyer. (Incorporated by reference to Exhibit 10.11 to the 1986 Form 10-K.) 10.12 Lease Agreement, dated March 12, 1987, by and between Lincoln Alvarado and Patrician Associates, Inc. as Lessor and the Company as Lessee. (Incorporated by reference to Exhibit 10.12 to Amendment No. 1 to the Form 8-B.) 10.12(1) Amendment No. 1 to Lease dated March 12, 1987. (Incorporated by reference to Exhibit 10.12(1) to the 1991 Form 10-K.) 11 Computations of Earnings Per Share. 12 Computation of ratio of earnings to fixed charges and preferred stock dividends. 22 Subsidiaries of the Company.
35 38 24.1 Consent of Price Waterhouse. 27 Financial Data Schedules
*Management contracts, compensatory plans and arrangements required to be filed as an exhibit pursuant to Item 14(c) of this Report. (b) Reports on Form 8-K No Report on Form 8-K has been filed during the last quarter of the period covered by this Report. 36 39 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LEWIS GALOOB TOYS, INC. (Registrant) By: /s/ Mark D. Goldman -------------------- Mark D. Goldman President, Chief Executive Officer Dated: March 29, 1995 -------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Mark D. Goldman President, Chief March 29, 1995 ----------------------- Executive Officer and Mark D. Goldman Director /s/ Scott R. Heldfond Director March 29, 1995 ----------------------- Scott R. Heldfond /s/ Paul A. Gliebe, Jr. Director March 29, 1995 ----------------------- Paul A. Gliebe, Jr. /s/ Martin Nussbaum Director March 29, 1995 ----------------------- Martin Nussbaum /s/ S. Lee Kling Director March 29, 1995 ----------------------- S. Lee Kling /s/ Andrew Cavanaugh Director March 29, 1995 ----------------------- Andrew Cavanaugh /s/ Roger Kowalsky Director March 29, 1995 ----------------------- Roger Kowalsky /s/ George Riordan Director March 29, 1995 ----------------------- George Riordan /s/ Hoffer Kaback Director March 29, 1995 ----------------------- Hoffer Kaback /s/ William B. Towne Executive Vice March 29, 1995 ----------------------- President, Finance William B. Towne and Chief Financial Officer
37 40 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Lewis Galoob Toys, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 28 present fairly, in all material respects, the financial position of Lewis Galoob Toys, Inc. and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Francisco, California February 10, 1995 F-1 41 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
December 31 ----------------------- 1994 1993 -------- ------- ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 2,225 $ 2,325 Accounts receivable, net 57,883 33,383 Inventories 16,824 12,979 Tooling and related costs 8,379 5,020 Prepaid expenses and other assets 5,492 7,341 -------- ------- TOTAL CURRENT ASSETS 90,803 61,048 LAND, BUILDING AND EQUIPMENT, NET 8,400 8,562 OTHER ASSETS 1,563 1,395 -------- ------- $100,766 $71,005 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable $ 6,971 $ - Accounts payable 14,973 10,834 Accrued expenses 14,939 18,916 Income taxes payable 499 282 Current portion of long-term debt 202 203 -------- ------- TOTAL CURRENT LIABILITIES 37,584 30,235 LONG-TERM DEBT 18,414 18,608 SHAREHOLDERS' EQUITY: Preferred stock Authorized 1,000,000 shares Issued and outstanding 183,950 shares of $17 Convertible Exchangeable Preferred Stock at $200 liquidation value per share 36,790 36,790 Common stock, par value $.01 per share Authorized 50,000,000 shares Issued and outstanding 10,055,089 shares in 1994 and 9,559,357 shares in 1993 101 96 Additional paid-in capital 31,506 27,293 Retained earnings (deficit) (23,182) (41,596) Cumulative translation adjustment (447) (421) -------- ------- TOTAL SHAREHOLDERS' EQUITY 44,768 22,162 -------- ------- $100,766 $71,005 ======== =======
The accompanying notes are an integral part of these Consolidated Financial Statements. F-2 42 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Years ended December 31 ----------------------------------------------- 1994 1993 1992 -------- -------- -------- Net revenues $178,792 $134,334 $166,280 Costs of products sold 104,592 82,875 104,965 -------- -------- -------- Gross margin 74,200 51,459 61,315 -------- -------- -------- Operating expenses: Advertising and promotion 30,616 23,537 22,826 Other selling and administrative 26,974 25,640 30,345 Research and development 7,288 7,451 6,861 Variable stock option plan expense - 4,046 - -------- -------- -------- Total operating expenses 64,878 60,674 60,032 -------- -------- -------- Earnings (loss) from operations 9,322 (9,215) 1,283 Expenses related to resignation of former officers - - (2,152) Net proceeds from Nintendo award 12,124 - - Interest expense (2,609) (1,836) (1,550) Other income, net 365 136 210 -------- -------- -------- Earnings (loss) before income taxes 19,202 (10,915) (2,209) Provision for income taxes 778 9 238 -------- -------- -------- Net earnings (loss) 18,424 (10,924) (2,447) Preferred stock dividends paid - - 782 -------- -------- -------- Net earnings (loss) after dividends paid 18,424 (10,924) (3,229) Preferred stock dividends in arrears 3,127 3,127 2,345 -------- -------- -------- Net earnings (loss) applicable to common shares $ 15,297 $(14,051) $ (5,574) ======== ======== ======== Common shares and common share equivalents outstanding - average 10,111 9,548 9,400 Net earnings (loss) per common share: Primary $ 1.51 $ (1.47) $ (.59) Fully Diluted 1.41 (1.47) (.59)
The accompanying notes are an integral part of these Consolidated Financial Statements. F-3 43
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ---------------------------------------------------------- (in thousands, except shares) Additional Retained Cumulative Preferred Stock Common Stock Paid-In Earnings Translation Shares Amts Shares Amts Capital (Deficit) Adjustment Total ------ ---- ------ ---- ------- --------- ----------- ----- Balance at 12/31/91 183,950 36,790 9,365,441 94 26,005 (27,411) (386) 35,092 Net loss - - - - - (2,447) - (2,447) Common stock issued - - 106,616 1 420 - - 421 Dividends declared on preferred stock - - - - - (782) - (782) Cumulative translation adj. and other - - - - - (12) (26) (38) ------- ------ --------- --- ------ ------- ---- ------ Balance at 12/31/92 183,950 36,790 9,472,057 95 26,425 (30,652) (412) 32,246 Net loss - - - - - (10,924) - (10,924) Common stock issued - - 89,800 1 343 - - 344 Warrants issued - - - - 525 - - 525 Common stock received in exchange for shares issued and cancelled - - (2,500) - - (20) - (20) Cumulative translation adj. and other - - - - - - (9) (9) ------- ------- ---------- --- ------- -------- ----- ------- Balance at 12/31/93 183,950 $36,790 9,559,357 $96 $27,293 $(41,596) $(421) $22,162 Net earnings - - - - - 18,424 - 18,424 Common stock issued, net - - 47,000 1 161 - - 162 Termination of 1992 Plan - - 449,732 4 4,042 - - 4,046 Common stock received in exchange for shares issued and cancelled - - (1,000) - 10 (10) - - Cumulative translation adj. and other - - - - - - (26) (26) ------- ------- ---------- ---- ------- -------- ----- ------- Balance at 12/31/94 183,950 $36,790 10,055,089 $101 $31,506 $(23,182) $(447) $44,768 ======= ======= ========== ==== ======= ======== ===== ======= The accompanying notes are an integral part of these Consolidated Financial Statements.
F-4 44 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years ended December 31 -------------------------------------------- 1994 1993 1992 ---- ---- ---- CASH FLOW FROM OPERATING ACTIVITIES: Net earnings (loss) $ 18,424 $ (10,924) $ (2,447) Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation 628 682 885 Variable stock option plan accrual - 4,046 - Changes in assets and liabilities: Accounts receivable (24,500) 2,523 (10,465) Inventories (3,845) 691 (4,152) Tooling and related costs (3,359) (2,212) 134 Prepaid expenses and other assets 1,681 (152) (689) Accounts payable 4,140 1,449 4,375 Accrued expenses 67 (3,002) 699 Income taxes payable 217 (549) (113) Other - - 318 ------- ------- -------- Net cash used in operating activities (6,547) (7,448) (11,455) ------- ------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Investment in land, building and equipment, net (466) (82) (114) Repayment of loan due from officer - - 1,116 ------- ------- -------- Net cash (used in) provided by investing activities (466) (82) 1,002 ------- ------- --------- CASH FLOW FROM FINANCING ACTIVITIES: Net borrowings (repayments) under notes payable 6,971 (5,698) 5,698 Borrowings under long-term debt agreement - 14,000 - Repayments under long-term debt agreements (194) (191) (225) Dividends declared on preferred stock - - (782) Proceeds from issuance of common stock 383 344 421 Repurchase of Common Stock (221) - - Other, net (26) (29) (38) ------- ------- -------- Net cash provided by (used in) financing activities 6,913 8,426 5,074 ------- ------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (100) 896 (5,379) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,325 1,429 6,808 ------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $2,225 $ 2,325 $ 1,429 ======= ======== ======== Supplemental disclosure of non-cash activity: In 1992, in connection with issuance of 8% Convertible Subordinated Debentures the Company issued warrants for 150,000 shares of common stock which were valued at $525,000. In 1994, The Company issued 449,732 shares of common stock in connection with the termination of the 1992 Senior Management Stock Option Plan. (See Note N) Supplemental disclosure of cash flow information: Cash paid for interest $ 2,656 $ 1,604 $ 1,387 Cash paid for income taxes $ 822 $ 574 $ 228
The accompanying notes are an integral part of these Consolidated Financial Statements. F-5 45 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1994, 1993 and 1992 NOTE A - Summary of Significant Accounting Policies Organization and Business The Company has been engaged in business since 1957 and was originally incorporated in California on November 6, 1968, and reincorporated in Delaware on August 28, 1987. The Company is engaged in the design, development, marketing and distribution of high quality toys worldwide. The Company's products are primarily manufactured in the People's Republic of China ("China"). Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, principally Galco International Toys, N.V. ("Galco"). All significant intercompany accounts have been eliminated in consolidation. Certain amounts in the financial statements of prior years have been reclassified to conform with the current year's presentation. Revenue Recognition The Company records a transaction as a sale when inventory is shipped to the customer and title passes. The Company provides for returns using a percentage of gross sales, based on historical experience. Foreign Currency Translation The financial statements of Galco have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, Foreign Currency Translation. All asset and liability accounts have been translated using rates of exchange in effect at the balance sheet date. Revenues and expenses are translated at the weighted average of exchange rates in effect during the year. Gains or losses from foreign currency translation adjustments are charged or credited directly to a separate component of shareholders' equity. F-6 46 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 Cash and Cash Equivalents Cash equivalents consist primarily of marketable securities with original maturities of less than ninety days. Cash and cash equivalents are stated at cost, which approximates market values. Concentration of Credit Risk Accounts receivable primarily represent balances due from customers. The Company performs credit evaluations of each of its customers and maintains allowances for potential credit losses. Such losses have generally been within management's expectations. Inventories Inventories are stated at lower of cost (first-in, first-out) or market. Tooling and Related Costs Costs incurred for tooling and package design are deferred and amortized over the life of the products, which range from one to two years. Prepaid Expenses Prepaid expenses include costs such as those incurred in the creation of television commercials which are deferred and amortized over their lives which is estimated to be one year or the period the commercial is used, if shorter. On January 1, 1995, the company implemented SOP 93-7 "Reporting on Advertising Costs." Implementation of the new standard will have no material impact on the financial statements. Prepaid expenses also include prepaid insurance, prepaid samples, prepaid advertising media, and royalty advances. Land, Building and Equipment Land, building and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. Amortization of leasehold improvements is provided using the straight-line method over the estimated useful lives of the assets, or the term of the applicable lease, whichever is less. Estimated useful lives are 35 years for building and building improvements, 1 to 12 years for leasehold improvements, 5 years for office furniture, fixtures and equipment, (including computer equipment), and 3 to 6 years for vehicles. F-7 47 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 Income Taxes In 1993, the Company retroactively adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. SFAS 109 prescribes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactments of changes in the tax law or rates. Previously, the Company used the SFAS 96 asset and liability approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. Adoption of SFAS 109 did not have a material effect on the financial statements. Earnings Per Share Primary earnings per share is based on the net earnings (loss) applicable to common shares, after providing for the dividends in arrears on the preferred stock, for the year divided by the weighted average number of common and common equivalent shares outstanding. Primary earnings per share for the year ended December 31, 1994, have been adjusted by common equivalent shares resulting from the assumed exercise of common stock options and stock warrants. Primary earnings per share for the years ended December 31, 1993 and 1992 have not been adjusted by common equivalent shares since the effect would be anti-dilutive. Fully diluted earnings per share for the year ended December 31, 1994 includes the effect of the assumed conversion of the $17 Convertible Exchangeable Preferred Stock and the 8% Convertible Subordinated Debentures into common stock. Fully diluted earnings per share for the years ended December 31, 1993 and 1992 were the same as primary earnings per share since the effect of the assumed conversion is anti-dilutive. F-8 48 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 NOTE B - Accounts Receivable, Net
(in thousands) December 31 ---------------------- 1994 1993 ---- ---- Trade receivables $65,757 $38,437 Provisions for: Advertising allowances (2,900) (1,400) Return of defective goods (900) (1,600) Markdowns and discounts (3,400) (1,400) Doubtful accounts (897) (849) ------- ------- Net trade receivables 57,660 33,188 Other receivables 223 195 ------- ------- $57,883 $33,383 ======= =======
On May 15, 1991, the Company entered into an amended maturity factoring agreement which provided for ledgering and collection of submitted accounts. In addition, the factor assumed the credit risk for submitted accounts based generally on pre-established customer credit criteria. A fee of 0.7% to 1.0% of the gross invoice amounts was paid to the factor. This agreement ended on March 31, 1993 and was not renewed. NOTE C - Inventories
(in thousands) December 31 ---------------------- 1994 1993 ---- ---- Finished goods $15,596 $10,363 Raw materials and parts 1,228 2,616 ------- ------- $16,824 $12,979 ======= =======
F-9 49 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 NOTE D - Land, Building and Equipment, Net
(in thousands) December 31 ----------------------- 1994 1993 ------- ------- Land and building $ 9,564 $ 9,402 Office furniture, fixtures and equipment 4,360 4,310 Leasehold improvements 787 787 Vehicles 104 161 ------- ------- 14,815 14,660 Less accumulated depreciation 6,415 6,098 ------- ------- $ 8,400 $ 8,562 ======= =======
NOTE E - Notes Payable The Company is party to a loan and security agreement (the "Loan Agreement") with Congress Financial Corporation (Central) (the "Lender") which makes available to the Company through March 31, 1995 a line of credit up to $30 million, with provisions to increase the line to $40 million if an acquisition is made. Borrowing availability is determined by a formula based on qualified assets. The current interest rate is at prime rate plus 2%; the rate will increase by 0.25% if the increase in the credit occurs. In consideration for entering into the Loan Agreement, the Company paid a $375,000 fee. The deferred loan fee is included in other assets and is being amortized using a straight-line method over the term of the loan. The Company has also agreed to pay an unused line fee of 0.25% and certain management fees. The Loan Agreement provides that the preferred dividend payments may not be made without the prior consent of the Lender. The Company has entered into a new agreement which increases and extends the line of credit through March 31, 1997 and reduces the rate of interest. (See Note Q for a description of the new agreement). F-10 50 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 The maximum outstanding borrowings, average outstanding balances and weighted average rates of interest for notes payable were as follows:
(in thousands) 1994 1993 ---- ---- Maximum outstanding at month end $18,209 $18,663 Average outstanding amount during the year 4,184 7,322 Weighted average interest rate for the year 9.7% 8.1%
NOTE F - Income Taxes Earnings (loss) before income taxes and the provision for income taxes are as follows:
(in thousands) Years ended December 31 ----------------------------------------- 1994 1993 1992 Earnings (loss) before income taxes: Domestic $18,861 $(10,806) $(5,346) Foreign 341 (109) 3,137 ------- -------- ------- $19,202 $(10,915) $(2,209) ======= ======== ======= Provision for income taxes: Current: Federal $ 490 $ - $ - State 201 - - Foreign 87 9 238 ------- -------- ------- 778 9 238 Deferred: Federal - - - State - - - Foreign - - - ------- -------- -------- $ 778 $ 9 $ 238 ======= ======== ========
F-11 51 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 Deferred tax liabilities (assets) consist of the following:
(in thousands) Years Ended December 31 -------------------------------------- 1994 1993 1992 ---- ---- ---- Prepaid expenses $ 1,586 $ 2,065 $ 1,697 Other temporary differences 705 647 624 ------- ------- ------- Gross deferred tax liabilities 2,291 2,712 2,321 ------- ------- ------- Accrued expenses (939) (1,377) (1,980) Defectives provision (315) (560) (1,020) Other temporary differences (2,970) (1,936) (1,542) Net operating loss carryforwards (4,037) (11,128) (8,519) Research and development tax credit carryforward (765) (765) (765) Other (944) (765) (666) ------- ------- ------- Gross deferred tax assets (9,970) (16,531) (14,492) ------- ------- ------- Deferred tax assets valuation allowance 7,679 13,819 12,171 ------- ------- ------- $ - $ - $ - ======= ======= =======
The net change in the valuation allowance for deferred tax assets was an increase (decrease) of ($6,140,000), $1,648,000 and $2,589,000 in 1994, 1993 and 1992, respectively. F-12 52 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 The provision for income taxes differs from the provisions determined by applying the applicable U.S. statutory federal income tax rates to pretax income as a result of the following differences:
Years ended December 31 -------------------------------------- 1994 1993 1992 Federal income taxes (benefit) at the U.S. statutory rate 35.0% (34.0%) (34.0%) Increase (decrease) in income taxes resulting from: Effects of U.S. and foreign income taxes on foreign operations (0.2) 0.1 10.8 State income taxes, net of loss 0.9 - - carryfowards, less federal tax benefits Loss carryback/carryforward (31.6) 34.0 34.0 ------ ----- ----- 4.1% 0.1% 10.8% ====== ===== =====
During 1993, the Company settled with the Internal Revenue Service (IRS) and the California Franchise Tax Board (CFTB) regarding audits of the years 1982 through 1990 for federal purposes and 1983 through 1989 for California purposes. The Company adequately provided for the amounts settled with the IRS and the CFTB. At December 31, 1994, the Company had federal and California net operating loss carryforwards for income tax purposes of approximately $11,500,000 and $1,000,000, respectively. The federal and California carryforwards expire in different years through the year 2008 and 1998, respectively. The Company also has federal minimum tax credit carryforwards of $944,000 that are allowed to be carried forward indefinitely and federal research and development credits of $765,000, which will expire in different years through the year 2003. If certain substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of operating loss carryforwards which can be utilized. No domestic deferred taxes have been provided on unremitted earnings of the foreign subsidiary. All such earnings are expected to be reinvested in the subsidiary. Undistributed earnings for which the Company has not provided taxes, which may be payable on distribution, were approximately $5,500,000 as of December 31, 1994. No foreign taxes will be withheld on the distribution of the untaxed earnings. F-13 53 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 NOTE G - Leases The Company leases its domestic warehouse and showroom facilities, and its facilities in Hong Kong. The leases have been classified as operating leases and are for terms expiring at various dates through 1998. Under the terms of the facility leases, rents are adjusted annually for changes in the consumer price index and increases in property taxes. The Company has a lease option on the domestic warehouse to renew for one five year term. Future minimum lease payments for all noncancellable operating leases as of December 31, 1994 (in thousands), are as follows:
Years ending December 31 1995 $1,452 1996 695 1997 239 1998 49 ------ $2,435 ======
Net rental expense for the years ended December 31, 1994, 1993 and 1992 was $1,515,000, $1,449,000 and $1,839,000, respectively. NOTE H - Accrued Expenses
(in thousands) December 31 ---------------------- 1994 1993 ---- ---- Accrued advertising $ 272 $ 2,582 Accrued royalties 6,039 4,709 Accrued expense related to variable stock option plan - 4,046 Accrued compensation and commissions 3,875 745 Accrued freight and duty 1,483 1,527 Accrued interest 1,108 1,296 Accrued purchase commitments 1,320 1,900 Other accrued expenses 842 2,111 ------- ------- 14,939 $18,916 ======= =======
F-14 54 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 In 1993, the United States Customs Service ("Customs") completed the on-site audit of duty due on importations of goods into the United States during 1988 through 1991. Customs has issued to the Company a notice stating that it is contemplating the formal issuance of a demand claim wherein it would set forth the amount they seek to recover. Management believes the recorded provisions at December 31, 1994 are adequate to cover the final settlement. NOTE I - Long-Term Debt
(in thousands) December 31 ----------------------- 1994 1993 ---- ---- 8% Convertible Subordinated Debentures due and payable on November 30, 2000, interest paid semi-annually $14,000 $14,000 Mortgage secured by headquarters land and building, payable in monthly installments of $55,314 (principal and interest) through November 30, 1996 when the remaining outstanding balance is due, interest rate 10.3% 4,616 4,783 Other - 28 ------- ------- 18,616 18,811 Current portion 202 203 ------- ------- $18,414 $18,608 ======= =======
Payments of principal for the years 1995 and 1996 are $202,000 and $4,414,000, respectively, with $14,000,000 due in the year 2000. On November 17, 1993, the Company issued in a private placement $14 million in principal amount of 8% Convertible Subordinated Debentures (the "8% Debentures"), at par. The interest is to be paid semi-annually. The 8% Debentures mature on November 30, 2000 and are convertible into shares of the Company's common stock at $9.26 calculated based upon 115% of the average of the Company's closing common stock price for the ten business days ending November 12, 1993. In connection with the 8% Debentures, the Company paid a commission to its investment bankers of $560,000 and issued warrants for 150,000 shares, which were valued at $525,000 and recorded as additional paid-in capital. These deferred loan costs are included in other assets and are amortized using a straight-line method over the term of the loan. F-15 55 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 NOTE J - Major Customers The Company had transactions with one customer, Toys "R" Us, Inc. that accounted for approximately 21% of net revenues in 1994, 1993 and 1992, respectively. NOTE K - Profit Sharing Plan The Company has a 401(k) profit sharing plan covering all non-union full-time employees. The plan is qualified under Section 401 (a) of the Internal Revenue Code so that contributions to the plan by the Company are not taxable until distributed to employees. Contributions under the plan are at the discretion of the Board of Directors and are subject to the amounts allowable under applicable provisions of the Internal Revenue Code. No Company contributions have been made in 1994, 1993 or 1992. NOTE L - Litigation On May 17, 1990, the Company filed a complaint against Nintendo of America, Inc. ("Nintendo") seeking a declaratory judgment and injunctive relief in the United States District Court, Northern District of California (the "District Court"). This complaint sought confirmation of the Company's right to market, distribute and sell its Game Genie product. On June 1, 1990, Nintendo filed a complaint in the same District Court alleging copyright and trademark infringement and seeking a preliminary and permanent injunction and unspecified damages. On July 3, 1991, the District Court reversed an earlier preliminary injunction against the Company and ruled that the sale of Game Genie products against the Company and ruled that the sale of Game Genie products did not infringe on Nintendo's copyrights. Nintendo appealed this ruling through the Ninth Circuit Court of Appeals (the "Appeals Court") and ultimately filed a petition of a Writ of Certiorari with the United States Supreme Court. On March 22, 1993, the Supreme Court rejected Nintendo's petition and, in essence, affirmed the District Court ruling. Separately, the Company pursued recovery of damages from Nintendo that resulted from the original issuance of the preliminary injunction. On July 6, 1992, the District Court awarded the Company a $15 million damage judgment against Nintendo, which was the maximum amount that could be awarded in light of the $15 million bond that Nintendo had been required to post in the proceedings. Nintendo appealed this damage award, and on February F-16 56 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 17, 1994 the Appeals Court unanimously affirmed the District Court's ruling. Subsequently, the Appeals Court rejected an additional Nintendo petition on March 21, 1994. On April 11, 1994, Nintendo paid the Company $16.1 million representing the full damage award plus interest and related costs. The Company retained approximately $12.1 million of this amount, and the Company's Game Genie licensors were paid the remaining $4.0 million. Notwithstanding such payment, on June 20, 1994, Nintendo filed a petition for a Writ of Certiorari with the United Sates Supreme Court, which asked the Supreme Court to review the damage award on a discretionary basis. On October 3, 1994, the Supreme Court rejected Nintendo's petition and affirmed Galoob's right to the full damage award. There is no further basis for appeal by Nintendo. Nintendo's original trademark claim and the Company's original anti-trust cross-claim against Nintendo were severed from the copyright claims that were adjudicated on July 3, 1991. On January 18, 1995 these claims were dismissed with prejudice by Nintendo and Galoob respectively. The Nintendo Game Genie infringement lawsuit is now complete. The Company is involved in various other litigation and legal matters which are being defended and handled in the ordinary course of business. None of these matters is expected to result in outcomes having a material adverse effect on the Company's consolidated financial position. F-17 57 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 NOTE M - Shareholders' Equity In 1989, the Company issued 183,950 authorized shares of $17 Convertible Exchangeable Preferred Stock with a $200 liquidation value (the "Preferred Stock") and deposited them with a U.S. Bank (the Depositary) and sold in a public offering an aggregate of 1,839,500 Depositary Convertible Exchangeable Preferred Shares (the "Depositary Shares") at a price of $20 per share. Each Depositary Share represents 1/10th share of Preferred Stock and has a cumulative dividend rate of $1.70 per annum, payable quarterly, and may be converted into common stock at the option of the holders at an initial price of $16.875 per share of common stock. The Depositary Shares are redeemable in whole or in part at any time, at the option of the Company, at redemption prices ranging from $21.36 to $20.00 plus dividends accrued and unpaid to the redemption date; provided certain redemption requirements are met which are based on the market price of the Company's common stock. The entire issue of Depositary Shares (in multiples of ten) and the entire issue of Preferred Stock is exchangeable, at the option of the Company, on any dividend payment date for the Company's 8-1/2% Convertible Subordinated Debentures due October 1, 2014 (the "8-1/2% Debentures") at the rate of $20.00 principal amount of 8-1/2% Debentures for each Depositary Share. At any time following the occurrence of certain change in control transactions, each holder of Depositary Shares, the Preferred Stock, or of 8-1/2% Debentures, as the case may be, has the right to cause the Company to exchange the Depositary Shares (in multiples of ten), the Preferred Stock or the 8-1/2% Debentures, as the case may be, for the Company's Subordinated Debentures due October 1, 2014 (the "Reset Debentures"). F-18 58 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 As long as the Preferred Stock, the 8-1/2% Debentures, or the Reset Debentures are outstanding, the Company will be subject to limitations on the payment of certain common stock dividends and other distributions and on the purchase, redemption, or other acquisition of capital stock. No common stock dividends may be paid unless the Preferred Stock dividends are current. The Company has reserved 2,180,148 shares of common stock for the conversion of the Preferred Stock. On June 10, 1992, the Company announced it would not pay the July 1, 1992 $ .425 per share quarterly dividend on its Depository Shares which represent shares of the Company's Preferred Stock. The Company has not paid the subsequent quarterly dividends. As of January 1, 1995, the dividend was cumulatively eleven quarters in arrears, representing a total dividend arrearage of $8.6 million. By the terms of the Certificate of Designations for the Company's Preferred Stock, the Company is not legally obligated to pay any such arrearage. The Company believes that it is in its best interest not to reinstate the dividend until the Company has generated consistent net income from operations and continuation of such profitability can be reasonably expected. The net earnings (loss) per share calculation includes a provision for the Preferred Stock dividends in arrears. No common stock dividends may be paid unless all Preferred Stock dividend payments are current. As a result of the cumulative dividend being six or more quarters in arrears, on July 15, 1994, the holders of the Preferred Stock exercised their right to elect two new directors. In 1990, the Company adopted a Stockholder Rights Plan and declared a dividend distribution of one Right for each outstanding share of common stock. Each Right will entitle holders of the Company's common stock to buy one one-thousandth of a share of Series A Preferred Stock of the Company at an exercise price of $43.00, subject to adjustment. The Rights will be exercisable only if a person or group acquires beneficial ownership of 20% or more of the common stock (other than pursuant to certain transactions involving the Company) (an "Acquiring Person") or announces a tender or exchange offer that would result in such person or group beneficially owning 20% or more of the common stock (other than a tender or exchange offer for all outstanding shares at a price determined by the non-affiliated directors to be fair). If any person becomes the beneficial owner of 20% or more of the common stock (other than pursuant to certain transactions involving the Company or a tender or exchange offer for all outstanding shares at a price determined by the non-affiliated directors to be fair), or an Acquiring Person engages in certain "self-dealing" F-19 59 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 transactions including a merger in which the Company is the surviving corporation, each Right not owned by such Acquiring Person will enable its holder to purchase, at the Right's then-current exercise price, shares of the common stock (or, in certain circumstances, cash, property or other securities of the Company) having a value of twice the Right's exercise price. In addition, if the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation, or if the Company sells or transfers 50% or more of its assets or earning power, each Right not owned by such Acquiring Person will entitle its holder to purchase, at the Right's then-current exercise price, common shares of the acquiring company having a value of twice the Right's exercise price. The Rights will expire January 17, 2000 or they may be redeemed by the Company at $.01 per share prior to that date. The Rights do not have voting or dividend rights, and until they become exercisable, have no dilutive effect on the earnings of the Company. NOTE N - Stock Options and Warrants The Board of Directors and the shareholders adopted an Employee Stock Option Plan in 1984 (the "1984 Plan"). During 1994, the 1984 Plan was amended to extend the plan until April 20, 2004 and to increase the aggregate number of shares available under the Plan. The 1984 Plan authorizes the Board of Directors to grant to officers and employees of the Company and certain of its subsidiaries options to purchase up to an aggregate of 1,589,997 common shares. Stock options are exercisable in accordance with the determination of the Board of Directors made at the time of their grant, and expire not more than ten years after the date of grant. Stock options granted in 1994, 1993 and 1992 were at 100% of market price. At December 31, 1994, 541,205 shares remain available for future grants. F-20 60 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 Stock option activity pursuant to the 1984 Plan is summarized as follows:
1994 1993 1992 ---- ---- ---- Options outstanding: At January 1 275,399 320,608 239,062 Granted 161,000 120,000 190,000 Exercised (97,000) (14,800) (25,000) Cancelled (7,500) (150,409) (83,454) -------- -------- -------- At December 31 331,899 275,399 320,608 Options exercisable: ======== ======== ======== At December 31 181,899 174,149 320,608 ======== ======== ======== Option prices per share: Granted $5.75-8.38 $3.25-7.38 $3.88-5.63 Exercised 3.25-5.63 3.00 3.00 Cancelled 3.00-6.125 3.00-6.38 2.66-4.78
In 1992, the Board of Directors and the shareholders adopted a Senior Executives Stock Option Plan (the "1992 Plan"), a variable stock option plan. Under the 1992 Plan 800,000 shares were reserved and options for 800,000 shares were issued and outstanding at December 31, 1993. These options vest over three years and expire after ten years. The initial exercise prices were $5.625 for 700,000 shares and $3.25 for 100,000 shares, respectively, the market prices on the dates granted. The exercise prices were adjusted downward on a pro-rata basis as the trading price of the stock increased above the initial exercise price so that the exercise price would be $.01 when the trading price of the stock was $19.00. Generally accepted accounting principles ("GAAP") for variable stock option plans required the Company to record a compensation expense accrual measured by the difference between the market price of the common stock underlying an option and the option price as of December 31, 1993. The sharp rise in the price of the Company's common stock during the fourth quarter of 1993, therefore, required a charge to earnings. F-21 61 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 The Company believed that the application of GAAP could have resulted in large and repeated future distortion to reported quarterly earnings of the Company, based on fluctuations in the stock price so long as the 1992 Plan remained in effect. Therefore, on January 26, 1994, the Board of Directors of the company ("Board") terminated the 1992 Plan, subject to shareholder approval. In connection with the termination of the 1992 Plan, the Company recorded an accrued liability on its balance sheet at December 31, 1993 in the amount of $4,046,000 and recorded a non-recurring, non-cash charge to earnings. In addition, in connection with the termination of the 1992 Plan, the Company granted an aggregate of 449,732 shares of common stock to the holders of the cancelled options, also subject to shareholder approval. In the second quarter of 1994, subsequent to the approval by the shareholders, the Company eliminated the accrued liability of $4,046,000 and increased shareholders' equity by the same amount for the common stock issued. Also, on January 26, 1994 the Board adopted the 1994 Senior Management Stock Option Plan (the "1994 Plan"), subject to shareholder approval. Under the 1994 Plan, each holder of options under the 1992 Plan was granted new options with an option exercise price of $9.00, the trading price of the common stock of the Company at the time of the Board actions. The shareholders approved the 1994 Plan in June 1994. On March 11, 1986, the Company issued warrants to purchase 15,000 shares of common stock at $7.83 per share. On July 7, 1988, in consideration for entering into a credit agreement, the Company issued warrants to purchase 785,732 shares of Common Stock at $4.50 per share. One half of the warrants issued on July 7, 1988, were repurchased on May 25, 1989, for $400,000. On May 4, 1990, the Company issued warrants to purchase 100,000 shares of common stock at $10 per share. On December 11, 1991, the Company issued warrants to purchase 25,000 shares of common stock at $4.375 per share. On November 17, 1993, the Company issued warrants relating to the 8% Debentures to purchase 150,000 shares of common stock at $9.50 per share. The Company granted 1,000 shares of common stock at no cost to each employee of the Company and Galco on November 8, 1991 and on January 2, 1992, respectively. The shares vested one year from the date of grant and resulted in the issuance of 84,000 shares of common stock in 1992 and 75,000 shares of common stock on January 3, 1993. The $650,000 compensation cost related to this plan was charged to expense over the vesting period. F-22 62 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 NOTE O - Related Party Transactions The Company has retained the legal services of Shereff, Freidman, Hoffman & Goodman, LLP in recent years. One of the Company's directors is a partner in this firm. The total amount of legal and director fees paid to the firm in 1994 and 1993 were approximately $0.4 million and $0.4 million, respectively. The Company has retained the insurance brokerage services of Rollins Hudig Hall ("RHH") in recent years. One of the Company's directors is the President and Chief Executive Officer of Rollins Real Estate/Investment, a division of RHH. The total amount of insurance premiums paid to RHH in 1994 and 1993 were approximately $1.4 million and $1.0 million, respectively. In 1994, the Company sold its minority interest in Galoob Toys Canada, Inc., which continues to act as the Company's distributor in Canada and which accounted for less than 5% of the Company sales. NOTE P - Expenses Related to Resignations of Former Officers During 1991, the Company's former chief executive officer resigned. In additions, during 1991 and 1992, certain senior officers resigned and the Company underwent a reorganization which included employee layoffs. Related expenses incurred in 1992 were $2.2 million. NOTE Q - Subsequent Event On March 31, 1995, the Company entered into an amended and restated loan and security agreement (the "New Agreement") with the Lender. The New Agreement extends through March 31, 1997 and provides a line of credit of $40 million, with provision to increase the line to $60 million at the option of the Company. Borrowing availability is determined by a formula based on qualified assets. The interest is at prime rate plus 1% (1% lower then the rate applicable to the old Loan Agreement). In consideration for entering in the New Agreement, the Company paid a $100,000 fee; additional fees will be paid if the Company exercises its option to increase the line. The Company has also agreed to pay an unused line fee of 0.25% and certain management fees. The New Agreement provides that the preferred dividend payments may not be made without the prior consent of the Lender. F-23 63 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 NOTE R - Segment Information The Company's operations are in one industry segment: the sale of toys primarily to major retail outlets. The Company operates in two primary geographic areas, the U.S. and Europe, and there are no sales between geographic areas. Information about the Company's operations in different geographic locations for 1994, 1993 and 1992 is as follows:
(in thousands) United States Foreign Consolidated ------------- ------- ------------ 1994 ---- Net revenues from unaffiliated customers $ 119,702 $ 59,090 $178,792 Earnings (loss) before income taxes 17,360 1,842 19,202 Identifiable assets at December 31, 1994 87,653 13,113 100,766 1993 Net revenues from unaffiliated customers 88,821 45,513 134,334 Earnings (loss) before income taxes (10,806) (109) (10,915) Identifiable assets at December 31, 1993 61,706 9,299 71,005 1992 Net revenues from unaffiliated customers 108,266 58,014 166,280 Earnings (loss) before income taxes (5,346) 3,137 (2,209) Identifiable assets at December 31, 1992 55,700 15,904 71,604
F-24 64 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, 1994, 1993 and 1992 NOTE S - Quarterly Financial Data (Unaudited) Quarterly financial data for 1994 and 1993 are summarized in the following table:
(in thousands, except per share amounts) Net Net Earnings Net Gross Earnings (Loss) Per Revenues Margin (Loss) Common Share -------- ------ -------- ------------ 1994 ---- 1st Quarter $30,235 $12,673 $(1,648) $(0.25) 2nd Quarter 33,720 12,601 9,753 0.91 3rd Quarter 50,273 19,937 3,909 0.30 4th Quarter 64,565 28,994 6,410 0.55 1993 1st Quarter $27,341 $11,250 $(1,439) $(0.23) 2nd Quarter 26,769 9,056 (3,490) (0.45) 3rd Quarter 37,692 14,265 (389) (0.12) 4th Quarter 42,532 16,888 (5,606) (0.67)
F-25 65 SCHEDULE I LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES MARKETABLE SECURITIES-OTHER INVESTMENTS (in thousands)
Name of Issuer and Principal Market Title of Issue Amount Cost Value ------------------ ----------- ---- ------ At December 31, 1994 None At December 31, 1993 U.S. treasury notes subject to a repurchase agreement with Sanwa Bank California $1,400 $1,400 $1,400 ------ ------ ------ $1,400 $1,400 $1,400 ====== ====== ======
S-1 66 SCHEDULE VIII LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands)
Additions Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions of Period ----------- ---------- ---------- ---------- -------- Year ended 12/31/94: Provisions for returns and allowances $5,249 $11,979 $9,131 $8,097 Year ended 12/31/93 Provisions for returns and allowances 6,031 5,516 6,298 5,249 Year ended 12/31/92 Provisions for returns and allowances 8,900 7,916 10,785 6,031
See Note B of Notes to Consolidated Financial Statements. S-2 67 SCHEDULE X LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION (in thousands)
Charged to Costs and Expenses ----------------------------- Years ended December 31 ----------------------------- Items 1994 1993 1992 ----- ---- ---- ---- Maintenance and repairs * * * Depreciation and amortization of intangible assets, pre-operating costs and similar deferrals * * * Taxes, other than payroll and income taxes * * * Royalties $13,498 $11,337 $19,263 Advertising and promotion 30,616 23,537 22,826
*Less than 1% of total sales. S-3 68
EXHIBIT INDEX Sequentially Numbered Exhibit No. Page ----------- ------------ 2 Agreement of Merger, dated as of July 6, 1987. (Incorporated by reference to Exhibit 2 to the Company's Amendment No. 1 on Form 8 to the Registration Statement on Form 8-B, filed with the Commission on January 11, 1988 (the "Amendment No. 1 to the Form 8-B").) 3.1 Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Form 8-B.) 3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Form 8-B.) 4.1 Form of Certificate for Shares of Common Stock of the Corporation. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, Registration No. 33-33640, filed with the Commission on February 26, 1990 (the "Form S-3").) 4.2 Form of 1986 Nontransferable Stock Purchase Warrant issued to Paul Sullivan. (Incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Form 8-B.) 4.4 Warrant Agreement, dated as of July 7, 1988, between the Corporation and Wells Fargo Bank and warrants issued to Wells Fargo Bank. (Incorporated by reference to Exhibit 4.4 to Amendment No. 3 on Form 8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, filed with the Commission on August 2, 1988. (the "Amendment No. 3 to the 1987 10-K").)
69 Sequentially Numbered Page ------------ 4.4(1) Warrant Agreement, dated as of May 4, 1990, between the Company and Camerica Corporation. (Incorporated by reference to Exhibit 4.4.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, filed with the Commission on March 30, 1992 (the "1991 Form 10-K").) 4.4(2) Warrant Agreement, dated as of May 4, 1990, between the Company and David Darling. (Incorporated by reference to the 1991 Form 10-K.) 4.4(3) Warrant Agreement, dated as of May 4, 1990, between the Company and Jim Darling. (Incorporated by reference to the 1991 Form 10-K.) 4.4(4) Warrant Agreement, dated as of May 4, 1990, between the Company and Richard Darling. (Incorporated by reference to the 1991 Form 10-K.) 4.4(5) Warrant Agreement, dated as of February 22, 1990, by and between the Company and Roger Kowalsky. (Incorporated by reference to Exhibit 28 to the Form S-3.) 4.4(6) Warrant Agreement, dated as of December 11, 1991, by and between the Company and Shereff, Friedman, Hoffman and Goodman. (Incorporated by reference to Exhibit 4.4(6) to the Company's Annual Report on Form 10-K for the fiscal year end December 31, 1993, filed with the Commission on March 31, 1994 (the "1993 Form 10-K").) 4.4(7) Warrant Agreement, dated as of November 17, 1993, by and between the Company and Gerard Klauer Mattison & Co., Inc. (Incorporated by reference to Exhibit 4.4(7) to the 1993 Form 10-K.)
70 Sequentially Numbered Page ------------ 4.5 Form of Certificate of Designations of the Company's $17.00 Convertible Exchangeable Preferred Stock. (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form 8-A, filed with the Commission on October 6, 1989 (the "October 6, 1989 Form 8-A").) 4.5(1) Form of Certificate of Designations of the Company's Series A Preferred Stock (Incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form 8-A, filed with the Commission on January 23, 1990 (the "January 23, 1990 Form 8-A"). 4.6 Form of Indenture with respect to the Company's 8-1/2% Convertible Subordinated Debentures due October 1, 2014, between the Company and Manufacturers Hanover Trust Company as Trustee, including form of Convertible Debenture. (Incorporated by reference to Exhibit 5 to the October 6, 1989 Form 8-A). 4.7 Form of Indenture with respect to the Company's Subordinated Debentures due October 1, 2014, between the Company and Manufacturers Hanover Trust Company as Trustee, including form of Debenture. (Incorporated by reference to Exhibit 6 to the October 6, 1989 Form 8-A). 4.8 Form of Indenture with respect to the Company's 8-1/2% Senior Subordinated Notes, between the Company and Continental Stock Transfer & Trust Company, as Trustee, including form of Note. (Incorporated by reference to Exhibit 7 to the October 6, 1989 Form 8-A). 4.9 Form of Deposit Agreement between the Company and Manufacturers Hanover Trust Company of California as Depositary, including form of Depositary Receipt. (Incorporated by reference to Exhibit 8 to the October 6, 1989 Form 8-A).
71 Sequentially Numbered Page ------------ 4.10 Form of Rights Agreement, dated as of January 17, 1990, between the Company and Mellon Securities Trust Company. (Incorporated by Reference to Exhibit 2.1 to the January 23, 1990 Form 8-A). 4.11 Indenture, with respect to the Company's 8% Convertible Subordinated Debentures due year 2000, between the Company and Continental Stock Transfer & Trust Company, as Trustee, including form of Debenture Note. (Incorporated by reference to Exhibit 4.11 to the 1993 Form 10-K) 10.1* 1984 Employee Stock Option Plan, as amended. (Incorporated by reference to Exhibit 4 to the Corporation's Registration Statement on Form S-8, Registration No. 33-9393, filed with the Commission on September 2, 1987 (the "1987 Form S-8").) 10.1(1)* 1992 Senior Management Stock Option Plan. (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-8, Registration No. 33-56004, filed with the Commission on December 18, 1992 (the "1992 Form S-8").) 10.1(2)* Amended and Restated 1984 Employee Stock Option Plan (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-8, Registration Statement No. 33-56585, filed with the Commission on November 23, 1994.) 10.1(3)* 1994 Senior Management Stock Option Plan. (Incorporated by reference to Exhibit 4.6 of the Company's Registration Statement on Form S-8, Registration Statement No. 33-56587, filed with the Commission on November 23, 1994.) 10.1(4)(a)* Form of Agreement between each of Mark Goldman, William Catron, Lou Novak, Gary Niles, Mark Shepherd, Ronald Hirschfeld and H. Alan Gaudie and the Corporation. (Incorporated by reference to Exhibit 4.6 of the Company's Registration Statement on Form S-8, Registration Statement No. 33-56589, filed with the Commission on November 23, 1994.) 10.1(4)(b)* 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 Corporation. 10.2* Profit Sharing Plan. (Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, Registration No. 33-6743, filed with the Commission on August 12, 1986 (the "1986 Registration Statement").)
72 Sequentially Numbered Page ------------ 10.4(7)* Agreement, dated October 27, 1994, between Mark Goldman and the Company. 10.4(10)* Agreement, dated as of December 11, 1991, by and between Martin Nussbaum and the Company. (Incorporated by reference to Exhibit 10.4(10) to the 1991 Form 10-K.) 10.4(11)(a)* Agreement, dated July 15, 1993, between William G. Catron and the Company. (Incorporated by reference to Exhibit 10.4 (11) (a) to the 1993 Form 10-K) 10.4(11)(b)* Agreement, dated July 15, 1993, between Lou Novak and the Company. (Incorporated by reference to Exhibit 10.4 (11) (b) to the 1993 Form 10-K) 10.4(11)(c)* Agreement, dated July 15, 1993, between Ronald Hirschfeld and the Company. (Incorporated by reference to Exhibit 10.4 (11) (c) to the 1993 Form 10-K) 10.4(11)(d)* Agreement, dated July 15, 1993, between Gary Niles and the Company. (Incorporated by reference to Exhibit 10.4 (11) (d) to the 1993 Form 10-K) 10.4(11)(e)* Agreement, dated March 29, 1994, between Loren Hildebrand and the Company. 10.4(11)(f)* Agreement, dated February 27, 1995, between William B. Towne and the Company. 10.7(3) Second Amended and Restated Credit Agreement dated as of March 31, 1992 among the Company, Bank of America National Trust and Savings Association and other signatory thereto. (Incorporated by reference to Exhibit 10.7(3) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, filed with the Commission on March 31, 1993 (the "1992 Form 10-K")).
73 Sequentially Numbered Page ------------ 10.7(4) Amendments dated November 1, 1992 and February 17, 1993 to the Second Amended and Restated Credit Agreement dated as of March 31, 1992. (Incorporated by reference to Exhibit 10.7(4) to the 1992 Form 10-K.) 10.7(5) Securities Purchase Agreement, dated November 17, 1993, by and among the Company and the purchasers executing signature pages thereto (the "Purchasers"). (Incorporated by reference to Exhibit 10.7 (5) to the 1993 Form 10-K) 10.7(6) Registration Rights Agreement, dated as of November 17, 1993, by and among the Company and the Purchasers. (Incorporated by reference to Exhibit 10.7 (6) to the 1993 Form 10-K) 10.7(7) Loan and Security Agreement, dated as of April 1, 1993, by and among the Company and Congress Financial Corporation (Central), including form of Revolving Loan Note. (Incorporated by reference to Exhibit 10.7 (7) to the 1993 Form 10-K) 10.7(7)(a) First Amendment to Loan and Security Agreement, dated as of November 17, 1993. (Incorporated by reference to Exhibit 10.7 (7) (a) to the 1993 Form 10-K) 10.7(7)(b) Amended and Restated Loan and Security Agreement, dated as of March 31, 1995, by and among the Company and Congress Financial Corporation (Central). 10.9(3) License Agreement, dated June 16, 1986, by and between Funmaker as Licensor and the Company as Licensee. (Incorporated by reference to Exhibit 10.10(5) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, filed with the Commission on March 31, 1987 ("1986 Form 10-K").) 10.9(4) License Agreement, dated May 4, 1990, by and among the Company as Licensee, Codemasters Software Company, Ltd. and Camerica Corporation, Limited. (Incorporated by reference to Exhibit 10.9(4) of the 1992 Form 10-K.)
74 Sequentially Numbered Page ------------ 10.9(4)(a) Amendment No. 1 dated June 1991 to License Agreement dated May 4, 1990. (Incorporated by reference to Exhibit 10.9(4) (a) of the 1992 Form 10-K.) 10.9(4)(b) Amendment No. 2 dated December 23, 1991 to License Agreement, dated May 4, 1990. (Incorporated by reference to Exhibit 10.9(5) (b) of the 1992 Form 10-K.) 10.9(5) European License Agreement, dated December 23, 1991, by and between the Codemasters Software Company, Ltd. and the Company as Licensee. (Incorporated by reference to Exhibit 10.9(5) of the 1992 Form 10-K.) 10.9(6) Third Amendment to United States License and First Amendment to European License, dated November 4, 1992. (Incorporated by reference to Exhibit 10.9(6) of the 1992 Form 10-K.) 10.9(7) Fourth Amendment to United States License Agreement, dated October 14, 1994. 10.10 Agreement of Purchase and Sale, dated October 22, 1986, by and between ATC Building Company as Seller and the Company as Buyer. (Incorporated by reference to Exhibit 10.11 to the 1986 Form 10-K.) 10.12 Lease Agreement, dated March 12, 1987, by and between Lincoln Alvarado and Patrician Associates, Inc. as Lessor and the Company as Lessee. (Incorporated by reference to Exhibit 10.12 to Amendment No. 1 to the Form 8-B.) 10.12(1) Amendment No. 1 to Lease dated March 12, 1987. (Incorporated by reference to Exhibit 10.12(1) to the 1991 Form 10-K.) 11 Computations of Earnings Per Share. 12 Computation of ratio of earnings to fixed charges and preferred stock dividends. 22 Subsidiaries of the Company.
75 Sequentially Numbered Page ------------ 24.1 Consent of Price Waterhouse. 27 Financial Data Schedules
*Management contracts, compensatory plans and arrangements required to be filed as an exhibit pursuant to Item 14(c) of this Report. EX-10.14B 2 FORM OF AMENDMENT NO. 1 1 EXHIBIT 10.1[4][b] LEWIS GALOOB TOYS, INC. 500 FORBES BOULEVARD SOUTH SAN FRANCISCO, CALIFORNIA 94080 December 20, 1994 Mark D. Goldman 1960 Grant Avenue, Unit 16 San Francisco, California 94133 Dear Mr. Goldman: Reference is made to that certain Agreement (the "Agreement") dated February 13, 1994 by and between you and Lewis Galoob Toys, Inc. This letter shall confirm your agreement to the amendment and restatement in its entirety of Annex A to the Agreement in the form set forth on Revised Annex A attached hereto. Please indicate your acceptance of and agreement with the terms hereof by returning an executed copy of this letter to my attention. Sincerely, LEWIS GALOOB TOYS, INC. By: /s/ Mark Shepherd ------------------------------- Mark Shepherd Senior Vice President, Finance and Chief Financial Officer Accepted and Agreed to as of this 20th day of December, 1994. /s/ Mark D. Goldman ------------------- Mark D. Goldman 2 REVISED ANNEX A Mark D. Goldman The Holder agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any shares of Common Stock acquired upon the exercise of New Options or any interest therein for a period of seven (7) months following such exercise. The Holder further agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a period of seven (7) months after the applicable Restriction Date (as hereinafter defined) for such Shares. Finally, and in addition to the foregoing, the Holder agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares until after the expiration of the period ending on the date of public release of the results of operations of the Company for the quarter and year ending December 31, 1994 (the "Blackout Period"). In the event that, during the first six (6) months of any seven (7) month period set forth above, the Holder shall, for any reason (other than death), cease to be an officer of the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees (i) to sell to the Company all shares of Common Stock which are subject to restriction for the seven (7) month period during which such event occurred for a price equal to the number of shares of Common Stock multiplied by $9.00 and (ii) to surrender to the Company all Shares which are subject to restriction for the seven (7) month period during which such event occurred. In addition, in the event that, during the Blackout Period, the Holder shall voluntarily terminate his employment with the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees to surrender to the Company all Shares which are or were subject to the Blackout Period. The Holder's New Options will vest as follows: 133,334 shares issuable upon exercise of New Options vested upon grant; 9,877 shares issuable upon exercise of New Options vested on April 22, 1994; 66,666 shares issuable upon exercise of New Options shall vest on January 30, 1995; 9,877 shares issuable upon exercise of New Options shall vest on April 22, 1995; 9,876 shares issuable upon exercise of New Options shall vest on April 22, 1996. In addition to the restrictions set forth above which will be legended on the certificates evidencing the Holder's Shares, the certificates evidencing the Holder's Shares will contain a restrictive legend preventing the Shares from being sold, transferred, pledged, hypothecated or otherwise disposed of until the dates (each, a "Restriction Date") set forth next to the amounts below: 70,991 Shares - no additional legend 7,609 Shares - legend is no longer applicable 35,495 Shares - January 30, 1995 7,608 Shares - April 22, 1995 7,608 Shares - April 22, 1996 3 LEWIS GALOOB TOYS, INC. 500 FORBES BOULEVARD SOUTH SAN FRANCISCO, CALIFORNIA 94080 December 20, 1994 Louis Novak 97 Filbert Street Sausalito, California 94965 Dear Mr. Novak: Reference is made to that certain Agreement (the "Agreement" ) dated February 13, 1994 by and between you and Lewis Galoob Toys, Inc. This letter shall confirm your agreement to the amendment and restatement in its entirety of Annex A to the Agreement in the form set forth on Revised Annex A attached hereto. Please indicate your acceptance of and agreement with the terms hereof by returning an executed copy of this letter to my attention. Sincerely, LEWIS GALOOB TOYS, INC. By: /s/ Mark Shepherd ------------------------------ Mark Shepherd Senior Vice President, Finance and Chief Financial Officer Accepted and Agreed to as of this 20th day of December, 1994. /s/ Louis Novak --------------- Louis Novak 4 REVISED ANNEX A Louis Novak The Holder agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any shares of Common Stock acquired upon the exercise of New Options or any interest therein for a period of seven (7) months following such exercise. The Holder further agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a period of seven (7) months after the applicable Restriction Date (as hereinafter defined) for such Shares. Finally, and in addition to the foregoing, the Holder agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares until after the expiration of the period ending on the date of public release of the results of operations of the Company for the quarter and year ending December 31, 1994 (the "Blackout Period"). In the event that, during the first six (6) months of any seven (7) month period set forth above, the Holder shall, for any reason (other than death), cease to be an officer of the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees (i) to sell to the Company all shares of Common Stock which are subject to restriction for the seven (7) month period during which such event occurred for a price equal to the number of shares of Common Stock multiplied by $9.00 and (ii) to surrender to the Company all Shares which are subject to restriction for the seven (7) month period during which such event occurred. In addition, in the event that, during the Blackout Period, the Holder shall voluntarily terminate his employment with the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees to surrender to the Company all Shares which are or were subject to the Blackout Period. The Holder's New Options will vest as follows: 91,667 shares issuable upon exercise of New Options vested upon grant; 6,790 shares issuable upon exercise of New Options vested on April 22, 1994; 45,833 shares issuable upon exercise of New Options shall vest on January 30, 1995; 6,790 shares issuable upon exercise of New Options shall vest on April 22, 1995; 6,790 shares issuable upon exercise of New Options shall vest on April 22, 1996. In addition to the restrictions set forth above which will be legended on the certificates evidencing the Holder's Shares, the certificates evidencing the Holder's Shares will contain a restrictive legend preventing the Shares from being sold, transferred, pledged, hypothecated or otherwise disposed of until the dates (each, a "Restriction Date") set forth next to the amounts below: 48,806 Shares - no additional legend 5,231 Shares - legend is no longer applicable 24,403 Shares - January 30, 1995 5,230 Shares - April 22, 1995 5,230 Shares - April 22, 1996 5 LEWIS GALOOB TOYS, INC. 500 FORBES BOULEVARD SOUTH SAN FRANCISCO, CALIFORNIA 94080 December 20, 1994 Gary Niles 255 Beverly Drive San Carlos, California 94070 Dear Mr. Niles: Reference is made to that certain Agreement (the "Agreement" ) dated February 13, 1994 by and between you and Lewis Galoob Toys, Inc. This letter shall confirm your agreement to the amendment and restatement in its entirety of Annex A to the Agreement in the form set forth on Revised Annex A attached hereto. Please indicate your acceptance of and agreement with the terms hereof by returning an executed copy of this letter to my attention. Sincerely, LEWIS GALOOB TOYS, INC. By: /s/ Mark Shepherd ------------------------------ Mark Shepherd Senior Vice President, Finance and Chief Financial Officer Accepted and Agreed to as of this 20th day of December, 1994. /s/ Gary Niles -------------- Gary Niles 6 REVISED ANNEX A Gary Niles The Holder agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any shares of Common Stock acquired upon the exercise of New Options or any interest therein for a period of seven (7) months following such exercise. The Holder further agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a period of seven (7) months after the applicable Restriction Date (as hereinafter defined) for such Shares. Finally, and in addition to the foregoing, the Holder agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares until after the expiration of the period ending on the date of public release of the results of operations of the Company for the quarter and year ending December 31, 1994 (the "Blackout Period"). In the event that, during the first six (6) months of any seven (7) month period set forth above, the Holder shall, for any reason (other than death), cease to be an officer of the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees (i) to sell to the Company all shares of Common Stock which are subject to restriction for the seven (7) month period during which such event occurred for a price equal to the number of shares of Common Stock multiplied by $9.00 and (ii) to surrender to the Company all Shares which are subject to restriction for the seven (7) month period during which such event occurred. In addition, in the event that, during the Blackout Period, the Holder shall voluntarily terminate his employment with the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees to surrender to the Company all Shares which are or were subject to the Blackout Period. The Holder's New Options will vest as follows: 91,667 shares issuable upon exercise of New Options vested upon grant; 6,790 shares issuable upon exercise of New Options vested on April 22, 1994; 45,833 shares issuable upon exercise of New Options shall vest on January 30, 1995; 6,790 shares issuable upon exercise of New Options shall vest on April 22, 1995; 6,790 shares issuable upon exercise of New Options shall vest on April 22, 1996. In addition to the restrictions set forth above which will be legended on the certificates evidencing the Holder's Shares, the certificates evidencing the Holder's Shares will contain a restrictive legend preventing the Shares from being sold, transferred, pledged, hypothecated or otherwise disposed of until the dates (each, a "Restriction Date") set forth next to the amounts below: 48,806 Shares - no additional legend 5,231 Shares - legend is no longer applicable 24,403 Shares - January 30, 1995 5,230 Shares - April 22, 1995 5,230 Shares - April 22, 1996 7 LEWIS GALOOB TOYS, INC. 500 FORBES BOULEVARD SOUTH SAN FRANCISCO, CALIFORNIA 94080 December 20, 1994 William G. Catron 1060 Siskiyou Drive Menlo Park, California 94025 Dear Mr. Catron: Reference is made to that certain Agreement (the "Agreement" ) dated February 13, 1994 by and between you and Lewis Galoob Toys, Inc. This letter shall confirm your agreement to the amendment and restatement in its entirety of Annex A to the Agreement in the form set forth on Revised Annex A attached hereto. Please indicate your acceptance of and agreement with the terms hereof by returning an executed copy of this letter to my attention. Sincerely, LEWIS GALOOB TOYS, INC. By: /s/ Mark Shepherd ----------------------------- Mark Shepherd Senior Vice President, Finance and Chief Financial Officer Accepted and Agreed to as of this 20th day of December, 1994. /s/ William G. Catron --------------------- William G. Catron 8 REVISED ANNEX A William G. Catron The Holder agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any shares of Common Stock acquired upon the exercise of New Options or any interest therein for a period of seven (7) months following such exercise. The Holder further agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a period of seven (7) months after the applicable Restriction Date (as hereinafter defined) for such Shares. Finally, and in addition to the foregoing, the Holder agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares until after the expiration of the period ending on the date of public release of the results of operations of the Company for the quarter and year ending December 31, 1994 (the "Blackout Period"). In the event that, during the first six (6) months of any seven (7) month period set forth above, the Holder shall, for any reason (other than death), cease to be an officer of the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees (i) to sell to the Company all shares of Common Stock which are subject to restriction for the seven (7) month period during which such event occurred for a price equal to the number of shares of Common Stock multiplied by $9.00 and (ii) to surrender to the Company all Shares which are subject to restriction for the seven (7) month period during which such event occurred. In addition, in the event that, during the Blackout Period, the Holder shall voluntarily terminate his employment with the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees to surrender to the Company all Shares which are or were subject to the Blackout Period. The Holder's New Options will vest as follows: 25,000 shares issuable upon exercise of New Options vested upon grant; 3,704 shares issuable upon exercise of New Options vested on April 22, 1994; 25,000 shares issuable upon exercise of New Options vested on April 30, 1994; 3,704 shares issuable upon exercise of New Options shall vest on April 22, 1995; 25,000 shares issuable upon exercise of New Options shall vest on April 30, 1995; 3,703 shares issuable upon exercise of New Options shall vest on April 22, 1996. In addition to the restrictions set forth above which will be legended on the certificates evidencing the Holder's Shares, the certificates evidencing the Holder's Shares will contain a restrictive legend preventing the Shares from being sold, transferred, pledged, hypothecated or otherwise disposed of until the dates (each, a "Restriction Date") set forth next to the amounts below: 13,311 Shares - no additional legend 2,853 Shares - legend is no longer applicable 13,311 Shares - legend is no longer applicable 2,853 Shares - April 22, 1995 13,310 Shares - April 30, 1995 2,853 Shares - April 22, 1996 9 LEWIS GALOOB TOYS, INC. 500 FORBES BOULEVARD SOUTH SAN FRANCISCO, CALIFORNIA 94080 December 20, 1994 Ronald Hirschfeld 425 Castenada San Francisco, California 94116 Dear Mr. Hirschfeld: Reference is made to that certain Agreement (the "Agreement" ) dated February 13, 1994 by and between you and Lewis Galoob Toys, Inc. This letter shall confirm your agreement to the amendment and restatement in its entirety of Annex A to the Agreement in the form set forth on Revised Annex A attached hereto. Please indicate your acceptance of and agreement with the terms hereof by returning an executed copy of this letter to my attention. Sincerely, LEWIS GALOOB TOYS, INC. By: /s/ Mark Shepherd ------------------------------ Mark Shepherd Senior Vice President, Finance and Chief Financial Officer Accepted and Agreed to as of this 20th day of December, 1994. /s/ Ronald Hirschfeld --------------------- Ronald Hirschfeld 10 REVISED ANNEX A Ronald Hirschfeld The Holder agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any shares of Common Stock acquired upon the exercise of New Options or any interest therein for a period of seven (7) months following such exercise. The Holder further agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a period of seven (7) months after the applicable Restriction Date (as hereinafter defined) for such Shares. Finally, and in addition to the foregoing, the Holder agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares until after the expiration of the period ending on the date of public release of the results of operations of the Company for the quarter and year ending December 31, 1994 (the "Blackout Period"). In the event that, during the first six (6) months of any seven (7) month period set forth above, the Holder shall, for any reason (other than death), cease to be an officer of the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees (i) to sell to the Company all shares of Common Stock which are subject to restriction for the seven (7) month period during which such event occurred for a price equal to the number of shares of Common Stock multiplied by $9.00 and (ii) to surrender to the Company all Shares which are subject to restriction for the seven (7) month period during which such event occurred. In addition, in the event that, during the Blackout Period, the Holder shall voluntarily terminate his employment with the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees to surrender to the Company all Shares which are or were subject to the Blackout Period. The Holder's New Options will vest as follows: 50,000 shares issuable upon exercise of New Options vested upon grant; 3,704 shares issuable upon exercise of New Options vested on April 22, 1994; 25,000 shares issuable upon exercise of New Options shall vest on January 30, 1995; 3,704 shares issuable upon exercise of New Options shall vest on April 22, 1995; 3,703 shares issuable upon exercise of New Options shall vest on April 22, 1996. In addition to the restrictions set forth above which will be legended on the certificates evidencing the Holder's Shares, the certificates evidencing the Holder's Shares will contain a restrictive legend preventing the Shares from being sold, transferred, pledged, hypothecated or otherwise disposed of until the dates (each, a Restriction Date") set forth next to the amounts below: 26,622 Shares - no additional legend 2,853 Shares - legend is no longer applicable 13,310 Shares - January 30, 1995 2,853 Shares - April 22, 1995 2,853 Shares - April 22, 1996 11 LEWIS GALOOB TOYS, INC. 500 FORBES BOULEVARD SOUTH SAN FRANCISCO, CALIFORNIA 94080 December 20, 1994 Mark Shepherd 2975 Eaton Avenue San Carlos, California 94070 Dear Mr. Shepherd: Reference is made to that certain Agreement (the "Agreement" ) dated February 13, 1994 by and between you and Lewis Galoob Toys, Inc. This letter shall confirm your agreement to the amendment and restatement in its entirety of Annex A to the Agreement in the form set forth on Revised Annex A attached hereto. Please indicate your acceptance of and agreement with the terms hereof by returning an executed copy of this letter to my attention. Sincerely, LEWIS GALOOB TOYS, INC. By: /s/ Mark D. Goldman ------------------------------------- Mark D. Goldman President and Chief Executive Officer Accepted and Agreed to as of this 20th day of December, 1994. /s/ Mark Shepherd ----------------- Mark Shepherd 12 REVISED ANNEX A Mark Shepherd The Holder agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any shares of Common Stock acquired upon the exercise of New Options or any interest therein for a period of seven (7) months following such exercise. The Holder further agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a period of seven (7) months after the applicable Restriction Date (as hereinafter defined) for such Shares. Finally, and in addition to the foregoing, the Holder agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares until after the expiration of the period ending on the date of public release of the results of operations of the Company for the quarter and year ending December 31, 1994 (the "Blackout Period"). In the event that, during the first six (6) months of any seven (7) month period set forth above, the Holder shall, for any reason (other than death), cease to be an officer of the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees (i) to sell to the Company all shares of Common Stock which are subject to restriction for the seven (7) month period during which such event occurred for a price equal to the number of shares of Common Stock multiplied by $9.00 and (ii) to surrender to the Company all Shares which are subject to restriction for the seven (7) month period during which such event occurred. In addition, in the event that, during the Blackout Period, the Holder shall voluntarily terminate his employment with the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees to surrender to the Company all Shares which are or were subject to the Blackout Period. The Holder's New Options will vest as follows: 16,667 shares issuable upon exercise of New Options vested upon grant; 2,470 shares issuable upon exercise of New Options vested on April 22, 1994; 16,666 shares issuable upon exercise of New Options vested on April 30, 1994; 2,469 shares issuable upon exercise of New Options shall vest on April 22, 1995; 16,667 shares issuable upon exercise of New Options shall vest on April 30, 1995; 2,469 shares issuable upon exercise of New Options shall vest on April 22, 1996; In addition to the restrictions set forth above which will be legended on the certificates evidencing the Holder's Shares, the certificates evidencing the Holder's Shares will contain a restrictive legend preventing the Shares from being sold, transferred, pledged, hypothecated or otherwise disposed of until the dates (each, a Restriction Date") set forth next to the amounts below: 8,874 Shares - no additional legend 1,903 Shares - legend is no longer applicable 8,874 Shares - legend is no longer applicable 1,902 Shares - April 22, 1995 8,873 Shares - April 30, 1995 1,902 Shares - April 22, 1996 13 LEWIS GALOOB TOYS, INC. 500 FORBES BOULEVARD SOUTH SAN FRANCISCO, CALIFORNIA 94080 December 20, 1994 H. Alan Gaudie 1448 Ranchita Court Los Altos, California 94024 Dear Mr. Gaudie: Reference is made to that certain Agreement (the "Agreement" ) dated February 15, 1994 by and between you and Lewis Galoob Toys, Inc. This letter shall confirm your agreement to the amendment and restatement in its entirety of Annex A to the Agreement in the form set forth on Revised Annex A attached hereto. Please indicate your acceptance of and agreement with the terms hereof by returning an executed copy of this letter to my attention. Sincerely, LEWIS GALOOB TOYS, INC. By: /s/ Mark Shepherd --------------------------- Mark Shepherd Senior Vice President, Finance and Chief Financial Officer Accepted and Agreed to as of this 20th day of December, 1994. H. Alan Gaudie -------------- H. Alan Gaudie 14 REVISED ANNEX A H. Alan Gaudie The Holder agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any shares of Common Stock acquired upon the exercise of New Options or any interest therein for a period of seven (7) months following such exercise. The Holder further agrees, without the prior written authorization of the Company, not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares for a period of seven (7) months after the applicable Restriction Date (as hereinafter defined) for such Shares. Finally, and in addition to the foregoing, the Holder agrees not to sell, transfer, pledge, hypothecate or otherwise dispose of any Shares until after the expiration of the period ending on the date of public release of the results of operations of the Company for the quarter and year ending December 31, 1994 (the "Blackout Period"). In the event that, during the first six (6) months of any seven (7) month period set forth above, the Holder shall, for any reason (other than death), cease to be an officer of the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees (i) to sell to the Company all shares of Common Stock which are subject to restriction for the seven (7) month period during which such event occurred for a price equal to the number of shares of Common Stock multiplied by $9.00 and (ii) to surrender to the Company all Shares which are subject to restriction for the seven (7) month period during which such event occurred. In addition, in the event that, during the Blackout Period, the Holder shall voluntarily terminate his employment with the Company, then forthwith upon the occurrence of such event, the Holder, upon demand by the Company, hereby agrees to surrender to the Company all Shares which are or were subject to the Blackout Period. The Holder's New Options will vest as follows: 16,667 shares issuable upon exercise of New Options vested upon grant; 8,333 shares issuable upon exercise of New Options shall vest on January 30, 1995; In addition to the restrictions set forth above which will be legended on the certificates evidencing the Holder's Shares, the certificates evidencing the Holder's Shares will contain a restrictive legend preventing the Shares from being sold, transferred, pledged, hypothecated or otherwise disposed of until the dates (each, a Restriction Date") set forth next to the amounts below: 8,874 Shares - no legend 4,437 Shares - January 30, 1995 EX-10.47 3 AGREEMENT BETWEEN MARK GOLDMAN & THE COMPANY 1 EXHIBIT 10.4[7] SEVERANCE AGREEMENT AGREEMENT made as of October 27, 1994 between LEWIS GALOOB TOYS, INC. (the "Corporation" ) and MARK D. GOLDMAN (the "Executive"). WHEREAS, the Executive is currently employed by the Corporation in an executive or key management position capacity and is currently serving as President and Chief Executive Officer, as a member of the Board of Directors and as a member of the Executive Committee of the Board of Directors; and WHEREAS, the Corporation believes by approving this Agreement that it is in the best interest of its stockholders to encourage the Executive to continue his employment with the Corporation; and WHEREAS, the Executive is willing to enter into this Agreement upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the Corporation and Executive agree as follows: 1. Term of Agreement. The term of this Agreement shall commence as of July 13, 1994 and shall continue indefinitely unless terminated by either the Executive or the Corporation subject to the conditions set forth in Section 3 hereto. 2. Position. During the term hereof, the Executive shall continue to serve as an officer or key management employee of the Corporation with the office or position, duties and responsibilities as follows: President and Chief Executive Officer of the Corporation responsible for managing, planning and directing the performance, operation and all other aspects of the Corporation; member of the Board of Directors; and member of the Executive Committee or any other committee, regardless of name, having authority similar to or greater than that currently vested in the Executive Committee (the Executive Committee and such other committee are hereinafter collectively referred to as the "Executive Committee"). 3. Termination of Employment. The termination of the employment of the Executive during the period of this Agreement may occur, under this Agreement, in one of the following ways: a. By the Corporation. The Corporation may terminate the employment of the Executive with "cause." Termination shall be defined to be for "cause" only if: 2 (1) The Executive knowingly and willfully breaches or habitually neglects material duties and responsibilities within the course and scope of his authority as Chief Executive Officer and President of the Corporation; provided, however, the Board of Directors shall have given the Executive written notice specifying the conduct alleged to have constituted such cause and the Executive has failed to cure such conduct, if curable, within thirty (30) days following receipt of such notice. (2) The Executive knowingly and willfully commits an act of dishonesty, fraud, misrepresentation which is materially adverse to the Corporation. b. By the Executive. The Executive may terminate his employment at any time during the period of this Agreement: (1) For any reason, including retirement pursuant to the provisions of the Corporation's retirement plan in effect at the time of termination; or (2) For "good reason." Termination shall be deemed for" good reason" if: (a) the Corporation makes a material change in the Executive's duties, responsibilities or authority, without his express written consent, or any change which would cause the Executive's position with the Corporation to become of less dignity, responsibility, importance or scope from the position and attributes therefor described in Section 2; (b) the Corporation reduces the Executive's base annual salary or annual cash incentive compensation bonus formula; (c) the Corporation elects or appoints anyone other than the Executive as Chairman of the Board; or (d) any of the following events shall occur (each such event shall be referred to hereinafter as a "Change in Control" of the Corporation and shall be deemed to occur as of the first date on which any of the following events occur): (i) A Person shall, in a transaction to which the Corporation is not a party, become the direct or indirect Beneficial Owner of securities of the Corporation representing fifty percent (50%) or more of the combined voting power of the issued and outstanding common stock voting securities of the Corporation ("Majority Owner"). For - 2 - 3 purposes of this Agreement, the terms "Person" and "Beneficial Owner" shall be given the definitions contained in Rule 13d-3 under the Securities Exchange Act of 1934, as amended from time to time. (ii) (A) Directors who constituted the Board of Directors on June 30, 1994, and any other individual(s) who becomes a director subsequent to the date of this Agreement whose election or nomination for election as a director, as the case may be, was initially approved by at least a majority of directors who comprised the Board of Directors as of the date of such election or nomination ("Incumbent Directors") comprise two-thirds (2/3) or less of the Board of Directors; or (B) notwithstanding anything else in this Agreement, including approval by the majority of Incumbent Directors, if the Corporation is a party to a transaction resulting in a Person becoming the direct or indirect Beneficial Owner of the securities of the Corporation representing twenty-five percent (25%) or more of the combined voting power of the issued and outstanding common stock voting securities of the Corporation, and, in conjunction with the transaction or in a period twelve (12) months from the date of that transaction, one-third (1/3) or more of the Board of Directors is composed of directors who were not Incumbent Directors prior to such transaction, or during the period commencing twenty-four (24) months from the date of such transaction, one-half (1/2) or more of the Board of Directors is composed of directors who were not Incumbent Directors prior to such transaction. (iii) The Executive ceases to be a member of the Board of Directors or the Executive Committee. c. By Death or Disability. If the Executive shall be prevented during the term of this Agreement from properly performing services hereunder by reason of illness or other physical or mental incapacity for a period of one hundred eighty (180) consecutive days, the Executive shall terminate his employment with the Corporation. The Agreement shall also terminate upon the death of the Executive. 4. Consequences of Termination. The termination of the employment of the Executive will cause the following results: a. If the termination is by the Corporation for cause or is by the Executive for any reason other than for good reason, the Corporation will pay the Executive within five (5) days after the date of termination any unpaid compensation for services performed prior to the date of termination and the amount of any accrued unused vacation pay to which the Executive may be entitled to under the Corporation's vacation plan; or - 3 - 4 b. If the termination is by the Corporation without cause prior to a Change in Control, or by the Executive for good reason prior to a Change in Control, the Corporation shall pay to the Executive within five (5) days after the date of termination, a lump sum payment equal to two times the Executive's annualized current base compensation and 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 the Executive 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 the Executive 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 (e.g., pre-tax income, operating income, income before preferred dividends, etc.) 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). c. If the termination is by the Corporation within the twenty-four (24) months following a Change in Control, or by the Executive for good reason within twenty-four (24) months following a Change in Control, the Corporation shall pay to the Executive a lump sum payment equal to three times the Executive's annualized current base compensation and the greater of: (1) three times the Annual Bonus or (2) five hundred thousand dollars ($500,000). d. (1) If the termination is by the Corporation without cause within the twenty-four (24) months following a Change in Control, or by the Executive for good reason within the twenty-four (24) months following a Change in Control, the Corporation shall continue, subject to Section 6, for a period of three years following the date of the Executive's termination the applicable benefits under the following employee benefit plans: (a) basic medical, hospitalization and surgical coverage and Major Medical coverage; and (b) executive life insurance and accidental death and dismemberment coverage. (2) In such event, the Corporation shall additionally pay to the Executive a lump sum amount equal to three times the car allowance in effect - 4 - 5 for the Executive at the time of termination and a lump sum amount equal to three times the insurance and maintenance cost incurred for said vehicle during the Executive's last full year of employment with the Corporation. e. The Corporation shall pay to the Executive reasonable attorneys' fees that may be incurred by the Executive in enforcing the terms of this Agreement. f. Nothing in this Agreement shall prevent the Executive from receiving any benefits to which the Executive may be entitled under any plan or program of the Corporation, except any severance pay benefits for which the Executive may otherwise be eligible under any plan, program or policy of the Corporation. g. (1) Notwithstanding anything to the contrary contained herein, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of clause 2(d)(i) of Section 3.b. of this Agreement, or by operation of other agreements or undertakings (including option agreements) but determined without regard to any additional payments required under this Section 4.g.) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any comparable Federal, state or local excise tax (such excise tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") 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 Executive shall retain an amount equal to the Payment minus all ordinary taxes on the Payment. The intent of the parties is that the Corporation shall be solely responsible for, and shall pay, any Excise Tax on any Payment and Gross-Up Payment and any income and employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment, as well as any loss of tax deduction caused by the GrossUp Payment. Appendix 1 to this Agreement presents an illustrative example of the operation of the Gross-Up Payment. (2) All determinations required to be made under this Section 4.g., including, without limitation, whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by Price Waterhouse or any other nationally recognized accounting firm which is the Corporation's outside auditor at the time of such determination, which firm must be reasonably acceptable to the Executive (the "Accounting Firm"). The Corporation shall cause the Accounting Firm to provide detailed supporting calculations to the - 5 - 6 Corporation and the Executive within fifteen (15) business days after notice is given by the Executive to the Corporation that there has been a Payment, or such earlier time as is requested by the Corporation. Within two (2) business days after said notice is given to the Corporation, the Corporation shall instruct the Accounting Firm to timely provide the data required by this Section 4.g. to the Executive. All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Section 4.g., shall be paid by the Corporation to the Internal Revenue Service ("IRS") and/or other appropriate taxing authority on the Executive's behalf within five (5) days after receipt of the Accounting Firm's determination. If the Accounting Firm determines that there is substantial authority (within the meaning of Section 6662 of the Code) that no Excise Tax is payable by the Executive, the Accounting Firm shall furnish the Executive with a written opinion that failure to disclose or report the Excise Tax on the Executive's Federal income tax return will not constitute a substantial understatement of tax or be reasonably likely to result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Corporation and the Executive in the absence of material mathematical or legal error. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that GrossUp Payments will not have been made by the Corporation that should have been made ("Underpayment") or that Gross-Up Payments have been made that should not have been made ("Overpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to Section 4.g.(5) below and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to the IRS or other appropriate taxing authority on the Executive's behalf or, if such Underpayment has been previously paid by the Executive, to the Executive. In the event that the Accounting Firm determines that an Overpayment has been made, any such Overpayment shall be treated for all purposes as a loan to the Executive with interest at the applicable Federal rate provided for in Section 7872(r)(2) of the Code, due and payable with ninety (90) days after written demand to the Executive by the Corporation; provided, however, that the Executive shall have no duty or obligation whatsoever to repay said loan unless the Executive's receipt of the Overpayment, or any portion thereof, is includible in the Executive's income and the Executive's repayment of same is deductible by the Executive for Federal and state income tax purposes. (3) The Executive shall notify the Corporation in writing of any claim by the IRS or state or local taxing authority that, if successful, would result in any Excise Tax or an Underpayment ("Claim"). Such notice shall be given as - 6 - 7 soon as practicable but no more than fifteen (15) business days after the Executive is informed in writing of the Claim and shall apprise the Corporation of the nature of the Claim, the administrative or judicial appeal period, and the date on which any payment of the Claim must be paid. The Executive shall not pay any portion of the Claim prior to the expiration of the thirty (30) day period following the date on which the Executive gives such notice to the Corporation (or such shorter period ending on the date that any amount under the Claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such thirty (30) day period that it desires to contest the Claim, the Executive shall: (a) give the Corporation any information reasonably requested by the Corporation relating to the Claim; (b) take such action in connection with contesting the Claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation concerning the Claim by an attorney selected by the Corporation who is reasonably acceptable to the Executive; and (c) cooperate with the Corporation in good faith in order to effectively contest the Claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including, without limitation, additional interest and penalties and reasonable attorneys' fees) incurred in such contests and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including, without limitation, interest and penalties thereon) imposed as a result of such representation. Without limitation upon the foregoing provisions of this Section 4.g., except as provided below, the Corporation shall control all proceedings concerning such contest and, at its sole option, may pursue or forego any and all administrative appeal, proceedings, hearings and conferences with the taxing authority pertaining to the Claim. At the written request of the Corporation and upon payment to the Executive of an amount at least equal to the Claim plus any additional amount necessary to obtain the jurisdiction of the appropriate tribunal and/or court ("Additional Sum") the Executive shall pay same and sue for a refund. The Executive agrees to prosecute any contest of a Claim to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation requests the Executive to pay the Claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold - 7 - 8 the Executive harmless on an after-tax basis, from any Excise Tax or income tax (including, without limitation, interest and penalties thereon) imposed on such advance or for any imputed income on such advance. Any extension of the statute of limitation relating to assessment of any Excise Tax for the taxable year of the Executive which is the subject of the Claim is to be limited solely to the Claim. Furthermore, the Corporation's control of the contest shall be limited to issues for which a Gross-Up Payment would be payable hereunder. The Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the IRS or any other taxing authority. (4) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to Section 4.g.(3) above, the Executive receives any refund of a Claim and/or any Additional Sum, the Executive shall promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to Section 4.g.(3) above, a final determination or a non-final determination is made by the taxing authority that the Executive shall not be entitled to any refund of the Claim (and, in the case of a non-final determination, the Corporation does not notify the Executive in writing of its intent to contest such denial of refund of a Claim prior to the expiration of thirty (30) days after such determination), then the portion of such advance attributable to a Claim shall be forgiven and shall not be required to be repaid. The amount of such advance attributable to a Claim shall offset, to the extent thereof, the amount of the Underpayment required to be paid by the corporation to the Executive. A "final determination" shall occur when a court of appellate jurisdiction shall have finally adjudicated a claim or when the period to contest or otherwise appeal any decision by an administrative tribunal or court of initial jurisdiction has been waived or the time for contention on appealing same has expired. h. In the event that Payment under this Agreement, except pursuant to the terms of clause 2(d)(i) of Section 3.b., together with all other Payments and the value of any benefit received or to be received by the Executive, would result in all or a portion of such Payment to be subject to excise tax under Section 4999 of the Code, then the Executive's Payment shall be either (i) the full Payment or (ii) such lesser amount which would result in no portion of the Payment being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable Federal, state, and local employment taxes, income taxes, and the excise tax imposed by Section 4999 of the Code, results in the receipt by the Executive, on an after-tax basis, of the greatest amount of the Payment, notwithstanding that all or some portion of the payment may be taxable under Section 4999 of the Code. All determinations required to be made under this Section 4.h. shall be made by the Accounting Firm. The Corporation shall cause the Accounting - 8 - 9 Firm to provide detailed supporting calculations of its determinations to the Corporation and the Executive. Notice must be given to the Accounting Firm within fifteen (15) business days after an event entitling the Executive to a Payment under this Agreement except a Payment pursuant to the terms of clause 2(d)(i) of Section 3.b. All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. The Accounting Firm's determinations must be made with substantial authority (within the meaning of Section 6662 of the Code). 5. Income Tax Withholding. The Corporation may withhold from any benefits payable under this Agreement any Federal, state, city or other taxes as may be required pursuant to any law, regulation or ruling. 6. Nonmitigation. The Executive shall not be required to mitigate the amount of any Payment provided for in Section 4 by seeking other employment, remitting any amounts received in connection with other employment or otherwise; provided, however, that the extended group insurance benefits provided to the Executive under Section 4.d., to the extent not paid, shall terminate when similar group insurance coverage begins upon the Executive's reemployment. 7. Confidentiality. Executive covenants and agrees to regard and preserve as confidential all such proprietary information and trade secrets that have been or may be obtained by the Executive in the course of his employment with the Corporation. 8. Enforceability. If any term or provision of this Agreement or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, then such term or provision shall be modified and construed hereunder in such a manner as to give the fullest effect permissible to its original intent, without rendering such term or provision invalid or unenforceable. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Amendment. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. 10. Notices. Unless either party notifies the other to the contrary, any notice hereunder shall be duly given if delivered in person or by registered first class mail to the party at the Corporation's principal place of business and at the Executive's then primary residence. 11. Remedies. In the event of a breach of this Agreement or if either party shall cause any other party or entity to engage in any act in violation of any provision hereof, the party not causing such breach shall be entitled, in addition to all other - 9 - 10 remedies, to damages and relief available under applicable law, to an injunction prohibiting such other party or person from engaging in any act or specifically enforcing this Agreement, as the case may be. 12. Governing Law. This Agreement shall be subject to, and governed by, the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Agreement as of the date first above written. /s/ Andrew J. Cavannaugh /s/ Mark D. Goldman --------------------------------- ---------------------------------- LEWIS GALOOB TOYS, INC. MARK D. GOLDMAN, President Its Authorized Representative and Chief Executive Officer - 10 - EX-10.411E 4 AGREEMENT BETWEEN LOREN HILDEBRAND & THE COMPANY 1 EXHIBIT 10.4[11][e] March 29, 1994 Mr. Loren H. Hildebrand 38362 Crocus Lane Palm Desert, CA 92260 Dear Loren: In connection with, and in consideration of, your continuing services in the position of Executive Vice President - Sales with Lewis Galoob Toys, Inc. (the "Company"), the Company hereby offers you the following: 1. a. If you are terminated by the Company for reasons other than "cause" (as hereinafter defined), or other than in connection with a change in control of the Company (which is provided for in paragraph 2 below), you will receive a continuation of your base annual salary ("Salary Continuation") that is in effect as of the date of termination of your employment ("Termination Date") and a continuation of certain other benefits as hereinafter provided ("Other Benefits", and collectively with the Salary Continuation "Severance Benefits"), for a maximum period of twelve (12) months from and after the Termination Date ("Extension Period"); provided, however, that from and after your Termination Date you will not receive or be entitled to any continuation of any bonus or profit sharing participation or eligibility for any part or all of the Company's fiscal year in which the Termination Date occurs. Except as provided below, Salary Continuation during the Extension Period will be paid on the Company's normal payroll schedule. If, however, during the Extension Period you commence regular full-time employment elsewhere, your ongoing Severance Benefits shall cease as of the date you commence said employment; provided, however, that as of that date a calculation shall be made to determine the aggregate amount of Salary Continuation (excluding Other Benefits) that remains unpaid and which you would have otherwise been entitled to receive during the remaining portion of the Extension Period, and the Company shall promptly pay you a lump sum (minus withholdings and other required deductions) of an amount equal to one-half (1/2) of that 2 Salary Continuation calculation. b. The Other Benefits referred to in paragraph 1.a. above include all medical, health and welfare and insurance benefits that were in effect and in which you participated as of the Termination Date and these will continue during the Extension Period until the earlier to occur of twelve (12) months from the Termination Date or the date you commence regular full-time employment elsewhere. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by you 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") stops accruing and/or being earned as of your Termination Date and all contributions to the Company's 401k and "cafeteria" benefit plan shall stop as of the Termination Date. c. Your automobile allowance and automobile program benefits, including your Company gasoline credit card and reimbursement for maintenance, insurance and other auto-related expenses, will cease as of the Termination Date and will not be extended to you during the Extension Period. The amount constituting the Salary Continuation that you are paid during the Extension Period will be adjusted downward to eliminate the monthly auto allowance that you were receiving immediately prior to the Termination Date. d. For purposes of this letter, "regular full-time employment elsewhere" shall not include or be deemed to include any situation where you become self-employed, or any self-employment circumstances where you own or control at least 51% percent of the stock or other controlling equity of an entity that serves as your employer and was created after the Termination Date solely for the purpose of your ongoing employment. e. For purposes of this letter, "cause" shall mean: i. Your gross neglect, knowing refusal or wilful failure to properly perform the material duties and responsibilities of your position or to properly perform to a material extent the reasonable directives or instructions of your immediate supervisor, whether any of the foregoing is evidenced by a single act or a series of acts; ii. Your gross neglect, knowing refusal or wilful failure to adhere or conform to, or abide by, the Company's policies and procedures, whether evidenced by a single act or a series of acts; 2 3 iii. Any act or acts of dishonesty, gross negligence, wilfulness, theft, fraud, violations of law (including, but not limited to, convictions of a felony or other crime involving moral turpitude, or the entering of a guilty plea or a plea of nolo contendre in connection with any such felony or moral turpitude charge) or other intentional conduct, whether or not in the course of or outside the scope of your employment, which in the reasonable opinion of the Company has had, or may or will have, a material adverse effect on the Company's business, property, goodwill or reputation. 2. Change in Control a. For purposes of this letter, a "change in control" of the Company shall be deemed to occur as of the date on which: (i) a person or entity or group of persons or entities, acting in concert ("Person") shall, in a transaction in which the Company is not a party, become the direct or indirect beneficial owner (within the meaning of Rule 13d-3 of the Securities and Exchange Act of 1934, as amended from time to time) of securities of the Company representing fifty-one percent (51%) or more of the combined voting power of the issued and outstanding voting securities of the Company (a "Majority Owner") and/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 letter and any other individual(s) who becomes a Director subsequent to the date of this letter whose election or nomination for election as a Director, as the case may be, was approved by at least a majority of the Directors who comprise the incumbent Directors as of the date of such election or nomination ("Incumbent Directors"); provided, however, that if the composition of the Company's Board of Directors changes after or in conjunction with a transaction to which the Company is a party that results in a Person becoming a Majority Owner then, for purposes of this Paragraph 3(a), and notwithstanding the approval of the majority of the Incumbent Directors, a change in control will be deemed to have taken place if there is a change in more than one-third (1/3) of the Board of Directors during the twelve (12) month period following such a transaction or in more than one-half (1/2) of the Board of Directors during the twenty-four (24) month period following such a transaction. 3 4 b. Subject to paragraph 2.d. below, if within a period of eighteen (18) months following the date of such a change in control: -- you are either terminated for reasons other than cause, or -- you experience a material diminution of your job responsibilities or authority or a demotion in the level of your reporting relationship or a reduction in your then-existing salary, or you are required to relocate outside of the San Francisco Bay area, and within thirty (30) days from the occurrence of such act you exercise your right to terminate your employment by written notice to the Company, then upon such Termination Date you will receive the following: (i) A lump sum payment (minus withholdings and other required deductions) of an amount equal to two (2) times your total base annual salary that is in effect immediately prior to the Termination Date, plus twenty-four (24) times the amount to which you are then entitled for the monthly automobile allowance; and (ii) An additional lump sum payment (minus withholdings and other required deductions) of an amount equal to the greater of two (2) times: (x) the bonus that was actually paid to you for the year's results for the Company's fiscal year immediately preceding the year in which your Termination Date occurs, or (y) the bonus anticipated, if any, for the current fiscal year in which your Termination Date occurs based upon the actual results as compared to the Company's financial plan as of such Termination Date. For clarification purposes, an example of this alternative bonus calculation is set forth in Schedule 1, which is attached hereto and hereby made part of this letter. It is also acknowledged that the amount payable under this subparagraph may be zero if there was no bonus paid in the preceding year and no bonus anticipated in the current year as of the Termination Date. c. Subject to paragraph 2.d. below, in addition to the lump sum payments provided for in paragraph 2.b. above, upon termination of your employment pursuant to such paragraph 2.b. you will also receive and be entitled to the following: 4 5 (i) All Other Benefits that were in effect and in which you participated immediately prior to the Termination Date, for a period of twenty-four (24) months following the Termination Date. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by you 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 FTO stops accruing and/or being earned as of your Termination Date and all contributions to the Company's 401k and "cafeteria" benefit plan shall stop as of the Termination Date. (ii) In addition to the lump sum payment of the monthly automobile allowance (referred to in paragraph 2.b.(i) above), for the period of twenty four (24) months following the Termination Date you will 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 on the Termination Date and from time to time thereafter. d. It is acknowledged and understood that the compensation plus other benefits for which you are otherwise eligible pursuant to a change in control of the Company in accordance with paragraphs 2b. and c. above may constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and that payment of the aggregate total of such compensation and benefits could constitute an "excess parachute payment" under Section 280G of the Code if it equals an amount in excess of 2.99 times your "Base Amount" as that term is defined in said Section 280G, thereby resulting in some or all of such aggregate total being subject to the excise tax under Section 4999 of the Code. (See attached letter from Shereff, Friedman for further explanation.) It is agreed that in such event the aggregate total of such compensation and benefits shall be reduced by the minimum amount necessary so that no portion thereof will be subject to the excise tax under Section 4999 of the Code. It is also understood and agreed that the Company will not "gross-up" or make any other additional payments to you that are intended, directly or indirectly, to partially or wholly offset any such excise tax obligations. 5 6 - 5 - 3. This letter and the other documents expressly referenced herein constitute the sole and exclusive agreement between you and the Company with regard to the specific subject matter contained herein concerning your severance for a termination other than for cause, the definition of "cause", and a change in control, and this letter supersedes and replaces that portion of any prior agreement or covenant, whether written or oral, between you and the Company expressly covering any one or more of these specific items. However, subject to this paragraph 3 and except as expressly set forth and/or amended herein, any other written agreement that you have with the Company concerning your current employment will remain in full force and effect. 4. The terms and conditions of this letter shall continue in full force and effect for a period of twenty-four (24) months from the date of this letter, at which time such terms and conditions shall automatically terminate unless renewed in writing by the Company, or unless prior to that date you have been terminated pursuant to the terms hereof or a change in control has occurred in which event the terms and conditions of this letter will continue for the purposes thereof. Please sign and date the duplicate originals of this letter in the place provided below, retain one fully executed original for your file and return the other fully executed original to my attention. Sincerely yours, LEWIS GALOOB TOYS, INC. /s/ William G. Catron ------------------------ William G. Catron Executive Vice President, General Counsel and Chief Administrative Officer ACCEPTED AND AGREED TO THIS 29th DAY OF March, 1994: /s/ Loren H. Hildebrand ------------------------ Loren H. Hildebrand 6 7 Attachments - Schedule 1 SCHEDULE 1 BONUS CALCULATION EXAMPLE Pursuant to paragraph 2.b.(ii) of the letter dated March 30, 1995, to which this Schedule is attached, assume that the executive has a bonus potential based upon achievement of the annual income plan as follows:
PLAN BONUS POTENTIAL ---- --------------- 150% 100% 125% 75% 100% 50% 90% 25%
Assume that the executive in question has a maximum bonus potential of 75% of base salary. As the table above illustrates, at 150% of plan, that executive can earn the maximum available bonus or, in this case, 75% of base. If the executive in question had a base salary of $250,000 per year, then the maximum bonus potential in the year for that executive would be $187,500. Let us assume that the termination of employment for this executive pursuant to paragraph 3.b. of the letter occurs as of June 30 of a particular year. If the net income plan for the Company through June 30 of the year in question was to earn $1 million, and actual earning were $1.5 million, then the executive in question would qualify for a bonus of 2 X $187,500 as the bonus plan component pursuant to paragraph 3.b.(ii)(y) of the letter. In the event that this payment is larger than 2 X the bonus paid to the executive in connection with the previous year's results, he would be paid 2 X $187,500 pursuant to paragraph 3.b.(ii). In the event that the bonus paid to the executive in connection with the previous year's results was higher than $187,500, the executive will be paid 2 X the previous year's bonus payment, as the payment component pursuant to paragraph 3.b.(ii). 7 EX-10.411F 5 AGREEMENT BETWEEN WILLIAM TOWNE & THE COMPANY 1 EXHIBIT 10.4 [11][f] March 28, 1995 Mr. William B. Towne 59 Hawxhurst Road Cold Spring Harbor, New York 11724 Dear Bill: In connection with, and in consideration of, your continuing services in the position of Executive Vice President - Finance and Chief Financial Officer, with Lewis Galoob Toys, Inc. (the "Company"), the Company hereby offers you the following: 1. a. If you are terminated by the Company for reasons other than "cause" (as hereinafter defined), or other than in connection with a change in control of the Company (which is provided for in paragraph 2 below), you will receive a continuation of your base annual salary ("Salary Continuation") that is in effect as of the date of termination of your employment ("Termination Date") and a continuation of certain other benefits as hereinafter provided ("Other Benefits", and collectively with the Salary Continuation "Severance Benefits"), for a maximum period of twelve (12) months from and after the Termination Date ("Extension Period"); provided, however, that from and after your Termination Date you will not receive or be entitled to any continuation of any bonus or profit sharing participation or eligibility for any part or all of the Company's fiscal year in which the Termination Date occurs. Except as provided below, Salary Continuation during the Extension Period will be paid on the Company's normal payroll schedule. If, however, during the Extension Period you commence regular full-time employment elsewhere, your ongoing Severance Benefits shall cease as of the date you commence said employment; provided, however, that as of that date a calculation shall be made to determine the aggregate amount of Salary Continuation (excluding Other Benefits) that remains unpaid and which you would have otherwise been entitled to receive during the remaining portion of the Extension Period, and the Company shall promptly pay you a lump sum (minus withholdings and other required deductions) of an amount equal 2 Mr. William B. Towne February 27, 1995 to one-half (1/2) of that Salary Continuation calculation. b. The Other Benefits referred to in paragraph 1.a. above include all medical, health and welfare and insurance benefits that were in effect and in which you participated as of the Termination Date and these will continue during the Extension Period until the earlier to occur of twelve (12) months from the Termination Date or the date you commence regular full-time employment elsewhere. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by you 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") stops accruing and/or being earned as of your Termination Date and all contributions to the Company's 401k and "cafeteria" benefit plan shall stop as of the Termination Date. c. Your automobile allowance and automobile program benefits, including your Company gasoline credit card and reimbursement for maintenance, insurance and other auto-related expenses, will cease as of the Termination Date and will not be extended to you during the Extension Period. The amount constituting the Salary Continuation that you are paid during the Extension Period will be adjusted downward to eliminate the monthly auto allowance that you were receiving immediately prior to the Termination Date. d. For purposes of this letter, "regular full-time employment elsewhere" shall not include or be deemed to include any situation where you become self-employed, or any self-employment circumstances where you own or control at least 51% percent of the stock or other controlling equity of an entity that serves as your employer and was created after the Termination Date solely for the purpose of your ongoing employment. e. For purposes of this letter, "cause" shall mean: i. Your gross neglect, knowing refusal or wilful failure to properly perform the material duties and responsibilities of your position or to properly perform to a material extent the reasonable directives or 10 3 Mr. William B. Towne February 27, 1995 instructions of your immediate supervisor, whether any of the foregoing is evidenced by a single act or a series of acts; ii. Your gross neglect, knowing refusal or wilful failure to adhere or conform to, or abide by, the Company's policies and procedures, whether evidenced by a single act or a series of acts; iii. Any act or acts of dishonesty, gross negligence, wilfulness, theft, fraud, violations of law (including, but not limited to, convictions of a felony or other crime involving moral turpitude, or the entering of a guilty plea or a plea of nolo contendre in connection with any such felony or moral turpitude charge) or other intentional conduct, whether or not in the course of or outside the scope of your employment, which in the reasonable opinion of the Company has had, or may or will have, a material adverse effect on the Company's business, property, goodwill or reputation. 2. Change in Control a. For purposes of this letter, a "change in control" of the Company shall be deemed to occur as of the date on which: (i) a person or entity or group of persons or entities, acting in concert ("Person") shall, in a transaction in which the Company is not a party, become the direct or indirect beneficial owner (within the meaning of Rule 13d-3 of the Securities and Exchange Act of 1934, as amended from time to time) of securities of the Company representing fifty-one percent (51%) or more of the combined voting power of the issued and outstanding voting securities of the Company (a "Majority Owner") and/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 letter and any other individual(s) who becomes a Director subsequent to the date of this letter whose election or nomination for election as a Director, as the case may be, was approved by at least a majority of the Directors who comprise the incumbent Directors as of the date of such election or nomination ("Incumbent Directors"); provided, however, that if the composition of the Company's Board of Directors changes after or in conjunction with a transaction to which the Company is a party that results in a Person becoming a Majority Owner then, for 11 4 Mr. William B. Towne February 27, 1995 purposes of this Paragraph 3(a), and notwithstanding the approval of the majority of the Incumbent Directors, a change in control will be deemed to have taken place if there is a change in more than one-third (1/3) of the Board of Directors during the twelve (12)month period following such a transaction or in more than one-half (1/2) of the Board of Directors during the twenty-four (24) month period following such a transaction. b. Subject to paragraph 2.d. below, if within a period of eighteen (18) months following the date of such a change in control: -- you are either terminated for reasons other than cause, or -- you experience a material diminution of your job responsibilities or authority or a demotion in the level of your reporting relationship or a reduction in your then-existing salary, or you are required to relocate outside of the San Francisco Bay area, and within thirty (30) days from the occurrence of such act you exercise your right to terminate your employment by written notice to the Company, then upon such Termination Date you will receive the following: (i) A lump sum payment (minus withholdings and other required deductions) of an amount equal to two (2) times your total base annual salary that is in effect immediately prior to the Termination Date, plus twenty-four (24) times the amount to which you are then entitled for the monthly automobile allowance; and (ii) An additional lump sum payment (minus withholdings and other required deductions) of an amount equal to the greater of two (2) times: (x) the bonus that was actually paid to you for the year's results for the Company's fiscal year immediately preceding the year in which your Termination Date occurs, or (y) the bonus anticipated, if any, for the current fiscal year in which your Termination Date occurs based upon the actual results as compared to the Company's financial plan as of such Termination Date. For clarification purposes, an example of this alternative bonus calculation is set forth in Schedule 1, which is attached hereto and hereby made part of this 12 5 Mr. William B. Towne February 27, 1995 letter. It is also acknowledged that the amount payable under this subparagraph may be zero if there was no bonus paid in the preceding year and no bonus anticipated in the current year as of the Termination Date. c. Subject to paragraph 2.d. below, in addition to the lump sum payments provided for in paragraph 2.b. above, upon termination of your employment pursuant to such paragraph 2.b. you will also receive and be entitled to the following: (i) All Other Benefits that were in effect and in which you participated immediately prior to the Termination Date, for a period of twenty-four (24) months following the Termination Date. The provisions and conditions covering these Other Benefits, including but not limited to the amount of any contributions to be made by you 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 FTO stops accruing and/or being earned as of your Termination Date and all contributions to the Company's 401k and "cafeteria" benefit plan shall stop as of the Termination Date. (ii) In addition to the lump sum payment of the monthly automobile allowance (referred to in paragraph 2.b.(i) above), for the period of twenty four (24) months following the Termination Date you will 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 on the Termination Date and from time to time thereafter. d. It is acknowledged and understood that the compensation plus other benefits for which you are otherwise eligible pursuant to a change in control of the Company in accordance with paragraphs 2b. and c. above may constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and that payment of the aggregate total of such compensation and benefits could constitute an 13 6 Mr. William B. Towne February 27, 1995 "excess parachute payment" under Section 280G of the Code if it equals an amount in excess of 2.99 times your "Base Amount" as that term is defined in said Section 280G, thereby resulting in some or all of such aggregate total being subject to the excise tax under Section 4999 of the Code. (See attached letter from Shereff, Friedman for further explanation.) It is agreed that in such event the aggregate total of such compensation and benefits shall be reduced by the minimum amount necessary so that no portion thereof will be subject to the excise tax under Section 4999 of the Code. It is also understood and agreed that the Company will not "gross-up" or make any other additional payments to you that are intended, directly or indirectly, to partially or wholly offset any such excise tax obligations. 3. This letter and the other documents expressly referenced herein constitute the sole and exclusive agreement between you and the Company with regard to the specific subject matter contained herein concerning your severance for a termination other than for cause, the definition of "cause", and a change in control, and this letter supersedes and replaces that portion of any prior agreement or covenant, whether written or oral, between you and the Company expressly covering any one or more of these specific items. However, subject to this paragraph 3 and except as expressly set forth and/or amended herein, any other written agreement that you have with the Company concerning your current employment will remain in full force and effect. 4. The terms and conditions of this letter shall continue in full force and effect for a period of twenty-four (24) months from the date of this letter, at which time such terms and conditions shall automatically terminate unless renewed in writing by the Company, or unless prior to that date you have been terminated pursuant to the terms hereof or a change in control has occurred in which event the terms and conditions of this letter will continue for the purposes thereof. Please sign and date the duplicate originals of this letter in the place provided below, retain one fully executed original for your file and return the other fully executed original to my attention. Sincerely yours, LEWIS GALOOB TOYS, INC. 14 7 Mr. William B. Towne February 27, 1995 /s/ William G. Catron --------------------- William G. Catron Executive Vice President, General Counsel and Chief Administrative Officer ACCEPTED AND AGREED TO THIS 29th DAY OF March, 1995: /s/ William B. Towne --------------------- William B. Towne Attachments - Schedule 1 SCHEDULE 1 BONUS CALCULATION EXAMPLE Pursuant to paragraph 2.b.(ii) of the letter dated March 30, 1995, to which this Schedule is attached, assume that the executive has a bonus potential based upon achievement of the annual income plan as follows:
PLAN BONUS POTENTIAL ---- --------------- 150% 100% 125% 75% 100% 50%
15 8 Mr. William B. Towne February 27, 1995 90% 25%
Assume that the executive in question has a maximum bonus potential of 75% of base salary. As the table above illustrates, at 150% of plan, that executive can earn the maximum available bonus or, in this case, 75% of base. If the executive in question had a base salary of $250,000 per year, then the maximum bonus potential in the year for that executive would be $187,500. Let us assume that the termination of employment for this executive pursuant to paragraph 2.b. of the letter occurs as of June 30 of a particular year. If the net income plan for the Company through June 30 of the year in question was to earn $1 million, and actual earning were $1.5 million, then the executive in question would qualify for a bonus of 2 X $187,500 as the bonus plan component pursuant to paragraph 2.b.(ii)(y) of the letter. In the event that this payment is larger than 2 X the bonus paid to the executive in connection with the previous year's results, he would be paid 2 X $187,500 pursuant to paragraph 2.b.(ii). In the event that the bonus paid to the executive in connection with the previous year's results was higher than $187,500, the executive will be paid 2 X the previous year's bonus payment, as the payment component pursuant to paragraph 2.b.(ii). 16 EX-10.77B 6 AMENDED AND RESTATED LOAN & SECURITY AGREEMENT 1 EXECUTION COPY EXHIBIT 10.7[7][b] AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT Dated as of March 31, 1995 between LEWIS GALOOB TOYS, INC. 500 Forbes Boulevard South San Francisco, CA 94080 and CONGRESS FINANCIAL CORPORATION (CENTRAL) 100 South Wacker Drive Chicago, Illinois 60606 2 TABLE OF CONTENTS Page ---- SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Interrelationship with the Original Agreement . . . . . . . . . . . . . . . 18 SECTION 2. LOANS; TERM; EARLY TERMINATION . . . . . . . . . . . . . . . . . . . . . . 18 2.1 Revolving Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.2 Loan Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.3 Maximum Loan Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.4 Amounts Charged to Debtor's Account; Place of Payment . . . . . . . . . . . 20 2.5 Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.6 Early Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 3. INTEREST AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 3.2 Default Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.3 Interest Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.4 Unused Line Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.5 Management Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.6 Closing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.7 Maximum Credit Increase Fee . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 4. LETTER OF CREDIT FACILITY . . . . . . . . . . . . . . . . . . . . . . . . 23 4.1 Letter of Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.2 Letter of Credit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.3 Letter of Credit Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.4 Letter of Credit Claims . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 5. SECURITY INTEREST AND COLLATERAL . . . . . . . . . . . . . . . . . . . . . 25 5.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 6. COLLECTION AND ADMINISTRATION OF ACCOUNTS AND CASH MANAGEMENT RELATIONSHIPS . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.1 Collection by Debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.2 Rights of Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.3 Reclaimed Goods; Account Adjustments . . . . . . . . . . . . . . . . . . . 27 6.4 Lockboxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 7. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . 28 7.1 Collateral Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.2 Location of Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.3 Representations as to Eligible Accounts . . . . . . . . . . . . . . . . . . 29 7.4 Investigations and Litigation . . . . . . . . . . . . . . . . . . . . . . . 29 7.5 Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.6 Corporate Organization; Foreign Qualification; Subsidiaries . . . . . . . . 30 7.7 Use of Corporate Name . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.8 No Default Under Other Contracts . . . . . . . . . . . . . . . . . . . . . 30
i 3 Page 7.9 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.10 Adequate Licenses, Patents, etc. . . . . . . . . . . . . . . . . . . . . 30 7.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.12 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.13 Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.14 Representations as to Inventory and Equipment . . . . . . . . . . . . . 31 7.15 Location of Cash Accounts . . . . . . . . . . . . . . . . . . . . . . . 32 7.16 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.17 Internal Controversies . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 8. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.1 Financial Information; Maintenance of Forms . . . . . . . . . . . . . . 33 8.2 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.3 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.4 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.5 Sale of Assets; Preservation of Corporate Existence . . . . . . . . . . 35 8.6 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 8.7 Liability for Indebtedness of Third Parties . . . . . . . . . . . . . . 36 8.8 Officer Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 36 8.9 Redemption of Capital Stock; Dividends . . . . . . . . . . . . . . . . . 36 8.10 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . 37 8.11 Payment on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . 37 8.12 Amendment of Articles of Incorporation . . . . . . . . . . . . . . . . . 37 8.13 Maintenance of Liability and Casualty Insurance . . . . . . . . . . . . 37 8.14 Litigation; Contested Taxes . . . . . . . . . . . . . . . . . . . . . . 38 8.15 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 8.16 Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 8.17 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 8.18 Notices of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 8.19 Maintenance of Records of Accounts . . . . . . . . . . . . . . . . . . . 42 8.20 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 8.21 Covenants as to Inventory and Equipment . . . . . . . . . . . . . . . . 42 8.22 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . 44 (a) Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . 44 (b) Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . 44 8.23 Loan Agreement as Financing Statement . . . . . . . . . . . . . . . . . 44 8.24 Location and Use of Collateral . . . . . . . . . . . . . . . . . . . . . 44 8.25 Location of Chief Executive Office . . . . . . . . . . . . . . . . . . . 44 SECTION 9. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . 44 9.1 Conditions Precedent to Rollover Advance . . . . . . . . . . . . . . . . 44 9.2 Conditions Precedent to All Advances . . . . . . . . . . . . . . . . . . 46 SECTION 10. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 10.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 10.2 Effect of Event of Default; Remedies . . . . . . . . . . . . . . . . . . 49 10.3 Possession of Collateral by Judicial Process . . . . . . . . . . . . . . 49 10.4 Notice of Public Sale . . . . . . . . . . . . . . . . . . . . . . . . . 49 10.5 Net Cash Proceeds Deficiency or Excess . . . . . . . . . . . . . . . . . 49 10.6 Remedies Not Exclusive . . . . . . . . . . . . . . . . . . . . . . . . . 50 10.7 No Waiver of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 50
ii 4 Page 10.8 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 10.9 Additional Remedies in Respect of Inventory . . . . . . . . . . . . . . 50 SECTION 11. TAXES; EXPENSES; INDEMNITY . . . . . . . . . . . . . . . . . . . . . . 51 11.1 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 11.2 General Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 11.3 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 11.4 Benefits of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 12. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 12.1 GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL; WAIVER OF DAMAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 12.2 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 12.3 Modification of Agreement . . . . . . . . . . . . . . . . . . . . . . . 55 12.4 Reimbursement for Congress' Costs . . . . . . . . . . . . . . . . . . . 55 12.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 12.6 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 12.7 Waiver of Notice, Hearing and Bond . . . . . . . . . . . . . . . . . . 57 12.8 Advice of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 12.9 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 12.10 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 12.11 Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 12.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 12.13 No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . 59 12.14 Existing Agreements Superseded . . . . . . . . . . . . . . . . . . . . 59
iii 5 Schedules ---------
Page Schedule 1.1(a) - Description of Headquarters Property Schedule 1.1(b) - Certain Permitted Indebtedness Schedule 1.1(c) - Galco Investment Schedule 1.1(d) - Inactive Subsidiaries Schedule 7.2 - Location of Offices and Records Schedule 7.4 - Investigations and Litigation Schedule 7.6 - Subsidiaries Schedule 7.9 - Compliance with Laws Schedule 7.10 - Licenses Schedule 7.11(a) - ERISA Matters Schedule 7.11(b) - Multi-Employer Plans Schedule 7.13 - Environmental Matters Schedule 7.14(b) - Locations of Collateral Schedule 7.15 - Locations of Cash Accounts Schedule 8.4 - Certain Permitted Liens Schedule 8.6 - Certain Permitted Investments Schedule 8.7 - Accommodation Obligations Schedule 8.8 - Officer's Compensation Schedule 8.15 - Funding Deficiencies Schedule 9.1(b)(ii) - Form of Amended and Restated Revolving Note Schedule 9.1(b)(vi) - UCC Search Results Schedule 9.1(b)(vii) - Form of Debtor Secretary's Certificate Schedule 9.1(b)(viii) - Form of Closing Certificate
iv 6 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated as of March 31, 1995 (as the same may be modified, amended, extended, restated or supplemented from time to time, this "Agreement") is entered into by and between LEWIS GALOOB TOYS, INC., a Delaware corporation ("Debtor"), whose principal place of business is located at 500 Forbes Boulevard, South San Francisco, California 94080, and CONGRESS FINANCIAL CORPORATION (CENTRAL), an Illinois corporation ("Congress"), having an office at 100 South Wacker Drive, Suite 1940, Chicago, Illinois 60606, AMENDS AND RESTATES IN FULL the Loan and Security Agreement dated as of April 1, 1993, among the Debtor and Congress, as previously amended by that certain First Amendment dated as of November 17, 1993 (such agreement, as so amended, the "Original Agreement"). W I T N E S S E T H: WHEREAS, the Debtor and Congress entered into the Original Agreement pursuant to which the Debtor obtained from Congress a $40,000,000 revolving credit facility for the purposes indicated therein; WHEREAS, the Debtor and Congress desire to amend and restate the Original Agreement in full as set forth herein; WHEREAS, the Debtor has requested that Congress enter into this Agreement in order to continue to make Revolving Loans to the Debtor in an aggregate amount of up to $60,000,000 and to provide Letters of Credit to the Debtor in order to refinance the existing indebtedness under the Original Agreement and to continue to obtain revolving loans and advances to provide for its letter of credit and ongoing working capital requirements; WHEREAS, it is the intent of the Debtor and Congress that this Agreement amend and restate in its entirety the Original Agreement and that, from and after the date hereof, the Original Agreement shall be of no force and effect except to evidence the terms and conditions under which the Debtor heretofore has incurred obligations and liabilities to Congress as evidenced by the Original Agreement and Congress' books and records. WHEREAS, this Agreement is made in renewal, amendment, restatement and modification of the obligations under the Original Agreement; NOW, THEREFORE, in consideration of the premises, the mutual covenants set forth herein, and for other good and 1 7 valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor and Congress agree as follows: SECTION 1. DEFINITIONS. 1.1 Definitions. All terms used herein which are defined in Article 1 or Article 9 of the Illinois Uniform Commercial Code (the "UCC") shall have the meanings given therein, unless otherwise defined in this Agreement, and all references to the plural shall also mean the singular. Any accounting term used herein and not specifically defined herein shall have the meaning customarily given to such term in accordance with GAAP. When used herein, the following terms shall have the following meanings: "Accommodation Obligation" of any Person shall mean any direct or indirect guaranty or other contractual obligation, contingent or otherwise, of such Person with respect to any Indebtedness or other obligation or liability of another, including any such Indebtedness, obligation or liability directly or indirectly guaranteed, endorsed (other than for collection or deposit in the ordinary course of business), co-made or discounted or sold with recourse by such Person, or in respect of which such Person is otherwise directly or indirectly liable, including any contractual obligations (contingent or otherwise) arising through any agreement to purchase, repurchase, or otherwise acquire such Indebtedness, obligation or liability or any security therefor, or to provide funds for the payment or discharge thereof (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, or other financial condition. "Account Debtor" shall mean each account debtor or obligor in any way obligated on or in connection with any Account. "Accounts" shall mean all of Debtor's present and future accounts, as such term is defined in the UCC, including, without limitation, all obligations for the payment of money arising out of Debtor's sale, lease or other disposition of goods or other property or rendition of services. "Acquisition" shall mean the Debtor's acquisition of all of the capital stock or assets of another company in the same or similar line of business as the Debtor, which acquisition shall be subject to the conditions set forth in the definition of "Permitted Investments" set forth herein. "Advance" shall mean any loan or extension of credit by Congress pursuant to the Loan Documents, including the face amount of any Letter of Credit issued pursuant to Section 4.1 hereof. 2 8 "Affiliate" shall mean any Person (i) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with Debtor, other than officers and directors of Debtor, unless any such officer or director satisfies clause (ii) below, (ii) that directly or beneficially owns or holds thirty-five percent (35%) or more of any class of the voting stock of Debtor or (iii) thirty-five percent (35%) or more of whose voting stock equity interests are owned directly or beneficially or held by Debtor. Nothing herein shall be deemed to constitute an agreement by the Debtor with respect to the definition of "Affiliate" for the purposes of the securities laws of the United States. "Agreement" shall have the meaning set forth in the preamble to this Agreement. "Availability Report" shall mean with respect to any date, a borrowing base certificate of the chief financial officer or any controller of Debtor in such form as Congress may prescribe from time to time, certifying, among other things, (i) a schedule of Debtor's calculation of the Net Amount of Eligible Accounts and (ii) a schedule of Debtor's calculation of the Value of Eligible Inventory, in each case, giving effect to all objectively determinable standards of eligibility known by the Debtor to be in effect (which calculations shall not be binding on Congress). "Bankruptcy Code" shall mean Title 11 of the United States Code (11 U.S.C. Section 101 et seq.) as amended from time to time, and any successor statute. "Benefit Plan" shall mean any employee benefit plan as defined in Section 3(3) of ERISA, other than a Multiemployer Plan, which is subject to Title IV of ERISA and in respect of which Debtor, or any ERISA Affiliate of Debtor, is, or at any time during the immediately preceding five years was, an "employer" (as defined in Section 3(5) of ERISA). "Business Day" shall mean any day other than a Saturday, Sunday or public holiday or the equivalent for banks in Chicago, Illinois or New York, New York. "Capital Lease" shall mean any lease which is or should be capitalized on the balance sheet of lessee in accordance with GAAP. "Cash Equivalents" shall mean (i) securities issued, guaranteed or insured by the United States or any of its agencies with maturities of not more than one year from the date acquired, (ii) certificates of deposit with maturities of not more than one year from the date acquired issued by a U.S. federal or state chartered commercial bank of recognized standing, which has capital and unimpaired surplus in excess of $200,000,000 and 3 9 which bank or its holding company has a short term commercial paper rating of at least A-2 or the equivalent by Standard & Poor's Corporation or at least P-2 or the equivalent by Moody's Investors Services, Inc., (iii) commercial paper or finance company paper issued by any Person incorporated under the laws of the United States or any state thereof and rated at least A-2 or the equivalent by Standard & Poor's Corporation or at least P-2 or the equivalent by Moody's Investors Services, Inc., in each case with maturities of not more than one year from the date acquired, (iv) investments in money market funds registered under the Investment Company Act of 1940, which have net assets of at least $200,000,000 and at least eighty five percent (85%) of whose assets consist of securities and other obligations of the type described in clauses (i) through (iii) above, and (v) interest bearing or time deposits which are insured by the Federal Deposit Insurance Corporation or a similar federal insurance program; provided, however, that the Debtor may, in the ordinary course of its business, maintain in its disbursement accounts from time to time amounts in excess of such then applicable program insurance limits. "Change in Control" shall mean one or more of the following events: (a) less than a majority of the members of the Debtor's board of directors (other than members of the Board of Directors elected by holders of the Debtor's preferred stock) shall be persons (i) who were serving as directors on the Closing Date or (ii) who are elected or nominated for election after the Closing Date by at least a majority of directors who comprised the Board of Directors as of the date of such election or nomination; or (b) the stockholders of the Debtor shall approve any plan or proposal for the liquidation or dissolution of the Debtor; or (c) a Person or group of Persons acting in concert (other than the direct or indirect beneficial owners of the capital stock of the Debtor as of the Closing Date) shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become the direct or indirect beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended from time to time) of securities of the Debtor representing more than thirty- five percent (35%) of the combined voting power of the outstanding voting securities for the election of directors or shall have the right to elect a majority of the Board of directors of the Debtor. "Closing Date" shall mean the first date on which all of the conditions to Congress' obligation to make the Rollover Advance have been satisfied. 4 10 "Collateral" shall have the meaning set forth in Section 5.1 hereof. "Collections" shall mean all cash, checks, remittances and other cash proceeds of Collateral or other property received by or payable to or in respect of Debtor. "Consolidated Tangible Net Worth" shall mean, as of any date, (a) the excess of the Debtor's total assets over its total liabilities (other than any Indebtedness under the Convertible Subordinated Debentures), as determined in accordance with GAAP on a consolidated basis, less (b) the value of all intangible assets as defined by GAAP including, without limitation, goodwill, organization costs, patents, trademarks, copyrights, franchises, research and development expenses, and any amount reflected as treasury stock. "Convertible Subordinated Debentures" shall mean the Debtor's $14,000,000 principal amount of 8.0% Convertible Subordinated Debentures due 2000 issued pursuant to the Convertible Subordinated Debenture Indenture. "Convertible Subordinated Debenture Indenture" shall mean the indenture governing the Convertible Subordinated Debentures, dated as of November 17, 1993, from the Debtor to Continental Stock Transfer & Trust Company, as Trustee. "Credit Reserve" shall mean on any day (a "Measurement Day"): (A) during the period commencing August 1 of each year and ending on the last day of December of such year an amount equal to the lesser of: (i) $3,000,000, or such greater amount as Congress shall determine is necessary in the exercise of its Permitted Discretion based upon, among other things, a review of the actual level of Cumulative Daily Sales during such period, and (ii) the sum of (a) five percent (5%) of Cumulative Daily Sales through the day immediately preceding such Measurement Day less (b) the Cumulative Daily Credits through the day immediately preceding such Measurement Day, or such greater amount as Congress shall determine in the exercise of its Permitted Discretion; or (B) during the period commencing January 1 of each year and ending on the last day of July of such year an amount equal to the Credit Reserve in effect as of December 31 as calculated pursuant to clause (A) above as such amount may be reduced by Congress from time to time in the exercise of its Permitted 5 11 Discretion based upon a review of the level of actual credits against the Eligible Accounts; provided, however, that at no time during the year shall the amount of the Credit Reserve as calculated pursuant to clause (A) or (B) above be less than $1,000,000 or such other amount as Congress shall determine from time to time in the exercise of its Permitted Discretion. "Cumulative Daily Credits" shall mean on any day during the period commencing December 1 and ending December 31, the aggregate amount of domestic non-cash credits or reductions of Accounts during such period through such day. "Cumulative Daily Sales" shall mean on any day during the period commencing August 1 and ending on the immediately succeeding November 30, the aggregate amount of domestic non-cash sales during such period through such day. "Customer Sales Reports" shall mean the retail tracking reports generated by the Debtor from information received from Toys-R-Us and other retail customers detailing such retail customer's (i) inventory stock status of the Debtor's products and (ii) sales of the Debtor's products. "Eligible Accounts" shall mean Accounts created by Debtor in the ordinary course of business arising out of Debtor's sale of goods or rendition of services, which are and at all times shall continue to be acceptable to Congress in all respects. Standards of eligibility may be fixed and revised from time to time solely by Congress in the exercise of its Permitted Discretion, based upon the information then available to Congress. In determining eligibility, Congress may, but need not, rely on agings, reports and schedules of Accounts furnished by Debtor, but reliance by Congress thereon from time to time shall not be deemed to limit Congress' right to revise standards of eligibility at any time as to both Debtor's present and future Accounts in accordance with the terms hereof. In general, an Account shall not be deemed eligible unless: (a) the Account Debtor on such Account is and at all times continues to be acceptable to Congress, (b) such Account complies in all respects with the representations, covenants and warranties hereinafter set forth, and (c) no more than 120 days have elapsed since the invoice date of such Account and no more than 30 days have elapsed since the original due date of such Account; provided, however, that (i) upon the written request of the Debtor, Congress may, in the exercise of its Permitted Discretion, from time to time, elect to include as an Eligible Account an Account where more than 120 days but less than 151 days have elapsed since the invoice date of such Account, (ii) Congress will not treat Accounts owing by Toys-R-Us or Kay-bee Toys which are subject to December 10 dating terms as ineligible by virtue of such Account's failure to meet the foregoing condition contained 6 12 in clause (c) hereof and (iii) Congress may, in the exercise of its Permitted Discretion, upon the written request of the Debtor, approve as Eligible Accounts December 10 dating terms from other Account Debtors from time to time. In addition, without limiting the generality of Congress' Permitted Discretion in determining eligibility, the following Accounts shall be deemed to be ineligible: (a) Accounts with respect to which the Account Debtor is a director, officer, employee, Subsidiary or Affiliate of Debtor; (b) all Accounts owing by a single Account Debtor if Accounts constituting fifty percent (50%) or more of the aggregate balance owing by such Account Debtor to Debtor remain unpaid more than 30 days past the applicable due dates of such Accounts or 120 days, or such longer period as may be applicable in connection with any approved dating program, after the applicable invoice dates of such Accounts; (c) Accounts from any Account Debtor who is also a creditor of Debtor, but only to the extent of the outstanding amount owing by Debtor to such Account Debtor; (d) Accounts owing in a currency other than U.S. Dollars or with respect to which the Account Debtor is not a resident of the United States of America or Canada unless the Account Debtor has supplied Debtor with an irrevocable letter of credit that: (i) has been issued by a financial institution satisfactory to Congress; (ii) is satisfactory in form and substance to Congress; and (iii) such letter of credit has been endorsed in blank and delivered to Congress; in which event such Accounts may be eligible to the extent of the face amount of such letter of credit; (e) Accounts with respect to which Congress does not have a first and valid fully perfected security interest; (f) Except as approved by Congress from time to time in writing, Accounts with respect to which the Account Debtor is the subject of bankruptcy or a similar insolvency proceeding or has made an assignment for the benefit of creditors or whose assets have been conveyed to a receiver or trustee; (g) Accounts with respect to which the Account Debtor's obligation to pay the Account is conditional upon the Account Debtor's approval or is otherwise subject to any repurchase obligation or return right other than return rights for defective products, as with sales made on a bill-and-hold, guaranteed sale, sale-and-return, sale on approval or consignment basis; 7 13 (h) Accounts with respect to which Toys-R-Us is the Account Debtor which are subject to December 10 dating terms, to the extent that such Accounts exceed sixty percent (60%) of the aggregate amount of all Accounts with respect to which the Account Debtor is a resident of the United States or Canada. "Eligible Inventory" shall mean Inventory deemed by Congress to meet the following requirements: (a) The Inventory is a finished toy product that is in good condition, meets all standards imposed by any governmental agency, or department or division thereof, having regulatory authority over the Inventory, its use and/or sale and is either currently usable or currently saleable in the ordinary course of Debtor's business and is not otherwise unacceptable to Congress because of age, type, category, quality and/or quantity; (b) The Inventory has not been consigned to a customer of Debtor, has not been used or repossessed, and has not been attached, seized, made subject to a writ or distress warrant, levied upon or brought within the possession of any receiver, trustee, custodian or assignee for the benefit or creditors; (c) Each of the warranties and representations set forth in this Agreement has been reaffirmed with respect thereto at the time the most recent Availability Report was delivered to Congress; (d) The Inventory was not purchased by Debtor in or as part of a "bulk" transfer or sale of assets and was not acquired in any transaction other than in the ordinary course of business unless (i) Debtor has complied with all applicable bulk sales or bulk transfer laws or (ii) Congress has given its prior written consent to Debtor's non-compliance with such laws in connection with an Acquisition approved by Congress as a Permitted Investment, which consent shall not be unreasonably withheld; and (e) The Inventory is at a location permitted under Section 8.24 hereof. In addition, without limiting the generality of Congress' Permitted Discretion in determining eligibility, the following Inventory shall be deemed to be ineligible: raw materials, work-in-process, slow-moving items, obsolete Inventory, discontinued or close-out Inventory and any other category of Inventory that Congress deems, in the exercise of its Permitted Discretion, to be ineligible. 8 14 "Environmental Laws" shall mean any federal, state, district, local and foreign laws, to the extent applicable to the Debtor, and all rules, regulations, or orders issued, promulgated or entered thereunder, and any licenses, permits or other requirements issued to or for the benefit of Debtor or its Subsidiaries pursuant thereto, relating to pollution or protection of the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, (a) laws relating to the identification, reporting, generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or other handling of any pollutants, contaminants, chemicals or any other industrial, toxic or hazardous substances, materials or wastes, (b) laws relating to emission, discharge, or other release or threatened release of any pollutants, contaminants, chemicals, or any other industrial, toxic or hazardous substances, materials or wastes into the environment, and (c) laws relating to any liability for the performance or payment of the costs of any response to any release or threatened release of hazardous substances. "Equipment" shall mean all of the Debtor's equipment, including, without limitation, machinery, equipment, office equipment and supplies, computers and related equipment, furniture, furnishings, tools, tooling, jigs, dies, fixtures, manufacturing implements, fork lifts, trucks, trailers, motor vehicles, and other equipment. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute. "ERISA Affiliate" shall mean with respect to any Person (i) any corporation that is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as such Person; (ii) a trade or business under common control (within the meaning of Section 414(c) of the Internal Revenue Code) with such Person; or (iii) a member of the same affiliated service group (within the meaning of Section 414(m) of the Internal Revenue Code) as any corporation described in clause (i) above, or as any trade or business described in clause (ii) above. "Event of Default" shall have the meaning set forth in Section 10.1 hereof. "Existing Revolving Loans" shall mean the "Revolving Loans" outstanding under the Original Agreement on the Closing Date. "GAAP" shall mean generally accepted accounting principles as in effect from time to time, consistently applied. 9 15 "Galco" shall mean Galco International Toys, N.V., a Netherlands Antilles corporation and a subsidiary of the Debtor, or the successor entity resulting from the merger or sale of stock or assets of such corporation to a Hong Kong corporation owned by the Debtor. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereto and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantor" shall mean any guarantor of the Obligations. "Hazardous Substances" shall mean any pollutants, contaminants, chemicals or toxic or hazardous substance, material or waste, including, without limitation, more than 100 gallons of petroleum (or any volume of petroleum that is released into the environment), PCBs, asbestos (when in a friable condition, when removed or contained or when required to be removed or contained pursuant to Environmental Laws), flammable explosives, radioactive materials, and any other substance, material or waste that is regulated pursuant to any Environmental Laws. "Headquarters Property" shall mean the tract of real property owned by the Debtor located at 500 Forbes Boulevard, South San Francisco, California 94080, described in Schedule 1.1(a) hereto, and (i) all rights, title and interests appurtenant thereto, including, all water, water rights, reservoirs, ponds, ditches, flumes and related equipment and fixtures appurtenant to or used in connection with such real property and (ii) all buildings, parking areas and improvements, and any and all additions, alterations or appurtenances thereto now or at any time hereafter existing, placed or constructed on such real property or any part thereof. "Indebtedness" of any Person shall mean, without duplication, (i) any obligation of such Person for borrowed money, including, without limitation, (a) any obligation of such Person evidenced by bonds, debentures, notes or other similar debt instruments, and (b) any obligation for borrowed money which is non-recourse to the credit of such person but which is secured by any asset of such Person, up to the lesser of the amount of such obligation and the value of such asset as indicated in an appraisal delivered to Congress that is reasonably satisfactory to Congress, (ii) any obligation of such Person on account of deposits or advances, (iii) any obligation of such Person for the deferred purchase price of any property or services other than trade payables arising in the ordinary course of such Person's business, (iv) any obligation of such Person as lessee under a Capital Lease, (v) any Indebtedness of another Person secured by a Lien on any asset of such first Person up to the amount of such 10 16 Indebtedness, except that if such Indebtedness is not assumed by such first Person, then up to the lesser of the amount of such Indebtedness or the value of such asset as indicated in an appraisal delivered to Congress that is reasonably satisfactory to Congress, and (vi) any Accommodation Obligation of such Person. Notwithstanding anything to the contrary in the foregoing, the following shall not constitute "Indebtedness:" payroll liabilities, accounts payable, normal accruals and other normal and customary expenses incident to the Debtor's business incurred in the ordinary course of such business. "Indemnitees" shall have the meaning set forth in Section 11.2 hereof. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations and rules promulgated thereunder in effect from time to time. "Inventory" shall mean all inventory, including, without limitation, raw materials, work in process, parts, components, assemblies, supplies and materials used, sold or consumed in Debtor's business, finished toy products and other goods, and all other inventory of whatsoever kind or nature, wherever located, whether now owned or hereafter existing or acquired by Debtor, including without limitation, all wrapping, packaging, advertising, shipping materials, and all other goods consumed in Debtor's business, all labels and other devices, names or marks affixed or to be affixed thereto for purposes of selling or of identifying the same or the seller or manufacturer thereof and all of Debtor's right, title and interest therein and thereto; Inventory shall also include all goods, wares and merchandise, finished or unfinished, held for sale or lease or furnished or to be furnished under contracts of service, and all goods returned to or repossessed by Debtor. "Investment" shall mean any investment, made in cash or by delivery of any kind of property or asset, in any Person, whether by acquisition of shares of stock or similar interest, indebtedness or other obligation or security, or by loan, advance or capital contribution, or otherwise. "Issuing Bank" shall have the meaning set forth in Section 4.1 hereof. "L/C Fee" shall have the meaning set forth in Section 4.2 hereof. "Letter of Credit Outstandings" shall mean, at any time, the sum of (i) the aggregate maximum amount available for drawing under the then outstanding Letters of Credit and (ii) any unpaid reimbursement obligations of Debtor with respect to Letters of Credit. 11 17 "Letters of Credit" shall mean any standby or commercial letters of credit which are now or at any time hereafter guaranteed, issued, or caused to be issued by Congress at the request of and for the account of Debtor and which have not expired or been rescinded, revoked or terminated. "Lien" shall mean any interest in any kind of property or asset, whether real, personal or mixed, tangible or intangible ("Property") securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest, charge, claim, or lien arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictments, leases and other title exceptions and encumbrances affecting Property. "Loan Documents" shall mean this Agreement, the Stock Pledge Agreement, the Patent Collateral Assignment, the Trademark Security Agreement, the Mortgage, the Revolving Note and all other security agreements, financing statements, lease assignments, guaranties, blocked account agreements, Letters of Credit and other agreements, instruments, documents and written indicia of contractual obligations between Debtor and Congress, any Affiliate of Debtor and Congress, any Person owning Collateral and Congress, any Guarantor and Congress, or any Participant and Congress delivered to Congress in connection with the Original Agreement, this Agreement or the transactions contemplated hereby, as each such document may be amended or supplemented from time to time. "Material Judgment" shall mean any final judgment rendered against Debtor which (i) materially adversely affects Debtor's business, (ii) adversely affects the priority of Congress' liens or (iii) require the payment of more than $750,000. "Maximum Credit" shall mean $40,000,000 or such increased amount requested by the Debtor in accordance with Section 2.3(b) hereof; provided, however, that at no time shall such amount exceed $60,000,000. "Mortgage" shall mean the Deed of Trust and Assignment of Rents made by the Debtor in favor of Congress, encumbering the Headquarters Property, as amended by the Mortgage Amendment and as the same may be supplemented, amended, extended, assigned or otherwise modified from time to time. 12 18 "Mortgage Amendment" shall mean the Amendment to Deed of Trust and Assignment of Rents, of even date herewith, made by the Debtor in favor of Congress. "Multiemployer Plan" shall mean any multiemployer plan (as such term is defined in Sections 3(37)(A) and 4001(a)(3) of ERISA) with respect to which Debtor or any ERISA Affiliate of Debtor has had an obligation to contribute that has not been satisfied. "Net Amount of Eligible Accounts" shall mean, at any time, the gross amount of Eligible Accounts less (i) the Credit Reserve and less (ii) sales, excise or similar taxes, and less returns, discounts, claims, credits and allowances of any nature at any time issued, owing, granted, outstanding, available or claimed. "Obligations" shall mean any and all loans, Indebtedness, liabilities and obligations of any kind owing by Debtor to Congress, however evidenced, whether as principal, Guarantor or otherwise, arising under this Agreement or any other Loan Document (including, without limitation, all Letters of Credit issued hereunder) or any supplement thereto, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, original, renewed or extended, and whether arising directly or acquired from others (including, without limitation, Congress' participations or interests in Debtor's obligations to others) and including, without limitation, Congress' charges, commissions, interest, expenses, costs and attorneys' and paralegal fees and disbursements chargeable to Debtor in connection with all of the foregoing. "Original Agreement" shall have the meaning set forth in the preamble to this Agreement. "Participant" shall mean any Affiliate of Congress or any other Person who participates in a Participation. "Participation" shall mean any arrangement by which a Participant, now or at any time or times hereafter, participates (whether through the purchase of a participation or an assignment) with Congress or any other participant or assignee in the Obligations of Debtor pursuant to the Loan Documents. "Patent Collateral Assignment" shall mean the Patent Collateral Assignment, dated as of April 1, 1993, between Debtor and Congress. "Permitted Discretion" shall mean Congress' judgment exercised in good faith based upon Congress' consideration of any factor which Congress believes in good faith: (a) could affect 13 19 the value of any Collateral, the enforceability or priority of Congress' Liens thereon, or the amount which Congress would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of any Collateral, (b) suggests that any collateral report or financial information delivered to Congress by Debtor or by Debtor's accountants or other advisors on Debtor's behalf is incomplete, inaccurate or misleading in any material respect, (c) materially increases the likelihood of a bankruptcy, reorganization or other insolvency proceeding involving Debtor or any of the Collateral, or (d) creates or, with notice or the passage of time, would create an Event of Default or a breach of any condition set forth in Section 9 hereof. In the exercise of such judgment, Congress may take into account factors which are already included in or tested by the definitions of Eligible Accounts or Eligible Inventory, as well as any of the following: (i) the current financial and business climate of Debtor's industry (giving due regard to the Debtor's position within such industry) and general macroeconomic conditions which impact Debtor's cost structure, (ii) material changes in the average collection history and the average dilution with respect to the Accounts, (iii) changes in levels of back-orders and demand for, and pricing of, Inventory, (iv) changes in any concentration of risk with respect to Accounts and Inventory and (v) any other factors that change the credit risk of lending to Debtor based upon the security of the Collateral. The burden of establishing Congress' lack of good faith shall be on Debtor. "Permitted Indebtedness" shall mean (i) the Obligations; (ii) Indebtedness issued in exchange for, or the proceeds of which are used to refinance or refund, outstanding Indebtedness, other than Indebtedness incurred pursuant to clause (i) or (iii), so long as the principal amount of the Indebtedness so issued does not exceed the principal amount of, premium, if any, and accrued interest on the Indebtedness so exchanged, refinanced or refunded; (iii) Indebtedness of Debtor incurred in connection with the redemption, acquisition or other retirement for value of capital stock of Debtor or a Subsidiary, stock options or stock appreciation rights held by officers, employees or employee benefit plans upon death, disability, retirement or termination of employment so long as the amount of such Indebtedness at any one time outstanding does not exceed $250,000; (iv) Indebtedness of Galco in an aggregate amount not to exceed at any one time $1,000,000; (v) Indebtedness assumed as part of an Acquisition in an aggregate amount not to exceed at any one time an amount to be determined by Congress at the time of its approval of the Acquisition; (vi) Indebtedness secured by a mortgage on the Headquarters Property in an amount not to exceed $5,000,000, which mortgage may be a first priority mortgage; (vii) Indebtedness described on Schedule 1.1(b) hereto; (viii) Indebtedness permitted under Section 8.7 hereof; and (ix) Indebtedness owed pursuant to the Convertible Subordinated Debentures. 14 20 "Permitted Investments" shall mean any of the following: (i) any Investment in Galco existing on the date hereof and described on Schedule 1.1(c) hereto; (ii) any additional Investment in Galco after the date hereof, to the extent that the cumulative amount of such additional Investments do not exceed $250,000 in the aggregate; (iii) Acquisitions; (iv) any Investment in Debtor by any Subsidiary; (v) loans or advances to employees made in the ordinary course of business and consistent with past practices of Debtor and its Subsidiaries; (vi) sales of goods on trade credit terms, consistent with the past practices of Debtor or any Subsidiary or as otherwise consistent with trade credit terms in common use in the industry; (vii) negotiable instruments held for collection, lease, utility and other similar deposits, or stock, obligations or securities received in settlement of debts owing to Debtor or a Subsidiary as a result of foreclosure, perfection or enforcement of any Lien, in each case as to debt that arose in the ordinary course of business of Debtor or any such Subsidiary; and (viii) as long as there are no Obligations outstanding under this Agreement (other than the aggregate maximum amount available for drawing under the then outstanding Letters of Credit), investments in Cash Equivalents, provided that, unless waived in writing by Congress, Debtor shall take any actions deemed necessary by Congress to perfect its security interest in such Cash Equivalents; provided, however, that, with respect to any Investment by Debtor described in clause (ii) or (iii) of this definition, all of the following conditions must have been satisfied: (a) The aggregate amount of Revolving Loans available to Debtor pursuant to Section 2 hereof minus the outstanding Revolving Loans minus the face amount of the Letters of Credit minus the total amount of such Investment ("Availability") immediately after such Investment is made is not less than $1,500,000; (b) The Availability (determined for the days during which the applicable loans were outstanding) for the 30 days preceding the date of the making of such Investment is not less than $1,500,000; (c) Debtor shall have delivered financial projections (setting forth the reasonable assumptions therefor approved by Congress) for the 90-day period subsequent to the date of the making of such Investment demonstrating that the Availability is not less than $1,500,000 at any time during such 90-day period. Such financial projections shall be accompanied by a certificate signed by an officer of Debtor stating that, to the best knowledge of such officer, such financial projections are based upon reasonable assumptions of fact, no known material facts are inconsistent with such projections, and such projections accurately reflect such officer's expectations for Debtor during the period covered by such projections; 15 21 (d) Debtor's accounts payable are all current or are paid to an extent and in a manner which Congress, in its Permitted Discretion, deems satisfactory; (e) There shall not have occurred an Event of Default; and (f) At least five days (or such shorter time as Congress agrees) prior to the making of such Investment, Debtor shall have provided Congress with written notice which (i) sets forth the total amount of such Investment, (ii) has attached to it a certified aging report which contains information to verify the satisfaction of the condition set forth in clause (d) above, and (iii) certifies that the conditions set forth in clauses (a) through (e) above shall have been satisfied as of the date on which such Investment is to be made; provided, further, that with respect to any Investment by Debtor described in clause (iii) of this definition, all of the following additional conditions must have been satisfied: (g) Congress shall have completed its due diligence inspection, testing, credit investigation, analysis and review of the assets and liabilities of the proposed target company and shall be satisfied with the results thereof in all respects; and (h) the structure and documentation of the Acquisition shall be in form and substance reasonably satisfactory to Congress and its counsel in all material respects. "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, entity, party or government (whether national, federal, state, provincial, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Pledged Securities" shall mean and include (i) one share less than sixty-six and two-thirds percent (66.67%) of the issued and outstanding shares of Galco, or such lesser percentage of such shares as Congress may require in the exercise of its Permitted Discretion because of the adverse tax impact on the Debtor of the pledge of such shares, (ii) all of the issued and outstanding shares, whether now owned or hereafter acquired by Debtor, of the capital stock of any Subsidiaries of the Debtor other than the inactive Subsidiaries set forth on Schedule 1.1(d) hereto, (iii) all shares of any other Person owned or held by the Debtor which, after the date of the Original Agreement, is or becomes a Subsidiary of the Debtor and (iv) any shares, stock, certificates, instruments, warrants, options or rights issued as an addition to, in substitution of, or in exchange for any such shares described in the preceding clauses, and any and all 16 22 proceeds thereof and dividends and distributions with respect thereto, now or hereafter owned or acquired by Debtor. "Prime Rate" shall mean the prime commercial interest rate from time to time publicly announced by The Philadelphia National Bank, incorporated as CoreStates Bank, N.A., Philadelphia, Pennsylvania, whether or not such announced rate is the best rate available at such bank. "Prohibited Transaction" shall mean any "prohibited transaction" (as defined in Section 4975 of the Internal Revenue Code or Section 406 of ERISA) to which a statutory, regulatory, class or individual exemption does not exist. "Records" shall mean all books, records, documents, ledger cards, computer programs, and other property and general intangibles evidencing or relating to the Accounts, the Inventory, the Equipment and any other Collateral or any Account Debtor, together with the file cabinets or containers in which the foregoing are stored. "Reportable Event" shall mean any event described in Section 4043(b)(6) of ERISA and the regulations issued thereunder. "Revolving Loans" shall mean the loans advanced pursuant to Section 2 hereof. "Revolving Note" shall have the meaning set forth in Section 9.1(b)(ii) hereof. "Rollover Advance" shall mean the rollover of the Existing Revolving Loans into Revolving Loans hereunder. "Stock Pledge Agreement" shall mean the Stock Pledge Agreement, dated as of April 1, 1993, between Debtor and Congress. "Subsidiary" shall mean any Person of which or in which Debtor and its other Subsidiaries own directly or indirectly more than fifty percent (50%) of (i) the combined voting power of all classes of stock having general voting power to elect a majority of the board of directors of such Person, if it is a corporation, (ii) the capital interest or profit interest of such Person, if it is a partnership, or (iii) the beneficial interest of such Person, if it is a trust, association or other unincorporated organization. "Taxes" with respect to any Person shall mean taxes, assessments or other governmental charges or levies imposed upon such Person, its income or any of its properties, franchises or assets. 17 23 "Termination Event" shall mean (i) with respect to any Benefit Plan, a Reportable Event; (ii) the withdrawal of Debtor or any of its ERISA Affiliates from a Benefit Plan during a Plan Year (as defined in Section 3(39) of ERISA) in which it is a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (iii) the provision by Debtor or any of its ERISA Affiliates to participants and other affected parties of a written notice of intent to terminate a Benefit Plan in a distress termination described in Section 4041(c) of ERISA; (iv) the institution of proceedings to terminate a Benefit Plan of Debtor or any of its ERISA Affiliates by the Pension Benefit Guaranty Corporation; (v) the Pension Benefit Guaranty Corporation's application under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan of Debtor or any of its ERISA Affiliates; or (vi) the partial or complete withdrawal (within the meaning of Sections 4205 and 4203, respectively, of ERISA) of Debtor or any of its ERISA Affiliates from a Multiemployer Plan. "Trademark Security Agreement" shall mean the Amended and Restated Trademark Agreement, of even date herewith, in which, among other things, Debtor (i) grants to Congress a security interest in certain trademarks, (ii) upon an Event of Default, grants to Congress a license to use such trademarks and (iii) upon an Event of Default, if requested by Congress, agrees to assign to Congress all of its right, title and interest in and to such trademarks. "Value" shall mean FIFO cost or market price, as determined by Congress, whichever is lower. 1.2 Interrelationship with the Original Agreement. As stated in the preamble hereof, this Agreement is intended to amend and restate the provisions of the Original Agreement and, notwithstanding the substitution of the Revolving Note on the Closing Date, the Debtor and Congress agree that, upon (i) the execution and delivery by each of the parties hereto of this Agreement and (ii) the satisfaction of each of the conditions set forth in Section 9 hereof, the terms and provisions of the Original Agreement shall be and hereby are amended and restated in their entirety by the terms and provisions of this Agreement. This Agreement is not intended to and shall not constitute a novation. All Existing Revolving Loans made and Obligations incurred under the Original Agreement which are outstanding on the Effective Date shall continue as Revolving Loans and Obligations under (and shall be governed by the terms of) this Agreement. All references in the Revolving Note and the other Loan Documents to the Original Agreement, as it may be amended from time to time, shall be deemed to include references to this Agreement. SECTION 2. LOANS; TERM; EARLY TERMINATION 18 24 2.1 Revolving Loans. On the terms and conditions set forth in this Agreement, Congress agrees to roll over Existing Revolving Loans into Revolving Loans and to continue, in the exercise of its Permitted Discretion, to make Revolving Loans (net of applicable reserves pursuant to Section 4.1 hereof) to Debtor from time to time, at Debtor's request, of (a) up to seventy five percent (75%) of the Net Amount of Eligible Accounts (or such greater or lesser percentage thereof as Congress shall, in the exercise of its Permitted Discretion, determine from time to time), plus (b) up to the following percentages of the Value of Eligible Inventory during the relevant periods set forth below (or such greater or lesser percentages thereof as Congress shall, in the exercise of its Permitted Discretion, determine from time to time):
Period Percentage ------ ---------- March 15 through September 30 50% October 1 through March 14 35%
less (c) the Letter of Credit Outstandings, and less (d) such reserves as Congress may, in its Permitted Discretion, establish from time to time, including reserves on account of judgments not yet satisfied. Except as may be expressly permitted by Congress in Congress' sole discretion, the outstanding aggregate principal amount of Advances by Congress to Debtor hereunder with respect to Eligible Inventory shall not exceed, at any time, the lesser of (a) the aggregate amount of the above percentages of Value of the above categories of Eligible Inventory or (b) $8,000,000. The Revolving Loans made pursuant to this Section 2.1 shall be repaid in full upon termination of this Agreement in accordance with Section 2.5 hereof. On each day that Debtor shall request an Advance, and on any other day that Congress may reasonably request, Debtor shall deliver to Congress an assignment schedule, a remittance report and a report of credit returns and allowances together with such other documents as Congress may reasonably request, including, without limitation, documents setting forth total sales, total non-cash credits and cash collections of Debtor. In addition, Debtor shall furnish to Congress on the first Business Day of each week, and on any other day that Congress may reasonably request, an Availability Report as of the last Business Day of the preceding week or as of such other date as Congress may reasonably request. In no event shall the information set forth in the Availability Report or otherwise delivered to Congress in connection therewith limit Congress' Permitted Discretion to determine the Eligible Accounts, the Eligible Inventory, the Net Amount of Eligible Accounts or the Value of Eligible Inventory. 2.2 Loan Account. All loans shall be charged to a loan account in Debtor's name on Congress' books. Congress shall render to Debtor each month a statement of Debtor's loan account, which shall be considered correct and deemed accepted by, and 19 25 conclusively binding upon, Debtor as an account stated, except to the extent that Congress receives a written notice of any specific exceptions by Debtor thereto within 30 days after the date of such statement. 2.3 Maximum Loan Amount. (a) Except as may be expressly permitted by Congress in Congress' sole discretion, the outstanding aggregate principal amount of all Advances by Congress to Debtor hereunder or under any supplement hereto shall not exceed the Maximum Credit at any time. (b) Upon at least five (5) Business Days written notice to Congress, the Debtor may request a permanent increase in the Maximum Credit available hereunder in multiples of $5,000,000 up to an aggregate Maximum Credit amount of $60,000,000. Such increase shall be effective on the date set forth by the Debtor in the notice (which date shall not be earlier than the fifth Business Day after receipt of such notice), subject to the payment of the fee required by Section 3.7 hereof. (c) Without limiting Congress' right to demand payment of the Obligations, or any portion thereof, in accordance with any other terms of this Agreement, or any supplement hereto, in the event that the outstanding aggregate principal amount of Advances by Congress to Debtor exceeds the Maximum Credit or the formula set forth in Section 2.1 hereof, Debtor shall remain liable therefor and the entire amount of such excess(es) shall, at Congress' option, become immediately due and payable upon Congress' demand, and all payments thereof shall be applied to the Revolving Loans or to cash collateralize any outstanding Letters of Credit. 2.4 Amounts Charged to Debtor's Account; Place of Payment. At Congress' option, all principal, interest, fees, commissions, costs, expenses or other charges with respect to this Agreement or any other Loan Document and any and all loans and Advances by Congress to Debtor may be charged directly to Debtor's account maintained by Congress. All loans shall be payable at Congress' office specified above or at such other place as Congress may hereafter designate from time to time and, at Congress' option and upon Congress' request, Debtor shall execute and deliver to Congress one or more promissory notes in form and substance reasonably satisfactory to Congress to further evidence such loans. 2.5 Term of Agreement. This Agreement shall be effective as of its date and shall continue in full force and effect for a term ending on March 31, 1997 unless sooner terminated pursuant to the terms hereof. This Agreement may be renewed for one year from the termination date hereof, or any 20 26 future termination date, upon the mutual agreement of the Debtor and Congress no later than 60 days prior to such termination date. Congress shall have the right to terminate this Agreement immediately at any time upon the occurrence of an Event of Default. No termination of this Agreement, however, shall relieve or discharge Debtor of its duties, obligations and covenants hereunder until all Obligations have been paid in full, and Congress' continuing security interest in the Collateral shall remain in effect until such Obligations have been fully discharged. 2.6 Early Termination. If Congress terminates this Agreement (i) upon the occurrence of an Event of Default (other than an Event of Default arising out of the Debtor's inability to repay), and Congress is repaid prior to March 31, 1997, (ii) at Debtor's request (other than because the Debtor is required to pay amounts under Section 11.3 hereof), and Congress is repaid prior to March 1, 1997 or (iii) at Debtor's request, and Congress is repaid on or after March 1, 1997 and prior to March 31, 1997 from any source other than from the proceeds of an offering of equity or unsecured Indebtedness of the Debtor, in view of the impracticability and extreme difficulty in ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Congress' lost profits as a result thereof, Debtor hereby agrees that it shall pay to Congress, upon the effective date of such termination, an early termination fee in an amount equal to one percent (1.00%) of the Maximum Credit; provided, however, that if the Debtor wishes to terminate this Agreement because it is required to pay amounts under Section 11.3 hereof, it shall notify Congress of such intent to terminate within thirty (30) days of the charging of such amounts by Congress, and, unless Congress agrees to waive the payment of such amounts within fifteen (15) days of such notice, this Agreement will terminate no later than ninety (90) days from such notice. Such termination fee shall be presumed to be the amount of damages sustained by said early termination and Debtor agrees that it is reasonable under the circumstances currently existing. The early termination fee provided for in this Section 2.6 shall be deemed included in the Obligations. SECTION 3. INTEREST AND FEES. 3.1 Interest. Interest shall be payable by Debtor to Congress in arrears on the first day of each month upon the closing daily balances in Debtor's loan account for each day during the immediately preceding month, at a rate equal to one percent (1.00%) per annum in excess of the Prime Rate. The interest rate charged hereunder shall increase or decrease by an amount equal to each increase or decrease, respectively, in the Prime Rate, effective on the first day of the month after any change in the Prime Rate based on the Prime Rate in effect on the last day of the month in which any such change occurs. 21 27 3.2 Default Interest Rate. On and after the date of any Event of Default or termination or non-renewal hereof, Congress may elect to charge and collect interest on all outstanding unpaid Obligations at a rate equal to two percent (2%) per annum in excess of the pre-default rate set forth above from the date of such Event of Default or termination or non-renewal, and all interest accruing hereunder shall thereafter be payable on demand. 3.3 Interest Calculation. Interest shall be calculated for actual days elapsed on the basis of a 360-day year and shall be included in each monthly statement of Debtor's loan account. Congress shall have the right, at Congress' option, to charge all interest to Debtor's loan account on the first day of each month, and such interest shall be deemed to be paid by the first amounts subsequently credited thereto. In no event shall charges constituting interest, payable by Debtor under this Agreement or any other Loan Document, exceed the rate permitted under any applicable law or regulation, and if any part or provision of this Agreement or other Loan Document is in contravention of any such law or regulation, such part or provision shall be deemed amended to conform thereto. 3.4 Unused Line Fee. If the average outstanding daily principal balance of the sum of all Revolving Loans plus Letter of Credit Outstandings in any calendar month shall be less than the Maximum Credit, Debtor shall pay to Congress in arrears on or before the tenth (10th) day of the next succeeding calendar month an unused line fee equal to one quarter of one percent (0.25%) per annum upon the difference between (A) the average outstanding daily principal balance of all such Revolving Loans plus Letter of Credit Outstandings in respect of such month and (B) the greater of (i) the applicable base amount for such month as set forth below or (ii) the percentage for such month as set forth below of the Maximum Credit:
Period Amount Percentage ------ ------ ---------- January through June $22,500,00 56.25% July through August $30,000,00 75.00% September through November $40,000,00 100.00% December $22,500,00 56.25%
3.5 Management Fee. Debtor shall pay to Congress a fee in an amount equal to $12,500 on or before the tenth (10th) day of each calendar quarter, in respect of Congress' collateral management services for such quarter during the term, including all renewal terms, of this Agreement or so long as any of the Obligations are outstanding. The management fee is intended to cover Congress' internal costs of (i) monitoring the Collateral, (ii) performing Congress' routine field examinations and (iii) other loan administration activities performed by Congress, in each case in the ordinary course prior to the occurrence of an Event of Default. From and after the occurrence of an 22 28 Event of Default, all such out-of-pocket costs and expenses of Congress incurred in connection with such activities shall be payable by Debtor. 3.6 Closing Fees. Debtor shall pay Congress closing fees in an amount equal to $100,000, payable on the date hereof. 3.7 Maximum Credit Increase Fee. Debtor shall pay Congress a fee in the amount of $50,000 for each $5,000,000 increase in Maximum Credit requested pursuant to Section 2.3(b) hereof, payable on the date on which such increase becomes effective in accordance with such Section. SECTION 4. LETTER OF CREDIT FACILITY. 4.1 Letter of Credit Facility. Subject to the terms and conditions of this Agreement, and provided there does not then exist an Event of Default, or any event or condition which, with notice, lapse of time and/or the issuance of such Letter of Credit, would constitute an Event of Default, Congress shall, upon Debtor's request and upon execution and delivery of whatever documents or applications Congress, in its sole discretion, may require of Debtor, guarantee or cause to be issued one or more Letters of Credit. All such Letters of Credit shall be issued by banks or other financial institutions designated by Congress in its sole discretion (an "Issuing Bank"), and Congress makes no representation to Debtor that any particular bank or financial institution will serve as Issuing Bank hereunder. The aggregate face amount of all Letters of Credit outstanding at any time shall not exceed $4,000,000, and each Letter of Credit shall be in form and substance satisfactory to Congress. In no event shall any Letter of Credit be issued if the face amount of such proposed Letter of Credit exceeds the amount then available for Revolving Loans pursuant to the formula set forth in Section 2.1 hereof. In addition, Congress may, in the exercise of its reasonable discretion, reserve from the availability of Revolving Loans the expected amount of any import duties, insurance and freight which may be applicable to any goods being acquired in connection with the issuance of any Letter of Credit. Debtor shall reimburse Congress on demand for any and all amounts which Congress at any time pays with respect to a Letter of Credit including, without limitation, application fees, opening fees, bank charges, commissions and all other fees, expenses and amounts of any nature whatsoever payable to the Issuing Bank and for any other out-of-pocket costs, fees, commissions and expenses incurred by Congress in connection with the application for and issuance of any Letter of Credit. Congress shall have the right, at its option, to charge all such Letter of Credit charges to Debtor's loan account on the first day of each month, and such charges shall be deemed to be paid, after amounts charged 23 29 pursuant to Section 2.4 hereof are paid, by the first amounts subsequently credited thereto. 4.2 Letter of Credit Fees. In addition to any fees, expenses, commissions or other amounts payable to Congress or the Issuing Bank pursuant to Section 4.1 hereof, for each outstanding Letter of Credit, Debtor shall pay to Congress each month in advance a fee (an "L/C Fee") equal to (i) one-half percent (.50%) of the average daily face amount of such Letter of Credit for the initial 60 days after issuance, and (ii) two-tenths of one percent (.20%) of the average daily face amount of such Letter of Credit thereafter; provided, however, if any Letter of Credit expires with any amount remaining undrawn thereunder the L/C Fee shall continue until the earlier of (i) the payment of any undrawn amount under such Letter of Credit or (ii) a period of 30 days after the stated expiration of such Letter of Credit. On and after the occurrence of an Event of Default or termination of this Agreement, Congress may, in its sole discretion, elect to charge and collect an L/C Fee not in excess of (i) the applicable L/C Fee due and owing pursuant to the immediately preceding sentence, plus (ii) two percent (2.00%) per annum on the average daily face amount of each Letter of Credit. All L/C Fees shall be computed on the basis of a 360-day year for the actual number of days elapsed. The L/C Fee for each Letter of Credit shall be payable in advance (i) upon the issuance of such Letter of Credit for the number of days remaining in the month during which such Letter of Credit is issued and (ii) thereafter, monthly, on the first day of each month during which such Letter of Credit remains outstanding. Any L/C Fees not paid upon these terms shall immediately constitute part of the Obligations and shall be payable by Debtor to Congress in accordance with the terms of this Agreement. 4.3 Letter of Credit Risks. Debtor assumes all risks of the acts and omissions of, or misuse of Letters of Credit by, the respective beneficiaries of the Letters of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the Letter of Credit applications, Congress, its correspondents and agents, the Issuing Bank and any correspondent banks or financial institutions used in connection with the issuance of Letters of Credit, shall not be responsible: (a) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of the Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (b) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (c) for failure of the beneficiary of a Letter of Credit to comply fully with conditions required in order to draw upon such Letter of Credit; (d) for errors, omissions, 24 30 interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (e) for errors in interpretation of technical terms; (f) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof; (g) for the misapplication by the beneficiary of a Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (h) for any consequences arising from causes beyond the control of Congress, the Issuing Bank or of the various correspondents, agents, and banks or financial institutions used in connection with the issuance of Letters of Credit, including, without limitation, any governmental acts. In furtherance of the foregoing, and without limiting the generality thereof, Debtor agrees to indemnify and hold harmless Congress, and any such correspondent, agent, and bank or financial institution used in connection with the issuance of Letters of Credit, from and against each and every claim which might arise against them by reason of any transfer, sale, delivery, surrender or endorsement of any bill of lading, warehouse receipt or other document held by Congress or for its account, except to the extent that it is finally determined by a court of competent jurisdiction that such claim shall have resulted from their own fraud or gross negligence. None of the above shall affect, impair, or prevent the vesting of any of Congress' rights or powers hereunder, or Debtor's obligation to make reimbursement. 4.4 Letter of Credit Claims. Debtor shall promptly examine (a) the copy of any Letter of Credit, including any amendments thereof, sent to it by or on behalf of Congress and (b) all documents and instruments delivered to it by or on behalf of Congress in connection with such Letters of Credit. In the event of any claim of noncompliance with Debtor's instructions or other irregularity, Debtor will immediately notify Congress thereof in writing. Debtor will be conclusively deemed to have waived any such claim against Congress, the Issuing Bank, their respective correspondents and agents, and any banks or other financial institutions used in connection with the issuance of Letters of Credit, unless such notice is given as aforesaid. SECTION 5. SECURITY INTEREST AND COLLATERAL. 5.1 Grant of Security Interest. As security for the prompt performance, observance and payment in full of all Obligations, Debtor hereby grants to Congress a continuing security interest in, the following (which, together with any of Debtor's other property in which Congress may at any time have a Lien, whether pursuant to this Agreement, any other Loan Document or otherwise, are herein collectively referred to as the "Collateral"): 25 31 All present and future (a) Accounts; (b) moneys, securities and other property (including all Cash Equivalents) and the proceeds thereof, now or hereafter held or received by, or in transit to, Congress from or for Debtor, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of Debtor's deposits (general or special), balances, sums and credits with Congress at any time existing; (c) Inventory; (d) Equipment; (e) Pledged Securities; (f) right, title and interest of Debtor, and all of Debtor's rights, remedies, security and liens, in, to and in respect of the Accounts and other Collateral, including, without limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, guaranties or other contracts of suretyship with respect to the Accounts, deposits or other security for the obligation of any Account Debtor, and credit and other insurance; (g) right, title and interest of Debtor in, to and in respect of all goods relating to, or which by sale have resulted in, Accounts, including, without limitation, all goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, any Accounts or other Collateral, including without limitation, all returned, reclaimed or repossessed goods; (h) deposit accounts of Debtor; (i) Records; (j) general intangibles of every kind and description of Debtor and licenses, to the extent reasonably necessary to facilitate liquidation of other Collateral; (k) the Headquarters Property; and (l) products and proceeds of the foregoing, in any form, including, without limitation, identifiable proceeds in deposit accounts of Debtor, insurance proceeds and any claims against third parties for loss or damage to or destruction of any or all of the foregoing. 26 32 SECTION 6. COLLECTION AND ADMINISTRATION OF ACCOUNTS AND CASH MANAGEMENT RELATIONSHIPS. 6.1 Collection by Debtor. Until Debtor's authority to do so is curtailed or terminated at any time by Congress, Debtor shall, at its expense, collect all remittances and all amounts unpaid on Accounts and all other Collections, and Debtor shall not commingle such Collections with Debtor's funds. Debtor shall, on the day received, remit all Collections to Congress in the form received, duly endorsed by Debtor for deposit with Congress, unless Congress shall direct Debtor otherwise. All amounts collected on Accounts, when received by Congress, shall be credited to Debtor's loan account after adding one and one-half Business Days for collection, clearance and transfer of remittances, conditional upon final payment to Congress. 6.2 Rights of Inspection. Congress or Congress' representatives shall at all reasonable times have free access to and right of inspection of the Collateral and have full access to and the right to examine and make copies of Debtor's Records, to confirm and verify all Accounts, to perform general audits and to do whatever else Congress deems reasonably necessary to protect its interests. Congress may, at any time that an Event of Default has occurred and is continuing, remove from Debtor's premises or require Debtor, or require Debtor to instruct any accountants and auditors employed by Debtor, to deliver any Records and Congress may, without cost or expense to Congress, use such of Debtor's personnel, supplies, computer equipment and space at Debtor's places of business as may be reasonably necessary for the handling of Collections. 6.3 Reclaimed Goods; Account Adjustments. Debtor shall, as soon as practicable upon obtaining knowledge thereof, report to Congress, in each Availability Report and the related reports and schedules delivered in connection therewith, (a) all reclaimed, repossessed and returned goods and (b) all Account Debtor claims and any other matter affecting the value, enforceability or collectability of any of the Accounts. All claims and disputes relating to Accounts are to be promptly adjusted within a reasonable time, at Debtor's own cost and expense. Congress may, after the occurrence of an Event of Default, settle, adjust or compromise claims and disputes relating to Accounts which are not adjusted by Debtor within a reasonable time. 6.4 Lockboxes. Without limiting the generality of Congress' discretion regarding Debtor's collection and administration of Accounts as provided in Sections 6.1, 6.2 and 6.3 hereof, Debtor shall at all times hereafter maintain lockboxes ("Lockboxes") with such banks as are acceptable to Congress ("Collecting Banks") to which Debtor shall promptly remit, and shall direct its Account Debtors to remit, all payments on Accounts and all payments made for Inventory or other 27 33 payments constituting proceeds of Collateral in the identical form in which such payments are made, whether by cash or check. The Collecting Banks shall acknowledge and agree, in a manner satisfactory to Congress, that all payments made, and items submitted, to the Lockboxes are the sole and exclusive property of Congress and the Debtor, that the Collecting Banks have no right to setoff against the Lockboxes and that the Collecting Banks will wire, or otherwise transfer immediately available funds in a manner satisfactory to Congress, collected funds deposited into the Lockboxes to Congress on a daily basis. Debtor hereby agrees that all payments made to such Lockboxes or otherwise received and collected by Congress, whether on the Accounts or as proceeds of other Collateral or otherwise will be the sole and exclusive property of Congress and for purposes of calculating (i) interest on the Obligations, will be applied (which application shall be conditional upon final collection) on account of the Obligations upon the expiration of one and one-half Business Days following the date of receipt by Congress of funds or other items of payment from the Collecting Banks and (ii) availability of Advances to Debtor in accordance with the guidelines set forth in Section 2 hereof, will be applied (which application shall be conditional upon final collection) on account of the Obligations upon receipt by Congress from such Collecting Banks. Debtor agrees to pay Congress any and all reasonable fees and actual costs and expenses, that Congress incurs in connection with opening and maintaining the Lockboxes and depositing for collection by Congress any check or item of payment received and/or delivered to the Collecting Banks or Congress on account of the Obligations; and Debtor agrees to reimburse Congress for any amounts paid to any Collecting Bank arising out of Congress' indemnification of such Collecting Bank against damages incurred by the Collecting Banks in the operation of the Lockboxes. SECTION 7. REPRESENTATIONS AND WARRANTIES. Debtor hereby represents and warrants to Congress as of the date hereof and continuing so long as any Obligations remain outstanding, and (even if there shall be no Obligations outstanding) so long as this Agreement remains in effect, the following, the truth and accuracy of which, or compliance with, being a continuing condition of the making of Advances hereunder by Congress: 7.1 Collateral Ownership. Other than the Liens permitted under Section 8.4 hereof, Debtor is and shall be, with respect to all Collateral now existing or hereafter acquired, the owner of such Collateral free from any Lien, security interest, claim or encumbrance of any kind, except in Congress' favor and as otherwise consented to in writing by Congress, and Debtor shall defend the same against the claims of all Persons. 28 34 7.2 Location of Records. The office where Debtor keeps Debtor's Records, Debtor's chief executive office, all of Debtor's other places of business, and all locations and places of business of each of Debtor's Subsidiaries as of the date hereof are set forth on Schedule 7.2 hereto. 7.3 Representations as to Eligible Accounts. (a) Each Account classified by Debtor as an "Eligible Account" on the most recently submitted Availability Report delivered to Congress represents a valid and legally enforceable Indebtedness based upon an actual and bona fide sale and delivery of goods or rendition of services in the ordinary course of Debtor's business which has been finally accepted by the Account Debtor and for which the Account Debtor is unconditionally liable (except for return rights for defective products) to make payment of the amount stated in each invoice, document or instrument evidencing the Eligible Account in accordance with the terms thereof, without offset, defense or counterclaim, and is expected by Debtor to be paid in full at maturity; and (b) All statements made and all unpaid balances appearing in the invoices, documents and instruments evidencing each Eligible Account are true and correct in all material respects and are in all respects what they purport to be and, to the Debtor's knowledge, all signatures and endorsements that appear thereon are genuine and all signatories and endorsers have full capacity to contract and each Account Debtor is financially able to pay in full the Eligible Account when it matures. None of the transactions underlying or giving rise to any Account violate any state or federal laws or regulations, and all documents relating to the Accounts are legally sufficient in all material respects under such laws or regulations and are legally enforceable in accordance with their terms and all recording, filing and other requirements of giving public notice under any applicable law have been duly complied with in all material respects. 7.4 Investigations and Litigation. Except as set forth on Schedule 7.4 hereto, there is no present investigation by any governmental agency pending or, to the best of Debtor's knowledge, threatened against Debtor. Except as otherwise disclosed to Congress in writing prior to the date hereof, there is no action, suit, proceeding or claim pending or, to the best of Debtor's knowledge, threatened against Debtor or its assets or goodwill, or affecting any transactions contemplated by this Agreement or any of the other Loan Documents before any court, arbitrator, or governmental or administrative body or agency which, if adversely determined with respect to Debtor, would result in any material adverse change in Debtor's business, properties, assets (tangible or intangible), goodwill, or condition (financial or otherwise). 29 35 7.5 Non-Contravention. The execution, delivery and performance of this Agreement or any of the other Loan Documents are within Debtor's corporate powers, have been duly authorized, are not in contravention of (a) any indenture, agreement or undertaking to which Debtor is a party or by which it is bound, (b) law, or (c) the terms of Debtor's Articles of Incorporation or by-laws. 7.6 Corporate Organization; Foreign Qualification; Subsidiaries. Debtor is a corporation duly organized and in good standing under the laws of the State of Delaware. Debtor is duly qualified as a foreign corporation in all other states where the nature and extent of the business transacted by it or the ownership of its assets makes such qualification necessary. The corporations listed on Schedule 7.6 hereto are all of the Subsidiaries and are duly organized and in good standing in their respective states, provinces or countries shown on Schedule 7.6. 7.7 Use of Corporate Name. Except as otherwise disclosed to Congress prior to the date hereof, Debtor has not used and has no current plans to use, any corporate or fictitious name other than the corporate name shown on Debtor's Articles of Incorporation. 7.8 No Default Under Other Contracts. Except as otherwise disclosed to Congress in writing prior to the date hereof, Debtor is not in default under any material contract, lease or commitment to which it is a party or by which it is bound. Debtor knows of no disputes regarding any such contract, lease or commitment that is material to the financial position and well- being of Debtor. 7.9 Compliance with Laws. Except as set forth on Schedule 7.9 hereto, Debtor and each of its Subsidiaries are in compliance in all material respects with all laws, orders, regulations and ordinances of all federal, foreign, state and local governmental authorities (excluding Environmental Laws) relating to the business operations and the assets of Debtor and such Subsidiaries the violation of which might materially adversely affect the conditions (financial or otherwise), operations, properties or prospects of Debtor or any such Subsidiary. 7.10 Adequate Licenses, Patents, etc.. Debtor possesses adequate licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications and trade names to continue to conduct its business as heretofore conducted. All such licenses are listed on Schedule 7.10 attached hereto and made a part hereof. 7.11 ERISA. 30 36 (a) Except as set forth on Schedule 7.11(a) hereto (i) neither Debtor nor any Subsidiary has received from any Governmental Authority any notice to the effect that any of them is not in compliance with any of the requirements of ERISA and the regulations promulgated thereunder (including, without limitation, minimum funding requirements); (ii) to the best of Debtor's knowledge, there exists no Reportable Event with respect to any Benefit Plan maintained by Debtor or any of its ERISA Affiliates which could result in a material liability to Debtor or its Subsidiaries; and (iii) neither Debtor nor any of its ERISA Affiliates has incurred any withdrawal liability under Section 4201 of ERISA with respect to any Multiemployer Plan that has not been satisfied. (b) As of the date hereof, neither Debtor nor any ERISA Affiliate of Debtor is a party to, or is obligated to contribute under, any defined benefit plan (as defined in ERISA) or a Multiemployer Plan except as set forth on Schedule 7.11(b). 7.12 Solvency. Debtor is solvent, is able to pay its debts as they become due and has capital sufficient to carry on its business and all businesses in which it is about to engage. Debtor will not be rendered insolvent by the execution and delivery of this Agreement or any of the other agreements, documents or instruments executed in connection with this Agreement or by the transactions contemplated hereunder or thereunder. 7.13 Environmental. Except as set forth on Schedule 7.13 hereto, to the knowledge of Debtor ("knowledge" for purposes hereof shall mean the actual knowledge of William G. Catron or other officers or employees charged by Debtor's board of directors (or a duly designated committee thereof) or executive officers with responsibility for environmental or legal matters): (a) the operations and facilities owned or controlled by Debtor or any of its Subsidiaries (i) are in compliance in all material respects with all Environmental Laws, (ii) are not the subject of any United States federal or state or Canadian federal or provincial investigation of which Debtor or any of its Subsidiaries has notice evaluating whether any remedial action is required or purported to be required pursuant to any Environmental Laws to respond to a release of any Hazardous Substance into the environment, and (iii) are not contaminated with any Hazardous Substance that may reasonably be expected to require a remedial action requiring the expenditure of $250,000 or more in remediation costs; and (b) neither Debtor nor or any of its Subsidiaries has received written notice to the effect that any of them is or may be liable to any Person (including, without limitation, any individual or government, whether federal, state, provincial, or local) as a result of the release or threatened release of any Hazardous Substance into the environment. 31 37 7.14 Representations as to Inventory and Equipment. (a) Debtor is and shall be, with respect to the Equipment, the owner of such Equipment free from any lien, security interest, claim and encumbrance of any kind, except in Congress' favor or as permitted by Section 8.4(d) hereof. (b) All of the Collateral is located at the addresses set forth on Schedule 7.14(b) hereto or at such other addresses as are hereafter approved in writing by Congress pursuant to Section 8.24 hereof. (c) The Inventory and the Equipment are and shall be used in Debtor's business and not for personal, family, household or farming use. (d) The Equipment is now and shall remain personal property. Debtor shall not permit any of the Equipment to be or become a part of or affixed to real property without (i) prior written notice to Congress and (ii) first making all arrangements, and delivering or causing to be delivered to Congress, such agreements and other documentation requested by Congress for the protection and preservation of Congress' security interests and liens, in form and substance reasonably satisfactory to Congress, including, without limitation, waivers and subordination agreements by any landlords or mortgagees of statutory and non- statutory liens and rights of distraint. 7.15 Location of Cash Accounts. Except as set forth on Schedule 7.15 hereto, Debtor has no cash accounts with any bank, savings and loan or similar institution, and Schedule 7.15 accurately reflects the location of each such account. 7.16 Financial Statements. All financial statements, including the notes thereto, provided to Congress by Debtor fairly present the financial condition of Debtor as of the respective dates thereof, all Indebtedness of Debtor is reflected thereon or has been previously disclosed to Congress in writing, and there has been no material adverse change in Debtor's operations, properties, assets (tangible or intangible) or condition (financial or otherwise) since December 31, 1994. 7.17 Internal Controversies. There are no controversies pending or, to the best of Debtor's knowledge, threatened between Debtor or any Subsidiary of Debtor and any of its employees (other than employee grievances arising in the ordinary course of business) which, if adversely determined with respect to Debtor, would result in any material adverse change in Debtor's business, properties, assets (tangible or intangible), goodwill, or condition (financial or otherwise). 32 38 SECTION 8. COVENANTS. Debtor covenants and agrees that, so long as any Obligations remain outstanding, and (even if there shall be no Obligations outstanding) so long as this Agreement remains in effect (unless Congress shall give its prior written consent thereto): 8.1 Financial Information; Maintenance of Forms. Debtor shall maintain Debtor's shipping forms, invoices and other related documents in a form reasonably satisfactory to Congress and shall maintain Debtor's books, records and accounts in accordance with GAAP. Debtor agrees to furnish Congress monthly with accounts receivable agings, inventory reports (if requested by Congress) and interim financial statements (including a balance sheet and statements of income and cash flows) and to furnish Congress, at any time or from time to time with such other information regarding Debtor's business affairs and financial condition as Congress may reasonably request, including, without limitation, balance sheets, statements of profit and loss, financial statements, cash flow and other projections, earnings forecasts, schedules, agings and reports. Debtor agrees to provide Congress with copies of all Customer Sales Reports generated by the Debtor. Debtor hereby irrevocably authorizes and directs all accountants, auditors or other similar third parties to deliver to Congress, at Debtor's expense, copies of Debtor's financial statements and to provide Congress with access to, and the right to copy, at Debtor's expense, all papers related thereto, and other accounting records of any nature in such parties' possession and to disclose to Congress any information such parties may have regarding Debtor's business affairs and financial condition. Debtor shall provide Congress with a copy of all filings made by Debtor with the Securities and Exchange Commission within five (5) Business Days of the filing thereof, including, without limitation, all filings and reports made in connection with the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and all applicable rules and regulations promulgated thereunder. Debtor shall furnish Congress with audited financial statements on an annual basis certified by independent public accountants selected by Debtor and acceptable to Congress within 120 days from year end. Congress hereby designates Price Waterhouse & Co. LLP as acceptable for purposes of this Section 8.1. All such statements and information shall fairly present Debtor's financial condition as of the dates, and the results of Debtor's operations for the periods, for which the same are furnished. Any documents, schedules, invoices or other papers delivered to Congress may be destroyed or otherwise disposed of by Congress one year after the date the same are delivered to Congress, unless Debtor makes a written request therefor and pays all expenses attendant to their return, in which event Congress shall return same when Congress' actual or anticipated need therefor has ceased. 33 39 8.2 Payment of Taxes. Debtor shall duly pay and discharge all taxes, assessments, contributions and governmental charges upon or against Debtor or its properties or assets (tangible or intangible) prior to the date on which penalties attach thereto, other than taxes the liability for which is being contested in good faith by appropriate proceedings, and as to which (i) Debtor shall, if appropriate under GAAP, have set aside on its books and records adequate reserves; and (ii) Congress has determined the maximum amount of the asserted tax liability and reduced the loan availability by such amount. Debtor shall be liable for any tax or penalty imposed on it arising out of this Agreement or any supplement hereto or giving rise to the Accounts or any other Collateral or which Congress may be required to withhold or pay for any reason and Debtor agrees to indemnify and hold Congress harmless with respect thereto, and to repay to Congress on demand the amount thereof, and until paid by Debtor such amount shall be added to and deemed part of Congress' loans to Debtor. 8.3 Further Assurances. Debtor shall, at Debtor's expense, duly execute and deliver, or shall cause to be duly executed and delivered, such further agreements, instruments and documents, including, without limitation, additional security agreements, collateral assignments, UCC financing statements or amendments or continuations thereof, landlord's or mortgagee's waivers of liens and consents to the exercise by Congress of all Congress' rights and remedies hereunder, under any supplement hereto, or under any other Loan Document or applicable law with respect to the Collateral, and do or cause to be done such further acts as may be necessary or proper in Congress' opinion to evidence, perfect, maintain and enforce Congress' security interest and the priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any other Loan Document. Where permitted by law, Debtor hereby authorizes Congress to execute and file one or more UCC financing statements signed only by Congress. 8.4 Liens. Debtor will not, and will not cause Galco or any of its active Subsidiaries to, create, incur, assume or suffer to exist any Lien or other encumbrance of any nature whatsoever on any of its assets, except for: (a) Liens in favor of Congress; (b) the Liens set forth on Schedule 8.4 hereto; (c) Liens securing the payment of taxes, either not yet due and payable or the validity of which are being contested in good faith by appropriate proceedings, and as to which (i) Debtor shall, if appropriate under GAAP, have set aside on its books and records adequate reserves; and (ii) Congress has determined the maximum amount of the asserted tax liability and reduced the loan availability by such amount; 34 40 (d) purchase money Liens relating to Equipment (including the interest of a lessor under a capital lease or an operating lease having substantially the same economic effect and Liens to which any property is subject at the time of Debtor's purchase thereof) securing an amount not to exceed $250,000 in the aggregate at any time, provided that such Liens shall not apply to any property of Debtor other than that purchased or leased, as the case may be; (e) deposits under worker's compensation, unemployment insurance, social security and other similar laws, or to secure the performance of bids, tenders or contracts (other than for the repayment of borrowed money) or to secure indemnity, performance or other similar bonds for the performance of bids, tenders or contracts (other than for the repayment of borrowed money) or to secure statutory obligations or surety or appeal bonds, or to secure indemnity, performance or other similar bonds in the ordinary course of business; (f) Liens on the stock of the target company in favor of the seller of such stock to the Debtor in the Acquisition, which Liens may only secure obligations owing by the Debtor to such seller in connection with the Acquisition; and (g) Liens on the Headquarters Property securing Indebtedness (other than the Obligations hereunder) in an amount not to exceed $5,000,000, which liens may be first priority liens. Debtor acknowledges that Congress has consented only to the Liens permitted by this Section 8.4. 8.5 Sale of Assets; Preservation of Corporate Existence. Debtor shall not, and shall not permit its Subsidiaries to, sell, lease, transfer, abandon or otherwise dispose of its properties, assets or rights (tangible or intangible), except for (a) sales of Inventory in the ordinary course of Debtor's business, (b) the sale of assets, other than Inventory in the ordinary course of Debtor's business (which shall include close-out sales of Inventory), during any fiscal year which have an aggregate value based upon the higher of fair market value and appraised orderly liquidation value not in excess of $500,000, (c) the sale of the Headquarters Property and (d) the sale, lease, transfer, or other disposition of Equipment so long as (i) such Equipment is promptly replaced with like-kind Equipment of the same or greater value or (ii) the Debtor determines in its reasonable business judgment that such Equipment is not necessary to its business. On or before the twentieth day of each month, Debtor shall deliver to Congress a report of dispositions of assets during the preceding month pursuant to Section 8.5(c) hereof. Debtor shall not, and shall cause each of its Subsidiaries not to, consolidate or merge with or into any other entity or permit any other entity to 35 41 consolidate or merge with or into Debtor or its Subsidiaries, except for mergers of any Subsidiary with Debtor solely to effect a name change as permitted in accordance with the immediately following sentence. Debtor shall give Congress 30 days' prior written notice of any proposed change in Debtor's corporate name or merger with any wholly owned Subsidiary of Debtor solely to effect such name change, which notice shall set forth the new name. Debtor will at all times preserve, renew and keep in full force and effect Debtor's existence as a corporation and the rights and franchises with respect thereto and continue to engage in business of the same type as Debtor is engaged as of the date hereof. 8.6 Investments. Except as set forth on Schedule 8.6 hereto and as otherwise provided herein, Debtor shall not make or permit to exist any investments other than Permitted Investments. 8.7 Liability for Indebtedness of Third Parties. Debtor shall not, and shall cause its Subsidiaries not to, directly or indirectly, create or become liable in respect of any Accommodation Obligation, except (i) the Obligations, (ii) trade obligations and other normal accruals in the ordinary course of business not yet due and payable, (iii) guarantees resulting from endorsement of negotiable instruments which are being collected in accordance with Section 6 hereof, (iv) Accommodation Obligations existing on the date hereof which are listed on Schedule 8.7 hereto, (v) the guaranty of Indebtedness of Galco in an aggregate amount not to exceed $500,000 outstanding at any time and (vi) as permitted under Section 8.4(d) hereof. 8.8 Officer Compensation. Except as set forth in Schedule 8.8 hereto, Debtor shall not, and shall cause its Subsidiaries not to, make any loans to, or pay any bonuses, management or other fees, amounts or other form of compensation to any officers, directors, employees or stockholders of Debtor or its Subsidiaries, except for (a) advances or reimbursements by Debtor or its Subsidiaries for reasonable travel, entertainment or other expenses to Debtor's or such Subsidiaries's officers, directors or employees in the ordinary course of Debtor's business, (b) compensation (including reasonable bonuses and benefits) for all officers, directors and other personnel which has been approved by the Debtor's board of directors or a duly designated committee thereof, and (c) professional, legal and consulting fees incurred in the ordinary course of Debtor's and its Subsidiaries' business. 8.9 Redemption of Capital Stock; Dividends. Debtor shall not, except with the prior written consent of Congress, which consent shall not be unreasonably withheld, (a) redeem, purchase or otherwise retire any of its shares of capital stock, and shall not permit its Subsidiaries to redeem, purchase, or otherwise retire any of their shares of capital stock, (b) declare or pay any dividends in any fiscal year on any class of 36 42 stock or classes of stock, (c) return capital to its stockholders, (d) make any other distribution on or in respect of any shares of any class of capital stock of Debtor, or (e) issue or distribute any capital stock or other securities for consideration or otherwise, except capital stock of the Debtor granted, issued or otherwise distributed to the Debtor's employees or directors pursuant to a stock option plan of the Debtor existing on the date hereof. 8.10 Transactions with Affiliates. Debtor shall not enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service to or by any Affiliate, except in the ordinary course of Debtor's business and upon fair and reasonable terms no less favorable to Debtor than Debtor would obtain in a comparable arm's- length transaction with a Person who is not an Affiliate. 8.11 Payment on Indebtedness. Except for (i) scheduled payments of interest on Permitted Indebtedness and (ii) the repayment of any Permitted Indebtedness in connection with the permitted refinancing or refunding thereof, Debtor shall not pay or agree to pay any of Debtor's existing Indebtedness (including, without limitation, Indebtedness owed pursuant to the Convertible Subordinated Debentures), or pay or make any distribution or loan to permit the payment of any existing Indebtedness of any of its Subsidiaries or Affiliates, prior to the scheduled maturity of such Indebtedness. 8.12 Amendment of Articles of Incorporation. Debtor may amend its Articles of Incorporation (including, without limitation, to effect a change in its corporate name), provided that Debtor provides Congress with 30 days' prior written notice thereof and thereafter furnishes to Congress a copy of such amendment, certified by the Secretary of State of Delaware, within ten days after the date such amendment is filed with the Secretary of State of Delaware. 8.13 Maintenance of Liability and Casualty Insurance. Debtor shall maintain, at its expense, such public liability and third party property damage insurance in such amounts, with such deductibles and with such insurance companies, as are reasonably acceptable to Congress. Debtor shall not, without Congress' prior written consent, amend, modify or change in any way any such insurance policy and shall provide Congress with written notice of any expiration of any such policy or any failure by Debtor to renew any such policy within five Business Days of such expiration or failure to renew. Debtor shall at all times maintain, with financially sound and reputable insurers, casualty and hazard insurance with respect to the Collateral for not less than its full market value and against all risks to which it may be exposed for which such insurance is customary in Debtor's industry. All such insurance policies shall be in such form, substance, amounts and coverage as in effect on the date of the 37 43 Original Agreement or as otherwise may be satisfactory to Congress and shall provide for ten days' minimum prior cancellation notice in writing to Congress. In the event that the Debtor fails to timely act hereunder, Congress may act as attorney for Debtor in obtaining, adjusting, settling, amending and cancelling such insurance. Debtor shall promptly (i) obtain endorsements to all existing and future insurance policies with respect to the Collateral specifying that the proceeds of such insurance shall be payable to Congress and Debtor as their interests may appear and further specifying that Congress shall be paid regardless of any act, omission or breach of warranty by Debtor, (ii) deliver to Congress original executed copies of such endorsements and, at Congress' request, originals or certified duplicate copies of the underlying insurance policies, (iii) deliver to Congress certificates of insurance executed by such insurers (or their agents) stating that such policies are presently in effect and the amounts and types of coverage of such policies, (iv) deliver to Congress copies of the insurance binders describing the terms of such insurance policies, and (v) deliver to Congress such other evidence which is satisfactory to Congress of compliance with the provisions hereof. Congress hereby acknowledges that it presently considers the insurance in effect as of the date hereof to be acceptable for purposes of this Section 8.13. Any insurance monies received at any time shall, at Congress' option, (i) be applied to the cost of repairs to or replacement for the damaged Collateral on account of which such proceeds were paid or (ii) be applied to payment of any of the Obligations, whether or not due, in any order and in such manner as Congress, in its sole discretion, may determine. 8.14 Litigation; Contested Taxes. Debtor shall, as soon as possible, and in any event within ten Business Days after Debtor learns of the following, give written notice to Congress of (i) any proceeding(s) being instituted or overtly threatened to be instituted by or against Debtor or any of its Subsidiaries in any federal, state, local or foreign court or before any commission or other regulatory body (federal, state, local or foreign) in which money damages in excess of $500,000 are claimed or any material nonmonetary relief is requested, and (ii) any material adverse change in the business, properties, assets (tangible or intangible) or condition (financial or otherwise) of Debtor, any of its Subsidiaries or any Guarantor. Debtor shall promptly notify Congress of any taxes, assessments, contributions and governmental charges which are not paid prior to the date on which penalties attach thereto. 8.15 ERISA. (a) Debtor shall, and will cause each Subsidiary to, (i) refrain from terminating any Benefit Plan that is presently in existence unless such Benefit Plan can be terminated without liability that is material to Debtor in connection with such termination; (ii) make contributions to all of Debtor's and its 38 44 Subsidiaries' Benefit Plans in a timely manner and in a sufficient amount to comply with the minimum funding requirements of ERISA so that no liability of Debtor arises as a result of a failure to make such contributions; (iii) comply with all requirements of ERISA that relate to any Benefit Plan so that no material liability of Debtor with respect to any non-compliance will arise; and (iv) notify Congress immediately upon receipt by Debtor or any of its Subsidiaries of any notice issued by the Pension Benefit Guaranty Corporation of the institution of any proceeding to terminate any Benefit Plan. (b) Debtor shall notify Congress in writing as soon as reasonably practicable upon becoming aware of the occurrence of any Termination Event or Prohibited Transaction in connection with any Benefit Plan or trust created thereunder, specifying the nature thereof, what action Debtor or its ERISA Affiliates have taken and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the Pension Benefit Guaranty Corporation with respect thereto, and shall provide Congress as soon as reasonably practicable, copies of (i) all notices received by Debtor or any of its ERISA Affiliates of the Pension Benefit Guaranty Corporation's intent to terminate any Benefit Plan or to have a trustee appointed to administer any Benefit Plan, (ii) all notices received by Debtor or any of its ERISA Affiliates from the sponsor of a Multiemployer Plan pursuant to Section 4201 of ERISA involving any withdrawal liability, and (iii) all funding waiver requests filed by Debtor or any of its ERISA Affiliates with the Internal Revenue Service with respect to any Benefit Plan, and all communications received by Debtor or any of its ERISA Affiliates from the Internal Revenue Service with respect to any such funding waiver request. (c) Debtor shall not (i) engage or permit any Subsidiary to engage in any Prohibited Transaction which could result in material liability to Debtor or any Subsidiary; (ii) except as set forth on Schedule 8.15 hereto, permit to exist any accumulated funding deficiency, as defined in Section 302(a) of ERISA and Section 412(a) of the Internal Revenue Code, or fail to pay any installment necessary to amortize any waived funding deficiency, with respect to any Benefit Plan maintained by Debtor or any Subsidiary; (iii) fail to make any payments to any Multiemployer Plan that Debtor may be required to make under any agreement relating to such Multiemployer Plan or any law pertaining thereto; (iv) terminate any Benefit Plan so as to result in any material liability of Debtor or any Subsidiary under Title IV of ERISA; or (v) permit to exist any occurrence of any Reportable Event which presents a material risk of material liability of such Debtor or any Subsidiary of Debtor under ERISA or the Internal Revenue Code. (d) Debtor will provide to Congress from time to time as necessary to keep such information complete and current, a description of all Benefit Plans maintained by Debtor and its 39 45 Subsidiaries and confirmation satisfactory to Congress that (i) except as set forth on Schedule 8.15 hereto, such Benefit Plans are adequately funded in accordance with at least the minimum statutory requirements for funding; (ii) no Reportable Event with respect thereto has occurred which could result in a material liability to Debtor or any Subsidiary that has not been satisfied; and (iii) no termination of, or withdrawal from, such Benefit Plans has occurred or is contemplated by Debtor or any Subsidiary which could result in a material liability to Debtor or any Subsidiary that has not been satisfied. (e) Upon the written request of Congress, Debtor shall provide Congress with an officer's certificate stating that Debtor and each of its Subsidiaries have made all payments required to be made by Debtor and its Subsidiaries to the Benefit Plans. (f) Debtor shall prior to becoming a party to or obligated to make payments under any Multiemployer Plan (i) provide Congress with an analysis of Debtor's projected funding obligations under such Multiemployer Plan over the immediately succeeding two-year period together with such other financial or other relevant information as Congress may reasonably request and (ii) obtain Congress' prior written consent, which consent shall not be unreasonably withheld. 8.16 Environmental. (a) Debtor shall, and shall cause each of its Subsidiaries to, conduct its business and maintain its facilities so as to comply in all material respects with all Environmental Laws, provided, however, that nothing contained in this Section 8.16 shall prevent Debtor or any such Subsidiary from contesting, in good faith by appropriate legal proceedings, any Environmental Laws or the application thereof. Notwithstanding the foregoing, an Event of Default shall not arise hereunder if, after discovery of any material noncompliance with any Environmental Laws Debtor within 15 Business Days of such discovery notifies Congress and corrects or remedies such material noncompliance within the earlier of a reasonable period of time after discovery or as required pursuant to any judicial or administrative order or any other Environmental Laws, that is not the subject of a good faith contest in any appropriate legal proceeding. (b) If Debtor or any Subsidiary shall receive written notice (i) that any violation of any Environmental Laws may have occurred or is about to occur in connection with the facilities or operations owned or controlled by Debtor or any such Subsidiary; (ii) that any administrative or judicial complaint or order has been filed or is about to be filed against Debtor or any such Subsidiary alleging any violation of Environmental Laws or requiring Debtor or any such Subsidiary to take any action in connection with the release or threatened release of any 40 46 Hazardous Substance into the environment, or (iii) that Debtor or any such Subsidiary may be liable or responsible for response costs associated with a release or threatened release of any Hazardous Substance into the environment or any damages caused thereby, then and in each case Debtor shall provide Congress with a copy of such notice within 15 Business Days of Debtor's receipt thereof. (c) If Debtor or any Subsidiary discovers or otherwise becomes aware of (i) any release of any Hazardous Substance at or from the operations and facilities owned or controlled by Debtor or any Subsidiary, or (ii) any violation of Environmental Laws arising out of or in connection with the operations and facilities owned or controlled by Debtor or any such Subsidiary, which release or violation will have a material adverse effect on the operations or facilities (solely for the purpose of this subparagraph (c), "material adverse effect" shall mean requiring the expenditure of $250,000 or more in remediation costs or directly related expense or costs or interfering in a material respect with the operation of any plant or major production line of Debtor), then Debtor shall provide Congress with written notice of such release or violation within 15 Business Days of discovery and confirmation thereof by Debtor or any such Subsidiary. (d) Debtor shall provide Congress with a copy of any report of any environmental audit, study, or other investigation relating to the operations and facilities owned or controlled by Debtor or the Subsidiaries within 20 Business Days of Debtor's receipt thereof. (e) Within 30 Business Days of Debtor having become aware of the enactment, promulgation or issuance of any Environmental Laws that may result in any material adverse change in the condition, financial or otherwise, of Debtor, Debtor shall provide Congress with written notice thereof. (f) Within 30 Business Days of Debtor having received notice, discovered or otherwise become aware of any non- compliance with any Environmental Laws, Debtor shall deliver (i) an estimate of the costs and related expenses of any response or remedial action required pursuant to any Environmental Laws, but only if such estimate exceeds $250,000 and, (ii) if such estimate is required to be delivered pursuant to this Section 8.16(f), a statement setting forth in reasonable detail projections showing compliance with financial covenants after giving effect to the payment of such costs and expenses, including all premises or assumptions on which such projections are based. 8.17 Indebtedness. Debtor shall not, and shall not permit its Subsidiaries to, incur or permit to remain outstanding any Indebtedness other than Permitted Indebtedness. 41 47 8.18 Notices of Default. Debtor shall provide Congress with a copy of all notices of default under any material contract (as defined in Section 10.1(i) hereof) (other than notice of Event of Default delivered to Debtor by Congress) delivered to Debtor or any of its Subsidiaries no later than two Business Days after Debtor receives such notice. In the event Debtor is informed orally of an Event of Default by any Person other than Congress, Debtor shall immediately notify Congress by telephone of such Event of Default, with written confirmation thereof to be delivered to Congress no later than two Business Days after Debtor was initially informed of such Event of Default. 8.19 Maintenance of Records of Accounts. Debtor shall keep and maintain, at its cost and expense, satisfactory and complete books and records of all Accounts, all payments received or credits granted thereon, and all other dealings therewith. At such times as Congress may reasonably request, Debtor shall deliver to Congress copies of documents evidencing the sale and delivery of goods or the performance of services which created any Accounts, including but not limited to any contracts, orders, invoices, bills of lading, warehouse receipts, delivery tickets and shipping receipts, together with schedules describing the Accounts and/or written confirmatory assignments to Congress of each Account, in form and substance reasonably satisfactory to Congress and duly executed by Debtor, together with such other information as Congress may reasonably request. In no event shall the making or the failure to make or the content of any schedule or assignment or Debtor's failure to comply with the provisions hereof be deemed or construed as a waiver, limitation or modification of Congress' security interest in, Lien upon and assignment of the Collateral or Debtor's representations, warranties or covenants under this Agreement or any other Loan Document. 8.20 Use of Proceeds. Debtor agrees that the funds advanced to it by Congress pursuant to the terms of this Agreement shall be utilized only for the following purposes: (a) for Debtor's working capital purposes; (b) to make capital expenditures to the extent otherwise permitted hereunder; and (c) for the Acquisition and fees and expenses incurred in connection therewith to the extent otherwise permitted hereunder; and . 8.21 Covenants as to Inventory and Equipment. (a) Debtor shall promptly notify Congress in writing of the details of any loss, damage, investigation, action, suit, 42 48 proceeding or claim relating to the Collateral which would result in any material adverse change in Debtor's business, properties (tangible or intangible) or condition (financial or otherwise). (b) Upon Congress' request, but in any case prior to an Event of Default no more than once during any fiscal year of Debtor, Debtor shall, at Debtor's sole cost and expense, execute and deliver to Congress written reports or updated appraisals as to the Inventory and Equipment listing all items and categories thereof, describing the condition of same and setting forth the value thereof (the lower of cost or market value of the Inventory and the lower of net cost less depreciation, fair market value and/or liquidation value of the Equipment), in such form as is satisfactory to Congress. (c) Debtor shall, at Debtor's own expense, keep the Equipment in good working order, repair, and operating condition, subject to normal wear and tear. (d) Debtor shall (i) use, store and maintain the Inventory and the Equipment with all reasonable care and caution, and (ii) use the Inventory and Equipment for lawful purposes only and in conformity with applicable laws, ordinances and regulations. (e) All Inventory shall be produced in accordance with the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto. (f) Debtor shall assume, as against Congress, all responsibility and liability arising from or relating to the use, sale or other disposition of the Inventory and the Equipment. (g) In addition to the requirements of (a)-(f) above and without limiting the generality of Congress' discretion in requesting written inventory records and reports, Debtor shall at all times hereafter maintain a perpetual inventory, keeping correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, Debtor's cost therefor and daily withdrawals therefrom and additions thereto, all of which records shall be maintained in accordance with GAAP, if applicable, and consistent with Debtor's past practice and which records shall be available during Debtor's usual business hours at the request of any of Congress' officers, employees or agents. Debtor shall conduct a physical count of the Inventory for which a statistical sampling will be sufficient, provided that such statistical sampling is consistent with prior practice of Debtor and performed in accordance with generally accepted auditing standards, at least once a year and promptly following such physical inventory shall supply Congress with a report in a form and with such specificity as may be satisfactory to Congress concerning such physical count of the Inventory. 43 49 8.22 Financial Covenants. From the date hereof and thereafter until the Obligations have been satisfied, Debtor shall: (a) Consolidated Tangible Net Worth. Maintain at all times a Consolidated Tangible Net Worth of not less $20,000,000. (b) Capital Expenditures. Not, and not permit any Subsidiary to, purchase or otherwise acquire (including, without limitation, acquisition by way of Capital Lease), or commit to purchase or otherwise acquire, any fixed asset if, after giving effect to such purchases or other acquisition, the aggregate cost of all fixed assets purchased or otherwise acquired by Debtor and its Subsidiaries on a consolidated basis in any one fiscal year would exceed $1,000,000; provided, however, that expenses incurred in connection with the development and acquisition of tools and molds for the manufacture of Inventory shall not be considered capital expenditures for the purposes of this Section 8.22(b). 8.23 Loan Agreement as Financing Statement. Debtor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. 8.24 Location and Use of Collateral. Debtor shall not keep Collateral at any location not set forth on Schedule 7.14(b) unless a financing statement with respect to such Collateral is on file in the appropriate filing office and in effect for such location and Debtor has delivered to Congress a bailee letter satisfactory to Congress in its sole discretion. Debtor shall use the Collateral only in Debtor's business and not for personal, family, household or farming use. 8.25 Location of Chief Executive Office. Debtor shall not change the location of its chief executive office without Congress' prior written consent, which shall not be unreasonably withheld, and prior to making any such change, Debtor shall execute any additional financing statements or other documents or notices which Congress may require in order to maintain Congress' perfected security interest in the Collateral. SECTION 9. CONDITIONS PRECEDENT. 9.1 Conditions Precedent to Rollover Advance. The effectiveness of this amendment and restatement of the Original Agreement and the obligation of Congress to roll over the Existing Revolving Loans into Revolving Loans hereunder shall be subject to the satisfaction of each of the following conditions: 44 50 (a) There shall have been no material adverse change in the business, assets, properties, conditions (financial or otherwise) or prospects of Debtor from the date of completion of Congress' latest field audit to the date hereof and no information reasonably deemed by Congress to be reliable shall have been received on or prior to the date hereof by Congress demonstrating or reflecting a material adverse change from the results obtained in Congress' latest field audit. (b) Congress shall have received all of the following, each fully executed by the appropriate parties and in form and substance satisfactory to Congress as Congress, in its sole discretion, shall determine: (i) this Agreement, together with all schedules and exhibits hereto which are in each case true, complete and correct; (ii) an Amended and Restated Revolving Note in the form attached hereto as Schedule 9.1(b)(ii) duly executed by Debtor (the "Revolving Note"); (iii) an opinion letter from Shereff, Friedman, Hoffman & Goodman, LLP; (iv) the Trademark Security Agreement; (v) the Mortgage Amendment and such evidence of the condition of title to the Headquarters Property as shall be reasonably acceptable to Congress, including, without limitation, title insurance with respect to the Headquarters Property; (vi) current Uniform Commercial Code searches made in such places as Congress may specify, covering Debtor and any Subsidiary which executes any of the Loan Documents showing no filings relating to, or which could relate to, the Collateral or the improvements on the Property, other than (i) those filings made under the Original Agreement and (ii) those other filings set forth on Schedule 9.1(b)(vi) hereto; (vii) a certificate of the Secretary of Debtor in the form of Schedule 9.1(b)(vii) hereto, dated as of the date of the Rollover Advance certifying, among other things, (a) the names and true signatures of the officers of Debtor authorized to sign any of the Loan Documents to which Debtor is a party; (b) that attached thereto is a true and complete copy of the Articles of Incorporation and the by-laws of Debtor as in effect on the date of such certification; and (c) that attached thereto is a true and complete copy of the resolutions of Debtor's Board of Directors approving and authorizing the execution and delivery of the Loan Documents to which Debtor is a party; 45 51 (viii) a certificate in the form of Schedule 9.1(b)(viii) hereto confirming representations and warranties and the satisfaction of conditions precedent; (ix) good standing certificates for Debtor issued by the Secretary of State of each of Delaware and California; (x) copies of the Articles of Incorporation of Debtor certified by the Secretary of State of Delaware; and (xi) any other documents required pursuant to the terms of any Loan Document or as Congress, in its sole discretion, may require. (c) there shall be remaining Availability immediately after the Rollover Advance of not less than $1,500,000. (d) Congress shall have sold Participations in an aggregate amount equal to at least $40,000,000. (e) No Event of Default (as defined in the Original Agreement) or event that with time or notice or both would result in an Event of Default (as defined in the Original Agreement), in each case under the Original Agreement, shall have occurred and be continuing. 9.2 Conditions Precedent to All Advances. The obligation of Congress to make any Advance (including the Rollover Advance) shall be subject to the satisfaction of each of the following conditions: (a) During the period commencing on the date of the most recent audited financial statement delivered to Congress prior to the date hereof and ending on the date on which Congress makes such Advance, Debtor's operations shall have been conducted in the ordinary course and there shall have been no material adverse change, as determined by Congress, in its sole discretion, in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Debtor; (b) All of Debtor's representations and warranties contained in this Agreement and any other agreement executed in connection therewith (other than the representations and warranties that are expressly made as of a certain date, which shall be true and correct on and as of such date) shall be true and correct on and as of the date on which Congress makes such Advance as though made on and as of that date; (c) No Event of Default or event that with time or notice or both would result in an Event of Default shall have occurred and be continuing or would result from the making of any Advance as of the date on which Congress makes such Advance; 46 52 (d) No law or regulation shall prohibit, and no order, judgment or decree of any Governmental Authority shall enjoin or restrain, Congress from making such Advance; and (e) Debtor shall have paid to Congress the fees and expenses due and payable under this Agreement on or before the date of the making of such Advance. SECTION 10. EVENTS OF DEFAULT. 10.1 Events of Default. All Obligations shall be, at Congress' option, immediately due and payable without notice or demand (notwithstanding any deferred or installment payments allowed, if any, by any instrument evidencing or relating to the Obligations) and any provision of this Agreement or any supplement hereto, as to future loans and advances by Congress shall, at Congress' option, terminate forthwith, upon the termination or non-renewal of this Agreement or upon the occurrence of any one or more of the following ("Events of Default"): (a) if Debtor (i) shall fail to pay to Congress interest and fees and, when due any other Obligations owing to Congress, (ii) shall breach any of the terms, covenants, conditions or provisions contained in Sections 8.15(b), 8.15(c), 8.15(d), 8.15(e) or 8.22 hereof, (iii) shall breach any of the reporting requirements contained in Sections 2.1 or 8.1 hereof, which breach is not cured by the Debtor within five (5) Business Days of the receipt of written notice thereof from Congress, (iv) shall breach and continue to breach for the period provided therein any covenant, condition or provision of this Agreement or any of the Loan Documents which contains an express cure period, or (v) shall breach any other term, covenant, condition or provision of this Agreement or any of the Loan Documents; (b) if any Guarantor, endorser or other Person liable on the Obligations shall terminate or breach any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other agreement of such person with, or in favor of, Congress; (c) if any representation, warranty, or statement of fact made to Congress at any time by Debtor or on Debtor's behalf is false or misleading in any material respect when made; (d) if Debtor, or any Guarantor, endorser or other Person liable on the Obligations, shall become insolvent, fail to meet Debtor's or its debts as they mature, call a meeting of creditors or have a creditors' committee appointed, make an assignment for the benefit of creditors, commence or have commenced against Debtor or any of them any action or proceeding for relief under any bankruptcy law, or if Debtor or any of them suspend or discontinue doing business for any reason, or if a 47 53 receiver, custodian or trustee of any kind is appointed for Debtor or any of them or any of Debtor's or their respective properties; (e) if there shall be a material adverse change in Debtor's business, assets or condition (financial or otherwise) from the date of the Original Agreement; (f) if at any time Congress shall, in Congress' Permitted Discretion, consider the Obligations insecure or any part of the Collateral insufficient and Debtor shall not on Congress' demand furnish other Collateral or make payment on account, satisfactory to Congress; (g) upon the occurrence of any Material Judgment; (h) upon the occurrence of any Change in Control; (i) upon the occurrence of a default or an event that will mature into an event of default with notice or the passage of time or both by Debtor or any Subsidiary of Debtor (subject to any applicable grace period) under any material contract, lease or commitment by which Debtor or any Subsidiary of Debtor or any Guarantor is bound. For purposes of this Section 10.1(i), "material contract" shall mean any contract the breach in question of which could reasonably be expected to have a material adverse effect upon Debtor and its Subsidiaries taken as a whole, or upon any Collateral; (j) upon the occurrence of a default in the payment when due, whether by acceleration or otherwise (subject to any applicable grace period), of any Indebtedness of, or guaranteed by, Debtor, any Subsidiary or any Guarantor (other than (i) any Indebtedness under this Agreement, (ii) any Indebtedness of any Subsidiary to Debtor or to any other Subsidiary, or (iii) any Indebtedness which does not exceed $250,000). Debtor shall provide Congress with a copy of all notices of default (other than notice of Event of Default delivered to Debtor by Congress) delivered to Debtor no later than two Business Days after Debtor receives such notice. In the event Debtor is informed orally of any default by any Person other than Congress, Debtor shall immediately notify Congress by telephone of such default, with written confirmation thereof to be delivered to Congress no later than two Business Days after Debtor was initially informed of such default; (k) upon the occurrence of any event or condition which results in the acceleration of the maturity of any Indebtedness in an amount not less than $250,000 of, or guaranteed by, Debtor, any Subsidiary or any Guarantor (other than (i) any Indebtedness under this Agreement or (ii) any Indebtedness of any Subsidiary to Debtor or to any other Subsidiary) or enables the holder or holders of such other 48 54 Indebtedness or any trustee or agent for such holders (any required notice of default having been given and any applicable grace period having expired) to accelerate the maturity of such other Indebtedness; and (l) upon the occurrence of a default or an event of default under the Convertible Subordinated Debenture Indenture. 10.2 Effect of Event of Default; Remedies. Upon the occurrence and during the continuance of any Event of Default which has not been waived in writing and at any time thereafter, Congress shall have the right (in addition to any other rights Congress may have under this Agreement, the other Loan Documents or otherwise) without further notice to Debtor, to appropriate, set off and apply to the payment of any or all of the Obligations, any or all Collateral, in such manner as Congress shall in Congress' sole discretion determine, to enforce payment of any Collateral, to cash collateralize any Letter of Credit, to settle, compromise or release in whole or in part, any amounts owing on the Collateral, to prosecute any action, suit or proceeding with respect to the Collateral, to extend the time of payment of any and all Collateral, to make allowances and adjustments with respect thereto, to issue credits in Congress' or Debtor's name, to sell, assign and deliver the Collateral (or any part thereof), at public or private sale, at broker's board, for cash, upon credit or otherwise, at Congress' sole option and discretion, and Congress may bid or become purchaser at any such sale, if public, free from any right of redemption which is hereby expressly waived. 10.3 Possession of Collateral by Judicial Process. In the event Congress seeks to take possession of all or any portion of the Collateral by judicial process, Debtor irrevocably waives: (a) the posting of any bond, surety or security with respect thereto which might otherwise be required, (b) any demand for possession prior to the commencement of any suit or action to recover the Collateral, and (c) any requirement that Congress retains possession and does not dispose of any Collateral until after trial or final judgment. 10.4 Notice of Public Sale. Debtor agrees that the giving of ten days notice by Congress sent by ordinary mail, postage prepaid, to Debtor's address set forth below, designating the place and time of any public sale or of the time after which any private sale or other intended disposition of the Collateral is to be made, shall be deemed to be reasonable notice thereof and Debtor waives any other notice with respect thereto. 10.5 Net Cash Proceeds Deficiency or Excess. The net cash proceeds resulting from the exercise of any of the foregoing rights or remedies shall be applied by Congress to the payment of the Obligations in such order as Congress may elect, and Debtor shall remain liable to Congress for any deficiency. Without 49 55 limiting the generality of the foregoing, if Congress enters into any credit transaction, directly or indirectly, in connection with the disposition of any Collateral, Congress shall have the option, at any time, in Congress' sole discretion, to reduce the Obligations by the principal amount of such credit transaction or to defer the reduction thereof until actual receipt by Congress of cash or other immediately available funds in connection therewith. 10.6 Remedies Not Exclusive. The enumeration of the foregoing rights and remedies is not intended to be exclusive, and such rights and remedies are in addition to and not by way of limitation of any other rights or remedies Congress may have under the UCC or other applicable law. Congress shall have the right, in its sole discretion, to determine which rights and remedies, and in which order any of the same, are to be exercised, and to determine which Collateral is to be proceeded against and in which order, and the exercise of any right or remedy shall not preclude the exercise of any others, all of which shall be cumulative. 10.7 No Waiver of Remedies. No act, failure or delay by Congress shall constitute a waiver of any of Congress' rights and remedies. No single or partial waiver by Congress of any provision of this Agreement or any other Loan Document, or breach or default hereunder, or of any right or remedy which Congress may have shall operate as a waiver of any other provision, breach, default, right or remedy or of the same provision, breach, default, right or remedy on a future occasion. 10.8 Waivers. Debtor waives presentment, notice of dishonor, protest and notice of protest of all instruments included in or evidencing any of the Obligations or the Collateral and any and all notices or demands whatsoever (except as expressly provided herein). Congress may, at all times, proceed directly against Debtor to enforce payment of the Obligations and shall not be required to take any action of any kind to preserve, collect or protect its or Debtor's rights in the Collateral. 10.9 Additional Remedies in Respect of Inventory and Equipment. Congress shall have the right (in addition to any other rights it may have under this Agreement, without notice to Debtor, at any time and from time to time, in Congress' discretion, with or without judicial process or the aid or assistance of others and without cost to Congress): (a) To enter upon any premises on or in which any of the Inventory or Equipment may be located and, without resistance or interference by Debtor, take possession of the Inventory and Equipment; (b) To complete processing, manufacturing and repair of all or any portion of the Inventory; 50 56 (c) To sell, foreclose or otherwise dispose of any part or all of the Inventory and Equipment on or in any of Debtor's premises or premises of any other party; (d) To require Debtor, at Debtor's expense, to assemble and make available to Congress any part or all of the Inventory or Equipment at any place and time designated by Congress; and (e) To remove any or all of the Inventory and Equipment from any premises on or in which the same may be located, for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose. SECTION 11. TAXES; EXPENSES; INDEMNITY. 11.1 Taxes. All payments by Debtor of principal of, and interest on, the Obligations and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, but excluding taxes imposed on or measured by any net income or receipts of Congress or any Participant (such non-excluded items being herein called "Non-excluded Taxes"). In the event that any withholding or deduction from any payment to be made by Debtor hereunder is required in respect of any Non-excluded Taxes pursuant to applicable law, rule or regulation, then Debtor will: (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to Congress an official receipt or other documentation satisfactory to Congress evidencing such payment to such authority; and (c) pay to Congress any additional amount necessary to ensure that the net amount actually received by Congress (and its Participants) will equal the full amount Congress (and its Participants) would have received had not such withholding or deduction been required. Moreover, if any Non-excluded Taxes are directly asserted against Congress or any Participant with respect to any payment received by Congress or such Participant hereunder, Congress or such Participant may pay such Non-excluded Taxes and Debtor will promptly pay any additional amount (including any penalties, interest or expenses) necessary in order that the net amount received by such Person after the payment of such Non-excluded Taxes (including any Non-excluded Taxes on such additional amount) shall equal that amount such Person would have received had such Non-excluded Taxes not been asserted. If Debtor fails 51 57 to pay any Non-excluded Taxes (other than any such Taxes which (i) are being contested by Debtor in good faith and by appropriate proceedings and (ii) if not paid, will not result in the imposition of any penalty on Congress or any Participant, as reasonably determined by such Person) when due to the appropriate taxing authority or fails to remit to Congress the required receipts or other required documentary evidence, Debtor shall compensate Congress and each Participant for and hold each harmless against, any incremental Non-excluded Taxes, interest or penalties that may become payable as a result of such failure. A distribution hereunder by Congress to or for the account of any Participant shall be deemed a payment by Debtor. 11.2 General Indemnity. Whether or not the transactions contemplated hereby shall be consummated, Debtor agrees to indemnify, pay and hold Congress and each Participant, and the officers, directors, employees, agents, and affiliates thereof (collectively the "Indemnitees"), harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for any of such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not any of such Indemnitees shall be designated a party thereto) that may be imposed on, incurred by, or asserted against any Indemnitee in any manner relating to or arising out of this Agreement or any other agreements executed and delivered by Debtor in connection herewith, the statements contained in any proposal or commitment letter, any Indemnitee's agreement to make the Advances or to issue Letters of Credit hereunder, the use or intended use of any Letters of Credit, or the use or intended use of the proceeds of any of the Advances hereunder (the "indemnified liabilities"). To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, Debtor shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all indemnified liabilities incurred by the Indemnitees or any of them. The provisions of the undertakings and indemnification set out in this Section 11.2 shall survive satisfaction and payment of the Obligations and termination of this Agreement. 11.3 Capital Adequacy. If Congress or any Participant shall reasonably determine that the application, adoption or phase-in of any law, rule, regulation, directive, interpretation, treaty or guideline regarding capital adequacy, or any change therein or in the interpretation or administration thereof, whether or not having the force of law (including, without limitation, application of changes to Regulation H and Regulation Y of the Federal Reserve Board issued by the Federal Reserve Board on January 19, 1989 and regulations of the Comptroller of 52 58 the Currency, Department of the Treasury, 12 CFR Part 3, Appendix A, issued by the Comptroller of the Currency on January 27, 1989) increases from that required at closing the amount of capital required or expected to be maintained by Congress or such Participant or any Person controlling such Person, and such increase is based upon the existence of such Person's obligations hereunder and other commitments of this type, then from time to time, within 10 days after demand from such Person, Debtor shall pay to such Person such amount or amounts as will compensate such Person or such controlling Person, as the case may be, for such increased capital requirement. The determination of any amount to be paid by Debtor under this Section 11.3 shall take into consideration the policies of Congress or such Participant or any Person controlling Congress or such Participant with respect to capital adequacy and shall be based upon any reasonable averaging, attribution and allocation methods. A certificate of the applicable Person setting forth the amount or amounts as shall be necessary to compensate such Person as specified in this Section 11.3 shall be delivered to Debtor and shall be conclusive in the absence of manifest error. If Debtor so requests, Congress shall use its best efforts to replace any Participant who makes a demand for payment pursuant to this Section 11.3, provided that Debtor shall have made such request no later than 90 days following Debtor's receipt of such demand for payment. 11.4 Benefits of Agreement. Debtor agrees that the provisions of this Section 11 are for the express benefit of Congress and the Participants and such provisions may be enforced by Congress on behalf of such Participants. SECTION 12. MISCELLANEOUS. 12.1 GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL; WAIVER OF DAMAGES. (a) THIS AGREEMENT AND, UNLESS OTHERWISE EXPRESSLY STATED, EACH LOAN DOCUMENT TO WHICH DEBTOR IS A PARTY (COLLECTIVELY THE "AGREEMENTS") SHALL BE GOVERNED BY AND INTERPRETED UNDER THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAWS PROVISIONS) AND DECISIONS OF THE STATE OF ILLINOIS, AND ANY DISPUTE ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN DEBTOR AND CONGRESS IN CONNECTION WITH THE AGREEMENTS AND WHETHER ARISING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAWS PROVISIONS) AND DECISIONS OF THE STATE OF ILLINOIS. (b) EXCEPT AS PROVIDED IN THE NEXT PARAGRAPH, CONGRESS BY ITS ACCEPTANCE HEREOF AND DEBTOR AGREE THAT ALL DISPUTES BETWEEN THEM ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THE AGREEMENTS, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED ONLY BY STATE OR 53 59 FEDERAL COURTS LOCATED IN CHICAGO, ILLINOIS, BUT CONGRESS BY ITS ACCEPTANCE HEREOF AND DEBTOR ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF CHICAGO, ILLINOIS. IN ANY SUCH DISPUTE, DEBTOR WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING SUCH DISPUTE INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS. (c) DEBTOR AGREES THAT CONGRESS SHALL HAVE THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST DEBTOR OR ANY COLLATERAL IN A COURT IN ANY LOCATION REASONABLY SELECTED IN GOOD FAITH TO ENABLE CONGRESS TO REALIZE ON ANY COLLATERAL, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF CONGRESS. DEBTOR AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY SUCH PROCEEDING BROUGHT BY CONGRESS (OUTSIDE OF COURTS LOCATED IN CHICAGO) TO REALIZE ON ANY COLLATERAL OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF CONGRESS. TO THE EXTENT THAT CONGRESS PROCEEDS WITH ANY DISPUTE IN A COURT LOCATED IN NEW YORK, CALIFORNIA OR ILLINOIS, DEBTOR WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH CONGRESS HAS COMMENCED A PROCEEDING DESCRIBED IN THIS PARAGRAPH INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS. (d) CONGRESS BY ITS ACCEPTANCE HEREOF AND DEBTOR EACH WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. INSTEAD, ANY DISPUTES RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL WITHOUT A JURY. (e) DEBTOR HEREBY IRREVOCABLY DESIGNATES CT CORPORATION SYSTEM, CHICAGO, ILLINOIS, AS THE DESIGNEE, APPOINTEE AND AGENT OF DEBTOR TO RECEIVE, FOR AND ON BEHALF OF DEBTOR, SERVICE OF PROCESS IN SUCH RESPECTIVE JURISDICTIONS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY DOCUMENTS RELATED HERETO. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT WILL BE PROMPTLY FORWARDED BY MAIL TO DEBTOR AT ITS ADDRESS SET FORTH IN THIS AGREEMENT, BUT THE FAILURE OF DEBTOR TO RECEIVE SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. DEBTOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO DEBTOR AT ITS SAID ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE FOUR DAYS AFTER SUCH MAILING. (f) NOTHING HEREIN SHALL AFFECT THE RIGHT OF CONGRESS, OR ANY HOLDER OF A NOTE TO SERVE PROCESS IN ANY OTHER MANNER 54 60 PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST DEBTOR IN ANY OTHER JURISDICTION. (g) DEBTOR (I) AGREES THAT CONGRESS SHALL NOT HAVE ANY LIABILITY TO DEBTOR (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) FOR LOSSES SUFFERED BY DEBTOR IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THE TRANSACTIONS CONTEMPLATED AND THE RELATIONSHIP ESTABLISHED BY THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION HEREWITH, UNLESS IT IS DETERMINED BY A JUDGMENT OF A COURT THAT IS BINDING ON CONGRESS (WHICH JUDGMENT SHALL BE FINAL AND NOT SUBJECT TO REVIEW ON APPEAL), THAT SUCH LOSSES WERE THE RESULT OF ACTS OR OMISSIONS ON THE PART OF CONGRESS CONSTITUTING WILLFUL MISCONDUCT OR KNOWING VIOLATIONS OF LAW AND (II) WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM AGAINST CONGRESS (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE), EXCEPT A CLAIM BASED UPON WILLFUL MISCONDUCT OR KNOWING VIOLATIONS OF LAW. WHETHER OR NOT SUCH DAMAGES ARE RELATED TO A CLAIM THAT IS SUBJECT TO THE WAIVER EFFECTED ABOVE AND WHETHER OR NOT SUCH WAIVER IS EFFECTIVE, CONGRESS SHALL NOT HAVE ANY LIABILITY WITH RESPECT TO, AND DEBTOR HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR, ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES SUFFERED BY DEBTOR IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO THE TRANSACTIONS CONTEMPLATED OR THE RELATIONSHIP ESTABLISHED BY THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS DETERMINED BY A JUDGMENT OF A COURT THAT IS BINDING ON CONGRESS (WHICH JUDGMENT SHALL BE FINAL AND NOT SUBJECT TO REVIEW ON APPEAL), THAT SUCH DAMAGES WERE THE RESULT OF ACTS OR OMISSIONS ON THE PART OF CONGRESS CONSTITUTING WILLFUL MISCONDUCT OR KNOWING VIOLATIONS OF LAW. 12.2 Entire Agreement. This Agreement, any supplement hereto, the other Loan Documents and any agreements, instruments or documents delivered or to be delivered in connection herewith or therewith represent the parties' entire agreement and understanding concerning the subject matter hereof and thereof, and supersede all other prior and contemporaneous agreements, understandings, negotiations and discussions, representations, warranties, commitments, offers, contracts, whether oral or written. 12.3 Modification of Agreement. No provision hereof shall be modified or amended orally or by course of conduct but only by a written instrument expressly referring hereto signed by both parties. 12.4 Reimbursement for Congress' Costs. Upon Congress' request Debtor shall pay to Congress, or reimburse Congress for, (i) all sums, costs and expenses (including the reasonable fees and disbursements of counsel to Congress) which Congress may pay or incur in connection with or related to the 55 61 negotiation, preparation and consummation of this Agreement, the other Loan Documents and all other agreements, instruments and documents in connection herewith and therewith, and the transactions contemplated hereunder and thereunder, (ii) the reasonable fees and disbursements of counsel to Congress relating to any amendments, supplements, consents or modifications which may be hereafter made or entered into in respect hereof or thereof, (iii) filing fees and taxes, title insurance premiums, recording taxes, expenses for searches, expenses heretofore incurred by Congress during the course of periodic field examinations of the Collateral and Debtor's operations, wire transfer fees and check dishonor fees, (iv) the reasonable fees and disbursements of counsel to Congress in connection with the ongoing interpretation and administration of this Agreement (including, without limitation, field audit expenses billed at $500 per day for field and office time plus out-of-pocket disbursements related to travel by the auditors), the other Loan Documents and all other agreements, instruments and documents in connection herewith and therewith, and the transactions contemplated hereunder and thereunder, and (v) all sums, costs and expenses (including the reasonable fees and disbursements of counsel to Congress) which Congress may pay or incur in connection with or related to the enforcement of this Agreement, the other Loan Documents and all other agreements, instruments and documents in connection herewith and therewith, and all efforts made to defend, protect or enforce the security interest granted herein or therein or in enforcing payment of the Obligations, including without limitation, all fees and expenses for the service and filing of papers, premiums on bonds and undertakings, fees of marshals, sheriffs, custodians, auctioneers and others, travel expenses and all court costs and collection charges, all of which shall be part of the Obligations and shall accrue interest after demand thereof at a rate equal to the highest rate then payable on any of the Obligations. 12.5 Notices. All notices, requests and demands to or upon the respective parties hereto shall be deemed to have been duly given or made: if by hand, telex, telegram or facsimile, immediately upon sending; if by Federal Express, Express Mail or any other overnight delivery service, one (1) day after dispatch; and if mailed by certified mail, return receipt requested, five (5) days after mailing. All notices, requests and demands are to be given or made to the respective parties at the addresses (or to such other addresses as either party may designate by notice in accordance with the provisions of this paragraph) set forth herein. 12.6 Power of Attorney. Debtor hereby constitutes Congress and Congress' agent and any designee, as Debtor's attorney-in-fact, at Debtor's own cost and expense, to exercise at any time all or any of the following powers which, being coupled with an interest, shall be irrevocable until all Obligations have been paid in full: (a) to receive, take, 56 62 endorse, assign, deliver, accept and deposit any and all checks, notes, drafts, remittances and other instruments and documents relating to the Collateral; (b) on or after the occurrence and during the continuance of an Event of Default to receive, open and dispose of all mail addressed to Debtor and to notify postal authorities to change the address for delivery thereof to such address as Congress may designate; (c) on or after the occurrence and during the continuance of an Event of Default to transmit to Account Debtors notice of Congress' interest therein and to request from such Account Debtors at any time, in Congress' or Debtor's name or that of Congress' designees, information concerning the Accounts and the amounts owing thereon; (d) on or after the occurrence and during the continuance of an Event of Default, to notify Account Debtors to make payment directly to Congress; (e) on or after the occurrence and during the continuance of an Event of Default, to take or bring, in Congress' or Debtor's name, all steps, actions, suits or proceedings deemed by you necessary or desirable to effect collection of the Collateral; and (f) to execute in Debtor's name and on Debtor's behalf any UCC financing statements or amendments thereto. Debtor hereby releases Congress and its officers, employees and designees from any liability arising from any act or acts under this Agreement or in furtherance thereof, whether of omission or commission, and whether based upon any error of judgment or mistake of law or fact, except to the extent that it is finally determined by a court of competent jurisdiction that such liability shall have resulted from their own fraud or gross negligence. 12.7 Waiver of Notice, Hearing and Bond. Debtor waives all rights of notice and hearing of any kind prior to the exercise by Congress of its rights from and after the occurrence of an Event of Default to repossess the Collateral with judicial process or to replevy, attach or levy upon the Collateral, real property, or other security for the Obligations. Debtor waives the posting of any bond otherwise required of Congress in connection with any judicial process or proceeding to obtain possession of, replevy, attach or levy upon Collateral, real property, or other security for the Obligations, to enforce any judgment or other court order entered in favor of Congress, or to enforce by specific performance, temporary restraining order, preliminary or permanent injunction, this Agreement or any other agreement or document between Congress and Debtor. 12.8 Advice of Counsel. Debtor represents to Congress that it has discussed this Agreement and the other Loan Documents with Debtor's lawyers. 12.9 Confidentiality. Congress shall hold all information with respect to Debtor or any Subsidiary that is obtained pursuant to or in connection with this Agreement (including, without limitation, the Customer Sales Reports) in accordance with its customary procedures for handling 57 63 confidential information of such nature and in accordance with safe and sound banking practices; it being understood that Congress may disclose such information (a) to any of its examiners, Affiliates, outside auditors, counsel and other professional advisors in connection with this Agreement, (b) to any actual or prospective Participant, (c) as required or requested by any governmental agency or representative thereof or pursuant to legal process or (d) in connection with any action by Congress to enforce this Agreement or to assert, defend or substantiate any rights of Congress hereunder; provided, however, that (a) unless specifically prohibited by applicable law or court order, Congress shall notify Debtor of any request by any governmental agency or representative thereof (other than any such request in connection with an examination of the financial condition of Congress by such governmental agency) for disclosure of any such information prior to disclosure of such information; and (b) prior to any disclosure by Congress to an actual or prospective Participant (except those Participants participating in the Advances on the date of the Rollover Advance, in which case prior to the date of the Rollover Advance), Congress shall require such Participant to agree in writing (i) to be bound by this Section 12.9; and (ii) to require any other Person to whom such Participant discloses such information to be similarly bound by this Section 12.9. Notwithstanding the foregoing, Congress may disclose any information that (i) becomes publicly available other than as a result of a breach of this Agreement, (ii) becomes available to Congress on a nonconfidential basis from a source other than Debtor or a Subsidiary and not in contravention of any other confidentiality obligations of which Congress has actual knowledge or (iii) was available to Congress on a nonconfidential basis prior to its disclosure to Congress by Debtor or a Subsidiary. 12.10 Survival. All representations and warranties contained in this Agreement shall survive the execution and delivery of this Agreement. Notwithstanding any investigation by Congress, all covenants, agreements, representations and warranties made herein by Debtor shall be deemed to be material to and to have been relied upon by Congress. Any indemnification that Debtor has granted to Congress in this Agreement and in connection therewith shall survive the execution, delivery and termination of this Agreement. 58 64 12.11 Participations. Congress shall be entitled to sell Participations in the Advances without the consent of Debtor. Congress agrees that any agreement between Congress and any such Participants in respect of such Participations shall not restrict Congress' right to agree to any immaterial amendment, supplement, waiver or modification to this Agreement or any other Loan Document. 12.12 Severability. If any part of this Agreement is invalid or in contravention of any applicable law or regulation, such part or provision shall be severable without affecting the validity of any other part or provision of this Agreement. 12.13 No Third Party Beneficiaries. Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any Person, other than the signatories to this Agreement and the Participants, any rights or remedies under or by reason of this Agreement. Any benefit conferred to any other Person which is not a signatory to this Agreement or a Participant is incidental and unintended. 12.14 Existing Agreements Superseded. As set forth in Section 1.2 hereof, the Original Agreement is superseded by this Agreement, which has been executed in renewal, amendment, restatement and modification of the obligations under the Original Agreement. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 59 65 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as of the day and year first above written. LEWIS GALOOB TOYS, INC. By: --------------------------- Name: ------------------------- Title: ------------------------ ATTEST: By: ------------------------- Name: ----------------------- Title: ---------------------- CONGRESS FINANCIAL CORPORATION (CENTRAL) By: --------------------------- Name: ------------------------- Title: ------------------------ EX-10.97 7 FOURTH AMENDMENT TO U.S. LICENSE AGREEMENT 1 EXHIBIT 10.9[7] FOURTH AMENDMENT TO LICENSE AGREEMENT THIS AGREEMENT is made and entered into as of this 14th day of October, 1994 and is by and between LEWIS GALOOB TOYS, INC. a corporation organized and existing under the laws of the State of Delaware and having its principal office at 500 Forbes Boulevard, South San Francisco, California 94080 ("Galoob"), and CODEMASTERS SOFTWARE COMPANY, LTD., a corporation organized and existing under the laws of the United Kingdom and having its principal offices at Lower Farm House, Stoneythorpe, Southam, Warwick CV33 ODL, England ("Codemasters"), and CAMERICA CORPORATION, by Deloitte & Touche Inc., in its capacity as Receiver and Manager of the assets and undertakings of Camerica Corporation and not in its personal capacity, ("Camerica") (Codemasters and Camerica being hereinafter collectively referred to as "Licensors"). and DELOITTE & TOUCHE INC., a corporation organized and existing under the laws of Canada and having its principal office at 390 Bay Street, Suite 2400, Toronto, Ontario, Canada ("Deloitte") WHEREAS: (a) Galoob, Codemasters and Camerica entered into a License Agreement dated May 4, 1990 (hereinafter referred to as the "License Agreement"); (b) Galoob, Codemasters and Camerica entered into an amendment to the License Agreement dated June (undated) 1991 (hereinafter referred to as the "First Amendment to License Agreement"); (c) Galoob, Codemasters and Camerica entered into a second amendment to the License Agreement date December 23, 1991 (hereinafter referred to as the "Second Amendment to License Agreement"); 2 (d) Galoob, Codemasters and Camerica entered into a third amendment to the License Agreement dated November 4, 1992 (hereinafter referred to as the "Third Amendment to License Agreement") (collectively the agreements referenced in (a) through (d) being referred to as "License Agreement, as amended"); and (e) Galoob, Codemasters and Camerica want to enter into this Fourth Amendment to License Agreement, to resolve certain royalty-related disputes and other matters on the terms hereinafter set out. NOW THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, and the payment by each of the parties to the other of the sum of Ten Dollars ($10.00) and other good and valuable consideration (the receipt of which consideration is hereby acknowledged by each of the parties), the parties mutually agree as follows: ARTICLE 1 INTERPRETATION 1.1 Whenever used in this Fourth Amendment to License Agreement or the attachments hereto, unless something in the subject matter or context is inconsistent therewith, capitalized terms and other terms which are not specifically defined herein will have the meanings ascribed to them in the License Agreement, as amended. 1.2 The division of this Agreement into Articles and Sections and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. The terms "this Agreement", "hereof", "hereunder" and similar expressions refer to this Agreement and not to any particular Article or Section or other portion hereof and include any agreement supplemental hereto. Unless something in the subject matter or context is inconsistent therewith, references herein to Articles or Sections are to Articles or Sections of this Agreement. ARTICLE 2 SETTLEMENT OF ROYALTY DISPUTES 2.1 The Licensors hereto have disputed the method by which Galoob has determined the Initial Published Price of its Nintendo Super NES Derivative Work and Sega Genesis Derivative Work for purposes of royalty calculations and payments under the License Agreement, as amended. Pursuant to the calculations shown on Schedule "A" (which is attached hereto and made a part hereof), it is agreed that the total amount in dispute concerning this Initial Published Price issue is U.S. $282,000.00. In full and final settlement of this dispute, it is agreed that Galoob will be entitled to retain 25% of this amount, equalling U.S. $71,000.00, and Galoob will pay Codemasters and Camerica an aggregate amount of 75%, equalling U.S. $211,500.00 as follows: Codemasters 70% thereof, equalling U.S. $148,050.00; and Camerica 30% thereof, 3 - 3 - equalling U.S. $63,450.00. Commencing with the royalties calculated and determined for the entirety of the third calendar quarter of 1994 and for the balance of the term of the License Agreement, as amended, it is agreed that Galoob will use its actual published average list price of each Game Genie Derivative Work sold in the first two calendar quarters during which such Game Genie Derivative Work is or was first commercially distributed for the purposes of determining the Initial Published Price and royalty calculations. It is agreed that the Initial Published Price for the Super NES, Sega Genesis, Game Boy and Game Gear Derivative Works are the following respectively, namely, $44.99, $44.99, $29.99 and $29.99. 2.2 (a) The parties have also disputed whether or not Galoob has the right to withhold certain royalties including those paid to Sega of America, Inc. under Galoob's license for the Sega Genesis Derivative Work, from the royalties otherwise due and payable under the License Agreement, as amended, to Codemasters and Camerica pursuant to Section 4.4 of the License Agreement. The parties agree that, as demonstrated on Schedule "A", the total amount of the certain Sega royalties withheld equals U.S. $666,200.00. In full and final settlement of this dispute, it is agreed that Galoob will be entitled to retain 60% of this amount, equalling U.S. $399,720.00, and Galoob will pay Codemasters and Camerica an aggregate amount of 40%, equalling U.S. $266,480.00 as follows: Codemasters 70% thereof, equalling U.S. $186,536.00; and Camerica 30% thereof, equalling U.S. $79,944.00. (b) Section 4.4 of the License Agreement is deleted and is replaced with the following: Commencing with the royalties calculated and determined for the entirety of the third calendar quarter of 1994 and for the balance of the term of the License Agreement, as amended, and in the absence of any agreement between the parties hereto to the contrary, which Galoob can solicit from the Licensors in good faith, it is agreed as follows: the amounts of all royalties payable to Licensors under this License Agreement, as amended, for any Derivative Work, will be reduced by the amounts of any and all royalty payments made by Galoob to bona fide arm's length third parties in connection with such Derivative Works for the use of third party intellectual property rights relating to the manufacture and distribution of the Derivative Works up to a maximum aggregate amount per unit of the lesser of (i) fifty percent (50%) of the royalty paid to said third party/third parties for each unit manufactured and distributed, (ii) 87.5 cents (U.S. $0.875) for each unit manufactured and distributed, or (iii) the amount of the royalty otherwise payable to Licensors for each unit manufactured and distributed. (c) Galoob represents and warrants to Codemasters and Camerica that pursuant to Galoob's license for the Sega Genesis Derivative Work with Sega of America, Inc, ("Sega") that Galoob is required to pay to Sega royalties in connection with such Derivative Work for the use of Sega intellectual property rights relating to the manufacture and distribution of the Sega Genesis Derivative Work. Based on the forgoing, and subject to 4 - 4 - the limits set forth in Section 2.2(b) above, Codemasters and Camerica acknowledge Galoob's right to make deductions from royalties paid hereunder in respect of such payments to Sega. 2.3 The Licensors hereto have claimed royalties from Galoob in connection with the sale and collateral merchandising by Galoob under Section 2.2(c) of the License Agreement of codebooks. In full and final settlement of this dispute, it is agreed that the last sentence of Section 2.2(c) of the License Agreement is deleted and is replaced with the following: Commencing with the royalties calculated and determined for the entirety of the third calendar quarter of 1994 and for the balance of the term of the License Agreement, as amended, and in the absence of any agreement between the parties hereto to the contrary, it is agreed that Galoob will pay Licensors a royalty calculated as follows: thirty percent (30%) of the Net Profits of Galoob in connection with the sale and collateral merchandising by Galoob of collateral merchandise (including codebooks) related to the Items (which for the avoidance of doubt includes the Game Genie and Derivative Works) such as collateral merchandise that uses characters, trademarks, or copyrights related to the Items or any Intellectual Property or Intellectual Property Rights (except for Galoob Modifications) related thereto, in the Exclusive Territory ("Collateral Merchandise"), sold or otherwise commercially distributed by Galoob or any third party under license from Galoob, in separate and independent payments in the following proportions: Codemasters 60% and Camerica 40% in respect of Collateral Merchandise for or related to the Game Genie and Codemasters 70% and Camerica 30% in respect of Collateral Merchandise for or related to all other Derivative Works. In this paragraph, the term "Net Profits" means the gross revenue (including royalties and license fees from third parties) received by Galoob (exclusive of tax) less actual costs incurred by Galoob (including but not limited to costs of goods sold, commissions and fees, and expenses to develop codes for inclusion solely in codebooks to be sold as collateral merchandise, but not including overhead) in connection with the collateral merchandising activities referred to in this section. 2.4 Subject to Galoob's payment obligation in Section 2.9(b), each of Codemasters and Camerica hereby jointly waive and release their rights, if any, under the License Agreement, as amended, to the receipt of any interest on or in connection with the payments by Galoob to the Licensors pursuant to Sections 2.1, 2.2, 2.3 and 2.9, as well as the payment to Camerica of the U.S. $345,757.00 amount pursuant to Section 2.6 below. Nothing herein shall, however, waive or release any right of Licensors to interest on any other payments that they are or may hereinafter become entitled to. 2.5 Galoob, Codemasters and Camerica agree that, other than as set forth in Section 2.1, 2.2, 2.3 or 2.9, as of the date hereof, there are no other open, disputed or unresolved royalty issues or issues in any way related to the owing and/or the payment of royalties by Galoob to Codemasters and/or Camerica up to and including the date of 5 - 5 - March 31, 1994, whether arising in the ordinary course of events under the License Agreement, as amended, or pursuant to the royalty audit that was undertaken by Ernst & Young on behalf of Codemasters during the months of December 1993 and January 1994. In this regard, simultaneous with the execution of this Fourth Amendment to License Agreement, Galoob, Codemasters and Camerica have executed a Release Agreement in the form attached hereto as Exhibit "I" which is made a part hereof. 2.6 Subject to Galoob's right to make deductions pursuant to Section 5.2(d) of the License Agreement, as amended, from royalties due to Licensors in respect of Costs incurred by Galoob in connection with the Proceedings (including Costs incurred by it in respect of the trademark claims therein) and to make deductions pursuant to Section 12.3 of the License Agreement, as amended by Section 2.10 of the Second Amendment to License Agreement in respect of Costs for which Licensors are responsible and fail to re- imburse Galoob as required by the said Section, and subject to Galoob's rights under Section 3.5 of the Second Amendment to License Agreement, the parties agree that Galoob shall no longer have the right to withhold any royalty payments in connection with the Proceedings under Section 5.2 or any other provision of the License Agreement, as amended. All royalties withheld by Galoob under Section 5.2(e) of the License Agreement, as amended, will be released separately to Licensors in the proportions to which they are entitled and in this regard, Galoob will wire transfer U.S. $345,757.00 to Camerica as its share of said withholding, and Galoob hereby notifies Codemasters that it no longer has an obligation to maintain letters of credit which were put in place to cover the royalties that had otherwise been withheld by Galoob from Codemasters, but upon creation of the letters of credit were subsequently paid back to Codemasters. Galoob shall also co-operate and take all reasonable steps requested by Codemasters or its bank to have such letters of credit cancelled. 2.7 Notwithstanding anything to the contrary in the License Agreement, as amended, and except as expressly provided in this Fourth Amendment to License Agreement, Galoob shall pay all amounts due to be paid to Camerica and Codemasters under the License Agreement, as amended, or under Article 2 hereof, by separate and independent payments, in accordance with the Licensors' respective wire transfer instructions, in the following proportions: Codemasters 60% and Camerica 40% for payments related to the Game Genie and Codemasters 70% and Camerica 30% for payments related to all other Derivative Works. Without limiting the generality of the forgoing, Licensors' entitlement to 23% of any settlement or damage recovery under Section 3.5 of the Second Amendment to License Agreement shall be paid in the following proportions: Codemasters 60% and Camerica 40%. Licensors' obligation for the Expenses referred to in that Section shall be apportioned as follows: Codemasters 60% and Camerica 40%. Further, all amounts payable to Licensors under Article 5 of the First Amendment to License Agreement in respect of the Proceedings, including the Injunction Damages to which Licensors are entitled and the amounts payable pursuant to Section 5.1(g) thereof relating to Attorney's Fees and Costs, shall be paid in separate and independent payments to Codemasters and Camerica in the following proportions: Codemasters 60% and Camerica 40%. 6 - 6 - 2.8 All payments due to Codemasters and Camerica under this Article 2 shall be made by wire transfer, without deduction or set-off of any kind, by no later than five (5) days following the execution of this Agreement by the parties. For the avoidance of doubt, the amount due to Codemasters and Camerica under this Article 2, as shown in Schedule A is as follows: to Codemasters U.S. $2,618,286.40 ($2,388,885.46 plus $229,401.00); to Camerica U.S. $1,829,764.3 ($1,747,107.44 plus $82,656.90). As shown in Schedule A the said sums are the remainder after deducting from amounts payable hereunder of withholding tax from the amount due to Camerica in the amount of U.S. $204,593.61 and the adjustments described in Schedule A under the heading "1st & 2nd QTR 1994 Royalty statements" totalling $156,738.00. 2.9 (a) The parties agree that Galoob has been paid by Nintendo Injunction Damages (comprising the $15 million damage award plus interest and related costs) in the total amount of U.S. $16,134,575.14. Pursuant to Section 5.1(a) of the First Amendment to License Agreement, the amount thereof owed by Galoob to the Licensors (the "Licensors Injunction Damages") is as follows: to Codemasters - U.S. $1,336,955.89, and to Camerica - U.S. $891,303.92. Pursuant to Section 5.1(b) of the First Amendment to License Agreement the total actual amount withheld and that is owed to Licensors with respect to Attorneys Fees and Costs as of the date hereof (the "Licensors Attorney Fee Recovery") is U.S. $1,705,745.00, which amount is owed to Licensors as follows: U.S. $1,023,447 to Codemasters and U.S. $682,298 to Camerica. (In this Agreement the term "Licensors Bond Recovery" means the Licensors Injunction Damages and the Licensors Attorney Fee Recovery and the term "Licensor Entitlement" means the entitlement of Camerica and Codemasters, as the case may be, to its share of the Licensors Bond Recovery). (b) The parties hereto have disputed the date upon which Galoob has had "unconditional receipt" of the Injunction Damages. In full and final settlement of this dispute, it is agreed that Galoob has had "unconditional receipt" of the Injunction Damages, and notwithstanding anything to the contrary in Section 5.1 of the First Amendment to License Agreement, Galoob shall pay each of Codemasters and Camerica it's Licensor Entitlement by no later than five (5) days following the execution of this Agreement by the parties. Galoob shall also pay to Codemasters and Camerica as interest on the amounts due under Section 5.1, as follows: Codemasters U.S. $28,482.57; and Camerica U.S. $23,158.13 . A per diem amount in the amount of U.S. $256.57 to Codemasters and U.S. $208.61 to Camerica shall also be paid to each of Codemasters and Camerica in the event the said Licensor Entitlements are not paid as and when specified in this Section 2.9. (c) The parties acknowledge and agree that upon the payment to Camerica and Codemasters, as the case may be, of its Licensor Entitlement, that such payment shall constitute full, final and complete payment and satisfaction of such parties' rights and Galoob's obligations with regard to the Injunction Damages and Attorneys Fees and Costs to which such party is entitled under Article 5 of the First Amendment to License Agreement and any amounts withheld from royalties by Galoob in connection with the Proceedings including but without limitation Section 2.7 of the Second Amendment to License Agreement 7 - 7 - and Section 5.2 of the License Agreement up to the date hereof, provided that nothing shall release Galoob from any payment obligations it may have for any additional Injunction Damages or attorneys fees and costs other than those described in Section 2.9(a), if any, it receives from Nintendo, or from any obligation of Galoob under Section 3.5 of the Second Amendment to License Agreement. (d) Galoob represents and warrants to Codemasters and Camerica that the Attorneys Fees and Costs (including all attorneys and expert witness fees and other costs which Galoob has paid to its attorneys, Galoob has been billed by its attorneys or expects to pay within ninety (90) days, or which Galoob is or may become liable to pay its attorneys for services rendered up to the date hereof) and for which, pursuant to Section 12.3 of the License Agreement, as amended by Section 2.10 of the Second Amendment to License Agreement Licensors were equally liable with Galoob, is U.S. $3,446,489.00. Galoob acknowledges that sum of U.S. $3,446,489.00 includes the sum of U.S. $35,000.00, which sum represents Attorneys Fees and Costs which Galoob expects to pay within ninety (90) days. 2.10 Camerica acknowledges and agrees that Galoob may deduct from payments due under this Fourth Amendment to License Agreement amounts equal to any withholding tax which is exigible in respect of amounts payable hereunder, but not to exceed U.S. $204,593.61, provided that Galoob shall remit the applicable amount to the relevant taxing authorities and shall furnish to Camerica particulars of such withholding and remittance in sufficient detail to enable Camerica to substantiate a claim for a foreign tax credit in respect thereof. 2.11 The parties agree that in the event Codemasters or Camerica (a "Defaulting Licensor") shall fail to make any payment it is required to make to Galoob under the License Agreement, as amended, including making any payment to Galoob pursuant to Section 12.3 of the License Agreement, as amended by Section 2.10 of the Second Amendment to License Agreement, and the other such party (the "Paying Licensor") shall make such payment to Galoob or shall have deducted from it's share of royalties or other amounts due under the License Agreement, as amended, an amount in respect of such debt (the amount so paid or deducted from royalties shall be referred to herein as the "Debt Obligation"), then the Paying Licensor shall have the right to be repaid the Debt Obligation by the Defaulting Licensor. In addition, upon giving no less than five (5) business days notice in writing to Galoob and the Defaulting Licensor, the Paying Licensor shall have the right to receive an amount equal to the Debt Obligation from royalties and other amounts due and payable to the Defaulting Licensor by Galoob under the License Agreement, as amended. Provided however, Galoob shall not make such payment to the Paying Licensor in the event the Defaulting Licensor, within the five (5) business day period, notifies Galoob in writing that it disputes the Debt Obligation and provides Galoob with documentary proof that the Debt Obligation has been satisfied. The parties agree that Galoob shall not be liable to the Defaulting Licensor for any such payment made to the Paying Licensor in good faith. This provision shall not apply to 8 - 8 - the payments to be made by Galoob to Codemasters and Camerica herein set out in Schedule A. ARTICLE 3 MISCELLANEOUS PROVISIONS 3.1 Each of the parties represents, warrants and covenants to the other parties that it has the requisite power and authority to execute and deliver this Agreement. Deloitte represents, warrants and covenants to Galoob and Codemasters that it is and has been duly appointed as the Receiver and Manager of Camerica Corporation and that it has the requisite power and authority to execute and deliver this Agreement and the attached mutual release and to bind Camerica Corporation hereto and thereto. 3.2 In the event that there is any inconsistency between the provisions of this Fourth Amendment to License Agreement and either the License Agreement or the First Amendment to License Agreement, the Second Amendment to License Agreement, or the Third Amendment to License Agreement, then and in that event the provisions of this Fourth Amendment to License Agreement shall prevail. 3.3 This Fourth Amendment to License Agreement can only be modified by an Agreement in writing signed by Galoob and Licensors. 3.4 This Fourth Amendment to License Agreement will be governed by, and construed in accordance with, the laws of the State of California. The parties hereto hereby submit to the exclusive jurisdiction of the United States District Court for the Northern District of California, the Superior Court for the County of San Francisco, California, or such other court or administrative forums in or around San Francisco, California as may hear claims arising under this Fourth Amendment to License Agreement (the "Court"). The parties hereto consent to the personal jurisdiction of the Court, and expressly waive any right or claim of forum non conveniens and any similar rule of law related to this Fourth Amendment to License Agreement. 3.5 This Fourth Amendment to License Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which taken together shall be deemed to constitute one and the same instrument. Each party hereto will receive by delivery or facsimile transmission a duplicate original of the Fourth Amendment to License Agreement executed by each party, and each party agrees that the delivery of the Fourth Amendment to License Agreement by facsimile transmission will be deemed to be an original of the Fourth Amendment to License Agreement so transmitted. 9 - 9 - 3.6 This Fourth Amendment to License Agreement and the License Agreement, as amended, constitute the entire agreement between Licensors and Galoob pertaining to the subject matter hereof and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, pertaining to the subject matter hereof, but nothing herein shall affect the letter agreements related to the Micro-Machines License dated October 9, 1992 and March 24, 1994, the Game Boy Game Genie and Co-Operative Manufacturing Agreement dated the 25th day of June, 1992 or the European License Agreement between Codemasters and Galoob. LEWIS GALOOB TOYS INC. /s/ Virginia Yoshida By: /s/ William G. Catron --------------------- --------------------------- Witness Name: William G. Catron Title: Executive Vice President Date: October 14, 1994 CODEMASTERS SOFTWARE COMPANY, LTD. /s/ Marion Mae Varish By: /s/ David Darling --------------------- --------------------------- Witness Name: David Darling Title: Managing Director Date: October 14, 1994 CAMERICA CORPORATION, BY ITS RECEIVER AND MANAGER DELOITTE & TOUCHE INC. /s/ Paul Denton By: /s/ G. S. MacLeod --------------------- --------------------------- Witness Name: G. S. MacLeod Title: Senior Vice President Date: October 14, 1994 DELOITTE & TOUCHE INC., /s/ Paul Denton By: /s/ G. S. MacLeod --------------------- --------------------------- Name: G. S. MacLeod Title: Senior Vice President Date: October 14, 1994 10 EXHIBIT "I" MUTUAL RELEASE This Mutual Release is entered into this October 14th, 1994 among Lewis Galoob Toys, Inc., ("Galoob"), Codemasters Software Company, Ltd. ("Codemasters"), and Camerica Corporation ("Camerica"). In consideration of the mutual covenants contained herein, Codemasters, Camerica and Galoob hereby agree as follows: 1. Mutual Release Except for the obligations and rights of Camerica, Codemasters and Galoob otherwise expressed or retained in this Mutual Release or in the Fourth Amendment to License Agreement, Codemasters and Camerica release and forever discharge Galoob and its employees, attorneys, officers, directors, shareholders, partners, and agents, and Galoob releases and forever discharges Codemasters and Camerica and their employees, attorneys officers, directors, shareholders, partners and agents, from any and all known claims, demands, obligations, and causes of action of any nature whatsoever, whether based on a tort, contract, statutory, or other theory of recovery, and whether for compensatory, punitive, statutory, or other form of damages or relief (legal or equitable) which exists as of the date of this mutual release arising out of or in any way connected with or resulted from (i) the calculation, methodology, determination and/or payment of royalties by Galoob under the License Agreement, as amended, for the period of time up to and through March 31, 1994, or (ii) the royalty audit that was undertaken by Ernst & Young on behalf of Codemasters during the months of December, 1993 and January, 1994. Notwithstanding the foregoing, (i) Camerica, Codemasters and Galoob retain all of their rights under the License Agreement, as amended in connection with and to receive royalties as of April 1, 1994 and thereafter, and to audit pursuant to section 6.2(a) of the License Agreement the amount of such royalties and deductions on various products for said time period and to assert rights to 11 - 2 - additional royalties based on such audits, and (ii) the parties retain all future rights relating to the License Agreement, as amended, the Fourth Amendment to License Agreement and the European License Agreement dated the 23rd day of December, 1991. LEWIS GALOOB TOYS, INC. /s/ Virginia Yoshida By: /s/ William G. Catron --------------------- --------------------------- Witness CODEMASTERS SOFTWARE COMPANY, LTD. /s/ Marion Mae Varish By: /s/ David Darling --------------------- --------------------------- Witness CAMERICA CORPORATION, by Deloitte & Touche Inc., in its capacity as Receiver and Manager of the assets and undertakings of Camerica Corporation and not in its personal capacity /s/ David Denton By: /s/ G. S. MacLeod --------------------- --------------------------- Witness 12 Schedule A FOURTH AMENDMENT TO LICENSE AGREEMENT
LICENSORS CODEMASTERS CAMERICA SHARE DOLLARS PERCENT DOLLARS PERCENT ------------ -------------------- -------------------- PAYMENT UPON FULLY EXECUTED FOURTH AMENDMENT 2.1 Initial Published price $211,500.00 $148,050.00 70.0% $63,450.00 30.0% 2.2 Third party royalty offset $266,480.00 $186,536.00 70.0% $79,944.00 30.0% 1st & 2nd QTR 1994 Royalty statements NES format ($23,939.00) ($14,363.00) 60.0% ($9,576.00) 40.0% All others formats ($65,904.00) ($46,134.00) 70.0% ($19,770.00) 30.0% Third party offset ($45,514.00) ($31,860.00) 70.0% ($13,654.00) 30.0% Fenwick & West legal expens ($6,546.00) ($3,928.00) 60.0% ($2,618.00) 40.0% Nintendo litigation expense ($14,835.00) ($8,901.00) 60.0% ($5,934.00) 40.0% ------------ ------------ ----------- SUB TOTAL ($156,738.00) ($105,185.00) ($51,553.00) ------------ ------------ ----------- TOTAL $321,242.00 $229,401.00 $91,841.00 2.10 Less tax withholding ($9,184.00) $0.00 ($9,184.10) ------------ ------------ ----------- @ 10% on Royalty Income TOTAL NET OF TAX $312,058.00 $229,401.00 $82,656.90 ============= ============= ========== PAYMENT UPON FULLY EXECUTED FOURTH AMENDMENT AND UNCONDITIONAL RECEIPT PER AGREEMENT 2.6 withheld per 5.2(e)(i) 20% $345,757.00 $0.00 0.0% $345,757.00 100.0% 2.9a 23% of excess* $2,228,259.81 $1,336,955.89 60.0% $891,303.92 40.0% 2.9a withhold due $1,705,745.00 $1,023,447.00 60.0% $682,298.00 40.0% ------------- ------------- ------------- SUBTOTAL $4,279,761.81 $2,360,402.89 $1,919,358.92 2.9b interest $51,640.70 $28,482.57 $23,158.13 ------------- ------------- ------------- TOTAL $4,331,402.51 $2,388,885.46 $1,942,517.05 2.10 Less tax withholding ($195,409.61) $0.00 ($195,409.61) @ 10% on Royalty & 15% on Interest TOTAL NET OF TAX $4,135,992.90 $2,388,885.46 $1,747,107.44 ============= ============= ============= * Includes impact of estimated future attorney fees of $35,000, which is subject to final actual fees.
13 FOURTH AMENDMENT TO LICENSE AGREEMENT Schedule B Nintendo Bond Recovery Sharing of Bond Recovery - Article 5
Injunction Damages $16,134,575.14 Less: Base Recovery $3,000,000.00 Attorney Fees and Costs (through 3/31/94) $3,411,489.00 Estimated Attorney Fees and Costs (after 3/31/94) $35,000.00 ------------- $ 6,446,489.00 Excess of Base Recovery and Attorney Fees $ 9,688,086.14 Due Licensor: 23% of Excess $2,228,259.81 (due within sixty days of unconditional receipt) ------------- Total Due LGT $13,906,315.33 ============== Withhold Due Licensor on amount equal up to 50% of legal fees(thru 3/31/94) $ 1,705,745.00 (due within sixty days of unconditional receipt) Total Due Licensor (23% of Excess plus Withhold regarding legal fees) $ 3,934,004.81 ============== Net Proceeds to LGT after Total Due Licensor $12,200,570.33 (prior to dismissal of trademark infrigement case). ============== Withhold Due Licensor on dismissal on trademark infrigement case $345,757.00 (only due to Camerica since cash already paid to Codemaster with backing of letter of credit). Net Proceeds to LGT after Total Due Licensor $11,854,813.33 (after dismissal of trademark infrigement case). ==============
EX-11 8 COMPUTATIONS OF EARNINGS PER SHARE 1 EXHIBIT 11 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES COMPUTATIONS OF EARNINGS PER SHARE
Years ended December 31 ----------------------------------------------------- 1994 1993 1992 ---- ---- ---- Primary Earnings: ----------------- Net earnings (loss) applicable to common shares ($000) $ 15,297 $ (14,051) $ (5,574) =========== =========== =========== Average shares of common stock outstanding during the period 9,852,673 9,548,422 9,399,600 Add: Incremental shares from assumed exercise of stock options and warrants 258,439 - - ----------- ----------- ----------- 10,111,112 9,548,422 9,399,600 =========== =========== =========== Net earnings (loss) per common share - primary $ 1.51 $ (1.47) $ (0.59) =========== =========== =========== Fully Diluted Earnings: ----------------------- Net earnings (loss) applicable to common shares ($000) $ 15,297 $ (14,051) $ (5,574) Add: Preferred stock dividends: Paid ($000) - - 782 In arrears ($000) 3,127 3,127 2,345 Add: Interest on Debentures ($000) 1,072 137 - ----------- ----------- ----------- $ 19,496 $ (10,787) $ (2,447) =========== =========== =========== Average shares of common stock outstanding during the period 9,852,673 9,548,422 9,399,600 Add: Incremental shares from assumed exercise of stock options and warrants 261,458 236,825 - Add: Shares issuable upon assumed conversion of Preferred Stock 2,180,148 2,180,148 2,180,148 Add: Shares issuable upon assumed conversion of 8% Convertible Subordinated Debentures, weighted 1,511,879 186,396 - ----------- ----------- ----------- 13,806,158 12,151,791 11,579,748 =========== =========== =========== Net earnings (loss) per common share - Fully Diluted $ 1.41 (A) (A) =========== =========== ===========
(A) Anti dilutive, therefore fully diluted earnings per share is same as primary earnings per share, $(1.47) for 1993 and $(0.59) for 1992. EX-12 9 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (in thousands, except ratios)
Years ended December 31 --------------------------------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Net earnings (loss) $18,424 $(10,924) $(2,447) $(7,540) $(29,245) Income tax 778 9 238 - - ------- -------- ------- ------- -------- Charge (credit) 19,202 (10,915) (2,209) (7,540) (29,245) ------- -------- ------- ------- -------- Fixed charges: Interest expense 2,609 1,836 1,550 1,775 3,046 Portion of rental expense 505 483 613 728 625 ------- -------- ------- ------- -------- Total fixed charges 3,114 2,319 2,163 2,503 3,671 ------- -------- ------- ------- -------- Earnings (loss) before income taxes and fixed charges $22,316 $ (8,596) $ (46) $(5,037) $(25,574) ======= ======== ======= ======= ======== Preferred dividends requirements $ 3,127(B) $ 3,127(B) $ 3,127(B) $ 3,127 $ 3,127 Ratio of pretax income to net income 1.04 1.00 1.00 1.00 1.00 ------- -------- ------- ------- -------- Preferred dividends factored 3,252 3,127 3,127 3,127 3,127 Total fixed charges 3,114 2,319 2,163 2,503 3,671 ------- -------- ------- ------- -------- Total fixed charges and preferred dividends $ 6,366 $ 5,446 $ 5,290 $ 5,630 $ 6,798 ======= ======== ======= ======= ======== Ratio of earnings to fixed charges and preferred dividends 3.51 (A) (A) (A) (A) ======= ======== ======= ======= ========
(A) Earnings are inadequate to cover fixed charges and preferred dividends in 1993, 1992, 1991 and 1990. (B) Includes Preferred Stock dividends in arrears. EX-21 10 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 22 SUBSIDIARIES OF THE COMPANY Galco International Toys, N.V. EX-23.1 11 CONSENT OF PRICE WATERHOUSE 1 EXHIBIT 24-1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-8 (No. 33-9393 and No. 33-56004) and Form S-3 (No. 33-33640) of Lewis Galoob Toys, Inc. and its subsidiaries of our report dated February 10, 1995 appearing on page F-1 of this Form 10-K. Price Waterhouse L.L.P. San Francisco, California March 29, 1995 EX-27 12 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1994 DEC-31-1994 2,225 0 65,757 7,874 16,824 90,803 14,814 6,414 100,766 37,584 18,414 101 36,790 0 7,877 100,766 178,792 0 104,592 0 64,878 0 2,609 19,202 778 0 0 0 0 18,424 1.51 1.41