1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- --------------------
Commission file number 1-9599
LEWIS GALOOB TOYS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-1716574
(State or other jurisdiction of (I.R.S. Employer Identification
Number) incorporation or organization)
500 FORBES BOULEVARD, SOUTH SAN FRANCISCO, CALIFORNIA 94080
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 952-1678
Former name, former address and former fiscal year,
if changed since last report
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
Common stock, par value $.01, 14,981,960 as of March 31, 1996.
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LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 Page
- Condensed Consolidated Balance Sheets 1
- Condensed Consolidated Statements of Operations 2
- Condensed Consolidated Statements of Cash Flows 3
- Notes to Condensed Consolidated Financial
Statements 4-5
Item 2
- Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-8
PART II - OTHER INFORMATION
Item 1
- Legal Proceedings 9
Item 3
- Defaults Upon Senior Securities 9
Item 6
- Exhibits and Reports on Form 8-K 9
SIGNATURE 10
3
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited) (Unaudited) (Audited)
March 31 March 31 December 31
ASSETS 1996 1995 1995
- ------ --------- --------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 2,226 $ 1,689 $ 2,030
Accounts receivable, net 47,698 31,920 68,402
Inventories 17,925 16,959 17,491
Tooling and related costs 10,041 8,716 8,311
Prepaid expenses and other assets 12,630 14,998 10,348
-------- -------- --------
TOTAL CURRENT ASSETS 90,520 74,282 106,582
LAND, BUILDING AND EQUIPMENT, NET 9,733 8,304 8,913
OTHER ASSETS 6,052 1,431 4,589
-------- -------- --------
$106,305 $ 84,017 $120,084
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable 18,773 5,131 15,071
Accounts payable 13,252 10,409 17,141
Accrued expenses 7,058 8,964 14,547
Income taxes payable 400 323 731
Current portion of long-term debt 4,371 207 4,422
-------- -------- --------
TOTAL CURRENT LIABILITIES 43,854 25,034 51,912
LONG-TERM DEBT -- 18,361 14,000
SHAREHOLDERS' EQUITY:
Preferred stock
Authorized 1,000,000 shares
Issued and outstanding 3,602 shares,
183,950 shares and 183,950 shares
of $17 Convertible
Exchangeable Preferred Stock
at $200 liquidation value per share 720 36,790 36,790
Common stock, par value $.01 per share
Authorized 50,000,000 shares
Issued and outstanding 14,981,960
shares, 10,059,639 shares and
10,089,961 shares 150 101 101
Additional paid-in capital 104,349 31,596 31,579
Retained earnings (deficit) (42,321) (27,417) (13,851)
Cumulative translation adjustment (447) (448) (447)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 62,451 40,622 54,172
-------- -------- --------
$106,305 $ 84,017 $120,084
======== ======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31
---------------------------
1996 1995
---- ----
Net revenues $ 37,522 $ 33,341
Costs of products sold 21,337 21,492
-------- --------
Gross margin 16,185 11,849
-------- --------
Operating expenses:
Advertising and promotion 5,804 4,304
Other selling and administrative 7,377 6,422
Royalties, research and development 6,310 4,679
-------- --------
Total operating expenses 19,491 15,405
-------- --------
Earnings (loss) from operations (3,306) (3,556)
Interest expense (829) (650)
Other income (expense), net 20 35
-------- --------
Earnings (loss) before income taxes (4,115) (4,171)
Provision for income taxes -- --
-------- --------
Net earnings (loss) (4,115) (4,171)
Preferred stock dividends
in arrears 15 782
Charge related to the exchange of
preferred stock for common 24,279 --
-------- --------
Net earnings (loss) applicable
to common shares $(28,409) $( 4,953)
======== ========
Common shares and common share
equivalents outstanding - average 10,491 10,061
Net earnings (loss) per common share $ (2.71) $ (0.49)
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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5
LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except shares)
(Unaudited)
Three Months Ended March 31
---------------------------
1996 1995
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) $(4,115) $(4,171)
Adjustments to reconcile net earnings
(loss) to net cash (used in) provided by
operating activities:
Depreciation 162 138
Changes in assets and liabilities:
Accounts receivable 20,704 25,963
Inventories (434) (135)
Tooling and related costs (1,730) (337)
Prepaid expenses and other assets (4,577) (9,374)
Accounts payable (3,889) (4,564)
Accrued expenses (7,162) (5,970)
Income taxes payable (331) (176)
------- -------
Net cash (used in) provided by
operating activities (1,372) 1,374
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and
equipment, net (982) (42)
------- -------
Net cash (used in) provided by
investing activities (982) (42)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings under notes payable 3,702 (1,840)
Repayments under long-term debt agreements (51) (53)
Proceeds from issuance of common stock 124 26
Costs associated with the conversion of debentures
and the preferred shares exchange (1,225) --
Other, net -- (1)
------- -------
Net cash (used in) provided by
financing activities 2,550 (1,868)
------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 196 (536)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,030 2,225
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,226 $ 1,689
======== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
During the three months ended March 31, 1996, $14,000 of the Company's 8%
convertible subordinated debentures were converted into 1,511,872 shares of its
common stock. Deferred loan costs and accrued interest amounting to
approximately $505, net, were debited to additional paid-in capital. See Note G.
During the three months ended March 31, 1996, 1,803,481 depositary shares of the
Company's preferred stock were exchanged for 3,336,433 shares of its common
stock. See Note H.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996
(Unaudited)
NOTE A - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets as of March 31, 1996 and 1995 and the
condensed consolidated statements of operations for the three month periods
ended March 31, 1996 and 1995 and the condensed consolidated statements of cash
flows for the three month periods ended March 31, 1996 and 1995 have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
March 31, 1996 and 1995 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1995. Certain amounts in the financial statements of prior years have been
reclassified to conform with the current year's presentation.
The results of operations for the three month periods ended March 31, 1996 and
1995 are not necessarily indicative of the operating results for the full year.
NOTE B - CREDIT AGREEMENT
On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "Loan Agreement") with Congress Financial Corporation
(Central) (the "Lender"). The Loan Agreement extends through March 31, 1997 and
provides a line of credit of $40 million, with a provision to increase the line
to $60 million at the option of the Company. Borrowing availability is
determined by a formula based on both accounts receivable and inventories. The
interest rate is at prime rate plus 1%. In consideration for entering into the
Loan 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 Loan
Agreement provides that the preferred dividend payments may not be made without
the prior consent of the Lender.
NOTE C - INVENTORIES
(in thousands)
March 31 December 31
-------- -----------
1996 1995 1995
---- ---- ----
Finished goods $17,318 $ 15,452 $17,023
Raw materials and parts 607 1,507 468
--------- --------- ---------
$17,925 $16,959 $17,491
======= ======= =======
NOTE D - TOOLING AND RELATED COSTS
Effective beginning January 1, 1996, the Company changed the timing of its
annual amortization of tooling, packaging and sample costs. These costs are now
being amortized on a percentage of annual sales basis rather than the previous
straight-line basis. The Company believes this change improves the matching of
costs and revenues. The effect of this change in timing was to decrease costs of
products sold and net loss by approximately $600,000 or $.06 per common share
for the quarter ended March 31, 1996.
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LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996
(Unaudited)
NOTE E - INCOME TAXES
At December 31, 1995, the Company had federal net operating loss carryforwards
for income tax purposes of approximately $7,300,000. The carryforwards expire in
different years through the year 2008. The Company also has federal minimum tax
credit carryforwards of $1,028,000 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
Company's foreign subsidiary. All such earnings are expected to be reinvested in
the subsidiary. Undistributed earnings, for which the Company has not provided
U.S. taxes which may be payable on distribution, were approximately $5,200,000
as of December 31, 1995. No foreign taxes will be withheld on the distribution
of the untaxed earnings.
NOTE F - LEGAL PROCEEDINGS
The current status of litigation is described in Part II, Item 1, herein.
NOTE G - LONG-TERM DEBT
In February 1996, the Company issued a call for the redemption of its 8%
Convertible Subordinated Debentures originally due November 30, 2000 (the
"Debentures"). This call resulted in the conversion on March 15, 1996, of all
$14,000,000 Debentures at $9.26 per share. This conversion resulted in the
issuance of 1,511,872 new shares of common stock.
NOTE H - SHAREHOLDER'S EQUITY
In February 1996, the Company offered to exchange 1.85 shares of its common
stock for each Depositary Exchangeable Preferred Share (the "Depositary Shares")
outstanding. Each Depositary Share represents 1/10th of a share of $17.00
Convertible Exchangeable Preferred Stock. This offer was accepted by the owners
of 98% of the Depositary Shares resulting in the issuance of 3,336,433 shares of
common stock on March 29, 1996. Generally accepted accounting principles require
a non-cash charge to reduce Net Earnings Applicable to Common Shares in the
calculation of Earnings Per Share for the fair value of the securities issued in
excess of the existing conversion rate of approximately 1.185 common shares.
This charge amounted to $24,279,000 and had the effect of increasing the net
loss per common share by $2.32 from $.39 to $2.71.
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LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
To improve the matching of costs and revenues, the Company has revised the
timing of its annual amortization of tooling, packaging and sample costs. These
costs are now being amortized on a percentage of annual sales basis rather than
the previous straight-line basis. This change reduced the 1996 first quarter
loss by $0.06 per common share.
The following table sets forth for the periods indicated the percentage
relationships between revenues and certain expense and earnings items:
Percentage of Net Revenues
--------------------------
Three Months Ended
March 31
--------
1996 1995
---- ----
Net revenues 100.0% 100.0%
Costs of products sold 56.9 64.5
----- -----
Gross margin 43.1 35.5
Advertising and promotion 15.5 12.9
Other selling and administrative 19.7 19.3
Royalties, research and development 16.8 14.0
----- ----
Earnings (loss) from operations (8.9) (10.7)
Interest expense (2.2) (1.9)
Other income (expense), net 0.1 0.1
Provision for income taxes - -
----- -----
Net earnings (loss) (11.0)% (12.5)%
======= =======
1996 Compared to 1995
Net sales increased 13% to $37.5 million in the first quarter of 1996 as
compared to $33.3 million in the first quarter of 1995. The growth in net sales
in the first quarter of 1996 was attributable to two principal factors: (1)
domestic net sales increased by 55% and (2) the Company's worldwide sales of
girls' toys increased by 45%. The girls' toy line increase was led by the hugely
popular Sky Dancers(R) flying dolls and the Pound Puppies(R) line. The domestic
increase was offset by a 33% decrease in international sales.
The Company's worldwide sales of boys' toys increased 16% from the comparable
period of the previous year. The growth in net sales of the boys' toys line of
business was attributable to the following: (1) worldwide sales of Micro
Machines(R) increased by 10% versus the comparable period from the previous
year, (2) in March 1996, the Company initiated sales of Dragon Flyz(TM), a line
of flying action figures plus vehicles and accessories, and (3) the Star
Wars(TM) Action Fleet(TM) line of toys continued its strong growth. This
increase was offset by a decrease in sales of Biker Mice From Mars(TM) due to
the discontinuation of this line to domestic retailers and lower sales of these
products internationally.
Gross margins were $16.2 million in the first quarter of 1996, an increase of
36.6% from the first quarter of 1995. This increase was due to higher sales
volume and an increase in the gross margin rate. The gross margin rate increased
to 43.1% in the first quarter of 1996 from 35.5% in the first quarter of 1995.
The increase in the gross margin was attributable to the following: (1) the
Company revised the timing of its amortization of tooling and packaging costs,
and (2) domestic sales as a percentage of worldwide sales was significantly
greater. The Company's gross margin rate on domestic sales is significantly
higher than foreign sales because the Company's prices on foreign sales are
lower than on domestic sales as the foreign customer is responsible for the cost
of importing and promoting the products.
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LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Advertising and promotion expenses were $5.8 million in the first quarter of
1996 as compared to $4.3 million in the first quarter of 1995. The higher
expenses were primarily a result of an increase in domestic television
advertising expenses in connection with the Company's expanded product lines.
Other selling and administrative expenses were $7.4 million in the first quarter
of 1996 as compared to $6.4 million in the first quarter of 1995. This increase
was due to higher planned personnel costs and higher legal expenses. Royalties,
research and development expenses were $6.3 million in the first quarter of 1996
as compared to $4.7 million in the first quarter of 1995. This increase was due
to higher royalty expenses associated with increased sales volume and the
write-off of royalty advances due to the discontinuation of the Happy Ness line
of toys.
Interest expense was $0.8 million in the first quarter of 1996 as compared to
$0.7 million in the first quarter of 1995. The increase was due primarily to
higher average borrowings outstanding during the quarter. The Company expects
interest expense to be reduced in future quarters due to an approximately $1.1
million annual interest savings associated with the conversion of the $14
million convertible debentures to common stock.
No tax recovery was reported because of the cumulative net operating loss
brought forward into the year. At December 31, 1995, the Company had federal tax
credits of approximately $7.3 million and unused federal tax credits of
approximately $1.8 million available to reduce taxes in future periods.
The Company's products are produced principally in China, which currently is
designated with Most Favored Nations ("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 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 of the
Trade Act of 1974, as amended). In the past, Section 301 sanctions proposed by
the United States did not include sanctions or punitive damages 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 import duty
for the Company's products produced in China 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 from China 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 product 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 located in China, (3) relocate its production in sufficient time to meet
demand, and (4) pass cost increases likely to be incurred resultant from (1)-(3)
above through to the Company's customers as product price increases.
Liquidity, Financial Resources and Capital Expenditures
On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "Loan Agreement") with the Lender. (See Note B of the
Notes to Condensed Consolidated Financial Statements.)
During the first quarter of 1996, the Company completed two transactions which
strengthened its capital structure. First, in February 1996, the Company issued
a call for the redemption of its 8% Convertible Subordinated Debentures
originally due November 30, 2000 (the "Debentures"). This call resulted in the
conversion on March 15, 1996, of all $14,000,000 Debentures at $9.26 per share.
This conversion resulted in the issuance of 1,511,872 new shares of common
stock. Second, also in February 1996, the Company offered to exchange 1.85
shares of its common stock for each Depositary Exchangeable Preferred Share (the
"Depositary Shares") outstanding. Each Depositary Share represents 1/10th of a
share of $17.00 Convertible Exchangeable Preferred Stock. This offer was
accepted by the owners of 98% of the Depositary Shares resulting in the issuance
of 3,336,433 shares of common stock on March 29, 1996. Additionally, the Company
has issued a notice for the June 10, 1996 redemption of the remaining 36,019
Depositary Shares.
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LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Working capital was $46.7 million at March 31, 1996 as compared to $54.7 million
at December 31, 1995 and $49.2 million at March 31, 1995. The ratio of current
assets to current liabilities was 2.1 to 1.0 at March 31, 1996 as compared to
2.1 to 1.0 at December 31, 1995 and 3.0 to 1.0 at March 31, 1995.
The Company had no material commitments for capital expenditures at March 31,
1996.
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 operating needs.
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LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various litigation and legal matters which are being
prosecuted and defended in the ordinary course of business. None of these
matters are expected to result in outcomes having a material adverse effect on
the Company's consolidated financial position.
Item 3. Defaults Upon Senior Securities
On June 10, 1992, the Company announced it would not pay the July 1, 1992 $.425
per share quarterly dividend on its Depositary Shares which represent shares of
the Company's Preferred Stock. The Company also did not pay the subsequent
dividends. The cumulative dividend, as of April 1, 1996, is sixteen quarters in
arrears, a total amount of $245,000. Additionally, the Company has issued a
notice for the June 10, 1996 redemption of the remaining 36,019 Depositary
Shares. The Company's Lender has given its permission for the dividend payment
associated with the redemption.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27 - Financial Data Schedule
(b) The Company filed a Current Report on Form 8-K on February 12,
1996 with respect to the redemption of its Debentures and its
intent to commence an exchange offer for the outstanding
preferred shares.
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LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEWIS GALOOB TOYS, INC.
(Registrant)
Date: MAY 15, 1996 By: /s/ H. Alan Gaudie
----------------------------------
H. Alan Gaudie
Senior Vice President, Finance
and Acting Chief Financial Officer
(and Principal Accounting Officer)
10
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EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule