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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 1-9599
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LEWIS GALOOB TOYS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-1716574
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 Forbes Boulevard
So. San Francisco, CA 94080
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415)952-1678
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, Par Value $.01 Per Share New York Stock Exchange
Depositary Convertible Exchangeable New York Stock Exchange
Preferred Shares (each representing
1/10 share of $17.00 Convertible
Exchangeable Preferred Stock)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by persons who are not
officers or directors (or their affiliates) of the registrant, as of March 1,
1995, was approximately $65,000,000.
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 1, 1995, was as follows:
Class Number of Shares
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Common Stock, Par Value $.01 Per Share 10,066,844
DOCUMENTS INCORPORATED BY REFERENCE
The following document has been incorporated by reference:
The registrant's Proxy Statement to be used in connection with the
Annual Meeting of Shareholders to be held on June 20, 1995 (the "Proxy
Statement") incorporated into Part III.
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PART I
Item 1. Business
Lewis Galoob Toys, Inc. (the "Company" or the "Corporation") designs, develops,
markets and sells high quality toys worldwide and has been engaged in business
since 1957. The Company's strategies in selecting and developing lines are to
focus primarily on low to medium priced extendable product lines that are
brandable, to capitalize on current trends in the toy industry and popular
culture and to expand and diversify its product categories. Consistent with
these strategies, the types of products which have produced the preponderance of
the Company's revenues have changed significantly. This product change evolved
both by developing and procuring new toys which are based on original ideas and
by seeking to obtain and develop new character licenses.
The Company's products are generally sold worldwide, with a substantial portion
of its revenues derived from sales in the United States and Europe. The Company
sells its products principally to retailers in the United States and to toy
distributors outside of the United States. U.S. retail outlets for the products
include specialty toy retailers, discount and chain stores, catalog and mail
order companies, department stores and variety stores. See
"Business--Distribution and Sales". The Company's products are generally
manufactured overseas, primarily in the People's Republic of China ("China").
The Company's results are dependent, in large part, on management's experience
in the toy industry and its ability to identify and capitalize on current trends
and market new products based on such trends in a timely and efficient manner.
As a result of changing consumer tastes, individual toys usually have relatively
short product lives. An increase or decrease in popularity of a particular item
during any year could have a material impact on revenues and profit for that
year.
Consistent with the extendable product life strategy, the Company's Micro
Machines(R) product line, first introduced in 1987, has generated significant
sales for a much longer product life than most toy products, and the Company
believes that the line will continue to generate significant sales in 1995.
Micro Machines sales represented 51% of the Company's total revenues in 1994
after representing 41% in 1993 and 28% in 1992. There can be no assurance that
the demand for Micro Machines will continue at current or previous levels.
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Products
The Company has historically marketed a variety of toy products designed for
children of both sexes and of different age groups. In recent years, the
Company's main emphasis has been to revive, develop, extend and expand its core
brand, Micro Machines, and to diversify the balance of its other product lines.
See "Business--Licensing and Related Rights; Trademarks."
The Company's 1995 product line consists of continuations and extensions of the
Micro Machines line and introductions of several new lines, including two new
extendable girl's brands, Sky Dancers(TM) Dolls and My Pretty DollHouse(TM)
toys.
The Micro Machines line includes the continuing licensed vehicles based on the
popular Star Wars(R) motion picture trilogy. Star Wars playsets depicting scenes
from the movies and including action features, figures and vehicles have been
added. Other licensed products also include vehicles and figures from the Power
Rangers(TM) television series, The Tick(TM) animated television series, as well
as James Bond 007(TM). There are also new vehicles from the Star Trek(R) and
Babylon 5(TM) television series. A new speed performance segment consisting of
Ultra-fast Radicators(TM) vehicles and higher performance race sets is also in
the line. To extend the Micro Machines segment of military vehicles and troops,
new playsets include Night Attack!(TM) with battery-powered searchlight and
multi-missile launcher, as well as FalconWing Skybase(TM) and Orion J-22(TM)
Submarine Base transforming playsets. Also continuing under the Micro Machines
brand is Z-Bots(R), a line of collectible robot figures, vehicles and playsets.
New ultra- small Mini Z's(TM) robots, the smallest Z-Bots ever, have been
introduced along with five combat-action Mini Z's playsets.
The new and innovative Sky Dancers(TM) line of dolls and playsets feature the
first known girls' doll that flies. These collectible ballerina dolls fly
utilizing a special launcher with pull-cord action done in various themes. The
playsets include Magic Rolling Launchers in the shape of a swan and pegasus.
The Company's new My Pretty DollHouse(TM) line is based on a classic girl's toy
play pattern that incorporates the successful concepts of miniaturization and
collectibility. This line consists of modular, finely decorated miniature
dollhouses that come with dolls and other surprise accessories. Also available
are coordinated designer Furniture Packs, Back and Front Yard Sets, and snap- on
2nd Story Additions to expand the houses into even bigger mansions.
Mutant League(R) is a new licensed male action line with a sports theme.
Figures, vehicles and playsets are based on the syndicated television series and
the popular Electronic Arts video games.
Also introduced is UltraForce(TM), a licensed male action line of
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dramatic super heroes and villains, vehicles and accessories, from the pages of
Malibu and Marvel Comics and the new syndicated animated TV show that is
scheduled to premier in September 1995.
Biker Mice From Mars(TM) is a continuing licensed male action line in our
international markets. The line consists of figures, accessories and playsets
based on the internationally successful animated series.
The Company's 1994 product line consisted of continuations and extensions of the
Micro Machines, Z-Bots, Game Genie(TM), and Splash Out(R) lines, and several new
product lines. These included Star Trek, Star Wars, and Biker Mice From Mars; My
Magic Kissing Dragon(TM) collectible dolls that spray a light scented mist when
you squeeze them; Sweet Secrets(R) miniature transforming dolls, accessories and
playsets; and Travel Pocket Play line of portable games and activity toys.
The Company's 1993 product line consisted of continuations and extensions of the
Micro Machines, Game Genie, and Splash Out lines, and several new product lines.
These included Fancy Sounds(TM), an electronic device that allowed the user to
add sound effects to any toy; Bow Wow Boutique(TM), plush dogs with removable
fur that could be cut and styled; Whispering Wishes(TM), a talking doll that
whispered special sayings when squeezed; and the Travel Pocket Play line of
portable games and activity toys.
The Company's 1992 product line consisted of continuations and extensions of the
Micro Machines, Game Genie, Baby Face(TM), Lazer Pro 9000(TM) and Splash Out
lines and several new product lines. These included Luv'n Handful(TM), a 13"
hand-puppet doll; Starlight(TM), a mechanical walking horse with light-up
features; and Trash Bag Bunch(TM), a line of collectible figures packaged in
dissolving bags.
Licensing and Related Rights; Trademarks
In 1994 and 1993, the Company produced substantially all of its products under
licenses from others. Some of these licenses confer rights to exploit original
concepts developed by toy inventors and designers. Other licenses, referred to
as character licenses, permit the Company to manufacture and market toys based
on characters which develop their own popular identity, often through exposure
in various media such as television programs, movies, cartoons and books. In
return for these rights, the Company pays royalties to its licensors.
Royalties paid by the Company to toy licensors typically range from 2% to 14% of
net sales. Electronic games typically have higher royalty rates than toys. In
certain instances, the Company may agree to guarantee payment of a minimum
royalty. As of December 31, 1994 and 1993, minimum future guaranteed payments
aggregated approximately $2,630,000 and $732,000, respectively. Royalties
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expense in 1994 and 1993 totaled approximately $13,498,000 and $11,337,000,
respectively. As a result of increased competition among toy companies for
licenses, in certain instances the Company has paid, and may in the future be
required to pay, higher royalties and higher minimum guaranteed payments in
order to obtain attractive properties for the development of product lines.
The Company is an active participant in the market for character licenses. A
determination to acquire a character license must frequently be made before the
commercial introduction of the property in which a licensed character appears,
and license arrangements often require the payment of non-refundable advances or
guaranteed minimum royalties. Accordingly, the success of a character licensing
program is dependent upon the ability of management to accurately assess the
future success and popularity of the properties which it is evaluating, to bid
for products on a selective basis in accordance with such evaluation, and to
capitalize on the properties for which it has obtained licenses in an
expeditious manner. In 1994, the Company generated significant sales under
existing character license arrangements for Star Wars, Star Trek, Biker Mice
From Mars and Power Rangers. In 1994, the Company entered into character license
arrangements for Mutant League, Gore Corp, Nintendo(R), James Bond, The Tick,
Godzilla(TM), HappyNess and Ultraforce. The products under these license
arrangements will be sold in 1995 and beyond.
The Company has obtained domestic and international distribution rights for most
of its products. Normally most character licenses extend for one to three years
and are typically renewable at the option of the Company upon payment of certain
minimum guaranteed payments or the attainment of certain sales levels during the
initial term of the license. Licenses for original ideas typically extend for
the commercial life of the product.
Most of the Company's products are sold under trademarks and certain products
incorporate patented devices or designs. The Company customarily seeks
protection of its product patents and major product trademarks in the United
States and certain other countries. These trademarks, such as Micro Machines,
are significant assets of the Company. The Company believes that the loss of
certain of its license rights or trademarks for particular product lines may
have a material adverse effect on its business. However, the Company believes
its rights to these properties are adequately protected.
Research and Development
The Company employs its own designers and engineers and also utilizes the
services of independent designers and engineers on an ongoing basis. The Company
presents its designers with toy concepts licensed or, to a lesser extent,
originated by it and the designers create renderings of the proposed product.
Designs are
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then presented to the Company's engineers, who, using the renderings, perform
mechanical drawings and engineering services and create prototypes for new
products. Prototypes for proposed products are then reviewed by the Company's
management, including representatives of marketing, sales and manufacturing,
prior to final acceptance. Character licensors usually retain the right to
approve the products being marketed by the Company.
The Company spent approximately $7,288,000, $7,451,000 and $6,861,000 on
research and development activities in 1994, 1993 and 1992, respectively,
exclusive of amounts paid to certain inventors and designers who receive
royalties as licensors. Those amounts do not include approximately $7,149,000,
$4,502,000 and $4,583,000, respectively, in 1994, 1993 and 1992 incurred for
tooling and package design.
Manufacturing
The Company's products are manufactured to its specifications by nonaffiliated
third party vendors, usually located in the Orient, principally in China where
over 87% of the Company's products were produced in 1994. These vendors are
responsible for all aspects of the production of the Company's products in
accordance with Company specifications.
The Company's manufacturing is currently performed by 19 manufacturers, some of
whom derive a substantial percentage of their business from the Company. In
1994, four manufacturers each produced in excess of 10% of the Company's
products and combined to produce 81%. It is anticipated in 1995 that
manufacturers' production will be similarly concentrated as in 1994.
The Company, through its wholly-owned subsidiary Galco International Toys, N.V.
("Galco") located in Hong Kong, maintains close contact with the manufacturers
and subcontractors and monitors the quality of the products produced. Decisions
related to the choice of manufacturer are based on price, quality of
merchandise, reliability and the ability of a manufacturer to meet the Company's
timing requirements for delivery. See "Business--Competition". Tooling is
ordinarily owned by the Company and may be utilized by different manufacturers
if the need arises for alternate sources of production. See "Business--Design
and Development".
The Company does not carry insurance for political, social or economic unrest or
disruption for several reasons including, but not limited to, costs of such
insurance and the limited insurance coverage available. The impact on the
Company from such unrest or disruption would depend on several factors,
including, but not limited to the nature, extent and location of such unrest or
disruption and the Company's ability to: (1) procure alternative manufacturing
sources outside of the country involved; (2)
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retrieve its tooling; (3) relocate its production in sufficient time to meet
demand; and (4) pass resultant product cost increases likely to be incurred
outside of the country involved through to the Company's customers as product
price increases.
The Company's products are produced principally in China which currently
is designated with "most favored nation" ("MFN") status by the United
States. This designation allows products imported into the United States from
China to be accorded the most favorable import duties. In late 1994, Congress
approved the GATT (Uruguay round) which allows imports into the United States
of toy merchandise with unconditional duty free entry from any nation with MFN
status. Generally, the trade negotiations between China and the United States
have been difficult, but both sides have shown their willingness to resolve
trade disputes and avoid punitive sanctions. Punitive sanctions could result
in the United States imposing higher duties on selective Chinese made products
imported into the United States (these sanctions would be put in place through
Section 301). In the past, Section 301 sanctions proposed by the United States
did not include sanctions or punitive duties against toy imports from China.
As such, the Company would be unaffected. The loss of MFN status for China,
however, would result in a substantial increase in duty for the Company's
products produced there and imported into the United States. This increase in
duty would be large enough that it could materially affect the Company's
business. Products shipped to other countries should not be affected. Other
toy companies also source product from China and would be affected to similar
degrees. However, the impact on the Company from any significant change in
duties on its Chinese produced products would depend on several factors
including, but not limited to, the Company's ability to: (1) procure
alternative manufacturing sources outside of China; (2) retrieve its tooling;
(3) relocate its production in sufficient time to meet demand; and (4) pass
resultant cost increases through as product price increases.
In 1994, certain quotas on selected Chinese produced toy products were
introduced in the European Economic Community. These quotas are not expected to
have a material impact on the Company's business in 1995.
Transactions in which the Company purchases goods from manufacturers are mostly
denominated in Hong Kong dollars and, accordingly, fluctuations in Hong Kong
monetary exchange rates may have an impact on cost of goods. However, in recent
years, the value of the Hong Kong dollar has had a continuing stable
relationship to the value of the U.S. dollar and the Company has not experienced
any significant foreign currency fluctuations. Inflationary pressure in China
could have an effect on the cost of product sourced from China.
Galco's staff of 98 employees in Hong Kong (as of December 31,
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1994) undertake certain elements of the design and development of new products.
Additionally, Galco arranges with manufacturers for the production, shipment and
delivery of products, and monitors the quality of the products produced. Galco
also has 33 employees in other countries in the Orient performing similar
activities.
The principal raw materials used in the production and sale of the Company's
products are plastics and paper products. The Company believes that an adequate
supply of raw materials used in the manufacture of its products are readily
available from existing and alternate sources.
Distribution and Sales
The Company markets and sells its products throughout the world, with sales to
customers in the United States aggregating on a consolidated basis 66%, 66% and
65% of net sales in 1994, 1993 and 1992, respectively.
Outlets for the Company's products in the United States include specialty toy
retailers, discount and chain stores, catalog and mail order companies,
department stores, variety stores and independent distributors which purchase
the products directly from the Company and ship them to retail outlets. In 1994
and 1993, Toys "R" Us, Inc. accounted for 21% of the Company's consolidated net
sales.
The Company has a sales staff of seven people supplemented by several
manufacturers' representative organizations in the United States who act as
independent contractors. The Company's sales staff and the manufacturers'
representatives offer the Company's products through the use of samples and
promotional materials at toy shows and by making regular customer sales calls.
The Company also directly introduces and markets to customer new products and
extensions to previously marketed product lines by participating in the major
trade shows in New York, Hong Kong and Europe and through the maintenance of a
showroom in New York City. Manufacturers' representatives utilized by the
Company receive commissions, which were approximately 1.0%, 1.3% and 1.3% of net
sales in 1994, 1993 and 1992, respectively.
The Company utilizes warehouse facilities primarily in Union City, California
for storage of its products. Disruptions in shipments from the Orient or from
this facility could have a material adverse effect on the Company. The Company
believes that adequate storage facilities are available.
Galoob has an extensive international sales program. The Company, in conjunction
with its Hong Kong subsidiary, Galco, actively sells it products into 35
countries and sells directly to 51 separate, independent toy distributors, each
of which is domiciled in the respective country to which sales are made. While
international sales have averaged approximately one-third of total company
sales, these sales are understated in proportion to the volume of Galoob
products sold outside of the United States. International sale
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prices to distributors are significantly lower than U.S. domestic sale prices to
retail accounts since international distributors are generally responsible for
all importation, warehousing, marketing, promotional and selling related costs.
In 1994, approximately fifty percent of all Galoob toys sold were shipped to
countries outside the United States.
Sales by the Company to foreign customers are ordinarily denominated in U.S.
dollars and, accordingly, the Company's revenues are not affected by
fluctuations in monetary exchange rates. However, the value of the U.S. dollar
in relation to the value of other currencies may have a positive or negative
impact on the Company's sales volume over time, depending on the change in
relationship of the respective currencies.
The Company does not ordinarily sell its products on consignment and ordinarily
accepts returns only for defective merchandise. Returns have historically not
been significant. In certain instances, where retailers are unable to resell the
quantity of products which they have purchased from the Company, the Company
may, in accordance with industry practice, assist retailers to sell such excess
inventory by offering discounts and other price concessions.
Advertising
Although a portion of the Company's advertising budget is expended for newspaper
advertising, magazine advertising, catalogs and other promotional materials, the
Company allocates the bulk of its advertising budget to television. As is common
practice in the toy industry, the Company advertises on national network,
syndicated cable and local spot television.
Seasonality and Backlog
Because of heavy retail demand for toy products during the Christmas season, the
toy industry is highly seasonal in nature. Consistent with U.S. toy industry
practices, receivables from a significant portion of domestic sales are not
collected until the final weeks of the fourth quarter and the first quarter of
the succeeding year, which creates a substantial demand for working capital on a
seasonal basis. See "Business--Advertising" and "Business--Manufacturing".
The results of operations for any quarter are subject to a number of variables
and may not reflect the results of operations for the year. Similarly, any
comparisons between fiscal periods of successive years may not be indicative of
the results of operations for a full year.
Orders in the U.S. toy industry are generally cancelable until shipped.
Therefore, the Company believes that backlog may not be an accurate indicator of
the Company's future sales.
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Competition
The toy industry is highly competitive. The Company competes with several larger
toy companies, such as Hasbro, Mattel and Tyco, and many smaller companies, in
the design and development of new toys, the procurement of licenses, the
improvement and expansion of previously introduced products and product lines
and the marketing and distribution of its products. In addition, it is common in
the toy industry for companies to market products which are similar to products
being successfully marketed by competitors. The Company believes that the
strength of its management team, quality of its products, its relationships with
inventors, designers and licensors, its distribution, and its overhead and
operational controls permit it to compete effectively in the marketplace. See
"Business--Design and Development", "Business--Distribution and Sales" and
"Business".
Government Regulations
The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws
empower the Consumer Product Safety Commission (the "CPSC") to protect consumers
from hazardous toys and other articles. The CPSC has the authority to exclude
from the market articles which are found to be hazardous and can require a
manufacturer to recall such products under certain circumstances. Similar laws
exist in some states and cities in the United States and in Canada and Europe.
Products are also designed and tested to meet or exceed ASTM F963, the Standard
Consumer Safety Specification on Toy Safety. The Company emphasizes the safety
and reliability of its products and has established a strong quality assurance
and control program to meet the Company's objective of delivering high quality
products.
Employees
As of December 31, 1994, the Company had 241 employees; 110 in the United States
and 131 in the Far East. This compares to 233 total employees at December 31,
1993; 111 in the United States and 122 in the Far East. Nine of the Company's
employees, some of which are employed only on a seasonal basis, are subject to a
collective bargaining agreement which expires May 31, 1998. The Company believes
that its labor relations are satisfactory.
Item 2. Properties
The Company's principal executive offices are located at 500 Forbes Boulevard,
South San Francisco, California, where the Company owns a building with
approximately 136,000 square feet. The Company occupies approximately 33,000
square feet of office space and leases the additional 103,000 square feet of
warehouse space to third parties. The Company also has 125,000 square feet of
warehouse space at Union City, California, under a lease which expires in 1997,
with rights to renew for one five year term. In addition, the Company has a
showroom, consisting of approximately
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9,000 square feet, which is located at 200 Fifth Avenue, New York, New York,
under a lease that expires in 1996, and office and warehouse space in Hong Kong
consisting of approximately 25,388 square feet under leases which expire at
varying dates through 1996.
The Company's properties provide adequate capacity to support the present and
expected future levels of business.
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Item 3. Legal Proceedings
On May 17, 1990, the Company filed a complaint against Nintendo of America, Inc.
("Nintendo") seeking a declaratory judgment and injunctive relief in the United
States District Court, Northern District of California (the "District Court").
This complaint sought confirmation of the Company's right to market, distribute
and sell its Game Genie product. On June 1, 1990, Nintendo filed a complaint in
the same District Court alleging copyright and trademark infringement and
seeking a preliminary and permanent injunction and unspecified damage.
On July 3, 1991, the District Court reversed an earlier preliminary injunction
against the Company and ruled that the sale of Game Genie products did not
infringe on Nintendo's copyrights. Nintendo appealed this ruling through the
Ninth Circuit Court of Appeals (the "Appeals Court") and ultimately filed a
petition for a writ of Certiorari with the United States Supreme Court. On March
22, 1993, the Supreme Court rejected Nintendo's petition and, in essence,
affirmed the District Court ruling.
Separately, the Company pursued recovery of damages from Nintendo that resulted
from the original issuance of the preliminary injunction. On July 6, 1992, the
District Court awarded the Company a $15 million damage judgement against
Nintendo, which was the maximum amount that could be awarded in light of the $15
million bond that Nintendo had been required to post in the proceedings.
Nintendo appealed this damage award, and on February 17, 1994 the Appeals Court
unanimously affirmed the District Court's ruling. Subsequently, the Appeals
Court rejected an additional Nintendo petition on March 21, 1994.
On April 11, 1994, Nintendo paid the Company $16.1 million representing the full
damage award plus interest and related costs. The Company retained approximately
$12.1 million of this amount, and the Company's Game Genie licensors were paid
the remaining $4.0 million. Notwithstanding such payment, on June 20, 1994,
Nintendo filed a petition for a Writ of Certiorari with the United States
Supreme Court, which asked the Supreme Court to review the the damage award on a
discretionary basis. On October 3, 1994, the Supreme Court rejected Nintendo's
petition and affirmed Galoob's right to the full damage award. There is no
further basis for appeal by Nintendo.
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Nintendo's original trademark claim and the Company's original anti-trust
cross-claim against Nintendo were severed from the copyright claims that were
adjudicated on July 3, 1991. On January 18, 1995 these claims were dismissed
with prejudice by Nintendo and Galoob respectively. The Nintendo Game Genie
infringement lawsuit is now complete.
The Company is involved in various other litigation and legal matters which are
being prosecuted or defended in the ordinary course of business. None of these
matters is expected to result in outcomes having a material adverse effect on
the Company's consolidated financial position.
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Item 4. Submission of Matters to a Vote of Security Holders
None.
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Item 4a. Executive Officers of the Registrant
The following table sets forth the names, ages and all positions and offices
held by the Company's executive officers:
Name Age Position
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Mark D. Goldman 44 President, Chief
Executive Officer and
Director
William G. Catron 49 Executive Vice President,
General Counsel and Chief
Administrative Officer
Loren Hildebrand 55 Executive Vice President,
Sales
Ronald Hirschfeld 44 Executive Vice President,
International Sales and
Marketing
Gary Niles 55 Executive Vice President, Marketing and Product
Acquisition
Louis Novak 46 Executive Vice President and Chief Operating Officer
William B. Towne 50 Executive Vice President,
Finance and Chief Financial Officer
H. Alan Gaudie 54 Senior Vice President,
Finance
Mark D. Goldman has served as President and Chief Executive Officer since June
1991. From 1987 to 1991 he served as Executive Vice President and Chief
Operating Officer. Prior to 1987, Mr. Goldman served in various executive
capacities at Ages Entertainment Software, Inc. (formerly Sega Enterprises Inc.)
and Mattel, Inc.
William G. Catron has served as Executive Vice President, General Counsel and
Chief Administrative Officer since May 1992. For the seven years prior to that,
Mr. Catron was Senior Vice President, Assistant General Counsel for Paramount
Pictures Corporation. Before 1985, Mr. Catron served in various executive
capacities at Ages Entertainment Software, Inc. (formerly Sega Enterprises,
Inc.) and Mattel, Inc.
Loren Hildebrand has served as Executive Vice President, Sales since April 1994.
From 1992 to 1994 he was President of Creative Consultants. From 1989 to 1992 he
was Executive Vice President and a partner in Toy Soldiers, Inc. a start-up
company. Prior to 1989,
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Mr. Hildebrand was a consultant for Worlds of Wonder and executive for
Mattel, Inc.
Ronald Hirschfeld has served as Executive Vice President, International Sales
and Marketing since February 1994. From 1989 to 1994 he served as Senior Vice
President, International Sales and Marketing. Prior to that time, he served as
Senior Vice President, International Operations from 1987 to 1989 and has held
various positions within the Company since 1978.
Gary Niles has served as Executive Vice President, Marketing and Product
Acquisition since February 1992. From 1989 to 1992, he served as Senior Vice
President, FOB Division. Before joining the Company, he was an executive with
U.A.C., Ltd., a division of Universal Matchbox, Revell Incorporated and Ages
Entertainment Software, Inc. (formerly Sega Enterprises Inc.).
Louis Novak has served as Executive Vice President and Chief Operating Officer
since February 1992. From 1989 to 1992, he served as Senior Vice President,
Operations. From 1986 to 1989 he was Senior Vice President, Worldwide Product
Operations for Coleco Industries, Inc. ("Coleco"). Prior to that time, Mr. Novak
was an executive with All American Gourmet Company, Inc., a manufacturer of
frozen food products and for Mattel, Inc.
William B. Towne has served as Executive Vice President, Finance and Chief
Financial Officer since March 1995. From 1990 to 1995, he served as Executive
Vice President, Chief Financial Officer for Forstmann & Co, Inc. From 1982 to
1990, Mr. Towne worked for Tambrands, Inc. where he rose from Manager of
Forecast and Planning to Chief Financial Officer of their International
Division.
H. Alan Gaudie has served as Senior Vice President, Finance since April 1992.
From 1985 to 1992 he served as Corporate Controller, Vice President, Corporate
Controller and Senior Vice President, Acting Chief Financial Officer.
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PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
The Company's common stock, par value $.01 per share, has traded on the New York
Stock Exchange since July 9, 1987. The following table sets forth for each
quarter during the last two fiscal years the high and low closing sale prices as
reported by the New York Stock Exchange:
Fiscal Year High Low
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1994 First Quarter 10 5/8 6 1/8
Second Quarter 6 7/8 5 1/2
Third Quarter 8 1/2 6 1/8
Fourth Quarter 7 3/8 4 3/4
1993 First Quarter $ 4 1/8 $ 3 1/8
Second Quarter 3 7/8 3 3/8
Third Quarter 3 3/4 2 1/2
Fourth Quarter 10 3/4 4 1/4
As of March 1, 1995, there were approximately 2,025 holders of record of the
Company's common stock.
No cash dividends were declared in 1994 or 1993 on the common stock. The Board
of Directors has no current plans to pay cash dividends on the common stock. The
Company's current credit agreement and the terms of its Convertible Exchangeable
Preferred Stock limit the Company's ability to pay cash dividends on the common
stock. (See Notes E and M of Notes to Consolidated Financial Statements.) Future
dividend policy will depend on the Company's earnings, capital requirements,
financial condition and other factors considered relevant by the Board of
Directors.
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Item 6. Selected Financial Data
(in thousands, except per share amounts)
Years ended December 31
-------------------------------------------------------------------------------
1994 1993 1992 1991 1990
Net revenues $178,792 $134,334 $166,280 $150,636 $126,943
Net earnings (loss) 18,424 (10,924) (2,447) (7,540) (29,245)
Preferred stock dividends:
Paid - - 782 3,127 3,127
In arrears 3,127 3,127 2,345 - -
Net earnings (loss)
applicable to
common shares $15,297 $(14,051) $ (5,574) $(10,667) $(32,372)
Net earnings (loss) per common share:
Primary $ 1.51 $ (1.47) $ (.59) $ (1.14) $ (3.48)
Fully diluted 1.41 (1.47) (.59) (1.14) (3.48)
Number of common shares
and common share
equivalents
outstanding - average 10,111 9,548 9,400 9,325 9,315
At December 31:
Total assets $100,766 $ 71,005 $ 71,604 $ 64,016 $ 75,546
Long-term debt 18,414 18,608 4,944 5,244 5,541
Working capital 53,219 30,813 27,070 29,127 37,914
Shareholders'
equity 44,768 22,162 32,246 35,092 45,610
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Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth for the periods indicated the percentage
relationships between revenues and certain expenses and earnings items:
Percentage of Net Revenues
Years ended December 31
1994 1993 1992
------ ----- -----
Net revenues 100.0% 100.0% 100.0%
Cost of products sold 58.5 61.7 63.1
----- ----- -----
Gross margin 41.5 38.3 36.9
Advertising and promotion 17.1 17.5 13.7
Other selling and
administrative 15.1 19.1 18.3
Research and
development 4.1 5.6 4.1
Variable stock option plan
expense - 3.0 -
Earnings (loss)
from operations 5.2 (6.9) 0.8
Expenses related to
resignations of former
officers - - (1.3)
Net Proceeds from Nintendo award 6.8 - -
Interest expense (1.5) (1.3) (0.9)
Other income, net 0.2 0.1 0.1
Provision for income
taxes (0.4) - (0.2)
----- ----- ----
Net earnings (loss) 10.3% (8.1%) (1.5%)
===== ===== ====
1994 Compared to 1993
In 1994, the Company was profitable, which was its best performance since
1989. This was a result of the successful implementation of the Company's
recovery plan which began in 1991.
The recovery plan objective was to reposition the Company so it could
generate sustainable profitability and growth. Essential to reaching
this objective were three key goals: (1) restore and expand the Company's
core business, the Micro Machines brand; (2) focus on growth opportunities
in new product areas, such as the male action category; and (3) to lower
breakeven versus the 1990 cost profile. The new management team was put in
place in 1991.
Overall, consolidated net sales, including both toy sales and sales
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of the Game Genie video game enhancer, in 1994 were $178.8 million which
represented a 33% increase from 1993 net sales of $134.3 million. Worldwide toy
sales in 1994 achieved a 72% increase over 1993. Domestic toy sales rose by 103%
and international toy sales by 33% from 1993 to 1994.
A major key to the 1994 sales growth was the continuing expansion of the Micro
Machines brand. In 1994, sales of Micro Machines grew significantly for the
second consecutive year. Net sales in 1994 climbed to $113.0 million which
was a 59% increase over 1993 levels. This comes on top of a 55% increase in
sales in 1993 over 1992. A significant area of growth in the Micro Machines
line was from licensed products such as Star Wars, Star Trek and Power Rangers.
The Company also successfully entered a new, high-growth potential category -
male action. Biker Mice From Mars, which was introduced in late 1993, generated
sales in 1994 of $41.4 million as compared to $4.3 million in 1993. In
September 1994, the Biker Mice From Mars television show went to five days per
week airing from its previous one day per week. Ratings since that time have
been lower than previously achieved and a smaller than anticipated increase in
retail sales in the U.S. market has occurred. However, demand has been
stronger in most European markets. Overall the Company achieved its 1994
worldwide Biker Mice From Mars revenue goal. As a result of consumer demand
falling short of the Company's expectations for the U.S. in 1994, the
Company has ceased all sales and marketing activities for Biker Mice from Mars
domestically in 1995. However, strong international demand for Biker Mice From
Mars is expected to continue. In 1995, the Company is expanding in the male
action category with toy product introductions for Mutant League and
Ultraforce.
In late 1994, shipments of two new products, Sky Dancers, a flying doll, and My
Pretty Dollhouse, commenced and generated sales of $3.3 million and $3.0
million, respectively. The Company believes the category of girls' toys is a
significant growth opportunity.
Game Genie sales were $4.2 million in 1994 as compared to $32.8 million in 1993.
This decrease reflected the normal maturity cycle for such products and this
trend is expected to continue.
Gross margin totaled $74.2 million in 1994, an increase of $22.7 million from
1993. This increase was due to higher sales volume and a higher gross margin
rate. The gross margin rate improved to 41.5% in 1994 from 38.3% in 1993 due
to three factors. First, the international gross margin rate was higher due to
a change in product mix. Second, the percent of U.S. sales to worldwide sales
was greater. The Company's gross margin rate on domestic sales is
significantly higher than foreign sales because foreign prices are lower as
the customer is responsible for the cost of importing and promoting the
products. Third, while tooling, packaging and other costs in the aggregate
where higher in 1994 to 1993, they were
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lower as a percent of sales in 1994 compared to 1993.
Advertising and promotion expenses were $30.6 million in 1994 compared to $23.5
million in 1993. The higher expenses were primarily a result of an increase in
planned television advertising expense domestically in connection with the
Company's expanded product lines. Other selling and administrative expenses were
$27.0 million in 1994 compared to $25.6 million in 1993. This increase was due
mainly to incentive compensation which was reinstated based on the Company's
1994 performance. Research and development expenses were approximately equal in
1994 compared to 1993.
The $4.0 million expense in 1993 related to the variable stock option plan was
a one-time charge. See discussion below.
The Company received $12.1 million in 1994 from the litigation award against
Nintendo of America, Inc. This amount was obtained by reducing the gross award
of $16.1 million by amounts due the Company's Game Genie licensors. (See Note L
of Notes to Consolidated Financial Statements).
Interest expense in 1994 was $2.6 million compared to $1.8 million in
1993. An increase of $1.0 million was due to the 8% Convertible Subordinated
Debentures being outstanding all of 1994 compared to being outstanding for
less than 2 months in 1993. Interest was reduced by lower average borrowings
under the line of credit in 1994, although interest rates were higher. The
increase in the prime rate which occurred during 1994 is expected to result in
a higher average interest rate during 1995.
Other income was $0.4 in 1994 compared to $0.1 in 1993.
The income tax expense for 1994 includes provisions for federal, state and
foreign income taxes, after taking into account the available net operating loss
carryforwards from prior years. In 1993, the tax provision represented only
foreign income taxes as there was no taxable U.S. income. At December 31, 1994,
the Company has federal net operating loss carryforwards of approximately $11.5
million and unused federal tax credits of approximately $1.8 million available
to reduce taxes in future periods. (See Notes A and F of Notes to Consolidated
Financial Statements).
The Company's breakeven point has been substantially reduced since 1990. In
1994, the Company's earnings from operations were $9.3 million on $178.8 million
sales which was a $39.1 million improvement in earnings from operations and a
$51.9 million sales improvement in comparison to 1990 sales of $126.9 million
and loss from operations of $29.8 million. The Company's operations have been
adjusted to generate profitability from a base of continuing business and
moderate success in newly introduced products.
In management's opinion, inflation did not have a material impact on
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23
the Company's business in 1994. The Company did not have any substantial price
increases in 1994 or 1993.
The toy industry is affected by changing consumer tastes, shifting cultural and
demographic trends and general economic conditions. Consequently, the Company's
results are dependent, in large part, on management's experience in the toy
industry and its ability to identify and capitalize on current trends and market
new products in a timely and efficient manner. The Company may not always be
able to anticipate changes in consumer demand or to respond quickly to such
changes once they are identified, and such inabilities could have an adverse
impact on the Company.
Historically, a relatively small number of items have contributed a large
portion of the Company's revenues in each year. An increase or decrease in
popularity of a particular item during any year could have a material impact on
revenues and profit for that year. The Company's strategy emphasizing multi-year
extendable brands is intended to mitigate adverse impacts.
The Company does not carry insurance for political, social or economic unrest or
disruptions, for several reasons including, but not limited to, costs of such
insurance and the limited insurance coverage available. The impact on the
Company from such unrest or disruptions would depend on several factors,
including, but not limited to the nature, extent and location of such unrest or
disruptions and the Company's ability to: (1) procure alternative manufacturing
sources outside of the country involved; (2) retrieve its tooling; (3) relocate
its production in sufficient time to meet demand; and (4) pass resultant product
cost increases likely to be incurred outside of the country involved through to
the Company's customers as product price increases.
The Company's products are produced principally in China which currently is
designated with "most favored nation" ("MFN") status by the United States. This
allows products imported into the United States from China to be accorded the
most favorable import duties. In late 1994, Congress approved the GATT (Uruguay
round) which allows imports into the United States of toy merchandise with
unconditional duty free entry from any nation with MFN status. Generally, the
trade negotiations between China and the United States have been difficult, but
both sides have shown their willingness to resolve trade disputes and avoid
punitive sanction. Punitive sanctions could result in the United States imposing
higher duties on selective Chinese made products imported into the United States
(these sanctions would be put in place through Section 301). In the past,
section 301 sanctions proposed by the United States did not include sanctions or
punitive duties against toy imports from China. As such, the Company would be
unaffected. The loss of MFN status for China, however, would result in a
substantial increase in duty for the Company's products produced there and
imported into the United States. This increase in duty would be large enough
that it could materially affect the Company's
21
24
business. Products shipped to other countries should not be affected. Other toy
companies also source product from China and would be affected to similar
degrees. However, the impact on the Company from any significant change in
duties on its Chinese produced products would depend on several factors
including, but not limited to, the Company's ability to: (1) procure alternative
manufacturing sources outside of China; (2) retrieve its tooling; (3) relocate
its production in sufficient time to meet demand; and (4) pass resultant cost
increases through as product price increases.
In 1994, certain quotas on selected Chinese produced toy products were
introduced in the European Economic Community. The quotas are not expected to
have a material impact on the Company's business in 1995.
In 1995, the Company expects its import duties to be reduced pursuant to the
new GATT agreement. The Company is aware of substantial cost pressures
concerning the price of paper used in packaging and plastic resin used in
production, and such cost pressures could result in price increases that
completely or substantially offset the import duty reductions.
1993 Compared to 1992
---------------------
Net revenues of $134.3 million for 1993 represented a 19% decrease from 1992
revenues. Results were adversely affected by heightened inventory controls by
retailers. Despite that environment the Company experienced sales growth in its
toy product lines which was mainly attributable to its core brands Micro
Machines. Worldwide sales in 1993 of Micro Machines which included Z-Bots
increased 55% over 1992 sales levels. Micro Machines sales increased to $54.9
million in 1993 from $45.3 million in 1992 and Z-Bots generated sales of $16.0
million in 1993.
Game Genie sales were $32.8 million in 1993 as compared to $65.3 million in
1992. This decrease reflected the normal maturity cycle for such products.
In December 1993, shipments of Biker Mice From Mars commenced and generated $4.3
million of sales. This new licensed product line consists of action figures,
accessories and playsets based on the Biker Mice From Mars syndicated television
animation series which first aired in September 1993.
In 1992, Trash Bag Bunch, Baby Face, World Championship Wrestling, Lazer Pro,
Macro Machines and Magic Diaper Babies had sales of $28.5 million; these
products had significantly reduced sales in 1993 to $3.3 million. The Company
continues to introduce new products each year, such as Z-Bots, to offset the
revenue lost as a result of the discontinuation of other products.
Gross margin totaled $51.5 million in 1993, a decrease of $9.8
22
25
million from gross margin of $61.3 million in 1992. The decrease was due to
lower sales volume. The gross margin rate improved to 38.3% in 1993 from 36.9%
in 1992 due mainly to two factors. First, sales of discontinued products, which
sold at little or no margin, decreased as a percentage of total revenues in
1993 over 1992. Second, domestic gross margins were higher due to a change in
product mix.
Advertising and promotion expenses were $23.5 million in 1993 compared to $22.8
million in 1992. The increase was due to various sales promotions and an
increase in television origination costs.
Other selling and administrative expenses were $25.6 million in 1993 compared to
$30.3 million in 1992. This decrease was due mainly to cost reductions in
foreign operations, reduced legal fees and reduced insurance expenses.
Research and development expenses increased in 1993 to $7.5 million from $6.9
million in 1992. This increase was attributable to outside contract expense and
the expansion of the number of products being developed.
Expenses related to the variable stock option plan were approximately $4.0
million in 1993 resulting from a fourth quarter non-recurring, non-cash charge.
This charge arose from the operation and termination of the Company's 1992
Senior Executive Stock Option Plan (the "1992 Plan"), a variable stock option
plan. The sharp rise in the price of the Company's common stock during the
fourth quarter (and the corresponding decrease in the exercise price of the
options granted under the 1992 Plan) led to the non-recurring charge. Generally
accepted accounting principles ("GAAP") for variable stock option plans required
the Company to record a compensation expense accrual measured by the difference
between the market price of the common stock underlying an option and the option
exercise price as of December 31, 1993. This charge against earnings was
recorded although no compensation payments were required by the 1992 Plan or
made by the Company.
The Company believed that the application of GAAP could have resulted in large
and repeated future distortions to reported quarterly earnings of the Company,
based on fluctuations in the stock price so long as the 1992 Plan remained in
effect. Therefore, on January 26, 1994, in order to prevent the distortion of
future reported earnings of the Company, the Board of Directors ("Board")
terminated the 1992 Plan, subject to shareholder approval. The 1992 Plan was
cancelled and replaced by a new plan, subject to shareholder approval. Under the
new plan, each holder of options under the 1992 Plan was granted new options
with an option exercise price of $9.00, the trading price of the common stock of
the Company at the time of the Board actions. In connection with the termination
of the 1992 Plan, the Company recorded an accrued liability on its balance sheet
at December 31, 1993 in the amount of approximately $4.0 million and recorded a
non-recurring, non-cash charge to earnings. In addition, in
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26
connection with the termination of the 1992 Plan, subject to shareholder
approval, the Board also granted 449,732 shares of common stock to compensate
such optionees for giving up their existing gain that had arisen under the 1992
Plan measured by the difference between the $9.00 market price and the option
exercise price of the 1992 Plan options at the time the 1992 Plan was
terminated. All of the above changes were approved by the shareholders on June
21, 1994. (See Note N of Notes to Consolidated Financial Statements.)
Interest expense in 1993 was $1.8 million compared to $1.6 million in 1993. The
increase was due to two factors. First, the average line of credit borrowing
were higher in 1993 as compared to 1992 and the interest rates slightly
decreased. Second, the Company incurred interest expense related to the 8%
Convertible Subordinated Debentures issued in November 1993.
Other income, net was approximately equal in 1993 and 1992.
The tax provisions recorded represent taxes accrued on income of the Company's
wholly-owned foreign subsidiary for the years ended 1993 and 1992. No U.S. tax
recovery was recorded on the loss in the years ended 1993 and 1992 due to prior
year losses. In 1993, the Company retroactively adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. The new
standard is similar to SFAS 96, which the Company had used since 1988, as SFAS
109 also requires, among other things, an asset and liability approach for
financial accounting and reporting for income taxes. Adoption of SFAS 109 did
not have a material effect on the financial statements.
Liquidity, Financial Resources and Capital Expenditures
The Company is party to a loan and security agreement (the "Loan Agreement")
with Congress Financial Corporation (Central) (the "Lender") which makes
available to the Company through March 31, 1995 a line of credit up to $30
million, with provisions to increase the line to $40 million if an acquisition
is made. Borrowing availability is determined by a formula based on qualified
assets. The current interest rate is at prime rate plus 2%; the rate will
increase by 0.25% if the increase in the credit limit occurs. In consideration
for entering into the Loan Agreement, the Company paid a $375,000 fee. The
Company has also agreed to pay periodically an unused line fee of 0.25%
and certain management fees. The Loan Agreement provides that the preferred
dividend payments may not be made without the prior consent of the Lender.
On March 31, 1995, the Company entered into an amended and restated security
agreement (the "New Agreement") with the Lender. The New Agreement extends
through March 31, 1997 and provides a line of credit of $40 million, with
provision to increase the line to $60 million at the option of the Company.
Borrowing availability is determined by a formula based on qualified assets.
The interest is at prime rate plus 1% (1% lower then the rate applicable to
the old Loan Agreement). In consideration for entering into the New
24
27
Agreement, the Company paid a $100,000 fee; additional fees will be due if the
Company exercises its option to increase the line. The Company has also agreed
to pay an unused line fee of 0.25% and certain management fees. The New
Agreement provides that the preferred dividends payments may not be made
without the prior consent of the Lender.
On November 17, 1993, the Company sold in a private placement $14 million in
principal amount of 8% Convertible Subordinated Debentures (the "8%
Debentures"), at par. The interest is to be paid semi-annually. The 8%
Debentures mature on November 30, 2000 and are convertible into shares of the
Company's common stock at $9.26, calculated based upon 115% of the average of
the Company's closing common stock price for the ten business days ended
November 12, 1993. The Company applied the net proceeds received from the 8%
Debentures to the expansion of its product lines.
On June 10, 1992, the Company announced it would not pay the July 1, 1992 $0.425
per share quarterly dividend on its Depository Shares which represent shares of
the Company's Preferred Stock. The Company has not paid the subsequent quarterly
dividends. As of January 1, 1995, the dividend was cumulatively eleven quarters
in arrears, representing a total dividend arrearage of $8.6 million. By the
terms of the Certificate of Designations for the Company's Preferred Stock, the
Company is not legally obligated to pay any such arrearage. The Company believes
that it is in its best interest not to reinstate the dividend until the Company
has generated consistent net income from operations and continuation of such
profitability can be reasonably expected. The net earnings (loss) per share
calculation includes a provision for the Preferred Stock dividends in arrears.
No common stock dividends may be paid unless all Preferred Stock dividend
payments are current. As a result of the cumulative dividend being six or more
quarters in arrears, on July 15, 1994 the holders of the Preferred Stock
exercised their right to elect two new directors.
Net cash used by operating activity during 1994 was $6.5 million (due to asset
increases more than offsetting the cash provided by net earnings) compared to
$7.4 million used in 1993. Net cash used in investing activities during 1994 was
$0.5 million (investment in new equipment) compared to $0.2 million in 1993.
Cash utilized in the Company's operating and investing activities during 1994
was principally provided by borrowings under the Loan Agreement.
Working capital was $53.2 million at December 31, 1994 compared to $30.8 at
December 31, 1993. The ratio of current assets to current liabilities was 2.4 to
1.0 at December 31, 1994 compared to 2.0 to 1.0 at December 31, 1993.
The Company had no material commitments for capital expenditures at December 31,
1994.
The Company believes that with its assets, the results of operations and the
Loan Agreement it has adequate liquidity and capital resources to meet its
current and anticipated needs.
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28
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements and Financial Statement
Exhibits are listed in Item 14(a) and are included herein.
Item 9. Changes in and Disagreements with Accountants and Financial
Disclosure
Not applicable.
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PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
The section entitled "Election of Directors" contained
in the Proxy Statement is hereby incorporated by
reference.
(b) Identification of Executive Officers:
See PART I of this Form 10-K.
Item 11. Executive Compensation
The section entitled "Executive Compensation" contained in the
Proxy Statement is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section entitled "Security Ownership of Management"
contained in the Proxy Statement is hereby incorporated by
reference.
Item 13. Certain Relationships and Related Transactions
The section entitled "Executive Compensation" contained in the
Proxy Statement is hereby incorporated by reference.
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30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
Index to Financial Statements
The following consolidated financial statements and schedules of the Company and
its subsidiaries are included as Part II, Item 8 of this Report:
(a) 1. Financial Statements Page
-------------------- ----
Report of Independent Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1994 and December F-2
31, 1993
Consolidated Statements of Operations for the years ended F-3
December 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Shareholders' Equity for F-4
the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended F-5
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements F-6 to
F-25
(a) 2. Financial Statement Schedules
-----------------------------
Schedule I - Marketable Securities - Other Investments - S-1
December 31, 1994 and December 31, 1993
Schedule VIII - Valuation and
Qualifying Accounts and Reserves S-2
for the years ended December 31,
1994, 1993 and 1992
Schedule X - Supplementary Income
Statement Information for the S-3
years ended December 31, 1994, 1993
and 1992
All other schedules have been omitted because they are inapplicable or not
required, or the information is included in the financial statements or notes
thereto.
(a) 3. Exhibits
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Exhibit No.
-----------
2 Agreement of Merger, dated as of July 6, 1987.
(Incorporated by reference to Exhibit 2 to the
Company's Amendment No. 1 on Form 8 to the Registration
Statement on Form 8-B, filed with the Commission on
January 11, 1988 (the "Amendment No. 1 to the Form
8-B").)
3.1 Certificate of Incorporation. (Incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to the Form
8-B.)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to
Amendment No. 1 to the Form 8-B.)
4.1 Form of Certificate for Shares of Common Stock of the
Corporation. (Incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form S-3,
Registration No. 33-33640, filed with the Commission on
February 26, 1990 (the "Form S-3").)
4.2 Form of 1986 Nontransferable Stock Purchase Warrant
issued to Paul Sullivan. (Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to the Form 8-B.)
4.4 Warrant Agreement, dated as of July 7, 1988, between
the Corporation and Wells Fargo Bank and warrants
issued to Wells Fargo Bank. (Incorporated by reference
to Exhibit 4.4 to Amendment No. 3 on Form 8 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987, filed with the Commission
on August 2, 1988. (the "Amendment No. 3 to the 1987
10-K").)
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32
4.4(1) Warrant Agreement, dated as of May 4, 1990, between the
Company and Camerica Corporation. (Incorporated by
reference to Exhibit 4.4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1991, filed with the Commission on March 30, 1992
(the "1991 Form 10-K").)
4.4(2) Warrant Agreement, dated as of May 4, 1990, between the
Company and David Darling. (Incorporated by reference
to the 1991 Form 10-K.)
4.4(3) Warrant Agreement, dated as of May 4, 1990, between the
Company and Jim Darling. (Incorporated by reference to
the 1991 Form 10-K.)
4.4(4) Warrant Agreement, dated as of May 4, 1990, between the
Company and Richard Darling. (Incorporated by reference
to the 1991 Form 10-K.)
4.4(5) Warrant Agreement, dated as of February 22, 1990, by
and between the Company and Roger Kowalsky.
(Incorporated by reference to Exhibit 28 to the Form
S-3.)
4.4(6) Warrant Agreement, dated as of December 11, 1991, by
and between the Company and Shereff, Friedman, Hoffman
and Goodman. (Incorporated by reference to Exhibit
4.4(6) to the Company's Annual Report on Form 10-K for
the fiscal year end December 31, 1993, filed with the
Commission on March 31, 1994 (the "1993 Form 10-K").)
4.4(7) Warrant Agreement, dated as of November 17, 1993, by
and between the Company and Gerard Klauer Mattison &
Co., Inc. (Incorporated by reference to Exhibit 4.4(7)
to the 1993 Form 10-K.)
30
33
4.5 Form of Certificate of Designations of the Company's
$17.00 Convertible Exchangeable Preferred Stock.
(Incorporated by reference to Exhibit 4 to the
Company's Registration Statement on Form 8-A, filed
with the Commission on October 6, 1989 (the "October 6,
1989 Form 8-A").)
4.5(1) Form of Certificate of Designations of the Company's
Series A Preferred Stock (Incorporated by reference to
Exhibit 2.2 to the Company's Registration Statement on
Form 8-A, filed with the Commission on January 23, 1990
(the "January 23, 1990 Form 8-A").
4.6 Form of Indenture with respect to the Company's 8-1/2%
Convertible Subordinated Debentures due October 1,
2014, between the Company and Manufacturers Hanover
Trust Company as Trustee, including form of Convertible
Debenture. (Incorporated by reference to Exhibit 5 to
the October 6, 1989 Form 8-A).
4.7 Form of Indenture with respect to the Company's
Subordinated Debentures due October 1, 2014, between
the Company and Manufacturers Hanover Trust Company as
Trustee, including form of Debenture. (Incorporated by
reference to Exhibit 6 to the October 6, 1989 Form
8-A).
4.8 Form of Indenture with respect to the Company's 8-1/2%
Senior Subordinated Notes, between the Company and
Continental Stock Transfer & Trust Company, as Trustee,
including form of Note. (Incorporated by reference to
Exhibit 7 to the October 6, 1989 Form 8-A).
4.9 Form of Deposit Agreement between the Company and
Manufacturers Hanover Trust Company of California as
Depositary, including form of Depositary Receipt.
(Incorporated by reference to Exhibit 8 to the October
6, 1989 Form 8-A).
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34
4.10 Form of Rights Agreement, dated as of January 17, 1990,
between the Company and Mellon Securities Trust
Company. (Incorporated by Reference to Exhibit 2.1 to
the January 23, 1990 Form 8-A).
4.11 Indenture, with respect to the Company's 8% Convertible
Subordinated Debentures due year 2000, between the
Company and Continental Stock Transfer & Trust Company,
as Trustee, including form of Debenture Note.
(Incorporated by reference to Exhibit 4.11 to the 1993
Form 10-K)
10.1* 1984 Employee Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 4 to the
Corporation's Registration Statement on Form S-8,
Registration No. 33-9393, filed with the Commission on
September 2, 1987 (the "1987 Form S-8").)
10.1(1)* 1992 Senior Management Stock Option Plan. (Incorporated
by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-8, Registration No.
33-56004, filed with the Commission on December 18,
1992 (the "1992 Form S-8").)
10.1(2)* Amended and Restated 1984 Employee Stock Option Plan
(Incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-8, Registration
Statement No. 33-56585, filed with the Commission on
November 23, 1994.)
10.1(3)* 1994 Senior Management Stock Option Plan. (Incorporated by
reference to Exhibit 4.6 of the Company's Registration Statement
on Form S-8, Registration Statement No. 33-56587, filed with the
Commission on November 23, 1994.)
10.1(4)(a)* Form of Agreement between each of Mark Goldman, William
Catron, Lou Novak, Gary Niles, Mark Shepherd, Ronald
Hirschfeld and H. Alan Gaudie and the Corporation.
(Incorporated by reference to Exhibit 4.6 of the Company's
Registration Statement on Form S-8, Registration Statement No.
33-56589, filed with the Commission on November 23, 1994.)
10.1(4)(b)* Form of Amendment No. 1 between each of Mark Goldman,
William Catron, Lou Novak, Gary Niles, Mark Shepherd,
Ronald Hirschfeld and H. Alan Gaudie and the
Corporation.
10.2* Profit Sharing Plan. (Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on
Form S-1, Registration No. 33-6743, filed with the
Commission on August 12, 1986 (the "1986 Registration
Statement").)
32
35
10.4(7)* Agreement, dated October 27, 1994, between Mark Goldman
and the Company.
10.4(10)* Agreement, dated as of December 11, 1991, by and
between Martin Nussbaum and the Company. (Incorporated
by reference to Exhibit 10.4(10) to the 1991 Form
10-K.)
10.4(11)(a)* Agreement, dated July 15, 1993, between William G.
Catron and the Company. (Incorporated by reference to
Exhibit 10.4 (11) (a) to the 1993 Form 10-K)
10.4(11)(b)* Agreement, dated July 15, 1993, between Lou Novak and
the Company. (Incorporated by reference to Exhibit 10.4
(11) (b) to the 1993 Form 10-K)
10.4(11)(c)* Agreement, dated July 15, 1993, between Ronald
Hirschfeld and the Company. (Incorporated by reference
to Exhibit 10.4 (11) (c) to the 1993 Form 10-K)
10.4(11)(d)* Agreement, dated July 15, 1993, between Gary Niles and
the Company. (Incorporated by reference to Exhibit 10.4
(11) (d) to the 1993 Form 10-K)
10.4(11)(e)* Agreement, dated March 29, 1994, between Loren
Hildebrand and the Company.
10.4(11)(f)* Agreement, dated February 27, 1995, between William B.
Towne and the Company.
10.7(3) Second Amended and Restated Credit Agreement dated as
of March 31, 1992 among the Company, Bank of America
National Trust and Savings Association and other
signatory thereto. (Incorporated by reference to
Exhibit 10.7(3) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992, filed
with the Commission on March 31, 1993 (the "1992 Form
10-K")).
33
36
10.7(4) Amendments dated November 1, 1992 and February 17, 1993
to the Second Amended and Restated Credit Agreement
dated as of March 31, 1992. (Incorporated by reference
to Exhibit 10.7(4) to the 1992 Form 10-K.)
10.7(5) Securities Purchase Agreement, dated November 17, 1993,
by and among the Company and the purchasers executing
signature pages thereto (the "Purchasers").
(Incorporated by reference to Exhibit 10.7 (5) to the
1993 Form 10-K)
10.7(6) Registration Rights Agreement, dated as of November 17,
1993, by and among the Company and the Purchasers.
(Incorporated by reference to Exhibit 10.7 (6) to the
1993 Form 10-K)
10.7(7) Loan and Security Agreement, dated as of April 1, 1993,
by and among the Company and Congress Financial
Corporation (Central), including form of Revolving Loan
Note. (Incorporated by reference to Exhibit 10.7 (7) to
the 1993 Form 10-K)
10.7(7)(a) First Amendment to Loan and Security Agreement, dated
as of November 17, 1993. (Incorporated by reference to
Exhibit 10.7 (7) (a) to the 1993 Form 10-K)
10.7(7)(b) Amended and Restated Loan and Security Agreement, dated
as of March 31, 1995, by and among the Company and
Congress Financial Corporation (Central).
10.9(3) License Agreement, dated June 16, 1986, by and
between Funmaker as Licensor and the Company as
Licensee. (Incorporated by reference to Exhibit
10.10(5) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1986, filed
with the Commission on March 31, 1987 ("1986 Form
10-K").)
10.9(4) License Agreement, dated May 4, 1990, by and among the
Company as Licensee, Codemasters Software Company, Ltd.
and Camerica Corporation, Limited. (Incorporated by
reference to Exhibit 10.9(4) of the 1992 Form 10-K.)
34
37
10.9(4)(a) Amendment No. 1 dated June 1991 to License Agreement
dated May 4, 1990. (Incorporated by reference to
Exhibit 10.9(4) (a) of the 1992 Form 10-K.)
10.9(4)(b) Amendment No. 2 dated December 23, 1991 to License
Agreement, dated May 4, 1990. (Incorporated by
reference to Exhibit 10.9(5) (b) of the 1992 Form
10-K.)
10.9(5) European License Agreement, dated December 23, 1991, by
and between the Codemasters Software Company, Ltd. and
the Company as Licensee. (Incorporated by reference to
Exhibit 10.9(5) of the 1992 Form 10-K.)
10.9(6) Third Amendment to United States License and First
Amendment to European License, dated November 4, 1992.
(Incorporated by reference to Exhibit 10.9(6) of the
1992 Form 10-K.)
10.9(7) Fourth Amendment to United States License Agreement,
dated October 14, 1994.
10.10 Agreement of Purchase and Sale, dated October 22, 1986,
by and between ATC Building Company as Seller and the
Company as Buyer. (Incorporated by reference to Exhibit
10.11 to the 1986 Form 10-K.)
10.12 Lease Agreement, dated March 12, 1987, by and between
Lincoln Alvarado and Patrician Associates, Inc. as
Lessor and the Company as Lessee. (Incorporated by
reference to Exhibit 10.12 to Amendment No. 1 to the
Form 8-B.)
10.12(1) Amendment No. 1 to Lease dated March 12, 1987.
(Incorporated by reference to Exhibit 10.12(1) to the
1991 Form 10-K.)
11 Computations of Earnings Per Share.
12 Computation of ratio of earnings to fixed charges and
preferred stock dividends.
22 Subsidiaries of the Company.
35
38
24.1 Consent of Price Waterhouse.
27 Financial Data Schedules
*Management contracts, compensatory plans and arrangements required to be filed
as an exhibit pursuant to Item 14(c) of this Report.
(b) Reports on Form 8-K
No Report on Form 8-K has been filed during the last quarter of the period
covered by this Report.
36
39
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LEWIS GALOOB TOYS, INC.
(Registrant)
By: /s/ Mark D. Goldman
--------------------
Mark D. Goldman
President, Chief Executive
Officer
Dated: March 29, 1995
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Mark D. Goldman President, Chief March 29, 1995
----------------------- Executive Officer and
Mark D. Goldman Director
/s/ Scott R. Heldfond Director March 29, 1995
-----------------------
Scott R. Heldfond
/s/ Paul A. Gliebe, Jr. Director March 29, 1995
-----------------------
Paul A. Gliebe, Jr.
/s/ Martin Nussbaum Director March 29, 1995
-----------------------
Martin Nussbaum
/s/ S. Lee Kling Director March 29, 1995
-----------------------
S. Lee Kling
/s/ Andrew Cavanaugh Director March 29, 1995
-----------------------
Andrew Cavanaugh
/s/ Roger Kowalsky Director March 29, 1995
-----------------------
Roger Kowalsky
/s/ George Riordan Director March 29, 1995
-----------------------
George Riordan
/s/ Hoffer Kaback Director March 29, 1995
-----------------------
Hoffer Kaback
/s/ William B. Towne Executive Vice March 29, 1995
----------------------- President, Finance
William B. Towne and Chief Financial Officer
37
40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Lewis Galoob Toys, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 28 present fairly, in all material
respects, the financial position of Lewis Galoob Toys, Inc. and its subsidiaries
at December 31, 1994 and 1993, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
February 10, 1995
F-1
41
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31
-----------------------
1994 1993
-------- -------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,225 $ 2,325
Accounts receivable, net 57,883 33,383
Inventories 16,824 12,979
Tooling and related costs 8,379 5,020
Prepaid expenses and other assets 5,492 7,341
-------- -------
TOTAL CURRENT ASSETS 90,803 61,048
LAND, BUILDING AND EQUIPMENT, NET 8,400 8,562
OTHER ASSETS 1,563 1,395
-------- -------
$100,766 $71,005
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 6,971 $ -
Accounts payable 14,973 10,834
Accrued expenses 14,939 18,916
Income taxes payable 499 282
Current portion of long-term debt 202 203
-------- -------
TOTAL CURRENT LIABILITIES 37,584 30,235
LONG-TERM DEBT 18,414 18,608
SHAREHOLDERS' EQUITY:
Preferred stock
Authorized 1,000,000 shares
Issued and outstanding 183,950 shares of $17
Convertible Exchangeable Preferred Stock at
$200 liquidation value per share 36,790 36,790
Common stock, par value $.01 per share
Authorized 50,000,000 shares
Issued and outstanding 10,055,089 shares
in 1994 and 9,559,357 shares in 1993 101 96
Additional paid-in capital 31,506 27,293
Retained earnings (deficit) (23,182) (41,596)
Cumulative translation adjustment (447) (421)
-------- -------
TOTAL SHAREHOLDERS' EQUITY 44,768 22,162
-------- -------
$100,766 $71,005
======== =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-2
42
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years ended December 31
-----------------------------------------------
1994 1993 1992
-------- -------- --------
Net revenues $178,792 $134,334 $166,280
Costs of products sold 104,592 82,875 104,965
-------- -------- --------
Gross margin 74,200 51,459 61,315
-------- -------- --------
Operating expenses:
Advertising and promotion 30,616 23,537 22,826
Other selling and administrative 26,974 25,640 30,345
Research and development 7,288 7,451 6,861
Variable stock option plan expense - 4,046 -
-------- -------- --------
Total operating expenses 64,878 60,674 60,032
-------- -------- --------
Earnings (loss) from operations 9,322 (9,215) 1,283
Expenses related to resignation of former
officers - - (2,152)
Net proceeds from Nintendo award 12,124 - -
Interest expense (2,609) (1,836) (1,550)
Other income, net 365 136 210
-------- -------- --------
Earnings (loss) before income taxes 19,202 (10,915) (2,209)
Provision for income taxes 778 9 238
-------- -------- --------
Net earnings (loss) 18,424 (10,924) (2,447)
Preferred stock dividends paid - - 782
-------- -------- --------
Net earnings (loss) after dividends
paid 18,424 (10,924) (3,229)
Preferred stock dividends in arrears 3,127 3,127 2,345
-------- -------- --------
Net earnings (loss) applicable to
common shares $ 15,297 $(14,051) $ (5,574)
======== ======== ========
Common shares and common share
equivalents outstanding - average 10,111 9,548 9,400
Net earnings (loss) per common share:
Primary $ 1.51 $ (1.47) $ (.59)
Fully Diluted 1.41 (1.47) (.59)
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
43
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
(in thousands, except shares)
Additional Retained Cumulative
Preferred Stock Common Stock Paid-In Earnings Translation
Shares Amts Shares Amts Capital (Deficit) Adjustment Total
------ ---- ------ ---- ------- --------- ----------- -----
Balance at 12/31/91 183,950 36,790 9,365,441 94 26,005 (27,411) (386) 35,092
Net loss - - - - - (2,447) - (2,447)
Common stock issued - - 106,616 1 420 - - 421
Dividends declared
on preferred stock - - - - - (782) - (782)
Cumulative translation adj.
and other - - - - - (12) (26) (38)
------- ------ --------- --- ------ ------- ---- ------
Balance at 12/31/92 183,950 36,790 9,472,057 95 26,425 (30,652) (412) 32,246
Net loss - - - - - (10,924) - (10,924)
Common stock issued - - 89,800 1 343 - - 344
Warrants issued - - - - 525 - - 525
Common stock received in
exchange for shares
issued and cancelled - - (2,500) - - (20) - (20)
Cumulative translation adj.
and other - - - - - - (9) (9)
------- ------- ---------- --- ------- -------- ----- -------
Balance at 12/31/93 183,950 $36,790 9,559,357 $96 $27,293 $(41,596) $(421) $22,162
Net earnings - - - - - 18,424 - 18,424
Common stock issued, net - - 47,000 1 161 - - 162
Termination of 1992 Plan - - 449,732 4 4,042 - - 4,046
Common stock received in
exchange for shares
issued and cancelled - - (1,000) - 10 (10) - -
Cumulative translation adj.
and other - - - - - - (26) (26)
------- ------- ---------- ---- ------- -------- ----- -------
Balance at 12/31/94 183,950 $36,790 10,055,089 $101 $31,506 $(23,182) $(447) $44,768
======= ======= ========== ==== ======= ======== ===== =======
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-4
44
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31
--------------------------------------------
1994 1993 1992
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 18,424 $ (10,924) $ (2,447)
Adjustments to reconcile net earnings
(loss) to net cash used in
operating activities:
Depreciation 628 682 885
Variable stock option plan accrual - 4,046 -
Changes in assets and liabilities:
Accounts receivable (24,500) 2,523 (10,465)
Inventories (3,845) 691 (4,152)
Tooling and related costs (3,359) (2,212) 134
Prepaid expenses and other assets 1,681 (152) (689)
Accounts payable 4,140 1,449 4,375
Accrued expenses 67 (3,002) 699
Income taxes payable 217 (549) (113)
Other - - 318
------- ------- --------
Net cash used in operating activities (6,547) (7,448) (11,455)
------- ------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and
equipment, net (466) (82) (114)
Repayment of loan due from officer - - 1,116
------- ------- --------
Net cash (used in) provided by
investing activities (466) (82) 1,002
------- ------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
notes payable 6,971 (5,698) 5,698
Borrowings under long-term debt
agreement - 14,000 -
Repayments under long-term debt agreements (194) (191) (225)
Dividends declared on preferred stock - - (782)
Proceeds from issuance of common stock 383 344 421
Repurchase of Common Stock (221) - -
Other, net (26) (29) (38)
------- ------- --------
Net cash provided by (used in)
financing activities 6,913 8,426 5,074
------- ------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (100) 896 (5,379)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 2,325 1,429 6,808
------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,225 $ 2,325 $ 1,429
======= ======== ========
Supplemental disclosure of non-cash activity:
In 1992, in connection with issuance of 8% Convertible Subordinated
Debentures the Company issued warrants for 150,000 shares of common
stock which were valued at $525,000.
In 1994, The Company issued 449,732 shares of common stock in connection
with the termination of the 1992 Senior Management Stock Option Plan.
(See Note N)
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,656 $ 1,604 $ 1,387
Cash paid for income taxes $ 822 $ 574 $ 228
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
45
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1994, 1993 and 1992
NOTE A - Summary of Significant Accounting Policies
Organization and Business
The Company has been engaged in business since 1957 and was originally
incorporated in California on November 6, 1968, and reincorporated in Delaware
on August 28, 1987. The Company is engaged in the design, development, marketing
and distribution of high quality toys worldwide. The Company's products are
primarily manufactured in the People's Republic of China ("China").
Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, principally Galco International Toys, N.V. ("Galco"). All
significant intercompany accounts have been eliminated in consolidation. Certain
amounts in the financial statements of prior years have been reclassified to
conform with the current year's presentation.
Revenue Recognition
The Company records a transaction as a sale when inventory is shipped to the
customer and title passes. The Company provides for returns using a percentage
of gross sales, based on historical experience.
Foreign Currency Translation
The financial statements of Galco have been translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
Foreign Currency Translation. All asset and liability accounts have been
translated using rates of exchange in effect at the balance sheet date.
Revenues and expenses are translated at the weighted average of exchange rates
in effect during the year. Gains or losses from foreign currency translation
adjustments are charged or credited directly to a separate component of
shareholders' equity.
F-6
46
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Cash and Cash Equivalents
Cash equivalents consist primarily of marketable securities with original
maturities of less than ninety days. Cash and cash equivalents are stated at
cost, which approximates market values.
Concentration of Credit Risk
Accounts receivable primarily represent balances due from customers. The Company
performs credit evaluations of each of its customers and maintains allowances
for potential credit losses. Such losses have generally been within management's
expectations.
Inventories
Inventories are stated at lower of cost (first-in, first-out) or market.
Tooling and Related Costs
Costs incurred for tooling and package design are deferred and amortized over
the life of the products, which range from one to two years.
Prepaid Expenses
Prepaid expenses include costs such as those incurred in the creation of
television commercials which are deferred and amortized over their lives which
is estimated to be one year or the period the commercial is used, if shorter. On
January 1, 1995, the company implemented SOP 93-7 "Reporting on Advertising
Costs." Implementation of the new standard will have no material impact on the
financial statements. Prepaid expenses also include prepaid insurance, prepaid
samples, prepaid advertising media, and royalty advances.
Land, Building and Equipment
Land, building and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets. Amortization of leasehold improvements is provided using the
straight-line method over the estimated useful lives of the assets, or the term
of the applicable lease, whichever is less. Estimated useful lives are 35 years
for building and building improvements, 1 to 12 years for leasehold
improvements, 5 years for office furniture, fixtures and equipment, (including
computer equipment), and 3 to 6 years for vehicles.
F-7
47
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Income Taxes
In 1993, the Company retroactively adopted Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. SFAS 109 prescribes
an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactments of changes in the tax law or rates.
Previously, the Company used the SFAS 96 asset and liability approach that gave
no recognition to future events other than the recovery of assets and settlement
of liabilities at their carrying amounts. Adoption of SFAS 109 did not have a
material effect on the financial statements.
Earnings Per Share
Primary earnings per share is based on the net earnings (loss) applicable to
common shares, after providing for the dividends in arrears on the preferred
stock, for the year divided by the weighted average number of common and common
equivalent shares outstanding. Primary earnings per share for the year ended
December 31, 1994, have been adjusted by common equivalent shares resulting from
the assumed exercise of common stock options and stock warrants. Primary
earnings per share for the years ended December 31, 1993 and 1992 have not been
adjusted by common equivalent shares since the effect would be anti-dilutive.
Fully diluted earnings per share for the year ended December 31, 1994 includes
the effect of the assumed conversion of the $17 Convertible Exchangeable
Preferred Stock and the 8% Convertible Subordinated Debentures into common
stock. Fully diluted earnings per share for the years ended December 31, 1993
and 1992 were the same as primary earnings per share since the effect of the
assumed conversion is anti-dilutive.
F-8
48
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE B - Accounts Receivable, Net
(in thousands)
December 31
----------------------
1994 1993
---- ----
Trade receivables $65,757 $38,437
Provisions for:
Advertising allowances (2,900) (1,400)
Return of defective goods (900) (1,600)
Markdowns and discounts (3,400) (1,400)
Doubtful accounts (897) (849)
------- -------
Net trade receivables 57,660 33,188
Other receivables 223 195
------- -------
$57,883 $33,383
======= =======
On May 15, 1991, the Company entered into an amended maturity factoring
agreement which provided for ledgering and collection of submitted accounts. In
addition, the factor assumed the credit risk for submitted accounts based
generally on pre-established customer credit criteria. A fee of 0.7% to 1.0% of
the gross invoice amounts was paid to the factor. This agreement ended on March
31, 1993 and was not renewed.
NOTE C - Inventories
(in thousands)
December 31
----------------------
1994 1993
---- ----
Finished goods $15,596 $10,363
Raw materials and parts 1,228 2,616
------- -------
$16,824 $12,979
======= =======
F-9
49
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE D - Land, Building and Equipment, Net
(in thousands)
December 31
-----------------------
1994 1993
------- -------
Land and building $ 9,564 $ 9,402
Office furniture, fixtures and equipment 4,360 4,310
Leasehold improvements 787 787
Vehicles 104 161
------- -------
14,815 14,660
Less accumulated depreciation 6,415 6,098
------- -------
$ 8,400 $ 8,562
======= =======
NOTE E - Notes Payable
The Company is party to a loan and security agreement (the "Loan Agreement")
with Congress Financial Corporation (Central) (the "Lender") which makes
available to the Company through March 31, 1995 a line of credit up to $30
million, with provisions to increase the line to $40 million if an acquisition
is made. Borrowing availability is determined by a formula based on qualified
assets. The current interest rate is at prime rate plus 2%; the rate will
increase by 0.25% if the increase in the credit occurs. In consideration for
entering into the Loan Agreement, the Company paid a $375,000 fee. The deferred
loan fee is included in other assets and is being amortized using a
straight-line method over the term of the loan. The Company has also agreed to
pay an unused line fee of 0.25% and certain management fees. The Loan Agreement
provides that the preferred dividend payments may not be made without the prior
consent of the Lender.
The Company has entered into a new agreement which increases and extends the
line of credit through March 31, 1997 and reduces the rate of interest. (See
Note Q for a description of the new agreement).
F-10
50
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The maximum outstanding borrowings, average outstanding balances and weighted
average rates of interest for notes payable were as follows:
(in thousands)
1994 1993
---- ----
Maximum outstanding at month end $18,209 $18,663
Average outstanding amount during the year 4,184 7,322
Weighted average interest rate for the year 9.7% 8.1%
NOTE F - Income Taxes
Earnings (loss) before income taxes and the provision for income taxes are as
follows:
(in thousands)
Years ended December 31
-----------------------------------------
1994 1993 1992
Earnings (loss) before income taxes:
Domestic $18,861 $(10,806) $(5,346)
Foreign 341 (109) 3,137
------- -------- -------
$19,202 $(10,915) $(2,209)
======= ======== =======
Provision for income taxes:
Current:
Federal $ 490 $ - $ -
State 201 - -
Foreign 87 9 238
------- -------- -------
778 9 238
Deferred:
Federal - - -
State - - -
Foreign - - -
------- -------- --------
$ 778 $ 9 $ 238
======= ======== ========
F-11
51
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Deferred tax liabilities (assets) consist of the following:
(in thousands)
Years Ended December 31
--------------------------------------
1994 1993 1992
---- ---- ----
Prepaid expenses $ 1,586 $ 2,065 $ 1,697
Other temporary differences 705 647 624
------- ------- -------
Gross deferred tax liabilities 2,291 2,712 2,321
------- ------- -------
Accrued expenses (939) (1,377) (1,980)
Defectives provision (315) (560) (1,020)
Other temporary differences (2,970) (1,936) (1,542)
Net operating loss carryforwards (4,037) (11,128) (8,519)
Research and development tax credit
carryforward (765) (765) (765)
Other (944) (765) (666)
------- ------- -------
Gross deferred tax assets (9,970) (16,531) (14,492)
------- ------- -------
Deferred tax assets valuation
allowance 7,679 13,819 12,171
------- ------- -------
$ - $ - $ -
======= ======= =======
The net change in the valuation allowance for deferred tax assets was an
increase (decrease) of ($6,140,000), $1,648,000 and $2,589,000 in 1994, 1993 and
1992, respectively.
F-12
52
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
The provision for income taxes differs from the provisions determined by
applying the applicable U.S. statutory federal income tax rates to pretax income
as a result of the following differences:
Years ended December 31
--------------------------------------
1994 1993 1992
Federal income taxes (benefit) at
the U.S. statutory rate 35.0% (34.0%) (34.0%)
Increase (decrease) in income taxes resulting from:
Effects of U.S. and foreign income
taxes on foreign operations (0.2) 0.1 10.8
State income taxes, net of loss 0.9 - -
carryfowards, less federal tax
benefits
Loss carryback/carryforward (31.6) 34.0 34.0
------ ----- -----
4.1% 0.1% 10.8%
====== ===== =====
During 1993, the Company settled with the Internal Revenue Service (IRS) and the
California Franchise Tax Board (CFTB) regarding audits of the years 1982 through
1990 for federal purposes and 1983 through 1989 for California purposes. The
Company adequately provided for the amounts settled with the IRS and the CFTB.
At December 31, 1994, the Company had federal and California net operating loss
carryforwards for income tax purposes of approximately $11,500,000 and
$1,000,000, respectively. The federal and California carryforwards expire in
different years through the year 2008 and 1998, respectively. The Company also
has federal minimum tax credit carryforwards of $944,000 that are allowed to be
carried forward indefinitely and federal research and development credits of
$765,000, which will expire in different years through the year 2003. If certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of operating loss carryforwards which can be
utilized.
No domestic deferred taxes have been provided on unremitted earnings of the
foreign subsidiary. All such earnings are expected to be reinvested in the
subsidiary. Undistributed earnings for which the Company has not provided taxes,
which may be payable on distribution, were approximately $5,500,000 as of
December 31, 1994. No foreign taxes will be withheld on the distribution of the
untaxed earnings.
F-13
53
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE G - Leases
The Company leases its domestic warehouse and showroom facilities, and its
facilities in Hong Kong. The leases have been classified as operating leases and
are for terms expiring at various dates through 1998. Under the terms of the
facility leases, rents are adjusted annually for changes in the consumer price
index and increases in property taxes. The Company has a lease option on the
domestic warehouse to renew for one five year term.
Future minimum lease payments for all noncancellable operating leases as of
December 31, 1994 (in thousands), are as follows:
Years ending
December 31
1995 $1,452
1996 695
1997 239
1998 49
------
$2,435
======
Net rental expense for the years ended December 31, 1994, 1993 and 1992 was
$1,515,000, $1,449,000 and $1,839,000, respectively.
NOTE H - Accrued Expenses
(in thousands)
December 31
----------------------
1994 1993
---- ----
Accrued advertising $ 272 $ 2,582
Accrued royalties 6,039 4,709
Accrued expense related to variable stock
option plan - 4,046
Accrued compensation and commissions 3,875 745
Accrued freight and duty 1,483 1,527
Accrued interest 1,108 1,296
Accrued purchase commitments 1,320 1,900
Other accrued expenses 842 2,111
------- -------
14,939 $18,916
======= =======
F-14
54
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
In 1993, the United States Customs Service ("Customs") completed the on-site
audit of duty due on importations of goods into the United States during 1988
through 1991. Customs has issued to the Company a notice stating that it is
contemplating the formal issuance of a demand claim wherein it would set forth
the amount they seek to recover. Management believes the recorded provisions at
December 31, 1994 are adequate to cover the final settlement.
NOTE I - Long-Term Debt
(in thousands)
December 31
-----------------------
1994 1993
---- ----
8% Convertible Subordinated Debentures due and
payable on November 30, 2000,
interest paid semi-annually $14,000 $14,000
Mortgage secured by headquarters land and
building, payable in monthly installments of $55,314 (principal and interest)
through November 30, 1996 when the remaining outstanding
balance is due, interest rate 10.3% 4,616 4,783
Other - 28
------- -------
18,616 18,811
Current portion 202 203
------- -------
$18,414 $18,608
======= =======
Payments of principal for the years 1995 and 1996 are $202,000 and $4,414,000,
respectively, with $14,000,000 due in the year 2000.
On November 17, 1993, the Company issued in a private placement $14 million in
principal amount of 8% Convertible Subordinated Debentures (the "8%
Debentures"), at par. The interest is to be paid semi-annually. The 8%
Debentures mature on November 30, 2000 and are convertible into shares of the
Company's common stock at $9.26 calculated based upon 115% of the average of the
Company's closing common stock price for the ten business days ending November
12, 1993. In connection with the 8% Debentures, the Company paid a commission to
its investment bankers of $560,000 and issued warrants for 150,000 shares, which
were valued at $525,000 and recorded as additional paid-in capital. These
deferred loan costs are included in other assets and are amortized using a
straight-line method over the term of the loan.
F-15
55
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE J - Major Customers
The Company had transactions with one customer, Toys "R" Us, Inc. that accounted
for approximately 21% of net revenues in 1994, 1993 and 1992, respectively.
NOTE K - Profit Sharing Plan
The Company has a 401(k) profit sharing plan covering all non-union full-time
employees. The plan is qualified under Section 401 (a) of the Internal Revenue
Code so that contributions to the plan by the Company are not taxable until
distributed to employees. Contributions under the plan are at the discretion of
the Board of Directors and are subject to the amounts allowable under applicable
provisions of the Internal Revenue Code. No Company contributions have been made
in 1994, 1993 or 1992.
NOTE L - Litigation
On May 17, 1990, the Company filed a complaint against Nintendo of America, Inc.
("Nintendo") seeking a declaratory judgment and injunctive relief in the United
States District Court, Northern District of California (the "District Court").
This complaint sought confirmation of the Company's right to market, distribute
and sell its Game Genie product. On June 1, 1990, Nintendo filed a complaint in
the same District Court alleging copyright and trademark infringement and
seeking a preliminary and permanent injunction and unspecified damages.
On July 3, 1991, the District Court reversed an earlier preliminary injunction
against the Company and ruled that the sale of Game Genie products against the
Company and ruled that the sale of Game Genie products did not infringe on
Nintendo's copyrights. Nintendo appealed this ruling through the Ninth Circuit
Court of Appeals (the "Appeals Court") and ultimately filed a petition of a Writ
of Certiorari with the United States Supreme Court. On March 22, 1993, the
Supreme Court rejected Nintendo's petition and, in essence, affirmed the
District Court ruling.
Separately, the Company pursued recovery of damages from Nintendo that resulted
from the original issuance of the preliminary injunction. On July 6, 1992, the
District Court awarded the Company a $15 million damage judgment against
Nintendo, which was the maximum amount that could be awarded in light of the $15
million bond that Nintendo had been required to post in the proceedings.
Nintendo appealed this damage award, and on February
F-16
56
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
17, 1994 the Appeals Court unanimously affirmed the District Court's ruling.
Subsequently, the Appeals Court rejected an additional Nintendo petition on
March 21, 1994.
On April 11, 1994, Nintendo paid the Company $16.1 million representing the full
damage award plus interest and related costs. The Company retained approximately
$12.1 million of this amount, and the Company's Game Genie licensors were paid
the remaining $4.0 million. Notwithstanding such payment, on June 20, 1994,
Nintendo filed a petition for a Writ of Certiorari with the United Sates Supreme
Court, which asked the Supreme Court to review the damage award on a
discretionary basis. On October 3, 1994, the Supreme Court rejected Nintendo's
petition and affirmed Galoob's right to the full damage award. There is no
further basis for appeal by Nintendo.
Nintendo's original trademark claim and the Company's original anti-trust
cross-claim against Nintendo were severed from the copyright claims that were
adjudicated on July 3, 1991. On January 18, 1995 these claims were dismissed
with prejudice by Nintendo and Galoob respectively. The Nintendo Game Genie
infringement lawsuit is now complete.
The Company is involved in various other litigation and legal matters which are
being defended and handled in the ordinary course of business. None of these
matters is expected to result in outcomes having a material adverse effect on
the Company's consolidated financial position.
F-17
57
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE M - Shareholders' Equity
In 1989, the Company issued 183,950 authorized shares of $17 Convertible
Exchangeable Preferred Stock with a $200 liquidation value (the "Preferred
Stock") and deposited them with a U.S. Bank (the Depositary) and sold in a
public offering an aggregate of 1,839,500 Depositary Convertible Exchangeable
Preferred Shares (the "Depositary Shares") at a price of $20 per share. Each
Depositary Share represents 1/10th share of Preferred Stock and has a cumulative
dividend rate of $1.70 per annum, payable quarterly, and may be converted into
common stock at the option of the holders at an initial price of $16.875 per
share of common stock.
The Depositary Shares are redeemable in whole or in part at any time, at the
option of the Company, at redemption prices ranging from $21.36 to $20.00 plus
dividends accrued and unpaid to the redemption date; provided certain redemption
requirements are met which are based on the market price of the Company's common
stock.
The entire issue of Depositary Shares (in multiples of ten) and the entire issue
of Preferred Stock is exchangeable, at the option of the Company, on any
dividend payment date for the Company's 8-1/2% Convertible Subordinated
Debentures due October 1, 2014 (the "8-1/2% Debentures") at the rate of $20.00
principal amount of 8-1/2% Debentures for each Depositary Share. At any time
following the occurrence of certain change in control transactions, each holder
of Depositary Shares, the Preferred Stock, or of 8-1/2% Debentures, as the case
may be, has the right to cause the Company to exchange the Depositary Shares (in
multiples of ten), the Preferred Stock or the 8-1/2% Debentures, as the case may
be, for the Company's Subordinated Debentures due October 1, 2014 (the "Reset
Debentures").
F-18
58
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
As long as the Preferred Stock, the 8-1/2% Debentures, or the Reset Debentures
are outstanding, the Company will be subject to limitations on the payment of
certain common stock dividends and other distributions and on the purchase,
redemption, or other acquisition of capital stock. No common stock dividends may
be paid unless the Preferred Stock dividends are current. The Company has
reserved 2,180,148 shares of common stock for the conversion of the Preferred
Stock.
On June 10, 1992, the Company announced it would not pay the July 1, 1992 $ .425
per share quarterly dividend on its Depository Shares which represent shares of
the Company's Preferred Stock. The Company has not paid the subsequent quarterly
dividends. As of January 1, 1995, the dividend was cumulatively eleven quarters
in arrears, representing a total dividend arrearage of $8.6 million. By the
terms of the Certificate of Designations for the Company's Preferred Stock, the
Company is not legally obligated to pay any such arrearage. The Company believes
that it is in its best interest not to reinstate the dividend until the Company
has generated consistent net income from operations and continuation of such
profitability can be reasonably expected. The net earnings (loss) per share
calculation includes a provision for the Preferred Stock dividends in arrears.
No common stock dividends may be paid unless all Preferred Stock dividend
payments are current. As a result of the cumulative dividend being six or more
quarters in arrears, on July 15, 1994, the holders of the Preferred Stock
exercised their right to elect two new directors.
In 1990, the Company adopted a Stockholder Rights Plan and declared a dividend
distribution of one Right for each outstanding share of common stock. Each Right
will entitle holders of the Company's common stock to buy one one-thousandth of
a share of Series A Preferred Stock of the Company at an exercise price of
$43.00, subject to adjustment. The Rights will be exercisable only if a person
or group acquires beneficial ownership of 20% or more of the common stock (other
than pursuant to certain transactions involving the Company) (an "Acquiring
Person") or announces a tender or exchange offer that would result in such
person or group beneficially owning 20% or more of the common stock (other than
a tender or exchange offer for all outstanding shares at a price determined by
the non-affiliated directors to be fair).
If any person becomes the beneficial owner of 20% or more of the common stock
(other than pursuant to certain transactions involving the Company or a tender
or exchange offer for all outstanding shares at a price determined by the
non-affiliated directors to be fair), or an Acquiring Person engages in certain
"self-dealing"
F-19
59
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
transactions including a merger in which the Company is the surviving
corporation, each Right not owned by such Acquiring Person will enable its
holder to purchase, at the Right's then-current exercise price, shares of the
common stock (or, in certain circumstances, cash, property or other securities
of the Company) having a value of twice the Right's exercise price. In addition,
if the Company is acquired in a merger or other business combination transaction
in which the Company is not the surviving corporation, or if the Company sells
or transfers 50% or more of its assets or earning power, each Right not owned by
such Acquiring Person will entitle its holder to purchase, at the Right's
then-current exercise price, common shares of the acquiring company having a
value of twice the Right's exercise price.
The Rights will expire January 17, 2000 or they may be redeemed by the Company
at $.01 per share prior to that date. The Rights do not have voting or dividend
rights, and until they become exercisable, have no dilutive effect on the
earnings of the Company.
NOTE N - Stock Options and Warrants
The Board of Directors and the shareholders adopted an Employee Stock Option
Plan in 1984 (the "1984 Plan"). During 1994, the 1984 Plan was amended to extend
the plan until April 20, 2004 and to increase the aggregate number of shares
available under the Plan. The 1984 Plan authorizes the Board of Directors to
grant to officers and employees of the Company and certain of its subsidiaries
options to purchase up to an aggregate of 1,589,997 common shares. Stock options
are exercisable in accordance with the determination of the Board of Directors
made at the time of their grant, and expire not more than ten years after the
date of grant. Stock options granted in 1994, 1993 and 1992 were at 100% of
market price.
At December 31, 1994, 541,205 shares remain available for future grants.
F-20
60
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
Stock option activity pursuant to the 1984 Plan is summarized as follows:
1994 1993 1992
---- ---- ----
Options outstanding:
At January 1 275,399 320,608 239,062
Granted 161,000 120,000 190,000
Exercised (97,000) (14,800) (25,000)
Cancelled (7,500) (150,409) (83,454)
-------- -------- --------
At December 31 331,899 275,399 320,608
Options exercisable: ======== ======== ========
At December 31 181,899 174,149 320,608
======== ======== ========
Option prices per share:
Granted $5.75-8.38 $3.25-7.38 $3.88-5.63
Exercised 3.25-5.63 3.00 3.00
Cancelled 3.00-6.125 3.00-6.38 2.66-4.78
In 1992, the Board of Directors and the shareholders adopted a Senior Executives
Stock Option Plan (the "1992 Plan"), a variable stock option plan. Under the
1992 Plan 800,000 shares were reserved and options for 800,000 shares were
issued and outstanding at December 31, 1993. These options vest over three years
and expire after ten years. The initial exercise prices were $5.625 for 700,000
shares and $3.25 for 100,000 shares, respectively, the market prices on the
dates granted. The exercise prices were adjusted downward on a pro-rata basis as
the trading price of the stock increased above the initial exercise price so
that the exercise price would be $.01 when the trading price of the stock was
$19.00.
Generally accepted accounting principles ("GAAP") for variable stock option
plans required the Company to record a compensation expense accrual measured by
the difference between the market price of the common stock underlying an option
and the option price as of December 31, 1993. The sharp rise in the price of the
Company's common stock during the fourth quarter of 1993, therefore, required a
charge to earnings.
F-21
61
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
The Company believed that the application of GAAP could have resulted in large
and repeated future distortion to reported quarterly earnings of the Company,
based on fluctuations in the stock price so long as the 1992 Plan remained in
effect. Therefore, on January 26, 1994, the Board of Directors of the company
("Board") terminated the 1992 Plan, subject to shareholder approval. In
connection with the termination of the 1992 Plan, the Company recorded an
accrued liability on its balance sheet at December 31, 1993 in the amount of
$4,046,000 and recorded a non-recurring, non-cash charge to earnings. In
addition, in connection with the termination of the 1992 Plan, the Company
granted an aggregate of 449,732 shares of common stock to the holders of the
cancelled options, also subject to shareholder approval. In the second quarter
of 1994, subsequent to the approval by the shareholders, the Company eliminated
the accrued liability of $4,046,000 and increased shareholders' equity by the
same amount for the common stock issued.
Also, on January 26, 1994 the Board adopted the 1994 Senior Management Stock
Option Plan (the "1994 Plan"), subject to shareholder approval. Under the 1994
Plan, each holder of options under the 1992 Plan was granted new options
with an option exercise price of $9.00, the trading price of the common stock of
the Company at the time of the Board actions. The shareholders approved the 1994
Plan in June 1994.
On March 11, 1986, the Company issued warrants to purchase 15,000 shares of
common stock at $7.83 per share. On July 7, 1988, in consideration for entering
into a credit agreement, the Company issued warrants to purchase 785,732 shares
of Common Stock at $4.50 per share. One half of the warrants issued on July 7,
1988, were repurchased on May 25, 1989, for $400,000. On May 4, 1990, the
Company issued warrants to purchase 100,000 shares of common stock at $10 per
share. On December 11, 1991, the Company issued warrants to purchase 25,000
shares of common stock at $4.375 per share. On November 17, 1993, the Company
issued warrants relating to the 8% Debentures to purchase 150,000 shares of
common stock at $9.50 per share.
The Company granted 1,000 shares of common stock at no cost to each employee of
the Company and Galco on November 8, 1991 and on January 2, 1992, respectively.
The shares vested one year from the date of grant and resulted in the issuance
of 84,000 shares of common stock in 1992 and 75,000 shares of common stock on
January 3, 1993. The $650,000 compensation cost related to this plan was charged
to expense over the vesting period.
F-22
62
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE O - Related Party Transactions
The Company has retained the legal services of Shereff, Freidman, Hoffman &
Goodman, LLP in recent years. One of the Company's directors is a partner in
this firm. The total amount of legal and director fees paid to the firm in
1994 and 1993 were approximately $0.4 million and $0.4 million, respectively.
The Company has retained the insurance brokerage services of Rollins Hudig Hall
("RHH") in recent years. One of the Company's directors is the President and
Chief Executive Officer of Rollins Real Estate/Investment, a division of RHH.
The total amount of insurance premiums paid to RHH in 1994 and 1993 were
approximately $1.4 million and $1.0 million, respectively.
In 1994, the Company sold its minority interest in Galoob Toys Canada, Inc.,
which continues to act as the Company's distributor in Canada and which
accounted for less than 5% of the Company sales.
NOTE P - Expenses Related to Resignations of Former Officers
During 1991, the Company's former chief executive officer resigned. In
additions, during 1991 and 1992, certain senior officers resigned and the
Company underwent a reorganization which included employee layoffs. Related
expenses incurred in 1992 were $2.2 million.
NOTE Q - Subsequent Event
On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "New Agreement") with the Lender. The New Agreement
extends through March 31, 1997 and provides a line of credit of $40 million,
with provision to increase the line to $60 million at the option of the
Company. Borrowing availability is determined by a formula based on qualified
assets. The interest is at prime rate plus 1% (1% lower then the rate
applicable to the old Loan Agreement). In consideration for entering in the
New Agreement, the Company paid a $100,000 fee; additional fees will be paid if
the Company exercises its option to increase the line. The Company has also
agreed to pay an unused line fee of 0.25% and certain management fees. The New
Agreement provides that the preferred dividend payments may not be made without
the prior consent of the Lender.
F-23
63
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE R - Segment Information
The Company's operations are in one industry segment: the sale of toys
primarily to major retail outlets. The Company operates in two primary
geographic areas, the U.S. and Europe, and there are no sales between
geographic areas.
Information about the Company's operations in different geographic locations
for 1994, 1993 and 1992 is as follows:
(in thousands)
United States Foreign Consolidated
------------- ------- ------------
1994
----
Net revenues from
unaffiliated
customers $ 119,702 $ 59,090 $178,792
Earnings (loss) before
income taxes 17,360 1,842 19,202
Identifiable assets at
December 31, 1994 87,653 13,113 100,766
1993
Net revenues from
unaffiliated
customers 88,821 45,513 134,334
Earnings (loss) before
income taxes (10,806) (109) (10,915)
Identifiable assets at
December 31, 1993 61,706 9,299 71,005
1992
Net revenues from
unaffiliated
customers 108,266 58,014 166,280
Earnings (loss) before
income taxes (5,346) 3,137 (2,209)
Identifiable assets at
December 31, 1992 55,700 15,904 71,604
F-24
64
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended December 31, 1994, 1993 and 1992
NOTE S - Quarterly Financial Data (Unaudited)
Quarterly financial data for 1994 and 1993 are summarized in the following
table:
(in thousands, except per share amounts)
Net Net Earnings
Net Gross Earnings (Loss) Per
Revenues Margin (Loss) Common Share
-------- ------ -------- ------------
1994
----
1st Quarter $30,235 $12,673 $(1,648) $(0.25)
2nd Quarter 33,720 12,601 9,753 0.91
3rd Quarter 50,273 19,937 3,909 0.30
4th Quarter 64,565 28,994 6,410 0.55
1993
1st Quarter $27,341 $11,250 $(1,439) $(0.23)
2nd Quarter 26,769 9,056 (3,490) (0.45)
3rd Quarter 37,692 14,265 (389) (0.12)
4th Quarter 42,532 16,888 (5,606) (0.67)
F-25
65
SCHEDULE I
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MARKETABLE SECURITIES-OTHER INVESTMENTS
(in thousands)
Name of Issuer and Principal Market
Title of Issue Amount Cost Value
------------------ ----------- ---- ------
At December 31, 1994
None
At December 31, 1993
U.S. treasury notes subject to
a repurchase agreement with
Sanwa Bank California $1,400 $1,400 $1,400
------ ------ ------
$1,400 $1,400 $1,400
====== ====== ======
S-1
66
SCHEDULE VIII
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
----------- ---------- ---------- ---------- --------
Year ended 12/31/94:
Provisions for returns and
allowances $5,249 $11,979 $9,131 $8,097
Year ended 12/31/93
Provisions for returns and
allowances 6,031 5,516 6,298 5,249
Year ended 12/31/92
Provisions for returns and
allowances 8,900 7,916 10,785 6,031
See Note B of Notes to Consolidated Financial Statements.
S-2
67
SCHEDULE X
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(in thousands)
Charged to Costs and Expenses
-----------------------------
Years ended December 31
-----------------------------
Items 1994 1993 1992
----- ---- ---- ----
Maintenance and repairs * * *
Depreciation and amortization of
intangible assets, pre-operating
costs and similar deferrals * * *
Taxes, other than payroll and
income taxes * * *
Royalties $13,498 $11,337 $19,263
Advertising and promotion 30,616 23,537 22,826
*Less than 1% of total sales.
S-3
68
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Page
----------- ------------
2 Agreement of Merger, dated as of July 6, 1987.
(Incorporated by reference to Exhibit 2 to the
Company's Amendment No. 1 on Form 8 to the Registration
Statement on Form 8-B, filed with the Commission on
January 11, 1988 (the "Amendment No. 1 to the Form
8-B").)
3.1 Certificate of Incorporation. (Incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to the Form
8-B.)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to
Amendment No. 1 to the Form 8-B.)
4.1 Form of Certificate for Shares of Common Stock of the
Corporation. (Incorporated by reference to Exhibit 4.1
to the Company's Registration Statement on Form S-3,
Registration No. 33-33640, filed with the Commission on
February 26, 1990 (the "Form S-3").)
4.2 Form of 1986 Nontransferable Stock Purchase Warrant
issued to Paul Sullivan. (Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to the Form 8-B.)
4.4 Warrant Agreement, dated as of July 7, 1988, between
the Corporation and Wells Fargo Bank and warrants
issued to Wells Fargo Bank. (Incorporated by reference
to Exhibit 4.4 to Amendment No. 3 on Form 8 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987, filed with the Commission
on August 2, 1988. (the "Amendment No. 3 to the 1987
10-K").)
69
Sequentially
Numbered
Page
------------
4.4(1) Warrant Agreement, dated as of May 4, 1990, between the
Company and Camerica Corporation. (Incorporated by
reference to Exhibit 4.4.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1991, filed with the Commission on March 30, 1992
(the "1991 Form 10-K").)
4.4(2) Warrant Agreement, dated as of May 4, 1990, between the
Company and David Darling. (Incorporated by reference
to the 1991 Form 10-K.)
4.4(3) Warrant Agreement, dated as of May 4, 1990, between the
Company and Jim Darling. (Incorporated by reference to
the 1991 Form 10-K.)
4.4(4) Warrant Agreement, dated as of May 4, 1990, between the
Company and Richard Darling. (Incorporated by reference
to the 1991 Form 10-K.)
4.4(5) Warrant Agreement, dated as of February 22, 1990, by
and between the Company and Roger Kowalsky.
(Incorporated by reference to Exhibit 28 to the Form
S-3.)
4.4(6) Warrant Agreement, dated as of December 11, 1991, by
and between the Company and Shereff, Friedman, Hoffman
and Goodman. (Incorporated by reference to Exhibit
4.4(6) to the Company's Annual Report on Form 10-K for
the fiscal year end December 31, 1993, filed with the
Commission on March 31, 1994 (the "1993 Form 10-K").)
4.4(7) Warrant Agreement, dated as of November 17, 1993, by
and between the Company and Gerard Klauer Mattison &
Co., Inc. (Incorporated by reference to Exhibit 4.4(7)
to the 1993 Form 10-K.)
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4.5 Form of Certificate of Designations of the Company's
$17.00 Convertible Exchangeable Preferred Stock.
(Incorporated by reference to Exhibit 4 to the
Company's Registration Statement on Form 8-A, filed
with the Commission on October 6, 1989 (the "October 6,
1989 Form 8-A").)
4.5(1) Form of Certificate of Designations of the Company's
Series A Preferred Stock (Incorporated by reference to
Exhibit 2.2 to the Company's Registration Statement on
Form 8-A, filed with the Commission on January 23, 1990
(the "January 23, 1990 Form 8-A").
4.6 Form of Indenture with respect to the Company's 8-1/2%
Convertible Subordinated Debentures due October 1,
2014, between the Company and Manufacturers Hanover
Trust Company as Trustee, including form of Convertible
Debenture. (Incorporated by reference to Exhibit 5 to
the October 6, 1989 Form 8-A).
4.7 Form of Indenture with respect to the Company's
Subordinated Debentures due October 1, 2014, between
the Company and Manufacturers Hanover Trust Company as
Trustee, including form of Debenture. (Incorporated by
reference to Exhibit 6 to the October 6, 1989 Form
8-A).
4.8 Form of Indenture with respect to the Company's 8-1/2%
Senior Subordinated Notes, between the Company and
Continental Stock Transfer & Trust Company, as Trustee,
including form of Note. (Incorporated by reference to
Exhibit 7 to the October 6, 1989 Form 8-A).
4.9 Form of Deposit Agreement between the Company and
Manufacturers Hanover Trust Company of California as
Depositary, including form of Depositary Receipt.
(Incorporated by reference to Exhibit 8 to the October
6, 1989 Form 8-A).
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4.10 Form of Rights Agreement, dated as of January 17, 1990,
between the Company and Mellon Securities Trust
Company. (Incorporated by Reference to Exhibit 2.1 to
the January 23, 1990 Form 8-A).
4.11 Indenture, with respect to the Company's 8% Convertible
Subordinated Debentures due year 2000, between the
Company and Continental Stock Transfer & Trust Company,
as Trustee, including form of Debenture Note.
(Incorporated by reference to Exhibit 4.11 to the 1993
Form 10-K)
10.1* 1984 Employee Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 4 to the
Corporation's Registration Statement on Form S-8,
Registration No. 33-9393, filed with the Commission on
September 2, 1987 (the "1987 Form S-8").)
10.1(1)* 1992 Senior Management Stock Option Plan. (Incorporated
by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-8, Registration No.
33-56004, filed with the Commission on December 18,
1992 (the "1992 Form S-8").)
10.1(2)* Amended and Restated 1984 Employee Stock Option Plan
(Incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-8, Registration
Statement No. 33-56585, filed with the Commission on
November 23, 1994.)
10.1(3)* 1994 Senior Management Stock Option Plan. (Incorporated by
reference to Exhibit 4.6 of the Company's Registration Statement
on Form S-8, Registration Statement No. 33-56587, filed with the
Commission on November 23, 1994.)
10.1(4)(a)* Form of Agreement between each of Mark Goldman, William
Catron, Lou Novak, Gary Niles, Mark Shepherd, Ronald
Hirschfeld and H. Alan Gaudie and the Corporation.
(Incorporated by reference to Exhibit 4.6 of the Company's
Registration Statement on Form S-8, Registration Statement No.
33-56589, filed with the Commission on November 23, 1994.)
10.1(4)(b)* Form of Amendment No. 1 between each of Mark Goldman,
William Catron, Lou Novak, Gary Niles, Mark Shepherd,
Ronald Hirschfeld and H. Alan Gaudie and the
Corporation.
10.2* Profit Sharing Plan. (Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on
Form S-1, Registration No. 33-6743, filed with the
Commission on August 12, 1986 (the "1986 Registration
Statement").)
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10.4(7)* Agreement, dated October 27, 1994, between Mark Goldman
and the Company.
10.4(10)* Agreement, dated as of December 11, 1991, by and
between Martin Nussbaum and the Company. (Incorporated
by reference to Exhibit 10.4(10) to the 1991 Form
10-K.)
10.4(11)(a)* Agreement, dated July 15, 1993, between William G.
Catron and the Company. (Incorporated by reference to
Exhibit 10.4 (11) (a) to the 1993 Form 10-K)
10.4(11)(b)* Agreement, dated July 15, 1993, between Lou Novak and
the Company. (Incorporated by reference to Exhibit 10.4
(11) (b) to the 1993 Form 10-K)
10.4(11)(c)* Agreement, dated July 15, 1993, between Ronald
Hirschfeld and the Company. (Incorporated by reference
to Exhibit 10.4 (11) (c) to the 1993 Form 10-K)
10.4(11)(d)* Agreement, dated July 15, 1993, between Gary Niles and
the Company. (Incorporated by reference to Exhibit 10.4
(11) (d) to the 1993 Form 10-K)
10.4(11)(e)* Agreement, dated March 29, 1994, between Loren
Hildebrand and the Company.
10.4(11)(f)* Agreement, dated February 27, 1995, between William B.
Towne and the Company.
10.7(3) Second Amended and Restated Credit Agreement dated as
of March 31, 1992 among the Company, Bank of America
National Trust and Savings Association and other
signatory thereto. (Incorporated by reference to
Exhibit 10.7(3) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992, filed
with the Commission on March 31, 1993 (the "1992 Form
10-K")).
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10.7(4) Amendments dated November 1, 1992 and February 17, 1993
to the Second Amended and Restated Credit Agreement
dated as of March 31, 1992. (Incorporated by reference
to Exhibit 10.7(4) to the 1992 Form 10-K.)
10.7(5) Securities Purchase Agreement, dated November 17, 1993,
by and among the Company and the purchasers executing
signature pages thereto (the "Purchasers").
(Incorporated by reference to Exhibit 10.7 (5) to the
1993 Form 10-K)
10.7(6) Registration Rights Agreement, dated as of November 17,
1993, by and among the Company and the Purchasers.
(Incorporated by reference to Exhibit 10.7 (6) to the
1993 Form 10-K)
10.7(7) Loan and Security Agreement, dated as of April 1, 1993,
by and among the Company and Congress Financial
Corporation (Central), including form of Revolving Loan
Note. (Incorporated by reference to Exhibit 10.7 (7) to
the 1993 Form 10-K)
10.7(7)(a) First Amendment to Loan and Security Agreement, dated
as of November 17, 1993. (Incorporated by reference to
Exhibit 10.7 (7) (a) to the 1993 Form 10-K)
10.7(7)(b) Amended and Restated Loan and Security Agreement, dated
as of March 31, 1995, by and among the Company and
Congress Financial Corporation (Central).
10.9(3) License Agreement, dated June 16, 1986, by and
between Funmaker as Licensor and the Company as
Licensee. (Incorporated by reference to Exhibit
10.10(5) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1986, filed
with the Commission on March 31, 1987 ("1986 Form
10-K").)
10.9(4) License Agreement, dated May 4, 1990, by and among the
Company as Licensee, Codemasters Software Company, Ltd.
and Camerica Corporation, Limited. (Incorporated by
reference to Exhibit 10.9(4) of the 1992 Form 10-K.)
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10.9(4)(a) Amendment No. 1 dated June 1991 to License Agreement
dated May 4, 1990. (Incorporated by reference to
Exhibit 10.9(4) (a) of the 1992 Form 10-K.)
10.9(4)(b) Amendment No. 2 dated December 23, 1991 to License
Agreement, dated May 4, 1990. (Incorporated by
reference to Exhibit 10.9(5) (b) of the 1992 Form
10-K.)
10.9(5) European License Agreement, dated December 23, 1991, by
and between the Codemasters Software Company, Ltd. and
the Company as Licensee. (Incorporated by reference to
Exhibit 10.9(5) of the 1992 Form 10-K.)
10.9(6) Third Amendment to United States License and First
Amendment to European License, dated November 4, 1992.
(Incorporated by reference to Exhibit 10.9(6) of the
1992 Form 10-K.)
10.9(7) Fourth Amendment to United States License Agreement,
dated October 14, 1994.
10.10 Agreement of Purchase and Sale, dated October 22, 1986,
by and between ATC Building Company as Seller and the
Company as Buyer. (Incorporated by reference to Exhibit
10.11 to the 1986 Form 10-K.)
10.12 Lease Agreement, dated March 12, 1987, by and between
Lincoln Alvarado and Patrician Associates, Inc. as
Lessor and the Company as Lessee. (Incorporated by
reference to Exhibit 10.12 to Amendment No. 1 to the
Form 8-B.)
10.12(1) Amendment No. 1 to Lease dated March 12, 1987.
(Incorporated by reference to Exhibit 10.12(1) to the
1991 Form 10-K.)
11 Computations of Earnings Per Share.
12 Computation of ratio of earnings to fixed charges and
preferred stock dividends.
22 Subsidiaries of the Company.
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24.1 Consent of Price Waterhouse.
27 Financial Data Schedules
*Management contracts, compensatory plans and arrangements required to be filed
as an exhibit pursuant to Item 14(c) of this Report.