-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gz/+FOdunyylbWxE7t0ekrOA0+0L09Vuf8gK/MefmkpxHpDjahmzikQf8+jpYlrB EmncnIGaYSz5AYZuP2lVCw== 0000950123-97-004290.txt : 19970515 0000950123-97-004290.hdr.sgml : 19970515 ACCESSION NUMBER: 0000950123-97-004290 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GALOOB TOYS INC CENTRAL INDEX KEY: 0000751968 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 941716574 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09599 FILM NUMBER: 97604298 BUSINESS ADDRESS: STREET 1: 500 FORBES BLVD CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4159521678 FORMER COMPANY: FORMER CONFORMED NAME: GALOOB LEWIS TOYS INC /DE/ DATE OF NAME CHANGE: 19920703 10-Q 1 GALOOB TOYS, INC 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the transition period from to ------ ------ Commission file number 1-9599 GALOOB TOYS, INC (Exact name of registrant as specified in its charter) Delaware 94-1716574 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 500 Forbes Boulevard, South San Francisco, California 94080 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 952-1678 Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, par value $.01, 18,019,864 as of March 31, 1997. 2 GALOOB TOYS, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Item 1 Page - Condensed Consolidated Balance Sheets 1 - Condensed Consolidated Statements of Operations 2 - Condensed Consolidated Statements of Cash Flows 3 - Notes to Condensed Consolidated Financial Statements 4-5 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 6-9 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 10 Item 6 - Exhibits and Reports on Form 8-K 10 SIGNATURE 11 3 GALOOB TOYS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except shares)
(Unaudited) (Unaudited) (Audited) March 31 March 31 December 31 1997 1996 1996 ----------- ----------- ----------- ASSETS Current Assets Cash and cash equivalents $ 32,271 $ 2,226 $ 27,920 Accounts receivable, net 71,141 47,698 102,322 Inventories 17,729 17,925 19,974 Tooling and related costs 16,439 10,041 15,436 Prepaid expenses and other assets 20,192 12,630 12,361 Deferred tax asset 2,404 -- 2,404 --------- --------- --------- Total Current Assets 160,176 90,520 180,417 Land, building and equipment, net 10,550 9,733 10,472 Indebtedness from related party 950 -- 950 Other assets 4,094 6,052 5,066 --------- --------- --------- Total Assets $ 175,770 $ 106,305 $ 196,905 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable $ -- $ 18,773 $ -- Accounts payable 11,628 13,252 19,655 Accrued expenses 14,571 7,058 24,680 Income taxes payable 516 400 1,671 Current portion of long-term debt 10 4,371 17 --------- --------- --------- Total Current Liabilities 26,725 43,854 46,023 Long-term debt 18 -- 20 Deferred tax liability 1,071 -- 1,071 --------- --------- --------- Total Liabilities 27,814 43,854 47,114 --------- --------- --------- SHAREHOLDERS' EQUITY Preferred stock Authorized 1,000,000 shares Issued and outstanding 0 shares, 3,602 shares and 0 shares of $17 Convertible Exchangeable Preferred Stock at $200 liquidation value per share -- 720 -- Common stock, par value $.01 per share Authorized 50,000,000 shares Issued and outstanding 18,019,864 shares, 14,981,960 shares and 17,919,864 shares 180 150 179 Additional paid-in capital 170,865 104,349 170,291 Retained earnings (deficit) (22,558) (42,321) (20,232) Cumulative translation adjustment (531) (447) (447) --------- --------- --------- Total Shareholders' Equity 147,956 62,451 149,791 --------- --------- --------- Total Liabilities and Shareholders' Equity $ 175,770 $ 106,305 $ 196,905 ========= ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 1 4 GALOOB TOYS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited)
Three Months Ended March 31 ------------------------ 1997 1996 -------- -------- Net revenues $ 40,598 $ 37,522 Costs of products sold 22,854 21,591 -------- -------- Gross margin 17,744 15,931 Operating expenses: Advertising and promotion 7,386 5,804 Other selling and administrative 8,007 7,123 Royalties, research and development 6,564 6,310 -------- -------- Total operating expenses 21,957 19,237 -------- -------- Earnings (loss) from operations (4,213) (3,306) Interest expense (69) (829) Other income (expense), net 469 20 -------- -------- Earnings (loss) before income taxes (3,813) (4,115) Income tax benefit (1,487) -- -------- -------- Net earnings (loss) (2,326) (4,115) Preferred stock dividends in arrears -- 15 Charge related to the exchange of preferred stock for common -- 24,279 -------- -------- Net earnings (loss) applicable to common shares $ (2,326) $(28,409) ======== ======== Average common shares outstanding 17,964 10,491 Net earnings (loss) per common share $ (0.13) $ (2.71)
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 5 GALOOB TOYS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except shares) (Unaudited)
Three Months Ended March 31 --------------------------- 1997 1996 -------- -------- CASH FLOW FROM OPERATING ACTIVITIES: Net earnings (loss) $ (2,326) $ (4,115) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation 238 162 Changes in assets and liabilities: Accounts receivable 31,181 20,704 Inventories 2,245 (434) Tooling and related costs (1,003) (1,730) Prepaid expenses and other assets (6,859) (4,577) Accounts payable (8,027) (3,889) Accrued expenses (10,109) (7,162) Income taxes payable (1,155) (331) -------- -------- Net cash (used in) provided by operating activities 4,185 (1,372) -------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Investment in land, building and equipment, net (316) (982) -------- -------- Net cash (used in) provided by investing activities (316) (982) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES: Net borrowings under notes payable -- 3,702 Repayments under long-term debt agreements (9) (51) Proceeds from issuance of common stock 575 124 Costs associated with the conversion of debentures and the preferred shares exchange -- (1,225) Other, net (84) -- -------- -------- Net cash (used in) provided by financing activities 482 2,550 -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,351 196 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,920 2,030 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,271 $ 2,226 ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: During the three months ended March 31, 1996, $14 million of the Company's 8% convertible subordinated debentures were converted into 1,511,872 shares of its common stock. Deferred loan costs and accrued interest amounting to approximately $0.5 million, net, were charged against additional paid-in capital. See Note F. During the three months ended March 31, 1996, 1,803,481 depositary shares of the Company's preferred stock were exchanged for 3,336,433 shares of its common stock. See Note G. The accompanying notes are an integral part of these Consolidated Financial Statements. 3 6 GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1997 (Unaudited) NOTE A - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated balance sheets as of March 31, 1997 and 1996 and the condensed consolidated statements of operations for the three month periods ended March 31, 1997 and 1996 and the condensed consolidated statements of cash flows for the three month periods ended March 31, 1997 and 1996 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 1997 and 1996 have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1996. Certain amounts in the financial statements of prior years have been reclassified to conform with the current year's presentation. The results of operations for the three month periods ended March 31, 1997 and 1996 are not necessarily indicative of the operating results for the full year. NOTE B - LEGAL The current status of litigation is described in Part II, Item 1, herein. NOTE C - LOAN AGREEMENT On March 31, 1995, the Company entered into an amended and restated loan and security agreement (the "Loan Agreement") with Congress Financial Corporation (Central) (the "Lender"). The Loan Agreement originally extended to March 31, 1997 and provided an original line of credit of $40 million which has been increased to $50 million, with a provision to increase the line to $60 million at the option of the Company. Borrowing availability is determined by a formula based on both accounts receivable and inventories. The interest rate is generally prime rate plus 1%. In consideration for entering into the Loan Agreement, the Company paid a $100,000 fee; additional fees of $100,000 were paid as the Company exercised its option to increase the line. The Company has also agreed to pay an unused line fee of 0.25% and certain management fees. On February 28, 1997, the Company signed an initial commitment letter for a $200 million credit facility with BT Commercial Corporation, a unit of Bankers Trust New York Corporation ("BT Facility"). The commitment is subject to certain conditions. The BT Facility will be finalized when the Company's credit requirements are defined. These requirements will be determined when Lucasfilm makes its decision regarding the licensing arrangement(s) for the new Star Wars trilogy. The Congress Loan Agreement has been extended while the new agreement is being finalized. No fee was paid for this extension, however, future borrowing, if any, will carry an interest rate of prime rate plus 2%. NOTE D - INVENTORIES
(in thousands) March 31 December 31 ---------------------- ----------- 1997 1996 1996 ------- ------- ------- Finished goods $17,293 $17,318 $19,667 Raw materials and parts 436 607 307 ------- ------- ------- $17,729 $17,925 $19,974 ======= ======= =======
4 7 GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1997 (Unaudited) NOTE E - RESEARCH AND DEVELOPMENT Research and development expenses amounted to $2.8 million and $2.4 million for the three months ended March 31, 1997 and 1996, respectively. NOTE F - LONG-TERM DEBT In February 1996, the Company issued a call for the redemption of its 8% Convertible Subordinated Debentures originally due November 30, 2000 (the "Debentures"). This call resulted in the conversion on March 15, 1996, of all $14,000,000 Debentures at $9.26 per share and the issuance of 1,511,872 new shares of common stock. Unamortized debt issuance costs of $833,000 were charged against additional paid-in capital on conversion of the Debentures. NOTE G - SHAREHOLDERS' EQUITY In February 1996, the Company offered to exchange 1.85 shares of its common stock for each Depositary Exchangeable Preferred Share (the "Depositary Shares") outstanding. Each Depositary Share represents 1/10th of a share of $17.00 Convertible Exchangeable Preferred Stock. This inducement offer was accepted by the owners of 98% of the Depositary Shares resulting in the issuance of 3,336,433 shares of common stock on March 29, 1996. Generally accepted accounting principles require a non-cash charge to reduce Net Earnings Applicable to Common Shares in the calculation of Earnings Per Share for the fair value of the securities issued in excess of the existing conversion rate of approximately 1.185 common shares per Depositary Share. This non-cash charge amounted to $24,279,000 and had the effect of increasing the net loss per common share by $2.32 from $.39 to $2.71 in the first quarter of 1996. The balance of the Depositary Shares were converted at the specified 1.185 exchange rate or redeemed by the Company in June 1996. NOTE H - RECENT ACCOUNTING PRONOUNCEMENT In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" which establishes standards for computing and presenting earnings per share. This statement simplifies the standards for computing earnings per share ("EPS") previously found in APB Opinion No. 15 "Earnings per Share". The new standard which is effective for years ending after December 15, 1997, replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For the three months ended March 31, 1997, SFAS 128 would have had no impact on the reported EPS as primary and basic are equal since the potentially dilutive securities were anti-dilutive. 5 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth for the periods indicated the percentage relationships between revenues and certain expense and earnings items:
Percentage of Net Revenues -------------------------- Three Months Ended March 31 -------------------------- 1997 1996 ----- ----- Net revenues 100.0% 100.0% Costs of products sold 56.3 57.6 ----- ----- Gross margin 43.7 42.4 Advertising and promotion 18.2 15.5 Other selling and administrative 19.7 19.0 Royalties, research and development 16.2 16.8 ----- ----- Earnings (loss) from operations (10.4) (8.9) Interest expense (0.2) (2.2) Other income (expense), net 1.2 0.1 Provision for income taxes 3.7 -- ----- ----- Net earnings (loss) (5.7)% (11.0)% ===== =====
Net earnings (loss) per common share in the first quarter of 1996 were affected by an unusual, non-recurring item, the charge related to the exchange of preferred stock for common stock of $24.3 million. A comparison of the net earnings (loss) per common share and the net earnings (loss) per common share adjusted to exclude the unusual item is set forth below.
Three Months Ended March 31 ------------------------ 1997 1996 -------- -------- Net earnings (loss) per common share on a primary basis, as reported $ (0.13) $ (2.71) Net earnings (loss) per common share on a primary basis, adjusted to exclude the unusual item $ (0.13) $ (0.39)
1997 Compared to 1996 Net revenues increased 8% to $40.6 million in the first quarter of 1997 as compared to $37.5 million in the first quarter of 1996. The growth in net sales in the first quarter of 1997 was attributable to domestic sales which increased 18%, rising to $31.3 million. International sales decreased 15% to $9.3 million in the first quarter of 1997 due to generally weak retail conditions in Europe. The Company's worldwide sales of boys' toys increased 37% in the first quarter of 1997 as compared to the first quarter of 1996. The growth in net sales of boys' toys was attributable to Micro Machines growth. Worldwide sales of Micro Machines, led by Star Wars Action Fleet, an extensive line of Star Wars vessels, playsets, and miniature action figures, increased by 67% in the first quarter of 1997 as compared to the first quarter of 1996. United States retail sales success of Micro Machines continued, reaching its seventeenth consecutive quarter of growth. The increase in the Company's Micro Machines sales was partially offset by a decrease in sales of the Dragon Flyz line. The Company's worldwide sales of girls' toys decreased 35% in the first quarter of 1997 as compared to the first quarter of 1996. Although the sales of the Pound Puppies line increased, this was more than offset by a decrease in the sales of the Sky Dancers line. Gross margins increased $1.8 million to $17.7 million in the first quarter of 1997 from $15.9 million in the first quarter of 1996. The higher sales volume increased gross margin by $1.3 million and an increase in the gross margin rate accounted for $0.5 million. The gross margin rate increased to 43.7% 6 9 in the first quarter of 1997 as compared to 42.4% in the first quarter of 1996. The increase in the gross margin rate was primarily attributable to a change in product mix partially offset by higher tooling, packaging development and inventory valuation allowances. Advertising and promotion expenses were $7.4 million, or 18.2% of net revenues in the first quarter of 1997, as compared to $5.8 million, or 15.5% of net revenues in the first quarter of 1996. The increase included higher television advertising, trade show and product promotion expenses. Other selling and administrative expenses were $8.0 million in the first quarter of 1997 as compared to $7.1 million in the first quarter of 1996. The increase in selling and administrative expenses principally resulted from higher freight expenses due to the growth in sales, higher legal expenses and the relocation expenses associated with the Company's move to a new warehouse facility. Royalties, research and development expenses were $6.6 million in the first quarter of 1997 as compared to $6.3 million in the first quarter of 1996. The increase was primarily the result of an increase in research and development expenses due to the expansion of the Company's product lines. Royalty expenses were essentially unchanged from the prior year. Royalty expenses in 1996 included a charge related to the write-off of an advance on a discontinued product line; this was replaced by higher royalty expenses related to increased sales in 1997. Interest expense was $0.1 million in the first quarter of 1997 as compared to $0.8 million in the first quarter of 1996. The decrease in interest expense was due to the paydown of the Company's borrowings under its loan agreement with Congress Financial Corporation in the fourth quarter of 1996 and the conversion of the $14 million convertible debentures to common stock in the first quarter of 1996. Other income was $0.5 million in the first quarter of 1997 as compared to $20,000 in the first quarter of 1996. The increase in other income was primarily attributable to interest income earned on cash generated from the Company's common stock offering in November 1996. The income tax benefit in the first quarter of 1997 reflects the quarterly application of the estimated annual rate based on projected full year earnings. No tax recovery was reported in the first quarter of 1996 due to the cumulative net operating loss brought forward into the year. All of the Company's products are manufactured to its specifications by nonaffiliated parties located in China and, to a lesser extent, other foreign locations. Therefore, the Company could be adversely affected by political or economic unrest or disruptions affecting business in such countries. The Company does not carry insurance for political or economic unrest or disruptions for several reasons, including, but not limited to, costs of such insurance and the limited insurance coverage available. The political unrest in 1989 in China had an insignificant impact on the manufacturing and shipping of the Company's products. There can be no assurance that in the future the Company will not be adversely affected by political or economic disruptions in China or other foreign locations. Further, changes in tariffs could have an adverse effect on the cost of goods imported from China. While China is currently accorded Most Favored Nation ("MFN") status by the United States, this status (which was last renewed in June 1996) is subject to annual review and could be revoked prospectively for any given year. Current MFN tariffs on toys imported into the United States are zero, and the loss of MFN status for China would result in a substantial increase in tariffs applicable to toys imported from China. This increase in duty could be large enough that it could have a material adverse effect on the Company's business, financial condition and results of operations. Products shipped from China to other countries would not be affected by China's loss of MFN status with the United States without similar actions being taken by the other importing countries. Moreover, many other toy companies also source products from China and could be affected to similar degrees. The Company can also be subject to the imposition of retaliatory tariffs or other import restrictions as a result of trade disputes between China and the United States. Generally, trade negotiations over matters in dispute between the two countries have been difficult but have been resolved without the imposition of trade retaliation. In the past, proposed retaliation by the United States has not included increased tariffs or other trade restrictions applicable to toys imported from China. It is possible, however, that some future trade dispute could result in substantial increases in tariffs or other 7 10 restrictions on imports, such as quotas, of toys from China. These increased tariffs or other restrictions could be imposed under Section 301 of the Trade Act of 1974, as amended, whether or not the trade dispute itself involved toys. Such increased tariffs or other trade restrictions could have a material adverse effect on the Company's business, financial condition and results of operations. The impact on the Company of any political or economic unrest or disruptions in China, the loss of China's MFN status or the imposition of retaliatory trade restrictions on products manufactured in China would depend on several factors, including, but not limited to, the Company's ability to (i) procure alternative manufacturing sources satisfactory to the Company, (ii) retrieve its tooling located in China, (iii) relocate its production in sufficient time to meet demand, and (iv) pass cost increases likely to be incurred as a result of such factors to the Company's customers through product price increases. As a result, any political or economic unrest or disruptions in China, the loss of China's MFN status or the imposition of retaliatory trade restrictions on products manufactured in China could have a material adverse effect on the Company's business, financial condition and results of operations. In 1994, certain quotas on toy products made in China were introduced in the European Economic Community. The quotas did not have a material impact on the Company's business in 1995 and, although no assurance can be given, are not expected to have a material impact on the Company's business in the foreseeable future. In addition, the Company's subsidiary, Galco International Toys, N.V. ("Galco") is located in Hong Kong. On July 1, 1997, ownership of Hong Kong, currently a dependency of the United Kingdom, will revert back to China. At the present time, the Company is unable to predict the effect, if any, that such change will have on the Company's or Galco's business, financial condition or results of operations. In addition, changes in the relationship between the United States dollar and the Hong Kong dollar may have an impact on the cost of goods purchased from manufacturers. Disclosure Regarding Forward-Looking Statements All statements other than statements of historical fact included in this Form 10-Q Report, including, without limitation the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements ("Cautionary Statements") include: the demand for the Company's products; the Company's dependence on timely development, introduction and customer acceptance of new products; possible weakness of the Company's markets; the impact of competition on revenues, margins and pricing; the effect of currency fluctuations; other risks and uncertainties as may be disclosed from time to time in the Company's public announcements; the gross national product in the United States and other countries, which also influences demand for the Company's products; customer inventory levels; the cost and availability of raw materials; failure to renew or obtain Star Wars licenses; and changes in trade conditions regarding China. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of one or both of them are expressly qualified in their entirety by such Cautionary Statements. Liquidity, Financial Resources and Capital Expenditures Demand for the Company's products is greatest in the third and fourth quarters of the year. As a result, collections of accounts typically peak in the fourth quarter and early first quarter of the following year. Due to the seasonality of its revenues and collections, the Company's working capital requirements fluctuate significantly during the year. The Company's seasonal financing requirements are usually highest during the fourth quarter of each calendar year. On March 31, 1995, the Company entered into an amended and restated loan and security agreement (the "Loan Agreement") with Congress Financial Corporation (Central) (the "Lender"). The Loan Agreement originally extended to March 31, 1997 and provided an original line of credit of $40 million secured by substantially all the assets of the Company, with a provision to increase the line to $60 million at the option of the Company. Borrowing availability is determined by a formula based on 8 11 qualified assets. Borrowings under the Loan Agreement are secured by a lien on substantially all of the assets of the Company. The annual interest rate is equal to the prime rate of CoreStates Bank N.A. as announced from time to time plus 1%. On February 28, 1997, the Company signed an initial commitment letter for a $200 million credit facility with BT Commercial Corporation, a unit of Bankers Trust New York Corporation ("BT Facility"). The commitment is subject to certain conditions. The BT Facility will be finalized when the Company's credit requirements are defined. These requirements will be determined when Lucasfilm makes its decision regarding the licensing arrangement(s) for the new Star Wars trilogy. The Congress Loan Agreement has been extended while the new agreement is being finalized. During the first quarter of 1997, the Company generated $4.2 million of cash in its operating activities. The net cash provided by operating activities resulted primarily from decreases in accounts receivable and inventories, primarily offset by the net loss, increase in prepaid expenses and other assets, and decreases in accounts payable and accrued expenses. Working capital was $133.5 million at March 31, 1997 compared to $134.4 million at December 31, 1996 and $46.7 million at March 31, 1996. The ratio of current assets to current liabilities was 6.0 to 1.0 at March 31, 1997 compared to 3.9 to 1.0 at December 31, 1996 and 2.1 to 1.0 at March 31, 1996. The Company had no material commitments for capital expenditures at March 31, 1997. The Company believes that its cash flow from operations, cash on hand and borrowings under the new BT Facility now being negotiated will be sufficient to meet its working capital and capital expenditure requirements and provide the Company with adequate liquidity to meet its anticipated operating needs for the foreseeable future. The Company is aggressively pursuing the renewal and extension of its current Star Wars license as well as licenses in connection with the expected release of the new Star Wars trilogy in 1999. If the Company is successful in extending its current license and adding new licenses for additional Star Wars product lines, the Company may need significant additional capital to pay for such license rights as well as to finance expenditures to support new Star Wars product lines. Should the $200 million BT Facility, which has not been finalized, be insufficient for these needs, the Company believes that additional financing can be arranged. There can be no assurance that the Company will be successful in obtaining licenses related to the new Star Wars trilogy. The failure to renew or obtain any part of such licensing rights could have a material adverse effect on the business, financial condition and results of operations of the Company. 9 12 Part II - OTHER INFORMATION Item 1. Legal Proceedings Licensing Litigation In June 1995, the Company filed a declaratory judgment action in United States District Court for the Northern District of California. The suit names Clemens V. Hedeen, Jr., Patti Jo Hedeen, and various affiliated entities, as defendants, and seeks a determination that the Company is not obligated to pay royalties to the defendants under their license agreement on certain specific products sold under the Company's "Micro Machines" name and trademark. The defendants filed a cross-complaint for breach of this license agreement claiming damages for past royalties allegedly due but not paid under the license agreement, and claiming entitlement to additional royalties on future sales of such products. The defendants also are asking the court to order that the Company cease the manufacture and sale of certain portions of the Micro Machines product line, and convey to the defendants certain rights to the Micro Machines product line, including patent and trademark rights. The defendants also claim the license agreement to be terminated for the non-payment of the royalties at issue. The defendants filed a motion for summary judgment, which was denied by the court in late 1995. The Company's complaint has been amended to address additional issues between the parties. Although there can be no assurance of the outcome of this matter, the Company believes that it has meritorious factual and legal claims in connection with this matter. In October 1995, the Company filed a breach of contract action in the United States District Court for the Northern District of California. The suit names Abrams Gentile Entertainment Inc. and Up, Up and Away as defendants, and alleges damages for the licensing, marketing and sale of products that are in violation of the Company's rights as licensee under its Sky Dancers and Dragon Flyz license agreements with Abrams Gentile Entertainment, Inc. The defendants filed a number of counterclaims, including breach of contract, interference with contractual relationships, misappropriation of copyright, unfair competition and trade libel. The Company has settled all of the open matters in this litigation, and the various claims and counterclaims have been dismissed with prejudice. The settlement will not result in additional liabilities to the Company, and the Company's rights under the license agreements have been preserved. Manufacturer Litigation In January 1991, the Company, through its wholly owned subsidiary, Galco, filed a lawsuit in Hong Kong against Kader Industrial Co., Ltd. ("Kader"), alleging damages suffered by both Galco and the Company as a result of Kader's defective manufacturing of two lead doll items for the Company's Bouncin' Babies toy line in 1990. Kader filed counterclaims alleging breach of 17 individual contracts. In August 1996, the trial court rendered a decision in favor of Kader on the general issue of liability in this matter, including an award of damages based on Kader's counterclaims which was approximately $250,000, plus prejudgment interest. In addition, the court awarded certain litigation costs to Kader, the amount of which will be determined in future proceedings and could substantially exceed the amount of the damages awarded. In the opinion of management of the Company, none of three above matters of litigation is likely to have a material adverse effect on the business, financial condition and results of operations of the Company. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K - None 10 13 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GALOOB TOYS, INC. (Registrant) Date: May 14, 1997 By: /s/ Roger J. Kowalsky ------------------------------------ Roger J. Kowalsky Executive Vice President, Finance and Chief Financial Officer 11 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements of Galoob Toys, Inc. for the quarter ended March 31, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 32,271 0 77,138 5,997 17,729 160,176 16,891 6,341 175,770 26,725 0 0 0 180 147,776 175,770 40,598 40,598 22,854 22,854 21,957 0 69 (3,813) (1,487) (2,326) 0 0 0 (2,326) (.13) (.13)
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