-----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, I7tHa2THCh2Gq6Q6aGc1vDq7IkCIIubGMbMJ3vTk2Cv+85qYcKBFNwbZeppw3U5H PonhFXhHIQCuqIzipRXk3Q== 0000950123-97-006496.txt : 19970807 0000950123-97-006496.hdr.sgml : 19970807 ACCESSION NUMBER: 0000950123-97-006496 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970806 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: 97652396 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: 2ND QUARTER 10-Q 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 June 30, 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 June 30, 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 4-6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7-11 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 12 Item 6 - Exhibits and Reports on Form 8-K 12 SIGNATURE 13
3 GALOOB TOYS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except shares)
(Unaudited) (Unaudited) (Audited) June 30 June 30 December 31 1997 1996 1996 ---- ---- ---- ASSETS Current Assets Cash and cash equivalents $ 16,693 $ 2,920 $ 27,920 Accounts receivable, net 59,216 61,773 102,322 Inventories 22,477 20,686 19,974 Tooling and related costs 18,708 12,983 15,436 Prepaid expenses and other assets 17,448 10,861 12,361 Income taxes receivable and deferred 12,275 -- 2,404 --------- --------- --------- Total Current Assets 146,817 109,223 180,417 Land, building and equipment, net 10,186 9,724 10,013 Indebtedness from related party 950 -- 950 Other assets 7,824 5,747 5,525 --------- --------- --------- Total Assets $ 165,777 $ 124,694 $ 196,905 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable $ -- $ 34,644 $ -- Accounts payable 12,094 13,785 19,655 Accrued expenses 13,170 8,493 24,680 Income taxes payable 450 372 1,671 Current portion of long-term debt -- 4,318 17 --------- --------- --------- Total Current Liabilities 25,714 61,612 46,023 Other liabilities 4,184 -- 20 Deferred tax liability 1,071 -- 1,071 --------- --------- --------- Total Liabilities 30,969 61,612 47,114 --------- --------- --------- SHAREHOLDERS' EQUITY Common stock, par value $.01 per share Authorized 50,000,000 shares Issued and outstanding 18,019,864 shares, 15,119,651 shares and 17,919,864 shares 180 151 179 Additional paid-in capital 170,865 105,774 170,291 Retained earnings (deficit) (35,673) (42,396) (20,232) Cumulative translation adjustment (564) (447) (447) --------- --------- --------- Total Shareholders' Equity 134,808 63,082 149,791 --------- --------- --------- Total Liabilities and Shareholders' Equity $ 165,777 $ 124,694 $ 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 Six Months Ended June 30 June 30 ------- ------- 1997 1996 1997 1996 ---- ---- ---- ---- Net revenues $ 52,356 $ 49,201 $ 92,954 $ 86,723 Costs of products sold 28,872 26,690 51,726 48,281 -------- -------- -------- -------- Gross margin 23,484 22,511 41,228 38,442 Operating expenses: Advertising and promotion 7,496 6,607 14,882 12,411 Other selling and administrative 6,932 5,629 14,939 12,752 Royalties, research and development 7,912 9,192 14,476 15,502 -------- -------- -------- -------- Total operating expenses 22,340 21,428 44,297 40,665 -------- -------- -------- -------- Earnings (loss) from operations 1,144 1,083 (3,069) (2,223) Micro Machines license rights and litigation settlement (22,949) -- (22,949) -- Interest expense (49) (767) (118) (1,596) Other income (expense), net 355 71 824 91 -------- -------- -------- -------- Earnings (loss) before income taxes (21,499) 387 (25,312) (3,728) Income tax benefit (8,384) -- (9,871) -- -------- -------- -------- -------- Net earnings (loss) (13,115) 387 (15,441) (3,728) Preferred stock dividends -- 6 -- 21 Charge related to the exchange of preferred stock for common -- -- -- 24,279 -------- -------- -------- -------- Net earnings (loss) applicable to common shares ($13,115) $ 381 ($15,441) ($28,028) ======== ======== ======== ======== Average common shares outstanding 18,020 16,222 17,992 12,774 Net earnings (loss) per common share ($ 0.73) $ 0.02 ($ 0.86) ($ 2.19)
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)
Six Months Ended June 30 ------------------------ 1997 1996 ---- ---- CASH FLOW FROM OPERATING ACTIVITIES: Net earnings (loss) $(15,441) $ (3,728) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 484 350 Changes in assets and liabilities: Accounts receivable 43,106 6,629 Inventories (2,503) (3,195) Tooling and related costs (3,272) (4,672) Prepaid expenses and other assets (7,386) (2,344) Income taxes receivable and deferred (9,871) -- Accounts payable (7,561) (3,356) Accrued expenses and other liabilities (7,346) (5,727) Income taxes payable (1,221) (359) -------- -------- Net cash (used in) provided by operating activities (11,011) (16,402) -------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Investment in land, building and equipment, net (657) (1,322) -------- -------- Net cash (used in) provided by investing activities (657) (1,322) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES: Net borrowings under notes payable -- 19,573 Repayments under long-term debt agreements (17) (104) Proceeds from issuance of common stock 575 875 Redemption of preferred stock -- (462) Costs associated with the conversion of debentures and the preferred shares exchange -- (1,268) Other, net (117) -- -------- -------- Net cash (used in) provided by financing activities 441 18,614 -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,227) 890 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,920 2,030 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,693 $ 2,920 ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: During the six months ended June 30, 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 six months ended June 30, 1996, 1,822,899 depositary shares of the Company's preferred stock were exchanged for 3,359,432 shares of its common stock. See Note 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 AND SIX MONTHS ENDED JUNE 30, 1997 (Unaudited) NOTE A - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated balance sheets as of June 30, 1997 and 1996 and the condensed consolidated statements of operations for the three and six month periods ended June 30, 1997 and 1996 and the condensed consolidated statements of cash flows for the six month periods ended June 30, 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 June 30, 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 and six month periods ended June 30, 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 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 was generally prime rate plus 1% until March 31, 1997. 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. The Loan Agreement has been amended to extend until September 30, 1997 with an interest rate of prime plus 2%. No fee was paid for this extension. 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 or other financing arrangements will be finalized when the Company's credit requirements are defined. NOTE D - INVENTORIES (in thousands)
June 30 December 31 ------- ----------- 1997 1996 1996 ---- ---- ---- Finished goods $21,983 $19,589 $19,667 Raw materials and parts 494 1,097 307 ------- ------- ------- $22,477 $20,686 $19,974 ======= ======= =======
4 7 GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED JUNE 30, 1997 (Unaudited) NOTE E - RESEARCH AND DEVELOPMENT Research and development expenses amounted to $3.0 million and $2.6 million for the three months ended June 30, 1997 and 1996, respectively, and $5.8 million and $5.1 million for the six months ended June 30, 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 $1.90 from $.29 to $2.19 in the six months ended June 30, 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 - MICRO MACHINES LICENSE RIGHTS AND LITIGATION SETTLEMENT During June 1997, the Company finalized an agreement under which it acquired all outstanding rights to its line of miniature vehicles, playsets and accessories marketed under the Micro Machines(R) brand. The agreement also ended litigation between the Company and Clemens V. Hedeen, Patti Jo Hedeen, and various affiliated entities (the "Licensor") over past royalties claimed by the Licensor and the extent of the Licensor's rights in Micro Machines. Under the agreement, the Company paid the Licensor an initial payment of $22,500,000. Additional amounts with a present value of $4,911,000 are due periodically through June 1, 2012. The agreement eliminates all future royalty payments to the Licensor, effective after March 31, 1997. The Company has accounted for this agreement by taking a pre-tax charge of $22,949,000 in the quarter ended June 30, 1997. The present value of the remaining balance amounting to $4,462,000 has been classified as other assets and is being amortized straight-line over a five year period. 5 8 GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED JUNE 30, 1997 (Unaudited) NOTE I - RECENT ACCOUNTING PRONOUNCEMENT The FASB issued three new standards, SFAS No. 128, Earnings per Share, SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 128 simplifies the standards for computing earnings per share ("EPS") previously found in APB Opinion No. 15 "Earnings per Share". This new standard 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 and six months ended June 30, 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. SFAS No. 130 establishes standards for reporting comprehensive income and its components in a financial statement and display of the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital. The Company does not expect the implementation of SFAS No. 130 to have a significant impact on the financial statements. SFAS No. 131 establishes standards for the reporting of selected information about operating segments in annual financial statements and interim financial reports issued to shareholders and the related disclosures about products and services, geographic areas and major customers. The Company has not determined the impact of SFAS No. 131 on the financial statements. The Company will be required to adopt SFAS 128 for the year ending December 31, 1997, and SFAS 130 and SFAS 131 for the year ending December 31, 1998. 6 9 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 Six Months Ended June 30 June 30 ------- ------- 1997 1996 1997 1996 ---- ---- ---- ---- Net revenues 100% 100% 100% 100% Costs of products sold 55.2 54.3 55.6 55.7 ----- ----- ----- ----- Gross margin 44.8 45.7 44.4 44.3 Advertising and promotion 14.3 13.4 16.0 14.3 Other selling and administrative 13.2 11.4 16.1 14.7 Royalties, research and development 15.1 18.7 15.6 17.9 ----- ----- ----- ----- Earnings (loss) from operations 2.2 2.2 (3.3) (2.6) Micro Machines license rights and litigation settlement (43.8) -- (24.7) -- Interest expense (0.1) (1.5) (0.1) (1.8) Other income (expense), net 0.7 0.1 0.9 0.1 Income tax benefit 16.0 -- 10.6 -- ----- ----- ----- ----- Net earnings (loss) (25.0)% 0.8% (16.6)% (4.3)% ===== ===== ===== =====
Net earnings (loss) have been affected by certain unusual non-recurring items. A comparison of the net earnings (loss) per common share and the net earnings (loss) per common share adjusted to exclude unusual items is set forth below:
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 1997 1996 1997 1996 ---- ---- ---- ---- Net earnings (loss) per common share on a primary basis, as reported $ (0.73) $ .02 $(0.86) $ (2.19) Net earnings (loss) per common share on a primary basis, adjusted to exclude the unusual items $ .05 $ .02 $(0.08) $ (0.29)
The unusual items excluded are as follows: Acquisition of Micro Machines license rights and litigation settlement of $14.0 million (after tax) in the three and six months ended June 30, 1997 and a one-time charge related to the exchange of preferred stock for common stock of $24.3 million in the six months ended June 30, 1996. 1997 Compared to 1996 Net sales increased 6% to $52.4 million in the second quarter of 1997 as compared to $49.2 million in the second quarter of 1996. The growth in net sales in the second quarter of 1997 was attributable to domestic sales which increased 20%, rising to $35.5 million. International sales decreased 14% to $16.9 million reflecting a generally weak European retail environment. The Company's worldwide sales of boys' toys increased 42% in the second quarter of 1997 as compared to the second quarter of 1996. The growth in net sales of boys' toys was attributable to Micro Machines growth and the introduction of the Company's Men in Black line. Worldwide sales of Micro Machines, led by Star Wars(TM) Action Fleet(TM), an extensive line of Star Wars vessels, playsets, and miniature action figures, increased by 73% in the second quarter of 1997 as compared to the second quarter of 1996. United States retail sales success of Micro Machines continued, reaching its eighteenth consecutive quarter of growth. This increase was partially offset by a decrease in sales of the Dragon Flyz line. 7 10 The Company's worldwide sales of girls' toys decreased 67% in the second quarter of 1997 as compared to the second quarter of 1996. This decrease was due principally to a decline in sales of the Company's Sky Dancer line. Net sales increased 7% to $93.0 million in the six months ended June 30, 1997 as compared to $86.7 million in the six months ended June 30, 1996. The growth in net sales in the second quarter of 1997 was attributable to domestic sales which increased 19%, rising to $66.8 million. International sales decreased 14% to $26.2 million. This decrease was attributable to the same factor, noted for the second quarter. The Company's worldwide sales of boys' toys increased 40% in the six months ended June 30, 1997 as compared to the six months ended June 30, 1996. The Company's worldwide sales of girls' toys decreased 52% in the six months ended June 30, 1997 as compared to the six months ended June 30, 1996. The change in sales of boys' and girls' toys was attributable to the same factors noted for the second quarter. Gross margins increased $1.0 million to $23.5 million in the second quarter of 1997 from $22.5 million in the second quarter of 1996. The higher sales volume increased gross margin by $1.5 million and a decrease in the gross margin rate accounted for $0.5 million. The gross margin rate decreased to 44.8% in the second quarter of 1997 as compared to 45.7% in the second quarter of 1996. The change in the gross margin rate was primarily attributable to higher tooling expense, packaging development expense, inventory valuation allowances and sales of discontinued products, which sell normally at little or no margin, offset by a favorable product mix and a favorable mix of sales between domestic and international markets. The Company's gross margin rate on domestic sales is significantly greater than foreign sales because the Company's prices on foreign sales are lower than on domestic sales as the foreign customer is responsible for the cost of importing and promoting the products. Gross margins increased $2.8 million to $41.2 million in the six months ended June 30, 1997 from $38.4 million in the six months ended June 30, 1996. This increase was primarily due to the higher sales volume. The gross margin rate increased to 44.4% in the six months ended June 30, 1997 as compared to 44.3% in the six months ended June 30, 1996. Advertising and promotion expenses were $7.5 million, or 14.3% of net revenues in the second quarter of 1997, as compared to $6.6 million, or 13.4% of net revenues in the second quarter of 1996. For the six months ended June 30, 1997, these expenses were $14.9 million, or 16.0% of net revenues as compared to $12.4 million, or 14.3% in the six months ended June 30, 1996. The increase in the advertising and promotion expenses was due to planned higher television advertising, trade show and product promotion expenses. Other selling and administrative expenses were $6.9 million in the second quarter of 1997 as compared to $5.6 million in the second quarter of 1996. For the six months ended June 30, 1997, these expenses were $14.9 million as compared to $12.8 million in the six months ended June 30, 1996. Other selling and administrative expenses for the second quarter of 1996 were reduced by $1.0 million resulting from a recovery received by the Company in settlement of a claim for damages partially offset by unusual legal expenses incurred related to this claim and another lawsuit. For the six months ended June 30, 1996, the total of the above items resulted in a net reduction in expense of $0.3 million. The additional increase in other selling and administrative expenses in the second quarter and six months ended June 30, 1997 was principally due to legal costs associated with the Micro Machines litigation and settlement agreement. Royalties, research and development expenses were $7.9 million in the second quarter of 1997 as compared to $9.2 million in the second quarter of 1996. For the six months ended June 30, 1997, these expenses were $14.5 million as compared to $15.5 million in the six months ended June 30, 1996. The decrease was attributable to the write-off of royalty advances associated with discontinued products in the second quarter and six months ended June 30, 1996. Exclusive of the 1996 write-off, the Company incurred higher royalty expenses related to increased sales as well as an increase in research and development expenses due to the expansion of the Company's product lines in the second quarter and six months ended June 30, 1997 as compared to the prior year comparable periods. 8 11 During the second quarter of 1997, the Company acquired all outstanding rights to its line of miniature vehicles, playsets and accessories marketed under the Micro Machines brand and settled related litigation. In 1986, the Licensor (as previously defined) licensed a concept to the Company that contributed to the origination of Micro Machines. The Company had paid royalties to the Licensor on the majority of Micro Machines sales. The agreement eliminates all future royalty payments to the Licensor, effective after March 31, 1997. The agreement also ends litigation between the Company and the Licensor over past royalties claimed by the Licensor and the extent of the Licensor's rights in Micro Machines. The Company recorded a pre-tax charge to earnings of $22.9 million in the second quarter of 1997 relating to this transaction. Additionally, the Company has capitalized $4.5 million which is being amortized over five years. Interest expense was $49,000 in the second quarter of 1997, as compared to $0.8 million in the second quarter of 1996. For the six months ended June 30, 1997, this expense was $0.4 million as compared to $1.6 million in the six months ended June 30, 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 $0.4 million in the second quarter of 1997 as compared to $0.1 million in the second quarter of 1996. For the six months ended June 30, 1997, other income was $0.8 million as compared to $0.1 million in the six months ended June 30, 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 second quarter and six months ended June 30, 1997 reflects the quarterly application of the estimated annual rate based on projected full year earnings. No tax recovery was reported in the second quarter and six months ended June 30, 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 May 1997) is subject to annual review and could be revoked prospectively for any given year. Current MFN tariffs on toys imported into the United States are zero, and the loss of MFN status for China would result in a substantial increase in tariffs applicable to toys imported from China. This increase in duty 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 9 12 possible, however, that some future trade dispute could result in substantial increases in tariffs or other restrictions on imports, such as quotas, of toys from China. These increased tariffs or other restrictions could be imposed under Section 301 of the Trade Act of 1974, as amended, whether or not the trade dispute itself involved toys. Such increased tariffs or other trade restrictions could have a material adverse effect on the Company's business, financial condition and results of operations. The impact on the Company of any political or economic unrest or disruptions in China, the loss of China's MFN status or the imposition of retaliatory trade restrictions on products manufactured in China would depend on several factors, including, but not limited to, the Company's ability to (i) procure alternative manufacturing sources satisfactory to the Company, (ii) retrieve its tooling located in China, (iii) relocate its production in sufficient time to meet demand, and (iv) pass 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 reverted 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. 10 13 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 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 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 was equal to the prime rate of CoreStates Bank N.A. as announced from time to time plus 1%. The Loan Agreement has been amended to extend until September 30, 1997 with an interest rate of prime plus 2%. No fee was paid for this extension. 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 or other financing arrangement will be finalized when the Company's credit requirements are defined. During the six months ended June 30, 1997, the Company used $11.0 million of cash in its operating activities. The net cash used by operating activities resulted primarily from the net loss which included the acquisition of the Micro Machines rights and litigation settlement. Also contributing to the use of cash were increases in inventories, tooling and related costs, prepaid expenses and other assets, and income taxes receivable and deferred, decreases in accounts payables, accrued expenses and other liabilities and income taxes payable offset by a decrease in accounts receivable. Working capital was $121.1 million at June 30, 1997 compared to $134.4 million at December 31, 1996 and $47.6 million at June 30, 1996. The ratio of current assets to current liabilities was 5.7 to 1.0 at June 30, 1997 compared to 3.9 to 1.0 at December 31, 1996 and 1.8 to 1.0 at June 30, 1996. The Company had no material commitments for capital expenditures at June 30, 1997. The Company believes that its cash flow from operations, cash on hand and borrowings under a new credit arrangement 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 Star Wars license 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 credit facilities currently being negotiated, which have 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. 11 14 Part II - OTHER INFORMATION Item 1. Legal Proceedings Licensing Litigation In June 1995, the Company filed a declaratory judgment action in the United States District Court for the Northern District of California. The suit named Clemens V. Hedeen, Jr., Patti Jo Hedeen, and various affiliated entities, as defendants, and sought a determination that the Company is not obligated to pay royalties to the defendants under their license agreement on certain specific products sold under the Company's "Micro Machines" name and trademark. The defendants filed a cross-complaint for breach of this license agreement claiming, among other things, damages for past royalties allegedly due but not paid under the license agreement, and claiming entitlement to additional royalties on future sales of such product. On June 2, 1997, the Company entered into a Settlement & Release Agreement (the "Agreement") with all of the defendants in this pending litigation. Under the Agreement, the litigation was terminated and the various claims and counterclaims were dismissed with prejudice, and the Company acquired all of the outstanding rights to its "Micro Machines" brand. Acquisition of these rights by the Company has eliminated all future royalty payments by it to the defendants in connection with the Micro Machines brand, effective after March 31, 1997. In October 1995, the Company filed a breach of contract action in the United States District Court for the Northern District of California. The suit named Abrams Gentile Entertainment Inc. and Up, Up and Away as defendants, and alleged damages for the licensing, marketing and sale of products that are in violation of the Company's rights as licensee under its Sky Dancers and Dragon Flyz license agreements with Abrams Gentile Entertainment, Inc. The defendants filed a number of counterclaims, including breach of contract, interference with contractual relationships, misappropriation of copyright, unfair competition and trade libel. 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. However, in the opinion of management of the Company, such amount is not 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 10.1 - Settlement and Release Agreement dated June 2, 1997 Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K - None 12 15 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: August 6, 1997 By: /s/ Roger J. Kowalsky -------------------------- Roger J. Kowalsky Executive Vice President, Finance and Chief Financial Officer 13 16 EXHIBIT INDEX Exhibit No. Description 10.1 Settlement and Release Agreement dated June 2, 1997 27 Financial Data Schedule EX-10.1 2 SETTLEMENT RELEASE AGREEMENT 1 SETTLEMENT AND RELEASE AGREEMENT This Settlement and Release Agreement (the "Agreement") is entered into as of this 2nd day of June 1997 (the "Effective Date") by and between Galoob Toys, Inc., formerly known as Lewis Galoob Toys, Inc. ("Galoob"), by and on behalf of itself and its wholly owned subsidiary Galco International Toys, N.V., and Hedeen and Companies, FunMaker, Clemens V. Hedeen, Jr., Patti Jo Hedeen, Ned Cain, Carol Cain, C.V. Hedeen's Fun Factory, Hedeen International, and CV Hedeen's Fun City, USA (collectively the "Hedeen Group"). A. DEFINITIONS 1. The "Lawsuit" means the case of Lewis Galoob Toys, Inc. v. Clemens V. Hedeen et al., and related cross-action, pending in the United States District Court for the Northern District of California, No. C95-1852-DLJ. 2. "Escrow Funds" means the money that Galoob has previously deposited in an account at the Associated Kellogs Bank in Green Bay, Wisconsin (the "Escrow Funds Bank"), pursuant to the Stipulation and Order Re Deposit of Funds, filed July 24, 1996 in the Lawsuit, plus any interest that has accrued in said account. The amount of money so deposited in the Escrow Funds Bank by Galoob is Two Million Eighty-One Thousand Five Hundred and Fifty-Six Dollars ($2,081,556.00). 3. "The Royalty Agreements" mean the following: (a) the Agreement between FunMaker and Galoob dated June 16, 1986 (the "1986 Agreement"); (b) the Supplemental Agreement between Hedeen and Companies (FunMaker) and Galoob executed on June 29, 1989 by Hedeen and Companies (FunMaker) and on July 5, 1989 by Galoob; (c) the letter agreement regarding Z-BOTS between FunMaker and Galoob dated December 14, 1992 and executed by 2 FunMaker on December 29, 1992; and (d) any claimed or alleged express or implied agreement or right based upon, relating to or arising out of any of the agreements described in subparagraphs A3(a) through A3(c) and/or Micro Machines (as defined below). 4. "The Parties" mean Galoob, on the one hand, and the Hedeen Group, on the other hand (with each member of the Hedeen Group being a "Party"). 5. "Micro Machines" means: (a) the words "Micro Machines"; (b) products sold, manufactured, given away, distributed, sublicensed, licensed or otherwise transferred under or using the Micro Machines name ("Micro Machines Products"); (c) the Micro Machines trademark, trade name, service mark, logo and goodwill and intellectual property rights associated therewith; (d) all other trademarks, trade names, service marks, markings, logos, patents, copyrights, trade dress, designs and other identifying features, goodwill and intellectual property rights owned or controlled by Galoob and used in conjunction with or associated in any way with any Micro Machines Products; (e) all other trademarks, trade names, service marks, markings, logos, patents, copyrights, trade dress, designs and other identifying features, goodwill and intellectual property rights licensed or otherwise authorized for use by Galoob from third parties to the extent used in conjunction with or associated in any way with any Micro Machines Products (the rights described in subparagraphs A5(a), A5(c), A5(d) and A5(e) are collectively referred to as "Micro Machines Intellectual Property"); (f) all molds, tooling, drawings, models, prototypes or other similar items sold, manufactured, given away, distributed, licensed, sublicensed or otherwise transferred or used in any way in connection with or relating to Micro Machines Products and/or Micro Machines Intellectual Property; and (g) all rights to sell, manufacture, give away, distribute, license, sublicense or otherwise enter into any agreement in connection with or relating to Micro Machines Products and/or Micro Machines Intellectual -2- 3 Property. 6. "Protective Order" means the Stipulation and Protective Order for Confidential Information, filed September 6, 1995 in the Lawsuit. B. AGREEMENT Subject to the terms of this Agreement, the Parties desire to finally and forever resolve all disputes of any kind or nature between them, including but not limited to claims that have been or could be asserted in the Lawsuit or elsewhere. Therefore, for good and valuable consideration, the Parties, and each of them, agree as follows: 1. Initial Cash Payment: On the date specified in paragraph B5, Galoob shall pay to the Hedeen Group the sum of Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000.00). 2. Additional Cash Payments: a. In accordance with the provisions of paragraph B2c below, Galoob shall cause to be paid to the Hedeen Group an additional sum totalling Seven Million Five Hundred Thousand Dollars ($7,500,000.00), payable as follows: (a) Seven Hundred and Fifty Thousand Dollars ($750,000.00) on June 1, 1998; (b) Five Hundred Thousand Dollars ($500,000.00) annually starting on June 1, 1999 through and including June 1, 2011; and (c) Two Hundred and Fifty Thousand Dollars ($250,000.00) on June 1, 2012. (If June 1 falls on a holiday or weekend in any year(s), the date for payment shall be the first business day following June 1.) b. In the event that Galoob fails to make any payment pursuant to paragraph B2a by the applicable due date ("Late Payment"), the Hedeen Group shall promptly give written -3- 4 notice of such Late Payment and Galoob shall have fourteen (14) days from the date of receipt of such notice to cure by making the payment. Galoob shall pay interest on any Late Payment at the rate of two percent (2%) over Bank of America prime from the applicable due date through the date of payment. c. Within thirty (30) days of the Effective Date hereof, Galoob will purchase one or more zero coupon government bonds that shall provide for payments in the amounts specified in paragraph B2a above ("Bonds") to secure payment of said amounts as set forth in the Security and Trust Agreement attached hereto as Exhibit 1. The Bonds shall be payable to a trustee, which shall be a bank or other institutional trustee designated by Galoob, and the Bonds shall be administered pursuant to the attached Security and Trust Agreement in favor of Clemens V. Hedeen and Patti Jo Hedeen, as secured parties. The Security and Trust Agreement shall be executed by Clemens V. Hedeen, Patti Jo Hedeen and Galoob prior to the time Galoob purchases the Bonds. Galoob may satisfy the obligations set forth in paragraph B2a by paying the sums, or any of them, directly in accordance with paragraphs B2a and B4 hereof or from the Bonds through the procedures set forth in the Security and Trust Agreement, either of which shall satisfy Galoob's obligations pursuant to paragraph B2a in full. The Parties shall also execute any other documentation reasonably requested by the trustee to implement the terms of the attached Security and Trust Agreement, provided that such other documentation is consistent with and does not contradict the terms and conditions of this Agreement or the Security and Trust Agreement attached hereto as Exhibit 1. 3. Escrow Funds: On the date and in the manner specified in paragraphs B4 and B5, Galoob shall cause the Escrow Funds to be paid to the Hedeen Group. The Parties shall also promptly execute all paperwork necessary to close the bank account that has been used to hold -4- 5 the Escrow Funds. 4. Manner of and Instructions re Payments: The payments described in paragraphs B1, B2 and B3 shall be made by wire or other transfer of funds to a single account with a single financial institution to be specified in writing by Clemens V. Hedeen and Patti Jo Hedeen, who are hereby authorized by the Hedeen Group, and each of them, to specify the recipient financial institution and account. Such specification shall be provided to Galoob no later than the time of execution of this Agreement. The Hedeen Group, and each of them, shall be solely responsible for allocating the payments specified in paragraphs B1, B2 and B3 among themselves. Payment by Galoob pursuant to the specifications provided by Clemens V. Hedeen and Patti Jo Hedeen will be deemed to have satisfied Galoob's obligations under paragraphs B1, B2 and B3. 5. Closing and Dismissal of Lawsuit: Within three (3) business days of execution of this Agreement by all Parties, the Parties shall execute and file a stipulation for dismissal of the Lawsuit with prejudice, including all complaints and counterclaims, in the form attached hereto as Exhibit 2. All Parties shall bear their own attorney's fees and costs in connection with the Lawsuit and this Agreement. Simultaneously upon filing of the stipulation for dismissal, Galoob shall: (a) cause the sum specified in paragraph B1 above to be paid to the Hedeen Group pursuant to the instructions in paragraph B4; and (b) provided Galoob has received the requisite forms from the Escrow Funds Bank ("Escrow Forms"), Galoob shall send the original Escrow Forms by Federal Express or other express mail with a facsimile copy to the Escrow Funds Bank authorizing it to pay the Escrow Funds to the Hedeen Group pursuant to paragraphs B3 and B4. If for any reason beyond Galoob's control, Galoob has not received the Escrow Forms from the Escrow Funds Bank by the time the dismissal is filed, Galoob will execute and send said Escrow Forms to the Escrow Funds Bank immediately upon their receipt. -5- 6 6. Galoob's Exclusive Rights to Micro Machines: a. The Hedeen Group, and each of them, acknowledge and agree that as of the Effective Date hereof and at all times hereafter, Galoob has and shall continue to have in the future the exclusive and entire right, title and interest in and to Micro Machines for all purposes. The Hedeen Group, and each of them, acknowledge and agree that as of the Effective Date hereof and at all times hereafter, they have no right, title or interest in or to Micro Machines and they shall not at any time assert any claim of any sort to or in connection with Micro Machines. The Hedeen Group, and each of them, further acknowledge and agree that Galoob has full and complete authority to make any and all decisions of any nature or kind whatsoever and to take any action of any nature or kind whatsoever concerning Micro Machines. Except only to the limited extent set forth in paragraph B6b, the Hedeen Group, and each of them, shall not use Micro Machines at any time now or in the future for any commercial or business purpose or for personal gain. b. Galoob will not object to the Hedeen Group describing itself as "inventors of the original Micro Machines toys"; provided, however, that Galoob does not accept any responsibility and expressly disclaims any responsibility for the accuracy of said statement. Galoob's agreement pursuant to this subparagraph B6b shall be limited to the terms hereof, and shall not in any way diminish or vary the terms of subparagraph B6a except to the extent specifically set forth herein. 7. The Royalty Agreements: The Hedeen Group, and each of them, hereby convey all right, title and interest in and to the subject matter of and rights under the Royalty Agreements in their entirety to Galoob for its exclusive use and ownership. All of Galoob's obligations and -6- 7 duties under the Royalty Agreements and all of the Hedeen Group's rights (and each of their rights) under the Royalty Agreements are extinguished in their entirety, including but not limited to any obligation to pay additional royalties or other payments thereunder and any examination or audit rights thereunder. The Hedeen Group, and each of them, acknowledge and agree that, except as set forth in paragraphs B1, B2 and B3 hereof, Galoob has no obligation of any kind to make any payments to the Hedeen Group, or any of them. The Royalty Agreements are no longer of any force or effect and are hereby terminated in their entirety and the Parties hereto expressly waive any and all rights and obligations under the Royalty Agreements, including but not limited to the provisions of paragraph 18 of the 1986 Agreement and any and all rights to examine Galoob's books and records pursuant to paragraph 13 of the 1986 Agreement, or otherwise. The Hedeen Group, and each of them, acknowledge and agree that all notices of default and/or notices of termination relating to the Royalty Agreements, or any of them, are cancelled and are of no force or effect. 8. Non-Competition and Non-Disparagement: a. The Hedeen Group, and each of them, hereby agrees that in connection with the execution of the Agreement and the transfer of their interest in the Royalty Agreements and the goodwill related thereto, the Hedeen Group, and each of them, shall not, either directly or indirectly, engage in the development, manufacture, license, distribution or sale of miniature vehicles in substantially the same scale as Micro Machines vehicles marketed to date and/or playsets for such miniature vehicles marketed to date. This restriction shall terminate within five (5) years of the Effective Date of this Agreement. b. The Hedeen Group, and each of them, shall not use or authorize the use of -7- 8 any name, trademark, logo, service mark, trade dress, copyright, patent, design or other marking which is confusingly similar to any Micro Machines Intellectual Property, or otherwise engage in any act which causes, or is reasonably likely to cause, any such confusion. In addition, except as specifically set forth in paragraph B6b above, the Hedeen Group, and each of them, shall not use or authorize the use of any name, trademark, logo, service mark, trade dress, copyright, patent, design or other marking, or otherwise engage in any act or business that does or is intended to dilute, tarnish, degrade, diminish, impair or otherwise adversely affect, Micro Machines Intellectual Property. 9. Samples and Prototypes: a. Within three months of the Effective Date hereof, Galoob shall use reasonable efforts to provide the Hedeen Group with samples of Micro Machines toys to the extent they are in Galoob's possession as of the Effective Date hereof, as follows: two samples of Micro Machines toys sold between 1994 and the Effective Date hereof, or one sample where two are not available, provided Galoob has at least one sample of each toy to retain for its own use. b. Within thirty (30) days of the Effective Date hereof, Galoob shall cause to be delivered to Legal Strategies Group all original Snappers prototypes submitted by the Hedeen Group in 1986 which are in Galoob's possession as of the Effective Date hereof. 10. Releases: a. By Galoob: Subject to and conditioned upon dismissal of the Lawsuit, Galoob, individually and for and on behalf of its successors, predecessors, parent companies, subsidiaries (including but not limited to Galco International Toys, N.V.), affiliated companies, -8- 9 partnerships, partners, associates and joint venturers, hereby fully, completely and finally waives, releases and forever discharges and covenants not to sue the Hedeen Group, and each of them, and their successors, predecessors, heirs, assigns, attorneys, executors, agents and representatives from any and all claims, demands, suits, liabilities, debts and obligations of any kind or nature, known or unknown, foreseen or unforeseen, suspected or unsuspected, that it has had, now has or may have in the future as to any and all matters of any kind through the Effective Date hereof, including but not limited to matters based upon, relating to or arising from the following: (1) all claims asserted or that could have been asserted in the Lawsuit; (2) the Royalty Agreements; (3) Micro Machines; and (4) all other dealings, contracts and agreements between the Parties, or any of them; provided, however, that this release does not release or discharge any claim or obligation expressly created by this Agreement or the Protective Order. b. By The Hedeen Group: Subject to and conditioned upon dismissal of the Lawsuit, the Hedeen Group, and each of them, individually and for and on behalf of their successors, predecessors, subsidiaries, parent companies, affiliated companies, partnerships, partners, associates, heirs, executors and joint venturers, hereby fully, completely and finally waive, release and forever discharge and covenant not to sue Galoob, and its successors, predecessors, parent companies, subsidiaries (including but not limited to Galco Internationals Toys, N.V.), affiliated companies and former and current employees, attorneys, officers, directors, agents, representatives, partners, associates, assigns, distributors, licensors and licensees from any and all claims, demands, suits, liabilities, debts and obligations of any kind or nature, known or unknown, foreseen or unforeseen, suspected or unsuspected, that they have had, now have or may have in the future as to any and all matters of any kind through the Effective Date hereof, including but not limited to matters based upon, relating to or arising from the following: (1) all -9- 10 claims asserted or that could have been asserted in the Lawsuit; (2) the Royalty Agreements; (3) Micro Machines; and (4) all other dealings, contracts and agreements between the Parties, or any of them; provided, however, that this release does not release or discharge any claim or obligation expressly created by this Agreement or the Protective Order. c. Civil Code Section 1542: The Parties hereto certify that they have read and understood, and hereby expressly waive the benefits of Section 1542 of the California Civil Code, and any and all similar provisions under other state and federal laws. Civil Code Section 1542 provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. The Parties warrant that they have been represented by counsel and have had a full and complete opportunity to consult with counsel about this Agreement and to investigate the facts of the matters in dispute. The Parties recognize that they may discover new facts in the future and voluntarily assume the risk that they may discover such new facts in the future. The Parties further recognize that they may suffer additional damages or injury arising out of the matters released in this Agreement. The Parties acknowledge that they intend these consequences even as to facts or claims for damages or injuries that may exist which they do not know to exist and which, if known, would materially affect their decision to execute this Agreement. The Parties have read and understood the operation and legal effect of Section 1542 and hereby intend through this release fully and forever to release all claims as set forth above regardless of the discovery of any additional facts or information subsequent to the execution of this Agreement. -10- 11 11. Denial of Liability: By entering into this Agreement, it is understood that the Parties do not admit, and to the contrary expressly deny, that they have breached any duty, obligation or agreement, or engaged in any illegal, tortious or wrongful activity, or that any damages have been sustained by any other Party hereto or any third party. 12. Integration Clause: The Parties hereto warrant that no promise, representation, inducement or agreement not expressed herein has been made to them, either individually or collectively, in connection with this Agreement. This Agreement is intended to be a full and complete statement of the terms of the agreement between the Parties and expressly supersedes any and all prior oral or written agreements (express or implied), including but not limited to the Royalty Agreements. 13. Modification or Amendment: This Agreement may not be altered, amended, modified or otherwise changed in any respect whatsoever except by a writing duly executed by Galoob, on the one hand, and Clemens V. Hedeen, Jr. and Patti Jo Hedeen, on the other hand, who are hereby authorized by the Hedeen Group, and each of them, to enter into such alterations, amendments, modifications and changes. 14. Affected Parties: This Agreement is and shall be binding upon and inure to the benefit of the Parties and their respective agents, attorneys, employees, officers, directors, parent companies, subsidiaries, predecessors, affiliates, affiliated and related companies, successors, assigns, spouses, associates, partners, principals, partnerships, joint venturers, representatives, estates and heirs. 15.Representations Re Signing Authority: Each of the persons executing this Agreement represents and warrants that he or she has full and complete authority to sign on -11- 12 behalf of the designated entity. 16. Representations Re Rights, Ownership, Etc.: The Hedeen Group, and each of them, represent and warrant as follows: a. They, and each of them, have the exclusive right, title and interest in (i) the Royalty Agreements and all rights, title and interest being conveyed to Galoob in paragraph B7 above; (ii) the Lawsuit, and all matters that were or could have been asserted in the Lawsuit; and (iii) the claims and/or causes of action described or released herein; b. They, and each of them, have the exclusive right to convey the interests and receive the benefits under this Agreement; c. This Agreement does not violate any agreement, obligation or contract that the Hedeen Group, or any of them, have with any third party; d. No person or entity outside of the Hedeen Group has or claims to have any right, title or interest in (i) the Royalty Agreements or any of the rights, title and interest in said agreements; (ii) the Lawsuit, or any of the matters that were or could have been asserted in the Lawsuit; and (iii) the claims and/or causes of action described or released herein; e. Except for the Lawsuit, they, or any of them, are not involved in any claims or lawsuits involving (i) the Royalty Agreements or any of the rights, title and interest being conveyed to Galoob in paragraph B7 above; (ii) the Lawsuit, or any of the matters that were or could have been asserted in the Lawsuit; and (iii) the claims and/or causes of action described or released herein; -12- 13 f. They, and each of them, have made no assignment, transfer, conveyance or other disposition of any of the right, title or interest in (i) the Royalty Agreements or any of the rights, title and interest being conveyed to Galoob in paragraph B7 above; (ii) the Lawsuit, or any of the matters that were or could have been asserted in the Lawsuit; and (iii) the claims and/or causes of action described or released herein. 17. Indemnity: In the event of any breach of any covenant, representation or warranty in this Agreement, the breaching Party shall indemnify and hold the other Party harmless from any loss, damage, cost or expense (including but not limited to reasonable attorney's fees and costs) suffered as a result of or arising from litigation, demands or other claims asserted by third parties as a result of or arising from such breach of covenant, representation or warranty. 18. Drafting: All Parties hereto have participated in the drafting of this Agreement with the benefit of counsel. Any rule of construction to the effect that any ambiguity is to be resolved against the drafting party shall not be applied to the interpretation of this Agreement. 19. Governing Law: This Agreement shall be governed by and construed under the laws of the State of California, without regard to principles of conflicts of law. 20. Counterparts: This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall be deemed one and the same instrument. 21. Remedies: In addition to all other remedies specifically provided herein, in the event of a breach of any covenant, representation or warranty herein, the Parties shall have all rights and remedies provided by law and equity, including but not limited to the right to seek -13- 14 injunctive relief, offset and all other remedies available in law or equity. 22. Notice: All notices, requests, demands and other communications required or permitted to be given pursuant to this Agreement shall be in writing to the following persons at their respective addresses: a. Notice to Galoob: William G. Catron, Esq. Galoob Toys, Inc. 500 Forbes Boulevard South San Francisco, California 94080 Facsimile: (415) 583-5572 b. Notice to the Hedeen Group: Clemens V. Hedeen, Jr. Hedeen International 218 N. 14th Street Sturgeon Bay, Wisconsin 54235 Facsimile: (414) 743-8835 - and - Patti Jo Hedeen c/o Hedeen and Companies 1309 N. 14th Avenue Sturgeon Bay, Wisconsin 54235 Facsimile: (414) 743-5163 Such notice shall be delivered by certified mail, return receipt requested, except where this Agreement otherwise specifies that notice shall be by facsimile. In the event that either party wishes to change the designated person and/or address for notice in the future, notice of such change of designated person and/or address shall be provided in writing. 23. Confidential Documents: The Protective Order shall remain in full force and effect and the Parties hereto will continue to be bound thereby. Within sixty (60) days of the Effective -14- 15 Date hereof, the Parties and their attorneys, consultants, experts and agents shall return all copies of documents and other materials containing information designated by any other Party as "Confidential" or "Highly Confidential" Information (with or without the "Attorney's Eyes Only" designation) pursuant to the terms of the Protective Order by delivering such materials to the other Party's counsel of record or, alternatively, such materials may be destroyed provided that the Parties and their counsel of record certify under penalty of perjury that all such materials have been destroyed, including copies given to consultants, experts and agents; provided, however, that counsel of record in the Lawsuit may retain pleadings, discovery, correspondence and work product that contains Confidential Information provided that such counsel of record agree to and shall continue to be bound by the terms of the Protective Order. 24. Headings: The headings of this Agreement are included for convenience only and shall not be deemed to constitute part of the Agreement or to affect its construction. 25. Confidentiality: a. For a period of ninety (90) days from the Effective Date hereof, the terms of this Agreement shall remain confidential and shall not be disclosed to any third party unless and until such sooner time as Galoob determines that it should disclose the terms, or any of them, as a result of its status as a publicly traded company or by virtue of judicial or legal process, securities laws or accounting requirements. In the event there is such sooner disclosure by Galoob, Galoob shall provide the Hedeen Group with twenty-four hours advance written facsimile notice to the recipients specified in paragraph 24b that it intends to publicly disclose any terms of this Agreement. Upon such public disclosure by Galoob, the terms of this Agreement shall no longer be confidential. -15- 16 b. The confidential negotiations relating to this Agreement are and shall remain confidential and shall not be disclosed to any third party except: (a) as required by accounting requirements, legal or judicial process, or for security law purposes; (b) to the extent that Galoob concludes that it is reasonably necessary to disclose such information as a publicly traded company; and (c) to the extent necessary to enforce the terms of this Agreement. c. In the event that any Party receives legal or judicial process requiring disclosure of the terms and/or negotiations of this Agreement at a time when such information remains confidential hereunder, said Party shall provide all other affected Parties with reasonable notice of such legal or judicial process to permit such Party to object to any disclosure. d. The Hedeen Group, and each of them, acknowledges and agrees that the terms of this Agreement, and the negotiations relating to this Agreement (collectively, the "Confidential Information"), may be deemed to be non-public, material information under the United States securities laws. Accordingly, the Hedeen Group, and each of them, agree they will not (i) directly or indirectly purchase, sell or otherwise trade in any Galoob common stock or other Galoob securities (including any options to purchase such common stock or other securities) (collectively "Galoob securities") at any time prior to the conclusion of the third business day following public disclosure by Galoob of the terms of this Agreement or ninety days after the Effective Date hereof, whichever is sooner, or (ii) recommend to or authorize any other party that such party should purchase, sell or otherwise trade in any Galoob securities at any time prior to the conclusion of the third business day following public disclosure by Galoob of the terms of this Agreement or ninety days after the Effective Date hereof, whichever is sooner. 26. Severability: If any provision of this Agreement shall be deemed to be void or -16- 17 unenforceable for any reason, the same shall in no way affect (to the maximum extent permissible by law) any other provision of this Agreement or the validity or enforceability of this Agreement as a whole. 27. Facsimile Signatures: This Agreement may be executed by facsimile, which shall be deemed an original; provided, however, that original signatures will also be provided by all signatories hereto. GALOOB TOYS, INC. By:_____________________________________ PRESIDENT ________________________________________ CLEMENS V. HEDEEN, JR. ________________________________________ PATTI JO HEDEEN ________________________________________ NED CAIN ________________________________________ CAROL CAIN FUNMAKER; HEDEEN AND COMPANIES; C.V. HEDEEN; FUN CITY USA; C.V. HEDEEN'S FUN FACTORY By:_____________________________________ CLEMENS V. HEDEEN, JR. -17- 18 By:_____________________________________ PATTI JO HEDEEN APPROVED AS TO FORM: LEGAL STRATEGIES GROUP By:_____________________________________ Attorneys for the Hedeen Group JACKSON TUFTS COLE & BLACK, LLP By:_____________________________________ Attorneys for Galoob Toys, Inc. -18- 19 EXHIBIT 1 SECURITY AND TRUST AGREEMENT This Security and Trust Agreement ("Agreement") is entered into as of __________, 1997 between Galoob Toys, Inc., formerly known as Lewis Galoob Toys, Inc. ("Galoob"), Clemens V. Hedeen, Jr. and Patti Jo Hedeen (collectively the "Hedeens") and ______________, a California bank or other California "securities intermediary" under the California U.C.C. ("Trustee"). RECITALS A. Galoob and the Hedeens have entered into a Settlement and Release Agreement ("Settlement Agreement") effective as of June 2, 1997, between Galoob, on the one hand, and Hedeen and Companies, FunMaker, Clemens V. Hedeen, Jr., Patti Jo Hedeen, Ned Cain, Carol Cain, CV Hedeen's Fun Factory, Hedeen International and CV Hedeen's Fun City, USA (collectively the "Hedeen Group"), on the other hand, pursuant to which Galoob has agreed to make certain payments to the Hedeen Group pursuant to paragraph B2a thereof. B. By no later than July 2, 1997, Galoob will obtain Zero Coupon bonds issued by the United States Treasury in the name of Trustee ("Zero Coupon Bonds"), as more particularly described in Exhibit A hereto. C. This Agreement is being made in accordance with and in full satisfaction of the provisions of paragraphs B2a and B2c of the Settlement Agreement. AGREEMENT NOW THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. CREATION OF TRUST; GRANT OF SECURITY INTEREST. 1.1. APPOINTMENT OF TRUSTEE. Subject to the terms and conditions of this Agreement, the parties hereto irrevocably appoint and engage ______________ to act as Trustee to hold, administer and dispose of the Trust Property (defined below) in accordance with the terms of this Agreement. The Trustee hereby accepts such appointment and agrees to perform the Trustee's duties hereunder in a diligent and professional manner. This Agreement irrevocably establishes the trust and may not be terminated by any of the parties hereto except pursuant to the provisions of paragraph 8 below. 1.2. DELIVERY OF TRUST PROPERTY. 1.2.1. Within three (3) business days of execution of this Agreement by the Trustee, Galoob shall cause the Zero Coupon Bonds in the name of the Trustee to be delivered to the Trustee and shall provide confirmation of the purchase and delivery of said Zero Coupon Bonds to the Hedeens. 20 1.3. ACCEPTANCE BY TRUSTEE. Trustee hereby agrees to accept the Zero Coupon Bonds and agrees to hold the Zero Coupon Bonds and all proceeds thereof in trust pursuant to the terms of this Agreement. (All of these assets, including all deposits to and interest accrued on the Trust Account, are hereinafter referred to as the "Trust Property".) 2. PURPOSE OF TRUST; SECURITY INTEREST. The Trustee shall hold exclusive title to the Trust Property for the benefit of Galoob and the Hedeens to effect and secure the payments called for under paragraph B2a of the Settlement Agreement in accordance with the provisions of this Agreement and paragraphs B2a and B2c of the Settlement Agreement. Galoob hereby grants to the Hedeens a security interest in the Trust Property to secure payment by Galoob of the amounts referred to in paragraph B2a and B2b of the Settlement Agreement ("Lien"). This Agreement is intended to and shall perfect such Lien under applicable law. Galoob represents and warrants to the Hedeens that the Trust Property is not presently subject to any other security interest or claim, and that the execution, delivery and performance of this Agreement by Galoob does not require the consent or approval of, or violate any agreement with, any third party. Galoob also agrees that it shall not voluntarily encumber the Trust Property for the benefit of any third party; and the Trustee agrees that it will not enter into any agreement with any third party that could create or perfect any additional interest in the Trust Property. The Trustee shall provide, or cause to be provided, an executed UCC-1 Financing Statement against the Trust Property, and only the Trust Property, for the Hedeens to file with the applicable authorities. Galoob shall provide an executed UCC-1 Financing Statement against the Trust Property, and only the Trust Property, for the Hedeens to file with the applicable authorities, which UCC-1 Financing Statement shall recite that it is being filed "at the Hedeens' request for protective purposes." The Financing Statements shall not attach the Settlement Agreement or this Agreement. The creation of the Lien in the Trust Property as provided herein shall give the Hedeens a lien on said assets; but said security interest shall not enable the Hedeens to direct the Trustee to make disbursements of the Trust Property other than as provided herein. In the event Galoob and the Trustee fail to make an annual payment as required under paragraph B2a of the Settlement Agreement following an opportunity to cure pursuant to paragraph B2b of the Settlement Agreement, and provided that the Trustee has not received a Notice of Payment or Notice of Litigation (as defined below), the Hedeens shall be entitled to foreclose or otherwise enforce their Lien against the Trust Property to the extent that the Trust Account contains proceeds from matured Bonds, plus interest thereon, if any. The Hedeens shall not be entitled to foreclose or otherwise enforce their Lien against any unmatured Bonds that secure future annual payments pursuant to paragraph B2a of the Settlement Agreement. 3. DUTIES OF TRUSTEE. 3.1 DEPOSIT. Trustee shall deposit all proceeds of the Zero Coupon Bonds into a market-rate interest-bearing account ("Trust Account") in Trustee's name at a bank located in California to be held in trust pursuant and subject to the terms of this Agreement. -2- 21 3.2. PRE-LITIGATION DISBURSEMENTS FROM TRUST ACCOUNT. 3.2.1. On June 1 of each year from 1998 through 2012, if the Trustee has not received a Notice of Payment or a Notice of Litigation as defined below, the Trustee shall disburse all funds in the Trust Account as follows: (i) first, to the Hedeens for the amounts to which the Hedeen Group is then entitled under paragraph B2a of the Settlement Agreement, which amounts are fully set forth in Exhibit B hereto; (ii) second, any remaining amounts to Galoob. An insufficiency of funds in the Trust Account for any reason shall not condition or excuse Galoob's payment obligations under paragraph B2a of the Settlement Agreement 3.2.2. Galoob may elect to make any or all of the annual payments required pursuant to paragraph B2a of the Settlement Agreement directly pursuant to paragraphs B2a and B4 of the Settlement Agreement, rather than from the Trust Property. If Galoob makes such an election to pay directly, Galoob shall provide written notice to the Trustee (with a copy to the Hedeens ) by no later than June 1 in any year in which such direct payment is made, together with bank confirmation that the requisite funds have been sent to the Hedeen Group ("Notice of Payment"). If the Trustee receives such a Notice of Payment, the Trustee shall hold the funds in the Trust Account until June 15 of the year in which the Trustee has received the Notice of Payment, at which time the Trustee shall disburse all funds in the Trust Account to Galoob; provided, however, that, if prior to June 15 the Hedeens shall notify the Trustee in writing that the Hedeen Group has not received good funds in the full amount of the required payment, the Trustee shall not disburse such funds until it has received joint disbursement instructions from both parties or a certified copy of a court order directing disbursement. 3.3 POST-LITIGATION DISBURSEMENTS FROM TRUST ACCOUNT. If the Trustee receives a written notice from Galoob stating that the Hedeen Group or any member thereof is in material breach of the Settlement Agreement and that Galoob has commenced litigation based upon such breach ("Notice of Litigation"), the Trustee shall thereafter not release or disburse any funds from the Trust Account unless and until either: (i) Galoob thereafter delivers to the Trustee a notice that the litigation has been dismissed; (ii) Galoob and the Hedeens thereafter deliver to the Trustee joint instructions for the disbursement of the funds in the Trust Account; or (iii) the Trustee receives a certified copy of a court order directing the Trustee to disburse the funds held. In agreeing that the funds may be held by the Trustee under the circumstances specified in this paragraph 3.3, the Parties hereto intend only to preserve the Trust Property until the events specified herein have occurred, and the Parties do not waive and expressly preserve all arguments, claims, rights and remedies they may have in such litigation, including any claim that the lawsuit was improperly commenced. 3.4 RELEASE OF TRUST PROPERTY. Trustee shall release the Trust Property only as provided in this Agreement. All disbursements to the Hedeens from the Trust Account shall include, if such disbursement is made after June 1 of any year, interest on the payment, if any, from June 1 to the date of payment as provided in the Settlement Agreement to the extent of funds in the Trust Account. -3- 22 3.5 BOOKS, RECORDS AND INFORMATION. 3.5.1 Trustee shall maintain complete and accurate books of account and records of the Trustee's activities, collections and disbursements pursuant to this Agreement. The Trustee shall make such books and records available during normal business hours for inspection and audit by the parties hereto and their respective representatives. 3.5.2. Not later than twenty (20) days from the end of each calendar year, the Trustee shall deliver to the parties hereto a statement accurately setting forth all deposits and disbursements made by the Trustee during said year. 3.5.3. Trustee shall provide the parties hereto all information reasonably requested regarding Trustee's actions in connection with this Agreement. 4. TRUSTEE'S RIGHTS. 4.1. The Trustee shall not be responsible or liable in any manner whatsoever for the sufficiency, correctness, genuineness or validity of any assets deposited with or held by the Trustee. 4.2. The Trustee shall be protected in acting upon any written notices, certificate, instruction or request which the Trustee believes in good faith to be genuine as to the due execution thereof, as to the validity and effectiveness of the provisions thereof, and as to the truth of any information contained therein. 4.3. The Trustee shall not be liable for any error of judgment for any act done or omitted except in the case of the Trustee's negligence, willful misconduct, or bad faith. 4.4. Trustee may execute or perform the Trustee's duties under this Agreement either directly or through agents. 5. NO OTHER DUTIES. The Trustee shall have no other duties except as expressly provided in this Agreement. 6. FEES. Trustee shall be entitled to receive reasonable fees for the Trustee's services from Galoob as shall be reasonably agreed to between the Trustee and Galoob. 7. ADDITIONAL OBLIGATIONS. 7.1 Galoob and the Hedeens hereby agree to take such action as requested by the Trustee to implement or recognize the provisions of this Agreement. 8. TERM. The term of this Agreement shall commence on the date hereof and shall end upon the first to occur of the following events: 8.1 distribution of all of the Trust Property in accordance with the provisions of this Agreement; -4- 23 8.2 joint written agreement of Galoob and the Hedeens, in which case the Trustee shall distribute the Trust Property as provided in such joint written agreement. 9. INDEMNIFICATION. 9.1. DISBURSEMENTS. If the Trustee shall incur any liability, damages or expenses arising out of or resulting from a final determination that the Trustee has improperly distributed funds hereunder, the party or parties receiving such funds hereby agree to indemnify the Trustee and hold the Trustee harmless therefrom. 9.2. LIMITATION. Such indemnification shall not apply to liabilities, damages, expenses or claims caused or incurred as a result of Trustee's negligence, willful misconduct, bad faith or breach of this Agreement. 10. RESIGNATION OR REMOVAL. 10.1. RESIGNATION. Trustee may at any time resign by giving written notice to Galoob and the Hedeens. Such resignation shall be effective upon the joint appointment by the parties of a successor Trustee and such successor Trustee's delivery to the parties of a written instrument accepting such appointment. 10.2. REMOVAL. Galoob and the Hedeens may by joint agreement remove and replace the Trustee. Such removal and replacement shall be effective upon the joint appointment by the parties of a successor Trustee and such successor Trustee's delivery to the parties of a written instrument accepting such appointment. 10.3. DELIVERY. In connection with its removal or resignation, the Trustee shall make arrangement for: (i) the delivery of the Trust Property, and (ii) the transfer of the Trust Account, to the successor Trustee effective concurrent with the effectiveness of the resignation or removal and appointment of such successor. 11. NOTICES. All notices required or permitted to be given under this Agreement shall be in writing and shall be personally delivered or sent by facsimile transmission with hard copy to follow, by overnight courier, receipt acknowledged (such as Federal Express, Express Mail or DHL), or by registered or certified mail, postage pre-paid, return receipt requested. Such notice shall be deemed to be received: (i) if personally delivered upon the date of delivery to the address of the person to receive such notice; (ii) if sent by overnight courier one (1) business day after delivery to such courier; (iii) if mailed in accordance with the provisions of this paragraph three (3) business days after the date placed in the United States mail; or (iv) if transmitted by facsimile as provided above on the business day following telephone confirmation of receipt. Notices shall be given at the following addresses: -5- 24 GALOOB: William G. Catron, Esq. WITH A COPY TO: Galoob Toys, Inc. Debra S. Belaga, Esq. 500 Forbes Boulevard Jackson Tufts Cole & Black,LLP South San Francisco, CA 94080 650 California Street, 32nd Floor Facsimile: (415) 583-5572 San Francisco, California 94108 Facsimile: (415) 392-3494 THE HEDEENS: Clemens V. Hedeen, Jr. WITH A COPY TO: Hedeen International Robert J. Vizas, Esq. 218 N. 14th Street Legal Strategies Group Sturgeon Bay, Wisconsin 54235 5905 Christie Avenue Facsimile: (414) 743-8835 Emeryville, CA 94608 Facsimile: (510) 450-9601 - and - Patti Jo Hedeen c/o Hedeen and Companies 1309 N. 14th Avenue Sturgeon Bay, Wisconsin 54235 Facsimile: (414) 743-5163 TRUSTEE:
The address for delivery of notices may be changed by the relevant party by giving notice of such change to all other parties to this Agreement in accordance with this paragraph. 12. PAYMENTS. 12.1. Payments in accordance with this Agreement which are to be made to the Hedeens shall be made to: Hedeen & Companies Account Number 10140715 Associated Bank P. O. Box 19006 200 North Adams Street Green Bay, WI 54307 ABA Routing #0759 00575 -6- 25 12.2. Payments in accordance with this Agreement which are to be made to Galoob shall be made to: Sanwa Bank California Account Name: Galoob Toys, Inc. Account Number 181102060 ABA Routing #122003516 12.3. The bank account for receipt of funds hereunder may be changed by the relevant party by giving notice of such change to all other parties to this Agreement in accordance with paragraph 11 hereof. 13. MISCELLANEOUS. 13.1. HEIRS, SUCCESSORS AND ASSIGNS. The terms of this Agreement shall be binding upon and inure to the benefit of the heirs, successors, receivers, conservators and assigns of the parties hereto. 13.2. HEADINGS. The headings of this Agreement are included for convenience only and shall not be deemed to constitute part of this Agreement or to affect its construction. 13.3. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall be deemed to constitute one and the same instrument. 13.4. SEVERABILITY. If any provision of this Agreement shall be deemed to be void or unenforceable for any reason, the same shall in no way affect (to the maximum extent permissible by law) any other provision of this Agreement or the validity or enforceability of this Agreement as a whole. 13.5. APPLICABLE LAW. This Agreement shall be governed by and construed under the laws of the State of California, without regard to principles of conflicts of law. By entering into this Agreement, Galoob and the Trustee hereby amend any agreement between Galoob and the Trustee with respect to the creation of the trust arrangement provided for in this Agreement to provide for the choice of law referred to in the preceding sentence with respect to all matters relevant to this Agreement. 13.6. COMPLETE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties and the Trustee. Except for the Settlement Agreement, this Agreement supersedes all prior agreements relating to the subject matter hereof. 13.7. CUMULATIVE RIGHTS; NO WAIVER. No failure or delay of any party hereto in exercising any power or right hereunder shall operate as a waiver thereof. The rights and remedies of the parties hereto are cumulative and not exclusive of any other rights or remedies such parties would otherwise have. No waiver of any provision of this Agreement nor consent to any departure by a party shall in any event be effective unless it is in writing; and such waiver or -7- 26 consent shall be effective only for the specific circumstance and will not constitute a waiver as regards future occurrences. 13.8 THE HEDEENS' REPRESENTATION. Clemens V. Hedeen and Patti Jo Hedeen, and each of them, represent and warrant that they have full and complete authority to execute this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement. TRUSTEE: _________________________________ GALOOB TOYS INC.: _________________________________ By:______________________________ _________________________________ Clemens V. Hedeen, Jr. _________________________________ Patti Jo Hedeen EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF GALOOB TOYS, INC. FOR THE QUARTER ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 16,693 0 63,049 3,833 22,477 146,617 16,634 6,448 165,777 25,714 0 0 0 180 134,628 165,777 52,356 52,356 28,872 28,872 22,340 0 49 (21,499) (8,384) (13,115) 0 0 0 (13,115) (.73) (.73)
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